Encyclopedia of Japanese Business and Management

ENCYCLOPEDIA OF JAPANESE BUSINESS AND MANAGEMENT

Edited by Allan Bird

London and New York First published 2002 by Routledge 11 New Fetter Lane, London EC4P 4EE

Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001

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This edition published in the Taylor & Francis e-Library, 2007.

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©selection and editorial matter Allan Bird 2002; ©the entries Routledge 2002

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British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library

Library of Congress Cataloging in Publication Data Encyclopedia of Japanese business and management/edited by Allan Bird.

Includes bibliographical references and index. 1. Japan—Gommerce—Encyclopedias. 2. Industrial management—Japan— Encyclopedias. 3. Corporations, Japanese—Management—Encyclopedias. 4. Business enterprises—Japan—Encyclopedias. 5. Japan—Commerce— Dictionaries. 6. Japanese language—Dictionaries-English. I. Title: Japanese business and management. II. Bird, Allan. HF1001 .E467 2001 1650′.0952–dc21 2001019952

ISBN 0-203-99632-1 Master e-book ISBN

ISBN 0-415-18945-4 (Print Edition) Contents

List of contributors vii Entries A-Z 1

Acknowledgements xi

Introduction xiii Index 483 How to use this book xv

Thematic entry list xvi

Contributors

Editorial team Volume editor Allan Bird University of Missouri, St. Louis

Consultant editors

Nigel Campbell Joop Stam University of Manchester Erasmus University Mitsuyo Hanada Mark Tilton Keio University Purdue University

Stephen Nicholas Mitsuru Wakabayashi University of Melbourne Nagoya University

Thomas Roehl Eleanor D.Westney Western Washington University Massachusetts Institute of Technology Shane J.Schvaneveldt Hideki Yoshihara Weber State University Kobe University

List of contributors

James C.Abegglen Christine L.Ahmadjian Asia Advisory Service KK Columbia University Tetsuo Abo Teikyo University Jennifer Amyx Research School of Pacific and Asian Studies, Raj Aggarwal Australian National University Kent State University Marie Anchordoguy Nathaniel O.Agola University of Washington Nagoya University viii Contributors

Fumie Ando Susumu Hagiwara Nanzan University Hosei University

Hirotaka Aoki Ehud Harari Tokyo Institute of Technology Hebrew University of Jerusalem David M.Arase Hitoshi Higuchi Claremont College, Pomona Shinshu University

William Barnes James E.Hodder University of Portland University of Wisconsin

Michael Beeman Ippei Ichige US Department of Commerce Aoyama Gakuin University Theodore Bestor Ralph Inforzato Harvard University JETRO Chicago

Mary Yoko Brannen Kenji Ishihara San Jose State University Association for International Cooperation of Agriculture Robert Brown Greenebaum, Doll & McDonald Pllc, Hiroshi Itagaki Louisville, KY Musashi University Ronda Roberts Callister Tetsuya Iwasaki Utah State University Shinshu University

Meika Clucas Megumi Katsuta California Polytechnic State University Aoyama Gakuin University

Alexandra Cohen Martin Kenney California Polytechnic State University University of California, Davis Richard A.Colignon Harold Kerbo Duquesne University California Polytechnic State University

Tim Craig Jo-Seoul Kim University of Victoria, Canada Shinshu University

Edwin C.Duerr Hiroki Kondo San Francisco State University Shinshu University Mitsuko S.Duerr Aya Kubota San Francisco State University Aoyama Gakuin University

Dayo Fawibe Hiroshi Kumon University of Missouri, St. Louis Hosei University

David Flath James R.Lincoln NCSU Department of Economics University of California, Berkeley Michael Gerlach Terri R.Lituchy University of California, Berkeley California Polytechnic State University

Georgios Giakatis Leonard H.Lynn Tokyo Institute of Technology Case Western Reserve University Contributors ix

Mark Mason Elizabeth L.Rose Yale University University of Auckland

Aki Matsunga Pernille Rudlin Aoyama Gakuin University Brighton, UK John A.McKinstry Ulrike Schaede California Polytechnic State University University of California, San Diego

Mari Miura Mark J.Scher University of Tokyo Institute for Financial Affairs, New York

Dario Ikuo Miyake Shane J.Schvaneveldt University of São Paulo Weber State University Shintaro Mogi Roblyn Simeon Shinshu University San Francisco State University

Sean Mooney Ron Singleton G2 Western Washington University

Tetsu Morishima Michael Smitka Aoyama Gakuin University Washington and Lee University Kazuharu Nagase Lucrezia Songini Shinshu University Bocconi University

Takeshi Nakajo Brenda Sternquist Chuo University Michigan State University

Jay Nelson Yasuo Sugiyama SS Media, New York University of Tokyo Stephen Nicholas Noriya Sumihara University of Melbourne Tenri University

Keith A.Nitta Margaret Takeda University of California, Berkeley Aoyama Gakuin University

Kazahiro Okazaki Sumihiro Takeda Aichi Institute of Technology Aoyama Gakuin University Soyeon Park Ogiwara Takeshi Aoyama Gakuin University Aoyama Gakuin University

Vladimir Pucik Jay Tate IMD University of California, Berkeley

William Purcell Mark Tilton University of New South Wales Purdue University Jörg Raupach-Sumiya De-bi Tsao German Institute for Japanese Studies Tokyo Institute of Technology

Thomas Roehl William M.Tsutsui Western Washington University University of Kansas x Contributors

Tsutomu Tsuzuki Michael A.Witt Shinshu University Harvard University

Victor K.Ujimoto Bernard Wolf University of Guelph York University Canada Robert Uriu Heung-wah Wong University of California, Irvine University of Hong Kong

Terri Ursacki Brian Woodall University of Calgary Georgia Institute of Technology

Chikako Usui Takehiko Yasuda University of Missouri, St. Louis Shinshu University Carien Van Mourik Masanori Yasumoto Eramus University Rotterdam Shinshu University

Steven Vogel Toru Yoshikawa University of California, Berkeley Nihon University

Mitsuru Wakabayashi Patrick Ziltener Nagoya University Max Planck Institute for the Study of Societies, Germany Eleanor D.Westney Massachusetts Institute of Technology Acknowledgements

Over the last several years I have found myself Stephen Nicholas, Melbourne University; Tho- paying closer attention to the acknowledgements mas Roehl, University of Western Washington; that precede most books. Perhaps it is simply a Joop Stam, Erasmus University; Mark Tilton, sign of advancing maturity or age, but I have Purdue University; Mitsuru Wakabayashi, become more curious about who people choose Nagoya University; Eleanor Westney Massachu- to recognize as contributing to a particular effort. setts Institute of Technology; and Hideki After all, there are a host of people associated Yoshihara, Kobe University with any published work, and an even larger Possibly the greatest challenge confronting the number involved in support of the research that compilation of any encyclopedia is the myriad goes into a scholarly volume. It is with that detail that must be sorted through. Once entries thought in mind that I sat down to pen a note of have been defined, authors must be identified and recognition for those who have contributed to contacted, manuscripts for each entry must be this volume. received and reviewed, revisions requested, com- An encyclopedia is, by its very nature, the off- pleted entries properly formatted, and the final spring of myriad parents—an insight I knew with product forwarded to the publishers. The task is my head at the outset of this undertaking. Now, difficult enough without the added challenge of at the conclusion, I know it with my heart as well. working with academic scholars, who as a group, It is only fitting, before proceeding on to intro- give added meaning to the phrase “herding cats.” duce the volume itself, to recognize those many I was ably assisted in the process of managing all individuals who have contributed to this effort. these details by three research assistants. Indeed, Though it is impossible to acknowledge every- truth be told, I was the inept professor doing what one, certain people stand out for both their per- I could to assist them. I began the project with sonal contribution, their insightful counsel or their Alexandra Cohen, who did much of the initial guiding spirit. organizing and preparation of databases. With I was aided in the difficult task of surveying about year to go in completing the project Alex an ill-defined academic field by an able group of headed off to Germany to continue her studies colleagues who served as Consulting Editors. I there. Before leaving she selected and trained her stand in admiration of each of them individually. replacement, Erin Montgomery Several months Collectively they served as a brain trust in help- later I moved from the California Polytechnic ing to identify the breadth and depth of the vol- State University in San Luis Obispo to the Uni- ume. Part of their task was to help set the markers versity of Missouri-St. Louis. It fell upon Erin to which would define the amorphous field we chose see that all databases, files and records were or- to label “Japanese business and management.” ganized so thoroughly that “not even Dr. Bird” Though named elsewhere in this volume, I would can foul them up. In St. Louis, with little help be remiss not to personally acknowledge their from me, Dayo Fawibe picked up where Erin had contribution here: Nigel Campbell, Manchester left off and helped carry the project through to University; Mitsuyo Hanada, Keio University; completion. xii Acknowledgements

In addition to an excellent trio of research as- Lloyd Laughlin taught me to how to think criti- sistants, I have been blessed to have very solid cally and respectfully At a time when I was a clerical and administrative support. In San Luis simple undergraduate student Sidney Chang saw Obispo, Sharon R.Leib helped to hide my a path for me to take and pushed me in that di- mutlitude of shortcomings while I tried to juggle rection. In Japan, Gregory Clark challenged my my responsibilities as editor with my duties as understanding of Japan and convinced me that area coordinator. In St. Louis, Kathleen my “future is in studying business, not history” Mohrmann provided a calm and cheerful per- Susumu Takamiya served as a wise and gentle sonality while taking care of the details involved mentor during my few short years at the Sanno with setting up life at a new university thereby Institute of Business Administration. Finally allowing me to concentrate on the encyclopedia. James C.Abegglen provided a model of abiding In addition to the many authors who contrib- interest in Japan and keen insight into Japanese uted to this volume, I have enjoyed the support business and management. of numerous colleagues. Each in their own way This volume would not have been possible offered words of encouragement and support as without the strong support of a very talented staff well as providing examples of scholarship on at Routledge who provided not only counsel and which I might model my own humble efforts. In direction, but also timely and much-needed en- particular, I would like to thank Roger Dunbar couragement along the way In particular, Fiona (New York University), Kiyohiko Ito (Univerity Cairns was instrumental in getting this project of Hawaii, Manoa), Gil Latz (Portland State Uni- off the ground and underway The matching versity), Harold Kerbo, Colette Frayne and Lynn bookend to Fiona was Dominic Shryane, who Metcalf (California Polytechnic State University), was largely responsible for bringing it to a suc- Tish Robinson (Univeristy of California, cessful conclusion. Berkeley), Schon Beechler (Columbia Univer- A “thank you” is also due to Kyle, Allyson, sity), Martha Maznevski (IMD), Mark Jared and Campbell. They think what I do is okay Mendenhall (University of Tennessee- Lastly I would like to thank my wife, Diane, Chattanooga) and Joyce Osland (University of whose constant love and support over the past Portland). twenty-three years has enabled and allowed me There were several other individuals who, to do what I do. It is hard for me to envision with one exception, had little direct involvement what I have done here as worthwhile without with this volume, but who nevertheless contrib- someone to share it with. uted to its creation through their impact on my Allan Bird life as an academic. In my first years in college, St. Louis, Missouri Introduction

Background away from many of the academics and journalists interested in business. Lacking fluency in Japa- From 1979 to 1989 the world witnessed the ar- nese, and in the absence of writings by Japanese rival of a global economic superpower. During academics and authors in English or other West- this ten-year period Japanese foreign direct in- ern Languages, it has been more difficult for non- vestment (FDI) totaled $67.5 billion. Of all Japa- Japanese to gain an accurate understanding. nese investment overseas, nearly 50 percent In the past three decades a body of work suf- occurred within the USA. On a world scale, by ficient to spark further interest and desire to learn 1993 Japanese firms had been so successful that about Japanese business has developed. Unfor- 281 of Businessweek’s Global 1,000 were Japanese tunately much of it is specialized. There is no firms. single source to which a person interested in Japa- In light of these developments, one would nese business can turn to find out specific prac- anticipate a well-developed interest in Japanese tices, learn about distinctive concepts or identify firms among business executives, government key personalities or institutions. The Encyclopedia administrators and management scholars. Yet, an of Japanese Business is intended to address this de- analysis of the leading journals in the manage- ficiency ment field (Administrative Science Quarterly, Strategic There are several general sources on Japan, Management Journal, Academy of Management Jour- among them the Cambridge Encyclopedia of Japan nal, and Academy of Management Review) reveals a and Kodansha’s Japan: An Illustrated Encyclopedia. dramatically different story. Of the roughly two However, these give short shrift to the Japanese thousand articles and research notes published business system or the environment in which it in these four journals from 1980 through 1994, operates. In a similar vein, there are encyclope- less than 3 percent address or directly relate to dias of international busines and of specific busi- either the domestic or international behaviors of ness disciplines such as marketing and finance. Japanese firms or their employees. The situation Unfortunately these volumes provide, at best, lim- is only slightly better when it comes to the cover- ited coverage of specific Japanese business con- age of Japanese firms in practitioner periodicals cepts, practices, individuals or entities. More such as Harvard Business Review or Sloan Manage- recently MIT Press has published The MIT Ency- ment Review, or in business periodicals such as the clopedia of the Japanese Economy. As its name im- Financial Times, The Economist, Businessweek and For- plies, this book focuses specifically on economics, tune. which of course has a large overlap with busi- At first blush an observer might conclude that ness and management. However, again, it misses Western management scholars are guilty of gross important areas of business and management. ethnocentrism. Although a severe case of paro- chialism may be part of the explanation, I believe a more benign interpretation is available. Aims of the Encyclopedia Japanese practices are fundamentally different from those found in the West, particularly the The aim of the Encydopedia is to offer an acces- USA. Additionally Japan is located in Asia, far sible and readable reference source of interest to xiv Introduction both the non-specialist and the specialist seeking Timeliness information on specific aspects of Japanese busi- Encyclopedias, representing as they do a snap- ness. Though focused primarily on post-Second shot of current knowledge about a field, suffer World War developments, practices and related obsolescence almost from their moment of con- concepts, entries on history provide grounding ception. This is even more the case when com- in the past. An effort was made to position the piling knowledge and understanding about a field writing and content of entries such that they en- that is in a constant state of flux. The Japanese courage use of the volume by both non-special- business system and its environment are under- ists (a journalist wanting background on the going rapid and widespread change. Mergers, Tokyo Stock Exchange or a student looking for acquisitions and company failures have taken information on Toyota) and specialists (a man- place at a fast clip during the 1990’s and into the agement scholar interested in the use of shokutaku new millennium. Additionally government min- shain (contract employees) in human resource istries have undergone significant restructuing as staffing strategies). Additionally entries are ori- well as some mergers of their own. In many cases, ented toward more recent developments and top- both in the private and public sectors, changes ics. However, a strong commitment was also have been accompanied by changes in names. For made toward providing appropriate historical example, the Ministry of International Trade and context for understanding Japanese business cul- Industry (MITI) is now operating as the Minis- ture. try of Economics, Trade and Industry (METI). No doubt further changes will take place in the Structure next several years, generating additional shortcomings in the titles and contents of entries. Nev- The structure of the Encydopedia consists of one ertheless, a concerted attempt has been made by volume divided into fourteen topical categories. authors and editors to see that all entries are ac- Individual entries are in one of four lengths. First- curate and up-to-date. level entries run about 2000 words in length, second-level entries are approximately 1000 words, third-level entries 500 words and fourth-level Conclusion entries 150 words. The first paragraph of each In commenting on the creation of this encyclope- entry follows a format in which basic informa- dia, contributing authors frequently voiced two tion is provided upfront, followed by historical observations. When asked to write on a particu- background which, in turn, is followed by a lar topic, they would usually respond that “surely deeper discussion. Entries were prepared in this someone has already written a clear explanation” manner so that readers anxious to gain a quick of this topic or that issue. Then, upon further overview could read the first few paragraphs, reflection, occasionally accompanied by a quick while those readers requiring more detail could search in the library they would express surprise proceed deeper into the longer entries. that no one had. “After all,” as one author said Cross-referencing within the volume allows the about a topic he had been asked to write on, “this reader to see and follow connections among top- is widely understood by everyone doing research ics. Furthermore, authors of longer entries have in the area.” The second observation followed provided selected readings so that those readers from the first, and usually came after completion wishing to pursue a topic further may do so. of an entry: it is good to get all of this information organized and gathered into a single source. This, of course, was the purpose of publishing this volume all along. We hope you will agree—it was good to pull this information together in one place. How to use this book

This is an easy to use book. The articles/topics • Industrial Relations have been ordered both alphabetically and cat- • Japanese Business Overseas egorically. Entries can be searched using either • Manufacturing approach. The categories are namely: • Marketing and Distribution • Research and Development • Economics • Finance Entries for topics and terms which are commonly • General Management/Business Administra- referred to in English using either the original tion Japanese or the English translation are cross-ref- • Government Institutions/Business-Govern- erenced with both terms. For example, the entry ment Keidanren can be searched using either that name or the English translation, Federation of Eco- • History nomic Organizations. Cross-references appear in • Human Resource Management bold type. Related entries are also noted in the • Influential Industries See also section at the conclusion of each entry • Influential Japanese Companies Where deemed appropriate, entries also include a further readings section, where authors have • Influential Social/Business Entities identified several books or articles helpful to the • Influential Social/Business Personalities reader in providing further coverage of the topic. Thematic entry list

Economics General management/business administration agricultural co-operatives accounting in Japan appreciating yen bankruptcies bad debt bottom-up decision making processes Bank of Japan business ethics Banking Act of 1982 commercial code banking crises competition bubble economy contracts city banks corporate governance consumption tax daihyoken Development Bank of Japan environmental and ecological issues dollar shock in 1971 habatsu dual structure theory industrial groups (keiretsu) economic growth joint stock corporation economic ideology joint ventures Heisei boom Kansai culture income doubling plan kansayaku Izanagi boom madogiwa zoku Japan Development Bank maruyu liberalization of financial markets mochiai main bank system Naniwashi bushi sarakin negotiations unemployment nemawashi nihonteki keiei nikkei jin Finance office ladies (OL) banking crises organizational learning capital markets restructuring corporate finance ringi seido cross-shareholdings salaryman debt/equity ratios small- and medium-sized firms postal savings stockholders general assembly promissory note strategic partnering shareholder weakness supply chain management in Japan takeovers three sacred treasures venture capital industry white-collar workers Thematic entry list xvii women’s roles Human resource management zaibatsu allowances and non-salary compensation appraisal systems burakumin Government institutions/business-govern- contract employees ment relations education system genba-shugi administrative guidance (gyosei shido) human relations management agricultural policy internal labour markets amakudari karoshi cartels lifetime employment dango outplacement depressed industries permanent employee Depressed Industries Law, 1978 seniority promotion deregulation shukko environmental regulations Fair Trade Commission foreign aid Industrial relations industrial policy enterprise unions industrial regions foreign workers Japan Inc. Japan Productivity Center for Socio-Economic madoguchi shido Development men in charge of MoF Ministry of Labour Ministry of Construction Sohyo Ministry of Finance Ministry of International Trade and Industry Rengo Influential industries trade barriers airline industry trade negotiations automotive industry banking industry computer industry History construction industry electronics industry American occupation motorcycle industry banto pharmaceuticals industry Buddhism retail industry distribution system software industry geography telecommunications industry guilds (za and kabunakama) history of the labour movement Influential Japanese companies ie industrial efficiency movement Ajinomoto Meiji restoration Arabian Oil Post-WWII recovery Bank of Tokyo Prince Shotoku’s 17 Article Constitution Canon Samurai, role of Daiei, Inc Tokugawa period Daiichi Kangyo Bank wartime legacy Export-Import Bank of Japan xviii Thematic entry list foreign companies in Japan Influential social/business personalities Fuji Photo Film Abegglen, James C. gaishikei kigyou Cole, Robert Honda Motor Co. Ltd. Deming, W.Edwards ITOCHU Corporation Dodge, Joseph M. Ito-Yokado Company Ltd. Dokoh, Toshio Japan Airlines Dore, Ronald Japan National Railways Fukuzawa, Yukichi Kao Hayakawa, Tokuji Kirin Brewery Company Hayato, Ikeda Kyocera Corporation Honda, Soichiro Long-Term Credit Bank of Japan Inamori, Kazuo Marubeni Corporation Ishikawa, Kaoru Matsushita Electric Industrial Company Iwasaki, Yataro Limited (MEI) Johnson, Chalmers Mitsubishi Corporation Juran, Joseph M. Mitsui & Co., Ltd. Koike, Kazuo Mitsukoshi, Ltd. Komiya, Ryutaro NEC Matsushita, Kounosuke Nintendo Co. Ltd. Minomura, Rizaemon Nippon Telegraph and Telephone (NTT) Morita, Akio Nissan Motor Company Nakauchi, Isao Nomura Securities Nonaka, Ikujiro Norin Chukin Bank Ohmae, Kenichi Seven-Eleven Japan Ono (Ohno), Taichi Sharp Corporation Shibusawa, Eiichi Sony Shingo, Shigeo Sumitomo Corporation Taguchi, Genichi Toshiba Tanaka, Kakuei Toyota Ueno, Yoichi Yamato Transportation

Japanese business overseas Influential social/business entities economic crisis in Asia Central Union of Agricultural Cooperatives general trading companies industry and trade associations Japanese business in Africa Japan Association of Corporate Executives Japanese business in Australia Japan Automobile Manufacturers Association Japanese business in Canada Japan Chamber of Commerce and Industry Japanese business in China Japan External Trade Organization Japanese business in Germany Japan Federation of Economic Organizations Japanese business in Italy Japan Federation of Employers’ Associations Japanese business in Korea and Taiwan Keio University Japanese business in Latin America Liberal Democratic Party Japanese business in Mexico Nihon Keizai Shimbun Japanese business in Southeast Asia sokaiya Japanese business in the Middle East Tokyo University Japanese business in the UK Thematic entry list xix

Japanese business in the United States of after-sales pricing America Akihabara Japanese investment patterns central wholesale markets Japanese MNEs chugen localization consumer movement New United Motor Manufacturing Inc. creative houses (NUMMI) Dentsu overseas business of small- and medium-sized department stores enterprises discounters overseas education e-commerce overseas production konbini (convenience stores) overseas R&D Large Retail Store Law, 1974 US investment in Japan marketing in Japan one-to-one marketing pricing practices Manufacturing/production social marketing 5S campaign superstores ISO issues tonya Japanese Industrial Standards (JIS) Tsukiji market just-in-time kaizen quality control circles Research and development quality management standard setting export and import of technology subcontracting system firm strategies for technology suggestion systems patent system total productive maintenance product development Toyota production system research cooperatives science and technology policy VLSI Research Cooperative Marketing and distribution advertising

Abegglen, James C. from workers in terms of loyalty and also the depth of concern management demonstrated for The most influential author on Japanese busi- the total welfare of those employees. In addition ness and management, Abegglen’s pioneering to lifetime employment, Abegglen also identified work, The Japanese Factory, set the focus and di- how rewards were based on group, not individual, rection of future analyses of the Japanese man- performance. He also drew attention to the em- agement system. To date, he has authored or phasis on length of tenure over pure merit-based co-authored ten books, including two other vol- criteria in promotion decisions. He concluded that umes receiving significant attention: Kaisha: The Japan’s pattern of industrialization differed from Japanese Corporation (with George Stalk, Jr:) and the US and other Western countries as a conse- Sea Change: Pacific Asia as The New World Industrial quence of the larger social and cultural context Center. Abegglen first came to Japan in 1945, liv- in which Japanese work organizations were em- ing and working there a majority of time since bedded. then. In 1965 he was one of the founding offic- In 1985, Kaisha: The Japanese Corporation had ers of the Boston Consulting Group (BCG) and an equally profound impact on a western busi- established BCG’s Tokyo office. Eighteen years ness community trying to understand the foun- later he established Asia Advisory Services. dation of competitiveness on which Japanese Abegglen also remained active in academia firms were achieving market share worldwide. It through his position as a faculty member at outlined both the strengths and weaknesses of Sophia University where he was director of the Japanese corporations. university’s Institute of Comparative Culture from 1987 to 1990. Although he did not coin the term “Japan, Inc.,” he is widely associated with it Further reading because of his active commentary on Japanese Abegglen, J.C. (1958) The Japanese Factory, Glencoe, IL: business through his writings in business peri- The Free Press. odicals, both in and out of Japan. Abegglen, J.C. and Stalk, G., Jr. (1985) Kaisha: The Japa- The Japanese Factory (1958) was a detailed ex- nese Corporation, New York: Basic Books. amination of the patterns of social life and influence relations in a Japanese factory In his analysis, ALLAN BIRD Abegglen pointed out a key difference from the American factory in that a person entering the accounting in Japan employment of a Japanese factory was making a lifetime commitment. He argued that this extraor- Accounting standards and financial reporting in dinary commitment helped to explain both the Japan are similar in many ways to US and Inter- all-consuming demands that management exacted national Accounting Standards; however, 2 accounting in Japan differences exist. Differences also exist in account- fied as “trading” securities be reflected in income ing standard setting and regulations. for the period. In contrast to trading securities, unrealized changes in the value of securities classified as “available for sale” are reflected in share- Accounting standard setting and regulations holders’ equity and do not affect current period Accounting standards and regulations are income. Accounting for investments in securities strongly influenced by governmental agencies and that result in over 20 percent ownership of the laws in Japan. Three primary sets of laws must investee is discussed below. be considered when analyzing accounting and re- Accounting for inventories in Japan is similar porting standards in Japan. The Commercial to most countries. The company may value in- Code, administered by the Ministry of Justice, ventory using either the historical cost or the prescribes accounting standards for limited liabil- lower of cost or market value. Typically histori- ity companies (kabushiki kaisha). The Commer- cal cost is used. The lower of cost or market cial Code has a strong legal focus and is primarily method requires that the decline in value be sig- concerned with creditor and shareholder protec- nificant (at least 50 percent) before adjustments tion. The Securities and Exchange Law, admin- to market are made, thus inventories may be over- istered by the Ministry of Finance, applies to stated to some extent. Inventory cost may be companies that list their stock on exchanges. The based on specific, identifiable values if available, primary interest of the Securities Laws is to pro- or cost flow assumptions, such as FIFO, LIFO vide information for investor decision making. or average cost, may be used. Replacement cost The final influential law affecting Japanese ac- is not allowed. The same accounting method must counting standards is the Corporate Income Tax be used for both financial accounting and tax pur- Law. This law basically requires that income and poses. deductions for tax purposes also be the same as Tangible assets, such as buildings and equip- those used for financial accounting purposes. ment, are recorded at historical cost. Revaluation These three laws are the primary laws and regu- is not permitted. Thus, land accounts in the finan- lations governing accounting and financial report- cial statements may be overstated in view of the ing in Japan. recent decline in Japanese land values. Deprecia- tion is based on amounts allowed for tax purposes, and typically calculated by one of the accelerated Accounting rules and standards methods. Land is not depreciable. Leased tangi- Accounting rules and standards are concerned ble assets that transfer the risks and rewards of with how the accounts are measured and how ownership to the lessee are accounted for as capi- amounts are calculated. As previously noted, the talized leases and treated in a similar manner to Commercial Code, Securities Laws and Corpo- purchased assets. However, capitalization of leases rate Income Tax Laws generally determine spe- is not a common practice in Japan. cific accounting rules and standards. The valuation of intangible assets depends on Accounts and notes receivable are based on the nature of the asset. Internally generated good- amounts owed to the company. The calculation will is not recognized. Purchased goodwill is capi- of the allowance for doubtful accounts is usually talized and amortized over five years, although based on the amount allowed by tax law. This is there are proposals to increase the amortization in contrast to the USA, where the estimate of period to twenty years. Goodwill generated in future bad debts is based on the amount that will the acquisition of another company is measured prove uncollectible. based on the book value of the net assets acquired Recent changes in accounting for marketable instead of fair market value. Research and devel- securities now require firms to use the year-end opment expenditures may be capitalized and am- market values of the securities for valuation pur- ortized over five years, although most companies poses. This is in contrast to historical cost that write off the expenses in the year incurred. was previously used. Pending changes require Accounting for longer term investments in that changes in market values of securities classi- other companies is determined by the degree of accounting in Japan 3 ownership. The equity method is used for invest- Reserves are often used in Japanese accounting, ments that represent 20–50 percent ownership but rare in the USA. The reserves basically rep- of the investee and for joint ventures. Investments resent appropriations of income or retained earn- of over 50 percent ownership in subsidiaries are ings and generally do not contain a cash consolidated and discussed below. Business com- component. The Commercial Code requires com- binations are accounted for as a purchase. Gen- panies to maintain legal reserves. The legal re- erally the pooling method is not allowed. serve represents an annual allocation or A major change in Japanese accounting has appropriation of income equal to at least 10 per- been in accounting for employer provided pen- cent of cash dividends and bonuses to directors. sions. In the past, pension liabilities and expenses The annual appropriation is required until the were accounted for on a “pay as you go” basis. reserve is equal to 35 percent of capital stock. The result was a significant understatement of Thereafter, appropriations are voluntary The re- pension liabilities. Recent changes now require quirement for a legal reserve is an example of that pension liabilities be accounted for using the focus on creditor protection by discouraging accrual concepts and market valuations. The excessive dividends and bonuses to directors. In funding status of the company’s pension plans addition, discretionary reserves are permitted and must also be disclosed. These adjustments and have led some analysts to conclude that manag- changes are expected to have significant effects ers of Japanese firms use reserves to smooth in- on the financial statements of Japanese firms. come or manage earnings. Deferred taxes arise when the timing of in- A final noteworthy accounting practice in Ja- come and expenses for financial accounting pur- pan, and one that differs from most countries, is poses is different from the recognition for income the charging of directors’ bonuses directly to re- tax purposes. Deferred tax accounting is com- tained earnings instead of an expense against in- mon in the financial statements of many other come for the period. The bonuses are viewed as countries; however, it is rare in Japan. Basically a distribution of corporate profits instead of an recognition of deferred tax assets is not allowed expense. and usually firms will not recognize deferred tax liabilities, even in consolidated financial state- Financial reporting ments. Typically there is no need for deferred taxes since the tax code requires that most items Financial reporting is concerned with how ac- of income and expenses be treated the same for counting information is presented or reported both financial accounting and tax purposes. in the basic financial statements. Both the Com- Leased assets in Japan are usually accounted mercial Code and the Securities and Exchange for as operating leases and charged to expense Law require firms to file a business report, a when incurred. Currently capitalized lease ac- balance sheet, income statement, proposed state- counting may apply in a few limited cases; how- ment of appropriations of retained earnings and ever, the trend is toward requiring capitalized supplemental schedules. However the format, leases in the future. classification, extent of disclosure and type of The consolidation of foreign subsidiaries re- supplemental information differs between the quires the translation of foreign currency accounts two agencies. Examples of supplemental infor- into yen equivalents. Assets and liabilities of formation required by the Commercial Code in- eign subsidiaries are translated using the exchange clude: rate in effect at the end of the year, and income statement items are generally translated using the • changes in capital stock and reserves average exchange rate for the year. Translation • changes in bonds payable and other debt in- adjustments are recorded as an asset or liability struments on the balance sheet. • changes in fixed assets and accumulated de- An additional major difference between Japa- preciation nese accounting and accounting in other coun- • disclosure of debt guarantees and disclosure tries, such as the USA, is the use of reserves. of collateralized assets 4 aadministrative guidance

• extensive disclosure of related party transac- of business and by geographical sector. Specifi- tions, such as with subsidiaries, directors and cally each segment’s turnover (sales revenue), controlling shareholders assets and operating income must be disclosed. • ownership of subsidiaries (and reciprocal Each company must have a statutory auditor ownership) who attests to the financial statements. The statutory auditor is usually not a Certified Public Ac- The Securities and Exchange Law requires simi- countant and often is an employee of the firm. lar information to be filed with the Ministry of Companies are required to have an audit by an Finance. The Ministry of Finance requires addi- independent Certified Public Accountant if they tional disclosure of information such as details of are listed on a stock exchange, or for unlisted pension obligations: marketable securities, sub- companies, if their share capital is over 500 mil- sequent events, intangible assets and so on. A lion yen or liabilities exceed 20 billion yen. cash flow statement and six month cash flow forecast is also required, but is not audited. Addi- tional forecasts, such as for capital expenditures Summary and debt retirement, are required to be filed with the Ministry but are usually not disclosed in the Japan’s accounting standards, rules and report- shareholder reports. ing requirements are similar in many ways to Consolidated financial statements are also re- those of other countries, and are becoming more quired of firms that are listed on security ex- harmonized in response to global economic changes and subject to the Securities and forces. Many differences remain, however, and Exchange Laws. The consolidated statements in- the rules are somewhat complicated by the multi- clude the balance sheet and income statement, agency standard setting process. but are expanded to include a cash flow statement. A subsidiary’s financial statements are consolidated with those of the parent company if the Further reading parent owns over 50 percent of the subsidiary company’s stock. It is important to note that there Choi, F.D.S., Frost, C.A. and Meek, G.K. (1999) Inter- are regulations that allow exclusions of some subnational Accounting, 3rd edn, Englewood Cliffs, NJ: sidiaries from the consolidated group. The re- Prentice Hall. quirement for consolidated financial statements Haskins, M.E., Ferris, K.R. and Selling, T.C. (2000) has increased the transparency of the firm’s ac- International Financial Reporting and Analysis: A Concep- tivities and led to disclosure of losses by unprof- tual Emphasis, 2nd edn, Boston: Irwin McGraw Hill. itable subsidiaries. Kiyomitsu Arai (1994) Accounting in Japan, Tokyo: In- The format of the financial statements varies stitute for Research in Business Administration, depending on the filing requirements. However, Waseda University Tokyo, Japan. the balance sheet requires that assets, liabilities KPMG Peat Marwick (1993) Comparison of Japanese and and equity be classified separately and that cur- U.S. Reporting and Financial Practices, Tokyo, Japan. rent assets and current liabilities be distinguished Nobes, C. and Parker, P. (1998) Comparative Interna- from long-term items. The income statement has tional Accounting, 5th edn, London: Prentice Hall an additional section for special gains and losses, Europe. but the definition of special gains and losses is RON SINGLETON not as restrictive as the definition of extraordi- KAZAHIRO OKAZAKI nary items required in the USA. Also, prior period adjustments are included in the special gain or loss section as opposed to a restatement of retained earnings. administrative guidance The Ministry of Finance also requires foot- note disclosure of the major segments of a firm’s The term “administrative guidance” or gyosei shido operations. The segments are classified by line refers to non-codified, extralegal regulation administrative guidance 5

whereby a ministry attempts to induce certain it is extralegal, ministries have to ensure that the behavior in a company or industry with the aim regulation garners sufficient industry support to of realizing an administrative goal. The process be meaningful. The process of designing guid- is typically not transparent and the resulting regu- ance therefore often entails sending a draft of a lation has a strong situational character, because new rule to the trade association concerned, to rules may be invoked or revoked at the discre- be discussed and modified by the presidents of tion of the ministry without cabinet or parliamen- the leading companies. The association then re- tary approval. During the heyday of industrial ports the presidents’ opinion to the ministry In policy in the 1950s and 1960s, administrative this sense, administrative guidance often emerges guidance was the predominant regulatory tool out of discussions between bureaucrats and the used to align business strategies and public policy regulated industry. goals. The trade association’s function in monitor- There are two forms of administrative guiding the implementation of rules is as important ance: written and oral. Written guidance typically as their input in regulatory policy creation. After establishes industry-wide rules that are valid in a new rule has been issued by the ministry the the medium run and published in one volume at regulatees themselves often assume the task of the end of the fiscal year. An example of written ensuring adherence. It is much easier for the firms guidance would be a notification (tsutatsu) from in an industry rather than bureaucrats to observe the Ministry of Finance’s (MOF) Insurance Bu- the market behavior of their competitors. Because reau that life insurance companies are allowed to it is extralegal and informal, administrative guid- invest a lower or higher maximum percentage of ance invites cheating, and it can only be enforced their total assets in the stock market, effective from with group pressure and controls by the indus- a certain date. Oral guidance typically remains try concerned. Given that administrative guid- undisclosed and involves delicate conversations ance builds on self-regulation for enforcement, it between ministry officials and industry repre- can be either extremely effective (if all compa- sentatives. For instance, when the Nikkei 225 nies agree to comply) or completely ineffective stock index fell significantly in the early 1990s, (if they choose to ignore the ministry’s guidance). MOF officials called up several investment banks and in the course of a jovial conversation pointed out just how detrimental they thought the de- Changes in the 1980s pressed stock market was for the overall economy In reaction, the banks were said to have bought Two major currents combined to diminish min- large positions in Japan’s flagship companies. isterial leverage with which to enforce adminis- Enforcement is based on a quid pro quo, or “car- trative guidance in the 1980s. First, as companies rot and stick,” approach. Companies know that grew and became world competitors, the “car- if they follow the ministry’s “advice” they may rots” offered by their ministries, such as access reap rewards later, whereas refusal to comply may to loans or foreign exchange, became less appeal- lead the ministry to obstruct future business oping. Second, deregulation and the opening of fi- portunities. “Carrots” are offered by the minis- nancial markets undermined the effectiveness of try in the form of subsidies or lenient regulation, both “carrots” and “sticks.” whereas the “stick” may be a threat to withhold The primary “carrots,” or rewards, that min- a business license, curb an import quota or give istries used for implementing industrial policy preferential treatment to a competitor. Because in the postwar period came in two forms: (a) ac- compliance is voluntary there is effectively no cess to and allocation of imported and scarce raw legal recourse for firms subjected to administra- materials, and (b) opening of new business op- tive guidance. Neither is there a legal means for portunities through such means as granting li- the regulating ministry to enforce its guidance. censes, subjecting product innovation to approval, Importantly administrative guidance is not or furnishing low-interest loans through public usually a “one-way street” with the ministry uni- financial institutions. The allocation of raw ma- laterally designing all the rules. Precisely because terials and foreign technology worked well until 6 advertising

1965, when a revision of the Foreign Investment advertising Law diminished the Ministry of International Advertising in Japan is typified by its lack of prod- Trade and Industry’s (MITI) control over for- uct focus. Many advertisements don’t show the eign reserve allocation. The revision of the For- product at all. Rather than promoting product eign Exchange and Trade Law in 1980 further features or brand, Japanese advertising generally curtailed MITI’s command over trade flows. No strives to promote a positive image of the com- longer could the ministry reward cooperative pany producing the product. This soft-sell style firms through the allocation of scarce raw mate- of advertising has long been described by West- rial imports. erners as image, or mood advertising. While mes- Second, changes in financial markets in the sage content is of utmost importance in 1980s seriously undercut the ministries’ ability advertising in the West, in Japan, the method of to punish manufacturing firms and banks that conveying the message is more important. resisted administrative guidance. With the devel- The soft-sell approach in Japanese advertising opment of the bond and stock markets, firms be- is a direct influence of Japan’s culturally ingrained came less dependent on bank financing, so avoidance of the direct approach. Japanese ads banking regulation no longer translated into are designed to appeal to the target audience’s manufacturing guidance. As manufacturing firms emotions. To achieve this, advertisements tend became more able to raise funds abroad, the gov- to place heavy emphasis on visual imagery and ernment’s threat of punishing mavericks by block- less on written copy. The resulting advertisements ing access to loans became meaningless. For the build a positive image of the corporation placing banks, deregulation meant less dependence on the advertisement, and thus their products, while Ministry of Finance (MOF) licenses and approv- providing very little detailed product information. als. Yet the need for constant monitoring remained In general, Japanese advertising has tradition- greatest in the banking industry and banks con- ally focused on building a corporation’s image. tinued to stay close to their regulators by desig- Vying to capture the viewers’ attention in the del- nating MOF-tan. uge of advertising, advertisements tend to be ori- Thus, the liberalization of trade rules and ac- ented around building a positive image of a cess to financial markets in the 1980s undermined corporation. In many cases this results in adver- government guidance of both the manufacturing tisements where the product is not shown, let and the financial sectors. While the practice con- alone mentioned. Such ads tend to have a sign- tinues to be more institutionalized and extensive off with the corporate name. than moral suasion in other countries, the effec- The theory behind this image advertising is that tiveness of guidance depends increasingly on the if a consumer has a good impression of a corpo- willingness of industry to cooperate, with minis- ration, they would tend to buy that company’s tries having fewer means at their disposals to cre- products. Product branding has not gained the ate such willingness. stature in Japan that it enjoys elsewhere in the world. As a result, most television commercials end with the corporation’s name and logo, which Further reading also feature prominently in print advertisements. One reason advertisements in Japan can omit Johnson, C. (1982) MITI and the Japanese Miracle: The product description is the wealth of product in- Growth of Industrial Policy 1925–1875, Stanford, CA: formation available in other venues. A visit to a Stanford University Press. retailer provides the consumer with a wealth of Schaede, U. (2000) Cooperative Capitalism: Self-Regula- highly descriptive complimentary product cata- tion, Trade Associations, and the Antimonopoly Law in logues. Further detailed product information can Japan, Oxford: Oxford University Press. be found in the many magazines dedicated to sup- Upham, F. (1987) Law and Social Change in Postwar Ja- plying in-depth product reviews. pan, Cambridge, MA: Harvard University Press. The one glaring exception to the soft-sell ap- ULRIKE SCHAEDE proach is in the case of products for which after-sales pricing 7 detailed information in the form of brochures and nationwide terrestrial stations, although satellite magazine reviews is not available. An example is and cable penetration are growing. advertising for products such as washing deter- A major factor in acquiring space in the mass gents which will often contain straightforward media is the fact that not every ad agency can messages and demonstrations of the product’s buy space. To buy space, an agency must have cleansing properties. an account with the media vehicle in question, Due to the Japanese culture of group con- and these vehicles don’t give the accounts away formity, Japanese ads are targeted towards the easily As a result, very few of Japan’s ad agencies group, rather than to the individual. Horizontal can buy ad space directly Rather, they have the identification is important. Advertisements that larger agencies buy the space for them. Once ad are perceived as containing an authoritarian space is acquired, getting an ad noticed among tone, such as a hard sell from an authority fig- the clutter of mass media advertising is a con- ure, are rejected. Similarly ads containing a bla- tinuous challenge for advertisers and their agen- tant message of vertical aspiration to a higher cies. This is especially true in the case of television, social station are also suspect. Successful adver- where the majority of spots are mainly of fifteen- tisements in Japan aim to build empathy with the second length. target group. A common method is featuring the A typical solution to the problems particular product’s acceptance by a peer, who is often also to advertising in Japan is the use of celebrities, both a celebrity. Japanese and foreign. Estimates put the use of ce- The lack of comparison ads in Japan has also lebrities in Japanese commercials at between 60 been attributed to Japan’s group culture. It has to 70 percent. These celebrities range from Japa- been argued that advertisements that compared nese comedians to pop singers, and from Holly- a firm’s product to that of a competitor would be wood box office stars to foreign scientists. The use rejected by Japanese consumers. However, in the of celebrities is believed to help a commercial stand few cases where comparative ads have been run, out from the competition, as well as to link a cor- it was found that Japanese consumers did not poration’s image with that of the celebrity Gener- reject them. Most likely the dearth of compara- ally these celebrities do not appear as tive advertisements in Japan is due to many ad spokespersons for a product, rather, their appear- agencies having more than one client per indus- ance has little to do with the product. try category and to industry self-regulation. SEAN MOONEY Regardless of the many quirks of advertising in Japan, the nation is flooded with advertising, from poles, to digital text messages broadcast to after-sales pricing small television to cloth placards attached to telephone screens inside taxis. There are two rea- After-sales pricing, or ato-gime, is pricing which sons for the prevalence of advertising in Japan. takes place after a product has been sold and de- One is the insatiable Japanese demand for infor- livered. It is a reflection of weak price competi- mation which results in nationwide newspapers tion. The opposite of ato-gime is jangime (pricing at with circulation in the millions. The other is the the time of sale). Such pricing, though standard relatively lax laws and regulations on advertis- in the West, is unusual enough in certain Japa- ing. Most industries are encouraged to conduct nese industries to require a special term. self-regulation regarding advertising. In addition, In a market economy buyers shop around for most media also regulate what they will, and will the best value. Shoppers look at quality service not, allow in an advertisement. and price, while producers compete to give shop- Acquiring mass media ad space in Japan is ex- pers the best deal. When buyers shop around, tremely expensive as well as highly competitive. supply and demand forces determine how much Both newspaper and magazine ad space is lim- they pay for the product they end up buying. If ited by restrictions on the number of pages avail- supplies are plentiful and demand is weak, shop- able for advertising. Television has only five pers can bargain for a lower price. If supplies are 8 aafter-sales pricing

scarce and there is much demand, sellers will be Second, if the cartel is waiting to decide on a in a strong position and able to raise prices. price, but the cartel relies on the good will of buy- However, both shopping and competing have ers, the cartel needs to negotiate over a final price costs. It takes time for shoppers to look around with buyers as a group. This is in fact how in- and it may be hard to find out how reliable a dustry-wide pricing in the petrochemical indus- particular supplier is. Shoppers may prefer to stick try has worked. Prices in the industry have been with particular producers so that they can save modified by considerations of two factors. Prices shopping time and be confident in the quality of may be modified to favor either sellers or buyers the goods they buy even if they have to pay a bit who are in a particularly difficult financial posi- more. Competing is also tough on sellers. Intense tion. That is, prices may be modified in the op- price competition brings down prices and can posite direction from market pressures. Or even drive firms out of business. Thus, both buy- alternatively prices may be modified with the ers and sellers have reasons to avoid constant market, in favor of either buyers or sellers de- shopping around on the basis of price. When pending on supply-demand conditions. Typically buyers are not choosing their suppliers on the whichever side is in a favorable position argues basis of price, they typically base prices on pro- during negotiations that cost-based, after-sales ducers’ costs. But if a sale is not based on price, pricing should be abandoned because it is old- the door is left open for negotiations over the fashioned and succeeds in using this rhetorical exact price to drag out long after the sale and ploy to adjust prices in its favor. delivery has been made. Finally after-sales pricing may take place be- There are three types of after-sales pricing. tween individual buyers and sellers based on First, when sellers are engaged in a cartel, it may these same considerations of fairness and mar- take a while for them to decide on final prices in ket conditions. Most commonly this kind of af- industries in which costs fluctuate considerably ter-sales pricing serves as a discount on a The primary example of this is the petrochemi- cartel-based price. cal industry. During the 1970s and early 1980s, The broad purpose of after-sales pricing is to when petroleum prices were rising sharply pet- modify prices somewhat in uncompetitive mar- rochemical producers tried hard to get buyers to kets with high prices. However, after-sales pric- pay the full cost of expensive petroleum ing brings certain disadvantages. The lack of feedstocks they used to make their products. transparent prices makes it more difficult for a Even though in principle buyers were supposed new firm to enter a market and attract customers to pay the full cost of production, the petro- with low prices. In a market where there are no chemical companies found that they were being definite prices at the time of sale, it is difficult for forced to compete on price and were losing the new entrant to know what price it is compet- money To solve this problem, the petrochemical ing against. Foreign firms trying to break into the industry adopted a price-fixing formula in 1983 Japanese glass market have made this complaint. to set prices for petrochemicals based on the cost Second, when prices are undecided for as long of feedstocks, which has been in effect ever as a year, as they are sometimes in the chemical since. Of course each company knows how industry it becomes difficult for firms to carry much it had spent on feedstocks by the time it out normal accounting procedures. How do firms delivered its chemicals, but chemical producers know what their revenues, expenses, and profits want to be sure that the formula is implemented are when prices are left dangling? However, the uniformly and that there is no price competition. chief problem with after-sales pricing is that it is So all the chemical producers wait until the gov- a symptom of weak price competition in Japa- ernment publishes average prices for the main nese industries such as chemicals, glass and phar- feedstock, naphtha. Because the industry is pric- maceuticals. Weak price competition fails to give ing on the basis of a cartel, and because it needs producers incentives to cut costs and become to wait for these price figures, pricing of prod- more productive. ucts throughout the petrochemical industry is delayed for several months. See also: cartels; competition; pricing practices agricultural cooperatives 9

Further reading cooperatives organized for the purpose of marketing specific types of farm products (dairy Tilton, M. (1996) Restrained Trade: Cartels in Japan’s Basic farming, horticulture, fruit culture, stock farming, Materials Industries, Ithaca, NY: Cornell University etc.) and multipurpose agricultural cooperatives Press. engaging in activities in the field of loan and credit MARK TILTON extension, mutual aid insurance, welfare (health and medical care), consultation and guidance, and agricultural cooperatives economic (marketing and purchasing) services. Agricultural cooperatives are generally called Modern agricultural cooperatives began in Japan nokyo in Japanese. When people refer to nokyo, following the land reform carried out by the Oc- they usually have the latter type of cooperatives cupation Forces after the Second World War. The in mind. These cooperatives are based on com- land reform took the form of the state purchase munities involved with rice culture or produc- of tenant farm land from landowners and subse- tion of crops and other farm products. quent sale thereof to tenant farmers, creating a Agricultural cooperatives have a total member- large number of very small owner-farmers with ship of 9,128,000 (as of 1998), consisting of an average of 1.1 hectares of farm land. How- 5,344,000 regular members and 3,784,000 asso- ever, because these small-scale owner-farmers ciate members (non-farmers such as consumers). could not expect to bring about agricultural de- The number of agricultural cooperatives stood velopment individually an attempt was made at at 1,411 in the year 2000. The government is united efforts in improving productivity and liv- promoting the amalgamation of agricultural co- ing standards through mutual aid and coopera- operatives, and the number of cooperatives is ex- tion among farmers. Accordingly the Agricultural pected to fall to 570 by 2010. Cooperative Society Law was enacted after the Observing specific fields of services provided land reform was started. The law was modeled by agricultural cooperatives as of fiscal 1997, mar- after cooperative group principles of 1936 and keting/distribution totaled ¥5.7 trillion (compris- the US law on cooperatives. Cooperative orga- ing of ¥1.6 trillion from rice, ¥1.35 trillion from nizations had also been in existence in Japan for vegetables and ¥3.8 billion from livestock), and half a century beginning with the Industrial Co- purchasing amounted to a total of ¥2.9 trillion operative Society Law which was enacted in 1900. (made up of ¥478.6 billion for feedstuff, ¥611.3 Agricultural cooperatives thus can be described billion for oil products, ¥357.2 billion for fertiliz- as cooperative societies seeking to make a fresh ers and ¥342.4 billion for agricultural machin- start on the basis of industrial cooperatives (sangyo ery). The percentage shares of the agricultural kumiai). cooperatives to the total amount of sales and pur- The difference between industrial and agri- chases made by the agricultural sector have been cultural cooperatives lay in their respective mem- on the decline in recent years: for example, agri- bership: industrial cooperatives’ membership cultural cooperatives accounted for 60 percent could include not only farmers, but also fisher- of vegetable sales and 60 percent of the purchase men, foresters, businessmen in commerce and of agricultural chemicals made by member farm- industry as well as consumers, while the agricul- ers. The percentage of farming households us- tural cooperative was intended to be a craft un- ing the services of agricultural cooperatives has ion composed of farmers as its regular members. also been falling. Revenues from marketing and The organizational structure, consisting of unit purchasing services were down 20 percent and agricultural cooperatives at the municipal level 12 percent respectively from those in fiscal 1985. and federations established at the prefectural and In the area of credit activities, the balance of national levels according to their respective busi- savings deposited with agricultural cooperatives ness functions, has been attributable to the tradi- as of the end of fiscal 1998 stood at ¥69 trillion, tion of industrial cooperative societies. accounting for 7.4 percent of the entire deposits Agricultural cooperatives can be divided into and savings in Japan. On the fund application two groups: single-purpose agricultural side, the outstanding loan balance amounted to 10 agricultural policy

¥22 trillion, bringing the ratio of loans to depos- tivities. Co-operatives provide member farmers its to a little under 30 percent. Most funds re- with advice on not only production but also mar- ceived as deposits and savings by individual keting and distribution with a view to improving cooperatives are in turn deposited with the pre- farming operation and management. Better liv- fectural credit federations of agricultural coop- ing guidance is related to consumer activities and eratives (Shinnoren) and the Norin Chukin Bank. involves health/medical care services for farmers. Because agricultural cooperatives’ credit services In the area of medical care in particular, welfare are operated in parallel with other lines of busi- federations are organized in twelve prefectures. ness, the amount of deposits/savings held by each With over 20,000 beds, they operate the largest operating entity is small, only about ¥34.1 bil- number of hospitals after the Japanese Red Cross lion. Cooperative deposits/savings are character- Society As public medical institutions, these hos- ized by disproportionately high percentages of pitals contribute to the development of medical personal savings (83.5 percent) and time deposit services in the community. (79.4 percent). The percentages of personal loans In the past when they were part of industrial and long-term loans are also high at 81.5 percent cooperative societies, Japanese agricultural coop- and 87.3 percent, respectively of total coopera- eratives, together with other agricultural organi- tive loans outstanding. Unlike ordinary city zations, were fostered by the State as institutions banks, agricultural cooperatives specialize in re- for exercising agricultural policies. With the tail banking. With the progress of financial de- change in agricultural policies, however, agricul- regulation, cooperatives have been increasing tural cooperatives have had to face critical tests. their focus on retail banking. Against this back- Liberalization of agricultural trade and financial drop, entities in other business categories have deregulation since 1990 have not allowed coop- moved into rural areas for new opportunities, erative development of farms, but forced the rea- putting downward pressure on operating income. lignment of the three-tiered organizational Accordingly gross profits from agricultural co- structure and rationalization of individual coop- operative business dropped to 35.4 percent from eratives. Future challenges for the agricultural co- 40 percent. operatives include whether these new The mutual aid services of cooperatives cor- developments can be implemented in concur- respond to life insurance and non-life insurance rence with the primary structure of existing co- business in the private sector. With a total of ¥34 operatives which are based on the function of trillion in outstanding plan balance, agricultural rural communities. cooperatives’ mutual aid plans account for 13.4 Confronted by broad changes in Japanese ag- percent of the life insurance market and 15.35 riculture, the declining number of people who percent of the non-life insurance market. Agri- may in future be engaged in agriculture and the cultural cooperatives boast the second largest progress of urbanization in rural areas, agricul- assets after Nippon Life Insurance Co. in terms tural cooperatives are uncertain about their di- of their life insurance portfolio, and are the top rection. It is possible that they may develop as non-life insurer in Japan in terms of the total cooperative organizations within the community amount of non-life insurance. The National more broadly encompassing not only farmers but Mutual Insurance Federation of Agricultural Co- also consumers and smaller businesses in com- operatives (Zenkyoren) has ¥34 trillion in total as- merce and industry. sets, accounting for 24.0 percent of the KENJI ISHIHARA agricultural cooperatives’ gross operating income. The mutual aid insurance business is the second largest business area after credit activities, and agricultural policy represents the most profitable operating area. Advice on farming and better living are of- Agricultural policies in Japan after the Second fered to member farmers as a non-profit under- World War started with land reform. The cen- taking, and are funded by revenues from the tral policy focus was on the securing of the food cooperatives’ credit, mutual aid and economic ac- supply and controlling its distribution in a time agricultural policy 11 when a planned economy and food shortages marketed rice premiums were provided to serve continued from prewar days. With the revival of as additional means of income redistribution. the economy in 1950, however, domestic resource Japan’s industrial structure underwent signifi- development began. Development of wild land cant changes around 1977. Companies, having and land reclamation projects were pursued for overcome the oil shock, promoted lean manage- the purpose of enlarging arable land areas. This ment. Emphasis shifted from the petrochemical/ was because during the period of so-called eco- heavy industries to microelectronics (ME). Glo- nomic independence in the late 1950s, food ac- balization progressed sharply In the period of high counted for as high as one-third of the total economic growth, agriculture had a role in at- imports, which placed pressure on foreign ex- taining food self-sufficiency because of Japan’s change availability and imposed restrictions on inadequate foreign currency reserves. In subse- the import of raw materials for use by exporting quent years, it played a two-pronged role. One industries. The business community thus called role was to provide a stable food supply at low for the attainment of self-sufficiency in food. prices, and another was to act as a regulating valve During the 1960s, when Japan entered into a to control the labor force in keeping with the cy- period of high economic growth, industrial com- clical fluctuation of the economy A stable food bines centering on steel production and petro- supply at low prices was subsequently satisfied chemical complexes were constructed in the by farm product trade liberalization, and the role Pacific belt zone in accordance with the National of a regulating valve to control the labor force Income Doubling Program. Even in this period, was played by workers in the tertiary industry a policy of food self-sufficiency was maintained rather than those in the primary industry From in order to avoid consuming foreign currency re- the latter half of the 1970s, those concerned with serves through food imports, reflecting con- agriculture have advocated regionalism together straints on the balance of payments which were with the idea of settlement zones in the Third serious fiscal and financial issues. The income Comprehensive National Development Plan. disparity that existed between rural and urban Non-farming households have come to account areas was regarded as a problem, and the Agri- for 60 percent of the agricultural community. Po- cultural Basic Law was enacted in 1961 with the litical and economic roles of rural areas have also intention to raise farm product prices, particu- undergone transformation. larly rice prices, in order to prevent the rapid Deregulation of agricultural product trade, migration of the labor force from rural to urban which began with liberalization of beef and or- areas. Rice prices rose 10 percent or more in the anges, started to affect rice in the 1980s. The Sec- 1960s. At the same time, as a result of the intro- ond Ad Hoc Commission on Administrative duction of farm machinery as well as progress in Reform (Second Rincho) was established in 1981. production technologies such as fertilizers and The Commission called for the reduction of price agricultural chemicals, food self-sufficiency was support for rice and other agricultural products, attained in the latter half of the 1960s. From the on the assumption that trade in agricultural prod- 1970s and thereafter, implementation of rice pro- ucts would be fully deregulated. Agricultural poli- duction adjustment and treatment of surplus rice cies would shift their emphasis from an income surfaced as major issues. Shortly after achieving redistribution function to agricultural life envi- food self-sufficiency however, the importation of ronment enhancement projects, including farm farm products was called for because of the need road construction/farming village drainage to further promote imports as a result of high projects in addition to agricultural infrastructure economic growth. There was no longer a balance construction program. The Agricultural Basic of payments constraint. Subsequently starting Law was reorganized into the Basic Law of Food, with livestock products, the importation of all Agriculture and Rural Areas. The new Law em- kinds of farm products accelerated. Throughout phasizes the importance of food security and the the 1970s, agricultural policies focused mainly on multifunctional roles of agriculture in the com- rice. Although rice prices were kept in check, pro- munity This Basic Law’s key points are as fol- duction adjustment subsidies and voluntarily lows: 12 airline industry

1 The establishment of a basic plan and set- and landing fees, and the deregulation of the ting of food self-sufficiency ratio targets. The domestic airline industry. target for the food self-sufficiency ratio is to be established with the aim of improving the Deregulation food self-sufficiency ratio and to serve as a guideline for domestic agricultural produc- Deregulation of the Japanese aviation industry tion and food consumption, while identify- commenced in 1985 with the granting of permis- ing issues which farmers and other relevant sion to ANA and JAS to operate internationally parties should address. In March 1986, ANA began scheduled interna- 2 Development of a food policy emphasizing tional service from Tokyo to Guam. Until then, consumers. Guidelines for a healthy dietary JAL was the only Japanese carrier allowed to fly pattern are to be set, the public’s knowledge regularly scheduled international routes and the of food consumption broadened, and rel- Ministry of Transport coordinated all domestic evant information provided. routes served by Japanese airlines. In 1986, the 3 Establishment of a desired agricultural struc- Japanese government relinquished its investment ture and development of farm management in JAL and JAL became a private corporation. policies. Measures are to be taken to encour- As a part of the government administrative re- age efficient and stable farm management form movement, the previous system of route al- and to construct an agricultural structure in location was abolished. Deregulation eventually which such management can play a major resulted in the removal of restrictions on over- part. Measures are to be taken to revitalize lapping or multitracking routes and the partial family farming, and to promote the incorpo- liberation of air fares. A significant result of de- ration of management. regulation was the take off of Skymark Airlines 4 Measures to ensure price formation reflect- in September 1998 and the commencement of ing appropriate market evaluation and man- daily service from Haneda Airport to Fukuoka agement stability. at half the cost in air fares charged by other do- 5 Maintaining and improving the natural cy- mestic carriers. Equally important was the fact clical function of agriculture. Agricultural that Skymark Airlines was the first new airline to production is to be developed in harmony be established in Japan in over thirty-five years. with the environment through the proper use Another new airline that marked its inaugural of agricultural chemicals and fertilizers and flight in 1998 was Hokkaido International Air- by improving soil fertility. lines (Air Do) which commenced three daily 6 Compensation for disadvantages in agricul- round-trip flights in December between Haneda tural production in hilly and mountainous Airport and the New Chitose Airport in Sapporo, areas. Support is to be provided (in the form Hokkaido. The substantially lower airfares proof direct subsidies) to help maintain adequate vided by the new upstart airlines meant increased agricultural production activities. domestic competition for the other three dominant carriers. KENJI ISHIHARA According to Civil Aviation Bureau statistics, the Tokyo-Hokkaido and Tokyo-Fukuoka routes airline industry are the two busiest in the world, with an annual traffic of approximately 8 million and 7 million In a rapidly changing and highly competitive glo- passengers respectively. Thus, in order to remain bal business environment, Japan’s airline indus- competitive, both Skymark and Air Do have in- try has faced considerable challenges during the stituted unique means of keeping their operational 1990s. The three major airlines in Japan, Japan costs low. For example, Air Do flight attendants Airlines (JAL), All Nippon Airways (ANA) and do not serve drinks or meals on their flights, how- Japan Air System have all been affected by the ever, they do have the additional task of cleaning prolonged recession in Japan, the steeply appre- and maintaining the cleanliness of aircraft. ciating yen, rising fuel prices, high airport usage Skymark does not use printed tickets but makes airline industry 13 use of thermal paper which can be inspected by to JAL subsidiaries resulted in improved produc- staff and thus does not require expensive auto- tivity as determined by the International Civil mated ticket readers. Not only does Skymark at- Aviation Organization (ICAO) measure of cost tempt to keep costs down, it also generates per available ton kilometer (ATK). In 1997, JAL’s additional revenue by selling advertising space cost to travel 1 kilometer carrying 1 metric ton on the exterior of its aircraft fuselages. was approximately 53 cents, compared to the world average of 47 cents. By fiscal 1998, JAL’s ATK was reduced to 48 cents through efficient Strategic management use of aircraft and personnel. Similar cost-cutting The economic turbulence experienced by Japa- measures were also instituted by All Nippon Air- nese airlines during the 1990s was not limited to ways and Japan Air System. Both airlines restruc- domestic routes only but extended to interna- tured their workforce, froze new hiring and tional routes as well. In 1994, the Transport Min- transferred less profitable routes to subsidiaries istry issued a warning to JAL, ANA and JAS to or to affiliated companies. For example, All Nip- reduce their labor costs in order to remain com- pon Airways’ subsidiaries Air Nippon (ANK) and petitive with other international airlines. As a re- Nippon Cargo Airlines (NCA) have lower op- sult, these three airlines postponed their plans to erational costs as their employees are paid less hire new flight attendants that year. In the mean- for doing similar work time, JAL had already begun a program to re- A major problem faced by both domestic and duce its labor costs by employing foreign flight international airlines operating in and to Japan is attendants on a limited contractual basis. These the excessively high landing fee, which far ex- foreign flight attendants were based overseas ceeds that charged at other major airports. For where the cost of living was substantially lower example, the overall landing fee for a Boeing 747– than in Japan. 400 at the New Tokyo International Airport, Another cost-cutting measure instituted by JAL Narita, is $11,807, nearly triple the $4,361 fee for and ANA was to reduce the overall number of New York and nearly double the landing fee of employees. JAL planned to reduce its personnel $6,685 for Paris. Furthermore, the Japanese gov- from 22,000 to 17,000 in the period from 1994 to ernment has set a very high fuel tax. Ballantyne 1998. Similarly ANA planned to reduce its per- (2000:19) reports that for JAL alone, fees and fuel sonnel from 15,000 to 13,500 by 1995. At ANA, tax account for some 24 percent of the domestic this was carried out through early retirement operating costs and 14 percent of total operating schemes and special bonus programs for flight costs. There is very little likelihood of a lower attendants over thirty years of age. The social landing fee or lower fuel tax as there are limited impact of these reductions on employee morale airport slots available. was considerable as the traditional concept of lifetime employment at major Japanese corpora- Resource optimization tions was rapidly eroded. In keeping with the traditional employment In addition to changes in human resources man- practices of many large Japanese corporations, agement to improve productivity Japanese airlines annual pay increases were based on one’s senior- have had to resort to other means to maintain ity or length of service with one’s company. As a global outreach and competitive advantage. The result of this practice, annual labor costs increased management strategies employed by each of the regardless of productivity. Thus JAL, for exam- Japanese airlines, however, differed somewhat in ple, has opted for expanded use of its lower cost addressing issues that developed from the liber- subsidiaries such as JAL Express (JEX) on more alization of global aviation markets. In October domestic flights, JALways (formerly Japan Air 1999, All Nippon Airways joined the Star Alli- Charter JAZ) for international routes, and J Air ance, which consists of several leading airlines and its Okinawa-based affiliate, Japan Transocean such as United Airlines, Lufthansa, Air Canada, Air for regional commuter flights. SAS, Thai, Ansett Australia and several other Japan Airlines’ strategy to transfer more routes airlines. In contrast, as of August 2000, Japan 14 airline industry

Airlines has not joined a major alliance but has From a productivity perspective, the kizuki sys- continued to establish code-shared arrangements tem and kaizen in Japanese aviation is best illus- with various airlines that belong to competing trated by the educational and training programs alliances. Similarly, Japan Air System has em- provided by the major Japanese airlines. In order barked on code-shared routes but not as exten- to develop human resources management skills sively as JAL. in addition to various technical skills, courses on One major benefit of joining an alliance or the principles of management and organizational code-shared arrangement with other airlines is behavior, error management, risk assessment, that customers are able to take advantage of a quality standards, problem consciousness and much wider and seamless airline route network. creativity are provided. From a kaizen perspective, At the same time, both customer services (such discussions are held on how to examine and im- as more convenient flight schedules, joint use air- prove the organization as well as specific proce- port lounges, and reciprocal frequent flyer pro- dures associated with daily tasks that can be grams) and operational services (flight and instituted. briefings, maintenance, ramp facilities, and catering) are considerably enhanced. Technological change and crew resource Another major benefit accruing from an alli- management ance partnership, from an operational perspective, is that maintenance employees and the For Japan Airlines, All Nippon Airways and Ja- deployment of spare parts along the route net- pan Air System, the introduction of advanced jet work can be reduced through the reciprocal pro- aircraft and the computerization of the cockpit vision of both personnel and essential parts and created an urgent requirement to integrate hu- equipment. The avoidance of duplication results man knowledge into their traditional training cur- in savings that can be passed on to customers. ricula. The traditional perspective on organizational behavior in which operational directives flowed from the captain to his crew was Kizuki system no longer satisfactory for the highly complex The success of an alliance, code-sharing or re- computerized flight management system. Since lated partnership arrangement ultimately depends human errors do occur when programming flight on the firm understanding and integration of plan data, new procedures required a cross-check- human factors throughout the system. In the case ing of procedures and data inputs prior to ex- of Japan Airlines maintenance, the company has ecuting instructions via the flight management developed a system of responsibility known as system. the kizuki system which consists of a group of dedi- New training procedures focused initially on cated engineers and mechanics to maintain and improving cockpit communication between the monitor the performance of the aircraft to which captain and his first officer. This enabled them to they are assigned. The term kizuki is a combina- operate as a cohesive team in which greater situ- tion of ki, which refers to aircraft, and zuki, which ation awareness was achieved and maintained means “to stick to.” A keen sense of responsibil- during flight. At the outset, the concept was ity and special attachment to each aircraft assigned known as Cockpit Resource Management; how- to the maintenance personnel are developed by ever, with the inclusion of extremely sophisticated having the names of the team leaders and their flight entertainment and other medical systems titles—for example chief engineer or mechanic— on modern jumbo aircraft, it became necessary prominently displayed on the cockpit bulkhead. to expand the concept to Crew Resource Man- Group loyalty and pride in the well-being of the agement (CRM) to recognize the important role crew and flight safety are thus achieved. Mainte- provided by flight attendants. nance crew members must be well coordinated CRM training programs at the three major in their scheduling of tasks to cover the various Japanese airlines differ slightly in their contents shift cycles necessary to handle various aircraft as each of the airlines has different operating arrivals and departures. routes and conditions as well as different corpo- Ajinomoto 15 rate cultures. However, the basic conceptual and Further reading philosophical elements are similar in that the main Ballantyne, T. (2000) “Deregulation,” Orient Aviation objective is to provide a greater appreciation and July: 16–19. respect for what each crew member’s skills and Saito, M. (1993) “Challenges to Human Factors Issues responsibilities are so that crucial decisions can in JAL Maintenance,” in Human Factors in Aviation, be made on the basis of having full knowledge of Montreal: International Air Transport Association, a given situation. Situation awareness at all times 187–195 during a flight is most important from a flight Ujimoto, V (1997) “Changes, Challenges, and Choices safety perspective. in the Japanese Aviation Industry: The Develop- ment of Crew Resource Management in Japan Air- Future outlook lines,” in H.Millward and J.Morrison (eds), Japan at Century’s End, Halifax: Fernwood Publishing Ltd, The challenges resulting from the deregulation 150–60. of the Japanese aviation industry are being met Yamamori, H. (1993) “Keeping CRM is Keeping the directly by Japanese airlines through restructur- Flight Safe,” in E.L.Weiner, B.G.Kanki and ing of their respective organizations and by join- R.L.Helmreich (eds), Cockpit Resource Management, ing alliances or by entering into code-shared New York: Academic Press, 399–420. arrangements with other airlines. The benefits that have accrued from these strategies are at best VICTOR K.UJIMOTO short-term solutions. The rapidly evolving technological changes in the aviation industry have Ajinomoto proceeded much more rapidly than the institutional changes necessary to accommodate the In 1908, Dr. Kikunae Ikeda discovered that technology-driven economic circumstances. glutamic acid was a source of flavoring for food Japan’s aviation industry must recognize the and immediately patented his discovery He highly competitive global aviation environment named the seasoning Ajinomoto and sold his dis- as well as the domestic transportation environ- covery to Saburonosuke Suzuki in 1917, the ment. In the deregulated market, sweeping re- founder and first president of Suzuki Shoten. ductions in personnel and wage cuts can only be Suzuki subsequently changed the company name a short-term measure. The increasing surplus of to Ajinomoto Co., Inc. due to the success of the airline capacity will impact on Japanese airlines Ajinomoto brand. through competitive airfare pricing, and thus, re- Today, Ajinomoto has four main product seg- duced revenue. This calls for greater rationaliza- ments in the food business: seasoning, edible oils, tion of routes through either alliances, or bilateral processed foods, and beverages and dairy prod- code-sharing arrangements on international ucts. In the seasoning segment, the company has routes. many products. Most Japanese housewives have On the Japanese domestic scene, the new used seasonings such as Cook-Do and Gohan startup airlines have not impacted on the major Ga Susumu Kun seasonings designed to enhance airlines to any great extent as airport slots are flavor and save cooking time for busy housewives. limited and thus competition has been control- Ajinomoto has always focused upon expanding led indirectly. The greatest competition in the its product line to meet the tastes of people as nation’s most heavily travelled corridor, how- well as serve their need for time savings and con- ever, comes from the shinkansen bullet train serv- venience. ice. It remains to be seen whether or not the In the chemicals segment, there are three main airlines will not only lower their airfares but also product lines: amino science, feed-use amino ac- provide more frequent service through better ids and pharmaceuticals. These lines include such scheduling and avoidance of simultaneous flight products as sweeteners, pharmaceutical interme- departures. diates, functional nutritional foods and ingredi- ents for cosmetics and toiletries. 16 Akihabara

In the amino science segment, Ajinomoto uses Tokyo famous for its concentration of shops sell- amino acids as raw materials in clinical nutrition ing electrical and electronic products. Located in products, gastrointestinal medicines and hyper- the Kanda district of Tokyo, the area is crowded tension medications. Because of continuously with large shops where electronic goods of all changing eating habits and increasing health con- varieties are sold at a discount, and small stalls in sciousness, the demand for a sweetener by amino the side streets and under the elevated train tracks acid has been increasing. These products are in where electronic parts are sold. Japan as well as in North America, Europe, South- In Japan, and to a lesser extent overseas, east Asia, and South Africa. In the feed-use amino Akihabara is famous as a showcase for Japanese acids segment, Ajinomoto has a 35 percent world- electronic technology. In Akihabara, practically wide market share for feeds containing lysine. In any electric gadget or appliance can be found, the pharmaceuticals segment, Ajinomoto focuses from digital audio recorders the size of a stick of research and product development on health is- gum to the latest handheld organizers that let you sues such as diabetes, infusions, clinical nutrition, surf the internet, to more mundane items such gastrointestinal diseases and cardiovascular dis- as washers and refrigerators. The area is also well eases. known for its discounted prices. In fiscal 1999, worldwide sales topped ¥8 tril- With so many stores crammed in the few lion ($800 million) of which foods accounted for blocks surrounding Akihabara station carrying 72.2 percent, fine chemicals for 16.2 percent and electronic products, competition is fierce. Each other products 11.6 percent. Ajinomoto is the sixth store vies with its hundred’s of competitors to largest company in the food industry in Japan. Al- carry the latest, the smallest, the most powerful though its domestic market share has remained versions of differing goods. Store displays change stable, recently it has become more difficult for from day to day depending on what new goods Ajinomoto to expand its business in Japan, due have come in. Price competition is also strong, to fierce competition and changing economic fac- and most stores, in an effort to keep prices low, tors. Thus, the company has focused efforts on spend the bare minimum on interior design. Prod- building its business overseas, which still only ac- ucts are stacked on metal shelves, or from the counts for about 15 percent of its overall sales. floor to the ceiling. Price cards are usually hand- Currently the Ajinomoto seasoning is sold in written, as are posters outside the stores announc- more than 100 countries. Since Ajinomoto opened ing the day’s specials. The stalls selling electronic its first overseas office in New York in 1917, the components are tiny cubicles crammed with items company has internationalized its business. To- in a layout only understood by the stall keeper. day the company’s products are produced and Above all, the noise, the crowds, and the hustle sold all over the world. Recently Ajinomoto ex- and bustle of Akihabara resemble an open-air flea panded into China, Vietnam and Myanmar. The market more than a clearing center of sophisti- company’s strategy for globalization is to under- cated high-tech product. stand each country’s situation and to behave like The area where Akihabara is located was origi- a domestic company. In spite of health warnings nally the site of a vast clearing. This open field about the possible ill effects of monosodium gluta- was created by local authorities as a firebreak af- mate, annual worldwide sales are growing at ter a devastating fire ravaged Tokyo in 1870. about 6 percent per year. Ajinomoto now sup- Eventually the clearing was surrounded by trees, plies almost one-third of the global market for and became known as Akibonohara, the Field of monosodium glutamate Autumn Leaves. In 1890, the Sobu train line built a train station on Akibonohara. Yet, a misinter- MARGARET TAKEDA pretation of the three kanji (ideograms) forming AYA KUBOTA the station name “Akibonohara” resulted in the Akihabara pronunciation of the name as Akihabara. When Tokyo’s Yamanote line also reached Akihabara, commonly referred to as Electric Akihabara station with elevated train tracks in Town or Electric City is an area in downtown the early twentieth century Akihabara became a allowances and non-salary compensation 17 major center of goods being transported through- the vendor, and are stocked with thousands of out the capital. Yet the impetus for Akihabara’s electronic components, such as capacitors, rise as a commercial district was the elevated train vacuum tubes, adapters, transistors, circuit tracks themselves. During Japan’s immediate boards, etc. The do-it-yourself fanatic can find postwar period, hundreds of black-marketers set any part needed, regardless of how obscure it may up stalls beneath the tracks in Akihabara. At the be. time, the majority sold hard to get radio and elec- With the rise of the computer generation, in trical parts. As Japan’s economy entered its high the latter 1990s a large number of shops have growth period in the 1960s, Akihabara’s stall- emerged in Akihabara that exclusively carry com- keepers began expanding their wares to include puters, peripherals and software. Many Japanese household appliances such as refrigerators, tel- high-tech companies use Akihabara either to test evisions and washing machines, as post-war de- new products’ acceptance, or to conduct con- mand for these items surged. sumer surveys. With its concentration of well over Over the years, Akihabara’s storekeepers be- 600 stores dealing exclusively with electrical and came respectable merchants, and their presence electronic goods, Akihabara draws crowds of con- attracted established electronic retailers. Yet the sumers daily Japanese electronic firms continu- influence of Akihabara’s black market days lives ously make use of this fact to test new products’ on in its free-wheeling style and its hodgepodge marketability. The lifespan of some of these prod- of shops and stalls. It is estimated that within the ucts in Akihabara is less than one month. Those multiple square blocks occupied by Akihabara, that prove successful are taken to full production there are now over 600 stores selling electric and and released nationwide, and eventually to over- electronic equipment and parts. seas markets. Consumer surveys are also carried The main street running through the heart of out so often in Akihabara that shoppers have been Akihabara, Chuo-dori, is lined with stores that known to complain that filling out survey forms sell the latest electronic gadgets and appliances. takes more time than shopping. Many stores specialize in particular goods, such SEAN MOONEY as household appliances, computers, or audio equipment. However, most carry a wide variety of goods like phones, fax machines, computers, allowances and non-salary heaters, air conditioners, televisions, VCRs, video compensation games and so on. The majority of these shops have a small floor space, but are several stories Allowances and other non-salary benefits com- high and covered with neon signs. Many of the prise an important portion of an average Japa- larger stores segregate their products by floor, nese employee’s overall compensation package. with washers and dryers on one floor, fax ma- Though the actual percentage amount of an chines and telephones on another, and cellular employee’s total compensation package tied up phones on yet another. in allowances and non-salary benefits may vary Specialty stores, such as those that concentrate significantly based on several key factors, esti- only on audio-visual equipment, or on digital cam- mates generally set it at somewhere between 25 eras and camcorders, abound. There are also and 35 percent. The specific types of allowances many duty-free shops crammed with electronic remain fairly stable across industries and across goods for export, catering to the many tourists firms within an industry. However, the size of who visit Akihabara. In addition, there are dis- specific allowances is often closely aligned with a count stores carrying huge arrays of electronic company’s relative ranking within the industry gadgets at discounted prices, and also stores that and the industry’s relative position within the exclusively carry used electronic products. private sector. In the latter part of the twentieth As well as the specialty stores lining the main century adjustments in allowances and non-sal- street, a few hundred stalls filled with hundreds ary compensation often occupied a more central of products are still located beneath the train position during the spring labor offensive (shunto), tracks. These stalls have only enough room for than did hourly wage and semi-annual bonuses. 18 allowances and non-salary compensation

Allowances and non-compensation benefits re- of tenure. A thirty-year-old married employee flect both the historical roots of Japanese organi- with two pre-school children will receive the same zations and a pragmatic approach to addressing family allowance as a married middle manager the current economic and sociocultural con- with two high school-age children. straints of modern Japan. The practice of provid- A typical package of allowances and non-coming allowances and benefits, over and above wages pensation benefits would include the following: and salary can be traced back to the ie of pre- family allowance (covering both spouse and chil- Meiji Japan. For example, loyal banto and tedai dren); housing allowance; transportation allow- (clerks) in the merchant houses could expect some ance; paid holidays; paid annual vacation; leaves assistance from the ie in buying their own house of absence; company-sponsored health insurance; or in renting living quarters. In the immediate company-subsidized home loans at favorable postwar period, at a time when many firms were terms; and access to special consideration and confronted with liquidity problems, allowances discount packages through company-arranged represented one way of attracting and retaining consumer goods and services purchasing pro- employees without having to significantly increase grams. The relative size of these benefits has, over cash outlays for wages and salaries. During ex- time, come to be fairly standard among firms. tended periods of economic growth in the 1960s Nevertheless, there are important differences from and 1970s, and into the 1980s when Japanese eco- industry to industry and from firm to firm. These nomic prosperity was at its height, allowances re- differences reflect variances in working condi- mained a critical component of the average tions, geographical factors and a firm’s relative employee’s compensation package because the position within the industry and corporate cul- benefits had come to be seen as an integral part ture and personnel practices. Top-ranked firms of the overall package, and because the value of tend to offer more generous allowances than some allowances represented a significant value lower ranked firms. With regard to differences not available outside the firm. For example, newly in corporate culture and personnel practices, hired single salarymen (see salaryman) are of- many corporations have developed distinctive ten housed in company dorms where the monthly orientations reflecting underlying corporate val- rent may be less than one-third the cost of com- ues which then become codified in personnel parable housing on the open market. practices that become institutionalized over time. The effect of having such a large number of In the case of the corporate values, Pioneer, for allowances and having them constitute such a example, has always tended to provide more gen- large percentage of an employee’s total compen- erous family allowances than other firms in the sation package is not inconsequential in its im- electronics industry. pact on intra-firm and inter-firm wage differentials. In the case of inter-firm differentials, Family allowance employees of two firms may start out with monthly salaries that differ by only five or six Family allowance refers to a monthly allowance thousand yen. However, once differences in al- that is paid to employees to cover the additional lowances are factored in the final amount of dif- cost of supporting dependents. It assumes that ference can be in excess of ¥30,000 or more. employees (who are overwhelmingly male) are Calculated over a full year, such a difference be- the sole income-earner in the household and comes substantial. therefore require additional support to fulfill this A second effect of allowances is to dilute the role. Indeed, married employees are referred to impact of merit-based increases in salary. Allow- as “income earners.” Although there is some varia- ances are provided on a non-merit basis to all tion in how the allowance is calculated, in most employees. For example, an outstanding single firms the allowance for the first dependent—which employee living in a company apartment receives is assumed to be the spouse—will be significant. the same housing allowance as does an average The incremental increase in allowance for a sec- single employee in the same apartment. Similarly ond dependent and any others thereafter will be allowances can also reduce the differential effect significantly lower. For example, in 1991 Toyota allowances and non-salary compensation 19 paid a monthly family allowance of ¥19,500 for (possibly by means of a companysubsidized low- the first dependent and ¥3,500 for a second de- interest rate mortgage) by that age. pendent. Variations on this allowance tend to To understand variations in housing allow- occur in two areas. Although rare, some firms ances, compare two companies: Fujitsu and make no distinction between the first dependent Toshiba in the mid-1990s. At Fujitsu, a housing and subsequent dependents. In firms where this allowance is available to single employees over is the case, the first dependence allowance is usu- twenty-two years old until they reach thirty In- ally lower than industry average, but the subse- come earners (married employees) will receive quent dependent allowance is two to three times an allowance for thirteen years or age forty which higher. The second area where firms may vary ever comes first. For both singles and income their practice is whether the size of allowance for earners, this salary varies by geographic location subsequent dependents will vary based on num- and is lower for singles. For income earners, To- ber; that is, the allowance is larger for the second kyo and Kanagawa employees the most, followed dependent than it is for the third or fourth. Again, by those in Osaka, Hyogo, Chiba and Tokyo sat- in some firms the allowance per dependent re- ellites receiving less and employees anywhere else mains constant regardless the number of depen- in Japan receiving the least. For singles, the first dents, in others it will decrease. Returning to the two classifications remain, however, single em- Toyota example, the allowance for dependents ployees outside of the Tokyo and Osaka metro- two and three would have been ¥3,500 each, but politan areas receive no housing allowance. the allowance for a third or more dependents Toshiba divides housing along geographic lines would have dropped to ¥2,000 each. By com- as well, with those in Tokyo receiving more than parison, in that same year, Daihatsu Motors paid those outside metropolitan areas. Also, singles re- a first dependent allowance of ¥13,000 and a sec- ceive a lower allowance than income earners. ond dependent (and all subsequent dependents) Lastly Toshiba provides a supplement to those allowance of ¥3,500. Differences between Toyota employees not in company housing, but renting and Daihatsu in first dependent allowance reflect on their own. their relative positions within the automotive industry whereas differences in second and subse- Transportation allowance quent dependent allowances reflect differences in corporate culture and personnel practice. This Many companies provide transportation allow- type of difference persists across all allowances. ance to employees working in metropolitan areas or in areas where it is expensive or unrealistic for employees to use their own transportation to Housing allowance get to and from work. The typical allowance cov- Of all the allowances that companies provide, the ers the cost of train and bus passes from the resi- greatest variation can be found in the housing dence to work. allowance. Differences in the geographic location of employment create the need for most compa- Non-salary benefits nies to develop contingencies. For example, the cost of housing for a single employee working at Non-salary benefits include such items as holi- a corporate headquarters in Osaka may be sig- days, paid vacations and leaves of absence. nificantly higher than the cost a single-family There are twelve national holidays, although the dwelling for a married employee working at a norm in most companies is to have all twelve manufacturing facility in Matsue. Marital status days off, there is widespread variation among and whether an employee has an apartment or a those companies that do observe all twelve, single-family dwelling are two other factors in- ranging from eleven days all the way down to fluencing housing allowance policy Finally many four. Additional holidays may include the com- companies place an age cap on the housing al- pany’s founding day and personal memorial lowance, usually 40 years old. Employees are ex- days (involving familial responsibilities relating pected to have purchased their own home to religious observances). 20 amakudari

Paid vacation days vary by tenure. Most com- See also: lifetime employment; seniority promo- panies offer 14–15 paid vacation days after the tion first year, up to a maximum of twenty days after ten years of service. Given the tendency of most Further reading employees not to take their full allotment of paid vacation days, companies also have policies per- Brown, C., Nakata, Y., Reich, M. and Ulman, L. (1997) taining to the transfer of vacation days from one Work and Pay in the United States and Japan, New York: year to the next. In a few firms, employees can Oxford University Press. transfer vacation days over a two-year period, but Japan Council of Metalworkers’ Union (Annual) Wages for the vast majority the limit on transfers is no and Working Conditions, Tokyo. more than one year. Tachibanaki, T. (1996) Wage Determination and Distribu- Companies grant leaves of absence for mar- tion in Japan, New York: Oxford University Press. riage, funeral services and childbirth. As with the ALLAN BIRD family allowance, there is widespread variation across firms, most often reflecting firm-specific choices. The longest leaves are granted for amakudari mourning. For a spouse, parent or child, the average leave granted is seven days. For one’s own Amakudari (descent from heaven) refers to the re- grandparents or brothers and sisters, the aver- employment of high-ranking civil servants to key age is five days. Leaves for other relations tend positions in diverse sectors of Japanese society be shorter: a spouse’s parents (five days), grand- upon their retirement from the central bureau- children (three days), children’s spouses (two cracy The literal translation as “descent from days) and aunts and uncles (one day). Leave for heaven” invokes the cultural symbolism of work- what are classified as happy events—marriage, ing in the bureaucracy and implies a distinction spouse’s childbirth and children’s marriage—av- between the life of the sacred and the profane. erage five days, three days and three days Before the Second World War, civil servants respectively. worked directly for the emperor who was considered sacred, a god, and the embodiment of the Japanese nation. Bureaucrats were seen as in Changes over time heaven by their noble and sacred work for the The variety and size of allowances companies of- god and the nation. Upon retirement, bureau- fer has evolved over time in response to economic crats were viewed as descending in status by re- pressures and to changing mores regarding what employment in the profane world of material companies should and should not do for their self-interest. employees. More recently particularly in the The pressures arising out of the seniority sys- 1990s, the trend has been to reduce the size of tem within ministries feed amakudari. Entering allowances and increase the size of the base sal- civil servants, upon passing the civil servant exam ary component in the overall compensation cal- (type 1) and being selected to the ministry re- culation. A change has been the lowering impact ceive extensive training and advance together as of company rank within industry on allowances. a cohort. As they reach their forties, their career In response to an aging workforce, a labor short- mobility options begin to narrow. There are few age among new recruits, increased competition section chief positions, fewer bureau chief posi- and the presence of non-Japanese firms offering tions, and only one vice-ministership for each a variety of, for Japanese, non-typical incentives ministry The final weeding out process comes such as stock options, Japanese firms have been when a new vice-minister is chosen and all the experimenting. As with other elements of the new vice-minister’s classmates and earlier cohorts Japanese management system, this is an area resign to insure that the new vice-minister has where further changes will occur, though their absolute seniority within the ministry. Ultimately direction is difficult to predict. everyone must “descend” because of the amakudari 21

unremitting pressure from new entering classes other, though less well-known, form of amakudari advancing from below. The usual retirement age is a movement from central government to local for the vice-minister is slightly over fifty but re- government or industrial associations. Finally tirement age varies across ministries. The new amakudari may involve a sequence of retirement vice-minister and the chief of the Secretariat are positions in the career of an ex-civil servant. This responsible for finding the retiring officials good multi-step retirement process is called “migratory positions in the private or public sectors. bird” (wataridori). Wataridori among some public Discussion of amakudari has increasingly pen- corporations is regulated by the Diet, but it is a etrated the western literature on Japanese social prevalent, institutionalized pattern of re-employ- structure, especially within the topics of the Japa- ment among top level ex-civil servants. These five nese “power structure,” “Iron Triangle” or “Ja- forms of amakudari are interrelated. Discussion pan Inc.” Amakudari is viewed as a key institutional of all the paths provides a more holistic apprecia- arrangement fusing relationships among the po- tion of why amakudari constitutes a key element litical, economic and bureaucratic operations. of the Japanese power structure. This imagery of amakudari as power structure is partially the result of perceived differences between the USA and Japan. The USA tends to History of amakudari separate the executive bureaucracy from the economic market and legislative political processes There is no consensus on the origin of amakudari. with the conviction that separate spheres produce In part, this ambiguity results from different in- the best results for everyone. This separation is terpretations of what constitutes amakudari. It be- celebrated in principles of checks and balances, gan as a diffuse movement of individuals between the laissez-faire tradition, an open market economy ministries and the private sector or public offices and a weak state bureaucracy with strict limits reaching back to at least the beginning of the Meiji on government regulation. Japan, by contrast, is period (1868–1912). However, after the Second characterized as fusing these linkages through ex- World War these diffuse flows became controlled tensive formal and informal relationships in the and routinized within the administrative appara- belief that these ties induce cooperation and pro- tus of each ministry and agency. duce the best outcome for all. There are scattered references to the movement of government officials into the business sector that occurred during the early Meiji pe- Definitions riod. A popular novelist and social critic, Uchida Conventional usage of amakudari is generic. It sim- Roan (1868–1929) used the term amakudaru ply means the different ways in which civil ser- (noun form of amakudari) in his social criticism, vants exploit their positions for post-retirement entitled Shakai hyakumenso (Society of Kaleido- careers. Analytic usage differentiates the major scope) published in 1902. Uchida may be the one paths of amakudari by destinations. The most who coined the term amakudari. Later scholars widely known definition of amakudari is a move- wrote of an emerging distinction in forms of re- ment to profit-making enterprises and is subject tirement (amakudari and chii riyo) between ‘eco- to legal restrictions. The second form of amakudari nomic’ and ‘social’ ministries. Kubota (1969) and is a movement to public corporations that are es- Garon (1987) suggest that after the First World tablished by law and financed in part from pub- War those retiring from ‘economic’ ministries, lic funds. It is sometimes called “sideslip” such as the Ministry of Finance and the Ministry (yokosuberi) and is not subject to legal restrictions. of Agriculture and Commerce, drew on “contacts The third form of amakudari is a movement into with business clientele” to take top positions in the political world, by becoming a candidate for private corporations (amakudari). Retiring bureau- election to the Diet. It is sometimes called “posi- crats from “social” bureaucracies, such as Home tion exploitation” (chii riyo) and is usually open to Ministry tended to remain within government or those who served in choice national or regional joined political parties, often with cabinet appoint- posts suitable for building political support. An- ments (chii riyo). 22 amakudari

The pivotal distinction for identifying the ori- resulting in policy effectiveness. Like Johnson and gin of amakudari is whether one defines it as a Okimoto, these authors treat amakudari as a flex- routinized personnel movement orchestrated by ible and principal empirical illustration, not of elite the ministries, or a movement based exclusively cohesion per se, but of the embeddedness of the on individual initiative. Amakudari before the Sec- developmental state (using Japan as the arche- ond World War was individually negotiated and typal developmental state). Evans views amakudari primarily restricted to retired army and navy per- as providing institutionalized channels for the con- sonnel. After the war the number of yokosuberi tinual negotiation and re-negotiation of goals and expanded as the number of public corporations policy Similarly Pempel (1998) sees amakudari as rose and ministries assumed more responsibility the “blurring of the line between elected officials for placing their retirees. A recent survey of high- and career civil servants” and the development ranking exofficials by Cho (1995) found that three and maintenance of ties between private inter- times as many amakudari officials attributed their ests and particular ministries of the central gov- retirement positions to ministry placements in- ernment. To Pempel, amakudari is the stuff of stead of individual contacts. inter-elite cooperation and alliances, fusing of the state with the public and private sectors, providing the basis for stability and development. Different views of amakudari Pempel, however, sees the bases of this fusion as There is general agreement among scholars on undergoing substantial changes in the 1990s. the existence of amakudari but there are disagree- In contrast, some authors challenge the no- ments over its interpretation. Chalmers Johnson tion of amakudari representing elite cohesion and (1974, 1978) popularized the concept of amakudari policy effectiveness. Calder (1989) questions the in his discussion of the Japanese developmental utility of amakudari as a mechanism of elite cohe- state. He suggested amakudari as “maintaining co- sion much less bureaucratic dominance. Instead, ordination and cooperative interactions among amakudari simply “broadens the access of less eco- the iron triangle of Japanese power elites—an as- nomically powerful firms.” The bureaucracy expect of what the Japanese call nemawashi (‘prepar- ercises a limited influence through amakudari since ing the groundwork’) and what foreigners it is mostly concentrated in second tier, weak pri- describe as consensual decision making among vate corporations, not in top corporations and the bureaucracy the conservative party and the banks. Other authors, following Calder, main- business community.” According to Johnson, the tain amakudari is not sufficient to affect industrial cooperation and avoidance of conflict attributed direction since it involves a small number of firms to “national character” is really the outgrowth of (less than 10 percent of the listed firms in any institutions like amakudari facilitating common ori- one year) and takes place mostly in small, not entations and cooperative ties between the gov- large firms. In addition, they point to a weaken- ernment, private sector, and the political world. ing significance of former officials in political of- Daniel Okimoto (1989) built on Johnson’s fice since the 1990s as the number of former civil work by discussing amakudari in the context of servants in political office declines. numerous relationships that make Japan’s indus- In summary various scholars agree on a high trial policy effective. He called the public-private level of interaction, communication and coopera- relationships “the network of ad hoc, informal tion among politicians, career bureaucrats and ties that give industrial policy and government- business people throughout the postwar era, but business interactions the resilience and adaptabil- they disagree on the interpretation of amakudari ity for which Japan is renowned.” For Okimoto, as important inter-institutional relations. To some amakudari is the best unobtrusive indicator of rela- authors, amakudari represents elite cohesion tive bureaucratic power vis-à-vis other ministries. provid ing the stability flexibility and effective- Other scholars, such as Peter Evans (1995) ness of state policy. Others question the effec- and T.J.Pempel (1998), see amakudari as ties bind- tiveness of this type of elite cohesion. Further, ing the bureaucracy and private corporations and some authors distinguish different forms of representing the basis of “state embeddedness” amakudari (for example, amakudari, yokosuberi, chii American occupation 23 riyo, and wataridori) that represent distinct analytic Evans, P. (1995) Embedded Autonomy: States and Indus- and empirical phenomena. Finally scholars are trial Transformation, Princeton, NJ: Princeton Univer- in agreement that inter-institutional (inter-elite) sity Press. relations began changing in the 1990s, though Garon, S. (1987) The State and Labor in Modern Japan, they differ on the degree of change, its interpre- Berkeley CA: University of California Press. tation, and direction. International markets, a new Inoki, T. (1995) “Japanese Bureaucrats at Retire- electoral system, a realignment of voters, weak- ment: the Mobility of Human Resources from ening linkages of the major keiretsu, and a reduc- Central Government to Pubic Corporations,” in tion in the policy tools of the bureaucrats are seen H.Kim et al. (eds), The Japanese Civil Service and as causes of changing relations among the bu- Economic Development, Oxford: Clarendon Press, reaucracy private sector and the legislature. 213–34. Johnson, C. (1974) “The Reemployment of Retired Government Bureaucrats in Japanese Big Business,” Limitations Asian Survey 14:953–65. ——(1978) Japan’s Public Policy Companies, Washington, There is substantial recognition that Japan is a DC: American Enterprise Institute for Public Policy network society and the Japanese state is a net- Research. work state embedded in Japanese society Koh, B.C. (1991) Japan’s Administrative Elite, Berkeley Amakudari is but one type of network between the CA: University of California Press. state and Japanese society among a myriad of Kubota, A. (1969) Higher Civil Servants in Postwar Japan: crisscrossing, overlapping, and multiplex relation- Their Social Origins, Educational Backgrounds, and Ca- ships. However, amakudari is the apex of net- reer Patterns, Princeton, NJ: Princeton University works. Amakudari and amakudari-like processes Press. operate everywhere in Japan, including the per- Okimoto, D. (1989) Between MITI and the Market: Japa- sonnel movements from large to medium and nese Industrial Policy for High Technology, Stanford, CA: medium to small affiliated companies. Similar Stanford University Press. personnel movements take place from the central Pempel, T.J. (1998) Regime Shifts: Comparative Dynamics bureaucracy to local governments and from local of the Japanese Economy, Ithaca, NY: Cornell Univer- governments to private and public sectors and sity Press. local political offices. Thus, any analysis of Schaede, U. (1995) “The ‘Old Boy’ Network and Gov- amakudari is at best a “biopsy” of the networking. ernment-Business Relationships in Japan,” Journal In this sense, we only scratch the surface of a of Japanese Studies 21 (2): 293–317. fundamental socioeconomic Japanese institution. Usui, C. and Colignon, R. (1995) “Government Elites and Amakudari in Japan, 1963–1992,” Asian Survey See also: nemawashi 35 (7): 682–98.

RICHARD COLIGNON Further reading

Blumenthal, T. (1985) “The Practice of Amakudari American occupation within the Japanese Employment System,” Asian By August of 1945 Japan lay utterly defeated, Survey 25 (3): 310–21. completely at the mercy of the victors. Fortunately Calder, K. (1989) “Elites in an Equalizing Role: Ex- for Japan, what the USA wished was to trans- bureaucrats as Coordinators and Intermediaries in form Japan from an authoritarian, militaristic, the Japanese Government-Business Relationship,” elitist and internally exploitative society into a Comparative Politics 21 (4): 379–404. society more like its own, which the Americans Cho, K.C. (1995) “Nihon no Seifu & Kigyo kankei to saw as more pluralistic, democratic, egalitarian, Seifu Shigen Douin no Osmotic Networker to shite and without the influence of a virtually uncon- no Amakudari,” Ph.D. dissertation, Tsukuba Uni- trolled military which had caused so much suf- versity Japan. fering throughout Asia (see wartime legacy), and 24 American occupation indeed within Japan itself. The United States vir- in the judgment of most observers a surprisingly tually ruled Japan for over six years, instituting positive and liberating force for Japan, as well as many changes and reforms. All in all, observers an advertisement of some of the best qualities of both American and Japanese evaluate the Ameri- American culture. The fear of a resentful and can occupation of Japan as highly successful. hostile Japanese populace was instantly wiped By 1944, although it was not clear how long away by the courtesy and cooperation of people the war would last, everyone on the American at all levels, from ordinary citizens to high-rank- side knew that the end was near in terms of Ja- ing officials in the government from the very be- pan’s ability to sustain military conflict. There ginning. Japan had lost the war, the Emperor had was considerable debate within the War Depart- declared so; there was a new ultimate authority ment and in congress over such issues as what in the nation, and almost all Japanese as a matter should happen to the Japanese emperor. It was of course directed the same sincere respect to- decided that when the war ended a large contin- ward it as they had to the old authority. gent of administrators would go to Japan and The problem of the multinational character force major changes in Japanese institutions. of the Occupation turned out to be partially Above the administrators in authority would be solved by the image of General MacArthur as an the United States Army; President Roosevelt egomaniac. It had been agreed upon among the chose General Douglas MacArthur to be su- USA and its allies that Japan would be adminis- preme commander of the occupation administered by the Allied Council for Japan (ACJ) with tration, even though the President did not representation from all four nations mentioned personally like the general and considered him a above. Legally General MacArthur, as Supreme likely future presidential candidate for the Re- Commander of the Allied Powers (SCAP), was publican party. nothing more than chairman of that body. How- ever, MacArthur simply refused to share power with any non-American. He and his subordinates Initial stages completely ignored ACJ, never once acting on any of its suggestions, and taking no note at all The first Occupation officials arrived on Japa- of its many complaints. It was in every respect nese soil August 30, 1945, fifteen days after Japa- an American occupation. nese representatives signed the formal surrender. Although MacArthur was always firmly in The situation did not bode well for implement- command, the Occupation was not in the stricting an ambitious plan for virtually remaking a est sense a military government. He was very se- modern society The first problem envisioned by rious about carrying out this historically the victors was getting the Japanese to go along important mission successfully. Later in his mem- with reforms dictated by its former enemy. The oirs he explained that what he wanted to accom- war had seen some of the most bitter and des- plish was first to end the military power of Japan perate fighting in history; physical destruction of and punish war criminals, then to build sound Japanese cities was on a scale never experienced representative government, enfranchise women, before in any country. Originally planned as a liberate farmers and workers, liberalize educa- joint effort between the allied nations most dition, decentralize economic power, establish a free rectly involved in fighting against Japan: the USA, and responsible press, and finally to separate Britain, the Soviet Union, and China. It was dif- church and state. In a few cases the plan could ficult to see how any kind of successful policy not be completely realized, but it is remarkable making could take place among nations who were how close SCAP came to fulfillment of those suspicious of and at times even hostile toward goals. one another. The American who was to preside Before Occupation administrators could get over the mix was characterized by some as a right- started, three important tasks were given to the wing ideologue with a mountainous ego. US military: demilitarization of the country iden- In spite of all this, the six years and eight tification and punishment of people Americans months of the formal Occupation of Japan was considered to be war criminals, and untangling American occupation 25 the human mess of Japanese abroad and non- roughly equivalent to the branches of the Japa- Japanese in Japan, the result of invasion, coloni- nese bureaucracy Personnel were selected from zation and forced labor. The two million soldiers the appropriate sector of US society related to its and sailors of the Imperial Army who were still mission. Businessmen and a few professors of in Japan, for the most part simply went home, business for the economics mission which worked demilitarizing themselves. Six million Japanese, mainly with the Finance Ministry and the Minis- about half military personnel and half civilians, try of International Trade and Industry; labor were returned from territory Japan no longer con- leaders for the mission related to labor relations trolled. Three million Taiwanese and Korean which worked mainly with the Labor Ministry laborers, many brought to Japan by force, were and so on. They were defined as “advisors,” and brought back to their homelands by the US Navy. stayed behind the scenes, issuing SCAP “admin- A series of war crimes trials, begun prior to istrative guidance,” a concept the Japanese were the end of the war in the Philippines, continued completely familiar with from the role customar- on in Japan for two years. This was the only as- ily played by their own bureaucracies. It was Japa- pect of the Occupation that was truly interna- nese government bureaucrats who actually tional: the trials were conducted by judges from carried out the policies, with SCAP personnel eleven nations including Australia, Canada, having little direct contact with the local popula- France, India, the Netherlands, New Zealand, and tion. the Philippines together with the four nations of A new constitution was drawn up by the ACJ. In all, about 6,000 people were indicted MacArthur’s staff and virtually forced on the Japa- as war criminals. Seven men were convicted as nese. It was the most significant factor in the de- Class A war criminals and were hanged in Sep- mocratization of Japan, establishing sovereignty tember 1948, including General Tojo Hideki, with the people through two popularly elected Prime Minister and war minister from 1941– houses of the Diet, giving women the right to 1944. Sixteen other Class A criminals were sen- vote, clarifying the status of the Emperor as a tenced to life imprisonment by the international mere figurehead, limiting the power of the po- tribunal, and two others given shorter prison lice, denouncing war for all time, and providing terms. Interestingly far more Class C (lower level for a host of further democratic guarantees. It personnel charged with minor atrocities) crimi- was first presented to the Japanese public on nals were actually put to death in trials conducted March 7, 1946 as a product of the Japanese gov- in Yokohama by the US Eighth Army over 700 ernment, but obvious direct translations from in total. English in the document suggested otherwise. There was considerable support in Washing- Initially SCAP planned to completely disman- ton and elsewhere for putting the Emperor on tle the Japanese economic system by shipping in- trial for war crimes. However, General dustrial equipment to the countries most damaged MacArthur staunchly opposed the idea, arguing by Japan in the war. MacArthur eventually de- that if the Emperor were humiliated in such a cided on a more moderate policy of dissolving way it would turn many Japanese against the aims the zaibatsu and establishing anti-monopoly laws. of the Occupation, and make the task of reform Originally established with government sponsor- far more difficult, perhaps even dangerous. As ship, the zaibatsu system was closed in the sense with most matters in the early days of the Occu- that once it was put into place, no new large in- pation, he got his way. dustrial competition was permitted. Suppression of the zaibatsu ushered in a new wave of entrepreneurial energy. Enterprises with fresh ideas joined Reforming Japan the older established order, some enjoying great success, companies such as Honda Motors and The actual administration of the conquered na- Sony Electronics, companies which were to con- tion was given over to various SCAP administra- tribute significantly to Japan’s version of the post- tive sections, or missions as they were called, war “economic miracle.” This window of 26 appraisal systems

opportunity for new industrial organizations to of ultra-nationalist and racist propaganda. The reach the top tier of Japan’s economy began to entire system was completely redesigned in both close somewhat in the 1960s, but it never returned structure and philosophy to conform to Ameri- to totally exclusive zaibatsu levels. The most en- can ideas; a new 6–3-3–4 structure of elemen- during Occupation reforms put in place by the tary education through college was set up under SCAP sections related to land reforms, labor re- the direction of local school boards, including the forms and education reforms. Parent Teacher Association (PTA) which still At war’s end, about 70 percent of Japanese plays a powerful role in Japanese education. farmers were tenants. Under SCAP guidance, the Higher education was greatly popularized, with Diet outlawed absentee landlordism, forced land- over 170 new universities and about 200 new jun- owners to sell their land to the government at ior colleges coming into existence. very low prices, and sold it to the farmers for nominal sums, effectively transferring land to the Further reading people who actually worked it. Rent for the small percentage of land that remained under tenancy Cohen, T. (1987) Remaking Japan: The American Occupa- was fixed by government regulation. Today farms tion as a New Deal, New York: The Free Press. remain small by the standards of industrial na- Hane, M. (1996) Eastern Phoenix: Japan Since 1945, Boul- tions, but are highly productive per acre. This der, CO: Westview Press. reform changed most farmers from tenant peas- James, D.C. (1975) The Years of MacArthur, Boston: ants to small businessmen; their standard of liv- Houghton-Mifflin. ing increased dramatically during the years Kawai, K. (1960) Japan’s American Interlude, Chicago: following land reform, and today they are among University of Chicago Press. the most prosperous small farmers in the world. Reischauer, E.O. (1950) “Broken Dialogue with Japan,” A labor movement had begun in Japan in the Foreign Affairs, October. 1920s, but by the 1930s the government had completely quashed it; work stoppage was treated as JOHN A.McKINSTRY an act of treason. With the full compliance of the Supreme Commander, considered a conservative Republican, SCAP officials, some labor leaders appraisal systems themselves, pushed through the Diet a trade union law which guaranteed workers, including pub- The appraisal system in a typical large or me- lic service employees and teachers, the right to dium-size Japanese firm follows the policies and organize, engage in collective bargaining, and principles gradually elaborated in the “boom strike. A labor standards law was designed by years” of Japanese management during the 1980s. SCAP setting maximum working hours, vacation, Although always a core part of the Japanese em- safety and sanitation safeguards, sick leaves, ac- ployment practices, it has not received as much cident compensation, and restrictions on the research attention as some other features of Japa- hours and conditions under which women and nese management. However, the evolution of children could work. Some of the provisions of “Japanese” performance appraisal illustrates well the labor laws were later modified by the Japa- the challenges and dilemmas facing Japanese com- nese, and in some cases standards have been ig- panies today in the field of human resource man- nored, but the overall impact of SCAP labor agement. reforms was extremely favorable for the working public, creating conditions comparable with other industrial democracies. Appraisal process Touching by far the most people were SCAP education reforms. Pre-war education in Japan How does the Japanese appraisal mechanism was modeled somewhat on a European elitist work? Typically periodic appraisals of employee system, completely controlled by the national gov- performance are conducted three or four times a ernment, and considered by SCAP an instrument year. Performance evaluations usually precede appraisal systems 27 salary increase decisions due in April of each year, Only a few firms have a formal policy requiring the summer and winter bonus determination, and performance feedback. In most cases, feedback the annual career development review, with tim- is recommended, but the form of feedback is left ing dependent on the employee’s status or posi- to the discretion of individual managers. Start- tion. In some firms, the evaluation for the annual ing the appraisal process with a self-evaluation salary increase and the career development re- by the employee is now an increasingly popular view may be combined to reduce the number of practice, a major change from the times when evaluations; in others, yet another set of evalua- even blank appraisal forms were considered con- tions takes place every time an employee becomes fidential. eligible for a promotion. With respect to performance feedback, there During the appraisal, employees are compared is still a widespread belief among many person- to other members of their peer group and ranked nel executives that the ability to solicit informa- accordingly. Who is in the peer group? At the tion about one’s standing in the organization start of one’s career, the core peer group is the through “back channels” is a legitimate part of cohort of entry: employees of equal educational the appraisal process itself, a mark of how well level (e.g. college graduates) who joined the firm the employee mastered informal communication. during the same year. After the first promotion, In other words, “If you have to ask, you can’t be the comparisons are more complex. Managers that good.” can be ranked within the original cohort, or Even if individual supervisors are willing to against all others with similar tenure in the same provide performance rating feedback to subordi- grade, or two rankings can be combined. In this nates, they often cannot do more than inform an case, the rating score reflects not only employee employee about what ratings were suggested. Ap- performance relative to their peers, but also their praisal items are marked first by the direct super- years of tenure in particular positions. visor, then the scores are reviewed by at least two As in many Western firms, the evaluation cri- other higher level managers or executives, with teria depend on the position class. For example, an emphasis on the harmonization of standards one set of criteria is used up to the level of a su- across departments and divisions, and at each pervisor, another for those in higher positions. level the initial scores are subject to modification. Typically the evaluations for professional employ- Finally as most companies use some version of ees and managers have four major components: the forced distribution approach, ratings are also (1) scores measuring job-related abilities such as adjusted at the corporate level so the final results human relations skills, business judgment, coor- fit the corporate guidelines. The results of these dination, and planning; (2) scores measuring job- adjustments are not always transmitted back to related attributes such as creativity leadership, the first-level evaluator. and reliability; (3) scores measuring personality- However, from the first year on the job, sal- related attributes such as sociability flexibility con- ary increases each year contain some variance fidence; and finally (4) a single achievement score. for merit, which, although very small in absolute The idea behind the multiple scores is to create amounts, may convey appropriate messages to an environment where the employee is not made employees and impart status differences within to feel that the “bottom line”—which may some- the cohort. As the information on the average times be beyond his control—is the only dimen- increase for a given cohort is usually distributed sion of the evaluation. through the company union, employees can have There are some conceptual similarities be- a reasonably good idea where they stand. Rank- tween categories of job-related abilities and ating results can be inferred by comparing one’s tributes and “competency models” increasingly paycheck with those of the peer group or with popular in Western organizations. However, announced average salary increases. Obviously while the competency model is usually a corner- those who received higher than the average in- stone for an in-depth developmental discussion crease encourage informal comparisons to make with the employee, direct feedback on appraisal their success known. Those receiving less than results is still rather rare in most Japanese firms. the average would rather avoid it. 28 appraisal systems

Coexistence of competition and system focused on early identification of high- cooperation potential “winners” with corresponding salary differentiations. The effect is to elicit full dedication Intensive appraisals occur regularly from the very and loyalty from the employees, engaging them first year a new employee enters the firm. These in unending competition for as long as possible. evaluations clearly discriminate among employ- When the cumulative impact of less than perfect ees. They have a major impact on employees’ rankings becomes visible in salary or promotions future careers, but they are a closely held secret. late in an employee career, there is always a so- Therefore, the competitive nature of the appraisal cially acceptable way out—after all, one works and the resulting intra-cohort rankings are not hard for the company not for money or promo- very visible during the first ten-twelve years of tions—one explanation of why work commitment tenure in the organization. This led many observ- of male employees in large Japanese firms tends ers of Japanese companies to observe that per- to increase with age. formance evaluation in large Japanese firms is long term, based on years of careful judgments and comparisons and that competition for pro- Problems with Japanese-style appraisals motion does not start until later in one’s career. While the first observation is correct, the second The objective of the traditional Japanese ap- is not. In fact, when the consequences of ranking praisal system is to induce employees to work within the cohort become visible, it is usually too hard on behalf of the firm. Over the years it was late to do anything about it. In most firms, the remarkably effective, but its fundamental con- chances for recovery from low ratings are slim tradictions are now quite apparent. One major (see seniority promotion). problem with the system is that in the long run, The fierce internal competition could create a it inevitably leads to risk-avoidance. Because the hostile, individualistic work environment were it chances for recovery from a low ranking are not for two characteristics of the Japanese work slim, employees may focus on not making any system: group-based organizations and vague job mistakes, rather than on taking the initiative. descriptions. Usually performance is evaluated With high job security for anyone with at least relative to similar groups in the company and, close to average performance, and no incentives therefore, each employee must cooperate with for bold actions, there is no surprise that the cul- colleagues to achieve the best results. Even the ture in many Japanese firms today resembles best individual performers will not succeed if their more a mediocre and complacent planned unit does not perform well. What is rewarded economy bureaucracy than the fearless global most is credibility and ability to get things done competitor of the 1980s. in cooperation with others. The competition with The inability to manage performance is the peers is keen, but its focal point is building coop- core of the problem. The system was created in a erative networks with the same people who are period of rapid growth where dealing with low rivals for future promotions. This emphasis on performance was not much of an issue—an occa- cooperation serves as a powerful check on a divisional kata-tataki (tap on the shoulder—selective sive competitiveness. dismissal) was a sufficient deterrent and reminder The invisible race creates constant fears of lag- to everyone to play by the rules. But what to do ging behind and being outperformed. At the same about a committed ‘salaryman’ who works hard time, even those who are left behind do not have for long hours, yet the added value from all this to fear losing their jobs; the system encourages effort is poor? internal competition while maintaining social har- In the past, there were enough positions to mony inside the organization. For an extended ‘park’ such an employee as madogiwazoku (group period of time, the vast majority of employees by the window) until retirement, or in an affiliate are treated as potential “winners,” with only small firm, without hurting the overall results of the differences between the top and the middle of firm. However, two trends made such arrange- the cohort, as opposed to a typical Anglo-Saxon ments increasingly problematic. Lower growth appreciating yen 29 rates and bulging cohorts of middle manage- An increasing number of firms now require ment—the results of hiring sprees of more than managers to conduct an appraisal interview with two decades ago—clogged the hierarchy. With the employee and also to inform the employee estimates of up to 40–60 percent of middle man- about the appraisal results. An unintended but agers in some firms being placed in phantom jobs, predictable consequence is that the distribution the formerly virtuous cycle of competition and of ratings become slanted with a vast majority of cooperation has degenerated into a vicious cycle employees ranked as average or better, making it of ballooning cost and paralyzed decision mak- even more difficult to address the performance ing. problems. In addition, the odds have changed. While in Early identification of high potentials is the past employees had a reasonable chance to meant to stem the outflow of talent to foreign- be promoted at least to middle-management po- owned firms. What it does is making obvious sition, it is now all too visible that most will not what was hidden before, namely that long-term make it; there is simply no more room at the top. decisions regarding an employee’s career are Therefore, there is not much incentive to com- made rather early. However, while the chosen pete, and without internal competition, the much few may appreciate the early recognition, for the praised work ethic has declined very quickly With majority of employees this is not good news. most white-collar jobs still secure, the low output The combination of “early identification-no does not have any consequences, and the annual reselection” is just another factor lowering em- appraisal becomes an empty ritual. ployee commitment. A related problem with Japanese appraisal is In summary marginal adjustments will not be that it is very difficult to implement in a global of much help. The fundamental roadblock in re- context, making it virtually impossible for a Japa- forming the Japanese appraisal system is the un- nese multinational to unify its organization in one willingness to deal with the consequences. global structure. Foreign employees generally resent the lack of direct feedback, but the lack of VLADIMIR PUCIK experience with face-to-face performance review dialogue is a serious handicap facing Japanese managers working overseas. An even more fun- appreciating yen damental flaw is the simple fact that the labor market structures overseas are different, and the Appreciating yen (AY), often called “high yen” is incentives embedded in the traditional Japanese not simply a phrase meaning the strong value of appraisal—a slow but sure rise to the top—do not the Japanese currency It refers more broadly to a have much meaning. ceaseless upward trend, with sharp fluctuations, in the currency value of yen. This trend has had distinctive impacts on the Japanese economy Current changes and its international relations in the post-Bretton Woods era after the “Nixon shock” of 1971. When the performance of a firm declines, What is AY? Following the breakdown in 1973 recalibrating the appraisal process is the usual first of the multilateral pegged exchange rate system, response. Japan is no exception. Influenced by a floating exchange rate regime was established. appraisal innovations introduced by foreign- As part of the original system established at owned companies, many firms are modifying Bretton Woods, the yen was set at $1: ¥360. Un- evaluation criteria, or adjusting the appraisal cycle der the floating exchange rate system, the value to incorporate 360-degree feedback. However, the of the yen increased nearly fourfold. In spring of major impact, some of it unintended, comes from 1995 the rate stood at about 11: ¥80. In spring changes in two areas: communication with the of 2001 it had retreated to $ 1: ¥108. This in- employee during and after the appraisal, and early crease in currency value has had a direct impact and visible identification of high-potential employ- on the continuous huge foreign trade and ees. current account surpluses sustained by Japan over 30 appreciating yen a nearly thirty year period. The strength of the trade surplus or deficit between two countries as currency has been based mainly on the strong a result of the nominal increase (decrease) in for- competitive power and the tremendous export eign currency prices of export (import) goods in potential of Japanese manufacturing industries the trade surplus country (vice versa). However, such as electronics, automobile, and machine in- the historical experiences since 1973 of Japan dustries. AY has appeared most obvious when and US have proven that this mechanism does seen in light of the performance of the US dollar, not necessarily work in such a symmetrical way which has depreciated over the long-term trend. depending on the managerial constitution of The depreciation of the US dollar is ascribed to companies in both countries. It is important to the declining competitive power of American in- note that especially in Japan there has been a dustries in the 1970s and 1980s, a period during unique mechanism for firms to accelerate suc- which the US also accumulated large foreign cessively the processes of AY. In many cases, trade deficits. The US foreign trade deficit stems until the 1980s in particular, Japanese companies mainly from purchase of Japanese imports and, did not raise the US dollar prices of their export since the 1980s, also purchases from many East goods by the same degree as yen was appreciat- Asian countries. ing, which means that they preferred to keep Another important feature of AY is the heavy their market shares of exports in lieu of main- and steep up and down movements of the ex- taining their profit margins. This is very much a change rate of yen that have pressured Japanese Japanese orientation to competition, and stands industries and firms to adapt to such urgent in contrast to the typical response of US compa- changes in every half a decade. The 36 percent nies in international markets. In addition, “J- AY from ¥360 in July 1971 to ¥264 in July 1973 Curve” effects (time lag effects due to export was the first such movement. The second oc- prices determined at contract) and the increase curred between December 1975 and October of “follow on” exports of parts and components 1978 when there was a 66 percent AY from ¥306 and equipment to subsidiary plants abroad to ¥184 in October 1978. There was a third sig- caused Japan’s foreign trade surplus to continue nificant movement resulting beginning with a to increase. A vicious cycle seemed to ensue in rate of ¥260 in May of 1985. The economic ex- which the yen appreciated, resulting in a larger pansion and high interest rate policies of the trade surplus and leading Japanese firms to ac- Reagan administration, followed by the Plaza cept lower profit margins, leading to an apprecia- Agreement in September 1985 led to a 109 per- tion of the yen, and so on. cent appreciation to ¥124 in May 1988. There The AY cycle, along with the “trade friction” was another appreciation, this one of 88 percent, between Japan and the USA, has propelled Japa- between April 1990 (¥158) and April 1995 nese foreign direct investment (FDI) since the (¥84). The first four months of 1995 were wit- early 1980s. Because an AY implies and reflects ness to one of the more cataclysmic shifts. In high expressed price values for domestic human early January the rate stood at $1: ¥100. By mid resources and materials it is more advantageous April of 1995, it had appreciated to $1: ¥79, as for Japanese multinational enterprises to im- much as 20 percent AY in three months (around plement local manufacturing abroad. In this con- 70 percent annual rate of change) from ¥100 in text, it is especially noteworthy that AY after the the early January, decisively smashing any possi- 1980s has played a critical role particularly in sup- ble chance of economic recovery in Japan since porting the “miracle of economic growth” in the the breakdown of the bubble economy in the larger East Asian region. Here, AY was not only early 1990s. an important factor in determining the location What are the mechanism and effects of AY? of Japanese FDI, it was a significant factor in the There is a “general theory” on the mechanism of promotion of technology transfer. It was also a a floating exchange rate system. This theory factor in Asian countries realizing a more com- states that the floating system can adjust auto- petitive edge in international markets as their own matically to recover the balance of a foreign currencies depreciated vis-à-vis the yen. Arabian Oil 31

What are the main problems of AY? From a Arabian Oil macroeconomic perspective, the cyclical and un Founded in 1958, with annual sales of approxi- stable nature deeply affects Japanese firms and mately $1.8 billion in 1999, Arabian Oil is Ja- the economy. The large scale ups and downs in pan’s largest oil producer. The Tokyo-based firm exchange rates affect basic price levels in Japan used to operate the Khafji oilfield, a large off- and its international economic relations. From a shore oilfield in the former neutral zone on the microeconomic perspective, firms and individu- Saudi Arabia—Kuwait border. As a result, the als must implement ‘risk management’ plans to Saudi Arabian and Kuwaiti government owned deal with the irregularly fluctuating foreign ex- 11 percent of its publicly traded stock and 60 change. Particularly for export-oriented firms percent of its disposition rights on crude oil pro- such as Toyota and Sony a single AY movement duction. against the US dollar can result directly in the Japan imports 99.7 percent of its oil supply of loss of several billion yen in their financial ac- only which 15 percent is produced by Japanese counts. Another serious problem is foreign ex- companies. In 1998, Arabian Oil produced change losses for investors in foreign portfolio 280,000 barrels per day 150,000 barrels of which assets. In Japan such huge losses occurred in the were exported to Japan and accounted for 4 per- third AY period, 1985–8, when many of Japa- cent of Japan’s total oil imports from oilfields mined nese institutional investors such as life insurance by Japanese companies. However, in February companies were heavily damaged. Notwithstand- 2000 it lost an important forty-year-old concession ing such experience, Japanese private portfolio in the Saudi Arabian section of the neutral zone investors as well as public institutions such as the due to its unwillingness to meet Saudi Arabia’s de- Bank of Japan have again built up enormous mands for a mine railway infrastructure invest- portfolio assets abroad. At the start of the twenty- ment. Japanese officials argued that a study showed first century overseas portfolio assets were more the proposed mine railway would be certain to run than $ 1 trillion, mostly in the USA. at a loss for a long time. However, the company This situation is also reflected on the US ap- still continues to drill from the portion of the oil- proach to foreign exchange known as “high dol- field controlled by the Kuwaiti government. lar policy”. The main purpose of this policy has In November 2000, Japan and Iran reached been to prevent the US economy from getting an agreement that gives Japanese oil companies caught up in a “vicious circle”—i.e. sharp depre- negotiating rights to a portion of the Azadegan ciation of the dollar followed by a rise of prices in oilfield in Iran, the world’s largest underdevel- import goods and then a rise in the domestic price oped oilfield. This field has a potential to pro- level, a rise in interest rates and a collapse of stock duce 400,000 barrels a day This new source of markets. oil is expected to help the Ministry of Econom- ics, Trade and Industry (METI) plan to raise the Further reading ratio of oil produced by Japanese companies. To combat the loss of rights to drill in the Saudi Abo, T. (ed.) (1994) Hybrid Factory: The Japanese Produc- Arabia section of the Khafji field, Arabian Oil tion System in the United States, Oxford: Oxford Uni- hopes to begin producing in Vietnam, while con- versity Press. tinuing oil and gas production in offshore China Kawai, M. (1996) “The Japanese Yen as an Interna- and the Gulf of Mexico. Crude oil represents most tional Currency: Performance and Prospects,” in of Arabian Oil’s sales; the remainder comes from R.Sato, R.V.Ramachandran and H. Hori (eds), Or- petroleum products. It has four consolidated sub- ganization., Performance and Equity: Perspectives on the sidiaries located in Japan, the Cayman islands, Japanese Economy, Dordrecht: Kluwer Academic Pub- the United States and Norway. lishers. See also: Japanese business in the Middle East

TETSUO ABO DAYO FAWIBE 32 automotive industry

ASIAN ECONOMIC CRISIS see economic million in 1970, including exports. Management crisis in Asia faced many challenges. One was simply to increase capacity given the rapidly growing domes- ATO-GIME see after-sales pricing tic market. But firms were also aware of their high costs and poor quality and the crowded domestic market generated strong rivalry Capital mar- automotive industry ket liberalization and lower trade barriers, targeted for 1971, added the threat of future for- From 1980 through 1993 Japan was the world’s eign competition. A positive dynamic developed: largest automobile producer, turning out a peak costs could clearly be lowered each year, and of 13.5 million units in 1990. Today output is quality improved; firms thus actively sought out stalled at 10 million units, though another 5.5 new ideas both at home and abroad. By the late million were produced overseas, including 3.1 1960s they were competitive in the small car million in NAFTA. In addition, consolidation in market in the USA, where their major rival was 1999 and 2000 left Toyota and Honda the only not the American Big Three but rather two independent firms, with Nissan, Mazda, Volkswagen. By the late 1970s the Japanese firms Isuzu and Mitsubishi under foreign control. Still, had established a reputation for high quality. the majority of domestic employment is with sup- This rapid improvement reflected the intro- pliers, not assemblers, and with 880,000 employ- duction of the set of management techniques ees the auto industry is the second largest known as “lean” production. Supporting imple- manufacturing sector (after electronics). Once mentation was senior management, who with few dealerships, gas stations and so on are included, exceptions came from careers based in factory the sector accounts for about 5 percent of the management and engineering; noticeably absent economy and vehicles alone for 15 percent of were people from finance and marketing. Firms Japan’s total exports. were thus highly receptive to the best in indus- Japan’s history shaped the industry Motoriza- trial engineering techniques, including statistical tion began with Model T buses imported after process control (SPC), continuous improvement the 1923 earthquake destroyed Tokyo’s trolley (kaizen) and total quality management (TQM), system. Ford and General Motors soon set up as well as flow-dominated factory layout, rapid assembly plants, and in 1936 Ford was prepar- tooling changes and “just-in-time” (JIT) producing to build an integrated facility as its vanguard tion scheduling, implemented at Toyota through plant in Asia. But war closed these firms and led the use of kanban cards. These techniques, devel- to import restrictions that lasted from 1936 oped during the 1950s and early 1960s, were through the 1970s. Instead of having efficient (al- widely publicized at the time in the business press beit foreign-owned) producers, trade barriers en- and engineering journals. Implementation, how- couraged entry and in the early 1950s Japan was ever, was achieved in stages, with assemblers burdened with a large number of inefficient, poor- putting them in place in the latter 1960s and sup- quality makers. Three-wheel vehicles comprised pliers in the 1970s. This helped bring about large the largest segment until 1962, and sales of pas- gains in quality and productivity following the senger cars only surpassed those of trucks in first oil crisis of 1973. 1968. New entry ceased in 1964, when Honda Suppliers were critical because they are more began regular production, while several early en- important than assembly both in terms of em- trants exited, including Prince in 1966. Nine pro- ployment (77 percent of the industry total) and ducers of cars and light trucks survived until costs. After the Second World War, existing as- 2000, with another two firms producing prima- semblers spun off most internal parts manufac- rily heavy trucks. turing, while new entrants used outside suppliers From the 1940s, output remained divided from the start, thereby lessening their capital re- among multiple firms in a variety of product seg- quirements. Another impetus was a strong labor ments. Costs remained high; total production was movement that won employment guarantees at under 2 million units in 1965 and just over 5 the firm level. By turning to suppliers, assemblers automotive industry 33 were able to raise output without expanding their ing market fit. Supplier input was crucial. They own employment until well into the 1960s. contributed about half of total engineering hours, Coordinating the supply chain was a chal- coordinated in part through “design-in” (the co- lenge. By the 1960s direct suppliers were organ- location of supplier staff at their customers). In ized into kyoryoku-kai, formal supplier general, Japanese suppliers tended to do more associations. Purchasing departments oversaw “black box” work, developing parts to perform- the interaction of suppliers with engineering at ance specifications, while US suppliers worked the development end and with the factory once to blueprints supplied by their customers. (In the vehicles entered production, and also organized latter 1990s the USA and the EU industries con- consulting efforts that diffused the latest in verged rapidly towards the Japanese model.) manufacturing and management techniques to On the opposite end of the industry is vehicle them. With interfirm organization built up over distribution and repair. As in most other mar- decades—most ties date back to 1960 or earlier— kets, users in Japan buy from franchised dealers, the cumulative benefits of ongoing relationships not from the assemblers themselves. Dealers in improved the capabilities of the supply base as a Japan are typically large, multi-store operations whole, raising the quality and lowering the cost with an exclusive prefectural-level sales territory of the finished vehicle. a legacy of the 1950s, when few dealerships were Supporting this relationship were clear pric- needed while registration procedures made it dif- ing rules, using standard cost models as a start- ficult to sell across prefectural boundaries. At the ing point, that made setting the terms of same time, the initially limited but geographically transactions less fractious. In turn, assemblers dispersed customer base—plus expensive real es- typically contracted the full production run of tate in major urban markets—meant that sales- four or more years to a single supplier, and (con- men visited likely customers, rather than waiting ditional on quality and delivery and general cost for potential buyers at dealership sites. As the competitiveness), suppliers could generally count market expanded, dealers set up new sales on customers trying to give sufficient orders for branches within their existing sales territory; until keeping their capacity utilized. Within this ongo- recently they were prohibited by their franchise ing relationship, rules of thumb for sharing the contracts from “dualing,” selling the cars of more gains from engineering improvements gave sup- than one maker. But with selling labor intensive, pliers the incentive to develop and implement new even in good times new cars were relatively un- designs and manufacturing methods, and share profitable. new ideas with their customers. With assemblers Instead, dealers’ profits relied upon a local mo- marketing several separate product lines, they nopoly on vehicle repairs and on shaken, the man- could have two-three firms supplying brakes, seats datory inspection of cars required every or other components; suppliers could and did pe- two—three years by the Ministry of Transport. riodically lose business to rivals, keeping them High fees from inspections (at one time $ 1,500 honest. On the flip side, most large parts firms or more) and fat margins on repairs more than sold to several different assemblers, though there compensated for the low profitability of vehicle was less overlap among suppliers to Nissan and sales. Because inspections became annual after Toyota due to capacity and geographic consid- the tenth year, few cars were kept after that point. erations. Together, these two features speeded the The market for used cars thus remained thin, diffusion of best practice throughout the indus- and (again unlike in the USA) was not a signifi- try. cant source of profits. Without “dualing” imports Suppliers also became integral to vehicle en- were unimportant; the few firms that specialized gineering and development. Within the auto com- in foreign cars (such as Yanase Motors) were low- panies, stylists, and product and process engineers volume operations with few sales points, focus- were organized in platform teams. This facilitated ing on high-margin models, and handling many overlapping different elements of the overall proc- makes in parallel. This, together with the cost of ess, and such simultaneous engineering speeded setting up an independent distribution system, product development, cutting costs and improv- kept foreign penetration low. However, firms that 34 automotive industry made the requisite investments, such as BMW with its many producers of small cars, and sig- after 1982, increased their sales volume and nificant import barriers.) earned high profits. In the USA, seven Japanese firms vied for The distribution system is now in flux. The share, keeping profits modest. They likely would prefectural scope of the typical franchise meant have exited the market when the small car seg- that from the assembler’s perspective a dealer was ment faded in the mid-1980s, as happened with too big to fail. Toyota did well after 1982, and its European imports in both the 1950s and 1960s. dealers thus had the resources to expand into the But in the spring of 1981 the Reagan administra- newly prosperous suburbs. In contrast, Nissan’s tion asked the Japanese government to impose a sales stagnated, and it had to bail out several ma- VER (“voluntary” export restraint) of 1.68 mil- jor dealers, but managers from corporate head- lion units. Despite public handwringing (and quarters proved no more adept at running genuine confusion among executives), Japanese dealerships than the unlucky entrepreneurs firms soon realized the benefits of a formal car- whom they replaced, and had no resources to tel, and raised prices for popular models by as expand to the suburbs. This vicious circle made much as 25 percent. Since only a limited number it even more difficult to maintain sales volume. of cars could be sold, firms also had an incentive The incipient weakness of this structure hit to move upscale and the VER provided the prof- home with the 25 percent drop in sales after 1990. its needed to develop bigger vehicles. Finally the Of course, some dealers overextended themselves VER encouraged local “transplant” assembly during the “bubble” (as Mazda did at the corpo- since parts were not subject to import restrictions. rate level, trying to match Toyota’s five sales chan- Honda opened the first such plant in 1982, and nels despite its much smaller size). In addition, by the end of the 1980s eight producers had op- deregulation of the shaken in 1996 led to both erations in either the USA or Canada. This proc- fewer inspections and lower prices. Combined ess accelerated after the Plaza Accord of 1986, with the market downturn following the con- when the steep appreciation of the yen made parts sumption tax hike in April 1997, the majority of imports from Japan unattractive. dealerships operated in the red during 1998– These ventures proved surprisingly success- 2000, and required subsidies from car makers to ful. There are now twenty assembly engine and stay in business. This is surely a source of un- transmission plants in the USA and Canada run ease in the entire industry even at Toyota, Honda by Japanese car makers, and at least 300 plants and Suzuki, whose domestic sales have held up run by “transplant” suppliers. In 1999 they ac- best. counted for 3 million units, 18 percent of NAFTA International sales began with truck exports output. The transplants initially focused on small to developing country markets in the 1950s. Pas- vehicles, with low profit margins, but Honda and senger car exports came later, when the success Toyota now produce more cars than Chrysler, of the Volkswagen Beetle in the late 1960s ex- and all are rushing to launch products in the panded the market for compact cars in the USA. minivan, SUV and pickup truck segments. Draw- New US emissions regulations in 1970 and the ing upon their experience in the US, Japanese oil crises of 1973 and 1979 further boosted the firms then expanded into the EU. Most chose small car segment to a peak of one-third of all Britain as their base, but the strong pound later sales. Rather than developing their own small hurt sales elsewhere in Europe. Japanese firms, cars, the Big Three turned to Japanese makers as however, dominate Asian markets, lagging only a source of captive imports, with General Mo- in China and Korea, and are expanding in Latin tors taking equity stakes in Isuzu and Suzuki, Ford America. in Mazda, and Chrysler in Mitsubishi Motors. What of the future? The industry built 1.5 Helped by good quality and a favorable exchange million units of new plants inside Japan at the rate, Japanese producers captured the majority start of the 1990s, leaving it with roughly 15 mil- of this new segment, some 2 million vehicles in lion units capacity But between the collapse of 1980, or about 20 percent of the US market. (In the “bubble” and the strong yen, domestic out- contrast, Japanese firms fared poorly in Europe, put appears likely to remain closer to 10 million automotive industry 35 units. While Honda and Toyota have done well ple, have already taken over suppliers historically in the USA, and minicar demand has expanded associated with Nissan. In addition, while imports inside Japan, profits have otherwise proved elu- might appear to comprise a trivial 6 percent share sive, both at home and abroad. Adjustment to of the market, they are concentrated in the high- this unpleasant reality has been slow. During the margin luxury segment, and foreign firms now 1990s several temporary upturns lulled the in- have potential additional sales channels through dustry with hopes that plant closures could be their new Japanese subsidiaries. forestalled. The steep recession that began with The future entails many management chal- the consumption tax increase of April 1997 lenges. New owners must restructure and absorb dashed these hopes, and a wholesale restructur- their purchases, despite little or no experience oping of the industry is underway. Ford took con- erating in Japan. Meanwhile, Toyota and Honda— trol of Mazda in 1996, and General Motors has and many suppliers—are only now grappling with 49 percent of Isuzu, giving it de facto control. In overseas operations that will end up more im- 1999 Nissan was taken over by Renault, and in portant than their domestic ones. Finally an ag- 2000 DaimlerChrysler took a potentially control- ing labor force and overall high wages make it ling stake in Mitsubishi. General Motors has in- likely that much parts production will move off- creased its positions at Suzuki and Fuji Heavy shore, making factory management more com- Industries (Subaru), and Toyota absorbed plex. Japan will remain a major producer, with Daihatsu and Hino. (The fate of Nissan Diesel is domestic output of 10–11 million units and still unclear). Toyota and Honda thus remain the strengths in engineering small vehicles, but it is only independent producers. A similar process almost certainly past its heyday. of realignment will follow in the parts sector: Bosch (Germany) and Delphi (USA), for exam- MICHAEL SMITKA B

bad debt essentially as an intermediary lending deposits to third parties, a rise in amounts of debt not Bad debt, more commonly referred to as “non- repaid also means that the chances of a bank not performing” or “bad loans,” are amounts loaned having the money needed to return a depositor’s by banks but which fail to generate returns. Pre- money rises. If a bank then becomes insolvent cise definitions vary from country to country but, and fails, confidence in other banks also drops however defined, regulatory authorities generally and depositors may rush to withdraw deposits. require banks to set aside capital to cover poten- Such a run on the banks can, in turn, lead to a tial losses arising from bad debt becoming unre- liquidity crunch. At any given time, most banks coverable debt. will not have the cash on hand to pay out every In Japan, the definition of non-performing depositor, since a significant portion of deposits loans was more restrictive than generally accepted will be tied up in loans extended to customers. standards in other advanced industrial countries Thus, even solvent banks have the potential to until the latter 1990s. Before fiscal year 1994, for collapse when another bank fails due to exces- example, loans to borrowers in legal bankruptcy sive bad debt. A rapid increase in amounts of or considerably past due were classified as non- bad debt in any nation’s financial system should performing but restructured loans were not. From thus be a phenomenon of concern to policy mak- fiscal year 1995 on, however, regulatory authori- ers and regulatory authorities. ties progressively widened the definition. Today definitions of bad debt in Japan fall in line with Sources of bad debt globally accepted standards. Bad debt arises for a number of reasons. Exces- sive risk-taking by management is often a primary Repercussions of bad debt cause. This was the case in the latter 1980s when Bad debt has a number of repercussions. The banks loaned funds for speculative purposes. Bad presence of large amounts of non-performing debt may also arise from an economic downturn. loans impairs the capital ratios of banks, thereby When the economy enters a recession, as Japan’s shrinking the amount of capital banks have avail- did twice in the 1990s, company profits tend to able to lend to other borrowers. In this way large fall, making it more difficult for borrowers to re- amounts of non-performing loans may induce pay debt. Because of this correlation between eco- credit crunches where potentially productive ven- nomic performance and bad debt levels, banks tures are unable to obtain sufficient capital be- and their regulators often initially delay in ag- cause capital is tied up in unproductive gressively addressing non-performing loan prob- investments. lems, hoping that bad debt will simply shrink to Since deposit-taking financial institutions serve an acceptable level with an economic recovery. Bank of Japan 37

Bad debt is also commonly spurred by exog- debt. With the use of public funds, banks were enous shocks. For example, the Great Hanshin required for the first time to disclose amounts of Earthquake that struck the Kobe area in Japan in non-performing loans to the public. Although 1995 destroyed the business foundations of many banks carried out record write-offs and recorded companies, and therefore led to a surge in bad record losses in 1999 and 2000, the continued debt for banks with heavy lending in this region. economic downturn and decline in asset prices Likewise, dramatic shifts in exchange rates or in led the number of corporate bankruptcies to con- oil prices may affect the profit bases of particular tinue to climb and additional bad debt to emerge. sectors of the economy with a high dependence Japanese banks therefore remained burdened with on imported materials or export markets, sud- large amounts of non-performing loans as they denly making them unable to repay debts. entered the twenty-first century.

Procedures for dealing with bad debt and Further reading the financial crisis of the 1990s Amyx, J. (2000) “Political Implications to Far-reaching Prior to the collapse of Japan’s asset bubble in Banking Reforms in Japan: Implications for Asia,” 1991, financial institutions infrequently encoun- in G.Noble and J.Ravenhill (eds), The Asian Finan- tered distress due to high levels of non-perform- cial Crisis and the Architecture of Global Finance, New ing loans. If a bank did face insolvency as a result York: Cambridge University Press, 132–51. of high levels of bad debt, the Ministry of Fi- JENNIFER AMYX nance (MOF) arranged a “rescue merger” behind the scenes, relying on a stronger bank to absorb the weaker. In an era of heavy regulation, Bank of Japan stronger banks had incentives to participate in The Bank of Japan (BOJ), the nation’s central such rescue procedures, for doing so meant gain- bank, was established in 1882 by the Finance ing valuable retail branches. With the 1991 burst- Minister as a joint undertaking of government ing of the nation’s asset bubble, however, all and business. The BOJ’s mission is to lay the Japanese banks became burdened with large foundation for sound economic development amounts of non-performing loans and limited de- through the maintenance of price stability and regulation meant that the relatively stronger banks ensuring the stability of the financial system. To had fewer incentives to assist in “rescue merg- fulfill this mission, it issues and manages ers.” banknotes, implements monetary policy, provides The magnitude of nonperforming loans in the financial settlement services, manages the busi- Japanese banking sector only began to be revealed ness of Japanese government securities, acts as a to the public in 1995, when a Finance Ministry representative of the Ministry of Finance (MOF) official testified in the Diet concerning the grave in the foreign exchange markets, compiles data, condition of the housing and loan corporations and carries out economic analysis and research. called jusen. Even then, only estimates of aggre- The BOJ’s Policy Board serves as the highest gate totals for the banking sector as a whole were decision-making body of the bank. revealed. Aggressive measures to deal with the high levels of bad debt in the banking system were postponed by authorities until the eruption Monetary policy of acute financial crisis in 1997–8. By this time, the magnitude of non-performing loans in the The BOJ implements monetary policy through Japanese banking system was estimated at close setting the official discount rate and through mar- to one trillion dollars. ket operations. Both activities influence interest In 1998 and 1999, the government injected rates and interest rates, in turn, affect various price public funds into a number of Japan’s large com- levels. The discount rate is the standard rate of mercial banks in an attempt to boost their capital interest on loans made by the central bank to pri- bases and aid them in the disposal of their bad vate financial institutions. Loose monetary policy 38 Bank of Japan

(low rates) makes it easier for banks to attract To prevent financial institutions from falling prey loan customers because it enables them to make to the “moral hazard” of regarding infusions of loans at lower interest rates. In general, the cen- capital from the BOJ as a form of insurance, the tral bank raises the rate when the economy be- BOJ conducts regular on-site examinations of comes overheated and lowers the rate when there those financial institutions with accounts at the are deflationary trends. central bank. Through market operations, the Bank guides The rescue operations of the BOJ saved large the key unsecured overnight call money rate. banks from failure in the Banking Crisis of 1927. From 1950–91, the BOJ also influenced the avail- The BOJ also came to the aid of Yamaichi Secu- ability of credit through the exercise of “window rities and other brokerages in 1965. More recently guidance” or madoguchi shido. Through “win- the BOJ provided funds in 1994 and the years dow guidance,” the BOJ indicated to commercial thereafter to execute schemes for facilitating the banks the amount of lending it deemed proper. rescue of credit unions and banks burdened with In the late 1980s, prolonged expansionary massive amounts of nonperforming loans. monetary policy by the BOJ fueled a speculative asset “bubble” of unprecedented magnitude. In International activities February 1987, the BOJ dropped the discount rate to a (then) postwar historic low of 2.5 percent The BOJ’s international activities are threefold. and held this rate until May 1989. With an abun- First, the Bank engages in international transac- dance of “cheap” money available, many compa- tions by providing yen accounts to central banks nies and individuals borrowed for the purposes and government institutions overseas. Second, the of speculative investment and from 1987 to 1989, Bank plays a central role in monitoring and in- the Tokyo Stock Exchange Nikkei 225 Average tervening, when necessary in currency markets. nearly doubled in value. The eventual tighten- For example, in the 1990s, the BOJ’s massive in- ing of monetary policy however, led to a burst- terventions in the form of dollar buying were key ing of this bubble. to suppressing the strength of the yen and mak- In attempting to shore up banks burdened with ing up for the shortfall between Japan’s current massive amounts of non-performing loans or and capital accounts. Finally the BOJ’s interna- dead debts that emerged from the bubble’s col- tional activities also involve participation in in- lapse, the central bank again loosened monetary ternational forums such as the meetings of the policy In April 1995, the discount rate was low- Bank for International Settlements (BIS), G7, and ered to a new historic low of 1 percent and then the International Monetary Fund. further lowered to 0.5 percent in September 1995. In an emergency measure extending from Feb- The new Bank of Japan Law ruary 1999 through August 2000, the BOJ also set the target overnight call rate at zero percent For most of the postwar period, the BOJ lacked following a series of financial institution bank- independence. Monetary policy strongly reflected ruptcies. the influence of the MOF and the Bank’s decision-making autonomy was also compromised by the conduct of its personnel and budget matters. Ensuring stability of the financial system The MOF appointed the BOJ’s executive audi- The BOJ provides and maintains a settlement sys- tors and comptroller and had the power to dis- tem for financial transactions between financial miss Bank officials, including the governor. The institutions. Funds are transferred across the cur- BOJ budget also required approval by the Finance rent account held by each financial institution at Minister. the central bank. The BOJ also serves as the With the 1997 passage of the New Bank of lender of last resort to financial institutions fac- Japan Law and the enactment of this law in April ing liquidity problems, extending uncollateralized 1998, however, the central bank gained greater loans to financial institutions if the stability of independence in the conduct of monetary policy the financial system is perceived to be in danger. and more autonomy in personnel matters. The Banking Act of 1982 39 new law also introduced greater transparency into Bank and BOT, with BOT being the only com- decision-making processes within the BOJ. The mercial bank to be authorized with such pow- central bank’s budget remains subject to MOF ers). This privileged position helped the BOT to approval. develop a reputation as a professional bank of The impetus for the new BOJ Law was the international finance, in turn helping it to domi- recognition of the MOF’s undue influence over nate the Japanese inter-bank foreign exchange the BOJ in its conduct of monetary policy in the markets. bubble period and the linkage of this policy break- In 1996, the BOT merged with Mitsubishi down to the nation’s prolonged recession and fi- Bank, to become Tokyo-Mitsubishi Bank. This nancial crisis in the 1990s. Reorganization of the new colossal bank, with combined assets of ¥72.8 central bank under the new law was also acceler- trillion, 36 percent larger than the title-holder ated by the emergence of scandals in the latter Sumitomo Bank and more than five times bigger 1990s. These scandals centered on dubious in- than America’s Citibank, became the world’s larg- teractions between BOJ officials and private fi- est bank. It is still one of the largest banks in the nancial institutions. world with subsidiaries and associated banks on five continents. In its domestic business, the bank provides a Further reading full array of commercial banking services. Its in- Bank of Japan Annual Review (annual) Tokyo: Bank of ternational banking services include investment Japan. financing. The Tokyo-Mitsubishi Bank has most Cargill, T, Hutchison, M. and Ito, T. (1997) The Politi- recently assisted the Export-Import Bank of Ja- cal Economy of Japanese Monetary Policy, Cambridge, pan and the Overseas Economic Co-operation MA: MIT Press. Fund in extending credit. It is a major commis- Yamawaki, T. (1998) Nihon Ginko no Shinjitsu (The Truth sioned bank for foreign bonds issued in yen de- of the Bank of Japan), Tokyo: Diamond-sha. nominations.

JENNIFER AMYX Further reading Bank of Tokyo Blanden, M. (1995) “Japan,” The Banker, 145(836): 26. Cashmore, N., Ramillano, M., Playfair, A., Shimomura, The Bank of Tokyo (BOT) was founded in 1880 K. and Horsburgh, K. (1996) “The Best Banks in as the Yokohama Specie Bank, which contributed Foreign Exchange,” Asiamoney 7 (3): 21. to the internationalization of domestic industries Shale, T. (1995) “Or the World’s Greatest Bank?” through international finance operations. After Euromoney 31, May. the Second World War, in 1946, the bank was “Bank of Tokyo Wins U.S. Clients Through Credit reorganized as a commercial bank, and the Bank System,” (1994) Nihon Keizai Shimbun, October 16. of Tokyo was established. In 1952, the BOT opened its first foreign branches in New York and SUMIHIRO TAKEDA London, and in 1954 the BOT became Japan’s only specialized foreign exchange bank. In 1962 Banking Act of 1982 the BOT was authorized to issue debentures (a type of bond) to support its yen funding. The The Banking Act of 1982 represented the first debentures issued by BOT were abbreviated as comprehensive revision of the Banking Law of Wari-To (discounted-Tokyo), and represented a 1927. The Act governed the behavior of all “or- service where the bank offered individual inves- dinary” banks in Japan and served as the legal tors the ability to purchase bonds. In Japan a lim- basis for the on-site inspections carried out peri- ited number of financial institutions were odically by the Inspections Bureau in the Minis- authorized to issue debentures (authorized banks try of Finance (MOF). The Act’s purpose was are long term credit banks, the Norin Chukin to maintain the smooth flow of credit and financ- Bank, Shyoko Chukin Bank, Shinkin Central ing while at the same time protecting depositors 40 Banking Act of 1982 by ensuring prudent management of the bank- ties agents, and loan securities as ancillary busi- ing business (Article 1). Its passage in the Diet nesses. With this newly granted permission, on May 25, 1981 and enactment on April 1, 1982 major Japanese banks were able to turn to bond followed decades of debate and numerous un- dealing and investment as a new source of prof- successful attempts by the Ministry of Finance its. Receiving permission to enter the government (MOF) to draft a banking law revision. bond business was especially important for the city banks, whose major borrowers and depositors were corporations making the shift away The beginning of securitization of the from capital-intensive undertakings at this time. banking sector As a concession to brokerages, securities compa- The Banking Act of 1982 was most notable for nies were permitted to start lending money se- its provisions widening the scope of business for cured by government bonds. banks. More specifically the Act marked the be- Notably the Banking Act of 1982 did not en- ginning of the securitization of the Japanese bank- tirely settle the debate over banks entering the ing sector. securities business, however. Many other areas The issuance of large amounts of government of the securities business remained closed to the debt in the 1970s affected the profit margins of banking sector and plans for major changes there- banks because banks comprised the government after became replaced by a step by step liberaliza- bond syndicate, absorbing government bonds at tion process. Brokerages continued to fiercely below market and holding them until the Bank resist the encroachment upon their territory by of Japan (BOJ) reabsorbed them. With a surge banks, thereby impeding efforts to do away more in debt issues, however, banks began to show sig- quickly with compartmentalization of the finan- nificant losses from their government bond hold- cial industry ings. As a result, they demanded the right to retail government bonds. Although MOF made adjust- Supporting the status quo with disclosure ments at the margins in response to these profit requirements concerns of banks—including altering accounting methods for government bonds—the banks re- A significant feature of the Banking Act of 1982 mained dissatisfied. In 1978, the banks boycotted (as well as of its predecessor, the Banking Act of the issue of long-term government bonds. This 1927) was its lack of explicit details regarding action spurred the government to seek alterna- banking regulations, leaving these instead to ad- tive measures to resolve the problem. ministrative guidance. Thus, MOF officials con- The provisions eventually contained in the tinued to enjoy a large degree of discretion in Banking Act of 1982 permitted banks to enter carrying out banking regulation. In the past, the the part of the securities business involving the ministry had preferred this approach to formally sale of government bonds to the public. This out- legislating changes, as the strategy of obtaining come, however, was the product of a fierce battle cooperation enabled the ministry to maintain a between the banking and securities industries. great deal of flexibility in response while also en- Brokerages naturally opposed entry by banks into joying discretionary authority. In the years lead- any aspect of the securities industry seeing it as ing up to the passage of the Banking Act of 1982, an encroachment on their turf. The MOF there- however, the ministry found reliance on extrale- fore was forced to broker a compromise that ena- gal administrative guidance to be a double-edged bled banks to avoid losses on government bonds sword. Instances of bank defiance of MOF guid- but at the same time compensated the broker- ance were on the rise. In the lead up to the pas- ages for the limited entry by banks into their sage of the Banking Act, therefore, the ministry business territory. in fact sought to formalize some of its guidance, In the Act’s final provisions, banks were per- drafting proposals for stricter disclosure require- mitted to invest in equities and bonds on their ments to be included as part of the Banking Act own behalf, underwrite and offer for sale gov- legislation. ernment and other public bonds, act as securi- MOF officials believed that consolidation of banking crises 41 the sector was needed to make the banking in- allowed to fail for the first time in the post-Sec- dustry more efficient. Since the deposit insurance ond World War era. In the 1990s Japanese banks scheme was not credibly funded, the ministry and securities firms failed primarily due to large hoped to eliminate the weakest banks through proportions of non-performing loans. The proxi- mergers rather than inducing failures. The mate cause of these banking problems seems to weaker banks had little incentive to cooperate in be the 1990 bursting of the asset price bubble of such mergers, however, since the ministry’s im- the late 1980s. By the end of the 1990s, many plicit guarantee against failure remained in place. large and small Japanese banks were insolvent Thus, MOF officials sought tougher disclosure and non-performing loans were estimated to be requirements as a means of facilitating the needed over $ 1 trillion and, on average, over 20 percent consolidation. of Japanese bank assets. Non-performing assets The All Japan Bankers’ Federation, Zenginkyo, were undoubtedly much higher than 20 percent opposed the MOF’s proposal, however, and at many banks. fiercely lobbied Liberal Democratic Party (LDP) It has been contended that only liberal ac- officials to veto the proposal on their behalf. The counting procedures permitted most banks to banking industry’s critical role as a provider of satisfy the Basel capital standards, while implicit large amounts of political funds helped it gain government guarantees prevented depositor runs. the LDP’s sympathy In the end, the banking in- In spite of these guarantees and accounting treat- dustry was able to foil the MOF’s attempt to in- ments, Japanese banks continued to face severe troduce more market discipline and the status quo liquidity problems in financial markets and sev- vis-à-vis disclosure was upheld. The MOF’s fail- eral Japanese banks have had to be rescued or ure on the disclosure issue was compounded as closed in the later half of the 1990s. The origin well by its failure to obtain legal authority to dis- of this recent banking crisis in Japan can be traced pose of bad bank management. to the poor state of the Japanese economy and the collapse of asset prices in the beginning of Other provisions the 1990s. While there have been a number of banking crises in Japan, especially in the 1920s, The Banking Act of 1982 also incorporated for the 1990s crisis was the first major crisis in the the first time an upper lending limit on the sum post-Second World War era. that could be loaned to a single party thereby On August 30, 1995, Hyogo Bank, a mid-sized reducing the risk of excessively concentrated bor- regional bank with about $37 billion in total as- rowing. Loans to a single customer could not ex- sets, became the first commercial bank in Japan ceed 20 percent of capital and surplus funds to fail since the end of the Second World War. (Supplementary Provisions, Article 4). This up- While all depositors were paid, in a departure per limit on lending had previously been speci- from the traditional ‘convoy system’ sharehold- fied through MOF circulars rather than by law ers and non-depositor creditors of Hyogo Bank but was made into law at the behest of the Finan- suffered losses. As in the past, the business of cial System Research Council. Hyogo bank was reorganized with funds from its major owners, other large banks, and taken Further reading over by a new entity Payments associated with this resolution depleted all deposit insurance Rosenbluth, F. (1989) Financial Politics in Contemporary funds and the government announced that it Japan, Ithaca, NY: Cornell University Press. would not allow any of the country’s twenty larg- JENNIFER AMYX est banks to fail before the year 2000. Nevertheless, three major institutions failed in banking crises 1997, Sanyo Securities on November 4, Hokkaido Takushoku Bank on November 17, and Yamaichi The decade of the 1990s was characterized by a Securities on November 24. Similarly two major series of banking crises in Japan. In this period, institutions also failed in 1998, Long-Term Credit major banks and securities firms in Japan were Bank of Japan on October 23 and Nippon Credit 42 banking crises

Bank on December 13. Other Japanese financial deregulated in the early 1990s. The 1993 Finan- institutions continued to fail intermittently in cial System Reform Act dismantled barriers be- 1999 and 2000. Why has the banking crisis in tween banking and securities businesses and the Japan lasted for all of the 1990s and is still con- implementation of the ‘Big Bang’ set of financial tinuing in early 2001? deregulations was started in 1998. Until recently the Japanese banking system Based on this brief review, we can now begin was heavily regulated and segmented. Different to answer why have Japanese banks been in cri- types of banks were permitted to serve only a sis since the beginning of the 1990s and contin- certain type of customer. For example, city banks ued to fail in the second half of the 1990s? One specialized in short-term loans, long-term credit reason seems to be the sudden collapse of asset banks specialized in long-term developmental prices in the first part of the 1990s. But why has loans, and trust banks specialized in the money the crisis lasted so long? One reason may be that management business. In addition to banks, Ja- Japanese regulators initially may have hoped to pan also has numerous financial institutions and grow out of the crisis as bank profits rose with cooperatives that specialize in lending to small economic recovery. However, economic recover- businesses, agriculture, forestry and fisheries, se- ies in Japan in the 1990s have been weak and curities finance companies, insurance companies, short-lived. In addition, there has been little po- and government financial institutions. The larg- litical will to inject the money needed to rescue est holder of savings in Japan, the Postal Savings Japanese banks, especially since the government System, is part of the last category. in Tokyo is a coalition government and the bank- Like other central banks, the Bank of Japan ing industry and its regulators have been tainted must balance the conflicting objectives of provid- by corruption scandals. Another explanation ing confidence in the system for financial inter- notes that Japanese banks have not developed mediation to take place while limiting the moral credit analysis capabilities having depended on hazard costs of rescuing banks in trouble. With government directed and collateralized lending an emphasis on stability in bank regulation, all and, given the generally poor levels of disclosure, bank deposits in Japan are insured by the govern- nor have they been subject to market discipline. ment and, from the Second World War until the Under the prevailing amaku dari practice where mid-1990s, no Japanese bank had been allowed retiring senior regulators were virtually guaran- to fail. Typically a merger partner would be found teed senior positions with the institutions they for an ailing bank and in the so-called “convoy regulated, it is contended that bank regulation in escort system,” major competitor banks were ex- Japan has been less than fully effective. However, pected to contribute funds for such rescues. In this bank regulation may also have lost its effective- system, bank relationships with commercial cus- ness as Japan gradually moved to a more mar- tomers were long-term in nature, there was little ket-oriented economy and financial system. competition, innovation, or push for efficiency While there are many causes of this continu- among banks, and any change was slow and lim- ing banking crisis in Japan, Japanese banks must ited by the slowest bank in a group. Public disclo- be restructured to reduce or eliminate non-per- sure of loan quality capital ratios, and other data forming loans from their balance sheets so that by banks in Japan has generally been of relatively they can restart lending. This will require govern- low quality. For example, Japanese banks were not ment funds and decisive action by the government. required to report non-performing loans until 1993 It would also be useful if Japanese banks develop and were not required to use US and international better credit assessment skills, improve disclosure, standards for such reports until 1998. and become more subject to market discipline. In recent years, driven by technology and globalization, the Japanese financial system is being Further reading gradually deregulated. Trading in new financial instruments was progressively permitted all Aggarwal, R. (ed.) (1999) Restructuring Japanese Business through the 1980s, derivatives markets were al- for Growth, Boston, MA: Kluwer Academic Publish- lowed by the late 1980s, and interest rates were ers. banking industry 43

Genay H. (1998) “Assessing the Condition of Japanese the pressing need to stabilize the economy next Banks: How Informative are Accounting Earnings?” led the Meiji genro (oligarchic leadership) of the FRB Chicago Economic Perspectives 4:12–34. “elder statesman period” to the adoption of a Hanazaki, M. and Horiuchi, A. (2000) “Is Japan’s Fi- European model based upon the establishment nancial System Efficient?” Oxford Review of Economic of a central bank. On the initiative of Meiji Fi- Policy 16 (2): 61–73. nance Minister Matsukata, the charters of more Hoshi, T. (2000) “What Happened to Japanese Banks?” than thirty central banks were examined, after Bank of Japan, IMES Discussion Paper Series, 2000- which a decision was made in favor of the Ger- E-7, March. man model. In 1882 the Bank of Japan (BOJ) Hoshi, T. and Kashyap, A. (1999) “The Japanese Bank- was created. The Reichsbank model was chosen ing Crisis: Where Did It Come From and How (notwithstanding apocryphal stories of the selec- Will It End?” NBER Macroeconomics Annual 129–201. tion of the Belgium model) and was reaffirmed Motonishi, T. and Yashikawa, H. (1999) “Causes of at the BOJ’s rechartering in 1942 because it gave the Long Stagnation of Japan During the 1990s: the maximum amount of power to the Ministry Financial or Real?” Journal of Japanese and Interna- of Finance (MOF) to the exclusion of any par- tional Economies 12 (2): 181–200. liamentary authority. Chief among the reasons for the founding of RAJ AGGARWAL the Bank of Japan was the need to regulate and control Japan’s currency. The BOJ was given the banking industry sole right to issue currency. It took the government four years, until 1886, however, to accu- Japan’s banking industry began in the early mulate enough gold to redeem the still Tokugawa period with the development of ex- outstanding private bank notes. This action initi- change houses and money lending stores within ated what proved to be the beginning of a long the family of enterprises of the great merchant history of government bailouts of the commer- houses or ie. These merchant banking operations cial banking sector. Another decade was required were to become the banks of the zaibatsu family to accumulate an adequate gold reserve before groups, as they were known starting in the early the Bank of Japan could achieve its ultimate goal modern period through the prewar period. These in 1897 of placing Japan on the gold standard. groups are still in operation today including From the late nineteenth century to the Mitsui group (Sakura Bank), Sumitomo group present, the Ministry of Finance, which wields and bank, Konoike household (Sanwa Bank). active control over the banking sector, has man- Most merchant banking operations were not aged Japan’s economic development policies. granted commercial banking licenses until the Matsukata, who was noted for his predilection 1890 Banking Act. for autocratic control, ruled the MOF for twenty The Meiji leadership of Japan’s early modern years and was responsible for initiating the prac- period, seeking to promote economic develop- tice of using of the banking system for policy- ment through modernization of its financial sys- based finance, which characteristic has identified tem, first adopted the US banking model. The Japan’s banking system for most of the past 120 National Bank Act of 1872 created a system of years. national chartered banks with the authority to First enunciated by Matsukata, government issue bank notes. By 1879, 153 banks had been banking policy aimed to create a system that was chartered, but their demise was equally rapid. non-competitive and highly segmented. This sys- Over-issuance of notes by the banks led to infla- tem was designed to meet the specific needs of tion, and limited capitalization led to quick bank business for short-term financing, long-term com- failures, largely due to inexperience with lending mercial goals, foreign exchange and commerce risk on the part of the former samurai owners, requirements, and the establishment of savings who used their government retirement bonds as banks. Specialized public sector policy-based fi- capital. nancial institutions were established to promote The failure of the National Bank model and economic development, industrial, regional, ex- 44 banking industry

port and import trade, colonial development and, panies which encompass all of Japan’s remaining until the end of the Second World War, to finance city banks together with trust banks. Japan’s military economy. It was Matsukata’s ex- After the revaluation of the yen following the pectation that the Ministry of Finance would con- 1985 Plaza Accord agreement, Japanese banks trol the activities of all of these institutions. This took a proactive role in financing the expansion segmented system lasted until the liberalization of Japanese direct investment overseas, most con- of the financial sector took place a century later spicuously the development by companies and in the 1990s. industries of subsidiary operations overseas, the The only notable exception to the tight con- acquisition of existing companies, and the build- trol wielded by the central bank occurred during ing of new production facilities. In North America the post-First World War decade when the gov- in the 1980s, every Japanese city bank and long- ernment’s laissez-faire policies let loose a period of term credit bank, followed by more than 65 re- free-wheeling financial markets. This period came gional banks, all opened branch offices in New to an abrupt end with the 1927 banking crisis, York as well as another 120 branches in other which followed the Bank of Japan’s dubious dis- US cities. Their lending to construction and the counting of bills as a relief measure after the Great real estate market in the USA led to a collapse in Kanto Earthquake (1923). Eventually a panic run the US real estate bubble in the early 1990s, as it ensued on a number of banks, which were had earlier in Japan. thought to be holding the worthless paper. The This pattern was repeated in the mid-1990s subsequent collapse of many banks led the Min- by Japanese banks which engaged in similar lend- istry of Finance to take a direct hand in the failing for speculative investment in Asia. Their ex- ing banking industry The government took over tensive lending to companies in the region led to ownership of a number of the failing banks, re- speculation in real estate and local equities mar- organizing and consolidating them. The newly kets. The number of Japanese bank branches in organized banks were soon pressed into the serv- Hong Kong exceeded their number in New York. ice of the emerging military economy of the The collapse of the resulting speculative bubble, 1930s. which had been financed by Japanese bank lend- The bank-centered financing regime gave the ing, helped precipitate the Asian financial crisis Ministry of Finance a considerable amount of of 1997. power in directing economic development policy Throughout the postwar period, until finan- particularly in comparison to its inability to di- cial liberalization policies were instituted in the rect the equity-capital markets. In the tight credit 1990s, the financial sector was strictly seg- conditions of the postwar period, the main bank mented into the following categories of short- system, in which banks were the chief suppliers term lending institutions: city banks, regional of corporate finance, became the MoF’s princi- banks, and sogo (mutual) banks. The city banks pal mechanism of rationing funds. were large-scale commercial banks with nation- In the 1980s the rapid expansion of credit pro- wide franchises that served primarily as chief vided by banks for speculative investment in real main banks to major commercial clients, such as estate and construction was one of the main the large-cap firms listed in the First Section of sources fueling what later became known as the the Tokyo Stock Exchange (TSE). Among this “bubble economy” The collapse of the bubble group of banks were the then so-called Big Six, led to the most profound recession since the end which were the main banks for the giant kigyo of the Second World War. Today non-perform- shudan (corporate enterprise groups) of the same ing loans still carried by the banks are estimated names: Mitsui (later re-named Sakura), to range from upwards of ¥63.3 trillion to twice Sumitomo, and Mitsubishi Banks, all former that amount, and have led to consolidations and zaibatsu banks, and for the so-called bank- mergers within the commercial banking sector centered groups: Daiichi Kangyo (DKB), as well as the bankruptcy of two of Japan’s three Sanwa, and Fuji Banks. Another half-dozen city long-term credit banks. This in turn has resulted banks had largely regional client bases. The in the creation (to date) of four giant holding com- Bank of Tokyo was also a city bank. Formerly banking industry 45 government owned, it was a specialized foreign eral. The IBJ’s operations were supervised by the exchange bank with a large clientele among government, and it also raised funds through the Japanese corporations doing business overseas. sale of debentures. A large share of its capital The second category of commercial banks was stock, some 43 percent, was raised in the Lon- the more than sixty-five regional banks. Their don market and held by foreigners. In the 1930s commercial base as main banks was among me- the bank was reorganized to provide long-term dium-sized businesses (typically Second Section credits for industries supporting the military firms listed on the TSE) and large privately held economy. firms. They also enjoyed the patronage of large In the postwar period three long-term credit corporations in their regions but not usually with banks registered under the Long-Term Credit Act main bank status. (1952) for the purpose of providing long-term The third category of short-term lending in- loans to industry: a newly organized Long-Term stitutions were the sogo (mutual) banks which were Credit Bank of Japan, the Industrial Bank of re-chartered as second-tier regional banks in the Japan, and later the Nippon Credit Bank, succes- late 1980s. These banks catered primarily to sor to the Hypothec Bank. Up until the 1980s small-scale corporations and privately held busi- their distinctive ability to offer long-term credit nesses within their regions. The legal distinctions became blurred as city banks also began extend- between the city banks, the regional banks, and ing long-term loans on a de facto basis by the the second-tier regional banks were erased in the rollover of short-term credits. Seeking to regain 1990s when they were all reclassified as commer- profits from the loss of their market share to the cial banks, but they still have retained their char- city banks, the Long-Term Credit Bank and Nip- acteristic markets. pon Credit Bank ultimately became casualties of The long-term credit banks were organized to the non-performing high-risk loans they had provide long-term financing, principally through made for construction and real estate and would the sale of long-term debentures. The Hypothec declare bankruptcy. The Industrial Bank of Ja- Bank of Japan, organized by the government in pan, the strongest of the three, merged with 1896, was the first bank of its type in Japan and Daiichi Kangyo Bank and Fuji Bank to form was modeled after the Credit Foncier of France. the Mizuho Financial Holding Group. As its name implies, this land-collateral based The Yokohama Specie Bank (YSB) was cre- bank made loans secured by agricultural proper- ated by the government with the mandate of fi- ties. The purpose of the bank was to provide long- nancing foreign trade. Until 1880 almost all term credits for agricultural and enterprise foreign exchange in Japan had been conducted development. In addition, local banks known as by foreign-owned banks. When currency depre- Agricultural and Industrial Banks were estab- ciations led to extreme fluctuations in exchange lished in each prefecture between 1897 and 1900. rates making foreign commerce difficult, the gov- The capital of these banks was held by individu- ernment created the Yokohama Specie Bank in als and the prefectural governments. Similar to order to bring this problem under control. The the Hypothec Bank in function, they raised funds YSB held the exclusive franchise to deal in for- by issuing debentures. In 1921 they were amal- eign exchange until the end of the First World gamated to become the Hypothec Bank’s regional War when commercial banks were allowed to branches. enter the foreign exchange market. Following the In 1900 the Industrial Bank of Japan (IBJ), Second World War the bank was reorganized as patterned after France’s Credit Mobilier, was es- the Bank of Tokyo and once again held until the tablished. Its purpose was to provide long-term 1970s the exclusive authority to deal in foreign developmental loans for vital industries, such as exchange. In the 1990s the bank merged with shipping, iron and steel, and chemicals, usually Mitsubishi Bank. for a term of at least five years. Local govern- The Savings Bank Act of 1890 was passed to ment bonds as well as debentures, shares of com- protect depositors, who were mostly peasants. panies, mortgages of land and buildings, factories, By 1901 there were 2,355 independent savings ships, and railways could be used as loan collat- and deposit banks. Although the government 46 bankruptcies earlier sought to consolidate them, it was not mise of the unsuccessful Financial Reconstruc- until 1943 that the Ministry of Finance ordered tion Commission (1997–2001). Other problems them closed and the personal savings they held confronting the banking industry include the still transferred into commercial banks to strengthen growing non-performing loan portfolio of the re- financing for the war effort. At this point indi- gional banks, the entry of foreign financial com- vidual and household savings became a large petitors into Japan’s formerly closed financial component of main bank system profits. Today, markets, as well as new domestic competitors, the only remaining savings deposit takers are the such as retailers and manufacturers which have shinkin (non-profit financial cooperatives) and the set up new institutions offering financial services. postal savings system. The commercial bank- Despite the injection of public funds to recapitalize ing system for many years has called for the the banks and the near-zero interest-rate policy breakup and privatization or the outright abol- of the Bank of Japan, banks have refused to issue ishment of the postal savings system, which new loans due to the continuing declining value comes under the supervision of the Ministry of of bank-held shares in their client firms which Posts and Telecommunications rather than the severely lowers their capital/asset ratio require- Ministry of Finance. ments. Since the late 1990s and up to the present, many changes have taken place in the consolida- Further reading tion of Japan’s banking industry The number of bank failures continues apace as a result of the Scher, M.J. (1996) Japanese Interfirm Networks and Their ongoing non-performing loan crisis, which are Main Banks, London: Macmillan and New York: chiefly loans to real estate and construction in- St. Martin’s Press. terests. This problem continues to plague the fi- Scher, M.J. and Beechler, S.L. (1994) “Japanese Bank- nancial sector since the collapse of the bubble ing in the U.S.—From Transient Advantage to Stra- economy of the late 1980s and has driven the tegic Failure,” Working Paper Series, Center on trend to takeovers and mergers among financial Japanese Economy and Business, New York: Co- institutions. lumbia University. The recent enactment of the Financial Hold- MARK J.SCHER ing Company Act has made it possible for commercial banks to merge without reducing their cross-shareholdings in client firms. The Act also bankruptcies permits different categories of banks—commercial, long-term, and trust banks—as well as secu- Bankruptcy involves an individual or corpora- rities firms and insurance companies to join tion seeking legal protection from creditors be- together, in essence, granting them universal cause of insolvency Comparatively speaking, the banking capabilities. This liberalization overturns incidence of corporate bankruptcy in postwar existing financial segmentation policies first laid Japan has been extremely high. In 1977, for ex- down by the Ministry of Finance in the nineteenth ample, more than 18,000 firms went bankrupt in century and reinforced in the postwar Ameri- Japan, while in the same year fewer than 800 firms can occupation period by the incorporation of went bankrupt in the United States. the principles of United States’ Glass-Steagall Act Firms may go bankrupt for a number of rea- within Article 65 of Japan’s Banking Law. As of sons. In general, however, the number of bank- today all of Japan’s top city banks, remaining long- ruptcies tends to rise substantially when an term credit bank (IBJ), and most of its trust banks, economy enters recession, experiences a shock together with several insurance companies have in the presence of latent business weakness, or been merged into four megabanks. undergoes structural changes. Until the latter As mentioned earlier, one of the paramount 1970s, most companies that went bankrupt in difficulties facing the banking industry today is Japan did so as a result of temporary critical con- the continuing non-performing loans problem, ditions. From the latter 1970s through the 1980s, which has withstood both the creation and de- however, structural causes were more often the bankruptcies 47 reason. In the 1990s, unsound investments made with other banks. This means of addressing prob- during Japan’s “bubble” period of the latter 1980s lems was seen as less costly than liquidation. Life- were a primary cause of failure, as asset prices time employment practices in large firms meant declined continuously over the course of the dec- the underdevelopment of a labor market for mid- ade. career employees. Therefore, employees left job- less due to bankruptcy were likely to find reemployment difficult. In smaller firms, in con- The “dual-structure economy” and trast, the expectation of lifetime employment was bankruptcy patterns not as firmly entrenched, the labor market was more mobile, and re-employment was easier to A distinctive feature of corporate bankruptcy pat- find. terns in Japan until the latter 1990s was the con- Occasionally the monitoring mechanisms of centration of these failures almost exclusively in the main bank system fell short, however. This small and medium-sized firms. The failure of was the case with Sanko Kisen, a Japanese ship- large corporations was extremely rare. In 1993, ping company with the largest tanker fleet in the for example, of the total number of bankruptcies world that filed for protection from creditors in leaving debts of ten million yen or more, over 99 1985 after many years of over-expansion. Such percent were accounted for by small and medium high-profile bankruptcies were extremely rare enterprises with a capitalization of less than 100 through the mid-1990s, however. million yen. The extraordinary commitment of banks to The heavy concentration of bankruptcies large corporate borrowers was supplemented by among smaller firms reflected the dual structure government support both in the prevention of of the Japanese economy Extensive subcontract- bankruptcy and in support of rescues in cases ing by large corporations to smaller firms meant when large corporations approached the brink that the smaller firms played the role of shock of insolvency In the financial sector, for exam- absorber in periods of economic downturn. ple, the fear of bankruptcy was never real until Smaller firms typically engaged in work for a sin- the mid-1990s. Under the so-called convoy ap- gle larger firm but the larger firms retained nu- proach to regulating financial institutions, failure merous subcontractors. When economic shocks was not an option. Competition was suppressed hit, then, subcontractors—financially dependent by the Ministry of Finance (MOF) so that no on the larger firms—tended to bear the brunt of firm moved forward so fast as to leave any oth- the pain and go under in high numbers. ers behind. If a financial institution nonetheless In contrast to the vulnerability of small and came under financial distress, the Finance Minis- medium-sized firms, the safety net for large cor- try arranged for a stronger bank to absorb the porations was distinctively strong in Japan. Al- ailing one. When necessary as in the case of though large Japanese corporations maintained Yamaichi Securities in 1965, the Bank of Japan a high degree of dependence on bank-centered stepped in to supply funds to prevent failure, in financing, most companies developed a long-term the interests of financial system stability. Avoid- relationship with a so-called main bank, through ing bankruptcy meant protecting depositors and which the corporation procured the majority of helped maintain confidence in the financial sys- its funds and all of its financial services. Close tem. monitoring by the main bank meant that prob- Heavy regulation in many other sectors of the lems were often caught before they led a firm to Japanese economy also guarded against “exces- reach the point at which liquidation was the only sive competition” that might otherwise have led option. And, if a corporate borrower did become to bankruptcy and protected companies from be- financially distressed, debt claims were often re- ing exposed fully to market forces. These regula- negotiated. The main bank’s role in the shadow tions typically included strict entry and exit of bankruptcy also might include the supply of requirements, price controls and other means to emergency funds or the arrangement of financ- induce companies to cooperate even as they coming for the distressed firm through cooperation peted. 48 bankruptcies

Surge in bankruptcies in the latter 1990s from falling sales and the inability to collect account receivables soared in 2000 on the back- After Japan’s asset bubble burst in 1991, many drop of slowed growth, weak consumer spending, companies struggled under the weight of high and the reluctance of banks to extend new credit interest payments on large debts and sluggish rev- or roll over loans to troubled firms. The retail enues. Massive amounts of fiscal stimulus, gov- and construction sectors were hit particularly ernment efforts to prop up the stock market, and hard in this period. low interest rates initially staved off large-scale Small and medium-sized companies also bankruptcies. Lax accounting and disclosure stan- found conditions to be harsh in the latter 1990s. dards by banks and their borrowers also helped In 1998, amid a sharp credit crunch and finan- postpone bankruptcy for many ailing firms and cial system instability the government adopted a their financiers. Companies often transferred special thirty trillion yen loan guarantee pro- debts to subsidiaries or paper companies. Because gram for small and medium-sized enterprises. consolidated accounting practices were not in Despite these efforts to prop up weak compa- place, this enabled parent companies to erase the nies, however, thousands of firms taking out debt from their books and thereby mask their loans ended up insolvent. The number of fail- financial distress. Banks also developed practices ures of semipublic companies (ventures between to avoid the classification of loans as non-perform- the public and private sectors) also increased in ing. One commonly used means involved banks the second half of the 1990s and accelerated fur- issuing new loans to companies to enable them ther in 1998 and 1999, damaging the financial to pay the interest on existing loans. health of local governments. These efforts at hiding problems and postponing reckoning with financial distress became increasingly inadequate, however, as the nation Developments in bankruptcy legislation moved into the second half of the 1990s decade. In the fiscal year 1996, the level of debt left by Japanese bankruptcy laws were relatively strong corporate bankruptcies reached the highest in his- and included the removal of top management. tory to that point, spurred by an increase in large- Yet, they were rarely used in the case of large scale bankruptcies of bubble-floated finance corporations over the postwar period. Until 2000, companies. The high amounts of debt left by bankruptcy procedures were undertaken in ac- bankruptcies in the four years thereafter reflected cordance with the Composition Law. The intro- the emergence of a number of large-scale bank- duction of the Civil Rehabilitation Law on April ruptcies such as department store operator Sogo, 1 of this year, however, made it easier for small listed on the First Section of the Tokyo Stock Ex- and midsize companies to declare bankruptcy and change, and major financial institutions. began to speed up the corporate rehabilitation The rise in large-scale bankruptcies from 1999 process. The new law has led to a surge in bank- on also was a byproduct of a new system of fi- ruptcy applications. nancial regulation put in place in October 1998. Under the law, companies may apply for court Regulatory authorities tightened disclosure re- protection and dispose of debt even before their quirements and asset classification standards for liabilities exceed their assets. As a result, the new banks, moves that translated into increased pres- law has given rise to some distrust between banks sure on borrowers to restructure. At the same and their borrowers, as banks now have incen- time, an infrastructure for dealing with insolvent tives to try to collect as many loans as possible banks was established, meaning that problems before borrowers go bankrupt. This changed with delinquent loans could be dealt with more bank behavior contrasts sharply with that aggressively While restructuring, mergers and behavior observed when the main bank system acquisitions, and tie-ups with foreign firms were functioned effectively in earlier periods. able to stave off bankruptcy for some firms as The new law also permits debtors to initiate the economy continued to flounder, others suc- bankruptcy proceedings and allows managers to cumbed. The number of bankruptcies resulting stay in their positions. The Ministry of Justice banto 49 furthermore revised bankruptcy-related laws in Saxonhouse, G. (1979) “Industrial Restructuring in Ja- 2000 so that the overseas assets of failed firms pan,” Journal of Japanese Studies 5(2): 289–320. operating across national borders would fall JENNIFER AMYX within the scope of Japanese bankruptcy proceedings. This change enabled the recovery of loans from such assets by creditors in a more orderly banto fashion than in the past. The absence of such a provision had impeded plans by Yamaichi Secu- Banto was the highest position of authority within rities Co. to restructure its operations prior to its a traditional merchant house, equivalent to head voluntary closure in November 1997. clerk. Within smaller merchant houses, the banto often held near absolute authority in business decisions. In larger houses, there might be sev- Rise in personal bankruptcies following the eral banto, in which case one would be designated bursting of the bubble shihainin, chief manager. Banto could use their own savings to set business on the side. They were The 1990s saw many changes in the level of per- also permitted to have a separate household and sonal bankruptcies as well. In this decade, the commute to work. If his business were success- number of cases of personal bankruptcy rose ten- ful he might be given permission to set up his fold. In 1991, cases of personal bankruptcy own, separate house, bekke. In such instances, he doubled on the year with the bursting of the still had an obligation of loyalty to his former speculative asset bubble to number approximately house. He would demonstrate that loyalty by 23,000. Although the incidence of personal bank- regularly paying his respects to the house and by ruptcy rose somewhat in the years thereafter, assisting it as called upon. Failure to honor his numbers surged significantly in 1996. And, in obligations could result in recision of the bekke fiscal year 1998, the number of cases exceeded and a return to his former House. 100,000 for the first time. One enduring and popular type of tale is of The record high numbers of personal bank- the loyal banto who, through daring, cleverness ruptcies reflected the strain placed on household or great courage rescues the house from finan- finances by rising unemployment levels and the cial distress or ruin. Typical of this type of tale is growth in the consumer loan industry Con- the example of Minomura Rizaemon, who saved sumer debt doubled in the 1990s decade and Mitsui from bankruptcy and guided it onto great- non-bank consumer loan companies—not sub- ness. ject to the Interest Rate Restriction Law—were The characteristics and role of the banto fore- able to charge exorbitant interest rates on loans. shadow several distinctive aspects of what has Many individuals were also driven into bank- come to be known as the Japanese management ruptcy after serving as guarantors for collateral- system. Banto worked their way up to the posi- free loans extended by non-banks to small tion through a process of apprenticeship and dem- enterprises. onstration of skill. Young men would enter the The surge in personal bankruptcies had a sig- house at the age of twelve or thirteen and be as- nificant impact on Japanese society perhaps most signed the rank of detchi. For a period of five to notably in the incidence of suicide. Nearly 3,000 six years the detchi would learn to read and write, individuals were reported to have committed sui- to do math, and how to handle many of the small cide in fiscal year 1998, due to excessive personal tasks and routines of the house. At seventeen or debts. eighteen the detchi would be promoted to the rank of tedai and be given a set salary After ten to twelve years, usually around age thirty a tedai who had Further reading demonstrated superior skill and business acumen would be promoted to banto. This practice of en- Pascale, E. and Rohlen, T. (1983) “The Mazda Turn- tering the house at an early age and then work- around,” Journal of Japanese Studies 9(2): 219–63. ing one’s way to the top is a type of internal labor 50 bottom-up decision-making processes market comparable to what is found in present proposal. This critical aspect of the process is day Japanese firms (see internal labor markets). called nemawashi, preparing the ground for op- In a similar vein, the opportunity given banto timal germination. to branch out and start one’s own business draws Once all aspects of the decision have been a close parallel to the modern day practice of cor- analyzed and confirmed, each contributor affixes porate spin-offs whereby successful units within his/her seal (hanko) to the ringi-sho document and the company are allowed, even encouraged, to it is then sent to top management for final ap- separate from the parent organizations and proval—or disapproval. Given the extremely com- achieve their own measure of independence. Such petitive nature of Japanese firms both within and spin-offs continue to maintain close ties to their without Japan, it would be naive to perpetuate parents and, in some instances, rescue them from an understanding of “bottom-up” as delegation financial difficulties. of strategic decision-making to middle managers and line workers. On the contrary an important decision cannot be confirmed without ultimate Further reading approval by top management. Furthermore, it is more the norm that the initial idea is passed down Hirschmeier, J. and Yui, T. (1981) The Development of from top-level executives. Japanese Business, 2nd edn, London: Allen & Unwin. The ringi-sho itself can be seen as an instrument that gives opportunity to participate in the ALLAN BIRD decision-making process, documents the record of approval, and transmits a decision to organi- bottom-up decision-making zational units affected by it. Finally it is used as a processes corporate record that serves to protect the continuity of corporate policies. The Japanese, so-called “bottom-up” decision- The net used to gather pertinent information making process has launched many an organiza- for decision making is therefore rather large and tional change effort seeking to uphold consensus widely cast. In addition, most of the informa- in hopes of delivering smooth and efficient tion-gathering discussions are conducted one- implementation marked by strong employee on-one and face-to-face bases to promote trust, ownership. While it is true that implementation avoid public confrontation and encourage com- of organizational decisions tends to proceed plete and open sharing of ideas. Decision mak- more smoothly in Japanese organizations, this is ing in the Japanese style is consequently not because the outcomes come about by con- time-consuming. sensus, nor because they are bottom instigated. Advances in communication technology such Rather, the key to Japanese decision-making is as the facsimile (fax) of the 1990s and electronic its distinctive emphasis on information gather- mail (e-mail) in the latter part of the decade, have ing. increased the speed of some aspects of the deci- After an idea is formulated in a Japanese com- sion-making process. For instance, some of the pany it is explained, discussed, and confirmed information gathering is currently done through by all those who might have input into or be af- these communication media. However, nemawashi fected by the decision. This procedure called ringi continues to be done one-on-one, and face-to-face seido is most accurately understood as a political thereby preserving the value of frankness while confirmation-authorization process. First, the ini- minimizing conflict. tiator writes a proposal in the form of a ringisho. Viewing decision making as a process rather The proposal is then circulated to all who might than an event is key to understanding the time be able to input critical information into the deci- factor in the Japanese system. Gathering infor- sion and to all who will be affected by it. The mation and confirmation from a wide array of initiator (or an emissary) will then meet with each organizational actors one-on-one takes time. Even decision-making contributor one or more times more time is required if several iterations of to discuss at length the various elements of the nemawashi with the same individuals is necessary. bubble economy 51

Once the decision has been made, however, very growth miracle of the post-Second World War little time is required to take action, last-minute period, develop this bubble and why is it suffer- surprises are extremely rare, and very little re- ing from its after-effects a decade later? sistance to implementation is encountered. After Second World War much of the Japa- An important ramification of the Japanese-style nese economy lay in ruins and Japanese industry decision-making process is that since decisions and economy as well as its political and financial are a collective effort, a conscious mutual depend- systems were restructured by the occupying forces ence of seniors and juniors in a company is nur- led by General Douglas McArthur and his staff. tured. Responsibility in the Japanese context Fortunately Japan enjoyed a period of rapid eco- means a symbolic assumption of guilt. The rules nomic growth in the forty-year period, 1950–90, of this sort of responsibility revolve around the rebuilt its economy to prewar levels by the early tenets of a vertically integrated society: when 1960s, and had become the second largest something goes wrong, the most senior person economy in the world by the 1970s. Unfortu- presiding over the error takes the “blame.” This nately, economic growth in Japan virtually means that those above must rely on their subor- stopped at the beginning of the 1990s with the dinates not to make errors that will lead to their collapse of the asset price bubble. How did this having to take the necessary consequences asso- asset price bubble arise? ciated with symbolic responsibility such as resig- While there may be little agreement on de- nation, or transfer. tails such as the technical definition of a bubble and the exact starting and ending dates for the bubble, there is little disagreement on the broad Further reading features of the late 1980s and 1990s episode of the speculative rise in asset prices and then their sudden decline with adverse consequences for Smith, L. (1985) “Japan’s Autocratic Managers,” For- the Japanese economy The following is a brief tune, 7 January. outline of this bubble episode, its possible causes, Whitehill, A.M. (1991) Japanese Management: Tradition and a review of efforts to mitigate its negative and Transition, New York: Routledge. economic consequences. MARY YOKO BRANNEN The late 1980s bubble in Japan seemed to have started as a consequence of the efforts to fight off the 1986 recession caused by the sudden jump in bubble economy the value of the yen associated with the international Plaza Accord in 1985. In the late 1980s the The Japanese economy in the late 1980s was government continued efforts to balance its characterized by what seems to be an asset price budget even in the face of a recession using mon- bubble. Land and stock prices reflected much etary policy as the primary means of economic speculative activity and rose to record levels that stimulus. Consequently, there was an unprec- were unusually high multiples of the present value edented lowering of interest rates (from 5 per- of future cash flows. Unfortunately land and stock cent in January 1986 to 2.5 percent in February prices collapsed in 1990 and were still less than 1987) and an expansionary monetary policy start- 40 percent of their peak levels a decade later. The ing in 1986 (in response to the recession result- Nikkei 225 stock index peaked on the last trading from the 1995 endaka rise in the Yen ing day of 1989 (29 December) at just below engineered by the Plaza Accord). This extraordi- 40,000 and at that time the land below the Impe- nary episode of monetary expansion seemed to rial Palace in Tokyo was reputedly worth more have started an asset price bubble that then char- than all of the land and real estate in California. acterized the late 1980s Japanese economy. The Japanese economy has suffered from highly Contributing to this bubble in Japan were a anemic growth (of around 1 percent) for the de- number of institutional practices that accelerated cade of the 1990s. How did Japan, an economic the bubble with positive feedbacks. For example, 52 bubble economy as most lending in Japan tends to be based on In spite of fiscal stimuli in the form of numer- collateral value, asset price increases led to higher ous government spending packages, an expan- collateral values and higher levels of lending sionary monetary policy and other efforts by the which then led to higher asset prices and so forth government, the Japanese economy has been in in an ever accelerating set of self reinforcing cy- a state of recession or very anemic growth since cles. Unfortunately there were few if any mecha- the early 1990s bursting of the bubble. The gov- nisms in Japan at that time to discipline or stop ernment launched nine major deficit spending the bubble in asset prices. packages totaling about $1.2 trillion between 1992 Between the start and end of the second half and 1999. The Bank of Japan steadily lowered of the 1980s, stock prices rose 3.1 times (to a interest rates to virtually zero by the end of the Nikkei Index of 38,915) and land prices rose four 1990s. The ineffectiveness of Japanese monetary times. In relative terms, for the last half of the policy to stimulate the economy has led many to 1980s, the ratio to GDP for land prices increased contend that Japan is in a liquidity trap. Given 3.67 times and for stock prices by 1.51 times with the high savings rate in Japan and its low, demo- the combined ratio increasing by 4.52 times. By graphically limited long-term economic growth any measure these were extraordinary increases prospects, the savings-investment equilibrium real in asset prices unprecedented in recent Japanese interest rate is estimated to be negative. Thus, history Price earnings ratios and other valuation given a nominal interest rate floor of zero, a posi- measures for Japanese equities were in a much tive expected rate of inflation is necessary for equi- higher zone than similar ratios elsewhere in the librium. Indeed, since the mid-1990s there seems world. With these highly valued assets, Japanese to be considerable evidence of money hoarding companies went on a spending spree buying up in Japan with significant growth of the money prime real estate and other assets in many for- supply but zero or negative growth in bank lend- eign countries at what later turned out to be ing. highly inflated values. The easy availability of However, an alternative explanation of the in- money in the second half of the 1980s also led to effectiveness of monetary and fiscal policies in poor investment decisions domestically. Japan in the 1990s may be the credit crunch as- As this late 1980s asset price bubble led to sociated with the high levels of non-performing increasing inequality and other social problems loans among Japanese banks. Tankan, the Bank including a potential breakdown of the social com- of Japan survey of business conditions, provides pact, the Japanese government and the Bank of some evidence supporting the credit crunch ex- Japan started to take steps to deflate the bubble, planation. It seems that the financial system raising interest rates from 2.5 percent in May 1989 needs to be restructured so it can contribute to to 6 percent in August 1990 and curtailing mon- economic growth with non-performing loans etary growth severely also during this period. written off, sold, or otherwise taken off the However, instead of a soft landing, the bubble books. collapsed in 1990. The value of the collateral un- Others have contended that the failure of the derlying most bank loans collapsed along with Japanese economy to respond to fiscal and mon- the asset price bubble. Consequently since the etary stimulus since 1990 can only be ended with bursting of the bubble, bank lending has been massive structural reform and deregulation of restricted by the continuing high levels of non- Japanese business and industry. Deregulation can performing bank loans (Japanese banks had yet be accomplished either in one or a few major to be restructured a decade later). It seems that episodes, or can be undertaken slowly allowing the same positive feedback cycles that accelerated time for the affected firms to adjust. As may be Japanese economic growth were now working in expected, deregulation changes the competitive reverse accelerating the decline in Japanese eco- structure in an industry and many inefficient firms nomic growth. Since the bursting of this bubble are forced out of business. Business failures cre- in 1990, the Japanese economy has suffered a ate economic discomfort (for example, higher un- number of recessions and a very low overall rate employment rates) and declines in consumer con of growth in the 1990s. fidence. While there has been slow and steady bubble economy 53

deregulation of Japanese business and industry efficient monitoring is incompatible with the there have been no major changes or deregulatory emergence of massive levels of non-performing moves. It is clear that Japan has chosen to loans and bad debts that have characterized the deregulate only at a slow and steady pace. Japanese economy in the last decade of the twen- Another factor constraining the economic re- tieth century. covery in Japan has been the bubble-related One explanation of this failure notes that changes in political governance in Japan. The Lib- Japanese banks have not developed credit analy- eral Democratic Party (LDP) that had governed sis capabilities, having depended on government Japan for most of the post-Second World War directed and collateralized lending and, given period lost its majority in the Diet, the Japanese the generally poor levels of disclosure, nor have Parliament, soon after the collapse of the asset they been subject to market discipline. Under price bubble and Japan has been governed by a the prevailing amakudari practice where retiring coalition of political parties since the early 1990s. senior regulators were virtually guaranteed sen- Public confidence in the government and other ior positions with the institutions they regulated, large institutions has also been sapped by many it is contended that bank regulation in Japan has corruption scandals involving elite officials. In this been less than fully effective. However, bank situation, political power has been dispersed and regulation may also have lost its effectiveness as it seems that there has been little political will for Japan gradually moved to a more market-ori- strong and decisive action to restore economic ented economy and financial system. Regard- growth. less, the traditional (prior to the 1990s) Japanese Regardless of the reasons for the failures of system of bank-centered capitalism is now being policies for economic recovery the Japanese widely questioned, even in many Asian develop- economy faced a critical impasse by the end of ing countries though, this bank-centered finan- the 1990s in terms of policies to restore economic cial system was associated with high rates of growth. Fiscal policy options were constrained growth in the post-Second World War period by the rapid growth of Japanese government debt until the late 1980s. Indeed, while there is wide- in the 1990s (to $6 trillion, about 1.3 times GNP) spread agreement in Japan that this old eco- and at the same time, monetary policy options nomic and financial system must be changed, were also limited as interest rates had already been there is less agreement on the form of the new dropped to near zero. system, and very little agreement on how to (and Before the last decade of the twentieth cen- how fast to) move to a new economic and finan- tury Japan’s bank-centered system of capitalism cial system. was considered perhaps the best alternative for developing countries, especially in Asia. The US system with its more unfettered capitalism was Further reading considered suitable only for a highly developed and powerful country such as the USA. Indeed, Aggarwal, R. (1996) “The Shape of Post-Bubble Japa- many in the USA also believed that the Japanese nese Business: Preparing for Growth in the New version of industrial policy was more humane Millennium,” International Executive 38 (1): 9–32. and a better alternative, even for the USA. While ——(ed.) (1999) Restructuring Japanese Business for Growth, the dismal performance of the Japanese economy Boston, MA: Kluwer Academic Publishers. since 1990 has been a major cause for reassess- ——(1999) “Assessing the Asian Economic Crises: The ing these views, the failure of the banking sys- Role of Virtuous and Vicious Cycles,” Journal of tem in Japan also calls into question the nature World Business 34 (4): 392–408. and effectiveness of the Japanese bank-centered Mori, N., Shiratsuka, S. and Taguchi, H. (2000) “Policy system of corporate governance where main Responses to the Post-Bubble Adjustments in Ja- banks closely monitored their commercial clients pan: A Tentative Review,” Bank of Japan, IMES so that other stakeholders did not have to en- Discussion Paper Series, 2000-E-13, May. gage in wasteful duplicate monitoring. After all, Motonishi, T. and Yashikawa, H. (1999) “Causes of 54 Buddhism

the Long Stagnation of Japan During the 1990s: denced between Shinto, championed by a con- Financial or Real?” Journal of Japanese and Interna- servative element at the center of power, and a tional Economies 12 (2): 181–200. more progressive body of aristocrats who saw Okina, K., Shirakawa, M. and Shiratsuka, S. (2000) Buddhism as a hallmark of modernization and “The Asset Price Bubble and Monetary Policy: progress. Early in the seventh century the prince Japan’s Experience in the Late 1980s and the Les- regent, Prince Shotoku, was eventually success- sons,” Bank of Japan, IMES Discussion Paper Se- ful in establishing a form of Chinese Buddhism ries, 2000-E-12, May. as a kind of semi-official court religion. Beyond Olson, M. (1982) Rise and Decline of Nations, New Ha- the immediate community of the ruling elite, ven, CT: Yale University Press. Shinto in its many manifestations remained the religious orientation of the masses. RAJ AGGARWAL For the first five hundred years of Japanese Buddhism it remained closely tied to the ruling nobility. Buddhist temples were sponsored by Buddhism various noble families, and were more like centers of political organization and intrigue than as The majority of Japanese are nominally follow- places to practice a religion. Buddhist scripture ers of various sects of the Buddhist religion; but and rituals were generally accepted as a type of they also practice observances of Shinto, a na- applied magic for most people who had access to ture-oriented series of religious beliefs and prac- them, although a few scholar/monks as early as tices unique to Japan. Buddhism was brought the seventh century came to understand quite both to Japan from China, and brought into Ja- clearly the philosophical nature of Indian and pan from China by native Japanese beginning in Chinese Buddhism, and their teachings had some the sixth century AD. Buddhism and Shintoism influence over the ruling elite. have remained co-religions since that time. Even- It was not until the turmoil of the early twelfth tually purely Japanese versions of Buddhism were century that Buddhism actually began to func- developed, and in the nineteenth and twentieth tion as popular religion in Japan. It was a time of centuries several new religions based loosely on uncertainty and change; civil war broke out in Buddhist teachings have emerged. Japan is unique various places, accompanied by a shift in politi- in the modern world in that, while having two cal power from the nobility in Kyoto to a new major religions, it is not, as is usually the case, warrior class more closely attached to common divided by religion. Over 90 percent of the more people. Four new and purely Japanese versions than one hundred twenty million Japanese sub- of the religion appeared: Jodo (Pure Land), Jodo scribe at least passively to both Shinto, the na- Shinshu or True Jodo, Hokke or Lotus (often tive religion, and Buddhism. called Nichiren Buddhism, named after its Toward the end of the sixth century a newly founder the monk Nichiren), and Zen Buddhism. united China began to spread its cultural bril- All four of these new versions of the religion fea- liance outward toward its periphery first to Ko- tured heroic leaders and simple methods of de- rea, and eventually reaching Japan. Some votion which could be utilized regardless of level leaders of an emerging Japanese government of intelligence or learning, occupation, sex or were greatly attracted to many aspects of Chi- class. While the warrior class itself leaned strongly nese civilization, its literacy sophisticated archi- toward the more contemplative Zen version of tecture, advanced metallurgy forms of urban Buddhism, the other three swept across the land life, and rational forms of governmental struc- and are still the most prominent versions of Bud- ture. Buddhism, of course, was part of it all, and dhism followed in Japan. Koreans who visited Japan with Buddhist arti- As ordinary people embraced popular Bud- facts and scriptures were eagerly accepted by dhism, they did not turn away from the native Japanese as teachers. For the first and only time Shinto. The two religions were given their own in Japanese history an open rivalry was evi- areas of special emphasis and have continued on burakumin 55

until the present with a peaceful accommodation. Kodo, M. (1982) Introducing Buddhism, Rutland, VT: Shinto has come to be associated with such tasks Tuttle. as marriage, christening, blessing of buildings, and Prebish, C.S. (1975) Buddhism: A Modern Perspective, Uni- thousands of local rituals involving the agricul- versity Park, PA: Penn State University Press. tural cycle. Buddhism deals with death and the JOHN A.McKINSTRY departed: funerals, memorials at intervals after death, and to a somewhat more modest degree than in Christian and Moslem societies, serves burakumin as a guide to thinking and behavior. In response to the growing popularity and Origins of burakumin power of the new versions of Buddhism, older The term burakumin literally means “people of the sects headquartered at Kyoto and Nara eventu- hamlet,” with earlier terms eta (polluted) and hinin ally modified the way people related to religious (non-human), also used to label extremely low practices. This was done to the extent that the status people in Japan. The origins of burakumin great bulk of Japanese Buddhist observance has people are not exactly clear and in dispute, but been for centuries either carried out entirely by there are historical records going back to 600 AD professional clergy or given over to extremely of a low-status people similar to burakumin. Much simple acts such as repeating phrases over and like the untouchables or outcastes of ancient In- over. There is much depth to the purely intellec- dia, it is believed that burakumin originally had tual part of Buddhism both inside and outside of occupations that were seen as unclean or polluted Japan; writers inspired by aspects of Japanese in the eyes of Buddhists and Hindus, occupations Buddhist thinking now and in the past have had such as dealing with dead animals (skinning and a respected and international audience. It is also tanning of hides for example). However, new his- true that Buddhism has had a significant impact torical works suggest that having such occupa- on Japanese culture in an indirect way through tions were not so much the cause of burakumin its influence on the samurai class, and the subse- status but rather reinforced the status. There were quent influence that class had on modern Japan several reasons a person could fall to a low posi- during the Meiji restoration. It must be noted, tion (such as being charged with criminal activ- however, that except for a small segment of intel- ity or falling into debt) and it was the limitations lectuals and members of minority religions, the on what activities and occupations these people Japanese are very casual about matters relating could have once in this lowly position that helped to religion, viewing religion as not much more legitimize and perpetuate their status. It is also than a series of rituals. “Faith,” in the Christian known that there were levels or degrees of this or Islamic sense, is a concept not intricately wo- low outcaste status, with eta (polluted) being ven into Japanese culture. higher than hinin (non-human). In the nineteenth and twentieth centuries, several new religions emerged in Japan. Spka Gakkai, purported to be a reinterpretation of Buddhism, The Tokugawa stratification system is the largest of these, and has grown to have Much more is known about the status of burakumin considerable resources and influence in Japanese from around the beginning of the fifteenth cen- society. tury When the Tokugawa or Edo period began in Japan (early 1600s), the Tokugawa Shogun See also: Prince Shotoku’s Seventeen-Article imposed more rigid controls upon the popula- Constitution tion and regional opponents to consolidate and maintain power in a country that had seen noth- Further reading ing but regional warfare for hundreds of years. One means of control imposed by the Tokugawa Hori, I. (ed.) (1989) Japanese Religion, Tokyo: Kodansha Shogun was the institutionalization of a system International. of social stratification, called shi noo koo shoo 56 burakumin

(literally meaning warriors, peasants, artisans, and The negative status has remained alive, there- merchants), with rigid and mostly hereditary fore, and Japanese people have gone to great ranks much like the caste system of ancient In- lengths to determine if a person has burakumin dia. There were four primary status positions un- ancestry Before parents will approve a marriage der the emperor and ruling shogun military clan; or employers will hire new employees for impor- the samurai, peasants, craftsmen and artisans, tant positions, for example, there is often a search with merchants on the bottom. Following the logic of past records to make sure the prospective mar- of the Indian caste system, of course, there was a riage partner or employee is “clean” of burakumin status grouping, since called burakumin, who were ancestry. There are hundreds of detective agen- even further down the ranks of the stratification cies that specialize in tracking down information system, and were so “unclean” or “polluted” as on burakumin ancestry contributing to a somewhat to have no real position at all; that is, they were significant percent of the Japanese economy. “outcastes.” Unlike the Indian caste system which One of the typical methods of detecting used the Hindu concept of reincarnation and “bad burakumin lineage is through old village family karma” (sins in a previous life) to explain a records. All Japanese citizens have their name person’s position in the caste system, the shi noo listed in an official family registry. Most often this koo shoo stratification in Japan did not specifically family registry is located in a small village be- invoke religion as a legitimating force. It is esti- cause of the recent agricultural history of Japan mated that there were about half a million people with the majority of population in farming occu- in this outcaste position during the Tokugawa pations until well into the twentieth century Be- period of Japanese history. cause of strict discrimination, most burakumin lived in separate villages (or hamlets) from other Japa- Burakumin in modern Japanese history nese and thus it was not difficult to track down a person’s burakumin heritage through examination With the fall of the Tokugawa Shogun by 1868 of these village records. During the 1970s, in an and the beginning of the Meiji Period, the rigid attempt to further reduce discrimination against Tokugawa stratification system was eliminated. burakumin, the Japanese government required that The new political elite of Japan formally elimi- family registries in former burakumin villages be nated the position of burakumin in 1871 and made kept from the general public. discrimination against former burakumin people However, in the last three decades, Japanese illegal. As has happened many times in India since government has become involved in doowa, the the formal elimination of the old caste system, official term for conditions and issues related to however, people considering themselves above burakumin. Programs to reduce discrimination outcastes or burakumin rioted in response to gov- against burakumin (much like affirmative action ernment attempts to attain more opportunity for programs in the United States) have shown con- these people. Crowds as large as 26,000 at any siderable success since the late 1960s and early one time were reportedly involved in these anti- 1970s. It is estimated that about $30 billion was burakumin riots, with more than 2,200 burakumin spent on these programs between the 1960s and homes burned in Fukuoka during 1871. 1993. Poverty rates are lower and educational attainment is higher. And whereas 90 percent of Burakumin today burakumin married other burakumin as recently as There are estimated to be about 2–3 million 1960, it is now estimated that about three in four people of burakumin heritage in Japan today but marriages by people of burakumin lineage are with unlike people of Korean or Chinese descent, there people of non-burakumin ancestry. are no cultural, much less biological or racial, distinctions between people of burakumin heritage and Further reading all other Japanese. As recently as 1965, however, opinion polls showed that some 70 percent of Japa- Buraku Mondai Kenkyujo (ed.) (1997) Buraku no Rekishi nese people still believed people of burakumin de- to Kaihoo Undoo. Gendai Hen (Buraku History and scent were of a different race. Liberalization Movement), Kyoto. business ethics 57

Hane, M. (1982) Peasants, Rebels, and Outcastes: The Un- poisoning in the 1950–60s became dissatisfied derside of Modern Japan, New York: Pantheon. with mimaikin and with informal dispute resolu- Kerbo, H. and McKinstry J. (1998) Modern Japan: A tion methods and filed lawsuits against the pol- Volume in the Comparative Societies Series, New York: luting companies. Pollution in Minamata, a small McGraw-Hill. city in Kumamoto Prefecture on Kyushu, Japan’s Komori, T. (1990) Doowa Mondai no Kiso Chishiki (Fun- southern island, was the first of several pollution damental Knowledge of Doowa Problems), Tokyo: cases. Minamata, which was mostly a fishing and Akashi Shoten. agriculture society was also home to Chisso Cor- Noguchi, M. (2000) Buraku Mondai no Paradaimu Tenkan poration, a large factory that produced nitrogen- (Paradigm Shift for the Buraku Problems), Tokyo: based chemical fertilizers and plastics. Fish, birds Akashi Shoten. and cats became sick. When this spread to hu- mans, the companied denied that they were the MEIKA CLUCAS cause, but paid mimaikin. The cause was later HAROLD KERBO shown to be mercury poisoning from the factory’s wastewater. business ethics A second strange disease, similar to the outbreak in Minamata, was found in Niigata Prefec- Business ethics has become an established disci- ture. The victims’ diets consisted mostly of fish pline in Japan in the 1990s. However, there is no from the Agano River. The cause was mercury clear-cut definition of the term. In Japanese, keizai poisoning from a Showa Denko factory Victims (economy) is a compound word consisting of kei filed lawsuits against the company in 1967. This and zai, which means governing the world in har- was the first pollution suit against a major com- mony and bringing about the well-being of pany in Japan. people. Therefore both keizai and keiei (business) Three months later, a lawsuit was filed in include a component of ethics. In the past, how- Yokkaichi in central Japan. A company was sued ever, the Japanese did not define or use the term for air pollution. The Yokkaichi’s court opinion in a similar fashion to the Western view of ethics. criticized the government for lack of environmen- However, in the early 1990s, the public was pre- tal planning. In 1968, a third case involved cad- sented with scandal after scandal of governmen- mium poisoning in Toyama. Finally in 1969, a tal officials being paid huge bribes. Most officials case was brought against Chisso Corporation by resigned their positions, although a few were pros- some of the victims in Minamata. Together, these ecuted and convicted. Because of this, business cases came to be known as the “Big Four.” These ethics has grown to become important within the changed the field of business ethics in Japan. All Japanese business community. four cases were decided in favor of the plaintiffs. During the Meiji period (1868–1912), The companies held to have legal responsibility Shibusawa Eiichi, a business leader, called for due to the harm caused by their business opera- the unity of morality and economy He cautioned tions. Changes in regulation administrative pro- against unethical business practices. He also ar- cedures, the growth of the consumer movement gued that Confucian values provided the correct were a few of the changes. path to doing business in an ethical manner. Prior The Japanese government passed a series of to the mid-1960s, the priority of Japanese busi- statutes and established a scheme to compensate ness was on economic growth. Companies were pollution victims. Polluting firms were required unlikely to address ethical, social or environmen- to pay for this scheme. The Basic Law for Envi- tal issues. Even when a corporation had caused ronmental Pollution Control and the Environ- serious damage to its neighbors or consumers, mental Agency were established. Japanese firms unless coerced by governments, consumer groups began to take social responsibilities more seriously or local communities, disputes were settled by The “Big Four Pollution Suits” also gave rise to a paying a small sum of money known as mimaikin social movement in Japan known as shimin undo or sympathy payment. (citizens’ movements). Citizens’ movements Victims of air pollution and toxic substance formed around local or regional environmental 58 business ethics issues and focused on local governments for re- In the late 1990s, many cases of Japanese cor- sponse and relief. Only rare cases, like the Big porations violating business ethics continued to Four, were of national scale. be reported by the Japanese media. These include A second ethical issue, the contribution of cor- payoffs to corporate racketeers, loans without col- porations to society first became an issue in Japan lateral by banks, and disclosure of unfair trade during the 1970s oil crisis. People resented corpo- practices. Unlike in the USA where many firms rations cornering the oil supply and their subse- have codes of ethics and systems in place to moni- quent reluctance to sell oil. Firms were seen as tor compliance, most Japanese firms do not have anti-social, so public opinion turned against the explicit corporate codes of conduct or business companies. In the 1980s as corporations attempted ethics. A 1996 survey by the Japanese Business to change from heavy industry to more sophisti- Ethics Society found that 35 percent of Japanese cated products, there was also a shift towards a corporations have ethics checks by in-company greater concern for corporate social responsibil- committees; 25 percent of managers stress the ity. During the bubble economy of the 1980s, the importance of business ethics; 23 percent of firms Japanese public seemed to think that since Japa- have a code of ethics in place; and only 5 percent nese business was efficient it must also be ethical. have introduced business ethics education into Many business people also believed that their suc- their corporations. Of the companies with ethics cess was proof of excellent business practices. systems in place, 11 percent have a company eth- Since the late 1980s, a series of business scan- ics committee or department; 8 percent have a dals have surfaced. They include illicit political full-time officer in charge of ethics; 5 percent have donations, dango practices; loss compensation for a system for handling in-company suggestions on favored clients in securities industries; bad loans or complaints about company ethics; and only 3 and mismanagement of financial institutions; and percent have voluntary reporting of activities the sale of HIV-tainted blood. These scandals which run counter to the company’s ethics policy. were often industry-wide and appeared to be Companies with mission statements that include rooted in the Japanese way of doing business. The statements on ethics usually have such vague or result was a passive trend in business ethics. abstract statements that they are of little help to Social changes also contributed to a passive company employees. In an influential article on trend of business ethics by Japanese firms in the business ethics in Look Japan, Koyama Hiroyuki 1990s. These included public interest in the en- argued that Japanese corporations must do three vironment; international pressures to open Japa- things in order to establish strong business eth- nese markets; passage of product liability laws; ics: (1) create a clear code of ethical business con- revision of the commerce law to dilute corpo- duct showing what actions are expected in rate governance; and lack of empowerment of concrete terms; (2) establish a system for ensur- the Japan Fair Trade Commission (FTC). The ing that the code of ethics is followed such as Japanese law on product liability makes it the having an ethics officer or survey of employees; plaintiff’s responsibility to prove design or manu- and (3) ensure everyday compliance of business facturing negligence, which is virtually impossi- ethics. ble, especially given the complex, high-technology These issues continue to be prominent within used in most products today. While the FTC is the Japanese business community: corruption, in- supposed to enforce antitrust laws, it has been dustrial espionage and violation of intellectual called a “toothless tiger” because it is essentially property rights (IPR). A 1992 agreement between powerless against the Ministry of Finance and the USA and Japan led to a revision of Japan’s Ministry of International Trade and Industry, Copyright Law. The revisions give copyright pro- both of which have vested interests in protecting tection to foreign sound recordings before 1978; Japanese businesses. When the FTC has investi- give foreign producers the right to authorize the gated powerful industries such as automotives rental of their recordings; and extend the protec- and automotive parts, construction, glass, and pation period for records from 20–30 years. Intel- per industries, it has punished them with “rec- lectual property rights continued to be an issue ommendations.” in the Japan-US Economic Framework Talks in business ethics 59

1994. The Japanese government agreed that the tion in global perspective that includes twenty Japanese Patent Office (JPO) would permit for- working groups. Seven working groups have to eign nationals to file patent applications in Eng- do with environmental issues: environmental lish (with Japanese translations to follow) and, policy dialogue; forests; oceans; Global Obser- prior to the grant of a patent, the JPO would vation Information Network; environmentally permit correction of translation errors. The US friendly and energy-efficient technologies; con- government agreed that the US Patent and Trade- servation; and development assistance for the en- mark Office (USPTO) would introduce legisla- vironment. tion to amend US patent law to change the term According to a Mecenat Association survey of patents from seventeen years from date of grant 180 companies gave ¥23.6 billion in assistance to patent to twenty years from date of filing an to support arts and culture in 1993. In 1994, this application. total decreased by 13 percent; however, 190 com- Industrial espionage has become more and panies provided assistance. Many companies be- more common in the 1990s. Japanese companies lieve that activities related to their main line of have been caught using a spy technique called business such as research and development of “tunneling” in which they set up a fake subsidi- pollution prevention technology constitute a so- ary and hire away the foreign, competitor com- cial contribution. Social contributions outside of pany’s knowledgeable employees. In a survey on the main line of business include: mecenat, sup- theft of intellectual property of American firms, port for guide dogs for the blind, support of chil- the Japanese ranked fifth after China, Canada, dren whose parents have died in traffic accidents, France, and India. Moles planted as employees and forest conservation. Social contributions of in competitors firms are another espionage tech- Japanese corporations are becoming necessary nique. Foreign businesspersons have also com- during the economic slump. Companies have plained about their rooms being bugged in come to believe that they cannot survive without Japanese hotels. Japanese businesses were widely consumer support and that being good corpo- accused of violating Intellectual Property Right rate citizens will give them a competitive advan- laws during their earlier stages of economic de- tage. Japanese companies are also engaging in velopment. More recently however, Japanese good corporate citizenship behaviors in the USA firms have become strong supporters of laws to and Europe, but appear less likely to do so in protect IPR laws. Asia and other parts of the world. The roots of good corporate citizenship in Ja- pan are different from the West. Japanese corpo- See also: environmental regulations; overseas re- rations’ views of citizenship consists of donations search and development; Japanese business in the to local festivals. From the early 1990s, execu- USA tives started to consider adopting a western style of corporate citizenship. This includes social contributions by firms to environmental groups Further reading rather than just contributions to, or sponsorships, of cultural events and the arts, mecenat. Compa- Koyama, H. (1997) “What Happened to Japanese Busi- nies are trying to protect the environment and ness Ethics?” Look Japan 43 (497): 14–16. are giving scholarships to students from less de- Taka, I. (1997) “Business Ethics in Japan,” Journal of veloped countries. As part of the Agreements in Business Ethics 16:1499–1508. the Japan-US Economic Framework Talks, the TERRI R.LITUCHY US and Japan set a common agenda for coopera- C

Canon step toward internationalization with the opening of the New York branch. Two years later the Canon, headquartered in Tokyo and originally company made first inroads into Europe with the best known for its cameras, competes today glo- establishment of Canon Europa. bally with a full range of consumer and profes- Since the 1950s Canon pursued an aggressive sional imaging and information products. These strategy to evolve from a specialized camera include not only cameras, copiers and computer manufacturer into a versatile producer of busi- peripherals familiar to consumers around the ness machines. In 1962 the company adopted its world, but also fax machines, video and broad- first five-year plan to diversify its product offer- casting equipment, and optical products for semi- ings. The first non-camera product was an elec- conductor manufacturing and medical fields. The tronic calculator, but the real breakthrough came company has manufacturing and marketing sub- when Canon entered the copy machine business. sidiaries in all continents, and the global Canon It was the first company able to challenge the Group is made up of more than 100 companies dominant leader with products based on its own with over 80,000 employees and sales of $25 bil- technology. These successful diversification ef- lion. forts led the company to change its name in 1969 Canon’s roots date back to 1933 with the to Canon, Inc. founding of Precision Optical Instruments Labo- Entering new markets through unique tech- ratory The laboratory was created with the aim nology has always been a foundation of the of producing high-quality cameras capable of Canon business strategy. It is a company strongly competing with the best in the world, such as focused on research and development and the Leica of Germany. Within a year, the prototype creation of breakthrough products, and for that of Kwanon, Japan’s first 35mm focal-plane-shut- purpose maintains an extensive R&D network ter camera, was produced, and in 1937 the orginal worldwide. Its dedication to innovation produced laboratory was reorganized as a joint-stock com- results: the company is consistently among the pany under the name of Precision Optical Indus- top patent recipients in the USA and ranks sec- try Co., Ltd. Ten years later, under the leadership ond in terms of patents registered in the USA in of Dr. Takeshi Mitarai, the company was renamed the 1990s. Canon’s current strategic objective is Canon Camera Co., Inc. to secure a global leadership position in the field Through successive model improvements and of digital imaging equipment and network-based the introduction of new cameras, Canon Cam- application services. era’s reputation for quality and value soon be- Canon’s corporate philosophy of kyosei (first gan to gain attention outside of Japan. The articulated by the former chairman Ryuzaburo company launched its international marketing Kaku)—living and working together for the com- efforts in 1951, and in 1955 took the first major mon good—is the guiding principle for Canon capital markets 61 companies around the globe and for long-term stock exchanges peaking at 123 in 1895. In these collaborative relationships with other companies. early days, trading on Japanese securities ex- Within the Canon organization, the principles of changes was limited mainly to bonds and futures kyosei are complemented by the “three-self” con- on shares. Spot trades in shares remained very cept: self-motivation, self-awareness, and self-man- thin until the modern (post-Second World War) agement, reflecting Canon’s management culture era as the zaibatsu business groups and other ma- of independence, innovation, and entrepreneur- jor companies were held privately in a pattern of ship. cross-holdings. Currently, there are eight stock exchanges and Further reading a fledgling JASDAQ over-the-counter market set up in collaboration with the US-based NASDAQ. Sandoz, P. (1997) Canon, London: Penguin Books. The Tokyo Stock Exchange (TSE) is the largest VLADIMIR PUCIK stock exchange, accounting for over 85 percent of all Japanese equity market valuation and trad- capital markets ing volume. In size, the TSE is followed by the Osaka Stock Exchange (also a major center for Japan is the second largest economy in the world trading in derivatives), and by exchanges in and the Japanese capital markets are some of the Nagoya, Kyoto, Hiroshima, Fukuoka, Niigata, largest in the world. As in other countries, capi- and Sapporo. Each of the three largest exchanges, tal markets in Japan consist of the equity mar- Tokyo, Osaka, and Nagoya, also has second sec- kets, government and corporate bond markets, tions for smaller companies. The two major stock and markets for longer term swaps, futures, op- indexes for Japanese equities are the price- tions, and other derivatives. weighted Nikkei 225 and the value-weighted To- The financial system in Japan is still mainly kyo Stock Exchange Index, Topix. Equities in bank-centered with securities markets playing a Japan are traded in lots of 1,000 and each ex- relatively smaller role. Banks and internal financ- change-traded share has limits on daily price ing are the main sources of funds for most com- changes depending on share price category. New panies in Japan. Companies in Japan generally issues of equity in Japan are regulated by the Min- have larger levels of debt in their capital struc- istry of Finance. Preferential allocation of un- ture than in the USA, with a great deal of debt in der-priced new issues is used to supplement the the form of short term loans that are routinely low (3.5 percent) underwriting expense. rolled over and are treated like long-term debt. Most fixed income securities are traded over Perhaps reflecting the higher savings rate in Ja- the counter in Japan. Japanese bonds generally pan, the real cost of capital in Japan has often have a denomination of ¥100,000 and pay inter- been lower in these than in the USA. est twice a year. The market for Japanese gov- Although it is changing and becoming more ernment bonds is now one of the largest in the liquid, the Japanese market for corporate control world. In this market, certain bonds are identi- is somewhat limited as companies are often fied as “benchmark bonds” and traded heavily closely held and hostile offers are generally not while the prices of other bonds are based on viewed favorably. Japanese accounting and report- market prices of these highly liquid bonds. The ing standards (see accounting in Japan) reflect corporate bond market is less well-developed and the culture and are generally not as stringent as fairly small in comparison. A large proportion of in the USA. While Japan has well-developed this corporate bond market consists of equity- money markets with trading in short-term gov- linked bonds of financial institutions and utili- ernment, financial institution, and corporate se- ties. Most corporate bonds are secured with access curities, this note will focus on capital markets, to the bond market limited mainly to the top cor- the financial markets for longer-term securities. porations. The first issues of equities by a Japanese com- The Japanese economy in the late 1980s was pany took place in 1878. The first stock exchanges characterized by what seems to be an asset price in Japan were set up in 1878, with the number of bubble (see bubble economy). Between the start 62 cartels

and end of the second half of the 1980s, stock ——(1996) “The Shape of Post-Bubble Japanese Busi- prices rose 3.1 times (to a Nikkei Index of 38,915) ness: Preparing for Growth in the New Millennium,” and land prices rose four times. In relative terms, International Executive 38 (1): 9–32. for the last half of the 1980s, the ratio to GDP ——(1999) Restructuring Japanese Business for Growth, Bos- for land prices increased 3.67 times and for stock ton, MA: Kluwer Academic Publishers. prices by 1.51 times with the combined ratio in- Mori, N., Shiratsuka, S. and Taguchi, H. (2000) “Policy creasing by 4.52 times. By any measure these were Responses to the Post-Bubble Adjustments in Ja- extraordinary increases in asset prices, unprec- pan: A Tentative Review,” Bank of Japan, IMES edented in recent Japanese history. These land Discussion Paper Series, 2000-E-13, May. and stock prices reflected much speculative ac- Motonishi, T. and Yashikawa, H. (1999) “Causes of tivity and rose to record levels that were unusu- the Long Stagnation of Japan During the 1990s: ally high multiples of the present value of future Financial or Real?” Journal of Japanese and Interna- cash flows. The Nikkei 225 stock index peaked tional Economies 12 (2): 181–200. on the last trading day of 1989 (December 29) at Takagi, S. (1993) Japanese Capital Markets, Cambridge, just below 40,000, and at that time the land be- MA: Blackwell Publishers. neath the Imperial Palace in Tokyo was reput- RAJ AGGARWAL edly worth more than all of the real estate in California. Unfortunately land and stock prices collapsed cartels in 1990 and were still less than 40 percent of their peak levels a decade later. In spite of fiscal stimuli A cartel is an agreement among independent in the form of numerous government spending firms to regulate prices by restricting production packages, an expansionary monetary policy and and competition. Restricting production makes other efforts by the government, the Japanese a good or service scarce, and allows producers to economy has been in a state of recession or very be less likely to cave in to pressure from buyers anemic growth since the early 1990s bursting of to sell at lower prices. The Japanese government the bubble. Compared to the second half of the has encouraged cartels in order to keep prices 1980s, capital market activity has similarly been high and help industry grow. During the late much lower in the 1990s. The 1990s saw the fail- 1980s the government discontinued most legal ure of many banks, securities firms, and invest- cartels, but cartels continue unofficially sometimes ment banks. with informal government blessing and support, In recent years, driven by technology and glo- in important industries. balization, the Japanese financial system is being The USA was the first nation to adopt strong gradually deregulated. Trading in new financial anti-cartel legislation, in the form of the Sherman instruments was progressively permitted all Anti-trust Act of 1890. The primary goal of the through the 1980s, derivatives markets were al- Sherman Anti-trust Act was to protect small farm- lowed by the late 1980s, and interest rates were ers and business from price gouging by big busi- deregulated in the early 1990s. The 1993 Finan- ness, though many economists also thought that cial System Reform Act dismantled barriers be- the economy would work more efficiently if there tween banking and securities businesses and the was free competition instead of control by car- implementation of the “Big Bang” set of finan- tels. Neither European nations nor Japan took a cial deregulations was started in 1998. The Japa- strong stand against cartels in the late nineteenth nese financial system is changing and is gradually and early twentieth centuries. At that time, Ja- moving away from an over-reliance on banks to pan had not yet developed true cartels with for- a more market-oriented system. mal price or production agreements in its major industries, though zaibatsu in many industries informally coordinated prices. The absence of Further reading formal cartel agreements was in contrast to Eu- Aggarwal, R. (1994) “Characteristics of Japanese Fi- rope, and especially Germany where cartels were nance,” Global Finance Journal 5 (2):141–68. powerful. The Japanese government developed cartels 63

cartel legislation in 1925, but the legislation was participate in them through the use of adminis- pro-cartel. The Important Industries Law of 1925 trative guidance. Cartels were used in a wide allowed the government to supervise cartels and variety of industries, from concentrated indus- gave industry associations the right to set prices tries with just a few very large firms, like steel and production quotas and to force companies and chemicals, to industries, like textiles, with to join cartels. As the effects of the Great Depres- many firms. Various kinds of cartels were used, sion hit Japan in 1930, the government mandated most of which restricted production in some way cartels in some industries and supervised their Cartels were relied on especially during times of implementation. By 1932, virtually all heavy in- recession, but also during times of expansion. For dustry was organized into cartels. instance, in industries such as cement and chemi- Although the goal of American antitrust legis- cals, firms agreed to take turns building new pro- lation had been to protect small farmers and busi- duction facilities to limit the volume of new nesses from price gouging by big business, the products coming onto the market at any one time. goal of Japan’s pro-cartel legislation was to These cartels did not always work, and even when strengthen the nation’s industries by helping them they did MITI would often monitor them infor- support prices. Cartels played a central role in mally to make sure they did not raise prices so Japan’s industrial policy both before and after high as to create large profits. the Second World War. Although neoclassical The peak period for legal cartels in Japan was economic theory holds that cartels make an from 1965 to 1972. During the 1950s many in- economy less efficient by distorting prices, Japa- dustries saw the Japan Fair Trade Commission nese developmentalist thinking has held that in a (JFTC) as so weak that they did not need to lateindustrializing country the state can use price bother to get permission for their cartels. Until distortions to promote industries that would not the early 1970s, political leaders and the public develop through the market. Cartels are meant were largely supportive of cartels because they to raise and stabilize prices for goods, thus en- thought them necessary to support weak indus- couraging investment and helping firms survive tries. In 1973, however, the public became en- depressions. raged when it learned that oil refiners had used When the Second World War ended in 1945, their cartel to boost profits during the crisis when the victorious Allied powers occupied Japan for the Organization of Petroleum Exporting Coun- seven years. The occupation, which was domi- tries (OPEC) withheld oil supplies. This outrage nated by the USA, tried to reshape Japanese in- gave the JFTC the political support it needed to stitutions in order to turn Japan into a democracy crack down on a number of illegal cartels. In 1973 which would not engage in military aggression. it recommended that sixty-seven industries in- As part of this process, the American authorities volving thirty-three trade associations desist from wrote a law banning cartels, the Anti-monopoly monopolistic activities. In addition, for the first Law. The Americans saw the great monopoly time the commission filed criminal charges. The power of big business as responsible to a great oil companies that were charged did not dispute extent for Japan’s military expansion in the 1930s that they had conspired to fix prices and restrict and 1940s. output, but they argued that they were following Most Japanese leaders saw the attempt to sup- MITI’s administrative guidance and therefore press cartels as an American plot to weaken Ja- were not guilty of violating the law. The Tokyo pan’s manufacturing industries. When the High Court ruled against the oil companies in occupation ended, the Japanese government wa- 1980, arguing that MITI did not have explicit tered down the Anti-monopoly Law, opening the authority to direct a cartel and that therefore the door to extensive cartel activity From the 1950s cartel was illegal. through the 1980s the Ministry of International Somewhat fewer cartels were used in the 1970s Trade and Industry (MITI) used official cartels and 1980s, but nevertheless between 1978 and as a core element of its industrial policy It ac- 1987 a number of declining industries used car- tively encouraged the use of cartels, helped or- tels to cut capacity and support prices under ganize them, and sometimes pressured firms to MITI guidance. In the mid-1980s another source 64 cartels

of political opposition to cartels arose, this time wide margins. Steel companies agree to support from the USA. Japan’s trade surpluses with the prices by restraining production amounts, espe- USA grew large at that time, and Americans ar- cially when demand is weak. To spread the pain gued that Japan was using cartels to block access of production cuts evenly the steel companies to its markets. In response to American criticism, make sure that each company always produces Japan largely abandoned officially sanctioned car- the exact same share of the total volume of steel tels. coming out of Japan’s integrated steel plants. For Japan’s cartels become somewhat more diffi- example, Nippon Steel’s share of total integrated cult to understand at this point. It is significant steel production ranged between 40.8 percent and that Japan no longer sponsors large numbers of 41.5 percent. Variation in the other four compa- legal cartels. Yet there is considerable evidence nies’ volumes of production is similarly slight. It that at least some of the cartels have simply gone would be impossible for the industry to keep underground. market shares so stable for so long in such a volatile market without a cartel agreement. Without this careful dividing up of market shares, each The steel cartel steel firm would be tempted to try to produce The steel industry is a good illustration of the more during business downturns and prices ways in which Japan’s government supports car- would fall further than they otherwise would. By tels. In order to work efficiently the integrated maintaining their production cartel steel compa- steel plants that make steel from iron ore and form nies keep their prices far higher than prices in it into products such as sheets and beams must the USA and other countries. be very large. Steel firms are therefore also large The steel industry and MITI deny that there and there are few of them. It is easier to make is a cartel. An agreement to limit production is agreements to limit competition in a concentrated illegal under the Anti-Monopoly Law. How does industry that is one with few firms, because there the steel industry manage to maintain the cartel is less chance that firms will cheat on the agree- even if it is illegal? ment. In all countries, steel is a relatively easy First, MITI helps out. The Ministry of Inter- industry in which to form a cartel. European steel national Trade and Industry (MITI) asks firms cartels were important through much of the twen- once a quarter to submit projections of produc- tieth century and American steel companies were tion and guides them as to how much steel they good at informally coordinating prices until the should produce. Second, the JFTC allows the early 1960s. But in recent decades the Japanese firms to continue the cartel. The JFTC has is- steel industry has been much more successful at sued reports on the industry and has stated that maintaining a cartel than the steel industries of there are worrisome signs of restraints on com- Europe and the USA, and the reason has largely petition that bear watching. The JFTC has in- to do with support from MITI and the weakness vestigated and fined smaller industries. But it of the JFTC. lacks the political support and resources to go There are five major integrated steel makers after big industries like steel that flagrantly vio- in Japan, which produce about two-thirds of Ja- late the Anti-Monopoly Law. pan’s steel. Minimills, which operate cheaply by Despite Japan’s high prices for steel, few im- melting down scrap steel to make new steel prod- ports make it into the market. Why do buyers ucts, compete with the integrated steel makers, not simply avoid the cartel by buying cheaper but there are many products the minimills can- imports? In part this is because major users actu- not make and which the integrated makers have ally support the cartel. Big users like auto and a monopoly over. Japan’s integrated steel produc- electronics firms say they buy domestic steel in ers have been successful at keeping prices high order to help assure that Japan maintains a strong and they have done so by maintaining a remark- steel industry, and because the Japanese steel in- ably successful production cartel. dustry provides high levels of quality and serv- Demand for steel is quite sensitive to the busi- ice that they value (see competition). This ness cycle and steel sales expand and contract by support from users also helps explain why the Central Union of Agricultural Cooperatives 65 steel cartel enjoys diffuse political support and K.Yamamura (ed.), Policy and Trade Issues of the Japa- why the JFTC does not crack down on it. Yet nese Economy: American and Japanese Perspectives, Se- while principal industrial users may pay the car- attle, WA: University of Washington Press. tel’s high prices voluntarily the steel cartel report- MARK TILTON edly threatens less committed buyers that it will cut off future supplies of Japanese steel if they buy imports. Middleman companies, including Central Union of Agricultural trading companies and the processing firms that Cooperatives cut and distribute steel, also reportedly hesitate to buy imports because of fear of retaliation from The Central Union of Agricultural Cooperatives steel manufacturers. By keeping imports out, steel (Zenchu) is a central organization of agricultural makers ensure that imports do not put too much cooperatives (Nokyo) established by the 1954 downward pressure on domestic prices. This is amendment to the Agricultural Cooperative So- in contrast to the USA and Europe, where large ciety Law. The amendment called for the setting volumes of steel imports have pushed prices up of a prefectural union of agricultural coopera- down. tives in each prefecture, and the Central Union Similar cartels operate in other concentrated of Agricultural Cooperatives at the national level. industries, including chemicals, glass and cement. The Central Union was created for the purpose Cartels do not always work, and the possibility of strengthening organizational structures within of JFTC enforcement against them is one of the the agricultural cooperative mvement, and in factors that prevents them from raising prices high concrete terms, for the purpose of improving the enough to produce large profits. However, the cooperatives functions in terms of providing farm fact that such a blatant cartel as steel has oper- guidance, better living guidance, and audits of ated for so long in Japan suggests that Japan’s agricultural cooperatives’ new undertakings. government is more tolerant and supportive of Zenchu’s purpose, therefore, were described as cartels than the governments of other industrial- auditing, farm guidance, better living guidance, ized countries. management guidance and agricultural administration activities. Auditing and management guidance involved the provision of services directly Further reading to agricultural cooperatives. Farm guidance was Freeman, L. (2000) Closing the Shop: Information Cartels originally started as production guidance aimed and Japan’s Mass Media, Princeton, NJ: Princeton at achieving increased food production and University Press. selfsufficiency of rice. Its purpose shifted in the Johnson, C. (1982) MITI and the Japanese Miracle: The 1960s to provide guidance on diversificattion Growth of Industrial Policy, 1925–1975, Stanford, CA: from rice culture to stock raising, fruit growing Stanford University Press. and horticulture, and to turn respective areas into Kikkawa, T. (1997) “Functions of Japanese Trade As- main production centers of the relevant crops. sociations before World War II: The Case of Car- Excess rice production became an issue in the tel Organizations,” in H.Yamazaki and M. 1970s. Major challenges at the time were the im- Miyamoto (eds), Trade Associations in Business History, plementation of rice production adjustment and International Conference on Business History Vol. crop diversification. 14, Proceedings of the Fuji Conference. In addition to these problems, increasing at- Noble, G. (1998) Collective Action in East Asia: How Rul- tention was given to the perspectives of interna- ing Parties Shape Industrial Policy, Ithaca, NY: Cornell tional competition from the beginning of the University Press. 1990s. Opportunities to pursue expansion of the Tilton, M. (1996) Restrained Trade: Cartels in Japan’s Basic farmoperating scale through coordination of ag- Materials Industries, Ithaca, NY: Cornell University ricultural land use, and to nurture a new genera- Press. tion that would be the support and driving force Yamamura, K. (1982) “Success That Soured: Admin- of future agriculture were explored. In the area istrative Guidance and Cartels in Japan,” in of better living guidance, Zenchu’s efforts initially 66 central wholesale markets centered on the modernization of kitchens and bution for various commodities differ widely and toilets in farmers’ households, and provision of so the market channels for each are quite dis- community-based assistance such as establish- tinct, although seafood and produce often con- ment of day nurseries and lunch delivery service verge in major urban markets. during the busiest farming season. Subsequently The national market system is organized in the 1960s the focus of Zenchu’s efforts shifted around two interlocking dimensions of vertical to consumer activities for food safety and health integration. One is the functional classification management and group health checkup associ- of markets at different scales and levels: central ated with the use of agricultural chemicals. Zenchu vs. regional wholesale markets, the latter further has recently taken part in activities relating to divided between production or consumption ar- health care for elderly in the community. eas. This hierarchy is paralleled by and main- The Central Union of Agricultural Coopera- tained through a complex system of licensing for tives’ rice price struggle in the 1960s, its move- markets and traders, which defines the scope of ments against farm product trade liberalization, activity at each market level and structures the and fierce protest against the government and for- chains of transactions that link them. eign countries concerning the issue of taxation and agricultural land in urban areas in the 1970s Market levels and 1980s all helped to make its name widely known in Japan and abroad. After farm product In 1998, the most recent year for which figures trade liberalization, however, these activities have are available, there were 87 central wholesale lost some of their former momentum. Zenchu has markets and 1,447 regional wholesale markets shifted its focus to the issue of management con- in Japan. Of the central wholesale markets, 72 ditions of individual cooperatives and the prob- handled produce with a total sales value of ¥2.7 lem of organizing members. Improvement of the trillion; 53 handled seafood (¥2.9 trillion); 23 management of agricultural cooperatives is con- dealt in flowers (¥160 billion); and 10 dealt in sidered by Zenchu as its most important task. To meat products (¥240 billion). The total sales vol- cope with financial deregulation, and maintain ume of regional wholesale markets, across all or improve soundness of management, agricul- commodity categories and including both pro- tural cooperatives are urgently enhancing their duction and consumption regions, was ¥4.8 tril- auditing capabilities. Zenchu in the meantime is lion. required to promote the qualitative transforma- Foodstuffs enter and circulate through the mar- tion of these agricultural cooperatives as quickly ket system in many ways. At “upstream” mar- as possible. kets—that is, production region markets—some of the products may go for local consumption, but KENJI ISHIHARA producers and producer co-operatives primarily sell to brokers, processors, and agents of higher- central wholesale markets level urban markets. These traders, in turn, bulk or consolidate catches into larger shipments for The distribution of many perishable foodstuffs sale or consignment in other markets “down- in Japan is organized through a national system stream,” closer to urban consumers, including cen- of central wholesale markets (chuo oroshiuri shijou) tral wholesale markets in large cities as well as and regional wholesale markets (chihou oroshiuri consumption region markets. These markets shijou). Altogether, slightly more than 1,500 whole- break or disassemble commodity flows into lots sale markets throughout Japan trade in seafood, small enough to be of use to a retailer or restau- fresh fruits and vegetables, fresh meat, eggs and rateur. Production region markets and higher- poultry, and cut flowers. Seafood and produce level regional markets depend exclusively on are the major commodities that pass through these domestic production. Central wholesale markets market systems; many markets handle only one receive products from lower level regional and or two commodities although a few deal in all local markets, as well as directly from individual types. The structures of production and distri- producers, and imported foodstuffs often enter central wholesale markets 67 the market system at this level, from trading com- sequent severe shortages, residents violently panies and foreign producers. Consumption re- stormed rice and other food dealers and markets gion markets generally depend on central in over 100 cities and towns, until the Japanese wholesale markets for their supplies. army quelled the riots. The law, which has been The Ministry of Agriculture, Forestry and revised and updated several times since then, es- Fisheries (Nourinsuisanshou, also known by the ac- tablished publicly regulated markets to prevent ronym MAFF) charters central wholesale mar- price-fixing, collusion, and other anti-competitive kets in cities with populations greater than practices. 200,000. MAFF sets national standards, enforces policies to ensure fair trading practice, and grants licenses to the auction houses or primary whole- Licensing and regulation salers that supply these markets. Local authorities (municipal or prefectural governments), on Competitive auctions are the core mechanism of the other hand, oversee the day-to-day operations central wholesale markets to ensure that transac- of these markets, issue licenses for local whole- tions are “impartial and equitable” (kouhei to kousei). salers, and enforce local regulations governing The rules and regulations under which auctions market operations, such as setting hours of op- must take place are spelled out in general terms erations, allocating space, and determining spe- by national regulations and in minute detail by cific categories of goods to be traded. local ordinances as well as in the customary un- Regional wholesale markets are chartered by derstandings that surround trade in a particular prefectural governments and are operated as mu- marketplace. nicipal, co-operative, or private ventures (which Primary wholesalers or auction houses, known make up roughly 85 per cent of the total). These officially as oroshiuri gyousha (wholesale dealers) markets are divided into those that serve “pro- or niuke gaisha (freight receivers, i.e. consignees) duction regions” (sanchi) and those for “consump- are licensed directly by MAFF to operate in a tion regions” (shouhichi), generally in regional cities specific marketplace. Their licenses give them and suburbs. Markets in production regions are exclusive rights to make markets for products and often closely linked to local branches of the na- also require them to attract a steady supply for tional system of agricultural cooperatives that market’s demand. There are about 260 auc- (nougyou kyoudou kumiai or noukyou) and fisheries tion houses nationwide. (Auction houses in re- cooperatives (gyogyou kyoudou kumiai or gyokou), gional markets are licensed by prefectural which in some cases operate the local markets. authorities; there are roughly 1,700 such regional Consumption region markets are mostly owned auction houses.) Many auction houses are affili- and operated by private corporations. ated with national chains, or keiretsu, that have Production markets funnel foodstuffs from lo- similar auction houses in other major markets. cal farmers and fishers into national distribution In seafood markets, for example, the Maruha channels in various ways: regional brokers may Corporation (formerly known as Taiyou purchase local products for shipment and resale Gyogyou KK) controls a dozen subsidiary firms to urban markets; cooperativess themselves may that operate auction houses in major central create a local brand for products that they sell on wholesale markets, and Maruha also has close consignment either through the regional market ties with many other auction houses in regional or directly through urban central wholesale mar- markets. kets; and individual producers may bypass re- Auction houses obtain products on consign- gional markets and consign their products directly ment (itaku hanbai) or on their own account to a central wholesale market. (kaitsuke). Domestically consignments come di- The entire system operates under the Central rectly from producers, from producer coopera- Wholesale Market Law (Chuo Oroshi Shijou Hou), tives, and from brokers operating in regional which was originally passed in 1923 in response markets. Imported products, unlike domestic to the so-called “Rice Riots” of 1918. In protest ones, are more likely to enter the distribution against speculative trading in foodstuffs and con- system at the level of central wholesale markets 68 central wholesale markets

rather than through regional markets. Imported their own shops within a marketplace to resell products are purchased outright from foreign pro- products. In addition, some marketplaces license ducers by the auction houses and their overseas “authorized buyers” (generally retailers or sec- affiliates, or arrive on consignment from major ondary distributors) to participate in auctions, but trading companies, joint ventures between for- they are not allowed to resell in the marketplace. eign producers and Japanese food companies, and Nationally there are approximately 48,000 “au- directly from foreign producers. thorized buyers.” At regional markets of all kinds, Auction houses sell through various forms of there are a total of approximately 185,000 licensed auctions (known collectively as seri or seri-uri, but buyers. more precisely classified as open bidding auctions (seri) or sealed bid auctions (nyousatsu or Recent trends nyousatsuseri)). In addition, auction houses may sell products to licensed wholesalers through negoti- Despite the enormous volume of foodstuffs that ated sales (aitai-uri). Auction houses receive com- continues to pass through the national system of missions that are set by local regulations. The wholesale markets, since the 1980s its overall sig- precise methods of auction and rules surround- nificance has declined, because of changes both ing negotiated sales vary from marketplace to in the structure of distribution and in consumer marketplace and from commodity to commod- behavior. ity. Auctioneers (serinin) are salaried employees People in the food and distribution industries of the auction houses and are individually licensed use the term jounai ryuutsuu (distribution within by the local authorities responsible for adminis- the market system) to describe transactions and tering marketplaces. channels that make use of the national system of Auction houses in turn sell to intermediate wholesale markets, auctions, and licensed deal- wholesalers (nakaoroshi gyousha or nakagainin) who ers. This is in contrast to jougai ryuutsuu (distribu- are licensed by the local authorities who administer tion outside the market system) which refers to each market. Nationally there are about 6,000 in- the non-regulated free trade in food products. As termediate wholesalers, each licensed—just like the the Japanese domestic economy has changed over auction houses—to operate only in a single mar- the past generation, jougai ryuutsuu has become ketplace. Many of the intermediate wholesaling much more important than it was in the past, in firms are small family-owned businesses, some of part because advances in communications and which can trace their histories in the trade back transportation make the shipment of perishable many generations, in some cases to the markets of foodstuffs very easy nationwide, thus reducing the feudal Tokugawa period (1600–1868). Con- some of the function of the nodal distribution temporary wholesale markets, therefore, tend to system organized around central markets. be close-knit, insular, and imbued with a strong In addition, large-scale retailers such as super- ethos of tradition, both in terms of commercial market chains have developed their own inde- practice and in relation to Japanese food culture pendent distribution channels directly linking as an important cultural legacy. them both to domestic producers and importers. In larger markets, intermediate wholesalers are Large trading companies, many of which have highly specialized; at Tokyo’s enormous Tsukiji major investments in supermarket and restaurant market (where there are, respectively for seafood chains, have also become much more active in and produce seven and four auction houses, 953 importing foodstuffs, some of which is sold and 126 intermediate wholesalers, and 388 and through central wholesale markets, but much of 1,018 authorized buyers) individual firms special- which goes directly to large-scale retail chains. ize in particular varieties of produce (onions or Paralleling these trends are changes in Japa- citrus fruits) or species of seafood (tuna or shrimp nese consumer behavior. Traditional small-scale or octopus). In smaller markets, intermediate retailers have steadily lost sales over the past fif- wholesalers may handle almost the full range of teen years to supermarkets and convenience products found in the market as a whole. Inter- stores (konbini), which handle increasingly large mediate wholesalers are authorized to operate arrays of pre packaged and processed products. Chugen 69

Distinct changes in the average diet and consump- the year. Many individuals send ochugen to their tion patterns of average Japanese consumers have boss and their customers in the hopes of retain- had direct impact on the sales of many of the ing their continued support and business. The kinds of fresh foodstuffs that the market system sending of ochugen to valued customers is obliga- has traditionally handled. Wholesale markets tory in Japanese corporate culture. All Japanese handle less and less of the high volume sales of companies maintain a Chugen budget, for giv- the most basic foodstuffs that supermarkets and ing gifts to important customers as a means of restaurant chains can arrange through their own showing the company’s appreciation of their busi- distribution networks. ness. Markets therefore have become more special- The giving of ochugen to superiors, clients, and ized at the top end of the spectrum: high quality others as an expression of gratitude for their guid- and high value products that are in demand for ance, patronage, or kindness is a well-established premier restaurants and for discriminating con- social and corporate custom in Japan. While the sumers who continue to shop in specialty retail amount spent on ochugen varies, it is generally shops. During the boom years of the so-called agreed that the average price is ¥5,000 each. As bubble economy, the market system prospered a result of this obligatory summer gift giving, a on this sector, characterized as “gaishoku [eating vast market has been created. out] and gourmet.” However, specialization in the As the Chugen season coincides with the Japa- highest quality and highest priced spectrums of nese summer bonus season, it is a busy time of products, including many pricey imported food- year for many Japanese retailers. Department stuffs, has left the wholesale market system vul- stores, with the largest share of Chugen sales, nerable throughout the economic recession of the set up special areas dedicated to ochugen, display- 1990s, when they have been particularly hard ing a variety of specially packaged gifts at a range hit by the decline in business entertainment, more of prices. Gift-wrapping and delivery services are frugal consumers, and intensified competition also provided. Supermarkets and convenience with supermarkets and other alternative distri- stores also sell ochugen, and provide delivery serv- bution systems. ice. Competition among retailers for chugen business is fierce. Some offer free delivery for a lim- Further reading ited range of items within a delineated delivery Bestor, T.C. (2002) Tokyo’s Marketplace, Berkeley CA: area, while others counter with offers of a flat University of California Press. delivery rate to any domestic location. Discounts are also offered on selected goods, as are mon- THEODORE BESTOR etary incentives in the form of gift certificates with purchases over a certain amount. Chugen During the Chugen season, large retailers such as department stores and supermarkets devote Chugen refers to the Japanese midyear gift-giv- entire sections exclusively to such gifts. Although ing season. This traditional summer exchange of gifts usually belong to high-end product catego- gifts occurs during the first two weeks of July ries, they tend to be practical items that can be before the Obon holiday. The giving of summer used, or consumed, at the recipient’s home. Com- gifts originated as an offering to families that had mon gifts include boxes of soap, cooking oil, cook- experienced a death during the first half of the ies, liquor, canned food, instant coffee, and beer, year. To this day Chugen takes place during the in addition to traditional gifts such as nori (dried two weeks before the obon (the Buddhist holi- seaweed), katsuobushi (dried fish), and oshinko (pick- day for honoring dead ancestors). led vegetables). The gifts, commonly referred to as ochugen, are Japan’s other major gift-giving season is the given as an expression of gratitude to either pri- year-end, between December 10 and the New vate individuals or work related individuals to Year holidays. Gifts exchanged at this time are whom the gift giver has been obliged to during referred to as oseibo. In general, oseibo are given to 70 city banks

the same individuals to whom an ochugen was and the fourth largest bank in the world by given. assets. The Bank of Tokyo-Mitsubishi is the main bank of the Mitsubishi keiretsu (see SEAN MOONEY main bank system; zaibatsu) and plans to merge with Mitsubishi Trust & Banking, city banks Japan’s premier trust bank, in April 2001 to form the Mitsubishi Tokyo Financial Group. City banks are major commercial banks with • Daiwa Bank. Founded in 1918, Daiwa Bank headquarters in a large metropolitan area and grew out of the old Osaka Nomura Bank nationwide branch networks. The eight city banks when its securities division separated and rank among the world’s largest banks. Controlled, became Nomura Securities. Headquartered regulated and protected by the Ministry of Fi- in Osaka, the Daiwa Bank has 7,315 employ- nance, they played a major role in bankrolling ees and a branch network of 191 offices. Its major corporations in the wartime economy and total assets (consolidated) of about ¥15.4 tril- during the period of high economic growth. Ill- lion make it Japan’s smallest city bank and executed deregulation of this system commenc- earn it a rank of seventy-one worldwide by ing in the 1970s culminated in the banking mess assets. Daiwa Bank gained international no- of the 1990s, as it created a situation of moral toriety in 1995 in a scandal involving unre- hazard in which banks had no incentive to de- ported bond-trading losses of $ 1.1 billion in velop business expertise and felt free to take risky the USA, as a consequence of which the bank positions in the mistaken belief that the ministry saw itself stripped of its US banking license. would bail them out if necessary While the bank- • Mizuho Financial Group. Mizuho Financial ing crisis seems to be under control for now, city Group is the result of the September 2000 banks still face serious challenges in the form of merger of Daiichi Kangyo Bank—itself the impending mergers, technical deficiencies, and outcome of the 1971 merger of two city internationalization. banks, Daiichi Bank and Nippon Kangyo Bank—Fuji Bank, and the Industrial Bank of Overview of the individual city banks Japan. Head-quartered in Tokyo, the group’s firms combined employ 33,914 staff and run As of September 2000, there are eight city banks. 747 branch offices. With total assets (con- In alphabetical order, these are: solidated) of ¥157.2 trillion, the Mizuho • Asahi Bank. Tracing its history back to 1945, Group is the world’s largest bank. Given its Asahi Bank is the product of the 1991 merger constituent banks, the Mizuho Financial of two city banks, Kyowa Bank and Saitama Group will probably serve as the main bank Bank, and adopted its present name in 1992. of the Ikkan and the Fuyo keiretsu. Asahi Bank maintains its headquarters in To- • Sakura Bank. Tracing its history back to kyo, employs 10,448 staff, and possesses a 1876, Sakura Bank is the result of the 1990 branch network of 365 offices. Its total as- merger of Mitsui Bank and Taiyo-Kobe sets (consolidated) amount to about ¥28.8 Bank, with the latter having itself grown out trillion, which makes Asahi Bank the sev- of a merger between Taiyo Bank and Kobe enth largest city bank in Japan and the thirty- Bank in 1973; it assumed its present name fifth largest bank in the world. in 1992. With headquarters in Tokyo, Sakura • Bank of Tokyo-Mitsubishi. Its history reach- Bank has 14,930 employees and the largest ing back to 1919, the Bank of Tokyo- branch network of all city banks with 438 Mitsubishi is the result of the 1996 merger offices. Its total assets (consolidated) are between Mitsubishi Bank and the Bank of worth about ¥48.5 trillion, which makes it Tokyo. Headquartered in Tokyo, it employs Japan’s fourth-largest city bank and the 17,412 staff and runs 375 branch offices. With world’s fifteenth largest bank by assets. total assets (consolidated) of about ¥74.8 tril- Sakura Bank is the main bank of the Mitsui lion, it is the second largest bank in Japan keiretsu and is scheduled to merge with city banks 71

Sumitomo Bank into the Sumitomo Mitsui History and status quo Banking Corporation in April 2001. • Sanwa Bank. Sanwa Bank was founded in Most, though not all, of today’s city banks devel- 1933. It has its headquarters in Tokyo, em- oped out of the “big banks” of the prewar era. In ploys 12,997 staff, and possesses 331 branch the early days of industrialization, Japan featured offices. It has total assets (consolidated) of several thousand banks. Size varied enormously about ¥46.9 trillion and is thus Japan’s fifth- from numerous tiny banks to the “Big Five”: largest city bank and the world’s seventeenth Mitsui Bank (now Sakura Bank), Daiichi Bank largest bank by assets. Sanwa Bank is the (later Daiichi Kangyo Bank), Mitsubishi Bank main bank of the Sanwa keiretsu and plans to (now Bank of Tokyo-Mitsubishi), Sumitomo set up a joint holding company with Tokai Bank, and Yasuda Bank (now Fuji Bank). These Bank and Toyo Trust in April 2001. big banks played an important role for their re- • Sumitomo Bank. Tracing its history back to spective zaibatsu, but overall their role in the 1912, Sumitomo Bank strengthened its To- economy was limited by strong competition with kyo business by acquiring Heiwa Sogo Bank, other banks and flourishing financial markets: a regional bank, in 1986. With its headquar- the Big Five provided only about twenty percent ters in Osaka, it maintains a staff of 14,394 of total bank loans, which in turn accounted for and possesses 353 branch offices. Total as- only about 20 percent of total assets in the sets (consolidated) of about ¥53.8 trillion economy until the 1930s. make it Japan’s third largest and the world’s Several factors strengthened the hand of the ninth largest bank by assets. Sumitomo Bank big banks from the late 1920s onward. First, a is the main bank of the Sumitomo keiretsu number of banking crises led to increased con- and will merge with Sakura Bank to form centration in the banking sector. Second, and the Sumitomo Mitsui Banking Corporation more importantly as the country prepared for war, in April 2001. banks assumed a central role in the bureaucra- • Tokai Bank. Tokai Bank was founded in cy’s efforts to bring the economy under control. 1941. The only city bank headquartered in In order to channel funds to industries central to Nagoya, it employs 9,675 staff and runs a the war effort, the state promoted further bank- branch network of 280 offices. Its total as- ing concentration, specialization, and a system sets (consolidated) amount to about ¥30.5 of “indirect finance,” in which firms received their trillion, which makes it Japan’s sixth largest capital through banks rather than directly from city bank and the world’s thirty-second larg- the capital markets. est bank ranked by assets. Tokai Bank acts Like so many aspects of the Japanese wartime as the main bank of the Tokai keiretsu and economy the highly controlled and regulated sys- plans to create a joint holding company with tem of indirect finance survived both defeat and Sanwa Bank and Toyo Trust in April 2001. Allied occupation and became a cornerstone of the high-growth era. As during the war, city banks Noteworthy also is the Hokkaido Takushoku were instrumental in funneling scarce capital to Bank, the only city bank to have failed. Head- major corporations (see also industrial policy). quartered in Sapporo, Hokkaido Takushoku Several phenomena were characteristic of this Bank was the smallest of all city banks when it role: “over-loan,” that is, the over-extension of collapsed under the burden of massive bad loans commercial loans sustained by lending from the on November 17, 1997. Its demise and the subse- Bank of Japan (see madoguchi shido); quent bankruptcy of Japan’s fourth-largest secu- “overborrowing,” that is, the extreme dependence rities firm, Yamaichi Securities, on November 24, of corporations on bank lending; and the imbal- 1997 greatly exacerbated the Japanese financial ance of bank liquidity (shikin henzai) between city crisis of the 1990s and served to focus the atten- banks and the smaller, local banks resulting from tion of the government authorities on the weak- the inability of city banks to raise enough depos- ness of the Japanese financial system (see its through their relatively small branch networks banking crises). to cover their large lending volumes. 72 Cole, Robert

Throughout this period of high economic petition from sophisticated foreign competitors growth, the city banks enjoyed a symbiotic rela- such as Citigroup entering the Japanese market. tionship with the Ministry of Finance (MOF). MOF used administrative guidance, price set- Further reading ting, protection, and restriction of competition to keep the banking system stable. Interest rates were Field, G. (1997) Japan’s Financial System: Restoration and set with spreads wide enough to keep all banks Reform, London: Euromoney Publications. profit able, and the “convoy” (goso sendan) system Japanese Bankers Association (2000) Japanese Banks, ensured that the assets of all banks grew at about Tokyo: Japanese Bankers Association. the same rate, their relative ranking remained Johnson, C. (1982) MITI and the Japanese Miracle: The unchanged, and no bank failed. Success under Growth of Industrial Policy, 1925–1975, Stanford, CA: these conditions was arguably more dependent Stanford University Press. on good relations with the ministry than on busi- Kitagawa, H. and Kurosawa, Y. (1994) “Japan: Devel- ness acumen. opment and Structural Change of the Banking Sys- This system contained the seeds of the bank- tem,” in H.T.Patrick and Y.C.Park (eds), The Financial ing mess of the 1990s. As the economy matured Development of Japan, Korea, and Taiwan, Oxford: Ox- in the early 1970s, the combination of slower ford University Press, 18–128. growth, high government debt, internationaliza- Patrick, H.T. (1999) “The Causes of Japan’s Financial tion, a shift of corporate finance away from bank Crisis,” Pacific Economic Paper No. 288, Canberra: Aus- lending, and increasingly diversified demand for tralia-Japan Research Centre, 1.1–1.19. financial services gave the impetus for slow but Tsutsui, W.M. (ed.) (1999) Banking in Japan, 3 vols, steady deregulation. However, MOF failed to cre- London: Routledge. ate a system of prudential regulation as deregu- Top 1000 World Banks (2000) The Banker, July: 78– lation proceeded and stuck to the old convoy 110. system. This created a situation of moral hazard Toyo Keizai Shinposha (2000) Japan Company Handbook: in which the city banks had no incentive to de- First Section Firms, Fall 2000, Tokyo: Toyo Keizai velop business expertise and felt free to take risky Shinposha. positions within Japan (especially during the bub- MICHAEL A.WITT ble economy) and overseas (especially in Asia) in the conviction that MOF would bail them out Cole, Robert if necessary. However, when many of these loans went bad following the bursting of the bubble as Educator and writer on Japanese organizational well as the economic crisis in Asia, the resulting behavior. Building on the earlier work of James banking crisis turned out to be too large for MOF Abegglen’s The Japanese Factory (1958), which fo- to handle. Hokkaido Takushoku Bank went un- cused on the factory as a key to understanding der, other city banks presumably came close. Japanese industrialization, Cole studied the work- While a ¥ 7.45 trillion public aid package for ers within the factories. Cole described how the the big banks and massive write-offs appear to Japanese focus on scarcity is reflected in its have stabilized the city banks for now, they still economy. face considerable challenges. First, it is not clear Cole developed a theory of functional alter- that the proposed banking mergers will show any natives in which he looked at industrial relation benefits beyond making city banks bigger. Sec- systems by viewing their features not as unique ond, city banks have proved incapable of incor- but as functional equivalents, variations and ex- porating technological change. Their expertise in aggerations of tendencies common to all indus- important areas such as risk management and trial societies (Cole 1971). Under this theory he sophisticated financial products remains low, as attempted to bridge the gap between convergence they lack the necessary specialists and have been theory (under which all economies would develop spending too little on information technology. similar characteristics) and historical uniqueness Third, city banks face increasing internationali- (under which there would be no convergence zation, which impacts them not least through com- since each nation is unique). Commercial Code 73

In his comparison of work practices in De- such as the USA, the UK, and the Netherlands. troit and Yokohama (Cole 1979), Cole found that Meiji-era leaders were determined to prevent Ja- while convergence did exist, there were also con- pan from being colonized. In order to be interna- tinuing differences as the Japanese adapted West- tionally recognized as an equal power, ern ideas and practices to their own needs. He modernization of the Japanese society and eco- described the greater worker participation among nomic development became important goals for Japanese in shop floor management. While he the Meiji government. The government sent out found a distinctive Japanese work ethic, the dif- many scholars to Germany France, and the ferences tended to lie along very specific dimen- USA to study industrialization, banking sys- sions. First, the social organization of a Japanese tems, and Western law. In the meantime, the firm is characterized by a lack of sharp job defini- Japanese government embarked on the modern- tion. This results in a low concern with promo- ization of the financial system by establishing the tion to particular jobs, job performance less Ministry of Finance in 1869, promulgating a important to promotion, extensive job rotation, National Bank Act in 1872, and establishing the tasks perceived as group projects and low com- Tokyo Stock Exchange in 1878. mitment of employees to particular jobs. Second, The Japanese Commercial Code was based the social organization of a Japanese firm has a on the German Commercial Code. Like the Con- strong internal labor market with employees hav- stitution, the old Commercial Code was drafted ing greater career commitments to the company by Karl Friedrich Hermann Roesler in 1890. The including low quit rate, stronger company train- parts concerning companies, bills and bankrupt- ing, employees have less job security concern, se- cies were implemented in 1893, the other parts lective new employee recruitment, and low union following in 1898, to be replaced by the new Com- involvement in job assignments. These differ- mercial Code in 1899. The old Commercial Code ences, according to Cole, even if unique, were had been considered too foreign, and was said to solutions to common problems. disregard customary business practices.

Further reading Development Abegglen, J.C. (1958) The Japanese Factory: Aspects of its Social Organization, Glencoe, IL: The Free Press. Prewar amendments took place in 1911 and 1938. Cole, R.E. (1971) Japanese Blue Collar: The Changing Tra- They consisted of changes in valuation standards dition, Berkeley CA: University of California Press. from market value, to lower-of-cost-and-market ——(1979) Work, Mobility, and Participation: A Comparative (1911), to historical cost (1938). In 1950, amend- Study of American and Japanese Industry, Berkeley CA: ments included the introduction of the authorized University of California Press. capital system and the non-par value stock system in order to facilitate the introduction of for- ROBERT BROWN eign capital. The revisions that took place in 1962 established the supremacy of accounting rules Commercial Code (concerning measurement, valuation and recognition) in the Commercial Code over the regulations of the Securities and Exchange Law and History the Statement of Business Accounting Principles. The Commercial Code is part of a series of laws The Commercial Code falls under the adminis- that also includes the Constitution, the Civil tration of the Ministry of Justice, whereas the lat- Code, and the Criminal Code. These laws were ter two are under the jurisdiction of the Ministry intended to make Japan a modern state equal to of Finance. The 1974 revision to the Commer- western states. At the time when Japan was cial Code made the audit system compatible with forced to open up its borders by the “black the audit system under the Securities and Ex- ships” of US Commodore Perry Japan had been change Law, and thus contributed to the unifica- forced into unequal treaties with Western states tion of the Japanese accounting system. 74 competition

Later amendments occurred in 1981, 1990, Outline 1994, and 1997, and included rules that accom- Book One of the Commercial Code is concerned panied the deregulation of Japanese financial mar- with general principles, and contains chapters on kets and the internationalization of business in regulations for carrying out the law, merchants, general. Examples of the first include issuance business registration, firm names, business ac- and administration of corporate bonds and de- count books, business users, and agents. Book rivatives. Examples of the latter include foreign Two consists of a chapter on general principles investments or mergers and acquisitions. The which mainly deals with definitions, and another latest revisions are a consequence of the financial chapter which is concerned with stock compa- and accounting Big Bangs. In 1998 the Commer- nies, their establishment, stock, institutions, gen- cial Code was amended to relax the purchase of eral shareholders meeting, auditing, company treasury stock. From 1999 the Commercial Code accounts, bonds, amendment of the articles of permits the establishment of holding companies incorporation, increase or decrease of capital again. When the zaibatsu were dismantled, hold- stock, liquidation, and penal regulations. ing companies had been prohibited. Furthermore, since 1999, new rules include fair value for fi- See also: joint stock corporation; zaibatsu nancial products. Revisions in 2000 lay down the rules for company splits. Within the framework CARIEN VAN MOURIK of the accounting Big Bang, more revisions are likely to follow. competition Competition in Japan has certain unique features. Character The fact that prices have been persistently higher The Commercial Code applies to all companies. than in other nations suggests that price compe- However, for certain regulations there are excep- tition is relatively weak. And while Japan has tions based on size. For example, external audits ended most of its legal cartels, informal restraints are not required for small and medium-sized com- on competition appear more widespread than in panies. For companies with a capital stock of over many other industrialized countries. Yet compe- ¥500 million or liabilities totalling more than ¥20 tition over quality and service is intense. Japa- billion, under the “Law concerning the exceptions nese firms in many industries compete hard to to the Commercial Code regarding the audit of create innovative, well-crafted goods that enjoy kabushiki kaisha” Art. 16 stipulates that in case the great success in world markets. external auditor concludes in its report that, as a The question of just how competitive Japan’s result of the audit of the accounts, they have not markets are is hotly debated for several reasons. found any improper items, approval by the gen- The first has to do with explaining economic eral shareholders meeting is not necessary. A mere growth. Neoclassical economic theory holds that presentation of the contents of the financial state- competitive markets promote growth, while re- ments is enough. straints on competition take away incentives to It is generally acknowledged that the Com- innovate and cut costs. The Japanese economy mercial Code is primarily concerned with the pro- has grown quickly during most of the post-Sec- tection of creditors rather than shareholders. One ond World War period. During much of this important aspect of Roesler’s draft that remains time of rapid growth, the Japanese government a characteristic of the Japanese accountability sys- encouraged cartels and protected domestic in- tem until today is the relationship between the dustries from imports. Was there intense compe- board of directors, the statutory auditors and the tition anyway? If not, how did the economy general shareholders meeting. Both the statutory grow so fast? Is neoclassical economic theory auditors and the board of directors are appointed wrong about the importance of competition for by the general shareholders’ meeting. In some economic growth? Some scholars argue deduc- cases, this would be the shareholders’ only di- tively from neoclassical economic theory that rect means of control. since Japan had high rates of economic growth competition 75 from 1952–91, and since markets must be com- prices in Japan would attract cheap imports that petitive to generate rapid growth, that Japan would put downward pressure on Japanese prices. must therefore have had an intensely competi- The fact that the expected cheap imports have tive market. Others argue that neoclassical eco- not succeeded in driving down Japanese prices nomic theory is wrong, and that certain suggests there are barriers to new entrants in Ja- restraints on competition can promote growth in pan’s markets. late-developing economies that are struggling to Yet while competition over prices is weak on accumulate capital and catch up with more ad- average, competition over quality and service is vanced nations (see industrial policy). intense. What causes this difference in competi- Another reason scholars and policy makers tion, and how does an emphasis on competition debate the nature of competition in Japan is be- over quality and service instead of price affect cause of its significance for Japan’s international the economy? trade relations. Critics of Japan argue that pri- Competition can be shaped both by vertical vate firms collude to keep prices high and to use and horizontal relations among firms. First, ver- their market power to keep new firms from un- tical relations between buyers and sellers in Ja- dercutting these prices, while the government pan are more often long-term and stable than in fails to enforce the nation’s Anti-Monopoly Law such countries as the USA or the UK. Buyers and uses informal regulation to help stifle com- make a long-term commitment to buy from a petition. They hold that anti-competitive activi- particular supplier and sellers make a long-term ties unfairly enable Japanese firms to keep prices commitment to make a particular good to the high, keep imports out, and then sell cheaply buyer’s precise specifications. Buyers and sellers overseas. do not constantly shop around for a better price, Opponents of this view argue that Japanese but that does not mean there is no competition. markets are in fact very competitive and that the Instead, buyers use “controlled competition” to difficulty foreign firms have in making sales in get better prices, quality and service from sellers. Japan is because Japanese firms compete so in- Under controlled competition, buyers have long- tensely to provide excellent goods and services. term relations with several suppliers. They limit They argue that Japan’s high prices reflect the their purchases to these designated suppliers, and high quality of goods that consumers demand as negotiate prices with them that cover production well as high production and distribution costs and costs. The various designated suppliers cooper- that, while there are some illegal cartels, these do ate to some degree to produce the goods the buyer not last long nor have great overall effect on wants, but the buyer also pressures these suppli- prices. ers to compete to provide good quality and serv- As with many debates, there is truth to both ice, and to gradually improve productivity and positions. Japanese markets are less competitive bring down costs. This kind of competition is than the markets of other industrialized nations common among providers of intermediate indus- in certain respects, but very competitive in oth- trial goods, such as telecommunications equip- ers. Compared to the USA or the European Un- ment or automotive parts. ion, competition policy is lax, and the Japan Fair Horizontal ties among competitors producing Trade Commission is more tolerant of cartels. the same good or service also can lead to an em- Japan’s high prices suggest that price competi- phasis on competition over quality and service tion is weak. Japanese prices are much higher than instead of price. An example of an industry in in the USA and Western Europe. The explana- which firms compete intensely over quality and tion for these high prices might be partly that service is the petrochemical industry Japanese pet- high distribution costs force prices up and that rochemical companies produce ten times as many the yen has been overvalued. But the high distri- different grades of chemicals as in other coun- bution costs themselves appear to be due to re- tries and they are willing to make deliveries of straints on competition in industries such as much smaller quantities. Firms provide these fine trucking or retail sales. And the yen has been gradations in quality and excellent service because high since 1985. One would think that the high they are competing to gain or keep customers. 76 competition

At the same time, the Japanese chemical indus- demand, prices are below costs, and producers are try charges very high prices for its goods. What in danger of being pushed out of business. Pro- explains this pattern of intense competition over ponents of this concept argue that excess compe- quality and service and weak competition over tition develops when firms have high sunk costs. prices? The reason Japanese companies compete That is, firms have invested in production facili- intensely to produce so many fine grades of ties, such as factories and equipment, which they chemicals is that they have agreements not to cannot easily sell off or use for some other pro- compete over price (see after-sales pricing). The ductive purpose. Firms that are stuck with big in- Ministry of International Trade and Industry terest payments on a factory are forced to keep has encouraged the petrochemical industry to producing goods even if they’re not making come to an agreement not to make so many enough money to cover the full costs of produc- grades, but as long as firms are prevented from tion in order to stay in business. Americans and competing over price, they have an incentive to Britons tend to see business failure as a normal compete over non-price differentiations between part of a market economy but the use of the term products. “excessive competition” suggests many Japanese One could argue that customers really want a observers see it as abnormal. The term is impor- large variety of grades of chemicals and deliver- tant because it has often been used to justify gov- ies of tiny quantities, and that this is the main ernment intervention to reduce competition and reason that Japanese chemical companies com- protect the beleaguered firms. It is this thinking pete in this specific way One could also argue which provides the political support for the restric- that Japan’s extraordinary levels of quality and tions on competition that the petrochemical indus- service shows that it is one of the most competi- try uses to maintain a system of competition that tive chemical markets in the world. However, emphasizes quality and service instead of price. given that we know that chemical companies Perhaps the best way to understand competi- have price-fixing agreements, we must conclude tion in Japan is to say that it operates somewhat that it is the lack of price competition that is differently from economies such as the USA pushing chemical companies to instead compete where price competition is more intense and over service and quality Is this wasteful? Think- where market relationships are more fluid. Higher ing in terms of static economic efficiency that is, prices cause some losses in efficiency but high the efficiency of distributing resources that are levels of quality can also provide some advan- available right now, the answer is yes. The result tages. Joseph Schumpeter, an Austrian economist of such arrangements is that Japanese consum- writing in the middle of the twentieth century ers pay high prices and have a lower level of con- disagreed with neoclassical economic theory and sumption. On the other hand, a widespread argued that the most important kind of competi- emphasis on quality rather than price competition in a market economy is not over price, but tion is one of the factors that has enabled Japa- over innovation. His way of thinking may explain nese manufacturers to be leaders in the why Japan has managed to achieve remarkable production of high quality goods. Car compa- long-term economic growth even with many of- nies say that they value the ability to get pre- ficial cartels and high prices. Yet the long reces- cisely the kind of chemical products they want sion that began in 1991 has caused many and on very convenient delivery schedules. This observers both within and outside Japan to won- orientation to quality over price may produce dy- der whether the old formula can still work and namic efficiencies. That is, it may increase the whether Japan may need stronger price competi- amount of resources available in the future by tion in order to push inefficient companies out of stimulating innovation. business and create space for new industries. Ob- People understand competition in Japan some- servers concerned with international trade equity what differently than in Britain or the USA. A key argue that Japan needs more competition in its concept for discussing competition in Japan is “ex- domestic markets in order to ensure that foreign cessive competition” (kato kyoso). Excessive com- firms have the same access to Japanese markets petition means that supplies greatly exceed that Japanese firms enjoy overseas. computer industry 77

Further reading industry to catch up with IBM, the state used four primary policies: protectionism, a quasi-pub- Flamm, K. (1996) Mismanaged Trade? Strategic Policy and lic computer rental company called the Japan Elec- the Semiconductor Industry, Washington, DC: The tronic Computer Company (JECC), financial Brookings Institution. assistance, and a variety of state-sponsored co- Fransman, M. (1995) Japan’s Computer and Communica- operative research and development projects. tions Industry, Oxford: Oxford University Press. These policies were critical in helping the indus- Lincoln, E. (1999). Troubled Times: U.S.-Japan Trade Re- try create a competitive hardware industry by the lations in the 1990s, Washington, DC: Brookings In- late 1970s. stitution Press. Protectionism included conventional tariffs Lynn, L.H. and McKeown, T.J. (1998) Organizing Busi- and quotas, but also a variety of limitations on ness: Trade Associations in America and Japan, Wash- foreign investment, which influenced the type and ington, DC: American Enterprise Institute for quantity of machines IBM could produce in Ja- Public Policy Research. pan, how much it had to export, how many parts Odagiri, H. (1994) Growth through Competition, Competi- it could import, and how much profit it could tion through Growth: Strategic Management and the repatriate. IBM only got permission to produce Economy in Japan, Oxford: Oxford University Press. in Japan when it agreed to license its patents at Schumpeter, J. (1976) Capitalism, Socialism and Democracy, reasonable royalty fees to local firms. Similar re- New York: Harper Torchbooks. strictions constrained the activities of Sperry Rand Tilton, M. (1998) “Regulatory Reform and Market (UNIVAC computers), which was forced into a Opening in Japan,” in M.Tilton and L.Carlile (eds), joint venture with Oki Electric, as well as other Is Japan Really Changing Its Ways? Regulatory Reform US players such as Hewlett-Packard. While pro- and the Japanese Economy, Washington, DC: tectionism usually leads to sluggishness and inef- Brookings Institution Press. ficiency domestic competition was encouraged, MARK TILTON requiring that firms make increasingly better machines in order to stay in business. The result was increased demand for domestic machines, computer industry which stimulated supply. The JECC was set up in 1961, and about 50 percent of its financing came from government Introduction low-interest loans. It worked in the following way: Japan is the only nation other than the USA to when a user decided which specific machine it develop a competitive computer industry. With wanted to rent, it told JECC, which bought the heavy state support in the 1960s and 1970s, Japa- machine from the designated maker and rented nese firms were able to become world leaders in it to the user for a reasonable monthly fee. The computer hardware. Their weakness has been in user had to keep the computer for at least 15 software, and like IBM, they missed the trend months or pay a penalty When a machine was toward downsizing to smaller computers in the returned, the computer maker was forced to relate 1980s. Japanese firms took over or formed purchase it at book value from JECC. The effect key partnerships with Europe’s top computer was to give Japanese domestic computer firms makers in the 1980s and 1990s and today sup- an immediate return on their investment. If the ply the world with advanced computer hardware firms had had to finance their own rentals, they and components. would have received returns in small monthly payments over a 4 year period. Since JECC only purchased machines users specifically asked to The 1960s and 1970s rent, there was a direct link to the market. If no one asked for your machine, JECC did not buy The Japanese computer industry started to de- it. Thus, the firms making the best machines got velop in the 1960s, largely as a result of govern- the most benefit from JECC. From 1961 to 1981 ment initiative. To help nurture a domestic the government funneled some 12 billion in loans 78 computer industry

into JECC to finance computer rentals. JECC firms and MITI decided to focus on a specific still exists today but rents only a small percent- niche market: memory semiconductors or age of the total number of rented machines. DRAMS, which were in great demand for use in State financial aid to the computer industry calculators and watches. The technological tra- came in various forms. The absolute amount of jectory was stable for these chips, they were subsidies, tax benefits, and low-interest loans has highly sensitive to production economies of been quite small compared to the huge sums the scale, and success depended on high-quality USA funneled into Pentagon projects. But the process technology and attention to manufactur- amounts were very large compared to what the ing detail, areas where Japanese firms have tradi- firms were investing themselves. For example, a tionally excelled. Japanese firms did not get conservative estimate suggests that from 1961–9 heavily involved in developing microprocessors, subsidies and tax benefits ($132 million) were so-called systems on a chip. Microprocessors equivalent to 46 percent of what the computer have a very heavy software component, an area firms themselves were investing in R&D and plant where Japan continues to lag. and equipment. If we include government low The success of policies toward hardware in interest loans, total aid ($542.8 million) was equal the 1960s and 1970s was undoubtedly depend- to 188 percent of what the firms were investing. ent on several conditions. Most important was Indeed, the state was also providing funds for that while the firms were protected from interna- working capital. From 1970 to 1975, subsidies and tional competition, domestic competition was tax benefits ($636.55 million) were equivalent to strongly encouraged. Even though cooperation 57 percent of what the firms were investing, 169 was sub-stantial on products, investment, and percent ($ 1.88 billion) if we include government R&D, market forces were kept intact enough to loans. Software and hardware were formally lib- force the firms to advance technologically and eralized in the mid-1970s yet from 1976 through cut costs in order to survive over the long term. 1981 subsidies and tax benefits ($1.03 billion) A broad societal consensus to allow the bureauc- were still 25.2 percent of what the firms were in- racy to decide what industries to target was also vesting; including state loans, total aid ($3.74 bil- critical. So was a stable institution—the Ministry lion) was still equal to 91.6 percent of what the of International Trade and Industry (MITI)— firms were investing. which had consistent policies that did not Various cooperative R&D projects, mainly fo- change with each new administration. A rela- cused on catching up with IBM, were conducted tively large domestic market in which to gain in the 1960s and 1970s. Their overall effect was economies of scale was important as was access to reduce the costs and risks of doing R&D by to foreign markets for technology and to sell pooling resources and sharing R&D results. The products. Overall macro-policies that encour- VLSI Project (1976–79) and the New Series aged savings and investment and discouraged Project (1972–76) were key projects that helped consumption enabled Japan to remain independ- Japanese firms, especially the three dominant ent of foreign loans while still investing heavily companies—Fujitsu, Hitachi, and NEC—catch up in strategic industries. with IBM in hardware by the late 1970s. Software was not subsidized much in the Success in hardware was contingent on nur- 1960s and 1970s and the aid it received was gen- turing a competitive semiconductor industry erally not very effective. The real focus was on The R&D cooperative computer projects all in- hardware not software. The firms essentially volved making advances in semiconductor tech- used modified versions of foreign software. nology. Other policies also helped nurture the Hitachi and Fujitsu, for example, decided in the world’s most advanced memory makers, includ- early 1970s to make IBM clones, but they modi- ing heavy-handed state intervention to handicap fied the IBM hardware and software enough to foreign semiconductor makers, such as Texas In- lock customers into their closed, incompatible struments, Motorola, and Fairchild in the 1960s standards. NEC had technological ties with and 1970s. With US makers focusing on bipolar Honeywell, but also created its own closed semiconductors in the early 1970s, Japanese standard. computer industry 79

The 1980s realizing they were falling further behind in software, chose the latter path. Fujitsu and Hitachi’s strategy of “borrowing” IBM’s software backfired in summer 1982 when they were caught stealing IBM technology in an The 2000s FBI sting case. This meant the free ride on IBM was no longer free. The firms now had to pay In 2000, Japanese firms are still hoping for open huge annual licensing fees to IBM. From then source solutions to prevent the total dominance on, the firms tried to diversify their reliance on of operating systems by Western firms. The com- IBM’s mainframe standard. In the 1980s, there puter firms are offering machines with the free- was a strong move toward UNIX-based systems of-charge Linux operating system on them, and an attempt to create a unique Japanese oper- though most experts believe Linux is too user- ating system standard called TRON. This latter unfriendly to become prevalent. The government pursuit, overly ambitious, was not successful is much less involved in the industry than in the though it still exists today past but Japan’s lag in software, massive parallel It was also in the early 1980s that Japan’s three processing, and the Internet has led to an explo- top makers moved into supercomputers, initiated sion of state-sponsored projects in these and other by the government in a fully-funded R&D coop- related areas. erative project. By the early 1990s, they were very Many argue that Japan’s efforts to support the competitive in traditional vector supercomputers computer industry have not been successful be- for certain types of applications. They have been cause Japanese firms do not currently dominate less successful at making massive parallel process- the world computer market. It is true that Japa- ing machines, but are aggressively researching this nese firms have not taken over these markets. area. But their success in semiconductors, supercomputers, and the overall components of most computers is providing the nation with bil- The 1990s lions of dollars in revenues and positions them well for success in the future. Computer knowl- By the 1990s, Japan’s mainframe makers, like edge has also been key to their success in related IBM, were caught with big machines when de- areas such as computer-operated numerically- mand soared for smaller computers. They were controlled machine tools and telecommunications slow to downsize and restructure their operations, equipment. Indeed, other than the USA, Japan is but were kept afloat by their telecommunications, the only nation competitive in a wide array of semiconductor, and consumer electronics divi- high-tech computer-related products. sions. At this same time the firms’ strategy of us- It is clear, however, that other late developing ing closed standards to lock users into their nations such as South Korea and Taiwan have respective brands began to haunt them. The assiduously studied Japan’s industrial and cor- market’s dependence on fragmented, non-com- porate strategies. With significantly lower wages, patible standards denied users the positive net- they are beginning to take market share from Ja- work externalities that come with using common, pan in key components such as memory chips. compatible standards. To make the jump from success in hardware to Concern over their growing lag in computer software, telecommunications, and internet tech- software reached crisis proportions in the 1990s, nologies, Japan needs to make a transition from especially as the Internet and other software-re- a manufacturing superpower to a more invention- lated industries emerged. The software industry oriented nation. Making this leap involves dis- was at a crossroads: it could continue offering mantling some of the institutional arrangements closed, modified versions of foreign standards or that helped Japan catch up with the West but unbundle (sell hardware and software separately) which now hinder its transition to a more inven- and embrace open, internationally-accepted tor and entrepreneur friendly system. These ar- standards. The firms, users, and the government, rangements include the bank-centered financial 80 construction industry

system, the main bank system of corporate Japan’s construction industry is convention- governance, the keiretsu industrial groups, and ally divided into two sectors: kenchiku (building, various employment practices such as lifetime which is the larger sector and includes office build- employment and seniority wages. Unfortunately ings, factories, schools, and housing) and doboku Japan needs to make this change at a time when (civil engineering, which includes dams, bridges, it is experiencing its deepest and longest postwar roads, and other infrastructure projects). The dis- recession. There is an acute awareness of the need tinction is long-standing: statistics on the construc- to change but vested interests and a weak finan- tion industry and individual company revenues cial system mean change will be slow. are both presented in terms of the two categories. The market is also divided into two catego- See also: software industry; telecommunications ries: public (national, prefectural, and local industry governments) and private (corporations and individuals). The public sector is the primary market for civil engineering projects, although private Further reading firms such as railway companies and real estate development firms also fund major infrastructure Anchordoguy M. (1989) Computers, Inc.: Japan’s Chal- projects. Public expenditure on construction has lenge to IBM, Cambridge, MA: Harvard University long been one of the main tools of economic Press. policy in Japan: government spending on con- ——(1994) “Japanese-American Trade Conflict and struction rises in economic downturns, with the Supercomputers,” Political Science Quarterly 109 (1): goal of stabilizing employment and stimulating 35–80. related industries such as steel, cement, and trans- ——(1997) “Japan at a Technological Crossroads: Does port. In the 1980s and the 1990s, the public sec- Change Support Convergence Theory?” Journal of tor accounted for just over one-third of Japanese Studies 23:363–97. construction spending (with the notable excep- ——(2000) Japan’s Software Industry: A Failure of In- tion of the construction boom of the bubble stitutions?” Research Policy 29:391–408. economy; in 1990, at its peak, private sector con- MARIE ANGHORDOGUY struction accounted for nearly 80 percent of the total). The structure of the industry is complex: there construction industry are almost as many establishments engaged in construction (over 650,000 in the late 1990s) as Construction is Japan’s largest industry account- there are in manufacturing (770,000). These range ing for approximately 15 percent of GDP at the in scale from the top general contractors, with close of the twentieth century and equivalent in thousands of highly qualified engineers and ar- absolute size to the US and Western European chitects, to one-man subcontracting operations construction industries together. With over 10 engaged in traditional carpentry. Many accounts percent of the nation’s labor force, it is the of the industry call it a “two-tier” industry di- country’s largest employer, with more than twice vided into modern, technologically and as many workers as the auto and electronics in- managerially sophisticated general contractors on dustries combined. In contrast to those highly the one hand and small-scale traditional subcon- competitive industries, however, the construction tractors on the other. But the industry structure industry has, since the late 1980s, been portrayed is far more complex than this suggests. The prin- in Japan and abroad as the epitome of the worst cipal industry association for construction, the features of the Japanese business system: pro- Japan Federation of Construction Contractors tected, overmanned, costly and corrupt. And yet, (Nihon Kensetsu-gyoo Dantai Rengookai), has a mem- the leading construction firms also exhibit some bership of ten further specialized associations (in- of the strengths associated with the best of Japa- cluding associations for civil engineering, nese industry: quality control, technical innova- building, electrical power con struction, railway tion, and reliability. construction, and so on) and seventy individual construction industry 81 companies, the largest firms in the industry. At sive and proactive growth, which included en- the top of the industry status hierarchy are the gaging in project development (such as resort de- top twenty-three firms, identified in the many in- velopment, partnering with real estate firms in dustry guides published in Japan in terms of three speculative building, and project financing), prop- categories: the Big Five (oode—Kajima, Ohbayashi, erty management (especially through build-and- Shimizu, Taisei, and Takenaka), which for a dec- lease projects), and international expansion ade from the mid-1980s to the mid-1990s became (Hasegawa 1988). The bubble economy in which the Big Six (with Kumagai temporarily rising from Japanese private investment in construction the next category); nine (or ten) “Quasi-Big” (jun- boomed, reinforced these aggressive strategies, oode) firms, and nine or ten medium-ranking and when the bubble burst in the early 1990s, (chuuken) firms. most construction firms were carrying large All of the top twenty-three firms trace their amounts of debt and were committed to projects origins to the Meiji period (1868–1912) or ear- whose economic value had suddenly plummeted. lier (Shimizu began in 1804, and Kajima in 1840). In the 1980s, however, the top general con- When Western construction technology was in- tractors seemed well positioned to become more troduced to Japan in the 1860s and 1870s, local global players, like their manufacturing counter- construction houses served as subcontractors on parts, and for some of the same reasons. Japa- projects such as railways, factories, and new gov- nese general contractors had followed their ernment buildings. They were able to draw on manufacturing clients in adopting quality control capabilities accumulated on construction projects programs (in 1979, Takenaka was the first of sev- in the previous era, including castles, road-build- eral contractors to win the Deming Prize for qual- ing, temples, and land reclamation, which in- ity). They invested more in technology volved both relatively advanced construction development than most of their foreign counter- techniques and complex social organization, in- parts: the top 20–30 general contractors main- cluding subcontracting. Well before the Second tained substantial R&D centers, and although World War, the largest of the construction houses construction accounted for only about 2 percent moved from the traditional household-based en- of the country’s total R&D expenditures, this was terprise to more modern forms of the incorpo- significantly higher than in any other nation. rated enterprise, including the publicly-listed joint Research areas in which Japanese general con- stock company although the founding families tractors made impressive contributions included continued to own most of the company. Indeed, tunneling, construction robotics, building mate- to this day a distinctively large number of con- rials, and earthquake protection. In 1986, 15 per- struction companies are dozoku-gaisha—family- cent of the country’s engineering graduates went linked companies—where the founding family into the construction industry Their investments members own significant blocks of shares and in construction technology were a major asset in have preferential access to top management posi- winning public works contracts internationally tions. in the 1980s. But they also were often able to Most of the leading construction firms ex- draw on low-cost financing from Japanese banks panded their activities into Japan’s growing Asian and trading companies, a more controversial colonial possessions before or during the Pacific source of competitive advantage. War. Defeat, however, focused their activities on The leading general contractors also had an rebuilding Japan’s infrastructure. The high- advantage in internationalization because of their growth era was a golden age for the construction close relationships with their Japanese clients. As industry and even after the first oil shock in 1973 Japan’s manufacturing firms expanded their pro- construction spending remained at a high level. duction facilities abroad, they turned to the gen- The second oil shock in 1979, however, ushered eral contractors with whom they worked in Japan in what industry leaders called the “winter era,” to build their plants abroad. Japanese large-scale when profits fell, competition intensified, and the building projects have followed a “design-and- outlook for the industry appeared gloomy Japan’s build” model, in which a contractor’s internal staff leading firms began to adopt strategies of aggres- of highly trained architects and designers develop 82 construction industry the design and its managers then supervise the tions, and in 1987 Congress voted to exclude construction process. This has several advantages Japanese firms from bidding on federally funded over the “design-bid-build” model prevailing in construction projects. Japan moved slowly to ad- the USA and elsewhere, in which one firm pro- dress these concerns, and construction remained duces the design and the client then solicits bids a major issue for negotiations through the mid- from other companies for the actual construction. 1990s, when domestic reform pressures on the “Design-and-build” fosters the integration of inflated costs of public works and Liberal building design and the construction process, in Democratic Party (LDP) corruption became ways comparable to the “design for the main force for change in public works con- manufacturability” characteristic of Japanese tracts. Prosecutions of the leading general con- product design, and it enables a contractor to keep tractors for bid-rigging became more aggressive within the agreed parameters of cost and sched- in the late 1990s, and in September 2000 a major ule. Foreign companies contracting with Japanese Fair Trade Commission inquiry targeted thirty general contractors for buildings in Japan have major construction firms, including the top three been pleasantly surprised by the absence of con- general contractors. struction delays and cost overruns. Critics of the The pressures on profit margins in public model suggest, however, that it has produced un- works, the slow but steady contraction of expen- imaginative buildings and that clients have paid ditures during the long economic slowdown of more than they would under a more competitive the 1990s, and the huge debt overhang from the system. But Japanese firms accustomed to the “de- aggressive investments of the bubble years have sign-and-build” system often preferred to work all combined to make construction one of Japan’s with Japanese contractors when they planned pro- most troubled sectors. The Big Five have been duction facilities abroad (Ohbayashi, for exam- quicker to restructure and rationalize than some ple, was the designer and contractor for Toyota’s of the companies immediately below them in the Kentucky plant). industry hierarchy and they are likely to survive As Japanese construction firms became more and even flourish. But bankruptcies have been active abroad in the mid-1980s, and even began increasing among construction firms, and may to win public works contracts in the USA (such become the dominant vehicle for the badly as the mid-1980s subway contracts in Los Ange- needed restructuring of the industry. les and Washington, DC), US firms sought to No discussion of construction in Japan would counter by competing in the Japanese market. be complete without some mention of housing. But they faced formidable obstacles. Japanese Because about 15 percent of housing construc- public works contracts worked on a system of tion is of prefabricated units, and because even designated bidders, in which firms had to gain conventional housing construction often uses prior approval to submit bids, based on a com- manufactured sub-assemblies like unit baths, plex array of criteria that included past project housing in Japan straddles construction and performance on Japanese projects and R&D ex- manufacturing. Japan leads the world in manu- penditures. Newcomers could rarely qualify factured housing (that is, modules and Moreover, the dango system, in which compa- subassemblies built in factories and shipped to nies agreed in advance on which company and assembled on site). Sekisui House, for ex- would submit the low bid, constituted a corrupt ample, produces 50–60,000 units per year at five practice under American law. So did the system factories located throughout Japan. whereby winning contractors on public works Homebuyers can customize their house by were expected to make political contributions at choosing various frames, floor plans, colors, and the local or the national level that were roughly so on. Prefab housing in Japan is not the low-end proportionate to the size of the contract. On the sector that it is in most countries; prefab housing grounds that such practices constituted unfair companies cater to middle and upper-middle in- trade barriers, American engineering firms and come customers. In contrast to the century-old US politicians made the opening of Japan’s con- general contractors, Japan’s leading housing struction market a major issue in trade negotia- com panies were established in the 1960s and consumer movement 83

1970s. Prefab housing in Japan has the advan- regulations impeded competition, bolstered cor- tage of speedy construction, important in a porate profits, and increased price levels in sec- country where many customers are rebuilding tors as diverse as retail and construction. Yet on the site of the old homes. It does not, how- Japanese consumer groups did not oppose most ever, have a significant price advantage over a of these policies, and actively supported many of house custom-built by a local contractor, al- them. though many argue that it has a quality advantage. Prefab housing firms also differ from the Postwar history general contractors in having significantly higher profit levels. The postwar consumer movement grew out of groups of housewives joining together, often for See also: Ministry of Construction the practical purpose of collective purchases rather than for any larger political goal. Con- Further reading sumer groups focused on lifestyle issues, and channeled their energy more at the local level Coaldrake, W. (1990) The Way of the Carpenter: Tools and than the national. The most prominent consumer Japanese Architecture, Tokyo: Weatherhill. group, the Housewives’ Federation (known as Hasegawa, S. and the Shimizu Group FS (1988) Built Shufuren), started in 1948 by protesting faulty by Japan: Competitive Strategies of the Japanese Construc- matches. Shufuren then developed its own labora- tion Industry, New York: Wiley. tory to test products for quality safety and truth Levy S.M. (1990) Japanese Construction: An American Per- in labeling. It launched campaigns to ban addi- spective, New York: Van Nostrand Reinhold. tives from pickled radish (takuan), to strengthen ——(1993) Japan’s Big Six: Inside Japan’s Construction In- labeling requirements for juice packages, and to dustry, New York: McGraw-Hill. crack down on companies marketing whale and Woodall, B. (1996) Japan Under Construction: Corruption, horse meat as beef. Shufuren and other groups Politics, and Public Works, Berkeley CA: University of consolidated their gains with a new law on label- California Press. ing and marketing standards (futokeihinrui oyobi ELEANOR D.WESTNEY futohyoji boshiho) in 1962. Consumer groups were not always successful in specific cases, but by consumer movement mobilizing public opinion and establishing consumer protest as a credible threat they fostered a Japan’s postwar economic system has often been phenomenal increase in the scope and stringency referred to as a “producer” system, yet Japan has of health and safety regulation. a large and well-organized consumer sector as By the 1960s, consumer groups had not only well. Consumer groups have successfully lobbied achieved some notable breakthroughs, but had for stronger health and safety regulation, espe- gained an institutionalized role within the policy cially with respect to food. More surprisingly process. In 1968, the government passed the Con- however, Japanese consumers have crusaded sumer Protection Law (shohisha hogo kihonho), set- against trade liberalization and economic deregu- ting forth government and corporate lation, policies which economists would expect responsibilities in responding to consumer con- to improve consumer welfare substantially Only cerns and creating a cabinet-level Consumer Pro- in recent years have consumer groups become tection Council (shohisha hogo kaigi). The somewhat more favorable toward economic lib- government also cultivated a national network eralization (Vogel 1999). of semi-public consumer information centers Japan’s postwar system favored producers over (kokumin seikatsu sentaa). consumers in many ways: financial regulation Consumer groups became even more aggres- kept deposit interest rates below market levels, sive in the late 1960s and 1970s, challenging cor- trade barriers allowed domestic producers to porations directly through public denunciation, charge higher prices, weak antitrust policy al- product boycotts, and law suits. In 1969, a lowed price cartels, and a wide range of economic disgruntled former Agriculture Ministry official 84 consumer movement

by the name of Takeuchi Naokazu joined others Since the 1980s, economists, business execu- to found Japan’s most outspoken consumer group, tives, and political leaders have campaigned for the Consumers Union of Japan (Nisshoren). Nisshoren deregulation, stressing that it could bring huge insisted on political neutrality refused government benefits for consumers. Yet the consumer groups financial support, only enlisted private individu- themselves have been less than enthusiastic. They als as members, and brought denunciation into strongly opposed the privatization and deregula- the strategic arsenal of the consumer movement. tion of telecommunications and rail transport and In 1969, for example, it launched a campaign other central pillars of the administrative reform against cola—which it felt was unhealthy and per- program in the 1980s, and they resisted many haps even dangerous—by publicly accusing Coca- elements of the deregulation drive in the 1990s. Cola Japan of violating Japanese laws regarding Of course, one would expect consumer groups foreign firms’ activities in Japan. In 1970, consumer to oppose the abolition of regulations designed groups boycotted color televisions in protest of to ensure the safety and quality of products. But manufacturers’ dual-pricing schemes. The groups Japanese consumers have also refused to support, argued that manufacturers published official prices and in some cases have directly opposed, the re- far above the actual prices charged by most retail- moval or relaxation of economic (price and en- ers, and that manufacturers and retailers used this try) regulations—precisely the kind of deregulation system to get less savvy customers to pay the higher that should benefit consumers the most. Con- prices. The boycott resulted in a sharp decline in sumer groups have even resisted retail deregula- sales, and the government eventually convinced tion, which should directly benefit consumers by manufacturers to lower their prices. Although con- bringing down retail margins. They argue that sumer groups were generally less successful in price is not everything, and that deregulation court, they used lawsuits to publicize their con- would not only hurt small retailers but could wipe cerns and thereby alter corporate behavior. out entire neighborhood shopping districts. Particularly surprising, especially from an American perspective, is the consumer groups’ Consumers vs. liberalization strong opposition to marketing promotions such When the Japanese government announced an as gifts and coupons. These groups lobbied hard ‘Action Program” to open its market in 1985, the to restrict these promotions in the 1970s, and they major consumer groups united in opposition, ar- have strongly fought off appeals to remove the guing that the program would sacrifice consumer restrictions in the 1990s. The US government protection to appease the USA. They fought most has requested the removal of these restrictions, vigorously against agricultural liberalization, cit- but consumer groups see this as US interference ing three primary concerns: liberalization would in Japan’s internal affairs that would only give undermine food self-sufficiency increase the risk unfair advantages to those large firms that can of contamination or disease, and threaten the live- afford promotions. lihood of farmers. The Japanese consumers’ So why have Japanese consumer groups re- stance contrasts markedly with that of similar sisted market liberalization that should enhance groups in other countries that have supported their economic welfare? With the overwhelming trade liberalization. Public opinion polls through- drive to catch up with the West, Japanese con- out the 1980s and 1990s have shown strong pub- sumers willingly subordinated their short-term lic support for agricultural protection. Consumer interest in lower prices and greater choice to na- groups have also reinforced trade protection by tional goals of economic growth and military demanding tough regulatory standards that ef- strength. Throughout the period of war mobili- fectively discriminate against imports. David zation, the Second World War, and recovery the Vogel has demonstrated that although consumer government actively sought to shape consumer groups have pushed for tough standards for both preferences that would support these goals, or- domestic and foreign products, they have been ganizing massive campaigns to increase savings particularly zealous in blocking imported prod- (hence to suppress consumption) and to buy only ucts (Vogel 1992). domestic products (Garon 1997). And the con- consumer movement 85

sumer groups themselves actively collaborated gave government ministries a pretext to limit com- in this effort. Through participation in national petition and bolster corporate profits by advo- campaigns and other activities, moreover, con- cating a heavy hand of regulation overall. sumer groups built up allegiances with other groups, including farm groups, trade unions, op- Signs of change? position parties, and environmental groups. Many of the local chapters of consumer organizations In the early 1990s, consumer groups turned their work directly with farm groups, especially the attention to pushing through the Product Liabil- rural cooperatives, and thus feel bound by mu- ity Law of 1994. The Consumers Federation of tual ties of obligation. Other groups work closely Japan (Shodanren), a liaison organization for thir- with the traditional opposition parties. The Ja- teen of the biggest consumer groups, organized pan Women’s Conference (nihon fujin kaigi), for a special national liaison committee to mobilize example, is allied with the Social Democratic public support and coordinate appeals to govern- Party of Japan, and the New Japan Women’s ment ministries and political parties. Consumer Association (shin nihon fujin no kai) with the Japan groups were also influential in pushing through Communist Party. These groups have been es- a US-style information disclosure law in 1999. pecially reluctant to embrace measures such as In recent years, consumer groups have begun trade liberalization and deregulation that might to develop new attitudes, albeit very slowly Most threaten labor unions, the core constituents of groups remain opposed to further agricultural lib- these parties. eralization, but they have shifted from staunch The Japan Consumer Cooperatives Union opposition to deregulation to a more nuanced (Nisseikyo), by far the largest consumer organiza- stance: they welcome the elimination or relaxation with 16 million members, is both a consumer tion of those regulations simply designed to pro- group and a major retailer in its own right. Con- tect industry, yet remain concerned that sumers join cooperatives to benefit from lower deregulation should not unduly disrupt social sta- prices or to gain access to products, such as or- bility Meanwhile, consumers at large have sub- ganic produce, but Nisseikyo plays a political role stantially altered their behavior in the as well. It generally has not opposed trade liber- marketplace. With the prolonged recession and alization—although it has not supported it either— the strong yen, Japanese consumers have become and it does sell imported fruits and vegetables more price sensitive, fueling a boom in discount- despite objections from other consumer groups. ers and a real decline in retail prices. Although Yet when it came to liberalizing the rice market, they did not support deposit interest liberaliza- Nisseikyo stood with the other groups, unified in tion or import liberalization, consumers have opposition. In recent years, another network of taken advantage of these changes in their sav- consumer cooperatives, known as Lifestyle Clubs ings and purchasing behavior. Over time, con- (seikatsu kurabu), has become active in politics, run- sumers’ changing economic behavior appears to ning its own candidates for local office and pro- be affecting their political role, if ever so slightly moting political participation with an emphasis as they have become less staunchly opposed to on local issues (Estevez-Abe and Gelb 1998). market liberalization. To understand why Japanese consumer groups did not reverse Japan’s “producer” system, we See also: consumption tax; Large Retail Store must recognize that consumer groups advocated Law 1974; marketing in Japan; pricing practices; policies that supported this system. They sup- retail industry; superstores; trade barriers; trade ported industrial investment by campaigning to negotiations increase savings; they complemented industrial policy by pushing for higher product quality Further reading standards; they reinforced trade protection by urging consumers to buy Japanese and by de- Garon, S. (1997) Molding Japanese Minds: The State in manding health and safety regulations that dis- Everyday Life, Princeton, NJ: Princeton University criminated against foreign suppliers; and they Press. 86 consumption tax

Gelb, J. and Estevez-Abe, M. (1998) “Political Women zation of income standards, the diversification of in Japan: A Case Study of the Seikatsusha Net- consumption patterns, the larger share of service work Movement,” Social Science Japan Journal consumption, the aging of the population and so 1:263–79. forth. In addition to these conditions, increases Kokumin Seikatsu Kenkyu (People’s Life Studies) (1994–6). in expenditures and a budget deficit fostered the Maclachlan, P. (1999) “Turned Away at the Gate: The idea that a broader range of people should share Politics of Postwar Japanese Consumerism,” manu- the basic burden of paying for the maintenance script. costs of society. The consumption tax, which is Vogel, D. (1992) “Consumer Protection and Protec- supposed to bear widely and evenly for consump- tionism in Japan,” Journal of Japanese Studies 18:119– tion, was considered to be a match for the idea 54. and to ensure more stable tax revenue than do Vogel, S. (1999) “When Interests Are Not Preferences: direct taxes such as income tax and corporation The Cautionary Tale of Japanese Consumers,” Com- tax, under which revenue strongly fluctuates ac- parative Politics 31:187–207. cording to the business cycle. Taxable items under the consumption tax are STEVEN VOGEL asset transfers made by enterprises within the country and imported goods (foreign goods re- consumption tax ceived from bonded areas). Asset transfers includes sales and leases of assets, and provision of The consumption tax is a Japanese version of the services. In other words, the tax is levied on con- European value-added tax (VAT). It was intro- sumption of goods and services and charged by duced in 1989 by the Tax Reform Act of 1988 sellers at the time of the sale of goods or services. and has come to be one of the main taxes within Taxpayers are enterprises and importers and, pe- the Japanese tax system, accounting for about 20 riodically they must total the tax collected on percent of total national tax revenue. sales, deduct from this the tax paid on purchases In order to cope with a budget deficit, the ag- and pay the balance to the tax authorities. As a ing of society and internationalization of the Japa- result, consumers ultimately bear the tax. The nese economy fundamental tax reform had tax bases are the counter-value of the transfers of become inevitable since the middle of the 1980s. assets and delivery value at the time of import. As part of the government’s efforts to reform the The tax rate is 5 percent, including a 1 percent tax system, the Tax Reform Act of 1988, one of local consumption tax. The rate was raised from the major tax reform acts, was enacted under the initial 3 percent in 1989 to 5 percent in 1997 by slogan of “tax reform to meet the time of aging the Tax Reform Act of 1994, which introduced society and internationalization of the economy” the local consumption tax at the same time. The main points of the Act were reduction and The following transfers of assets are exempted rationalization of the income tax burden, meas- from taxation in terms of non-consumption or ures for more equitable distribution of the tax social policy: sales and leases of land, sales of burden, reduction of the inheritance tax, funda- securities and means of payments, interest on mental reform of indirect taxes including the in- loans and insurance premiums, sales of postal and stallation of the consumption tax, and reduction revenue stamps, fees for government services, for- of the corporate tax. Besides coping with the prob- eign exchange, medical care covered under the lems touched upon above, the aims of the Act medical insurance laws, social welfare services, were to develop an optimal tax system, balanc- burial and crematory services, educational serving income, consumption, property and other tax ices and so forth. revenue areas, and to secure stable and sufficient There are some special rules for small enter- revenue. prises, which were introduced in order to weaken A fundamental reform of indirect taxes was their opposition to the consumption tax. First, needed in the context of social and economic de- small enterprises whose taxable sales during the velopments such as the increase and the equali- base period are less than ¥30 million are exempt contract employees 87 from the tax. However, this rule is not applied to the issue of transparency will certainly be raised newly established corporations with equity capi- again. tal of ¥10 million or more. Second, small enterprises whose taxable sales during the base period Further reading are ¥200 million or less can choose to use the product of the consumption tax associated with Ishi, H. (1993) Japanese Tax System, 2nd edn, Oxford; final sales and the deemed rate of purchases as Tokyo: Clarendon Press. the consumption tax associated with purchase. Kato, J. (1994) The Problem of Bureaucratic Rationality: Tax The deemed rates are 90 percent for wholesal- Politics in Japan, Princeton, NJ: Princeton Univer- ers, 80 percent for retailers, 70 percent for manu- sity Press. facturers, 60 percent for others, and 50 percent JETRO (2001) Illustrated Guides: Taxation Laws, Tokyo: for services. This rule, which was designed to Japan External Trade Organization. decrease the task of tax filing for small enterprises, Ministry of Finance (2000) An Outline of Japanese Taxes, is called the simplified taxation system. Tokyo: Printing Bureau, Ministry of Finance. Since the consumption tax is a value-added ——(2001) Outline of the Consumption Tax System, http:// tax levied at each stage of distribution of goods www.mof.go.jp/english/zei/report/ zc001e05.htm. and services, the tax already paid in the former HITOSHI HIGUGHI stage is deducted. In other words, the consumption tax paid on purchase is deducted from the consumption tax collected on sales by enterprises contract employees on the basis of its accounting records. It is has been said that using invoices is the most accurate Also known as non-regular employees (the com- method for determining the added value, and mon term in Japanese is shokutaku shain), the term thus the amount of tax, and that this system also can also be applied to part-time and temporary guarantees an open relationship between the tax workers, though there are distinctions among the authority consumers, and distributors in terms three types. Each type will be discussed in greater of filing taxes and of incorporating the tax in depth below. Contract employees are distinguish- prices. However, an accounting method that used able from regular or permanent employees in that bookkeeping without invoices was introduced in the former do not have full membership in the Japan in order to appease small enterprises that organization, that is, they do not have access to had feared their accounts would become too security (lifetime employment), seniority promo- open, and also above board. The new method tion or union membership. Moreover, the full has attracted widespread criticism. According to range of allowances and non-salary compen- Kato (1994), for example, the Rengo (Union of sation may also be outside their contracts. Con- Japan Private Labor Unions) argued that under tract employees constitute an important segment the new method it was difficult for the tax au- of the total work force in Japan. They often serve thority to ascertain if distributors were manipu- as a buffer within the labor force, their work hours lating transaction records or keeping inaccurate expanding or shrinking based on the temper of records in their accounting books and not filing the economy. the taxes that consumers had paid. Although all Contract workers usually work on one-year taxpayers are required by the Tax Reform Act of renewable contracts. Though they lack full ac- 1994 to keep books plus business invoices, it is cess to the benefits of affiliation that permanent still said to be insufficient. In addition, the above- employees enjoy it is the custom to receive a va- mentioned measures for small enterprises have riety of allowances and benefits. Contracts are made the consumption tax more opaque and usually renewed automatically and many work- problematical, because they may allow small en- ers have lengthy tenures with the firm. Except in terprises to collect a “subsidy” or “profit tax” extreme situations non-renewal of contract is a (ekizei) from consumers. When the issue of rais- rare occurrence. ing the consumption tax comes up in the future, Temporary workers are those persons who 88 contracts work on contracts ranging from three to nine vary in contents and characteristics. The civil months. Their position in the firm is a level be- code of Japan stipulates thirteen types: gift, sale, low that of contract workers. Contracts may be exchange, loan for consumption, loan for use, renewed somewhat automatically but there lease, contract of employment, contract for tends to be greater mobility among this segment work, mandate, bailment, association, life annu- of the workforce, with some workers wanting ity and compromise. The civil code provides greater freedom to move to other firms should a substituting rules for the case where concerned good opportunity present itself. During down parties do not specify rules between themselves. cycles, these workers are much less likely to When they do so, they may establish rules dif- have their contracts renewed. Indeed, some ferent from the civil code, on condition that their firms in the manufacturing sector confronted rules are not against public order and good mor- with cyclical patterns of demand rely on tempo- als. rary workers to buffer their permanent labor A bilateral contract refers to a contract such force. as a sale, under which both parties assume a claim Part-time workers are predominantly female and an obligation. A unilateral contract is one and work less than forty hours a week, though it such as a gift, under which only the donor is is not unusual for them to work more than forty under obligation to transfer whereas the donee hours per week during certain times of year or in is exempt from obligation. Onerous contract re- response to short-term pressures. Part-timers are lates to one with enumeration, and gratuitous overwhelmingly female. An OECD study esti- contract without. mated that females comprise 75 percent of the The consensual contract, the predominant part-time labor force. Part-timers are not to be form of contract, comes into existence once dec- confused with arbuaito (a Japanization of the Ger- larations of intention accord with each other. A man “arbeit” a term which is generally applied to contract in kind, on the other hand, becomes valid students working side jobs. when the object is actually delivered, such as a loan for consumption, a loan for use, or a bail- See also: lifetime employment; permanent em- ment. ployee The civil code is the general legal framework for contracts, but a number of laws are applied to specific types of contract. A sale between mer- Further reading chants is under the jurisdiction of the Commer- Brown, C., Nakata, Y., Reich, M. and Ulman, L. (1997) cial Code. Especially after the Second World War, Work and Pay in the United States and Japan, New York: a series of enactments and revisions have been Oxford University Press. undertaken to protect the economically weak and Tachibanaki, T. (1996) Wage Determination and Distribu- the interests of the consumer. Examples of such tion in Japan, New York: Oxford University Press. enactments and revisions include Land and Hous- ing Lease Laws, Labor Standards Law, Usury ALLAN BIRD Law, Door-to-Door Sales and Other Direct Sales Law, Installment Sales Law, the Consumer Con- contracts tract Act, and the Law on Sales of Financial Prod- ucts. The contract comes into existence when a prior declaration of intention (an offer) is met by a posterior declaration of intention (an acceptance), Further reading regardless of whether consideration takes place or not. The validity is not affected either by an Oda, H. (1997) Basic Japanese Laws, Oxford: Oxford absence of contract under seal. University Press. The liberty of contract refers to the right to Uchida, T. (1997) Minpou II (The Civil Code, vol. II), freely choose the specific counterpart of contract Tokyo: The University of Tokyo Press. and establish legal relation with it. Contracts Wagatsuma, S., AriizumiT. and Mizumoto, H. (1997) corporate finance 89

Shinban Minpo 2 Saikenho (The Civil Code New Edi- Another key distinction between loans versus tion, vol. 2, Credit Law), Tokyo: Ichiryuusha. market debt instruments is the ability of lenders to exercise control over a borrower’s behavior. KAZUHARU NAGASE To a substantial extent, that ability depends on the number of lenders involved. With bonds or corporate finance other market traded debt, there may be thousands of individuals as well as financial institutions Fundamentally corporations are financed with which own portions of the debt. It is extremely some combination of debt and equity. In Japan, difficult to coordinate such a large number of there has been a tendency to use relatively large lenders, who also have potentially differing finan- amounts of debt, much of it being loans via the cial situations and motivations. In fact, a stand- banking system. Indeed, Japan has been charac- ard procedure for facilitating renegotiations of a terized as having a bank-centered financial sys- firm’s debt position is to buy up most (or all) of tem compared with the more market-based the market-traded debt so that there are a limited system in the USA. Another notable characteris- number of lenders involved in the negotiations. tic is the substantial cross-shareholdings among At the opposite extreme would be a situation Japanese corporations. Progressive deregulation where all a firm’s borrowing is from a single of the Japanese financial system has led to fore- source; for example, a bank. In that situation, casts that the strong role of banks would disap- the firm can reveal information to the bank on a pear and much of the cross-shareholding would confidential basis. The firm and bank can nego- be unwound. While there has been some move- tiate whatever borrowing terms are agreeable to ment, these traditional aspects of Japanese cor- both. Furthermore, such terms can be renegoti- porate finance have remained very important. ated in the future much more easily than if there are many lenders involved. In Japan, an intermediate situation has evolved Debt financing in the form of the main bank system. In essence, Debt comes in a variety of forms, including dif- a firm develops a close working relationship with fering maturities, interest rates which may or one bank (sometimes two), which is referred to may not be fixed over time, and a host of pos- as its main bank. The main bank performs a sible repayment provisions. A particularly im- monitoring function regarding the client firm’s portant characteristic is whether the debt is a behavior. This might involve bank access to con- market-traded instrument such as a bond, or fidential information regarding major proposed whether it is a loan (typically not tradeable). investments and strategic planning at the firm. This distinction is important for the flexibility of The main bank may also provide advice on a terms on the borrowing. With a loan between a wide range of financial issues, including the de- bank (or other financial institution) and some sirability and terms of potential market debt or borrower, all the terms and provisions are poten- equity issues. The intensity of the main bank’s tially negotiable. For a bond or other market involvement is generally viewed as increasing traded instrument (e.g. commercial paper), more with the indebtedness of the client. standardized provisions are needed. In addition, Traditionally other lenders such as other provisions on market instruments are frequently banks and insurance companies have relied on the subject of governmental regulation, at least the main bank’s monitoring to mitigate lending ostensibly to protect investors (possibly indi- risks. Hence, they could lend to a monitored viduals) who may be less sophisticated and have firm (with the main bank’s concurrence) without inferior information compared with financial in- having to acquire as much information. If the cli- stitutions such as banks. Indeed, the information ent firm got into financial difficulties, the main which must be publicly disclosed for a bond is- bank possibly bore substantial responsibility due sue may be sufficiently sensitive that a firm to either inadequate monitoring or poor advice. chooses to borrow via loans rather than disclose This suggests a potential obligation for the main such information. bank to compensate other lenders for its failures; 90 corporate finance a quasi-guarantee of their loans. Indeed, there were also substantial equity issues. Thus by 1990, have been spectacular examples where a main Japanese firms had a much broader set of fund- bank absorbed large losses due to a client’s fi- ing sources available, had substantially lower nancial difficulties while other lenders were debt/equity ratios, and overall were less depend- largely unscathed. On the other hand, there ant on the banking system. have been bankruptcies where the main bank apparently did not compensate other lenders. This illustrates that the main bank’s obligation Equity financing can vary dramatically and ultimately depends on acceptable business practice within the Japa- Japanese equity markets have also provided nese banking community. some marked contrasts with the US situation. It has been argued that the main bank system Prior to 1970, virtually all share issues were developed in response to severely restricted fi- rights offerings to a firm’s existing shareholders nancial markets in Japan. Until the early 1980s, and priced at the stated par value for that firm’s the typical Japanese firm was not allowed to bor- shares. Typically this par value (often 50 yen per row outside Japan. Moreover, it could not issue share) was well below the current market price. market debt instruments (e.g. bonds) in Japan Listing requirements, particularly on the Tokyo without bank permission. There were also restric- Stock Exchange, caused firms to pay (if at all tions on equity issues which made them a rela- possible) annual dividends of at least 10 percent tively unattractive funding source. Rapidly of par value. From a cash flow perspective, these growing firms tend to need substantial amounts two requirements made equity issues an expen- of external funding to supplement their own sive financing mechanism since Japanese interest retained profits, and many Japanese firms were rates have typically been well below 10 percent growing rapidly from the 1950s until the as well as being fully tax deductible for borrow- mid-1970s. During this period, the banks control- ers. led (directly or indirectly) funding for these After the Second World War, there was a confirms. Even if this did not create the main bank fiscation and redistribution of shares from system, it surely enhanced its strength and zaibatsu, large holding companies, to individu- growth. als. This resulted in Japanese individuals owning Around 1975, the average Japanese manufac- roughly 70 percent of all listed shares in 1950. turing corporation was over 80 percent financed However, this percentage has declined markedly with debt (less than 20 percent equity; see debt/ and by 1990 was down to less than 25 percent. equity ratios). Over the next fifteen years, growth In contrast, holdings by financial institutions rates were slower for most Japanese firms; and (primarily banks and insurance companies) as there was a sequential liberalization of finan- well as industrial firms has grown substantially. cial markets in Japan. Access to offshore financ- Often these shareholdings are reciprocal, with ing was also greatly enhanced, and it became an firms owning shares in each other. This includes important funding source. This included not only industrial firms owning shares in banks and vice loans from foreign financial institutions but large versa. Frequently any one firm’s holdings repre- issues of bonds in offshore markets, particularly sent a small fraction of the other firm’s outstand- during the last half of the 1980s. Many of these ing shares. However, a group of such firms can bonds were convertible into equity shares or had collectively have a controlling fraction of the to- attached warrants which allowed future share tal shares. As a simplified illustration, suppose purchase (typically within four or five years) at a there is a group of 20 firms where each firm specified price. In 1987, a domestic commercial holds 3 percent of the shares issued by each of paper market came into existence, where large the other nineteen firms. Collectively 57 percent industrial firms could borrow short term funds of each firm’s shares is held by other group via market-traded instruments. That market members. This effectively blocks unfriendly proved attractive and rapidly grew to a substan- takeovers and merger bidding contests such as tial size. During the last half of the 1980s, there seen in the USA. corporate finance 91

The pattern of cross-shareholding in Japan is collateral on bank loans, and this created serious more complex than that simple illustration and problems for many industrial firms. In some cases, is motivated by more than simply takeover de- firms continued to make payments on loans terrence. Cross-shareholding is prominent within whose principal amounts exceeded the current keiretsu, groups of firms with common interests value of their assets. In other instances, borrow- and/or heritage; for example, descendants of ers defaulted. The effect on the banking system former zaibatsu groups. It has also been used to was disastrous, with virtually all banks suffering cement long-term customer and supplier relation- enormous losses which severely curtailed their ships outside a keiretsu. The pattern also extends ability to make new loans as well as to “roll over” to banking relationships where client firms fre- existing loans. quently hold shares in their main bank and other In the aggregate, Japanese firms dramatically important lenders, with the banks holding shares shifted their funding away from bank loans. In in the firm (subject to a 5 percent legal limita- large part, they reduced their use of external fund- tion). Moreover, cross-shareholding relationships ing, slowing their asset growth and relying more in Japan tend to be very long term and are even on internal funding (retained profits plus depre- referred to as stable shareholdings. ciation). They also relied more on the domestic Except for parent firms with a majority stake bond market and, after the early 1990s, on for- in a subsidiary cross-shareholding positions are eign loans. The Japanese commercial paper mar- typically so dispersed that shareholders are in a ket stopped growing, and offshore bond issues weak position for exercising control over a cor- declined. The shift away from domestic bank poration’s management. This contrasts with the loans reflects the difficulties experienced by the main bank’s position described earlier. While the Japanese banking system. Clearly there has been main bank is almost certainly a shareholder (typi- a weakening of the main bank system. However, cally about 5 percent), its power comes largely forecasting its demise seems quite premature. On from being the firm’s key lender. For substantial the other hand, the growth of market-based fi- borrowers, the main bank may be providing a nancing has probably been healthy via provid- modest fraction (perhaps 25 percent) of the firm’s ing a broader and more balanced range of debt; however, the bank’s view on the firm’s pros- financing alternatives for firms. pects is critical to obtaining other loans and floating bond issues. For firms with modest borrowing See also: banking crises; shareholder weakness positions, the main bank’s influence is substantially diminished and the firm’s management has considerable autonomy from both lenders and Further reading shareholders. Campbell, J. and Hamao, Y. (1994) “Changing Pat- terns of Corporate Financing and the Main Bank System in Japan,” in M.Aoki and H. Patrick (eds), After the crash The Japanese Main Bank System: Its Relevance for Devel- oping and Transforming Economies, Oxford: Oxford The Japanese stock market declined precipitously University Press, 325–49. in 1990. This was followed slightly later by a simi- Hodder, J.E. and Tschoegl, A.E. (1993) “Corporate larly precipitous decline in real estate prices. Col- Finance in Japan,” in S.Takagi (ed.), Japanese Capi- lectively this has been referred to as “bursting” tal Markets, Cambridge, MA: Basil Blackwell, 133– the bubble economy, which prevailed in the late 63. 1980s with booming stock and real estate prices. Hoshi, T. and Kashyap, A. (1999) “The Japanese Bank- The dramatic price declines altered the landscape ing Crisis: Where Did It Come From and How for corporate financing in Japan. The number Will It End?” in B.S.Bernanke and J.Rotemberg and size of new equity issues declined, with mar- (eds), NBER Macroeconomics Annual 1999. ket price offerings virtually disappearing for a time. Real estate had frequently been used as JAMES E.HODDER 92 corporate governance corporate governance ers with a stake of 3 percent can demand that a board meeting be held, while a 10 percent stake In its broadest sense, corporate governance re- gives a shareholder access to confidential finan- fers to a complementary set of legal, economic, cial documents (see torishi mariyakukai). and social institutions that protect the interests Actual practice, however, diverges consider- of a corporation’s owners. Systems of corporate ably from the spirit if not the letter of the Com- governance vary widely across the industrialized mercial Code. Shareholders’ meetings tend to be economies, reflecting the fact that different coun- short and incorporate little to no discussion. For tries answer the fundamental question, “To whom many years, sokaiya, corporate blackmail artists, does the corporation belong?” in very different accepted payments from companies to stifle em- ways. barrassing questions from shareholders (though The Japanese system of corporate governance their activities have diminished over time). The is based on the notion that a company is answer- shareholders’ meeting is little more than a rub- able to multiple stakeholders: creditors, employ- ber stamp for board appointments, dividend pay- ees, trading partners, and society This emphasis ments, and other important decisions mandated on multiple stakeholders contrasts sharply with by the Commercial Code. Kansayaku, with their the shareholder focus of the Anglo-American obligation to monitor the board, are in fact ap- system. The Japanese system, however, also di- pointed by the president, and are mostly insiders verges from other stakeholder-centered systems, or outsiders with very close ties to the firm who such as that of Germany in that the obligations play little to no real role in governance. of a corporation to its stakeholders stem from a set of normative understandings rather than law or ownership. While Japanese corporate law, codi- Stakeholder governance fied in the Commercial Code, spells out a system of shareholder rights and corporate Japanese corporate governance, as it actually obligations, this system is largely a fiction, and works, bears little resemblance to practices out- bears little resemblance to actual practice. Japa- lined in the Commercial Code. Japanese manag- nese corporate governance works through a web ers balance the interests of banks, employees, of mutual obligations, minority ownership ties, trading partners, and society at large. In turn, all business interests, and social norms. of these stakeholders play an important role in monitoring management. While key stakeholders of Japanese firms—its banks, buyers and sup- The Commercial Code pliers, and other business associates—tend to be shareholders of the firm as well, their interests The Japanese Commercial Code governs the are in a firm’s long-term growth and survival, structure and behavior of the corporation and rather than its ability to pay high dividends or outlines a system of corporate governance that, maximize its stock price. In the 1980s, such stable on paper, is very similar to that of the USA. At shareholders held from 50–70 percent of a typi- the core of the Commercial Code is the assump- cal firm’s equity. tion that shareholders are the ultimate owners of At the core of this stakeholder system are the the firm, and accordingly the Japanese corporate banks. Most Japanese firms have one (sometimes law grants broad rights to shareholders. The two) main banks (see main bank system). Main shareholders’ meeting, or kabunushi sokai, elects banks not only investigate corporate finances and directors, or torishimariyaku, who then select man- strategy as a prerequisite for loan approval, but agement. Shareholders further elect statutory also intervene actively in corporate management. auditors, or kansayaku, who are required to moni- The role of the bank is most obvious in troubled tor the board of directors, and assure that it op- firms. If a firm appears in danger of defaulting erates in accordance with the law. The on its loans, a bank is likely to step in with a new Commercial Code grants minority shareholders management team, strategic direction, and financ- even greater powers than in the USA. Sharehold- ing. While banks are less vocal when it comes to corporate governance 93

high performing firms, they nevertheless keep a more of their own managers on a supplier’s board close watch on management to prevent a bailout to provide ongoing oversight. Even so, equity from ever becoming necessary. stakes in buyers and suppliers tend to fall short Certain conditions have enabled banks to play of levels that allow control. A firm’s obligations this role. Japanese firms, heavily dependent upon to its buyers and suppliers, and the ability of buy- bank financing for much of the postwar period, ers and suppliers to monitor each other, rests have had little choice but to submit to rigorous largely on a set of normative understandings con- bank monitoring. Banks may also exert influence cerning a firm’s obligations to its trading part- by placing one or two of their own executives on ners. a firm’s board. By law, banks are forbidden to hold more than a 5 percent equity stake in a firm. Recent changes in corporate governance However, a firm’s other shareholders are likely to be related trust banks and insurance compa- Until the bursting of the bubble economy in the nies, and other firms closely related to the bank early 1990s, the Japanese stakeholder-oriented such as other members of the bank’s keiretsu, or system of corporate governance was praised as a business group. key to Japan’s competitive strength. Patient capi- Employees are another cornerstone of Japa- tal—in the form of minority equity positions by nese corporate governance. In general, large cor- friendly banks and trading partners—allowed porations consider providing employment firms to make long term investments rather than stability and career advancement to seishain (full- scramble to meet quarterly financial goals. Praise time employees, hired with an implicit promise of Japanese corporate governance turned abruptly of permanent employment) as a goal more im- into criticism as the bubble burst, and the Japa- portant than maximizing share price. Under the nese economy faltered during the 1990s. It was permanent employment system, employees’ ca- during the 1990s that the Japanese translation of reer prospects are closely linked to the fate of the the term corporate governance—copureto gabanansu firm, and thus, they carefully monitor manage- or kigyo tochi—became widespread in the mass ment. A president who fails to take employees’ media and popular discourse. Poor corporate gov- interests into account is unlikely to remain in that ernance was blamed for everything from the exposition for long. It is important to note, how- cesses of the bubble economy to a spate of ever, that unlike in Germany where employee corporate scandals exposed in the 1990s. The representation on the supervisory boards of large stakeholder system was blamed for fostering in- firms is legally mandated, Japanese employees sular thinking and lack of accountability A de- have no legal right to board representation. bate emerged over whether Japan should adopt Rather, their important role in the Japanese sys- what was termed the “global standard” of Anglo- tem of governance revolves on strong social American corporate governance, or fine-tune the norms concerning a firm’s obligation to its em- existing system. ployees. While the causes of the bubble economy are A further set of stakeholders are buyers and complex, and it is not clear how much inadequate suppliers. Like employees, buyers and suppliers corporate governance was to blame, changes in often have a long-term stake in the survival of a the Japanese economy in the 1980s and 1990s firm, in particular if they have invested in rela- did render the existing system less effective. Large tionship-specific assets that cannot be easily used firms, in particular, increasingly turned to capi- elsewhere. A supplier that has built a factory next tal markets rather than banks for funds. Banks to its main buyer, or a buyer that has invested had less reason to monitor firms, and firms had heavily in training a supplier’s engineers in its less reason to listen to banks. The banking crisis manufacturing system, has a vital interest in the further diminished the credibility of banks as survival of its trading partner. Firms often hold monitors and dispensers of managerial advice (see minority equity stakes in their trading partners, banking crises). While the institutions of per- often in conjunction with other members of their manent employment and long-term buyer-sup- keiretsu. Buyers, in particular, often place one or plier relationships did not disappear in the 1990s, 94 creative houses they were weakened through bouts of corporate American governance, attempts to fine-tune the restructuring. The web of mutual obligation that existing system, or window-dressing to please for- caused firms to put the interests of these eign investors. stakeholders over returns to shareholders began to unravel. Another force in the transformation Further reading of corporate governance was the increasing influence of foreign shareholders. Ownership of Aoki, M. (1988) Information, Incentives, and Bargaining in Japanese shares by foreigners increased from the Japanese Economy, New York: Cambridge Uni- about 5 percent in 1990 to over 13 percent in versity Press. 1997 and ownership levels continued to grow Aoki, M. and Patrick, H. (eds) (1994) The Japanese Main through the end of the decade. These foreigners, Bank System, New York: Oxford University Press. largely US and European institutional investors Charkham, J. (1995) Keeping Good Company: A Study of and corporations, often had little ongoing busi- Corporate Governance in Five Countries, New York: Ox- ness interest in the firms in which they invested, ford University Press. and began to demand that Japanese firms pay Fukao, M. (1995) Financial Integration, Corporate Gover- more attention to shareholder value. nance, and the Performance of Multinational Companies, The decade of the 1990s produced a number Washington, DC: The Brookings Institution. of changes in governance. In 1994, the filing fee Gerlach, M.L. (1992) Alliance Capitalism: The Social Or- for shareholder derivative suits was reduced dra- ganization of Japanese Business, Berkeley CA: Univer- matically This increased the number of share- sity of California Press. holders attempting to sue a company for real or Shishido, Z. (2000) “Japanese Corporate Governance: alleged misbehavior. In 2000, shareholders won The Hidden Problems of Corporate Law and Their an ¥83 billion decision against the directors of Solutions,” The Delaware Journal of Corporate Law Daiwa Bank for their role in trading improprie- 25:189–233. ties in the USA. Managers of Japanese compa- CHRISTINE L.AHMADJIAN nies claimed that the real threat of shareholder suits made them far more cognizant of shareholder interests than ever before. creative houses Other changes were implemented in board structure and compensation. Beginning in 1997, Creative houses are specialized in activities re- corporations were allowed to issue stock options lated to advertising, a major area of marketing. to their board members and, by 2000, nearly 800 The advertising industry in Japan was born dur- companies had done so (though a combination ing the Meiji era, when newspapers aimed to- of a sinking stock market and very few options ward ordinary citizens began to be published. At issues, made this incentive less than lucrative). A first they relied heavily on readers for sales and number of firms, beginning with Sony, reduced profitability but they soon realized that charges the size of their boards, often by more than half, for advertisements and various announcements by demoting board members with operating rein the paper were a much more stable source of sponsibilities to shikko yakuin, or corporate execu- revenue. As the economy grew a number of tive officers. This, it was argued, would enable leading newspapers achieved increased circula- the board of directors to behave more like a US tion and volume, which in turn prompted a pro- corporate board, in overseeing the activities of liferation in firms seeking space for their top managers. The Ministry of Justice, urged on advertisements. by the various interests of the Ministry of Inter- Prior to the Second World War, the main national Trade and Industry, Keidanren, and function of advertising firms was limited to bro- foreign investors, began the process of a major kerage activities between newspapers and adver- overhaul of the Commercial Code to mandate tisement sponsoring companies. Although there more effective and realistic governance practices. were some ingenious examples of advertise It was, however, by no means clear whether these ment using other media such as magazines and changes were harbingers of convergence to Anglo- periodicals, billboards, and publicity slips which creative houses 95

were distributed with papers, the leading adver- peting with each other. In order to avoid poten- tising firms handled only newspaper space. tial conflict of interests or leakage of secret infor- In the 1950s, a number of independent radio mation, the teams and sales force are grouped stations began commercial broadcasting. The according to each client. In this regard, Japanese leading advertising firms in Japan today such as advertising firms are radically different from their Dentsu and Hakuhoudou, were quick to foresee Western counterparts, the advertising agencies the large potential of this new media, while those that adhere to the principle of one client in one who neglected it never found a way to keep pace industry Furthermore, the Japanese advertising with the tremendous growth of the industry. firms’ scope of operation includes a variety of Commercial messages on radio proved to be related activities such as planning and conduct much more effective than more traditional me- of marketing research or its arrangement on be- dia. But when television broadcasting started, the half of producers, inception and management of principal media for mass advertising shifted conventions and large development projects. Due quickly from radio to television. to these characteristics, they are usually referred With the introduction of audience polls in both to as advertising firms (koukoku gaisha), rather than radio and television broadcasting, programs be- advertising agencies. gan to be rated according to the audience per- A recent trend in the advertising industry in centage they were able to track. However, they Japan is to assume the entire marketing activities were rated from the standpoint of attractiveness of producers, under the self-designation of “mar- and quality. Over time, firms gradually recog- keting agency” On the other hand, as an adver- nized that the advertising must be carried out in tising firm’s client companies become ever more line with a comprehensive and coherent market- international and foreign agencies make inroads ing strategy. in Japan, alliances and cooperative arrangements The advertising firms’ function, hitherto lim- are actively pursued. ited to the brokerage of space and time, soon ex- The total advertising expenditure in Japan, es- panded to planning and production of effective timated by Dentsu, was ¥5.7 trillion in 1999. Ad- commercial messages. The most important area vertising firms nationwide number approximately of development was that of audio-visual messages 3,500, but only sixty or so have annual turnover on television, especially during the period when above ¥10 billion. Among the latter, Dentsu the entire nation became viewers following the (based in Tsukiji, Chuo ward, Tokyo) is by far period of economic growth. the largest with a turnover at ¥1.309 trillion in Once the quality of commercial messages on fiscal 1999. It is followed by Hakuhoudou (in television was put under careful scrutiny literary Shibaura, Minato ward, Tokyo, ¥673.9 billion), and artistic components such as catchy copy over- Asatsu-D.K. (in Ginza, Chuo ward, Tokyo, all design, audio and visual effects gained impor- ¥320.1 billion), Tokyu Agency (in Akasaka, tance. As a result, the contents of commercial Minato ward, Tokyo, ¥182.1 billion), Daiko (in messages were understood as a kind of synthetic, Miyahara, Yodogawa ward, Osaka, ¥152.9 bil- or total, art. Consequently the section of adver- lion), and Yomiuri Koukokusha (in Ginza, Chuo tising firms responsible for planning and produc- ward, Tokyo, ¥110.5 billion). tion of commercial messages was renamed the “creative” section, in contrast to the sales section Further reading handling the traditional brokerage functions. The head of the creative section is now often called Nikkei Koukoku Kenkyujo (2000) Koukoku Hakusho “creative director”, and subordinates are known (Advertising White Paper), Tokyo: Nihonke- as “creators,” the “creative team,” or the “crea- izaishinbunsha. tive group.” Saito, Y. (2000) 2002 Hikaku Nippon no Kaisha Koukoku Japan’s leading advertising firms often carry Gaisha (Comparison of Japanese Companies: The out the substitute function of serving as the ad- Advertising Industry), Tokyo: Jitsumuk- vertising section of several sponsors who are com- youikushuppan. 96 cross-shareholdings

Yamaki, T. (1994) Koukoku Yougo Jiten (Dictionary of American model of corporate governance. Advertising), Tokyo: Toyokeizaishinpousha. Cross-shareholding arrangements between suppliers and customers are primarily a franchise to SHINTARO MOGI do business, a method of cementing transactional relationships. cross-shareholdings In 1992, Japan’s Economic Planning Agency (EPA) responded to criticism raised by the United It has been a common practice in Japan for States in the Strategic Structural Initiative (SSI) pairs of firms to exchange equity shares in each trade negotiations that cross-shareholding pro- other, a practice called “cross-shareholding.” moted unfair trading practices and that Japan’s Sometimes the firms have been in the same in- cross-shareholding and main bank system spe- dustrial groups, sometimes they are suppliers cifically locked out foreign-owned banks. In its and customers, and sometimes creditors and reply EPA advanced three main economic justi- borrowers. fications, among others, for cross-shareholding, Kabushiki mochiai (mutual aid shareholding) is characterizing them as “merits.” the Japanese term for what is customarily trans- First, it argued that cross-shareholding pro- lated as “cross-shareholding,” that is, equity shares vides a stable source of funding for businesses that two companies hold in one another. Cross- by ensuring that there will be partners who will shareholding, in turn, is a subset of what is known be stable investors and who will buy new issues as antei kabunushi (quiescent stable shareholding), of stock whenever needed. Second, according to which may be held in trilateral, multilateral, or EPA, cross-shareholding strengthens the stabil- otherwise stable arrangements among companies, ity of corporate management by acting as a bul- usually based on group and/or transactional re- wark against the threat of hostile takeover. Such lationships. Together, the various forms of stable arrangements relieve management of the neces- shareholdings comprise some 65 percent to 70 sity of responding to excessive pressures from percent of all stock issued by publicly traded cor- the capital markets, permitting it to develop porations in Japan. The remaining shares are operations according to a long-term perspective. freely traded on the stock exchanges. Lastly the EPA maintained, cross-shareholding Cross-shareholding in Japan, however, repre- stabilizes and strengthens business transactions sents much more than a single-dimension own- between companies. The EPA White Paper of ership relationship. It often also reflects other 1992 termed cross-shareholding a mutual “hos- understood but unstated obligations. As will be tage” taking, which creates a captive relationship noted, cross-shareholding arrangements in the in the supply of goods or services and promotes postwar era operated as tacit mutual pacts de- long-term transactional relationships between signed to insulate the management of both sides cross-shareholding companies. from any market threat of hostile takeover. The However, EPA accepted the point that group purpose of most cross-shareholding is to avoid companies tend to do business mainly with each rather than confer shareholder rights, so stable other, thus making it difficult for foreign inves- shareholding relationships function as a strategy tors to break into Japanese networks, and thus of corporate management to limit shareholder that extensive cross-shareholding among mem- governance of the firm. bers of a corporate group could lead to Cross-shareholding may be divided into two exclusionary anti-competitive business prac- categories: (1) cross-shareholding between mem- tices: bers of a horizontal corporate conglomerate group, or kigyo shudan, the core of stable Even though interlocking stockholding has shareholding arrangements, and (2) cross- the functions mentioned above, if it creates shareholding that reflects business relationships a relationship of ‘conspiracy’, business may between suppliers and customers. In neither case become inefficient. What is more impor- is the cross-shareholding relationship intended to tant, in selecting the customers, if it is taken confer the ownership rights inherent in the Anglo- into account whether or not they have in- cross-shareholdings 97

terlocking stock holding unrelated to their new stock in exchange; such a transaction is individual products or substance of service, purely a paper one. Third-party investors in both or cartel relations come into existence be- firms might be made worse off in that their own- tween competitors, competition may be lim- ership share in the equity of the firm has been ited. diluted by the increase in the number of shares (Japan Economic Planning Agency 1992:181) without there being a corresponding increase in the earning capacity of the shares from invest- In addition, scholars in Japan have long criticized ment. In addition, there has been an unspoken the practice of cross-shareholding as limiting fear among third-party shareholders that any shareholder governance, which they have char- large-scale sell-off of shares into the market by a acterized as among its major “demerits,” particu- cross-shareholding partner (i.e., without either larly in terms of management accountability In consultation or the replacement of that partner other words, without effective oversight by share- with another stable shareholder) could cause the holders of corporate operations and managerial collapse of the company’s share price in the eq- performance, Japanese managers had little incen- uity market. tive to seek to maximize profits. This is typically The widespread practice of cross-shareholding contrasted with the United States, where share- has also been criticized as having negative effects holders, at least theoretically oversee the effec- on the stock market. As cross-held shares in a tiveness of corporate management, and where the company are rarely traded on the exchange, the possibility exists of shareholders exercising their effective market in each company’s stock is re- rights to change management if operations be- stricted to a fraction of the firm’s outstanding come too inefficient. Corporate management in shares. Thus, according to this view, speculators the USA is thus given the incentive to focus on can manipulate the market price more easily Such the more effective operation of the company for speculation by Japanese investors would tend to the benefit of the shareholders. In Japan, how- discourage outside investors, and, in overall ever, the mutual non-interference agreements terms, would dissuade participation of longer generally implied in a Japanese cross-shareholding term investors. relationship gave Japanese corporate management Whether positive or negative on a net basis, an abundance of discretion in making business the standard practice of enterprises holding sub- decisions and in regulating itself. This allowed stantial shares in other enterprises, owing prima- inefficiencies to build up that produced a low re- rily to the cross-shareholding phenomenon, turn on equity Until recently declaring share- creates an interdependency in the prices of shares. holder dividends had been neither a necessity The shares of companies holding stock in other nor even a priority concern of Japanese corpo- companies are more vulnerable to share price rate managers. In recent years this view has been volatility the larger the holdings of such stock. changing. Stable shareholders, in the absence of The interdependency arises because when a firm profits from capital gains, are now demanding has large holdings of shares in other companies, dividends on their shareholdings. its own profits can depend to a significant degree Another significant demerit raised by critics on the price performance of those shares. If stock in Japan is the potential for cross-shareholding prices go up, the company earns “hidden prof- agreements to damage and even defraud share- its” from those stocks; but if the prices of those holders. Cross-shareholding represents an offset- stocks go down, they will have unrealized losses. ting exchange of stock between companies, in As the market is at least implicitly aware of these most cases entailing no injection of new outside unrealized gains and losses, it affects the first capital. For example, when a company issues firm’s own stock price. For example, Japanese ¥100 million in stock, the company uses the funds companies that showed a steady rise in their core to acquire productive assets worth ¥100 million. business income between 1985 and 1991, suf- Most often, in cross-shareholding arrangements, fered unrealized losses on shares held in other when a company issues stock to a partner, there companies when the stock market declined from are usually no net proceeds, just the receipt of 1989 to 1991. This resulted in a decline in their 98 cross-shareholdings

own company’s stock price during those years, former zaibatsu groups of Sumitomo, Mitsui, and despite the core business profits, the effect being Mitsubishi re-established themselves as a new greater the greater the extent that they engaged form of grouping of companies, called kigyo shudan in cross-shareholding. (corporate groups), horizontally organized con- The postwar cross-shareholding arrange- glomerates, with their trading companies and ments grew out of the dissolution of the zaibatsu banks at the center of their groups (see below). in the initial period of the American occupa- The second stage in the growth of cross- tion of Japan following the Second World War. shareholding was precipitated by the collapse of The zaibatsu were holding companies, each of share prices in 1964–5 and the first Yamaichi Cri- which held shares in and controlled a group of sis (1964), in which Japan’s fourth largest securi- firms, many of which, in turn, had controlling ties company was faced with imminent interests in other firms (albeit often through a bankruptcy. In order to boost the Japanese stock minority stake). The dissolution was intended to market, a special corporation, the Nihon Kyodo introduce “Western” principles of corporate de- Shoken (Japan Cooperative Securities Co.), was mocracy and to dismantle the industrial under- set up by the securities industry with Ministry pinnings of Japanese militarism. The divestiture of Finance (MOF) administrative guidance to by the zaibatsu of their corporate holdings under make major purchases of shares. Another major the Anti-Monopoly Act of 1949 led to an in- factor was Japan’s having become a member of crease in stock ownership by individual inves- the Organization for Economic Cooperation and tors. As a result, individual investors held 69 Development in 1964. As a condition of mem- percent of all outstanding shares in 1949, a level bership, Japanese capital markets were to be that would fall dramatically as cross- gradually deregulated, causing the MOF as well shareholding was resurrected. as business to become concerned about prevent- The cross-shareholding system as it existed by ing hostile takeovers by foreign investors. the 1990s was the result of three stages of major Once the Yamaichi bankruptcy had been buildup: the first in the early 1950s, the second averted, the Nihon Kyodo Shoken was able to from the middle 1960s to early 1970s, and the sell the shares it had accumulated. Section 280 of third in the late 1980s. The corporate equity mar- the Commercial Act was revised so that boards ket in the early 1950s was characterized by ac- of companies would be able to allocate newly is- tive takeovers and free-wheeling shareholder sued shares to specified companies and individu- meetings. During this period, speculators pur- als. Such allocations were made primarily to chased stocks, which management bought back financial institutions and companies within their at a higher price (greenmail). Companies wanted own group, resulting in further stabilization and to protect themselves by cross-shareholding. concentration of stock ownership. This strength- However, the provisions of the Anti-Monopoly ened the afore-mentioned successors to the pre- Act prohibited stockholding by companies. Re- war zaibatsu groups and aided newly emerging vision of the Act in 1953 allowed companies to kigyo shudan, centered around Sanwa, Daiichi invest in stocks of other companies, provided such Kangyo Bank (DKB) and Fuji Bank. As these stock holdings were not anti-competitive. The res- shares were unlikely to be sold, it reduced the urrection of cross-shareholding during this period threat of hostile takeovers by either domestic or was thus primarily intended to protect compa- foreign investors. nies from unsolicited acquisition by speculators, The second stage of the growth of cross- who were particularly active after Japanese stock shareholding ended with the introduction of a prices collapsed following the end of Japan’s eco- new policy to curtail the practice. After the first nomic boom during the Korean War. The 1953 “oil shock” hit Japan in the fall of 1973, inflation easing of the Anti-Monopoly Act also raised the rose and the price increases were seen as having upper limit of shareholdings by financial institu- been engineered by the corporations. This led, tions from 5 to 10 percent. after much opposition, to adoption of the 1977 This first stage in the development of cross- Anti-Monopoly Reform Bill, that reduced the al- shareholding was also significant in that the lowed bank shareholding of company stocks from cross-shareholdings 99

10 to 5 percent. The implementation of this re- cause most Japanese banks depended on the mar- form, however, was stretched over ten years. ket value of stocks held in their portfolios to help The third stage in the growth of cross satisfy capital adequacy standards. With the huge shareholding accompanied the “’bubble period” decline in the Tokyo stock market during the of the late 1980s, when corporations took advan- 1990s, at times falling to less than one-third of its tage of high and rising equity prices and flooded 1989 peak level, banks had great difficulty in the stock market with new issues as a way to raise maintaining the level of capital required to meet funds. By itself, this would have increased the the Basel Committee standards to operate inter- proportion of company shares that were actively nationally The greatest part of bank-held shares traded, relative to the “quiescent stable shares.” have been in each bank’s client firms. However, the issuance of new cross-held shares Although there has been a decline in non-fi- could prevent this, which was thus the primary nancial firms holding bank stocks, since many of purpose for the issuance of such shares in this these firms were importuned by their main banks period. to purchase their shares in the late 1980s so that This was also a period of intensive zaitech (fi- the banks could meet the newly imposed capital nancial engineering) investment in securities by adequacy standards, there has been little wind- corporations, unrelated to investment for crossing down of bank holdings of shares in current shareholding purposes. That is, many companies client firms. It is within the category of transac- sought to bolster their profits from gains in the tional relationships that one should view the rising stock market. The portfolio of the zaitech shares of stock that a bank and its major client investor, like any unaffiliated investor, was strictly firms cross hold. The same is true for insurance speculative, in anticipation of capital gains. Firms companies and trust banks. They typically own following this practice thus built up their portfo- shares in companies with which they do a signifi- lios of shares in other firms and if after several cant amount of business, including selling insur- years these new shares were not traded, they ance and pension fund products to the client firm would appear quite like traditional “stable” shares. and its employees. Such transaction-related Indeed, after the stock market crashed there was shareholdings are considered to be separate and little incentive to sell these shares. apart from any holdings of the client firm’s stock In fact, when analysts observed a reduction in that these financial institutions may have in their corporate shareholding portfolios in the late investment portfolios. 1990s, they measured the fastest rate of dissolu- In the midst of these changes in Japanese (and tion as being in the stable-shareholding (antei global) financial systems, the prospects for bank- kabunushi) category However, it is difficult to dis- firm cross-shareholding are unclear. Japanese tinguish sales of shares that had actually been firms increasingly have market alternatives to part of a firm’s stable shareholding from sales of banks for funds and depositors increasingly have zaitech shares which it would have been timely to market opportunities for placements of funds. sell given that the Tokyo market had temporar- Arm’s length, market-related financial transac- ily regained some strength as foreign buying in- tions seem less amenable to the kinds of relation- creased substantially in the mid-1990s and again ships that bank-firm cross-shareholding in 2000. characterized. Much of bank-firm cross-shareholding in Ja- In fact, banks continued to acquire shares in pan has taken place within groups of interrelated firms that have newly become main bank clients. firms, typically with a large bank at the center Asahi Bank and Tokai Bank (both with strong (see main bank system). Some economists sug- regional bases) and most recently firms in the gest that the groups helped to manage risk in the Fuji group and in Sakura Bank’s Mitsui group Japanese economy (Nakatani 1984). Other ana- have also increased their holdings in order to lysts have been critical of bank-firm cross- strengthen their group’s main bank. Business in shareholding, challenging this supposition. The Japan is typically conducted within highly shares cross-held by banks and firms became a contextualized sets of relationships and opaque matter of grave concern in the 1990s in part be- rules that govern access and accountability Thus 100 cross-shareholdings far, there is little evidence of devolution in mu- Further reading tual shareholding arrangements on the part of Iwao, N. (1984) “The Economic Role of Financial Cor- banks, especially by regional banks whose clien- porate Grouping,” in M.Aoki (ed.), The Economic tele have very traditional notions of business re- Analysis of the Japanese Firm, North-Holland: Elsevier lationships. Publishing, 227–58. For the banks, we can conclude that two sig- Scher, M.J. (1997) Japanese Interfirm Networks and Their nificant purposes of cross-shareholding exist: to Main Banks, London: Macmillan, and New York: maintain stable business relationships, i.e., trans- St. Martin’s Press. actional relations between the cross-shareholding ——(1999) “Japanese Interfirm Networks: ‘High Trust’ partner companies, in other words, as a franchise or Relational Access?” in A.Grandore (ed.), Inter- to do business with each other; and second, to firm Networks: Organization and Industrial Competitive- maintain capital adequacy standards. Firms, on ness, London: Routledge, 303–18. the other hand, are today buying bank shares gen- ——(2001) “Bank-Firm Cross-Shareholding in Japan: erally only if they are in difficulty and need to Why Is It, Why Does It Matter, Is It Winding preserve their relationship with a bank. Cross- Down?” Discussion Paper No. 15, United Nations shareholding thus continues to provide implicit Department of Economic and Social Affairs. relational contracts, a function that still has a role in Japanese business society. MARK J.SCHER D

Daiei meters in the 1970s. This expansion enabled Daiei to include food, textile, and variety merchandise Daiei, Inc. was established by Isao Nakauchi in in its stores. April 1957 in Osaka. Shortly thereafter, Daiei Daiei is also known for its rapid business di- expanded very rapidly to become a national gen- versification. In the 1980s, the Large Store Law eral merchandising store chain. In March 1972, was extended to cover supermarket chains and it outperformed Mitsukoshi and had the largest thus limit the expansion of Daiei. In response to gross sales of any retailing company. Daiei is char- this legal change, the company quickly developed acterized by its low prices, mass sales policy ag- other retail formats such as convenience stores gressive mergers and acquisitions strategy (Lawson), discount stores (D-Mart), supermar- business diversification, and organizational inno- kets (Maruetsu), specialty stores (Robella), and vation. In September 1999, the company directly department stores (Printempts). At the same time, operated 317 stores, employing 15,603 staff. In Daiei branched into hotel business, property de- the same year, the company was capitalized at velopment, finance business, restaurants, fast food ¥52,000 billion and the operating profit totaled business, travel, baseball, publishing and so on, ¥2.3 trillion. turning itself into a large retail conglomerate. Yoi moto o don don yasuku uru (Sell high quality To organize effectively for this rapid diversifi- goods inexpensively) is Nakauchi’s mission and cation, Daiei turned its divisions into nine inde- the corporate philosophy of Daiei. This mission pendent companies, transferring most of the is reflected in the company’s pricing and store headquarters functions to each independent com- development strategies. Daiei adopted the low pany which could thus be more flexible in satis- price and mass sales policy from the beginning, fying ever-changing customer needs. In believing that low prices would stimulate sales December 1997, Daiei established the first hold- and eventually increase profits. It has also ex- ing company in postwar Japan in order to contended its network of stores from Kansai to trol its subsidiaries. Kyuushuu, Touhoku, Kantou, Hokkaidou, and In 1998, the company recorded a ¥2,500 bil- Okinawa to exploit economies of scale. In the lion loss with a ¥260 billion debt. At the begin- 1990s, Daiei further expanded its network ning of 1999, the company’s chairman Nakauchi through mergers and acquisitions. In 1994 the appointed Tadasu Toba, the former president of company merged with three other retail compa- Ajinomoto and a corporate finance specialist as nies. Three years later, Daiei acquired sixteen the company’s president, hoping that Toba could stores from Yaohan Japan. Daiei also expanded improve the company’s finance. In March 1999, its business scale by building high-volume stores, Nakauchi’s son suddenly resigned from the post expanding the average sales floor area from 1,500 of vice president. His unexpected resignation, it square meters in the 1960s to over 5,000 square was said, has made the future of Daiei uncertain. 102 daihyoken

See also: retail industry directors such as the president and a few senior executives hold daihyoken. However, the number of directors with daihyoken varies by industry and Further reading size of company. In Japanese firms with both a Mizoue, U. (1998) Daiei VS Ito-Yokado (Daiei, Inc. and president and chairperson, the president is usu- Ito-Yokado Co., Ltd), Tokyo: Baru Shuppan. ally the highest ranking director with daihyoken. The chairperson is a semi-retirement position for HEUNG-WAH WONG the previous president, often without daihyoken. Such chairpersons play the role of elder states- daihyoken man, attending official functions, particularly those of industry and business associations. How- ever, in some cases, chairpersons retain the right Under the Japanese Commercial Code, at least to represent the company and continue to exert one director must have the authority to repre- strong influence over the management of the com- sent the company to third parties and execute pany as well as the appointment of the president. resolutions approved at the general shareholders Thus, whether or not the chairperson holds meetings and the board of directors meetings daihyoken reveals the relationship between the (torishimariyaku-kaigi). Such directors, called daihyo- chairperson and the president. The same can be torishimariyaku (literally representative director) are said about who else holds daihyoken and their re- chosen from the members of the board of direc- lationship within the board and other board mem- tors (Commercial Code 261–1). The board of bers. directors or torishimariyakukai can dismiss daihyo-torishimariyaku anytime. Daihyo- torishimariyaku hold the right to represent and sign Further reading documents for all business activities of the company (Commercial Code 261-III). Thus, even if Bird, A. (1988) Nihon kigyo executive no kenkyu (Research the board of directors imposes some restriction on Japanese Executives), Tokyo: Sangyo Noritsu on this right, for example to restrict the right of Daigaku Shuppansha. daihyoken to represent only some operations or Charkham, J. (1994) Keeping Good Companies: A Study of businesses of the company the company is still Corporate Governance in Five Countries, Oxford: liable to any claims made by third parties with- Clarendon Press. out such knowledge. From a legal standpoint, there are only two TORU YOSHIKAWA classes of directors in Japanese firms, daihyo- torisimariyaku and torishimariyaku. However, most Daiichi Kangyo Bank Japanese companies have their own internal designations for various classes of directors such as Daiichi Kangyo Bank (DKB) was established in kaicho (chairperson), shacho (president), fuku- 1971 as a result of a merger between Daiichi Bank shacho (vice president), senmu (senior managing and Nippon Kangyo Bank. Dai-Ichi Bank, which director), and jyomu (managing director). While was established in 1887 as a national bank, was these internal designations have no legal founda- the oldest modern bank in Japan and had con- tion and thus need not be officially registered, tributed to the industrialization of Japan. In 1896 they are often mistakenly seen as titles to indi- it became a commercial bank. Nippon Kangyo cate the right to represent the company. In order Bank was established in 1897 as a special bank to protect the public trust in daihyo- for promoting agriculture and industry In 1948 torishimariyaku, the company has an obligation to it started national lotteries for public agencies. In inform third parties without legal knowledge of 1950 it became a commercial bank. daihyoken when it has business contracts with Since the merger, Daiichi Kangyo Bank (DKB) them (Commercial Code 262). has grown to be a major global bank. During the In most Japanese firms, only higher ranking 1970s DKB began in earnest efforts to become dango 103 more competitive and efficient, which ultimately karuteru). In some cases, notably in bidding for led to the internationalization of its business. It public works contracts, dango arrangements take was listed on the Amsterdam stock exchange in on a highly institutionalized and almost ritualis- 1973 and on the London, Paris and Swiss stock tic form. exchanges in 1989, well ahead of its rival banks. Some observers believe that dango is an off- During the 1990s DKB actively pursued the de- spring of the Japanese cultural proclivity for har- velopment of its information technology infra- mony and consensual decision making. While structure in addition to investing in building its there may be some truth in such cultural expla- financial engineering capabilities, thus ensuring nations, it is well to note the existence of pecuni- rapid internationalization. ary incentives and political institutions that In July 1997, DKB’s reputation was dealt a facilitate this shadowy behavior. For instance, the serious blow when it was revealed that it illegally existence of well-organized industry associations lent billions of yen to a racketeering group or enables close contact among executives of rival sokaiya (corporate extortionists) at about the firms, thereby providing opportunities for would- same time other scandals were being discovered be competitors to establish standards of “accept- (for example, Nomura Securities). The former able” market behavior and price-setting. Of chairman of DKB was arrested for violation of course, this sort of behavior is not unknown in Japanese Commercial Code and the bank itself the United States and other countries, but Japan’s was prosecuted. In reaction to this devastating industry associations tend to play a more exten- turn of events, the bank began a complete over- sive and significant role than do their counter- haul of its management, replacing all top man- parts in other Western countries. In the case of agement and attempting to renew an ethical bidding for public works contracts, the Japanese corporate culture. government’s procurement system facilitates Finally in September 2000, Daiichi Kangyo price-fixing. In contrast to an “open bidding” Bank, Fuji Bank, and the Industrial Bank of Ja- system wherein all qualified firms are permitted pan began their three way merger process under to submit bids, the Japanese government employs a new holding company Mizuho Holdings. This a “designated bidder” system in awarding con- new colossal bank boasted some ¥130 trillion in tracts for the vast majority of public works assets, the largest in the world. Mizuho Financial projects. Under this system, the contracting group focuses its investment banking activities agency designates approximately ten “qualified” on the promotion of corporate mergers and ac- firms from which to accept bids on a project. The quisitions. contract is awarded to the firm submitting the lowest “responsible” bid, as judged in accordance Further reading with a government-set anticipated ceiling price (yotei kakaku). In this way the procurement sys- Bremner, B. (1999) “Rebuilding the Banks: Mega-merg- tem limits the sphere of competition for public ers are Just the Beginning; in Tokyo,” Business Week, works contracts. Defenders of the system argue September 6:48. that since public works are financed by taxpay- Ishizuka, M. (1997) “Japanese Firms’ Sokaiya Ties Run ers, it is important to ensure that they are carried Deep,” Asian Business Vol. 33 (8): 18. out efficiently and that the work meets a high SUMIHIRO TAKEDA standard. In theory only contractors who have a proven track record are designated to submit bids. dango Dango is also facilitated by close, mutually beneficial interactions involving industrialists, politi- Dango, loosely translated as “agreement through cians, and government bureaucrats. Here, too, consultation,” is the practice of price-fixing or bid- the case of public works is instructive. In order rigging. Even though Japanese law forbids such to ensure that they are designated to bid on a practices, dango arrangements have been uncov- project or to assist in settling disputes concern- ered in a range of industries and activities. A ing which firm will be the “low bidder,” construc- popular alias for dango is “shady cartel” (yami tion contractors often appeal to influential allies 104 dango

in the political world. Mayors, prefectural gover- would-be price-fixers from engaging in anti-com- nors, and members of parliament have been petitive behavior. Indeed, until the early 1990s known to be the object of these appeals. The use the maximum administrative surcharge imposed of political influence in this context is known as in those rare instances when violations of anti- the “voice of heaven” (ten no koe). Not surpris- monopoly law actually came to light was a mere ingly large transfers of cash seem to accompany 0.5–2 percent of ill-gotten gains; and the maxi- the invocation of heaven’s will. In fact, it is known mum fine for criminal activity was a paltry 5 mil- that certain politicians demand kickbacks in the lion yen. In contrast, those convicted of form of a prescribed percentage of the total value price-fixing in the United States face treble dam- of the project. Given the pecuniary incentives, it ages and the very real possibility of incarcera- is somewhat surprising that relatively few bureau- tion. Under pressure from US trade negotiators, crats from the contracting agencies—in particu- the Japanese government agreed to strengthen lar, officials of the Ministry of Construction—are anti-monopoly penalties and their enforcement. directly implicated in scandals involving bid-rig- The administrative surcharge was raised to 6 per- ging on public works projects. Indirectly how- cent and the maximum fine was boosted to 100 ever, the cost of bureaucratic involvement takes million yen. These rather modest legal changes the form of providing “second careers” for re- certainly give would-be price-fixers a bit more to tired officials, a practice known as amakudari think about, and they place Japanese penalties (descent from heaven). Some observers believe more in line with those found in some European that firms employing ex-bureaucrats benefit not countries. But many observers believe that the only from their technical competence, but also disincentives to price-fixing are not strong appear to be rewarded with strategic leaks of in- enough, and doubts persist about the ability of formation concerning the allegedly confidential the Japan Fair Trade Commission to transform government-set anticipated ceiling price. Obvi- itself into anything more than a nearly toothless ously prior knowledge of the ceiling price is a watchdog. valuable asset when it comes time to rig bids on In sum, dango is deeply entwined in the mecha- public works contracts. nisms of political and economic power in Japan. Brokers (dangoya) play the part of determining The system serves the narrow concerns of vested how to apportion the illegal profits gleaned from interests while neglecting the general welfare. In- price-fixing. In the case of public works contracts, dustrialists reap ill-gotten gains, retired govern- brokers determine how much money will be ment bureaucrats secure second careers in the transferred from the designated winner-to-be to private sector, and politicians rake in political con- the other members of the shadowy cartel. A popu- tributions. Of course, the cost of this anti-com- lar device for accomplishing this aim is the “shady petitive activity is directly borne by Japanese joint venture” (ura jointo). After bids are submit- consumers and taxpayers. Because of its shad- ted on a project, the contract is awarded to the owy nature, it is impossible to accurately estimate low bidder, Firm A. As the prime contractor, it is the cost of this price-fixing in Japan. In the case perfectly legitimate for Firm A to allocate seg- of spending on public works projects, estimates ments of the project to specialized subcontrac- of the inflated price tag imposed by bid-rigging tors. However, in a shady joint venture, the prime range from 15 percent to as high as 50 percent or contractor transfers the contract to Firm B, which more of the total contracted amount. And Japan’s proceeds to pass it along to Firm C.Eventually trade partners point to the dango system as non- Firm D is hired as a specialized subcontractor. tariff barrier that unfairly disadvantages foreign As prime contractor and subcontractor, Firm A firms in their efforts to gain access to Japanese and Firm D can lay just claim for services ren- markets. dered. But, in a shady joint venture, Firms B and C also receive payment for service charges even Further reading though neither do any actual work. Finally Japan’s weak penalties and lax enforce- McMillan, J. (1991) “Dango: Japan’s Price-Fixing Con- ment of antimonopoly law do little to discourage spiracies,” Politics and Economics 3:201–18. debt/equity ratios 105

Schoppa, L.J. (1997) Bargaining with Japan: What Ameri- cent. In other words, these firms were financing can Pressure Can and Cannot Do, New York: Colum- roughly 20 percent of total assets with equity and bia University Press. 80 percent with debt: a debt/equity ratio of Woodall, B. (1996) Japan Under Construction: Corruption, roughly 4. For US manufacturing corporations Politics, and Public Works, Berkeley CA: University of in 1980, the aggregate debt/ equity ratio was 1.02 California Press. and the equity/total asset percentage was 49.5 percent. The difference across the two countries BRIAN WOODALL is striking. Moreover, these figures represent very broad averages and suggest a major systemic dif- debt/equity ratios ference in borrowing patterns across the two economies. The debt/equity ratio measures the amount of An important aspect of leverage, particularly debt (bonds, bank loans, etc.) relative to equity when it reaches high levels, is that it increases used to finance a firm and is interpreted as an the risk of financial distress. The logic is that more indicator of financial riskiness. Particularly dur- leverage implies larger debt payments (interest ing the 1970s and early 1980s, debt/equity ratios and principal), which are obligatory The larger of many Japanese firms appeared extraordinar- these payments, the greater the chance that a ily high by US or UK standards. This led to downturn in a firm’s revenue will result in not questions regarding why Japanese financial insti- having enough income to make the required pay- tutions would lend to firms with high debt/eq- ments. The firm may still be able to meet the uity ratios and how the apparent risks were payments (for eample, using cash reserves); how- controlled. ever, if revenues remain low or decline further, The debt/equity ratio is viewed as measuring the situation may become critical. Even if the firm financial leverage, with higher ratios indicating does not default on its obligatory debt payments, greater leverage. The physical analogy is that debt the prospect of financial distress can have very acts like a lever; and the longer the lever (more negative consequences. When default risk seems debt), the more weight (total assets) can be sup- substantial, lenders may decline to renew matur- ported by a given amount of equity on the le- ing loans. Similarly suppliers will be reluctant to ver’s other end. This suggests an accounting extend trade credit (accounts payable) and instead perspective where a firm’s total assets must equal demand cash-in-advance. Also, customers may the sum of its liabilities (debt) plus net worth (eq- be less willing to purchase products from firms uity). Hence, more debt allows a firm to have that may not exist when replacement parts or serv- greater total assets for a given amount of equity. ice are needed. In addition, employees may leave Interest in Japanese debt/equity ratios was for positions at other firms which seem to pro- fueled by comparisons which suggested startling vide more job security. These are strong reasons amounts of leverage for Japanese firms. Fre- to avoid even the appearance of a serious risk of quently these comparisons examined average financial distress. From this perspective, the Japa- values for broad groups of firms: for example, nese debt/equity ratios appeared almost unbeliev- all manufacturing corporations. Often the statis- able. tic reported was the equity/total assets percent- There was considerable debate and analysis, age. This statistic provides equivalent information particularly during the 1980s, regarding whether to the debt/equity ratio when debt is interpreted Japanese firms were really that highly leveraged. as total liabilities. To illustrate, one could take Several authors proposed adjustments for ac- the 1980 book value of total liabilities for all Japa- counting differences across the two countries as nese manufacturing corporations (reported by the well as using market values for the equity calcu- Bank of Japan) and divide by their aggregate lation. One motivation was that many Japanese shareholders equity (net worth) to obtain a ratio firms had hidden assets (such as land and of 3.85. Alternatively one could divide net worth shareholdings) which were much more valuable by total assets (net worth plus total liabilities) to than reflected in their accounting statements. obtain an equity/total asset percentage of 20.6 per- Typically such adjustments dramatically reduced 106 Deming, W.Edwards

the apparent leverage differences, at least on av- ture: A Comparison of United States and Japanese erage. Some analysts concluded that after such Manufacturing Corporations,” Financial Management adjustments there were no significant remaining 15 (1): 5–16. differences. Others argued that there were still JAMES E.HODDER broad differences in leverage patterns and that some Japanese firms remained very highly leveraged by US standards. This naturally led to Deming, W.Edwards questions of why lenders would provide financing to such firms or, alternatively, how financial An American, W.Edwards Deming (1900–93) distress risks were being controlled. was one of the leading proponents of quality Answers to such questions were typically at- management in Japan and the west. With his tributed to the main bank system, where a large emphasis on viewing organizations as systems Japanese bank monitored and potentially inter- and on understanding the implication of varia- vened in the activities of highly-leveraged client tion in processes, he is widely credited with hav- firms. Moreover, there was an implicit quasi-guar- ing tremendous influence on the development of antee that should a client firm get into financial Japanese manufacturing excellence during the difficulties, its main bank would organize a res- second half of the twentieth century. Despite cue. Thus, the main bank system was viewed as Deming’s technical background (Ph.D. in math- providing the mechanism for controlling finan- ematical physics), his message was managerial, cial distress risks and allowing firms to operate with simple statistical approaches advocated as with high amounts of leverage. useful tools to support business decisions (see The discussion of high debt/equity ratios for Ishikawa). Japanese firms subsided considerably in the early During the 1930s, Deming, an expert in sta- 1990s. As suggested above, accounting and mar- tistical sampling, was exposed to Dr Walter ket value adjustments diminished the apparent Shewhart’s work on statistical process control book value differences. Also, book value debt/ (SPC). This sparked Deming’s interest in qual- equity ratios for Japanese firms displayed a sub- ity management. Shewhart’s focus was on apply- stantial decreasing trend starting in the mid-1970s ing SPC to production, to reduce scrap and and continuing into the 1990s. When coupled rework. Deming recognized that the tools were with accounting adjustments, this tended to make more broadly applicable, to both manufacturing aggregate leverage differences between the US and services. and Japan appear fairly minor by the early 1990s. Immediately after the Second World War, Subsequently discussion has focused more on the Deming and others (including Juran) were in- possibility that a high debt/equity ratio with main vited to Japan by the Japanese Union of Scien- bank support can be disadvantageous if the main tists and Engineers (JUSE) to lecture on statistical bank gets into financial difficulties. The banking methods. In addition to SPC, Deming covered crisis in Japan made this issue quite relevant for managerial issues, laying the foundations for some firms (see banking crises). modern quality management. His experience in the USA led him to insist that the audience in- See also: corporate finance clude top managers, in addition to engineers and designers. Deming was convinced that quality began at the highest levels of the organization, Further reading because improvement required substantial Gibson, M.S. (1995) “Can Bank Health Affect Invest- changes in processes, which only senior management? Evidence From Japan,” Journal of Business 68 ment could accomplish. He argued that over 90 (3): 281–308. percent of the potential improvement fell under Hodder, J.E. (1991) “Is the Cost of Capital Lower in the control of management, rather than work- Japan?” Journal of the Japanese and International Econo- ers. Thus, exhorting workers to produce better mies 5:86–100. quality without changing the processes and sys- Kester, W.C. (1986) “Capital and Ownership Struc- tems in which they operated, was futile. Deming, W.Edwards 107

Deming’s impact in Japan was far-reaching. Knowledge about variation Many credit him with changing the Japanese management approach from top-down to bottom-up Two types of variation characterize all processes. decision making processes. The Deming Prize Common cause (system) variation is that inher- is Japan’s highest quality award. In 1960, Deming ent in the process. Special cause variation is due received the Second Order Medal of the Sacred to specific, generally identifiable, events. Special Treasure from the emperor. Very proud of this causes are often resolvable by workers close to honor, he nearly always wore the lapel pin com- the problem. Common cause variation is gener- memorating the award. Despite his stature in Ja- ally related to process design or the consistency pan, he made few inroads into Western of incoming material. Management must resolve management until the early 1980s, when Ford these issues, as front-line workers have neither Motor Company and then General Motors en- the authority nor the fiscal responsibility. Com- gaged him to assist with large-scale corporate mon and special cause variation demand differ- turnarounds. Ironically US interest in Deming ent actions. Treating common cause variation as was driven by competition from Japanese firms special leads to over-adjustment of processes, that had adopted his suggestions in the 1950s. which increases the system variation. Treating Deming advocated a complete transformation special cause variation as common prevents the of the traditional top-down approach to manage- search for a resolvable problem. SPC is based on ment. The transformation was to be based on reducing the economic loss from these two er- considering the organization as a system and man- rors. aging its interrelationships, understanding statis- A process with only common cause variation tical variation to permit data-based decisions, is statistically stable; only stable processes can be focusing on internal and external customers, and used for prediction. However, stable processes creating “win-win” situations in place of debili- are not necessarily capable of meeting specifica- tating competition. His book Out of the Crisis (1982) tions. To achieve process capability specifications described fourteen points which should serve as should be established only after the process vari- the basis for the transformation. Deming then ation is understood. Taguchi loss functions can worked to develop a more theoretical approach, be used in place of specifications. which resulted in his “system of profound knowledge,” as described in The New Economics for Indus- try, Government, Education (1993). He asserted that Theory of knowledge the fourteen points would follow naturally in an organization whose management was guided by Deming maintained that all management is based the four interrelated parts of profound knowl- on prediction, and that prediction requires theory. edge: appreciation for a system, knowledge about Knowledge is then developed through system- variation, theory of knowledge, and psychology. atic revision and extension of theory, based on Deming emphasized that an organization is a comparing predictions with observations. Theory network of interrelated components (e.g. depart- which may be revised, is necessary for using in- ments) with a single aim of gain for everyone: formation and creating knowledge. This stockholders, employees, suppliers, customers, relationship is demonstrated in Deming’s Plan- community and environment. Managing the Do-Study-Act cycle (which he called the interdependencies among the components is cru- “Shewhart cycle”), a systematic approach to prob- cial, and necessary for optimization of the entire lem solving. system. Independent optimization of individual Ultimately organizations consist of people, and components will result in suboptimization of the Deming emphasized the need to understand what system. Success requires cooperation, rather than motivates individuals. He stressed that manag- competition, among the components. Top man- ers must be aware of the different factors that agement must guide the optimization of the sys- motivate individual people, and understand that tem, with a focus on delighting customers, both intrinsic (internal, individual) motivation is more internal and external to the organization. important than extrinsic (external) motivation. 108 Dentsu

According to Deming, the reward systems used These employees will be housed in Dentsu’s new in most organizations allow extrinsic motivation headquarters in the Shiodome ward of Tokyo, to smother intrinsic motivation, replacing simple which is scheduled for completion in 2002. The recognition with money and removing joy from remainder of Dentsu’s employees in Japan are work. located in its five regional subsidiaries, and its affiliate and associate companies, which total 400 in number. Further reading Dentsu also has many subsidiaries including film and video production companies, theme Deming, W.E. (1982) Out of the Crisis, Cambridge, MA: park and resort companies, real estate services, CAES. property management and insurance compa- —– (1993) The New Economics for Industry, Government, Edu- nies. Together with Young & Rubicam of the cation, Cambridge, MA: CAES. USA, Dentsu also has a joint venture ad agency Latzko, W.J. and Saunders, D.M. (1995) Four Days with named Dentsu Young & Rubicam that is focused Dr. Deming: A Strategy for Modern Methods of Manage- exclusively on the Asia/Pacific region. In addi- ment, Reading, MA: Addison-Wesley. tion, Dentsu maintains six fully owned overseas Scherkenbach, W.W. (1986) The Deming Route to Qual- offices, and has subsidiaries and affiliates in ity and Productivity: Road Maps and Road Blocks, Wash- forty-seven cities in thirty-four countries world- ington, DC: CEE Press Books. wide. Dentsu is privately held. The two largest share- ELIZABETH L.ROSE holders are two of Japan’s major news services, Kyodo News and Jiji Press. Dentsu has an- Dentsu nounced plans for a listing on the Tokyo stock exchange in 2002. Dentsu is Japan’s largest advertising agency with In Japan, Dentsu’s several thousand clients in- almost double the billings of its number two clude both Toyota and Honda, as well as all of competitor, Hakuhodo. Dentsu has dominated Japan’s major brewers. This is possibly due to Japanese advertising for a long time, and it has the sheer size of Dentsu, particularly its number consistently accounted for one-quarter of of employees, allowing the agency to physically Japan’s total advertising billings. In the area of separate the sections handling competing clients. network television, Dentsu dominates to an A major reason clients go to Dentsu is due to even greater degree by buying half of the na- its clout with the media. The root of Dentsu’s tional prime time airtime. Dentsu is also ranked strength with the media lies in the fact that as one of the largest advertising agencies in the Dentsu has a history of assisting the various world. media during their launches. Dentsu helped es- Originally established in 1901 as a news tel- tablish the Tokyo Broadcasting System (Chan- egraphic service, the name Dentsu literally means nel 6), and remains the network’s largest “telegraphic communications.” Today Dentsu is non-financial shareholder. In addition, Dentsu a full-service mass media advertising agency that holds minority interests in other television sta- also handles below-the-line services such as tions and owns a large percentage of Video Re- events, sales promotions, transit advertising, search, Japan’s television rating service. Dentsu internet advertising, direct mail, and outdoor bill- also conducts business with an unrivaled boards, to name a few. These activities are in number of Japanese publishers. Besides creating keeping with Dentsu’s publicized strategy of pro- and placing advertisements in the publishers’ viding “total communications services.” magazines, Dentsu’s support extends to such ac- The majority of Dentsu’s nearly 6,000 employ- tivities as publicizing books and magazines and ees are based in Japan, where the agency has helping new publications secure a position in the thirty-one offices nationwide. The slightly over media community. 4,000 employees presently based in Dentsu’s headquarters in Tokyo occupy ten buildings. SEAN MOONEY department stores 109 department stores products in all the top ten department stores, so there is little to differentiate one department store Japanese department stores have a long history. from another. Third, department stores follow The earliest stores began as kimono shops, even- the manufacturer’s suggested retail price. Little tually growing into other product categories. department store merchandise is direct purchase, Matsuzakaya (founded 1611) originated as a so manufacturers maintain the right to set and Nagoya kimono shop. Shirakiya, which is now maintain price throughout the season. Seasonal Tokyu Department Store began in Tokyo in 1662. sales will be determined by the manufacturer, if Mitsukoshi (Echigoya) began in 1673. Daimaru they are held at all. (1717) Sogo (1830) and Takashimaya (1831) are Japanese department stores expanded to Hong some of the other early retailers. Six of the ten Kong, Singapore, Thailand, Taiwan, Indonesia, largest department stores in Japan originated be- Vietnam and China. By 1989, the fourteen Japa- fore 1850. A second group of department stores nese department stores in Hong Kong held 30 originated as providers of daily necessities and percent of the department store market. Ten years operated in or near the railroad terminal. Their later, however, most of the Japanese department names, such as Seibu, are shared by railroad lines. stores had left Hong Kong. Some stores such as Originally the terminal department stores were Tokyu and Matsuzakaya simply withdrew and considered much lower status than the kimono went home. Others such as Isetan used Hong shop stores, but gradually the newer terminal Kong as a departure point for operations in stores gained respect as full-line department China. stores. There are three environmental factors that Department stores represent tradition in Ja- make international markets attractive: (1) domes- pan. They offer cradle-to-grave services for their tic competition from mass merchandisers; (2) gov- customers. About one-third of a department ernment restrictions on expansion of large store’s total sales will occur during two Japanese department stores; and (3) the high cost of labor seasonal gift-giving periods. Department stores and land in Japan. Japanese mass merchandisers, provide gift-giving consultation, gift wrapping and also called supermarkets, carry clothing, appli- home delivery Selecting gifts from a prestigious ances, and often food. Although they carry the department store provides assurance that the gift same merchandise mix as department stores, they is appropriate. are not brand name discounters. They carry mer- Since the economic bubble burst in 1990, de- chandise with brand names different from those partment store sales have declined dramatically. of the traditional department stores. Often the The top department stores in Japan in order of same manufacturer will produce brand-name rank are Takashimaya, Marui, Seibu, Mitsukoshi merchandise for department stores and brand- and Isetan. The ranking of these top department name merchandise for supermarkets, but con- stores changed little from 1990 to 2000. sumers do not associate the two brand names Several characteristics of Japanese department with each other. The difference between the po- stores set them apart from department stores in sitioning of the two store formats is that depart- other parts of the world. First, Japanese department stores carry a luxury image while mass ment stores can be considered manufacturers’ merchandisers provide goods for everyday needs. showrooms. Only about 10 percent of the mer- The relaxation in the large-scale retail law has chandise in a Japanese department store is direct made the opening of these stores easier, and in purchase; the other 90 percent is return-based addition the recession in Japan has made custom- purchases with no inventory responsibility (shoka ers very price-conscious. Mass merchandisers shire) and consignment sales (itaku shiire). Second, such as Ito Yokado and Mycal have been trading sales employees are sent from the manufacturer up, reducing the distinction between mass mer- and are compensated by the manufacturer rather chandisers and department stores. than the retailer. These sales employees interact The domestic growth of department stores was with consumers gathering market intelligence for limited by the Large-Scale Retail Store Law. This the manufacturer. Major manufacturers sell their law required lengthy evaluation and approval of 110 depressed industries

any new large store development, severely re- causes, including rising costs of production, no- stricting the number of new department stores, tably those of labor and other resource inputs but also reducing competition for the department such as raw materials and energy; outmoded and stores that are already present in the market. The inefficient plant technology especially relative to Large-Scale Retail Store Law motivated several foreign rivals; or a shift in demand to other sub- Japanese department stores to use international stitutes. Depressed industries generally lose com- expansion as a growth mechanism. petitiveness relative to foreign producers, and so Land prices and construction costs in Japan are challenged by high levels of imports. De- are the highest in the world. There is no early pressed industries are characterized by excess return on investment in a new building project. production capacity relative to existing demand, It takes ten to twelve years for a new department leading to great pressures for firms to exit the store to become profitable in Japan, and fifteen market, as well as high levels of unemployment. to twenty years before it breaks even on invest- Industrial decline can be divided into two ment costs. In places like Hong Kong, Singapore, stages: industrial distress, in which firms strug- Taipei and Bangkok, retail footage is expensive, gle to remain solvent in the face of underutilized but it is available. capacity and depressed prices and profits; and Japanese department stores also have small true decline, in which the industry’s problems branch outlets around the world to provide Japa- are so overwhelming that exit of large numbers nese travelers the guarantee of nearly 300 years of firms is the only option. Thus far, most of Ja- of tradition and service. pan’s declining industries have not yet entered this second phase. See also: discounters; distribution system; Ito- Yokado; Japanese business in China; Large Re- Depressed industries in postwar Japan tail Store Law Although more attention has been paid to Japan’s growth industries in the postwar period, de- Further reading pressed industries have also been common. In the 1950s, for instance, industries such as coal Sternquist, B. (1998) International Retailing, New York: mining and various parts of the textile industry Fairchild Press. (yarn and cloth production, weaving, etc.) had ——(2000) “Internationalization of Japanese Department clearly lost their competitiveness, and were faced and GMS Stores: Are There Characteristics of Pro- with excess capacity bankruptcy and high levels file Success?” in M. Czinkota and M.Kotabe (eds), of unemployment. Others, such as silk reeling Japanese Retail Strategy., London: International and rayon production, found demand for their Thomson Business Press, 242–249. products superseded by other substitute goods. Sternquist, B., Chung, J.E. and Ogawa, T. (2000) “Japa- (Another entire sector of the economy agricul- nese Department Stores: Does Size Matter in Buyer- ture, has been inefficient for most of the postwar Supplier Relationship?” in M.Czinkota and period. Similarly a number of service sectors, in- M.Kotabe (eds), Japanese Retail Strategy, London: cluding the construction industry and many in- International Thomson Business Press, 64–80. dustries involved in the distribution system have BRENDA STERNQUIST also suffered from a relative lack of efficiency.) In the 1970s the rapidly rising price of oil following the twin oil shocks staggered a number of depressed industries energy-intensive materials industries, including aluminum, petrochemicals and chemical fertiliz- In the course of a nation’s industrial development, ers, synthetic fibers, and minimill steel. Others, it is inevitable that some manufacturing indus- such as the shipbuilding industry suffered from tries will lose their competitiveness and enter into the worldwide decline in demand for new ships. long-term periods of economic distress and de- Still others, such as paper and paper pulp, ce- cline. Industrial decline can stem from various ment, and plywood also faced deep industrial depressed industries 111 distress as the result of declining demand at home prices and profits for all, industries have organ- and abroad. ized to try to stabilize their industry’s conditions. In the 1990s, former growth industries such In general, these efforts have taken the form of as the integrated steel industry and the automo- trying to control or manage “excessive competitive industry have approached industrial matu- tion.” In the short term, industries have attempted rity and have experienced periods of economic to form quasi-cartels, in which all firms in the distress. These problems were exacerbated by the industry consent to reduce their output levels by long recession of the 1990s. The economy’s weak an agreed upon amount. These efforts at bring- condition and rising levels of unemployment ing production in line with demand have been made more difficult the adjustment process for aimed at stabilizing prices, and therefore profits. these new depressed industries. Above all, industries have sought to avoid cut- throat competition that would damage all firms. In the longer term, industries have also tried to Adjusting to decline: market-oriented and reduce overall capacity using similar, collective political solutions through the 1980s means. Rather than relying on the market to force All depressed industries in Japan have attempted out the least competitive, industries have negoti- to deal with their problems through market ated collective agreements in which all firms are mechanisms, for instance by cutting the costs of expected to reduce a negotiated percentage of production or by developing new sources of de- their capacity. mand. Firms have also attempted to diversify into These collective efforts have usually been ne- higher value-added production by shifting to gotiated on a private basis, usually within each more specialized, processed products, or into industry’s political organization, the industry and other, non-related businesses. Others have at- trade associations, or gyokai. Within these asso- tempted to relocate production facilities abroad, ciations, firms have been able to communicate, either to tap into less expensive inputs (labor and negotiate industry-wide agreements, and to some raw materials) or to be closer to final demand. extent enforce their collective action. In periods Successful market-oriented adjustment to in- of acute economic distress, however, industries dustrial decline, however, has been limited to the have often found these private enforcement relatively large, capital and technology-intensive mechanisms to be insufficient to curb the prob- firms. Smaller firms, which have often had less lem of free riding common to any cartel. Rather, access to capital and technology have been much industries found external enforcement mecha- less successful in following these economic ad- nisms to be necessary and have often turned to justment strategies. In addition, all industries have the Ministry of International Trade and Indus- had a hard time in drastically reducing their labor try (MITI) for help, either to discipline so-called forces. Most Japanese firms—including small industry “outsiders” (relatively competitive firms ones—have made an implicit guarantee to their that refuse to cooperate with industry agree- workers not to fire them at the first sign of indus- ments), to regulate new entry into the industry trial distress. Rather, firms have resorted to such or, in some cases, to impede rising levels of im- measures as cutting working hours, retraining reports. dundant workers, and transferring excess labor The Japanese government responded with a to other, related firms. Again, larger firms, espe- variety of measures, especially for those indus- cially those with keiretsu ties, have been better able tries with political clout, as well as those that are to pursue these options; still, all firms in Japan deemed to be strategically important. MITI have tried to shield their workers to bear the full helped industries to coordinate production and brunt of adjustment. capacity cuts, often through the formation of for- In the past, depressed industries in Japan have mal “recession cartels.” In 1978 the government also tried to deal with their problems through passed the Depressed Industries Law, which sup- political, or collective, means. Rather than letting ported the capacity reduction efforts of designated market forces weed out the less efficient firms, industries, raised barriers to entry into the in- which would entail long periods of depressed dustry and made further cartelization possible. 112 Depressed Industries Law (1978)

The law also included specific provisions designed result have often been slow to adjust to changing to prevent “outsider” firms from violating the in- market conditions. In the late 1990s, however, dustry’s capacity reduction plans. The Japanese many firms, including some of Japan’s largest government has also supported efforts by indus- firms, saw no alternative but to lay off significant tries to slow down the growth of foreign imports, numbers of their core workers. which would undermine domestic attempts to The rising level of foreign investment in Ja- stabilize prices and profits. In the textile industry pan in the late 1990s has been a new and signifi- as one example, MITI used its powers of admin- cant catalyst for adjustment. In the automotive istrative guidance to importers and trading com- industry for example, foreign participation has panies to avoid flooding the domestic market. led to a significant restructuring of the industry. While Japan has avoided overt protection of its domestic market, the Japanese government has See also: bankruptcies; cartels; industrial policy; also helped to negotiate informal agreements with industrial regions competing textile industries in other countries, including China, Korea, and Pakistan, to main- Further reading tain an “orderly market” in Japan, akin to the “voluntary” export restraints that the United Dore, R. (1986) Flexible Rigidities: Industrial Policy and States has negotiated with Japan. The government Structural Adjustment in the Japanese Economy, 1970– has also passed measures to cushion the costs of 1980, Stanford, CA: Stanford University Press. adjustment, for instance by encouraging labor re- Katz, R. (1998) Japan: The System That Soured, Armonk, training and relocation, and providing induce- NY: M.E.Sharpe. ments for diversification. Noble, G. (1998) Collective Action in East Asia: How Rul- ing Parties Shape Industrial Policy, Ithaca, NY: Cornell University Press. Depressed industries in the 1990s Tilton, M. (1996) Restrained Trade: Cartels in Japan’s Basic Materials Industries, Ithaca, NY: Cornell University In large part because of foreign pressures, the Press. Japanese government in the 1990s was less able Uriu, R. (1996) Troubled Industries: Confronting Economic to support industry efforts to deal with distress Change in Japan, Ithaca, NY: Cornell University through collective or political means, especially Press. when such actions served to impede imports. ROBERT URIU Japan’s ability to impede imports through informal means has also come under heavier scrutiny. Recession and other types of government-ap- Depressed Industries Law (1978) proved cartels are less common today. Legisla- tion specifically designed to help industries In response to demands from a number of de- cooperate to reduce production or capacity lev- pressed industries, the Japanese government in els have been made more generic over time. Still, May of 1978 passed this legislation, designed to Japan’s depressed industries benefit from the help designated industries to cooperatively reduce many existing regulations that help them continue their excess productive capacity. The Japanese to stabilize their economic environment. De- economy in the late 1970s was still feeling the pressed industries have been powerful and vocal effects of the first oil shock, which forced many opponents of efforts to deregulate the domestic energy-intensive industries, such as aluminum economy. smelting, synthetic fibers, and petrochemicals, to Depressed industries in the 1990s have thus face rising production costs and the loss of com- had to rely more on market-oriented adjustment petitiveness relative to foreign producers. Other mechanisms. Some large firms have had success industries, such as the shipbuilding industry faced in diversifying at home or relocating production a drastic drop in foreign demand. All industries overseas. But all firms continued to struggle with in Japan were also hurt by the 40 percent appre- the problem of shedding excess labor, and as a ciation of the yen between 1977 and 1978, which deregulation 113 further undermined their export competitiveness way to deal with the problems of industries un- (see appreciating yen). der its jurisdiction. MITI was especially con- Under the provisions of the 1978 law (Tokutei cerned with avoiding socially disruptive Sangyo Antei Rinji Sochiho, or Tokuanho), two-thirds bankruptcies and rising unemployment, as this of an industry’s firms had to agree to apply to would have increased the politicization of its in- the government in order to be designated as de- dustrial policy. Some MITI officials were also pressed. Designated industries were exempted concerned with a handful of industries deemed from anti-trust laws, allowing the industry to for- to be strategically important. mulate a “stabilization plan” specifying capacity The legislation proved effective in helping reduction targets and methods. These plans were some designated industries shed their excess ca- then approved by the Ministry of International pacity. In most cases firms had planned to scrap Trade and Industry, but capacity cuts remained these facilities even before the law was passed, voluntary Industries that could not scrap suffi- but the effect of the law was to ensure that scrap- cient capacity could form an indicative cartel for ping occurred. The second oil shock hit Japan the purpose of capacity reductions. The law also soon after the legislation went into effect, mak- created a special trust fund that provided lowing recovery of the designated industries more interest loans to the designated industries to fi- difficult. In addition, a number of other indus- nance capacity reductions. In addition, the tries became depressed in this period. The government also passed separate legislation deal- Tokuanho expired in June 1983, and was super- ing with unemployed workers in depressed in- seded by a similar piece of legislation, the Struc- dustries, and for designated depressed regions. tural Improvement Law (Tokutei Sangyo Kozo Kaizen There was a strong consensus among indus- Rinji Sochiho). try leaders, politicians, and bureaucrats in favor of the Tokuanho. Depressed industries in Japan had See also: cartels; industrial regions been struggling with excess capacity for some years prior to the legislation. Rather than allow- Further reading ing the market to weed out the weakest firms, which would have led to periods of depressed Dore, R. (1986) Flexible Rigidities: Industrial Policy and prices and profits for all, industries had been try- Structural Adjustment in the Japanese Economy, 1970– ing to reduce capacity through cooperative in- 1980, Stanford, CA: Stanford University Press. dustry agreements. Industries were finding, Noble, G. (1998) Collective Action in East Asia: How Rul- however, that these efforts were undermined by ing Parties Shape Industrial Policy, Ithaca, NY: Cornell the problem of free riding: each firm hoped that University Press. it would be someone else who cut capacity or Tilton, M. (1996) Restrained Trade: Cartels in Japan’s Basic exited the market. The Tokuanho allowed indus- Materials Industries, Ithaca, NY: Cornell University tries to develop a more formal mechanism to re- Press. duce capacity across the board, and offered Uriu, R. (1996) Troubled Industries: Confronting Economic financial inducements for the disposal of capac- Change in Japan, Ithaca, NY: Cornell University ity Many of the depressed industries themselves Press. were vocal advocates of the law, and in fact lob- ROBERT URIU bied for provisions that would have given the government even greater powers to enforce their deregulation collective capacity-cutting efforts. Japanese politicians, faced with growing criti- Deregulation refers to the reduction or elimina- cisms for failing to act to deal with the economic tion of government regulations over industry It crisis of the 1970s, were also in favor of the law. is most often used to refer to the reduction of The new legislation promised to help some key economic regulations, such as price and entry industrial supporters deal with their problems. restrictions, but may also be used to refer to the Bureaucrats from the Ministry of International reduction of social regulations, such as health and Trade and Industry also saw the Tokuanho as a safety codes. Most advanced industrial countries 114 deregulation

have experienced a broad deregulation movement In all of these sectors, the regulatory authorities since the 1980s that has redefined government- continued to manage competition after “deregu- industry relations. The Japanese government’s lation,” controlling new entry and minimizing exit approach to deregulation diverged sharply from from the market. They retained a discretionary that of the United States or Britain in that it was regulatory style, and resisted the devolution of much more cautious in promoting competition regulatory responsibilities to independent agen- and reducing or devolving regulatory authority cies outside the central government ministries. (Vogel 1996). Some have argued that the failure to deregulate Popular commentators tend to use the term “de- more thoroughly contributed to the Japanese regulation” to refer to both the reduction of regu- economy’s weakness in the 1990s. lation and the promotion of competition, as if the The Japanese government accelerated its de- two were necessarily associated. That is, they as- regulation program in the 1990s in the face of a sume that less regulation necessarily means more severe recession combined with a full-fledged fi- competition. In the case of US airline deregula- nancial crisis. Manufacturers began to press for tion, this is precisely what happened: the govern- deregulation in the utility and service sectors to ment reduced regulation and eliminated a major lower their costs, and economists and journalists regulatory agency and by doing so stimulated advocated deregulation to address structural in- greater competition. But in many other cases, gov- efficiencies in the economy The government set ernments have actually strengthened regulation up a new deregulation headquarters in the Cabi- in order to promote competition. In telecommu- net Office in 1994, and developed a long-term nications, for example, most governments have plan for deregulation subject to annual progress increased regulation in order to foster competition reviews. with the former monopoly service providers. Thus In the financial sector, Prime Minister deregulation is often a misnomer for regulatory Hashimoto announced the “Big Bang” reform reforms which combine market liberalization with package in December 1996, and the government “reregulation,” meaning the reformulation of ex- began implementation in April 1998. The pack- isting regulations or the creation of new ones. age includes the deregulation of brokerage com- In Japan, the deregulation movement began missions, the elimination of controls on many with the Second Provisional Commission on Ad- foreign exchange transactions, and the liberaliza- ministrative Reform (known as the Rincho), which tion of the asset management market. It also al- presented a report in 1982 recommending sweep- lows banks, securities houses, and insurance ing bureaucratic restructuring and deregulation. companies to cross into each others’ lines of busi- In practice, however, the Rincho and related re- ness through holding companies. form commissions were more successful with pri- In telecommunications, the Ministry of Posts vatization than with deregulation. In and Telecommunications overhauled price regu- telecommunications, the government privatized lation in 1994, creating new larger local dialing Nippon Telegraph and Telephone NTT and areas with higher initial call rates. The govern- opened the telephone market to competition in ment then broke up NTT into one long-distance 1985. In transport, the government introduced carrier and two regional carriers, although the second and sometimes third carriers on select three units remain joined within a single holding routes through a meticulously planned series of company structure. In 1998, it announced fur- barters in which Japan Airlines (JAL), for ex- ther deregulation, including the elimination of ample, would open a new route on a specific All some price regulations and the reduction of in- Nippon Airways (ANA) line, and ANA would terconnection charges (charges levied by NTT open a new route on a JAL line in exchange. In for other providers using its network). finance, it gradually liberalized deposit interest In retail, the authorities phased in reforms rates from 1985 through 1994, and began the gradually from 1990 through 1994, streamlining process of lowering regulatory barriers between the approval process for large stores but still al- different segments of the financial industry (such lowing the small merchants themselves to exer- as banking, brokerage, and insurance) in 1992. cise considerable control. Then in 1998 the discounters 115 government replaced the Large Retail Store Law been several types of novel retailers that were with a new regulatory regime (effective in 2000) designated as discounters, one after another. that devolves authority to local governments. The The first renowned discounter in the post-Sec- new system is designed to promote competition ond World War period is Daiei, which opened while still allowing local authorities to promote its first store in 1957. Its founder, Isao Nakauchi, social values such as preserving the environment. was firmly opposed to the then prevailing price Critics argue, however, that it leaves consider- maintenance practices that the leading produc- able discretion in the hands of both the Ministry ers administered. He deployed a large number of International Trade and Industry (MITI) of chain stores that provided strong buying power and the local governments, and that in practice it in regard to the existing wholesalers, and em- may actually constrain competition and increase ployed such innovative methods as bulk purchase regulation. by cash and direct purchase on site of produc- The Japanese government has sustained a tion, in order to bypass the traditional distribu- commitment to deregulation from 1980 through tion system and offer lower prices to customers. to the present, yet progress has come slowly due As consumer needs increased rapidly through- to substantial political resistance from bureau- out the postwar period of economic growth, a crats, regulated industries, trade unions and con- number of new entrepreneurs followed Nakauchi sumers. with the chain store strategy consisting of deployment of standardized stores, self-selection of mer- See also: airline industry; competition; consumer chandise in contrast to the traditional sales by movement; liberalization of financial markets; clerks, and lower prices. They were generally Ministry of Finance; retail industry called “super” or “supermarket” despite the fact that the Japanese outlets were much smaller than the US supermarkets and located, at this initial Further reading stage, in commercial districts rather than in sub- Carlile, L. and Tilton, M. (eds) (1998) Is Japan Really urban areas, and should fall into the category of Changing Its Ways? Regulatory Reform and the Japanese superstores. Economy, Washington, DC: Brookings Institution. After the 1970s, a distinction began to be made Management and Coordination Agency (various) Kisei between general merchandizing stores (GMS) kanwa hakusho (Deregulation White Paper), Tokyo: and supermarkets (SM). GMS pursued a strat- Okurasho Insatsukyoku. egy of establishing branch stores nationwide, Vogel, S. (1996) Freer Markets, More Rules: Regulatory Re- while SM, essentially focusing on fresh products form in the Advanced Industrial Countries, Ithaca, NY: (fish, meat, and vegetables), tended to focus on Cornell University Press. regional expansion. By the late 1980s, GMS and ——(1999) “Can Japan Disengage? Winners and Los- SM chains had become the dominant forms ers in Japan’s Political Economy and the Ties that within the retail industry. At this time, however, Bind Them,” Social Science Japan Journal 2: 3–21. a new type of discounter began to challenge GMS and SM, especially in the field of liquor retailing. STEVEN VOGEL The liquor tax law in Japan stipulates a number of restrictions in regard to the distribution of al- DEVELOPMENT BANK OF JAPAN coholic beverages. These restrictions functioned see Japan Development Bank to sustain a complex and lengthy channel composed of the producers, tonya, and retailers. The new discounters developed various methods to discounters skip intermediary stages that allowed them to lower their prices. The term discounters relates to retailers who, by In the 1990s, as a result of the US-Japan Struc- developing innovative distribution channels, sell tural Talks that opened the Japanese retail indus- commodities at a considerably lower price than try to foreign operators, some American and the standard market price. In Japan, there have European leading retailers began to enter the 116 distribution system country. Among them, Toys R Us, which opened product or segment channels characterize the its first store in Japan in 1991, is known to be the system. Compared with distribution systems in first example of a “category killer.” Category kill- Europe or North America, it is often considered ers are retailers with a chain network specializing highly inefficient. However several unique geo- in a specific type of commodity at discount prices. graphic, physical and social aspects of the Japa- The term refers to the fact that this type of re- nese market help to explain how the system tailer aims to capture a large share of a particular developed and why it is so complex. In the latter category of commodities from traditional depart- half of the twentieth century and with increasing ment stores and GMS. The term was then ap- acceleration, significant changes have been tak- plied, in parallel with the term “discounters,” to ing place within the system. The most notewor- the roadside low-price chain stores specializing thy of these are the appearance of discount retail in such fields as home electronic appliances, men’s outlets that have effectively bypassed several lay- clothing, shoes, and optical wares, and also to ers of the distribution system and the growing camera discounters located in high-traffic areas presence of foreign firms, a number of which have close to large railroad terminals. introduced innovative or more sophisticated ap- Throughout the 1990s, this new type of dis- proaches to distribution management. counter spread to other genres of commodities. With a population of over 125 million people Several power centers, composed of a handful of living in an area slightly smaller than Sweden, category killer stores along with a GSM or SM, the Japanese market is a large, but relatively com- were developed following the US model of Kmart pact one. Population density in the major urban and Wal-Mart. Toward the end of the decade, areas of Kanto and Kansai ranks among the high- however, this second generation of discounters est in the world. When combined with the his- gradually lost novelty. torical development of the Japanese economy the Since the turn of the century a new form of result is a complex distribution system. Most of discounter has emerged, under the designation the roughly 6 million business enterprises in Ja- of the SPA (Specialty store retailer of Private La- pan are small. This is particularly the case in the bel Apparel) or SPA type retailer. UNIQLO, the retail sector, where over 90 percent of retail out- brand and store name of First Retailing Com- lets employ 10 persons or less, yet account for pany is generally regarded as a pioneer of this nearly 80 percent of all retail sales. These small type of discounting. The company designs all the retail outlets fall into one of four categories: (1) clothes and related products in-house, orders pro- specialty shops or boutiques marketing niche duction from overseas factories (especially China), products to a narrow market segment; (2) single and sells them exclusively in its own stores. The brand stores or franchises with a very close rela- term SPA is also used to designate other com- tionship to a single manufacturer; (3) convenience modity retailers that provide original products at stores, such as 7–11, Circle K or Family Mart; low price, relying on overseas production in and (4) traditional “mom and pop” stores serv- Southeast Asia and China. An example is Daiso, ing established neighborhoods. Many outlets are a retailer that sells a variety of commodities at a located away from major thoroughfares and lack uniform price of ¥100. the capacity to carry inventory North American- style shopping centers or European-style hyper- See also: foreign companies in Japan; Large Re- markets are becoming somewhat more common. tail Store Law; trade negotiations The density of the population and the high cost of land, however, have limited their growth. SHINTARO MOGI distribution system Historical development

Compared to its counterparts in the West, Japan’s Several historical developments have influenced distribution system is complicated and difficult the structure of the distribution system. In the to navigate. Multiple vertical layers and multiple Tokugawa period (1603–1854), during which distribution system 117 much of the commercial infrastructure developed, chasing habits and tastes, combined with height- wholesalers and merchants established a craft-like ened competition, led to economic distress among orientation toward their distribution activities. many wholesalers in traditional product and mar- Wholesalers would carry a specific product and ket channels. Not surprisingly many struggling service a defined geographical area. For example, wholesalers attempted to forestall bankruptcy by a pickle wholesaler in the Asakusa area of Tokyo expanding into new geographic areas or by try- would handle only pickled or cured products and ing to take on new products. deliver them only to shops in the several kilome- The early 1980s also saw the emergence of ter area surrounding Asakusa Shrine. Similarly a television shopping and catalog sales, which fur- wagashi—tea cakes and candies—wholesaler would ther eroded the margins of struggling distribu- distribute only these goods, but within the same tors, as growth in consumer purchases from retail geographic region. Over time, wholesalers devel- outlets flattened. This was followed in the 1990s oped close relationships with each shop owner, by the growth of the Internet and the emergence leading to the establishment of highly individu- of e-commerce websites. alized arrangements with regard to matters such as product returns and sales financing. System structure In the immediate post-Second World War era the emergence of large comprehensive consumer The postwar Japanese distribution system electronics and household appliance companies evolved into a multi-layer, multi-channel system. led to the establishment of brand or company In the mid-1980s the average distribution chan- stores. Companies such as Hitachi, Toshiba and nel had four layers. A manufacturer would hand Matsushita signed exclusive dealership contracts off product to a primary wholesaler capable of with pre-existing shops as well as helped finance distributing it nationwide or, at a minimum, to the opening of new ones. In exchange for carry- several major regions within Japan. The primary ing only the products of a single company these wholesaler would then transfer the product to a stores were allowed to sell the full range of prod- secondary wholesaler, who would cover a region ucts manufactured by that company. For exam- of smaller geographic area. The secondary whole- ple, a National (the domestic name for Matsushita saler would deliver the product to a tertiary products) dealer would sell everything from wash- wholesaler—often called a tonya—who would then ing machines, refrigerators and air conditioners deliver the product to a retail outlet. In short, the to home stereo systems, clock radios, televisions average product was handled four times, entail- and VCRs to electric shavers, lamps, light bulbs ing four margins or commissions. By contrast, and batteries. The manufacturers benefited from the average length of distribution channel in the this relationship because it allowed them to cre- USA was 1.5 layers and in France it was 1.25 ate closed distribution channels, thereby enabling layers. Each additional layer incurs an added cost, the removal of layers and associated margin costs. thereby making the distribution of product in Ja- Closed channels also made it possible for large pan significantly more expensive for both domes- firms to maintain price controls on products, and tic and foreign firms. to carefully monitor competition among brand The Japanese system is also multi-channel. retailers. There are separate channels for separate prod- In the 1980s, with the advent of a maturing ucts. Pet food is delivered through one channel, market, discount houses began to surface in ma- dry goods through another, soft drinks through jor metropolitan areas. Although major manufac- a third and so forth. An average 2,000 meter2 turers tried to prevent discounters from gaining supermarket in Japan may be serviced by more access to their products, as consumer awareness than thirty different wholesalers. Interestingly a grew this became increasingly difficult. In the single channel wholesaler would not be limited early 1990s the US-based Toys R Us entered the to a particular brand of product. So, for exam- Japanese market, further solidifying the position ple, a personal hygiene products wholesaler of discounters. would deliver to the same store competing brands At this same time changes in consumer pur- of toothpaste, soap, shampoo and deodorant. 118 distribution system

To some extent, the multiple layers and chan- shop distribution channel by encouraging the re- nels represent a historical artifact. However, ge- tail sale of their hair care products. Formerly ography also plays a role. Because most retail wholesalers to this channel had delivered only outlets are small, the tertiary wholesaler, or tonya, large, institutional products for use by the bar- often acts as a warehouse for the retailer, holding bers and beauticians. These two European firms inventory and delivering it to the store on an “as showed wholesalers how they could increase their needed” basis. Additionally the tonya often pro- sales by also distributing customer-use size prod- vides a financial service. Rather than the custom- uct for additional point-of-purchase sales. Again, ary “thirty day due” payment arrangements over time this innovation spread to other prod- common in North America and Europe, tonya use ucts and to other channels. promissory notes to extend credit on deliveries A Japanese company through its involvement up to 120 days. Payment arrangements are often with a US convenience store chain, introduced individualized, such that a tonya may have a dif- one of the most significant changes to the distri- ferent billing scheme for each retail outlet to which bution system. 7–11 Japan was a US-licensed op- he delivers. Additionally return of unsold goods eration owned by the Ito-Yokado Group. In the is an established practice, requiring the tonya, as 1970s it began opening 7–11s around the coun- well as secondary and primary wholesalers to try 7–11 pioneered the convenience store in Ja- move goods backwards through the channel. pan, competing directly against “mom and pop” Not surprisingly the distribution system has neighborhood stores. By staying open for longer often been targeted by foreign firms as a non- hours, carrying a wider variety of products and tariff barrier to their doing business in Japan. With by restocking shelves more frequently 7–11 ef- established, long-term relationships to both re- fectively overwhelmed its more traditional coun- tail outlets and manufacturers, wholesalers were terparts. In the mid-1980s it borrowed Toyota’s historically reluctant to take on the products of just-in-time concept and introduced a point-of- foreign manufacturers. To handle foreign prod- sale (POS) inventory that allowed them to track ucts was to run the risk of angering domestic sales on an hourly basis. The innovation in dis- manufacturers, who might in turn refuse the distribution came about when the company began tribution of their products. Nor were many for- using its POS data to make more frequent and eign firms adept at working with wholesalers in targeted deliveries. A typical, urban 7–11 received terms of financing arrangements or liberal re- deliveries twice a day once before the morning turns. rush hours and once before the evening rush. As a result of its ability to keep high demand product fresh and on the shelf, by 1990 7–11 Japan The influence of foreign firms had grown to become the fifth largest retail op- Many significant changes in the distribution sys- eration in the world. Following its lead, other con- tem have been brought about, either directly or venience stores, grocery stores and supermarkets indirectly by foreign firms seeking to enter the have attempted similar approaches in managing Japanese market. There are several notable ex- their distribution systems. amples. When Coca-Cola entered the Japanese Although other discount houses had already market in 1960, it sought to control its market- established themselves, Toys R Us entered Japan ing channels, but required retailers to pay on the as the first “category killer,” that is, a large retail standard “thirty day due” terms it was accus- store that sells only one category of merchandise tomed to in the USA. Initial resistance was re- and often dominates competition. Its entrance placed by acceptance, as word of product sales was significant because Toys R Us competes on spread among cooperating retailers. Although not the basis of price, relying on direct purchases from widespread, this payment practice has continued manufacturers and the attendant cost savings to spread among other manufacturers and into from not having to pay wholesaler commissions. other channels. Discount houses adopt a similar approach, but In a similar vein, L’Oreal and Wella introduced generally carry a much wider range of products. innovations into the beauty parlor and barber- By contrast, and of particular significance for the Dokoh, Toshio 119 distribution system in Japan, Toys R Us sought less, the Dodge Line was crucial in stabilizing the to control only a single market segment. Its con- volatile postwar economy and restoring it to a sequent overwhelming success had a devastating firm peacetime footing. The financial discipline effect not only on toy retailers, but on the toy which Dodge imposed would continue to char- distribution channel. As with other distribution acterize Japanese fiscal policy until the 1960s. innovations, category killers in other market segments have moved into Japan. Further reading The future of the distribution system Tsutsui, W.M. (1988) Banking Policy in Japan: American It is clear the innovations over the latter half of Efforts at Reform During the Occupation, London: the twentieth century will continue to reshape Routledge. the distribution system in the twenty-first cen- WILLIAM M.TSUTSUI tury Heightened competition is removing layers and blurring distinctions among channels. More- over, the growth of catalog and on-line shopping Dokoh, Toshio will further erode the power and role of the wholesalers and the traditional distribution system. Toshio Dokoh (1896–1988) was one of the lead- Nevertheless, the historical constraints of small ing Japanese business leaders responsible for re- outlets, limited inventory capacity long-term re- vitalizing Japanese industry in the aftermath of lationships and specialized arrangements suggest the Second World War and for reforming the that the Japanese distribution system will con- Japanese government and public corporations in tinue to retain greater complexity and appear the 1980s. Born in Okayama Prefecture in 1896, more inefficient than its Western counterparts. he graduated from the Tokyo Technical Higher School (subsequently named the Tokyo Institute of Technology) in 1920. Upon graduation he Further reading joined the Ishikawajima Shipyard Company Dodwell Marketing Consultants (2000) Retail Distribu- (which was later renamed Ishikawajims Heavy tion in Japan, Tokyo. Industries). He ascended to the presidency of the company in 1950, and held that position for ten ALLAN BIRD years. During his tenure as president, he reposi- tioned the company to take advantage of US pro- Dodge, Joseph M. curement in Japan in support of US military involvement in the Korean War. During the lat- Dodge was a Detroit banker who, as financial ter part of his presidency he engineered the advisor to the American occupation of Japan merger that created Ishikawajima-Harima Heavy from 1949–52, designed policies to end Japan’s Industries (IHI), and then became president of postwar hyperinflation, re-establish interna- the merged company. tional trade, and restore the market mechanism In 1965 Dokoh took over the reins of Toshiba in the Japanese economy Dodge’s severe auster- and, as he had done at IHI, led another com- ity program, known as the “Dodge Line,” dic- pany to growth and profits. In 1972 he moved tated the balancing of the national budget, the from president to chairman, retiring from that reform of US aid policies, the reduction of gov- position in 1976. From 1974 to 1980 he also ernment subsidies and direct economic controls, served as president of Keidanren, the Federation and the setting of a single yen-dollar exchange of Economic Organizations, one of the four most rate. important business associations in Japan. Dodge’s deflationary policies were extremely In 1981, Prime Minister Yasuhiro Nakasone unpopular and caused widespread fears of finan- asked Dokoh to head the Second Ad Hoc Com- cial collapse before Korean War procurements mission on Administrative Reform. (The First buoyed Japanese industry in 1950–1. Neverthe- Ad Hoc Commission on Administrative Reform 120 dollar shock

operated from 1962 to 1964.) Though the com- would enable ‘major nations to compete as equals.’ mission reviewed a broad range of governmental There is no longer any need for the United States administrative issues, the most significant re- to compete with one hand tied behind her back.” lated to what should be done with Japan’s three Three concessions were demanded of Japan: ex- largest public corporations: Japan National change rate adjustment (a large-scale revaluation Railways (JNR), Nippon Telegraph and Tel- of the yen), liberalization of domestic markets, ephone (NTT) and Japan Tobacco Corporation and burden sharing of American global policy (JT). Under Dokoh’s leadership, the commis- costs such as defense and ODA (Official Devel- sion recommended the privatization of all three, opment Assistance). an action that began in 1983. Dokoh passed In 1968, Japan became the second largest away in Tokyo in 1988. economy in the free world and its rapid increase in exports accelerated the expansion of the United ALLAN BIRD States foreign trade deficit that deepened the dollar crisis,—in other words, the international mon- dollar shock etary crisis—and led to the Nixon shock. As a result, the USA demanded that Japan share the The dollar shock in 1971, generally called the maintenance costs of world order in a broad “Nixon shock” in Japan, was caused by President sense. However, Japan’s response was delayed. Nixon’s announcement of his New Economic With regard to Japan’s delayed response, Angel Policy that led to the collapse of the Bretton (1991) pointed out, “Lack of response was inter- Woods system. Although the shock waves went preted in the United States and Europe as evi- throughout the world, Japan received the great- dence of Japan’s unwillingness to assume her est shock. The reason was that the policy was share of the costs of maintaining the international viewed in Japan as an attempt to force Japan to economic system.” revalue the fixed ¥360:$1 exchange rate estab- Nakamura (1981) notes that at that time there lished in 1949 that had been regarded as one of were misunderstandings between Japan and the the institutional frameworks of the high-speed rest of the world over Japan’s international posi- growth. In fact, the Nixon shock became a major tion and its economic power, namely the gradu- turning point of the Japanese economy. ally widening gap between the Japanese In order to cope with the dollar crisis, the perception of their own economy as a small, back- policy included the suspension of convertibility ward latecomer, and its evaluation by the inter- of dollar into gold, an across-the-board 10 per- national community as an emerging economic cent surcharge on imports, and a 10 percent re- power. This perception gap was an underlying duction in foreign aid expenditure. The goals of source of Japan’s delayed response and interna- the policy were: the suspension of dollar’s con- tional economic friction as symbolized by the vertibility into gold would initiate a multilateral Nixon shock. currency adjustment; the import surcharge would Having received the Nixon shock, the Japa- force other countries to revalue their currencies nese government was forced to respond to for- (after which it would be lifted); the costs of main- eign pressure, especially American demands. taining the world order such as foreign aid and Under the Smithsonian Agreement of December defense expenditures should be shared more 1971, Japan accepted the upward revaluation of properly among major countries. Ultimately the the yen from ¥360 to ¥308, a 16.88 percent ap- policy sought to reduce the United States’ bal- preciation against the dollar. The Japanese gov- ance of trade deficits, the situation that had caused ernment’s statement on the Agreement noted the dollar crisis. “there was an ‘end to the postwar system’ in the In his speech announcing the New Economic background of implementation of the multilat- Policy on August 15, 1971, President Nixon eral currency adjustment,” and “the time has ar- stated: “Others should bear ‘their fair share of rived when we should, domestically further the burden of defending freedom around the increase welfare and, abroad, make still greater world’ and agree to exchange-rate changes that contributions to international society” Dore, Ronald 121

Japan also partly accepted liberalization of do- Higuchi, H. (1999) Zaisei Kokusaika Trends: Sekaikeizai mestic markets, but showed a negative attitude No Kozohenka to Nippon No Zaiseiseisaku (Fiscal Inter- toward sharing the costs of defense against the nationalization: Structural Changes of the World so-called communist world because of constitu- Economy and Japanese Fiscal Policy), Tokyo: tional constraints, strong domestic opposition, Gakubunsha. and Asian neighbors’ memories of Japanese im- Kosai, Y. (1986) The Era of High-Speed Growth: Notes on perialism in the prewar and wartime period. More the Postwar Japanese Economy, trans. J.Kaminski, To- positive actions by Japan included an expansion- kyo: University of Tokyo Press. ary fiscal policy to stimulate domestic demand Nakamura, T. (1981) The Postwar Japanese Economy: Its and reduce the trade surplus. This led to a rapid Development and Structure, trans. J.Kaminski, Tokyo: increase in government spending on public works University of Tokyo Press. and social welfare. Uchino, T. (1978) Japan’s Postwar Economy: An Insider’s At that time, the Japanese government had View of its History and its Future, trans. M.A.Harbison, just confronted a three-pronged problem: for- Tokyo: Kodansha International. eign pressure, as noted above; a domestic reces- HITOSHI HIGUGHI sion that implied the end of high economic growth; and relatively meager social welfare provision compared to that of other major coun- Dore, Ronald tries. In order to deal with these three problems simultaneously the government adopted a sys- Ronald Dore was a British sociologist, author of tem of policies centered on expansionary fiscal many highly influential books on Japan, includ- policy which was supposed to expand social wel- ing City Life in Japan (1958), Land Reform in Japan fare and public works, recover the economy (1959), and Education in Tokugawa Japan (1964). from the recession, and reduce the trade surplus. This historical and social research provided a It was a plan that attempted a switch in growth strong grounding for his influential compara- pattern from export-led growth to fiscal policy- tive study of work organization and industrial led growth. relations in a Japanese and a British manufac- After the Nixon shock, other major countries turing company, British Factory Japanese Factory. openly demanded that Japan accept the burden His model of the Japanese enterprise as com- sharing of maintenance costs of the world order munity and his exposition of late development and Japan began to virtually share the burden. as an explanation for the differences between The “small country hypothesis” no longer held. the Japanese and British patterns were very in- In this period, however, an international discre- fluential. His later work on relational contract- tionary coordination of macroeconomic policy to ing in the Japanese textile industry (1986) and maintain the world economy had not yet ap- his writings on the importance of the Japanese peared. Consequently it is reasonable to argue model of capitalism (1987) have made him the that the Japanese response was an attempt at in- most influential European sociologist of Japa- ternational monetary cooperation, in response to nese business. criticism that Japan was responsible for the rapid increase in trade surplus that was the cause of the international monetary crisis. Further reading See also: income doubling plan Dore, R.P. (1973) British Factory Japanese Factory, Berke- ley CA: University of California Press. Further reading ——(1986) Flexible Rigidities, Stanford, CA: Stanford University Press. Angel, R.C. (1991) Explaining Economic Policy Failure: Ja- ——(1987) Taking Japan Seriously, London: Athlone Press. pan in the 1969–1971 International Monetary Crisis, New York: Columbia University Press. ELEANOR D.WESTNEY 122 dual structure theory

dual structure theory question that this structure developed over time from the Meiji era forward, largely as a result of The dual structure economy is generally under- government policies. However, there is contro- stood as a national economy that has both mod- versy about what other factors contributed to its ern capitalistic sectors and traditional development and how it can be eliminated. non-capitalistic sectors at the same time. The term The most popular theory espoused by was first introduced by Hiromi Arisawa in 1957 Miyohei Shinohara, proposed that the most imin an Economic White Paper and was noted as portant factors of the dual structure were the one of the distinctive characteristics of the Japa- split labor market and the Japanese banking sys- nese economic system. It was also believed that tem that had favored large-scale industries. As effective economic growth could not take place large-scale industries were able to invest huge within such an economic structure. Indeed, in a amounts in capital-intensive equipment, even in White Paper published the previous year, the its overseas operations, with long-term loans at government declared, “The Japanese economy favorable interest rates from both banks and the has passed its recovery process; the postwar pe- government, it was able to earn high returns riod has ended.” Elimination of the dual struc- with a relatively small number of laborers. ture came to be viewed as the most critical issue Those who were not able to gain access to em- in modernizing the economy through rapid ployment, or who were eliminated from, the growth. large-scale capitalistic sector had no other alter- The 1957 White Paper argues that the most native than to be absorbed into small and me- obvious distillation of the dual structure could dium industry which offered lower income due be found in the specific structure of the labor mar- to shortages of capital. ket: large numbers of family members contin- The typical Japanese labor system character- ued to work as laborers in both agriculture and ized by lifetime employment and a seniority sys- small industry/commerce. As a result, it was com- tem of wages has been adopted to a limited extent mon for labor relations to be non-existent or pre- within large industry. Given this, Shinohara’s ex- modern in those sectors and for wage differentials planation seems rational and persuasive. How- to be large and varied according to firm size ever, another school of thought challenges this within the industry. conclusion. Daikichi Ito argues that, because the As far as the manufacturing sector was con- monopoly power of large industry has so thor- cerned, the exact wording of the White Paper oughly penetrated the economic system from top report referred to the dual economy as a “polari- to bottom, there is really not a dual structure. zation between small industry and large indus- Instead, the wage differentials of workers in try” In 1957, large enterprises with more than smaller firms merely reflect the monopoly power 300 employees accounted for 44 percent of total that large firms hold over small firms, who are manufacturing shipment but just 27 percent of often their subcontractors. Other critics note that employment, while small enterprises with fewer Shinohara’s view, concentrating as it does mainly than 100 employees accounted for 39 percent of on labor and capital markets, does not take into shipment, but 42 percent of employment. Fur- consideration product markets in which prices thermore, comparing these numbers with those are non-elastic in the monopolistic markets and of the USA and Britain, Japan was characterized vice versa. by significantly larger numbers of small-and-me- While the positions were disputed by schol- dium sized enterprises and “mom and pop” busi- ars, the government recognized the importance ness operations: 68 percent of all enterprises had of providing more support to the huge number fewer than 200 employees and 34 per cent had of small/medium industries that were very influ- fewer than 20 employees. In the USA, the re- ential to the national economy and the people’s spective figures were 40 percent and 16 percent; life. Even before the first analysis in the 1957 in Britain they were 40 percent and 16 percent. White Paper, the government had already estab- The data unquestionably confirm the presence lished the National Finance Cooperation, a bank of a dual economic structure. Nor is there any for small and family businesses, in 1949. This dual structure theory 123 was followed by the Finance Cooperation for medium-sized enterprises emerged, and they were Small and Medium Enterprises in 1953, when able to overcome, by means of high technology democratization of the economy was in progress and skilled labor, the difficulties twice caused by after the Anti-Trust Law was introduced by GHQ oil crises. Although wage differentials still remain, in 1947. Soon after the Income-Doubling Program as does the subcontracting system, it is difficult was started in 1961, the government enacted the to argue that the dual structure still dominates Minor Enterprise Law in 1963. “Modernization” the Japanese economy. was the key word for small/medium industry One opinion holds that a dual structure can policy in that period. The government announced be seen as a temporary phenomenon in the capi- its intention to foster medium-sized enterprises talistic development in latecomers. In fact, South that have both modern management and high Korea demonstrated a similar pattern in the 1970s, technology. although the subcontracting system did not ex- Through the 1970s, the situation underwent ist. Instead, the South Korean government pro- many changes. First, when an abundant labor moted policies aimed at encouraging “organic force abandoned the rural areas, wages rose even linkages” to develop in the domestic economy in small manufacturing firms and wage differen- Similar cases may be emerging in other develop- tials diminished as a result. Ohkawa demon- ing countries in Asia and Southeast Asia. strated that it was at this point that Japan passed Lewis’s Turning Point. Second, many modern JO-SEOL KIM E

e-commerce ing the necessary licenses from the Ministry of Posts and Telecommunications, and even when In the latter half of the 1990s, as Japan struggled licenses were granted, the government allowed to recover from the recession that followed the only narrowly defined applications of the Internet collapse of the bubble economy e-commerce was and was not supportive of efforts to broaden its one of the few bright spots in the nation’s eco- usage. nomic landscape. Although Japan still lagged be- An individual Japanese and a natural disaster hind other industrialized nations in the everyday are generally credited with reversing this situa- application and use of information technology tion. Jura Murai, often referred to as the “godfa- (IT), Internet use and e-commerce were expand- ther of the Japanese Internet,” fought with ing rapidly. At the same time, these were evolv- government officials over the right to bring the ing in somewhat different directions in Japan than Internet into the country and, when faced with elsewhere, reflecting the nature of the country’s continuing opposition, went ahead on his own. specific business and regulatory environment. In 1992, Murai and his colleagues created the In Japan, as in other countries, IT, Internet Internet Initiative Japan (IIJ). IIJ’s Internet sys- use, and e-commerce have been and will continue tem violated the Ministry of Posts and Telecom- to be marked by rapid and continuous change. munications’ rigid regulations, but was faster and This entry describes the state of e-commerce as more efficient than the government’s own sys- it existed in Japan in the year 2000. tem. Helped by the fact that Internet access and usage is by nature difficult to monitor, Murai’s efforts prevailed, and the government’s attempts The development of the Internet in Japan to monopolize the Japanese Internet ended. A The Internet got off to a slow start in Japan, due further boost was given to Internet usage in the in large part to excessive regulation on the part aftermath of the Kobe earthquake in 1995. At a of the Japanese government. Japan’s first Internet time when other communications systems failed transmissions were sent not by Japanese but by or were inadequate, Internet transmission served American engineers working for US companies as a vital means of sharing information, and this which had set up Internet services for expatri- helped convince government officials of the ben- ates working in Japan. During the early years of efits of the new technology. the Internet, the Japanese government placed Although high access charges, the dominance higher priority on maintaining its highly regu- of English on the Web, and the slow spread of lated telecommunications system than on promot- personal computers for home use prevented ing the development of the new technology. Internet usage from growing as quickly as in some Japanese companies seeking to enter the Internet countries, Internet use in Japan increased stead- market were blocked by the difficulty of obtain- ily beginning in the mid-1990s. In 1995 it jumped e-commerce 125 by 41 percent, the highest rate of growth in the wireless phone company launched i-mode, an world at that time. By the end of 1997, Japan had Internet connection service for mobile phones 11.6 million Internet users and Japanese was the (keitai denwa). By May of 2000, i-mode and simi- second-most commonly used language on the net. lar services had 10 million subscribers and NTT Japan’s Internet population continued to grow, DoCoMo had become Japan’s largest Internet reaching 16.9 million by the end of 1998 and 27 service provider. Hundreds of Web sites were million—21.4 percent of the population—by the being created for tiny cell phone screens to sup- end of 1999. It was projected that 77 million peo- port mobile e-commerce, or “m-commerce.” The ple—60 percent of the population—would be us- response rate to i-mode advertising was reported ers by the year 2005. In 1998 there were 1 million to be five times higher than that for ordinary Web Japanese web sites, the second highest number ads. in the world.

The growth of e-commerce Internet access in Japan One of the biggest drags on Internet use and the The same type of hands-on approach that marked development of e-commerce in Japan was slow the Japanese government’s early regulation of the and expensive access. In 2000, most of Japan’s Internet could be seen in its efforts to promote e- Internet users accessed the Web through the tele- commerce, which by the late 1990s was seen as a phone network of Nippon Telegraph and Tele- major driver of economic growth in the twenty- phone Corporation (NTT), formerly a first century While the United States promoted government monopoly This meant paying not IT through deregulation, Japan did the opposite: only Internet access fees to an Internet Service using government subsidies and intervention to Provider (ISP) but also per-minute local telephone try to push development of e-commerce and other charges, which NTT had not reduced for twenty- IT sectors. For example, in 1996 the US govern- three years. With Internet fees averaging around ment amended the nation’s Telecommunications $ 20 per month for thirty hours of access and Law to remove barriers between telecommuni- local telephone charges adding up to $100 or more cations carriers and broadcasters in order to en- for a heavy user, Internet use in Japan was quite courage competition, reduce connection charges, costly by international standards. On top of this, and support the growth of e-commerce. At the many of Japan’s small ISPs lacked the scale and same time, the Japanese government set up the resources needed to secure premium bandwidth, Electronic Commerce Promotion Council of Ja- resulting in slow and poor connections. Faster pan, which together with MITI invested $476 and cheaper Internet service was becoming avail- million to try to develop Japanese e-commerce able, however, as ISPs were consolidating to se- technology; by 2000 this project had produced cure better international connections and little in the way of results. broadband alternatives such as cable television While government efforts floundered, Japa- and ADSL (asymmetric digital subscriber lines), nese companies and consumers gradually em- which allow vast amounts of data, including mov- braced e-commerce. According to a Ministry of ing pictures and music, to travel through the net Posts and Telecommunications White Paper is- at very high speed, were starting to be offered. sued in 2000, Japan’s e-commerce market in 1999, NTT was marketing a flat-rate ISDN (integrated including advertising, totaled more than $200 bil- services digital network) service in Tokyo and lion. B2B (business-to-business) transactions Osaka that provided faster access than phone dominated, with consumer spending accounting lines, while Sony had announced plans to build a for only $3.2 billion. E-commerce was projected wireless network to provide low-cost, high-speed to expand to $1.35 trillion per year by 2005, with Internet access in large Japanese cities. $68 billion being spent on consumer goods. The The Internet access mode that was growing explosive growth of cell phone-based Internet use at the greatest speed in Japan was wireless. In was expected to stimulate sharp growth in the 1999 NTT DoCoMo, Inc., the country’s largest B2C (business-to-consumer) sector. In 1999 126 e-commerce almost two-thirds of Japanese Internet users re- online than men, and appreciated the convenience ported making purchases online; the major prod- of use, access to foreign companies, and new en- ucts and services being bought were consumer tertainment services offered by the Internet. The electronics and personal computers, automobiles, environment for creating new e-businesses was travel, office supplies, books, and software. By also improving, with the launching of the Moth- 2000, Japan had over 25,000 virtual shops, with ers and NASDAQ Japan stock markets for start- new e-businesses being added at a rate of 500 to ups and the financing and incubation of new 800 per month. Online advertising expenditures e-commerce ventures by companies such as the totaled $68 million in 1998 but were expected to venture capitalist and Internet holding company reach $1.26 billion by 2003. Softbank, Inc. Numerous Internet data centers— Despite these figures, many industries had not facilities where corporate customers can locate yet been able to generate significant online sales. their servers and connect them to the Internet One reason for this was that Japanese consum- and which provide security from hackers and ers did not feel comfortable using credit cards natural disasters like earthquakes—were being set online. This led to the development of alterna- up in Japan. And every day Japan’s business press tive payment methods, including cash at physi- carried announcements of new e-commerce ini- cal stores for goods ordered online. Convenience tiatives: by companies large and small, old and stores, which are found everywhere in Japan, were new, and in areas from banking, computers, and also becoming a key site for e-commerce transac- entertainment to kimonos, food, and online edu- tions. The ‘Loppi’ system, developed by IBM and cation. installed in convenience stores, allowed shoppers Elements of both careful, hands-on planning— to order thousands of items online—from concert characteristic of the traditional Japanese approach tickets to software—far more than could be to business—and the more freewheeling, sponta- stocked in an actual store. 7–11 Japan was in- neous nature of dot.com entrepreneurship in Cali- stalling terminals in its convenience stores for fornia’s Silicon Valley could be seen in the various those who did not have Internet access at home e-commerce start-up communities that were and was teaming up with NEC, Sony Japan emerging in Japan. Representative of the former Travel Bureau and other leading Japanese firms was Kyoto’s highly organized Kyoto Research to set up an e-commerce market which integrated Park (KRP). Established by Osaka Gas Corpo- the convenience of online shopping with in-store ration, KRP provided space, service, and support payments and merchandise pickup capabilities. for Internet start-ups in return for stock, and had One factor which slowed the growth of e-com- built a reputation as one of Japan’s top incuba- merce in Japan was the lack of a national, com- tors. At the other end of the spectrum was the prehensive IT policy like that of Singapore, which Bit Valley Association and organic start-up com- in 1997 built a high-bandwidth telecommunica- munity of Tokyo’s Shibuya district. The Bit Val- tions network to connect the country to the rest ley Association was started in 1999 by two Tokyo of the world, and Malaysia, which promoted e- Internet pioneers as a weekly meeting/party held commerce by enacting “cyber laws” that recog- in a Shibuya cafe. It soon attracted thousands of nize electronic signatures and protect privacy. participants and inspired many people, includ- Another issue was fear that e-commerce could ing salaried workers from large established firms, cause job losses, by cutting out the middlemen in to jump into Internet businesses and establish e- Japan’s traditional multi-tiered distribution sys- commerce start-up funds. tem. The Japanese preference for face-to-face con- Given the nation’s history of success in busi- tact with suppliers and customers also tended to ness and the eagerness of Japanese to purchase hamper e-commerce. and try out new technologies, often available ear- Other factors were working in e-commerce’s lier in Japan than in other countries thanks to the favor, however. Women, who made up 40 per- leadership position enjoyed by major Japanese cent of Japan’s Internet users, were being seen as technology firms, it seemed certain that Japan a major engine for future e-commerce growth; would remain at the forefront of e-commerce well female Web users were more willing to shop into the twenty-first century. economic crisis in Asia 127

Further reading (20 percent), and extended holidays/vacations (4 percent). Coates, K. and Tiessen, J.H. (2000) Canadian Firms, Elec- In 1990, the Nikkei Index (the Japanese stock tronic Commerce and the Japanese Market, Toronto: The market) went from a high of 38,915 to a low of Canada-Japan Trade Council. 19,781, a drop of 49 percent. It had not been TIM CRAIG below 20,000 since 1987. Large companies’ share prices fell (for example, Nissan by 44.6 percent, Toshiba by 23 percent, Sony by 19.6 percent, economic crisis in Asia Honda by 18.2 percent, and NEC by 15.6 percent), while banks and real estate firms were even In the early 1980s the Japanese economy was harder hit (Mitsubishi Estate Co. fell by 63.7 per- booming. However, the economic bubble then cent, Sumitomo Bank by 56.1 percent, and burst, leading to an economic crisis in Japan that Daiichi Kangyo Bank by 46.5 percent). This reverberated throughout Asia. Japan’s productive first occurred in isolation, but over time the en- capacity began to exceed demand and a recur- tire economy of Japan and then the economy of ring trade surplus developed. The Japanese gov- the entire Asian region was affected. Minister of ernment was forced to adopt policies aimed at Finance Hashimoto closed the Tokyo Stock Ex- boosting internal demand and restraining produc- change for a day and announced a market-res- tion. Mandatory cutbacks in rice acreage were cue plan. Japanese real estate firms began to sell imposed, and voluntary restraints were applied their holdings in the United States because Japa- to exports. The bursting of the bubble economy nese banks were nervous and increased interest shows that supply and demand cannot be bal- rates. This affected not just the USA and Europe, anced by relying on a bureaucratic-led drive to but the rest of Asia as well. stimulate domestic demand and keep the Many economists hold that deregulation is key economy going. GDP growth began to decrease for economic recovery The Japanese government from 6.2 percent in 1988 to 4.3 percent in 1991 must restructure the economy stimulate demand, and -1.1 percent in 1992. There was also a long and reform the political system. Japanese compa- slump in the stock market beginning in 1990 and nies must upgrade their operations and lower continuing for several years. Deflation (defure in their production costs. Prime Minister Morihiro Japanese) led to a decrease in consumer prices Hosokawa’s economic policies were not planned and a price revolution, kakaku hakai, that came to in advance, but developed as a result of the eco- be known as Heisei Recession. Declining corpo- nomic crisis. Called “Hosonomics,” this policy rate profits and adverse business conditions were placed an emphasis on small government, deregu- due in part to the appreciating yen. This was lation, consumerism, deficit spending, and busi- also a time of lowering real estate prices and low ness-oriented government policies. interest rates. In 1996, according to a study by Dentsu Ad- Job offers also decreased in Japan, although vertising, 34.5 percent of Japanese consumers be- unemployment remained unchanged at less than lieved that the economy was on course to recover. 3 percent for many years. The ratio of job offers However, consumers wanted lower prices, and to job seekers was 1.02 in 1988 and 0.76 in 1993. were willing to accept “good enough” quality This was a recession without layoffs. Between rather than “best quality.” In other words, they 1992 and 1994, 8.5 percent of Japan’s compa- were still cautious about spending money In 1997, nies with 1,000 or more employees cut an aver- leisure businesses such as theme parks and de- age of 130 new jobs. Between 1992 and 1995, partment stores were still showing large losses. manufacturing employment decreased by 8 per- By the end of that year, the economic problems cent. Companies said that this was accomplished in Japan were even worse. by dismissing part-time and temporary workers The Japanese recession may have positive im- (6 percent), reducing overtime (24 percent), plications for small and medium enterprises reassignments, hai-ten and shukko (18 percent), (SMEs) and the service industry (see small and hiring freezes (13 percent), voluntary retirement medium-sized firms). Some things that small 128 economic growth businesses could not do during the 1980s could Japanese firms were hit hard by the crisis in be done during the recession because of lower the region. The cost of imported raw materials real estate prices and lower interest rates. Labor rose, while demand for finished products de- and other resources were also now available and creased. Many companies put expansion plans affordable. However, the SMEs were hard hit by on hold. The Japanese government supplied fi- the crisis and are still negative about an economic nancial aid, primarily through the IMF, to assist recovery. the countries in crisis. To decrease expenses, temporary work and By 2000, the economies of the region had fi- employment of women on a part-time basis is in- nally begun to recover. The ASEAN countries creasing. To decrease production costs, Japanese and Korea showed growth in their gross domes- companies moved manufacturing operations tic products in 1999. The consensus is that the overseas to the rest of Asia, which was also hit by Asian economy is on the mend, but appropriate the economic crisis. This allowed Japanese firms government policies are needed to reinforce in- to import lower cost products. Japanese real es- frastructure and create jobs in order to keep tate firms began selling off overseas holdings. This growth on track. too affected not only the United States and Eu- See also: business ethics; Heisei boom rope but also the rest of Asia. In 1997, Japan was still in a recession and the TERRI R.LITUCHY currency crisis began in Asia. There was a slowdown in growth for all ASEAN countries in economic growth 1997–98. The ASEAN four—Thailand, Indone- The postwar Japanese economy attained high growth. sia, Malaysia and the Philippines—were at the Annual growth rates of gross domestic product on center of the crisis but other Asian countries were average for the periods of 1955–60, 1960–65 and also hard hit including Korea, Taiwan, Singapore, 1965–70 were 8.9 percent, 9.0 percent and 10.9 per- Hong Kong and China. Hong Kong had its worst cent respectively These rates declined somewhat to economic crisis since the Second World War. The 4.4 percent and 4.1 percent in the 1970s and 1980s. Hong Kong stock market lost more than 80 per- However, in the 1990s (1990–97), the economy cent of its value in one year, and real estate prices slowed to 1.6 percent. The sections below consider plunged. Hundreds of businesses went bankrupt the features and fundamental factors underlying the and unemployment doubled to greater than 4 per- high growth periods in light of several theoretical percent (a fifteen-year high). spectives and then discuss problems that the Japanese In all of Asia, wages were hit by the crisis. economy faces The devaluation of the Thai baht caused workers’ monthly wages to fall from US$164 in June Features and theoretical background of high 1997 to $ 90 in July 1997. In Indonesia and Ma- economic growth in Japan laysia, wages fell by about half. Currency devaluation led to a 30–50 percent decrease in The high growth of the Japanese economy ac- automobile prices. In order to try to prevent a companied rapid changes in industrial structure. recession, many governments raised taxes and In particular, industries such as metal, machin- increased prices on government-controlled indus- ery and chemicals, grew dramatically These tries and goods, such as electricity and gas. In heavy and chemical industries comprised 20 per- 1998, the Korean government increased fares on cent of Japanese total product of manufacturing airlines, buses and railways. The Malaysian gov- industries in 1955, but 75 percent in 1990. The ernment increased prices of sugar, flour, milk and machinery industry now comprises the largest other government-controlled items. However, the share of Japanese exports. In the process of recession continued. Companies in Thailand, Ma- industrializa tion, a rapid concentration of the laysia, Korea, and elsewhere in Asia laid off em- population in urban areas has been observed. At ployees. Many businesses shut down operations present the two largest metropolitan areas, To- due to decreased demand and consumption in kyo and Osaka, account for nearly half of the the region. total population in Japan. economic growth 129

Neoclassical economic growth theories explain economy where scale merits operate: an equilib- the processes of capital accumulation and eco- rium in which no investments are made and in- nomic growth based on the saving behavior of come levels remain low; and an equilibrium in households and the investment behavior of com- which industries with scale economies are suc- panies. The smaller the amount of installed equip- cessfully established and high income levels at- ment, the higher the return on investment for a tained. The former is called a “poverty trap.” In company. Thus, aggressive investment in equip- the latter equilibrium, scale economics result in ment is observed in the earlier stages of economic the geographical concentration of capital and the growth, and this lifts interest rates in the capital labor force. With these new growth models, it is market. In contrast, households increase future possible to explain the persistent income gap income by consuming less and saving more when among nations. We can also say that economic interest rates are high. Large savings by house- growth in Japan is a “jumping process” to a bet- holds finance large investments in equipment. In ter equilibrium. this way a higher economic growth rate is at- However, this jumping process cannot be tained. As capital accumulates and income in- achieved automatically. Sufficiently large markets, creases, returns on investment fall. Investment entrepreneurship, positive expectations for the fu- and saving decline and consumption increases. ture, an abundant labor force, and appropriate The process of economic growth is thus com- economic policies are all indispensable. The fol- pleted. lowing is an analysis of these factors in the post- Traditional growth models, however, cannot war Japanese economy. fully explain the cases of postwar Japan and other Asian economies in recent years. Traditional growth models predict higher growth rates in an Large domestic market economy with lower income levels. Hence, the difference in per capita income among economies Industries with effective scale economics cannot should converge in the long run. In reality how- be established until huge investments in equip- ever, the difference has been diverging rather than ment are made. Markets large enough to pay for converging. To explain this phenomenon, two fac- this investment are essential. Foreign markets tors have been explicitly introduced into new eco- have played a significant role in the recent indus- nomic growth models. trialization of Asian economies. In Japan, how- Firstly focus has been placed on capital goods ever, the domestic market is more important than other than equipment. The accumulation of hu- foreign markets. The Japanese economy had been man capital, which is acquired through educa- growing since the middle of the nineteenth cen- tional investment, plays a particularly crucial role tury Light industries, such as textile and foods, in economic growth. Differences in economic were the leading sectors in prewar Japan, and ac- growth rates can be explained to some extent by cordingly income levels were not particularly low. this factor. Furthermore, drastic reforms such as farmland Secondly scale economies have been explic- reform after the Second World War mitigated in- itly introduced into new growth theories. Scale is come inequalities. These factors created poten- effective in heavy and chemical industries. In tially large domestic markets for durable other words, the size of an industry has a posi- consumer goods. tive external effect on the productivity of the companies within that industry; the larger the scale of the industry the more productivity increases. Positive expectations for the future This characteristic is opposite to the diminishing returns that are assumed in traditional economic To establish an industry with scale economies, growth theories. To establish such industries, a several companies must simultaneously invest huge investment in equipment is necessary in the heavily in equipment. Of course, investments are initial stages. made in anticipation of future profits. In indus- There are two stable equilibriums in an tries with scale economies, however, companies 130 economic growth will make investments only if they do share posi- ment Bank have financed huge investments of tive expectations regarding the future size of their heavy and chemical industries. market. Then, a balance of coordination and competition among the companies is needed. Once Abundant labor force the investments are made, productivity and income, and therefore the market size, increase. As In order to establish and develop industries with a result, initial investment can produce a profit effective scale economies, it is necessary to mobi- and positive expectations become self-fulfilling. lize a large labor force in a short period. A huge The market expands more and more, which leads number of young and inexpensive workers were to new companies entering the industry. In this supplied from rural areas and absorbed into the way a competitive market is achieved, and this newly growing sectors in urban areas. In this way leads to further economic growth. This process rapid changes in industrial structure and high can be observed in the postwar Japanese economy growth of the Japanese economy were attained. especially in the 1960s. In contrast, pessimistic Japanese company management systems were the expectations depress investment. Income and mechanisms used to organize the labor force effi- markets never grow, and pessimistic expectations ciently. thus become self-fulfilling. This process is a vi- The concentration of population in cities in- cious circle in which investment for industries creased the demand for durable consumer goods. with scale merits is never made. When labor force migration stopped, wages began to increase, and companies began substituting equipment for workers, which increased the Appropriate economic policy stances demand for machinery. These growing markets promoted industrialization and sustained high Protective trade and industrial policy are often growth. said to have supported Japan’s industrialization and economic growth. However, these did not play as important a role as they are said to have. Summary and recent issues Several Latin American nations also attempted industrialization that relied on protective poli- Through the factors we have examined here, the cies, but failed. Their domestic markets were too Japanese economy was able to attain high growth small for scale to be fully realized. The expecta- and catch up with the Western industrialized tion of perpetual protectionism and limited entry countries. The Japanese company management also hampered the development of entrepre- system, the relationship between the private and neurship. In Japan, however, abundant demand public sectors, and the education system oper- and resources, as well as the efforts of the private ated very efficiently based on Japan’s potentially sector, were the basic factors behind high large domestic markets and abundant young la- growth. The trade and industrial policies imple- bor force. mented in Japan were far smaller in relative scale The situation today however, is drastically and were intended to be temporary From this, different. Which industries will grow is not as we can conclude that the policies were not essen- clear as it once was. Unclear and pessimistic ex- tial. pectations for the future deter companies from in- However, it can be said that some policies vestment. In financial markets, many commercial played an important role in coordinating eco- banks have not yet disposed of the huge bad debts nomic activities and in improving some incom- caused by overheated speculations and invest- pleteness of financial markets. The Ministry of ments in the bubble economy era. This is a nega- International Trade and Industry may have tive factor for a standard Japanese company that contributed by causing companies to share posi- heavily depends on indirect finance. Because of tive expectations for the future and regulating these negative factors in both demand and sup- them to prevent excess competition. Public fi- ply sides, investments in new industries cannot nance companies such as the Japan Develop- grow. The supply of young and inexpensive economic ideology 131

workers which would allow rapid changes in in- ——(1989) “Industrialization and the Big Push,” Journal dustrial structures has dried up. Rapid aging of of Political Economy 97:1003–26. the population is fundamentally changing the HIROKI KONDO Japanese company management system. Goods, financial and labor markets all face problems. Abuses of the once-beneficial relation- economic ideology ship between the private and public sectors are also coming to light. In goods markets, with in- Japan’s extremely rapid rise to economic power dustrial policies to promote not only process in- in the postwar period brought with it a much novation but also product innovation, large new sharper interest in the Japanese economic system. foreign markets can be created. Aging may cre- As observers both within and outside of Japan ate potentially large domestic markets of new sought to explain the success of Japanese capital- types of goods and services. In financial markets, ism, explaining the ideological underpinnings public financial organizations are still influential. became increasingly important. However, for When financial markets are incomplete, the pub- both Japanese and non-Japanese alike, explain- lic sector should finance huge investments of ing ideology has not been particularly easy For growing industries. At present this duty should observers weaned on free-market, neoclassical be transferred to competitive markets. However, economics, Japan’s economic system often though direct participation may not be called for, seemed a paradox. The lessons of neoclassical indirect participation by governments is neces- theory are to let flexible prices in deregulated sary The nature of incomplete financial markets markets delineate where resources go; this ulti- and the types of appropriate government partici- mately leads to greater efficiency and growth. pation is currently the focus of much theoretical However, Japan grew amazingly quickly in the and empirical investigation. postwar period with capital, labor, and product It is essential for these Japanese systems to “markets” influenced heavily by government and change in ways that will allow them to utilize the inter-firm relationships. middle-aged and older labor force and the female The implication of neoclassical economic labor force efficiently Japanese company manage- theory is that the Japanese economy could have ment systems such as employment and promo- grown even faster during the postwar period had tion systems are drastically changing. Appropriate it looked more like a laissez-faire economy with social security systems to enforce these move- flexible price signals. By the 1980s, however, this ments will also be indispensable. began to ring hollow as many US and European industries lost significant ground to the Japanese. Attention increasingly turned to how capitalist Further reading systems can differ in their evolution and in a particular moment in time, as well as what can be Barro, R.J. and Sala-I-Martin, X. (1995) Economic Growth, learned from those differences. Furthermore, with New York: McGraw-Hill. the collapse of the Soviet Union in the 1990s, the Grossman, G. and Helpman, E. (1991) Innovation and Cold War pressure to view capitalism Growth in the Global Economy, Cambridge, MA: MIT monolithically—without historical, institutional, Press. and cultural differences—diminished. Given rec- Krugman, P. (1991) Geography and Trade, Cambridge, ognized differences, the question now for capi- MA: MIT Press. talist economic systems is what form they should Mankiw, N.G., Romer, D. and Weil, D.N. (1992) “A take during different stages of development. Contribution to the Empirics of Economic Growth,” Ironically the early 1990s also marks the mo- Quarterly Journal of Economics 107: 407–37. ment when the Japanese bubble economy Murphy K.M., Shleifer, A. and Vishny R.W. (1989) burst, and the drawn-out struggle to revive Ja- “Income Distribution, Market Size, and Industrial- pan’s economy has made literature pinpointing ization,” Quarterly Journal of Economics 104:537–564. and trumpeting the reasons for Japan’s success 132 economic ideology somewhat less compelling. The urge to define sought to industrialize rapidly due to the West- and learn from Japanese economic ideology has ern threat of superiority and that this urgency arguably decreased in the face of Japan’s stagna- affected ideology. For the Japanese, the goal in tion. Indeed, the pendulum swung in the other the nineteenth century was immediate: strengthen direction in the 1990s, with many outside and the nation’s power in international competition. inside Japan arguing for major structural reform In contrast, Anglo-American capitalism was of the economy structural reform that gives free gradually nurtured in a cultural context of indi- markets a more central role. This parallels the vidualism during the Enlightenment. In Japan, German experience in the 1990s as the USA and industrialization was borrowed from the West, Britain boomed while Germany struggled. Inter- but the laissez-faire mindset stressing the au- estingly like their US counterparts in the 1980s tonomy of the individual was not. In the twenti- debating the relative merits of industrial policy, eth century a military form of developmentalism policy makers and others in Japan and Germany had emerged in full force in response to the Great are similarly engaged with whether, when and Depression and the First World War. This was how to allow convergence towards more Anglo- later challenged by the democratic reforms un- American practices such as a shareholder model der MacArthur, but instead of resulting in a lib- of corporate control (see corporate govern- eral free market economic system, the economy ance). evolved into a form of developmentalism Japan’s economic ideology draws some inspi- centering on trade. ration from Anglo-American neoclassical theory This is one view of a fairly well-known school but it is also clear that the German schools of of thought on Japanese economic ideology; there thought have had particular influence. German are other schools, some focusing on the critical schools of economic thought and philosophy such role of corporations, or of human resources, or as the historical school stress the role of the gov- of the market. At this point, it is safe to say that ernment in a “national” economy oriented to- debates over capitalist economic ideology—even wards production. Actors in a system like this debates within a country over what that ideol- engage collectively in production to increase a ogy is—are not about to end. The Japanese nation’s power. Production strengthens national developmentalist model—however “stylized” it power while consumption weakens that power. may be—remains important as a point of refer- Japan’s economic ideology has been labeled ence. This is especially the case for the develop- “developmentalism” by those focused on the pri- ing world. The Russian experience provides a macy of the Japanese government in economic sobering case study in the potential pitfalls of activity Chalmers Johnson is perhaps the best universalist neoclassical solutions quickly admin- known of the Western scholars for his exposi- istered. Deregulating Russia through Western tion of developmentalism. Principles characteriz- style “shock therapy” proved to be nothing short ing developmentalism in Japan include the of disastrous. The Japanese approach to devel- importance of strategy and the government in opment—which is more incrementalist, strategic, directing resources, a production rather than a and sensitive to institutional and historical con- consumer orientation, restraint of excessive price text—widens the constellation of possibility and competition, and the premium on long run firm enlivens the challenge of increasing economic and growth and productivity rather than profit. Also social welfare in all countries. distinctive is the focus on the concrete processes of production, distribution, exchange, and consumption. Japanese developmentalism is relentlessly Further reading pragmatic and not bound to any one universalistic Gao, B. (1997) Economic Ideology and Japanese Industrial economic theory. As such, it is relativistic, flex- Policy, New York: Cambridge University Press. ible, and grounded in the contemporary condi- Johnson, C. (1982) MITI and the Japanese Miracle, tions of economic life. Stanford, CA: Stanford University Press. Johnson and other scholars have pointed out that Japanese capitalism evolved as the country WILLIAM BARNES education system 133 education system mayor. Municipal boards operate municipal elementary and middle schools; choose textbooks The Japanese education system has provided the from the MOE’s approved list; and make recom- foundation for twentieth-century Japanese eco- mendations to the prefectural board of education nomic success by producing an adaptable, pro- on the appointment and dismissal of teachers. ductive work force and has become a model for developing countries, particularly in East Asia. Historical development Growing out of roots in the Meiji restoration and modeled after the German, French and Historians describe two educational revolutions American education systems, it is a unitary sys- in Japanese history The first occurred during the tem dominated by the Ministry of Education in Meiji restoration in the late nineteenth century Tokyo and its affiliated prefectural branches. The when Japanese leaders worked to tear down neo- Japanese education system is renowned for pro- Confucian educational structures and attitudes viding a strong education to all students, particu- and institute modern educational practices, roles, larly in mathematics and science, but has been and structures imitated from the United States, criticized by Japanese teachers and politicians for Germany and France. From France, Meiji lead- inhibiting creativity and causing extreme stress ers imitated a centralized educational system run in some students. by a national Ministry of Education. Following The education system in Japan is structured the German model, they created a system that along the American model, with six elementary sorted students from the time they entered pri- school years, three middle school years, three high mary school into discrete career tracks. They bor- school years and four university years. Elemen- rowed basic curriculum from the United States. tary and middle school are mandatory Students During the 1920s, teachers pressed for Ameri- with physical and mental handicaps attend sepa- can-style reforms inspired by John Dewey such rate schools, creating greater educational uniform- as “liberal education” and “life-in-education.” The ity. Over 99 percent of children of compulsory rise of the military during the 1930s, however, school age are enrolled in school, and approxi- ensured that the centralized, state-oriented sys- mately 95 percent of students complete the tem continued. equivalent of high school. The Japanese school The second educational revolution occurred year begins in early April and is organized in tri- after Japan’s defeat in the Second World War. mesters that run from April to July September to The American occupation attempted to create a December, and January to March. Japanese stu- more decentralized, egalitarian, and above all dents receive an average of approximately 200 democratic Japanese education system. At the days of classroom instruction. urging of Occupation authorities, the Japanese The Ministry of Education (MOE) exerts the Diet created a single-track 6–3–3–4 system to strongest influence on the school system, prescrib- replace the pre-war multi-track system. Occupa- ing curricula, standards, and requirements; ap- tion authorities also mandated the establishment proving textbooks; providing guidance and of neighborhood schools instead of merit-based financial subsidies accounting for nearly half of school recruiting; established locally elected total educational expenditures; authorizing the school boards; and limited the authority of the establishment of colleges, universities, and pri- MOE to issuing outlines, suggestions, and teach- vate schools; and operating national universities, ing guides. junior colleges, and technical colleges. Each pre- While political liberals and the national teach- fecture also has a board of education, appointed ers’ union embraced the reforms, Japanese po- by the prefectural governor. Prefectural boards litical conservatives bitterly opposed them. After appoint the prefectural superintendent of educa- winning control of the government in 1955 tion with the consent of the MOE; operate pre- when the Liberal Democratic Party was cre- fectural high schools; license teachers; and make ated, conservatives began an educational “re- appointments to schools. Finally each municipal- verse course,” passing legislation gutting the ity has a board of education appointed by the authority of local school boards, making MOE 134 education system

curriculum nationally mandatory requiring that and mathematics. However, no academic track- all school texts be approved by the MOE review ing takes place, and teachers deliberately mix stu- boards, and finally striking at the single-track dents of differing academic ability in han and go system by creating vocational high schools. El- to extreme lengths to ensure that all students pro- ementary schools, however, remained largely ceed together through lessons. untouched. In the 1980s, Japan entered a national debate Secondary schools on education reform. Spurred by widely reported incidents of student violence, increasing reports In contrast to elementary schools, Japanese sec- of bullying, and a sharp rise in “school refusers,” ondary schools focus on preparing students to children psychologically unable to attend school enter the workforce. High schools and to some out of fear or stress, Prime Minister Yasuhiro extent middle schools track students and teach Nakasone created the National Ad Hoc Council increasingly specialized curricula. They also stress on Education Reform to further diversify the sin- the central importance of hard work and diligence gle-track system, improve the high school and through required moral education courses and university entrance examination system, increase structures such as the entrance examination sys- emphasis on moral and physical education, pro- tem. mote internationalization of education, and im- Like elementary schools, middle schools are prove the quality of teachers. Despite strong neighborhood schools. Students remain with the public interest, pervasive media coverage, sup- same kumi for at least a year, while teachers spe- port from Nikkeiren and Keidanren, and the cializing in an academic area rotate classrooms prime minister’s personal attention, the council throughout the day Students learn the same failed to recommend structural changes, only en- MOE-mandated curricula, use the same MOE- dorsing increased moral education and interna- approved textbooks, and take the same classes: tionalization. Radical change to the educational mathematics, Japanese language, English, science, system appears unlikely. history moral education, and physical education, with occasional art and music classes. Middle school students’ concerns become in- Elementary schools creasingly dominated by the prefectural high Japanese elementary schools emphasize personal school entrance examination. The examination development and an experiential approach to is written to ensure that students have mastered learning, seeking to build students’ motivation three years of middle school course material and and confidence, as well as personal and social is dominated by facts and specifics. In order to skills. In particular, elementary schools stress the excel, students must spend hours studying and ability to work well in small groups through struc- memorizing. Proponents of the system argue it tures such as han, classroom workgroups. Han teaches students the importance of hard work, members must work together to perform aca- diligence, and perseverance. Based on the results demic tasks, such as making presentations and of the entrance examination, a student may en- doing research, as well as non-academic tasks, ter (in decreasing prestige): an elite private school, such as serving lunch and cleaning the classroom a public university prep school, a public voca- and school. tional school, a general private school, or a pub- Elementary students remain with the same lic night school. kumi, or class, for the entire academic year. El- Education in Japanese high schools varies ementary school teachers’ top priority is to en- widely according to the type of school. In univer- gage students in learning, not to fill their heads sity prep schools, the mood is serious and behavior with facts. Accordingly teachers emphasize proc- is oriented toward the national university entrance ess, engagement, and commitment rather than examination. Teachers are expected to pour infor- discipline and outcome. At the same time, teach- mation into students by lecture to prepare them ers work to provide students with fundamental for the university entrance examination. Students academic skills, particularly in Japanese language in vocational schools have fewer hours of the core education system 135

academic subjects to allow them to study nursing, Once admitted, however, almost 75 percent cooking, practical business skills, etc., and empha- of university students graduate in four years and sis falls on those vocational skills. In night schools, almost 90 percent graduate eventually teachers emphasize basic coping skills. Coursework demands drop off significantly from High school students are expected to continue high school and most students take part-time jobs. to learn to work in groups, continuing to stay Japanese universities have been criticized for their with the same kumi for a year, though han are relatively lax instruction and poor attendance, much less prominent than in elementary school. leading to their reputation as merely credentialing Instead, students participate in mandatory after- institutions. school sports or culture clubs, where students Graduate students are concentrated in a small learn to work within the sempai-kohai, or senior- number of elite public and private universities junior, relationships that will become important and make up only 4 percent of total university during their university and work lives. enrollment. Graduate studies are considered strictly in-service training for careers in academia since most Japanese employers prefer to train uni- Juku and yobiko versity graduates in-house. Juku encompass a large and diverse range of private, for-profit tutorial, enrichment, remedial, preparatory and cram schools. On average, students Strengths and weaknesses attend juku after school two and a half times per week for a total of five hours. The majority of The Japanese education system generates gradu- students attending juku study English and math- ates with a high average level of capability. On ematics, most in preparation for the high school the whole, Japanese students are well-disciplined or university entrance examination. and motivated. They routinely score at or near Yobiko are yuku specializing in intense training the top of international test comparisons in math- for university entrance examinations, often tai- ematics and science. Over 97 percent of Japanese lored specifically to the requirements and exami- are functionally literate, despite the demands of nations of individual schools. Yobiko particularly using a non-phonetic writing system. The Japa- cater to the 200,000 ronin in Japan, students who nese education system achieves these results even have failed the exams for their first-choice schools though Japan spends only 2.3 percent of its GDP and who have elected to spend a full year prepar- on primary and secondary education, much less ing to take the examinations again. Because so than other industrialized countries such as the many university students have had the ronin-yobiko United States. experience, education in Japan has been called Critics of the Japanese education system ar- the 6–3–3–1–4 system. Most ronin and yobiko stu- gue it is too centralized and regimented. With dents are male, outnumbering female students textbooks, curricula, and examinations set by by more than 10 to 1. MOE bureaucrats, relatively little discretion for local innovation exists. In addition, the lock-step educational approach disadvantages the bright- Higher education est and slowest students and marginalizes handi- Approximately 20 percent of high school gradu- capped students. The system also lacks ates enter a four-year university about 10 per- institutionalized emotional and psychological sup- cent enter a two-year junior college, and another port beyond teachers, often failing to support 25 percent enter a vocational program, usually a troubled students. Finally critics argue that the continuation of studies begun at vocational high examination system puts too much pressure on schools. Admission to universities and colleges children at too young an age, resulting in over- is determined almost exclusively by the results stressed and unhappy children. The continuing of the national entrance examination, and admis- problem of bullying as well as the rise of school sion to the most prestigious universities such as violence since the 1980s are symptoms of these Tokyo University is extremely competitive. weaknesses. 136 electronics industry

Further reading duced telephone service. In 1905, the Japanese Navy used wireless telegraphy to defeat a Rus- Beauchamp, E.R. (ed.) (1991) Windows on Japanese Edu- sian fleet in the Russo-Japanese War. cation, New York: Greenwood Press. The origins of modern electronics engineer- Leestma, R. and Walberg H.J. (eds) (1992) Japanese ing in Japan are commonly dated to 1925, when Educational Productivity, Ann Arbor, MI: Center for radio broadcasting began. By this time Japanese Japanese Studies, University of Michigan. researchers were amongst the most advanced in Marshall, B.K. (1994) Learning to Be Modern: Japanese the world in some areas of electronics. Yagi Political Discourse on Education, Boulder, CO: Westview Hidetsugu and Uda Shintaro invented the Yagi Press. antenna in 1926. The Yagi became the most Rohlen, T. and Björk, C. (eds) (1998) Education and widely used radio and television antenna in the Training in Japan, 3 vols, London: Routledge. world. That same year, Takayanagi Kenjiro was United States Study of Education in Japan (1987) Japa- one of the first in the world to produce an all- nese Education Today, Washington: Government Print- electronic television image (Japanese sources ing Office. credit Takayanagi with being the first). KEITH A.NITTA Foreign firms were deeply involved in the early Japanese electronics industry Western Electric es- electronics industry tablished a Japanese subsidiary in 1899 that later became today’s NEC. In 1905 General Electric Japan’s electronics industry includes world-lead- (GE) took a controlling interest in Tokyo Elec- ing firms in consumer electronics, semiconduc- tric Lighting, which used GE technology to be- tors, computers and telecommunications. Most come Japan’s leading producer of light bulbs. Five of these firms were established long before the years later, GE exchanged heavy electrical equip- Second World War, but came into international ment technology in return for 24.5 percent of the prominence during the 1950s and 1960s when equity of Shibaura Electric Works. This helped they began large-scale exports of transistor ra- Shibaura to become Japan’s largest producer of dios, television sets, calculators and semiconduc- generators and other heavy electrical equipment. tors. The industry continued to thrive through Tokyo Electric and Shibaura later merged to form the 1980s, as Japanese consumers became increas- Tokyo Shibaura Electric, today’s Toshiba. ingly affluent, but with the end of Japan’s bubble Westinghouse Electric, a US firm, worked in part- economy, was faced with a number of problems: nership with Mitsubishi to establish Mitsubishi relatively slow growth in domestic markets, high Electric in 1921. Similarly in 1923 Germany’s wages, and increasing competition from newly Siemens and Furukawa Electric formed Fuji Elec- industrialized Asian competitors. In the late 1990s tric. A Fuji spin-off, Fujitsu, later became one of and early 2000s most of the leading Japanese elec- Japan’s “big five” firms in the industrial electron- tronics firms began restructuring in response to ics industry. these pressures. Other major Japanese electronics firms that were established before the Second World War remained independent of foreign interests. Hitachi Origins of the industry was established in 1908 as a shop repairing elec- After Japan was opened to the West in the mid- tric pumps and other equipment at a mine. It be- nineteenth century the Japanese were quick to came a separate firm in 1920. Matsushita (the master the advanced technologies of the time. consumer electronics giant which also uses the Telegraph service was inaugurated between To- National, Panasonic and Quasar brand names) kyo and Yokohama in 1869. In the 1870s the gov- was established in 1918. Sharp was initially es- ernment established a university-level program tablished in 1912 as a metal processing firm. Its in electrical engineering and electrical research founder invented a mechanical pencil (the “Ever laboratories. By the end of the nineteenth cen- Sharp”) from which the company eventually took tury Japanese had built electric power plants, its brand name. The company began making ra- begun producing electric light bulbs, and intro- dio sets in 1925. electronics industry 137

During the late 1930s the foreign firms were making transistor radios. In 1960 transistor ra- forced out of Japan. One consequence of this was dios generated more export earnings for Japan that Japan had less access to foreign technology. than any other industry except shipbuilding. The Japanese electronics firms were also required Japanese firms also began the production of to stop producing home appliances and to con- transistors. At the time transistor production was centrate on military electronics. highly labor-intensive and Japanese companies were able to hire thousands of young women, “transistor girls,” to manufacture the transistors The electronics industry after the Second at approximately ten cents per hour. This helped World War Japan to become the world’s largest transistor pro- New opportunities contributed to the explosive ducer. growth of the Japanese electronics industry after As Japanese consumers became more affluent the Second World War (see post-Second World in the late 1950s, demand increased for a variety War recovery). First of all, the American occu- of electrical and electronic products: rice cook- pation authorities promoted the rapid introduc- ers, electric fans, washing machines, refrigerators, tion of commercial radio (and later television) and stereos. The utilities needed heavy electrical broadcasting, believing this would help foster the equipment and there was unprecedented growth development of democracy Secondly large num- in telephone service. bers of talented electronics engineers were suddenly available to work on commercial products. The military research institutions had been closed Challenges and growth in the 1960s and down and research on radar and other technolo- 1970s gies that could contribute to remilitarization was banned. Finally much of the technology devel- Although Japan continued its rapid economic oped in the West during the 1930s and 1940s growth through the 1960s and into the early suddenly became available to the Japanese. By 1970s, special challenges faced the electronics in- 1949 nearly 200 Japanese firms were producing dustry. New transistors were developed that elimi- radios. Two former naval researchers started nated low labor cost as a major competitive Tokyo Telecommunications Engineering advantage. This and the later development of the (Totsuko) to repair radios and to make various integrated circuit (IC) shifted competitive advan- electrical devices. In 1958 Totsuko changed its tage in semiconductors from Japan to the United name to Sony. States. Meanwhile, the most important consumer As the demand for radios approached satura- product in Japan, the black and white television tion, television provided another big boost for set, was reaching market saturation. By the early the Japanese electronics industry Television 1960s, about 90 percent of Japanese households broadcasting began in 1953, and in January of had television sets. that year Sharp marketed the first Japanese-made The electronics firms quickly made the tran- television set. Sharp was not alone. Nearly forty sition to the production of color television sets. Japanese firms had signed technology transfer Although the sets produced in the mid-1960s may agreements with RCA, then the leading source have been inferior to those available in Europe of television technology (see export and import and the United States, the Japanese market was of technology). protected until Japanese firms could catch up with In 1953 Sony signed an agreement to import their foreign competitors. In 1970 color televi- transistor technology from Western Electric. Most sion sets accounted for one-third of total electron- of the other Japanese electronics firms soon signed ics industry sales. As this market, in turn, moved their own agreements. Although US firms were towards saturation the consumer electronics firms ahead of Sony in marketing transistor radios, began introducing new products such as video Sony offered a combination of price and size that tape recorders. In the case of monochrome and almost instantly attracted a huge market. By 1959 color televisions, the Japanese had trailed the USA more than one hundred Japanese companies were and Europe by several years. Now they were in 138 electronics industry the vanguard in introducing a major new con- There were problems, however. Wage costs sumer electronics product to world markets. which had been a source of competitive advan- In 1969, another key product for the Japanese tage, were now a competitive weakness for Japan. electronics industry was introduced. Sharp be- Trade frictions with the USA and other countries gan selling a Large Scale Integrated Circuit (LSI) made it politically impossible to sustain export calculator. Some fifty other Japanese firms quickly growth. Some Japanese firms had built or bought brought out their calculators beginning what be- off-shore production facilities in the 1970s, and in came known as “the calculator wars.” Only two the 1980s this became a growing trend. firms survived the resulting competition. Just as the transistor radio had supported the birth of a The 1990s and 2000s Japanese semiconductor industry the calculator supported the next phase of development of the In the 1990s the Japanese electronics industry industry Although the LSI and later Very Large faced severe difficulties. The collapse of the Scale Integrated Circuit (VLSI) technologies had bubble economy at the end of 1989 undermined been developed in the United States, US firms consumer confidence. Domestic markets for con- developed increasingly complex forms of this sumer electronics goods were largely saturated. technology for use in defense applications. The Competitors were beginning to emerge in other Japanese concentrated on simpler, cheaper, more parts of East Asia. The economic crisis in Asia reliable integrated circuits that served especially in the late 1990s further aggravated the situation. well in consumer applications. The Japanese gov- During the 1990s sales of consumer electronics ernment played some role in nurturing the de- products dropped in half. This weakness in development of the technological capacities of the mand was also devastating for the semiconduc- semiconductor industry In a controversial piece tor firms, which still relied on consumer products of policy it delayed the entry of Texas Instruments to take one-third of their output. into the Japanese market. It also orchestrated the The trend towards offshore production con- formation of research cooperatives, such as the tinued. By 1998 Japan’s electronics firms had VLSI Research Cooperative, to speed the de- some eight hundred production facilities in other velopment of technology. parts of Asia and an additional four hundred in other parts of the world. Only about 10 percent of the color television sets produced by Japanese The 1980s: years of triumph firms were actually made in Japan, and only about During the 1980s it seemed as though the progress one-third of the video recorders. of Japanese industry was unstoppable. Although The “big five” Japanese industrial electronics Japan no longer enjoyed the economic growth of firms, Toshiba, NEC, Hitachi, Fujitsu and earlier decades, Japan was now the world’s sec- Mitsubishi Electric, and the largest consumer elec- ond largest economy and had passed the United tronics firm, Sony were all experiencing new dif- States to lead the world in per capita GDP. ficulties. Toshiba, for example, experienced its By 1985 Japanese firms and their affiliates pro- first losses in nearly a quarter of a century. The duced some 80 percent of the world’s video re- large vertically integrated giant Japanese electron- corders. Sony’s Walkman, introduced in 1979, ics firms that had seemed unstoppable in the was a worldwide hit through the decade and later. 1980s were now seen as unwieldy and poorly Throughout the 1980s lists of the world ten larg- focused because of their size. Many of them were est semiconductor products typically included five re-structuring and entering into international al- or six Japanese firms. Indeed, by the late 1980s liances, most often with US partners. Japanese firms had more than half of the world market for semiconductors. The Japanese also Further reading moved to an early lead in the development and use of computer-aided machine tools, industrial Anchordoguy M. (1989) Computers, Inc.: Japan’s Chal- robots and other factory automation technolo- lenge to IBM, Cambridge, MA: Harvard University gies. Press. enterprise unions 139

Aoyama, Y. (1991) Kaden (Home Electronics). Tokyo: most important of these are degree of concentra- Nihon Keizai Shimbun. tion in industry government regulation, and path Lynn, L. (1998) “The Commercialization of the Tran- dependency during the formative years. sistor Radio in Japan: The Functioning of an Inno- Zensen Doumei (Textile Workers Union) is vation Community,” IEEE Transactions of Engineering an example of a highly centralized national un- Management 45(August): 220–29. ion, whose affiliated enterprise unions are Methe, D. (1991) Technological Competition in Global In- PAEUs. Jidousha Souren (Automobile Workers dustries, New York: Quorum. Union) is a loosely-structured national federation Nathan, J. (1999) Sony: The Private Life, New York: of enterprise unions and so its affiliate enterprise Houghton-Mifflin. unions are HAEUs. Partner, S. (1999) Assembled in Japan: Electrical Goods and the Making of the Japanese Consumer, Berkeley CA: Overview of major trade unions in Japan University of California Press. Incorrect images of Japanese trade unions are LEONARD H.LYNN widespread in the world, even among industrial relations professionals. One such popular but er- enterprise unions roneous view is that most trade unions in Japan are “enterprise unions.” The second incorrect ste- There are two kinds of workers in the world: reotype is the view that “enterprise union” is a employees and independent craftsmen. Employ- sugar-coated phrase for “company-dominated ees are organized into unions according to their union,” a union which is essentially obedient to plant, establishment or enterprise. Furthermore, and cooperative with management. The former employee trade unions usually include enterprise- stereotype is examined first. based organizational units within their organiza- In 1999, there were twenty-three national un- tion. Can such enterprise-based organizational ions in Japan that had over one hundred thou- units of unions be called “enterprise unions?” If sand union members: so, every trade union in the world, with the exception of craft unions, can be termed an enter- Jichirou (Local Government Employees Union) 1,017,000 prise union. In order to avoid confusion, it is Jidousha Souren (Automobile Workers Union) 768,000 necessary to provide a definition of enterprise Denki Rouren (Electrical Equipment Workers Union) 740,000 union. Enterprise unions are those unions which Zenken Souren (Construction Workers Union) 715,000 are organized on the basis of enterprises or es- Zensen Doumei (Textile Workers Union) 585,000 tablishments and which are more or less autono- JAM (Metal Machinery Workers Union) 500,000 mous with regard to national unions. Nikkyouso (Teachers Union) 365,000 Organizational autonomy of the enterprise union, Seiho Rouren (Life Insurance Workers Union) 351,000 vis-à-vis the national union applies to collective Jouhou Rouren (Communications Workers Union) 266,000 bargaining, finance and staff. Denryoku Souren (Electrical Power Workers Union) 257,000 Jichi Rouren (Local Government Employees Union—left wing) 249,000 Types of enterprise union CSG Rengou (Chemical Workers Union) 214,000 Enterprise unions can be classified into two types Nippon Ih Rouren (Hospital Workers Union) 172,000 according to their degree of autonomy with re- Tekkou Rouren (Steel Workers Union) 170,000 spect to national unions: highly-autonomous Kokukou Rouren (Central Government Employees unions and partially-autonomous unions, referred Union) 168,000 to here as HAEU and PAEU, respectively. Such Sitetsu Souren (Private Railway Workers Union) 167,000 autonomy depends on the power-relations among Zentei (Postal Workers Union) 155,000 enterprise unions affiliated with the national Zenginren (Bank Employees Union) 149,000 union and with the national headquarters of their Zenkyou (Teachers Union—left wing) 143,000 national union. Various characteristics determine Unyu Rouren (Trucking Workers Union) 136,000 the organizational structure of trade unions. The Shougyou Rouren (Retail Workers Union) 124,000 140 enterprise unions

Zousen Juki Rouren (Shipbuilding and Heavy ties at the national level. Under these circum- Machinery Workers Union) 123,000 stances, enterprise unions are unable to maintain Shokuhin Rengou (Food and Drink Workers Union) 110,000 a high degree of autonomy and in this sense Total number of members 7,644,000 PAEUs are more dominant than HAEUs in Ja- pan. There were approximately 11,706,000 union The pure enterprise union is the exception in members in 1999, with an estimated union den- Japan. Affiliated enterprise unions are very simi- sity of about 22.2 percent. The ratio of major lar to union locals affiliated with national unions national union members to total union members in the US. Are there any distinctions between is 65.3 percent, and the trade union movement the Zen Toyota Rouren (an enterprise union), in Japan has been much more vigorous in the which is affiliated with the Jidousha Souren (a public and the highly concentrated private sec- national union), and the GM Department (an tors than in the less concentrated private sectors enterprise union) of the UAW (a national union)? where small firms are dominant. Enterprise In terms of organizational structure there does unions do not exist in the public sector at all be- exist a slight difference. cause public corporations were largely privatized in the 1980s and public sector enterprises as such Unique characteristics of Japanese do not yet exist. One-third of all organized work- enterprise unions ers are public employees and have “enterprise unions”. The third largest union in the private Generally speaking, industrial societies are be- sector, Zenken Souren (Construction Workers coming similar, an indication that the convergence Union), is a craft union whose members are theory of history is also valid in the field of in- skilled craftsmen such as carpenters or plumb- dustrial relations. But national uniqueness does ers. Craft unions are not enterprise unions. In not disappear so long as it is appropriate for and Japan, pure enterprise unions are very few. Most does not hinder the economic and societal devel- enterprise unions belong to national unions and opment of the society In terms of organizational are allied with other enterprise unions within the structure, Japanese enterprise unions have a few same national union in their struggle against man- unique features compared with similar labor or- agement and government. The national union is ganizations of foreign countries. Firstly enterprise an alliance of enterprise unions within the same unions in Japan are distinctive in regard to mem- industry. bership eligibility. In Japan, both white-collar and Which type of union is more numerous, the blue-collar workers join the same enterprise HAEU or PAEU? In postwar Japan, wage nego- union, without exception. In the case of blue-col- tiations, and consequently wage determination, lar workers, members retain their union status have been highly centralized. Therefore, enter- until they are promoted to general foremen and prise unions are not very autonomous in their white-collar workers usually lose membership eli- negotiations with employers, these being coordi- gibility when they are promoted to kachou (sec- nated at the national level by the headquarters of tion chief). In the Republic of Korea, the bottom their national unions or by the national federa- organizations of national unions are enterprise tion of national unions. Since 1955, wage nego- unions but white-collar employees do not usu- tiations in Japan have been concentrated in the ally join these unions. In the USA, white-collar spring and synchronized and/or coordinated at workers are organized separately. the national level. This wage determination prac- The second distinctive feature of enterprise tice has been called “spring offensive.” The wage unions in Japan is the alignment of union mem- negotiations themselves are conducted mostly at bers. Enterprise unions are organized according the enterprise level, and collective agreements are to the organizational structure of the enterprise signed firm by firm, and by the leaders of the or company. Skilled tradesmen or professionals respective enterprise unions and management. do not have their own organizational chapter However, these enterprise-level negotiations are within the enterprise union. For example, a medi- coordinated by the concerted actions of both par- cal doctor (company doctor or company clinic enterprise unions 141

doctor) belongs to the hospital or clinic section trial unionism.” Other practitioners and scholars of the enterprise union; there is no separate evaluate union participation in management branch within the organization for professional highly and praise enterprise unions as the most people in the enterprise union. Medical doctors, advanced organizational form of trade unionism nurses, technicians, clinic clerks and janitors join today. This type of participationist view is called the same union chapter and meet at the same yougo ron (defense of enterprise union). union conference. Today practitioners are losing interest in the The third feature that is characteristic of most debate but industrial relations scholars and labor Japanese enterprise unions is their dual role in historians are enthusiastically discussing the prob- relation to management. Enterprise unions en- lem. After the collapse of the Soviet Union, Marx- gage in collective bargaining with management ists are becoming even less influential among and at the same time take part in joint consulta- intellectuals and at the same time such radical tion committees as partners to make the enter- opinions of trade unionism are fading even among prise more competitive and to enhance its academics. profitability. This two-faceted nature of the enterprise union raises serious questions for both practitioners as well as scholars of industrial rela- Past, present and future of enterprise tions in Japan and abroad. Collective bargaining unions is a process for resolving antagonism and disputes between employers and employees, and it Enterprise unions were hastily organized in the presupposes the existence of adversarial rela- latter half of 1946, with the strong support of the tions between the parties. But union participa- Occupation Army SCAP (Supreme Commander tion in management or the decision-making of Allied Powers) ordered the government of Ja- process and partnership between employers and pan to enact labor legislation for the democrati- employees rests upon an opposite philosophy zation of Japan, and the Diet (Parliament) rapidly namely that the parties share mutual interests enacted the Trade Union Act in December of and are like “a crew in a life boat” (Gemeinschaft in 1945. The Act was implemented in April of 1946. German). Enterprise unions in Japan engage in During the war, workers had been organized in wage negotiations annually and sometimes enterprise-based patriotic organizations called strike to win their demands. At the same time, sanpou, short for Sangyou Houkoku Kai (Indus- enterprise unions meet and discuss managerial trial Patriotic Association). Sanpous were the fore- matters with employers at least four times a year runners of enterprise unions. Blue-collar as well at the roushi kyougi kai (union-management con- as white-collar workers joined the sanpou, which ference). was engaged in both negotiation and participation. The reason that the trade union movement in Japan was able to deeply take root in enter- Controversy over the nature of the prises in a short period of time was the historical enterprise union good luck of the War and the Occupation, times Enterprise unions play a balancing act between during which employers’ were easily deprived of their roles as collective bargaining agents and their management prerogatives. Enterprise union- management collaborators. Is it possible for a ism was one of the “war babies.” union to do that? There have been heated con- The enterprise union is the most appropriate troversies about this in postwar Japan. Some prac- type of organization for a trade union playing titioners and scholars assert that enterprise unions the double roles of negotiation and participation. are not bona fide unions, that they are company- Recently the Dunlop Commission in the USA dominated labor organizations in nature, and that recommended the introduction of enterprise-un- they must be destroyed and replaced with bonafide ion organizations to promote union—management trade unions. This type of leftist opinion is called cooperation. The enterprise union is one institu- dappi ron (casting off argument) and one of the tional model of present-day industrial democra- slogans of such proponents is “towards indus- cies in which worker participation and 142 environmental and ecological issues

employment security is growing increasingly im- History portant. The enterprise union provides unions While medieval Japan had experienced instances with three organizational advantages: (1) partici- of severe forest depletion and watershed erosion, pation in the creation of rule-making for work; the first major case of industrial pollution began (2) enhancing employees’ career development; in the 1880s with the Ashio Copper Mine in and (3) maintaining employment security. Tochigi, where mining wastes poisoned the region’s rivers and lands. Though other cases of Further reading industrial pollution continued to emerge throughout Japan, one that eventually attracted world- Koike, K. (1977) Shokuba no Rodo Kumiai to Sanka (Work- wide attention was Chisso Corporation’s place Labor Union and Participation). discharge of mercury compounds into Minamata Oukochi, K. (ed.) (1956) Rodo Kumiai no Seisei to Soshiki Bay Eventually thousands of Minamata residents (Formation and Organization of Labor Unions), in suffered debilitating effects or even died due to Sengo Rodo Kumiai no Jittai (Realities of Postwar La- mercury poisoning from eating contaminated fish. bor Unions), Tokyo: Tokyo University Press. Though human cases were first reported in 1956 Roshi Kankei no Nihibei Hikaku (Comparative Labor Re- with the probable cause determined soon after- lations in Japan and the US), Tokyo: Toyokeizai ward, cover-ups and denials by Chisso with the Shinpo Sha. backing of the Ministry of International Trade Shirai, T. (1979) Kigyoubetsu Kumiai (Enterprise Unions), and Industry (MITI) delayed an official confir- Tokyo Chuo Koron Sha. mation of Chisso’s responsibility until a 1968 an- SUSUMU HAGIWARA nouncement by the Ministry of Welfare. In the meantime, outbreaks of several other pollution- environmental and ecological issues related diseases occurred, including itai-itai disease from cadmium poisoning in Toyama, Alternately described as an environmental out- Yokkaichi asthma named after the city by that law or an environmental performance leader, name and its smog-emitting petrochemical indus- Japan’s record with regard to the natural envi- trial complex, and yet another case of mercury ronment has been filled with a complex mix of poisoning in Niigata prefecture. The severity of environmental tragedies and triumphs. During widespread pollution led one international ob- its high economic growth years of the 1950s and server to liken Japan to a test case of unrestrained 1960s, Japan experienced environmental degra- industrialization that the rest of the world was dation that was without historical precedent. watching, much as coal miners once watched the While Japan continues to be criticized for such canary in the cage. practices as whaling and importation of tropical Increasing public concern during the 1960s hardwoods, Japan also merits recognition for its about widespread air and water pollution even- subsequent achievement of world-class perfor- tually resulted in government action, with the mance on several environmental measures. Re- 1967 passage of the first basic environmental cently the involvement of Japanese business in protection law. Due to industry pressure, how- environmental issues has been undergoing a no- ever, this law contained a clause that environ- table transformation as it attempts to shift from a mental protection was to be pursued in reactive orientation to a more proactive stance. “harmony with sound economic development.” During the late 1990s and early 2000s in par- Intense public concern continued, however, and ticular, leading Japanese companies have actively led to a special Diet session in 1970 that passed worked to improve their environmental perfor- fourteen strict environ mental laws and abol- mance through greener technology purchasing, ished the “harmony” clause. Japan’s Environ- operations, accounting and other means. At the ment Agency was established soon afterward in same time, the Japanese economy as a whole con- 1971. With the later passage of more laws and tinues to face considerable challenges in achiev- the creation of a number of innovative regula- ing environmentally sustainable development. tory approaches, the 1970s and 1980s can be environmental and ecological issues 143 characterized as a period of active technocratic lease of a Global Environmental Charter in 1991 environmental policy for pollution abatement (later updated in 1996) that notes the responsi- and energy conservation, though industry pres- bility of corporations to protect the global envi- sure did win some later concessions. Air pollu- ronment and its resources. By the late 1990s and tion levels for sulfur dioxide fell from their 1967 early 2000s, the Japanese business press was regu- peak to become the lowest per capita among larly reporting on corporate environmental ini- OEGD nations. Such improvements were due tiatives and companies touted their to a combination of energy conservation, fuel accomplishments in frequent press releases. conversion, economic structural change, and Representing this rise in Japanese corporate technology investment. At its peak in 1975, in- environmentalism was the “ISO 14000 boom,” vestment in pollution control accounted for 20 referring to the intense interest shown in the in- percent of capital investment, several times ternational standard for environmental manage- higher than other OECD nations. By 1989, ment systems released October, 1996. Japanese companies operated three-fourths of Certification activity was initially highest among the world’s desulpherization and denitrification export-oriented industries such as consumer units. Spurred by the “oil shocks” of the 1970s electronics, but quickly extended to other indus- and with the guidance of MITI, Japanese industries and even local government bodies. As of try also achieved the world’s highest level of en- January 2001, Japan’s number of certifications ergy efficiency Energy consumption and carbon ranked highest internationally at 5,338, double dioxide emissions remained nearly level from the number for the next highest country Ger- 1970 to 1987 even while the index of industrial many and nearly four times that of the UK or production increased by 70 percent, with a ma- USA. jority of this effect attributable to improved en- Besides corporate image and meeting market ergy efficiency (Watanabe 1997). As a result of requirements, improving eco-efficiency is an- R&D and investments in energy conservation other motivation behind this activity as compa- and pollution control, Japan came to be a world nies try to reduce wastes and resource leader in many environmental technologies. consumption. A number of Japanese firms, including Kirin Brewery NEC and Honda, have announced that their plants have achieved “zero Recent issues emissions,” where practically all the waste The 1990s marked a new era for Japan and the stream is recycled in some way rather than environment. At the international level, Japan was hauled to a landfill. Some firms are increasing increasing its environmental diplomacy efforts their efforts at recycling and remanufacturing and attempting to position itself as an environ- parts for reuse in new products. Fuji Xerox, for mental leader in the global community Domesti- example, first modeled its remanufacturing ef- cally a new wave of environmental legislation was forts after Xerox in the USA, but reports that it passed, including an ambitious new basic envi- has since improved upon and overtaken Xerox. ronmental law. In the years afterward, several Also, stricter laws on packaging and recycling additional laws were enacted dealing with pack- are motivating companies to design products aging, energy conservation, recycling of automo- with lower end-of-life costs. biles and household appliances, pollutant release Forming the subject of MITI’s Eco-Vision re- and transfer registration, and the creation of a port, environment-related businesses have been “sustainable recycling-based society” (junkan-gata another area of activity Many firms have estab- shakai). In 2001, Japan’s Environment Agency was lished divisions or subsidiaries to provide envi- raised to ministry status. During the 1990s, the ronmental services and others have increased Japanese business community also experienced their efforts at developing and marketing clean a shift in its environmental stance, as being technologies and systems. Besides green process “green” became an increasingly important busi- technologies, many firms have also been success- ness issue. Symbolizing this was Keidanren’s re- ful in developing market-leading green products. 144 environmental regulations

Japanese firms lead in such areas as battery tech- resources. The challenge, however, is that Japan’s nology hybrid cars, solder-free electronics prod- own biological capacity to provide those resources ucts, and consumer goods with ultra-low power was less than one-sixth of that required. consumption. Corporate environmental reports, though rare Further reading in the early 1990s, are now becoming de rigueur. Also, by 2000, one in five firms surveyed by Environment Agency (2000) Kankyo Hakusho (Quality Nikkei had initiated environmental accounting. of the Environment in Japan) Tokyo: Gyousei. Though savings are achieved in some areas, early Ishizu, T., Ichie, M. and Shimizu, M. (1993) Japanese reports generally showed overall environmental Corporate Response to Global Environmental Issues, Japan costs several times larger than environmental Development Bank Research Report No. 36, To- savings. In addition, a Nikkei survey showed kyo: Japan Development Bank. Nikkei Ecology, To - nearly one in four companies as having estab- kyo: Nikkei Business Publications (monthly). lished environmental criteria for procurement Tsuru, S. (1999) The Political Economy of the Environment: decisions. Also, Japan’s first eco-funds for inves- The Case of Japan, Vancouver, BC: UBC Press. tors began in the summer of 1999, with Toyota, Tsuru, S. and Weidner, H. (eds) (1989) Environmental NEC, Sony NTT, Matsushita, Fujitsu, and Ricoh Policy in Japan, Berlin: Edition Sigma Bohn. among the more popular companies for invest- Watanabe, C. (1997) “The Role of Technology in En- ment. ergy/Economy Interactions: A View from Japan,” in Y.Kaya and K.Yokobori (eds), Environment, En- ergy, and Economy, Tokyo: United Nations Univer- Challenges sity Press, 199–231. Japan has achieved a dramatic turnaround from SHANE J.SCHVANEVELDT the 1960s and 1970s when it was known as a “showcase for industrial pollution.” Nevertheless, its progress is far from complete. Development environmental regulations and public works projects routinely take prece- dence over nature conservation. Biodiversity faces Before the 1970s, Japan’s environmental policy serious threats. Reports of illegal dumping of focused on anti-pollution measures by directly wastes are not uncommon. A reliance on incin- controlling emissions from factories and power eration of wastes has led to dioxin levels far higher plants. Rapid growth in Japan in the 1970s and than other countries. Also, due to its high popu- 1980s, however, led to increased pollution. Do- lation density and relative lack of natural re- mestically Japanese businesses were criticized for sources, Japan will continue to face the challenge being concerned only for growth and for being of sustaining its economic well being. According the cause of pollution and ecological destruction. to a 2001 cross-national comparison conducted The attitude of Japanese firms led to lawsuits by by the World Economic Forum, Japan ranked victims of pollution. In the 1980s the focus of behind most industrialized nations on its index environmental policies shifted to automobiles and measuring environmental sustainability at twenty- other vehicles. The Japanese government intro- second, with Finland ranking first, Canada third, duced several laws and regulations to deal with Australia seventh, USA eleventh, Germany fif- pollution caused by automobiles. There were also teenth, and the UK sixteenth. Yet another study tougher regulations on diesel engine emissions. from the 2000 Living Planet Report compared In 1993, new pollution laws and environmental the ecological footprint of various nations: the regulations were introduced. These environmen- land and sea area necessary to meet their con- tal regulations covered everything from air pol- sumption of food, materials, and energy Accord- lution and soil pollution to solid waste ing to this study Japan’s eco-footprint on a per management treatment systems and hazardous capita basis was among the smallest of the indus- waste emissions systems. trialized nations due to relatively efficient use of Not surprisingly these new regulations have export and import of technology 145 also led to rapid growth in the Japanese environ- through drinking water, and fish and livestock mental system industry. Total production has used for human consumption. New legal regula- been over ¥1.5 trillion in recent years. This is tions on dioxin emissions from refuse incinera- due to strong demand for replacement of envi- tion were established in 1997 amending both the ronmental facilities constructed in the 1970s and Waste Disposal Law and the Air Pollution Con- for new systems that improve the quality of the trol Law. environment. Solid waste treatment systems ac- Eco-business has seen new opportunities in Ja- count for 40 percent of this demand. The mar- pan due to these environmental protection regu- ket is dominated by demand from the government lations. The Ministry of International Trade for new recycling technologies and by laws on and Industry (MITI) predicts rapid growth in recycling packages and containers. This has environmental support, waste and recycling, en- caused the Japanese industry for environmental vironmental conservation, environmental friendly systems to be a showcase for the most advanced energy and environmental friendly products. By technologies in the world, although US controls 2010, MITI expects eco-business in Japan to be on hazardous emissions are tougher than the con- a ¥3.5 trillion market. trols in Japan. The Japan Environmental Association uses a See also: business ethics life-cycle assessment (LCA) to determine if prod- TERRI R.LITUCHY ucts are environmentally friendly. The Associa- tion considers products friendly when they use few resources, emit no waste during production, export and import of technology save energy and are easily broken down to permit recycling. In 1996, the Association revised Japan’s rapid economic expansion, both in the its “eco-mark” system to promote production and years between the Meiji restoration (1868) and use of products that are environmentally friendly. the Second World War and in the first three or Products that meet the LCA are allowed to dis- four decades after the war, is often credited to its play this new mark on their packaging. efficient utilization of technologies developed in In 1997 new recycling legislation was passed. the West. Japan is still the world’s largest importer The law divides responsibility for the separation of technology. As Japan became a technology and collection of containers and packaging be- super-power in the 1970s, it also began to emerge tween local government, businesses and consum- as a significant exporter of technology Today it is ers. Due to increasing household garbage, second only to the United States in the value of discarded cans, bottles, and plastic containers ac- technology exported. count for over 60 percent of garbage by volume and must now be recycled. By 2000, businesses using containers and packages must treat and re- Prewar imports of technology cycle packages and containers. PET (polyethylene terephthalate) bottles are a problem since the gov- Japan began systematically importing technol- ernment does not yet have the technology to re- ogy in the seventh century when it brought in cycle them, although some cities and weaving, pottery lacquer ware, mining, metal- municipalities already have separate collections lurgy and farming technologies from China. of PET bottles (from 1.8 percent of container Technology was also acquired from Korea. In waste in 1995 to 14 percent in 2000, and expected the late sixteenth century the Portuguese to rise to a rate of 27 percent in 2005). brought Western guns and artillery to Japan. Dioxin pollution is another major environ- The Japanese quickly developed the ability to mental issue in Japan. Ninety percent of dioxin produce their own firearms and even introduced pollution comes from the incineration of gar- some refinements. bage such as plastics (PCBs). The dioxins enter During much of the Tokugawa Period (1603– the atmosphere as soot particles falling into soil, 1868) contact with the outside world was severely rivers and oceans. They enter the food chain restricted. Foreign books (except for those on 146 export and import of technology

Christianity) however, could be brought in be- place the foreigners with Japanese who had stud- ginning in 1720. Since the Dutch were the only ied technology abroad or who had been trained Westerners allowed to trade with Japan, it was by the foreign employees. Dutch-language books on Western science and The Japanese often found it necessary to technology that were imported. A government make major adaptations before they could use official produced a Dutch-Japanese dictionary in foreign technology. In 1897, for example, the 1745. In 1774 a book on anatomy was translated Japanese government planned a world-class inte- into Japanese. The book demonstrated the uni- grated iron and steel works at Yawata. Since versality of Western science and inspired transla- Germany had the world leading blast furnace tions of books on astronomy physics, chemistry technology at the time, Germans were hired to and botany. In 1808 the government established design the construction of the blast furnace and a special office for the translation of Western supervise its construction. German foremen and books. workers were also hired to supervise operations. In 1853 and 1854 a US naval squadron un- The technology however, was not suited to the der Commodore Perry visited Tokyo Bay to pres- types of coke available in Japan and the plant sure the Japanese government to open Japan to was forced to shut down. The Germans were trade. The squadron demonstrated such achieve- sent home and Japanese successfully redesigned ments of Western technology as the steam en- and operated the steel works. Japan’s growing gine and the telegraph. The obvious military mastery of imported Western technology was advantages that technology gave the Westerners further demonstrated in 1905 when the Japa- caused both the central Tokugawa government nese navy used wireless telegraphy to decisively and the regional rulers to strive to absorb mili- defeat a Russian fleet. tary and related technologies as quickly as possi- Despite these successes, the Japanese some- ble. Some ninety young Japanese were sent times had to rely on on-going foreign support to abroad to study Western technology and institu- effectively use imported technology. In the elections. The Tokugawa government requested trical industry for example, Japanese firms relied Dutch and French help to build facilities to make heavily on the capital, patents and technical guid- iron and build ships. ance of Western firms. General Electric provided Efforts to assimilate Western technology technology and took a stake in Toshiba. reached a fever pitch during the Meiji Era (1868– Mitsubishi Electric was formed with the partici- 1912). By 1873 some 250 young Japanese were pation of Westinghouse. Fujitsu was formed as a abroad studying Western technology and admin- joint venture between Fuji Electric and Siemens. istrative practices. The Ministry of Industry Japan imported far more technology than it (Komusho, also called Ministry of Engineering) exported in the decades before the Second World played a key role in the adoption of foreign tech- War, but there were some consequential Japanese nology from 1870–85. The Ministry and other technology exports. Perhaps the best known of parts of the Japanese government hired some two these was the sale of patent rights for the Toyota or three thousand foreign technical experts in the Automatic Loom to Platt Brothers of Great Brit- late nineteenth century Englishmen were put in ain in 1929. The proceeds financed Toyota’s en- charge of Japan’s rail and telegraph systems, and try into the automobile business. Other prewar Germans served as experts on medicine and medi- Japanese technologies, notably the Yagi antenna cal education. Large numbers of American and (invented in 1926), also came to be used widely French technical advisors were also hired. around the world. The foreign experts had the highest salaries Despite the strong realization that Japan in the Japanese government at the time. Provid- needed foreign technology to maintain its eco- ing for their transportation, housing and enter- nomic and military security the Japanese peri- tainment was also very expensive. By 1879 the odically became concerned about the risk of high cost of the foreigners, plus the desire of the being overly dependent on foreign technology. Japanese to become as independent as possible, In 1896, for example, Japanese shipyards were led the government to move aggressively to re- forbidden to use imported ship parts. During the export and import of technology 147

1930s foreign firms such as General Electric, firms signed agreements to import polypropylene Western Electric, and Westinghouse were forced production technology from Italy MITI did not to turn their Japanese operations over to their approve the agreements. When Japanese firms Japanese partners. finally did import the technology the cost was substantially higher. Those arguing that the technology import con- Postwar technology import control policies trol policies benefited Japan point out that gov- In the years following the Second World War, ernment intervention allowed a pooling of the Japan’s leaders were again convinced that Japan limited experience of Japanese firms with inter- needed to import technology to catch up with national agreements, put government pressure on the West. At the time Japan suffered from chronic the side of the Japanese negotiators, kept Japa- balance of payments deficits, and the government nese firms from bidding against each other (rais- tightly controlled foreign currency. Firms wanting the price of a technology), encouraged foreign ing to import technology during the 1950s and firms to sell technology to Japanese firms (because 1960s had to get the foreign exchange to pay for of government guaranteed payments), and kept it from the government. Approval was required Japanese firms from using technology agreements from the most relevant Ministry most often the to monopolize the Japanese markets. These claims Ministry of International Trade and Industry are supported by well-documented cases in the (MITI). Government staff reviewed the proposed steel and computer industries. It has also been agreements to ensure that the Japanese buyer was pointed out that only two or three example of not paying too much or being unduly restricted apparent harm caused by the policies have ap- in using the technology and that the agreement peared in the literature. was beneficial to the Japanese economy Govern- ment controls were substantially eased in the Japan’s technology imports 1960s as Japan joined the OECD and changed its status in the IMF, but the currency control During the 1950s the Japanese government ap- laws remained in effect until 1980. Since then proved more than one thousand “A” technology Japanese government controls over technology import agreements (in which the effective life of trade have been closer to those in other devel- the agreement was more than a year and pay- oped countries. ment was to be made in foreign currency). US There is a long-standing controversy over firms were the technology suppliers for two-thirds whether the restrictive controls in the 1950s and of these agreements. About half the agreements 1960s benefited or harmed the Japanese economy were in just three industries: electrical/electron- Some observers conclude that government inter- ics, chemicals and steel/non-ferrous metals. The vention in technology import must have been USA continues to supply about two-thirds of harmful. They cite Sony’s import of transistor Japan’s technology imports, though today most technology. MITI delayed Sony’s agreement to of the imports are in electronics and computer import the technology from Western Electric be- software. cause Sony was then a small and unknown company. While Sony did successfully import and Japan’s postwar technology exports commercialize the transistor, some argue that it might have done so more quickly and at lower Japan’s technology exports were relatively stag- cost without government intervention. They fur- nant through the 1950s, and overwhelmingly con- ther suggest that there may have been other firms centrated in Asia. In 1960 the Japanese steel that failed to surmount bureaucratic barriers, cost- industry achieved a breakthrough by signing its ing Japan even greater economic success in the first major contract for the export of technology. 1950s and 1960s. The Japanese-language litera- The recipient of the technology was a Brazilian ture mentions another instance where govern- company which paid nearly six million dollars ment intervention apparently raised costs to for technical guidance in building a steel plant. Japanese importers of technology. In 1958, two In 1963 Japanese steel makers made their first 148 Export-Import Bank of Japan technology exports to advanced Western coun- Lynn, L. (1982) How Japan Innovates: A Comparison with tries, and in 1974 steel became Japan’s first in- the U.S. in the Case of Oxygen Steelmaking, Boulder, CO: dustry to achieve a technology trade surplus. The Westview Press. steel industry continued to generate large rev- ——(1998) “Japan’s Technology-Import Policies in the enues for its technology as Japanese firms entered 1950s and 1960s: Did They Increase Industrial into technology agreements with firms in the Competitiveness?” International Journal of Technology United States and elsewhere. The construction Management 15(6/7): 556–67. and textile industries also enjoyed surpluses dur- Ozawa, T. (1974) Japan’s Technological Challenge to the West, ing the 1970s, but Japan had huge technology 1950–1974, Cambridge, MA: MIT Press. trade deficits in electronics, telecommunications Partner, S. (1999) Assembled in Japan: Electrical Goods and and transportation. the Making of the Japanese Consumer., Berkeley CA: By the late 1970s, Japan was second only to University of California Press. the United States in R&D spending and Japan’s Peck, M. and Tamura, S. (1976) “Technology” in technology exports continued to increase during H.Patrick and H.Rosovsky (eds), Asia’s New Giant, the 1980s and 1990s. In 1983 Japan achieved a Washington, DC: Brookings Institution, 525–85. surplus in automotive technology trade, and in Samuels, R. (1994). “Rich Nation, Strong Army:” National 1993 in electronics. By the mid-1990s Japan had Security and the Technological Transformation of Japan, passed the UK to become the world’s second larg- Ithaca, NY: Cornell University Press. est exporter of technology after the USA. In the Yamashita, S. (1998) “Japanese Investment Strategy and late 1990s Japan’s annual technology exports Technology Transfer in East Asia,” in H.Hasegawa were valued at about 70 billion dollars, compared and G.Hook (eds), Japanese Business Management, to nearly five times that amount for the USA. London: Routledge, 61–79. Nearly half of Japan’s technology exports (44 per- LEONARD H.LYNN cent) went to the United States, but 34 percent went to Asia (especially Taiwan, South Korea, China and Thailand, which accounted for 22 per- Export-Import Bank of Japan cent of total exports). Some 85 percent of the exports were in automobiles and electrical goods/ Originally called the Japan Export Bank, electronics. ExportImport Bank of Japan (Nihon There has been controversy over the benefits Yushutsunyuu Ginkou) was one of the principal of Japan’s technology export practices compared governmentfunded financial institutions in Japan. to those of other advanced nations. Hatch and Headquartered in Tokyo, it provided wide ranges Yamamura (1996) argue that Japanese firms care- of services, engaging primarily in overseas invest- fully control the transfer of technology to other ment financing and trade financing. parts of Asia, allowing only the slow transfer of The Japan Export Bank was established in relatively old technologies. The result is an 1950, but changed its name in 1952 to the Ex- everwidening gap between Japan and other Asian port-Import Bank of Japan when it expanded its countries. Yamashita (1998) agrees that Japanese activities to include import financing. The bank’s firms exercise more control in technology trans- principal activity was the provision of low-cost fers, but characterizes this as allowing a more ef- loans to support corporate growth. Such activi- ficient transfer that benefits the recipients. ties included, for instance, credits for exports of heavy industrial products and imports of raw See also: industrial policy; science and technol- materials in bulk as well as financing ships and ogy policy industrial plants in order to promote the export of Japanese products. In the 1960s the bank provided loans to Japanese ventures for overseas in- Further reading vestments and expanding of overseas resources. The Export-Import Bank of Japan also provided Hatch, W. and Yamamura, K. (1996) Asia in Japan’s yen loans to developing countries in order to al- Embrace, Cambridge: Cambridge University Press. low them to import from Japan, these loans in Export-Import Bank of Japan 149 particular constituted a large portion of the bank’s ute to the development of Japan and the interna- activities. The bank limited the uses of its loans tional economy and community through under- to Japanese investors to three general purposes: taking lending and other financial operations. (1) to finance the equity of ownership in over- Among these operations are the promotion of seas ventures; (2) to provide debt capital to over- Japanese exports, imports and Japanese economic seas ventures; and (3) to finance the purchase of activities overseas, the development of stability plants and equipment from Japanese firms, to be of the international financial order and the eco- installed in overseas ventures. nomic and social development of economic sta- The Export-Import Bank of Japan came un- bility in developing areas. The Japan Bank for der growing pressure from other countries, par- International Cooperation functions in accord- ticularly from the United States, to make changes ance with the principle that it shall not compete to its onesided trade policies and its growing trade with commercial financial institutions and has surpluses. As a result of foreign pressures, the taken the general responsibility for: (1) financing bank began to develop some programs to assist to contribute to the promotion of Japan’s exports in management of the global economy. In 1986 or imports and overseas economic activities, and it began to work with the World Bank and the to the stability of international financial order; Asian Development Bank in co-financing loans and (2) financing to contribute to economic and to developing countries. social development and the economic stability in In October 1999 the Export-Import Bank of overseas developing regions. It will also combine Japan merged with the Overseas Economic Co- the knowledge and enterprise, which the two in- operation Fund of Japan, forming the Japan Bank stitutions have accumulated, and the synergy ef- for International Cooperation (JBIC), a govern- fect of the merger will hopefully prove beneficial ment financial institution facilitating crossborder to the Japan Bank of International Cooperation. economic cooperation. The purpose of the Japan Bank for International Cooperation is to contrib- ALEXANDRA COHEN F

Fair Trade Commission had a dominant presence on the Commission. The agency is staffed by career civil servants who Japan’s Fair Trade Commission (FTC) is the undertake the day-to-day work of the agency al- country’s sole competition policy agency respon- though a small but significant number of these sible for the enforcement of the nation’s Anti- employees also have come from other ministries. monopoly Law as well as two additional statutes Japan’s Antimonopoly Law has features simi- promoting protection of small business and con- lar to other such laws in advanced industrialized sumers. The FTC, created in 1947 according to countries, including prohibition of private mo- the mandate of occupying American forces after nopolization, unreasonable restraints of trade (car- the Second World War, is based on the US inde- tels, boycotts, etc.), and unfair trade practices. The pendent commission-style of government agency former two are punishable by administrative or Its powers appear broad on paper, and include criminal measures and, in the case of restraints quasi-legislative (rule-making powers) and quasi- of trade, by fixed surcharges on illegal activity. judicial functions (independent hearing and ap- Measures against unfair trade practices are lim- peal procedures) in addition to its administrative ited to orders to cease illegal activities and take role. In spite of its powers, however, the agency appropriate remedies. The Antimonopoly Law has been buffeted consistently by opposing forces was passed with additional provisions unique to for much of its history thereby having a deleteri- Japan’s competition policy regime, such as a ban ous effect on the overall importance of competi- on holding companies to prevent the re-formation policy in Japan. tion of industrial groups, or zaibatsu. The FTC also enforces unfair business prac- Organization and function tice laws. One helps provide small business with some protection from larger companies in their Organizationally the FTC is headed by a com- business dealings, and another protects consum- mission of five members appointed by the prime ers from misleading advertising and aggressive minister and confirmed by the Diet for five-year advertising promotions. It should be noted that terms, one of whom acts as the chairman of the the restrictions on promotions and premiums, FTC. Since the early 1950s, appointments to the while playing some consumer protection role, also Commission traditionally have been made from appears to have limited competition in the retail former officials of a select group of government sector. ministries. These patterns of appointments are widely perceived to have compromised the History agency’s independence. By the mid-1990s, however, these appointment patterns changed so that The FTC has had a difficult history for much of the industrial and finance ministries no longer its existence, even having been threatened with firm strategies for technology 151 complete abolition from time to time, particularly to Japan’s Public Prosecutors Office. By the end during periods when Japan’s conservative Lib- of the 1990s, the dissolution of the Left in Japa- eral Democratic Party (LDP) has held a strong nese politics and an economic downturn enabled majority in the Diet. The introduction of US-in- the repeal of the ban on holding companies. The spired antimonopoly legislation in 1947 directly FTC nonetheless remained able to continue with challenged pre-Second World War and in par- a cautious but moderate level of enforcement of ticular wartime industrial practices of government the Law. and industry-led control associations, turning Japan’s industrial, political, and bureaucratic elite Current status against the agency and its legislative mandate. The US Occupation’s anti-zaibatsu program, in- The FTC’s overall profile in the Japanese gov- cluding dissolution and restrictions under the An- ernment today is much improved from its posi- timonopoly Law, also was an additional factor. tion during the 1950s and 1960s. However, the Conservative forces began consistent efforts agency remains among the more cautious com- from the late 1940s to emasuclate competition petition policy agencies in advanced countries for policy through efforts such as weakening the a variety of institutional as well as political rea- Antimonopoly Law, drawing up legal exemptions sons. The fact that the FTC has been embattled to the Law, and circumventing the Law through for much of its existence has had a critical impact the formation of cartels among businesses to be on the attention that Japanese companies have led by bureaucrats in other agencies. The FTC paid to competition policy in their overall busi- survived complete abolition through the 1950s ness activities. This is particularly relevant be- and 1960s by weakening its standards, failing to cause the agency until very recently effectively take on high-profile cases, and appealing to small has controlled access to, interpretation of, and business and other groups to support the agency remedies and punishments under the Antimo- and its role. nopoly Law. Direct access to the courts to file The FTC re-emerged during the early 1970s Antimonopoly Law grievances now is allowed when inflation and suspected price rises by car- for lesser violations under unfair methods of trade tels became an important political issue. The FTC provisions. took on a high-profile case against oil companies in the wake of the 1973 oil shock and followed Further reading with an active anti-cartel campaign. The attention enabled a strengthening of the Antimonopoly Beeman, M. (1997) “Public Policy and Economic Com- Law in 1977, including the addition of manda- petition in Japan,” D.Phil Thesis, University of Ox- tory surcharges on cartel activity. As inflation ford. faded and as the LDP emerged again as the domi- Hadley E. (1970) Antitrust in Japan, Princeton, NJ: nant party in the 1980s, the FTC de-emphasized Princeton University Press. active enforcement in favor of a defensive pro- Iyori, H. and Uesugi, A. (1994) The Antimonopoly Laws gram to encourage compliance with the law. and Policies of Japan, New York: Federal Legal Publi- The rise of Japan’s industrial might by the late cations. 1980s brought international scrutiny of Japan’s Matsushita, M. (1993) International Trade and Competi- industrial structure and business practices that tion Law in Japan, New York: Oxford University were perceived to keep foreign companies out of Press. Japan’s domestic market. Strong pressure was Tilton, M. (1996) Restrained Trade, Ithaca, NY: Cornell brought to bear on Japan by the United States to University Press. strengthen measures against anti-competitive MICHAEL BEEMAN practices. As a result, the FTC again emerged with a stronger profile. Cartel surcharges were firm strategies for technology raised, among other measures. The FTC also began stronger efforts to enforce the law, includ- Firm strategy for technology is roughly divided ing intermittent use of referrals of criminal acts into goal setting in technology development and 152 firm strategies for technology the formulation of the means to obtain the goals others—followed the innovation of Hitachi imme- set. Setting a goal in this context means the selec- diately. As a result, intense competition in the tion of a technology domain to which firm re- product market occurred, and Japanese compa- sources are allocated. To formulate the means to nies boosted their frequency of new product de- acquire technologies, alternative methods such velopment in order to compete in a tough market. as in-house development, alliances with other In turn, the cost performance of Japanese prod- companies, license contracts and acquisitions of ucts was remarkably improved, leading to the companies are considered. In addition, the ap- defeat by Japanese companies of US competitors proach to innovation—whether a company in US markets. Although the selection of similar achieves its targeted performance through means technology can intensify competition in an indus- of radical innovation or by accumulating incre- try it can also lead to mutual learning among com- mental innovations—could be included in the for- petitors and the development of related industries. mulation of means. As a result, products and manufacturing processes can be improved quickly in comparison with foreign competitors. Selection of technology domain The matter of the homogeneous selection of The key characteristic of Japanese companies in technologies has sparked interest from a differ- terms of the selection of technology domain is ent direction in more recent times. The adoption homogeneity with its competitors. Many compa- of a unified technical standard in an industry par- nies tend to select a similar domain to that of ticularly in high-tech industries, has become im- their competitors. As a result, many unremark- portant. The underlying reason for this tendency able companies may compete against each other is the spread of products connected to the diffu- in the same industry. This occurs because firms sion of its complementary goods, such as appli- believe that by mimicking competitors’ tech- cation software for personal computers (PCs). To nologies and products they can avoid being in a produce these types of products, companies pre- weak position in the market. This strategy seems fer developing and manufacturing products with to run contrary to the general theory of strategic a unified standard as opposed to having to com- management, which proposes that firms should pete among companies with different standards accumulate distinct technical resources, and in- in the same market. A good illustration of com- troduce differentiated products in the market. petition over a technical standard is the well- Lacking distinctive or differentiated products, known case of a videocassette recorder (VCR) Japanese firms often compete on the basis of standard among Japanese companies. In the 1970s price. But intensified price competition with ho- the Betamax standard developed by Sony and mogeneous competitors is likely to decrease VHS standard promoted by Matsushita and JVC company profits, and hurt a company’s ability to competed head-to-head in the consumer VCR make long-term investments as well. In this market. Though considered technologically in- sense, Japanese firm strategy is often regarded as ferior to Betamax, the VHS standard eventually irrational. won out. The major factor in VHS’s predomi- However, Japanese firms have succeeded in nance in the market was the spread of VHS-com- some industries by using a mimic strategy For plementary goods: software and product. The example, the Japanese color television industry VHS standard defeated the Betamax standard, was successful by adopting homogeneous tech- even though it was introduced to the market nologies. As changes in televisions production much later than Betamax. technology began to occur with the adoption of transistors and integrated circuits, Japanese firms Means of technology acquisition copied one another, while American firms did not follow suit. Led by Motorola, only a few US The means to acquire technology are: in-house companies adopted these technological innova- development, alliances with other companies, li- tions early on. But the leading companies in Ja- cense contracts and the acquisition of a company pan—Matsushita, Sony, Toshiba, and that has valuable technologies. From the end of 5S campaign 153 the Second World War to the 1960s, technology toms, rather than that of deliberate strategic introduction by means of license contracts was choice by corporate executives. Thus some re- the primary means by which Japanese firms ac- searchers express doubts about the innovation complished their technology development goals. capability of Japanese companies, especially with After the 1970s, however, the rate of in-house tech- regard to their ability to achieve radical innova- nology development was increased, which is pref- tion. They argue that the Japanese system of erable in terms of the long-term growth prospects training engineers, the labor market, the corpo- of companies. In fact, new products developed rate culture and other features of the Japanese by Japanese companies, such as the consumer system create obstacles to pursuing a technology VCR and facsimiles, have increased remarkably. strategy that focuses on new radical technology Also in the field of intermediate goods, such as development. However, it cannot be easily de- LCD and industrial robots, Japanese technology termined that one is better for the progress of developed in-house has surged ahead of other technology than the other, and the tendency of countries. adopting an incremental approach does not nec- However, in the 1980s and 1990s, companies essarily mean a low ability for technical innova- began to focus on technical alliances and acquisition. tions. The speed of technology development has increased, while the ability to develop technol- Further reading ogy in-house remains relatively unchanged due to the long time it takes to develop technological Finan, W.F. and Frey J. (1994) Nihon no gijutsu ga abunai capabilities in-house. Increasingly Japanese firms (Japanese Technology at Bay), Tokyo: Nihonkeizai have sought alliances with firms outside Japan. Shinbunsha. For example, a Japanese drug manufacturer, Porter, M.E. (1985). Competitive Advantage: Creating and Takeda Chemical Industries, Ltd, tied up with Sustaining Superior Performance, New York: The Free Abbott Laboratories and succeeded in develop- Press. ing a new medicine for prostate cancer, Leuplin. Rosenbloom, R. and Cusumano, M. (1987) “Techno- However, compared with the behavior of firms logical Pioneering and Competitive Advantage: The in the United States, these methods are not as Birth of the VCR Industry” California Management widespread in Japan. Review 29 (4): 51–76. Shintaku, J. (1994) Nihon kigyo no kyoso senryaku (Com- Approach to technical innovation petitive Strategy of Japanese Corporations), Tokyo: Yuhikaku. In terms of their approach to technical innovation, Japanese companies focus on incremental YASUO SUGIYAMA innovation rather than radical innovation. With regard to technical innovation, although the in- 5S campaign troduction of epoch-making technology often attracts great attention and is viewed as being The 5S campaign is a technique used by Toyota central to technological progress, the accumula- and other Japanese firms to establish and main- tion of incremental innovations often brings great tain a quality environment in the organization. progress in technological advances as well. Fre- The name stands for five Japanese words: seiri, quent introduction of new products with incre- seiton, seiso, seiketsu, and shitsuke. mental innovations has the advantage of making Seiri means structure or organize. An exam- use of the “learning by using” of customers and ple would be to throw away rubbish. Seiton the experience of manufacturing in contributing means systematize or neatness. A typical exam- to the progress of technology. ple would be the quick retrieval of a document. Many studies tend to view the technology Seiso means sanitize or cleanliness. It is an indi- orientation of Japanese firms as an inevitable vidual’s responsibility to keep the workplace consequence of Japanese institutions and cus- clean. Seiketsu is standardize or standardization. 154 foreign aid

Shitsuke means self-discipline, in other words, fol- to coordinate the Western countries’ economic lowing the 5S’s daily. assistance efforts and raise its effectiveness. Ja- pan’s reparation programs were recognized as TERRI R.LITUCHY economic assistance, but they came under critical scrutiny within DAC because of their thinly foreign aid veiled export promotion emphasis. Pressure was put on Japan to make new aid commitments that In line with postwar Japan’s emphasis on non- were more concessional and genuinely benefi- military contributions to international society cial to the recipient economy Over the years the Japan’s foreign aid has been limited to official DAC and its members have played a key role in development assistance (ODA) and disaster removing Japan’s ODA away from its original lief aid. Since its origins in early postwar bilat- character. eral reparation agreements, Japan’s foreign aid Through its aid programs Japan has offered grew to be the single largest aid program in the developing countries valuable access to its high late 1980s, and it retains that status as of 2001 quality industrial products and engineering serv- despite growing domestic pressure for budget ices. In return for granting this benefit Japan has cuts. been able to gain recipient cooperation in address- The Potsdam Declaration (1945) which set the ing Japan’s problems of foreign resource depend- Allied Powers conditions for peace with Japan ence and competitiveness in a global economy called on the latter to pay war reparations to all Over the years Japan has used aid projects to se- victims of Japanese wartime aggression. The San cure stable long-term supplies of critical energy Francisco Peace Treaty (1951) narrowed this by resources, raw materials, and food resources. limiting Japan’s reparation obligation only to With the emergence of the borderless economy countries that suffered losses as a direct conse- Japan has used its aid to help Japanese firms glo- quence of Japanese occupation. As postwar Ja- balize production by helping developing coun- pan re-established ties to its Asian neighbors, the tries build industrial parks and regulatory reparation obligation in each case became a key environments hospitable to Japanese firms seek- initial hurdle to normalized bilateral relations. ing to move production overseas. Japan’s situation at that time played a critical Japan also offered its aid program to the West role in determining its reparations policy and as an alliance contribution during the Cold War. subsequent ODA policy. As a war-devastated Starting from the mid-1960s Japan offered aid as country seeking to rebuild its industrial base and support for US containment policy in Asia. In recapture export markets, Japan decided to the 1970s and 1980s it offered rapid growth in its make reparations in kind, not in cash. Repara- aid spending as a non-military contribution to tions would typically come in the form of indus- winning the Cold War and as a salve for trade trial plant and equipment. This assisted the friction with its western trading partners. In the recipient’s industrialization and generated ex- 1990s Japan attempted to use its aid to gain a port orders for Japanese industry The Japanese larger role in international security matters by government also adopted a request-based sys- promulgating new aid principles in 1991 that con- tem. This required the recipient country to sub- ditioned ODA upon the recipients’ development, mit specific project requests to Tokyo for review. procurement, and exports of weapons. It followed But because the reparation countries often did this up with a symbolic and temporary cut in not have the technical expertise to identify and grant aid to China after that country’s nuclear design industrial projects, in practice Japanese bomb test in 1995. In the aftermath of the Asian businesses active in these markets would fill this financial crisis of 1997–8 Japan made new fund- void. ing pledges for Asian currency stability. At the Japan joined the Development Assistance start of the new millennium, Japan is emphasiz- Committee (DAC) of the Organization for Eco- ing the use of its aid to help narrow the so-called nomic Cooperation and Development (OECD) digital divide and to address problems of the heav- in 1961. DAC was formed at American initiative ily indebted developing countries. foreign companies in Japan 155

On the domestic front, the Japanese govern- contributions. With respect to bilateral aid, the ment has confronted widening calls for greater share of technical aid has increased markedly to ODA transparency and reform from the late over 30 percent while the share of loans has de- 1980s to the present. It attempted to deal with creased to little more than 40 percent. This re- this by producing an ODA Program Outline in flects a shift in emphasis away from heavy 1992 that laid down a broad and flexible set of infrastructure projects toward debt relief, techni- policy principles. In response to pressures for in- cal training, and programs to improve the wel- creased effectiveness and breadth of concern Ja- fare of poorer population segments. pan moved to include non-governmental organizations (NGOs) in the identification and Further reading implementation of aid projects and programs, and Arase, D. (1995) Buying Power: The Political Economy of aid to address environmental problems became Japan’s Foreign Aid, Boulder, CO: Lynne Rienner. more salient in aid policy in the 1990s. Continu- Development Assistance Committee, Organisation for ing aid scandals and revelations of misuse, how- Economic Cooperation and Development (annual) ever, along with tightening budgetary constraints DAC Journal: Development Cooperation Report, Paris: throughout the 1990s led to the first ever ODA OECD. budget cut in 1997. The prospect at present is for Economic Cooperation Bureau, Ministry of Foreign arrested budget growth and perhaps a gradual Affairs (annual) Japan’s ODA Annual Report, Tokyo, decline in real spending terms. Japan: Ministry of Foreign Affairs. Japan’s aid administration has long been noted for its opaque and bureaucratic character. The DAVID M.ARASE Foreign Ministry has the role of representing Ja- pan’s aid policy to external actors. Behind this foreign companies in Japan window, however, the realities of policy making are more complicated. Aid policy is coordinated The history of foreign companies in Japan paral- inside the domestic political system by four cen- lels the development and transformation of tral government bureaucratic actors, i.e., the Min- Japan’s economy and also serves as a proxy for istry of Foreign Affairs, the Ministry of Finance its increasing openness to foreign ideas and cul- (MOF), the Ministry of International Trade tures. Very few foreign companies were active in and Industry (MITI), and the Economic Plan- Japan prior to the Second World War, since Ja- ning Agency In addition, some fourteen other pan made few efforts to open itself to foreign prod- main government ministries and agencies play ucts, its consumers or middle class were very more specialized roles in those aspects of aid that small and not very exposed to non-Japanese cul- fall into their respective areas of competence. With tures, and Japan’s distance from other markets respect to policy implementation, the Japan In- made the conduct of business there difficult. ternational Cooperation Agency (JICA) admin- Nevertheless, a few companies did persist in at isters most of Japan’s grant aid and the Japan least establishing relationships and business in Bank for International Cooperation administers Japan. Of those, many were invited to Japan to the bulk of loan aid. provide specific know-how or product knowledge In 1999 net ODA disbursements totaled $15.3 that Japan could not provide for itself. For in- billion with almost two-thirds allocated to coun- stance, the Swiss food giant Nestlé first opened a tries in East and South Asia. This regional distri- representative office in Yokohama in 1913 in or- bution reflects Japan’s traditional pattern of der to provide milk products to Japan’s populace. aid-giving. In other respects, however, the break- Other foreign companies operating in Japan dur- down of Japanese aid has changed. The balance ing the 1920s and 1930s, but which had origins of bilateral and multilateral aid has shifted from in the countries allied against Japan in the Sec- roughly a 2:3 ratio to a 3:4 ratio in the 1990s, ond World War, were shut down or were effec- reflecting perhaps some degree of Japanese dis- tively banished from Japan during the war. appointment at its weak leadership role in multi- After the war, foreign majority ownership of lateral institutions relative to the size of its financial Japanese companies was prohibited by law, but 156 foreign companies in Japan

the presence of military government and soldiers profits in order to obtain greater market share, from the victorious powers influenced the growth the existence of exclusionary buying networks of an environment of admiration for foreign life- among Japanese producers and suppliers, the ex- styles and, as a result, for foreign products. Many istence of a host of “non-tariff” or administrative of the largest and most profitable foreign compa- barriers to trade and investment, the existence of nies in Japan today for example, first set up op- a complex and multi-tiered physical distribution erations in Japan or began exporting to Japan in system for many different types of products, the the two decades following the war. often greater importance of relationships, qual- As Japan’s society grew increasingly affluent ity and service (instead of price) in buying deci- in the 1950s and 1960s, interest in Japan among sions, and opaque and often arbitrary regulatory globalizing foreign companies grew, and during guidance and decision making, have all combined many of those years Japan ran a trade deficit. to cause difficulties for a variety of foreign com- But Japanese companies and government policies panies seeking to grow their businesses in Japan. designed to completely protect key domestic in- Occasionally these problems attained a high pro- dustries (such as agriculture and distribution) file or became entangled with domestic politics, combined to ensure that foreign companies would as in the case of the Lockheed bribery scandal not be able to dominate specific industries and that caused the resignation of the Japanese prime destroy their mostly smaller domestic competi- minister in 1976, but more frequently foreign com- tors. For example, a 1956 Department Store Law panies like Procter & Gamble grew to appreciate protected small retailers and strengthened their the need to modify or design their products spe- ability to keep unwanted competitors out of their cifically for Japan, or manufacture in Japan rather community And revisions to Japan’s Shogyo Ho, than try to import. Or in the case of General or Commercial Code, during the 1960s encour- Motors, to put the steering wheel on the right aged domestic companies to issue new shares and rather than the left. place them with friendly customers, suppliers and In the 1970s and 1980s, certain foreign prod- companies in their industrial groups. Not only ucts and brands grew popular with Japan’s mid- would this strengthen keiretsu ties, but it would dle-class society including German luxury cars also provide insurance against unwanted foreign such as BMW, French and Italian beauty and takeover attempts. As a result, the few foreign fashion brands such as Louis Vuitton and Gucci, companies that were allowed to set up wholly- and US consumer and food brands like owned subsidiaries in Japan, such as IBM in 1960, McDonald’s and Coca-Cola. Increases in tour- were forced to license most or all of their basic ism abroad by Japanese families, and a strong yen, patents and technologies to their eventual Japa- helped expose Japanese families to foreign brands nese competitors as a condition of doing so. Or, for the first time. But Japan’s growing affluence like the foreign oil companies, they were allowed in the 1980s, its trade surplus with the rest of the to set up operations for the specific purpose of world, and its increasing acquisitions or estab- ensuring Japan’s access to essential commodities lishment of operations in its traditional export and supplies. Other successful major foreign com- markets, increased the interest of other countries panies formed joint ventures in Japan, such as in stimulating structural changes in Japan’s do- Hewlett-Packard with Yokogawa Electric and mestic market that would stimulate domestic con- McDonald’s with Fujita. A number of Chinese sumption, increase importation of foreign goods, and Korean-owned businesses also set up opera- and lower the trade surplus. This resulted in tions in Japan during this time; today they ac- many cases of friction between Japanese and for- count for the majority of foreign companies in eign companies competing in the same industry Japan. and also between foreign governments and the Many foreign companies soon learned that the government of Japan. Negotiations between gov- dynamics of competition in Japan were different ernments and among governments and specific from those they were used to in their home mar- industries often resulted in explicit agreements kets or other markets where they competed. The by Japan to increase imports, loosen regulations willingness of Japanese companies to accept lower or ‘non-trade barriers, open specific industries for foreign companies in Japan 157 foreign investment, reduce restric tions on for- acquisitions of major bankrupt companies in re- eign ownership, protect intellectual property cur- cent years). Foreign companies (such as AutoLiv tail exports, or implement reforms to give foreign and other global automotive systems suppliers) companies a ‘level playing field’ when compet- are also increasingly using relationships estab- ing in Japan. A variety of such negotiations, in- lished first in their native regions with Japanese volving numerous industries ranging from textiles manufacturers operating abroad, to expand into in the early 1980s to Internet access in the late Japan with customer relationships already estab- 1990s, have taken place over the past two dec- lished. Those wishing to establish new operations ades and continue today and have collectively on the ground are able to take advantage of the had a major impact on the ability of foreign com- availability of qualified native staff, as well as panies to enter and grow their companies in Ja- lower costs for advertising, office space, travel, pan. staff and entertainment. Still other companies like Japan’s capital market development also played US-based Boeing have established and main- a role in foreign companies’ Japan strategies (see tained significant Japanese business while success- capital markets), as foreign firms such as IBM fully avoiding the creation of Japanese which had major Japanese operations took their competition, by making potential Japanese com- Japanese units public in the 1970s and early 1980s petitors like Mitsubishi and Kawasaki Heavy In- as a way of emphasizing their dedication to the dustries significant suppliers to their commercial local market and solidify their ties to customers airplane manufacturing operations. and suppliers. The popularity of listing in Japan Foreign companies can rely on a variety of or- died down in the early 1990s as Japan’s stock ganizations and programs to support their op- market fell, but picked up again in the late 1990s erations and employees in Japan. Japan is the only as technology companies such as Oracle listed major economy whose government has estab- shares of their Japan operations on the local mar- lished an agency whose specific objective is to ket. Today the existence of NASDAQ Japan dem- increase the level of imports to Japan, encourage onstrates the involvement of foreigners in Japan’s foreign direct investment in the country and oth- capital market institutions. erwise provide assistance to foreign companies At present, foreign companies are entering and seeking to do business in Japan. The Japan Ex- growing in Japan in a variety of ways, using nu- ternal Trade Organization (JETRO) was ini- merous strategies and tactics to increase their tially created to promote Japanese exports, but prospects of success. Smaller firms or those with now operates offices around the world and all niche products, technologies or services often over Japan to assist foreign companies and help contract with middlemen of various kinds (such them make the contacts they need to increase as agents, representatives, distributors or their Japanese business. Among its various ac- webmalls). Larger companies (such as General tions, it promotes the existence of specific “for- Motors, Starbucks, and Unisys) are able to ar- eign access zones,” which offer incentives for range partnerships and alliances in Japan, which foreign companies which choose to establish op- may or may not include the formation of joint erations in specific, often rural, prefectures. It also ventures or the taking of equity in their Japanese provides temporary office space, library facilities, partner. For companies seeking to acquire major and other services helpful primarily to small and positions in the Japanese market immediately medium-sized foreign companies. Other Japanese mergers and acquisitions or transactions which national government bodies, such as Japan De- provide operating control of an already existing velopment Bank, provide financing or offer spe- Japanese company (such as Renault with Nissan) cific programs, incentives and discounts designed have become far more frequent, and the avail- to encourage investment by foreign companies, ability of distressed companies (or those exces- including large manufacturers, in Japan. And in- sively burdened by their debt) and those open to dividual prefectures and municipalities often management buyouts has increased markedly in sponsor their own programs designed to ease the recent years (companies such as Cargill, Merrill entry or investment of foreign companies in their Lynch and General Electric have made outright regions. 158 foreign workers

Many of the countries whose companies have and account for a much smaller proportion of come to Japan in significant numbers have them- total employment, than in other developed econo- selves established both government and/or non- mies in which they compete. profit support organizations and chambers of Nevertheless, because of relatively low share commerce in Japan. Organizations such as the to date in Japan, and the recent weakness of an American Chamber of Commerce in Japan increasing number of previously formidable do- (ACCJ), the European Business Community Or- mestic competitors, foreign companies may find ganization in Japan, and Deutsche Industrie und Japan’s enormous market to be one of their last Handelskammer in Japan (DIHKJ) are examples great growth markets as the new century dawns. of membership organizations providing informa- JAY NELSON tion services, programs and events for their respective business communities in Japan. In addition, often specific states, regions or prov- foreign workers inces of a country establish offices in Japan, both to promote the Japan business interests of their Japan continues to have the most homogeneous home companies, as well as to seek Japanese in- population of all major industrial nations in the vestment in their state and prefecture abroad. world. Approximately 3 percent of Japan’s over- Today certain foreign companies dominate all population could be described as other than their industries in Japan. Coca-Cola obtains fully culturally ethnically and racially Japanese, and 20 percent of its global operating profit from Ja- this 3 percent is made up primarily of Koreans pan, despite a host of competitors in Japan’s vari- and Chinese. Both Taiwan and Korea were long- ous beverage markets. Microsoft holds greater term colonies of Japan until the Second World than a 90 percent share of the PC operating sys- War, and many of these Chinese and Koreans in tem market in Japan. American Family Life As- Japan today were forced to migrate to Japan with surance Company (AFLAC) receives more than the labor shortage during the war. Most of these 80 percent of its business from its Japanese sales people have remained in Japan in subsequent of cancer and other specialty health insurance. generations but continue to hold Korean or Tai- Service industries such as healthcare, nursing, wanese citizenship, partly because of Japan’s eldercare, financial services, Internet, and envi- highly restrictive naturalization laws. ronmental technology are in many cases wide The number of foreign workers in Japan, open and solicitous of foreign technology and in- however, has been growing in recent years. At vestment. Early in 2001 a British company BS first the increase in foreign workers was induced Group, made an acquisition in one of Japan’s larg- by the economic boom of the 1980s. Although est yet most traditional industries, that of pachinko, Japan is currently experiencing a severe eco- and it is rare today to find a Japanese industry in nomic recession, this trend persists; the number which foreign companies do not participate at of foreign workers is now over 600,000, or about least marginally. 1 percent of the nation’s working population. To On the other hand, certain Japanese industries a large degree, the need for foreign workers per- have proven too difficult or inaccessible for for- sists even during Japan’s long economic stagna- eign companies to make significant inroads to tion from the early 1990s because, as is common date. These include the construction industry, with advanced industrial nations, the more afflu- the telecommunications industry dominated by ent and well-educated Japanese population is un- the Japanese government through its (until re- willing to perform unattractive jobs which are cently) majority ownership in dominant tel- characterized by the so called 3Ks: kiken (danger- ephone carrier Nippon Telegraph and ous), kitanai (dirty), and kitsui (demanding). Ja- Telephone (NTT), and the agriculture industry. pan faces a looming crisis because of a rapidly In automobiles, foreign car brands still only aging population due to a serious drop in the achieve (as of 2000) 6 percent share of all vehi- birth rate and an increasing life expectancy that cles sold in Japan. In fact, foreign companies play has already put Japan ahead of all other nations. a much smaller overall role in Japan’s economy This looming labor shortage crisis is made more foreign workers 159 critical for Japan’s future because typical solu- accountants, medical personnel, and researchers. tions of immigration and increased female labor However, the law also attempts to tighten up regu- participation are culturally resisted in Japan. lations and control the inflow of unskilled and semi-skilled foreign workers. It imposes sanctions on those who try to recruit or hire illegal unskilled Immigration foreign workers. The increase in the number of During the mid-1980s and 1990s Japan began legal residence and work categories allows a va- exporting jobs to Southeast Asia as the yen dra- riety of professional workers as well as the de- matically increased in value. If Japan is to keep scendants of Japanese immigrants abroad, up to existing factories and offices operating in Japan the third generation, to work and reside legally and stop short of moving most production to in Japan for a specified period of time. other countries, the immigration of foreign work- In terms of controlling illegal immigration, the ers into Japan would seem the most logical solu- new law has had a temporary deterrent effect. tion. This is a solution all of the advanced Before the law took effect, about 30,000 illegal industrial nations in Europe and North America workers left Japan for fear of arrest. The new have followed to at least some degree. But it is a visa agreement made it very difficult to obtain a solution that creates extensive resistance among visa, and contributed to the reduction of the the Japanese people. Japanese government sur- number of visitors. veys continue to show that Japanese people are The new law also allows some unskilled labor uncomfortable among foreigners and the unfa- in through the following categories: (1) company vorable treatment many foreign workers have re- trainees, which has become a way for employers ceived in Japan in recent years has caused public to bring in low-wage foreign workers for un- conflict. skilled, manual labor jobs where little training is When Japan experienced a serious labor short- involved; and (2) students of post-secondary (ex- age during the period of rapid industrialization cept for university) institutions, including lan- of its economy in the mid-1960s, there was a guage and vocational schools. They can work for strong demand to import foreign workers from a limited number of hours per week. countries such as Korea and Taiwan. However, Under this law, the only group of foreigners the Japanese labor minister at the time argued who can legally work full-time in simple labor against this idea, since he feared that the impor- jobs in Japan is nikkeijin, foreigners with Japanese tation of foreign laborers might deter the nation ancestry. The legal status of nikkeijin workers led from promoting the welfare of domestic workers to the replacement of illegal foreigners with and improving working conditions. Then again nikkeijin by many companies. Even with these the same decisions were made by subsequent provisions created for employers to obtain un- labor ministers in the 1970s. Japan managed with- skilled workers, Japan still maintains the position out importing foreign laborers, partly thanks to that the nation does not allow unskilled laborers. the massive introduction of labor saving technolo- Thus, the new law has been criticized because it gies in various industries, as well as a large labor does not directly address the labor shortage in pool in rural areas. There is growing awareness, unskilled labor jobs. however, that sooner or later the looming labor shortage because of the “baby bust” will demand Further reading more foreign workers. By the late 1980s, the Japanese Diet approved Kitagawa, T. (1992) “Social Research on Japanese several amendments to its Immigration Control South American Immigrant Workers in and Refugee Recognition Law that became ef- Oizumimachi, Gunma Prefecture: The Settling fective in 1990. The new law expands the number Down Motivation and Infrastructure for Accep- of job categories for which the country will ac- tance,” in K.Yamashita (ed.), Hito no Kokusaika ni cept foreign workers; from eighteen categories kansuru Soogooteki Kenkyuu (Comprehensive Research to a total of twenty-eight categories. These are of Internationalization of People), Tokyo: Depart- mostly professional categories such as lawyers, ment of Sociology Tokyo University. 160 Fuji Photo Film

Komai, H. (1991) “Are Foreign Trainees in Japan Dis- Fuji Photo began an optical products export busi- guised Cheap Laborers?” Migration World Magazine ness in 1949. Fuji Photo began exporting photo 20:13–17. film to Asia and South America in 1954, slowly Morita, K. and Sassen, S. (1994) “The New Illegal Im- developing its overseas markets. During this time, migration in Japan 1980–1992,” International Migra- Fuji Photo took on the role as exemplar for other tion Review 28:153–63. Japanese companies that followed its lead in in- Murashita, H. (1999) Gaikokujin Roodoosha Mondai no ternationalizing operations and services. By tak- Seisaku to Ho (Government Polities and Laws Re- ing a leadership role, Fuji Photo dominated the garding Foreign Worker Problems), Osaka: Keizai photo film market in Japan by 1960. In 1962, Hooka Daigaku Shuppan Bu. Fuji Photo Film developed a partnership with Xerox UK to form what is now considered to be MEIKA CLUCAS one of the most successful joint venture companies in the history of business, Fuji Xerox. This Fuji Photo Film joint venture project helped Fuji Photo to solidify its international presence and reform its image Fuji Photo Film Co., Ltd was established on Janu- over the next few years. ary 20, 1934. Fuji Photo began as a division of Future growth for Fuji Photo will depend on Dainihon Celluloid Company. At that time, the strength of their existing operations around Dainihon Celluloid was attempting to cooperate the world. It plans to expand its digital based with Kodak, Inc. of the United States in order to business as part of a drive to dominate “imaging learn new techniques of film production and pro- and information.” So far, success within this cessing, because it lacked the technological so- growth industry has been mixed. Fuji Photo phistication necessary to compete. However, has 20 percent market share in digital cameras Kodak refused to help, and Fuji Photo went on in the world, which, although high, places it to learn how to produce photo film on its own. third compared to its Japanese rivals, Olympus As the company grew and developed, it diversi- and Sony. Fuji Photo’s goal for the future is to fied into many film-related businesses, globalized be number one in the world in the digital and became the one of the largest photo film com- imaging business. panies in the world. Currently Fuji Photo is a global company with over 37,551 employees worldwide, distributed Further reading across ninety-two subsidiaries. Fuji Photo’s capi- Arai, T. (1995) The Real Ability of the Lion, Fuji Film, The tal stands at ¥40,363 million as of March 31, Nikkan Kogyo Shinbun, Ltd. 1999, with net sales ¥1,437,810 million and net Barron, D. (1997) “Integrated Strategy Trade Policy income of ¥71,540 million for the fiscal year end- and Global Competition,” California Management Re- ing March 31, 1999. Fuji Photo’s businesses in- view 39(2): 145. clude imaging systems, photo finishing systems Fuji Photo Film Co., Ltd. (1984) 50 Years History of Fuji and information systems. These activities are Photo Film, Tokyo Fuji Shoshun Fuirumu Kabushiki spread across divisions: general photo and Kaisha. imaging, advanced photo systems, camera and movie film, digital photo systems (Fuji developed OGIWARA TAKESHI the first digital camera in 1988), recording media MARGARET TAKEDA (including video tapes and CDs), office imaging information systems, printing systems, medical instruments, and high-functional industrial ma- Fukuzawa, Yukichi terial. Within the global photo film industry Fuji Born in 1835 in southern Kyushu, Yukichi Photo holds the largest market share in Japan (70 Fukuzawa was perhaps the most influential man percent) and ranks second in the world. Its inter- of the Meiji era who did not serve in government. national success started over fifty years ago when He was trained in “Dutch Learning,” the study Fukuzawa, Yukichi 161 of Western society literature and science through Upon his return he founded a school in Edo books and materials introduced into Japan via which, in time, became Keio University, the lead- Dutch traders who had restricted trade with Ja- ing private university in Japan in terms of edu- pan on a small island at Nagasaki. After teaching cating top business leaders. He subsequently Dutch in Edo (present-day Tokyo), he switched published, in 1875, The Encouragement of Learning, over to a study of English in response to the in- which laid out his ideas on education. More than flux of foreigners involved in trading at 700,000 copies of the book were sold. Yokohama. In 1860 and 1862 he accompanied ALLAN BIRD embassies to the USA and Europe respectively G

GAISHIKEI KIGYOU see foreign companies The power exercised by production teams in in Japan Japanese shops is not derived from the institutionalized group autonomy embedded in the genba-shugi work group which seeks to maintain independent authority relative to management, as is the Genba-shugi literally means “shop-floorism.” This Scandinavian model of autonomous work groups. is a management philosophy that dictates that, Rather, power is delegated by management to the as far as possible, the process of production of shop-floor level on the basis of established ac- goods and services must be controlled at the shop- countability of the shop, and in terms of policies floor level by shop people. The set of policies and targets set by management. Thus, genba-shugi and practices designed for implementing this idea works effectively when management deploys set is called the shop-floor approach, and is com- policies with clear goals of production to which monly observed in Japanese factories. Genba-shugi genba teams commit. In this sense, genba-shugi is a includes a variety of participative and bottom-up method of shop management co-operation for the approaches used for managing the process of accomplishment of goals of production. production based on empowerment of the shop In Japan, the tradition of corporate unionism workers and delegation of decision-making au- helped co-operation between management and thority to the shop-floor level. Genba indicates the the shop develop very quickly after the Second “actual site” where all important processes take World War, based on the idea of genba-shugi. The place, and people who run the genba are consid- concept also facilitated a “win-win” spirit within ered to have full power and responsibilities for the firm between management and employees. controlling what is going on there. Therefore, to Both parties recognized that responding to mar- successfully implement this idea, systematic del- ket needs quickly by providing reliable products egation of authority from management and engi- with relatively low costs was essential to winning neering sections to genba leaders and workers is and growing in competitive markets. Therefore, indispensable. Also important is empowerment all parties concerned in the firm—managers, en- of the shop through extensive training of genba gineers, technicians, and operating workers— workers in the skills and knowledge of produc- started to explore methods for responding to tion management, and sharing day-to-day busi- market needs by studying through quality con- ness and production-related information with trol circles and experimenting based on kaizen them. In other word, systematic human resource activities at the shop-floor level. The fruits of their development at the shop-floor level and exten- co-operation were shared through the other com- sive information sharing by managers and engi- ponents of the Japanese style of management, neers with shop people constitute critical namely lifetime employment, seniority-based conditions for practicing genba-shugi successfully. wage increases and promotion, biannual bonuses, genba-shugi 163 welfare provisions and so forth. In Japan, the genba fer would take place in order to practice genba- is recognized as the ultimate source of competi- shugi production in the USA. tive strength and all efforts are placed on improv- To effect a transfer of genba-shugi, this firm first ing production processes in order to perfect genba-shugi. categorized knowledge and skills considered man- Consequently the shop sometimes experiences datory for running the genba shop and then or- increasing pressure, and stress increases. When ganized them into a team structure as follows (see this happens, the weight of expectations associ- Table 1) ated with genba-shugi will become excessive for The above arguments suggest that empower- team members and work will become overwhelm- ment of a team comprised of qualified team mem- ing (see karoshi) bers is a key to this type of shop-floor approach. Particularly a powerful leader must possess appropriate qualifications of extensive quality con- Organization for the practise of genba-shugi trol skills and management knowledge, Hanada and Yoshikawa (1991) characterize the problem-identifying and solving skills, long-range organization for genba-shugi practices in Japan as planning skills, all practical skills related to work being soft, having flexible boundaries, sustained subordinates are conducting, skills of training sub- by face-to-face communication networks and ordinates, writing manuals, conducting kaizen im- implementing extensive on-the-job training, com- provement, handling emergencies and so forth. pared to the hard, hierarchical, manual-based and It is clear these skills overlap with those of engi- occupational skill-based organizations of Western neers and managers. Therefore, engineers and society. In other words, in order to practice managers must be able to work closely with shop genbashugi, the organization of factories must be sub-leaders and associates in order to run the shop constructed by overlapping roles in which task- smoothly. Genba-shugi is impossible without teams related skills, knowledge, information and respon- empowered with management authorities sibilities can be shared extensively so that all through delegation, competent team leaders and people concerned particularly managers, foremen qualified team members organized into a soft and and operators, can co-operate easily through ef- overlapping work system. In particular, continu- ficient interpersonal communication networks. ous development of team members through ex- Likewise, Wakabayashi and Graen (1991) dem- tensive knowledge-sharing and skill is essential onstrated that a transplant organization devel- for successful implementation of a shop-floor ap- oped by a company in the Toyota group in the proach. USA was based on empowered teams with technical and information support provided by supervisors, managers and staff engineers. They Practices associated with genba-shugi pointed out that human resource development for establishing effective team-based factory or- Practices conducted at the shop-floor level are ganization in the cross-cultural context was a key closely associated with policies and goals set by to successful transfer of the Toyota production management. Houshin-kanri (policy deployment) system (TPS) to the USA. is one of the methods by which management poli- Commonly a team consists of one team leader, cies and specific goals of production are deliv- one or two sub-leaders and ten to fifteen operat- ered to the shop, with the provision of necessary ing workers called associates. One supervisor or resources and authority for achieving them. Man- foreperson supervises several teams. Roughly 20– agers, supervisors and engineers monitor the pro- 30 associates work under the supervisor. Since a duction process and assist the genba workers in team leader and sub-leader(s) are synonymous realizing policies and goals. Normally quality im- with hancho and kumicho of the home plant respec- provement and cost reduction are the two major tively in terms of position roles and functions, areas where policies and goals are set. developing a genba organization with a Japanese- First, genba-shugi must be initiated through em- style team structure was considered to be the powerment of team members. To build team ca- foundation on which further technology trans- pabilities, members are developed through a 164 genba-shugi

Table 1: Qualifications for team associates and a team leader for genba-shugi,

multi-job-holding program where, theoretically and shitsuke (discipline). These 5Ss constitute pre- speaking, everybody becomes capable of han- conditions for implementing further cost saving dling everyone else’s job by going through a and quality production programs in genba-shugi planned job rotation and on-the-job training. (see 5S campaign). Multiple job holding by multi-skilled workers Third, a variety of team-based small group ac- makes possible interchangeable job assignment. tivities can be practiced for quality improvement It also helps each person detect mistakes made and cost reduction at the shop-floor level. QCC by others, and encourages fixing them before the (quality control circle) and kaizen (incremental im- process is completed. These practices also lead provement) activities are two common ones. to members feeling a sense of belonging to an These programs become engines and foundations effective team and further nurturing a team spirit. for the more extensive TQM (total quality man- Second, maintaining genba in a clean and or- agement) or TQC program for the entire firm, derly manner becomes an important responsibil- which must be rooted within team activities at ity for each team member. Typically the 5Ss are the shopfloor level. practiced for this purpose: seiri (orderliness), seiton Fourth, entire production systems such as (aligning), seisou (sweeping), seiketsu (cleanliness) Toyota’s TPS that incorporate just-in-time and general trading companies 165 kanban practices must depend on the genba-shugi ing conglomerates. They have close links to other philosophy. Since the ultimate goal of TPS is de- manufacturers in their keiretsu, however, and of- ploying policies and empowering teams to enable ten have joint venture manufacturing companies them to satisfy market needs in technical and cost- with these manufacturers. Sogo shosha supply other related issues by improving the quality and re- keiretsu members with raw materials and sell their ducing muda (waste) of all kinds (materials, energy finished and semi-finished products on the do- defects, efforts, time, transport, etc.), genbashugi mestic and international markets. Thus, as they must be pursued to its maximum benefit. Moreo- react to the changing needs of their clients, their ver, what is known as jidouka (self-control) sys- patterns of overseas expansion and business de- tems in TPS involving FMS (flexible velopment have many parallels with other multi- manufacturing systems), fail-proof devices, an nationals. There is some evidence that their andon (lantern) line-stop mechanism all depend keiretsu ties are weakening, however, due to post- on initiatives of empowered teams at the shop- bubble economy restructuring and mergers. floor level. Partly as a result of their ties with keiretsu com- Finally in future, genba-shugi practices will in- panies across a range of key industries, sogo shosha crease in importance because employees are be- are also heavily intertwined with the fate of the coming more and more empowered and Japanese economy to the extent that Japanese organizations are becoming flatter. Management GNP growth is often the most statistically sig- is talking more directly with employees at the nificant predictor of their trading transactions shop-floor level. Moreover, information technol- growth rates. Sogo shosha still handle a major pro- ogy and the evolution of new organization sys- portion of Japan’s international trade, coordinat- tems are changing the nature of the shop and ing 30 percent of Japan’s exports and 50 percent genba-shugi. of its imports. This sense of ‘representing Japan’ permeates their business strategy and has pre- MITSURU WAKABAYASHI vented them from becoming truly global operations, in the sense of having key clients and senior general trading companies managers originating from outside Japan. This is illustrated by the surprisingly large proportion General trading companies (sogo shosha) are tradi- of turnover represented by domestic transactions. tionally defined as integrated international trad- According to the Japan Foreign Trade Council, ing enterprises engaged in importing and the combined sales of the eighteen sogo shosha are exporting a wide range of merchandise. Sogo shosha around one trillion dollars a year, of which 12 themselves like to claim that an increasing pro- percent comes from exports, 15 percent from im- portion of their profit comes from investment in ports, 24 percent from offshore trading and 49 various projects around the world, undertaken percent from domestic trading. Although the scale not only to boost trading relationships but also of their trading transactions has led to the top for pure capital gain. This shift to investment is five sogo shosha being named as some of the world’s the latest in a series of business transitions by largest companies, their market capitalization sogo shosha, who have been declared obsolete in would not justify this claim. Furthermore their every decade since the 1960s but have so far net profits are only a fraction of a percentage of managed successfully to reinvent themselves, with their turnover and their employee totals world- only a few casualties along the way. wide are not much more than 10,000, even for Although sogo shosha are usually considered to the largest companies. be unique to Japan because of the range and scale There are around 8,000 import/export com- of their business activities and their pivotal role panies in Japan, but only eighteen are recognized in each keiretsu, many Japanese business scholars as sogo shosha by the Japan Foreign Trade Council prefer to point out their similarity to Western trad- (which represents Japanese trading companies). ing companies and multinationals in general, both The more common interpretation includes only past and present. It is important to remember that the nine largest companies: ITOCHU Corpora- sogo shosha are by origin trading, not manufactur- tion, Kanematsu Corporation, Marubeni 166 general trading companies

Corporation, Mitsubishi Corporation, Mitsui Sogo shosha are also well-known for their be- & Co Ltd., Nichimen Corporation, Nissho Iwai nevolent, perhaps overwhelming care of their em- Corporation, Sumitomo Corporation and ployees, in excess even of Japanese high standards. Tomen Corporation. Recently however, As well as the usual fringe benefits of dormito- Kanematsu has been excluded from this group, ries, subsidized accommodation and life-time em- following a restructuring which halved its staff ployment, many sogo shosha offer employee and sold off its textiles and energy businesses. marriage bureaux, higher than average salaries The remaining nine smaller companies are: and retirement packages and very generous ex- Chori Co, Ltd., Iwatani International Corpora- patriation benefits. With the latest restructuring, tion, Kawasho Corporation, Kinsho-Mataichi however, some of these benefits are being cut and Corporation, Nagase & Co Ltd., Nissei Sangyo the complex hierarchies associated with lifetime Co. Ltd, Sumikin Bussan Corporation, Toshoku employment are being de-layered. It is noticeable Ltd. and Toyota Tsusho Corporation. The latter too that trading companies have been slipping is the only trading company that is growing rap- down the student employer popularity rankings idly and has ambitions to enter the ranks of the in the 1990s, largely due to being identified with top five trading companies by acquiring or tak- the “old” and failing Japanese economic struc- ing a stake in other failing trading companies. ture. Okura and Co was also part of the official group of sogo shosha until it filed for bankruptcy in 1998. History General trading companies are engaged in all industrial sectors from resource development to Most general trading companies started merchant advanced technology including energy such as businesses during the Tokugawa period (1623– oil and gas; metals such as iron and steel and 1853) but formally established themselves in the nonferrous metals; machinery including automo- Meiji era (1868–1912) as specialty trading com- biles, ships, airplanes and industrial machinery panies: Mitsui as a silk and rice merchant, and equipment; chemicals including petrochemi- Sumitomo as a copper refining and sales com- cal products; general merchandise, sporting and pany Mitsubishi as a shipping and shipbuilding leisure goods, medical equipment, construction company and so on. In fact the use of the term and property development, and information and sogo shosha to describe trading companies only be- communications including satellites and mobile came popular in the mid-1950s, when foreign phones, software and services such as retailing. trade was resumed after the Second World War In addition to trading and business investments, and the Japanese economy began to revive. In- general trading companies also offer services such deed, many of the prewar specialty trading com- as financing, transportation and logistics, research panies only became general trading companies and consulting, marketing and project coordina- in the first two decades after the war. tion. The early specialties were a reflection of the status of some of the trading companies as seisho, or merchants who used their close contacts with Employees politicians to take advantage of the Meiji govern- Due to their pivotal role in the Japanese economy ment’s industrial promotion policy The trading the variety of work and possibility of international companies took up the challenge of wresting con- postings that sogo shosha offer, they are a highly trol of Japan’s trade from the foreign merchants popular employment choice for Japanese univer- who had a near monopoly on Japan’s foreign sity graduates. Sogo shosha employees are there- commerce and shipping after the enforced open- fore well represented amongst the alumni of ing of Japan, following two centuries of isolation. Japan’s elite universities, and consequently have The earlier trading companies were given licenses high level contacts ranging across government to export the products in which Japan had a com- and business circles. These contacts further en- parative advantage, such as silk, rice and tea. Late- hance their usefulness as facilitators for entry into comers such as Mitsubishi concentrated first of the Japanese market for foreign companies. all on fighting off P&O for shipping lines out of general trading companies 167

Japan and then on transferring technology from 1960 and 1973. This was partly due to mergers, Britain for shipbuilding, in order to reduce de- inflation and yen reevaluations but also because pendency on foreign ship purchases. The trad- of their ability to diversify into news industries ing companies quickly diversified into mining, and to integrate their businesses upstream and manufacturing and transportation, evolving into downstream. zai batsu. These various divisions were spun out In the 1970s sogo shosha facilitated the overseas into separate companies, with the sales divisions investments of Japanese manufacturers, often tak- becoming the prewar predecessors of the post war ing a stake in their foreign subsidiaries, or setting sogo shosha. up joint ventures for distribution and warehous- The First World War proved a major boost to ing. They also became conduits for Japan’s in- some of the trading companies and a disaster for creasing Overseas Development Assistance others. Those who speculated heavily in metal projects in Africa and the Middle East. and did not control their finances failed, such as Sogo shosha’s raison d’etre was questioned again Masuda, Shimada, Furukawa, Kuhara, Mogi, in the 1980s, a decade which was supposed to be Yuasa, Takada and Suzuki Shoten. Mitsui Bussan a “winter” for them. In the early 1980s, the sec- by contrast avoided speculation and maintained ond oil crisis and the Iran-Iraq war had a serious a steady and high profit level, profiting from the impact on their growth and profitability as did shortage of goods and ships in wartime. the depressed state of the Japanese economy The Mitsubishi Shoji’s period of growth and consoli- development of the bubble economy from the dation did not come until the 1930s, however, mid-1980s revived their fortunes, however, and when its strengths in heavy industry drew it into led them to direct their resources into zaitech and the rearmament and Asian expansion of Japan. other financing functions. These two companies were the nearest to a pre- The 1990s have largely been a decade of re- war form of sogo shosha in terms of range of prod- structuring and writing off of bad debts arising ucts and international presence. By 1938, Mitsui from zaitech failures, although there have been Bussan and Mitsubishi Shoji employed 7,000 peo- some new initiatives in information technology ple and had trading transactions of ¥2bn ($560m) retailing and Asian investment. each. The trading companies were dissolved, along Function with their fellow zaibatsu member companies, by the Supreme Command of the Allied Powers as Sogo shosha use their international networks to col- holders of excessive economic power in 1947. His- lect and analyze information, which they then torical ties were never completely severed, how- pass on to their headquarters or even to govern- ever, and with the pressures of the Korean War, ment agencies. This latter activity has sometimes they were allowed to regroup in the 1950s. led sogo shosha to be accused of espionage, par- Mitsubishi Shoji was the first to become a true ticularly by US politicians and journalists. The sogo shosha, opening offices around the world to importance of the information gathering function cover a range of products in 1954–5. Mitsui has necessitated major investments in informa- Bussan was slower to regroup, with its final tion and communication technology including merger taking place in 1959. Marubeni, Itochu satellite communication and dedicated electronic and Sumitomo were specialty trading houses until networks. Unsurprisingly sogo shosha have recently the 1960s. combined their knowledge of information and The 1960s were supposed to herald the “set- communication technology and trading to be- ting sun” for sogo shosha, as the liberalization of come involved in setting up e-commerce networks Japan’s trade meant that specific categories of and business-to-business exchanges. trade were no longer allocated to them by the The traditional function of sogo shosha is the government, so they would have to compete for procurement and distribution of goods. This func- business. In fact, the 1960s were a time of vigor- tion has its roots in Japan’s status as a resource ous expansion for sogo shosha, with their combined poor country and a major importer of raw mate- annual sales growing over 900 percent between rials. The importation of fuel, iron ore, foods and 168 geography so on into Japan has led to the logical extension In considering geography and its relationship of their business into actual investment and de- to social and historical factors, Britain and Japan velopment of coal mining, oil fields, and agricul- offer some interesting similarities. Both are made ture overseas. Sogo shosha often act as the up of large islands and have between 100,000 coordinators of these highly complex projects, as and 150,000 square miles of territory; both are well as acting as financiers. Whereas in previous located off the coast of continents, which are decades investment had been undertaken as a home to long civilized traditions. Both have re- way of securing scarce resources or boosting trad- ceived influence from those traditions, but have ing relationships with major customers, invest- been isolated enough to retain a distinct identity. ment activity is increasingly looked on by sogo They share basically similar climates and both shosha as a profit center in its own right, for pure were the first in their respective areas to industri- capital gain. Sogo shosha are therefore starting to alize. The two nations have used the sea with compete more directly with Japan’s struggling unusual effectiveness for military and commer- banks and investment houses in areas such as cial pursuits. But the similarities only hold in a mergers and acquisitions and investment funds. very general comparison. Climate in Japan is more varied than the climate of Britain, more reminiscent of the climate Further reading along the US eastern seaboard. Hokkaido has quite cold winters and mild summers. The Arai, S. (1991) Shoshaman: A Tale of Corporate Japan, Ber- weather in the center of Japan near Tokyo is quite keley CA and Los Angeles: University of Califor- like that of the Washington, DC area, cool to nia Press. cold in winter, with muggy hot days in late sum- Yonekawa, S. (ed.) (1990) General Trading Companies: A mer. Okinawa, the southernmost part of Japan, Comparative and Historical Study, Tokyo: United Na- is Japan’s winter playground. tions University Press. Japan is far more isolated from its continent Yoshino, M.Y., and Lifson, T.B. (1986) The Invisible Link: than Britain. By contrast, Japan lies approximately Japan’s Sogo Shosha and the Organization of Trade, Cam- ninety miles off the Korean Peninsula. For hu- bridge, MA: MIT Press. mans to swim from England to France is a chal- Young, A.K. (1979) The Sogo Shosha: Japan’s Multina- lenging but completely possible undertaking. tional Trading Companies, Tokyo: Charles E. Tuttle Japan is also very close to some Russian held is- Company. lands in the north, but cultural influences have PERNILLE RUDLIN never come from those places. From Japan to the main body of its nearest historical contact, Ko- rea, there is more than a hundred miles of ocean. geography In terrain, as well, the British Isles and the Japa- nese islands are quite dissimilar. Britain is rela- Japan is made up of a chain of four mountainous tively flat, while Japan is more like a larger version islands: Honshu, the main island, Hokkaido in of Switzerland, with dramatic stretches of moun- the north, Kyushu to the south,and Shikoku the tainous terrain in many interior areas, with smallest off the coast of southern Honshu, to- smaller mountains and hills covering all areas with gether with several hundred lesser islands. The the exception of a few interior valleys and rela- total landmass of Japan is about 145,000 square tively small coastal plains. miles; its elongated nature is revealed by the fact For several hundred years, Japan’s population that although Japan stretches over 1,800 miles has been about double that of Britain; early in from northeast to southwest (from 25 to 45 de- the twenty-first century it stands at a little over grees latitude), no point in Japan is more than 125,000,000. Japan has, on the other hand, less seventy-five miles from the sea. Until the mod- than half the arable land for farming that Britain ern era, Japan was relatively isolated physically has, and although the Japanese employ intensive from the Asian mainland, left free to develop its farming techniques and some of Japan’s soil is own cultural system. quite fertile, Japan imports a high percentage of giri 169 its food products, being self-sufficient only in a ring since that time. Partly because of events few products such as green vegetables and rice. which occurred during the Tokugawa period, The Japanese islands are situated on the west- the capital city of Tokyo plays a role similar to ern edge of what has been called the “Ring of that of Paris or London in their respective socie- Fire,” an area of seismic volatility stretching from ties. It has the largest concentration of popula- the Philippines up along the Asian mainland, tion in the industrialized world, and while Osaka, across the Aleutian Islands and down the west Sapporo, Kyoto, and Fukuoka together with a coast of North and South America. There are few other cities are important centers of culture more than sixty active volcanoes in Japan, and and commerce, Tokyo is the center of political, modest quakes of 2.5 or less on the Richter scale economic, entertainment and international activ- occur somewhere in Japan almost daily. Large ity of the nation. quakes causing loss of life and great destruction have been recorded throughout Japanese history See also: Kansai culture including the catastrophic Great Kanto Earth- quake of 1923 which brought enormous damage Further reading to Tokyo and environs and cost the lives of over 100,000 people, and the more recent Great Noh, T. and Kimura, J.C. (eds) (1989) Japan: A Re- Hanshin Earthquake which struck the city of gional Geography of an Island Nation, Tokyo: Teikoku Kobe in 1995. Shoin. With only two navigable rivers (and both of Reischauer, E.O. (1981) The Japanese, Rutland, VT: those for less than one hundred miles), aside from Tuttle. fresh water fishing, rivers have not played an im- Trewartha, G. (1990) Japan, a Geogmphy, Madison, WI: portant role in Japanese life. The ocean, on the University of Wisconsin Press. other hand, is deeply woven into Japanese cul- JOHN A.McKINSTRY ture in many ways. It has served to protect it from foreign military power, provided a considerable percentage of the Japanese diet, and throughout giri history has been a chief medium for moving people and things. It is interesting to observe that Ethics and morality in Japan are not as tied to because of the mountainous terrain and proxim- universal concepts of good and bad as in societ- ity of ocean waterways, the Japanese, unique ies which have been influenced by monotheistic among sophisticated societies, never developed religions such as Christianity and Islam. For the any practical system of animal-pulled carriages. Japanese, behaving properly relates less to abso- The human population of Japan is not as lute rules of conduct than in the West, and is more spread out over the land as is that of Britain. A tied to how well people fulfill obligation within few areas are extremely densely populated, and relationships. A highly developed sensitivity to others, for example the long arm of northern duty and obligation owed to others has resulted Honshu called by the Japanese the Tohoku region, in a specialized vocabulary of terms relating to are considered to be underpopulated. A corridor such phenomena. Giri is one of those terms. about 350 miles long, but only forty miles wide, Introducing giri to people not familiar with Ja- running from northeast of Tokyo, down the Pa- pan carries with it the danger of exaggeration. cific coast through the city of Nagoya, and then Giri is real, and its effects on relations between on southwest to and including the three cities of people and institutions are real, but its imprint the Kansai area—Osaka, Kyoto, Kobe—is home on contemporary Japanese society is quite sub- to almost half of the entire Japanese population, tle; in fact, hardly noticeable until one gets well even though in land mass it represents just one- beneath the surface of everyday life. The word fiftieth of the nation. giri is heard frequently. But used for its traditional As late as the end of the Second World War, meaning, to refer to a somewhat more conscious less than half the population of Japan lived in and formalized sense of obligation to people and urban areas, with very rapid urbanization occur- organizations, the term is not actually used often 170 giri

in Japan today. When it is used that way it is by natural selection, to constitute the special cul- often employed in a negative sense, such as re- ture of bushido., the way of the warrior (see samu- ferring to someone who is judged not trustwor- rai, role of). thy as in giri shirazu no hito, literally a person who Four terms relating to the formal sense of duty does not know giri. The reason for its frequent arose from bushido. Gimu, similar to giri, usually use is simply because it has over the past seventy used in regard to an abstract entity such as the or eighty years come to be the most popular word state. On, a related concept, referred to formal for “in-law;” a wife’s mother is referred to as giri obligation owed to persons and institutions in an no okaasan, and a husband’s older sister as giri no ascribed sense, for example to one’s feudal lord, oneesan. and to parents. During the Meiji period, Japa- It is not exactly clear which came first: giri with nese were taught that they owed obligation to the samurai, later filtering down to influence more the nation, symbolized by on owed to the Em- general cultural themes, or in the reverse direc- peror. Giri was obligation owed because of some tion, giri as a more general cultural theme which service or help rendered. One owed giri to a the samurai formalized. Whatever the answer to teacher of calligraphy or swordsmanship, or to that question is, we know that what giri came to someone who rendered assistance in battle. The mean in Japanese life was first articulated in the fourth term, ninjo, was the feelings of affection fourteenth century a time when the warrior elite and longing pulling in the opposite direction, feel- began to eclipse the court nobility in Kyoto as ings which if acted on could cause a samurai to the dominant force in Japan. But it is quite possi- violate the code of bushido by failing to carry out ble that the basic idea of giri, in a more diffuse his duty. Japanese drama through the centuries and less formal sense, was an important part of institutionalized the pull of affection against the the way people and communities establish order demands of duty. The dilemma of the giri/ninjo, and at all levels as far back as there has been in which giri always wins, has been the subject of anything recognizable as Japanese society Any Japanese drama through the ages, from kabuki human group, in order to function in a coopera- through to modern motion pictures. tive way over time, has to be tied together with Ethics and morality continue to be somewhat some kind of basic outline of ethics and morality. less tied to universal concepts of good and evil, In societies which came to be dominated by and more directed toward connection to people monotheism, the agents and interpretations of and organizations. Words such as on and giri, God serve much of this purpose. Societies such which in the twentieth century came to be used as China and Japan that have not had significant more or less interchangeably sound old-fashioned experience with a single, prescribed set of guides to people in contemporary Japan, but their force for behavior and relationships have to rely on can still be discerned in the sensitivity Japanese something else. In China, bonds of kinship and have to what is owed to other people. In Japan extended clan ties have traditionally been the an- the lessons of reciprocity are given a special im- chors of ethics and morality For the Japanese, it portance. Gifts must always be repaid with con- seems that a conscious type of mutual obligation, comitant worth. The first words uttered upon both ascribed by formal social roles, and achieved subsequent meeting of someone who has hosted through deeds of behavior, has served more typi- a person in any way are, Kono aida wa domo, cally than elsewhere to underlay the rules of mo- “Thank you for the (nice) time.” For any adult to rality. neglect to do so would be more than impolite, it The fifteenth and sixteenth centuries in Japan would represent for many Japanese, a breach of were a time of desperate struggles for power and decency. dominance in various regions throughout the See also: business ethics country. Survival of any han, the autonomous mini-states of feudal Japan, depended on military Further reading prowess, and the virtues of loyalty devotion, faith- fulness, honor, sacrifice, together with skill in Benedict, R. (1946) The Chrysanthemum and the Sword: swordsmanship and other forms of combat, came, Patterns of Japanese Culture, Boston: Houghton Mifflin. guilds 171

Keene, D. (1961) Major Plays of Chikamatsu, New York: Under this policy all za were prohibited, except Columbia Univesity Press. for those with special permission, such as the Nakane, C. (1970) Japanese Society, Berkeley CA: Uni- mints (the gold za or kinza, the silver za or ginza— versity of California Press. located in what today is central Tokyo—and the copper za or zeniza). The new Tokugawa govern- JOHN A.McKINSTRY ment also introduced a division of society that put merchants at the bottom of the hierarchy and guilds created a new leadership class of administrative officials (the former samurai) who had money to The earliest Japanese guilds (za) were formed in spend and wanted products to buy. In the ab- the eleventh century while trade associations sence of laws and courts, associations surrepti- (nakama) were established during the Tokugawa tiously re-emerged to design mechanisms of period (1603–1868). These farmers’ and mer- enforcing trade agreements. After 1670, the chants’ associations formulated and enforced Shogunate gave up on its attempts to outlaw the market rules for their industries in a growing groupings, and nakama (literally “among those economy to create trade in the absence of legal who know each other”) flourished. institutions and to safeguard market participants The earliest full-fledged nakama we know of from deception and fraud. Thus, guilds and were the wholesalers and shippers (tonya) along nakama are predecessors of today’s trade associa- the Tokaido, followed by public bath-houses tions. Their early formation and sophisticated (1650), hairdressers (1659) and money changers organizational structures reflect both the vigor (1679). All of these were awarded licenses (kabu, and drive of the Tokugawa-period economy and literally “shares”) by the government because they the merchants’ vital contributions to creating and were considered to play important social roles maintaining their own markets. (maintaining public hygiene, banking). From the entrepreneurs’ perspective, the licensing system Early history: Za enabled them to control their markets. Outsid- ers were not allowed to practice in the profes- The earliest groupings that can be considered co- sion. This meant that all stationary and successful operatives were the muyin, groups of farmers in entrepreneurs were members of a trade associa- the Heian period who submitted dues so that a tion. few group members could go on a pilgrimage to the Ise Shrine every year (something no farmer Nakama organization could have afforded on his own). The first records of a merchants’ guild date from the year 1092, The organizational structure of the nakama was when a group of merchants in Kyoto established remarkably similar to that of today’s trade asso- market hours and rules. As the economy began ciations. At the biennial general meeting (sokai), to develop in various regions of the country the members elected directors. There was one stand- za grew stronger. They had exclusive member- ing (long-term) director, resembling today’s se- ship, created barriers to entry and set product nior administrative director, as well as annual and prices on their markets. During the continuing monthly directors. The main tasks of a board of wars and territorial disputes of the fifteenth and directors were: (1) to collect taxes and donations sixteenth centuries, the za became increasingly to the Shogunate and domain chiefs from mem- powerful by assuming control over regional tax bers; (2) to evaluate and admit new members; barriers and domain borders. (3) to punish transgressions of nakama rules (typi- In 1603, Oda Nobunaga (the first of the three cally by prohibiting the infringer from producing unifiers) assumed military control over Japan. He or trading for a certain period); (4) to maintain understood that one primary source of power and contacts with other associations about the good wealth of the local landlords were the guilds. To standing of merchants; (5) to establish quality con- weaken these landlords, Oda instituted a policy trols in the industry; (6) to set uniform prices for of rakuichi-rakuza (free the markets, open the za). the industry’s products or services; and (7) to 172 guilds

hold social functions such as arranging gifts to very careful in selecting as new members only shrines and temples or end-of-the-year parties. merchants who would not undermine the group’s To engage in a certain business, an entrepre- standing. Moreover, nakama imposed strict boy- neur had to become a member of the nakama. cott rules: members were not allowed to trade Once admitted, the member had to move into with merchants that were not a member of a the nakama’s quarter. Living in one area facilitated nakama. Occasionally an additional entry barrier the monitoring of a member’s business behavior, was employed in the form of minimum require- creditworthiness, and pricing. ments that were set so high that only incumbent firms could fulfil them (e.g., a certain shipping volume was required before a wholesaler could Economic functions enter a shipping nakama). Nakama engaged in trade-enhancing activities, By inviting and enabling sophisticated trade ranging from structuring market rules to guar- practices, creating markets, restricting access, and anteeing the creditworthiness of their members. ensuring stable profit margins, the nakama con- Specifically by establishing fixed and regular tributed greatly to the economic development of market hours, nakama brought merchants of dif- Japan. Businesses grew steadily, and markets de- ferent trades together. By limiting markets to veloped around the country On the downside, members and monitoring their behavior, nakama precisely because the nakama were so protective kept markets clear from charlatans and swindlers. and restrictive, they hindered technology trans- Because a member’s standing was guaranteed by fer among industries and often served to slow its nakama, a credit economy could develop. In technological progress and innovation. This be- Osaka this even led to the establishment of a rice came apparent when Japan opened up in the futures exchange in 1730, where trading positions 1860s: some basic artisan trades were world-class, were kept on the books and settled at the end of but the country lagged behind in many indus- a three-month trading period. Not only did these trial areas. settlement systems make things easier, in many instances they made trade possible in the first Shogunate policies towards nakama place, thus leading to the creation of new markets. By enforcing quality controls, the nakama In the course of the Tokugawa period, the further reduced the potential for fraud on the Shogunate changed its policies towards trade as- marketplace. In the event of deception, the nakama sociations several times. This was particularly vis- had rules for settlements and punishment. Social ible during the three major economic reforms of stigma was attached as well, as most nakama had 1720, the 1780s, and the 1830s. an elaborate code of honor. Finally nakama often In 1720, Shogun Tokugawa Yoshimune faced administered the widespread apprenticeship sys- huge budget deficits and inflation in most prod- tem and enforced rules against the poaching of ucts other than rice. To realign finances and apprentices by competing merchants. prices, he embarked on major fiscal reforms and In addition to enhancing the trade mechanisms officially licensed all nakama. By issuing kabu to of the time, the nakama also ensured that their the associations, he could charge licensing fees members would be profitable by limiting compe- and taxes to increase the goverment’s tax rev- tition. In particular, most nakama enforced a “fair enue. He also asked the nakama to set or main- profit” system, whereby the directors described tain certain prices, and in particular to increase binding product prices that enabled merchants the price for rice while curbing inflation else- to earn a stable, but not exorbitant, profit mar- where. This was the first time that trade associa- gin. By way of their organization, nakama also tions were used as an instrument of public policy established barriers to entry In many cases, the implementation. number of outstanding kabu for nakama was lim- The effects of Yoshimune’s reforms were short- ited, and only after an incumbent member had lived. Pro-business policies after his reforms quit or died could a new merchant enter the granted associations more freedom to regulate group. Even groups that did not issue kabu were their own markets, and in turn the nakama were guilds 173 charged ever higher taxes and fees. The nakama were increasingly called upon to gear their in- passed these taxes on to their customers by way dustries towards the war effort. However, the of higher prices, which severely affected the government’s attempts at complete economic samurais’ standard of living. The Kansei Reform control and rationing were consistently under- of the 1780s was also aimed at fiscal restructur- mined by circumvention on the black market. To ing. To curb the increasing influence of business enforce production and distribution controls, and cut their monopolistic pricing powers, the the Key Industries Association Ordinance of largest nakama were dissolved. However, since 1941 established control associations (toseikai) in small associations were allowed to continue and every narrowly defined industry. The toseikai the previous groups soon reassembled, these at- were headed by the leading businessmen in their tempts at breaking up industry association once industries, and their function was to implement again proved futile. input and output plans and punish any deviation The Tempo Reform of the 1830s brought from these plans. In 1942, the Transfer and Ad- about an interesting real-world experiment with ministrative Authority Law even gave official le- market institutions, as it rested on the complete gal authority to the toseikai to punish violations. abolition of all trade associations, with the goal Interestingly while the toseikai were an attempt of curbing merchants’ influence and power. What to increase government controls over industry in the reformers had overlooked was that this move the end they only increased industry’s controls halted all the trade-creating and trade-support- over itself. By receiving official enforcement ing mechanisms supplied by the nakama, and thus rights, the toseikai leaders could structure their own toppled the pillars of the market system. The poli- rules while upholding the appearance of coop- cies were revised in 1857 when nakama were al- eration with the government. lowed to operate again, albeit with open Beginning in 1945, the US Occupation membership and free market access. Forces demanded that all toseikai be dissolved. Many of the existing groups simply adopted slightly different names but maintained staff and Modern associations directors. While a purge of business leaders by the Occupation affected many executives in the This last policy move coincided with the open- leading firms, their proteges, who had also been ing of the country after 1853. The Meiji Restora- active in the associations before, assumed leader- tion of 1868 led to a complete reorganization of ship and continued many of the old policies. In government. All nakama were asked to dissolve. 1947, the USA helped Japan draft and pass a Again, because this significantly limited trade in new Antimonopoly Law as well as a highly re- an increasingly uncertain environment, many as- strictive Trade Association Law. This law was so sociations continued to operate surreptitiously. prohibitive that business lobbied very heavily to The new Meiji government did not pass a new have it abolished as soon as the Occupation Commercial Code until 1893, but, understand- ended in 1953. Some of the competition rules ing the merchants’ plight, it began to actively sup- for trade associations were subsumed in the report the formation of local Chambers of vised Antimonopoly Law of 1953, but in much Commerce and trade associations in the 1870s. more lenient form. This more lenient wording As some of the modern industries grew at the and interpretation of anti-trust statutes allowed beginning of the twentieth century the large firms trade associations to continue significant indus- began to found their own, large-firm trade asso- try self-regulation throughout the postwar pe- ciations, plus over-arching federations, such as riod. the predecessor of Keidanren in 1917. A distinct differentiation of trade associations into small-firm cooperatives and large-firm groups emerged dur- Further reading ing the Taisho years (1911–25). As Japan moved towards a war economy in Miyamoto, M. (1958) Kabu nakama no kenkyu (Research the 1930s, trade associations and cooperatives on Kabu Nakama), Tokyo: Yuhikaku. 174 guilds

Okazaki, T. (1999) Edo no shijo keizai (The Market and the Antimonopoly Law in Japan, Oxford: Oxford Economy of Edo), Tokyo: Kodansha. University Press, ch. 7. Schaede, U. (1989) “Forwards and Futures in Sheldon, C.D. (1958) The Rise of the Merchant Class in Tokugawa-Period Japan: A New Perspective on the Tokugawa Japan 1600–1868: An Introductory Survey, Dojima Rice Market,” Journal of Banking and Finance New York: Russell & Russell. 13:487–513. Yamamura, K. (1973) “The Development of Za in Me- ——(2000) “The Historical Development of Self-Regu- dieval Japan,” Business History Review 47: 438–65. lation by Japan’s Trade Associations,” in U.Schaede, Cooperative Capitalism: Self-Regulation, Trade Associations, ULRIKE SCHAEDE H

habatsu is often unspoken and implicit, yet it is felt very clearly and strongly by management and employ- Habatsu, or “clique,” refers to a significant com- ees alike. ponent of the social organization in Japanese com- So, who becomes a member of a habatsu? In panies. Japanese organizations are structured Japanese organizations most employees belong primarily around small groups for decision mak- to one informal group or another. But, whereas ing, socialization, organizational learning and cliques in American companies are often based career development. These small groups reflect upon common interests, sports or community both the cultural and historical roots of modern activities, Japanese habatsu are based upon unal- Japanese organization. For example, it is theorized terable criteria. Examples of habatsu membership that Japanese small group decision making is an criteria include graduating from the same uni- indirect derivative of rice paddy culture, in which versity growing up in the same prefecture (state), all members of the community play a role within or coming from the same hometown. Because a system of small groups (Hayashi 1988). Others these criteria are unchangeable for the employee, argue that it is the historical significance of feu- habatsu membership is considered to be involun- dal governance which has influenced the strong tary as well as permanent. adherence to group allegiance within organiza- As mentioned, habatsu can be a powerful force tions (Whitehill 1991). In any case, it is clear that within the power structure of Japanese organiza- the small group as a unit of decision making is a tions. Since they have their own internal, vertical cornerstone of Japanese social organization. hierarchy they can disrupt attempts at company- Habatsu represents one version of this small group wide programs aimed at employee development, phenomenon. such as career planning, employee development Habatsu represent informal groups within or- and or promotion systems. They can influence ganizations to which membership is mandatory company wide long-term planning, budgetary and loyalty is paramount. Membership in the decision making and even marketing strategies. habatsu means for employees that they must obey Depending on the longevity of the habatsu in the habatsu rules and seek to achieve habatsu goals, organization and the power with which members even in the case when habatsu-related goals are exercise their desires, habatsu are sometimes con- contradictory to overall company goals. Thus, sidered the invisible power structure (operating habatsu can be both a constructive and destruc- like an underground or parallel economy) within tive force in the organization. Habatsu member- the Japanese organization (Whitehill 1991). ship influences employee and management Habatsu can also have a direct impact on com- decision making on such things as overall company strategy. A powerful habatsu can influence pany policy strategic goals, personnel policy and the outcome of major organizational decisions, even budgetary decisions. The habatsu influence through its implicit support or defeat. Since 176 Hayakawa, Tokuji

members of habatsu can be fiercely loyal to their of the effect of gaku-batsu membership on career leaders, it is in the highest interest of upper man- success for Japanese employees. Acceptance to, agement to gain the support of habatsu leadership graduation from and then membership in a top on any major decision facing the organization. university gakubatsu is still believed to be the key One of the most enduring forms of habatsu in ingredient for success in Japan. Until these gaku- Japanese organizations is the gaku-batsu or uni- batsu lose some of their power and influence, it versity clique. Gaku-batsu members are fiercely may be difficult for Japanese companies to loyal to the alumni of their university and offer professionalize their management systems. preferential treatment for their members. In some Japanese organizations, hiring, staffing, promo- Further reading tion and even compensation systems are heavily influenced by gaku-batsu membership, making this Hayashi, S. (1988) Culture and Management in Japan, To - form of clique more than just an informal influ- kyo: University of Tokyo Press. ence on the organization. These systems can be Ouchi, W. (1981) Theory Z, New York: Addison-Wesley so rigid that even in the cases of exceptional abil- Rohlen, T. (1974) For Harmony and Strength, Berkeley ity talent or effort by a non-member of a power- CA: University of California Press. ful gaku-batsu, rewards (promotion, extra Tung, R. (1984) Key to Japan’s Strength: Human Power, compensation) are not forthcoming. Only those Lexington, KY: D.C.Heath and Co. who are members of the powerful gaku-batsu can Whitehill, A. (1991) Japanese Management: Tradition and expect to be treated favorably and provided ca- Transition, London: Routledge. reer advancement. MARGARET TAKEDA Recently the increasing level of foreign competition in Japan has begun to erode the strong tradition of habatsu power in Japanese social or- Hayakawa, Tokuji ganization. Japanese companies are beginning to embrace human resource management practices Hayakawa, the inventor of the snap belt buckle which are contradictory in nature to the habatsu and the mechanical pencil, was an entrepreneur system. One example is performance manage- and founder of Sharp Corporation. Born in To- ment, which relies on the objective assessment of kyo in 1894, Hayakawa set up his first business, employee contribution to company goals in or- a metalwork business employing two other people der to determine promotion and pay In this merit- that produced a snap belt buckle, the “Tokubijo.” based, professionally oriented system there is no Hayakawa came up with the idea after being an- room for feudal like preference for special groups noyed in a theatre by a man sitting nearby who solely based upon fixed membership criteria. kept playing with his belt. Three years later, in Habatsu may even impact globalization at- 1915, he invented the “Ever Ready Sharp” pen- tempts by Japanese companies. According to cil. This was the original mechanical pencil and Rosalie Tung (1991), Japanese organizations can- quickly acquired the nickname “Ever-Sharp” be- not professionalize their operations while cling- cause it did not requiring sharpening. At this time ing to outdated social mechanisms like habatsu. Hayakawa also founded the Hayakawa Electric Since professionalism is the foundation for glo- Industry Co., Ltd, the predecessor of the current balization efforts (standardization of practices, Sharp Corporation. performance management systems based upon On September 1, 1923, Hayakawa’s entire fair, unbiased criteria), informal small group struc- manufacturing facility was destroyed in the Great tures such as habatsu may act as an impediment Kanto Earthquake. In December of that year he to the long-term competitiveness of Japanese com- relocated to Osaka and set up Hayakawa Metal panies. Works and undertook research on radio technol- Still, habatsu continue to thrive in many of the ogy Two years later, in 1925, he built his first larger, established Japanese firms. As evidence crystal radio set. Mass production of radio sets of this, the importance placed upon entry into began shortly thereafter. By 1930 the company top universities in Japan is still largely a function had pioneered numerous product innovations history of the labor movement 177 and established itself as a leading electronics respects, there were also significant differences. manufacturer. Property prices rose during and then slumped Hayakawa carried his creative capabilities onto after all three booms. However, the drop in land the production floor. His mass production facili- values was extreme in the Heisei boom. So in- ties developed a reputation for quality and effi- flated were land values during this period that ciency. Masaru Ibuka and Akio Morita credit several economists noted, in theory one could their visit to his factory floor with helping them purchase the entire state of California, including hone their own manufacturing skills when the all of its buildings, plants and equipment, in ex- fledgling Sony (then known as Totsuko) was first change for the plot of land on which the imperial getting off the ground. palace was situated. In 1970, Hayakawa stepped down as president A second similarity is found in the high level and became chairman. In 1980, the company for- of investment in plant and equipment during each mally changed its name to Sharp Corporation in of the three booms. However, again the Heisei honor of his “Ever-Sharp” pencil. Hayakawa died boom differed in that much of the financing for in 1981 at the age of 86, after building the Sharp this investment derived primarily from the issu- Corporation into a world leader in electronic ance of stock, rather than by obtaining financing products. The company’s creativity and dedica- through banks and other lending institutions. tion to quality reflect his core values as its founder. Stock issues reached a peak of ¥8.848 trillion in 1989, but dropped precipitously to ¥3.792 tril- ALLAN BIRD lion in 1990. The decline continued on a downward trend hitting ¥807.7 billion in 1991 and Heisei boom ¥419.9 billion in 1992. In short, there was a drastic decline in the rate of capital increase. The Heisei boom refers to an expansion of the Finally the Heisei boom remains significant Japanese economy that began in November 1986 because of the length of the recession that fol- and lasted until roughly July 1991. The economic lowed it due to a snowballing effect of loss of expansion was one of the longest in Japan’s post- confidence that rippled through the economy The war economic history It was marked by extraor- longest postwar recession previously took place dinary growth, peaking at 5.6 percent in 1990. over a thirty-six-month period from March 1980 The high growth came to halt in 1991, and was to February 1983, following the second oil shock. followed by three years of macroeconomic stag- The Heisei boom broke that record, and the Japa- nation and subsequently by economic recession nese economy struggled through the remainder through the end of the decade. The Heisei boom of the 1990s. subsequently came to be called the “bubble boom” or the bubble economy. The name See also: economic crisis in Asia “Heisei” derives from the name of the imperial era in the Japanese calendar during which the ALLAN BIRD most dramatic rises in the economy occurred. In Japan’s postwar history there have been history of the labor movement three significant periods of economic expansion. The first took place from 1958–61 and was The term “labor movement” can be generally known as the Iwato boom. The second boom understood as a sustained and organized joining took place between October 1965 and July 1970. together of employees, or wage earners, to ad- The Izanagi boom (named after a mythical Japa- vance common interests. By joining together, nese figure) saw fifty-seven months of uninter- employees increase their power and their ability rupted economic expansion, and came to an end to bargain with employers over employee con- shortly before the International Exposition cerns such as wages, working hours, and work- opened in Osaka. The third significant period was ing conditions. Labor unions—identifiable, the Heisei boom. permanent associations of employees engaging Although similar to the other two in several in collective action—are often the result of labor 178 history of the labor movement

movements, but not always. Strikes and labor ions are more at the mercy of particular employ- disturbances, for example, are much older than ers. Because of this belief, many Western observ- unions. ers have been critical of the Japanese propensity In Europe, then the USA, and then Japan, the to unionize by employer in enterprise unions, labor movement was primarily sparked by the and not by industry. Industrial Revolution, a time of great economic Japan’s labor movement has waxed and waned and social upheaval. Labor unions first started like other labor movements, and there are sev- with small associations of craft employees threat- eral distinct phases that are important. Interest- ened by new mass production methods. Crafts- ingly the later phases are really when the labor men such as printmakers and metalworkers faced movement and labor management relations took the prospect of being undercut by lower cost pro- on a cast commonly seen as “Japanese,” charac- duction methods and of passing into permanent terized by lifetime employment, seniority wages, wage earning status. For these skilled employees and enterprise unions. Before 1900, early craft working under the supervision of a master hop- workers in Japan—accustomed to autonomy and ing to later become masters of a craft themselves, applying their skills in different settings—were not the new mass production methods represented inclined to appreciate the discipline of factory an unpalatable loss of autonomy status, and crea- work, similar to their Western counterparts. They tivity and unions represented a way to counter- also had significant power because management balance these losses. still needed their skills and had not learned how Paralleling the spread of mass production, the to direct labor in an organized way Management labor movement and the formation of unions oc- therefore had to rely on these relatively skilled curred first in Europe, primarily Britain, where workers to do a wide variety of jobs dependably labor was plentiful and land and capital equip- and well, even though many workers were not ment were scarce. To increase their relative willing to commit themselves to one organiza- value, employees in Europe quickly learned the tion. Furthermore, there was also little job secu- power of acting collectively In the USA, with rity for them. Although there were attempts to abundant land, there was ample opportunity for organize a union movement towards the end of individuals to seek self-employment when there this period, it was largely unsuccessful. was dissatisfaction with wage employment. This Around the beginning of the twentieth cen- meant that individual employees, with more al- tury coincident with increased specialization of ternatives, had more bargaining power than work in Japanese large manufacturers, manage- their European counterparts, and unionization ment began to try to impose a more coherent, did not arrive in the USA as soon or with as authoritarian form of control on employees, cou- much intensity. pling this with the rhetoric of “beautiful customs” In both Europe and the USA, as mass pro- such as paternal care and worker obedience. Typi- duction and markets continued to spread and to cal company strategies at this point included nationalize, unions began to nationalize as well, greater control over the work process, more effi- with industry-wide and national unions becom- cient labor, and cultivation of foremen who would ing commonplace by the mid-1800s in the USA. identify with the long-term fate of the company. By the mid-1900s, the AFL-CIO was a huge na- Initial paternal practice was largely rhetorical, but tional union representing over 15 million employ- increased in substance during periods of strong ees in a large constellation of industries including labor challenges. Employers were still wrestling auto and steel. The tendency to organize across with problems of high turnover, and this, cou- employers and industries in the USA and in Eu- pled with occasional union pressure, led to wage rope continues to this day By the end of the twen- hikes, bonuses, and welfare programs such as re- tieth century a common Western view was that tirement pay all designed to promote commitment meaningful unions are organized across employ- to the firm. From this point, through the First ers within an industry With anything less, the World War and up to the Second World War, power of collective action is diminished and un- the groundwork for more stable patterns of labor Honda Motor 179 management was laid. Employee expectations of labor relations version that arose—now charac- job security wages based on seniority and em- terized as the three sacred treasures—was man- ployer expectation of commitment from employ- agement-led. At the same time, however, workers ees emerged in this period. However, actual did become a much greater part of the organiza- practice differed from expectations, and it was tion and were accorded a status that they did not only after the Second World War that this gap have before. With job security seniority wages, narrowed. and enterprise unions, coupled with rapid eco- There was significant labor strife in this pe- nomic growth, many blue-collar employees were riod, particularly around the First World War. able to achieve their broader goals of stability and Like unions in other countries, Japanese unions middle-class status, something that did not exist gained economic strength from the expanded for them before. demand for labor as the economy boomed. Strike activity increased, and the growing economic Further reading strength of unions helped lead to political concessions. However, union leaders were also rou- Gordon, A. (1985) The Evolution of Labor Relations in Ja- tinely incarcerated. By the early 1930s, union pan: Heavy Industry, 1853–1955, Cambridge, MA: membership as a percentage of the industrial Harvard University Press. workforce peaked at 8 percent. By the late 1930s, Taira, K. (1970) Economic Development and the Labor the Japanese government had imprisoned many Market in Japan, New York: Columbia Univer- of the labor leaders with socialist leanings, and sity Press. by 1940 independent labor unions were abolished completely organizing unions into company by WILLIAM BARNES company political cells. These cells preempted the formation of autonomous labor unions in order to suppress disputes and advance the war Honda Motor effort. After the Second World War, the Supreme Established in 1946 by Soichiro Honda, Honda Commander of Allied Powers (SCAP) imposed Motor is the leading manufacturer of motorcycles labor laws that initially strengthened and led to a in the world. It is also one of Japan’s top five more democratic labor movement. The Labor automobile manufacturers. Its reputation is built Union Law enacted in 1945 officially recognized on excellence in engineering and design of en- labor unions and their right to strike. Two other gines. Along with Sony, Honda has been one of laws, the Labor Relations Adjustment Law and the fastest growing companies in the post-Second the Labor Standards Law, further elaborated the World War era. It rose to prominence in Japan in rights of unions and employees and curtailed the the 1950s when it grew from having a 20 percent power of employers to break up independent un- share of the domestic market to a 44 percent ions. Unionization increased rapidly from this pe- market share, surpassing the former leader riod, climbing to 55 percent of the workforce by Tohatsu. 1949. The union desire for consistent and fair The company’s major breakthrough in inter- treatment by managers echoed concerns voiced national markets came in 1962, when Honda suc- before the war. These legal and newly powerful cessfully penetrated and then captured the US labor unions helped to bring fundamental change motorcycle market. With its innovative advertis- to the structure of labor relations in the first post- ing campaign and the slogan, “You meet the nic- war decade, building on the past. est people on a Honda,” it transformed the However, it was also during this period that perception of motorcycles from that of a wild ma- radical elements of the labor movement rose up chine favored by rebels to that of an economical, and were forcefully put down, with the help of mainstream mode of transportation. In the 1980s SCAP. Ultimately, the labor movement was efit moved aggressively into the three-wheel and fectively split by management, and the resultant all-terrain vehicle (ATV) markets. It is also a 180 Honda, Soichiro strong competitor in the small engine market of age: The High-Performance Business Philosophy of Soichiro lawn mowers, portable generators, and other simi- Honda, New York: Weatherhill. lar products. ALLAN BIRD Honda is one of the most widely known Japa- nese companies in the world. In the early 1960s Honda committed to an overseas production strat- Honda, Soichiro egy that it has consistently implemented, first with motorcycles, later with automobiles and small en- Soichiro Honda (1906–91) was a Japanese inven- gines. As a result, Honda has generally experi- tor and automobile executive, and founder of enced less criticism from host country Honda Motor Company the world-famous governments than its Japanese automotive and manufacturer of motorcycles and automobiles. motorcycle counterparts, many of which set up Honda was born in 1906 in a small town near production facilities only reluctantly Honda’s Hamamatsu in Shizuoka Prefecture, where his Marysville, Ohio plant for example, was estab- father was a blacksmith. As a child he was fasci- lished in 1982 as the first Japanese automotive nated by machinery and when the first automo- facility in the United States. bile appeared in his village during his primary Honda is consistently rated among the top ten school days, he decided that he would one day companies preferred to work for in Japan. It also build cars himself. At the age of fifteen, Honda has a reputation for innovation in both its prod- became an apprentice at an automobile repair ucts and its managerial policies. The foundation shop in Tokyo. Pressed into intensive on-the-job for this reputation is the company’s commitment training when the 1923 Tokyo earthquake forced to excellence in engineering through individual most of the shop’s employees to return to their initiative and experimentation. One example of homes, he became an accomplished mechanic, this is the company’s annual inventor’s fair. Em- and in 1928 he opened his own auto repair shop ployees working on their own time and with mod- in Hamamatsu. est support from Honda, compete as individuals Honda’s skills as an inventor became evident and teams to create new and unusual products. when he began building racing cars in his spare In 1992 Honda became embroiled in a scan- time. Through innovations such as tilting the en- dal in the United States involving illegal payments gine to the left so that the car could more easily of cash and gifts totaling $ 50 million over a fif- negotiate left turns, improving engine cooling by teen-year period. At that time, Honda fired key adding an extra radiator, and fashioning the valve executives implicated in the scandal. Between seats out of heat-conducting metal, his cars won 1994 and 1997, eighteen former executives were many races. Although a crash at the finish of the convicted. The scandal grew out of the effects of 1936 All-Japan Speed Rally ended his career be- the voluntary import restraints placed on Japa- hind the wheel, Honda’s interest in racing con- nese automotive makers in 1981. The demand tinued, leading to the success of Honda for Honda’s cars rose precipitously creating a situ- motorcycles and racecars in international racing ation in which dealers were coerced to make ille- competition in later decades. gal payments in order to get shipments. In 1937, Honda decided to try his hand at manufacturing piston rings. Studying metal cast- See also: automotive industry ing on his own, Honda developed a piston ring and tried to sell it to Toyota, but was turned down. He refused to give up, however, and after two Further reading hard years of trials and failure he was finally able Lynch, S. (1997) Arrogance and Accords: The Inside Story of to produce piston rings that met Toyota’s quality the Honda Scandal, Dallas, TX: Pecos Press. standards. His company became a supplier to Nelson, D., Moody P.E. and Mayo, R. (1998), Powered Toyota in 1940. by Honda: Developing Excellence in Global Enterprise, New When the Second World War ended, Honda York: John Wiley & Sons. sold his company to Toyota and used the pro- Otsuki, S., Tanaka, F. and Sakurai, Y. (1996) Good Mile- ceeds to buy a large drum of medical alcohol. human relations management 181

This he installed in his home, where he made decision making while promoting interpersonal whiskey and spent a year partying with friends conflict resolution and close personal relations. and playing the shakuhachi (Japanese flute). Additionally small group activities promote group In 1946, refreshed, Honda established the level learning, which improves implicit commu- Honda Technical Research Institute, the forerun- nication and company specific knowledge devel- ner of Honda Motor Company in Hamamatsu. opment. Therefore, the work system facilitates His new company began by modifying the small the building of a “company mindset” and strong engines that the Japanese military had used for corporate culture (Nonaka and Takeuchi 1998). radios and attaching them to bicycles. He then Recruitment in the human relations system is began producing his own engines, and went into based upon long-term external relationships with the production of motorcycles. In 1949 he teamed the company. The system of recruiting only new up with Takeo Fujisawa, who became co-founder school graduates is still the norm in Japan. Re- of Honda Motor Company. The two worked to- cruitment into a Japanese company most often gether as equal partners until their retirement in centers on achieving a fit between the personal- 1973, with Honda in charge of technological de- ity of the individual and the company culture. velopment and Fujisawa responsible for manage- This is because recruitment is designed to pro- ment of the company. vide stable human capital for the long term versus short-term (strategic) skill or knowledge. Males and females are recruited for different roles Further reading in the organization, as are white-collar (university graduates) and blue-collar (high school or Otsuki, S., Tanaka, F. and Sakurai, Y. (1996) Good Mile- junior college graduates) employees, but the de- age: The High Performance Business Philosophy of Soichiro lineation among employees is confined mainly Honda, New York: Weatherhill. to these categories. Sakiya, T. (1982) Honda Motor: The Men, The Manage- Training and development in the Japanese sys- ment, The Machines, Tokyo: Kodansha International. tem emphasizes an evolutionary process of edu- TIM CRAIG cation and training designed to mold an individual into the ideal corporate employee. On- human relations management the-job training, or OJT, is the primary method of training for the Japanese employee. OJT is Human relations management refers to the type learning by observing and doing, with little or of work system found in Japanese companies, in no systematic measurement or evaluation. This particular, how Japanese companies manage their system of knowledge development is sometimes personnel. The human relations approach relies supplemented by education and training for em- on the assumption that an employee enters the ployees outside the company, as in study abroad company as a “clean slate.” Thus, human rela- scholarships or technical training assignments, but tions management focuses upon interpersonal is largely confined to company-specific employee skill development, teamwork, flexibility and gen- development. eralist knowledge. The study of human relations Compensation and promotion are based upon management focuses upon the functional divi- a seniority system. The seniority system assumes sions of management, namely the work system, a slow, steady progression of employee develop- recruitment, training, compensation and labor ment which occurs at roughly the same time for relations. all employees. Thus, the length of employment de- The work system in Japanese companies is termines the amount of change in pay and or sta- structured around small group activities and de- tus of the individual. This is in direct contrast to centralized decision making. The primary focus a performance-based system in which individual in this approach is upon the promotion of coop- effort and output determine the amount of com- eration among workers in order to sustain an in- pensation and the rate of advancement. Although ternal workforce over the long term. Small group the seniority system has often been criticized as activities serve as a tool to involve employees in promoting mediocrity and dampening innovation 182 human relations management in the organization, its main purpose, to maintain Further reading harmonious relations among employees, has been successful over time. Abegglen, J.C. and Stalk, G. (1985) Kaisha: The Japa- Labor relations in a human relations manage- nese Corporation, New York: Basic Books. ment system relies on the family structure of Japa- Inohara, H. (1990) Human Resource Development in Japa- nese organizations to allow a unique “company nese Companies, Tokyo: Asian Productivity Organi- union” system to persist. Whereas in the West- zation. ern labor union tradition there is an adversarial Nonaka, I, and Takeuchi, H. (1998) The Knowledge relationship between management and workers, Creating Company: How Japanese Companies Create the Japanese managers and line staff are members of Dynamics of Innovation, Oxford: Oxford University the same union. Again, the focus of Japanese un- Press. ions is to promote quality or work-life issues much Whitehill, A.M. (1991) Japanese Management, London: more than the traditional Western unions which Routledge. negotiate mainly on issues of compensation and safety. MARGARET TAKEDA I

There is perhaps no more evocative word in the Japanese language than ie, most literally “family,” which encompasses a range of meanings from simply “kinsfolk” to “dwelling” to a value-laden sense of “household.” Historically shaped by Confucian familial rights and obligations, the word ie today still connotes the social basis of one’s fundamental relationships: to parents and offspring, to community and workplace. By pur- posefully extending the household collective be- Figure 1 yond relationships bound purely by blood, the ie has continued to serve from Japanese medieval times to the present as the basic unit of a cohe- cus of Confucian doctrine was the cult of the fam- sive social structure that eventually built the “Japa- ily In general, it prescribed: the hierarchical rela- nese economic miracle.” tions between members; personal loyalty The toyo kanji (ideograph) for family Ie, shown consisting of reciprocal duties and obligations; in Figure 1, illustrates its roots. The ideograph ritual observances of these reciprocities; contrac- consists of two elements: a roof over a pig, a do- tual arrangements between groups patterned af- mesticated animal in a dwelling. This image suc- ter family relationships. Diffusion of Confucian cinctly symbolizes the importance placed upon ideas to all social orders did not occur until much the household’s economic role over the human later, during the Tokugawa period. Until then, aspects of a conjugal nuclear family The conju- peasant family members were scattered as serfs gal nuclear family is subordinate to the Ie. The among the noble classes within the feudal order. Ie’s significance as an economic collective has, in Buddhism also had a profound effect on Japa- fact, brought added relevance to the word’s other nese culture. Its social impact, through an em- meanings. phasis on the cultivation of humility and the The ie concept of the household unit may be subordination of individual ambition for a col- traced back to ancient times and has its earliest lective good, cannot be overestimated, particu- roots in the cooperative nature of traditional ag- larly in regard to its implicit support for key ricultural production. Later, in the seventh cen- Confucian values. Confucianism and Buddhism tury Confucian concepts were imported from were complementary to the ujigami, patron dei- China and adapted by the elite classes, providing ties of the native Shinto local god system. To- fundamental support for the ie ideology. The fo- gether the three evolved into a family religion, 184 Ie

commonly referred to as ancestor worship, which by law, the peasantry began to adopt the family was virtually universal in Tokugawa Japan. The values of the samurai household codes. brief daily ceremony before the family shrine was The ie was seen first and foremost as an ongo- a constant reminder to household members of ing enterprise rather than as a sanguineous fam- their obligations to the ie. ily unit. Once an ie was established, its continuity The ie was the most basic economic, political, through successive generations was of major con- and social collective unit of a society that was cern to its members. If there was no son, a daugh- itself governed by precepts of giri, obligations and ter’s husband would be adopted into the duties to superiors, and on, benevolence to inferi- household to assume the family name and even- ors. Within the ie, the most important criterion tually inherit the household. If there were no chil- by which to evaluate action and behavior was dren at all, a son or daughter would be adopted how well it served the group. In such a collec- and, with his or her spouse, carry on the house- tively oriented society the individual hardly ex- hold. Kinship blood ties were not as important isted as a distinct entity and failure to fulfill one’s as the suitability of the candidate to manage the obligations was considered selfish, or even cow- affairs of the household, particularly in a mer- ardly. This ie ideological system suited Japan’s chant family. Although a son would normally be oligarchic feudal system quite well. The daimyo considered first choice to inherit, if unsuited to (feudal lord) was referred to as shushin (lordparent) the task he might be sent to establish his own and the followers as ienoko (children of the fam- branch household while a longtime faithful em- ily). First adopted by the warrior class, the samu- ployee would be chosen as successor, married to rai, the ie house system later informed the a daughter, and adopted into the household. business and social practices of the merchant and Although the laws of inheritance allowed for the artisan classes as these groups increased in only one heir so as to preserve the property of economic importance. the household, custom provided for the estab- The giri psychology of moral obligation and lishment of branch households for additional off- duty provided stability to the two and one-half spring and loyal apprentices who had become part centuries of peace and tranquillity of Tokugawa of the ie. It is these last two attributes, the adop- Japan, following a hundred years of civil wars. tion of a non-blood member as heir and the indi- After the Battle of Sekigahara in 1600, Tokugawa visibility of inherited property that distinguishes hegemony was established and a class structure the Japanese institution of the ie from other East imposed that was to become largely immutable. Asian family/ kinship enterprise systems, such Its rigid hierarchy popularly known as the as in China and Korea. shinokosho (warrior, farmer, artisan, merchant The harsh living conditions of the Tokugawa classes), declared the peasants second only to the period made the division of property among off- samurai in the social pecking order, although they spring nearly impossible, so that only the wealthi- ranked last economically. est families were able to bestow any assets on a By the mid-1700s the whole of Japanese soci- second or third son. However, high mortality ety was comprised of economic units based on rates during the Tokugawa period and into the households reinforced by a religious cult of the modern period meant that second or third sons family. During this Pax Tokugawa, every effort was could be adopted into other households in the made to suppress change in order to maintain same or neighboring villages. the social structure. Tokugawa government policy It was most common that, in the formative sought to settle peasants permanently in stable stages of the household enterprise, the direct man- villages and establish the ie as the basic unit of agement of the ie was in the hands of family mem- society During the seventeenth and eighteenth bers for the first two generations. As the business centuries, land and tenant rights were promul- grew in stability and size, however, often by the gated among the peasantry making it possible for third generation, competent managers who had individual farming households to establish them- grown up in the ie from early childhood and had selves. Family units could then remain intact been promoted from detchi (apprentice) to tedai through successive generations. Thus formalized (salesperson) and then banto (manager), were Ie 185

ready to assume the management operations of of businesses and strategies. They were active in an expanded business. It was often at this stage developing the capital resources and a household in the development of the Ie that management of enterprise management system during the early the mise (store) became physically separated from Tokugawa period that enabled them to continue the oku (back living quarters), symbolically mark- to prosper during the industrialization era of the ing the progression from a nuclear family busi- Meiji period. ness to an extended family business. For ie that The management style which enabled the de- had grown to a very large scale, such as Mitsui, velopment of the merchant household style busi- it was imperative that non-family member man- ness was based on a distinctive concept of kinship, agers be given authority since there could not namely of non-blood, fictive kinship-based eco- possibly be a sufficiently large talent pool within nomic units. In a household style business non- the Mitsui family itself. blood related individuals function together as a The banto was permitted to marry at age simulated kinship group. Even when the internal twenty-five and was then provided by the master structure of a modern industrial enterprise grows with a bekke (separate house). Those who contin- beyond a small-sized business, traditional patterns ued to work within the honke (main house) were of on and giri continue. Subsidiaries and sub-units guaranteed their livelihood after retirement. assume the traditional obligations to their em- Those bekke that operated a business were fi- ployees. Similarly the traditional distinctions be- nanced and given a share of the goodwill by the tween insider and outsider are in play in the honke, whether in the same or a different type of modern notion of the “lifetime employee,” a mod- business. Apprentices for the main house were ern-day embodiment of the traditional appren- selected from among the sons of the bekke, thus tice, an adoptive member of the ie (household). maintaining the fictive kinship relationship. In the postwar period the most sought after jobs The successful collectivist centered develop- for new university graduates are those not only ment of the Japanese firm differed sharply from with a prestigious company but also with a se- the weakened role of the household firm in West- cure “family” culture. Although, only some 30 ern Europe, which was superseded by the crea- percent of Japanese industrial workers were con- tion in early seventeenth century England and sidered to have “lifetime” status; an employee the Netherlands of the joint stock company form would still be classified as “temporary” or “part- (see joint stock corporation). time” even after working twenty years for the The Japanese family firm in the ie system was firm. The so-called temporary employee remains able to develop many of the attributes of a West- outside the network of reciprocities, without share ern-style corporation while retaining the motiva- in the ie or job security. tional aspects of a household business: (1) The attributes of the postwar Japanese style perpetuation of the firm by training of suitable management, such as the lifetime employment successors from within the ie; (2) securing the system, seniority promotion. and a paternalis- loyalty of management to the household by the tic policy towards employees, have their histori- use of fictive kinship status; (3) the indivisibility cal basis in the annals of medieval seventeenth of the ie and its assets, which tended to constrain century merchant households. Ie household codes the ability of any one individual stakeholder to governing the management of family businesses act on his own against the overall interests of the contained specific regulations on the theory and household. practice of long-term employment, seniority and The origins of the zaibatsu and its successors the good treatment of employees. the keiretsu (vertically grouped companies) and The process of modernization in Japan may kigyo shudan (horizontally grouped corporate be viewed, in some very fundamental aspects, as firms) are found in the establishment of the mer- the continuous development of native institu- chant family houses of the Tokugawa period. The tions rather than as the result of the abrupt intro- extended household enterprises or family asso- duction of Western ideas in the Meiji period of ciations, such as the Konoike, Sumitomo, and the late nineteenth century The values and be- Mitsui groups, were all engaged in different types liefs associated with the ie household concept are 186 Ikeda, Hayato

alive not only in family-operated businesses but tered the National Cancer Center. In October, are reflected in the relationships and practices he announced his resignation, and the entire within firms and within industrial groups. The Ikeda Cabinet resigned in November. He passed concepts that came to be inherent in ie provided away on August 13, 1965. He was awarded the foundation for the transformation of Japanese Grand Cordon of the Supreme Order of the household enterprise across the centuries into Chrysanthemum that same year. the present day forms as member firms of large corporate enterprise groups (kigyo shudan) and keiretsu. Ie prepared the way for the great trading Further reading houses and their commercial banks, known as the zaibatsu in the prewar period. Finally ie Ito, M. (1985) Hayato Ikeda and His Times, Tokyo: Asahi “house” practices not only prefigured the rela- Shinbun-sha. tionship for the kigyo shudan, of today but, more Kobayashi, K. (1989) Hana mo Arashi mo: Prime Minister significantly the development of Japanese firms Hayato Ikeda’s Ambitions, Tokyo: Kodansha. as group entities, prototypic of the formation of relationships between industrial groups, both MARGARET TAKEDA big and small, throughout Japanese society and AKI MATSUNAGA its economy.

Inamori, Kazuo Further reading Nakane, C. (1970) Japanese Society, Berkeley CA and Born in 1932, Kazuo Inamori is the founder of Los Angeles: University of California Press. two multibillion dollar companies: Kyocera Cor- Scher, M.J. (1997) Japanese Interfirm Networks and Their poration, which is the world leader in manufac- Main Banks, London: Macmillan, and New York: turing ceramic casings for semiconductors, and St Martin’s Press. DDI Corporation, the second-largest telephone company in Japan. He is viewed by many as one MARK SCHER of the greatest entrepreneurs of post-Second World War Japan along with Akio Morita and Ikeda, Hayato Soichiro Honda. As a student, Inamori failed to get into any of Hayato Ikeda was born in the Hiroshima prefec- the prestigious high schools, colleges, or compa- ture in 1899. In March 1925, he graduated Kyoto nies. He later received a degree in chemical engi- Teikoku University (presently Kyoto University) neering from Kagoshima University and in 1955 Department of Law, and entered the Ministry went to work for Shofu Industries, a Kyoto-based of Finance. He became the chief of National manufacturer of electronics. In 1959, at the age Taxation at the Ministry of Finance in 1941, and of twenty-seven, he quit Shofu because the com- the Vice-Minister of Finance in 1947. In 1952, he pany management would not pursue his vision became Minister of International Trade and In- of a ceramic business, and started Kyocera with dustry. seven colleagues. In 1960 the First Ikeda Cabinet was formed, Inamori’s business philosophy has strong reli- and the government set the Shotoku-Baizo-Keikaku gious overtones. For example, Kyocera’s corpo- (Double Income Policy). The success of this policy rate motto is “respect the divine and love people.” formed the basis of Japan’s phenomenal economic His teachings are a mixture of Zen, Zig Ziglar growth during the next few decades. Japan for- and motivational speaking. He has written two mally became a member of the Organization for books that have been translated to English: A Economic Cooperation and Development Passion for Success and For People For Profit. (OECD) in April, 1964. In September of that year (1964), Ikeda en- DAYO EAWIBE income doubling plan 187 income doubling plan Five major problems had to be solved in order for the plan to reach this target. First, infra- The National Income Doubling Plan (Kokumin structure bottlenecks that impeded further Shotoku Baizo Keikaku) decided by the Ikeda Cabi- growth had to be solved by increasing govern- net in 1960 has been called the “Income Dou- ment investment. The expansion of the private bling Plan” and is the most famous government sector was creating bottlenecks due to lack of economic plan in post-Second World War Japan. roads, harbors, factory sites and so forth. Sec- The then Prime Minister, Hayato Ikeda, taking a ond, in order to achieve economic independ- hint from Professor Ichiro Nakayama’s theory of ence, the modernization of national industrial wage-doubling, announced that his government structure had to be promoted. This called for the would double national income within ten years Americanization of Japanese industry, or in from 1961 to 1970. other words, the introduction of Fordism. Third, The political and economic background of the the promotion of international trade and coop- plan was the following. On the one hand, 1960 eration had to be increased. Fourth, the improve- was the year for renewal of the United States— ment of human capabilities and advancement of Japan Security Treaty concluded in 1951, which science and technology was emphasized and gave the United States the right to station troops promoted. For example, one approach was to set and maintain military bases in Japan. The treaty up a number of new colleges of science and engi- renewal, which did little to change the basic situ- neering. Fifth, mitigating the negative side ef- ation, gave rise to strong opposition and political fects of the dual structures of the economy (see turmoil. After Prime Minister Kishi Nobusuke’s dual structure theory) and securing social sta- resignation in 1960, he was succeeded by Ikeda, bility was established as a major focus. This was who tried to overcome the political crisis, which a response to problems that accompanied rapid had also been triggered by the Mitsui-Miike Coal economic growth: the need to reduce wage dif- Mine Strike, the postwar period’s largest labor- ferentials between large and small companies, to capital confrontation. In this context, the an- reduce income gaps between agricultural and nouncement of the plan had an aspect of political manufacturing sectors, and to diminish regional appeasement. income disparities. The type of approach em- On the other hand, the Japanese economy bodied in the income-doubling plan can be though reconstructed after the destruction of the viewed as one element of Japanese-style welfare Second World War, was still weak and fragile do- state. mestically as well as internationally Although The plan’s policies can be broken down into rapid growth had begun in 1955, achieving full two main thrusts: economic growth and ap- employment and balancing international accounts peasement. Although it is difficult to evaluate were still the biggest challenges facing Japan. The the full effects of the plan itself, the Medium- Ikeda plan also had to address these challenges. Term Economic Plan introduced by the Sato The plan stated its goal as follows: “the ulti- Cabinet in 1965 replaced the plan halfway mate aim is to move toward a conspicuous in- through its lifespan. The Japanese economy con- crease in the national standard of living and the tinued to grow at the highest rate of any major achievement of full employment. To that end, the economy in the world and, as a result, exceeded maximal stable growth of the economy must be the target of ¥26 trillion, reaching nearly ¥40 contrived.” The target set in order to maximize trillion in 1970. The actual average annual stable growth was to double national income and growth rate in the period from 1961 to 1970 was GNP within ten years. The target level for GNP 11.6 percent. in 1970 was set at ¥26 trillion (at 1958 values), Due to its high rate of growth, Japan attained double the GNP for 1960. Therefore, average almost full employment and economic inde- annual growth had to reach 7.2 percent over the pendence in the middle of 1960s, mitigating to decade. In actuality the plan called for an aver- some extent the dual structure economy and be- age annual rate of 9 percent for the first three coming the second largest economy in the free years. world. However, the high rate of growth caused 188 industrial efficiency movement distortions in the economy such as price in- View of its History and its Future, trans. M.A.Harbison, creases, overpopulation in urban areas and de- Tokyo: Kodansha International. population in rural areas, pollution, and so forth. HITOSHI HIGUGHI Indeed the main objective of the above-touch behind introducing the Medium-Term Eco- nomic Plan was to correct these distortions. industrial efficiency movement Japan’s economic planning, as carried out of- The industrial efficiency movement (nouritsu ficially by the Cabinet, began with the five-year undou) was a series of initiatives starting in the plan for economic self-support put forward in period 1910–20 that aimed to modernize labor 1955. Since that time the government has intro- and production management practices in Japa- duced fourteen further plans. The most recent nese industry. Inspired by American models, and plan is called the Ideal Socioeconomy and Poli- especially by Frederick Winslow Taylor’s theo- cies for Economic Rebirth (1999–2010). ries of scientific management, Japanese reform- Japan’s economic plans possess three basic ers sought to systematize and rationalize characteristics. First, they indicate the “desired inefficient, customary production methods. direction of economic and social development;” Adapting imported theories to Japanese condi- second, they indicate the policy direction the gov- tions, the proponents of industrial efficiency pio- ernment should take in order to achieve these neered managerial ideologies and techniques ends; third, they indicate behavior guidelines for which would become the hallmarks of Japanese- people and for business. On the whole, the style management (Nihon teki keiei) after the planned figures fall somewhere between predic- Second World War. tions and guidelines. Few government or business leaders consider the national economic plan as a rigid, binding plan that must be followed by The age of efficiency the government. Instead it is viewed as a long- term forecast, with some flavor of wishful think- Japan’s industrial efficiency movement paralleled ing by the plan-makers. similar drives to modernize factory management Especially in the case of the Income Doubling practices in the United States and Europe. Plan, Komiya (1990) suggests that the “announce- Taylor’s work on the systematic rationalization ment effect” or “propaganda effect” on economic of production was a crucial catalyst in this inter- growth seems to have been quite substantial. national effort and his classic book, The Principles Ikeda and the plan pulled together a national of Scientific Management, was published in Japanese consensus for economic growth and defined the only two years after its American release in 1911. era of high growth that had already begun. Taylorite methods and the broader notion of efficiency captured the imagination of many in in- See also: dollar shock dustrializing Japan, from engineers to academics to the general public: new books and journals dedicated to management issues proliferated, Further reading many universities introduced courses on Komiya, R. (1990) The Japanese Economy: Trade, Indus- Taylorism, and expositions featuring the latest try, and Government, Tokyo: University of Tokyo managerial advances attracted thousands of in- Press. terested spectators. Kosai, Y. (1986) The Era of High-Speed Growth: Notes on Although the Japanese mania for efficiency the Postwar Japanese Economy, trans. J.Kaminski, To- seemed to some a passing fad of the 1910s, im- kyo: University of Tokyo Press. portant figures in private industry and the gov- Nakamura, T. (1981) The Postwar Japanese Economy: Its ernment embraced the Taylorite message and Development and Structure, trans. J.Kaminski, Tokyo: actively promoted the adoption of techniques University of Tokyo Press. such as time-and-motion study standardization Uchino, T. (1978) Japan’s Postwar Economy: An Insider’s and incentive wages. During the 1920s, thanks industrial efficiency movement 189 in part to the work of Yoichi Ueno and other lacked adequate markets, capital and technology early management consultants, scientific manage- to make the leap to American-style assembly lines. ment spread steadily through Japan’s modern in- Indeed, even incremental Taylorization proved dustries, especially textiles, electrical goods and impossible for many Japanese employers: under the national railways. Reformers encountered the straightened circumstances of the depression, opposition from some intellectuals and labor mass layoffs and work intensification seemed groups that criticized Taylorism as dehumaniz- easier solutions than the scientific analysis of pro- ing, exploitative and excessively materialistic. duction. Nonetheless, Taylorite practices appear to have The coming of the Second World War and engendered significantly less hostility from shop- the realization that industrial power was as im- floor workers in Japan than was the case in ei- portant as military might in modern “total war” ther the USA or Europe. An important reason brought an unprecedented surge of interest in ef- for this was the fact that Japanese management ficiency and management reform. Japanese reformers, sensitive to their nation’s particular Taylorites were readily mobilized and the appli- economic and cultural conditions, sought to adapt cation of scientific management was trumpeted Taylorism ideologically and methodologically to as the patriotic duty of manufacturers. But de- Japanese realities. Tempering scientific manage- spite heightened appreciation of Japan’s need for ment’s mechanistic rationality and managerial managerial modernization, actual progress on the elitism with more concern for the well-being of shop floor was slow in an environment of con- workers, proponents of industrial efficiency stant dislocation, endemic shortages and imper- endeavored to develop a more humane Taylorism fect central planning. Standardization and for application in Japan. specialization proved elusive through the war and, in the end only a few industries realized even limited assembly line production. Nonetheless, Depression and war wartime developments did lay sound foundations After the onset of the Great Depression, Japan’s for the sweeping reform of management practices management reformers were increasingly inte- and the attainment of mass production in the post- grated into the industrial rationalization move- war years: most importantly as the number of ment (sangyou gourika undou), a major trained, professional managers swelled during the government-sponsored program to increase pro- war, the vision of a humanized recasting of ductivity limit competition and stabilize industry Taylorism was widely embraced as a specifically during the global economic crisis. As part of this Japanese approach to modern production and broader effort, the industrial efficiency movement, labor management. which during the 1920s had been a loosely organized, uncoordinated and largely private sector Legacies initiative, became more centralized, streamlined, and professional. With official subsidization and Although the industrial efficiency movement is encouragement, a series of new campaigns aimed usually taken to have ended with Japan’s defeat at the modernization of factory management were in 1945, its intellectual and methodological lega- launched during the 1930s. cies suffused the major management reform ef- Despite the early achievements of the indus- forts of the postwar period. For example, Taylorite trial efficiency movement, proponents recognized ideologies—including the assumption that pros- that much improvement was still possible, espe- perity would neutralize class conflict and the abid- cially as labor productivity in Japan continued to ing faith in apolitical managerial expertism—came lag behind US and European levels. Some ambi- to characterize the productivity movement, a US- tious reformers even looked toward the estab- sponsored drive to modernize Japanese industry lishment of Fordist mass production, a dramatic and labor relations. Meanwhile, familiar Taylorite extension of the logic and methodologies of practices such as time-and-motion study became Taylorism. Yet such a dream remained beyond the technical building blocks of the famed Toyota the reach of prewar Japanese industry which production system and were widely embraced 190 industrial groups

as Japan made the postwar transition to a mod- nent of several of the groups centered around ern, mass production economy. the large industrial companies, and (4) directed Japan’s particular heritage of scientific man- marketing channels (also called distribution agement may have had its greatest impact, how- keiretsu). This entry is confined to the first two of ever, on the postwar quality control movement. these, which we will refer to respectively as the Over a decades-long process of trial and error, financial keiretsu and the enterprise groups. Both quality advocates sought to realize the vision of a are also called industrial groups. humanized Taylorism, fusing the scientific remaking of the workshop (through statistical analysis Financial keiretsu and rigorous standardization) with new means for engaging and motivating labor such as qual- The financial keiretsu are the postwar reincarna- ity control circles. The distinctive patterns and tions of the prewar zaibatsu. After the end of the conspicuous successes of Japanese quality man- Second World War, the American occupation agement—and, indeed, of contemporary Japanese authorities directed the dismantling of the zaibatsu. production and labor management as a whole— These measures included the divestiture of share derived in large part from the formative influ- interlocks, dissolution and abolition of holding ence of the industrial efficiency movement. companies, and appropriation and disbursement of shares held by the zaibatsu families. Soon after See also: Japan Productivity Center for Socio- the Occupation ended, and continuing until about Economic Development 1960, many of the firms previously affiliated with the major zaibatsu or the successors of such firms re-established their old shareholding interlocks. Further reading The large commercial banks among these firms Okuda, K. (1985) Hito to keiei: Nihon keiei kanrishi kenkyuu became major stockholders in most of the other (Men and Management: Research in Japanese members of their respective reconstituted groups. Managerial History), Tokyo: Manejimento-sha. Besides the progeny of the big four zaibatsu— Sasaki, S. (1987) “Scientific Management Movements Mitsui, Mitsubishi, Sumitomo, and Fuyo (for- in Pre-War Japan,” in S.Yasuoka and H. Morkiawa merly Yasuda)—the six financial keiretsu include (eds), Japanese Yearbook on Business History: 1987, To - the Dai-Ichi Kangyo group, consisting mainly of kyo: Japan Business History Institute. former members of the smaller Kawasaki and Tsutsui, W.M. (1998) Manufacturing Ideology: Scientific Furukawa zaibatsu, and the Sanwa group that had Management in Twentieth-Century Japan, Princeton, NJ: no prewar antecedent. Princeton University Press. There are different ways of ascertaining which companies belong to which financial keiretsu. The WILLIAM M.TSUTSUI clearest evidence of affiliation is appearance on the roster of monthly “presidents’ club” meet- industrial groups (keiretsu) ings of any one of the six respective groups. These rosters are public, though the agendas of the meet- Keiretsu is a Japanese word that defies exact trans- ings are not. A few companies belong to more lation. A literal rendering into English might be than one presidents’ club—Hitachi belongs to “succession,” in the sense of a sequence of enti- three of them—but these are the rare exceptions. ties joined together, as links in a chain. The word The rosters of the presidents’ clubs exhibit little keiretsu is used to refer to business groups includ- change from one year to the next, and the changes ing (1) the six groups centered around the large that do occur are mostly the result of mergers. Japanese banks (also called financial groups, fi- Altogether, the members of the six presidents’ nancial keiretsu, or horizontal keiretsu), (2) the clubs in 1995 numbered 185 companies, includ- groups of firms centered around the forty or so ing most but not all of the largest companies in largest industrial companies of Japan (also called Japan. Some of the large companies not on the enterprise groups or vertical keiretsu), (3) the sub- rosters of presidents’ clubs include Honda Mo- contracting groups that are an important compo- tor, Matsushita, Sony and Fuji Film. industrial groups 191

The presidents’ club companies span a wide keiretsu, and from the regional banks. Since 1980, selection of industries. In fact, the economist large Japanese companies have been allowed ac- Miyazaki Yoshikazu famously characterized the cess to international financial markets as a source financial keiretsu as organized on the basis of the of funds, but still rely quite heavily upon domes- “complete-set principle” (wan setto shugi); that is, tic loans. each of them comprised of at least one company Another visible linkage among fellow presi- in each major industry. In industry after indus- dents’ club members is cross-shareholding. The try the members of the differing financial keiretsu average fractions of outstanding shares held compete with one another. For instance, Toyota, within the respective presidents’ clubs in 1997 Mitsubishi Motors, Nissan, Daihatsu and Isuzu were Sumitomo (22.2 percent), Mitsubishi (27.3 are each affiliated with a different keiretsu. Kirin percent), DaiIchi Kangyo (11.3 percent), Sanwa Brewery belongs to the Mitsubishi presidents’ (15.8 percent), Mitsui (15.1 percent), and Fuyo club, but Sapporo Breweries belongs to the Fuyo (15.5 percent), but about half of these shares were presidents’ club. There are many other similar held by financial institutions of the respective examples. The financial keiretsu are not simply groups. The Antimonopoly Law of Japan limits cartels, coalitions of suppliers of similar products. the extent of shares that banks and insurance com- Rather, they represent suppliers of differing prod- panies may hold in any one company Since 1987 ucts, and in many instances, fellow members of these limits have been set at 5 percent for banks the same presidents’ club trade with one another. and 7 percent for insurance companies. Few banks Japan’s Fair Trade Commission has periodically or insurance companies hold share interests ap- surveyed the extent of transactions between fel- proaching these limits. The shareholding of banks low members of same presidents’ clubs. In 1980 in the companies to which they lend is an impor- it reported that 20 percent of the sales of presi- tant aspect of Japan’s bank-centered system of dents’ club manufacturing firms were to fellow financial intermediation. members of the same clubs, and 12 percent of About one-third of the (non-ordered) pairs of purchases were from fellow club members. These nonfinancial companies belonging to a same are all very large companies, most of whose trans- presidents’ club are directly linked with one an- actions are probably with smaller firms, outside other by cross-shareholding, and in about half of the presidents’ clubs, so the Fair Trade Commis- these instances, the cross-shareholding is recip- sion data does suggest a disposition towards trade rocal. Typically the share interest of any one between fellow members of the same financial presidents’ club company in another lies around keiretsu. 1 percent. In other words, the cross- Presidents’ club members borrow principally shareholding ties are usually insufficient to con- but not exclusively from fellow members. The fer a controlling interest. Cross-shareholding single largest lender to each of them is usually between nonfinancial members of differing the city bank that belongs to the same presidents’ presidents’ clubs is unusual. club as the company itself. In the usual pattern, The financial keiretsu occupy a sizeable niche loans from the presidents’ club city bank account in the Japanese economy. Together, the six presi- for 10 percent to 20 percent of any other fellow dents’ clubs in 1997 accounted for about one- presidents’ club member’s total outstanding debt. eighth of the sales of nonfinancial businesses in The presidents’ club trust bank holds another 5 Japan, one-seventh of the paid-in capital, and one- percent to 10 percent of each fellow member’s eighth of the net profit. debt and the life insurance company 1 percent to 5 percent. The balance of a typical presidents’ Enterprise groups club company’s total borrowing is from outside the group, including borrowing from financial The groups of firms centered, respectively around members of other presidents’ clubs than the one a number of the largest industrial companies are of affiliation. Presidents’ club members also bor- also referred to as keiretsu and as industrial groups. row from the three long-term credit banks, the There is no standard term of reference for them city banks not affiliated with the six financial but here let us refer to them as enterprise groups. 192 industrial groups

The prominent examples are listed in Table 2 be- share of external funds and also therefore devel- low. Quite a few of the forty firms identified there oped close relationships with loan clients. The as leaders of enterprise groups are themselves main bank for any one member of a financial members of a keiretsu presidents’ club. keiretsu was naturally the main bank for all be- The enterprise groups generally include cause given the various group members’ active myriad subsidiaries as well as independent sub- commerce with one another, information about contractors and other suppliers, and some also each one’s creditworthiness also bore on that of include wholesalers and retailers of the group’s the others. This very fact further inclined the com- products. Trading ties within the respective en- panies to perpetuate their special ties with one terprise groups may be presumed to be much another; the implied information spillovers low- more extensive than is generally true in the fi- ered their costs of borrowing. nancial keiretsu. Also the shareholding of the en- The enterprise groups represent a form of eco- terprise group leader in the other members is nomic organization that is less vertically inte- typically strong enough to confer de facto control, grated than some conceivable alternatives. In the not merely a silent financial interest. The enter- market economy vertical integration will proceed prise groups are more tightly knit than the finan- further when the costs of transacting through the cial keiretsu. price system are greater and the costs of admin- The combined assets of the forty enterprise istering a directed system of production are lower. groups listed in Table 2 approached 10 percent Factors bearing on transaction costs include the of the total assets of all industrial firms in Japan, extent of the market, the weight of reputation in 1994. In other words, the scale of the forty effects, the sophistication of contracts and the de- largest enterprise groups roughly corresponds to gree of government interference with private con- that of all the industrial members of the presi- tracts. The large scale of the Japanese market, dents’ clubs of the six financial keiretsu. the durability of trading ties in Japan, and the Business scholars have offered various con- laxity of Japan’s anti-trust laws all contribute to jectures regarding the fundamental rationale be- the organization of production into enterprise hind Japan’s industrial groups. The financial groups rather than into fully vertically integrated keiretsu owe something to their zaibatsu anteced- enterprises. ents. The companies’ long history of profitable trade and cooperation with one another has en- Table 2 Companies that head the forty most signifi- gendered a mutual sense of trust within the re- cant enterprise groups. Presidents’ club mem- spective financial keiretsu, and enhanced their berships are stated in parent heses. shared reputations in dealings with outsiders. These reputations represent a true business ad- 1801 Taisei (Fuyo) vantage and one that the companies are loathe to 2503 Kirin Brewery (Mitsubishi) abandon. If the companies’ early histories had 2914 Japan Tobacco not included the fact that each lay within the con- 3402 Toray Industries (Mitsui) trol orbit of the same respective zaibatsu then these 3407 Asahi Chemical Industry (Dai-Ichi) advantages of group affiliation might never have 3863 Nippon Paper Industries (Mitsui, Fuyo) been realized and perpetuated. The Sanwa finan- 4010 Mitsubishi Chemical Industries (Mitsubishi) cial keiretsu, unlike the others, has no prewar an- 4204 Sekisui Chemical (Sanwa) tecedent but from its origin it imitated the proven 4452 Kao Corp. success of the others and so required their exam- 4502 Takeda Chemical Industries ple. 4901 Fuji Photo Film Bank dominance of financial intermediation 5001 Nippon Oil Co. in Japan is another factor buttressing the finan- 5108 Bridgestone Corp. cial keiretsu. Regulations and other factors that in- 5201 Asahi Glass (Mitsubishi) hibited companies from raising external funds in 5401 Nippon Steel securities markets gave rise to the main bank sys- 5404 NKK (Fuyo) tem in Japan, in which banks supplied the greater 5711 Mitsubishi Materials (Mitsubishi) industrial policy 193

5802 Sumitomo Electric Industries (Sumitomo) dustries differentially and so is distinct from gen- 6326 Kubota (Fuyo) eral economic policies that influence the economy 6501 Hitachi (Fuyo, Sanwa, Dai-Ichi) as a whole, overall aggregate demand, economic 6502 Toshiba (Mitsui) welfare, and the like. In general, industrial policy 6503 Mitsubishi Electric (Mitsubishi) involves actions that anticipate or at times con- 6701 NEC (Sumitomo) tradict market signals, with the goal of channel- 6702 Fujitsu (Dai-Ichi) ing resources to (or away from) selected 6752 Matsushita Electric Industrial Co. industries, leading to developmental outcomes 6758 Sony Corp. that would not have occurred had market forces 7011 Mitsubishi Heavy Industries (Mitsubishi) been allowed to operate freely Industrial policy 7201 Nissan Motor (Fuyo) generally operates on the supply-side, influenc- 7203 Toyota Motor (Mitsui) ing private investment decisions in directions con- 7267 Honda Motor Co. sistent with broader political goals. A key concept 7751 Canon (Fuyo) in industrial policy is the creation of comparative 8031 Mitsui (Mitsui) advantage: rather than maximizing efficient pro- 8058 Mitsubishi (Mitsubishi) duction while taking existing factor endowments 8263 Daei as a given, a government can use industrial policy 8264 Ito-Yokado Co. incentives to change a country’s factor endow- 8591 Orix (Sanwa) ments. 8801 Mitsui Estate development (Mitsui) In the postwar period the Japanese government 9501 Tokyo Electric Power Co. has provided a range of policy incentives, both 9613 NTT positive and negative, to influence private sector JR-Higashi Nihon behavior. Industrial policy was designed first to help the Japanese economy recover, and then to Source: T.Y.Keizai (1996) Kigyo keiretsu soran (Handbook of foster the development of industries with high Keiretsu Enterprises), Tokyo. growth potential, particularly those that embodied advanced technology. In general, Japan’s industrial policy has focused on the promotion of Further reading capital and technology-intensive production, and has sought to shift the country’s entire industrial Flath, D. (1996) ‘The Keiretsu Puzzle,” Journal of the structure in these directions. Another focus of Japanese and International Economies 10:101–21. Japan’s industrial policy has been on international Gerlach, M. (1993) Alliance Capitalism: The Social Orga- trade: many policies have sought to increase the nization of Japanese Business, Berkeley CA: Univer- export competitiveness of Japanese products, and sity of California Press. at times have shielded domestic industries from Hadley E. (1970) Antitrust in Japan, Princeton, NJ: international competition. Princeton University Press. Scholars do not agree on the nature of Japan’s Miyazaki, Y. (1967) “Rapid Economic Growth in Post- industrial policy goals, and the extent to which War Japan—With Special Reference to ‘Excessive the state has been insulated from political and Competition’ and the Formation of ‘Keiretsu,’” The societal pressures. Many have argued that state Developing Economies 5:329–50. bureaucrats have been able to define and pursue DAVID FLATH relatively coherent national-level goals such as improving Japan’s international power position industrial policy through rapid industrialization or achieving national economic and technological autonomy Industrial policy consists of government actions Others stress the economic motivations behind to influence the economic behavior of specific industrial policy such as raising factor productiv- industries, firms, and other economic actors, for ity and national incomes, and overcoming so- the achievement of broadly defined political goals. called “market failures.” Still others argue that Industrial policy is designed to affect specific in- industrial policy has been more politicized, 194 industrial policy

subject to the influence of political actors or af- especially those deemed to be important for Ja- fected industries. An academic consensus is pan’s military capabilities. In the 1930s and then emerging that describes Japan’s industrial policy during the Second World War, the Japanese gov- as the product of a negotiated balance between ernment became increasingly involved in the the goals of the state and the sometimes conflict- economy especially in order to direct resources ing interests of the private sector. to war-related industries. During the war, the government semi-nationalized a number of industries through the so-called control boards (toseikai), in Japan’s early industrial policy an effort to sustain the war effort.

Japan’s rapid industrialization in the Meiji era is often associated with the industrial policies fol- Japanese industrial policy during the era of lowed by the new government. The Meiji leader- rapid growth ship recognized that Japan lagged behind the European countries in terms of industrial The government’s direct involvement in the strength, technology and military capabilities. economy was drastically reduced following Unless Japan could rapidly increase its national Japan’s defeat in the war. In the postwar period strength it would be unable to protect its national the Japanese government has not relied heavily sovereignty or preserve its economic autonomy on public or state-owned firms. Rather, indus- and thus would be vulnerable to the fate that was trial policy has relied on more indirect measures, befalling many others in Asia: imperialism. The including inducements, guidance, and threatened Meiji leadership, under the slogan fukoku kyohei, punishments, to influence private sector behav- or “rich nation, strong army” thus embarked on ior. a sustained effort to upgrade Japan’s industrial In the postwar period industrial policy has capabilities and to achieve economic and military been the responsibility of the Ministry of Inter- parity with the West. national Trade and Industry (MITI), created In addition to the government’s massive ef- in 1949. (Prior to this, MITI was known as the fort to create a modern government administra- Ministry of Commerce and Industry or MCI; in tive structure, the state also took the lead in using January 2001 the ministry was renamed the Min- industrial policy to modernize the Japanese istry of Economics, Trade and Industry or economy The government realized that Japan was METI.) The creation of MITI ushered in a pean economic “latecomer,” and that the private sec- riod of rapid industrial development and growth. tor lacked adequate capital, technology and en- Between 1950 and 1973, the country’s gross na- trepreneurial skills to create crucial large-scale and tional product grew by an average of more than capital-intensive industries. Rather than relying 10 percent per year, a record of sustained devel- on market forces, the Japanese government in- opment that was unprecedented, in Japan or any- tervened in the market by creating a number of where. At the same time, Japan’s industrial state-run “model firms” in such industries as tex- structure shifted from agriculture to manufactur- tiles, steel, and shipbuilding. These firms were in ing and services, and from light to heavy indus- part designed to induce private Japanese entre- try By the end of this period a growing number preneurs to create firms of their own, and most of Japanese industries had reached the forefront were soon sold off to private sector entrepreneurs. of international competitiveness, and Japan had Other government industrial policies included the become a highly successful exporter. These promotion and financing of the import of ad- achievements can be attributed at least in part to vanced technology and the development of ex- industrial policy although analysts still disagree ports, particularly in the textile industry. on the extent. In subsequent decades, the government’s in- The decades of fast economic growth up dustrial policy role became more indirect. State through the oil shocks of the 1970s, the period of policy continued to promote exports and to en- the so-called “Japanese miracle,” can be consid- courage investment in strategic industries, and ered industrial policy’s “golden age.” During this industrial policy 195

period the Japanese government enjoyed a to as that of a “gatekeeper,” with some influence number of advantages, particularly the benefit over what was allowed to enter and leave Japan. of a national consensus on economic growth and The government was able to restrict the import control over scarce resources and policy tools, of competitive manufactures through relatively that allowed it to design and implement a rela- high industrial tariffs and quotas. These allowed tively coherent industrial policy. Japan to protect its targeted industries and in par- The national consensus on the need for eco- ticular the so-called “infant industries” that would nomic recovery permeated Japanese society dur- have been overwhelmed if exposed to open coming the first two decades following the war. Not petition with more established, more efficient for- only government officials, but also the conserva- eign competitors. The Japanese government was tive politicians, small and large businesses, and also able to influence to an extent access to for- labor, all generally agreed on the need to focus eign technology. MITI in particular tried to en- the country’s energy on economic growth. Op- courage the import of technologies deemed ponents of a focus on industrialization had been essential and to discourage those that were not. weakened either during the war or in the period In addition, MITI played a critical early role in of the US occupation. helping to “untie” technology using its ability to Japan’s industrial policy was also more effec- restrict access to the Japanese market to allow tive in this period because the state controlled Japanese firms to obtain foreign technology with- access to a number of scarce resources that the out permitting inward investment. private sector desperately needed. Particularly in Japan’s industrial policy also focused on the the early postwar years, most Japanese industries promotion of exports. In addition to early “in- faced acute shortages of critical resources, espe- fant industry” protection, export sectors were pro- cially capital and technology. It was the govern- vided with incentives such as tax exemptions and ment’s ability to influence the availability of these direct and indirect subsidies. State support was resources that gave it some early leverage over often withdrawn once the industry was able to the behavior of the private sector. compete on its own in international markets. The Most importantly the state was able to con- Japanese government was also active in compel- trol to an extent the flow of capital. The govern- ling, or allowing, key export industries to become ment at the time had control over foreign more concentrated through mergers. Japan’s in- exchange, and was able to allocate this scarce re- dustrial policy thus influenced the country’s in- source to favored industries. The government was dustrial structure in two ways: the shift to capital- also able to use a system of “industrial finance” and technology-intensive industries, and the shift to favor selected industries. MITI, working with toward an oligopolistic structure within each in- the Ministry of Finance, was able to use gov- dustry. ernment loans from the Japan Development A final factor that made Japan’s industrial Bank (JDB) as a signal to the private sector. These policy more coherent was the so-called “advan- JDB “policy loans” amounted to a government tages of a follower:” Japan could use the example stamp of approval; industries that received these of the industrialized nations as a blueprint for its loans could then usually borrow all that they own industrial development. Early on, it was clear needed from the private sector. MITI also was to government officials, politicians, and the busi- able to offer low-interest loans to selected indus- ness community that Japan needed to rebuild tries through the annual Fiscal and Investment some basic infrastructure industries. One of the Loan Plan (FILP), which were drawn from Ja- earliest postwar industrial policy efforts was the pan’s huge national postal savings system. This “priority production plan” in which the govern- system of savings represented a pool of capital ment helped rebuild four key industries: electric that the government could direct to the private power, coal mining, steel, and shipbuilding. In sector on relatively easy terms ensuing years it was also clear to most that Japan The closed nature of the Japanese economy needed to develop certain basic industries, nota- in this period also made industrial policy more bly steel, chemicals and energy-related industries. effective. The government’s role has been referred It was also clear which would be the “industries 196 industrial policy of the future,” not only in terms of high levels of sources of capital and technology. As a result, income and value-added, but also in terms of their many industries had become less dependent on, “strategic” importance to the industrial economy. and thus less receptive to, the inducements of- In subsequent decades the state provided support fered by the state’s industrial policy. to a broad range of industries, including general At the same time, the Japanese government and precision machinery automobiles, and con- was in the process of losing many of its industrial sumer electronics. Most of the chosen industries policy tools, largely because of external factors. were those that enjoyed high growth potential or As the condition for joining the international eco- were deemed to be potentially competitive in in- nomic organizations, Japan was forced to sub- ternational markets. stantially lower its tariffs on imported goods, and was later compelled to liberalize its foreign exchange laws. Another important change in this Industrial policy after the oil shocks period was the rising level of international scru- Many of the factors that made industrial policy tiny of Japan’s industrial policy In the early post- seemingly coherent in the high-growth era were war period Japan, as a “small economy” whose gradually breaking down over time. By the time actions did not have a great impact on its trading of the oil shocks of the 1970s, which ushered in a partners, was able to make its industrial policy period of stable growth, Japan’s industrial policy without much outside interference. But as the had become less coherent and more politicized. Japanese economy gained in export competitive- First, as Japan caught up with the industrial- ness, its actions now clearly impinged on its trad- ized nations, the consensus on growth gradually ing partners. Foreign governments now put broke down. By the 1960s many in Japan had growing pressures on Japan to refrain from using come to recognize the costs of high-speed indus- its industrial policy to give unfair advantages to trialization, most notably industrial pollution. In Japanese industries. addition, the population increasingly demanded Japan’s industrial policy in this era also was that more attention be paid to general quality of made more complicated because many of its in- life issues such as improving housing and public dustries had reached the forefront of technology. infrastructure. At the same time, a growing Without the advantages of a follower, it was less number of industries clamored for industrial clear which industries of the future were the most policy support from the state, including many promising or strategic. One key shift in this pe- small and medium-sized firms and depressed in- riod was the support of the “knowledge-inten- dustries that had lost their international competi- sive” industries. In particular, MITI became tiveness. Many of these less-favored firms relied involved in public-private research and develop- on support from politicians to press their demands ment efforts, for instance the VLSI (Very Large on industrial policy bureaucrats. Scale Integrated) Circuit project (see VLSI Re- As the result of these changes, Japan’s indus- search Cooperative). The Japanese state contin- trial policy after the oil shocks became less “stra- ued to provide incentives for future technologies, tegic” and more redistributive in nature. Industrial but with a more mixed success rate. Although policy in this era continued to focus on high- industries such as semiconductors and comput- growth industries and the promotion of exports, ers developed in part because of state support, but now also was involved in improving hous- industrial policy was less successful in industries ing, welfare-related infrastructure, and regional such as aerospace and computer software. development. In addition, a growing portion of industrial policy efforts was now devoted to prop- Reassessing industrial policy after the ping up the less efficient sectors in the economy. bubble Japan’s industrial policy was also less effective in this era because industries were no longer The long period of stagnant growth in the 1990s as dependent on the resources the state had to has led many scholars to reassess the nature and offer. As the Japanese economy grew, many of effectiveness of Japan’s industrial policy Many Japan’s industries were able to develop their own have noted that Japan’s earlier industrial policy industrial regions 197 was not infallible, often citing MITI’s failure to nomic problems have bolstered the position of recognize the future competitiveness of firms such those who stress the potential downside risks of as Sony and Honda, and its failures in industries government intervention in the market. such as aerospace. Others have argued that Japan’s industrial policy has led to a chronic prob- See also: administrative guidance; amakudari; lem of excess capacity in that it has been more cartels; competition; declining industries; Fair effective in inducing firms to invest, but less ef- Trade Commission; industry and trade associa- fective in forcing firms to divest or exit the indus- tions; industrial regions; Johnson, Chalmers; try. Rather, industrial policy more recently has shingikai often been used to shield industries suffering from excess capacity from the costs of economic ad- Further reading justment, leading to a Japanese economy that is less efficient and competitive. Calder, K. (1995) Strategic Capitalism: Private Business and Most recently Japan’s industrial policy prac- Public Purpose in Japanese Industrial Finance, Princeton, tices have been at the center of the ongoing de- NJ: Princeton University Press. bate on deregulation. Many of Japan’s Callon, S. (1995) Divided Sun: MITI and the Breakdown industrial policy regulations, which at one time of Japanese High-Tech Industrial Policy, Stanford, CA: served to nurture and protect infant industries Stanford University Press. or to stabilize competition in the domestic mar- Johnson, C. (1982) MITI and the Japanese Miracle: The ket, are now being blamed for stifling innovation Growth of Industrial Policy, 1925–1975, Stanford, CA: and preventing the Japanese economy from re- Stanford University Press. gaining its competitiveness. Industries that ben- Katz, R. (1998) Japan: The System That Soured, Armonk, efit from these regulations—often the less NY: M.E.Sharpe. competitive, inward-oriented sectors—have been Noble, G. (1998) Collective Action in East Asia: How Rul- very powerful opponents of substantial deregu- ing Parties Shape Industrial Policy, Ithaca, NY: Cornell lation. On the other hand, complaints about ex- University Press. cessive regulation have come not only from Okimoto, D. (1989) Between MITI and the Market: Japa- Japan’s trading partners but also from many of nese Industrial Policy for High Technology, Stanford, CA: Japan’s more competitive, export-oriented in- Stanford University Press. dustries. Industrial policy bureaucrats thus find Samuels, R. (1994) Rich Nation, Strong Army: National themselves in a dilemma as to which side of Ja- Security, Ideology, and the Transformation of Japan, Ithaca, pan’s dual economy to support. NY: Cornell University Press. The current emphasis on the problems and Tilton, M. (1996) Restrained Trade: Cartels in Japan’s Basic failures of industrial policy is perhaps as exag- Materials Industries, Ithaca, NY: Cornell University gerated as the earlier belief that industrial policy Press. was a main reason for Japan’s economic success. Uriu, R. (1996) Troubled Industries: Confronting Economic Scholars still disagree in their assessment of the Change in Japan, Ithaca, NY: Cornell University effectiveness of Japan’s industrial policy. Many Press. have argued that industrial policy was especially effective in its earlier phases, as it helped Japan ROBERT URIU recover from the devastation of the war and get back on the high-growth track relatively quickly; counterfactually we need to consider whether the industrial regions economy would have grown as fast as it did without the industrial policy that Japan followed. But There are three primary industrial regions in Ja- as the Japanese economy matured and reached pan. In order of size and importance they are the the frontiers of technology the coherence and ef- Tokyo-Yokohama regions, the Osaka and fectiveness of its industrial policy was already greater Kansai region, and Nagoya and the beginning to decline even before the economy Chubu region. These three regions stretch con- stagnated in the 1990s. Japan’s more recent eco- secutively along the eastern side of Honshu (the 198 industrial regions largest island in the Japanese archipelago) begin- two other large cities in this region are Kyoto, ning in the north with Tokyo and extending the imperial capital of Japan for more than a mil- down to Osaka. Taken as a whole their com- lennium, and Kobe, a second major port city to bined geographic area is also home to roughly the region. The six prefectures surrounding 30 percent of the Japanese population. Osaka—Hyogo, Kyoto, Mie, Nara, Shiga, and Tokyo is the largest city in Japan with a popu- Wakayama—encompass the second largest con- lation in its twenty-three wards exceeding 8 mil- centration of industrial capacity after the Tokyo- lion. The larger metropolitan area has a Yokohama region. population of 11.9 million. It is the national capi- Osaka is the third largest city in Japan and is tal and ranks number one among all cities for the site of the second largest stock market, again number of corporate headquarters. Not surpris- after Tokyo. From the ninth century until well ingly it is the hub of the Kanto region. Tokyo into the twentieth century Osaka was the com- harbor is the third largest seaport in Japan, and mercial center of Japan. It was the birthplace of Narita International Airport is the largest airport five of Japan’s general trading companies: in terms of passenger and cargo. In addition to ITOCHU, Marubeni, Mitsui. Nissho Iwai and the nearly thirty other towns that comprise the Sumitomo. It is also home to Matsushita Elec- remainder of the Tokyo metropolitan region, the tric Industrial, the largest electrical appliance six prefectures surrounding Tokyo—Chiba, manufacturer in the world. The Osaka region’s Gumma, Ibaraki, Kanagawa, Saitama and chemical and petroleum industries rank Gumma—are also considered part of this indus- number one in terms of production capacity trial region. They are home to thousands of large, and the steel industry ranks second only to the medium and small manufacturers, assembly Tokyo region. plants and warehouses. From the Meiji restoration (1858) onward, The other hub of this industrial region, in Osaka witnessed an erosion of its commercial im- Kanagawa prefecture, is Yokohama, situated on portance as business activity shifted to Tokyo and Tokyo Bay 30 kilometers southwest of Tokyo. the munificent government contracts that marked With a population approaching 4 million, it is the era of Japan’s push toward rapid industriali- Japan’s second largest city and possesses the larg- zation in the latter half of the nineteenth century est seaport in Japan. It handles roughly 15 per- Mitsui typified this exodus from Osaka to Tokyo cent of Japan’s foreign trade. This is not surprising when it moved its corporate headquarters in 1873. given its historical importance. In 1859 it became The trend of Osaka firms moving corporate head- the most influential seaport in all of Japan as a quarters to Tokyo has continued for well over result of its proximity to Tokyo, the national capi- 100 years. It was given additional impetus in the tal. Yokohama soon attracted a large number of immediate postwar era, as the American occu- foreign residents, most of them connected with pation had a tendency to further concentrate European and American trading and shipping power and control of resources in Tokyo. companies. For that reason, Yokohama has tended In the past decade, however, the region’s for- to have a more international atmosphere than its tunes have taken a turn for the better. For one, big sister, Tokyo, nearby. the Tokyo-Yokohama region simply ran out of The Kanagawa region immediately surround- room for further significant industrial expansion. ing Yokohama became the site of major manu- Because of its well-developed infrastructure and facturing facilities, which used the nearby port historical position, the Osaka became the heir for exporting their products overseas and even apparent for future growth. This shift has been domestically within Japan. As a result, the area buttressed by several aggressive development around Yokohama ranks near the top in terms of projects. The first of these was the Kansai Inter- manufacturing output for general and electrical national Airport, built on a man-made island in machinery. Osaka Bay The project was the culmination of a The second major industrial region is located thirty-year project by government and business in the Kansai region and has as its main hub the leaders to significantly upgrade the commercial historical commercial capital of Japan, Osaka. The and cargo air facilities in the region. The airport industry and trade associations 199

opened in 1994 and its impact on bringing more in industrial policy and regulation (interacting foreign investment into the region appears sig- with bureaucrats), lobbying and policy planning nificant. A second major project involved a joint (interacting with politicians), as well as intra-in- business-government effort to build a cluster of dustry and inter-industry negotiations on joint large high-tech research parks and government product development, production curtailment, research centers in a completely new city. Kansai and self-regulation. Science City can be considered a Kansai coun- Over time, the pendulum of government in- terpart to Tsukuba, the Kanto city known for its volvement in trade association activities has government and corporate research facilities. In swung back and forth. During the Edo period, many respects, Kansai Science City represents an the Shogunate at times ignored the guilds and at effort by the central and local governments to other times used them for its policy purposes. replicate the success of Tsukuba in the Kansai The Meiji period saw more active government region. interest in business affairs, and the Taisho period Nagoya and the Chubu region, locating less. The immediate postwar years were a period roughly midway between Tokyo and Osaka, are of particularly high government involvement, so the third major industrial region of Japan. Nagoya much so that it often looked as if the ministries is Japan’s fourth largest city with a population of unilaterally imposed policies onto industries. approaching 2.5 million. It is located in Aichi pre- Because in those years the interests of the bu- fecture and is considered the main city of the reaucrats and those of industry were often inter- Chubu region, which includes the surrounding twined, it was difficult to determine whether prefectures of Gifu, Mie, Nagano and Shizuoka. bureaucrats were bending to industry pressure Because Toyota, Honda. Mitsubishi and Suzuki in designing certain policies, or industry was are headquartered in the region and have their shaped to the interests of government. This may major manufacturing there, the Nagoya region have led to an exaggeration of the role of minis- accounts for over 50 percent of all vehicles manu- tries in industrial policy design and implementa- factured in Japan. Just as Toyota City is a key tion. When the ministerial leverage over industry automotive producer, two other cities claim simi- by way of administrative guidance and indus- lar honors in two other industries. Seto is an es- trial policy began to decline in the 1980s, the tablished center for ceramics, which explains why pendulum of government involvement in indus- Noritake and several lesser fine china manufac- try also began to swing back, and trade associa- turers are headquartered in the region. tion activities of self-regulation became Ichinomiya, in nearby Gifu prefecture, is a major increasingly important and visible. center for textiles. Data See also: Kansai culture The wartime control associations were based on ALLAN BIRD very narrowly defined industries, often by product category. Although these control groups were industry and trade associations forced to dissolve under the Occupation, many of them simply changed their names and contin- Trade associations (jigyosha dantai) have played an ued to exist to support the recovery of their mem- important role in Japan’s early economic devel- ber firms. As a result, there are more trade opment (see guilds). In the control economy associations in Japan than in many other coun- during the Second World War, existing industry tries. For instance, even in the 1990s, there were groups were transformed into “control associa- separate associations for pens, pencils, ballpoint tions” (toseikai). In every industry a control asso- pens, fountain pens, highlighting pens, and white- ciation was in charge of designing and out ink. implementing the rationing of input materials and As of 1997, a total of 15,437 trade associations output quotas. After the war, a large number of were registered with Japan’s Fair Trade Com- associations continue to be importantly involved mission (FTC). Of these, roughly 2,100 were 200 industry and trade associations

“incorporated” (zaidan hojin), i.e., they held a li- committee meetings (which occur in large num- cense from their cognizant ministry and had to bers at frequent intervals); publishing a newslet- submit annual reports. In contrast, 9,700 were ter; collecting industry statistics; conducting “voluntary”, with no immediate ties to a regula- research on foreign market access; collecting opin- tor, while 3,500 were cooperatives based on spe- ions on policy issues and contacting related asso- cial small-firm legislation that exempted these ciations; organizing educational programs and associations from certain anti-trust rules. seminars; organizing trade shows and other indus- In a sample of 1,200 trade associations in 1990, try promotion; and processing information from the median (representative) association had eighty the cognizant ministry for distribution to mem- member firms, four staff, twenty directors, and a ber firms. In large associations, several of the staff budget of 70 million yen; these numbers were are shukko, employees from member firms on a two- similar to US associations except for budget, year secondment. During the stints at the asso- which was, on average, more than five times ciation, shukko learn about their industries and meet larger in Japan (Schaede 2000). Given that budg- a large number of people with whom to maintain ets are financed through membership dues and networks as their careers develop. Japanese firms are typically members of several associations, Japanese companies incur significant Functions expenses from association membership. Trade associations fulfil a wide range of functions which require different organization. For instance, Organization for influential lobbying, associations must be The governing body of every trade association is large, but for effective cooperation they should the “general meeting” (sokai). Typically once a be small. Japanese industries have addressed this year all members meet to vote on general issues tradeoff between size and effectiveness by creat- such as changes in the by-laws. Very large asso- ing a pyramid with focused, small associations at ciations also hold annual conventions (taikai) the bottom, industry umbrella associations in the which are high-profile events and often feature middle, and large, over-arching federations, such as speakers representatives from the cognizant as Keidanren, at the top. Thus, different types of ministries and politicians. Substantial policy de- associations specialize in different functions within cisions are delegated to the board of directors the political economy In general, there are three (rijikai), which meets monthly. The directors (riji), categories of functions: (1) administrative (infor- as well as the association’s president, are mem- mation exchange), (2) economic (self-regulation ber company presidents who are officially elected and ministry/business relations), and (3) political at the general meeting and are usually the presi- (lobbying and politicians/business relations). dents of the largest firms in the industry. While all associations engage in information ex- Directly under the president, the staff of the change, large federations typically engage more association is headed by one senior administra- in lobbying, whereas the focused industry-based tive director (senmu riji) who is a member of the associations are more concerned with economic board of directors but as a long-term employee functions. provides institutional memory among the rotat- Studies in corporate management attest to the ing directors. This person also acts as a liaison importance of information and knowledge for between the member firms, the association, and businesses to reduce uncertainty in strategy de- the outside world. In those associations that hire cisions, avoid duplication, and cooperate on new retired government officials or “old boys” for technologies. In particular, if firms want to coop- closer contacts with their regulators, this person erate, the most important condition for a sus- typically assumes the position of senior adminis- tainable agreement is the frequent exchange of trative director. information, because it facilitates monitoring. Below the senior administrator, a number of Understanding this, Japan’s trade associations staff people are in charge of administrative func- have crafted systems of institutionalized infor- tions, including: organizing committee and sub- mation exchange through committee meetings industry and trade associations 201 at various junior and executive levels. These fre- trade associations collect data on foreign markets, quent meetings provide formal and informal op- ministries often use them as informants in inter- portunities to interpret complicated signals from national trade negotiations. Second, rather than competitors and related markets, and to respond contacting individual firms, the regulators typi- to them. Japanese anti-trust law does not require cally negotiate policy issues with the association. that a lawyer be present at these meetings, and This is particularly useful when the ministry is because the antitrust authority has never inter- drafting administrative guidance, which does fered with the extensive and multi-layered com- not need cabinet approval but is negotiated just mittee structure, the exchange of critical data, between the regulator and the industry Third, including prices and costs, appears to be quite trade associations are instrumental in monitor- customary in some industries. ing compliance with informal regulation. As Ja- pan does not have specific supervisory agencies (except for the financial industries since 1998), Trade associations and regulation the ministries are at the same time responsible The fundamental economic function of trade as- for policy formulation and enforcement. In most sociations is to ensure a constant flow of discus- industries, understaffed ministries rely on the sion between officials at the ministries and the trade associations for administering industry self- associations they regulate. Activities that formal- enforcement. ize these contacts include long-standing delibera- Finally trade associations also engage in au- tion councils (shingikai), holding joint seminars tonomous self-regulation, without the involve- on special policy issues, or a ministry paying the ment of ministries. “Self-regulation” refers to a association to undertake a feasibility study for process by which a trade association designs the their industry. rules of trade for that industry and enforces these As for what ministries do for associations, at rules through self-designed sanctions. What types the most basic level the bureaucrats structure a of rules associations create depends on the spe- bargaining situation and assume the role of ref- cific circumstances and competitive environment eree for the negotiation. A well-known example of their industries. Fundamentally these rules can of an outcome of this process are research coop- be either “administrative” and trade-enhancing eratives. Upon discussion with all affected in- (for example, through standard or quality require- dustries and companies through their ments, or rules on advertisement and ethical associations, MITI may formulate the basic plan behavior), or they can be “protective” and trade- and offer subsidies as incentives for a group of restricting (through price agreements, restricting firms to engage in joint research (importantly markets or customers, restricting market access, Japanese ministries rarely offer subsidies to indi- or an exclusive distribution system). Although vidual firms). Since firms do not typically like to industries differ in the extent and types of their disclose technology-related information, without self-regulation, the practice is widespread. One a referee they may be unable to agree on a project. reason is that the boundaries between adminis- Another example can be found in maturing, or trative and protective self-regulation are difficult structurally depressed, industries. By creating ne- to define, and even protective self-regulation is gotiations among firms regarding capacity reduc- not necessarily always found to be in violation of tions, a ministry can fulfil its own goals of phasing the anti-trust statutes. in unemployment in the industry. From the perspective of the regulating minis- Lobbying tries, trade associations are important and helpful both in formulating and implementing Trade associations participate in the policy-mak- regulation. First, the understaffed ministries need ing process in various ways. At the formal level, associations to provide them with aggregate in- association representatives often participate in the formation on industry such as sales, investments, government’s deliberation councils. More infor- or inventory as well as industry-specific knowl- mally business tries to influence political decisions edge of products, standards, etc. Because many through informal meetings and small gifts. For 202 internal labour markets instance, large associations typically procure the Schaede, U. (2000) Cooperative Capitalism: Self-Regula- best tickets to sumo wrestling bouts or kabuki and tion, Trade Associations, and the Antimonopoly Law in no performances, to give them to politicians who Japan, Oxford: Oxford University Press. hold influence over their industry. Young, M. (1991) “Structural Adjustment of Mature Above all, trade associations play a major role Industries in Japan: Legal Institutions, Industry As- in party donations. To the extent that compara- sociations and Bargaining,” in S. Wilks and tive data are available, the ranking of sources for M.Wright (eds). The Promotion and Regulation of In- political donations in Japan are almost the oppo- dustry in Japan, New York: St. Martin’s Press, 135– site from the USA. Whereas in the mid-1990s, 66. donations to US parties came primarily from in- ULRIKE SCHAEDE dividuals with corporations only contributing 6 percent of the total, in Japan individuals accounted for 10 percent of all party financing internal labour markets whereas corporations provided more than 30 percent. Importantly Japanese companies chan- A central premise behind the idea of “internal labour nel their contributions through their trade asso- markets” (ILMs) is that many of the rules determining ciations. The associations in turn give directly to economic outcomes for employees are written inside the party up to the legal limit of 100 million yen the firm rather than outside in an external labor mar- per year, and also channel funds to the ultimate ket. When employees work for long time periods in umbrella organization, Keidanren. Under the one firm, understanding internal firm rules becomes LDP one-party rule between 1955 and 1993, all critical if one wants to understand the organization of industries were most interested in lobbying the work, wages, how and why employees change jobs, LDP, and Keidanren was continuously one of its and other labor outcomes. Of course, the internal strongest supporters. The system was interrupted rules may vary substantially across individual firms, when the LDP briefly lost its majority in the industries, national boundaries, and time periods. Lower House in 1993. Early literature on internal labor markets was US based. Clark Kerr—who focused on US labor Outlook market institutions in the 1950s—first made the point that there was a central boundary between The decline in ministerial leverage over industry what was happening in the firm and the activity due to deregulation and market liberalization is in “external” labor markets. His distinction was further increasing the importance of trade asso- important because prevailing neoclassical eco- ciations in Japan’s political economy. Whereas nomic theory implied that the boundary was not associations have always self-regulated to a signifi- significant: the laws of supply and demand in the cant degree, their activities are becoming more labor market affect everyone in the same way important as antitrust authorities allow significant Kerr and others began to argue that this is not exchange of information and rule-making by as- necessarily the case; the internal, firm-specific sociations, while many ministries do not strictly rules affect internal employees in ways that are supervise or monitor their industries. Some indus- independent of an external labor market. John tries self-regulate to open their markets and ex- Dunlop, who originally coined the term “inter- pose their member firms to full competition, nal labor markets” in the 1960s, first focused on whereas others create entry barriers to protect in- the job ladders that he saw within US firms. Much cumbent firms. Many of these firms have been able of this early research was narrowly focused on to weather the extended recession of the 1990s detailing ILMs within blue-collar, union-domi- thanks to the activities of their trade associations. nated manufacturing industries in the USA. More recent work has focused on the differences be- Further reading tween ILMs in different manufacturing work Procassini, A. (1995) Competitors in Alliance: Industry As- models, between manufacturing models and serv- sociations, Global Rivalries, and Business-Government Re- ices, and across national boundaries. This is par- lations, Westport, CT: Quorum Books. ticularly true in the last two decades as US, internal labour markets 203

Japanese, and European firms set up transplants market “model” do tend to have a self-reinforc- and joint ventures. In the USA in Freemont, Cali- ing logic and should be evaluated and understood fornia, the NUMMI joint venture between as a whole. For example, narrow job classifica- Toyota and General Motors generated extreme tions, wage attachment to a specific job, and few interest because of its early success with a signifi- restrictions on the ability of the firm to lay off cantly different model of work using US employ- workers are practices that tend to be mutually ees. reinforcing. Broader job classifications, wages at- Because of the longer documented job tenure tached to individuals rather than a job, and for Japanese employees relative to their Western greater job security are also practices that are self- counterparts, analyzing and understanding in- reinforcing. The former model is essentially a tra- ternal labor markets has been a primary concern ditional American model, while the latter is of those studying Japanese labor markets. James commonly associated with Japanese firms and Abegglen and Ronald Dore were among the particular US and other non-Japanese firms modi- first non-Japanese scholars to document Japa- fying their traditional work systems (now com- nese style employment practices that character- monly labeled as “high-performance work ize ILMs, including the “three pillars” of systems”). lifetime employment, seniority promotion In the post-Second World War period, many and wages, and enterprise unions. The stylized observers saw the character and smooth func- facts on Japanese and US ILMs are now very tioning of internal labor markets within Japanese familiar. Kazuo Koike and many others have firms as a source of relative economic strength. been careful to point out that comparisons can To encourage cooperation and commitment from often be misleading, and the differences revolve employees, flexibility in job assignments in the around degree. Some of the more common styl- firm, and effective employee participation in ized differences are: (1) executive and manager online problem solving, Japanese firms provided pay vs. average employee pay is more com- firm-specific training, relatively high job security pressed in Japan; (2) job security for core em- and compressed wages based largely on senior- ployees at large Japanese firms is greater than in ity. More effective on-line problem solving and a their US counterparts; (3) job rotation, em- commitment to the firm ensured rising produc- ployee participation, and training is emphasized tivity and product market success for Japanese much more strongly; and (4) the delineation be- firms. tween blue-collar and white-collar work tends to Japan’s internal labor markets worked well in be more ambiguous, with movement from blue- the context of a high and stable growth environ- collar ranks to white-collar work. ment with tight labor markets, and few cyclical The study of Japanese internal labor markets disturbances. With high growth and scarce labor, has recently become much more fine-grained, it makes good sense to build an internal labor with scholars increasingly concerned about what market system that attracts, trains and keeps good we can learn from different ILM systems. Early workers. Rapidly growing firms also allow quick comparative work was often static and described promotion internally for qualified employees com- Japanese ILMs as uniquely Japanese. Even if seen mitted to firm success. With no large, unexpected as efficient and effective in the Japanese context, declines in demand, the relative expense of guar- many argued that particular ILM practices could anteeing employment and training employees is not be transferred across national culture. How- low. This is especially the case with a corporate ever, the weight of opinion now sees ILM prac- landscape dominated by firms utilizing the same tices as dynamic and in a constant state of strategies. evolution within particular countries. Also, cross- Sustained lower growth in Japan during the national diffusion of differences can and often 1990s has increased pressure to de-regulate does occur. “rigid” internal labor markets and to increase the At the same time, there is growing agreement efficiency of external labor markets. With low that the rules making up a particular internal labor growth, Japanese firms with relatively permanent 204 Ishikawa, Kaoru

employment guarantees can quickly become top- data, and its presentation using charts and dia- heavy. The temptation to cut expenses by reduc- grams. He developed the widely-employed cause- ing employees has increased as traditional options and-effect (fishbone) diagram for understanding such as farming out core employees to subsidiar- relationships in processes; it is often called the ies (shukko) are exhausted. Meanwhile, those em- “Ishikawa diagram.” Ishikawa espoused an ho- ployees who are let go are finding it harder to listic view of quality arguing that it is much find work in a weak external labor market. broader than simple product quality but rather How, then, will Japan’s labor markets change? an all-encompassing way of managing people and Many Japanese firms are still reluctant to give up processes. the benefits of an internal labor market that effectively encourages firm specific skill acquisition and meaningful employee participation. Even as Further reading non-Japanese firms continue to appreciate Japa- nese ILM practices, Japanese firms continue to Ishikawa, K. (1976) Guide to Quality Control, Tokyo: Asian search for ways to adapt to a persistently difficult Productivity Organization. economic environment. This search includes ex- ELIZABETH L.ROSE perimentation with more “Western” practices like performance-based pay less overall security for employees, and a firm decision matrix that gives ISO issues shareholders more power. However, to what ex- ISO is a group of five standards set by the Inter- tent practices like these should be and will be national Organization for Standardization that are adopted remains unclear. generic guidelines and models for ensuring the quality of a company’s goods and services. Some Further reading companies see ISO as a management tool, while others see it as a trade barrier. Abegglen, J.C. (1958) The Japanese Factory: Aspects of its ISO 9000 and total quality are not the same Social Organization, Glencoe, IL: The Free Press. thing. However, ISO 9000 can be part of a larger Dore, R. (1973) British Factory, Japanese Factory, Berke- total quality management (TQM) environment. ley CA: University of California Press. Organizations that have achieved a high level of Gordon, A. (1985) The Evolution of Labor Relations in Ja- quality may already have the criteria for ISO pan: Heavy Industry, 1853–1955, Cambridge, MA: 9000 in place. This is the case in Japan. It is a Harvard University Press. major reason why Japanese firms have not Koike, K. (1988) Understanding Industrial Relations in Mod- adopted ISO 9000 to the extent that businesses ern Japan, New York: St. Martin’s Press. in other countries have. Many Japanese firms do WILLIAM BARNES not see the need for ISO 9000 certification since the Japanese are known for quality and already Ishikawa, Kaoru have many of their own quality processes in place. The Japanese also have their own awards Kaoru Ishikawa (1915–89) was a pioneer in the for quality such as the Deming Award. Some re- development of quality management in Japan, searchers believe firms such as Toyota would with a particular impact on the spread of quality have little to gain from ISO certification since control circles. He emphasized company-wide their products are recognized as world class in participation in quality and worked to develop a terms of quality. Many Japanese firms set their set of simple statistical tools, usable by workers sights on one of the best-known quality awards, at all levels of the organization. Making invalu- the Deming Prize. Deming Prizes are almost ex- able contributions to the implementation of con- clusively won by Japanese firms, with three ex- cepts introduced by Deming and Juran, Ishikawa ceptions (Florida Light & Power, Taiwan Tube, promoted the careful collection of process-related and Lucent Technology). In Japan, five years af- ISO issues 205 ter a company has received the Deming Prize, it ent and effective and that will achieve the stated is eligible to compete for the Japan Quality Con- environmental objectives of a given organization. trol Prize. Only a few organizations, including It attempts to balance socio-economic and busi- Toyota, have won this award, thereby showing ness needs with environmental protection and their commitment to continuous quality im- pollution prevention. provement. In Japan, with environmental issues becom- Today the new versions of ISO 9000 include ing a public issue and with growing governmen- principles of total quality management and con- tal regulations around environmental issues, firms tinuous improvement from Japan. Quality Im- are looking into ISO 14000 certification as a way provement and therefore ISO 9000 is important of demonstrating their commitment to the envi- from organizations’ and suppliers’, as well as cus- ronment, to be “good corporate citizens” and as tomers’ perspective. At a time of increasing glo- a competitive advantage. Firms such as Toyota balization, ISO 9000 provided an international and Denso have sought ISO 14000 certification standard for quality For example, European Un- in their plants in Japan and abroad. ion (EU) members made ISO 9000 compliance It is important to note that Japanese compa- part of their safety laws and many EU companies are not trying to modify existing operations nies require suppliers to be ISO certified. How- to implement ISO 14000. Instead, they are creat- ever, there are no laws requiring ISO ing new operations that meet the ISO 14000 cri- certification to export or sell to Europe. Never- teria. As of 1999, more than 2100 Japanese theless, it is a competitive advantage. The stand- companies have already been certified. Accord- ards do not apply to products or services ing to one report, about 1000 Japanese compa- themselves, but rather to the process. They are nies per year are applying for certification. an assurance that the certified firm has in place a Overseas, Japanese firms such as Sony and quality system enabling it to meet its stated qual- Toyota in the United States have made public ity As Japanese companies continue to move commitments to ISO 14000 standards. manufacturing facilities to developing countries, Japanese companies are also starting to recog- they have become more interested in having nize suppliers who are more environmentally their subsidiaries as well as their suppliers ISO friendly For example, Witt (1999) states that 9000 certified. Matsushita Electric has a program of “green In the summer of 2000, ISO standard officials sourcing.” It gives priority to companies with ISO from 46 countries met in Kyoto, Japan to sign off 14000 certification. These suppliers do over $2 on revisions to the year 2000 version of the ISO billion in business with Matsushita. series. However, Japan as well as France voiced In the United States, Sony and Toyota, as well objections to these new standards. The new stand- as Ford, have made public commitments to ISO ards are streamlined and focus more on tracking 14000 standards. Additionally numerous Japa- processes, on continuous improvement, and on nese firms have stated that they plan to have all customer satisfaction. of their overseas operations both ISO 9000 and In addition to global recognition of the impor- ISO 14000 certified in the future. tance of high-quality products and services is the growing worldwide concern for the environment. Further readings ISO 14000 is a newly established certification system of environmental standards. The ISO Com- Witt, C. (1999) “ISO 14000 revisited,” Material Han- mittee developed an environmental management dling Engineering 54 (11): 22. system that could be applied to firms around the Zuckerman, A. (2000) “Start Preparing for Revised ISO world. It provides companies with a structure for 9000 Standards,” Metal Center News 40 (11): 5–6. an environmental management system that will ensure that all operational processes are consist- TERRI R.LITUCHY 206 Ito-Yokadou

Ito-Yokado sale) system to implement “item-by-item inventory control,” which enabled the company to de- Ito-Yokado Company Ltd was established by tect sales trends for each item of merchandise and Masatoshi Itou, currently Ito-Yokado group’s subsequently develop a selling strategy which honorary chairman in Tokyo in April 1958. would then be tested again using sales data. The Masatoshi successfully developed the company fourth stage was to develop new products. Ito- into a retail conglomerate over the next forty- Yokado adopted the concept of “team merchan- two years. Ito-Yokado is characterized by its profit- dising,” whereby the company based on the sales oriented policy and scientific management. In data, came up with product ideas and then February 2000, the company directly operated worked with manufacturers, wholesalers, and 176 stores, employing 16,514 staff. In 1999, the other collaborators as a team to develop new company was capitalized at ¥46,674 million and products. sales totaled ¥1,490,709 million. The company started to expand again in the In the 1960s, Ito-Yokado aggressively ex- final stage. First, Ito-Yokado started to extend its panded its supermarket chains. In contrast with store network to western Japan, building stores Daiei’s nationwide expansion, Ito-Yokado chose rapidly in the Kansai area from 1995. The sec- to build its new stores in the Tokyo area to main- ond expansion took place overseas. In 1996, Ito- tain the company’s domination there. It became Yokado established a joint venture with a Chinese the second largest retailer in Japan in terms of retail company in China, aimed at building a na- total sales in 1981. tionwide store chain there. Simultaneously the Ito-Yokado also operated its own department company allied with Wal-Mart and Metro Group stores (for example, York Matsuzakaya), discount to develop new merchandise. stores (Daikuma), specialty shops (Merian), supermarkets (York Benimaru), and convenience See also: retail industry stores (7–11 Japan). 7–11 Japan in particular has been very successful. It was named York Seven Inc. when Ito-Yokado reached a licensing agree- Further reading ment with the Southland Corporation to run the Mizoue, U. (1998) Daiei VS Ito-Yokado (Daiei, Inc and convenience store business in Japan in 1973, and Ito-Yokado Co., Ltd), Tokyo: Baru Shuppan. was renamed 7–11 Japan in 1978. In 1996, 7–11 Okamoto, H. (1998) Yokado guruupu: koushuueki no Japan became the first company to record profits shisutemu kakushin (Yokado Group: System Reform of ¥100,000 million in Japan. For High Profit), Tokyo: Baru Shuppan. Ito-Yokado also branched out into restaurants (Denny’s Japan), mail order (Shop America Ja- HEUNG-WAH WONG pan), food production (Aiwai Foods), real estate (Urawa Building), and finance (Union Lease). ITOCHU However, the company is still less diverse than Daiei. In 1858, at the age of fifteen, Chubei Ito began In the 1980s, Ito-Yokado could no longer in- work as a linen trader. In 1872 he established crease its profit simply by building new stores “Benichu,” a fabric shop in Osaka. From this because of the introduction of the Large Store humble beginning emerged one of Japan’s larg- Law. The company unlike Daiei with its diversi- est sogo shosha (general trading company). Build- fication strategy decided to fundamentally reform ing upon its strengths in the burgeoning textile its management system. In 1982, Ito-Yokado industry in late nineteenth-century Japan, Ito formed an operation reform committee to carry expanded the business into thread and yarn. In out a five-stage reform to improve its profitabil- 1914 he formally re-organized under the name ity. The first and second stage aimed at improv- C.Itoh & Company and the firm came to insinu- ing the inventory, increasing the stock turnover, ate itself into all aspects of the textile trade, from and reducing the opportunity losses. In the third threads and yarns to finished goods, from arrang- stage, Ito-Yokado introduced the POS (point of ing for the purchase, shipment and delivery of Iwasaki, Yataro 207

milling machines to the export of textiles world- ing Tosa clan figure, Yoshida Toyo, who became wide. In 1918 Ito divided the company, forming his teacher in 1858 and recommended Iwasaki a second trading company, Marubeni. for a commercial post in Nagasaki, in 1859. In During the Second World War, C.Itoh & Co. Nagasaki Iwasaki first came into contact with merged with Marubeni and several manufactur- scholars of Chinese classics, doctors of Western ers, including Kureha Cotton Spinning and medicine and foreign technology. His lack of lan- Amagasaki Nail. However, as part of the Ameri- guages frustrated him in his quest for knowledge, can occupation’s policy of breaking up zaibatsu, so he returned home before he was supposed to, in 1949 C. Itoh, Marubeni, Kureha and several and was discharged from his post by the Tosa related firms were separated. clan as a punishment. In the postwar era, C.Itoh established itself as Despite this setback he was able to reacquire an aggressive sales company. It has consistently a higher ranking title for the family in 1861, and led its industry in sales. In 1992, to reflect a more in the following year he married Kise, with international identity it formally changed its name whom he had five children; Masaya, Yasuya, to ITOCHU. As of 2000 the company was or- Masako, Hisaya and Haruji. Iwasaki reclaimed ganized into seven divisions: textiles; automobile rice fields and managed forests in Inokuchi until industrial machinery; aerospace, electronics and 1867, when he was reappointed as a clan official multimedia; energy metals and minerals; chemi- and transferred to the Nagasaki branch. It was in cals, forest products and general merchandise; Nagasaki that he came to deal with later busi- food; and finance, realty insurance and logistics ness partners such as Thomas Glover, buying services. steamships and munitions from them. Iwasaki As with other general trading companies, became head of the clan’s Osaka branch in ITOCHU has been involved in numerous large- 1869, which was then separated from the Tosa scale projects around the world. It achieved par- clan management and set it up as a private firm, ticular visibility in the early 1980s when, at the Tsukumo Shokai, in 1870. Some historians date height of Japan-US trade friction over automo- this as the beginning of the Mitsubishi zaibatsu biles, it facilitated a joint venture between Gen- although Iwasaki was not officially the head of eral Motors and Toyota which became the the company at that time. The company was re- NUMMI operation in Fremont, California. named Mitsubishi Shokai in 1873, taking the name from the three water chestnut diamond- See also: general trading companies shaped leaves that formed the Iwasaki family crest. This change in name probably marks the ALLAN BIRD point at which Iwasaki gained full control over the company. Iwasaki, Yataro Iwasaki saw the spirit of contributing to the company’s prosperity as the same as contribut- Born December 11, 1834 in Inokuchi Village, ing to the nation’s prosperity. This philosophy Shikoku island, in the Tosa clan domain (now led to Iwasaki volunteering his ships for deliver- Kochi Prefecture), Yataro Iwasaki was the founder ing munitions for the Japanese government’s of the Mitsubishi zaibatsu. Frustrated by dis- Taiwan Expedition in 1874. Until 1881 Iwasaki crimination because of the family’s status as low- could be considered to be a seisho, a merchant ranking samurai and appalled by the way Japan’s who made use of government contacts to build a trade was subordinated to foreign concerns, he commercial empire. Iwasaki’s particular govern- swiftly gained a reputation for being impetuous ment support was from Toshimichi Okubo and and aggressive but also possessing a shrewd busi- other progressive bureaucrats. In 1875 he peti- ness sense and excellent negotiating skills. Iwasaki tioned the Japanese government for a loan to buy was imprisoned for six months in 1856–7 for li- the Shanghai Line of the Pacific Mail, which was beling the government, after his father had been granted on Okubo’s recommendation, as part of beaten up by an Inokuchi village headman. His the government’s shipping promotion policy. In abilities were nonetheless recognized by a lead- 1876, when another powerful rival appeared, the 208 Izanagi boom

Peninsular and Oriental Steam Navigation Com- was encouraged in scholarly activities by his lit- pany of the United Kingdom, Iwasaki reduced erary family as a child and this respect for intel- his own salary by half, made sixteen workers re- lect undoubtedly made Iwasaki keen to hire dundant and cut the salaries of his executives by educated people for his company This habit of a third, in order to engage in a rate cutting war. hiring intelligent, independent-minded staff rather P&O eventually withdrew their Yokohama-Kobe conflicted with Iwasaki’s autocratic style. He outline in August 1876, and Iwasaki celebrated his lined his official position in his Rissha Teisai (The victory by inviting them and other foreign ship- Style of Establishing the Company), where he ping companies to a lavish banquet, where he stated that all key decisions were to be made by asked for their future cooperation. the president. Nonetheless, Iwasaki sometimes Iwasaki also helped the government suppress found himself overruled, as in the instance of his the Satsuma Rebellion in 1877 through provid- close friend and famous educationalist, Yukichi ing transport for troops and munitions, from Fukuzawa, collaborating with Iwasaki’s younger which he made a tidy profit and further consoli- brother Yanosuke and another Mitsubishi em- dated his shipping monopoly. On July 8, 1878 ployee, Shoda Heigoro, to persuade Iwasaki to the government decorated Iwasaki with the buy the failing Takashima Coal Mine in 1880. It Fourth Order of Merit with the Grand Cordon was businesses such as this which Iwasaki’s heirs of the Rising Sun, the first time a non-bureaucrat were to build up into the diverse conglomerate had received such an honor. for which the Mitsubishi name became famous. However, after the assassination of Okubo in 1878, Iwasaki had only one protector left in the See also: general trading companies government, Shigenobu Okuma. Okuma’s faction fell from power after senior ministers decided Further reading not to accept his radical democratic ideas for a constitution. The new faction in power suspected Hensankai (ed). (1967) Iwasaki Yataro Den, Tokyo: Uni- Okuma, Iwasaki and other allies of plotting to versity of Tokyo Press. overthrow them. Iwasaki found himself being PERNILLE RUDLIN shadowed and his house watched by spies. He became so incensed by what was happening that he declared in 1881 that his staff should no longer Izanagi boom be involved in politics. Nonetheless the attacks continued and the gov- The Izanagi boom (October 1965-July 1970) re- ernment established a new steamship company fers to the postwar unprecedented prosperity that to compete against Mitsubishi in 1882. Iwasaki lasted for fifty-seven consecutive months. This stated his view that having two large companies period saw the second-highest level of economic competing with each other would only weaken growth in Japanese history. Under the Eisaku Sato Japan’s nascent maritime industry but decided Administration, the Japanese economy grew rap- not to campaign publicly to stop the formation idly mostly due to dependence on exportation of the new company Instead he paid off the re- and the power of Japanese financial standing in mainder of the loans from the government for Asia and the world. Also, the Japanese economy ship purchasing, cut costs and upgraded the ship- was recovering from a period between 1956–65 ping services, in order to ready the company for in which economic growth was restricted by the a price war. This war ended with the merger of deterioration of international income and expen- the new company with Mitsubishi’s shipping ac- diture. The substantial growth rate reached 11.6 tivities in 1885, to form the Nippon Yusen Kaisha, percent (the average between 1966–70) and GNP several months after the death of Iwasaki, aged grew to third place among capitalist countries fifty. (behind only West Germany and the USA). Mitsubishi was able to continue throughout During this period, individual consumption, Iwasaki’s frequent illnesses in the 1880s thanks investment in private facilities, and exporting to the able staff whom Iwasaki had hired. Iwasaki worked together toward a balanced expansion Izanagi boom 209 for the economy. Consumer electrical products The Izanagi boom was a period during which such as cars, air conditioners, and color televi- steel production doubled along with the volume sions expanded into mainstream use, thus fueling of oil refined and the output of aluminum. But a boom in the consumer electronics industry in these increases took place without any change in which Japanese companies were poised for suc- the methods of production, meaning a corre- cess: the market expansion for autos was 17 per- sponding increase in the amount of waste cre- cent per year, air conditioning equipment 5 ated. Pollution became and still is a huge problem, percent, and color televisions 25 percent. The with cases being brought to court one after an- color television was at the height of popularity other, spurring the creation of the first laws on during this period. And air conditioning systems environment pollution control. The Japanese gov- were fast becoming staple household and indus- ernment understood the need for industry to in- try items, coming into wide use in department vest in environmentally friendly technology and stores around 1970. a new position, that of Director General of the The profitability due to trade income increased Environment Agency was established. to its high point and then the tide shifted away from high growth, mostly due to the maturing of Further reading the Japanese economy. By the time of the Inter- Hitomi, H. (1996) Nihonsi-B Yougosyu, Tokyo: national Exposition hosted in Osaka in July 1970, Yamakawa-syuppan. the Izanagi boom was over. The peak price of Ikeda, Y. (1997) Seiji EKeizai (Political Economy), To- the average Japanese stock was ¥2,534 in April kyo: Shimizushoin. 1970, and it is said that the decline of the stock market during the three months prior to the Ex- MARGARET TAKEDA position signaled the end of the Izanagi boom. IPPEI ICHIGE J

Japan Airlines additional domestic competition as carriers were allowed to set their own ticket prices. Japan Airlines Company Ltd. (JAL) was founded The introduction of technologically advanced on August 1, 1951, as Japan’s national flag car- aircraft, the computerization of the flight man- rier. Exactly two years later, on August 1, 1953, agement systems in both air and ground envi- the so-called JAL Law was passed by the Japa- ronments, and the highly competitive deregulated nese government and, on October 1 of the same business environment have required JAL to un- year, it provided half of the new company’s capi- dertake a thorough review of its human resources tal investment. Government support continued training and productivity By 1994, JAL had initi- until November 18, 1987, at which time the gov- ated massive cost-cutting measures by reducing ernment sold its 34.5 percent stake and JAL be- its full-time workforce by nearly 4,300 and by came a fully privatized company. hiring, on a limited contract basis, part-time non- During its initial start-up phase, JAL flights op- Japanese flight attendants. Another strategy em- erated only on domestic routes. On February 2, ployed by JAL to cope with the highly competitive 1954, the first international route was inaugurated business environment was to use its low-cost sub- between Tokyo, Honolulu, and San Francisco. sidiaries: JAL Express (JEX) for domestic flights Six years later, on August 12, 1960, JAL entered and JAL-ways for international flights. the jet age when a DC8–32 made its inaugural In June 1998, Isao Kaneko became the first non-stop flight between Tokyo and San Francisco. JAL president and chief executive officer to ad- JAL’s international route expansion continued the vance from the labour management division, thus following year with the introduction of a trans- signifying a major change in the selection of JAL polar route which linked Tokyo, Anchorage, Paris leaders who have traditionally come from the and London. Five years later, the Tokyo-San Fran- sales and corporate planning departments. cisco flights were extended to New York. From 1970 forward, JAL remained positioned Further reading with the most technologically advanced aircraft to meet the challenges of both domestic and in- Japan Airlines (1999) A More Competitive JAL Group, ternational competition. During the decade-long Tokyo: Japan Airlines. recession of the 1990s in Japan, as well as in the Norris, G. and Wagner, M. (1996) Boeing 777, Osceola, rest of Asia, its revenues steadily eroded. Moreo- WI: Motorbooks International. ver, the deregulation of the aviation industry in Orlady H.W. and Orlady L. (1999) Human Factors in Japan resulted in greater domestic competition Multi-Crew Flight Operations, Aldershot: Ashgate. with the creation of two new domestic airlines in Ujimoto, K.V (1997) “Changes, Challenges, and Japan. Subsequently Japan’s aviation laws were Choices in the Japanese Aviation Industry: The revised on February 1, 2000 and this resulted in Development of Crew Resource Management in Japan Association of Corporate Executives 211

Japan Airlines,” in H.Millward and J.Morrison Tax Policy; Committee on Public Administration: (eds), Japan at Century’s End, Halifax: Fernwood, Economy; Committee on Social Security Re- 150–60. forms; Committee on Political Affairs; Commit- Yamamori, H. (1993) “Keeping CRM is Keeping the tee on Judiciary Reforms; Committee on Flight Safe,” in E.L.Wiener, B.G.Kanki and Education; Committee on Environment, Re- R.L.Helmreich (eds), Cockpit Resources Management, sources and Energy; Committee on Issues Con- New York: Academic Press, 399–420. cerning Metropolitan Areas; Committee on Foreign Relations and National Security Issues; VICTOR K.UJIMOTO Committee on Socioeconomic Principles for the Twenty-First Century; Committee on E- Japan Association of Corporate Economy; and Committee on New Technology Executives Strategies. As is evident from the committee names, the interests of the association include but Founded in 1946 by eighty-three business lead- also extend well beyond business and economic ers seeking to contribute to the reconstruction of matters and address a host of important political the economy the Keizai Doyukai (Japan Associa- and social matters. tion of Corporate Executives) is distinctive among A second group of committees within the as- business associations in Japan. Its membership sociation fall under the title, International Affairs in 2000 included 1,500 senior executives from Committees. The groups, of which there are five, over 900 large corporations. A distinguishing focus on geographical regions and their relation characteristic of Keizai Doyukai is that members to Japan. Finally a third grouping of activities falls are expected to participate in association affairs under the title of Discussion and Study Programs. as individuals, letting go of their corporate iden- These include the following: Industrial Discus- tities. A second characteristic is that members are sion Groups; Seminar on Current Topics; Glo- expected to adopt a far-reaching and long-term bal Forum; Committee for the Future; Senior perspective in addressing issues that span a range Executives’ Discussion Group; and Discussion of political, economic and social matters. In striv- Group of New Members. ing to maintain an independent position with the Keizai Doyukai has been criticized as being larger business and social community Keizai elitist and exclusive. It has also been criticized as Doyukai conducts its own in-depth studies, re- a “harmonizing voice” in support of Keidanren. search projects and discussions. It also actively There is no doubt that its membership, comprised pursues a dialogue with government officials, la- as it is of very senior executives from the largest bor organizations, political parties and other busi- corporations, reads like a Who’s Who list. It is ness organizations. It is one of the most influential also true that a comparison of the membership business organizations in Japan and, along with of the two organizations has a high degree of over- the Japan Chamber of Commerce and Industry lap. At the same time, the association has taken (Nihon Shoko Kaigisho), the Japan Federation positions at variance with Keidanren on a number of Employer’s Associations (Nikkeiren), and the of matters. Perhaps more importantly Keizai Federation of Economic Organizations Doyukai, with its unique purpose and perspec- (Keidanren), is one of the four “voices of busi- tive, provides a venue where individuals have ness” in Japanese society. room to speak their own minds. Whether those For purpose of research, discussion and coor- minds have become inextricably entangled with dination, the association is structured into three the corporation mindset from whence they come basic areas. Policy committees address a host of will, in all likelihood, remain a point of debate. primarily domestic matters. As of 2001, there What is not debatable is the large influence that were fifteen standing committees. These were as the association wields within the Japanese busi- follows: Committee on Corporate Management; ness community. Committee on Employment Issues; Committee on Financial Markets; Committee on Fiscal and ALLAN BIRD 212 Japan Automobile Manufacturers Association

Japan Automobile Manufacturers try in Japan since its inception. JAMA opened Association branches abroad to deal with these matters: the Paris office was opened in 1969; the New York The Japan Automobile Manufacturers Associa- office was opened in 1970; the Washington of- tion, Inc. (JAMA) or Jikoukai was established on fice was opened in 1976; Japan Automobile April 3, 1967, with the objectives of encouraging Manufacturers Association of Canada was the development of the Japanese automotive opened in 1986; and the European office was industry and contributing to the progress of so- opened in Brussels in 1990. A commerce mis- ciety (the first Japan-US automobile meeting was sion was dispatched to the Association of South- held in the same year). The former Automotive east Asian Nations (ASEAN) in 1995 in Industrial Association and Midget Motor Manu- response to the advance of Japanese manufactur- facturers’ Association of Japan were merged into ers into ASEAN. In 1996 a Singapore office was one association, Jikoukai. Since then the organi- opened. zation has been the leading association of the JAMA has standing general committees and automobile industry in Japan. special vehicle committees. The general commit- The purpose of founding JAMA was to en- tees consist of the technical administration com- able the industry to address a host of issues as a mittee, the safety and environmental technology unified entity The impending liberalization of committee, environment committee, the traffic capital was a particularly pressing matter, and as affairs committee, the distribution committee, the JAMA’s activities would also include the promo- taxation committee, the international affairs com- tion of exports, issues of traffic safety exhaust mittee, the parts & materials committee and the emissions and international trade were also points electronic information exchange committee, and which needed to be considered. these committees deal with various issues in the The new association’s membership did not in- automobile industry. The special vehicle commit- clude all the members of the two previous or- tees consist of the mini-vehicle committee, the mo- ganizations. Many members of the Midget Motor torcycle committee, and the heavy vehicle Manufacturers’ Association of Japan entered into committee. These committees deal with the mat- a new cooperative relationship with JAMA, while ters based on type of car, such as exhaust emis- other companies, especially chassis manufactur- sion standards. ers actually merged into JAMA. JAMA has an administration under the super- JAMA consisted of the fifteen founding mem- vision of a vice-chairman and associates. The ad- ber manufacturers: Aichi Kikai, Isuzu, Kawasaki, ministration is divided into the administration Suzuki, Daihatsu, Toyota, Toyo Kogyo, Nissan, department, the planning and coordination of- Nissan Diesel, Hino, Fuji Heavy Industries, fice, the traffic affairs department, the business Bridgestone Cycle, Honda. Mitsubishi Heavy In- affairs department, the technical department, en- dustries, and Yamaha. The first chairman of vironment department and the international de- JAMA was Katsuji Kawamata, president of Nissan partment. The administration regularly issues Motor Co., who had also served as chairman of several publications, provides information, helps the Automotive Industrial Association, JAMA’s to adjust different opinions in the industry holds predecessor. Since then, either the chief execu- international conferences, helps negotiations and tives of Toyota or Nissan have been elected as carries out industry research. chairman. Some elected executives of the thir- JAMA’s activities under the general commit- teen domestic motorcycle and automobile mem- tees and the administration were: (1) research ber manufactures have been installed in the board projects related to production, distribution, trade of directors, which is comprised of a chairman, and consumption of automobiles; (2) the ration- five vice-chairmen, a president, an executive vice- alization of automobile production, setting and president and a secretary general. promoting policies concerning improvements in JAMA has been the contact organization remanufacturing techniques; (3) setting and pro- garding the export, overseas developments and moting policies concerning the automobile trade the internationalization of the automobile indus- and international exchanges; and (4) other Japan Automobile Manufacturers Association 213 projects in order to achieve its objectives. Con- tal measures concerning exhaust emission stand- cretely, JAMA carries out the following: ards, recycling, and waste disposal has received increasing attention. In addition, taking steps to • production of yearly quarterly monthly and cope with safety problems has recently taken on other publications to provide information increased importance. JAMA seeks to shape these about the automobile industry and interna- developments in ways that lead to automotive tional trade; innovations being in harmony with society. • provision information about traffic safety fuel In response to increasing concerns about vari- reduction, environmental preservation, and ous environmental issues, Japanese automobile so on; manufacturers have sought to solve these issues • participation in international conferences re- by introducing new technologies such as electron- lated to automobiles; ics. They also conduct research and develop new • joint research and information exchanges materials for automobile manufacture and also about automobiles, auto parts and auto ma- develop alternative energy sources. For instance, terials, as well as global environment issues Japanese manufacturers are experimenting with with various organizations in many coun- new perspectives such as establishing internal or- tries; ganizations to deal exclusively with specific is- • cooperation in the attainment of international sues and developing charters for comprehensive agreements regarding various automobile environmental action. Their objective is to carry standards such as those relating to safety and out decisive, effective measures across the spec- the environment; trum, from development and design, through • research in order to set future roles in the manufacturing and sales, to the eventual scrap- automobile industry and to set future direc- ping and recycling of their products. tions in international society; In this context, JAMA established forums in • opinion adjustment concerning global envi- its organization to comprehensively assess and ronment problems in the broader industrial address these issues. Since the 1970s JAMA has world as a whole; promoted collection and salvage of discarded au- • issuance of position statements on behalf of tomobiles. Since the late 1980s it has dealt with the automobile industry in Japan; global pollution of the environment, such as • compiliation of statistical data related to the greenhouse gas emissions. Moreover, in 1994 an automobile industry in Japan and the an- environment department was established to ad- nouncement of the result of statistical analy- dress environmental problems on behalf of the ses; automobile industry. The organization also con- • research and investigations related to the au- siders traffic safety owing to an increase in the tomobile industry in Japan, and the publica- number of traffic accidents. While various meas- tion of research results. ures to promote traffic safety have been introduced by the government, requiring the In addition to these activities, JAMA set up a meet- cooperation of vehicle users with respect to, for ing for the study of a reduction in working hours example, the mandatory use of seatbelts and hel- in 1992 in order to deal with the problems of mets, Japanese manufacturers have also been ac- fatigue caused by overwork and economic stag- tively pursuing programs to ensure traffic safety. nation. Consequently the application for employ- The JAMA action plan which is now being ment adjustment subsidies started in 1993. Since carried out demands further improvements in au- the early 1990s JAMA has dealt with environ- tomobile safety features, new traffic safety cam- mental and safety matters, and has promoted ex- paigns and educational activities, improvement change and discussion of different opinions with of driving conditions such as road infrastructure American and European makers about supply- development, and close government-industry co- ing materials to Japanese makers. operation on traffic accident analysis through the With the improvement of automobiles’ effi- Institute for Traffic Accident Research and Data ciency and reliability the progress of environmen- Analysis, founded jointly by the government and 214 Japan Automobile Manufacturers Association public sectors in 1992. JAMA has carried out its JAMA and MEMA, was held in Las Vegas for activities broadly: it sets up various kinds of new the purpose of promoting negotiations between committees and meetings regarding traffic safety US parts makers and Japanese automakers. Five implements various traffic safety campaigns, stud- meetings had been held as of 1995. In 1991 a ies the actual nature of vehicle uses, prepares and report on “Replacement Parts for Japanese Vehi- publishes statistical data, and conducts public re- cles in the US“was released, and in 1993 a meet- lations to deepen understanding of the automo- ing was held in Tokyo for the purpose of bile industry. promoting closer cooperation between the US While economic internationalization is pro- and Japanese auto industries. In the meeting, gressing, Japanese automobile companies have de- eleven Japanese automakers announced volun- veloped export activities to various countries as tary plans to purchase US-made parts. These well as improving their local production in those meetings have led to the implementation of spe- countries. Since the 1960s, Japanese automobile cific initiatives aimed at establishing closer busi- manufacturers have been asked for assistance in ness ties between Japanese manufacturers and US the import of materials and the development of parts suppliers, including joint committees, the self-subsistence capabilities in several countries. publication of materials explaining the “design- To cope with these requests, JAMA assists Japa- in” process of Japanese manufacturers, the com- nese makers and foreign makers in mutual un- pilation of industry contact lists, and the derstanding at the private sector level by offering organization of special events designed to enhance a venue for the exchange of opinions and afford- cooperation and mutual awareness. ing opportunities to negotiate with one another. In Europe, JAMA-mediated negotiations have At the government level in Japan and the led to adjustments between Japan and Europe. United States, the Japan-US automobile meeting JAMA held Japan-UK automobile meetings on was held in 1967; two Japan-US summit meet- twenty-three occasions from 1975 to 1992, and ings took place in 1992; and the Japan-US auto held a meeting with European automobile manu- parts meeting was held in 1993. From 1981 to facturers in Paris in 1985. In the late 1980s, the 1994 voluntary export restraints (VER) for the rapid advance of Japanese manufacturers into the US market were carried out. At the private sec- European market brought about problems con- tor level, however, significant efforts have also cerning the rate of self-subsistence in the field. been made to resolve automobile trade issues For these kinds of situations, JAMA has promoted between Japan and the United States. JAMA also adjustments and negotiations between Japan and serves as a mediator between Japan and the Europe at the private sector level. United States at the private sector level. Japanese manufacturers are actively promot- In terms of local parts procurement, Japanese ing industry-level cooperation to obtain local makers are actively promoting industry-level co- parts. In 1995 JAMA held a joint conference with operation. In 1977, and also in 1980, JAMA dis- the European Automotive Components and patched a mission to the United States to promote Equipment Industries Association (CLEPA) in the purchase of auto parts. In 1987, the first JAMA- Paris, where decision makers from eighty selected MEMA Liaison Committee Meeting was held in European suppliers met with representatives of Tokyo to exchange opinions concerning the pur- Japanese manufacturers to explore potential busi- chase of US-made auto parts. Fifteen meetings had ness opportunities. Japanese manufacturers are been held as of 1995. A series of general also working hard to expand business ties with conferences and discussion meetings organized by automotive parts firms in Canada, Europe, Asia the Japan Automobile Manufacturers Association and Australia with JAMA’s assistance. Some of (JAMA), the US Motor and Equipment their initiatives have been outlined in the JAMA Manufacturers Association (MEMA) were first Action Plan for International Cooperation re- held in 1987 for the purpose of promoting US leased by the Japan Automobile Manufacturers auto parts to Japanese manufacturers. Association in June 1995. In 1990 the first One-on-One Auto Parts Busi- ness Development Meeting, co-sponsored by MASANORI YASUMOTO Japan Development Bank 215

Japan Chamber of Commerce and and are prohibited from engaging in political ac- Industry tivities. They are also prohibited from for-profit activities. The local chambers are independent The Japan Chamber of Commerce and Industry and self-governing; they do not operate under (JCCI) or Nihon Shoko Kaigisho is the the direction of the JCCI. overarching association to which all local and JCCI supports about 5,500 business consult- regional chambers belong. Its membership con- ants who are located in the local chambers to sists of the 523 (as of 1999) local chambers of provide counsel and guidance to small and me- commerce, whose collective member firms total dium-sized businesses on a host of matters in- 1.64 million. It operates as the primary represen- cluding advances and innovation in management tative of the concerns of small and medium-size practices, financial issues, and tax matters. In sup- enterprises throughout the country. It is, in many port of these consultants, JCCI carries out vari- respects, the counterpart of Keidanren, which ous research projects and field studies which it represents primarily the interests of large corpo- disseminates to the local chapters. rations. JCCI coordinates discussion among lo- JCCI also works to assist business members cal chambers and formulates concerns and of the local chambers in recruiting and training recommendations that it then proposes to gov- skilled employees. It offers standardized certifi- ernment ministries and agencies. It also assists in cation tests in English, bookkeeping and account- the implementation of initiatives growing out of ing, word processing, salesmanship and those recommendations. Other functions of JCCI abacus-based calculation. Annually JCCI tests include the dissemination of information on gov- roughly two million people. ernment policies and programs affecting cham- Beginning in the 1980s and expanding rap- ber members, human resource training and idly in the 1990s, JCCI has worked with the lo- development programs, and information sharing cal chambers to enhance its services in helping and coordination of joint efforts with business Japanese firms find foreign partners and vice organizations outside of Japan with similar inter- versa. In 2000, JCCI handled over 15,000 inquir- ests and concerns. It is one of the most influen- ies from abroad regarding potential trade oppor- tial business organizations in Japan and, along tunities with business outside Japan. In support with the Japan Association of Corporate Ex- of its international activities, it published the quar- ecutives (Keizai Doyukai), the Japan Federation terly JCCI Business Guide. It also provides assist- of Employers’ Associations (Nikkeiren), and the ance by helping local chambers in the issuance Federation of Economic Organizations of certificates of origin, of which over 1 million (Keidanren), is one of the four “voices of busi- are issued each year. As small and medium-size ness” in Japanese society. Japanese firms have expanded their activities into The first local chambers of commerce and in- foreign markets, the role of JCCI within the larger dustry in Japan were established in Tokyo, Osaka Japanese business and economic community has and Kobe in 1878. In the next few years, enter- grown, as has its influence. prises in other cities followed suit. Fourteen years ALLAN BIRD after the first local chambers were established, fifteen of them met in Tokyo to establish the Ja- pan Chamber of Commerce and Industry. Japan Development Bank Local chambers in Japan are designated as “corporations with special status” and operate The Japan Development Bank (JDB) was char- under the Chambers of Commerce Act. Under tered in 1951 and is the modern incarnation of this special status, local chamber membership is the many specialized public policy-based banks open to companies both large and small. How- which were created at the end of the nineteenth ever, the bulk of active chamber membership is and beginning of the twentieth century to pro- among small and medium-size firms. Chambers mote economic development and implement the are also required to maintain political neutrality policies of the Ministry of Finance under the long 216 Japan Development Bank tenure of the autocratic Meiji Finance Minister, nity for these institutions to reap considerable Matsukata Masayoshi. main bank rewards with a lesser commitment of The JDB’s most immediate predecessor was their own funds to the client firm (see main the Reconstruction Finance Bank (RFB) (1947– bank system). JDB as a government-owned in- 9) which was the only financial institution in the stitution is prohibited from taking deposits or immediate postwar period capable of helping to serving as a main bank. revive key industries such as the coal, iron and Over the years the national policy mission of steel, electric power, and chemical industries. The JDB, as determined in an inter-ministerial gov- chief failing of the FRB was that, because its fund- ernment agency committee, changed with the de- ing came directly from the Bank of Japan, repay- velopment of Japan’s economy Initially in the ments of loans to the FRB were at interest rates early 1950s JDB provided funding for reconstruc- far below the hyperinflation rate of the postwar tion of the electric power, coal mining, ocean ship- period. In effect, the loans made by the FRB be- ping, and iron and steel industries. In the late came a form of government grants to private in- 1950s to the early 1960s the emphasis shifted to dustry outside the scrutiny of the Allied catching up with advanced countries in the syn- occupation forces, or, for that matter, parliamen- thetic fiber, oil refinery nuclear power generation, tary authorities. machinery and electronics industries. By the late The problems of the FRB reflected the fact 1960s and into the early 1970s policy emphasis that postwar reconstruction had to be placed on was directed towards social welfare and environ- a more sound financial footing which would pro- mental considerations in urban and residential vide long-term credits to industry. The creation land development, pollution prevention, welfare of JDB, as well as the chartering of long-term facilities, private railroads, and further develop- credit banks in 1952 (see banking industry), ment of new technology. In the late 1970s and were designed to address this need through their early 1980s energy policy received priority with authority to provide intermediate long-term funds lending directed towards energy conservation and by the issuance of five-year debentures. In JDB’s the development of alternative energy sources. case, most of their debentures in the early years In the late 1980s and early 1990s JDB’s key mis- were purchased by the Ministry of Finance’s Fis- sion was directed towards promoting the struc- cal Investment Loan Program (FILP) whose main tural adjustment of industry and industrial source of funds was from deposits from the postal research and development. savings system, as well as postal pension schemes Lending policy in the present period is tar- and government pension plans. geted towards livelihood and lifestyle, the im- The chief mechanism in directing funding for provement of living standards, social targeted industries was by the so-called “cow- welfare-related facilities, regional revitalization, bell effect” in which JDB led the private sector urban transportation, information and telecom- banks to join in lending to the targeted industry munications, and the fostering of new businesses. and/or specific firms. Although it was rarely the The name of the bank has also been changed to majority supplier of funds within any given syn- the Development Bank of Japan (DBJ). This dicate of loans for a particular enterprise, JDB change in part reflects the bank’s assumption of was able to organize support as a result not only remnants of the Hokkaido Takushoku Bank, a of its diligent project appraisal and credit analy- failed city bank with a strong regional base in sis of the enterprise, but also because of an im- northern Japan. This bank’s demise was due to plicit government guarantee of JDB’s its extensive exposure in non-performing real es- policy-based initiatives and the ability of the tate loans, dating back to the bubble period of Ministry of Finance (MOF) to bestow upon co- the late 1980s. It is a testament to the due dili- operative banks favorable consideration in regu- gence of JDB that it suffered only one-tenth the latory matters. Of equal, if not greater, rate of non-performing loans that still continue importance to the participation of private sector to plague the entire private commercial banking banks in the lending syndicate was the opportu- sector. Japan Federation of Economic Organizations 217

Further reading guides, and numerous other materials to assist foreign business executives in doing business in Scher, M.J. (1996) Japanese Interfirm Networks and Their and exporting to Japan. JETRO organizes large Main Banks, London: Macmillan and New York: trade exhibitions on behalf of foreign companies St. Martin’s Press. in such areas as healthcare and environmental MARK J.SCHER equipment in Japan. Product import specialists in the information technology and consumer products sectors are sent to overseas markets for Japan External Trade Organization individual consultations with companies regarding export potential for the Japanese market. Japan External Trade Organization (JETRO) or JETRO also organizes seminars on Japan’s Nihon Boeki Shinkokai, is comprised of JETRO economy business trends and assists foreign busi- headquarters in Tokyo, JETRO Osaka, thirty- ness development missions. In addition, JETRO six local offices throughout Japan, and eighty of- maintains extensive business libraries in Tokyo, fices in fifty-eight countries. JETRO is Japan’s and in overseas offices, which are open to busi- official trade promotion organization. Originally ness executives. JETRO’s presence on the established in 1951 as the Japan Export Research internet includes regularly updated market re- Trade Organization, its original purpose was to ports, background information, current articles collect and distribute information on foreign from periodicals, and instructions for participa- markets to Japanese manufacturers and export- tion in JETRO programs. ers. In 1954, the institution was restructured into In the United States, JETRO staffs regional the Japan External Trade Recovery Organization offices in New York, Chicago, Los Angeles, San with capabilities to display Japanese products at Francisco, Houston, Denver and Atlanta. Addi- trade exhibitions, providing overseas market re- tionally “Senior Trade Advisors” are assigned to search and providing a trade inquiry service. At work directly with state trade officials in a number this time the Ministry of International Trade of states, and with individual companies to facili- and Industry (MITI) began to oversee JETRO’s tate local efforts to trade with Japan. activities. JETRO attained its current status as a JETRO merged with the Institute of Devel- public corporation in 1958 when a law was passed oping Economies (IDE) in July 1998. IDE’s fo- that officially outlined its functions and its opera- cus on economic research on the developing tional framework. As a result of this legal transi- economies of Asia complements JETRO’s exten- tion, 25 July 1958 is said to be the year JETRO sive global business development activities. was established. RALPH INFORZATO JETRO’s role changed as Japan’s global competitiveness increased. In the early 1980s, JETRO began to implement a variety of programs Japan Federation of Economic toencourage imports and expand foreign invest- Organizations ment in Japan. In 1985, the Made in USA Fair was organized in Nagoya along with other exhi- The Japan Federation of Economic Organizations bitions in Tokyo, Yokohama, and Kitakyushu. In or Keidanren (an abbreviation of its name in Japa- 1993, JETRO’s first Business Support Center was nese, Keizai Dantai Rengokai) was established on established in Tokyo to be followed by centers in August 16, 1946. Its membership as of 2001 Yokohama, Nagoya, Osaka, Kobe, and Fukuoka. stands at 1,007 firms (sixty-five of these firms are These facilities function as temporary offices for non-Japanese) and 118 industry and trade groups foreign companies needing support while doing representing all of Japan’s key industrial sectors. market research and establishing contacts in Ja- Keidanen’s primary purpose is to coordinate the pan. discussion and subsequent resolution of major JETRO publishes extensive English periodi- problems confronting the Japanese business com- cals, marketing reports, fact books, business munity whether domestically or abroad. Given 218 Japan Federation of Employers’ Associations

its large size and broad scope of purpose, its work nese economy became increasingly influential is structured around committees that focus on within the world economy especially during the specific industry sectors as well as particular top- 1980s, Keidanren has sought to develop ties with ics. It is one of the most influential business orga- influential business and economic organizations nizations in Japan and, along with the Japan outside of Japan. At the same time, it has increased Association of Corporate Executives (Keizai its efforts to build closer relationships with vari- Doyukai), the Japan Federation of Employers’ ous groups including labor, consumer and spe- Associations (Nikkeiren), and the Japan Cham- cial interest non-profit organizations domestically. ber of Commerce and Industry (Nihon Shoko ALLAN BIRD Kaigisho), is one of the four “voices of business” in Japanese society. Keidanren was established as part of the ef- Japan Federation of Employers’ fort to reorganize the business sector of Japanese Associations society in the postwar era. As its influence grew, in 1952 it absorbed the Japanese Industrial Coun- The Japan Federation of Employers’ Associations cil, in a move that increased its membership and or Nihon Keieisha Dantai Renmei, more com- expanded its influence. In addition to its close monly known as Nikkeiren, was established on interaction with Japanese government bureauc- April 12, 1948. Founded in a context of frequent racy it was also active in the political realm and is labor disputes, Nikkeiren was launched to pro- credited with playing an important role in the mote solidarity among employers and better re- creation of the Liberal Democratic Party, which lationships between labor and management. One was established in 1955. Its participation in the of Japan’s four key economic organizations and political arena was significant until 1975, when identified as part of the zaikai, Nikkeiren has his- political contributions became more tightly regu- torically wielded considerable clout with the gov- lated. Its influence has also waned as Japanese ernment over the postwar period. The companies have become global players and the organization’s membership is comprised of sixty influence of non-Japanese firms within Japan has industry associations and forty-seven prefectural grown. employers’ associations. Member associations Leadership of the organization is drawn from represent the whole range of industries. among the largest and most influential companies in Japan. Among its past chairmen are such business leaders as Toshio Dokoh (CEO of both Activities Toshiba and Ishikawajima-Harima Heavy Indus- tries) and Akio Morita (CEO of Sony). In addi- Nikkeiren’s activities include the articulation of tion to position papers and policy statements, policy proposals, requests to the government, and Keidanren also develops charters which it encour- position statements based on the conclusions ages member firms and organizations to sign. A reached at regular meetings and on findings from recent example is the Keidanren Global Environ- survey research. The organization presents these ment Charter, which sets forth guidelines and to member organizations and corporate employ- standards for environmentally responsible eco- ers, the government, political parties, and related nomic activity. The organization is involved in ministries and agencies and works to have these an array of public relations efforts, including semi- policies implemented. Nikkeiren also sends rep- nars and conferences. It also publishes position resentatives to government deliberation councils papers and several periodical and occasional pub- to ensure that managerial views are reflected in lications. This range of activities is directed at the development of government policy The or- both gathering and shaping public opinion on ganization furthermore publishes a number of pe- matters pertaining to business and the economy riod icals, including a weekly newsletter, the in Japan. Nikkeiren Times, and a monthly journal, Monthly As Japanese companies have become more ac- Keieisha. tive within the world economy and as the Japa- Nikkeiren has been well represented on the Japan Federation of Employers’ Associations 219

government’s Labor Legislation Council. The or- and the other business organizations—arguing that ganization also maintains close ties with the Min- national economic viability was contingent on a istry of Labor and the Ministry of Health and stable political situation—were furthermore very Welfare, and has had an influential voice in the influential in pushing for a merger between the selection of the Labor Minister. Nikkeiren fur- Liberal and Democratic Parties to form the Lib- thermore maintains close ties to the Labor Sub- eral Democratic Party (LDP) in 1955. committee of the LDP’s Policy Committee and Since the 1960s, Nikkeiren’s emphasis has fo- to the Social Welfare Committees of both houses cused more on the promotion of cooperation be- in the Diet. The association holds frequent infor- tween labor and management. In 1974, when mal meetings with government officials and poli- Japan was confronted with economic difficulties ticians as well. arising from the first oil crisis, for example, Since 1951, Nikkeiren has served as the offi- Nikkeiren established a task force to study reper- cial voice of Japanese employers in the Interna- cussions in the area of labor relations. Nikkeiren’s tional Labor Organization (ILO) and one of efforts since have focused in particular on hu- Nikkeiren’s Policy Board members serves simul- man resource development, management ethics, taneously as a member of the ILO Governing orderly and harmonious relationships within cor- Body. Nikkeiren has also actively participated in porations, and social and economic progress the activities of the International Organization through corporate activities. The organization has of Employers (IOE) and taken part in the work been particularly active as a voice in articulating of the Organization for Economic Co-operation management concerns in regard to changes in and Development (OECD) through the activi- the employment, personnel, social security and ties of the OECD’s Business and Industry Advi- education systems. sory Committee (BIAC). In addition, Nikkeiren’s International Cooperation Center furthers hu- Spring labor negotiations man resource development abroad by bringing managers from overseas for training in Japan. Every year, Nikkeiren’s Committee for the Study of Labor issues a report in January examining the current Japanese economy and labor issues. Evolution of role This report then serves as the basis for spring In its early years, Nikkeiren was regarded as the wage negotiations, also known as the “spring la- most powerful and unified of Japan’s four main bor offensive” or shunto. Major changes in the business organizations. This unity came about industrial and employment structures, record high because of greater agreement in the business com- unemployment rates, and a widening of the gap munity in the 1950s and 1960s over the need to between strong and weak firms within particular confront labor than on other aspects of economic industries have changed the character and needs activities. Nikkeiren was highly sensitive to the of labor negotiations since the latter 1990s, how- activities of those political parties supporting la- ever. bor, and especially to the activities of the Com- Management and labor in individual compa- munist Party The association was then known nies settle labor negotiations and wage agree- as “fighting Nikkeiren” since it focused its efforts ments. Yet, in the past, unions demanded on addressing labor offensives. identical wage increases and simultaneous re- Leaders of Nikkeiren helped play a role in the plies from management. In a context of eco- 1955 establishment of the Economic Reconstruc- nomic growth, long-term employment within a tion Council, an organization that pooled politi- single firm, and a seniority system of promo- cal contributions from zaikai. This council was tions, this strategy seemed to work well. Since intended to strengthen the zaikai’s position vis-à- the 1990s, however corporate earnings have vis the leftist movement while at the same time come to vary widely even within the same indus- helping to prevent the political scandals often aris- try. As a result, it has become increasingly diffi- ing out of close relationships between individual cult for industry unions to make unified companies and individual politicians. Nikkeiren demands. At the same time, employers are 220 Japan Federation of Employers’ Associations switching to pay systems that emphasize merit clining birthrate and aging population will also over seniority. As a result of these developments, change Japan’s labor force participation rate in the traditional negotiating practice between the future and thereby affect labor supply trends. Nikkeiren and labor unions has become increas- In response to concerns over the tendency to- ingly outdated and the need for annual labor ne- wards declining consumption that typically ac- gotiations questioned. In twenty-first century companies a declining population, Nikkeiren has Japan, it is no longer as desirable or feasible to spoken out in favor of relaxed immigration laws. work towards the adoption of uniform wage and Finally a number of corporate and manage- working conditions across companies or indus- ment scandals in the 1990s raised the profile of tries. business ethics in Nikkeiren’s activities. The or- Nikkeiren’s position in the 2001 spring labor ganization has advocated the establishment of negotiations reflected adjustment to this changed higher standards of behavior. At the same time, environment. Opposing uniform wage increases, however, Nikkeiren has expressed alarm at rul- Nikkeiren called instead for individual compa- ings in 2000 concerning the responsibility of cor- nies to raise their labor expenses to appropriate porate directors for failure to carry out proper levels. The organization also proposed that work risk management, seeing the burden of responsi- sharing should be introduced as an issue in the bility placed on Japanese management as exces- negotiations and that priority should be placed sive. on stable employment over wage increases. Merger with Keidanren Challenges to labor-management relations in For many years, Nikkeiren and the Japan Fed- recent years eration of Economic Organizations, Keidanren, Other dramatic changes in the economic and busi- proved complementary Although there was con- ness environment in the 1990s posed additional siderable overlap in memberships, the division challenges to labor-management relations. The of labor was fairly clear: Nikkeiren was the lead- prolonged economic downturn led companies to ing player in shaping corporate policies regard- rectify high cost structures through cuts in em- ing labor and wages while Keidanren focused on ployment. Growing labor mobility arising from other business issues. In the 1990s, however, the change in industrial structure, corporate re- Keidanren became increasingly concerned with structuring, diversification in the modes of em- social security and social welfare issues such as ployment and changing employment expectations pension reform and medical insurance programs, have also been an outgrowth of the economic areas that had traditionally been the domain of downturn. Notably the number of temporary Nikkeiren. The increasing overlap in issue area employees has grown steadily since the introduc- focus, combined with the declining role for tion of the Manpower Dispatching Business Law Nikkeiren in annual labor negotiations and calls in 1999. These changes have spurred Nikkeiren for restructuring and streamlining of business or- to work together with Rengo (the Japanese Trade ganizations in line with similar trends in corpo- Union Confederation) to determine what kinds rate Japan, eventually resulted in pressure for the of labor-management relations might best serve two organizations to merge. In September 2000, Japan in this transitional period. Nikkeiren and Keidanren announced their plans Nikkeiren’s activities have focused increasingly to create a more unified voice to articulate Japa- on working to expand skill training to enhance nese business interests. The merger, to be car- employability The organization is engaged in ried out in 2002, will result in a new organization building an information network to enhance labor called the Japan Business Federation. mobility and enable companies to better meet em- Some regional employers’ associations have ployment needs. In addition, Nikkeiren advocates expressed opposition to the merger between deregulation in the economic and labor fields and Keidanren and Nikkeiren. Nikkeiren member- the establishment of private sector leadership in ship at the local employers’ association level in- the economy as a means of creating jobs. A de- cludes some small and medium-sized firms Japan, Inc. 221

whose interests have not traditionally been rep- ernment and business, with relations rather like resented in Keidanren. Keidanren’s primary that in a conglomerate, Japan, Incorporated, members tend to be large companies with head- whose businesses were free to compete within quarters located in Tokyo. Local employers’ as- the broad limits of common overall goals and sociations are also wary of the trend towards consensus. Audiences still at that time had little centralization of power in Tokyo and fear that knowledge of Japan’s economy and still only region-specific concerns may become increas- marginal interest. “Japan, Inc.” was a useful way ingly overshadowed by national or Tokyo- of describing Japan’s economic management sys- centered concerns. tem to naive audiences. The different legal status of the two business As Japan’s industrial growth continued and organizations also complicates the merger proc- as trade frictions with the United States intensi- ess. While Nikkeiren operated as a voluntary fied, the phrase began to take on a more sinister body Keidanren operated as an incorporated as- tone, and became a way of encapsulating what sociation. To carry out the merger, Nikkeiren will was seen as a conspiratorial Japan in which busi- be dissolved and then absorbed by Keidanren, a ness entities marched in unison to instructions process that to some symbolizes the likely over- from an all-powerful central government. This shadowing of the Nikkeiren elements by view was very much reinforced as some US aca- Keidanren elements in the new organization. The demic studies provided legitimacy to the view that merger is expected to have some clear positive the Ministry of International Trade and Indus- benefits, however. In addition to bringing a po- try (MITI) was the entire determinant of Japan’s tentially greater business influence over the for- industrial structure, competitive frameworks and mation of government policies and eliminating trade policy “Japan, Inc.” became the quick refer- redundancies in the respective activities of the ence to this unfair conspiracy which served to two groups, the merger is expected to lead to an explain Japan’s success. This was for business and increased volume of information available to government in the United States at least a much members. more palatable explanation for Japan’s competitive success than different levels of competence in the market place, and appealed to widely held Further reading paranoid feelings of being attacked by a sinister Chitoshi, Y. (1968) Big Business in Japanese Politics, New enemy. Haven, CT: Yale University Press. Much of the rapid and wide currency of the The Current Labor Economy in Japan (annual), Tokyo: Ja- phrase no doubt derived from a US Department pan Federation of Employers’ Associations. of Commerce publication, Japan, The Govern- Nikkeiren Position Paper (annual), Tokyo: Japan Federa- ment-Business Relationship: A Guide for the American tion of Employers’ Associations. Businessman, issued in early 1972. The Japanese translation, Kabushiki Kaisha Nippon, appeared in JENNIFER AMYX Tokyo only a few months after the US edition. The book provided a very good definition of the Japan, Inc. Japan, Inc. phrase, using the conglomerate ana- logue, and describes most positively govern- “Japan, Inc.” is a widely used phrase in referring ment-business interaction in Japan. The three to Japan’s industrial system, with a changing detailed industry case studies in the book, of meaning that reflects the changing views of computers, autos and steel, similarly give little Japan’s economy over several decades. Appar- support for the more sinister and conspiratorial ently first used in an article in Fortune magazine echoes. in the mid-1930s, the term vanished from the Even now, after so long a time, “Japan, Inc.” business vocabulary until the mid-1960s when it remains a very much used, and misused, phrase. was given currency in several speeches and ar- Perhaps it is distance that blurs complexity and ticles. It served usefully as a brief description of makes a simple (and misleading) phrase useful the generally supportive interaction between gov- to newsmen and others when speaking of Japan. 222 Japan National Railways

Unfortunately, the negative nuances of the phrase Up to then, the railways had been privately are also long-lived, serving as one measure of how owned. To create more cooperation between the little we seem to have learned about the intrica- lines as well as put government backing behind cies of Japan’s business systems. them, the National Railways Law was passed in 1906, with private railways taken over by the government in the following year. Throughout the Further reading next several decades the national railways continued to make progress in new trackage and in Kaplan, E.J. (1972) Japan, the Government-Business Rela- technical developments. Some of the develop- tionship. A Guide for the American Businessman, Wash- ments during this time were electric locomotives, ington, DC: U.S. Government Printing Office. colored signal lamps, automatic couplers for pas- Shomushohen, B. (1972). Kabushiki Kaisha Nippon, To - senger cars, ticket vending machines and auto- kyo: Simul Press. matic door openers. Japan’s first subway was introduced in Tokyo at this time, as well as a JAMES C.ABEGGLEN number of tunnels being built. In 1949, following the devastation of rail lines during the Second World War, the rail system Japan National Railways was reorganized with the creation of Japan Na- tional Railway (JNR). In the years that followed, Japan has long placed great emphasis on its rail- JNR continued to develop the nation’s rail sys- way system, believing it to be an important means tem. In 1956, the Tokaido line between Tokyo of fostering economic development. As early as and Kobe was electrified. In 1964, at the time of 1872, an opening ceremony was held for a rail the Tokyo Olympics, the Tokaido Shinkansen line running between Shimbashi, near Tokyo, and (high-speed service) line opened between Tokyo Yokohama. By 1874, service between Osaka and and Osaka. Other high-speed lines followed: Kobe began. Three years later, the service was Osaka to Okayama in 1972, Okayama to Hakata extended from Osaka to Kyoto. By 1880, rail- in 1975, Nigata to Omiya and Morioka in 1982, ways were running in the northern-most island, and Omiya to Ueno in 1985. By this time, there Hokkaido. In 1882, service opened between were five types of railway operating organizations Shimbashi and Nihombashi, and in 1889, the in Japan: JNR, local government railways, pri- Tokaido line between Shimbashi and Kobe be- vate railway companies (mintetsu), joint local gov- gan. In the same year, the Kyushu Railway Com- ernment and private railways known as the third pany began operations between Hakata and sector, and Teito Rapid Transit Authority for lo- Chitosegawa. cal commuters. The 1890s saw continued expansion of Japan’s In 1987, Japan National Railways was priva- rail system. Kyushu Railway Company opened tized. At that time, there were about 27,600 km another line from Moji to Kumamoto in 1891, of railway lines, and 345 billion passengers per the same year that Nippon Railway Company km. Freight transportation was about 21 billion began running trains between Ueno in Tokyo tons per km. The reason for the privatization was and Aomori. Japan’s first steam locomotive was JNR’s tremendous operating and accumulated produced in Kobe in 1893, with the Kyoto Elec- deficits and labor problems. At the time of priva- tric Railway opening in 1895. At the end of the tization, accumulated deficits were written off, and decade, the Kansei Railway Company line be- labor cuts were made. As a result of the privati- tween Nagoya and Osaka began. In the new cen- zation, JNR was split into six passenger compa- tury Japan continued to develop its rail system. nies, one freight company and other The Sanyo Railway Company began to operate organizations. The passenger companies were between Kobe and Shimonoseki in 1901, and the regionally based: Hokkaido, East, Central, West, Kobu Railway Company began running electric Shikoku and Kyushu. Since they were no longer and steam locomotives between Iidamachi and government-owned, National was not included Nakano from 1904. in their names. For instance, the northernmost Japan Productivity Center for Socio-Economic Development 223 regional company was named Hokkaido Japan resource-centered approach, while the latter of- Railways. ten advocate a technology-centered perspective. Additionally JPC-SED acts as a human resources development organization. Through various Further reading seminars and outreach programs, it educates managers of Japanese companies about the latest tech- Noda, M., Harada, K., Aoki, E. and Oikawa, Y. Japa- niques and trends of corporate management and nese Railway: The Establishment and Development, Rail- economics. The fees from these seminars are the way History Series, Tokyo: Nihon Keizai major source of income for JPC-SED. Conse- Shinbunsha. quently JPC-SED is not dependent financially on other organizations. ROBERT BROWN In order to propose solutions to the problems that the Japanese society and economy face, the Japan Productivity Center for JPC-SED has formed committees consisting of Socio-Economic Development leaders and experts from various fields such as management, economics, and sociology. There are fifteen committees that carry out studies and The Japan Productivity Center for Socio-Eco- surveys on issues such as social policy welfare, nomic Development (JPC-SED) is a private, non- employment, management innovation, and soci- profit tripartite association of management, ety in the information age. Although typically academics and labor circles. As its organizational long term, these committees are not permanent, mission, JPC-SED seeks to further strengthen the but change according to the issues that emerge. productivity movement in Japan and abroad. It The members of the committees disclose the re- came into being in 1994 when the Japan Produc- sults of these studies to the public in the form of tivity Center (JPG) merged with its sister organi- policy proposals. These proposals are typically zation, the Social and Economic Congress of presented to the prime minister’s cabinet, appear Japan (SECJ). Established in 1955, JPC was a in the leading mass media, and often are com- major channel for acquiring advanced manage- pared to the proposals made by Ministry of In- ment technology from the USA and Europe and ternational Trade and Industry (MITI). disseminating it throughout Japan. SECJ was es- JPC-SED disseminates its knowledge and ex- tablished in 1973 to develop a national consen- periences to overseas countries. It is the national sus by addressing social and economic representative to the Asian Productivity Organi- macro-issues. The new organization combines zation, an inter-governmental regional organiza- SECJ’s expertise in research with the productiv- tion established in 1961 to increase productivity ity techniques that JPC has developed. Although in the countries of Asia and the Pacific the Japanese government played a major role in region. Also, JPC-SED instituted the Japan the initial establishment of the two organizations, Quality Award in 1995, an annual award that it was not involved in their evolution beyond that recognizes excellence of management quality in point. companies. JPC-SED’s major role is the study and formulation of policy proposals concerning three See also: industrial efficiency movement major issues: reform of various social systems, productivity enhancement and structural economic reform, and development of the interna- Further reading tional economy balanced with conservation of the global environment. Its most significant accom- Japan Productivity Center Staff (1989), New Paradigm plishment has been its promotion of the produc- of Productivity Movement in Japan,. Portland, OR: Pro- tivity movement in Japan. A significant difference ductivity Press Inc. between JPG-SED and other similar organizations abroad is that the former employs a human GEORGIOS GIAKATIS 224 Japanese business in Africa

Japanese business in Africa the countries having a negligible presence of Japa- nese corporations. It can also be noticed that some In contrast with other regions, Japanese business of the Japanese trading and manufacturing com- have only an insignificant presence in Africa. This panies use their presence in one African country situation can be attributed to both the lackluster as a strategic position for gauging the regional economic performance of the region, and the economic trends. A case in point is that of com- physical distance between Japan and the African panies based in South Africa, Kenya and Egypt, continent. However, two significant trends can which use these strategic vantage points to gauge be noticed: the uneven presence of Japanese busi- the economic trends within the larger regions of nesses within the various African countries, and southern Africa, eastern Africa, and northern Af- the adoption of certain distinctive aspects of Japa- rica, respectively. nese management practices. In sharp contrast to the negligible presence of Japanese businesses are concentrated in a few Japanese business in Africa, it is quite common African countries, while a large number of coun- to find certain elements of the Japanese manage- tries have a negligible presence, if not a total ab- ment style practiced by both foreign affiliates and sence, of Japanese enterprises. Within the indigenous firms in various African countries. Sub-Saharan African countries, the largest This is true for both the manufacturing and serv- number of Japanese businesses and investment ice industry The use of Japanese management can be found in South Africa. In northern Af- practices can be largely attributed to the branch rica, Egypt has the largest number of Japanese offices of one international consulting company. businesses and investment. The other countries This consulting firm had previously learned the that have a relatively significant share of Japa- Japanese system of management for use in their nese presence include Kenya, Tanzania and Ethio- European division. While jointly working with pia in eastern Africa, Zambia, Namibia and their European counterparts, the firm’s African Swaziland in southern Africa, and Senegal and division consultants became interested in the Japa- the Ivory Coast in West Africa. The Japanese nese management system. This interest finally businesses found in Africa are mostly found in culminated in the adoption of the Japanese man- the natural resources, manufacturing and com- agement system into the consulting firm’s prod- mercial services sectors. Investments in natural uct portfolio. This has resulted in the wide use of resource extraction and processing are in such certain aspects of the Japanese management sys- product areas as agricultural products, copper, tem in Africa, albeit with varying levels of suc- and other precious metals. Businesses in the cess. manufacturing sector are mainly involved in The most commonly found aspects of the Japa- transport equipment, electrical machinery and nese management system are quality control sys- electrical appliance assembly and manufacturing. tems, kaizen activities to reduce waste, elements The branches of some of the more established of the just-in-time production system, factory lay- and larger Japanese trading companies domi- out changes, and multi-skill training for shopfloor nantly represent commercial businesses. workers. Adoption of the Japanese quality con- Two clear issues emerge with regard to the trol system can be found in large manufacturing uneven distribution and relatively insignificant enterprises in a number of African nations. presence of Japanese businesses in Africa. First, Clearly discernible are the quality task groups the African region is still not a favorable recipi- and the new concept that quality starts at the ent of Japanese investment. Second, business be- beginning of the production process with raw tween the region and Japanese companies is still material acquisition, rather than at the end of the conducted through international trade. The pres- production line. There are also a number of ence of branch offices of major Japanese trading manufacturers that have changed their factory companies in the capitals of many African coun- layout by introducing cells and bringing machines tries attests to the fact that Japanese business in closer together. Even though the lack of a com- Africa is still by and large at an explorative or munity of parts and components suppliers has information collection stage. This is more so for prohibited the complete adoption of the Japanese business in Australia 225 just-in-time system of production, many manu- Japanese business in Australia facturers use the kanban system to organize production activities in their factories. Against the Japan is Australia’s most important business part- background of production inefficiency and ram- ner in terms of both inward investment and over- pant wastage, many factories have found kaizen all trade. Japanese business interests in Australia to be an appealing method for reducing wastage are also substantial and represent 5 percent of and effecting incremental small changes in the Japan’s total global investment (see Japanese in- entire production process. Another aspect of the vestment patterns), making Australia the third Japanese management style that many African largest recipient of Japanese foreign direct invest- factories have found quite appealing, is the hu- ment (FDI) behind the USA and the UK. Japa- man resource management system for factory nese business in Australia has been concentrated floor workers, placing emphasis on multi-skill in agriculture, mining, automobiles and finance training. However, there has been mixed perform- with a recent growth of investment in real estate ance in the adoption of the Japanese management and tourism. system, with the emphasis on failure; generally The development of offshore operations in the performance has been very dismal. This can Australia has taken place in a series of waves. In be attributed to management failure in several the 1960s and early 1970s Japanese business in- areas: poor approach to quality issues, resistance vestment in Australia was mainly “resource seek- from middle management and the workforce, un- ing” and was focused around raw material reliable suppliers and poor quality of parts and extraction, with Australia traditionally being Ja- components, and short-term output maximization pan’s largest supplier of iron ore and coking coal. at the cost of preventive maintenance. In the 1970s “market-seeking” FDI intended to In the future, an increase in the presence of offset trade barriers saw substantial Japan in- Japanese business will largely depend on posi- vestments in the Australian automobile and elec- tive economic performance, political tranquility tronics industries with the establishment of local and a generally favorable investment climate in manufacturing operations by major Japanese com- Africa. It is also an interesting fact that in the last panies including Toyota, Nissan, NEC, Sanyo half of the 1990s there have been a number of and later Mitsubishi. These investments pre- Japanese delegations visiting a few African coun- ceded by almost a decade similar investments in tries (South Africa, Kenya, Ethiopia and Zam- the USA and Europe. Japanese business invest- bia) on fact-finding missions on the general ment in Australia from the mid-1980s to the early investment climate in Africa. Such visits may sig- 1990s witnessed a new wave of investment in nal a relative increase in economic exchanges and real estate, tourism, and services, making Aus- possibly be followed by direct investment from tralia the largest recipient of Japanese investment Japanese companies. As such, any significant pres- in these categories next to the USA. Australia ence of Japanese business in Africa will follow a also became one of the top 10 recipients of Japa- pattern in which certain favored first-in-line coun- nese finance-related investment as Japanese banks tries will act as a window from which the strate- established a succession of affiliates in Australia. gic monitoring of both national and regional Over 700 Japanese business firms operate in economic conditions and opportunities will be Australia and directly employ more than 45,000 undertaken. Nevertheless, it is quite difficult to local workers or about 0.5 percent of the project as to when there will be any significant workforce. In addition, some 180 Australian sub- Japanese investments in Africa. contractors and major suppliers to Japanese businesses employ an additional 263,000 workers, Further reading making a total of 308,000 people employed in Japanese or Japanese-related companies. This rep- Kaplinsky R. and Posthuma, A. (1994) Easternization: resents 3.7 percent of Australia’s total full-time The Spread of Japanese Management Techniques to Devel- workforce. Japanese manufacturing firms, while oping Countries, London: Frank Cass. representing only 15 percent of Japanese invest- NATHANIEL O.AGOLA ment in Australia employ 34 percent of all direct 226 Japanese business in Australia employees, highlighting the contribution of Japa- are wholly-owned subsidiaries. Since the mid- nese firms to employment in the local manufac- 1980s more than 80 percent of new Japanese busi- turing sector. Japanese business operations in nesses have been greenfield investments, of which primary industries such as mining, energy and two-thirds are wholly owned subsidiaries. Japa- agriculture involve a relatively small number of nese banks and tourism firms are overwhelmingly Japanese companies handling a large volume of (92 percent) wholly-owned, greenfield operations. exports. Conversely in secondary industries such Japanese manufacturing firms came to Aus- as manufactured goods and industrial production tralia principally to supply the Australian domes- a large number of Japanese companies handle a tic market, while financial firms came to mainly relatively small volume of exports. service their parent’s Japanese clients or other Of Japan’s nine sogo shosha (see general trad- Japanese firms in Australia. Japanese tourism ing companies) in Australia, four rank in the firms came to service the burgeoning Japanese top ten list of Australia’s exporters. Combined tourism market. Japanese manufacturing firms export revenue in 1995–6 of the nine sogo shosha rank the need to adapt to local customer require- was US$15.8 billion, representing 21 percent of ments, political stability tariff duties and energy Australia’s total merchandise exports in the same costs as the most important reasons for selecting year. Australia as an investment location (Nicholas et Almost half of all Japanese manufacturing al. 1996). firms in Australia were established before 1980, Japanese businesses in Australia have also although the last decade has witnessed a rapid adopted many of the organizational practices of growth in the number of Japanese multinational Japanese firms in Japan, including the wide ap- enterprises (MNEs) operating sales and produc- plication of work practices related to product tion facilities. The establishment of financial serv- and process technology such as quality control ices and tourism firms is much more recent and circles, kaizen, just-in-time production systems generally after 1988. and formal on-the-job training practices (Purcell Japanese financial, trading and manufacturing and Nicholas 1999). In the banking and trading firms have a long history of involvement in the sectors, which contain the highest levels of Japa- Australian economy (Purcell 1981). Most Japa- nese ownership and where the density of Japa- nese firms have pre-FDI involvement in Australia nese expatriates and Japan-related business is through representative offices or joint venture. highest, Japanese management style in Australia The beginnings of Japanese business in Australia tends to be most intense and subsidiaries more go back almost 150 years to the late Tokugawa “clone-like” in appearance. Where the ratio of period when Akiyama Teiji, the first Japanese local employees is high, such as in manufactur- trader to reside in Australia, arrived in Sydney in ing, firms tend to be much more hybrid in ap- 1850 to attend the International Exhibition and pearance, characterized by the adoption of later opened a store in Melbourne selling Japa- Japanese organizational practices on the one nese wares. The real beginnings of Japanese busi- hand but accompanied by more local labour ness in Australia, however, began in 1890 when market incentives on the other. Kanematsu Fusajiro established Kanematsu Shoten, the forerunner of the great Kanematsu See also: Japanese investment patterns; Japanese Trading Company based around the export of multinational enterprises; Japanese business in the Australian wool to Japan. By the early 1920s more USA than thirty Japanese companies operated some fifty branch offices in Australia. The group in- Further reading cluded Japan’s seven great sogo shosha including Mitsui Bussan and Mitsubishi Shoji plus a vari- Australian Institute of International Affairs (ed.) ety of smaller, more specialized operators and an (1999) Australia and Japan Beyond 2000, Proceedings ancillary group of banking, shipping and insur- of the 20th Australia-Japan Relations Symposium, ance firms including the Yokohama Specie Bank. Canberrra: AIIA. Nearly all of Japanese businesses in Australia Nicholas S., Merrett, D., Whitwell, G. and Purcell, W. Japanese business in Canada 227

(1996) “Japanese FDI in Australia in the 1990s: million Cdn and in 1998 stood at $972 million Manufacturing, Financial Services and Tourism,” Cdn. Combined, these two industries (resources) Pacific Economic Papers 256:1–24. accounted for over one-fifth of Japanese FDI in Purcell, W. (1981) “The Development of Japan’s Trad- Canada. ing Company Network in Australia, 1890–1941,” Manufacturing became the largest compo- Australian Economic History Review 22 (2): 114–32. nent of FDI by the early 1980s. Unlike the FDI Purcell W. and Nicholas S. (1999) “The Transfer of in raw materials, this sector’s FDI was aimed at Human Resource and Management Practice by serving the North American market. It began Japanese Multinationals to Australia: Do Industry with a handful of consumer and industrial in- Size and Experience Matter?” International Journal of vestments such as Matsushita producing color Human Resource Management 10 (1): 72–88. televisions and NTN turning out ball bearings. Toyama, Y. and Tisdell, C. (eds) (1991) Japan-Australia In 1983 combined Japanese inward investment Economic Relations in the 1990s., Osaka: Centre for in food processing, chemicals, electrical and elec- Australian Studies. tronic production, construction and communications stood at only $84 million Cdn rising to WILLIAM PURCELL $1.511 billion Cdn in 1998 or about 18 percent STEPHEN NICHOLAS of total Japanese FDI in Canada. (This is the grouping according to Statistics Canada, Japanese business in Canada which includes some non-manufacturing businesses.) Canada has a small, open economy highly de- However, the largest investments in manufac- pendent on international trade and foreign direct turing are those in the automotive industry. This investment (FDI). International trade accounts reflects the strong competitive advantage that for over 40 percent of Canada’s gross national Japanese auto companies have had over their ri- product. Inward foreign direct investment has vals from the early 1980s. Statistics Canada clas- always played a large role in Canadian economic sifies automotive investment in the machinery and development. More recently outward FDI has transportation equipment category. From a 1983 grown very rapidly to the point where it now level of $368 million Cdn, Japanese FDI in the exceeds inward FDI. In 1998, the stock of in- industry grouping rose to $3.148 billion in 1998 ward FDI amounted to $217 billion Cdn and Cdn and has increased considerably since. In outward FDI was 1240 billion Cdn. Canadian 1998, this sector accounted for nearly 38 percent FDI in Japan is still relatively insignificant, but it of Japanese FDI in Canada, compared to only is growing in importance. Japan ranks fourth in about 14 percent of overall Canadian inward FDI. terms of Canadian inward FDI, following the Hence, Japanese companies are much more con- United States, the United Kingdom and the Neth- centrated in this sector than are other foreign in- erlands. The Japanese share of the stock of Ca- vestors. nadian inward FDI was about 4 percent or $8.3 The automotive investment began in the mid- billion Cdn. As a percentage of Japanese outward 1980s when the Japanese auto assemblers de- FDI, it was under 2 percent. cided to build plants in North America to avoid Early post-Second World War Japanese FDI both import quotas resulting from the voluntary in Canada aimed at securing raw materials for restraint agreement they were forced to accept, the resource-poor Japanese domestic economy and also to avoid being subject to North Ameri- The first investments were in mining, both en- can import tariffs. As part of their North Ameri- ergy and minerals. In 1983 these totaled $726 can expansion, Honda and Toyota decided to million dollars Cdn. They peaked in the mid- select Canadian sites in Ontario (in addition to 1990s at over $1 billion Cdn and in 1998 fell their United States operations. Suzuki, a smaller back to $783 million Cdn. FDI in wood prod- Japanese manufacturer, followed by forming a ucts, including pulp and paper, was still relatively joint venture with General Motors known as small in 1983 at less than $100 million Cdn, but CAMI. Although these plants served the Cana- it grew rapidly to a maximum in 1996 of $1 1,250 dian market, their output was primarily destined 228 Japanese business in Canada for the United States. Canada was chosen for Effective February 2001, General Motors, Ford several reasons. These included the lure of duty and DaimlerChrysler (the Big Three) can no rebates offered by the Canadian government as longer import vehicles from their factories out- well as incentives provided both by the federal side of North America duty-free. For example, and provincial governments. There was also an Saabs produced in Sweden, Mercedes assembled available easily trainable labor force. Lower in Germany by DaimlerChrysler, and Volvos and wage rates in Canada and the payment of medi- Jaguars manufactured in Sweden and England, cal insurance by the Canadian government were respectively will have to bear the same 6.1 per- other incentives. In addition, energy and land cent tariff that is levied on motor vehicles im- prices were attractive and, given that the United ported into Canada from outside of North States market was quite close, transportation America by other manufacturers. Canada will no costs were not high. Finally other things being longer be able to discriminate in favor of the Big equal, firms like to produce in markets where Three, who were party to the 1965 Canada- they have substantial sales. United States Auto Pact. The Honda and Toyota operations were Turning to Japanese FDI in finance, including originally small, even sub-optimal. However, insurance, there is a rapid increase in the period they were expanded partly as a result of the duty 1983 to 1998, from $150 million Cdn to $1.31 free access to the United States market provided billion Cdn. In the case of services including re- by the Canada-United States Free Trade Agree- tailing, the trajectory is far less steep, climbing ment in 1989 (and subsequently provided by the only from $350 Cdn to $614 Cdn over the same North American Free Trade Agreement of 1994 period. The small investment in services is in- that added Mexico to the free trade zone). A dicative of Japan’s comparative disadvantage in rapid descent of the Canadian dollar relative to this sector. While Japanese auto assemblers, es- the United States currency in the 1990s further pecially Honda and Toyota, excel in manufac- enhanced the attractiveness of expanding the turing vehicles, the service sector in Japan lags Canadian plants. In 1997 Toyota opened a sec- its Western counterparts. ond plant at its site and Honda likewise in 1998. What is the likely future of Japanese FDI in In 1998 Honda began to produce its new Odys- Canada? Most probably the automotive invest- sey minivan and Toyota its Camry Solera coupe ments will continue to grow if Toyota and Honda in Canada. In 2000, Honda launched produc- are able to gain market share in North America tion of its new sports utility van (SUV), the against the Big Three. There is also likely to be Acura MDX. Soon a sister vehicle, a Honda more FDI in technologically advanced industries, SUV, will be added. Toyota is now gearing up to as Canada becomes a more knowledge-focused assemble the first Lexus produced outside of Ja- economy. pan, the RX300 SUV The total investment in the three operations is expected to be $5.1 billion Further reading Cdn by 2003 (Honda 1.1, Toyota 2.1, and CAMI 1.0). Aside from these plants, there are Canadian Embassy Tokyo, DFAIT/Asia-Pacific & Co- also in Canada forty Japanese auto parts, materi- ordination, Investment Section (2000) Japanese In- als and machine shop operations associated with vestment Fact Sheet 2000. the automotive industry. Over half of these are Industry Canada (2000) The Trade and Investment Moni- joint ventures with Canadian partners. Total em- tor, Fall/Winter 1999–2000. ployment in 2000 was over 9,000 in vehicle pro- Japanese Automotive Manufacturers Association of duction and more than 10,000 in parts Canada (JAMA) (2000) http://www.jama.ca. manufacturing. Statistics Canada (2000) Canada’s International Invest- Japanese automotive companies recently in- ment Position from 1926 to 1999, Ottawa: Statistics creased their competiveness versus their US- Canada. based rivals by winning a case that Japan had brought before the World Trade Organization. BERNARD WOLF Japanese business in Germany 229

Japanese business in China Local procurement is modest in China. The number of firms that source over 50 percent of The People’s Republic of China has become an their raw materials and parts locally totaled only important destination country for Japanese busi- 16.4 percent. Firms in China that source no more ness in recent years. Over 50 percent of Japanese than 20 percent of procurement locally reached FDI in emerging markets goes to China. Al- a level of 67.2 percent. Most firms also did not though Japan and China had a long history of have local boards of directors (86.8 percent). diplomatic and trade relations, and although The export of electronics and IT-related parts China began opening up to the world in 1979, and materials from Japan to China has been in- most of Japan’s FDI has taken place in the 1990s. creasing in recent years. There has also been an Of almost 2,000 Japanese subsidiaries in China increase in imports of consumer electronics from in 1996, only 4 percent were in China before 1987. China to Japan as well. As of 1997, there were almost 2,000 Japanese subsidiaries in China; over 77 percent are joint See also: Japanese business in Southeast Asia; ventures, and 20 percent are wholly-owned sub- economic crisis in Asia sidiaries. China is also the primary country into which Japanese SMEs are moving their produc- TERRI R.LITUCHY tion operations. Reasons for locating in China include geo- Japanese business in Germany graphic and cultural proximity. The main reason for choosing China, however, is the potential of A history of the Japanese presence in the domestic market. Over 56 percent of compa- Germany nies surveyed by the Japan External Trade Or- ganization in 1997 chose China for this reason. While the Japanese corporate presence can be The country is a particularly attractive market found all over western and southern Europe, most for electronic firms as well as automotive compa- Japanese corporate operations are concentrated nies such as Toyota and Denso. At present, how- in the United Kingdom, Holland, and Germany ever, most of the products manufactured by (in that order). Within Germany corporate of- Japanese companies in China are for export. Ex- fices and personnel are primarily in the ports represent 91.3 percent of all Japanese pro- Dusseldorf area. During the early 1990s Ger- duction. In the case of audio component systems, many had the second highest concentration of China holds the number one position in terms of Japanese firms. Since then the Netherlands has reverse imports to Japan. moved ahead of Germany. When Japanese cor- China has also been expanding its sales to Ja- porations began moving into Europe in large pan of inexpensive mass-produced clothing made numbers from the 1970s, the Dusseldorf area was with low-cost labor. In the 1990s, the Japanese a favored location for several reasons. Dusseldorf textile industry set up operations in China mostly is located in the Ruhr area of Germany in the through the establishment of joint ventures with länder (state) of Nordrhein-Westfalen, known since Chinese companies. Japan’s reverse imports of the 1800s as the industrial heartland of Germany. textiles reached ¥2.8 trillion in 1996, a 52 per- The nearby city of Duisburg also has one of the cent increase over 1993, most of which originated biggest inland seaports in Europe, with easy ac- in China. cess to the Atlantic through the Rhine River. Fur- Japanese businesses in China are doing reason- thermore, the Dusseldorf area is centrally located ably well. Approximately 70 percent reported a in Western Europe, giving foreign corporations profit in 1992. However this number decreased easy access to all of the biggest industrial centers to 50 percent in 1997. Sales to Chinese consum- of Western Europe. ers, however, have not taken off. Furthermore, Before the Second World War, the Japanese exports to China in 1999 were a record high at presence in Germany was concentrated in the 16.5 percent. At the same time, imports from China northern port city of Hamburg. But from the mid- increased to 16.2 percent, also a record high. 1950s the returning Japanese corporations were 230 Japanese business in Germany moving mostly to Dusseldorf. There was one moving back to Dusseldorf because of the infra- Japanese person registered as living in Dusseldorf structure and support from a well-established in 1950, but 300 by 1960, 2,000 by 1973, and Japanese community with a Buddhist center and 7,443 by 1992. In 1966 the Japanese Chamber of good Japanese schools. But there has continued Commerce in Dusseldorf was founded, represent- to be a reduction of Japanese corporate offices in ing sixty Japanese companies in the area. By 1968 the Dusseldorf area due to movement out of Ger- the number of Japanese companies had grown to many since the early 1990s, and especially to 100, then 200 by 1973, and 300 by 1980. Japa- neighboring Holland. The movement out of Ger- nese companies first began production in the area many has been stimulated mostly by high labor in 1971. In 1990, Japan was behind only the costs and labor laws. The European Single Mar- United States and the Netherlands in levels of ket, realized in 1993, has eliminated barriers to direct investment in Nordrhein-Westfalen, and capital flow and trade, producing strong locational Nordrhein-Westfalen accounted for half of all competition for the whole EU market, making it Japanese investment in Germany In 1980 the more and more difficult for Germany to hold on Japanese direct investment in Nordrhein- to such direct foreign investment. Westfalen totaled slightly more than DM 1 billion; by 1990 it had grown to over DM 5 billion. German labor laws In 1990, however, the number of Japanese companies’ production facilities in the Dusseldorf area Even at the high point of Japanese investment in had still only reached 30 and began to decline Germany during the early 1990s, only 10.1 per- from this time forward. cent of the Japanese corporations in all of Ger- From 1992 the number of Japanese corpora- many were involved in manufacturing, while the tions of all industries in Dusseldorf began a slow vast majority were active in sales, service, and decline because of: (1) the economic slowdown the financial industry The Japanese corporations in Japan; (2) slow movement to Berlin after Ber- involved in manufacturing were almost exclu- lin was designated the new capital of united Ger- sively electronic firms. Interviews with the top many; and (3) slow movement out of Germany executives of thirty-four randomly selected Japa- along with more economic activity in nearby nese firms in the Dusseldorf area and officials of Holland. As of late 1998 there were just over the Japanese Chamber of Commerce confirmed 23,000 Japanese living in Germany and 1,110 that the primary reasons few Japanese corpora- Japanese corporations with some kind of operations have manufacturing plants in Germany are tions in Germany Just over 4,500 Japanese lived labor costs, taxes, powerful German labor unions, in the Dusseldorf area in 1999, down from 7,443 and the strict German labor laws. These are also in 1992. among the reasons most often given for the move- By the late 1990s there were also only 520 ment of Japanese corporations out of Germany Japanese companies in the Dusseldorf area. A and into other European countries such as the 1991 survey by the Japanese Chamber of Com- Netherlands. German workers continue to enjoy merce in Dusseldorf found about 75,000 Ger- the highest wages and benefits in the world, and mans employed by 1,099 Japanese corporations the German Works Constitution Act, passed soon in Germany with more than DM 100 billion in after the Second World War (and expanded dur- profits in Germany These numbers have been ing the early 1970s, also referred to as “co-deter- cut almost in half since 1991, but as noted above mination laws”) gives German employees there are still 1,110 Japanese companies with at extensive influence and rights in the work place. least some business in Germany But by the late These German work laws apply to all corpora- 1990s there were almost no Japanese production tions hiring a significant number of German facilities in the Dusseldorf area, or anywhere else employees while in Germany Most importantly in Germany Still, Dusseldorf remains the center these German work laws require companies to for Japanese business activity in Germany. By the allow for the election of employees to fill the late 1990s some Japanese firms that had moved “works council” which must be consulted on all out of the area (and especially to Berlin) began matters involving the interests of employees in Japanese business in Germany 231 the company including the hiring and firing of finance. There are, however, signs of gradual employees at all levels, wages and other compen- change in the influence of labor in the German sation, and even changes in work organization economy Despite the election of Gerhard and working hours. The larger the number of Schroeder to head the German government in employees in the company the larger the works 1998 with a “green-red” coalition government of council, whose members must be given paid re- the Social Democrats and Green Party (both tra- lease time to take care of employee interests. Cor- ditionally most supportive of labor), there has porations can try to go against the been a slow erosion of labor influence, support recommendations of the works council in such for the welfare state, and high corporate taxes. matters as the hiring and firing of employees, but This is also in spite of considerable evidence by they do so at their own peril. There is a system social scientists and labor research institutes (such of labor courts to back up the German work laws as the Institut für Arbeit und Technik in and a company can be tied up in court, unable to Gelsenkirchen) in Germany that the high pro- implement changes challenged by the works coun- ductivity of German labor is related to their rights cil, for months if not years. Powerful German and co-determination required under these Ger- labor unions add to the influence of German em- man work laws. ployees by focusing on industry-wide issues and politics while the works council members take Lack of trust of foreign employees and the care of employee interests on every shop floor position of German middle managers and office. The philosophy of the German government after the Second World War in passing While labor conflict within Japanese corporations the Works Constitution Act was that employees in Germany has been comparatively low, there of companies have just as much right to influ- is, however, a major employee-related problem ence major decisions of the company as stock- for Japanese corporations in Germany a prob- holders. This is why German laws also require lem found in Japanese corporations with foreign that almost all major corporations reserve half operations all over the world. There is a rigid the positions in the boards of directors for repre- “glass ceiling” for foreign employees in Japanese sentatives elected by the employees of the com- corporations. A simple indicator of the situation pany. is the Japanese Chamber of Commerce publica- Despite such rigid labor laws and powerful tion in Germany listing all Japanese corporations unions, which Japanese managers find in extreme and their top managers in Germany: There is contrast to their working environment in Japan, almost a complete absence of non-Japanese names research has found that respect for German labor among these executives. Foreign managers in appears to remain very high among Japanese ex- Japanese corporations know that they are seldom ecutives in Germany. There is little history of sig- given the full trust of Japanese higher manage- nificant labor conflict in Japanese corporations ment or given authority on major company deci- in Germany and German labor union officials sions. (And in this sense it can be said that have confirmed that Japanese executives have at German employees on the shop floor have more least as much respect as executives of German legal, and perhaps actual influence than do Ger- corporations. Before the middle 1990s, Japanese man middle managers of a Japanese company in executives said they would remain in Germany Germany.) The lack of opportunities for career despite high labor costs, regulations, and taxes promotions within the company mean that these because German labor is the most skilled, pro- Japanese corporations have difficulty hiring and ductive, and quickest to train of any country. This keeping talented German middle managers. This ratio of costs and benefits of doing business in problem is crucial because, given the rigid Ger- Germany especially for those with production man work laws, the common practice is for Japa- facilities apparently began to change by the end nese executives to rely extensively on German of the twentieth century. Japanese executives of- middle managers. Japanese executives in Ger- ten state they are in Germany now because they many as elsewhere, are expected to spend only a must be there primarily for sales, service, and few years away from Japan, often returning to 232 Japanese business in Italy

the home office in Japan after two years. These panies in Italy Developments during the 1990s Japanese executives do not typically understand confirm this situation. In fiscal year 1989, Japa- the full meaning of German work laws, nor do nese FDI in Italy accounted for ¥42.2 billion (2.1 they speak fluent German. Thus the German percent of total investments in Europe). In 1991 middle manager is most often a “go-between,” a it reached a peak of ¥44.2 billion (3.4 percent of representative of German employees to Japanese total Europe). Between 1992 and 1998 they de- management and at the same time a representa- creased from ¥28.2 billion (3 percent) to ¥14 bil- tive of Japanese management to the German em- lion (0.8 percent). The weakness of the Italian ployees. Thus, especially in Germany with the position is confirmed by the fifteenth survey on crucial role played by German middle managers Japanese-affiliated manufacturing companies in under German work laws, the mistrust and lack Europe conducted by the Japan External Trade of promotions for foreign managers in a Japa- Organization (JETRO). According to JETRO nese corporation proves to be especially harmful data, even if the number of Japanese manufac- to Japanese corporate interests. turing companies in Italy has steadily increased from twenty-eight to fifty-seven in the ten-year period between 1989 and 1998, the last figure Further reading accounts for only 6.5 percent of the 883 Japa- Kerbo, H.R. and Strasser, H. (2000) Modern Germany, nese companies operating in Europe (JETRO New York: McGraw-Hill. 1999). As of 1998, nineteen Japanese enterprises Kerbo, H.R., Wittenhagen, E. and Nakao, K. (1994a) in Italy had design centers or R&D facilities, again Japanische Unternehmen in Deutschland: Unternehmens- accounting for only a small percentage (5 per- struktur und Arbeitsverhaeltnis, Gelsenkirchen: cent) of the total number of such facilities in Eu- Veroffentlichungsliste des Instituts Arbeit und rope. ——(1994b) “Japanese Transplant Corporations, For- Japanese FDI in Italy has some peculiar fea- eign Employees, and the German Economy: A tures. First, the majority of Japanese companies Comparative Analysis of Germany and the United are mainly sales subsidiaries; they involve mostly States,” Duisburger Beiträge zur Soziologischen Forschung, trade-related activities and manufacturing and Duisburg. only in very few cases of finance and insurance Lincoln, J.R., Kerbo, H. and Wittenhagen, E. (1995) services. Second, the manufacturing companies “Japanese Companies in Germany: A Case Study are concentrated in traditional and specialized in Cross-Cultural Management,” Journal of Indus- supply industries, such as textile, clothing, ma- trial Relations 25:123–39. chinery and machine tools, where Italian compa- Thelen, K.A. (1991) Union of Parts: Labor Politics in Post- nies are highly competitive. With regard to the war Germany, Ithaca, NY: Cornell University Press. fifty-seven Japanese manufacturing companies Turner, L. (1991) Democracy at Work: Changing World operating at the end of 1998, thirteen were in Markets and the Future of Labour Unions, Ithaca, NY: chemical and petroleum products, nine in gen- Cornell University Press. eral machinery industry seven in transport machinery parts, six in electrical machinery and five HAROLD KERBO in apparel and textile products, with the remain- PATRICK ZI LTE N ER der in various other industries (JETRO 1999). Japanese business in Italy Third, with respect to mode of entry and capital structure, joint ventures are preferred over At the close of the twentieth century Japanese wholly-owned, green-field investments. This may direct investments in Italy amounted to ¥5.2 bil- be due to several reasons. Italian subsidiaries of lion, less than 0.2 percent of the total Japanese Japanese firms are of relatively recent age. The foreign direct investment (FDI) in Europe. When first cases of Japanese manufacturing companies compared to Japanese FDI in the UK (45.4 per- in Italy were YKK Italia, which began to operate cent), the Netherlands (40.1 percent), France (4.4 in 1968; Honda, which was established as a joint percent), Germany (2.5 percent), this figure points venture (IAP Industriale) in 1971; Alcantara, out the marginal involvement of Japanese com- which was originally a joint venture between ENI Japanese business in Italy 233 and Toray Industries (1974); and Tessitura sible for a wider range of value-chain activities. Tintoria Stamperia Achille Pinto, a joint venture They pursued long-term goals, both typical of between an entrepreneurial Italian company and Western companies (profitability) and peculiar to Toray Industries, established in 1974. Addition- Japanese firms (growth and quality); adopted ally the majority of Japanese companies were es- both formal, vertical and Western organizational tablished in Italy during the 1980s and 1990s. A mechanisms and some peculiar Japanese ones, second reason may be the fact that in the first those devoted to developing human resources phase of Japanese FDI Italian companies took on competencies. The size, the shareholding struc- the role of developers of the Italian market. Fi- ture, the older age and a wider range of core ac- nally in many joint ventures, there is the pres- tivities influenced the degree of transferability of ence of an Italian partner who often owns the Japanese management. As far as headquarters majority of capital, and is an entrepreneurial firm control over foreign subsidiaries was concerned, having peculiar creative capabilities. For the Ital- Japanese multinationals coordinated and control- ian partner, the joint venture represents a way led Italian subsidiaries by both substantive con- both to gain access to competencies, technolo- trol systems, based on the centralization of gies and assets which could not be developed au- strategic resources and decisions at the parent tonomously and rapidly and to enter new company and administrative control mechanisms, markets, especially in Asia, through cooperating based on planning and control systems. Moreo- with a strong competitor (Molteni et al. 2000). ver Japanese headquarters involved Italian sub- Conversely for the Japanese partner, the joint ven- sidiaries in most strategic decisions concerning ture provides an opportunity to obtain rapid ac- innovation, pricing and production levels. cess to the Italian market, to overcome legal or The transferability of Japanese management to trade barriers, to take advantage of fiscal incen- Italy points out that Japanese management has to tives, and to gain access to the peculiar knowhow be adapted to the local context to be effective. In of the Italian partner, which complements the the green-field, wholly-owned investments, often Japanese partners’ range of competencies. The in depressed areas, such as for example Sony and most striking cases of joint ventures between big Honda’s transplants, Japanese technology and Japanese and Italian companies are, for example, management were transferred more effectively due those established by Fiat and Hitachi, Olivetti and to the fact that this choice favored the selection of Canon, Fiamm and Nippon Denchi, Eni and young workers more willing to create employment Toray FAI and Komatsu, Piaggio and Daihatsu. relationships similar to those used in Japan. As far With regard to the transferability of Japanese as joint ventures are concerned, in some cases they management and production systems to Italian achieved satisfactory results in terms of produc- subsidiaries, it usually has taken place with ad- tion efficiency profitability and knowledge crea- aptation of Japanese management principles to tion, due to the fact that they stimulated the the local context. In particular, according to a development of synergies between the partners. study carried out in 1993 on Japanese manufac- However, in other cases the transferability of Japa- turing companies in Italy local management style nese management and production systems found seemed to predetermine Japanese management significant obstacles and resistance due to the Ital- principles. This result may be due to the fact that ian system of labor market regulations, the resist- the research involved a significant number of joint ance of labor unions and management, the ventures with entrepreneurial Italian companies language and cultural barriers, the difficulties of (Songini and Gnan 1995). A similar study car- Japanese companies in attracting the first-class Ital- ried out in 1997 pointed to a combination of Japa- ian graduates and technicians. nese and local goals, organizational mechanisms and management styles (Songini and Gnan 1998). Further reading This study identified a more significant role of the Italian subsidiaries than in 1993. In fact, Ital- JETRO (1999) The 15th Survey on the Operations of Japa- ian subsidiaries seemed to have stronger R&D nese-affiliated manufacturing Companies in Europe and Tur- and product policy autonomy and to be respon- key, Tokyo: JETRO. 234 Japanese business in Korea and Taiwan

Kidd, J.B. (1998) “Knowledge Creation in Japanese largely in response to the import-substitution in- Manufacturing Companies in Italy,” Management dustrialization policies adopted by those govern- Learning 29(2): 131–46. ments. Like other developing economies, Korea Molteni, C. (1996) “Japanese Manufacturing in Italy” and Taiwan imposed high tariffs on imported in J.Darby (ed.), Japan and the European Periphery, manufactured products in order to protect and London: Macmillan, 132–48. nurture their own industries. Japanese and other Molteni, C., Conca, M.G. and Zara, C. (2000) “Japa- foreign companies then began local production nese Manufacturing Activities in Italy: Character- in order to surmount the high tariff barriers and istics and Management Issues,” in L. Songini (ed.), capture markets. Most of the local production Political and Economic Relations between Asia and Europe, projects were launched in the form of joint ven- Milano: EGEA, 121–36. tures with local firms because of restrictions on Songini, L. and Gnan L. (1995) “Management Styles foreign ownership. In particular, the Korean gov- of Japanese Companies in Italy” Management Inter- ernment imposed severe restrictions on the en- national Review 2:9–26. try of foreign companies, and as a result, Japanese ——(1998) “Japanese Management in the Nineties: New direct investment in Korea took off later and on Features and Their Transferability Abroad,” paper a more reduced scale than in Taiwan. given at the AIDEA 3rd International Conference, A major turning point in Japanese investments Lugano, Switzerland. into the two economies came from the late 1960s Songini, L., Gnan, L. and Kidd J. (2000) “A Compari- through the 1970s. Behind this change were both son of Management Styles of Japanese Manufac- “pull” and “push” factors. The “pull” factor was turing Firms in the UK and in Italy” in L.Songini the fact that both economies had switched to ex- (ed.), Political and Economic Relations n Asia and Europe, port-oriented industrialization policies, under Milano: EGEA, 147–81. which they sought industrialization through the promotion of exports by attracting foreign com- LUCREZIA SONGINI panies. Specifically they set up “export processing zones” where foreign companies were allowed Japanese business in Korea and to establish 100 percent-owned units and were Taiwan granted preferential tariff treatment for the importation of parts and production facilities, but The operations of Japanese-affiliated companies were required to export the products they made in Korea and Taiwan are characterized by a rela- there. The first of the “push” factors was that tively high degree of localization of top manag- after going through its period of high economic ers at overseas subsidiaries, as well as by a growth, Japan had lost its suitability as a location considerable level of implantation of the Japanese for labor-intensive industries as wages rose to management system in terms of institutions and match those of European countries. As a result, form. However, there are considerable differences Japanese companies headed toward Korea and between these firms and manufacturing plants at Taiwan, which then had cheap and ample labor, home in Japan in more substantive aspects, such as well as to Singapore and Hong Kong. This as the degree of employee participation in man- grouping was called the newly industrialized agement and the development of a wide range of countries (NICs) (they are now referred to as the skills among workers. In the future, Japanese-af- newly industrializing economies (NIEs)). The sec- filiated companies in Korea and Taiwan will need ond “push” factor was undoubtedly the growing to strive to narrow these gaps with Japanese trade friction between Japan and other advanced plants, and at the same time to learn from the economies, which prompted Japanese companies advantages of local companies accruing from their to search for bases from which to “detour” their local business climates. exports. These factors combined to push Japa- nese companies to establish exclusively export- The process of entry oriented wholly-owned factories, mainly in The advances of Japanese companies into Korea labor-intensive industries or processes such as and Taiwan, which began in the 1960s, came textiles, electrical and electronics, and leather. Japanese business in Korea and Taiwan 235

At first, this mode of industrialization was criti- The wave of digitalization that swept through cized as degrading Korea and Taiwan into mere electronics and other industries in the latter half subcontractors for Japanese companies and for of the 1990s dramatically altered the intra-com- ultimately subordinating them to the Japanese pany divisions of labor in a short period of time. economy In reality however, the advance of Japa- Japanese firms gained the ability to almost simul- nese firms and transfers of technologies from Ja- taneously begin turning out nearly equivalent fin- pan contributed to lifting the levels of both ished products in Japan, ASEAN and China, thus technologies and income in the two economies. lessening the importance of Korea, and of Tai- This then made possible the transfer of higher wan to a greater extent, as production bases. How- levels of technologies from Japan, and in turn en- ever, a new, functional relationship of couraged the development in Japan of higher intracompany divisions of labor is already being value-added products. In summary a virtuous developed. This new relationship calls for Japan cycle was created where the advance of Japanese to focus on R&D activities and the production of firms and the accompanying technological trans- products with frequent model changes or high fer made possible and promoted the transfer of value-added products for the domestic market, higher levels of technologies. for ASEAN and China to export volume-prod- The second turning point came in the latter ucts, and for plants in Taiwan, Singapore and half of the 1980s. The rapid industrialization other NIEs to serve as mother plants, providing raised income levels in both Korea and Taiwan, technical support for plants in ASEAN and bringing about broad democratization ranging China. from politics to intra-company organizations (though there were differences in that demands Specific features of management for democracy were more radical in Korea than in Taiwan). This far-reaching democratization re- The management styles of Japanese companies sulted in sharp rises in wages. At the same time, in Korea and Taiwan share common institutional the two economies faced trade frictions with the and organizational formulas with Japanese do- United States, and were criticized for the per- mestic plants. They include low barriers separat- ceived undervaluation of their currencies against ing job categories, wage systems in which rates the US dollar. Eventually Korea’s won and Tai- are not determined by job categories, and the fact wan’s new Taiwan dollar were substantially re- that responsibility for quality control is given to valued vis-à-vis the US dollar. The sharp rises in the workers at manufacturing plants. The intro- wages and the revaluation of the currency ex- duction of these organizational characteristics is change rates prompted Korean and Taiwanese a prerequisite for the building of versatile skills, companies to invest in ASEAN (the Association coordination between divisions, and high opera- of Southeast Asian Nations) states, while Japa- tional efficiency in areas where Japanese firms nese companies also shifted their main export are strong, such as quality control, production of bases to ASEAN countries, centering on Thai- many varieties of products, and parts inventory land and Malaysia, and then to China in the management. The first reason the Japanese sys- 1990s. This is not to say however, that Japanese tem has taken root in Korea and Taiwan is be- direct investment into Korea and Taiwan com- cause, unlike the other advanced industrialized pletely dried up. While the value of new invest- economies such as the United States and Euro- ment did decline, the flow continued in pean nations, they had no established systems to qualitatively higher sectors. Thus, Japanese firms hamper the introduction of the Japanese formu- molded a relationship of intra-company divisions las. Secondly they had certain similarities with of labor: the mass production of products with Japan in organizational features and in the way high value-added was done in Japan, the output they dealt with workers, as exemplified by low of mass-produced goods with low value-added institutional barriers between job categories, and in ASEAN and China, and the production of in their wage systems. many varieties of products in small lots in Korea Another feature of the management of Japa- and Taiwan. nese-affiliated firms in Korea and Taiwan is the 236 Japanese business in Korea and Taiwan relatively high degree of localization of manage- value for products. Meanwhile, subsidiaries in ment. In comparison with subsidiaries in indus- Korea have a higher dependence than their coun- trialized countries, they have lower ratios of terparts in Taiwan on the procurement of parts Japanese expatriates to total payrolls. In compari- from Japanese firms or Japanese parts makers op- son with subsidiaries in ASEAN and other host erating in Korea, reflecting the weakness of sup- countries with similar ratios of Japanese expatri- porting parts industries in Korea. In the ates, those in Korea and Taiwan have more localization of top executives, however, Korea has locallyrecruited top executives. Many of the firms an upper hand over Taiwan. One reason for this are joint ventures with local firms that themselves is that the joint venture partners there are all have relatively long years of operations. But as manufacturers, while in Taiwan the partners are the same can be said about subsidiaries in quite often nonmanufacturers, such as distribu- ASEAN, these factors alone cannot explain the tion firms. Another reason that cannot be over- larger number of locally-recruited chief execu- looked is the greater intensity of anti-Japanese tives. The more fundamental reason for the sentiments in Korea, a fact that is traceable to greater localization of top management lies in the differences in Japan’s colonial rule in the two existence of local managers in Korea and Taiwan economies. who have a deep understanding of Japanese man- In the future, Japanese-affiliated plants in Ko- agement style. This can be traced to the institu- rea and Taiwan will have to increase the stability tional, social and cultural similarities between of core personnel and strive to narrow their gaps Korea and Taiwan and Japan, including educa- with Japanese plants in such areas as the acquisition. Also many local managers have a fluent com- tion of versatile skills and coordination between mand of the Japanese language. divisions. At the same time, they need to selec- However, there are differences, which cannot tively learn the advantages of local companies be neglected, between Japanese domestic plants accruing from the local business climate. In Tai- and those in Korea and Taiwan. The extent of wan, for example, subsidiaries need to introduce employee participation in management is a sharp-witted management style to enable them smaller, as seen in the lack of enthusiasm for to promptly discover business areas with high small group activities. Therefore, regardless of earnings potential and to assemble products by whether the top management is led by Japanese gathering parts and components with high cost or local executives, subsidiaries there have a performance. stronger tendency toward top-down management than those in Japan. It can be said there are See also: Japanese investment patterns; Japanese gaps between the formal introduction of the multinational enterprises; overseas production Japanese management style and the conditions of its actual implementation. These gaps stem in Further reading part from the higher separation rates (tendency for workers to quit their jobs) than in Japan and Itagaki, H. (ed.) (1997) The Japanese Production System: large promotion gaps based on educational Hybrid Factories in East Asia, London: Macmillan. backgrounds. Suehiro, A. (2000) Kyacchi-appu-gata kogyoka-ron: Ajia The differences between Korea and Taiwan keizai no kiseki to tenbou (Catch-Up Style Industrial- are also important. The strong point of ization: Tracks and Prospects of Asian Economy), Japaneseaffiliated plants in Korea is management’s Tokyo: Nagoya Daigaku Shuppannkai. ability to achieve high productivity and high qual- Tokunaga, S., Nomura, M. and Hiramoto, A. (1991) ity levels while precisely observing the stipulated Nihon kigyo/sekai sennryaku to jissenn: dennshi sangyo no work and quality standards within relatively large gurobaru-ka to nihonn-teki keiei (World Strategy and operational organizations. In Taiwan, which com- Practices of Japanese Companies: Globalization of pares unfavorably to Korea in quality and other the Electronics Industry and Japanese-Style Man- management abilities, there are subsidiaries that agement), Tokyo: Dobunnkann. excel in the intermediate fields between hardware and software, or in creating a wide range of added HIROSHI ITAGAKI Japanese business in Latin America 237

Japanese business in Latin America dropped since then. In Brazil, for example, 86 percent of current Japanese subsidiaries were es- Japan has had a long history of doing business in tablished prior to 1990. Comparable figures hold Latin America. Japan’s relation with Latin for Argentina and Mexico, where the rates were America dates back to the 1600s when traders 74 percent and 64 percent respectively. brought goods from Spanish colonies to Japan. Direct investment grew in the 1990s due to More than any other country other than the USA, the formation of the NAFTA and Japan exerts political and economic leverage in MERCOSUR economic alliances. The South- this region of the world through its substantial ern Common Market (MERCOSUR) was es- amounts of development assistance and interna- tablished in 1988 as a customs union between tional business (trade, joint ventures, subsidiar- Argentina and Brazil. It subsequently expanded ies and affiliates). This may be because Latin to include Uruguay Paraguay Bolivia and Chile. America is rich in the natural resources that Japa- After its formation, MERCOSUR countries nese industry needs. An additional motive for saw an almost immediate increase in Japanese close ties between Japan and Latin America is FDI, particularly in the automotive, electrical the benefit of foreign direct investment (FDI) in appliance, communications equipment and food the regions. Historically Latin America has had processing industries. Not including Mexico, comparatively inexpensive labor, low overall pro- Japanese FDI in Latin America grew from ductions costs, and lax environmental standards, US$3.628 billion in 1990 to US$5.231 billion by and has provided a geographically proximate 1994. Between 1993 and 1994 alone there was a export platform for delivering goods to North 55.2 percent increase in Japanese FDI. America and Europe. The economies of Latin America plunged Hundreds of Japanese firms have been at- into recession in 1998 and 1999. Most of coun- tracted to Latin America, especially to Colombia tries in the region saw initial signs of economic and to Mexico’s US border cities. In addition, recovery by the first quarter of 2000, when GDP FDI in Latin America is a logical way to access grew by 0.9 percent in Argentina, 3.1 percent in US market as a result of the North American Brazil, 2.2 percent in Colombia, 5.5 percent in Free Trade Agreement (NAFTA). Although Chile, 7.9 percent in Mexico and 8.5 percent in NAFTA involves only one Latin American Peru. Latin American exports of goods and serv- country—Mexico—along with the USA and ices rose in 1999. Despite these positive eco- Canada, it is expected that future modifications nomic signs, Japanese exports to Latin America to the agreement will incorporate other coun- fell 8.1 percent in 1999 to US$17.79 billion, tries in the region, most likely Argentina, Brazil mostly in transport equipment, electrical ma- and Chile. chinery and general machinery. At the same Within the context of modern trade relations, time, however, Japan’s imports from the region there has been an imbalance between Japan and rose to US$ 9.25 billion, an increase of 3.6 per- Latin America. Japan has been seen as more im- cent from 1998. portant to Latin America than the other way As Latin American economies continue to around. Eight percent of all Latin American ex- grow, and with the expansion of MERCOSUR ports go to Japan. Conversely Japanese exports to include more countries in the near future, ana- to Latin America are relatively small, and are lysts expect Japanese FDI to grow. In a similar mainly in industrial goods. The most signifi- vein, trade between Japan and the region is also cant level of activity is in Japanese FDI in the expected to increase. region. Although Japanese firms have maintained a See also: Japanese business in Mexico; Japanese presence in the region since the early 1900s, Japa- business in the USA nese FDI in Latin American grew most significantly during the decade of the 1980s, and has TERRI R.LITUCHY 238 Japanese business in Mexico

Japanese business in Mexico have North American fibers. As many Japanese MNCs already had manufacturing and assem- Beginning in the early 1980s and extending over bly facilities in the USA, the effect of NAFTA the next twenty years, Japanese corporations have was to encourage them to maintain existing made significant foreign direct investment (FDI) manufacturing operations in the USA but to shift in Mexico. Mexico has often been seen as a geo- assembly to plants in Mexico. graphically convenient platform for the manu- The Japanese experience in Mexico has not facture and assembly of products destined for the been without its problems. In addition to the usual large market of Mexico’s northern neighbor, the challenges of adjusting to different business prac- USA. With the emergence in the 1990s of a grow- tices and business related cultural values, Japa- ing middle class and the establishment of a stable nese firms have struggled with crime, including political climate, in the twenty-firstst century kidnapping and extortion. In 1997, for example, Mexico is becoming an attractive market in its the president of Sanyo Video was kidnapped and own right. held for a $ 2 million ransom. In 1999, another The primary attraction for Japanese foreign Japanese executive was killed in a botched direct investment (FDI) has been the opportu- carjacking. In response to the growing problem, nity to establish maquiladoras. These are factories Sony Sanyo and several other major Japanese situated in the US border region which manu- employers met with Mexican President Ernesto facture products for export to the US using pri- Zedillo in the spring of 2000 to express their con- marily US parts and components that are cern over safety and security issues. assembled by Mexican workers. Matsushita, Japanese firms have also taken measures to Sanyo, Sony and Hitachi were the first major respond to crime in Mexico. Many Japanese ex- Japanese MNCs to establish maquiladoras in this ecutives working along the US border area of region. They are also Tijuana’s largest private Tijuana—San Diego live on the US side and re- employers. Sony has over 6,400 employees, Sanyo ceive armed escorts to and from work in Tijuana. has 5,000 and Matsushita has 4,000. Hundreds Additionally firms have hired their own plant se- of other Japanese manufacturers and suppliers curity staffs and worked with organizations such followed these firms not only into Baja Califor- as the Latino Peace Officers Association to con- nia, but also located throughout Mexico. In duct in-house training on personal protection and Tijuana alone, there are over 515 Japanese safety. Finally, it is well known that Denso chose maquiladoras. Monterrey in the interior of the country as the With the signing of the North American Free site for its automotive parts manufacturing facil- Trade Agreement (NAFTA), Mexico has become ity because it felt the area was safer than the US an even more attractive site for Japanese FDI. border region. NAFTA created a customs union among Canada, Mexico and the USA. It called for steps to abol- See also: Japanese business in Latin America; ish tariffs for goods made in North America. For Japanese business in the USA products to be classified as “Made in North America,” they must meet one of the following criteria: (1) produced using materials produced Further reading in North America; (2) changed in tariff classifica- JETRO (various years) JETRO White Paper on Interna- tion in the process of production in North tional Trade, Tokyo: Japan External Trade Organi- America when using materials not produced in zation. North America; or (3) achieve a certain level of local content even when not meeting condition TERRI R.LITUCHY 2. In general, the local content level is 60 percent (when using the transaction price), or 62.5 per- Japanese business in Southeast Asia cent for automobiles. In addition color television sets and some electronics must have key compo- While Japanese investment has flowed into South- nents made in North America and textiles must east Asia for decades since the post-Second Japanese business in Southeast Asia 239

World War recovery, this FDI (foreign direct Of the many large industrial parks around Thai- investment) picked up considerably from the mid- land, for example, more than half of the hun- 1980s. With Japanese economic power on the rise dreds of factories display the corporate logo of around the world from the early 1980s, and with Japanese firms. As of 1999 the Japanese Cham- North American and European nations growing ber of Commerce in Thailand listed 1,166 Japa- more critical of Japanese economic power and nese firms with operations in Thailand. And while investment in their countries, FDI from Japan was Vietnam is far behind other Southeast Asian increasingly directed closer to home. Some have countries such as Thailand, Malaysia, and Indo- charged this investment flow to Southeast Asia nesia in establishing such industrial parks, it has has been an attempt by Japan to build a self-sus- also begun to establish them. During 1995, FDI taining Asian centered economy with Japan in from Japan to Vietnam exceeded the $ 1 billion the powerful center. The immediate stimulus for mark, with much going to facilities in new indus- the increased flow of FDI into Southeast Asia, trial parks around Hanoi and Ho Chi Minh City however, was the rapid rise of the yen compared Japan remains behind South Korea and Taiwan to other world currencies after the Plaza Accord in terms of FDI in Vietnam, but is gaining on in 1985. Japanese goods quickly became more both countries. expensive around the world and to cut costs many The most “troubled” countries of Southeast Japanese corporations began seeking cheaper la- Asia, particularly Cambodia, Laos, and Burma bor in Southeast Asia. Some authors argue that (Myanmar), have received very little FDI from it was this influx of Japanese investment which Japan, or any other country for that matter. There began the economic boom in many Southeast has been discussion of Japanese investment in Asian nations. But it must also be recognized that Laos, but little action, especially since the Asian many countries in Southeast Asia had already economic crisis of 1997 reduced costs in other, entered boom years from the early to middle more attractive Southeast Asian countries and 1980s, leading Japanese firms to implement strat- took away economic incentives to move invest- egies to tap into the expanding consumer mar- ments to even lower cost countries in the region. kets of Southeast Asia. For example, the sale of The change in economic incentives can be easily automobiles in Thailand was increasing at a rate seen in the history of the Thai baht. Before July of 30 percent or more annually during the late 1997 the Thai baht was pegged at around 25 baht 1980s and early 1990s, leading all of the major to 1 US dollar, falling to 55 baht to 1 US dollar auto companies in Japan to set up plants to build six months after the Asian economic crisis hit and then distribute automobiles in Thailand. By (see economic crisis in Asia), then stabilizing at the mid-1990s Japanese auto firms accounted for just under 40 baht to the dollar through the fall some 90 percent of all autos made or sold in of 2000. Thailand. The Asian economic crisis of 1997, as might During the mid-1990s, Japan accounted for be expected, slowed the movement of Japanese more FDI than any other country in each of the FDI into Southeast Asia, and even led to steep industrializing countries of Southeast Asia except drops in investments. By the end of the twenti- one, the Philippines, a former colony of the eth century most nations in the region have United States and still dominated by FDI from shown significant recovery from the crisis and the USA. Japan accounted for just over 20 per- Japanese FDI in the region has begun to pick up. cent of FDI in Indonesia, 32 percent in Malaysia, However, concerns about the strength of the 23 percent in Singapore, 29 percent in Taiwan, Southeast Asian recovery remain, particularly and 34 percent in Thailand. With doi moi (eco- because many of the needed reforms, especially nomic liberalization) in Vietnam from the late in Southeast Asian financial institutions, and how 1980s, Japan has been moving investments into long it can be sustained. Southeast Asian nations Vietnam as well. In many of these countries the have lost export share to rich countries such as Japanese economic presence seems even greater the United States because countries such as China because of the concentration of Japanese plants and Mexico have increased their exports signifi- in huge industrial parks around the main cities. cantly since the Asian economic crisis of 1997. 240 Japanese business in Southeast Asia

Thus, FDI in Southeast Asian nations remains erations in Southeast Asian nations and hire fewer below pre-1997 levels both in terms of actual dol- local employees for top positions in the local op- lar amounts (over $ 20 billion for 1997 but less erations. Japanese transplant corporations in that $14 billion for 1999) and in share of world- Southeast Asia as elsewhere in the world, have wide foreign direct investment. been found to promote fewer local managers to top positions than transplants from other countries, and in Southeast Asia the percentage of Japa- Labor relations nese executives per corporation was actually Labor relations for Japanese corporations in increasing through the 1990s. Studies document Southeast Asia are reported to be generally good, complaints that Japanese managers, compared to despite the negative view of the Japanese in many managers from North America and Europe, do of these countries because of the Second World not allow their local managers to become involved War. Studies report there is very little labor union in decision making, and some Japanese execu- representation in Japanese corporations around tives have even admitted to having secret meet- Southeast Asia, but in none of these countries ings of Japanese only managers for decision have labor unions been allowed to grow very making. Not surprisingly studies of Japanese cor- strong by governments in the region. While there porations in Southeast Asia have found local em- are reports in the mass media of exploitation of ployees stating they feel a lack of trust on the Southeast Asian workers by American and Japa- part of the Japanese executives. Further, while nese corporations, it is important to note that the Thai employees of Japanese corporations report larger and well-known corporations from the that wages and benefits are above local levels, United States and Japan generally provide higher they also state they prefer working for American wages and better benefits than do domestic cor- rather than Japanese corporations for the above porations in each of the countries in Southeast reasons. Asia. These wages and benefits are certainly low compared to standards in North America, Eu- Japanese management styles rope, or Japan, but certainly not by Southeast Asian standards. There are foreign corporations One of the most interesting issues related to Japa- paying poverty or below poverty wages in South- nese transplant corporations in Southeast Asia is east Asia, but these tend to be small foreign firms the extent to which famous Japanese management able to hide from negative attention or corpora- techniques such as quality control circles, rotations such as Nike that work mainly with small tion of workers, and kaizen are put into effect by local companies to out-source their production. Japanese corporations in the region. Studies of One large study of major American and Japa- Japanese transplants in North America and Eu- nese corporations in Thailand, for example, rope report that individualistic oriented Western showed firms from both countries to have com- employees require that Japanese transplants alter paratively high levels of work satisfaction among their typical management styles and work orga- Thai employees, and these employees claimed nization. The common assumption, however, is that wages and benefits were above those of Thai that Japanese transplants in East and Southeast corporations. Asia would be more likely to follow traditional In most of the major Southeast Asian coun- Japanese management styles and work organiza- tries where studies have been conducted, how- tion given “common Asian values.” There is some ever, there are some common complaints directed research on this issue, but far more is needed to toward Japanese corporations and their manag- arrive at firm conclusions. The little research that ers, especially by the local white collar and man- exists remains somewhat contradictory Some re- agement employees. As in other countries around port success for Japanese corporations in using the world, Japanese executives are known for their their traditional management styles and work or- lack of trust in foreign employees. Compared to ganization. This seems to be the case more often corporations from other nations, Japanese cor- in the auto industry The large Toyota plant in porations send more executives to oversee op- the Bangkok area of Thailand, for example, is Japanese business in the Middle East 241 the second most productive and efficiently run nomic Catharsis: How Asian Firms Bounce Back From Toyota plant in the world. Interviews in Toyota Crisis., Westport, CT: Quorum Books, 33–54. plants in Thailand find both Japanese and Thai ——(2000) “Thailand, Japan and the East Asian Devel- management claiming to fully implement the opment Model: The Asian Economic Crisis in work organization of the home factories in Ja- World System Perspective,” in F.-J. Richter (ed.), The pan. But other studies indicate more mixed re- East Asian Development Model: Economic Growth, Insti- sults, with many Japanese firms admitting they tutional Failure and the Aftermath of the Crisis, London: have given up trying to implement Japanese work Macmillan, 119–40. organization with Southeast Asian employees. Slagter, R. and Kerbo, K. (2000) Modern Thailand, New It seems most likely the success of Japanese York: McGraw-Hill. management styles and work organization in HAROLD KERBO Southeast Asia is affected by type of industry and varies by the nation where Japanese transplant corporations are in operation. Contrary to popu- Japanese business in the Middle lar assumption, there is considerable cultural vari- East ation within Southeast Asia, and most likely more cultural variation than can be found across North Japan’s exports to the Middle East (including America and Europe. Vietnam, for example, de- North Africa) were $12.2 billion dollars in 1999, spite the years of communism, remains more which accounted for 2.9 percent of Japan’s total Confucian, with high respect for authority and exports. About 80 percent of exports to the group cooperation, while the Thais are noted for Middle East were machinery. Transport machin- their greater individualism and independence in ery electric machinery and industrial machinery the work place. The Thai corporation is usually account for 46 percent, 13 percent and 19 per- described as authoritarian and dominated from cent, respectively Oil-exporting countries were the top much like an old feudal domain. How- Japan’s main export markets in the Middle East, ever, while Thai employees are expected to defer accounting for about 70 percent of total exports. to superiors as would be expected in Asian Saudi Arabia was the largest market (27 percent) collectivist societies, Thai employees are noted and UAE was the second (21 percent). Exports for their lack of loyalty jumping from employer to non-oil exporters (excluding Israel) are usu- to employer in a rather un-Japanese fashion. With ally affected by the oil producers’ economic situ- the rich mixture of cultural variation throughout ations, which are influenced by oil prices. Southeast Asia, we find an interesting opportu- Japan’s imports from the Middle East were nity for research on the effects of culture and dif- $31,261 million in 1999, which accounted for 10.1 ferences in social organization in the cross-cultural percent of total imports. Most of the imports were work place. mineral fuel, mainly crude oil. Japan’s direct investments to the Middle East have been absolutely small and unstable com- Further reading pared with its economic size. The amount of Ja- Dobson, W. and Yue, C.S. (eds) (1997) Multinationals pan’s direct investments to the Middle East and East Asian Integration, Singapore: Institute of accounted for only 1.6 percent of the world total Southeast Asian Studies. in 1998. According to a research by the Oriental Elger, T. and Smith, C. (eds) (1994) Globalization Ja- Economist, only about seventy Japanese compa- pan: The Transnational Transformation of the Labour Pro- nies were operating in the six Persian Gulf coun- cess, London: Routledge. tries (Saudi Arabia, Kuwait, United Arab Hatch, W. and Yamamura, K. (1996) Asia in Japan’s Emirates, Bahrain, Iran and Oman) in 2000. Embrace: Building a Regional Production Alliance, Cam- About one-third of these firms are trading com- bridge: Cambridge University Press. panies. The others are electric machine compa- Kerbo, H. and Slagter, R. (2000) “The Asian Economic nies, electronic parts companies, industrial Crisis and Decline of Japanese Economic Leader- machine companies, construction and engineer- ship in Asia,” in F.-J.Richter (ed.), The Asian Eco- ing companies and so forth. For the most part, 242 Japanese business in the Middle East

these companies consist solely as sales or serv- the expiry of Arabian Oil’s oil concession in the ice/maintenance companies. Saudi part of the Neutral Zone.

Saudi Arabia United Arab Emirates

Japan’s exports to Saudi Arabia amounted to Japan’s exports to the United Arab Emirates $3.97 billion and imports $7.1 billion in 1998. amounted to $ 1.9 billion and imports were $8.7 Transport machinery accounted for 69 percent billion in 1999. Transport machinery accounted of total exports, and industrial machinery elec- for 38 percent of total exports and machinery in tric machinery and steel products 11 percent to total was 74 percent. Mineral fuel such as crude 13 percent respectively. Mineral fuel such as oil accounted for 98 percent of total imports. The crude oil accounted for 96 percent of total im- UAE is the largest supplier of crude oil and liq- ports. Saudi Arabia is the second largest mineral uefied petroleum gas to Japan. More Japanese fuel supplier to Japan. Although it is also a main local affiliates are located in the UAE than in any supplier of chemical products such as ethylene other country in the Persian Gulf region. Elec- glycol, styrene and methanol, its share of im- tric/ electronic machinery manufacturers, indus- ports is only 3 percent of Japan’s total. Construc- trial machinery manufacturers, automotive tion and engineering companies represent the manufacturers and transport/distribution compa- largest number of Japanese firms in Saudi nies have UAE-based affiliates, which handle Arabia. There are also local subsidiaries of sales, transport, and distribution activities manufacturing firms, but their activities are throughout the Gulf area via Dubai. mainly in sales and service. In the early 1980s, manufacturing companies Iran such as National Pipe Co. (steel pipe), Saudi Methanol Co. (methanol), and Eastern Petro- Japan’s exports to Iran amounted to $576 mil- chemical Co. (Petrochemical) were founded as lion and imports $3.1 billion in 1999. Transport large Japanese companies attempted to secure a machinery industrial machinery and metal prod- Saudi market that appeared to be expanding in- ucts accounted for 20 percent to 25 percent of definitely However, investment activities have total exports respectively Mineral fuel, mainly been stagnant since the mid-1980s owing to a crude oil, accounted for 97 percent of total im- long-lasting recession. ports. Iran is Japan’s third largest mineral crude A chronic unemployment problem among oil supplier. The Iran-Japan Petrochemical joint young people has continued to be a serious issue venture (IJPG) was founded in 1973. Shortly in Saudi Arabia since the latter half of the 1980s. thereafter, Japanese companies (including me- In an effort to ameliorate this problem, Saudi gov- dium-size companies) undertook investment in ernment and business circles have asked that Ja- Iran throughout the 1970s. After the Iranian pan increase investments in Saudi non-oil sectors. Revolution in 1979, the situation changed owing In turn, the Japanese government asked Japan to widespread political and socio-economic con- External Trade Organization (JETRO) and fusion. Japanese participants withdrew from the other government affiliates to find potential in- IJPC and Japanese investments to Iran decreased vestment projects, which resulted in the founda- drastically. tion of several joint venture companies such as The Iranian government, in principle, did not the Saudi Arabian-Japanese Pharmaceutical Co. approve any new entry of foreign capital until (medicine), the Red Sea Prawn (aquaculture) and the Rafsanjani administration adjusted foreign several joint venture agreements in the fields of policies, increasing Iran’s openness toward new firebricks, printing ink and textile goods. Despite investment. As policies became more positive all of these Japanese efforts, the Saudis have com- Iran also enacted the Free Zone Act, which plained about the low level of investments by Japa- granted special tax and investment breaks to for- nese companies and this may have resulted in eign companies in special processing zones. The Japanese business in the UK 243 government subsequently introduced a bill on the first wave of euro membership and uncertain inward foreign direct invest ment but it stalled in prospects for its future membership. the face of strong resistance by religious conservatives. Statistical overview Rafsanjani and the current president, Mohammad Khatami, are positive about the ac- US firms are still the largest foreign employers ceptance of official development aid (ODA). In of UK labor but Japanese foreign direct invest- response to Iranian requests, the Japanese gov- ment in the UK since the 1980s showed fastest ernment has granted yen loans to support hy- growth rate of any country increasing fivefold droelectric projects and other infrastructure from 1987 to 1996 and reaching an annual total development initiatives. Although the US gov- of $9.79 billion in 1998. Conversely investment ernment has imposed sanctions on Iran, the Japa- by British companies in Japan has rarely reached nese government believes that aid will help ease even 10 percent of this level. the Iranian government’s entry back into the Over 280 Japanese companies have invested world community During President Khatami’s in manufacturing in the UK, accounting for more visit to Japan in November 2000, both govern- than 40 percent of Japanese total investment in ments agreed on economic cooperation plans in the European Union, with 65,000 associated jobs several areas, including oil development projects (Japan External Trade Organization in 1997 and petrochemical projects. claimed 100,000 jobs or 2.5 percent of the Brit- Most Japanese local affiliates in Iran are trad- ish manufacturing labor force derive from Japa- ing companies at present. Recent reports are that nese affiliates in the UK). Individual investments Kobe Steel has undertaken a feasibility study on have become more capital intensive over the the building of a steel mill in a “free zone,” which 1980s and 1990s, however, and the average em- may be a sign that Japanese firms have started to ployment per firm has shrunk. Total real fixed resume investment in Iran. assets reached just under £4 billion by 1996. Of increasing importance is the investment by Japa- TETSUYA IWASAKI nese companies in R&D in the UK; there are now over 150 such operations by Japanese companies. Japanese business in the UK Reasons for investing in the UK Although most attention has been paid to the rapid increase in Japanese manufacturing invest- The reasons most cited for Japanese companies ment in the UK since the 1980s, Japanese com- favoring a UK location over other countries in panies have had a presence in the UK since the the European Union are the English language, late nineteenth century. Furthermore, the bulk the size of the UK market, low direct labor costs, of investment activity both then and now, good employment relations, high-quality has been in the service sector (particularly finan- workforce, political and economic stability solid cial services), rather than the manufacturing sec- infrastructure and legal system, well-established tor. parts industries, stable local financing and low Undoubtedly much of the recent investment corporate taxes. There are also less openly cited, in manufacturing was due to Japanese compa- but influential factors such as the Japanese inter- nies wishing to gain a foothold inside the single est in British culture (including golf and whisky) European market in a way that would avoid fur- and the long-standing historical ties between Ja- ther tariff impositions and anti-dumping actions pan and the UK. against them. The UK has attracted the major Many of these advantages were emphasized portion of this kind of Japanese investment over by the Conservative government which came to the past two decades, but it is debatable whether power in 1979 and showed a very welcoming at- this trend will continue. Japanese companies have titude towards Japanese investment in the 1980s, been expressing concern over the high sterling which has continued with successive governments exchange rate, following the UK’s refusal to join in the 1990s. The Conservative government’s 244 Japanese business in the UK

restructuring of the British economy led to highly trol, flexible working, enterprise unions and so localized pockets of skilled manual unemploy- forth were introduced into British-owned facto- ment and trades unions which were only a ries, with varying degrees of success and sincer- shadow of their former militant selves. Gener- ity. ous regional grants, the above-mentioned Japa- nese strategy of setting up operations in the EU Service sector investment and other factors favorable to the UK led to the nice coincidence of Japanese plants being set up Japanese service sector companies established opin areas of Britain with strong historical ties to erations in the UK a good century before Japa- Japan. nese manufacturers arrived. Japanese sailors Nissan’s opening of a £350m greenfield car started settling in London and the Northeast, and plant in Sunderland in 1986, near to where ships Japanese marine engineers arrived on extended had been built for Japan since the mid-nineteenth study tours from the 1860s onwards, often set- century was a catalyst for other Japanese manu- ting up trading companies or boarding houses. facturers to set up nearby. Another cluster devel- The first major Japanese company to start opera- oped in Wales following Sony’s 1973 investment tions in the UK was probably Okura, a Japanese in television manufacturing in Bridgend. Other merchant house, which established a London of- major investments have included Toyota’s £700m fice in the early 1870s. Over the next two de- car plant in Derbyshire, which was opened in cades other commercial companies such as 1992, Honda’s £300m car plant in Swindon and Mitsui, Takata, Tokio Marine Insurance Com- Fujitsu’s £400m semiconductor facility in the pany the Nippon Yusen shipping company and Northeast. the Yokohama Specie Bank all opened operations in London to support Japan’s attempt to regain commercial rights over its exports such as rice, Japanization of British industry silk, and tea. The establishment of these plants in areas of high These firms faced a struggle to survive, how- unemployment partly explains the high degree ever, until the First World War, when many more of attention paid to them by the British media Japanese companies arrived in London. They and academia, relative to investments by other were aiming to take advantage of Japan’s limited foreign companies. The other noteworthy feature involvement in the war on the Allied side by mak- was that they were concentrated in relatively few ing up the shortfall of European products avail- sectors, either ones in which the UK had lost able worldwide. Trading companies such as any preeminence, such as automobile manufac- Suzuki and Furukawa were also tempted by the ture, or sectors where Japan had become fa- shortages of wartime necessities such as steel, and mously strong, such as semiconductors and began speculating in scrap. Few purely specula- electronics. Japanese companies brought their tive ventures survived the end of the war, the manufacturing and human resource management 1920 recession in Japan, the 1923 Kanto Earth- techniques with them to the UK, with resultant quake and the 1927 Japanese financial crisis. Con- successes such as Nissan’s plant in Sunderland, sequently the number of Japanese companies in which is now widely seen as being the most effi- London began to decline in the 1920s. cient car manufacturing operation in Europe. Those London offices that survived, such as There was therefore a strong sense that Brit- those of the trading houses Mitsui and ish management and manufacturing could learn Mitsubishi, began to evolve into regional head- from Japan, either to revive failing industries or quarters, using London’s status as a world com- to enter the new high technology sectors. Much modity trading center to coordinate the export debate amongst academia, the private sector and of raw materials to Japan, as well as importing the government ensued from the late 1980s into items into Europe such as canned fish and oils the 1990s, about the degree and desirability of from Japan’s colonies in Asia. This role contin- “Japanization” in British industry Concepts such ued after the Second World War until the boom as just-in-time, kaizen, kanban, total quality con- in Japanese manufacturing investment in Europe Japanese business in the USA 245 and the consolidation of the City of London as a ability and cost of a highly educated and skilled world financial capital in the 1970s and 1980s workforce to support new, higher value-added brought a second wave of Japanese financial com- production are going to be critical in maintaining panies to London. the UK’s position as main recipient of Japanese Japanese banks and securities houses had a manufacturing investment in the EU. dramatic impact on the City, buying prime Lon- don real estate at the height of the boom in the Further reading late 1980s and paying extravagant salaries and bonuses to their locally hired staff. Japan’s eco- Aaron, C. (1999) The Political Economy of Japanese Foreign nomic problems in the 1990s, particularly the Direct Investment in the UK and US: Multinationals, collapse of several banks towards the end of the Subnational Regions and the Investment Location, Lon- decade, have brought about a withdrawal or con- don: Macmillan. traction of London operations. At the same time, Conte Helm, M. (1989) Japan and the North East of En- many of the persistent issues surrounding the gland from 1862 to the Present Day, London: The management of Japanese overseas operations Athlone Press. were once more uncovered, in a series of sex and Morris, J., Munday M. and Wilkinson, B. (1993) Work- racial discrimination cases and other incidents ing for the Japanese: The Economic and Social Consequences pointing to a lack of risk management and locali- of Japanese Investment in Wales, London: The Athlone zation. Press. Newall, P. (1996) Japan and the City of London, London: The Athlone Press. The future of Japanese companies in the UK Oliver, N. and Wilkinson, B. (1992) The Japanization of Unless London loses its status as a world finan- British Industry: New Developments in the 1990s., 2nd cial centre, it is unlikely that there will be any edn, Oxford: Blackwell. further significant decline in Japanese commer- Warner, F. (1991) Anglo-Japanese Financial Relations: A cial and financial companies operating in Lon- Golden Tide, Oxford: Blackwell. don. Of more concern to the British government PERNILLE RUDLIN is the impact that the UK’s non-membership of the euro, the high sterling exchange rate relative to the euro and uncertainty over the UK’s future Japanese business in the USA position inside the European Union will have on Japanese manufacturers. Japanese manufacturers Japan and the United States have had a long and may relocate British operations in Eastern Eu- difficult history of trade and foreign direct in- rope or Asia, or choose such locations for any vestment. According to the Japanese External new investments. The signs are mixed: Fujitsu Trade Organization (JETRO), economic and closed its semiconductor factory in Durham in trade relations between the USA and Japan have 1999, but this was as much due to the world- been calm since the auto trade agreement wide slump in semiconductor prices as any local reached in 1995. However, the Asian financial disadvantages. Mitsubishi Electric closed its tele- crisis in 1997 caused the US once again to be vision factory in Scotland in 1998, but is increas- concerned over the growing size of its trade defi- ing European investment in mobile phones. The cit with Japan. UK government claims the number of Japanese Beginning in the late 1980s and into the early UK-based investment projects increased 15 per- 1990s, a large number of Japanese firms set-up cent from 1999 to 2000. The future of the Nissan production facilities in the United States. These Sunderland plant is in question now that Renault “transplants,” especially in the automotive in- has a strong say in Nissan’s European produc- dustry were sometimes seen as a way for Japan tion, following Renault’s purchase of a 36.8 per- to work around the Voluntary’ import quotas on cent stake in Nissan in 2000. Clearly factors such auto exports, while others see Japanese manu- as links to continental Europe (both transporta- facturing plants as jobs for Americans. By 1990, tion and commercial/political) as well as the avail- there were over 300,000 Americans working in 246 Japanese business in the USA

Japanese businesses in the USA. Japanese FDI procurement of local (American) parts. In addi- exceeded $50 billion. Many of the largest, well- tion to transferring manufacturing plants, the known Japanese firms have manufacturing facili- Japanese firms have transferred management and ties in the United States, including companies technological know-how. Joint research and de- such as Sony, Epson, Mitsubishi, NEC, Toyota, velopment as well as cooperative sales programs Nissan, Isuzu, Mazda and Sanyo. There were have grown as a result of these relationships. more than 600 Japanese businesses in California In the electronics industry, the USA has led alone in 1990. in innovation and entrepreneurship while Japa- As a result of this dramatic growth in the Japa- nese firms have led in quality and overall com- nese presence, many Americans were concerned petitiveness. These complementary competencies with Japanese takeovers of US companies, tech- have led to joint ventures in manufacturing as nology and real estate. Sensitive to this concern, well as research and development. Similar ar- several Japanese companies formed joint ven- rangements have been developed in the chemi- tures to break into the US market, such as cal industry and pharmaceuticals industry. specialty steel manufacturers. These relationships have been beneficial to firms At the same time that one segment of the US on both sides of the Pacific. Banks and the US population was concerned about rising Japanese government have both strengthened the relation- investment, another segment was actively court- ship between Japanese companies located in the ing Japanese joint ventures and strategic alliances. US and local firms. In addition to the federal gov- In the high-technology area, many small US ven- ernment, particularly the Department of Com- ture firms struggling to attract US venture capi- merce, many US states have offices in Japan to tal were happy to get capital from Japanese firms promote trade, including California, Georgia, Il- instead. In return, Japanese firms obtained access, linois, Kentucky North Carolina, Tennessee, to and control of, cutting-edge technologies and Oregon and Washington processes. Japanese firms acquired four banks and Japanese investment has not been without its several large pieces of California real estate. In critics. While providing in excess of 300,000 jobs, two of the most visible acquisitions, Sony pur- observers note that there were no Americans in chased Columbia and Matsushita bought Uni- top management positions in these firms. Moreo- versal Studios. Some people feared that Japan was ver, at most of companies there were communi- taking over the United States. The concern was cation problems, in some cases quite severe. Most short-lived, as the bursting of the bubble Japanese managers have limited English skills, economy forced many Japanese companies to sell while only 10 percent of the American employ- off their US holdings. ees speak Japanese at any level of fluency In re- Despite the economic recession in Japan, the cent years the number of local employees able to US trade deficit with Japan grew 14.7 percent communicate in Japanese has been on the rise. from 1998 to 1999, reaching US$73.4 billion. Japanese managers, although they usually only Japan imports decreased due to the slow pace of remained in the United States for from three to its economic recovery while exports increased due five years, brought Japanese management tech- to a booming economy in the USA. Japan’s FDI niques with them. Decision making by consen- (foreign direct investment) in the USA has been sus, life-time employment, and other practices decreasing from 53.3 percent (126,128 million) widely used in Japan appeared to work for the in 1990 to 34.5 percent (| 17,331 million) in 1994. Japanese but often the Americans felt left out. In other words, investment from Japan accounted For example, many American employees lacked for 38.7 percent of all FDI received in 1990 and any knowledge of their firm’s mission statement. dropped to 12.9 percent in 1994. Most Japanese firms in the United States try to Around this same time, in the automotive in- duplicate the Japanese model of management, but dustry Japanese firms developed relationships this is not always possible, due to differences in with American automotive manufacturers and culture and values. suppliers and related fields such as hardware and Japanese companies of all sizes and all indus- software, thereby creating more jobs as well as tries are doing business in the United States. In Japanese Industrial Standards 247

1972, the Maruchan division of Toyo Suisan the shape, dimension, function, and so forth, of Kaisha opened its first instant ramen production products (50 percent). Two JIS of particular note facility in the United States; by 1997 it had three are the JIS Q 9000 series and JIS Q, 14000 seris, factories. In 1991 there were 1,563 Japanese which are the identical Japanese equivalents of manufacturing plants in the USA employing over the ISO 9000 and ISO 14000 international stand- 300, 600 employees. By 1996, the number of ards for quality management and environmen- plants had increased to 1,709. tal management systems. Organizations with responsibilities for JIS in- See also: overseas education; overseas research clude the Japanese Industrial Standards Commit- and development; trade barriers; trade negotia- tee (JISC; see www.jisc.org) and the Japanese tions Standards Association (JSA; see www.jsa.or.jp). Based on the Industrial Standardization Law originally passed in 1949, these two bodies work to- Further reading gether to establish and promote JIS. JISC is Laurie, D. (1990) “Yankee Samurai and the Produc- affiliated with the Ministry of Economics, Trade tivity of Japanese Firms in the United States,” Na- and Industry (formerly MITI) and serves as the tional Productivity Review 9:131–9. national standards body with membership in the International Organization for Standardization TERRI R.LITUCHY (ISO) and the International Electrotechnical Commission (IEC). Among other things, JISC Japanese Industrial Standards has responsibility for deliberating and approving draft standards that have been submitted to it. Japanese Industrial Standards (JIS) refer to tech- Initial drafting of most standards is done by in- nical standards established for the purpose of dustry and trade associations, with a small improving the quality of industrial and mineral number done by consumerist groups and gov- products and for facilitating their efficient pro- ernment entities. JSA’s responsibilities include fa- duction, distribution, and usage. Similar to ANSI cilitating the creation of draft standards and in the USA or BS in the UK, JIS are voluntary publishing and disseminating approved JIS, as national standards that are established or revised well as promoting standardization and quality on the basis of a consensus between producers, management activities in Japanese industry consumers and related parties. JIS and other stan- Certain designated products meeting the rel- dardization efforts at the national, industry and evant JIS standards may be authorized to dis- company level are credited with making signifi- play the mark, based upon an examination of the cant contributions to Japan’s successes in quality product prototype and the production facility in- and productivity improvement. At the same time, volved. As of March 1999, the number of certifi- some technical standards have been viewed as cations for JIS marks were 14,976 domestically non-tariff trade barriers by foreign companies. and 354 in foreign countries. Other product cer- At the end of 2000, there were 8,764 Japanese tification and marking schemes in Japan include Industrial Standards in force, which reflected ac- the JAS (Japanese Agricultural Standards) mark tivity during the year of 621 newly established for agricultural and forestry products, as well as standards, 464 revised standards, and 309 with- the S mark and SG mark for product safety. drawn standards. While JIS are classified into nineteen different technical areas ranging from See also: standard setting civil engineering and architecture to management systems, they fall into three major types: (1) ba- Further reading sic standards which specify terminology symbols, units, etc. (roughly 30 percent of all JIS); (2) Japanese Industrial Standards Committee (1991) In- method standards which specify procedures for dustrial Standardization in Japan, Tokyo: JISC. testing, analysis, inspection, measurement, etc. (20 Japanese Standards Association (2000) JIS Yearbook, percent); and (3) product standards which specify Tokyo: JSA. 248 Japanese investment patterns

Krislov, S. (1997) How Nations Choose Product Standards and as collectors and providers of news and in- and Standards Change Nations, Pittsburgh, PA: Uni- formation about foreign markets and societies. versity of Pittsburgh Press. Banks provided the financial support necessary McIntyre, J.R. (ed.) (1997) Japan’s Technical Standards: for Japan’s foreign trade. The insurance indus- Implications for Global Trade and Competitiveness, try helped to absorb the risks associated with Westport, CT: Quorum Books. ocean transport and of course, the marine shipping industry carried manufactured products and SHANE J.SCHVANEVELDT raw materials back and forth between Japan and its trading partners. The earliest of the sogo shosha Japanese investment patterns to venture abroad was Mitsui & Co., Ltd. It opened a branch office in Shanghai in 1877, fol- For many years, Japanese foreign direct invest- lowed by one in Paris in 1878 and then in New ment (FDI) consisted mainly of investment that York in 1879. was related to Japan’s worldwide trading activi- In the period between the First and Second ties, at manufacturing industries in Asia and at World Wars, direct investment expanded in the resource development. In the 1980s, however, a Japanese colonies in Manchuria, China, on the major shift occurred in these investment patterns Korean Peninsula, and in Taiwan as well as in as the Japanese manufacturing industry changed those regions under the general sphere of influ- its strategy from exports to local production ence of the Japanese Imperial Army In all of these within the industrially advanced countries. Non- areas, investment was directed not only at those manufacturing industries such as finance and industries specifically engaged in trade, but also insurance also began to energetically pursue FDI. at the railroad, mining, and manufacturing in- In examining the stages and changes in invest- dustries. During and following the Second World ment patterns of Japanese FDI, it is helpful to War, Japan lost its overseas foreign assets, the classify this development into four periods: pre- majority of which were located in Asia, after they war expansion, postwar economic recovery were either frozen or seized. through the 1960s, strategic changes in the 1970s and 1980s, and finally globalized management in the 1990s. Furthermore, since Japanese FDI is From the Second World War until the 1960s: regulated by the Japanese Foreign Exchange and resumption Foreign Trade Control Law (FEFTCL), the FDI The second period in the development of Japan’s includes the acquisition of foreign securities re- FDI was from the end of the Second World War flecting 10 percent or more of stock or invested until the 1960s. The Japanese government be- capital, the establishments of branch offices or gan to regulate FDI when it enacted the Foreign factories and the period of investment exceeds Exchange and Foreign Trade Control Law in one year. 1949. In the beginning, the Ministry of Finance reviewed applications for FDI on an individual Before the Second World War: investment basis, granting permission in those cases where related to trade and colonies it felt that there was a positive impact on Japan’s balance of payments as well as clear merit for the There was a rapid surge in Japanese FDI in the economic benefit of the Japanese people. During 1980s, in fact the roots of Japanese investment this period, FDI patterns were essentially the same overseas date back to before the Second World as before the war. In other words, those indus- War. Most of this pre-war investment was related tries which contributed to the promotion of trade, to trade and it was largely in the four areas of namely sogo shosha and banks, became the major trade, banking, insurance, and shipping. The sogo recipients of investment, which was applied to shosha acted as middlemen, facilitating exports and regions throughout the world including North imports, as well as the transfer of technology (im- America, Asia, Central and South America, and porting factories, creating licensing agreements, Europe. Moreover, in the developing nations, par- introducing investment opportunities in Japan) ticularly in Asia, this investment was directed Japanese investment patterns 249 mainly towards the extraction of natural resources that distinctive management and production sys- as well as towards local production by the manu- tems, such as lifetime employment and the facturing industry in response to foreign govern- Toyota production system which had developed ments’ policies for promoting their own in Japan, would take root in foreign countries, industrialization through import substitution. especially in North America or Europe. Although However, in contrast to the prewar activities, there some Japanese companies had ventured overseas were no longer any political or military objec- in the 1950s and 1960s, these were the rare ex- tives associated with this investment. This invest- ceptions. By far the majority of enterprises elected ment was implemented by private sector to stay at home and tread the path of “interna- industries and carried out not only in East Asia tionalization” on the basis of exporting their but in Southeast Asia as well. manufactured products from Japan. However, it was during this period that two compelling reasons began to emerge for Japan’s The 1970s and 1980s: strategic shift from manufacturing corporations to switch their strat- export to overseas production egies from export to FDI. The first of these was The third period in the development of Japanese trade friction with the industrially advanced coun- FDI was the two decades spanning the 1970s and tries, and the second was the appreciation of the 1980s. Particularly in the latter decade, the level yen beginning 1985. Trade friction between Ja- of FDI increased and there was a fundamental pan and the USA first appeared in regard to tex- shift in the pattern of this investment. This was tile fibers, followed by iron and steel, color partly the result of changes in strategies for inter- televisions, semiconductors, and automobiles, in nationalization as well as a shift from the manu- that order. Trade friction with the European coun- facturing industry’s export-led initiatives towards tries also occurred, although it lagged slightly be- one that relied increasingly upon local overseas hind that that developed with the United States. production. There was also diversification among The policy for eliminating trade friction was one the types of industries in the non-manufacturing of voluntary export restrictions on the part of sector that carried out FDI. No longer were par- the Japanese exporters. The manufacturing in- ticipants limited to those involved in trade-related dustries offered their vigorous response to the activities; now these included the real estate in- policy for voluntary export restrictions through dustry as well as non-trade-related businesses in local overseas production. In regard to yen ap- the financial and insurance industries. Further- preciation, the rise in the export price of Japan’s more, while overseas investment had been tradi- manufactured products resulted in a decrease in tionally weighted in favor of the developing exporters’ price competitiveness. To avoid this countries, now investment in North America and effect, exporters had no choice but to pursue Europe began to become more numerous. overseas production. As a result of these two The factors underlying these changes included factors, the switch away from an export-led strat- the liberalization of FDI, trade friction between egy became inevitable, as Japan’s manufacturing Japan and the other industrially advanced nations, corporations grudgingly began to tread the path and the dramatic appreciation of the yen. Between towards local overseas production. In the case of 1969 and 1978, the Japanese government carried industries in the non-manufacturing sector, the out FDI liberalization in five stages. In the third applicability of Japanese-style management prac- stage, which was implemented in 1971, the limit tices in a foreign environment was also an issue on the amount of investment eligible for auto- of some concern; however, the obstacles were not matic approval was lifted. This is not to say how- as great as they were for manufacturers. ever, that the change in policy suddenly resulted FDI by Japanese corporations increased stead- in a massive increase in FDI. Since the end of the ily through the 1970s and 1980s, and particularly Second World War, the Japanese manufacturing from 1986 until 1989. In 1972, it reached $2.3 industry had developed its overseas markets in billion, exceeding the $2 billion mark for the first accordance with a fundamental export-oriented time. In 1984 it surpassed $10 billion and in 1986 strategy. Business leaders had little confidence $20 billion for the first time, reaching a level of 250 Japanese multinational enterprises

$47 billion in 1988. In the three years from 1986 The composition ratio of Japanese FDI in to 1988, cumulative Japanese FDI reached $102.7 North America was very close to global trends. billion, exceeding the cumulative FDI for the However, in Europe, the finance and insurance twenty-five-year period from 1951–85, of $83.6 industries represented an even larger proportion billion. Finally, in the year 1989 alone, Japanese of investment than the global average, followed FDI posted an amazing $67.5 billion, an annual by the manufacturing sector. In Asia, on the other record that holds to this day. hand, nearly 50 percent of the investment comes Among the rest of the industrially advanced from the manufacturing industries, reflecting the nations, Japan’s FDI in the 1980s ranked at the increased investment in China that took place in very top, reflecting the extent to which invest- the 1990s. In Central and South America, finance ment patterns had changed. In addition to the and insurance were the largest targets of invest- dramatic surge in the amount of investment, two ment, followed by shipping. In summary whereas other salient characteristics were, industrially the North American pattern closely resembled advanced nations now outnumbered the devel- the average global pattern for Japanese FDI, Eu- oping nations, among the nations which were the rope received a higher proportion of investment target of this FDI, and there was a notable diver- in the finance and insurance industries than in sification among the types of industries that were the case of other countries, while FDI in China carrying out the investment, spanning a variety was predominantly directed at the manufactur- of industries from the manufacturing to the non- ing industries. manufacturing sectors. See also: Japanese multinational enterprises The 1990s to the present: global management Further reading The fourth period in the development of Japa- Basu, D.R. and Miroshnik, V (2000) Japanese Foreign nese FDI began in the 1990s. It was during this Investments 1970–1998: Perspectives and Analyses, decade that the Japanese economy was burdened Armonk, NY: M.E.Sharp. with the task of managing the non-performing Encarnation, D.J. (ed.) (1999) Japanese Multinationals in loans that had accumulated as a result of the as- Asia: Global Operations in Comparative Perspective, New set-inflated bubble economy. Nevertheless, the York: Oxford University Press. high level of Japanese FDI persevered and Japan Hollerman, L. and Myers, R.H. (eds) (1996) The Effect maintained its position as the leading provider of of Japanese Investment on the World Economy: A Six-Coun- FDI in the world. In the latter half of the 1980s, try Study, 1970–1991, Stanford, CA: Hoover Insti- the dawn of the age of globalized management, tution Press. the patterns of Japanese FDI, in terms of regions Mason, M. (1997) Europe and the Japanese Challenge: The and industries, became more distinct. In other Regulation of Multinationals in Comparative Perspective, words, on a cumulative basis, the industrially ad- New York: Oxford University Press. vanced countries of North America and Europe Wilkins, M. (1994) “More than One Hundred Years: received the highest proportion of investment, A Historical Overview of Japanese Direct Invest- followed by Asia and then Central and South ment in the United States,” in T.Abo (ed.), Hybrid America. Factory: The Japanese Production System in the United By industry and from a global perspective, the States, New York: Oxford University Press, 257– manufacturing industries carried out 30 percent 83. of the total investment, and the non-manufactur- HIROSHI KUMON ing industries 70 percent. Among the non-manufacturing industries, and again from a global perspective, the finance and insurance industries Japanese multinational enterprises carried out the bulk of the investment, followed by real estate, services, and commerce, in that Theories that attempt to explain Japanese multi- order. national enterprises (MNEs) fall into two broad Japanese multinational enterprises 251 categories: those that adhere to the Development considered characteristic of Japanese MNEs, such Stage Model and those that follow the Japanese as the high ratio of expatriates, a head office-ori- MNE Model. According to the former, Japanese ented managerial style, and the importance of MNEs developed later than those in the West- informal information networks, can also be ex- ern economically advanced nations and were plained by this paradox, and by a style of man- characteristically immature and backward. The agement that accumulates managerial resources. Japanese MNE model, however, contends that Japanese MNEs incorporated Japanese-style High-performance operational efficiency management and organizational features into their overseas subsidiaries, giving rise to a new The competitive advantage of Japanese corpora- model of MNE that differed from its Western tions lies in their operational efficiency. Basic mul- counterparts. To be sure, the characteristically tinational theory teaches that Japanese MNEs high ratio of Japanese expatriates, which is evi- must introduce their competitive advantage, dence of a certain immaturity as well as the con- namely their operational efficiency to the host centration of authority in the home country are countries in which they operate. changing as Japanese corporations gain experi- This operational efficiency is the result of a ence in international business. In this respect, the quality control capability that ensures a high level Development Stage Model presents an undeni- of quality in finished products, a level of produc- ably persuasive argument. However, compared tion control that allows a diverse range of prod- with their US counterparts, Japanese MNEs’ ucts to be manufactured in the same plant and conspicuously high ratio of expatriate employ- on the same production line, inventory manage- ees, as well as their tendency to leave much of ment that minimizes the stock of parts and mate- the strategic and business decision-making in the rials, and a maintenance system which assures hands of the parent companies, is fundamentally that all of the manufacturing equipment is run- unchanged despite their increased experience in ning smoothly and kept in good condition. For- international business. Consequently, the follow- eign subsidiaries of Japanese companies have ing explanation will emphasize the Japanese MNE achieved fairly good results in regard to this op- Model. erational efficiency as documented by Takamiya The fundamental characteristic of Japanese (1979), Abo (1994), and Itagaki (1997). Their MNEs lies in the paradox between their high- research has provided evidence that foreign sub- performance operational efficiency as reflected sidiaries of Japanese firms in the UK or the USA, in quality control and inventory management, on as well as their export factories in Asia, have suc- the one hand, and their low-performance profit- ceeded in achieving a level of product quality that ability on the other. Why is it that Japanese MNEs is almost on par with products manufactured in have achieved a fairly decent operational effi- Japan. Furthermore, while most of the Japanese ciency but are unable to realize a level of profit- subsidiaries operating in the US are less efficient ability that is comparable with the overseas than their mother plants in Japan, they boast a subsidiaries of Western MNEs? The key to higher productivity than their local rivals. To re- unraveling this paradox lies in the organizational alize this high operational efficiency Japanese cor- features of those Japanese corporations that em- porations have introduced a variety of systems phasize the accumulation and utilization of mana- and innovations. For example, they have adopted gerial resources to increase operational efficiency quality control innovations that improve quality such as technology and the human resources that during the manufacturing process instead of sim- possess skill and know-how. The paradox of si- ply rejecting defectives at the final stage, and have multaneously high operational efficiency and low implemented a just-in-time (or similar) inventory profitability and the type of business management system that minimizes the stock of parts and that values the accumulation and utilization of materials. In terms of the Japanese manufactur- managerial resources are characteristics that Japa- ing system, this is referred to as the international nese corporations at home and abroad share. transfer of its functional core. In other words, Moreover, those features that have come to be Japanese MNEs have succeeded to a remarkable 252 Japanese multinational enterprises degree in achieving a high operational efficiency companies with manufacturing operations in the as well as in transferring the functional core of NIEs or ASEAN countries withdrew their invest- their manufacturing system to their overseas sub- ment and less than 10 percent of the companies sidiaries. with plants in ASEAN countries laid off any of their regular employees. For example, neither Toyota’s subsidiaries in Thailand nor in Indone- Organizational features and low profitability sia laid off any regular employees despite pro- Specific organizational features of Japanese cor- duction cutbacks. On days when plants were not porations as they exist in Japan, and which are operating, they held training sessions or sent large necessary to attain a high operational efficiency groups of employees to Japan for training. include the following: First, the tendency to a Finally to encourage employees’ participation long-term commitment to the enterprise. This or sharing of information, a number of subsidi- means setting up various types of business and aries have introduced small-group activities, vari- accumulating core technologies within the cor- ous types of meetings, and cooperative poration, as well as improving the ability of the labor-management conferences. However, the incorporation to respond to the ever-changing and troduction of such organizational features is to a increasingly challenging business environment. large extent influenced by the business environ- Second, a priority for management participation ment that obtains among the host countries and by and information sharing among all of the many in general, their international transfer is more re- different classes of employees, as well as an inter- stricted than in the case of the functional core. departmental capacity for coordination. This fea- Compared to the situation in Japan, overseas sub- ture supports a rapid and flexible response to a sidiaries experience a lower degree of employee variety of unanticipated problems concerning participation in management, and for many sub- matters such as quality or equipment mainte- sidiaries employees have only a narrow range of nance. Third, long-term training and methods for skills. Factors that obstruct the international trans- cultivating human resources that possess a wide fer of organizational features include pre-exist- variety of skills. The formation of these skills ing systems in the host countries (e.g. the wage supports a managerial approach that places em- system in the USA and in continental Europe), phasis upon information sharing and coordina- social inequality stemming from factors such as tion between departments. Fourth, a personnel education (in Asia and Europe, including the management system with the type of wages and UK), a management style that emphasizes job opportunities for promotion that can attract em- specialization (USA and Europe), and high employees to remain with the company for longer- ployee turnover ratios (common among many term employment. Long-term employment is a host countries). basic premise for the cultivation of multi-skilled A number of supplementary features have al- employees. Fifth, harmonious labor relations are lowed overseas subsidiaries to achieve high op- widely seen throughout Japan and are a founda- erational efficiency despite their insufficient tional characteristic that promotes management transfer of organizational features. The first of participation and information sharing. these was the presence of Japanese expatriates Although such organizational features are com- among their personnel. At many subsidiaries, mon in Japan, are they common in overseas sub- these personnel were used to fill gaps between sidiaries? There are two things that the overseas different jobs or to assist with coordination be- subsidiaries have in common with companies in tween departments. This is one of the reasons Japan: their long-term commitment to the enter- that the ratio of expatriate staff at Japanese sub- prise and their unwillingness to easily resort to sidiaries was higher than at US or European layoffs. This was clearly revealed by the behavior counterparts. It is also important to give credit to of Japanese firms in the face of the 1997 Asian the continual transfer of know-how from Japan, economic crisis. According to a survey conducted such as the results of kaizen. This represents the by the Ministry of International Trade and In- transfer of the products of organizational fea- dustry (MITI), as little as 3 percent of Japanese tures, rather than the transfer of those features Japanese multinational enterprises 253 themselves. It also helps to explain one of the costs up further. Finally the reliance upon Japa- factors behind the strict authority maintained by nese parts suppliers also puts upward pressure the mother plants and head offices in Japan. It on costs. should be noted that the authority and influence of the mother plants, which are at a similar rank Prospects in the managerial hierarchy as the overseas subsidiaries, were in some cases even stronger than For Japanese overseas subsidiaries, achieving high that of the headquarters. This is because the operational efficiency which gives them their com- source of the technology and knowhow, which is petitive edge, is a prerequisite for success. Ne- related to operational efficiency exists at the glecting their operational efficiency in the pursuit mother plants in Japan. This also helps to ex- of short-term profits may likely sacrifice the very plain characteristics of the Japanese MNEs such basis of their competitiveness. However, focus- as the importance of informal information net- ing on operational efficiency while the transfer works and the weak function of regional head- of organizational features remains incomplete is quarters. Finally the quality and inventory hazardous and entails not only increased costs control aspects of the subsidiaries’ operational but a variety of other attendant risks as well. Japa- efficiency is due to the presence of Japanese nese MNEs face the dilemma of having to choose parts manufacturers who established their own between operational efficiency and higher costs operations in host countries in tandem with and risks on the one hand, or undermining their Japanese MNEs. This situation is frequently re- competitive advantage by sacrificing efficiency ferred to as the “mini-Japan” form. and reducing costs and risks, on the other. It is According to data accumulated by the Japa- interesting to consider how the Japanese MNEs nese Ministry of Finance and by the US De- will attempt to solve this dilemma in the particu- partment of Commerce, the ratio of return on lar case of the Japanese expatriates. foreign direct investment by Japanese MNEs is A high ratio of Japanese expatriates and the conspicuously lower than that of US MNEs. large role they play not only increases costs for Similarly if the rates of return on investment from the overseas subsidiaries, but also risks damag- European and Japanese MNEs operating in the ing the motivation of local employees and en- USA are compared, those of Japanese MNEs are couraging the best employees to seek work also lower, as a rule. To be sure, these organiza- elsewhere. This may create a vicious circle tional features, which protect and sustain diverse where it becomes even more difficult to reduce managerial resources over the long term, are ex- the degree of dependence on expatriates, and tal- tremely effective in coping with continued ented local employees are further encouraged to changes in an increasingly challenging business leave. However, unreasonably decreasing the environment and in raising operational efficiency. number of expatriates will reduce operational ef- In contrast, however, this means that at any given ficiency and possibly obstruct the transfer of point in time there exist superfluous managerial technology in the longer term. Even if the need resources that do not contribute to the return on for Japanese MNEs to reduce their dependence investment. This is the fundamental factor be- on expatriates is a given, it may be better to con- hind the low profitability that characterizes Japa- sider this a long-term objective. Perhaps the key nese plants at home and abroad. Especially when for the success of Japanese MNEs is to discover economic conditions are poor, the excess of mana- a talented local manager who understands the gerial resources is magnified and there is a importance of accumulating and utilizing the stronger tendency to further aggravate declining characteristic Japanese managerial resources and profits. In the case of overseas subsidiaries, there then to put the reins of management into that are also additional factors such as the high ratio person’s hands. In fact, among successful Japa- of expatriates, the relatively short plant operat- nese MNEs, there are already examples where ing experience, and employee education programs this has taken place. including the dispatch of a wide variety of per- To gradually reduce the degree of depend- sonnel to Japan for training, all of which drive ence upon Japanese expatriates, it is necessary to 254 Johnson, Chalmers systemize and standardize the skills and know- Campbell, N. and Burton, F. (eds) (1994) Japanese Mul- how required to increase operational efficiency. tinationals: Strategies and Management in the Global In many host countries where there is a high em- Kaisha, London: Routledge. ployee turnover ratio, the proportion of “core” Itagaki, H. (ed.) (1997) The Japanese Production System: multi-skilled employees is smaller than it is in Ja- Hybrid Factories in East Asia, London: Macmillan. pan. To that extent the systemization and stand- Kenny M. and Florida, R. (1993) Beyond Mass Produc- ardization of these skills and know-how becomes tion: The Japanese System and its Transfer to the U.S., even more important. While some Japanese New York: Oxford University Press. MNEs are grappling with this task themselves, Kojima, K. (1978) Direct Foreign Investment: A Japanese in most cases the process of systemizing and Model of Multinational Business Operations, London: standardizing these skills and know-how is left Croom Helm. either to the mother plant or to personnel dis- Takamiya, M. (1979) “Conclusions and Policy patched from Japan. To make full use of the Implicationsm,” in S.Takamiya and K.Thurley (eds), standardized know-how that has accumulated at Japan’s Emerging Multinationals: An International Com- subsidiaries in each host country it may be nec- parison of Policies and Practices, Tokyo: University of essary to organize a horizontal information-shar- Tokyo Press. ing network among the various subsidiaries. HIROSHI ITAGAKI Once that is accomplished, it will be possible to share the authority that is currently over-concentrated in the mother plants and headquarters. Johnson, Chalmers Finally in the long term, it is possible that the stability of employees in Japan and their degree Born 1931, in Phoenix, Arizona, Johnson taught of participation in management will both gradu- political science at the University of California, ally begin to decrease. At such time, it will be- Berkeley from 1962–88. In 1988 he moved to come necessary to transfer to Japan the know-how University of California, San Diego. Since 1994 accumulated by overseas plant management he has served as president of the Japan Policy about organizing a highly mobile workforce. Research Institute. When that happens we may see a Japanese MNE- Johnson is the most prominent non-Japanese style international, horizontal network that sup- theorist of the politics of Japanese capitalism. His ports the mutual learning and exchange of work analyzes the Japanese bureaucracy’s use of information between mother plants and their industrial policy to promote economic develop- overseas subsidiaries as well as among overseas ment. Johnson explains how the industrial plan- subsidiaries themselves. ning bureaucracy operates internally how it works with business to develop and implement plans, See also: Japanese investment patterns; overseas and how it has been supported politically. production See also: competition; industrial policy; Minis- try of International Trade and Industry Further reading

Abo, T. (ed.) (1994) Hybrid Factory: The Japanese Produc- Further reading tion System in the United States, New York: Oxford University Press. Johnson, C. (1982) MITI and the Japanese Miracle: The Bartlett, C.A. and Ghoshal, S. (1989) Managing Across Growth of Industrial Policy, 1925–1975, Stanford, CA: Borders: The Transnational Solution, Boston: Harvard Stanford University Press. Business School Press. ——(1995) Japan: Who Governs? The Rise of the Develop- Beechler, S. and Bird, A. (eds) (1998) Japanese Multi- mental State, New York: W.W.Norton. nationals Abroad, New York: Oxford University Press. MARK TILTON joint stock corporation 255

joint stock corporation (Kawase Gaisha), set up in the same year, could arguably be called the first joint stock corpora- The joint stock corporation is one of four types tions. Their fund suppliers received interest and of company form in Japan. These are: (1) the shared in the profits, but did not enjoy limited gomei kaisha (commercial partnership where part- liability The first joint stock bank, and joint stock ners have unlimited liability to creditors); (2) the corporation in the true sense of the word, was goshi kaisha (limited partnership that has limited the First National Bank (Dai-ichi Ginkou), which and unlimited liability partners, of which the was established in 1873. Finally in June 1878 the unlimited partners represent the company); (3) Tokyo Stock Exchange was established in order the yugen kaisha (limited liability company where to enable companies to raise capital outside the the total contribution is no less than ¥3 million, banking system. At that time, regulations for in- the number of members is no more than fifty vestor protection were still virtually non-existent. and the contribution per member is no less than The Commercial Code as it was implemented ¥50,000); and (4) the kabushiki kaisha (joint stock in 1893 provided rules for the establishment of corporation with a total contributed capital of no companies, and offered some basis for creditor less than ¥10 million). protection and accountability towards stockhold- In 1998 there were a total of 27,000 gomei kaisha ers. The Securities and Exchange Law (SEL) of and goshi kaisha, 850,000 yugen kaisha, and 800,000 1948 was enacted to contribute to “the proper kabushiki kaisha. Of these 800,000 joint stock cor- operation of the national economy and the pro- porations about 2,000 are listed on the first and tection of investors.” In accordance with the Se- second sections of the Tokyo Stock Exchange, curities and Exchange Law, the stock exchanges and another 800 or so are traded on the over- themselves provide detailed regulations for list- the-counter (OTC) market. In 1995 there were ing. The “Ministerial Ordinance regarding the about 1,200,000 joint stock corporations and disclosure of corporate information” stipulates the fewer limited liability companies than in 1998. rules for disclosure of information towards share- The minimum capital stock for kabushiki kaisha holders. The Ordinance is part of the Laws per- was raised to ¥10 million, in 1991. As there were taining to the SEL. many joint stock companies that could not meet this new requirement within the five years that were allowed as an adaptation period, in 1996 Establishing a joint stock corporation in many kabushiki kaisha were converted to yugen Japan kaisha. The majority of Japanese companies in gen- Chapter 4, paragraph 1 of the Commercial Code eral as well as the joint stock corporations in par- stipulates the rules for establishing a joint stock ticular, are small and medium-sized firms. At corporation. The articles of incorporation should the beginning of the twenty-first century the two include the company’s purpose, firm name, the largest Japanese joint stock corporations are NTT number of authorized shares, par value of the Docomo with a total capitalization of about ¥19 shares (if applicable), a breakdown of par value trillion, and Toyota Motors with a capitalization and non par-value shares issued, the company’s of about ¥16 trillion. address, the method of public announcement, and the names and addresses of the sponsors. Par value of the shares shall be no less than ¥50. At History the time of the establishment of the company the The modernization of the Japanese economy stock issued shall be no less than one fourth of starting with the establishment of a modern fi- the authorized capital. In case non par-value stock nancial system, was a major goal for the Meiji is issued at the time the corporation is established, government from its establishment in 1868. the minimum value shall be ¥50,000. Total capi- Therefore in 1869 the government founded the tal stock shall be no less than ¥1 million. A direc- Ministry of Finance. The Commercial Company tor and a statutory auditor shall be appointed at (Tsuushou Gaisha) and the Exchange Company the inaugural meeting. 256 joint ventures

See also: Commercial Code alliances require more interaction, shared work and interface management. GARIEN VAN MOURIK Resource joint ventures have been the traditional way to minimize risk or deal with closed mar- joint ventures kets. This is changing as markets open up. But they are still a useful vehicle when competitive Before the FDI liberalization in the mid-1970s, pressures such as resource constraints, political joint ventures were the typical mode of entry into and business risks, or economies of scale lead Japan. Even today when full control is the pre- competitors to join forces. It can help minimize ferred option, it is still used by many foreign en- the risks in a particular aspect of the business by terprises as a means to reduce cost of entry getting others to participate. When Japanese car minimize risk, and gain quick access to market companies began to advance in the USA in the knowledge and infrastructure. For Japanese firms, mid-1980s, their suppliers did not have much joint ventures offered a shortcut for accumulat- choice but to follow suit. For most of them the ing knowledge, or minimizing the risk of going investments required to enter the USA were too abroad. Outward joint ventures peaked in the big and too risky so many decided to join forces 1980s during the Japanese investment expansion with US companies in the same business. to Southeast Asia, while in the US and Europe Finally competitive joint ventures are formed be- the preferred option was always 100 percent tween companies who are otherwise competitors. owned entity. One of the best-known examples is NUMMI, a There are four types of joint ventures between 50–50 joint venture between General Motors and Japanese and foreign enterprises, based on their Toyota. This venture was nominally designed for strategic and knowledge-creation contexts: com- the joint production of small cars for the North plementary learning, resource, and competitive. American market, but at the same time it was A complementary joint venture is formed when part- intended to serve as a ‘learning laboratory’ for ners with complementary strategic intent join the two competitors. General Motors gained forces to exploit their existing resources or com- insights into Toyota’s manufacturing system, and petencies—by linking different elements of the Toyota learned how to operate a US-based manu- value chain, for instance. A typical complemen- facturing facility In a competitive alliance, it is tary joint venture in a Japanese market would be not just fast learning that matters but also its speed an alliance in which a Western firm contributed and effectiveness relative to the partner; main- its technology and the local partner facilitated taining learning parity is the key to sustaining entry into a local market. While most joint ven- such a relationship. tures are typically defined as complementary in None of four types of joint ventures is “bet- opening public relations statements, a shift in part- ter” than another. Joint ventures in all four quad- nership orientation must be expected. rants can enhance a firm’s competitive advantage. A learning joint venture can develop from a com- However, the management challenges associated plementary alliance when both partners share an with each type of a joint venture are different. interest in enhancing their individual competen- Problems occur when the company does not cies, whether through an exchange of existing know what kind of alliance it has entered or— knowledge, or the development of new knowl- because joint ventures are by their nature dy- edge where the partners jointly participate in the namic and transitory—when it does not respond same value chain activities. An example of learn- appropriately to early signals that the nature of ing alliances is the former Fuji-Xerox joint ven- the alliance is changing. For example, in a com- ture in Japan. Originally set up to facilitate plementary venture, a Western company can rely Xerox’s penetration of the Japanese market, it on the Japanese partner to recruit and train the served for many years as a critical source of com- alliance workforce since the loyalty factor may petency development for the Xerox worldwide. not be an issue—at least in the short run. How- Compared to complementary alliances, learning ever, in a competitive venture such an approach just-in-time 257 could prove costly in the event of subsequent con- competency development. In Japan, as in many flict between the partners. other markets, the rule for joint venture success Contrary to a popular metaphor, a joint ven- is simple: “There is no free lunch.” ture is not like a marriage: longer alliances are VLADIMIR PUCIK not necessarily better. Joint ventures are not for- ever; most either die early or evolve, just as any other business enterprise. Joint venture stability Juran, Joseph M. is a contradiction in terms. Joint venture success A US-based pioneer in quality management. cannot be measured by its longevity but the de- Juran (1904-) was invited to Japan by the Union gree to which the alliance helps the firm to im- of Japanese Scientists and Engineers (JUSE) in prove its ability to compete in the marketplace. 1954. Like Deming, he gave lectures to manag- In this respect, a good question to ask is, “how ers on the need to promote quality in both pro- successful were the joint ventures with the Japa- cesses and products. nese, in particular those in the Japanese market Juran’s focus has been on management, stress- combining Western technology with the market ing managerial responsibility for quality with qual- know-how and distribution capabilities of the ity integral to managerial duties. He promotes Japanese?” planning for quality with goal-driven agendas, The bottom line is that the track record of and defines quality as “fitness for use,” rather than many joint ventures in Japan is poor. By the early compliance with specifications. Based on work 1990s most were dissolved or taken over by the by economist Vilfredo Pareto, Juran developed Japanese partner who rapidly absorbed new tech- the “Pareto principle,” which states that large pro- nology without ceding much in market access. portions of problems are generated by only a few For the Japanese, the “market-for-technology” causes. Often cited as an “80/20” split, the Pareto swap exchange created valuable opportunities to principle emphasizes the separation of the “vital upgrade their competitive capability. The strate- few” from the “useful many” when allocating re- gic intent of many of the Japanese partners was sources to fixing problems. to learn as much as possible about the technology contributed by the Western firm. A carefully implemented human resource strategy secured Further reading rapid diffusion and assimilation of the know-how Juran, J.M. (1988) Juran on Planning for Quality, New to the Japanese parent. York: The Free Press. Western firms did not pay sufficient attention to the competitive aspects of the joint venture re- ELIZABETH L.ROSE lationship and were not prepared for the possibility of changes in the relative power of their Japanese partners. Western partners saw their just-in-time joint ventures as “defensive,” established primarily to save resources, or simply to supplement As articulated by its principal architect, Taiichi the competency they lacked. Because of a lack of Ono of Toyota Motor Corporation, a just-in-time systematic investment in learning, very little lo- (JIT) system produces only the necessary items, cal knowledge filtered back to the Western par- at the necessary time, and in the necessary quan- ent. Without such local knowledge, the Western tity to meet customer demand. The underlying firm’s freedom of action in the Japanese market philosophy is to seek manufacturing excellence was greatly reduced. through the elimination of waste in all aspects of Successful joint ventures were only those that the production system, with particular attention were “offensive” in building a common competi- placed on reducing excess levels of in-process and tive and learning culture. The partners embarked finished goods inventories. Common usages of jointly on a “race to learn,” using the joint ven- the term can be confusing, however, because in ture as a mutual tool for faster and broader gains varying instances JIT is used to refer to the ge- in competitive capability through investments in neric philosophy of manufacturing management 258 just-in-time noted above, to a specific mechanism of produc- recognized that reducing inventories without also tion and inventory control called kanban, or to improving the production system can result in a the overall Toyota production system (Toyota system stoppage as the buffering function of the seisan hoshiki) which includes other aspects. inventory is eliminated. Though Toyota did not develop the methods For this reason, Toyota and other companies for realizing just-in-time production until the emphasize kaizen and effective quality manage- 1950s under Ohno, the term was used as early ment to assure that parts are defect free, as there as the 1930s by Toyota founder, Kiichiro Toyoda, is little or no buffer inventory to replace them. as an English phrase with Japanese pronuncia- One approach that JIT uses to achieve defect- tion (jasuto in taimu) (see Fujimoto 1999). Within free production is the use of jidoka, sometimes Japan, the terms “just-in-time” and “JIT” are still translated as autonomation. The original mean- used with a Japanese pronunciation rather than ing of jidoka is to stop a machine automatically a native Japanese language equivalent. In an in- when abnormal conditions are detected so as not terview, one Toyota executive commented that to produce defective parts. Extensions of this idea the phrase “just-on-time” may have been more are the use of poka-yoke, or mistake-proofing de- appropriate, so as to emphasize the synchronized, vices, and visual control systems such as andon clockwork nature that is intended, rather than a light boards that indicates to workers when and “barely in time” connotation. In the West, while where a problem has occurred so that corrective other terms such as stockless production and zero action can be taken. Along with this, failure-free inventory have been used, JIT remains the com- equipment is necessary so that a machine break- monly accepted, though imprecise, term. down in one area does not force a shut-down of Under Ohno’s leadership, Toyota developed the entire system. To improve equipment reliabil- its JIT system using kanban during the 1950s and ity approaches such as total productive mainte- gradually implemented it throughout Toyota nance are often used. plants. By the late 1960s, Toyota was also extend- In order to effectively implement JIT, several ing it to its suppliers, with the result that not only other supporting factors must be in place, includ- Toyota, but also its first-tier suppliers, were able ing smoothed production schedules, rapid setup to dramatically decrease their inventory levels. or changeover times, multiskilled workers, and The cost and quality advantages that Toyota highly reliable processes. Heijunka, or smoothing achieved through JIT and its company-wide qual- of the production schedule to achieve uniform ity control approach (see quality management) plant loading, is critical for JIT implementation. are credited with buoying Toyota through the eco- With heijunka, Toyota attempts to even out the nomic turmoil following the 1973 “oil shock.” production quantities of each item in the final Toyota’s success prompted many other Japanese assembly schedule. This minimizes the variation manufacturers to learn from its JIT methods at in the quantities of parts needed and enables the that time. By the late 1970s and early 1980s, JIT upstream stages to produce each part at an effi- was the object of intense interest worldwide. cient, constant rate. In addition, the production schedule is smoothed in terms of product variety. In other words, if several models are sched- Concepts and support factors uled for production then the quantities of each model are divided up and evenly dispersed A notable aspect of JIT is that it focuses on in- throughout the day rather than producing large ventory reduction not only as an end, but also as batches of each model in succession. The ulti- a means to enable broader improvements mate goal is to have a production system so flex- throughout the production system. High inven- ible and responsive that products can be made in tory levels are viewed like deep water that hides a batch size of one and scheduled according to various problems and inefficiencies below the the market’s demand rate. This is also called one- surface. Reducing inventory levels, therefore, piece flow production. exposes problems so that they may be acted upon To make such small batch sizes feasible, it is for improvement. At the same time, it must be important that setup or changeover times be short just-in-time 259 for all processes, with a common goal being to Kanban systems are not appropriate for all situ- reduce setup times of all processes to less than ations, however. Toyota itself uses several alter- ten minutes. Toyota consultant Shigeo Shingo is nate methods for coordinating production and known for a number of techniques for achieving material flows. For low consumption parts, Toyota rapid setup. Also, in a one-piece flow production uses a push method called chakko-hiki, or sched- environment, it is possible that each succeeding ule-initiated production. In this method, the pro- item might require different operations to be per- duction and delivery of parts is determined in formed. For this reason, the development of a advance based upon the final assembly schedule flexible, multiskilled workforce is necessary. and bill of materials. For large components and Cross-training also makes it possible for a worker parts such as engines and seats, another method to be responsible for several machine tools and called junjo-hiki, or sequence-synchronized produc- to be flexibly reassigned to keep both worker and tion, is used. With this method, the production machine utilization high. and delivery of each part is synchronized with the individual vehicles in the final assembly schedule, rather than waiting for a kanban card to sig- Production and inventory control methods nal production of the part. Another typical aspect of JIT is the use of a pull See also: supply chain management in Japan method, such as the kanban system, for coordinating production and inventory throughout the system. In a pull system, production is initiated Further reading only to replenish what has been actually used at the next stage of the production system. This is a Enkawa, T. and Schvaneveldt, S.J. (2001) “Just-in-Time, reversal of a push system in which parts are pro- Lean Production, and Complementary Paradigms,” duced in anticipation of future demand. A kanban in G.Salvendy (ed.), Handbook of Industrial Engineer- system functions as a pull system due to the way ing, 3rd edn, New York: Wiley 544–61. that it uses kanban (literally meaning card or sign) Fujimoto, T. (1999) The Evolution of a Manufacturing Sys- and returnable parts containers to control the pro- tem at Toyota, New York: Oxford University Press. duction and movement of materials between two Kuroiwa, S. (1999) “Jasutuo In Taimu to Kanban stages of the production system. The production Hoshiki” (Just-In-Time and Kanban System), in of additional parts is authorized only when a T.Enkawa, M.Kuroda, and Y.Fukuda (eds), Seisan worker at the downstream stage begins to use an Kanri no Jiten (Handbook of Production Manage- existing full container of parts and takes the ap- ment), Tokyo: Asakura Shoten, 636–46. propriate kanban card back up to the upstream Monden, Y. (1998) Toyota Production System: An Integrated process as authorization to produce another full Approach to Just-In-Time, 3rd edn, Atlanta, GA: Insti- container as replenishment. The total amount of tute of Industrial Engineers. inventory in the production system is determined Sugimori, Y., Kusunoki, K., Cho, F. and Uchikawa, S. by the number of kanban cards and containers in (1977) “Toyota Production System and Kanban Sys- circulation between any two stages of the system. tem: Materialization of Just-In-Time and Respect Consequently inventory levels can be reduced for Human System,” International Journal of Produc- by removing some of the kanban containers from tion Research 15 (6): 553–64. the system. Sometimes this is done as a purpose- ful way of stressing the system in order to iden- SHANE J.SCHVANEVELDT tify the weak points that are exposed when the inventory buffer is removed. K

kaizen There are three different dimensions of kaizen activities. Two types are seen at the shopfloor Kaizen, continuous improvement, is one of a full level. The first encompasses broader day-to-day set of the Japanese-style production practices, but, improvement practices carried out on the in a sense, a word to reveal the most essential shopfloor by all members. This would include aspect of the overall Japanese management and practices such as quality control circles focused production systems. Kaizen in itself is simply bit- on maintaining better productivity, quality, and by-bit improvement in practices and day-to-day so forth as well as activities aimed at promoting accumulation of the results which are imple- worker motivation and improving work proce- mented as participative activities at worksites of dures, as reflected in practices incorporated in Japanese companies. It is not a strictly defined the Toyota production system (TPS). The sec- concept by academic people but a conventional ond type of kaizen covers activities that are both one that has been used in broad meanings by narrower and deeper, and more technology-ori- worksite people at companies, the leaders at prac- ented. These are carried out primarily through tice institutions such as the Japanese Union of activities led by groups of engineering and main- Science and Engineers (JUSE), and only by some tenance specialists. A third type of kaizen activity researchers. Kaizen has not clearly been defined is found within management or at the overall com- in dictionaries, there is room for various kinds pany level. At the company or factory level, kaizen and levels of definitions. initiatives are led by top management and focused Historically, the above characteristic features on evolutionary changes through total quality of kaizen practices by Japanese firms, small to large, control (TQC) and total production management in their technology and skill improvements have (TPM). broadly been seen in Japan, compared with the Theoretically, at any levels, the essence of kaizen science-led, breakthrough type innovations, of- is an overarching philosophy of requiring all man- ten seen in western, especially American, firms. agement personnel to be responsible for motivat- The reasons are several. First Japanese people are ing all employees to improve steadily the existing generally stronger in practice-oriented inductive state of conditions. It is interesting to note the ways of doing research and development than in international diffusion of kaizen and its feedback theory-oriented deductive ways. Second, the Japa- to Japan of kaizen activity Modifications and ad- nese also have a distinct inclination for working aptations to local managerial environment are re- together in cooperative ways within a team, rather flected in the ISO 9000 and Six Sigma initiatives than as individuals in division of labor. Finally a originated in Europe and North American respec- worksite-oriented style of management has be- tively Both can be understood as modified come popular at the company level, integrating and developed quality improvement models the above into kaizen innovation activities. adopted from Japanese style worksite-oriented Kansai culture 261

organizational learning activities to more Ameri- which time the worker takes the appropriate can style top-down and specialist-led methodolo- kanban card to the upstream process that makes gies. the part. In due time, the upstream process will use that card as authorization to produce another standardized container full of the part to Further reading be ready for the downstream process. The number of kanban cards and containers in circu- Cole, R.E. (1999) Managing Quality Fads, Oxford: Ox- lation between the upstream and downstream ford University Press. processes can be adjusted to control the total Fujimoto, T. (1999) The Evolution of a Manufacturing Sys- number of parts in the system. Since the produc- tem at Toyota, Oxford: Oxford University Press. tion of more parts is initiated only when they are Toyota Motor Corporation (1996) The Toyota Produc- being used in the downstream process, a kanban tion System, Nagoya. system is considered to be a “pull system:” demand downstream pulls or triggers the produc- TETSUO ABO tion of more parts from the upstream processes. If the usage of a part slows or stops downstream, kanban then its production upstream will correspond- ingly slow or stop. In this way kanban functions Made famous by the Toyota production system as a sort of self-regulating, manual system for (TPS) and just-in-time (JIT), the term kanban controlling the flow of materials from upstream simply refers to a card or ticket used to control stages, including outside suppliers, through final production and inventory of a given item. Kanban assembly. cards typically indicate such information as the Although the term kanban system is sometimes relevant part number, process name, and num- used synonymously with just-in-time or Toyota ber of parts per container. In a kanban system production system, it should be recognized that (kanban hoshiki), these cards are used in combina- kanban is merely a mechanism to help achieve tion with returnable containers that hold a desig- the goals of JIT and is only one aspect of TPS. nated number of parts. Together they form a Also, successful implementation of a kanban sys- means to authorize and coordinate the produc- tem requires that many supporting factors be in tion and movement of materials between stages place, including leveled production schedules, of a manufacturing system so as to prevent ex- high-quality levels, rapid equipment set-up times, cess production and inventory. multiskilled workers, and so forth. Taiichi Ono of Toyota Motor Corporation is credited with leading the development of the kanban system. He, in turn, credits American su- Further reading permarkets as being an inspiration in the sense Fujimoto, T. (1999) The Evolution of a Manufacturing Sys- that they put additional items on the shelf only tem at Toyota, New York: Oxford University Press. to replenish the number of items pulled off by Monden, Y. (1998) Toyota Production System: An Integrated customers. When Toyota originally developed the Approach to Just-In-Time, 3rd edn, Atlanta, CA: Insti- kanban system in the 1950s, Toyota called it the tute of Industrial Engineers. “supermarket system” and adopted the kanban Ohno, T. (1988) Toyota Production System, Portland, OR: name some years later. Toyota first implemented Productivity Press. kanban on a plantwide scale in 1959 and extended it company-wide in 1962. In 1965, Toyota began SHANE J.SCHVANEVELDT extending the kanban system to its suppliers. There are various types of kanban cards and Kansai culture systems. In the most basic form of kanban system, the production of more parts is authorized In ancient Japan around the twelfth century only when a worker begins to withdraw parts Kansai, which literally means “west of the bar- from an existing full container of the part, at rier”, referred to the whole of western Japan, west 262 Kansai culture of a major barrier station located in today’s Mie internationally with Westerners and Chinese. Prefecture in the middle of Honshu Island. Kanto, They also provided major daimyos with guns, “east of the barrier”, referred to eastern Japan. which were then new weapons. Guns were ini- Today the areas of both Kansai and Kanto are tially brought to Japan from Portugal in the mid- much more limited. Kanto indicates Tokyo and sixteenth century but soon thereafter were being its several surrounding prefectures, and Kansai made by Japanese artisans. Sakai was a center of covers three major cities in the west, Osaka, the gun industry at the time. Even today the spe- Kyoto, and Kobe, and a few surrounding prefec- cific skill and expertise developed in making guns tures. Kansai and Kanto have been noted as two survives in the production of high-quality bicy- major central areas in the history of Japan, al- cle parts and cooking knives, which are exported though in the postwar period, Kanto has been overseas in addition to having a large domestic increasingly dominant politically economically market share. and culturally. Toyotomi Hideyoshi, a peasant-born samurai, Even though the term “Kansai” is widely used finally put an end to a half-century of civil war in Japanese daily living, it is hard to say that there toward the end of the sixteenth century He built is a common “Kansai culture,” as the area that a huge castle in Osaka to rule Japan and dramati- Kansai covers consists of a wide variety of sub- cally increased the commerce of Osaka. cultures. Values, customs, communication styles, Tokugawa Ieyasu reigned in Japan after the death and so on are significantly different, even among of Hideyoshi and even after he settled his the above-mentioned central three cities. shogunate government in Edo (now Tokyo) in Kyoto has a long history of noble culture. The the early seventeenth century Osaka continued imperial family had resided there for over 1,000 to be the center of commerce for over two centu- years before moving to Tokyo in the late nine- ries during the Tokugawa period. teenth century Osaka has developed since the Japan’s modernization started after the sixteenth century as a center of Japanese com- Tokugawa period ended in the late nineteenth merce and industry In contrast, Kobe has a rela- century Even though modern Japan’s capital is tively short history It was founded in the late Tokyo, Osaka played a central role in moderniz- nineteenth century but its historical significance, ing Japan. From the end of the nineteenth cen- parallel with that of Yokohama in Kanto, as a tury until the 1930s, Osaka was the center of the major international trade port of Japan has been spinning industry in Japan, the tractor of the in- notable. Therefore, Kobe has been known as a dustrial revolution. Toyobo, one of the major spin- city with an international atmosphere because ning companies based in Osaka, was the largest many Westerners and Asians have settled there such facility in the world in the early 1930s. Thus, since the beginning of the city’s history In addi- Osaka was said to be the “Manchester of the tion to these three cities, the city of Nara, the Orient.” ancient capital of Japan before Kyoto, can be also The chemical industry and pharmaceuticals included as part of Kansai, thus adding to the industry also developed in Osaka in moderniz- diversity of Kansai culture. ing Japan, as Osaka merchants had dealt with In terms of economic status, the three major Chinese and even Western medicine in the city areas are absolutely dominant in Kansai. Tokugawa period. Many of Japan’s major phar- However, since Osaka has been outstanding eco- maceutical companies originated in Osaka and nomically and in terms of population, the focus still operate there. is exclusively on that city Osaka began to play a Osaka also witnessed the founding of seven major economic and industrial role in the his- out of nine sogo shoshas, large-scale trading com- tory of Japan in the late sixteenth century The panies in Japan, including Sumitomo, ITOCHU city of Sakai, in the southern part of Osaka, and Marubeni. Only two others, Mitsubishi and emerged as a major international center of com- Mitsui, started in Tokyo. Japan’s representative merce and industry in the late sixteenth century electric appliance makers, Matsushita and when Japan was torn by civil wars among daimyo, Panasonic, also originated in Osaka. The former’s the samurai lords. The merchants in Sakai traded founder, Matsushita Konosuke, said to be the kansayaku 263

“God of Management” in Japan, was trained to cation is that Osaka is noted as a centre of com- be a merchant in Senba, a small region in Osaka, edy. Many comedians who have come from historically known as the mecca of commerce. Osaka or been trained there have become famous Sharp also started in Osaka, although the nationwide. founder came from Tokyo. In addition, major securities houses such as Nomura Securities and NORIYA SUMIHARA Daiwa have roots in Osaka. Since the Second World War, Tokyo has had an increasingly greater presence economically as kansayaku well as politically whereas Osaka’s presence has declined significantly. However, the tradition of The kansayaku is equivalent to an auditor in West- centuries of commerce and industry can also be ern companies, and a mandatory organ for any seen in the culture of the daily way of living and kabushiki kaisha (joint stock corporation). The the values of Osaka people. kansayaku monitors the management of the If one were to characterize Osaka culture, it torishimariyakukai and audits the accountings would be as a culture of the people. This appears of joint stock corporations with more than ¥100 in various aspects of Osaka people’s behavior. million of capitalization. The former function is An individual is evaluated by his personality and not assumed in case of joint stock corporations ability not by his birth, formal authority or po- with ¥100 million of capitalization or less. The litical power. This consciousness can be traced kansayaku is not mandatory for yugen gaisha (lim- to Toyotomi Hideyoshi, who ruled Japan in the ited liability corporations), and if there is one, sixteenth century. He is still a hero in Osaka be- assumes only an auditing function. In either case, cause he was a peasant-born man of great ability the general assembly of stockholders or mem- who made his way from the bottom to the top of bers of the corporation elect kansayaku. The Com- society. The Osaka anti-establishment attitude can mercial Code stipulates that kansayaku are not also be seen in the tradition of public entertain- eligible to serve as torishimariyaku, general manag- ment. For example, unlike such Japanese tradi- ers, or as employees of the corporation or its sub- tional performing arts as the no play and kabuki, sidiaries (article 276). whose performers are hereditary in the bunraku More than three kansayaku must be elected for puppet play which developed in Osaka in the a stock corporation with outstanding common Tokugawa period, birth is not important. Recruits stock of ¥500 million or more or total liabilities are found in the general public and trained to be of ¥20 trillion or more, and more than one is performers. required to be chosen from outside the corpora- The Osakan consciousness of anti-authority tion. The kansayaku must then set up a and power sometimes manifests itself as an anti- kansayakukai, auditing board. Tokyo attitude. Unlike many other areas in Ja- Kansayaku can request that anyone in the cor- pan, what is trendy in Tokyo is not necessarily poration at any time report to them about the so in Osaka, where people tend to assert their corporation’s operations, and are entitled to sur- own taste. vey the practices and properties of the corpora- Osaka’s tradition of commerce is also mani- tion (article 274 clause 2). Torishimariyaku must fested in the people’s face-to-face communication promptly report to kansayaku in cases where a dan- style. In negotiation, for example, a delicate tech- ger that might cause asubstantial damage to the nique of communication is used by which one corporation has been identified (article 274–2). expresses his opinion and feeling quite honestly Kansayaku at a parent company if it is deemed but in a way that avoids hurting the opponent’s necessary for them to carry out their duties, can feelings. Conversely even in cases where an op- exercise these same rights in regard to subsidiar- ponent is too aggressive or offensive, an adroit, ies, and are required to mention in the auditors often humorous defensive response is given on report the methods and results of their auditing an ad hoc basis. in regard to subsidiaries (article 281). One outcome of such a culture of communi- Projects and papers drafted by torishimariyaku 264 Kao

for submission to shareholders at the general Europe. Consolidated sales for 1999 were ¥924.5 meeting of shareholders must be scrutinized by billion with a net profit of ¥98 billion. kansayaku prior to submission. If kansayaku find Kao has grown to 6,086 employees worldwide, violations of law or violations of the articles of excluding related subsidiaries and joint venture association of the corporation, or a matter of sub- companies. Of that total, almost a quarter of the stantial inadequacy they must declare this at the workforce are involved in research and develop- general meeting (article 275). ment. Even with this extraordinarily high per- Kansayaku are entitled to request that centage of employees devoted to R&D, former torishimariyaku cease actions that are either beyond president Maruta Yoshiro said that half of the em- the purpose of the corporation or that amount- ployees in the future would be involved with re- ing to a violation of law or the articles of associa- search and development. By focusing on tion that may lead to substantial damage to the innovation and new products, the company has corporation (article 275). An extension of this remained at the forefront of basic chemical re- function of the kansayaku is that, in case of legal search. disputes between the torishimariyaku and the cor- Kao has announced that its strategic goals are poration, the kansayaku represents the latter (arti- to invest in technological development, develop cle 267 clause 1). Prosecution of the marketing through new distribution systems, and responsibilities of torishimariyaku is also brought maintain a state-of-the-art information system. to trial by kansayaku (article 275–4). Kao’s increasing sales and profit could not be explained without discussing its marketing infor- See also: bubble economy; business ethics mation system (MIS). The “free access to information” computer system introduced in the organization allows anyone at Kao to access the Further reading sales system, marketing information system, production information system, and even the distri- Kishida, M. (2000) Zeminaaru Kaishaho Nyuumon (Intro- bution information system. This unique system ductory Seminar on Corporate Law), Tokyo: Nihon provides the user full access to real time com- keizai shinbunsha. pany data, giving all employees firsthand busi- Maeda, H. (2000) Kaishaho Nyuumon (Introduction to ness knowledge regardless of their position in the Corporate Law), Tokyo: Yuuhikaku. company. Oda, H. (1997) Basic Japanese Laws, Oxford: Oxford Another strength of the Kao management sys- University Press. tem is its distribution system, which has been KAZUHARU NAGASE evaluated as the best of any Japanese corporation. The Tokyo Distribution Center runs at such Kao a high capacity that deliveries of Kao products can be made to as many as 6,000 retail stores Tomiro Nagase founded Kao in 1887, creating located at metropolitan areas by the next day fol- the first soap business in Tokyo. Throughout its lowing receipt of an order. history the company changed its name nine times Kao has established its consumer products and and made seven changes in its logo, indicating chemical products as the pillars of its business how the company has tried to adapt to the chang- activities, and is striving to expand its operations ing tastes of society in Japan. The current presi- in each business segment and in the global mar- dent, Takuya Goto, has led the company through ketplace by providing consumers throughout the major structural and cultural change in order to world with superior products and services. become the leading company in the household products industry in Japan. Kao sells over 600 Further reading consumer products, from household detergents to floppy disks. In addition, the company is now Nonaka, I. and Takeuchi, H. (1995) The trying to globalize and has so far established for- KnowledgeCreating Company, New York: Oxford Uni- eign operations in Asia, North America, and versity Press. karoshi 265

Noriaki, O. (1985) Kao’s Astounding Strategy VAN, To - • 70 percent feel stressed; kyo: Chukei. • 44 percent feel constant fatigue; • 42 percent fear death from overwork; MARGARET TAKEDA • 28 percent lack creativity and motivation; TETSU MORISHIMA • 23 percent feel a frequent desire to call in karoshi sick. At time of writing, there is a great deal of debate Fundamental changes in the employment envi- in Japan regarding sudden death among Japan’s ronment are taking place, however, which should white-collar workers. This phenomenon is called have a favorable impact and minimize karoshi. The karoshi, or sudden death syndrome. The Japanese rise of the shinjinrui (new workers), the new gen- officially recognized karoshi as a fatal illness in eration of Japanese born into affluence, is chang- 1989. Its symptoms include high blood pressure ing work habits and transforming Japan into a and asthma-like problems. Most of the victims, consumption-driven economy Employees are no in their prime working years in white-collar oc- longer willing to sacrifice their lives for the good cupations, die from subarachonodial hemorrhage of the company or try to give the appearance to (stroke) or myocardial infarction (heart attack). that effect. Employees are resisting pressure to The cause of karoshi can be attributed to the stay at work when there is no actual work to be fundamental nature of the Japanese-style work done. They are choosing to spend more time at week, which consists of twelve-hour days and home with their families, and are even taking workfilled evenings. The Japanese work such long vacations. hours because in many organizations, working Although the Japanese government has finally overtime has become a ritual of obedience and acknowledged that karoshi claims an estimated subservience. This is in spite of the fact that there 10,000 workers each year, it still does not offi- is rarely any work-related reason and there are cially recognize its existence and does not main- no improvements in productivity for the com- tain comprehensive statistics. However, the pany. In addition to the long working hours, there Japanese Labor Ministry said it would introduce is social pressure which discourages employees a new medical insurance program meant to pre- from taking vacations. vent karoshi or death from overwork. Workers Consequently many Japanese workers feel believed to be at greatest risk—those who are mentally and physically fatigued every day and obese, have high blood pressure, high blood sugar many are afraid of dying from overwork. This and high blood lipid levels—would get free medi- high level of work anxiety often results in poor cal checkups under the plan. work performance for those employees, causing other employees to take up the slack. The resulting redundancy means that the some employees Further reading are doing the work of up to four people. Those overworking employees cannot manage the “A Kinder, Gentler Workplace” (2000) New York Times, heavy workload within normal time frames and January 30, 3 (4): 1. so they work extra long hours in order to give Brown, W, Lubove, R. and Kwalwasser, E. (1994) the appearance of efficiency. The result is a Karoshi: Alternative Perspectives of Japanese Management selffulfilling destructive cycle of anxiety Styles, Greenwich, CT: Business Horizons. overwork, and death. Palumbo, F. and Herbig, A. (1994) “Salaryman Sud- To illustrate the extent of the karoshi phenom- den Death Syndrome,” Employee Relations, 54–61. enon, a study conducted by the Fukoku Life In- Smith, P. (1998) “Tougher than the Rest,” Management, surance Co. found that: 42–7. • 80 percent of Japanese workers want to sleep MARGARET TAKEDA more; 266 Keio University

Keio University doctoral programs, an individual could pursue what might be called a “cradle to corporation” Keio University (in Japanese, Keio Gijuku educational experience at Keio. Daigaku) was founded as Fukuzawa’s Dutch Keio University has maintained its position Studies School in Edo (present-day Tokyo) in as Japan’s leading educator of business manag- 1858 by Yukichi Fukuzawa. It is the oldest insti- ers in several ways. In 1978, it became the first tution of higher learning in Japan and, with university in Japan to offer an American-style Waseda University one of Japan’s two leading Master of Business Administration (MBA) de- private universities. Historically it has been a gree. In a partnership with Harvard Business primary source of many of Japan’s top business School, it introduced a full-time MBA program leaders, a position that it continues to hold to the modeled on Harvard’s curriculum and employ- present. ing the distinctive case method pedagogy It sub- The name “Keio” was adopted in 1868 and sequently introduced Executive MBA courses. comes from the Japanese name for that era. In With the growth of executive education, lifelong 1871 the university moved to its present location learning and distance education trends to Japan, in Mita, a southern section of Tokyo. At present Keio University’s role as a leading business edu- it also maintains two large branch campuses: cator continues to expand. one in Hiyoshi, a suburban area roughly midway between Tokyo and Yokohama, and one in ALLAN BIRD Fujisawa, about forty minutes by train west of Tokyo on the coast. Keio’s prominence as a university and its in- Kirin Brewery fluence within Japan is twofold. First, early on the university established a reputation for edu- Kirin Brewery is Japan’s largest brewer. Kirin has cating business leaders. As school-based dominated the Japanese beer industry for most habatsu—i.e. gakubatsu—became established in of the postwar period on the strength of its flag- larger firms, a powerful dynamic was created to ship Kirin Lager brand and a strong supporting enhance this reputation. Within a firm, the Keio production and marketing strategy. gakubatsu helped advance the careers of its mem- Kirin’s origins go back to Japan’s first brew- bers who, in turn, encouraged the hiring of Keio ery Spring Valley Brewery which was established graduates, who joined the company thereby by an American in Yokohama in 1870. In 1885, strengthening the influence of the gakubatsu. In Spring Valley was reorganized into Japan Brew- some organizations, Keio graduates accounted ery Company Ltd, with financial backing from for an influential portion of the overall manage- several of Japan’s leading industrialists, includ- rial cadre. For example, at Mitsukoshi, the top ing Yanosuke Iwasaki of the Mitsubishi business department store chain, as late as 1990, approxi- group. Under the guidance of German mately one-fourth of the torishimariya kukai, or brewmasters, Japan Brewery offered a German- board of directors, were Keio graduates. style lager beer named “Kirin,” after a dragon- Second, having been founded by one of Ja- like creature from Chinese legend. (A picture of pan’s most influential and revolutionary educa- a kirin adorns the Kirin beer label.) In 1907, the tors, it has continued to pioneer many educational company again changed hands, and was renamed initiatives. As far back as 1898 it created what Kirin Brewery Company. amounted to a vertically integrated educational Japanese breweries proliferated and thrived corporation by establishing elementary and sec- during the early twentieth century but with the ondary schools. This meant that a student could 1929 stock market crash, the worldwide depres- begin the very first year of formal education sion of the 1930s, and the Second World War, within the Keio system and continue all the way demand plummeted and many breweries closed through to university graduation in that system. or consolidated. By 1948 only two beer makers With the postwar establishment of a Keio pre- remained in Japan: Kirin and Dai Nippon Brew- school, when combined with its graduate and eries, which had been built over a forty-year Koike, Kazuo 267 period through the merging of numerous inde- Further reading pendent brewers. In 1949, Dai Nippon was declared in violation of Japan’s new anti-monopoly Craig, T. (1996) “The Japanese Beer Wars: Initiating law and split in half along geographical lines, with and Responding to Hypercompetition in New Prod- its operations in western Japan becoming today’s uct Development,” Organization Science 7 (3): Asahi Breweries and those in eastern Japan be- 302–21. coming today’s Sapporo Breweries. At the time TIM CRAIG of Dai Nippon’s breakup, Sapporo held 38.6 percent of the market, Asahi 36.1 percent, and Kirin 25.3 percent. Koike, Kazuo Over the next thirty years, Kirin surpassed its Koike (1932-) is the most influential labor econo- rivals and came to dominate the industry. Kirin’s mist in postwar Japan. His contributions to the success is attributed to several factors. First, the field of labor research lie mainly in three areas: breakup of Dai Nippon into Sapporo and Asahi economic development, industrial relations left Kirin as the only brewer with a nationally theory and the economics of skill formation. recognized brand name and a nationwide sales Koike has bitterly criticized the popular theo- network, until the others could expand their op- ries of Japan’s economic development, especially erations. Second, Kirin anticipated growing de- the unlimited supply of labor and the dualist ap- mand for beer and aggressively built new proach to Japanese industrial organization. He production capacity at a rate of one new brewery advocates the latecomer theories of economic de- every two years. Third, Kirin targeted the home velopment proposed by Alexander Gerschenkron consumption market, which expanded rapidly in and Ronald Dore. the 1950s and 1960s as refrigerator use became Japan began to industrialize one hundred years widespread. Fourth, the strong, bitter taste of after the UK. The lack of strong craft unionism Kirin Lager was right for the times; the diet in as a result of late industrialization encouraged the postwar Japan was poor and bland, leading con- internalization of the labor market and fostered sumers to crave strong taste where they could the development of enterprise unions. The dis- get it. Finally the company effectively stressed tinction between blue-collar and white-collar al- Kirin’s superior taste in its advertising, leading most disappeared in postwar Japan. Koike the public to equate Kirin with beer. conceptualized this development as “white- In 1979 Kirin’s market share reached 63 per- collarization of blue-collar.” cent, prompting Japan’s Fair Trade Commis- Koike’s most important contribution lies in the sion to consider splitting the company into two economic analysis of on-the-job-training (OJT) separate entities. In the end, Kirin remained in- and career development. The recent progress of tact, though it suspended advertising for a time information technology requires OJT-based, more to dampen sales growth and deflect charges that intelligent skills which can be formed through it was a monopoly The company also began di- intra-firm career development. versifying into other product areas, including wines, soft drinks, restaurants, and pharmaceuticals. Further reading During the 1990s, Kirin lost ground in the Koike, K. (1977) The Economics of Work in Japan, Tokyo: beer market to Asahi, whose Super Dry brand LTCB International Library Foundation. became Japan’s top selling beer. But with two ——(1988) Understanding Industrial Relations in Japan, Lon- strong-selling brands in Kirin Lager and Ichiban don: Macmillan. Shibori, Kirin still held the industry’s largest Koike, K. and Inoki, T (1991) Skill Formation in Japan market share at around 40 percent in 2000. and Southeast Asia, Tokyo: Tokyo University Press. Kirin is a member of the Mitsubishi business group. SUSUMU HAGIWARA 268 Komiya, Ryutaro

Komiya, Ryutaro There currently are estimated to be over 40,000 konbini throughout Japan, many of them Ryutaro Komiya (1928–), professor at Aoyama franchised stores affiliated with large national Gakuin University and emeritus professor at chains. Several of these chains have thousands University of Tokyo, is one of the leading Japa- of outlets, including the largest chain 7–11 (over nese international economists. He served as the 8,000 stores), Lawson’s, Family Mart, Circle-K, director of MITI /Research Institute of Interna- and am-pm. Konbinis first carved out their niches tional Trade and Industry from 1987–97. He has as purveyors of take-out food, snacks, beverages, argued that the cause of the large trade surplus and magazines, but their repertoire has expanded of Japan is not due to the exclusive nature of the enormously. They have become general stores— Japanese markets toward imports but due to the touted as “lifestyle centers”—for young, mobile, fact that the amount of saving exceeds investment. free-spending Japanese consumers. Current He also argues that the situation of the United konbini staples include computer software; copy- States is just the opposite, and if the United States ing and fax services; music CDs; postage stamps does not adopt a policy of increasing the saving and telephone cards; tokens for toll expressways; rate, managed trade measures to correct the im- ordering flowers for delivery; and rail and air- balance are meaningless. Furthermore, he believes line reservations. that the Maekawa Report, which made a formal Food remains their mainstay however. Konbini commitment to the right of the Japanese to main- benefit from long-established patterns in Japa- tain a trade surplus, was a mistake. nese shopping behavior—frequent shopping trips for small quantities—which reflects some combi- Further reading nation of consumer preference for fresh food products with practical limitations on domestic Ryutaro, K. (1990) The Japanese Economy: Trade, Indus- storage space in densely populated Japanese cit- try, and Government, Tokyo: University of Tokyo ies. Traditionally urban neighborhoods were Press. dotted with small-scale shops that enabled resi- SUMIHIRO TAKEDA dents to shop quickly often, and close to home. Konbini are heir to this shopping and retailing konbini pattern. Konbini derive one-third of their sales from the sale of box lunches (bento) and prepared Konbini (convenience stores) constitute a dynamic foods, according to statistics reported in October segment of the Japanese retail industry that has 2000 by the Ministry of Economics, Trade and a major impact on distribution channels for food Industry (METI, formerly Ministry of Interna- and daily necessities and, increasingly for prod- tional Trade and Industry MITI). Packaged ucts and services based on information technol- foods, beverages, and snacks account for an- ogy. They are a ubiquitous presence on the urban other third. Magazines, media, and services Japanese landscape and an iconic trend in popu- make up the final third of their sales. Electronic lar sociology. Convenience stores were introduced services constitute only about 4 percent of total to Japan from the United States in the 1970s, and sales, but this is the fastest growing segment, in- the term konbini, a contraction of “convenience,” creasing approximately 10 per cent over the pre- first gained popularity around 1990. vious year. Sales for top-of-the-line konbini Konbini are medium-sized, brightly-lighted, locations average approximately ¥600,000 per streamlined shops, usually open twenty-four day hours a day and generally located in high-traffic During the enduring Japanese economic slump sites. The stores sell ready-to-eat and simple pack- since the late 1980s, konbini chains have increased aged foods, beverages, magazines, toiletries, and their market share vis-à-vis other categories of basic household goods. Initially konbini were popu- large-scale retailers such as supermarket chains lar primarily with young adults and commuters, and department stores. In 2000, the konbini re- but their appeal has spread widely and their num- tail sector had an estimated sales volume of ¥6 bers have grown enormously. trillion, roughly 70 per cent of the total sales of konbini 269 department stores and 40 per cent of supermar- and that they can arrange for delivery at a time ket sales. Profit margins for konbini tend to be and place convenient for their daily commute. higher than those for other large-scale retailers. In response to government mandated social Some national konbini chains are subsidiaries welfare programs, one major chain has developed of major retail corporations. 7–11, for example, a system for daily deliveries of meals to senior is owned by Ito-Yokado, a major supermarket citizens. Government agencies are considering and discount chain which itself purchased the possibilities for distributing bureaucratic forms Southland Corporation, the US founder and to the general public and accepting routine infor- disseminator of the franchise. Lawson’s, the sec- mation, such as social services applications, via ond largest Japanese konbini chain, is owned by konbini networks. another major supermarket and discount re- The extensive technological know-how and in- tailer, Daiei. An initial reason why large-scale frastructure provided by large konbini chains has retailers actively developed konbini was as a strat- been a critical factor in their successful market- egy to work around the restrictions on the size ing of franchises to local business people, many and scale of retail stores (under the Large Retail of whom have converted old-line specialized re- Store Law) which effectively prevented the ex- tail shops—corner grocers, rice shops, or liquor pansion of supermarkets and department stores stores—into konbini. Small-scale family owned into many commercial districts and most resi- shops have been a major feature of the urban dential neighborhoods. The small size of konbini retail, wholesale, and service sectors for genera- (usually well under 100 square meters) set them tions. Many family-owned businesses occupy outside the scope of the restrictive law, and ma- valuable commercial locations, but in the past jor retailing firms were able to engineer ultra-so- generation this small-scale sector of the economy phisticated distribution and inventory systems has faced enormous labor difficulties, between appropriate to dense networks of small-scale out- the aging of the population engaged in family lets. enterprises and the reluctance of children to fol- 7–11, in particular, is noted for pioneering a low in parental footsteps and take over the busi- retail “just-in-time” distribution and inventory nesses. Konbini therefore offer many small-scale system, which relies on deliveries daily or more family businesses a good opportunity to capital- often. Their system incorporates sophisticated ize on real estate assets and to retain ownership realtime point-of-sale data collection for inven- of a local business, much of the management of tory control and ordering, as well as consumer which is embedded in the technical know-how analysis and market forecasting. The aggressive and efficiently engineered distribution systems use of information technology by konbini has also of the large franchise chains (see distribution sys- enabled the major chains to become major pro- tem). These systems reduce the need for hands- viders of a wide (and increasingly wider) range on management by local proprietors and enable of electronic services. Konbini provide automated the stores to be operated largely with relatively teller machines; process many kinds of routine low-cost, low-skilled labor. Many stores rely to a bill payments for utilities and insurance compa- great extent on part-time labor, for example from nies; make reservations and sell tickets for con- college students and housewives. certs, sports events, and travel; operate as Konbini have become a major social phenom- drop-off and delivery points for express services enon in their own right, and there is an enor- (takkyubin); and download software updates for mous amount of pop sociological analysis of their consumers. Konbini have developed a pivotal role impact and appeal. Some critics of konbini see them in e-commerce, through links made with major as garishly intrusive shops that destroy local re- Japanese manufacturers and merchandisers. tail competitors and push aside local production Konbini serve as a customer’s point for picking up and distribution networks in favor of highly cen- and paying for products that consumers order tralized major corporations. This economic trend over the internet directly from other companies. has the side effect of hollowing out the social in- The advantages for consumers are that they do frastructure of regional and community life. not have to use a credit card over the internet Other opponents see konbini as purveyors of a 270 Kyocera highly impersonal popular culture of consump- GmbH, a joint venture with Feldmuhle AG of West tion that especially targets alienated teenagers and Germany to manufacture semiconductor pack- young adults. Still other detractors decry the ages, and Kyocera Hong Kong, which supplies elec- impact of konbini on nutrition and cuisine: the tronic components and equipment to Southeast pejorative term “konbini housewives” labels young Asia. In 1979, Kyocera acquired Cybernet Elec- women who lack culinary skills and depend on tronics Corporation, a manufacturer of citizen- the ready-made dishes of their local convenience band radios and equipment, in order to expand stores. the company’s base outside of ceramic packaging. Regardless of the criticisms, konbini have clearly In 1988, as part of a major expansion to bolster established themselves as a major category of overseas operations, Kyocera set up head offices Japanese retailing, with wide consumer appeal in Asia, the United States, and Europe (based in and a significant impact on future developments Germany). Also in 1990, it spent $250 million to in merchandising and services. They appear well- acquire Elco corporation, a maker of electrical positioned to continue to expand their influence. connectors, and $560 million in 1991 to acquire AVX Corporation, a manufacturer of multi-lay- THEODORE BESTOR ered ceramic and tantalum capacitors used in semiconductors, based in South Carolina. In 1995, it Kyocera expanded into multimedia with the establishment of Kyocera Multimedia Corporation. Later the Kyocera Corporation was originally founded as same year, it established Shanghai Kyocera Elec- Kyoto Ceramics Ltd. in April 1959 by Dr. Kazuo tronics Co. Ltd to manufacture electrical compo- Inamori and seven colleagues as a company spe- nents in China. In 1996, it merged with Dongguan cializing in fine ceramic components. Today it is Shilong Kyocera Optics Co. Ltd to manufacture the world leader in the manufacture of fine ce- and sell consumer optical instruments such as cam- ramic components, semiconductor components eras, lenses, and stroboscopes. (circuit boards), electronic components (liquid As of March 2000, Kyocera had 13,746 em- crystal displays, LCD), information equipment ployees, capital of ¥115, 703, 320,000 and $7,779 (printers), telecommunication equipment (cellu- million in sales. Its largest sectors in terms of sales lar phones) and optical equipments (single-lens are electronic equipment (33.4 percent), telecom- reflex). munications equipment (20.7 percent) and semi- Most of Kyocera’s growth is due to mergers and conductor parts (18.8 percent) respectively It is acquisitions. Some of its subsidiaries include traded on the Tokyo, Osaka and New York stock Kyocera International Inc., which was established exchanges. in the United States in 1969 as a sales company Feldmuhle Kyocera Elektronische Bauelemente DAYO FAWIBE L

Large Retail Store Law, 1974 if successful, typically required two years or longer from the time approval was first sought. The Large Scale Retail Store Law (which was en- The process involved hearings before local pan- acted in 1973 and took effect in 1974, was els that included owners of existing stores whose amended in 1978, and abolished in May 1998) businesses would have suffered if the particular was the latest in a succession of Japanese laws proposed large store was established. These pan- over the last sixty years that imposed bureaucratic els tended either to recommend against MITI obstacles to the establishment of large stores. The approval or else propose restrictions on the hours Department Store Act of 1937, which was sus- or days of the week that a new large store could pended in 1947 and then reinstated in 1956, re- operate. In many cases they proposed onerous quired approval of the national government requirements such as the requirement that the (Ministry of Commerce and Industry prewar/ large store offer classes in cultural activities like Ministry of International Trade and Industry calligraphy or floral arrangement, at prices that postwar) for the opening of new department failed to cover costs. MITI tended to adopt these stores anywhere in Japan. In 1974 the Large Scale recommendations and proposals. Consequently Retail Store Law replaced the Department Store following the adoption of the 1978 amendments Act and made the extent of floor space of pro- to the Large Store Law, the number of applica- posed stores, rather than the nature of the stores, tions to open new stores dropped to a mere trickle the criterion for necessitating MITI approval. The in 1984, with less than 500 applications for per- cutoffs were 3,000m2 in the largest cities and mission to open stores with floor space in excess 1500m2 everywhere else; in fact, almost all stores of 500m2 in all of Japan, a nation of 120 million with more floor space than these cutoff limits had persons (see Larke (1994) for the details of the been department stores. In 1978 this law was process of gaining approval to open a new large completely revamped so as to broaden its cover- store). age to include all proposed new stores with floor In 1989, the US government identified the space above 500m2. In May 1998, the Diet re- Large Store Law as a “structural impediment” to placed the old law with a new one (actually with the sale of US-made consumer products in Ja- three new laws) that place all details of the regu- pan, arguing in trade negotiations with the gov- lation of large stores under the control of the pre- ernment of Japan for repeal or relaxation of the fectural governments. Some prefectures may law. Whatever the merits of the claim that ex- enact more severe restraints on the opening of pansion of the number of large stores in Japan large stores, and others may remove the restraints would expand commercial opportunities for altogether. American businesses, the government of Japan Prior to 1998, the process of securing MITI did agree to expedite the process of approving approval to open a large store was tortuous, and, the opening of large stores. But the law remained 272 Large Retail Store Law, 1974 in force and the actual numbers of large stores deadweight losses they impose are small in rela- showed little signs of increase. Then in 1998 the tion to the net subsidy. Given that small stores Diet repealed the Large Store Law, in effect shift- are already ubiquitous in Japan for the reasons ing control of such regulations to the prefectural mentioned in the previous paragraph, regulations governments (who may actually perpetuate simi- that protect small stores from competition by large lar restrictions to those embodied in the old law). stores imply only small economic distortions and The Large Store Law is the essential reason why encounter little effective resistance. If small stores Japan, at least for now, has far fewer department did not already predominate, the Large Store Law stores per person than the USA while at the same could not have survived in Japan’s political mar- time it has far more of most other kinds of stores ketplace. Geographic factors in the USA have per person (McCraw and O’Brien 1986). Never- favored large chain stores, and slanted the politi- theless, the Large Store Law and its antecedents cal marketplace in favor of regulations that ben- are almost certainly not the fundamental basis efit them instead. Government limitations on large for Japan’s multiplicity of small stores. stores can survive the give-and-take of political The proliferation of retail stores benefits house- competition in Japan but not in the USA. For holds but at the same time raises the logistical local zoning that favors large stores over small costs of the distribution sector itself. It is more ones the reverse is true. In each case, regulation costly to restock numerous small stores than a ends up exaggerating the inherent tendencies few large stores. Put differently as stores prolifer- rather than fundamentally influencing them. ate some of the burden of transporting goods from The Large Store Law of Japan and its ante- point of production to point of consumption are cedents have protected small stores from compe- shifted away from households and on to the dis- tition with larger ones. Government regulations tribution sector. Just how far such shifting will go in the USA have tended to favor large stores. depends upon the households’ and distribution Local zoning in almost every city in America has sector’s relative efficiencies at storing and trans- had the effect of separating residential and com- porting goods. This is because new stores can be mercial activities, which promotes car ownership profitable only if the added benefits their pres- and favors large stores over smaller ones. Many ence confers are greater than their costs. Factors scholars and others have correctly deplored Ja- such as scarcity of living space, that raise all house- pan’s Large Store Law as imposing unnecessary holds’ costs of storing goods lead households to constraints on the marketing of goods in Japan, offer higher price premia to retailers who locate but have perhaps both exaggerated the extent to closer to their dwellings. This makes a greater which Japan’s marketing system reflects the heavy profusion of stores profitable. Similarly factors hand of government regulation, and overlooked that lower retailers’ costs render it more profit- the extent to which America’s marketing system able for them to accommodate households’ pref- and those of other nations are also influenced by erences for shorter shopping trips and increase government regulations. the profitability of a profusion of stores. Sorting Japan’s fragmented and complex distribution out the various influences on Japan’s density of sector is uniquely suited to its own particular retail stores which include the Large Store Law, geography. The scarcity of living space in Japan, scarcity of household storage space, geographic and the inconvenience of owning and operating centricity cost of maintaining personal vehicles, a car, enhance Japanese households’ willingness and population density requires careful statisti- to pay for the added convenience of next-door cal investigation. To this point there have been shopping. And Japan’s geographic centricity and only a few such studies (Flath (1991), Potjes highly developed transport system lower the costs (1993), and Flath and Nariu (1996)), but their of a distribution sector that accommodates this findings support the tentative conclusion that preference, a distribution sector having a prolif- regulation matters less than the other factors just eration of retail outlets that must be continually mentioned. restocked through complex logistical arteries. Government policies that transfer income en- These factors combine to make a proliferation of counter less strenuous political opposition if the stores in Japan not only inevitable, but desirable. Liberal Democratic Party 273

And given this, regulations like the Large Store war period, and tended to be critical of the new Law that protect small stores from competition constitution drafted in 1947. As they outnum- by large ones imply only minor economic distor- bered the former LP members, the new party’s tions and encounter little effective political resist- platform called for constitutional reforms, which ance. The Large Store Law more reflected than contributed to the “reactionary” and “right-wing” shaped the structure of Japan’s distribution character of the LDP. In contrast, the former LP sector. members were generally more consenting to the new constitution, under which they had started their political careers. References The postwar political structure of Japan is sometimes referred to as a two-party system con- Flath, D. (1991) “Why Are There So Many Retail trolled by the LDP and the SDP, or the “1955 Stores in Japan?” Japan and the World Economy 2: 365– regime.” In fact, however, it was an exemplary 86. model of the predominant-party system, consist- Flath, D. and Nariu, T. (1996) “Is Japan’s Retail Sec- ent with the definition laid out by Giovanni tor Truly Distinctive?” Journal of Comparative Eco- Sartori, a leading Italian political scientist. The nomics 23:181–91. LDP secured the position of the first party in all Larke, R. (1994) Japanese Retailing, London: Routledge. general elections for more than three decades McCraw, T.K. and O’Brien, P. (1986) “Production and (1958–90), and stayed in power throughout the Distribution: Competition Policy and Industrial period of Japan’s economic growth and bubble Structure,” in T.K.McCraw (ed.), America Versus Ja- economy. Its defeat in the general elections in pan: A Comparative Study, Boston: Harvard Business 1993 put the party for the second time in its his- School Press, 77–116. tory in opposition. But the next year the LDP Potjes, J.C.A. (1993) Empirical Studies in Japanese Retail- came back to power in a coalition government ing, Tinbergen Institute Research Series no. 41, with its arch-rival the SDP, and has managed to Amsterdam: Thesis Publishers. stay as the central force of successive coalition governments since then. DAVID FLATH However, the end of the Cold War makes it extremely difficult for the LDP to retain its ini- Liberal Democratic Party tial, and essential, identity as an anti-socialist coalition. Being created as the central pivot against As the dominant political party of Japan, the Liberal the danger of socialist revolution, and almost Democratic Party (LDP), known in Japanese as Jiyu nothing else, the LDP has become a catch-all Minshu To or simply Jiminto, has been in power party The party was split in 1993 precisely be- throughout the post-Second World War era except for cause of different ideologies among members. two brief periods. It was established in 1955 as the result of a merger between the Democratic Party (DP) led by Ichiro Hatoyama, the then prime minister, and Leaders and achievements a dissident group of the Liberal Party (LP) led by Shigeru Yoshida, Hatoyama’s predecessor. The party Ichiro Hatoyama was elected the first president was largely meant to be an anti-socialist coalition, as (Sosai) of the LDP in 1956. As the prime minister socialist candidates had won more and more seats of since December 1954, he wished to reverse his the House of Representatives in the successive elec- aristocratic predecessor Yoshida’s pro-US for- tions in 1952, 1953, and 1955. The establishment of eign policies. One result was the termination of the LDP was prompted by the reunification of the So- the belligerent status between the former USSR, cial Democratic Party (SDP), the largest socialist with which diplomatic relations were normal- party which had split in 1951. ized in 1956. On the other hand, Hatoyama In the second half of the 1950s, the LDP con- tried, and failed, to revise the constitutional sisted of two major groups. Most of the former clause, Article Nine, that calls for the abandon- DP members had been in politics since the pre- ment of arms. 274 Liberal Democratic Party

After a brief interval, Nobusuke Kishi, who troduced a new style of premiership described as as a leading official had been purged on suspi- “taking a low profile” or “tolerance and patience.” cion of being a war criminal, took office in 1957. His administration put aside the constitutional Kishi also was critical of Yoshida’s foreign poli- revision and honored the new security treaty with cies but, as his nickname Ryogishi (literally “both- the USA, but built up de facto military strength. sided”) indicated, he was a genuine realist. He Ikeda is generally regarded as the statesman who aimed at what he thought would be the real in- established the postwar Japanese conservative dependence of Japan, free from the US influences politics. Japan enjoyed the economic growth in the sphere of international politics, and adopted throughout the 1960s, which consolidated LDP’s pro-US policies precisely for this reason. The Ja- position as the ruling party. pan-US security treaty concluded by Yoshida in Ikeda’s successor, Eisaku Sato, was in office 1951, provided no duty on the part of the US for seven years and eight months, the longest military forces based in Japan to protect it, which, premiership in postwar Japan. Sato was also a from the prewar politician’s viewpoint, was an graduate from the “Yoshida School,” but a offense to Japan’s sovereignty. younger brother of Kishi by birth. The fact made However, if Kishi wanted an equal partner- him a personification of the two founding par- ship with the USA, Japan would be obliged to ties’ ideologies (LP and DP). Sato’s premiership accept a reciprocal obligation to assist the USA was described as the politics of waiting, as he in case of war, but use of military means is ex- usually did not wish to intervene with sensitive plicitly denied by the 1947 constitution. Kishi’s political issues and preferred to wait until the goal then became to revise both the constitution opportunity ripened. But Sato was a shrewd and the security treaty with the USA. manipulator of appointments. He placed his con- Not only the SDP and Sohyo, the largest labor fidential fellow politicians in cabinet posts and organization at that time, but many ordinary citi- the principal party posts, in order to have them zens, still living with wartime memories, rejected carry out what he wished. Kishi’s idea. On May 19, 1960, Kishi suddenly One of the few issues on which Sato took an resorted to a forcible voting motion for ratifica- initiative was the return of Okinawa from US tion of the new security treaty with the USA. governance, which he deemed as his most im- The news made headlines nationwide and vio- portant task. Already Yoshida, his teacher in lent demonstrations took place demanding his politics, and his natural brother Kishi had pro- resignation and rejection of the treaty After a few vided him with examples to follow: the principle days, during which the Diet was surrounded by of give and take. Yoshida extended help to the tens of thousands of protestors, the new treaty USA in the first half of 1950s, when it badly was ratified, but Kishi was forced to resign. needed behind the front-lines activities support- His successor, Hayato Ikeda, was also a former ing its war efforts in the Korean Peninsula. Kishi high-ranking official, but a faithful disciple of the also supported the USA when it was challenged so-called “Yoshida School”. Yoshida, his political by the USSR with supremacy in rocket tech- teacher, had served as prime minister under the nologies in the latter half of the 1950s. In the occupation of Japan by the General Headquar- 1960s, Sato firmly supported the US commit- ters and the Supreme Commander of Allied Pow- ments to Vietnam, and Okinawa was returned ers (GHQ/SCAP), instituted the 1947 to Japan in 1972. However, some problems were constitution and concluded the peace treaty at left untouched, such as the suspected secret San Francisco, as well as the former security treaty agreement with the USA that allows the bring- although he rejected the idea of rearmament of ing of nuclear weapons into Japanese territory in the country Yoshida had put more emphasis on cases of emergency. postwar recovery. It was he who brought Ikeda In the 1972 presidential election held within and his aides, Masayoshi Ohira and Kiichi the LDP, Kakuei Tanaka defeated Takeo Miyazawa, into political careers and advised them Fukuda. By then, many Japanese had grown on various occasions. Ikeda launched the famous weary of prime ministers who came from the elite income doubling plan, but at the same time in- central bureaucracy such as Kishi, Ikeda, and Liberal Democratic Party 275

Sato. In this regard Fukuda, a graduate of the in office for five years, from 1982–7. Until 1985 University of Tokyo and a former Ministry of Tanaka and his loyal members of parliament, Finance official, was not an attractive candidate called the “Army of Tanaka,” exerted decisive in popular eyes. Tanaka, who had held a seat in influence in choosing LDP presidents, hence the the House of Representatives since he was first prime ministers of Japan. The credo of the Tanaka elected at the age of twenty-nine in 1947, was an faction was, as they themselves advocated, that experienced politician. Such prominent statesmen holding a majority meant holding power. The of the “Yoshida School” as Yoshida himself, Ikeda, LDP managed to rule Japan as the economy and Sato had trained him in politics. But the fact shifted from one of high growth to one of slow that he had graduated only from an elementary growth. school and had been in business in civil works In hindsight, many Japanese tend to regard contracting presented a sharp contrast to the pro- the 1990s as a “lost” decade, filled with legacies files of established political figures. of money but devoid of agenda. Not only the Tanaka’s premiership was heralded at first, as LDP but its archrival the SDP and other new it symbolized postwar Japan where the prewar parties were suspected of being incapable of guid- feudalistic social restraints no longer applied and ing the nation to overcome the social and eco- democratic values, as well as equality of economic nomic challenges that have arisen since the opportunities regardless of one’s birth or origin, collapse of the bubble economy. A question, then, were a reality. Although a score of prime minis- is why the LDP has lost its dominant role. This ters after Tanaka were again from the central question, in turn, leads to another: why did the bureaucratic circles (Fukuda, Ohira, and LDP succeed in riding out the economic ups and Miyazawa), the image of the Japanese prime min- downs and social changes throughout the post- ister changed irrevocably with Tanaka. Thanks war period? As an old adage goes, the cause of partly to his talent for oratory Tanaka enjoyed LDP’s failure lies in its very success. popularity for most of his term, but his politics were always accompanied with an image of plu- LDP power structure tocracy His approach was, critics said, centered on raising and distributing money in order to There are four main reasons for the LDP’s long make political gains such as winning elections and governance. Firstly the opposition, especially the forming and maintaining his faction; in short, a SDP, was, and still probably is, weak and never money politics. His greatest achievement was the really ready to be in power. Secondly the long normalization of relations with the People’s Re- history of the LDP as the ruling party provided a public of China in 1972. Despite this diplomatic strong reason for the electorate to vote for its success, he is generally regarded as the one who candidates. coined the legacy of money in Japanese politics. Thirdly the LDP was the only party fit to the Tanaka’s term was two years and five months. medium constituency system. Under this system, The oil shock shattered his ambitious policy of the country was divided into 130 districts, where economic expansion. In December 1974 he re- on average four members of parliament were signed due to financial scandals. Two years later, elected. Since the House of Representatives con- suspected of accepting bribes from Lockheed sisted of 512 seats, it required a party aiming for Corporation, he was charged with violation of an absolute majority to nominate more than two foreign exchange regulations. Although found candidates in all districts. Only the LDP was able guilty Tanaka retained a strong political influence to gather that number of candidates. until he died in 1985. On the other hand, however, more than two During the 1970s and 1980s, the LDP contin- candidates with the same party affiliation had to ued to remain in power under successive presi- contest with each other in the same constituency dents. After Tanaka, Takeo Miki, Fukuda, Zenko One difference between the LDP candidates lay Suzuki, Yasuhiro Nakasone, and Noboru in affiliations to factions within the LDP, not the Takeshita held the post of prime minister, each party itself. The LDP was, and still is, composed for about two years. Exceptionally Nakasone was of five or six factions. Election campaigns were 276 liberalization of financial markets

run by factions and candidates’ local supporters Ministry of International Trade and Industry organizations, but not by the party itself. Another are closely connected with each other through difference lay in the candidates’ popularity among the petrochemical industry and the party holds a the voters, which it was critical to win. Typically close relationship with the transportation indus- each potential candidate, regardless of whether try which is under the auspices of the Ministry he or she were actually seated in the parliament, of Transport. Business makes financial contribu- would be present at every ceremonial occasion tions to the party which is useful in having the to “sell” their face with a gratuity (now illegal), ministries and agencies grant licenses and pro- called giri. When elected, members belonging to mote policies fit to their needs. LDP gives aspir- a faction asked their boss to approach the minis- ant bureaucrats a chance of becoming a tries and agencies on behalf of their local sup- statesman. This system, however, often works to porters, called nemawashi. The boss, in need of protect vested interests that are in search of an the party members’ votes when he would run executive’s help to be shielded from free compe- for the LDP presidency accordingly approached tition (referred to as “convoy guard practices”). bureaucrats and assisted his followers’ support- In this regard, the LDP is neither liberal nor ers looking for subsidies to build bridges, roads, democratic, but may be similar to a social demo- railways, and so on. cratic party which stands by the weak. This method of systematically canvassing for Such a system will not survive as Japan enters votes is said to have been developed by Tanaka. the age of global mega-competition, which re- But this system required much money to be spent quires openness and fairness. The LDP also faces by politicians, not supporters. For example, mem- changes in the nation’s social and demographic bers of parliament hired, at their own expenses, structure. If the LDP clings to its traditional old private secretaries to be in charge of handling “customers” in local areas, it will run the risk of the various requests of their local supporters, or being rejected by new potential clients, especially “clients.” Since the late 1980s, LDP faction bosses the urban electorate. If the LDP regards the lat- one after another suffered from money scandals, ter as important, the former will no longer re- which aroused indignation among the voters. In gard the party as their representative. The party the face of demands for political and electoral today faces an unprecedented dilemma. reforms, the medium constituency system was replaced in 1994 with the single-member constitu- Further reading ency system for 300 seats and the proportional representation system for the remaining 200 seats. Curtis, G.L. (1971) Election Campaigning Japanese Style, Subsequent general elections, taking place in 1996 New York: Columbia University Press; trans. and in 2000, however, have not yet produced the S.Yamaoka as Daigishi no Tanjo (Birth of a Politician), two-party system that the reform had anticipated. Tokyo: Saimarushuppankai, 1971. The fourth reason for the LDP’s long govern- Hayasaka, S. (1993) Oyaji to Watashi (Reminiscences of ance was an “iron triangle” relationship between Kakuei Tanaka), Tokyo: Shuueisha. the LDP, the central bureaucracy and business. Ishikawa, M. (1995) Sengo Seijishi (Political History of At first, the LDP was an agrarian party Newly Post-War Japan), Tokyo: Iwanami Shoten. created independent, small-scale farms provided Sato, S. and Matsuzaki T. (1986) Jiminto Seiken (LDP strong support. The farmers’ interest group, the in Power), Tokyo: Chuuoukouronsha. National Federation of Agricultural Cooperative TSUTOMU TSUZUKI Associations (Nokyo), functioned as the most loyal election machine of the LDP, as well as an organ to promote the policies laid down by the liberalization of financial Ministry of Agriculture, Forestry and Fishery In markets return, LDP leaders ensured that the Ministry would extend various assistance to villages. The liberalization of financial markets involves The same triangle can be found in every in- the introduction of greater competition into the dustrial sector. For example, the LDP and the financial system. In general, therefore, the liberalization of financial markets 277 liberalization process centers on abolishing or re- Bank of Tokyo—was permitted to engage in for- laxing regulations that stifle competition. In the eign exchange transactions. early stages of industrialization, a nation’s finan- Segmentation of the financial system also sti- cial system tends to be particularly vulnerable fled competition. Not only was the banking and and countries typically place heavy regulation or securities business legally divided, but banks were controls on the movement and investment of capi- also subdivided into ordinary trust, long-term tal. As a nation’s financial system develops and credit, and foreign exchange banks. Crossing over the national economy becomes increasingly inte- into other areas of business was strictly prohib- grated into the global economy however, the costs ited, as were financial holding companies. Other and benefits of heavy regulation change, and regulations also served to offer support for bank- controls stifling competition tend to be dis- centered financing over the development of capi- mantled. Politics and the structure of political and tal markets. administrative institutions play a critical role in Strict limits on market entry and exit further- the timing and nature of the reform process. more stifled competition. The Ministry of Fi- nance (MOF) rarely issued new licenses for banks, brokerages, or insurance companies and Competition-suppressing characteristics of kept a tight lid on the expansion of retail Japan’s financial system branches. A so-called “convoy approach” to regulation at the same time ensured that no actor Japan had a relatively laissez-faire financial sys- moved forward so fast as to leave another actor tem in the 1930s. In the immediate postwar pe- behind. Financial institution failure was circum- riod, however, the Japanese financial market was vented by the government’s implicit guarantee heavily regulated as a means of promoting eco- of all banks and its arrangement for “rescue nomic reconstruction and growth. Japanese au- mergers” in cases of dire financial institution thorities established a system intended to promote distress. financial system stability and facilitate the alloca- These formal regulations were not the only tion of scarce capital from the private sector to impediments to competition, however. In fact, the corporate sector, and to critical industries in much of financial system regulation was infor- particular. This system had a number of charac- mal in nature. Administrative guidance—that is, teristics that suppressed free market-based com- extra-legal directives given by government au- petition. thorities to companies—was one of the most One of the most prominent features of this prominent features of regulation of the financial system was the presence of numerous price con- sector. These directives also helped ensure that trols. Artificially low interest rates on loans regu- competition never became “excessive.” lated the cost of capital for industry At the same time, the Interest Rate Control Act of 1947 capped interest rates on deposits at below market rates, Pressures for liberalization thereby guaranteeing banks significant profit margins on making loans. Interest rate regula- Many of the regulations that served to protect tions also applied to the bond-issue markets. and stabilize the Japanese banking system in the Importantly these price controls took place on early postwar years became obstacles to efficiency a backdrop of capital controls. Under the For- as time progressed. Pressures for the liberaliza- eign Exchange and Control Law, the government tion of Japanese financial markets began to limited cross-border financial transactions. In their emerge in the 1970s, and continued to rise in the international financial dealings, Japanese banks decades thereafter. These pressures arose prima- faced restrictions on their net foreign exchange rily in response to changing opportunity struc- positions, on the banks’ issuance of certificates tures for domestic actors—both public and of deposit abroad, on the amounts of foreign as- private—and to pressures from abroad. sets held by institutional investors, and on long- As large Japanese firms became internation- term Euroyen loans. Only a single bank—the ally active, they were able to circumvent high 278 liberalization of financial markets

bank fees by raising funds abroad. By the 1970s, Impediments to financial liberalization many multinational corporations procured funds in the Euromarkets rather than borrowing from In these ways, fiscal deficits, profit pressures on banks. Thus, at the wholesale end, banks had banks, and foreign pressure served as impetus incentives to support deregulation. In the area of for the commencement of financial liberalization retail banking, however, deregulation was slower in Japan. Interests were divided within Japan over because bank customers had fewer exit options. the pace of this liberalization, however. Politics Nonetheless, with many more assets to invest and would control the pace of the transformation, the threat of a loss to purchasing power which helping to make the Japanese process of financial inflation in the 1970s had brought, Japanese firms liberalization distinctively slow in comparison to and households became increasingly more sensi- liberalization in other advanced industrial coun- tive to interest rate levels. By the late 1980s, the tries such as the USA or the UK. The Ministry MOF had begun to allow interest rates on de- of Finance was the primary arena for mediating posits to approach market levels. pressures for change and deliberating reforms but Increased budget deficits in the 1970s also its own organizational interests had become en- placed pressure on authorities to liberalize finan- trenched in this system. Thus, Japan’s path of cial markets, as the financial system was hard- financial liberalization would reflect consideration pressed to absorb increasing amounts of public of the ministry’s own preferences, as well as the debt in the absence of liberalized bond markets. preferences of domestic industry and the The city (large commercial) banks played a large industry’s political advocates. role in underwriting government bond issues. Because interest rate levels were integrally tied When the volume of government bond issues was into profits of financial institutions, liberalization small, Japanese banks could absorb these issues. of interest rates could be expected to squeeze fi- After the oil shocks, however, debt issues reached nancial institution profits. This anxiety for banks, such a level that banks could no longer absorb however, might have been relieved by permitting government debt or tolerate the losses this en- banks to engage in other areas of financial serv- tailed. Pressure on the government to change ices and thereby shifting away from exclusive controls on Japan’s capital markets thus emerged reliance on bank loan spreads as the primary basis from the banking sector. In 1978, financial insti- for profit-making. Yet, granting banks permission tutions were permitted to commence the sale of to expand into new business areas—and into the government bonds in the secondary market. securities business, in particular—drew strong Banks also pushed for the right to expand into a protests from brokerages. Rather than moving wider range of services and products and the forward with financial system reform, therefore, Banking Act of 1982 represented a move in this the ministry followed a less conflictual route of direction. alleviating profit pressures through loose mon- Through the US-Japan Yen-Dollar Commit- etary policy In the process, financial liberaliza- tee of 1983–4 and other pressures on Japan for tion was replaced in the latter half of the 1980s reciprocity foreign pressure also played a role in by the inflation of a speculative asset bubble. propelling reforms in the direction of a more Japan’s deposit insurance system was also open financial system. The overseas activities of poorly equipped to handle liberalization. The Japanese banks became increasingly prominent introduction of greater competition would inevi- in the 1980s, while the virtual absence of foreign tably mean the need to deal with some financial banks in Japan was likewise conspicuous. This institution failures. Although a Deposit Insurance disparity led the US government to complain Corporation (DIC) had been established in 1971, that the Japanese financial market was closed it lacked sufficient funds to pay off depositors in and push for deregulation that would enable for- even a second-tier regional bank. Yet, banks re- eign banks to enter. The USA threatened to limit sisted the imposition of higher deposit insurance opportunities for Japanese banks in the USA if premiums, preferring instead to rely on informal Japan failed to open up its domestic financial sec- ad hoc means of solving problems that they per- tor. ceived to be less costly. liberalization of financial markets 279

Big Bang financial reforms settlement system and the implementation of tax reforms. As a result of the political impediments faced in To promote greater investor confidence in the 1980s, the final stages of Japan’s financial lib- Japanese capital markets, the Big Bang reforms eralization would be postponed until the 1990s have improved disclosure by financial institutions and the first decade of the twenty-first century. and the quality of supervision by regulators. Early The 1993 Financial System Reform Law allowed warning systems designed to detect serious prob- banks to enter the securities business in a limited lems with asset quality before financial institu- way through subsidiaries but postponed their tions reach the point of insolvency have also been entry into stock trading. Far-reaching reforms introduced in the form of Prompt Corrective would not take place until the emergence of po- Action measures. Finally the reforms aim to im- litical leadership and reform elements within the prove the safety net for depositors, investors, and Finance Ministry. insurance policyholders. In 1996, Prime Minister Ryutaro Hashimoto The heavy reliance on informal relations-based announced a plan to push forward with liberali- regulation over most of the postwar period means, zation of the Japanese financial market. The re- however, that true liberalization also involves a form program, nicknamed the “Japanese Big redefinition of the relationship between financial Bang,” was touted to make Japan’s financial sys- firms and their regulator. Legislation imple- tem “fair, free, and global.” The plan resembled mented in April 2000 in the form of a new Ethics in many respects the major reforms undertaken Law for National Public Civil Servants has helped in the UK some years earlier. Commencing in effect this needed shift. 1998 and scheduled for completion in 2001, the reforms were intended to revitalize the Japanese economy by making the management of over Implications of financial liberalization 1,200 trillion yen in household financial assets more efficient. In essence, the Big Bang reflected The liberalization of Japanese financial markets— the completion of the liberalization process be- and the Big Bang financial reforms, in particu- gun—but delayed—in the 1980s. lar—have had a number of implications. Most The Big Bang reforms include three major notably the ongoing liberalization has led to a components: the promotion of competition be- surge in foreign direct investment into the Japa- tween the securities and banking markets, the nese financial sector. Liberalization has also ef- improvement of Japan’s capital market infrastruc- fected changes in the relationships between banks ture, and the promotion of investor confidence and their borrowers, serving to further weaken in Japanese capital markets. The first goal re- the main bank system and encourage firms to quired the liberalization of cross-border capital diversify their sources of fund procurement. Fi- transactions—that is, the repeal of foreign ex- nally while liberalization has meant the need to change controls—and was carried out in April reduce or eliminate profit-padding regulation, it 1998. This goal also necessitated promotion of has meant the need to establish new prudential competition among various financial intermedi- regulations to ensure that financial institutions aries and the promotion of competition in the do not act recklessly with their newfound free- domestic market. dom. Reforms taken to improve Japan’s capital market infrastructure included the elimination of legal obstacles to securitization, the promotion of Further reading small business financing through the securities market, and the diversification of financial instru- Hamada, K. and Horiuchi, A. (1987) “The Political ments used by corporations. Procedures for issu- Economy of the Financial Market,” in K. Yamamura ing securities have also been simplified and and Y.Yasuba (eds), The Political Economy of Japan: accounting standards reformed as well. Other The Domestic Transformation, Stanford, CA: Stanford integral measures include improvement of the University Press, 223–60. 280 lifetime employment

Toya, T. (2000) “The Political Economy of the Japa- that under 20 percent of industrial workers take nese Financial Big Bang: Institutional Change in part in the system. Finance and Public Policy Making,” Ph.D. disserta- The lifetime employment system is closely tion, Stanford University. linked to the seniority system in Japan, or nenko. Vogel, S. (1996) Freer Markets, More Rules: Regulatory In the seniority system, the length of service Reform in Advanced Industrial Countries, Ithaca, NY: (years working for the company) heavily deter- Cornell University Press. mines both wage increases and promotions. With- out a long-term employment relationship between JENNIFER AMYX the employee and company secured in some way lifetime employment it would be impossible to maintain such a system. Thus, without lifetime employment, the sen- The lifetime employment system, known as iority system would fail. shushin koyo, is well known as one of the “three The lifetime employment system, as men- sacred treasures” of Japanese management, the tioned previously is not offered to all workers in other two being the seniority system and com- Japan. A dual structure of employment exists in pany unions. Although lifetime employment is which “core employees” are protected by the life- not actually protected by law, it is an institution- time employment practice, but all other employ- alized practice which is engrained in the indus- ees (often called “peripheral” or “non-regular”) trial structure of the country Lifetime are not. These core employees are predominantly employment refers to the widespread practice of male university graduates who are expected to employing salaried workers for the duration of be the future managers and leaders of the organi- their working life within the same company fam- zation. Education, training and employee devel- ily In some cases an annual contract is continu- opment programs are most often designed ously renewed, but in the majority of cases an exclusively for the “core employees.” Thus, com- employment relationship is understood to be for pany investment is high for this “core” group of an indefinite period, with nothing put into writ- employees who will be retained for the extent of ing. This long-term relationship between com- their working life. pany and employee is offered mainly to salaried, The “peripheral” workforce includes all non- college-educated males who are recruited from core employees, such as women, part-time, con- university campuses each year in the spring-time. tract, junior college graduates, foreign employees The lifetime employment system does not extend and other “non-regular” hires. The peripheral itself to part-time, female, or non-salaried work- workforce provides the labor flexibility the comers (often called peripheral workers) except in a pany requires to maintain its lifetime employment few cases. However, even without the implicit system for the core employees. contract of lifetime employment, most people “Peripheral” employees do not have job or expect to work for the same company for the wage security and thus are a more flexible fea- duration of their career, reflecting the importance ture of the Japanese employment system. Invest- of group memberships and company affiliation ment in peripheral employees is low, and when in Japanese society. employment restructuring is necessary the “pe- For Japanese employers, the notion of lifetime ripheral” workforce is more easily adjusted. How- employment is a practical way to solve labor short- ever, even with these “peripheral” workers the age problems during economic expansions. For Japanese company maintains a level of long-term Japanese employees, it provides the job security commitment much higher than its Western coun- they had long demanded through their enterprise terpart. Firing is difficult given that the role of unionization. the company is that of “caretaker” for the em- Studies of Japanese mobility suggest that im- ployee. Although peripheral workers are not en- plementing the lifetime employment system dif- dowed with the same rights and privileges as the fers by organizational type and size. Some studies core group, they still have a relatively high de- assume that lifetime employment is limited to gree of job security compared to their Western large firms (at least 500 employees), suggesting counterparts. lifetime employment 281

The history of the lifetime employment system After the Second World War, the zaibatsu (family group of companies) system was abolished In pre-First World War Japan, workers were under the new constitution and immediately re- highly mobile. The labor market was structured placed by an almost identical keiretsu family sys- upon occupational skill and knowledge, not upon tem of companies and shareholders. This system company affiliation. Differences in labor mobil- has been characterized as the “industrial policy ity depended upon whether or not the occupa- model” in which government and business act tion was a traditional Japanese craft or based upon together in order to meet societal economic goals a Western-style skill. The wage system was based (Abegglen and Stalk 1985). Within this system, upon the classification of these occupations, and Japanese companies began to operate at a much an individual worker would stay within the same broader level to maintain their costly lifetime wage classification as long as they stayed in the employment system by developing a two-tier same job, regardless of their years of service. In wage system. In this system, higher wages would this system, the only way to increase status or always go to the “core employees” (white-collar pay was to move jobs. Thus, if there was dissatis- college graduate males) at the expense of “pe- faction with either the pay or the company there ripheral workers” (women, part-time, contract was little disadvantage to moving. This ability to workers, retirees). Japanese companies used the move around in order to increase one’s individual foundation of commitment between employee wealth helped to strengthen a worker’s self-re- and organization to structure a complete system spect and independence, making it difficult for of lifetime rewards (employment, security bonus, employers to control their workforce. Thus, this retirement). system was good for the individual worker, but Over the period between 1914 and 1945, Japa- not necessarily the company. nese companies created the now famous Japanese In the post-First World War era, this system management system, in which lifetime employ- began to be replaced during a period of “ration- ment is a key feature. Although the lifetime em- alization” which centered around creating large ployment system has never formally applied to enterprises capable of supporting the develop- more than 30 percent of the working population, ment of the Japanese economy and military. The it nevertheless is prevalent in most large compa- government of Japan played an active role in the nies today. Over the years, employees put in long configuration of industry management of organi- hours and are loyal to their employers. In turn, zations and development of human capital (labor). their future is secure and income is adjusted to Production processes in large companies were their needs. Salaries grow progressively regard- divided into simplified jobs which made the old less of individual performance. Younger employ- system of skilled labor unnecessary. Company ees are underpaid, and older ones receive more personnel policies were developed to reflect the than their contribution to the company. increasing focus on large enterprise development This system has worked well for the past fifty and workforce control, including the hiring and years, as long as companies maintained high prof- training of their own new labor force. The old its, strong export growth, and were able to hire a system of masters training unskilled students was sufficient number of new university graduates replaced with companies training unskilled new every year. But this system is costly to maintain recruits, with the guarantee of lifetime job secu- in a low-growth, highly competitive environment. rity in return for company loyalty. Company Thus, the lifetime employment system has dis- management assumed the responsibility for skill tinct advantages and disadvantages in today’s development, which was usually exclusive to the competitive global business environment. needs of the company. Therefore the laborers’ skills became non-transferable. This system of Advantages and disadvantages of the skill development, along with long-term compen- lifetime employment system sation packages which reflected increasing wages over time, effectively replaced the old system of The lifetime employment system has distinct highly mobile and independent labor. advantages for the company. First, it retains the 282 lifetime employment services of employees in times of labor shortage. margins which once helped Japanese companies In this system, no matter what the market cir- finance their overseas expansion and fuel growth cumstances may be, there is little chance of the at home. Although Japanese companies were able employee finding a better position outside of his to remain competitive, it made many jobs in Ja- current company. In addition, the company main- pan redundant. However, with an institutional- tains optimal control over the individual and their ized long term employment system, it has been training, career development and compensation. close to impossible to reduce labor costs by This reduces the high level of uncertainty and downsizing. risk that comes with more fluid labor markets. The second major factor to challenge the life- Finally the company is able to plan for the long time employment system has been the farreaching term and invest in its human resources accord- effects of the collapse of Asian markets. Both the ingly allowing it to develop a strong future Japanese government and Japanese companies workforce. relied heavily on the strong growth in Southeast For the employee, the system has the advan- Asia during the 1980s and 1990s as a foundation tage of job security in times of labor surplus and to their global manufacturing systems. With the commitment from the organization toward the collapse of currencies and even whole markets future development of the employee’s knowledge (Indonesia), Japanese investments turned into and skills. More importantly from a cultural per- losses. Japanese companies not only lost billions spective is the fact that the company provides the of yen, but were forced to cancel longterm in- whole social existence, or community from which vestment projects, and in many cases, close down employees derive their identity and their self- whole operations. In the short term this forced worth. As a community the company exercises Japanese companies to repatriate thousands of shared authority and control in a society based overseas managers, and over the long term has upon group norms and social structure. resulted in widespread economic turmoil in Ja- Thus, the lifetime employment system pro- pan. Thus, an era of employment restructuring vides many cushions both economically and so- had finally begun in Japan. cially. Layoffs are scarce, wages are steady on the A third challenge to the lifetime employment whole (but can rise and drop dramatically for the system is the aging workforce in Japan. There is individual who is either promoted, demoted or now only one future worker for every two em- transferred outside the headquarters), and a con- ployees currently employed in Japan. This means stant source of human capital is readily available. that over time all institutions will be affected by a shortage of labor at one end, and a surplus of welfare recipients (retirees) at the other. When Challenges to lifetime employment companies experience such a shortage within the The lifetime employment system worked best in lifetime employment structure, it means that they an environment of steady economic growth, lim- can no longer rely on the long term strategy of ited imports and controlled competition. Recently human resource development. Fewer workers will several factors have arisen which have had an have to produce the higher output to remain com- impact on the lifetime employment system in Ja- petitive, which means increasing the skills and pan: the high yen, the collapse of Asian markets, abilities of workers at a faster rate, and at the the aging population, and increasing global com- same time trying to control spiraling labor costs. petition. Thus, the lifetime employment may have a nega- During the 1990s, the strengthening yen tive effect on employee productivity and company forced Japanese companies to significantly in- performance. crease the amount of their overseas investment, Finally the effect of global competition on the especially within Asia. Trade with other Asian Japanese employment system has been to chal- nations now exceeds trade with Europe and the lenge the long-term nature of employee develop- United States combined. Supported by the high ment. New technologies and the skills required yen, imports have risen significantly exceeding to develop and manage them are all changing at export growth. This has eroded the local profit increasingly rapid rates. Companies no longer localization 283 have the luxury of slow, internally focused and Inohara, H. (1990) Human Resource Development in Japa- incremental skill development for their employ- nese Companies, Tokyo, Japan: Asian Productivity ees. They will need to attract employees at all Organization. levels of the organization and be able to recruit Ministry of Labor (1994) White Paper on Labor: Tasks for the necessary knowledge, skills and abilities to Enriching Working Life Based on Stable Employment, To - remain competitive. The system of lifetime em- kyo, Japan: Japan Institute of Labor. ployment, which includes annual university re- Okimoto, D. and Rohlen, T. (1988) Inside the Japanese cruiting and long-term seniority wages, may be System, Stanford, CA: Stanford University Press. too slow and inflexible to respond to the rapid Okuchi, K., Karsh, B. and Levine, S. (1988) The Japa- change of the global marketplace. nese Employment Relations System, New York: Routledge. The future of lifetime employment MARGARET TAKEDA Job changes in the labor market are becoming polarized, or in some cases, even more fragmented. Companies are creating smaller “cores” localization and increasing their peripheral workforce (specialists, irregular hires, and term hires). Jobs are Localization is known as genchika in Japanese. One diversifying and job change for peripheral work- meaning of localization refers to the gathering of ers is on the increase. Thus, some conclude that as many production facilities at one geographical the lifetime employment system will slowly be- location as possible in order to increase efficiency come a thing of the past. Usually however, genchika is used in the context of the international management practices of Japa- nese multinational corporations that have over- Conclusion seas sales and production subsidiaries. Often such The Japanese lifetime employment system has a overseas subsidiaries operate under the aegis and long tradition in Japan. This system of long term direct control of their parent company in Japan. commitment between employee and company Genchika, on the other hand, refers to loosening serves as both social and economic foundation the control of the parent company so that the for the industrial system in Japan. However, this subsidiary becomes more independent in order system may be changing in order for Japanese to be regarded in the host country as a local rather companies to adjust to contemporary market re- than a foreign company. The genchika process alities. There remains an open debate as to consists of the following three elements: an in- whether or not the positive aspects of this sys- crease in the percentage of local capital, an in- tem will outweigh the negative when it comes to crease in the supply of raw and industrial maintaining a competitive labor market for Japa- materials for production within the host country nese companies competing in the global and the appointment of native managers to top economy. posts. With the rapid postwar economic development, many big Japanese corporations became Further reading multinational and began to do business all over Abbeglen, J. and Stalk, G. (1985) Kaisha: The Japanese the world. Much of their investment has been in Corporation, New York: Basic Books. Asia, North America and Western Europe. In Cheng, M. and Kalleberg, A. (1997) “How Permanent general, genchika has been encouraged by Was Permanent Employment?” Thousand Oaks, pressure from the host countries, not by the in- CA: Work and Occupations. ternal motivation of Japanese corporations Clark, R. (1979) The Japanese Company, New Haven, themselves. CT: Yale University Press. In Asia, many nations gained their independ- Hayashi, S. (1988) Culture and Management in Japan, ence from Japan after the Second World War and Tokyo: University of Tokyo Press. had to develop their own economies. At first, 284 localization

these nations had strong protectionist policies to increased enormously up to the present. There- protect their natural resources and native busi- fore, Japan has imposed restrictions on its exports nesses from the inflow of products from advanced to the USA. In the 1970s, Japan restricted the nations. However, in order to modernize, they export of textiles and color televisions, and in opened their gates to foreign multinationals in the 1980s of automobiles, semiconductors and an effort to utilize foreign capital and advanced manufacturing machinery Thus, a major moti- technology for their own national economy. De- vation for establishing local production and sales veloping nations in Asia invited multinational subsidiaries for most Japanese companies was corporations of advanced nations, including Ja- retaining market share in the USA. pan, to set up local subsidiaries. Japanese multi- Unlike their Asian subsidiaries, there were nationals established both sales and production very few Japanese factories in North America subsidiaries because both cheap labor and devel- before 1975, but since the late 1970s, the number oping markets were available to them. has shot up like “bamboo shoots after rain.” The In terms of capital, developing nations in Asia Plaza Agreement in 1985 especially accelerated have demanded that foreign companies establish this tendency as the value of the yen rose drasti- joint ventures with native investors. They have cally after the agreement. In addition, the long- also demanded an increase in the local supply of lasting recession of the US economy in the 1970s production materials. The same is true for hu- and 1980s, and the accompanying de-industriali- man resources. Asian nations expect foreign com- zation of the USA provided an atmosphere of panies to develop native technicians and also to welcome for Japanese companies. At the turn of appoint native managers to high posts. the twenty-first century more than 600,000 In general, genchika by Japanese multination- Americans are employees in Japanese subsidiar- als has advanced significantly in terms of capital ies in the USA. and production materials in Asia. In these two Japanese corporations’ multinationalization in aspects, Japanese multinationals have met the laws Europe was also driven by the same motivation, and expectations of the host nations. But when it retaining market share in the face of a protec- comes to personnel management, very few Japa- tionist tendency However, this tendency is rein- nese multinationals have opened their doors for forced by the historic unity of the European native employees to take top executive posts. In Union among Western European countries. the vast majority of Japanese multinationals, Japa- The three aspects of genchika in the USA and nese men who are sent directly from the parent Europe display a pattern that is slightly different companies in Japan have occupied the highest from that in Asia. In both the USA and Europe, posts. Japanese multinationals have been very there is little restriction on the percentage of capi- reluctant to have local people as top managers in tal, so Japanese companies can own 100 percent their subsidiaries, because the parent companies of their subsidiaries. However, just as in Asia, a fear that locals will not be as obedient as Japa- certain percentage of production materials must nese managers. be sourced locally; in the USA, this is in order to The fact that Japanese multinationals have comply with what are known as “local contents” been reluctant to appoint local people as top laws. As for the personnel issue, there is a strong managers in Asia has nothing to do with Japa- expectation from local employees in the USA and nese prejudice against non-Japanese Asians. The Europe that the top managers be native people. same is true of Japanese multinationals in North However, Japanese parent companies remain very America and Europe, although the background reluctant to hire non-Japanese local employees as of genchika in those areas is somewhat different. top executives. The parent companies assume Japanese corporations’ multinationalization in that local people are hard to control and less obe- North America, especially in the USA, and Eu- dient because they do not know the inner work- rope was largely driven by protectionist sentiment ing of the parent company. On the other hand, in those nations based on trade friction. Ever since local employees who are not familiar with how the late 1960s, Japan has maintained a positive Japanese management works, tend to assume that balance of trade with the USA, and the gap has the subsidiary president and all top managers Long-Term Credit Bank of Japan 285

should be natives. This view fails to recognize and Hokkaido Takushoku Bank. After becom- how drastically subsidiary management would ing a private financial institution in 1961, LTCB be affected by such a change. emphasized offering large amounts of capital for Although genchika consists of such elements as investment by the heavy chemical industry The capital, supply of local materials and human re- LTCB also contributed to the modernization of sources, the concept can also include other as- medium-sized and small businesses. LTCB raised pects such as the transfer of management funds by selling debentures. know-how cross-nationally Host nations and the During its high growth period of the 1970s, local employees do not necessarily expect foreign the LTCB expanded its business to include the corporations to operate just like a local company. financing of social development projects, such as If they sense that there is a “better” element in resource and energy projects. The LTCB also the foreign approach to management, they natu- began expanding its activities to include interna- rally want it to be retained in the local subsidi- tional finance and the security business. During ary. this period, it opened overseas branches in Lon- Research (Sumihara 1999) in a Japanese- don, New York, and Los Angeles. In the 1980s, owned subsidiary in North America suggests that the LTCB opened branches in Asian markets such both Japanese expatriates and American employ- as Singapore and Hong Kong, while diversifying ees refer to genchika or localization as a “good even more into mergers and acquisitions and even mixture of Japanese and American management,” aviation finance. although they did not reach an agreement on During the slowdown of the Japanese economy what a “good mixture” is. As a reflection of this in the 1990s, the LTCB emphasized expansion thinking, some American employees were sent of its business to security and derivatives trading to the parent company in Japan for over a year in and infrastructure development. The LTCB sup- order to become familiar with how the parent ported the overseas expansion of Japanese com- company operates. In other words, the concept panies, but also encouraged foreign companies of genchika may even include socializing natives to enter the Japanese and Asian markets. In 1997, into the company’s Japanese way of doing things. the LTCB entered into an alliance with Swiss Bank, and began an investment bank business. But, in October 1998 LTCB failed due to bad Further reading loans totaling ¥5 trillion ($46 billion) and was Sumihara, N. (1999) “Roles of Knowledge and ‘Cross- temporarily nationalized by an emergency act of Knowledge’ in Creating a Third Culture: An Ex- parliament. The LTCB was then sold in Febru- ample of Performance Appraisal in a Japanese ary 1999 for ¥121 billion to a consortium led by Corporation,” in S.Beechler and A. Bird (eds), Japa- the US-based Ripplewood Holdings and renamed nese Multinationals Abroad: Individual and Organizational and relaunched to become Shinsei (meaning “re- Learning, New York: Oxford University Press, 92– birth”) Bank in June 2000. 106.

NORIYA SUMIHARA Further reading “Finance and Economics: Serious Long-Term Prob- Long-Term Credit Bank of Japan lems” (1998) The Economist, May 2, 69. “Finance and Economics: Unforgiven” (2000) The The Long-Term Credit Bank of Japan (LTCB) Economist, July 1, 73. was a government-run, long-term credit bank in Sender, H. (1999) “Old Habits Die Hard,” Far Eastern Japan. LTCB was established in 1952 as a semi- Economic Review 162(26): 42. governmental institution. It succeeded the long- term financial business of Nihon Kangyo Bank SUMIHIRO TAKEDA M

madogiwa zoku work” jobs is difficult to support in the economy of the 1990s. Firms have pared down their Literally “window-side tribe,” the term madogiwa madogiwa zoku, moving in two directions. One di- zoku refers to salarymen (see salaryman) who rection has been to find ways to enhance the pro- have been shunted off the seniority promotion ductive capabilities of unproductive workers. The career track and who now have jobs of relatively other has been to engage in shukko and little consequence and, therefore, sit by the win- outplacement. dow rather than with a work group. Salarymen moved to a window-side position have almost no ALLAN BIRD hope of future promotion, but instead must resign themselves to handling matters of small im- madoguchi shido port until they either choose to resign or reach the age of retirement. Madoguchi shido, or “window guidance,” was an Japanese office layouts are often arranged extra-legal means of quantitative credit control around workgroups. A typical workgroup will employed by the Bank of Japan (BOJ) from the have the desks of all its members arranged to- 1950s through 1991. It involved indications by gether in the middle of the room, with the group the Bank of Japan to banks of the amount of lend- leader’s desk at the head or located immediately ing it deemed proper. As such, window guidance nearby Such an arrangement affords ease of com- supplemented more conventional methods of munication among the group and encourages controlling the monetary base. Although the BOJ increased interaction. In this sense, madogiwa zoku was strongly influenced by the Ministry of Fi- employees have been moved literally to the pe- nance in the setting of the discount rate and in riphery of the workplace and the organization. A other aspects of its operations, the central bank madogiwa zoku move is a polite, but clear signal by had relative autonomy in giving window guid- an organization about that employee’s future with ance. the organization. In some respects it also reflects The effectiveness of window guidance as a an organization’s recognition that the employ- tool of influence over banks was inextricably ment agreement has not worked out as hoped, linked to the practice of overborrowing and but that “permanent employment” compact must overlending by the nation’s banks. Companies be honored nonetheless. borrowed from banks well beyond their capacity With the bursting of the bubble economy in to repay or beyond their net worth. Large com- 1989, Japanese firms have found it increasingly mercial banks without a deposit base large difficult to maintain the practice of madogiwa zoku enough to meet loan demands borrowed, in assignments. The economic costs of retaining turn, from the central bank to meet this demand. unproductive employees in essentially “make- Through the 1950s and 1960s, the city (large madoguchi shido 287 commercial) banks borrowed over 10 percent of banks until the 1970s. Its was heightened by the their total funds from the BOJ. The overloan segmented nature of the loan market but, as time phenomenon thus made the banks dependent progressed, lending through agent banks began on the guarantees of the BOJ. Importantly how- to erode the barriers in the loan market. Thus, ever, overborrowing also profited the banks be- from the 1970s, the BOJ began applying guid- cause funds from the BOJ were a cheap and ance to a wider range of financial institutions, convenient source of capital. The discount rate and to regional banks in particular. Foreign banks at which funds were borrowed from the BOJ remained outside the scope, however. was lower than private sector lending rates else- As the financial system became more market- where. Thus, banks risked endangering their oriented, window guidance declined in impor- profitability if they ignored the BOJ’s guidance. tance. Its effectiveness relied on the need or desire The dependence of Japanese industry on bank- of private banks to rely on supplemental borrow- centered financing and the underdevelopment of ing from the central bank to fund overloans. With Japanese capital markets heightened the effec- a change in industrial structure, however, came a tiveness of window guidance as a tool of mon- shift in demand for credit from the private sec- etary policy The BOJ could employ window tor. guidance to expand or contract the tempo of eco- Window guidance also led to perverse incen- nomic activity in response to the international tives for banks. Increases in lending were typi- balance of payments or other considerations. cally calculated as percentages of the existing Scholars have debated the degree to which win- lending base. Thus, to maximize the lending base dow guidance served as a means for qualitative in future quarters, banks had to lend to their maxi- credit allocation but recent studies suggest that mum quota in each quarter, regardless of the the guidance focused on aggregate loan levels worthiness of projects. The imprudent behavior rather than on the composition of loan portfo- this policy fueled became evident in the “bub- lios. ble” period of the latter 1980s. From mid-1991, It is clear, however, that window guidance was the BOJ abolished the window guidance system another aspect of the “convoy approach” to regu- and focused instead on exercising influence over lation, wherein no financial institution was per- credit flows via market interest rates. mitted to move forward at a pace that would leave another financial institution behind. This was Further reading because window guidance was carried out individually with each bank and not only served to Calder, K. (1993) Strategic Capitalism, Princeton, NJ: regulate the monetary base but also served to Princeton University Press. ensure that no bank grew appreciably faster than Hamada, K. and Horiuchi, A. (1987) “The Political another. Estimates of deposit base growth and Economy of the Financial Market,” in K.Yamamura expected growth, and estimates of fund demands and Y.Yasuba (eds), The Political Economy of Japan, served as the basis for ceilings set on the quar- Volume 1: The Domestic Transformation, Stanford, CA: terly rate of increase in bank loans. Stanford University Press, 223–60. The BOJ’s window guidance also affected the Horiuchi, A. (1980) Nihon no Kinyu Seisaku (Monetary relationship between banks and their borrowers. Policy in Japan), Tokyo: Toyo Keizai Shimposha. When the BOJ reduced available funds, thereby Patrick, H. (1962) Monetary Policy and Central Banking in tightening monetary policy banks necessarily cut Contemporary Japan, Bombay: Bombay University lending. Banks tended to pass this tightening of Press. credit on to those borrowers for which it did not Teranishi, J. (1994) “Japan: Development and Struc- serve as a main bank (see main bank system). tural Change of the Financial System,” in H.Patrick Thus, the practice provided incentives for firms and Y.Park (eds), The Financial Development of Japan, to establish relationships with a main bank. Korea, and Taiwan., New York: Oxford University Window guidance was used most frequently Press, 27–80. in the late 1960s and applied almost exclusively to city (large commercial) and long-term credit JENNIFER AMYX 288 main bank system main bank system ity of its client firm to other creditors and shareholders, the so-called signal function; (2) main The term “main bank” generally describes the bank assistance to firms in financial distress, the relationship of a primary lender among a lend- so-called rescue function; and (3) the main bank ing hierarchy of several banks to a single firm. role in corporate governance. The credibility of The main bank system, as it later came to be these hypothesized functions of the main bank called in the 1980s, is said to have its origins in was questioned by scholars, mainly in Japan but the 1930s when Japan’s wartime economic plan- also elsewhere, who had been studying the main ners sought to insure that companies deemed bank system. essential to the military economy received ad- Among the criticisms leveled against the equate funding for the uninterrupted production agency interpretation of the role of the main bank of munitions. The system was later adapted to was the absence of supporting evidence based and reshaped by the requirements of postwar on bank practices. Often treating the bank as a reconstruction as part of a diversification strat- “black box,” the agency literature emphasized the egy of loan syndication to industry in the post- main bank’s hypothetical agency role to the ex- war credit crunch period. Historically the special clusion of considering what the role of the “main attributes which are an inherent part of the main bank” meant in fact to the main bank and the bank relationship were a cornerstone of bank— firm. The main bank relationship is the bank’s firm relationships among members of the zaibatsu greatest source of profits. The liberalization of group (see banking industry). Before the mod- interest rates in recent years has made large cor- ern period, main bank-style relationships can be porate lending the least profitable aspect of the traced back to the exchange houses and lending banking business. Similarly the competition be- practices of the great merchant households (see tween bank securities subsidiaries in underwrit- ie) of the Tokugawa period. ing corporate bonds has proven to be a low profit In the early 1990s the main bank system was area, and likewise is considered by bankers as a hailed as a governance model to be emulated by “loss leader” necessary for maintaining client re- developing economies. Based on a highly styl- lationships. By contrast, the main bank will ordi- ized theoretical model, the main bank was seen narily receive many lucrative benefits from its as a significant corporate governor and monitor- status as lead main bank to a company. The main ing agent over the activities of the client firm, not bank expects to be given the main deposit ac- only on behalf of other creditors, but also for the counts of its client, and it will require, as well, shareholders of the firm, as the main bank typi- that the client firm hold a standing low or non- cally held shares in the firm (see cross- interest compensating balance account. The cli- shareholdings). This view of the role of the main ent may also be expected to maintain low bank was an expansion upon Nakatani’s thesis, interest-bearing time deposits at the bank for some which held that one of the functions of Japanese off-balance sheet favor such as a business intro- industrial groups is risk-sharing among their duction. In addition, the main bank receives a members. In the case of the main bank, the long- disproportionately larger share of fee-based trans- term implicit contractual role of the group bank actions such as transfers, foreign exchange, and as risk-insurer for the other group members was derivative products, an important area of bank interpreted as the chief mechanism enabling risk- profits, than the other banks in the client firm’s sharing. Building on principal-agency theory their lending hierarchy. Finally whether the client is model of the main bank emphasized the role of large or small, the bank also expects to receive the bank as the governance and monitoring agent the advantage of the company’s employee pool of the firm for its fellow creditors and sharehold- as its customers and with it the opportunity to ers. According to economists adopting this model, supply a host of lucrative retail services to this it purportedly achieved benefits in the following captive client base. three areas: (1) efficiencies of capital derived from The personal accounts of employees of the delegated cost of monitoring by affirming the client firms represent one of the greatest rewards continued creditworthiness and financial viabil- to the main bank in the relationship and are an main bank system 289 important source of low-cost depository funds. bank financial subsidiaries. The opportunity for The extent of the main bank’s efforts to main- banks below the top five to acquire profitable tain its relationship with the client firm is often business with the client outside of lending has directly proportional to the size of the captive become quite remote, principally because corpo- employee base. Companies will “request” all of rations themselves are attempting to rationalize their personnel to open accounts at the main bank their relations. for the direct deposit of their salary. A large base The overriding characteristic that distinguishes of employee accounts means a significant amount the main bank from the second and third banks of business for the bank in the retail sector, a high is that it is by custom the creditor of last resort profit-margin area which includes consumer for the firm in financial distress and is expected transactions, in the form of electronic transfers, to initiate any rescue plan among the other banks. consumer lending, personal lending, credit cards, The degree to which the rescue function exists is mortgages, and so on. The commercial banking more a matter of perception on the part of the sector’s large share of personal accounts has stead- client than contractual. Bankers report that they ily eroded throughout the 1990s banking crisis are loath to make even an implicit commitment. as depositors seeking greater safety have shifted A key agency assumption of corporate gov- their personal savings into Japan’s postal saving ernance by the bank is based on the so-called bank system (see postal savings). rescue function. However, evidence reveals that Although the main bank system is no longer such rescues generally have been effected only driven by large corporate bank borrowing, it has when the bank determined that a client’s difficul- found new fuel in a host of bank products and ties were a result of a liquidity problem rather services, thus maintaining profitability for the than a solvency crisis. The bank then acted out main bank and for the second, third, fourth, and of its own interest, if not just for its own profit. even fifth bank in the lending hierarchy as well. Bank officers often report they were the last to On the other hand, firms expect to be able to know of an imminent financial crisis when the rely on the bank’s offices to supply business in- client firm was intent on evading bank oversight. formation, consulting services, and, especially for If the main bank rescue function really did exist, the medium-size firms, the ever-important bank such calculated evasion by failing client firms introductions to prospective clients or suppliers. would have been pointless at the very least, if The client corporation thus has its own reasons not counter-productive. In cases of insolvency to protect the hierarchical standing of its lead main “rescue” most often means overseeing the disso- bank. Such relationship banking practices are not lution of the firm’s assets and the distribution of restricted nor exclusive to the lead main bank, collateral to its chief creditors, namely the banks. however. The second and third lending banks of Typically for a small or medium-sized firm this that company will attempt to provide similar serv- means that the bank will ask some member com- ices, as will even the fourth and fifth banks in the pany of their corporate group to take over the lending hierarchy which may be composed of company or find some other enterprise to merge upwards of 20–30 banks if the corporation is with the troubled company. Only in those lim- large. Preservation of that hierarchy in a highly ited cases deemed by governmental authorities competitive environment is of paramount impor- to be in the interest of the nation’s welfare, such tance to the lead main bank, particularly since it as a large failing firm with many employees, does receives a disproportionately larger share of prof- the Ministry of Finance (MOF) “request” a main its from the client than the other institutions in bank to deliver a rescue package. Implicit in the the hierarchy In fact, when the top five lending bank’s willingness to provide funds to a sunset banks typically supply only 50 percent of the industry is the understanding that MOF will re- firm’s borrowed funds, they can still expect to ward the bank by granting it some concession in receive almost 100 percent of the firm’s fee-based another area. transactions, such as foreign exchange, letters of Bankers report that the main bank was often credit and other trade or business related credit the lender of “last resort” to a firm only because guarantees, leasing and underwriting to their non- the other creditors had been able to accomplish 290 main bank system

a rapid retreat, thereby increasing the burden of for speculative purposes by the client. This lend- the main bank. According to agency theorists, ing/ sales function was in obvious conflict with other creditors take their cues by observing the agency theory notions of monitoring a client “signals” of the main bank’s actions, as the firm’s firm’s creditworthiness, which the bank could do largest creditor. The question is whether the sig- only to a very limited extent in any case. nal “sent” is necessarily an accurate representa- The main bank’s leverage is therefore quite tion of the client firm’s actual internal affairs. low over firms listed in the First Section of the Often the signal is distorted by the main bank’s Tokyo Stock Exchange (generally large capital- own strategic considerations and needs in main- ized firms) and even for Second Section firms taining a particular client relationship. Any hint (generally large to medium capitalized firms), of trouble, signaled by a decrease in lending by because firms in both categories have direct ac- the firm’s main bank, would be noted by the other cess to money markets and thus can circumvent creditors, typically setting off a chain reaction of the need for bank finance. Indeed, it is difficult retreat by those banks which benefit least from for banks to monitor the activities of many such their relationship with the ailing firm. Main banks firms due to these firms’ large scope of opera- are, therefore, very keen on not sending any sig- tions, business locations, and the multitude of nal which would lead to the collapse of the firm’s other banks a firm may deal with. Furthermore, lending syndicate. That is why competing banks only the largest corporations merit their own bank prudently make their own independent credit teams. Medium and small-sized firms receive only assessments. the occasional attention of already overburdened The primary vehicle for carrying out the main junior officers whose ability to monitor their cli- bank relationship is the bank team assigned to ent firms is often limited to tracking the cash flow large client firms. Monitoring of the client firm into the client’s main deposit account. by the bank team is often cited as one evidence Agency economists’ assumption of firm moni- of the existence of such an external governance toring by former bankers, the retirement or function. In the case of a large corporation, a bank shukko (transfer of employees) process, is simi- team, typically headed by a relationship manager, larly flawed. Shukko serves as an outplacement is intimately involved in the affairs of the client, mechanism under Japan’s lifetime employment visiting the firm’s offices and other facilities on a system and reflects the primarily fiscal necessity daily basis. However, the nature of the team’s of the bank to find early retirement positions for mission is essentially sales-oriented. The team’s high-salaried senior bank executives. Bankers purpose is to try and obtain information about readily acknowledge that their continued influ- the firm’s future plans in order to promote the ence over their former employees was extremely bank’s services. The second and even the third limited, especially when a conflict of interest arose banks of a major corporation will also assign between the bank and its client firm. The neces- teams to service a larger client. sity to retire senior bank employees has acceler- A bank’s ability to exercise any form of out- ated in pace since the over-hiring of junior side governance arises exclusively from its posi- personnel during the “bubble period.” However, tion as a major creditor and only when there are as Japanese firms also continue to downsize there no other options for the client firm to access other are fewer and fewer positions available in client banks, outside money markets, or internal firms for retirement shukko from the banks. sources of funds. However, given the competi- In considering the role of banks in corporate tive nature of the banking industry other banks governance, banks are not acting as monitors in competing with the firm’s main bank are usually the agency sense, that is, as agents for fellow share- only too eager to grant a new loan in an effort to holders, since the bank’s own credit exposure to improve their position in the relationship hierar- the client far exceeds its own equity position in chy and the increased access that it affords. Dur- the client firm. Even from a creditor’s standpoint, ing the “bubble period” of the 1980s, the mission the bank’s ability to monitor is limited. The proof the bank teams was primarily to boost bank longed banking crisis in Japan has also painfully assets by issuing new loans, which were often used revealed the banks’ lack of ability to evaluate the marketing in Japan 291 creditworthiness of clients when money was lent for market share rather than on meeting con- to pursue land and stock speculations in the 1980s sumer needs. In Japan’s rapidly developing “bubble economy.” In the ever-rising economy economy consumer demand was so strong that which had been characteristic of Japan in the quality products sold as soon as they hit the postwar era, the validity of agency assumptions shelves. This led to the prevailing belief that the of bank governance, and the main bank’s “res- Japanese were homogeneous, and that individual cue function,” implicit or otherwise, had not been tastes and concerns were not that important. The seriously tested until the 1990s. The elements of theory was that since any member of the firm the agency theory approach have been largely producing a product was a representative of the demythologized since then by the ongoing bank- target consumer, focus group interviews and con- ing crisis. As Japan still continues to suffer its first sumer surveys were unnecessary. profound postwar recession, questions of corpo- At best, Japanese firms considered marketing rate financial efficiency are being starkly con- as a function of everyone in the organization, fronted. The prolonged recession has been rather than a specialized pursuit. Thus the Japa- characterized with increasing frequency as a gov- nese corporate custom of hiring entry-level col- ernance recession. lege graduates en masse, and subsequently The main bank relationship is rooted in the rotating them through various positions, accounts history of the postwar reconstruction of the Japa- for the fact that many individuals assigned to nese economy and prior to that in the role of the marketing departments have little or no formal bank within the prewar zaibatsu groups. Indeed, training. many of its present-day practices stem from that From the beginning of Japan’s economic re- history and also bear within them a strong com- surgence during the postwar era until the late ponent of traditional group relationships endog- 1980s, Japanese consumer demand for products enous to Japanese society. Nonetheless, we cannot outpaced supply A good product from a reputa- escape the fact that the functionalist practices of ble corporation was almost guaranteed success. the main bank relationship are to seek competi- During this producer-driven economy the more tive advantages in a system in which the rela- products a firm could produce to fill retailers’ tionship itself is a key source of bank profits. shelves, the higher the chance for success. The keys to a product’s success were considered to consist of a good corporate image, technological Further reading expertise, and a strong distribution channel. This Aoki, M. and Patrick, H. (eds) (1994) The Japanese Main led to a style of advertising that focused on build- Bank System: Its Relevance for Developing Economies, ing the corporate brand, rather than espousing Oxford: Oxford University Press. product merits, or building product brands. Not Scher, M.J. (1996) Japanese Interfirm Networks and Their surprisingly in this atmosphere, the discipline of Main Banks. London: Macmillan and New York: marketing was not considered an instrumental St. Martins Press. function to a product’s success. ——(1998) Mainbank shinwa no hokai (Collapse of the This product-driven approach worked well Main Bank Myth), Tokyo: Toyo Keizai Shimposha. until the bursting of Japan’s bubble economy in ——(1999) “Japanese Financial Institutions as Informa- the early 1990s, and the subsequent recession. tion Intermediaries,” in H.Albach, U. Goertzen and As consumer purse strings tightened, product R.Zobel (eds), Information Processing as a Competitive manufacturers found themselves vying for con- Advantage of Japanese Firms, Berlin: Sigma Publishing. sumer attention. Consumers began exercising personal choice, forcing companies to concentrate MARK SCHER their attention on consumer needs. Forced by the shift in the market to accept the marketing in Japan importance of marketing in Japan, many major corporations looked for guidance from across the For the majority of Japan’s post-war history mar- seas, resulting in a proliferation of Western keting in Japan traditionally focused on the fight marketing books translated into Japanese. More 292 Marubeni

telling is the heavy investment Japanese corpora- trading, eventually opening branches and offices tions are making in marketing, by sending up- throughout China and in India. It also expanded and-coming staff to overseas universities to pursue the goods it handled to include construction marketing degrees or MBAs. materials, machinery sundries, food products, and Recognizing the importance of marketing, so on, in addition to textiles. The Osaka branch’s more Japanese companies are now tracking con- sales grew rapidly and in 1937 exceeded those of sumer preferences through point-of-sale data and the main store, accounting for 62 percent of over- consumer research, and tailoring their products all sales. to those findings. Many companies have also As the business performance of Marubeni begun segmenting their markets by values and Shoten, C.Itoh & Co. and others recovered, the lifestyles, rather than relying on demographics move to reunify all of the Ito family business alone. Furthermore, the importance of the prod- strengthened. In September 1941, three compa- uct brand has come to be recognized, with the nies (Kishimoto Shoten, a steel trading company; result that more emphasis is put on building the Marubeni Shoten and C.Itoh & Co.), merged to brand through advertising. As Japanese firms form Sanko Kabusiki Kaisya. Soon after, how- realize that their success depends increasingly on ever, the Second World War erupted and this lim- their marketing strategy marketing staffs and ited the company’s trading to China and budgets are being increased. Southeast Asia. In September 1944, Sanko Kabusiki Kaisya SEAN MOONEY merged with Daido Boeki Kaisha and Kureha Cotton Spinning Co. (also established by Chubei Marubeni Itoh) to form Daiken Co. The combined entity now had 103 affiliated companies inside and out- The company that later became Marubeni Cor- side of Japan and interests in shipping and deliv- poration was founded in 1858, the year in which ery of textiles, heavy industry and chemical the company’s founder, Chubei Itoh, began to industry products, grains, fertilizer, etc., and also sell Omi linen. In 1872, Chubei opened Benichu, provided materials to the military. With the end- a drapery shop, in Osaka, and in 1883 began ing of the war, however, the company lost all of using the Beni mark as the store’s logo. The Beni its overseas assets. mark is the origin of the name Marubeni. The In February 1948, Daiken Co. was designated company expanded into Osaka, Kobe, and Kyoto as being one of those subject to the Law for Elimi- through the nineteenth century. nation of Excessive Concentrations of Economic In 1914, the company was reorganized from Power, a measure designed to break up the zaibatsu a proprietorship into C.Itoh & Co. (see which dominated Japan’s economy at that time. ITOCHU). In 1918 the limited partnership was Daiken was divided into four companies: divided into Itochu Shoten, with the main store Marubeni Co., C.Itoh & Co., Kureha Cotton and Kyoto store as its core, and C.Itoh & Co., Spinning Co., and Amagasaki Nail Works. with the yarn store and the Kobe Branch at its On December 1, 1949, Marubeni Co. was center. These two companies were the forerun- formally established with headquarters in Osaka, ners to Marubeni Corporation and ITOCHU was capitalized at ¥150 million, and had 1,232 Corporation, respectively. employees. When established, the company did As a result of the post-First World War slow- not have a single overseas office, but new regula- down in commodity markets, Itochu Shoten tions allowing imports and exports were just start- merged with Ito-chobei Shoten, which had re- ing. The first financial results after establishment mained under sound management, to form (December 1949-March 1950) showed sales of Marubeni Shoten in March 1921. At that time ¥5 billion, 80 percent of which were from tex- the company which had only one branch in tiles. Kyoto, was a textiles wholesaler handing silk and Although its commodities businesses collapsed wool fabrics. In 1931, the Osaka branch was es- after the Korean War, the company opened its tablished. This branch began to concentrate on first overseas office in New York in April 1951. Maruyu 293

By the end of 1954 the company had twenty-two viously served moved to bypass them in favor of overseas subsidiaries. The government decided direct export. The company suffered high write- that the trading companies needed to be strength- offs from the reorganization of affiliates, and re- ened to expand the country’s trade and so estab- lied heavily on asset sales to maintain profit levels. lished a policy to do so. Because the trading The businesses that did expand during this pe- company Iida & Co., the forerunner of riod were exports for power systems, energy Takashimaya Department Store, had sustained a chemicals, etc., and exports of steel pipe for oil large loss from the collapse of the soybean mar- producing companies. In particular, large orders ket, that company’s main bank, Fuji Bank, de- for power systems were received from around cided that a merger with another trading the world, and this proved to be a major profit company was the only way to restructure that source for the company from the 1980s through company and asked Marubeni to cooperate. the first half of the 1990s. By fiscal 1990, the com- Marubeni agreed to the merger, judging that it pany had largely recovered, and reflected sales was in accordance with the country’s policy to of ¥19.156 trillion and ordinary income of ¥54.8 strengthen the trading companies. On Septem- billion, both record figures. ber 1, 1955, Marubeni and Iida & Co. merged to Throughout the 1990s the company reorgan- form Marubeni-Iida Co., now a true general trad- ized and integrated some subsidiaries and affili- ing company (sogo shosha). ates and liquidated others, while continuing to In line with Japan’s accelerating growth at the expand in many areas, including information and time, Marubeni-Iida established a chemicals de- electronic businesses and high-cost projects such partment in 1957, expanded into polyethylene as fiber optic submarine cables to Europe and production, and in 1958 started automobile ex- the USA. As a result of appraisal losses on its ports to the United States on behalf of Nissan bank and other stock portfolio, in fiscal 1997 Motor Co. In April 1966, Marubeni merged with Marubeni posted a net loss of ¥30.8 billion, the Totsu Co., which was a trading company spe- company’s first loss since fiscal 1951. In the late cializing in metals and one of the sales agents of 1990s it actually sought to reduce employee head- Nippon Kokan K.K. (now NKK). Sales of heavy count through early retirement, attrition, buyout and chemical industry products, such as metals, programs, and selected layoffs. Restructuring machinery and chemicals, now accounted for continued in 2000 and 2001 and the company is more than 50 percent of Marubeni-Iida’s sales. now focused on four business areas: retail, infor- Tokyo effectively became the company’s head- mation and telecommunications business and quarters. electric power infrastructure, high value-added In 1966 the Fuyo Conference consisting of the materials and materials processing and sales, and presidents of Fuyo group companies (all affiliated resource development and trading. Given their with Fuji Bank) was started, and a keiretsu was common roots, many observers believe Marubeni formalized. On January 1, 1972, the company and ITOCHU Corporation will eventually changed its name from Marubeni-Iida Co. to merge again, as they have at previous times in Marubeni Corporation, and moved to the newly their history. constructed Marubeni Building in the Takebashi district, which is still its headquarters today. See also: general trading companies The Iranian Revolution in 1979 caused a tem- JAY NELSON porary stoppage in crude oil production and oil prices rose. During this time the company’s energy and chemicals division sales increased Maruyu greatly and came to account for nearly 23 percent of sales, the same as the machinery and Maruyu is a system of tax breaks for small savers metals division. which was introduced in 1963. Investors could In the early 1980s, Japanese trading compa- earn tax-exempt income on a total of ¥14 mil- nies faced criticism for their size and power in lion ($US 140,000) in savings. Of that amount, the economy while manufacturers they had pre- up to 3 million yen could be deposited in tax-free 294 Matsushita Electric Industrial Corporation bank accounts; 3 million yen in postal savings, 3 practices occurred during the Japanese Depres- million yen in government bonds; and 5 million sion. In December 1929, to reduce inventory to yen in special accounts for buying a house. The avoid layoffs, MEAF put all workers on half-day system spawned tax evasion on a huge scale. work with full salary eliminated holiday pay and After April 1988, the law was changed to limit asked all the workers to sell the excess inventory access to the maruyu system. Eligibility for maruyu By February 1930 everyone was back to their was limited to people sixty-five years or older; regular shifts. In 1930 MEAF began its first sales those who received a survivor’s annuity; people of radios, which were defective; in 1931 the ra- who received a widow annuity or single mother dios were redesigned and won first prize in a annuity; mothers whose children receive Nippon Hoso Kyokai (Japan Broadcasting Cor- childcare support allowance; and those who re- poration or NHK) contest. By 1942 Matsushita ceived a handicap annuity was the largest radio producer in Japan. In 1933 MEAF was one of the first firms in Japan to introduce a divisional structure based Further reading on product families, the goal of which was to Holloway N. (1988) “Conflicting Accounts—Banks delegate more authority to the divisions. Al- Scramble as Japan Ends the Small Saver’s Tax though General Motors had adopted a divisional Break,” Far Eastern Economic Review 99–100 structure as early as 1921, Matsushita does not appear to have been influenced by General Mo- SUMIHIRO TAKEDA tors. The divisional structure created clear profit responsibilities, with the divisions operating al- Matsushita Electric Industrial most like independent corporations. These divi- Corporation sions continue to be powerful and independent. At the end of the Second World War MEI had Matsushita Electric Industrial Co., Ltd (MEI) is forty-nine separate subsidiaries. a diversified manufacturer of industrial and con- In the aftermath of the war, MEI was declared sumer electronics/products, both assembled a zaibatsu and five factories were seized by the goods and components. MEI’s predecessor firm, occupation authorities. Initially MEI executives Matsushita Electric Appliance Factory (MEAF), were scheduled to be purged; however, after a was established in 1918 in Osaka, Japan by considerable lobbying effort this order was re- Konosuke Matsushita, and incorporated as MEI scinded. Only in 1950 was Matsushita relieved in 1935. MEI is the core firm in the Matsushita of zaibatsu-related controls. In the 1950s MEI Group. In fiscal year 1999 its consolidated sales expanded rapidly broadening its product lines to were in excess of $ 63 billion, and its total world- include black-and-white televisions, transistor wide employment was over 282,000. It sells un- radios, stereos, tape recorders, air conditioners, der the National, Panasonic, Technics, and washing machines, and other products. It intro- Quasar brand names. In the late 1990s, MEI and duced its first television in 1952. MEI acquired its subsidiaries had a very broad product line that majority ownership in Japan Victor Corporation included components, home appliances, con- (JVC) in 1954, but JVC continues to operate in- sumer electronics, and many industrial electron- dependently. ics products. MEI was also an early entrant into global In 1918 MEAF brought out its first product, markets. Matsushita Electric Trading Company a double-ended electrical socket. Another impor- was established in 1935 and operated through- tant early product was a battery-powered bicycle out Asia. During the Second World War MEI lamp that was introduced in 1922. MEAF grew established production facilities throughout the quickly in the 1920s and 1930s by selling house- expanding Japanese Empire. In the immediate hold electrical products such as irons and, later, aftermath of the war, thirty-nine overseas facto- radios, fans, light bulbs, and various electric ap- ries were confiscated. In 1948 the Dutch firm pliances. An early instance of the firm’s willing- Philips approached Matsushita to reestablish their ness to move beyond conventional business prewar business relationship. In 1951 Konosuke Matsushita, Konosuke 295

Matsushita visited firms in the USA and also shortcomings, in 1953 MEI created its Central Philips in Holland. By 1952 the two firms had Research Laboratory in Osaka, and MEI has created a joint venture for the Japanese market, continually increased investment both at the cen- and in 1954 they opened a plant in Osaka to pro- tral laboratory and in divisional research and duce picture tubes, vacuum tubes, transistors, development laboratories. semiconductors, and other electric components. In 1953 MEI opened its first overseas liaison of- See also: electronics industry; Sony fice in New York City. In 1959 Matsushita Elec- tric Corporation of America was founded in New Further reading York, becoming its first overseas subsidiary. The same year MEI opened its first overseas produc- Kotter, J.P. (1997) Matsushita Leadership: Lessons from the tion facility National Thai, in Thailand, and since 20th Century’s Most Remarkable Entrepreneur, New York: then Matsushita has opened many subsidiaries The Free Press. around the world. Global sales, marketing, and Matsushita, K. (1988) Quest for Prosperity: The Life of a production continues to be a high priority. In 1974 Japanese Industrialist, Tokyo: PHP Institute Inc. MEI purchased Motorola’s consumer electron- MARTIN KENNEY ics division, which retailed under the brand name Quasar, but closed the last Motorola television factory in 1995. In 1990, MEI purchased a US Matsushita, Konosuke entertainment and movie firm, MCA, for $6 bil- Konosuke Matsushita (1894–1989) was the lion, but then sold it in 1995 to Michael Bronfman founder of Matsushita Electric Industrial Co., for $5.7 billion. By 1999 MEI had 223 manufac- Ltd. Japan’s largest consumer electronics manu- turing and sales subsidiaries globally and oper- facturer. Known in Japan as the “god of manage- ated in over 160 countries. ment,” Matsushita is credited with pioneering From its inception, MEI’s business strategy numerous managerial innovations, including the has focused on being a fast follower: it has intro- division system and the five-day workweek, and duced improved versions at lower prices. In con- his books on management as well as broader so- trast to many Japanese firms, MEI has often cial and philosophical issues continue to sell well purchased other companies as a method of en- even after his death. tering a new business. An important strategy it had developed already in the 1920s was to promote brand names, particularly its National The early years brand. MEI aggressively built a distribution and sales keiretsu before the Second World War, and Matsushita was born in 1894 in Wakayama Pre- as of 1999 it has the strongest retail distribution fecture, south of Osaka, the youngest of eight network in Japan, consisting of approximately children in a wealthy farming family. When he 25,000 retail distribution outlets nationwide. was four, his father lost everything while specu- These shops are the backbone of Matsushita’s lating in the rice futures market and the family leading market share in Japan. was thrown into poverty. This was the beginning MEI’s strength has been its emphasis on effi- of a long series of trials that Matsushita would ciency and quality mass production. In 1958 MEI face, including poor health, the early deaths of received the Deming Award for quality In con- all his siblings and his only son due to illness, trast to the large general electric manufacturers, and numerous business setbacks. Overcoming such as Hitachi and Toshiba, before the war MEI such adversity was to be a recurrent theme did not invest in research and development, pre- throughout much of his life. ferring to improve upon existing products. How- When Matsushita was nine, he was sent to ever, after the war the relative backwardness of Osaka where he worked for six years as an ap- Japanese technology became clear to Konosuke prentice in a bicycle shop. When he was sixteen, Matsushita, as did the necessity of purchasing he got a job at the Osaka Electric Light Com- technology from foreign firms. To remedy these pany and became an installation technician, 296 Matsushita, Konosuke wiring homes and businesses for lighting. At age and renamed Matsushita Electric Industrial Com- nineteen, he was put in charge of large projects, pany (MEI). with dozens of employees under his supervision. He was further promoted to inspector, but was Innovation in management unhappy in this position because it provided too many idle hours and not enough “serious work.” By the 1930s, several of the distinctive character- In his spare time, Matsushita worked on design- istics of Matsushita-style management were being a light socket that was better than the one his coming evident. Matsushita rarely came out with company used. When he had devised a socket an entirely new product category; instead the that he had confidence in, he showed it to his company improved existing products, making boss, but his boss was not interested. At this point, them better and/or cheaper than those offered Matsushita decided to quit the company to manu- by competitors. Costs were kept low by hard work facture light sockets himself. and relentless pursuit of manufacturing efficiency In 1917, at the age of twenty-two, he started a New and creative marketing methods were used, business with 100 yen, setting up operations in a such as the promotion of the “National” brand two-room tenement house with five workers, in- name through aggressive nationwide advertising. cluding himself and his wife. None had a high Close and cooperative relationships were estab- school education, so they worked long hours to lished with suppliers and retailers, in contrast to overcome their lack of technical expertise. Their the arm’s-length dealings that were then the norm first product did not sell well, and soon the com- in Japan. Matsushita also set up its own distribu- pany was down to just three employees. tion channels, following a conflict with a sales Matsushita’s first successful product was a agent for bicycle lamps. Many of these practices double outlet adapter that screwed into light sock- are now taken for granted in Japanese business, ets. Since Japanese houses generally had just one but at the time Konosuke Matsushita first intro- electrical outlet, this enabled them to double their duced them they were rare. capacity: the adapter could accommodate a light Matsushita was also a pioneer in company— bulb plus one other electrical appliance. employee relations. When the stock market crash Matsushita’s small company continued to intro- of 1929 sent the Japanese economy into depres- duce one or two new products per month. He sion, Matsushita’s sales were cut in half. initially designed the products himself, but gradu- Matsushita responded by cutting production by ally came to rely on others. All of his products half, but did not lay workers off. Instead, un- were improved versions of existing products, sold needed production workers were shifted into at prices below the competition. sales, to help reduce excess inventories. Thus, In 1922, Matsushita developed a bullet-shaped during the 1930s when other companies were bicycle light that was more durable and burned laying off employees and bringing out few new longer than existing bicycle lights. When he had products, Matsushita did the opposite. This pre- trouble persuading skeptical retailers to carry the dated by three decades the lifetime employment light, he came up with an innovative marketing system and the practice of moving workers into strategy: he had salesmen leave samples at bicy- other jobs to avoid lay-offs, policies for which cles shops with one lit lamp on display and asked Japanese companies became well known but to be paid only if the lamps sold. When retailers which were not widely adopted until after 1960. saw that the demonstration lamp worked for fifty Matsushita was also the first Japanese company hours on a single set of batteries, they were im- to introduce the five-day work week, in 1960. As pressed, and began recommending the lights to founder and “hands-on” president of Matsushita customers. Sales took off. Matsushita continued Electric, Konosuke Matsushita was the man re- to expand his product line, and by 1931 his com- sponsible for all of these management innova- pany had 140 patents and was manufacturing tions. over 200 products, including radios, lighting, Matsushita was also willing to take the risk of batteries, and electric irons. In 1935, the com- moving quickly into mass production, even when pany was reorganized into a public corporation the market for a product was still small. Inspired Matsushita, Konosuke 297 by the pricing strategy used by Henry Ford with four divisions: radios, lamps and batteries, wir- the Model T, Matsushita understood the concept ing and electrical fixtures, and electrical heating of expanding the market for a new product by appliances. The company then continued to add mass producing it at an early stage, thereby renew divisions as it expanded into new product ducing per-unit production costs through econo- areas. Each of Matsushita’s product divisions is mies of scale, and then translating the reduced in charge of its own R&D, engineering, produc- costs into lower prices, making the product af- tion, and sales; at the same time, the accounting, fordable to more consumers. In 1931, Matsushita recruitment, and basic employee training func- made the unusual move of purchasing a critical tions are centralized to maintain a degree of con- patent and making it available free of charge to sistency and corporate control. The head of a all radio manufacturers, to help stimulate growth division is held responsible for performance; di- of the radio market. Matsushita applied this mar- visional profitability is made public within the ket expansion model repeatedly. One of the best company and when a division fails to meet its examples was with videocassette recorders profit target for two consecutive years, the divi- (VCRs) in the 1970s and 1980s. When sion head is replaced. Over the years, Matsushita Matsushita adopted the VHS format (which had alternatively tightened and loosened corporate been developed by JVC, a Matsushita subsidi- control over the divisions, in response to market ary), he aggressively built up production capac- conditions and to maintain a balance between ity in anticipation of growing worldwide demand, divisional autonomy and cooperation among di- and licensed the VHS technology to other manu- visions. facturers. The result was falling production costs, falling prices, rapid expansion of the VCR mar- During and after the Second World War ket, and the establishment of the VHS system as the industry standard over the competing Sony During the Second World War Matsushita Elec- Betamax format. By the mid-1980s, VCRs ac- tric, like all Japanese industrial companies, manu- counted for almost 30 percent of Matsushita’s factured products for the Japanese military. After total sales and around 45 percent of its profits. the war, the Occupation authorities designated Matsushita a zaibatsu, ordered it to cease production, and announced that its top management, The division system including Konosuke Matsushita, would no longer In the Japanese business world, Matsushita Elec- be allowed to work for the company. Arguing tric is especially well known for its division sys- that Matsushita was not a zaibatsu but a young, tem. In a division system, the different units of a founder-led company which had been pulled into company are organized primarily by product or the war by the military Matsushita fought hard product group, with each product division oper- to have the Occupation rulings reversed, making ating more or less autonomously much like an over fifty trips to Allied Headquarters in Tokyo independent company. Matsushita first adopted to plead his case. The company’s labor union a division system in 1933, about the same time helped too; at a time when many labor groups that Pierre du Pont was pioneering a similar were petitioning to have their business leaders divisionalized organization in the United States. removed from office, Matsushita’s union gath- His goals in devising this organizational struc- ered over 15,000 signatures from union members ture were to delegate authority and train busi- and their families asking that Konosuke be al- ness managers (particularly as Matsushita himself lowed to remain as president. These efforts were suffered from chronically poor health); to give successful; Allied Headquarters announced in product units the customer closeness and flex- 1947 that Konosuke Matsushita and all his ex- ibility of small companies; and to prevent em- ecutives could continue to work for the company ployees from becoming too specialized and losing although it was not until 1950 that all of the post- sight of the goals of satisfying customers and earn- war restrictions on the company’s business ac- ing profits. tivities were removed. Matsushita initially divided his company into In the 1950s, Matsushita put his company on 298 Meiji restoration

the road to “internationalization.” In 1951 he vis- of values, which were sung and recited by all ited the United States, where he was impressed company employees every morning before start- by the sophistication and dynamism of Ameri- ing work. Included in the code of values and in- can business, and in 1952 he signed a licensing grained in every employee are Matsushita’s and technology exchange agreement with the “Seven Principles:” national service through in- European electronics giant Philips. Matsushita’s dustry fairness, harmony and cooperation, strug- first overseas company Matsushita Electric Cor- gle for betterment, courtesy and humility poration of America, was set up in New York in adjustment and assimilation, and gratitude. 1959, and this was followed over the next four Matsushita’s philosophy shaped his company’s decades by the establishment of dozens of sales approach to human resource development as well. offices, manufacturing plants, research facilities, Unlike many large Japanese companies, and training centers in countries all over the Matsushita does not rely heavily on recruitment world. of graduates from elite universities to fill management-track positions; instead, the company focuses on getting “extraordinary results from Spiritual values ordinary men.” All employees receive thorough Konosuke Matsushita is also revered in Japan for and continuous training, both in business skills the philosophical side of his management philoso- and in Matsushita values. As one often-heard phy. Throughout his career, Matsushita empha- company slogan goes, “Matsushita makes peo- sized the importance of establishing and sharing ple before it makes products.” with his employees clear management objectives Konosuke Matsushita served as president of and slogans to guide business decisions and ac- Matsushita Electric until 1961, when he was made tions. In 1929, he laid down his company’s “ba- chairman. In 1963 he moved into a more “hands sic management objective” (koryo), which states: off” executive advisory position as he sought to “Recognizing our responsibilities as industrialists, develop the next generation of company leader- we will devote ourselves to the progress and de- ship. Even as advisor, however, he was quick to velopment of society and the well-being of people become involved when a crisis arose. Matsushita through our business activities, thereby enhanc- was also a prolific author, writing forty-six books ing the quality of life throughout the world.” His between 1953 and 1990. thinking was further influenced through an encounter with a popular religious movement in Further reading 1932 which led him to feel strongly that people Kotter, J. (1997) Matsushita Leadership, New York: The need a way to connect their work lives with soci- Free Press. ety. This idea, along with his own business expe- Matsushita, K. (1988) Quest for Prosperity: The Life of a riences, shaped the continuing development of Japanese Industrialist, Kyoto: PHP Institute. his management philosophy. Concerning the re- Pascale, R.T. and Athos, A.G. (1981) The Art of Japa- lation between business, society and profit, he nese Management. New York: Simon and Schuster. said: “A business should quickly stand on its own, based on the service it provides to society. Profits TIM CRAIG should not be a reflection of corporate greed but a vote of confidence from society that what is Meiji restoration offered by the firm is valued. When a business fails to make profits it should die—it is a waste of The Tokugawa period was followed by the first resources to society” (Pascale and Athos 1981). era of modern Japan, the Meiji period (1868– Another famous part of the Matsushita man- 1912). It was established by a rebellion against agement philosophy is the “water philosophy:” the Tokugawa regime led by low-ranking samurai Konosuke’s declaration that manufacturers from feudal estates far from the capital at Edo. In should strive to make all products as “inexhaust- theory it was not actually a revolution, but a “res- ible and as cheap as tap water.” Matsushita was toration of Imperial rule.” With a breathtaking the first company to have its own song and code series of fundamental changes, leaders of the Meiji Meiji restoration 299 restoration quite literally designed a new Japan. West that they feared so much, and establish a It stands as one of the most comprehensive and new regime which, although imperfect and re- rapid transformations of any society in world quiring many adjustments as time went on, suc- history. Within the space of thirty years, Japan cessfully brought Japan into the modern world was transformed from an agriculture-based feu- to an extent no non-Western nation has ever been dal economy and social system into a modern able to do. world power. The young men who did all this (the oldest The Tokugawa regime was the supreme au- was a mere forty-one), were mainly lower rank- thority in Japan for more than two and one-half ing samurai from what the Tokugawa regime had centuries, finally coming to an end in 1868. always considered “outsider” han, those kept There were signs that the end was near even be- physically distant from Edo, and never allowed fore events occurred which forcefully brought to participate in the deliberations of running the the regime down. Physical isolation of the coun- nation. They were joined by a progressive fac- try one of its main ideological pillars, was under tion of young court nobles in Kyoto. Especially mounting attack from Britain, Russia and the prominent in what finally culminated in the Meiji United States. The warrior elite from feudal es- Restoration were samurai of Choshu in extreme tates outside those favored by the regime were southern Honshu and of Satsuma in southern becoming more openly restive, and the question Kyushu, who championed the idea of removing, of why the Emperor was not the actual head of by force if necessary the entire Shogunate sys- government, rather than a mere ornament of his- tem of government and replacing it with a gov- tory had become a common focus of discussion ernment established on western lines with the among groups of samurai, even including some Emperor as a kind of spiritual rallying point. The within the ruling Tokugawa clan itself. When a young samurai from Choshu and Satsuma rallied small American fleet steamed into Edo Bay in a few thousand other samurai to their cause, con- June of 1853, under the very walls of the Sho- fronting the forces of the Shogun for the first time gun’s castle, with orders demanding that Japan in three centuries. The rebels were victorious in open ports to allow foreign ships to take on coal a short military struggle which produced surpris- and provisions, the beginning of the end was at ingly few casualties. The Shogun abdicated, was hand. A year later the Shogun’s representatives never harmed, and in fact was later granted a were forced to open ports to several nations, and lifetime pension. The old regime was thus swept to suffer the humiliation of tariffs dictated to it away and now a group of idealistic young men by foreigners, and even to surrender a measure faced the daunting task of building a modern of sovereignty over areas where foreigners lived nation on the ruins of an agriculture-based feu- and worked. dal autocracy. It took another fourteen years for the regime The first task at hand for the new leaders was to finally be replaced, a period called bakumatsu to establish trust and the image of authority over in Japanese, “last years of the military govern- a confused population, and the way these young ment,” during which endless debate about what men used the imperial institution to do that re- to do was carried out both inside and outside flected their cleverness and farsightedness. They governmental circles. As the foreigners came in decided to keep the seat of political power in Edo, increasing numbers, their technological and mili- but in a calculated move to symbolize the revolu- tary superiority was undeniable, and although tionary nature of the new order, the Shogun’s many Japanese hated their presence, fearing the enormous castle was transformed into the home country would be reduced to semi-colonial sta- of the Keio Emperor, a lad recently turned four- tus as had China, they came to realize that they teen, and the city itself was renamed Tokyo, “east- were in no position to deal with the foreigners on ern capital.” To further enhance the sense of an equal footing. Fortunately for Japan, this cri- newness of the regime, the Emperor’s reign name sis brought to the fore a cadre of remarkable men was changed to Meiji, “enlightened rule.” 1868, who were eventually able to put aside han rival- the start of a new modernizing Japan, thus be- ries, suppress individual egos, learn from that very came the first year of the Meiji period. 300 Meiji restoration

Building a new Japan: the first Meiji military achieved complete victory indicat- quarter-century ing that without a doubt the new regime was firmly in place. No emperor for a thousand years of history to The West, especially Germany Britain, France that date had actually been a ruler in Japan, and and the United States, became in a real sense class- the young Meiji Emperor certainly was not made rooms for the young men of the new regime. one. In theory on the other hand, getting rid of Under conditions that must have been extremely Shogunate rule was for the purpose of “restor- trying, dozens of those young men agreed to ac- ing” the emperor—the sacred emperor—to his tually go to Western countries and examine in rightful place as head of the Japanese polity. In detail “how things were done.” Industrial tech- almost all respects, the young emperor had no niques, especially shipbuilding techniques were real idea of what was going on, but the Meiji lead- examined in Britain. Military organization and ers controlled his seal. All edicts in a whirlwind artifacts were studied in France. The railroad of fundamental changes across society were pro- system of the United States, the most compre- claimed in his name. Ordinary people had no hensive in the world at the time, was of special difficulty accepting the explanation the new gov- interest, and Meiji leaders turned to Germany ernment put forth that the Shoguns had been for a model of modern government. Engineers usurpers, and that Japanese society was at long and technicians were lured to Japan with two to last back on its original course with the Emperor three times the salaries of their previous employ- at the helm. The Imperial institution was effec- ment, a great drain on the new regime’s modest tively used not only as a rallying point and a resources. source of legitimacy but actually as a way to put The earmarks of industry appeared within a beyond criticism, even beyond serious review, few short years in the form of electric power in many changes that were being made. Tokyo, a railway line stretching from the central Designers of the new regime were themselves part of the capital some seventeen miles to samurai and court nobles, but they understood Yokohama harbor, and a silk-weaving factory that the old order would have to be completely using steam power. At first the government tried dismantled if Japan was to be able to protect her- to build modern industries by itself, but as funds self from domination by western powers through ran out, it was decided to sell offenterprises to modernization. Meiji leaders adroitly placated the private owners. With the exception of a few old elite by subsuming them into the new order. wealthy merchants who had prospered during the Important daimyo and central figures at the former late Tokugawa period, the only people with avail- Kyoto court were given titles in a new, European- able cash were former samurai, who, if they style nobility. The classification of samurai was pooled what money they had, could in some cases officially discontinued; samurai costume and buy entire industries from the government. This sword-wearing were declared illegal. In compen- formed the beginning of the zaibatsu groups sation, former samurai were given cash payments which were to dominate the economic life of the together with government bonds, valuable only nation for the next seventy years. if the Meiji government continued to exist. From Enormous progress in building a new society now on, except for the titled nobility and the was achieved during the first twenty-five years. Imperial family itself, all Japanese were to be con- A modern military system was established and sidered part of a population of equals. the seeds of an industrial economy had begun to The new social order was not instituted with- bear fruit. A constitution was issued (as a gift out some resistance. An uprising of sorts, led by from the Emperor) in 1889, and a year later an a charismatic man who had himself helped to elected national legislature met for the first time. overthrow the Tokugawa regime, broke out in A great landmark was reached in 1894, when Kyushu, pitting samurai against a new Western- first Britain and then the other Western powers style conscript army. The samurai fought val- signed new treaties with Japan, ending the un- iantly and became somewhat canonized in equal status Japan had been put under and had legend, but more significantly soldiers of the endured for forty years. Men in charge of MOF 301

The later Meiji period Kosaki, M. (1978) Japanese Thought in the Meiji Era, Princeton, NJ: Princeton University Press. Late in the nineteenth century the original Meiji Pyle, K.B. (1969) The New Generation in Meiji Japan, leaders began to die off. Their passion had been Stanford, CA: Stanford University Press. to build a nation strong enough to ward off the Reischauer, E.O. and Craig, A.M. (1988) Japan, Tradi- West. The second generation of Meiji leaders was tion and Transformation, Boston: Houghton Mifflin. determined to go farther, to see Japan itself as a full-fledged member of the community of great JOHN A.McKINSTRY powers. Nationalist ideology a blend of the sa- credness of the Emperor with a new version of national Shinto, became a part of the school cur- Men in charge of MOF (mofutan) riculum in an education system as widespread as any in Europe at the time. Political parties Meaning literally “in charge of,” the tan is a spe- emerged, and eventually parliamentary govern- cial company employee responsible for relations ment began to challenge the power of entrenched, with the cognizant ministry in a system of infor- non-elected bureaucracy. mal regulation. Mofutan is a specialized Japanese In foreign relations, Japan looked more and expression referring to those who work with the more like an aggressive military power. Aware of Ministry of Finance. Almost every large corpo- the way England and France exploited other peo- ration designates at least one employee to be in ple to their economic advantage, a plan was constant contact with the bureaucrats in the regu- hatched by a triad of political, economic and mili- lating agencies (for example, the Ministry of Fi- tary leaders to expand Japan’s authority beyond nance (MOF) and Bank of Japan for banks, the her traditional boundaries. A war was provoked Ministry of Health and Welfare for pharmaceuti- with China in 1895 which the newly industrial- cals, etc.). The more regulatory discretion the ized Japan easily won, giving it concessions and cognizant ministry exercises over a firm, the more control over parts of the Asian continent. Early relevant the company’s ability to affect the regu- in the new century expansionists in Japan turned latory outcome through individual lobbying. In their attention to Korea, and eventually rivalry this respect, the tan are the junior-level equiva- over control of the Korean peninsula resulted in lents of the “’old boys,” senior-level company the Russo-Japanese war of 1904–5. At great sac- employees often hired upon retirement from civil rifice Japan prevailed in the war, an outcome with service to facilitate the flow of information with rather profound significance. Since the beginning the ministry. of the Industrial Revolution no society outside the orbit of European-based culture was able to confront on equal footing the technology and Objectives military power of the great European powers. It was assumed by most people in the West that The most important goal for a company in des- such a thing could never happen. Japan proved ignating a tan is to ensure a regular, immediate them wrong, and the set of assumptions under- flow of information between the company and lying European superiority were fatally weak- the cognizant ministry While trade associations ened. facilitate access to information on generic, industry-wide concerns, companies aim to ensure company-specific lobbying with the cognizant Further reading regulator. Even companies not necessarily close to their regulator often designate a tan in what Akamatsu, P. (1972) Meiji 1868: Revolution and Counter- can be called “regulatory competition:” if one Revolution in Japan, New York: Harper & Row. competitor continuously lobbies its interests, all Fukuzawa, Y. (1966) Autobiography of Fukuzawa Yukichi, other firms in the industry will also dispatch a trans. E.Kiyoka, New York: Houghton Mifflin. tan in order not to lose out. 302 Men in charge of MOF

The need to designate a tan increases with the detriment of the affected shareholders and trad- ministry’s leverage over a single company. One ing partners. example is the voluntary export restraints (VER) demanded by the USA in the automobile trade The finance industry negotiations of the mid-1980s. The VER meant that each company had to limit its exports ac- One industry where the tan system has been of cording to a quota, which was officially set by particular importance is banking. Until 1998, the MITI. While in practice the quota agreement was MOF held a wide scope of regulatory responsi- reached among the firms based on their existing bilities and relied heavily on situational, infor- market shares, MITI had the power to change mal regulation. Regulating banks is subject to these quotas. To represent their interests, even special requirements in all countries. For instance, the most independent auto makers sent out their to avoid a bank run that could destabilize an entan. tire financial system, governments sometimes opt to withhold critical information in the hope of limiting the damaging ripple effects of a bank fail- Implications ure. In Japan, however, bank regulation based not The overall effects of the tan system are twofold. on objective inspections but instead on an exces- On the positive side, the tan serve to increase the sive reliance on behind-the-door problem-solving flow of information between government and may have largely contributed to the banking cri- business in a very direct, cost-effective manner. sis of the 1990s. The full extent of bad loans held Since individuals interact repeatedly and openly by the country’s banks remained undisclosed, and the civil servant is supposedly informed of all even after a new agency had conducted thorough events in the industry under his jurisdiction and inspections beginning in 1998, the scope of the can identify low-cost solutions to any problems. bad loan problem remained unclear. The tan system also reduces the actual costs of Another instance highlighting the negative regulation, since it replaces on-site inspectors and effects of the system was the August 1995 case of other monitoring by the ministry Moreover, the Daiwa Bank. The bank’s New York branch in- tan system helps overcome one potential regula- curred enormous losses which allegedly were tory problem inherent in the rotation-on-the-job duly reported to Japan’s MOE Because several system, which also applies to ministries. As civil defaulting Japanese banks were threatening the servants are moved to new positions every other financial stability of Japan at the same time, the year, they have to learn from scratch about the MOF decided not to inform US officials and did new industry’s opportunities and challenges. The not make a public statement. US regulators were company and trade association tan provide free livid and demanded termination of all of Daiwa training to the incoming regulator. Of course, this Bank’s international business. also means that the industry lobbies the regula- In response to these crises, the MOF was re- tor from the beginning. organized by transferring banking regulation to On the negative side, the tan system increases the new Financial Supervisory Agency and an the opacity of Japanese regulation. In industries abolition of the tan system was demanded. Banks that are predominantly regulated through ad- and other companies had to abolish the desig- ministrative guidance and where direct lobby- nated positions and terminate individual lobbying is therefore particularly effective, the ing. In banking, this was strictly enforced institutionalized tan representation of large firms beginning in 1995. is a disadvantage to both smaller and foreign firms. The system also obfuscates the process of policy making and can lead to regulatory Outlook disinformation of outsiders. Moreover, the system helps to cloak accountability In cases of Problems with this abolition soon became pain- management mistakes, a ministry may choose to fully obvious because the informal mechanisms withhold negative information, possibly to the of regulation were not replaced with formal ones. Ministry of Construction 303

The positive effects of smooth and efficient regu- ters office is subdivided into a Minister’s secre- lation were lost, and regulators had less access to tariat and five bureaux that administer function- information about their industries. In particular, ally specific policies for cities, rivers, roads, formulating regulation became impossible with- housing, and economic affairs. The ministry over- out inside knowledge of new banking products. sees the Public Works Research Institute, Build- Quietly, some of the old relationships were re- ing Research Institute, Geographical Survey established, especially through trade association Institute, and the Construction College. Much tan. Whether the tan system will continue in the of MOC’s work is carried out through eight con- future depends on whether supervisory agencies struction bureaux located in the Tohoku, Kanto, will be established in industries other than bank- Hokuriku, Chubu, Kinki, Chugoku, Shikoku, ing, as these would obviate extensive personal and Kyushu regions. Only Hokkaido and communication with the ministry. Okinawa, which are overseen by agencies under the auspices of the Office of the Prime Minister, ULRIKE SCHAEDE are excluded from the ministry’s administrative embrace. In addition, MOC and its regional bu- Ministry of Construction reaux carry out their functions through hundreds of work offices and branch work offices located The Ministry of Construction (Kensetsusho or across the country. MOC) is one of twelve ministries in Japan’s cen- The Ministry of Construction is charged with tral government bureaucracy The ministry is spending a sizable share of Japan’s general ac- charged with developing, operating, and main- counts budget and a major portion of allocations taining roads, highways, sewerage, water re- from the Fiscal Investment and Loan Program sources, parks, and other public facilities; (Zaisei Toyushi Keikaku), the so-called “second implementing river improvement, erosion con- budget.” MOC’s spending power is reflected in trol, and coastal preservation projects; planning the fact that Japan’s ratio of public works expendi- for cities; promoting the construction and real ture to gross domestic product tends to be two to estate industries; establishing building standards; four times greater than that of other advanced and constructing and maintaining government industrial countries such as France, the United buildings. States, Germany and the United Kingdom. In- The Ministry of Construction was established creased spending on public works—largely fi- on 10 July 1948. Even though it was a creation of nanced by the issuance of construction bonds the early post-Second World War period, the min- (kensetsu kokusai)—is a popular artifice whereby the istry inherited certain elements of its mission, struc- Japanese government seeks to stimulate economic ture, and personnel from other ministries. Most growth. For these reasons, MOC is considered importantly MOC absorbed the Civil Engineer- one of Japan’s most powerful spending agencies. ing Bureau of the once powerful Home Ministry Nevertheless, some observers contend that MOC (Naimusho), which was dissolved as part of the is among the most politicized of Japan’s central Occupation’s efforts to demilitarize and democ- governmental ministries, allegedly manipulated ratize Japan. From the War Recovery Bureau by the Liberal Democratic Party. However, (Sensai Fukko In), MOC incorporated the tasks some observers believe that the Construction of reconstructing and maintaining public sector Ministry wields relatively more power over Ja- facilities, supervising infrastructure development, pan’s enormous construction industry than the and overseeing public works projects. MOC’s Ministry of International Trade and Industry immediate organizational predecessor was the does over client industries in its administrative short-lived Construction Institute (Kensetsu In), bailiwick. which was created in January of 1948. The Ministry of Construction is organized Construction bureaucrats around a headquarters office, several institutes, and a network of regional bureaux. Located in The human element of the Ministry of Construc- Tokyo’s Kasumigaseki district, MOC’s headquar- tion consists of a trio of political appointees who 304 Ministry of Construction

head up a vast corps of meritocratically selected MOC’s career bureaucrats may be divided civil servants. At the apex of MOC’s formal or- into two groups, each with its own peculiar ca- ganizational hierarchy are the Minister of Con- reer path leading to the post of administrative struction (kensetsu daijin) and two Parliamentary vice-minister (jimu jikan), the foremost post for Vice-Ministers of Construction (kensetsu seimu career civil servants. As with other ministries, the jikan). As with all of the ministries and agencies majority of MOC’s “generalists” (jimuya) are of Japan’s central government bureaucracy these graduates of the law and economics faculties, with are MOC’s only political appointees. The pau- prestigious universities such as the University of city of political appointees in Japan’s government Tokyo supplying a disproportionate share. But bureaucracy contrasts starkly with the dozens, MOC is unique among Japan’s central govern- sometimes hundreds, of politically selected func- ment ministries in that “technical specialists” tionaries in each of the various agencies of the (gijutsuya)—individuals trained in civil engineer- federal government in the United States. Most ing, architecture, and other technical fields—are of those appointed to the top political posts at permitted to hold the post of administrative vice- MOC spend only a brief time in the position. In minister. Aside from wielding considerable ad- fact, from 1948 to 2000 the average length of ten- ministrative power within the Ministry these ure in the Construction Minister post was only technical specialists perform a larger sharer of the about nine months. Among other things, this design services involved in public works projects means that the political appointees must depend than do their counterparts in commissioning heavily upon the good will and expertise of the agencies in countries such as the United States. career bureaucrats in carrying out their duties of The balance of power between generalists and overseeing the ministry While a few individuals, technical specialists is a postwar phenomenon. such as Ichiro Kono (Construction Minister, Indeed, technical specialists in the prewar Home 1962–4), come to be known for strong-handed Ministry’s Civil Engineering Bureau were not control, there is little evidence to suggest that promoted above the rank of section chief in the ministers exert any appreciable long-term influ- Ministry’s headquarters or head of the civil engi- ence over major policy and personnel decisions neering department in the regional branches. at the Ministry. Owing to the combination of several forces, in- At the time of its creation, slightly less than cluding the faith of Occupation planners in “sci- six thousand civil servants were employed in the entific administration” (for which, presumably Construction Ministry’s internal sections, affili- technical specialists would be ideally suited), ated organs, and local branches. The total rose Tadayasu Iwasawa, a civil engineer, became the precipitously until the mid-1960s when the Min- MOC’s first administrative vice-minister and the istry employed more than 35,000 individuals. But first technical specialist to ascend to the post. the number has declined steadily ever since, with Despite the triumph of the technical specialists, the 1998 figure standing at 23,674 employed of- Masami Nakata, a generalist, became adminis- ficials. As with all central state ministries in Ja- trative vice-minister upon Iwasawa’s resignation pan, MOC’s officials fall into two distinct in March of 1950. This initiated what has be- categories, depending upon whether they entered come an unwritten, and nearly inviolable, law at the Ministry after passing the Class A or the much the Ministry of Construction: that the top ad- less demanding Class B segment of the Higher- ministrative post will alternate between technical level Public Officials Examination. The former specialists and generalists. are referred to as “career” officials, while the While the dual-track personnel system has vastly more numerous latter group is known as become institutionalized at the administer/vice- the “non-careers,” a distinction akin to that be- minister level, there is no alternation with regard tween commissioned and non-commissioned to the penultimate posts in the respective career military officers. The non-career officials tend to ladders, deputy vice-minister for administration lack the educational pedigree of their career coun- (daijin kanbo cho) and vice-minister for engineer- terparts, and their promotional prospects are se- ing affairs (kensetsu gikan). Generalists invariably verely limited. serve as directors of the minister’s secretariat, Ministry of Construction 305

economic affairs, and city bureaux, while techni- slip style descent from heaven” (yokosuberi gata cal specialists hold the director posts at the river amakudari). This denotes the re-employment of and road bureaux. The only exception is the di- ex-bureaucrats in upper administrative positions rectorship of the housing bureau, where in quasi-governmental corporations, foundations, generalists and administrative specialists alternate financial banks, and similar organizations. It is in the director’s post. For the most part, the top said that a large share of the top positions in these posts in the Ministry’s eight regional construc- public entities are “hereditary” in that their occu- tion bureaux, auxiliary organs, and local branch pants tend to be drawn almost exclusively from offices are held by technical specialists. the ranks of retired government officials, particu- MOC exerts influence over the construction larly those from the agency which oversees the bureaucracy at the local levels through shukko, corporation. In some cases, these positions in- the practice of temporarily “loaning out” mid- volve relatively high salaries, few duties other than career officials. These loaned-out officials typi- ceremonial functions, and various other perqui- cally spend from two to fours years in positions sites. MOC is in the enviable position of control- attached to prefectural or municipal bureaucra- ling a number of “progenitor posts” in a dozen cies. In addition, MOC “loans” a number of mid- or so public corporations, such as the Japan Hous- career officials to public corporations, particularly ing Public Corporation. Some former MOC bu- those entities under the ministry’s jurisdiction, reaucrats have been known to “migrate” through such as the Hanshin Highway Public Corpora- as many as five side-slip posts. tion. Finally the Construction Ministry is well represented among members of parliament. The first construction bureaucrat to descend into parlia- Descent from heaven mentary politics was Tadayasu Iwasawa, MOC’s Upon retirement from the government service, first administrative vice-minister, who won elec- usually between the ages of fifty and fifty-five, tion to the Upper House in 1950. Over the years most upper bureaucrats “descend from heaven” a number of former MOC officials have trodden into a “second career.” This re-employment of up the fabled red carpet of the National Diet ex-officials, known as amakudari (descent from Building. The vast majority have claimed mem- heaven), takes several distinct forms. The most bership in the Liberal Democratic Party It is be- widespread and controversial form of amakudari lieved that much of the electoral success enjoyed is the re-employment of retired MOC officials in by former MOC bureaucrats derives from the private-sector construction firms. The ostensible potent campaign support provided by the “con- reason that firms hire ex-bureaucrats is to obtain struction machine” (kensetsu mashiin), a somewhat the administrative and technical expertise that shadowy apparatus designed to turn out the vote these individuals possess. Yet many observers for candidates favored by the ministry. believe that the most important reason behind In this way amakudari is the glue that binds the practice of re-employing retired MOC bureau- together MOC, the construction and real estate crats in construction firms involves their personal industries, and influential allies in the parliamen- connections to the government bureaucracy Spe- tary world. Most importantly amakudari facilitates cifically some observers believe that firms em- mutually beneficial interactions and the exchange ploying ex-bureaucrats are rewarded with access of information. to confidential information concerning bidder designation and secret leakages of information “Construction friction” and beyond concerning the government’s confidential anticipated ceiling price (yotei kakaku) for public works In the mid-1980s the Ministry of Construction projects. In this way amakudari is said to be en- became engulfed in heated trade friction with the twined with dango, the institutionalized, albeit United States and other countries concerning the illegal, system of price-fixing on public works closed nature of Japan’s construction market. The projects. first salvo in this trade dispute involved demands A second form of amakudari is termed “side- to include American firms in bidding for projects 306 Ministry of Finance

connected with the construction of the new mantled other powerful government agencies, Kansai International Airport. Eventually the dis- such as the Home Affairs Ministry but kept the pute widened to include demands for reform of MOF intact as a means of facilitating financial the designated competitive bidder system— system stability and the development of a strong whereby the contracting agency designates which banking system. As a result, the ministry emerged firms will be permitted to submit bids on public from the Second World War largely unscathed works projects—and strengthening of Japanese and clearly at the top of the bureaucratic hierar- antimonopoly law. A particularly contentious chy. episode in this dispute followed the revelation that The ministry has a long history of recruiting from 1984 to 1987 Japanese contractors rigged the best and the brightest in Japan to join its ranks. bids on construction projects at the US Naval In the initial postwar decades, many of the eco- Base at Yokosuka. Issues relating to US-Japanese nomics departments in top universities were domi- “construction friction” were incorporated into the nated by socialist thinking. As a result, the majority Bush administration’s Structural Impediments of officials on the elite career track within the min- Initiative and the Clinton administration’s Frame- istry held law rather than economics degrees. In work Talks. Given the enormous size of the Japa- more recent years, the number of officials hold- nese construction market and the difficulties faced ing economics degrees has risen substantially al- by foreign firms attempting to gain access to it, though law graduates remain the majority. construction friction likely will be a nagging irri- tant in Japan’s foreign economic relations. Implications of a wide scope of authority

Further reading Until 1998, the ministry’s tasks spanned from the compilation of the national budget, tax col- Brooks, R.A. (ed.) (1990) Opening Japan: The Construc- lection, and oversight of monetary policy to the tion Market, Washington, DC: The Heritage Foun- regulation and supervision of private sector fi- dation. nance, the management of national assets, and Cutts, R.A. (1988) “The Construction Issue: Japan the regulation of the liquor and tobacco indus- Slams the Door,” California Management Review 30: tries. This enormous breadth of authority made 46–63. Japan’s Finance Ministry distinctive when com- Kensetsusho (annual) Kensetsu hakusho (Construction pared to its counterpart finance ministries and White Paper), Tokyo: Okurasho Insatsu Kyoku. treasuries in other countries. The ministry’s si- Ministry of Construction Home Page, http:// multaneous responsibility for fiscal and monetary www.moc.go.jp/eng/eng/index.htm. policy as well as financial regulation and supervi- Woodall, B. (1996) Japan Under Construction: Corruption, sion also gave rise to particularly strong links Politics, and Public Works, Berkeley CA: University of between the ministry and the governing party California Press. private sector corporations (financial institutions, BRIAN WOODALL in particular), and other government and quasi- government agencies. Ministry of Finance More specifically the number of former MOF officials occupying seats in the Diet has typically The Ministry of Finance (MOF) was established exceeded numbers of ex-bureaucrats from other in 1869, a year after the Meiji restoration, as ministries. At the same time, former MOF offi- one of Japan’s central government organs. The cials have assumed larger numbers and more lu- ministry’s roles and functions have undergone crative private sector positions upon retiring from numerous changes in the years since. For most the public service than have former officials from of the postwar period, the MOF’s operations were any other ministry Furthermore, MOF officials based on the Ministry of Finance Establishment on secondment have staffed a distinctively large Law, promulgated in May 1949. After the Sec- number of positions within other ministries and ond World War, Allied Occupation officials dis- agencies. Ministry of Finance 307

Even while the ministry has been noted for its Nonetheless, the balanced budget principle has strength, however, it has been infamous for its remained a strong undercurrent in all of the compartmentalization and lack of organizational MOF’s policy discussions. coherence. It has long been described within Ja- Efforts to suppress excessive public spending pan as a “bureaucracy within a bureaucracy” have been evidenced in the guidelines for budget (kancho no naka no kancho) and as “a collection of requests issued by the MOF each year as part of bureaux rather than a ministry” (kyoku atte, sho the annual budget process. Although any minis- nashi). Although MOF officials in the fiscal policy try or agency may in theory request budget ap- bureaux of Budget and Tax engage in constant propriations in any amount, the Budget interaction with officials in the governing party Bureau—with the Cabinet’s consent—normally set as part of the annual budget process and review “ceilings” that indicated the highest levels per- of tax legislation, officials in the financial bureaux missible. These ceilings have ranged from a 10 of Banking, Securities, and International Finance percent increase on the previous year to a 10 per- long enjoyed relative decision-making autonomy cent decrease on the previous year. This different pattern of interaction with the Diet across bureaux reflected the relative electoral sa- Monetary functions lience of the respective issue areas. The MOF is also responsible for the management of Japan’s monetary affairs, both domestically and Fiscal functions abroad. Carrying out the government’s financ- The ministry’s fiscal functions involve the admin- ing operations involves the administration of istration of public finance. More specifically the funds in the ministry’s Trust Fund Bureau. Of ministry formulates the national budget, oversees particular importance is the ministry’s manage- the execution of this budget and the collection of ment of the Fiscal Investment and Loan Program tax revenue, manages funds so as to coordinate (FILP). The FILP is a kind of “second budget” spending and revenue generation, and manages that funnels money from postal savings, postal national property. life insurance, welfare, and national pension funds The budget formulation process begins in June into the government’s special accounts, various when government ministries and agencies begin government organs, quasi-governmental corpo- to draw up estimated budgets. These are then rations, and local public authorities, in order to typically submitted to the MOF in August and implement policy objectives. In April 2001, ma- the ministry compiles a national budget proposal. jor reform of the FILP will significantly alter this Following Cabinet and Diet deliberations and any traditional flow of funds, however, and require amendments (extremely rare), this proposal be- traditional fund recipients to turn to other means comes law and the ministry then moves to spend to procure resources, including the bond mar- or allocate money in accordance with the provi- ket. sions. The MOF’s monetary functions also include Finance ministries or national treasuries in the regulation and supervision of private sector most countries exhibit conservative tendencies, financial institutions including banks, insurance but in Japan, the MOF’s persistent articulation companies and brokerages. A so-called “convoy of a “balanced budget” principle has been a par- approach” (goso sendan hoshiki) to financial regula- ticularly prominent feature of ministry rhetoric. tion characterized the ministry’s supervision of This principle was first breached in 1965 with private sector finance over the postwar period. the issuance of government bonds to finance This approach ensured that no financial sector public works projects and was encroached upon actor was left behind and that no actor moved for- more severely in the late 1970s and early 1980s ward so fast as to endanger the viability of oth- when government bonds were also issued to cover ers. revenue shortfalls. As Japan’s massive levels of The convoy approach also served a multiplic- public debt today suggest, the ministry was also ity of interests. The stability it facilitated in the unable to adhere to the principle in the 1990s. financial sector ensured constant flows of credit 308 Ministry of Finance to industry as the nation focused on economic the ministry’s failure to aggressively tackle the reconstruction in the immediate postwar period. non-performing loan problem in the nation’s Through its support of the banks in this way the banking sector led to an unprecedented level of government also cushioned the impact of eco- criticism of the ministry as well as to dire conse- nomic shocks on borrowers. Importantly the con- quences for the economy as a whole. voy approach also served the interests of banks, Public criticism of the MOF in the 1990s was for it gave rise to a cartel-like arrangement that in itself nothing new. The ministry became the benefited all members. Furthermore, the practice target of public criticism on a number of occa- of amakudari meant that this principle was a re- sions over the postwar period. Prior to the 1990s, flection of self-interested ministry behavior as however, this criticism bore little connection to well. Any bank that went under would be one policy breakdown per se. Occasional scandals fewer potential depository for officials retiring emerged over such things as ministry officials in from the ministry. Until the mid-1990s, the min- the Budget Bureau being wined and dined by istry successfully upheld this principle. representatives of quasi-government agencies Finally the ministry’s monetary functions have seeking subsidies from the budget. The introduc- an international dimension. The ministry formu- tion of the consumption tax in 1989 led to some lates, executes and coordinates exchange rate public anger directed at the ministry Criticism of policies, while also supervising the government’s the MOF in the 1990s was distinct, however, in external loans and investments. In the wake of that it depicted the ministry’s lax financial super- the 1997–8 Asian financial crisis, the ministry was vision and influence on monetary policy in the particularly active in coordinating and providing bubble period as a central reason behind the bad aid to countries hit by crisis. debt that plagued the financial system after the bubble’s collapse. The bad debt problem, in turn, Organizational adjustments to changing needs was perceived as also contributing to the economic downturn. Organizational changes have been carried out in The political context of MOF criticism in the the MOF over the postwar period to accommo- 1990s also differed from the past, occurring date changes in the policymaking environment. against the backdrop of unprecedented upheaval In response to the growth in Japan’s external trade in the political party system. Criticism intensi- and the liberalization of foreign exchange trans- fied from 1995–6 in particular, after the ministry actions, for example, a Customs and Tariff Bu- requested public funds to dispose of failed hous- reau was established in 1961. By 1964, as Japan’s ing and loan corporations called jusen. In the wake economic system became more liberal and the of this development, the Liberal Democratic nation became a member of the Organization for Party’s coalition partners—and some members Economic Cooperation and Development of the LDP itself—began calling for the ministry (OECD), the need to place greater priority on to be “dismantled.” the development of the capital markets and for- In 1997, legislation was passed in the Diet to eign exchange transactions was evident. In this reorganize the MOF. In April 1998, responsibil- year, therefore, a Securities Bureau and an Inter- ity for monetary policy was devolved from the national Finance Bureau were established within ministry to the Bank of Japan with the imple- the ministry Then, in 1992, in response to the mentation of the new Bank of Japan Law. Then, growing inter-relationship between financial ser- in June 1998, responsibility for the regulation and vices and the emergence of financial scandals, the supervision of private financial institutions was ministry established the Financial Inspections transferred from the MOF to a new and inde- Department within the Minister’s Secretariat. pendent Financial Supervisory Agency In July 2000, responsibility for financial system planning Policy breakdown and reorganization of the was also transferred to the Financial Services ministry Agency (the successor to the Financial Supervi- The ministry however, did not always adjust sory Agency). As a result of these changes, the adeptly to changing policy needs. In the 1990s, scope of authority enjoyed by Japan’s Finance Ministry of International Trade and Industry 309

Ministry today more closely resembles that of its tries other than agriculture. It was established in counterpart agencies elsewhere in the world. 1949, taking over from the Ministry of Com- As Japan enters the twenty-first century the merce and Industry As of 2000, MITI had a MOF must play a critical role in addressing some staff of 12,346 and annual budget of ¥2.03 tril- of the most difficult challenges faced by Japan in lion. It was restructured as the Ministry of the postwar period. These include restarting the Trade, Economy and Industry (METI) in the economy after a decade of prolonged economic context of the complete revision of national ad- stagnation and addressing the dire state of public ministration organization of Japan in January finance. As of 2001, Japan’s ratio of government 2001. deficit to GDP ranked as the worst among the advanced industrial nations. The administrative area and organization of With the reorganization of Japan’s central gov- MITI ernment ministries and agencies in January 2001, the Japanese name of the MOF was changed from The administrative area of MITI covers most of Okurasho to Zaimusho (literally “Treasury Min- the private sector (most manufacturing industries, istry”). The official English translation, however, wholesale, retail and service industries) other than remains “Ministry of Finance.” agriculture, the transportation business, construction industries, and telecommunication business. MITI is responsible for government policy to- Further reading ward industry and trade covering such matters as the healthy development of industrial sectors, Brown, J.R. (1999) The Ministry of Finance: Bureaucratic which it supports through advisory and techni- Practices and the Transformation of the Japanese Economy, cal support of private sector initiatives; environ- Westport, CT: Quorum Books. mental protection as it relates to industrial activity; Hartcher, P. (1998) The Ministry: How Japan’s Most Pow- and the management and resolution of trade con- erful Institution Endangers World Markets, Boston: flicts and disputes involving Japanese firms and Harvard Business School Press. industry both domestic and international. While Kato, J. (1994) The Problem of Bureaucratic Rationality: Tax much of MITI’s activities seem directed at large Politics in Japan, Princeton, NJ: Princeton Univer- companies, it is also responsible for industrial sity Press. policies affecting small and medium enterprises, Mabuchi, M. (1994) Okurasho Tosei no Seiji Keizaigaku as well as patent policy. (The Political Economy of the Finance Ministry’s The extensive administrative area of MITI is Control), Tokyo: Chuo Koron-sha. better understood by considering the ministry’s Rosenbluth, F.M. (1989) Financial Politics in Contempo- organization. The organization of MITI has rary Japan, Ithaca, NY: Cornell University Press. changed corresponding to the challenges con- Vogel, S.K. (1994) “The Bureaucratic Approach to the fronting the Japanese economy In 1973, follow- Financial Revolution: Japan’s Ministry of Finance ing a major organizational reform, the ministry and Financial System Reform,” Governance: An Inter- consisted of genkyoku (original bureaux) which national Journal of Policy and Administration 7 (3): 219– are in charge of policies for each industry and 43. yokowamkyoku (inter-industry bureaux) which are in charge of the policies for specialized issue ar- JENNIFER AMYX eas such as environmental policy trade policy and so forth. There are three genkyoku: the Ma- chinery and Information Industries Bureau, Ministry of International Trade and which is in charge of policy for the machine and Industry information industries; the Basic Industries Bu- reau, which develops policies for the chemical The Ministry of International Trade and Indus- industry the steel industry and so forth; and the try (MITI) is in charge of administering Japan’s Consumer Goods and Service Industries Bu- policies covering international trade and indus- reau, which oversees policy for the textile and 310 Ministry of International Trade and Industry apparel industries, miscellaneous goods, the pot- eign currency was a subject of special concern tery industry and so forth. and, in order to address this concern, an export There are four yokowamkyoku. The Industrial promotion policy was adopted. As a consequence, Policy Bureau is in charge of industrial policy an export insurance system was carried out be- overall, such as the policy for industrial structure ginning in 1950 and from 1953 favorable tax conversion, industrial finance and industrial tech- treatment extended to export activities. Also, the nology. The International Trade Policy Bureau Japan External Trade Organization (JETRO) is in charge of multilateral and bilateral trade was established in 1958 to accumulate and dis- negotiation. This bureau is also in charge of policy seminate information on foreign economies. In for the promotion of international trade, such as 1956 Japan joined the General Agreement on trade insurance policy. The Industrial Location Tariffs and Trade (GATT). and Environmental Protection Bureau is in charge In the 1960s Japan became a vital member of of policy for industrial location, preserving the the world economy through the liberalization of environment and safety. Also, there are three trade and capital. In 1960, the Japanese govern- gaikyoku (agencies). The Small and Medium En- ment adopted a plan to liberalize trade and cur- terprise Agency develops and coordinates small rency that raised the rate of trade liberalization and medium enterprise policy The Japan Patent from 40 percent to 80 percent within three years. Office is responsible for patent administration. Further, in 1964 Japan accepted the Article 8 The Agency for Natural Resources and Energy obligation of the International Monetary Fund, is in charge of policies to ensure stability and se- and carried out its first capital liberalization in curity of energy and natural resources as well as 1968. The primary focus of MITI in the 1960s policies that relate to the energy and mining in- was to cultivate new industries such as automo- dustry The Minister’s Secretariat has the role of biles, petrochemical products and synthetic adjusting and coordinating the opinions on in- fibers under the difficult circumstance of trade dustrial policy from the related bureaux and to and capital liberalization. MITI put forward a form the budget and draft laws submitted to the policy of “heavy and chemical industrialization,” Diet. which it outlined in a document entitlted Vision of MITI Policy in the 1960s. At the time, the ministry believed that key industries were suffering from The history of MITI a lack of funds, excessive competition and inabil- MITI was formally established in 1951. From ity to achieve scale economies. MITI dealt with that date to the present, it has held the primary this problem by means of market-intervening responsibility for the development of policies af- measures such as the use of administrative guid- fecting the Japan’s economy and industrial de- ance to carry out advance adjustment of enter- velopment. In the 1950s, MITI’s primary charge prise investment plans, based on its own survey was to strengthen the independent base of the of these plans. (Such measures were discontin- Japanese economy which had been devastated ued in the 1970s.) A typical example of MITI’s by the war. In 1951, the Japan Development efforts to advance improvements in industrial Bank was established as a policy financing bank. structure through government leadership was The Enterprise Rationalization Promotion Law the submission to the Diet in 1963 of the Draft was promulgated in 1952 to give favorable treat- Law on Temporary Measures for Promotion of ment such as tax credits to encourage enterprise Specified Manufacturing Industries. This Draft rationalization. Thereafter many other laws were Law designated the specialty steel, automobile introduced to promote targeted industries such and petrochemical industries as “specified indus- as electronics and various machinery industries. tries.” It ruled that representatives of the indus- The ultimate objective of these policies and their try in question, along with representatives from supporting legislation was the achievement of financial circles and competent ministers should economic equality with other developed coun- deliberate on “promotion standards” for these tries. As Japan must rely on the importation of target industries in order to cultivate their devel- raw materials and food, the acquisition of for- opment in a coordinated fashion. MITI argued Ministry of International Trade and Industry 311 that the government needed to carry out a policy lessen the shock to the domestic textile industry of favorable treatment in taxation and funding of export reductions. toward these industries, and also to give them an In 1970 MITI announced its Vision of MITI exclusion from the Anti-Monopoly Law (the Policy in the 1970s. It identified the knowledge in- Law Concerning the Prohibition of Private Mo- tensification of the industrial structure as the pri- nopoly and the Preservation Fair Trade) if mary focus of its efforts. It specifically targeted necessary However the Draft Law was tabled the computer and numerically controlled (NC) twice and finally abandoned without a vote be- machine tool industries as well as the fashion in- ing taken. Reports at that time indicate that, with dustry as representative examples of knowledge- the exception of MITI, members of financial intensive industries. In response to the and industrial circles and other ministries were socio-economic problems that emanated from opposed to the Draft Law because the bill was rapid economic development, it also proclaimed seen as strengthening the power of MITI. As a the importance of industry’s role in, and respon- result, MITI’s policy gradually shifted to one sibility to, society This represented an important that was more informational in nature, provid- shift in the ministry’s orientation. It was at this ing information and advice to complement, point that industrial policy at MITI gradually rather than control, market mechanisms. shifted its emphasis toward achieving a sound The distortions of high economic growth be- economic development while taking values other gan to appear in the Japanese economy in the than growth into account. latter half of the 1960s. The first was serious en- In 1973 MITI restructured itself and estab- vironmental destruction, as reflected in several lished the Agency for Natural Resources and highly visible water and air pollution disasters. Energy. Shortly thereafter, the worldwide oil cri- In response, the government promulgated the sis occurred and the Japanese economy experi- Basic Law for Environmental Pollution Control enced a sharp jolt. Quickly the newly formed in 1967, and MITI formulated new initiatives in agency found itself at the center of attention as it support of the measure, such as the development worked to develop a plan for enhancing energy of technology for pollution prevention, promo- efficiency and reducing petroleum consumption. tion of pollution prevention investment, and pro- MITI followed through with regulations and motion of positioning technical experts in policies based on the Petroleum Supply and De- manufacturing facilities. mand Optimization Law on Emergency Meas- The second distortion was the appearance of ures for National Life Stabilization. depopulated areas and the concentration of popu- As a result of the oil crisis and the end high lation in cities. The government tried hard to economic growth, the 1970s was a time when construct industrial infrastructures of rural dis- several major industries fell into a serious chronic tricts in response to this problem, and MITI ad- business slump. In 1978 the Law on Temporary vanced policies to address the adjustment of Measures for Stabilizing Specified Depressed In- industrial location by means of the Industrial dustries was promulgated, and MITI targeted the Relocation Promotion Law (1973). restructuring of these industries with an aim of Trade friction also emerged as a significant reducing excessive capacity and improving oper- issue during this period, as Japan’s economic rise ating efficiency thereby enhancing competitive- led to it becoming a competitive force within the ness. world economy The US-Japan textile negotia- In the 1980s, trade friction intensified as the tions begun in 1969 became a major political trade imbalance between Japan and the USA problem for the first time. The negotiations con- continued to grow. The areas of trade friction tinued until the US-Japan Textile Agreement of expanded to include automobiles, semiconduc- 1972, which contained provisions to restrain tex- tors and NC machine tools. As for automobiles, tile exports from Japan to the USA. Correspond- after intense negotiations, Japan agreed to restrain ing to this, MITI implemented a policy to the export beginning in 1981. In the area of NC promote the abandonment of excessive looms, machine tools, self-restraint was also accepted. in order to reduce production capacity and In semiconductor negotiations, Japan agreed to 312 Ministry of Labor introduce an export monitoring system and make specific responsibilities. At the ministry level, it efforts to assist US makers’ entry into the Japa- coordinates and adjusts policies put forward by nese market. There was concern within MITI individual bureaux. MITI’s objectives and the that this series of bilateral negotiations would means by which it accomplishes those objectives threaten the world free trade system, with its have evolved over time in concert with the de- emphasis on broader, multilateral agreements. In velopment and evolution of the Japanese the 1990s much of the trade friction problem was economy The fundamental thrust of that evolu- resolved through the development of new inter- tion has been in the direction of increasing reli- national trade rules such as the Marrakesh Agree- ance on approaches that complement market ment establishing the World Trade Organization. mechanisms. In recognition of further changes In 1985, the rapid appreciation of the yen follow- in the Japanese economy MITI has evolved once ing the Plaza Accord brought about a difficult again. It restructured itself and was reborn as the situation for export-led small and medium-sized Ministry of Trade, Economy and Industry firms. MITI took measures to lessen the shock (METI) in January 2001 with the complete revi- by promulgating the Law on Temporary Meas- sion of the national administration organization ures for Small and Medium Enterprises in Speci- in Japan. fied Regions. In the 1990s, the situation surrounding MITI changed drastically. First, deregulation became Further reading an urgent issue and was seen as critical to further economic development in Japan. MITI aban- Sumiya, M. (2001) A History of Japanese Trade and Indus- doned its regulation in many fields. The aboli- try Policy, Oxford: Oxford University Press. tion of the Large Retail Stores Law and the TA K E H I KO YA S U DA liberalization of electric power prices are two examples of MITI’s shift. Second, both at home and abroad, the preservation of the environment Ministry of Labor came to take on greater importance. In this area, MITI began promoting recycling of electrical Recently combined in 2001 with the Ministry of equipment and other energy and resource con- Health and Welfare to become the Ministry of servation activities. Furthermore, MITI pushed Health, Labor and Welfare, the Ministry of La- policies that sought to reduce industry and con- bor (MOL) was originally established in Sep- sumer demand for energy through research and tember of 1947. Its charge, according to the development on energy efficient and energy con- Ministry of Labor itself, is to secure stable em- serving technologies. The 1990s was also the ployment, promote worker welfare, and contrib- decade in which MITI actively worked toward ute to economic expansion and stability of the further construction of international rules of national life. Similar to the Department of Labor trade, investment, and the protection of intellec- in the USA with its Bureau of Labor Statistics, tual property In each of these areas, MITI was the Ministry and affiliated institutions such as put in the position of coordinating Japan’s do- the Japan Institute of Labor collect extensive mestic system with the larger international sys- data on the workplace constantly throughout tem. the year, and act as a central clearinghouse for labor-related information. The Ministry is also deeply engaged in labor policy and is involved in Summary many decisions that bear directly on the economic welfare of employees. The Ministry en- Within the government administration, MITI has forces the nation’s labor laws and is also partly been responsible for the oversight of a large por- responsible for legal revision. Known for its tion of the Japanese of economy MITI carries strong support of job security and other charac- out its wide and varied duties through a struc- teristics of the stylized view of Japanese labor ture of bureaux that have either industry or topic- markets (see internal labor markets; lifetime Ministry of Labor 313 employment; seniority wages; enterprise History and description of selected policies unions), the Ministry has struggled in recent years to adapt labor policy to rapidly changing The MOL was founded in the context of a pro- labor conditions. This includes rising unemploy- found period of change for labor policy in Japan. ment and a rapidly aging population. Just after the Second World War, three very im- More than twenty statistical surveys per year portant laws—sometimes known as “the three are performed by the MOL and affiliated institu- fundamental labor laws”—were passed that were tions. Two well-known surveys are the Monthly to frame policy for the postwar period. The La- Labor Survey and the Basic Survey of Wage bor Union Law (1945) established the right of Structure. The general purpose of surveying is workers to organize and bargain collectively and to identify trends and problems in the labor sta- defined unfair labor practices. The Labor Rela- tistics. Possible problems might revolve around tions Adjustment Law (1946) defined the limits wages, working hours, employment, and person- of strike behavior and established procedures for nel and labor management. Additional qualita- settlement of labor disputes. The Labor Standards tive data is gleaned through management Law (1947) legislated, among other things, bet- conferences in each industry and Ministry of ter working conditions, minimum wage stan- Labor research meetings on topics such as per- dards, an eight-hour working day compensation sonnel and labor management. The level of de- for work related injuries, and lastly restrictions tail the ministry is able to gather on separate on female and minor employment. The main industries and businesses is extensive. Each year, thrust of these three laws lasted through the post- a White Paper on Labor is published by the Min- war period to the present. Perhaps the most im- istry based on data collection. The White Paper portant law for Ministry of Labor jurisdiction was tends to focus on the issues identified over the the Labor Standards Law, which was only fun- course of the year and proposes medium and damentally overhauled after fifty years. The terms long-term solutions to these problems. For ex- of the law covered all employees in Japan, union- ample, in the midst of continued stagnation in ized and non-unionized alike. the Japanese economy rising structural unemploy- Although many of these terms remain in ef- ment, and an aging workforce, the 1997 White fect, there have been some changes recently Re- Paper focused on employment and wages in struc- strictions on female employment originally tural transformation, as well as possible solutions intended as protection—including restrictions on to the inevitable problems that will arise from an overtime, nighttime, and early morning work— aging workforce. were eventually seen as hindering the move for The Ministry remains a large institution bro- greater egalitarianism in Japan. These restrictions ken into many different bureaux and divisions were recently relaxed, and the Ministry began covering the areas of labor administration. Ma- enforcing more egalitarian work standards. Cou- jor bureaus include the Labor Relations Bureau, pled with the Equal Opportunity Employment the Labor Standards Bureau, The Women’s Bu- Act, women in Japan now have more opportuni- reau, the Employment Security Bureau, and the ties and choice than they did before. On this and Human Resources Development Bureau. These other issues relating to discrimination, the MOL bureaux in turn are broken up into divisions. is combining carrot and stick; companies that Typical divisions include the Labor Legislation conform to new standards tend to get rewarded Division within the Labor Relations Bureau, the with penalties levied on firms that violate discrimi- working hours and working compensation divi- nation legislation. Other recent significant sions within the Labor Standards Bureau, and changes to the Labor Standard Law have aimed the Employment Insurance Division within the at making the labor market more flexible by steer- Employment Security Bureau. Important affili- ing workers toward newer industries such as in- ated organizations include the Japan Institute of formation technology. Labor, founded in 1958, which disseminates in- Although there are many examples, the mini- formation to the public through the Employment mum wage policy in Japan is a good illustration Information Center within the Institute. of the MOL’s degree of involvement in everyday 314 Ministry of Labor labor issues. The Ministry of Labor is in charge group of employees, the MOL objected strongly of the overall administration of the minimum and brought about a change of heart. However, wage system, and it ensures that minimum wages in the face of continued stagnation and growing are revised every year in accordance with changes recognition of the need for change in labor mar- in overall wages and prices. In sharp contrast to kets, the stance on preserving employment secu- the USA and to many European countries, Ja- rity has softened. pan does not have a uniform national minimum The private sector plays a major role in shap- wage. A Minimum Wage Law enacted in 1959 ing change as well. Typical of most diffusion of stipulates that individual industries and regions new organizational forms in Japanese business, play a major role in determining the level of the private sector companies and bureaucrats work wage. On the recommendation of the Minister together to legitimate new practices. An example of Labor or the Chief of the Prefectural Labor of collaboration between the Ministry of Labor Standards Office, a Minimum Wage Council in and the private sector was in a 1994 report pub- each prefecture then adjusts the minimum wage lished by the Employment Information Center. accordingly Contemporary data provided by the Based on Ministry research on “best practice” Ministry of Labor has the highest minimum wage already beginning to occur, it urged companies by prefecture at 5,465 yen per day (in Tokyo, to create three new promotion tracks for a new Kanagawa, and Osaka), while the lowest is 4,712 wage system: true managers leading subordi- yen (in Miyazaki). Across industries, the highest nates, researchers and planners, and skilled work- minimum wage paid in a particular industry per ers and technicians. Within categories, the day is 7,280 yen (in general trucking), while the recommendation was to promote according to lowest is 4,928 yen (in ceramic ware manufac- ability. Hitachi, Matsushita, NTT, Sanyo and turing). other leading companies had all implemented Enforcement of the minimum wage law, like systems like this by the mid-1990s. enforcement of many of the other labor laws in The latter half of the 1990s and early 2000s is Japan, is quite difficult. Constrained by a rela- presenting unique challenges for the MOL, and tively low number of trained monitors and fairly the situation has remained troublesome for sev- weak punishment, the MOL essentially educates eral years running. Unemployment overall is at the public with the resources available. Having a a postwar peak of around 4.9 percent, with in- many-tiered minimum wage system injects a large voluntary unemployment surging from 320,00 degree of complexity into the system, and it is in 1992 to 1 million by 2001. An increasing per- common for employees to be unaware of the level centage of this unemployment may be structural, of minimum wage that their employers are le- rather than cyclical. Discouraged workers—those gally obligated to pay As such, the temptation who are not even searching for a job—have risen for employers to cheat is high. Every November, from 1 percent of the workforce to around 2.2 the Ministry runs a ten day campaign to educate percent. Temporary part-time, and contract em- the public about the year’s minimum wage in- ployees have risen from 4.7 percent of the labor creases and to try to ensure payment of mini- force to 27.5 percent of the labor force. A slow mum wages. shift to the service sector remains underway with Despite the inherent complexity of labor mar- the latter rising from 50 percent of the workforce kets, the MOL has been strategically involved in to 55 percent; according to most theory on eco- shaping their evolution. Throughout the postwar nomic development, this last trend is a good thing. period, for example, the MOL generally has In short, change in labor markets already sought to soften the effects of downturns and underway has accelerated dramatically and is preserve long term employment—sometimes di- causing dislocation of a sort not seen in Japan rectly subsidizing firms to ensure that employees since the Second World War. will be hired back after a period of layoff. At other Faced with these realities, the MOL has be- points the MOL has brought direct pressure on gun to shift away from employment preservation firms to not fire employees in times of stress. In towards a focus on new job creation, especially 1993, when Pioneer Electric officially laid off a in small and medium sized businesses. In 1999 Minomura, Rizaemon 315

and 2000, subsidies were being granted to em- few to evolve during the Tokugawa period ployers who hired workers laid off from other (1603–1857) and make a successful transition in firms; this is a practice many Japanese firms still the modern industrialized era, and became the find difficult to do. Extra unemployment meas- dominant zaibatsu of the late nineteenth and early ures were built in to automatically kick in should twentieth centuries. unemployment go above 4.9 percent. Growth After joining Mitsui, Minomura quickly rose sectors of the economy—such as information tech- to the top. Through his skill and the develop- nology and health services—were provided other ment of close ties to the government he was able employment subsidies. Despite measures such as to steer it through a difficult period. At one point, these, unemployment has persisted. Generally when Mitsui’s financial position was extremely these and other policies have favored older work- weak, the government imposed a forced loan on ers and former “insiders” (those employees who Mitsui and other wealthy merchant houses. Be- worked inside the firm for a long duration), rather cause of his government connections, he was able than younger workers. Thus, the high unemploy- to arrange a remittance, thereby alleviating ment rate for young workers will remain an is- Mitsui’s difficulties. Shortly thereafter he was sue. This also preserves high costs to employers, promoted to the position of head clerk, a posi- as older workers are more expensive. In response tion of nearly unassailable power within the firm. to this problem, the MOL has begun to focus on Though the Mitsui clan controlled the firm, com- training unemployed young employees in hopes pany custom dictated that a non-family member of maintaining and improving their skills for a occupy the position of head clerk and hold op- time when employment conditions improve. One erational power. thing is clear from recent activity: Japan’s labor Through his close ties with the government policy is evolving, but the Ministry of Labor is of the Meiji restoration, Minomura was able to still very much engaged in the current problems receive special privileges for Mitsui. Only two of the day. other merchant houses, Shimada and Ono, were able to acquire similar arrangements. It was this access to government contracts, subsidies and Further reading monopoly privileges that enabled Minomura to steer Mitsui into the most profitable areas of the Lincoln, J. and Nakata, Y. (1997) “The Transforma- newly industrializing economy. For example, tion of the Japanese Employment System: Nature, roughly two-thirds of the Japanese army’s provi- Depth, and Origins,” Work and Occupations 33–55. sions were managed through Mitsui contracts. OECD Economic Surveys (2000) Structural Policies to Recognizing the importance of being physically Enhance Growth and Secure Recovery: A Review of Progress. close to government, Minomura waged a determined campaign with the Mitsui family to move WILLIAM BARNES the headquarters from Kyoto, where it had been based for several centuries, to Tokyo. Though Minomura, Rizaemon the campaign even stirred up the population of Kyoto against him, he eventually succeeded, and Born in Edo (now Tokyo) on November 25, 1821, moved the headquarters in 1873. Minomura Rizaemon was orphaned early in life. However, in addition to understanding the After the death of his ronin father, he traveled from benefit of close ties to the central government, Kyushu up to Kyoto at fourteen years of age, then Minomura also introduced modern banking traveled the country eventually settling back in methods to Japan. He became the first president Edo. At nineteen he took a position as a of Mitsui Bank, the first modern private bank in merchant’s apprentice. In the markets of Edo he Japan. Moreover, he was aggressive in steering worked hard, and eventually found his way into the Mitsui conglomerate into other key sectors, the merchant house of Mitsui. During his ten- such as mining, thereby securing a stable foun- ure Mitsui grew into a financial giant, one of the dation for the future. 316 Mitsubishi

Minomura was equally capable of divesting national outlook and his values shaped the Mitsui of unprofitable ventures. When Echigo- Mitsubishi Corporation culture. This is encap- ya, one of the oldest and most famous retail sulated by his address to the general managers of stores in Tokyo, suffered sustained losses, he Mitsubishi Shoji in 1920, where he outlined the severed its long-standing connection to other three fundamental principles of Mitsubishi’s busi- Mitsui enterprises. The move proved beneficial ness ethos as being: corporate responsibility to to Mitsui and to Echigoya, as the latter recov- society integrity and fairness and international ered and went on to establish itself as understanding through trade. To this day Mitsukoshi, the most prestigious department Mitsubishi Corporation retains a reputation for store in Japan. Although he died in Tokyo on being “gentlemanly” cautious and having a strong February 21, 1877 at the relatively young age of organizational structure. fifty-six, by the time of his death Mitsui’s foun- Up until the mid-1930s Mitsubishi Shoji had dation and future developmental path had be- limited operations and low profitability compared come firmly established. to its main rival, Mitsui Bussan. In the 1930s it became more profitable through focusing on metals, machinery and exporting from Asia. Al- Further reading though these businesses bolstered the militarist government’s ambitions, Mitsubishi was regularly Amakawa, J. (1968) “The Spirit of Capitalism in Meiji attacked throughout the decade for lacking pa- Japan,” Kwansei Gakuin University Annual Studies. triotism. Hirschmeier, J. and Yui, T. (1975) The Development of Mitsubishi Shoji was dissolved by the Allied Japanese Business, London: George Allen. Occupation into 139 separate companies and for- Lockwood, W.W. (1954) The Economic Development of bidden to re-form or use the Mitsubishi name or Japan, Growth and Structural Change 1868–1938, logo. Due to the pressures of the Korean War, Princeton, NJ: Princeton University Press. zaibatsu were allowed to regroup in the 1950s and eventually Mitsubishi Shoji was re-established ALLAN BIRD in 1954, immediately opening offices in major trading centers around the world. Mitsubishi In the 1960s it became heavily involved in the rebuilding of Japan’s industries and a substantial Mitsubishi Corporation is the general trading part of its business was purely domestic. Even in company of the Mitsubishi keiretsu founded by 1999 over 40 percent of its trading transactions Iwasaki Yataro in the 1870s. It imports and ex- took place within Japan only This is despite the ports a wide variety of products, as well as fi- fact that throughout the 1970s Mitsubishi Cor- nancing and investing in various projects around poration became a major participant in Japanese the world. Its 12,000 employees are spread around Overseas Development Assistance projects, open- a network of forty-two offices in Japan and 118 ing offices in Africa, the Middle East and Latin offices and subsidiaries in seventy-three locations America. overseas. More recently Mitsubishi Corporation has Mitsubishi Shoji, as it is known in Japanese, developed various “merchant banking style” func- first became a separate entity in 1918, formed tions, including investment funds and mergers from the sales division of Mitsubishi Goshi. and acquisitions, although, like other trading com- Mitsubishi Goshi’s president, Iwasaki Koyata, had panies, it had to write off substantial bad debts a policy of spinning off parts of Mitsubishi Goshi from its zaiteku activities in the 1980s. into separate businesses, including the predeces- In the 1980s and early 1990s Mitsubishi Cor- sors of Mitsubishi Corporation’s present day sis- poration was regularly listed by Fortune as the ter companies (and major customers) such as largest company in the world, in terms of trad- Mitsubishi Electric Corporation and Mitsubishi ing transactions ($116bn in 1999) but is cur- Heavy Industries. rently undergoing a period of retrenchment and Iwasaki Koyata had a strong liberal and inter- restructuring, due to the strong impact of the Mitsubishi 317 depressed Japanese economy on its perform- eign markets. Although its core business is in ance. commercial transactions—mainly trading by making good use of substantial information, people and their long experiences. Mitsui has developed Further reading many business fields, including: Iron and Steel, Kankokai (ed.) (1981) Mitsubishi Shashi, Tokyo: Uni- Non-Ferrous Metals, Property Service, Construc- versity of Tokyo Press. tion & Housing Business Development, Machin- Mishima, Y. (1989) The Mitsubishi: Its Challenge and Strat- ery Chemicals, Energy Food, Textiles, General egy, Greenwich: JAI Press. Merchandise, Transportation and Distribution, Rudlin, P. (2000) The History of Mitsubishi Corporation in and the Information Industry. London: 1915 to Present Day, London: Routledge. Currently Mitsui is emphasizing its information technology (IT) business. On February 1, PERNILLE RUDLIN 2000 a company called 7dream.com was established. It is a joint venture with eight companies Mitsui including Mitsui, 7–11 Japan Co., Sony and NEC. This company was established to provide Mitsui was established in the Meiji era, a period total e-commerce services. Using multimedia of extraordinary development of Japanese soci- terminals that are set up at every 7–11 store the ety especially toward the outside world. As a following services are available: hotel reserva- general trading company Mitsui established it- tion, purchases of airline tickets and books, self as a main source for trading goods, both online distribution of music and so on. It is an- overseas and domestic. In addition to trading, ticipated that success or failure in information Mitsui offered a wide range of business support technology business ventures will significantly services including: information support for busi- affect the long-term prospects of the Mitsui com- nesses, networking, personnel recruiting, fi- pany. nance and support for new enterprise development. Further reading The modern Mitsui & Co., Ltd. was established on July 25, 1947, forming the nucleus of Fukuyama, F. (1995) Trust: The Social Virtues and the the so-called Mitsui keiretsu. The former Mitsui & Creation of Prosperity, New York: Free Press. Co., Ltd. was officially dissolved after the Sec- Miyashita, K. and Russel, D. (1994) Keiretsu Inside The ond World War because of its zaibatsu, a disso- Hidden Japanese Conglomerates, New York: McGraw- lution commanded by the United States in 1947. Hill. After the reconstruction, an amalgamation with Okimoto, I.D. (1989) Between MITI and the Market: Daiichi Co. in 1959 shaped today’s Mitsui. Japanese Industrial Policy for High Technology, Stanford, Mitsui has a reputation for hiring bright and CA: Stanford University Press. promising students. In fact, the company attributes its long-term success directly to its tal- MARGARET TAKEDA ented personnel. Including Tokyo Head Office, MEGUMI KATSUTA Mitsui has thirty-four offices in Japan and eighty- nine offices overseas. Globally it has forty-two overseas subsidiaries with ninety-one offices, in Mitsukoshi a total of ninety-three countries. Mitsui holds a large market share in many fields and is one of Mitsukoshi was Japan’s first department store. the largest general trading companies in Japan. Founded in the seventeenth century Mitsukoshi During the high-growth period from the 1960s initiated a number of innovative sales methods through the 1980s, Mitsui contributed to the through its long history and the company remains growth of the Japanese economy by diversifying one of the leading retail operators in present-day its range of business activities, exploiting foreign Japan. resources, and opening up new domestic and for- Mitsukoshi’s foundation was laid by Takatoshi 318 mochiai

Mitsui, who opened a kimono store named company has slightly more than 8,000 employ- Echigoya in the Honmachi quarter of Edo (now ees, and the surface of its retail floors, including Tokyo) in 1673. Ten years later, the store moved tenant shops, is 361,000 square meters. to Surugacho where Mitsui introduced, for the first time in the modern world, the sale by price See also: industrial groups; retail industry ticket and cash-and-carry. He also established a money exchange alongside his garment retail Further reading business, which would later become Mitsui Bank (now Sakura Bank). Hirschmeier, J. and Yui, T. (1975) The Development of At the beginning of the twentieth century the Japanese Business, 1600–1973, New York: Allen & house of Mitsui launched a project to establish Unwin. the first Western-style department store in Japan. ——(1977) Nnihonno Keiei Hatten: Kindaika to Kigyou Keiei The famous six-story building in Renaissance (The Development of Japanese Business: Modern- style in Nihonbashi, in central Tokyo, was com- ization and Management), Tokyo: Toyokei- pleted in 1914. Its underground floor, escalator zaishinposha. (the first in Japan), a roof garden, and annex thea- SHINTARO MOGI tre (added in 1927) set the precedent for Japa- nese department store designs. After opening branch stores in Osaka, Seoul (Korea) and Dairen mochiai (China), the company changed its registered name from Mitsui-Echigoya to Mitsukoshi in 1928. Many Japanese companies hold equity shares in Mitsukoshi embarked on an ambitious chain- trading partners that pass some threshold of pub- store strategy and built stores in such retail centers lic awareness but that are insufficient to confer as Shinjuku, Ginza, Kobe, Takamatsu, Kanazawa, effective control. The Japanese terms used to de- Sapporo, and Sendai. scribe this practice vary but one of the most com- After the Second World War, the growth of mon is mochiai. Mochiai literally means to balance consumer needs further enlarged its scope of or remain steady. This meaning provides insight business. The company sought to be a provider into the practice of cross-shareholding. That is, the of affluent and cultured lifestyle, and diversified cross-shareholdings represents a silent financial into areas of cultural fairs, sale of artworks, the interest only Often, but not always, the housing business and travel agency In 1971, it shareholding is reciprocal. Common examples of opened its first European branch store in Paris, cross-shareholding are the share interests that aiming primarily at Japanese tourists looking for banks in Japan typically hold in their loan clients. local products. The Paris store was followed by The banks hold these share interests to improve store openings in Rome, London, New York, their incentives in monitoring the real investments Dusseldorf, Hong Kong, Frankfurt, Munich, of the loan clients, and to gain access to privileged Madrid, and Hawaii. In Japan, Mitsukoshi has information. Antimonopoly law limits eighteen stores as of 2000. shareholding by banks and insurance companies One stronghold of the present Mitsukoshi is to 5 percent and 7 percent of outstanding shares its outward sales division, which sells gift items respectively but the shareholding seldom ap- in bulk to corporate clients and high-income cus- proaches these limits. Cross-shareholding is most tomers. Another important division is the build- prominent within the financial keiretsu. About half ing service division, which is specialized in interior of the cross-held shares within keiretsu presidents’ designing and furnishing. For example, the To- clubs are held by financial institutions. One-third kyo Dome Hotel, opened in 2000, was provided of the non-ordered pairs of non-financial members with banquet rooms and room interiors designed of same presidents’ clubs are linked by cross-held and furnished by this division. shares and in about half of these instances the cross- Mitsukoshi’s unconsolidated sales in fiscal shareholding is reciprocal. Cross-shareholding by 1999 was ¥676 billion, with operating profit of non-financial firms has a different rationale from ¥9 billion, and recurring profit of ¥6 billion. The the cross-shareholding of banks. By holding stock Morita, Akio 319 in a trading partner a firm weakens its own bar- company Tokyo Telecommunications Engineer- gaining position, for its own gain from trade then ing Corporation. That company later became includes a share interest in the other party’s gain Sony Corporation. The founders were Masaru from trade. Precisely for this reason the credible Ibuka, a thirty-eight-year-old engineer, and Akio threat of divesting cross-held shares bonds the Morita, a twenty-five-year physicist. They started other party to attend to the shareholder’s wishes. with initial capital of $500. Cross-shareholding in Japan is often erroneously From the beginning, the company’s philoso- identified as a takeover defense. The threat of phy was based on its being an innovator, in hostile takeover has never been a serious one in Morita’s words, a clever company that would Japan, and cross-shareholding is not the most ef- make new high technology products in ingenious fective defense against a takeover. The other ex- ways. Initially Ibuka and Morita assumed that planations for cross-shareholding are therefore all they had to do was make good products. When more convincing. orders did not come in, Morita shifted to focus on merchandising, while Ibuka remained focused on engineering. Further reading By 1953 the company was struggling to make Flath, D. (1993) “Shareholding in the Keiretsu, Japan’s a profit, surviving in part from family contribu- Financial Groups,” Review of Economics and Statistics tions and deferred salaries for seven years. Rec- 75:249–57. ognizing the limitations of the Japanese market, ——(1996) “The Keiretsu Puzzle,” Journal of the Japanese Morita made his first trip overseas to develop and International Economies 10:101–21. opportunities there. His first trip was to the USA, a market that would remain a primary focus for DAVID FLATH Sony. From the beginning, another focus of Sony Morita, Akio was miniaturization and compactness, a focus that also continues today. Unlike many other Japa- Morita is a post-Second World War entrepreneur nese companies following the war, Sony was not and innovative business leader, a founding mem- dependent on assistance from the Ministry of ber of Sony Corporation who helped turn it into International Trade and Industry (MITI). For a leading technology company. Ultimately he most of this period, Sony had to battle the bu- became chairman of Sony. Long recognized as a reaucrats at MITI, many of whom did not recog- maverick in Japanese business circles, he finally nize the potential of Sony’s intended technology gained acceptability in Japan with his selection markets. For instance, it had great difficulty in as chairman-elect of the Keidanren, the associa- obtaining a foreign exchange license from MITI tion of Japanese businesses. Unfortunately a to pay $25,000 to Western Electric for the right stroke prevented him from taking over the chair- to use its transistor technology. manship. Over the next forty years, through persever- Morita came from a very successful business ance and hundreds of trans-Pacific trips, Morita family that owned a sake brewing company and helped expand a company that is recognized had created a baking company now called Pasco. around the world not only as a high-tech com- He had attended business meetings with his fa- pany but the company which usually leads oth- ther from an early age in anticipation of his takers in developing new technology. His reputation ing over the family business. One of the first signs for innovation among his competitors was such of Morita’s independence was when he declined that initially Sony could produce a particular to do so. As a first son, he broke a tradition that model for a year or two before competitors en- had existed in the family for fifteen generations. tered the market. Eventually competitors began On May 7, 1946, approximately twenty peo- to follow Sony’s innovations in just six months, ple gathered on the third floor of a burned-out and often sooner. department store building in downtown Tokyo. Morita not only led his competitors, but At the meeting, they agreed to establish a new also led consumers. Sony’s goal was to lead the 320 motorcycle industry

public with new products rather than ask them rai family went into the bookselling and publish- what kind of product they wanted. Since it was ing business at the end of the Tokugawa period so far ahead of the rest of the market, Morita felt and expanded the business into a large chain of the public did not necessarily know what was bookstores. Sanseido, her family’s company pub- possible. Some of the products created and intro- lishes the popular Concise line of foreign language duced by Sony were transistor radios, tape re- dictionaries, an idea that originated with her fa- corders, Betamax video recorders (which was ther. Although she grew up without any real in- supplanted by the later-introduced VHS of terest in foreign countries and when she was Matsushita), and Walkman. young had no great desire to travel, she became Personally Morita never stopped his search for prominent in international business circles and a change and development. During his first trip to symbol for Japanese women. She became very the United States, he made certain he rode the involved in helping to educate Japanese women roller coaster at Coney Island. Later in his ca- going abroad and wrote a book to help them reer, he rode with a stunt pilot as he flew upside understand living in foreign countries. It is still down fifty feet above ground level. At the age of used today as a guide. She also did a television fifty-five, he took up the game of tennis; at sixty show in Japan for ten years, traveling to new fash- he learned to ski, and at sixty-four he learned ion centers, bringing back interviews and intro- water-skiing. ducing new ideas to Japan, which was then behind Morita’s business management policies be- the times in fashion awareness. Her influence may came famous around the world. He believed that have helped turn Tokyo into an international fash- investors and employees are in equal positions, ion center. but that sometimes employees are more impor- ROBERT BROWN tant because they will be there a long time whereas investors will often get in and out on a whim in order to make a profit. Throughout Sony motorcycle industry management has been dedicated to the principle of upgrading workers. Morita believed that peo- The motorcycle industry in Japan is a significant ple need money but that they also want to be industry in that, for several reasons, its impact happy in their work and proud of it. He meas- extends far beyond its current economic size for. ured managers by how well they organized a large First, it gives us an indication of the nature of number of people, and how effectively they got competition in Japan when there is little govern- the best performance from their employees and ment intervention in an industry. Second, the blended them into a coordinated group. He also world first discovered here that scale alone is not believed that when Japanese talk about coopera- the key to competitiveness, but that experience tion or consensus building, it usually means the also matters. Third, this industry experienced elimination of individualism. At Sony his chal- some of the earliest areas of successful Japanese lenge was to bring ideas out into the open. foreign investment as trade barriers increased. Morita also felt that an enemy of innovation, Japanese firms remain major players in the which was a key element of Sony’s operating world motorcycle market. Honda, Yamaha, policy could be its own sales organization. If the Suzuki and Kawasaki are the four players. While sales force had too much power, it often discour- each firm initially had a large commitment to aged innovation. Morita, on the other hand, was motorcycles, none of these firms currently has committed to three creativities: creativity in tech- greater than half of its sales in this product seg- nology product planning and marketing. His so- ment. Only Yamaha, at 42 percent of sales, has lution to the problem of unleashing this creativity more than 10 percent of its sales in this industry was to set targets instead of giving undefined segment. Yet Honda builds more motorcycles, goals. even with only 10 percent of its sales volume in Morita’s wife, Yoshiko, also had an important this sector. For Kawasaki, a large, diversified impact on Japanese business. She came from a heavy equipment manufacturer, its business in prominent business family Originally her samu- motorcycles never was a major share in its total motorcycle industry 321 sales. Yet even as the firms have built on their the Super Cub provided that expanded market base of motorcycle technology to enter autos and the associated cost reduction. (Honda), minicars (Suzuki) and recreational vehicles (Yamaha), the legacy of their motorcycle Experience curve business is still important. The Super Cub was a transition to the second area where the motorcycle industry is important The nature of competition for Japanese business, the experience curve. Most analyses of competition had emphasized the im- When government does not dictate the rules of portance of the size of the production facility so- competition in Japan, new players can enter, and called economies of scale. With this approach, there are frequent pressures for both product there was no easy way for a new competitor to improvement and price reduction. The motor- enter the market because the size of the existing cycle industry is a good example of both these competitors would block the newcomer from phenomena. The motorcycle was never seen by profitable operation. The newcomer could not the government as a strategic industry and thus compete on production cost. The successful en- had little industry-specific government support. try of Honda and the other Japanese firms into In the early postwar period, we can observe the world market demanded an explanation, since the entry phenomenon. Tohatsu, a reliable, well- their initial size was much less than that of the run company had the major share of the indus- established players in the UK and the USA. The try. Soichiro Honda was an inventor whose only usual explanation of government subsidies did earlier experience was in supplying parts to not provide a convenient explanation for the Japa- Toyota. Yet he was able to identify new markets nese success, since the government provided no and utilize new technology in engines to redefine special support to this industry Studies by the the industry dethrone the existing leader Tohatsu, Boston Consulting Group showed that the com- and send it into bankruptcy. Thinking unconven- panies could indeed succeed even if their initial tionally, Honda realized that people in the imme- costs were much higher than that of the foreign diate postwar economy needed inexpensive ways players. Given the strategies mentioned above to to get products into the devastated cities from expand the markets, Japanese firms could increase the countryside. He mounted an engine built to the volume of production rapidly As they did so, run on a noxious mixture based on coal tar to a they learned to produce motorcycles less expen- bike, and sold this to the many people who were sively A large domestic market provided the op- profiting from the trade in food. Later, having portunity to expand volume quickly for the upgraded engine and machine, he observed a smaller bikes that were not at that time on offer potential market for the motorcycle in the vari- from foreign manufacturers. As the cumulative ous delivery services that were common in Japan volume built up, the firms were able to pass along at that time. Designing a carrier that could stay the savings to their new customers. This led to a level while a cycle careened through the narrow virtuous cycle that in turn led to substantial streets of Japanese cities, he enabled firms and changes in competitive position. Instead of a strat- even the neighborhood noodle shop to deliver egy of simply basing decisions on high volume their wares efficiently. Again, the market ex- alone, this approach showed that the growth strat- panded. egy of Japanese firms could be profitable. Fast Pricing was also an important strategy for growth, if based on these learning efficiencies, Honda. The company calculated that it could could be the basis for sustainable, profitable com- increase sales and reduce cost by identifying a petition. Pricing based on the experience curve large market and then designing a new product economies gave Honda and the other Japanese for that wider market. An easy-to-shift motorcy- companies a sustainable advantage both in do- cle, he observed, would enable many more peo- mestic and international markets. ple to be comfortable on a motorcycle, and would When Japanese motorcycle companies tried increase the market substantially His design of to compete only on price, however, and hoped 322 motorcycle industry that the increased volume would lead to profits, a reasonable period of time. In the Harley the industry found itself in an unsustainable con- Davidson case, the company chose to appeal to dition often found in Japanese markets. This is the US government to give it a period of protec- what Japanese call “excess competition.” We can tion to achieve that experience level. The gov- use this industry to learn about the dangers of ernment and the firm agreed to an unusual this type of price competition in Japanese mar- structure for the period of protection that reflected kets. The obsession with share so often found in the economies to be expected from the experi- Japanese markets led the motorcycle industry into ence curve. An initial high tariff on large Japa- a period of chaos in the 1970s. Concerned with nese bikes was decreased each year, disappearing its perpetual “number two” status in the indus- in seven years. If Harley Davidson could not re- try the president of Yamaha threw down the duce its costs and expand the market for its bikes, gauntlet to Honda, saying that it would take over the reduced tariff protection would doom their the top position within a short period of time. strategy. This incentive to improve productivity Unfortunately the desire for increased volume and develop new products worked well for the was not based on any significant cost advantage company and it is now competitive in the high at Yamaha. Nor was it based on any ability to end of the market. The company needed less than design new products at a faster pace than Honda. the seven years to complete its program to in- At that point, Honda was moving into the auto- crease competitiveness, and the tariffs were abol- mobile market, and Yamaha thought it might be ished ahead of schedule. Harley Davidson, in a distracted, and that Honda would not respond. move that Honda surely would have grudgingly Honda’s response provides an important lesson respected, took out advertisements saying that on the nature of competition in the Japanese the firm was now competitive, and no longer market: no firm lets a new player into the market needed protection. without a significant fight. Images of shared markets and cartelized industries give foreigners the Entering international markets impression that Japanese generally agree to share markets. But if the government is not involved The strategy of new market segments, mentioned in coordinating the market, this is far from the earlier, also helped Honda develop new markets norm. In this case, Honda responded by reallo- overseas. At the time that Honda started to de- cating a large number of engineers from the au- velop the US market, the image of the motor- tomotive division. It designed a significant cycle user was not of a mass market of typical number of new models, and matched the de- people, rather the image was of someone who creases in price that Yamaha had initiated. With was rebellious and slightly “off color.” To get more no significant production advantages and an en- people to use the motorcycle, Honda had to cre- gineering staff that was not equal to that of ate a respectable image. Using an innovative ad- Honda, Yamaha had to beat an ignominious re- vertising campaign, “You meet the nicest people treat. Honda’s dominant position in the industry on a Honda,” the company persuaded Americans was maintained due to its cost and product de- to accept the fact that everyday people could use sign capabilities. this means of transportation. The most memo- The industry gives one additional example of rable ad was of a nun riding over a pristine moun- the importance of experience curve effects, tain path. though this example comes from a US company The challenge of the Japanese motorcycle firms Harley Davidson, rather than the Japanese firms. soon generated calls from both Europe and the Harley Davidson had understood the importance United States for restrictions on imports. This of experience curve economies and had begun led both Kawasaki and Honda to set up manu- to digest many of the lessons of Japanese manufacturing plants abroad. Both firms located in facturing process efficiencies. It also knew that it rural US communities where they felt their team- could be competitive with the Japanese firms at based manufacturing techniques would be more the high end of the market if only it could gener- consistent with the culture. These very visible ate enough sales to internalize that experience in manufacturing operations brought home to motorcycle industry 323

Americans many of the Japanese management case of experience curve benefits in production, techniques. The plants arguably stimulated Honda sought out early experience and learning changes in the wider transportation equipment in overseas operations. industry as American suppliers learned that they The Japanese motorcycle industry is now could utilize the techniques to improve produc- competing globally. In the late 1990s, there have tivity within the US environment. been increases in production facilities by all four In Honda’s case, the investment in motorcy- Japanese manufacturers in China. While the in- cle plants had another benefit. Since the company dustry is no longer the important contributor to also competed in the automotive industry, it the Japanese economy that it was at one time, it knew that it would soon face similar restrictions remains important for its contribution to the on autos. Its early investment in motorcycles, first firms. Honda used its engine technology to en- in Europe and then in Columbus, Ohio, allowed ter the auto industry. The company used its cus- it to generate experience in managing foreign tomer base in the United States, built from its operations and in developing local parts suppli- motorcycle bridgehead, to generate the scale ers. This was invaluable in the more complex needed to compensate for its weakness in distri- automobile plant investments that were to follow. bution in the Japanese market. The industry has Honda’s plants in the USA generally have a also contributed to the understanding by non- higher reputation for good management and sup- Japanese of the Japanese production system and plier relations than some other Japanese firms. competition. This is in no small part due to this early experimentation in motorcycles. Just as in the earlier THOMAS ROEHL N

Nakauchi, Isao In 1990, Nakauchi became vice-chairman of the Federation of Economic Organizations. He Isao Nakauchi was born in Osaka prefecture in acquired the Recruit Company Ltd. (a recruit- August 1922. He graduated from Kobe Commer- ment, publishing and services giant) in 1992. In cial High School (now Kobe Commercial Uni- 1993, he received the Grand Cordon of the Or- versity) in 1941, then entered and dropped out der of the Sacred Treasure. Daiei acquired rival of Kobe Economic University (now Kobe Uni- supermarkets, Chujitu-ya, Yunid Daiei, and versity Faculty of Economics) in 1950, and started Daihana, in 1994, and launched the first “national to work for Nichimen Corporation. In 1943 he chain store” in Japan, with stores covering all of was drafted into the military and was assigned to Japan from Hokkaido to Okinawa. Daiei also service in Manchuria. After the war, he returned received the Tenth Corporate PR Award (Spe- to Japan in 1945 and joined his family’s business, cial Award) that year. In 1995, Nakauchi resigned Daiei Yakuhin Kogyo (Daiei Medicinal Manufac- as vice-chairman of the Federation of Economic turing). Organizations. In 1996, he received the Nakauchi opened the first supermarket in Ja- Comandoll Badge of Leopard Medal. pan, Shufu-no-Mise (A Store for Housewives) in At present, Isao Nakauchi serves on the board the city of Osaka in 1957. In 1963, he opened of directors and as a top-advisor of Daiei Incor- another store in Fukuoka Prefecture, thus begin- porated, chairman of the board of directors of ning expansion of a chain of stores nationwide. Recruit Company Limited, owner of the profes- He became the chairman of the Japan Chain Store sional baseball team Fukuoka Daiei Hawks, and Association in 1967. In 1970, the name of the on the board of directors and as president of stores was changed to Daiei, and Isao Nakauchi Nakauchi Educational Institution. He was the became president (he also held the post of chair- model used in the national best-selling novel man starting from 1982). Since then, Daiei has Kakaku Hakai (Price Destruction), written by expanded all over Japan using the chain store Saburo Jyoyama. His own book, Waga Yasu-Uri method and has become a market leader in the Tetsugaku (My Philosophy of Bargaining), is about supermarket industry with 300 affiliated compa- his commercial philosophy and strategy. nies. In 1977, Nakauchi received the Medal with Blue Ribbon (a national award designated for philanthropy and inventions). Further reading Nakauchi received the Sixth Keizai-kai Taisho Nakauchi, I. (1969) Waga Yasu-Uri Tetsugaku (My Phi- (the Sixth Economic World Grand Prize) in 1980, losophy of Bargaining), Tokyo: Nihon Keizai and the Pegasus-Club Diamond Award and the Shinbun-sha. Business Excellence International Award in 1987. In 1989, he became the owner of the professional AKI MATSUNAGA baseball team the Daiei Hawks. MARGARET TAKEDA NEC 325

Naniwa bushi United States, now Lucent Technologies. Dur- ing stage two, from 1924–45, NEC expanded into Literally “Naniwa melodies,” the term refers to a the radio market with both production and re- business negotiation or management style that search and development facilities. From 1946– appeals to intuition, emotion and “gut instinct” 64, NEC expanded into computers and electronic rather than reason or fact-based business sense. switching systems. Its research into transistor Naniwa is the former name for Osaka, and the technology led the company to apply for numer- term refers to songs from that area that recount ous patents in Japan and the USA, plunging it romantic tales of love and daring, often involv- into the US market for the first time in 1964. ing Robin Hood-type heroes who lived on the The period from 1964–78 focused on worldwide fringes of respectable society and treated those expansion and diversification for NEC. The com- around them with generosity and flair. pany began producing advanced satellite systems, In a business context, naniwa bushi is used to at the same time ushering in their well known describe two types of related, but somewhat dif- “C&C” strategy combining computer and com- ferent behaviors. In negotiating and managerial munications technologies. Also during this pe- contexts, it is used to refer to appeals to one’s riod, NEC listed stocks on the London Stock romantic nature (in the sense of chivalry and Exchange, the Swiss Exchange, and the Nether- grand gesture) or to one’s emotional side. It can lands Exchange. also refer to blatant attempts to appeal to one’s In 1979, NEC announced the introduction of sympathy rather than business judgment. their first computers, including the A second type of behavior characterized as supercomputer. By 1986, NEC had developed naniwa bushi involves acts of hospitality and gen- the dynamic random access memory (DRAM) erosity that exceed what one might normally and by 1986 had developed information-process- expect. Showering guests with gifts, extravagant ing systems application architecture. NEC en- meals and gestures of largesse can serve as a tered the semi-conductor market in the early means for achieving cooperation by weakening 1990s. resolve and lowering defenses so that objective Currently, NEC is divided into three distinct considerations are overwhelmed by good feelings operating divisions, broadly known as NEC So- and a sense of indebtedness. lutions, NEC Networks, and NEC Electronic ALLAN BIRD Devices. NEC Solutions provides Internet-related solutions through the development of applications NEC derived from supercomputers, computers, PCs, printers, and Internet-related services, including NEC, formally registered as NEC Corporation, Internet access services such as Biglobe. NEC is a company offering service-related computer was the first Japanese computer manufacturer to and Internet solutions. NEC corporate headquar- provide integrated Internet services. ters is located in Tokyo, Japan. It boasts six pro- NEC Networks is responsible for supplying duction facilities near Tokyo, as well as fifty-six and supporting network systems. Network sys- subsidiaries and twenty affiliate firms through- tems are best described as equipment which sup- out Japan. NEC’s marketing network consists of ports photonic IP solutions, ATM solutions, nearly 400 sales offices and 150 marketing and mobile communications, and digital broadcast- service subsidiaries and affiliates in thirty-four ing. NEC Electronic Devices focuses on advanced countries. In addition, as of 2000 NEC has seven electronic equipment such as semiconductors, R&D facilities in Japan, two in the United States modules, and ion rechargeable batteries. and one in Germany. Known for charting its own course, NEC pio- NEC was established on July 17, 1899 and neered the concept of the “value chain” manage- has had a long and varied history which can be ment in Japan, which seeks to connect and divided into distinct stages. From 1899 to 1923, optimize the products and services offered among NEC was founded as the result of a joint ven- the three NEC divisions. NEC continues to ture with Western Electronic Company of the experience strong worldwide growth and 326 negotiations technological diversification largely due to its interpersonal tolerance of others to prevent dis- relentless focus on R&D and customer service. putes from arising. A well-known Japanese proverb states: “In a quarrel, both parties are to blame.” At least partially because of this, the court Further reading system in Japan is typically not used to litigate MacLellan, A. (2000) “NEC’s Divestiture Talk Sets disagreements. Litigation is viewed as a method Wheels in Motion,” Manhasset: Electronic Buyers’ News. of resolving disputes between immoral individu- Miyashita, K. and Russell, D. (1994) Keiretsu: Inside the als when the moral manner of settling disputes Hidden Japanese Conglomerates, New York: McGraw- by tolerance and mediation have failed. Hill. Another important concept in Japanese soci- Okimoto, D. (1989) Between MITI and the Market: Japa- ety and in dispute resolution is the concept of nese Industrial Policy for High Technology, Stanford, CA: face. Face refers to the self-image one projects to Stanford University Press. others. Respect is the way in which face is main- Robertson, J. (1999) “NEC Sets Massive Restructur- tained. Maintaining face confirms a person’s ac- ing Plan,” Manhasset: Electronic Buyers’ News. ceptance in a society and that person’s status. When tensions in a dispute escalate with either MARGARET TAKEDA party becoming emotional, the display of these SOYEON PARK negative emotions is disrespectful and result in the loss of face. negotiations When disputes arise in Japan, which is a hierarchical culture with harmony as a strong value The way in which Japanese negotiations unfold and a preference for indirect confrontation, there is distinctly different from negotiations that take is a tendency toward early involvement of third place within other cultures. These differences can parties. Involving a third party is viewed as a face- hamper the success of both sides in cross-cultural saving, harmony-preserving way to resolve a dis- negotiations. It has been shown for example, that pute. Having the assistance of a third party who the joint outcomes of Japanese-US negotiations acts as a go-between or mediator can prevent the are worse than if the negotiations had been con- loss of face that would occur if one of the parties ducted within the same culture (Brett and expressed their negative emotions in front of the Okumura 1998). With negotiating experience other party The Confucian philosophy embed- and increased cultural understanding, the out- ded in Japanese culture holds that it is a society’s comes of cross-cultural negotiations generally communal responsibility to maintain harmony. improve. Therefore, people feel personal responsibility to assist with conflicts. The most effective third party Conflict resolution is someone with equal or higher status relative to each of the parties involved and someone who Negotiations can be used both in resolving con- knows each party well enough that they can re- flicts and in negotiating more general business main a neutral and unbiased mediator. The me- relationships (for example, buyer/seller agree- diator will then typically listen to each side ments, joint ventures or partnerships). Some of separately gathering information and clarifying the concepts that are most relevant to conflict their positions. The mediator then conveys in- resolution in Japan are: (1) harmony as a societal formation to the other party often removing any goal; (2) the importance of face-saving and; (3) emotional or negative statements from the infor- the use of third parties to assist in resolving con- mation passed to the other side. The mediator flicts. may also suggest some possible courses of action Maintaining harmony is an important part of and may if the conflict is close to reconciliation, Japanese society. Respected Confucian proverbs try to bring the two sides together to speak di- emphasize that disharmony is the fault of and an rectly to each other. It is not without personal embarrassment to all of the participants. Each risk that a third party undertakes mediation. individual bears some responsibility for having Should the situation worsen following the negotiations 327 mediator’s intervention, the mediator may be tection toward the seller. It has been difficult for negatively viewed by one or both parties as other cultures to penetrate the Japanese market aossekai (nosey or meddlesome). partially because outsiders trying to sell products or services often have difficulty showing suffi- General business cient deference to buyers and developing an adequate level of trust with their Japanese Business negotiations are conducted with the counterparts. Normally in intra-cultural negotia- hope of mutually beneficial outcomes and are tions, Japanese sellers would begin first by ex- often viewed as having several distinct phases: plaining characteristics of the product and relationship building; exchanging information; background factors, but not initially discussing persuasion and compromise; and concessions and price. Then the Japanese buyer would ask clari- agreement. These stages are approached differ- fying questions. One study found that when price ently by Japanese negotiators and those from is eventually discussed, Japanese sellers often other cultures. suggest a more extreme initial price than would a US negotiator (Graham 1993). Relationship building In comparison to those in the USA and the UK, Exchanging information Japanese negotiators spend longer periods of time in developing relationships prior to negotiating In Japanese negotiations the exchange of infor- the specifics of a business deal. The Japanese put mation is a primary part of the negotiation. Ne- significant effort into establishing a harmonious gotiators may ask many questions so that they and trusting relationship. It appears that this strat- are confident of their understanding. It is com- egy may help the Japanese to avoid litigation later. mon for the Japanese to want more written docu- USA and UK negotiators appear much more mentation than is typical in the USA or UK. conscious of time pressures and deadlines and Published information is viewed as more cred- often become uncomfortable and impatient with ible and valuable than oral assurances. When an the amount of time the Japanese spend entertain- opponent makes an offer, the Japanese are likely ing and socializing in order to evaluate and build to respond initially with silence or by asking more a potential long-term relationship. questions. They are less likely than most oppo- Japanese negotiators pay close attention to the nents to respond to an offer with a counteroffer. power of the parties involved. The most impor- During the information exchange, Japanese view tant aspect of power is the social status of the US and UK negotiators as honest to the point of negotiators. Exchanging business cards is an im- discomfort as they communicate even negative portant initial ritual to help all involved deter- information very directly Japanese negotiators mine the social status of each person in the may share less information and are more likely negotiations. Often the highest status member of to communicate information subtly and indirectly a Japanese negotiating team will be the most quiet This can result in information being lost because during the negotiation, observing closely what is negotiators from the US and UK may not real- being said by both parties. In the USA and UK, ize or fully understand that information is being the relative power of the negotiators is more likely communicated by Japanese negotiators. The Japa- to be assessed by determining which side has the nese try to be truthful, but also polite. As a re- best alternative, if the negotiation fails. The Japa- sult, they do not share much negative nese are much less likely to view alternatives as a information, and when they do share negative source of power (Brett and Okumura 1998). information, it is shared indirectly so as to be In Japan the buyer is accorded much more less offensive. In comparison to other cultures status than the seller. In Japan the adage “the including the UK, Taiwan, Korea, France, China, buyer is king” is a realistic description of the rela- Russia, Germany Brazil and the USA, Japanese tionship. Buyers would typically expect deference negotiators are much less likely to use the word and respect from sellers. In return the buyers of- “no” (Graham 1993). For example, “That will ten exhibit a type of paternalistic or fatherly pro- be very difficult” is a common, more indirect and 328 negotiations polite way for the Japanese to communicate “No, risk displaying anger or impatience creating a loss we can’t do that.” of face.

Concessions and agreement Persuasion and compromise Japanese companies prefer to conduct business US and UK negotiators are most likely to view negotiations with a team of people. In such as the persuasion portion of the negotiation as the case, concessions are unlikely to be made by the actual negotiation because they are finally “get- Japanese until they have a chance to confer pri- ting down to the real meat of the issues.” They vately and reach a consensus on their response. will plan to spend the majority of their time try- They also typically need to consult with their ing to persuade. As a result, they try to move home office. Once a decision has been made, Japa- quickly to this phase and try to start bargaining nese negotiators tend to make all concessions at before they have gathered information from the the end of the negotiation and expect that these other side. If English is used to conduct the ne- will immediately lead to a final agreement. In gotiation, then language difficulties may lead the contrast, US and UK negotiators tend to make Japanese negotiators to spend more time focused concessions throughout the process and expect on the numbers and the carefully constructed their opponents to reciprocate with concessions arguments and persuasions commonly used by as well. US and UK negotiators are also likely to US and UK negotiators are likely to be lost. characterize the decision-making style of the Japa- In contrast, the Japanese believe that if a trust- nese team as very slow and unhurried and ex- ing relationship has been built and they have care- press discomfort at the lack of decision-making fully gathered information and gained an authority a Japanese team typically has. Negotia- understanding of each side, then little persuasion tions are sometimes terminated prematurely be- is necessary Once the Japanese feel confident that cause of the occasionally mistaken belief that the a beneficial long-term relationship can be estab- negotiations are not progressing. lished and all of their questions have been an- Japanese are more likely than those from other swered satisfactorily an agreement can come cultures to respond to an offer or concession with together fairly quickly Japanese negotiators may a period of silence. While this silence is usually a suggest an agreement that addresses the negotia- common part of Japanese communication style, tion as one overall package and may view this occasionally this silence is an intentional strategy stage as just working out minor details. This is to communication displeasure with the offer different from the tendency in the USA and UK (Graham 1993). The resulting silence can create to break a negotiation into smaller pieces and try discomfort and result in concessions from oppo- to use persuasive tactics to come to an agreement nents. on each point before proceeding. Other differences between Japanese and other The Japanese tend to be less aggressive and negotiators include the Japanese preference for more polite negotiators when compared to nego- formality for written agreements that are brief and tiators from other cultures. They are unlikely to cover basic principles, and their longer term per- threaten, command or warn and more likely to spectives. This contrasts with the informality de- make recommendations and positive promises. tailed legalistic contracts and generally shorter term They are therefore, likely to be uncomfortable perspectives of US and UK negotiators. In con- with aggressive tactics and displays of negative clusion, while negotiations can easily break down emotions. The Japanese have a proverb, Tanki wa because of a lack of understanding of cultural dif- sonki which translates, “if you lose your temper, ferences, continuing efforts to understand the cul- you will lose your case.” In negotiating with Japa- tural differences can be beneficial to both sides. nese, it is best not to show negative emotions or even impatience, the result may be loss of respect. Further reading The Japanese are unlikely to enter into arguments. If they think they are right they may just Brett, J.M. (in press) Negotiating Globally: How to Negoti- remain silent. Entering into an argument might ate Deals, Resolve Disputes and Make Decisions nemawashi 329

Across Cultural Boundaries, San Francisco: Jossey- unanimous decision at the top level meeting is Bass. preferred over a decision by majority. The unani- Brett, J.M. and Okumura, T. (1998) “Inter- and Intra- mous decision symbolizes that the plan has been Cultural Negotiations: U.S. and Japanese Negotia- examined from all possible perspectives and that tors,” Academy of Management Journal 41: 495–510. everyone shares responsibility for the execution Callister, R.R. and Wall, J.A. (1997) “Japanese Com- of it. munity and Organizational Mediation,” The Jour- Thus, nemawashi is an institution, integral to nal of Conflict Resolution 41:311–28. the ringi-seido. There are two aspects of nemawashi Graham, J.L. (1993) “The Japanese Negotiation Style: in action, both of which are characterized by in- Characteristics of a Distinct Approach,” Negotiation formal person-to-person, off-the-record commu- Journal 9:123–40. nication. First, when a plan is in the making, the Martin, D., Herbig, P., Howard, C. and Borstoff, P. initiator of the plan needs to modify or polish it (1999) “At the Table: Observations on Japanese by contacting all the people the plan would in- Negotiation Style,” American Business Review 17 (1): volve after it is officially approved. Those who 65–71. are contacted are expected to give advice from their own standpoint. In the process, the original RHONDA ROBERTS GALLISTER plan may be more refined, and, what is equally important, the plan becomes a creation nemawashi of everyone involved, who all become its supporters. The original meaning of nemawashi refers to the The second aspect is that in order for the plan method by which a tree, especially an old tree, is to be approved unanimously all the major deci- transplanted from one place to another. Accord- sion makers have to be fully informed informally ing to the method, the root of an uprooted tree is of it. Among these important people, there may covered with a straw mat and left alone for be influential people that are only partially af- months; then it is transplanted, so that the tree fected by the plan. Nemawashi is likely to be used may not die. with them to smooth the discussion in the meet- The term is used metaphorically in modern ing. Japanese society to mean laying the groundwork Thus, nemawashi includes explanation, persua- for achieving one’s goal, especially agreement in sion, request, and asking a favor on a personal decision making. The nature of nemawashi is its basis. Nemawashi can be done anywhere, even informality and off-the-record, if not necessarily outside as well as inside the organization. secret, communication. Before 1970, very few Nemawashi is sometimes used in secretive, behind- Japanese language dictionaries listed the meta- the-scenes manoeuvering, but its positive aspect phorical use of the term, but after 1970 all major has also been pointed out. Compared with a plan dictionaries did. It is also true, however, that in that has not been examined thoroughly a plan the late 1960s newspapers were already using the that has been screened through examination by term in its later meaning. way of nemawashi in many sections of the organi- The term has been used in all kinds of Japa- zation will usually be a better plan. Additionally nese organizations besides business. The reason since all possible hurdles have already been it has had such wide use is because the action of cleared before the plan is officially approved, it nemawashi is closely associated with the traditional can be put smoothly into practice. In the same Japanese decision-making process, known as ringi vein, as all the relevant members of the organiza- seido, or the referral and clearance system. Ac- tion are fully aware of the plan, they are quick to cording to this system, a plan is initiated by mid- cooperate when the plan is executed. Moreover, dle management in an organization through a unique plan which might be disapproved if it examination of its feasibility. Then it is proposed were a directly proposed in a meeting has a bet- upward for official agreement. The term ringi, ter chance to be approved if nemawashi is prop- means offering a proposal from below to above. erly done. One critical characteristic of the system is that a Some shortcomings of nemawashi have also 330 New United Motor Manufacturing Incorporated

been pointed out. Since nemawashi is done infor- New United Motor Manufacturing mally on a person-to-person basis, it is hard for a Incorporated person to respond in the negative. It is also argued that in rapidly changing times, nemawashi In 1984, Toyota and General Motors (GM) takes so much time that the organization may formed the New United Motor Manufacturing lose an opportunity to move in a new direction. Inc. (NUMMI) joint venture to produce subcom- Also, a unique, potentially good plan may be pact cars in California. Toyota’s objectives in- turned down in the complex nemawashi process if cluded beginning production in the United States only the negative aspects are examined. The and gaining experience in working with Ameri- strengths of nemawashi contain its weaknesses as can unionized labor. GM’s objectives were to well. learn about the efficient Toyota production sys- Finally nemawashi has been widely practiced tem and to produce high-quality cars. in Japan because it is rooted in Japanese culture. The production facility used for NUMMI was Japanese want to avoid harsh face-to-face argu- a former General Motors plant that had been ment and conflict in meetings, where they know closed due to labor problems, quality problems, one another well. Nemawashi provides a means to and low productivity Under the new Toyota avoid the possibility of such conflict. management, the plant quickly became the most As Japanese multinationals have introduced productive of all GM facilities and the automo- nemawashi in their overseas operations, it has not biles produced received very high-quality ratings. been well received. In North America, where Grievance rates and absenteeism were exception- nemawashi was widely practiced, it was one of the ally low, and remain so. Quality and productiv- least favored aspects of Japanese management ity have continued to improve. among American employees. Although many Before operations began, Toyota management American employees, especially middle manag- worked with the United Automobile Workers ers and above, learned how to conduct union to establish a cooperative relationship. The nemawashi, only a few thought the practice had resulting labor agreement provided the strongest merit. job security clause in the industry included a “no Despite complaints from American workers, strike” provision with respect to production and Japanese managers have not tried to change their safety standards, and emphasized non-confron- decision-making style. Due to their close connec- tational problem resolution. A great deal of time tions with parent companies in Japan, most sub- and care were taken in the selection of workers, sidiaries cannot be that independent. Nemawashi including interviews to determine the applicant’s remains deeply rooted in the Japanese decision- potential for teamwork. Extensive training was making process. provided for new employees, with more than 11 percent of the workforce being sent to Japan for three weeks of training. The company continues Further readings to regularly send employees to Japan for additional training. Sullivan, J.J. (1992) Invasion of the Salarymen: The Japa- The production workforce was organized in nese Business Presence in America, London: Praeger. teams with team responsibility for quality pro- Sumihara, N. (1993) “A Case Study of Cross-Cultural ductivity and continuous improvement. Along Interaction in a Japanese Multinational Corpora- with the responsibility each worker had the au- tion Operating in the United States: Decision-Mak- thority to stop the production line for safety or ing Processes and Practices,” in R.R.Sims and quality reasons. Team members were given R.F.Dennehy Diversity and Differences in Organizations, training in problem-solving techniques, were re- Westport, CT: Quorum Books, 135–48. quired by the union contract to participate in quality/productivity improvement programs, NORIYA SUMIHARA and were cross-trained to do every job in the Nihon Keizai Shimbun 331

team. In addition to the features of the system ness-oriented newspaper, on a par with the Wall described above, NUMMI developed relation- Street Journal in the USA and the Financial Times ships with suppliers to support a just-in-time in- in the UK. It is the world’s largest selling daily ventory system. business newspaper and, like the Wall Street Jour- Both Toyota and General Motors met their nal and the Financial Times, it includes articles on objectives in forming NUMMI. Toyota sent a social trends, culture and the arts, sports and some group of its managers from NUMMI to apply general news. In the latter part of the twentieth what they had learned in their new, wholly- century the newspaper has expanded into other owned plant in Kentucky. Executives with expe- business information-related and business data rience at NUMMI were subsequently assigned services. In both English and Japanese, the to key positions at Toyota headquarters. GM newspaper’s name is often abbreviated to Nikkei, sent a number of managers to NUMMI for a combination of the first syllables of the first training, and thousands of others on visits. It two words in its name. applied what it learned in NUMMI in the devel- Nihon Keizai Shimbun, Inc. (Nikkei) actually opment of its Saturn plant, and is now in a long- publishes four newspapers as well as thirty-four term effort to make its other plants more like other magazines. In addition, it also publishes Saturn. NUMMI continues to produce high business and economic books, averaging about quality vehicles, cars for GM and both cars and 300 new volumes annually in the 1990s. In addi- light trucks for Toyota. tion to the daily Nihon Keizai Shimbun, two of the papers cover specialized areas of business, and See also: automotive industry; kaizen the fourth is an English-language publication. The Nikkei Sangyo Shimbun (Nikkei Industrial Newspa- per) covers economic and business developments Further reading in Japan’s manufacturing sector. The Nikkei Adler, P., Goldoftas, B. and Levin, D. (1999) “Flexibil- Ryuutsuu Shimbun (Nikkei Marketing Newspaper) ity Versus Efficiency? A Case Study of Model focuses on developments in the marketing and Changeovers in the Toyota Production System,” distribution sectors. Finally the Nikkei Weekly is Organization Science 10 (1): 43–68. an English-language newspaper that is a combi- Duerr, M. (1992) “New United Motor Manufacturing nation of news stories translated from the three Inc. at Midlife: Experience of the Joint Venture,” in Japanese-language papers as well as some features A.Negandhi and M.Serapio (eds), Research in Inter- prepared specifically for its English-speaking read- national Business and International Relations, Volume 5, ership. Also in English, its Japan Economic Alma- Japanese Direct Investment in the United States: nac is a standard reference volume. Trends, Developments, and Issues, Greenwood, CT: Nihon Keizai Shimbun is published daily in both JAI Press. morning and evening editions. Its four main publication sites are Osaka, Sapporo, Seibu and To- EDWIN C.DUERR kyo. Daily circulation in 2001 exceeded MITSUKO S.DUERR 2,800,000. Outside of Japan, it has news offices in major national capitals and world financial centers. Nihon Keizai Shimbun Nikkei’s electronic data services include the English-language News Telecom/Japan News and Founded in 1876 as the Chugai Bukka Shimpo (Do- Retrieval, a counterpart to its Japanese-language mestic and Foreign Price News), the newspaper Nikkei Needs database. Both services have expe- adopted the name Chugai Shogyo Shimpo (Domes- rienced rapid growth in recent years. Nikkei also tic and Foreign Commercial News) in 1889, and supports and produces a wide variety of broad- then changed to its current name Nihon Keizai casting initiatives, and industrial and cultural Shimbun (meaning Japanese Economic Newspa- events. per) in 1946. It is widely respected in Japan and throughout the world as Japan’s foremost busi- ALLAN BIRD 332 Nihonteki keiei

NIHON SHOKO KAIGISHO see Japan sity entrance examinations during their final year Chamber of Commerce and Industry of high school. The first years of work are an initiation process during which new employees Nihonteki keiei receive general training, learn their firm’s history and culture, and experience work in several dif- Nihonteki keiei, “Japanese-style management,” re- ferent departments. They are then given longer fers to a set of management systems and prac- term assignments, but will continue to be trans- tices that are unique to or characteristic of ferred to other jobs and departments until they Japanese companies and which differ from those reach retirement age, usually 55–60. Only in ex- typically found in non-Japanese, and particularly treme circumstances, such as near bankruptcy on Western, companies. Nihonteki keiei includes life- the part of the firm or criminal behavior on the time employment. seniority promotion. enter- part of an individual, are lifetime employees laid prise unions. bottom-up decision-making off or fired. processes, and other related management prac- The commitment to lifetime employment pro- tices. Together, these form a unified approach to duces a strong bond between company and em- management that provides benefits such as rich ployee. Employees know that their earnings and intra-company information flows, low rates of benefits depend on the performance of the com- absenteeism and employee turnover, and a high pany so they work hard to help make their com- level of employee training and commitment. In pany successful. Companies know that it is the hard economic times following the collapse unlikely that their employees will move to an- of Japan’s bubble economy, the costs of nihonteki other firm, so they can invest in employee educa- keiei became more difficult for companies to bear, tion and training with little fear of losing the causing some of its features to be re-examined, benefits of that investment. Another benefit of modified, or eliminated. the system is efficient information flow within In Japan, as in any country there is consider- the company. The combination of lifetime em- able variation in management practice from firm ployment, frequent transfer, and the after-hours to firm; consequently the description that follows socializing that is a part of Japanese business life is a generalization. It should also be noted that means that employees develop extensive people nihonteki keiei management practices are found networks throughout the organization. These more prominently in Japan’s large companies enable them to keep up to date on what is hap- than in its small and medium-sized firms. pening in other parts of the company and to get needed information, answers to questions, and introductions to people whose assistance or co- The “three pillars” of Japanese-style operation they may need. Lifetime employment management also has an important strategic implication: the The so-called “three pillars” of nihonteki keiei are imperative of providing continued employment lifetime employment, seniority-based wages and for all their regular workers causes Japanese firms promotion, and the enterprise union. Under life- to aggressively pursue growth and market share, time employment (shushin koyo), employees join a often at the expense of profitability. company upon graduation from high school or The lifetime employment system applies to university with the expectation, on the part of only around 30 percent of the Japanese workforce, both employee and company that the employee mostly the regular male employees of larger firms. will remain with the company for his or her en- The majority of Japan’s workers, including day tire working career. Employees tend to be hired laborers, part-time employees, and most female more for their general characteristics and abili- workers (who typically work for a few years af- ties than for specific skills. The best companies ter graduation and then get married and “retire” hire from the best schools, so the competition to to raise a family), do not enjoy lifetime employ- enter a good university is intense, producing the ment and the benefits associated with it. infamous “examination hell” that Japanese stu- In nearly all companies, wage increases dents experience as they prepare to take univer- and promotion are based on a combination of Nihonteki keiei 333 seniority and merit, but under nihonteki keiei, sen- approved at all levels. Parallel to the formal ringi iority typically carries greater weight (nenko joretsu). seido is another form of consensus-building known This is especially true with wages, which start at as nemawa shi, informally consulting with oth- low levels and increase as employees reach the ers and sharing information about a proposal or age where they need greater income to support decision before a formal decision is made. their families and pay for their children’s educa- While this decision-making process is time- tion. Promotion is slow, and increasingly merit- consuming, implementation can be carried out based as a person advances to higher ranks; the smoothly and quickly as all concerned parties are more-talented employees are promoted more fre- informed and on board. This is in contrast to quently and to higher positions than those with topdown decision making, where decisions are less talent. The average wage gap between top made quickly but implementation takes longer management and ordinary worker is significantly because the broader organization has had less smaller in Japanese companies than in Western input and been given little chance to become fa- ones. miliar with a proposal and convinced of its ben- Japanese unions differ from Western unions efits. in that they are organized by enterprise (com- Quality control circles, just-in-time produc- pany) rather than by trade. Each company has tion, and kaizen are other elements of nihonteki just one union and each union negotiates with keiei that empower and tap the ideas and knowl- only one company. All company employees (ex- edge of employees in the lower levels of the or- cept for parttime workers and management at ganization. Quality control circles are groups of the rank of section chief and above) are mem- workers that meet outside work hours to develop bers, regardless of their job category Labor-man- ways to improve product quality or the efficiency agement relations are more cooperative than or safety of operations. With just-in-time produc- adversarial, with unions exerting moderate pres- tion systems, line workers are responsible for a sure for wage and benefit increases but rarely range of tasks, including stopping the assembly striking or making demands that would hurt the line when there is a problem and taking the ini- company’s economic health. Unlike trade unions tiative to find ways to improve quality and effi- in other countries, Japanese enterprise unions do ciency Kaizen, continuous improvement, enlists not present a barrier to employee movement the entire workforce in a systematic effort to find among jobs. better ways of doing things, large and small.

Bottom-up decision making The origins and overseas application of Decision-making in nihonteki keiei is generally de- nihonteki keiei scribed as bottom-up or consensus-based, in contrast to the top-down style that is more Although many of the roots of Japanese-style characteristic of Western companies. Problems management are cultural, social, or historical, may be identified at any level of the organiza- the lifetime employment system and other key tion, but lower-level managers or task forces are elements of nihonteki keiei are in fact of relatively usually given the job of generating solutions in recent origin. Japan’s union movement, which the form of proposals which are then circulated had been weak prior to the Second World War, upward to successively higher levels of manage- grew into a powerful force following the war, ment through what is known as the ringi seido, supported by the Occupation authorities and or memo circulation system. During this process, spurred by high unemployment in the early proposals may be modified and refined. Once a postwar years. Conflict between labor unions proposal has been approved by all levels in the and company management became common, originating unit, it is circulated laterally to other and even as economic growth took off in the concerned managers and departments for their 1950s, the nation’s factories continued to be the review and routine approval. The implementa- scene of frequent and sometimes violent strikes, tion stage comes only after a proposal has been employment and wage insecurity and fierce 334 Nihonteki keiei

battles for worker loyalty between militant leftist made certain costs of nihonteki keiei, such as the labor unions and more moderate, company- inability to downsize or shed inefficient workers sponsored unions. Management-friendly enter- under lifetime employment and the high salaries prise unions gradually won out over the more paid to older workers under the seniority-based militant ones and finally realizing that continued wage schemes, more difficult to bear than they strife would threaten the nation’s economic fu- had been in more prosperous, higher growth ture, labor and management came to an agree- periods. Risutora, or restructuring, became one ment: companies would ensure rising wages and of the strongest, and most feared, trends in Japa- employment security for all union members by nese business in the 1990s, as major companies providing seniority-based pay and lifetime em- began moving more of their operations overseas ployment, while unions and workers would and slimming down their Japanese workforces adopt more cooperative and supportive policies through plant closures and layoffs. For as long as toward their companies. This happened around possible, companies avoided outright layoffs, in- 1960, the same time that Prime Minister Hayato stead downsizing through attrition and by letting Ikeda announced the income doubling plan. part-time workers go. But as recessionary condi- and the nation turned its attention more fully to tions continued, companies’ commitment to life- the achievement and enjoyment of economic time employment weakened, and more and prosperity. more regular lifetime employees, particularly As Japanese companies expanded overseas in older employees, were pressured to retire or the 1970s and 1980s, they took nihonteki keiei with were discharged. The seniority system weak- them, experimenting to find out which of its ele- ened as well, with wages and promotion becom- ments would work with and be accepted by non- ing increasingly based on merit rather than years Japanese workers. In general, Japanese-style of employment. management was successful with blue-collar em- Social trends also contributed to change. The ployees. Product quality and production efficiency generation of young people who joined compa- at Japanese-run foreign plants approached levels nies in the 1980s and 1990s differed from earlier achieved in Japan, and blue-collar workers tended generations. Dubbed shiryinrui, or “new human to feel more appreciated and empowered under species,” these people seemed to lack the work Japanese management, with its greater reliance ethic and company loyalty of their seniors, whose on initiative and input from line workers, than values had been shaped by growing up in less they had under Western management. Foreign affluent times. Older managers complained that white-collar employees tended to be less happy the new generation preferred to go home at five complaining that management decisions were o’clock to enjoy their private lives and interests made in Tokyo and that a “glass ceiling” limited rather than work overtime or go drinking with promotion opportunities for non-Japanese. Japa- work colleagues after hours. There were also an nese companies were able to build relatively co- increasing number of young people who felt lit- operative relationships with overseas labor tle attraction to the idea of lifetime employment unions, or avoid unionization of the workforce and slow, seniority-based promotion, preferring altogether, but lifetime employment was not of- instead a chance to prove themselves and be re- fered to foreign employees to the extent that it warded for their achievements at an early age. was to regular employees in Japan. Further reading Post-bubble developments Abegglen, J.C. (1958) The Japanese Factory: Aspects of its Nihonteki keiei has continued to evolve and adjust Social Organization, Glencoe, IL: The Free Press. to changing external conditions. Change was Abegglen, J.C. and Stalk, G. (1985) Kaisha: The Japa- particularly noticeable during the 1990s, when nese Corporation, New York: HarperCollins. the economic downturn following the collapse of Clark, R. (1979) The Japanese Company, New Haven, the bubble economy put heavy pressure on CT: Yale University Press. firms to cut costs and increase efficiency. This Marsland, S.E. (1980) Note on Japanese Management and Nintendo 335

Employment Systems, Boston: Harvard Business Kitano, H.H.L. (1969) Japanese Americans, Engelwood School. Cliffs, NJ: Prentice-Hall. Takahashi, Y. (1993) Nikkei Brajiru Imin Shi (The His- TIM CRAIG tory of Japanese Brazilian Immigration), Tokyo: San Ichi Shobo.

Nikkei jin MEIKA CLUCAS Nikkei jin literally means people of Japanese descent. The term generally refers to those who are Japanese or of Japanese descent that live out- NIKKEIREN see Japan Federation of side Japan and possess the nationality of the coun- Employers’ Associations try where they reside. Japanese emigration was noted as early as the sixteenth century However, it was not until after Nintendo the Meiji restoration that large-scale emigration Founded by Fusajiro Yamauchi in Kyoto, Japan, began. Emigrants worked primarily as agricul- Nintendo is the oldest company to be involved tural and mining laborers; their destinations were in the manufacture of video games. Founded in South Asia, East Asia, Hawaii, California, the 1889 as the Marufuku Company it produced west coast of Canada, and Latin American coun- elaborately decorated Hanafuda playing cards. tries including Brazil, Peru, Argentina, and Bo- The name was changed to Nintendo Koppai in livia. São Paulo, Brazil has more people of 1907. In the 1970s, Gunpei Yokoi, a Nintendo Japanese descent than anywhere else in the world designer, began creating toys such as the Ultra outside Japan. Hand and the Beam Gun. These toys led to sub- Beginning in the late 1980s, a significant stantial profits for Nintendo and moved it into number of Japanese descendants from Latin the first tier of the Osaka Stock Exchange. American countries, primarily from Brazil, have In 1975 Nintendo obtained the rights to sell been returning to Japan to work as foreign the Magnavox Odyssey game system in Japan laborers. Recent usage of the term Nikkei jin by and in 1977, working together with Mitsubishi, the media in Japan generally refers to these for- Nintendo developed the TV-Game 6, with 6 vari- eign workers from South America. Japanese of- ations of Pong; this was later followed by the TV- ficials maintain a position of not allowing in any Game 15. By the end of the 1970s Nintendo had unskilled foreign laborers. However, faced with developed a department devoted solely to pro- the nation’s acute labor shortage in the late 1980s ducing arcade games. and 1990s, the Japanese government revised their In the early 1980s Nintendo began marketing immigration policies and allowed these descend- and distributing its arcade games in the United ants of Japanese immigrants to South American States, and after some unsuccessful attempts at countries to work and live in Japan for up to three designing new products, introduced Donkey years with a domicile visa. The Japanese authori- Kong in 1981. Americans initially mocked this ties hoped that foreigners of Japanese descent coin-operated arcade game, but then quickly be- would be more likely to blend in with Japanese came fascinated by the hero, a carpenter named society thereby minimizing the effect on the na- Mario, who rescued a kidnapped girl from a go- tion’s ethnic and cultural homogeneity rilla. So strong was the demand expressed for Donkey Kong that numerous bootleg copies were produced. Further reading After Donkey Kong’s success became apparent, Nintendo was threatened with a lawsuit from Clucas, M. (1995) “Race, Ethnicity and Life Satisfac- Universal for infringing on the 1929 film King tion: A Study of Nikkei Workers in Japan,” Ph.D. Kong. Nintendo refused to settle and countersued dissertation, Department of Sociology University instead, claiming that Universal had no rights to of Southern California. King Kong and that the company was well aware 336 Nippon Telegraph and Telephone of that fact when suing Nintendo. A judgment of ephone monopoly under the authority of the $1.8 million was made in favor of Nintendo. Ministry of Post and Telecommunications and In 1983 the Famicom was introduced in Ja- one of the few public corporations with substan- pan, an 8-bit game system which was introduced tial demand-generating power for information to the US market two years later as the Nintendo industries. All foreign carriers connect to NTT Entertainment System (NES.) By this time to do business in Japan. In early 1997, restructur- Nintendo controlled 90 percent of the Japanese ing into three affiliated companies and several game market and in the following year outsold subsidiaries combined with market deregulation its competitors in the US by a margin of 10:1. In thrust change upon NTT. In 1997, British the early 1990s Nintendo introduced the Game Telecom (BT) officials publicly declared that they Boy a portable game system which used inter- would seek a preferred partnership with NTT. changeable game cartridges. With more than 500 These overtures had begun in late 1996 when game titles available at the end of 1999, the Game Japan’s Ministry of Posts and Telecommunica- Boy is the best-selling game system to date. tions said it would break up NTT and do away Nintendo faced serious competition in the with the regulations that segregated Japan’s car- 1990s. In 1991 the Sega Genesis, a faster system riers by international and domestic markets. The than the improved Super NES, was launched. Ministry also began easing laws on foreign par- Although Nintendo had made plans to work to- ticipation in Japan’s market. gether with Sony on a CD-ROM project, named The biggest turning point for NTT started in the PlayStation, the plans fell through and Sony early 1999 when market deregulation pushed continued on its own, creating yet another com- NTT into the international telecommunications petitor in the video-game market. In 1995 stage for the first time in its history Due to Ja- Nintendo showed further signs of distress when pan’s market segregation, NTT’s revenues cur- Square and Enix, two of Nintendo’s main devel- rently come solely from its home market. Despite opers, went over to Sony. However, when its size, the company remains uncommitted to Nintendo’s system was improved again in 1996 the kind of global telecommunications alliance and the Nintendo 64 became available in the or major merger that the world’s other big carri- United States, it outsold both the Saturn and the ers including AT&T, BT, Sprint, and MCI have PlayStation. sought. In September 1998 Nintendo introduced the Though less concerned with global markets, Pokémon game. The Pokémon franchise has be- NTT has developed new domestic services. In come a worldwide phenomenon, and ironically 1999, I-mode services were introduced by NTT has returned Nintendo to the sale of playing cards DoCoMo and IC public card telephones have and toys, which had been responsible for the com- also been introduced. Some international tel- pany’s initial success. ephone services have been established by NTT Communications and ADSL trial services have been initiated by NTT East and NTT West. Further reading NTT is currently investing in the next-genera- Sheff, D. (1993) Game Over, New York: Random House. tion of network operators. NTT said it will commit as much as 1100 million to Denver-based ALEXANDRA COHEN Verio, an ISP that has grown rapidly merging small US ISPs. Recently NTT sought and re- Nippon Telegraph and ceived telecommunications licenses in major Telephone markets including the United States, and it is an investor in a project to connect the United States The telephone company Nippon Telegraph and and China with 30,000 kilometers of fiber-optic Telephone Corporation (NTT) was established cable. on April 1, 1885. It currently has 195,000 em- The future goal of NTT is to work toward ployees, and a capital of ¥796 billion. creating new opportunities for its “information Since 1885, NTT has operated as a public tel- distribution” business in a variety of forms, not Nomura Securities 337 limited to the traditional telecommunications poor presence in the newly developed, more car- field but also including such efforts as construc- oriented suburbs of major cities. tion of platforms to safely and efficiently distrib- Marketing ineptitude also played a role. The ute videos and other types of content. To original Datsun logo was dropped in overseas accomplish this, NTT will seek to apply the markets in the mid-1980s, and a quirky advertis- R&D capabilities of the NTT Group, whose ing campaign hurt the launch of the luxury Infiniti high standards are recognized on a global scale, in the crucial US market. The firm had long been and mobilize the group’s full range of manage- involved in overseas production, in Mexico from ment resources to provide cutting-edge services 1960, in the US (Smyrna, Tennessee) from 1984 at lower prices. and in Sunderland, England from 1986. How- ever, its cars were often out of touch with local MARGARET TAKEDA markets; it reacted slowly to the collapse of the US subcompact car market after 1985. Its Smyrna Nissan factory ranked number one in several US production efficiency surveys, and a major new pro- Nissan Motor Co. began in a series of mergers duction center in Kyushu, Japan, leaves it with and acquisitions during the period 1925–34. Later relatively new plants. Such strengths have been alliances included producing British Austin cars offset by poor sales and overcapacity in all major under license in the 1950s, and the purchase of markets since 1992. Large losses led it to close Prince Motors in Japan in 1966. Nissan likewise its Zama plant outside of Tokyo in 1995, the first invested in a range of specialty assemblers in the Japanese producer to take such a step, and with- 1950s and early 1960s, such as Nissan Auto Body draw from assembly in Australia. Even though it (light trucks), Nissan Diesel (heavy trucks), and lost money in every year but one during 1992– parts firms such as Tokyo Radiator. Finally it 2000, it delayed restructuring. Renault’s takeo- came to control a number of its large dealers, ver in 1999 and the installation of the often unwillingly when the latter ran into man- Brazilian-born Carlos Ghosn as president agement problems. The largest domestic auto changed that: revamped marketing, additional producer from 1937 through 1962, it was then plant closures, and the sale of stakes in affiliate surpassed by Toyota, and while it did very well companies followed. With 2.5 million units world- during 1970–6, both domestically and as Japan’s wide output, Nissan remains a major producer, leading exporter, it lost market share almost con- but restructuring will likely drive it from its cur- tinuously thereafter. rent second place in the Japanese domestic mar- Some of Nissan’s long-term problems date to ket. a five-month labor dispute in 1953, resolved only through the formation of a new union. MICHAEL SMITKA That maneuver was supported by Kawamata Katsuji, who later dominated the firm as presi- Nomura Securities dent (1957–73) and chairman (1973–85). The conflict produced factions, with the union sup- Nomura Securities is one of Japan’s “Big Three” porting Kawamata but undermining his succes- domestic financial securities companies, which sors, such as Ishihara Takashi, who pioneered also includes Nikko Securities and Daiwa Secu- Nissan’s sales in the USA as well as the develop- rities. It was established in 1925 as a spin-off from ment of the highly successful Datsun Sunny the Securities Department of Osaka Nomura launched in 1966. The end result was poor coor- Bank Co., Ltd, which was founded by Tokushichi dination among departments—development and Nomura. Since the 1960s, Nomura has been the engineering did not work with marketing—and a largest of all Japanese financial securities compa- sales force that once refused to work Saturdays nies, and is the leader in almost all domestic seas a way to stress union prerogatives. Nissan’s curities business fields, including stock trading, domestic output peaked in 1980, and it entered bond sales, corporate bond underwriting, and the 1990s with a weak dealership network and a initial public offerings. 338 Nomura Securities

For the fiscal year ending March 2000, able peak in the late 1980s, Nomura was in- Nomura’s revenues were over a trillion yen, volved in several major scandals. In 1991, nearly double that of Nikko Securities (approxi- Nomura was implicated in illegal loss compensa- mately 650 billion yen) and Daiwa Securities (ap- tion of over ¥26 billion to favored large custom- proximately 530 billion yen). Because of its ers but not to small individual customers. Also, overwhelming size and power in Japan, Nomura at that time, financial loans to yakuza, or Japanese is occasionally nicknamed “Gulliver Nomura”, organized crime gangs, came to light. In particu- after the “giant” in Swift’s satirical novel. In ad- lar, the scandal in 1997 had a huge impact on dition to 124 branch offices in Japan, it also has Nomura and other major Japanese securities 105 group companies engaged in activities related companies. In that year, illegal payoffs to to the securities business, such as banking, trusts, sokaiya, or corporate racketeers, were uncov- information services, consulting, real estate, lease ered. The Securities and Exchange Surveillance and rental. Group member companies of particu- Commission of Japan indicted Nomura Securi- lar note include Nomura Research Institute (the ties and its executives. Former managing direc- world’s largest commercially-owned think tank), tors, as well as people at banks who provided Nomura Asset Management Co., Ltd. (Japan’s financing to the sokaiya for the purchase of largest asset management firm), and Nomura Nomura Securities shares, were arrested on sus- Securities International (NSI). picion of violating the Securities and Exchange Born in 1878, Tokushichi Nomura was the Law for illegal compensation of losses and the son of an Osaka moneychanger. In 1908, he left Commercial Law for illegal payoffs to sokaiya. on a five-month trip to the United States and Afterwards, executives of several major securi- Europe to understand the Western dealing sys- ties companies and banks, including the former tem. After this visit, he established his own Nomura president Hideo Sakamaki, were ar- clique of financial companies called Nomura rested. This series of events developed into the zaibatsu. In 1925, Nomura Securities was spun scandal that shook the financial and securities off from the Osaka Nomura bank, which was industry in Japan, with payoff amounts reaching the main bank of the Nomura zaibatsu (see main ¥700 million in total. A different sort of chal- bank system). By the early 1960s, Nomura had lenge faced by Nomura in 1998 was the enor- outstripped Yamaichi Securities, the leading mous business loss incurred by its US subsidiary company at that time, to reach the top of the NSI. A sudden fall in the market prices of real Japanese financial securities industry (Yamaichi estate bonds along with holdings of problematic Securities would later file for bankruptcy in Russian national loan bonds led to staggering 1997). Nomura employees were put under losses of ¥160 billion by the subsidiary. heavy pressures to achieve sales targets. Moreo- Following Nomura Securities International’s ver, performance appraisals for promotions and (NSI) registration as a member of the Boston pay raises were carried out on the basis of an Stock Exchange in 1969, Nomura has been ac- extensive merit system. In those days, the work tively expanding abroad. By 2000, the number environment in a Nomura office was often ex- of Nomura group companies located in North pressed as suuji wa jinkaku, meaning that a person and South America was twenty-six, with thirty- was known by his numbers or results. Due to seven group companies in Europe, and twenty- their long work hours, Nomura’s employees three group companies in Asia/Oceania. Within were described as “Seven-Eleven”. In those days, the Japanese securities industry Nomura is the it was often said that a stock pushed by Nomura recognized leader in international business. As was sure to go up. By these means, Nomura an example of its international activity it is known gradually established itself as a giant among in Vietnam for helping to establish a securities Japanese financial securities companies. At the market as well as commercial corporations. Be- height of the 1980s bubble economy, the cause of its size and extensive overseas presence, number of Nomura customers reached upwards Nomura has become one of the more well known of five million. Japanese business names to people of other coun- After the Tokyo market passed its unsustain- tries. Norin Chukin Bank 339

More recently, according to a business plan founded and became dean of the Graduate School announced in October 1998, Nomura has been of Knowledge Science. His book with Hirotaka trying to establish its identity as the top invest- Takeuchi, The Knowledge-Creating Company: How ment bank in Japan. The plan identified the fol- Japanese Companies Create the Dynamics of Innovation, lowing four areas as cores of its business: global won numerous book-of-the-year awards in 1997 bonds, global stocks, global investment banking, and 1998. and domestic retail financial services. Nomura Nonaka’s theoretical and empirical work on has intensively invested its management resources how knowledge is created within organization had in these fields. Building on its domestic base and a profound effect on theories of organizational aiming at becoming an important global player, learning. In major departure from the dominant Nomura also has been working to reorganize its view, first propounded by Nobel laureate Herbert international business and to improve the effi- Simon, of organizations as “information proces- ciency of all its business operations. sors,” Nonaka argued the organizations didn’t simply process knowledge, but rather they created knowledge. Moreover, it was the knowledge Further reading creating activities of organizations that gave them Alletzhauser, A.J. (1990) The House of Nomura: The In- a competitive edge in the market. Though he side Story of the Legendary Japanese Financial Dynasty, argues for the universality of his theories of New York: Arcade/Little, Brown & Co. knowledge creation and management, Nonaka’s Arora, D. (1995) Japanese Financial Institutions in Europe: thinking is firmly rooted in an understanding of International Competitiveness of Japanese Banks and Secu- the product development processes common to rities Companies, Amsterdam: Elsevier. Japanese organizations. Fitzgibbon, J.E., Jr. (1991) Deceitful Practices: Nomura Se- curities and the Japanese Invasion of Wall Street, New See also: firm strategies for technology York: Carol Publishing Group. Kimura, Y. and Pugel, T.A. (1993) “The Structure and Performance of the Japanese Securities Industry” Further reading in I.Walter and T.Hiraki (eds), Restructuring Japan’s Financial Markets, Homewood, IL: Irwin. Nonaka, I. and Takeuchi, H. (1997) The Knowledge-Cre- Nomura Securities Company (1986) Beyond the Ivied ating Company: How Japanese Companies Create the Dy- Mountain, Tokyo: Nomura Securities. namics of Innovation, New York: Oxford University Press. HIROTAKA AOKI ALLAN BIRD

Nonaka, Ikujiro Norin Chukin Bank A leading scholar in the field of knowledge creation within organizations, Nonaka obtained a Japanese cooperatives, after the enactment of the B.A. in political science from Waseda University Industrial Cooperative Society Law in 1900, de- in 1958 and a Ph.D. in business administration veloped mainly in rural areas as societies under- from the University of California, Berkeley in taking credit, marketing, purchasing and 1972. On the Faculty of Social Science at the utilization activities in parallel. In 1923, the Cen- National Defense Academy from 1977–9, he then tral bank for Industrial Cooperatives, the prede- joined the Institute of Business Research, cessor of the Norin Chukin Bank, was founded Hitotsubashi in 1979, serving as director of the for the purpose of expanding credit operations. institute from 1982 to 1995. In 1997 he became Its name was officially changed to the Norin the first Xerox Distinguished Professor of Knowl- Chukin Bank in 1943 when forestry cooperatives edge at the Haas School of Business, University joined the Bank. of California, Berkeley In the same year he After the end of the the Second World War, 340 Norin Chukin Bank functional associations such as agricultural coop- curing fertilizers, feedstuff, agricultural chemicals eratives (nokyo), fishery cooperatives (gyokyo), for- and machinery as well as for the food processing estry cooperatives (shinrinkumiai), consumer industry. Other operations include inland ex- cooperatives (seikyo) and credit unions replaced change, international business, and securities cooperative societies. Nokyo, gyokyo and transaction. For international operations, the shinrinkumiai, which support the primary indus- Bank engages mainly in loan extension and try and their respective federations at the prefec- money market transactions from its branches in tural level, engaging in credit-extension New York, London, and Singapore. Its locally business, made capital contributions to the established subsidiaries engaging in securities Norin Chukin Bank, and the Bank made a fresh business in London and Switzerland operate with start as the financial institution for the coopera- central focus on bond issuance and debt securi- tive organizations that operate credit-extension ties flotation. business. The Bank has fourteen subsidiaries and two The core of the Bank’s business consists of affiliated companies, which together form the financial services to nokyo, gyokyo, shinrinkumiai and Norin Chukin Group, and provide securities their respective federations. The Bank’s primary business, trust services, lease operations and other sources of funds are deposits, the majority of financial services. which come from the cooperative system, or de- Finding ways to wage competition against large posits obtained from members of Nokyo and private-sector city banks in the likelihood of fur- other cooperatives. The Bank is also authorized ther progress in financial liberalization represents to issue bank debentures under the Law of Cen- the major challenge that lies ahead in the future tral Cooperative Bank for Agriculture, Forestry for the Bank. Elimination of high cost structure and Fisheries, and raise funds by selling those associated with the nature of cooperative bank’s bank debentures to individuals and institutional activities centering on retail business character- investors. ized by time deposits and long-term loans is an- Loans relating to agriculture, fisheries and for- other challenge for the future. estry constitute an important part of the Bank’s business which, consist mainly of loans for pro- KENJI ISHIHARA O

office ladies social veneer, embodying the traditional feminine roles. Jobs are more ornamental than substan- “Office ladies” (OL) refers to young unmarried tial. They remain “ladies” and have decorative women who work full time in assistant clerical value as receptionists or office assistants. They occupations. The term emerged during the rapid answer telephones, operate photocopy machines, expansion of a tertiary sector (service and trade) serve tea, and clean the office desks. Office la- in the 1960s and connotes glamour and freedom dies are recruited immediately after high school for unmarried young women whose life course or junior college. They typically resign from work is in a transition from youth (school graduation) either upon marriage or the birth of the first child. to adulthood (marriage). Working as an OL Pressure for resignation comes from strong so- means a time of “waiting” and preparation for cial expectations that women are supposed to put the “real life” that comes after marriage. It is a their family first. Such pressure is sometimes time to see the world, and to earn and save money made through employer suggestions that they for marriage. For this reason, the position is de- retire, a practice known as kata-tataki (tap on the scribed as koshikake, temporary bench. The pri- shoulder). With the passage of the Equal Em- mary goal of working as an OL is to meet ployment Opportunity Law (EEOL) in April prospective husbands who can bring a comfort- 1986, however, the suggestion that women retire able middle-class lifestyle, or alternatively to re- at marriage is no longer legal. turn to their home towns to make a better There is no career mobility but the lack of a marriage match. job ladder is for the most part irrelevant. The The contribution of office ladies to Japan’s clearer understanding of the significance of OL GNP is small, especially when compared to that requires a larger structural and historical picture. of married women. Young unmarried women During the rapid economic development of the constitute less than one-third of the total female 1960s, the (new) middle class expanded, and workforce, but they make up nearly 50 percent along with it an image of the ideal housewife who of female clerical workers. Women’s representa- is fully committed to the family. Marriage was tion in clerical occupations declines sharply with seen as a ticket out of labor-intensive agricultural age and marriage. Married women, whose jobs or textile mill work or unrewarding office work, are more intermittent, are likely to work in pro- as well as an entry into the security of a middle- duction, both skilled and unskilled, and sales jobs. class lifestyle. The new ideology situated women They provide a vital supply of substantial but as nurturers of children, supporters of husband’s cheap labor and act as a buffer in the overall career (or the family business), and caregivers of economy. aging parents. In contrast to the type of work performed by Currently Japan faces an uncertain trend. The married women, the position of OL provides a strong normative and behavioral consensus that 342 Ohmae, Kenichi

existed about women’s roles is crumbling. There Women, Berkeley CA: University of California Press, is greater awareness among women that employ- 244–70. ers continue to discriminate against women who Carter, R. and Dilatusb, L. (1976) “Office Ladies,” in do not intend to leave work upon marriage and J.Lebra, J.Paulson and E.Powers (eds), Women in those with career ambitions. During the 1980s Changing Japan, Stanford, CA: Stanford University and 1990s, women began to postpone marriage. Press, 75–88. As the economy opened up more job opportuni- Clammer, J. (1997) Contemporary Urban Japan, Oxford: ties, women’s life options widened, and the need Blackwell. for rushing into marriage for economic security Fujimoto, T. (1994) “Office Lady Syndrome: A Gen- decreased. Marriage that only increases their fam- der Comparison of Job Attitudes Among Japanese ily responsibilities and puts an end to their free- Clerical Workers,” in Best Papers Proceedings, Asso- dom is no longer attractive. The average age of ciation of Japanese Business Studies, 7th Annual marriage for women rose from twenty-five in 1975 Meeting, Vancouver, British Columbia, Canada, to twenty-eight in 1995, and in the Tokyo area, it 183–207. is thirty-one. Women on average are having 1.6 Inoue, T. and Ehara, Y. (eds) (1995) Women’s Data Book, children, one of the lowest birth rates in the world. Tokyo: Yuhikaku. The celebration of single lifestyle among office Lo, J. (1990) Office Ladies/Factory Women: Life and Work at ladies gave rise to a popular phrase, “office lady a Japanese Company, New York: M.E. Sharpe. syndrome.” It describes the orientation of office Ogasawara, Y (1998) Office Ladies and Salaried Men: Power, ladies geared to dining out, fashion, leisure, and Gender, and Work in Japanese Companies, Berkeley CA: travel. University of California Press. Studies are divided in the interpretation of the Saso, M. (1990) Women in the Japanese Workplace, Lon- “office lady syndrome.” Some observers consider don: Hilary Shipman. it a product of the bubble economy of the 1980s. Usui, C. (1994) “Do American Models of Female Ca- According to this view, women who were pam- reer Attainment Apply to Japanese?” Occasional pered by their parents during the bubble era de- Paper Series No. 9408, Center for International veloped a strong sense of money and Studies, University of Missouri-St. Louis. consumption orientation without long-range life White, M.I. and Barnet, S. (1995) Comparing Cultures, plans or a career orientation. This position sug- Boston: Bedford Books of St. Martin’s Press. gests the pursuit of conspicuous consumption is more consistent with existing patterns of gender GHIKAKO USUI differentiation than it is with the advancement of new roles for women. Alternatively some suggest that a “quiet revolution” is taking place in Ohmae, Kenichi this group of women involving the postponement of marriage. According to this view, young Kenichi Ohmae was born in the Fukuoka prefec- women are disillusioned with Japanese men and ture in 1943. He received his bachelor’s degree marriage, question the wisdom of “traditional” at Waseda University, his master’s degree at To- women’s roles, and are more selective in their kyo Institute of Technology and his doctorate life course options. This perspective views women degree at Massachusetts Institute of Technology. as quiet initiators of social change, including the After working for Hitachi Limited for two years re-negotiation of gender roles. (1970–2) as an engineer on nuclear development, Ohmae joined McKinsey & Company Incorpo- See also: salaryman rated in 1972. He received the Twelfth Keizai-kai Taisho Tokubetsu-sho (Special Prize at the Eco- nomic-World Grand Prize) in 1986, and became Further reading the chairman of McKinsey & Company Incorpo- Awaya, N. and Phillips, D. (1996) “Popular Reading: rated Japan in 1989. He resigned from the com- The Literary World of the Japanese Working pany in 1994. Women,” in A.Iwamura (ed.), Re-imaging Japanese Ohmae is well known as a theorist of the open- one-to-one marketing 343 ing of the Japanese market. His books include them could expand sales. In parallel, the growth The Evolving Global Economy: Making Sense of the New of the service industry prompted a wide range of World Order, The Invisible Continent: Four Strategic business activities to become ever more customer- Imperatives of the New Economy, and The Borderless oriented. In the late 1980s, the notion of customer World: Power and Strategy in the Interlinked Economy. satisfaction (CS) gained popularity and a number of CS surveys were conducted so as to gauge a MARGARET TAKEDA company’s overall performance from a broader AKI MATSUNAGA point of view. In 1995, the translation of Peppers and Rogers’ one-to-one marketing book The One to One Future (1993), was published. The new term “one-to-one marketing” was then One-to-one marketing relates to the pinpointing interpreted as a long-awaited solution to the of specific needs of individual customers, and it above-noted agendas. Peppers and Rogers fore- is best understood as the opposite of mass mar- see the possibility of maximizing each custom- keting. The concept of marketing was first intro- er’s satisfaction through the use of computers, duced in Japan in the 1950s, at the initial stage of from which the sales force can retrieve a large economic growth, and deemed particularly rel- amount of past and new information, previously evant to the buoyant consumer goods industry unavailable and not possible to accumulate, such which applied methods of mass merchandising as requests from various customers, data on past during the 1960s. In the 1970s, however, eco- purchases, inclinations, etc. With a continuous nomic growth came to an end, especially after renewal of the database on a customer-by-cus- the oil shock. In the face of a slowdown of the tomer basis, companies will, argue the authors, Japanese economy the traditional policy of be able to increase their opportunities for con- swamping the market with a uniform product, tact with the customers over a lifetime than would which was based on the notion that the market competitors. Companies would thus retain cus- was composed of unspeciflc customers with ho- tomers for a long period, which, in turn, would mogenous needs, no longer applied. It was contribute to higher market shares. One-to-one thought, instead, that the market had become marketing, therefore, is made possible by com- heterogeneous, requiring differentiated products puter technologies that provide databases, at corresponding to the needs and characteristics lower cost than before, for developing new meth- of customers forming sub-sets of the entire mar- ods to contribute to the customer satisfaction. Its ket (segment marketing). aim is to maximize the time and opportunity share Segment marketing had three variations. of individual customers. Firstly, target marketing related to methods for However, database marketing with the use of approaching and exploiting a particular segment. computer has been developed in the direct mail Secondly differentiation marketing aimed at sev- industry and the retail industry through the is- eral segments simultaneously which Japanese suance of point cards and credit cards, which can automotive producers and leading publishing be regarded as one-to-one marketing tools. With companies typically adopted for their product the advent of the information society however, lineups. Thirdly focus marketing was specifically the Internet has become a powerful transaction employed in regard to a narrowly defined seg- channel of business to consumer (B to C) mar- ment. keting, as exemplified by the popularity of As the consumer market in Japan was thought Amazon.com. to have matured, segment marketing became ir- The term “one-to-one marketing” in Japan relevant, as it was believed that the entire market tends to be used in a broader context, and also was composed of segments within which cus- applied to approaching specific customers for a tomer needs were still homogeneous. It was sub- relatively long period of time. For example, a sequently argued that sorting out the specific housing company that approaches its customers needs of individual customers and responding to on the occasions of periodic maintenance and 344 Ono, Taiichi then proposes rebuilding or additions is some- Further reading times referred to as using one-to-one marketing. Cusumano, M.A. (1985) The Japanese Automobile Indus- The term is also used within the automotive re- try: Technology and Management at Nissan and Toyota, tail industry to designate sales efforts to induce Cambridge, MA: Council on East Asian Studies, current users to choose the same manufacturer’s Harvard University. car for replacement. Sales promotions (SP) with a view to captur- WILLIAM M.TSUTSUI ing high yield customers are commonly used by door-to-door sales and the department store in- organizational learning dustry (see department stores), and they are also viewed as a form of one-to-one marketing. A When organizations and its members acquire uniquely Japanese example of one-to-one mar- new knowledge and new insights, organizational keting are Buddhist temples that apply the no- learning occurs. To sustain competitive advan- tion to the management of their relations with tage in the global market, organizations should families and persons affiliated with the sect. maintain effective organizational learning and continuously overcome any obstacles to learning. See also: marketing in Japan Although the processes of the organizational learning cycle itself do not differ much, the learning methods of Japanese firms differs from those Further readings of US firms in a few essential points, and this in Peppers, D. and Rogers, M. (1993) The One to One Fu- turn leads to other differences. ture, New York: Doubleday; trans. T.Iseki, ONE to Historically theories of organizational learn- ONE Maaketingu: Kokyaku Rireishon Senryaku. Tokyo: ing appeared around the early 1960s. These early Daiyamondosha, 1995. theories were based on studies of organizational adaptation. Organizational adaptation simply SHINTARO MOGI means defensive adjustment to gaps, for example, the gap between the aspiration level and the Ono, Taiichi real performance of an organization. On the other hand, the more recent definition of organizational Taiichi Ono (Ohno) is an engineer and execu- learning includes new understanding of causal tive who guided the development of the Toyota chains and changing shared beliefs and values of production system. A graduate of Nagoya organizational members. Firms that want to suc- Higher Industrial School, Ono worked for ceed in their business need continuous change in Toyoda Spinning before joining Toyota Motors existing and obsolescing values. In other words, in 1943. Influenced strongly by Fordist mass pro- they need organizational learning. As a result of duction and Frederick Winslow Taylor’s theories this change in perspective, the study of organiza- of scientific management, Ono was dedicated to tional learning has become more popular. eliminating waste, increasing labor productivity It was around the year 1990 that the term and cutting costs on Toyota’s production lines. “organizational learning” became a subject of Through a process of constant analysis and ex- great interest among both academic people and perimentation on the shop floor, Ono adapted businesspeople. The prominent work of Peter American manufacturing models to Japanese re- Senge’s The Fifth Discipline played an important alities, introducing a series of production man- role in popularization of this term. He focused agement innovations between the late 1940s and on a “learning organization” and the applied theo- the mid-1960s. These highly successful methods, ries of organizational learning. Because his dis- including multi-machine handling, small-lot pro- cussion on it attached importance to duction, the just-in-time concept, and the kanban implementation and was perceived as useful, the system, revolutionized traditional manufacturing concept was welcomed by businesspeople. An- practices and were widely emulated both in Ja- other reason for the rapid diffusion of this term pan and abroad. was that executives of US firms noticed the strong organizational learning 345 power of effective organizational learning for plan developed in the previous phase. The third gaining competitive advantage. They regarded phase is “reflection.” People conduct feedback, the overwhelming victory of many Japanese examining their action and inquiring as to manufacturing firms in the 1980s as due to a whether or not it is consistent with organizational learning-oriented corporate culture and to daily values and vision, and if it has been carried out learning activities on the shop floor. correctly The forth is “memory,” during which Many Japanese manufacturing firms had long the learning acquired from the three previous made efforts towards quality management and phases is shared with other organizational mem- the development of education systems for their bers. Memory is also the starting point of the employees. A typical example can be found in next learning cycle. Effective organizational learn- the activities of quality control circles formed ing can be maintained when this learning cycle by blue-collar workers, which became very popu- continues in iterative fashion without interrup- lar from the late 1960s to the mid-1970s. Mem- tion. The so-called PDCA (Plan-Do-Check-Ac- bers of QC circles decided upon a common theme tion) cycle is another way of understanding the by themselves. Themes aimed at the improve- learning cycle. ment of the performance of both the team and Argyris and Schön (1978) note that there are the corporation. Because QC circles were not two levels of organizational learning. The first activities maintained by compulsion of manag- level is single-loop learning, which occurs when ers but by means of individual pursuit of self- organizational members do not question organi- fulfillment, motivation for learning through circle zational values or approaches, but simply detect activities was high. The learning-supportive at- and correct errors. Kaizen is an example of sin- mosphere of Japanese firms also helped employ- gle-loop learning. The second level of organiza- ees to participate in the activities positively. For tional learning is double-loop learning. Members example, executives and managers were ready engage in double-loop learning when they ques- and quick to adopt many new ideas proposed by tion or explore organization values and perspec- circle members. Their attitude was useful in en- tives, replacing obsolete value with new, more hancing employees’ perceptions that each was an appropriate ones. The difference between the two active member of the firm and that members’ ways of learning is in the method of reflection ideas could directly improve corporate perform- that occurs during the third phase of the organi- ance. As whole, these activities enabled Japanese zational learning cycle. When members regard firms to have continuous and effective organiza- the cause of a problem as not embedded in or- tional learning. ganizational values, but rather as a behavioral It is difficult, however, for any firm to main- error, they engage in single-loop learning. When tain effective organizational learning practices. reflection leads to a replacement of existing or- The capability that firms need is always chang- ganizational values with a new one, then double- ing in concert with changes in a firm’s environ- loop learning occurs. Both types of learning are ment. Some Japanese firms that were successful important for organizations. Effective single-loop in the 1980s now confront many difficulties, learning is useful to improve the daily task per- which hinder desirable organizational learning. formance, while effective double-loop learning Some of these obstacles are common to all firms, enables organizations to adopt innovative ideas and some are specific to Japanese firms. thereby transforming themselves. Though the same learning cycle can be applied to both, there are several intrinsic differ- The process of organizational learning ences between Japanese and US firms. The first difference is found in the main entity of organi- The cycle of organizational learning generally zational learning. In US firms, top management consists of four phases. The first phase is “plan- tends to engage in double-loop learning much ning,” in which people clarify what they learn or more than other layers of the organization be- must learn in the organization. At the second cause of a top-down management style. Con- phase “action,” people attempt to carry out the versely middle and lower level personnel tend to 346 organizational learning

be more involved in single-loop learning. The tween an apprentice and a master craftsman, merit of this style is rapid execution and diffu- employees must carefully observe their bosses or sion of the learning results acquired by top man- other skilled persons and develop through ob- agement. The downside is that the firm’s fortunes servation and “intuition” the ability to do their are directly affected by the top level’s ability or work. In other words, most of the important inability to realize double-loop learning. knowledge is reserved and transferred as tacit In contrast to US firms, most Japanese firms knowledge in Japanese firms. The success of have bottom-up decision-making processes. transferring tacit knowledge greatly depends on Based on their daily experiences, employees at the capability of the receiver, that is, the user of the front-line make proposals to those above organizational shared knowledge. If the receiver them. When proposals are good, managers are acquires as much learning through accessing the ready to receive them as the result of organiza- tacit knowledge of their boss and organization tional learning and diffuse the new knowledge and adds new insights of their own, the receiver throughout the organization. In addition, the role can experience both single-loop and double-loop of middle management in learning is quite im- learning. However, in the case of a poor or inef- portant for Japanese firms. They pull critical in- fective receiver, even single-loop learning can be formation out of lower employees and translate difficult to achieve, resulting in significant loss in this information into a form accessible to the top potential organizational knowledge, and at a high management of the organization. They also com- cost in resource investment. municate upper management’s requests to lower levels, again after transforming such requests into an accessible form. In this sense, the middle man- Obstacles to effective organizational ager’s function is to act as a catalyst of effective learning organizational learning. If middle managers function well, both single-loop and double-loop learn- There are several obstacles to effective organiza- ing will effectively appear at any place within the tional learning. Some are common to every or- organization. The merit of this style of organiza- ganization, while others are unique to US firms tional learning is that the organization is strongly or Japanese firms. The types of obstacles firms supported by every employee who is highly learn- confront depend on differences in their approach ing-oriented. The demerit is that an organization to learning, as noted above. An example of a com- can be severely damaged by the failure of middle mon obstacle is that, as a result of organizational management to adequately carry out this func- culture, most organizational members are reluc- tion. tant to change present conditions or to accept new The second difference between Japanese firms ways of doing things. In such a culture, mem- and US firms is the way they transfer new val- bers lose opportunities to learn, because people ues and knowledge. In US firms, employees only notice a problem in existing practices or record most of their new knowledge in a formal values when confronted with a different perspec- document, which is so-called explicit knowledge. tive or way of doing things. In addition, organi- Because of this, anybody who reads the docu- zations which have such a culture produce ment can imitate and utilize it at once. In the case members who dislike change or non-routine that organizational members transfer their knowl- events, thereby limiting the effectiveness of em- edge and values as explicit knowledge, it is also ployee training and socialization systems. Because difficult to realize double-loop learning because they take existing values and practices for there is less chance to add new values to existing granted, new approaches and proposals are of- values. At the same time, the possibility of effec- ten rejected and the person proposing the change tive single-loop learning is high because the loss is gradually discouraged by repeated refusal. of knowledge through transfer is a minimized. When people hesitate about doing challenging In contrast, the really important knowledge— things, there are fewer and fewer chances to learn values and orientations—for Japanese firms tend new things. Under this condition, the organiza- not to be explicit. Just like the relationship be- tional learning cycle does not function, so outplacement 347 neither single-loop nor double-loop learning can Further reading occur. When there is a communication block Ando, F. (2001) Soshiki gakusyu to soshiki-nai tizu (Orga- between departments of the firm, each depart- nizational Learning and Navigation Maps in the ment tends to develop a defensive mindset, lead- Organization), Tokyo: Hakuto Shobo. ing departmental members to reject ideas from Argyris, C. and Schön, D.A. (1978) Organizational Learn- outside their own department. In order to solve ing: A Theory of Action Perspective, Reading, MA: this problem, firms need to change organizational Addison-Wesley culture through the development and use of cross- Hisamoto, N. (1998) Kigyo-nai roshi kankei to jinzai keisei functional teams. (The Labor-Management Relations in the Organi- The absence of a clear corporate vision can zation and Human Development), Tokyo: also be a critical factor in obstructing organiza- Yohikaku. tional learning for both Japanese and US firms. Nonaka, I. and Takeuchi, H. (1995) The Knowledge-Cre- However, the reasons are different for the two ating Company, Oxford: Oxford University Press. types of firms. In the case of US firms, the ab- Senge, P. (1990) The Fifth Discipline, New York: sence of vision prevents executives from attract- Doubleday. ing employee acceptance and enthusiasm, thereby reducing employee contributions to the FUMIE ANDO organization. Because they lack the power to motivate organizational members, they cannot outplacement achieve effective organizational learning. On the Outplacement is a way to adjust a company’s other hand, the absence of vision in Japanese human resources by encouraging employees to firms exerts a bad influence mainly on middle transfer their jobs through use of outside place- managers in Japanese firms, because it makes it ment corporations. It has been firmly established difficult for them to understand the future orien- in Japanese economy and society from the 1990s. tation of the organization or what they should Outplacement requires employees to find and do to convey a motivating vision to lower level transfer to jobs beyond those that might be pos- employees. When middle managers do not func- sible in subsidiaries and affiliated firms. It is very tion well as catalysts of organizational learning, different from the manner in which large Japa- neither the top management nor the lower level nese companies had traditionally managed hu- achieves adequate learning. Generally Japanese man resource adjustments. The primary executives, in comparison with US executives, difference is that outside personnel service com- do not explicitly express corporate vision and panies mainly help employees find a job. beliefs. This lack of explicitness needs to change if Japanese firms are to promote enhanced learn- The conventional approach to human ing activities. resource adjustments One of the obstacles specific to Japanese firms is the possible deterioration of employees’ learn- The conventional characteristics of the Japanese ing capabilities. Recently it has become impor- employment system are permanent employment tant for Japanese firms to try to improve the and the seniority system. Although large enter- quality of white-collar workers. If their capabil- prises adopted these systems, the adjustment of ity of receiving tacit knowledge or of translating human resources was still carried out for middle- frontline employees’ requests into adequate in- aged and older employees. Older employees not formation is low, most of the tacit knowledge will critical to the firm were required to permanently be gradually lost and the organization will lose leave their positions and work for subsidiary or its competitive edge in international markets. To affiliated companies (tenseki) or to temporarily avoid this, Japanese firms must upgrade the qual- transfer to subsidiary or affiliated companies ity of their employee training activities. At the (syukkou). Tenseki means employees resign their same time, they need to transform tacit knowl- position, and work for the subsidiary or affili- edge into explicit knowledge that all members ated companies, so it is essentially a job change. can use. Syukkou refers to when employees work for 348 overseas business of small and medium-sized enterprises subsidiary or affiliated companies, and receive a with white-collar workers after a revision to the salary from them, but employees continue to be- law in 1967. However, at that time, such firms prolong to the original company. Middle-aged and vided services primarily for temporary or part-time older employees tend to be transferred to subsid- workers such as housewives returning to work. iary or affiliated companies for syukkou. However, Until 1997, when the law was again revised, white after a few years of syukkou, this usually turns into collar placements totaled less than 5 percent of all tenseki. In these situations, the Japanese company placements. In the aftermath of the 1997 revisions secures employees’ positions without the aid of there was immediate and rapid growth in the personnel service companies. number of personnel services companies operating in Japan. With structural changes in the Japanese The influence of economic and social change economy and society demand for outplacement The employment system in Japanese companies services has increased significantly. Because began to change in the 1990s because of changes outplacement is often part of a company’s larger in the economic structure and the aging of soci- human resources management strategy it is some- ety. With the collapse of the bubble economy, times described as restructuring (jinin sakugen). the Japanese economy entered a period of matu- The emergence of out-placement as a more widely rity Under economic stagnation, the need for accepted practice and the emergence of person- companies to achieve enhanced efficiencies in- nel services companies signify an important shift creased, which made it difficult for companies to in the human resource practices of Japanese firms. maintain the long-term employment and senior- The extent and permanence of this shift and its ity system. Though some sectors of the economy ultimate impact on traditional personnel practices such as computer manufacture and information remains to be seen. services, were experiencing labor shortages, most other industries had a labor surplus. Conse- Further reading quently there was a severe need to redistribute Abegglen, J.C. and Stalk, G. (1985) Kaisha: The Japa- human resources out of some firms and indus- nese Corporation: The New Competition in World Business, tries and into others. At the same time, with the New York: Basic Books. aging of society it was difficult for older workers Cole, R.E. (1979) Work, Mobility and Participation: A Com- to secure employment opportunities. In response parative Study of American and Japanese Industry, Ber- personnel service companies began to emerge to keley CA: University of California Press. help struggling firms find positions for redundant Dore, R.P. (1973) British Factory Japanese Factory: The employees. Origins of National Diversity in Industrial Relations, Ber- keley CA: University of California Press. Legal issues and obstacles Takanashi, A. (ed.) (1994) Kawaru Nihongata koyou (The Change of the Japanese Employment Style), Tokyo: Historically labor restructuring and mobility has Nihon Keizai Shinbunsya. been handled mainly buy public agencies under Yashiro, N. (1997) Nihonteki Koyou-Kankou no the jurisdiction of the Minister of Labor. This was Keizaigaku:Roudou-Shijou no Ryudouka to Nihon-Keizai codified in the Syokugyou Antei Hou (Occupa- (Economics of Japanese Employment Custom: La- tional Security Law). These agencies focus on blue- bor Market Mobilization and Japanese Economy), collar workers, so that when labor restructuring Tokyo: Nihon Keizai Shinbunsya. and redistribution began to occur among white- collar workers, they lacked sufficient knowledge MASANORI YASUMOTO or skill to adequately respond. They had difficulty addressing the variety of industries involved and overseas business of small and me- the overall volume of white-collar workers in need dium-sized enterprises of new positions. As a consequence, private personnel services began to appear. Personnel serv- Japanese small and medium-sized enterprises ices had initially been granted permission to work (SMEs), especially manufacturing firms, have overseas business of small and medium-sized enterprises 349 been moving production offshore due to the SMEs interested in business tie-ups with foreign strength of the yen, low-priced imports, and the firms. JASMEC also provides guidance and sup- abundance of inexpensive labor overseas, espe- port for overseas expansion and procurement of cially in Asia. Among manufacturers with fewer parts and materials in the international market. than fifty employees, only a small number were They conduct overseas training services for per- operating abroad in the 1970s. However, the num- sonnel and management as well as provide loans bers of SMEs operating overseas has been climb- to SMEs. ing steadily since the 1980s. A 1997 JETRO survey found 57 percent of Pressure from large businesses for SMEs to SME respondents already had, or were planning, lower prices has also caused medium and small overseas operations. Of those planning to go oversized companies that supply the electronics in- seas, 57 percent said they are looking to enter an dustry and automotive industry in Japan to look ASEAN country because of political and social overseas for sourcing parts and manufacturing. stability In contrast, the potential domestic mar- The need for these SMEs to find foreign part- ket attracted Japanese SMEs to China (56 per- ners is greater than ever. SMEs, however, face cent) and India (59 percent), while in Hong Kong hurdles of language barriers and concern about it was the infrastructure that was most attractive red tape when expanding their businesses over- (40 percent). As mentioned earlier, one reason seas. Private and public-sector organization pro- SMEs go overseas is for the inexpensive labor. grams are helping Japanese SMEs stake a more Japanese SMEs in Asians countries have found global approach to their businesses. For exam- that China and India have lower wages than ple, since 1994, JETRO (Japan External Trade ASEAN countries, while Hong Kong and Singa- Organization) has an advisory program to help pore have the highest wages. One of the difficul- SMEs in Japan find import and export partners. ties SMEs face overseas is procuring enough The purpose is to encourage grass-roots level materials and supplies. One-third of Japanese operations. SMEs in ASEAN countries report that 50 per- The major destinations for Japanese SMEs cent of raw materials and supplies are sourced have been China and the United States. In 1995 locally. This compares with only 16.4 percent in SME foreign direct investment (FDI) was 783 China, but is below the 67.9 percent reported by projects. FDI by region included 434 projects in firms in India. Overseas business was seen as a China, 109 in ASEAN (Association of Southeast good investment strategy in ASEAN (50.4 per- Nations), 55 in Asian NIEs (Newly Industrial- cent), Hong Kong (65.8 percent), and Singapore ized Economies), 15 in other Asian countries, 30 (61.6 percent). Only 19.9 percent of the respond- in Europe, 103 in North America and 37 in other ents planned to increase research and develop- countries. Most of the FDI has been in manufac- ment overseas, but they were planning to increase turing (573 projects in 1995), followed by com- production in the Philippines (76.2 percent), In- merce (59) and service (31). Sixty percent of these dia (75 percent), and Indonesia (71.6 percent). overseas manufacturing operations have been Many of these firms are also exporting in ASEAN joint ventures. In China most ventures have been (94.1 percent). Thirty-one percent of respondents production operations, while in ASEAN coun- stated that at least 50 percent of their exports went tries Japanese SMEs are involved primarily in to other ASEAN countries. The findings of this processing and assembly. To assist SMEs with survey found that 62.7 percent of the respond- overseas business, JETRO has established Local ents were profitable in 1997, down from 68 per- to Local Initiatives for Mutual Industrial Devel- cent in 1995. opment. This program brings together regional The major problems cited by these firms were level groups and SMEs in Japan and overseas. rising local wages and labor relations. Country- Since 1993, JASMEC (Japan Small and Medium specific problems include a complicated tax sys- Enterprise Corporation) has been expanding tem in China, and difficulties in accessing capital ways it can assist SMEs in internationalization. in India. International advisors who have extensive inter- Compared to large firms, it is more difficult national business experience provide advice to for SMEs to expand into foreign markets. To 350 overseas education

offset these difficulties, groups such as the Osaka another country. The Japanese usually look on Global Business Opportunities Convention (G- this experience favorably as long as the student BOC) assist Japanese and foreign firms in find- is able to fit back into the Japanese education sys- ing partners. The G-BOC, held under the tem upon return to Japan, something that can be auspices of JETRO, MITI (Ministry of Inter- difficult given strong social pressures for confor- national Trade and Industry) and the Osaka mity to peer norms in areas of speech, appear- Chamber of Commerce and Industry has been ance and behavior. held in Osaka every year since 1990. Its purpose More and more Japanese are being sent to is twofold: to help foreign SMEs to gain a foot- work overseas, and many of them bring their hold in the Japanese market and to help connect families with them. A real concern is whether or Japanese SMEs with foreign partners. not their children will fall behind their peers in Japanese SMEs have used a variety of ap- schools back in Japan. Consequently there has proaches in their businesses. These include over- been a demand for Japanese schools overseas. seas expansion and offshore operations such as Keio University and several other educational foreign direct investment project, wholly-owned institutions in Japan have opened “branch” cam- subsidiaries and joint ventures; import and ex- puses in the USA and elsewhere in the world to port partnerships, exploring the world market for address this need. Where Japanese children are new ideas and new customers, and other coop- unable to attend a Japanese school, they will at- eration with foreign counterparts. tend local American schools, and then attend The high yen and the growing overseas pres- Japanese schools in the evenings or weekends to ence of large Japanese firms continue to provide keep up in Japanese language and mathematics, strong incentives for SMEs to pursue overseas the latter of which is more advanced in Japan expansion. However, with overseas expansion, than in the United States. many SMEs now confront important challenges One of the major concerns for most Japanese in developing overseas research and development expatriates is what will happen to their children capabilities, establishing extensive after-sales serv- upon return to Japan. Beginning in the early ice capabilities in overseas locations and respond- 1980s, Japanese educators identified a problem ing to calls for greater environmental protection with ijime (bullying) of returning Japanese chil- in their Asian and Southeast Asian manufactur- dren. Known as kikokushijo (literally “returning ing operations. In short, Japanese SMEs now home children”), these children were often sin- confront all of the major issues encountered by gled out by classmates because they dressed dif- the large Japanese multinational corporations. ferently spoke differently or had different interest and hobbies. In response, the Ministry of Educa- See also: economic crisis in Asia; Japanese busi- tion established “magnet” schools where kikoushijo ness in China; Japanese business in Southeast could be grouped and received special educational Asia; overseas research and development; small support and counseling. and medium-sized firms There are several other types of Japanese overseas education. The National Association of Ja- pan-America Societies is a private, nonprofit Further reading network of thirty-five Japan-America societies JASMEC (Japan Small and Medium Enterprise Cor- across the United States. Its mission is education poration) Home Page, http:// www.jsbc.go.jp/ about Japan and US-Japan relations. Most socie- english. ties have speakers that address business, political and cultural issues. They also offer Japanese lan- TERRI R.LITUCHY guage classes. The society has over 30,000 members (mostly in the 25–50 age group) across the overseas education United States including over 30 percent of Japa- nese who are residents in the United States. Many Japanese students spend a high school or The Japan Business Information Center college semester or a year abroad to learn about (JBIC) is a privately funded non-profit business overseas production 351 association. Its mission is to improve bilateral fundamental post-war strategy of developing understanding between Japan and the USA. overseas markets through exports from Japan. As The JBIC established its first overseas office of far as manufacturing industries were concerned, the Keizai Koho Center in 1992. The Center’s “internationalization” remained primarily a mat- mission is to promote understanding through ter of promoting exports. communication, dialogue and cooperation of Eventually there occurred changes in the in- Japanese and American business leaders and ternational business environment that began to educators. The JBIC sponsors seminars and lec- exert pressure on this export-driven strategy for tures, social studies programs, and business internationalization. These changes were the de- school programs. velopment of trade friction and the appreciating yen that followed in the wake of the Plaza TERRI R.LITUCHY Accord. The Japanese manufacturing industry which needed to find some way of responding to overseas production trade friction and yen appreciation, had no alternative but to begin to undertake overseas pro- Overseas production on the part of the Japanese duction in the industrially advanced nations, first manufacturing industry entered a period of rapid in the United States, and then later in Europe. expansion in the latter part of the 1980s. While By the 1990s, Japanese manufacturing industries the ratio of overseas production, as measured in had achieved a truly globalized stage of develop- terms of sales by overseas manufacturing subsid- ment with production footholds in Asia, Europe, iaries compared with sales by all manufacturing and North America. corporations in Japan, stood at only 3 percent in It is worthwhile to consider the differences in 1985, it had jumped to 13.1 percent by 1998. The amount of FDI as well as in the volume of sales same ratio for only those corporations that had posted by overseas subsidiaries according to the undertaken some overseas production was 32.2 type of industry. In terms of FDI, the electronics percent in 1998. industry accounted for the largest proportion of The Japanese manufacturing industry first such investment at 27 percent, followed by vehi- ventured overseas in the beginning of the twenti- cle and chemical manufacturing industries at 13 eth century when Japanese companies in the cot- percent each. These three industries taken to- ton spinning industry first established overseas gether thus comprised approximately one-half of production operations in China. Later, as Japan’s all investment by Japanese manufacturing indus- sphere of influence gradually expanded, more tries in overseas production. Metals manufactur- such overseas manufacturing facilities sprang up ing (ferrous and non-ferrous), foods, general in China, as well as on the Korean peninsula and equipment, and precision tools manufacturing Taiwan. However, when the Second World War industries followed, in that order. The strongly ended in defeat for Japan, such holdings were export-competitive electronics, automobiles and seized, and Japan lost all of its overseas assets. chemical manufacturing industries were, not sur- In 1950, a few years after the end of the war, prisingly the top three industries to engage in FDI. overseas production resumed on a very limited Furthermore, electronics and automotive manu- basis. Most of these efforts targeted locations facturing showed the highest ratios of overseas within Asia, although a certain number also in- to domestic production within their own indus- cluded the industrially advanced nations. In 1970, tries. the Japanese government promoted the liberali- In 1998, the ratio of overseas sales registered zation of foreign direct investment (FDI), and in by each industry against the total overseas sales accordance with the third phase of this liberaliza- by all overseas production operations revealed tion, which was implemented in 1971, the gov- that the electronics, auto, and chemical manufac- ernment removed restrictions on the value of turing industries accounted for more than 70 investment that would qualify for automatic ap- percent of all overseas production sales, at 32.5 proval. Nevertheless, at this time the Japanese percent, 31.9 percent and 8.2 percent respec- manufacturing industry continued to pursue its tively In terms of the regions in which these sales 352 overseas production occurred for each of these industries, it is clear as the best means for promoting the internation- that the electronics industry achieved most of its alization of Japanese business vis-à-vis those na- sales in Asia, followed by North America and tions. However, after the Second World War, the then Europe. The vehicle manufacturing indus- Asian countries adopted policies to promote their try had its largest volume of sales in North own industrialization through import substitution. America, followed by Europe and then Asia; the Manufacturing corporations from the industri- chemicals industry was biggest in North ally advanced nations expected Asian countries America, then Asia and finally Europe. to pursue a policy of local production of goods Next, let us examine the amount of FDI, the that they would otherwise have had to import. volume of sales, and the number of employees at Therefore, in order to promote industrialization these overseas production operations on a region- and to nurture and protect their own fledgling by-region basis. North America ranks number manufacturing industries, these developing na- one in terms of amount of FDI as well as volume tions applied high tariff rates on the import of of sales, while Asia is first in terms of number of finished products. These policies also facilitated employees. The cumulative figure for amount of efforts by the Japanese manufacturing industries FDI in the years 1951 to 1999 is approximately to locate production facilities in those countries. $288.7 billion. As much as 85 percent of this ac- Local overseas production on the part of Japa- tivity is concentrated in the three regions of North nese manufacturing industries in the industrially America, Europe and Asia. Of this, $125.8 bil- advanced nations raised the question of whether lion (43.6 percent) is invested in North America, it would be possible to successfully transfer the ($116.6 billion or 40.4 percent of the total in the Japanese-style management and production sys- United States), $76.3 billion (26.4 percent) is spent tem overseas. Broadly speaking, this concerned in Asia, and $52.8 billion (18.3 percent) in Eu- the problems of the transferability of work or- rope. Other regions include Central and South ganization and of technology. The Japanese-style America where FDI amounted to $20.3 billion management and production system, otherwise (7.0 percent), Oceania with $8.5 billion (2.9 per- known as the Toyota production system, was cent), the Middle East with $3.8 billion (1.3 per- characterized by features such as a highly skilled cent), and Africa with $1.2 billion (0.4 percent). workforce, a wage system identical to that for Turning to the volume of sales by overseas white collar personnel, quality management on production operations, North America is the high- the production line, a parts procurement system est with Asia and then Europe following in that that minimized parts inventory (just-in-time), order. Finally persons employed at Japanese over- kaizen, consensus-style decision making, and seas manufacturing facilities in 1998 number participatory labor relations. approximately 2.2 million in total, of which 1.4 The problem was whether Japanese manufac- million (61.1 percent) are in Asia, 473,000 (21.3 turers would be able to maintain its large com- percent) are in the North America, and 241,000 petitive advantage and apply its homegrown (10.9 percent) are in Europe. management and production system in its over- The reason that Japanese manufacturing in- seas manufacturing operations. Among the industries chose to pursue an export-led strategy dustrially advanced nations, the managerial for such a long period after the Second World environment differed significantly from that of War and that they eschewed a policy of ventur- Japan and there was also a well-established pro- ing abroad with production operations lay in the duction system already in existence. If the Japa- characteristics of the Japanese-style management nese manufacturers were going to hire local system. The leaders of Japanese manufacturing managers and local production workers, and if industries had no confidence that their manage- they were going to procure products from local ment system, created and cultivated in Japan, was materials and parts manufacturers, then it was capable of being applied in the midst of a differ- clear that they were going to be influenced by ent managerial environment, particularly as ob- the existing local manufacturing system. Ulti- tained among the industrially advanced nations. mately the overseas manufacturing operations The export strategy therefore, came to be viewed were able to succeed in transferring the Japanese overseas production 353 system. However, although it was difficult to American industry in that most of its sales were transfer the system in its purest form, it was pos- from within its own region, and exports outside sible to implement a management and produc- of the region were very limited. tion system that combined elements from the local The roots of the expansion of Japanese indus- and the Japanese systems. The answer lay in the try into Asian countries can be found in Japa- hybridization or transformation of the Japanese nese direct investment in China in the beginning system. As a result, overseas production by Japa- of the twentieth century. Asia was also the first nese manufacturing industries promoted the in- region to receive Japanese FDI after the Second ternational spread and acceptance of the Japanese World War. In the 1960s, investment targeted manufacturing system. the Asian NIEs such as Taiwan and Korea. In The transfer of Japanese manufacturing op- the 1980s, ASEAN countries and in the 1990s erations to North America, and particularly to China, India and Vietnam became the focus of the United States, began to accelerate in the 1970s, investment. Additional investment ground to a and was especially pronounced through the halt with the 1997 Asian currency crisis. 1980s. This was largely the result of measures to By industry while the cotton spinning indus- cope with trade friction as well as the yen appre- try was historically the most important focus for ciation that followed in the wake of the Plaza investment, in modern times the electronics and Accord. Most Japanese FDI in the United States then the chemicals industries carry out most of was in the electronics, vehicle, chemicals, and the investment. Two characteristic features of general equipment manufacturing industries. The Japanese investment in the Asian countries is the regions that benefited from this investment were overwhelming prevalence of joint ventures as a firstly the western United States followed by other form of investment, and the large number of parts of the country. By industry although many employees. Manufacturing in the Asian countries electronics manufacturing plants were in Califor- serves not only to produce goods for sale in those nia, these plants also spread to other parts of the countries but also to produce goods for export to country. In contrast, a characteristic of the auto Japan and the other industrially advanced nations. parts makers and assemblers was that their plants Approximately 60 percent of the products are sold were concentrated in the region extending from in Asia and the rest is exported, mainly to Japan, Michigan to a region just south of the Midwest- the United States, and Europe. ern United States. Since the manufacturing industry in North America achieves about 90 Further reading percent of its sales within North America, there is a strong tendency for most of its activities to Abo, T. (ed.) (1994) Hybrid Factory: The Japanese Produc- be confined within a given region. tion System in the United States, New York: Oxford Although the expansion by Japanese industry University Press. to Europe also began to increase in the 1970s, Itagaki, H. (ed.) (1997) The Japanese Production System: the same as in North America, it was concen- Hybrid Factories in East Asia, London: Macmillan. trated mainly in the period leading up to the in- Liker, J.K., Fruin, W.M. and Adler, P.S. (eds) (1999) tegration of the European markets in 1992. The Remade in America: Transplanting and Transforming Japa- trends for FDI by industry were the same as in nese Management Systems, New York: Oxford Univer- North America, favoring the electronics, vehicle sity Press. and chemicals manufacturing industries, respec- MITI (2000) Dai 29-kai, 1999-nen Kaigai Jigyo Katsudo tively. The United Kingdom received the largest Kihon-Chosa Gaiyo (Research Outline on the Oveaseas proportion of Japanese FDI, or approximately 30 Business Activities of the Japanese Companies in percent, followed by France and then Germany. 1999, No. 29), Tokyo: MITI. Together, these three countries accounted for MOF (2000) Zaisei-Kinyo Tokei-Geppo: Tai Nai-Gai Minkan more than half of all Japanese manufacturing FDI Toshi-Tokushu (Ministry of Finance Statistics Monthly: in Europe. Spain, the Netherlands and Italy fol- Special Issue for the Foreign Direct Investment and lowed, in that order. The European manufactur- Inward Investment), No. 584, December, Tokyo: ing industry was also similar to the North MOE 354 overseas research and development

Oliver, N. and Wilkinson, B. (1992) The Japanization of at a hospital affiliated with Harvard University British Industry: New Developments in the 1990s., Ox- in exchange for licensing rights to all technology ford: Blackwell. developed there. Hiring foreigners for research and develop- HIROSHI KUMON ment positions in their Japan operations is another strategy that Japanese firms adopted overseas research and development beginning in the early 1980s. Prior to that time, labor laws and restrictions on immigration made In its narrowest sense, “overseas research and it extremely difficult to bring in foreign workers, development” refers to the off-shore research and even in research positions, for anything other than development activities of Japanese corporations. short-term stays. By the late 1990s changes in However, the term can also be applied more labor and immigration laws have effectively re- broadly to encompass the acquisition in Japan of moved most obstacles. The result has been a sig- research and development capabilities, as well as nificant increase in foreign hires. For instance, at joint activities involving Japanese and non-Japa- the Advanced Telecommunications Research In- nese researchers, either in Japan or overseas. stitute, more than 25 percent of the 230 research- Japanese are not known for the type of “break- ers are foreigners. There appears to be little through” creative or innovation that is revered resistance to this recent development. Research in the west. Among Nobel laureates in the physi- chiefs are allowed to hire foreign researchers at cal sciences, only one is Japanese. The reasons their own discretion. for Japan’s shortcomings in this area have been Japanese firms are not only hiring foreign re- widely debated within the Japanese business com- searchers for their R&D efforts in Japan, they are munity and the wider society at large. Some also hiring scientists, many of whom teach at US blame the educational system, which emphasizes universities. These scientists now work for pri- rote memorization over creative problem solving. vate Japanese firms with R&D operations in the Others blame the nature of Japanese society with United States. Another approach to enhancing its tight strictures on roles and responsibilities and R&D capabilities is the acquisition of “boutiques,” its avoidance of risk-taking or failure. Whatever small start-up firms often headed by scientists with the reasons, real or imagined, many Japanese a marketable specialized technology patentable companies have opened or moved their research process or product. Much of this activity began and development operations overseas to coun- in the late 1980s when many firms were flush tries perceived as having more creative with money At the same time that Japanese firms workforces. Japanese firms and government agen- were looking to acquire R&D capabilities over- cies are also hiring foreigners to work in Japan or seas, many high-tech and biotech firms in the US moving their R&D operations overseas to over- were looking for infusions of capital to cover their come these difficulties. start up costs. In return for their financial invest- Overseas research and development takes ments, Japanese firms got innovative technolo- place through the formation of research agree- gies that they could not develop at home in a ments between Japanese companies and Ameri- cost effective manner. can universities. Such agreements may cover the The Japanese government also provides sub- establishment and operation of R&D facilities as stantial assistance in research and development. well as licensing agreements. In 1990, for exam- Government organizations such as MITI fund ple, Hitachi Chemicals and the University of research in a variety of fields. They currently California at Irvine signed a $16.5 million agree- support fifteen research laboratories in Japan, ment in biotechnology. In exchange for a new some of which involve US companies or US re- university building, Hitachi employees have un- searchers. The Japanese government is also fund- restricted access to the university researchers’ ing a multimillion dollar semiconductor research laboratories and research notes. Also in 1990, project. MITI has committed $160 million on a Shiseido, the cosmetics company pledged $ 85 R&D project with a super-clean room facility to million over ten years to develop a research center begin in 2002. As a result of opposition to the overseas research and development 355 project voiced by US semiconductor firms the foreign postdoctoral fellowships (from over Japanese have decided to open up this project to twenty-five countries) were funded. The Society foreign firms such as Motorola, Texan Instru- also sends Japanese researchers overseas through ments, and IBM. bilateral exchanges (129 Japanese to twenty-six Smaller overseas R&D activities are sponsored countries), fellowships to visit Southeast Asia by prefectural and city governments. The Osaka (fifty-one Japanese fellows to five countries), and government, for example, encourages R&D at postdoctoral fellowships (fifty-five in 1996). Fi- home and overseas by organizing events for Japa- nally the JSPS funds and hosts joint research and nese firms to find overseas partners. For exam- seminars in Japan as well as bilateral programs ple, the Global Venture Forum brings companies in France, Germany the UK and the USA. JSPS in new, high-tech and emerging fields of business has offices in the USA, Egypt, Germany Brazil, together with potential Japanese partners. Thailand, and Kenya. The Japan Society for the Promotion of Sci- ence (JSPS) brings Japanese and foreign research- See also: Japanese business in the USA; small ers together. JSPS provides funding for research and medium-sized firms collaboration. In 1996, 315 foreign fellowships (from over eleven countries) and seventy-nine TERRI R.LITUCHY P

patent system Broadcasters’ rights include rights to reproduce, rebroadcast, transmit, communicate and enlarge Copyright images. The term of copyrights is lifetime of author Copyright protection arises automatically on cre- plus fifty years. The fifty-year period is from ation of an object in the literary, scientific, artistic death, publication if published under an assumed or musical field. It is not dependent on applica- name, or from publication for works of an or- tion and registration; nor is it dependent on pub- ganization. Moral rights, however, can only be lication. Based on the European principle of droit exercised by an author—meaning they are valid moral, authors have moral rights to their works only during the author’s lifetime. In some cases, to protect from unauthorized use even if not re- immediate family members of a deceased author leased to the public. Such moral rights also in- may seek an injunction or damages to the au- clude the right to be identified as the author and thor’s honor. Neighboring rights are valid for fifty the right to prevent unauthorized alteration. years from the first performance, recording or Protection is available for architectural works, broadcast. All duration periods are counted from choreography compilations and database works, January 1 following death, creation or publica- computer programs, maps, motion pictures, pan- tion. tomimes, and photographs. Excluded are mate- Copyright holders may grant exclusive publi- rials whose republication is in the public interest, cation rights to third parties. To be effective such as statutes, orders, ordinances, court deci- against third parties, the grant must be registered sions, and official government publications. with the Agency for Cultural Affairs. Unless oth- Authors have the right to adapt, broadcast, erwise agreed, the recipient must publish within copy exhibit, lease, perform, recite, screen, and six months after receipt of the manuscript and translate their work, as well as request payment keep it in print (if normal in the publishing busi- for private use—including digital audio or visual ness). If the recipient breaches these requirements, display Transfers of copyrights are permitted, but the holder can cancel the publication rights. Un- must be registered with the Ministry of Educa- less otherwise agreed, publication rights expire tion to be enforceable. Neighboring rights exist three years from first publication. Limited assign- for performers, phonograph record producers ments of copyrights are possible. For instance, and broadcasters. Performers’ rights include the authors can split translation, publication and per- exclusive right to audio and video recording, formance rights among different parties. Infring- broadcasting, leasing, and request payment for ers are subject to injunction, civil damages and lease to public. Phonograph record producers’ criminal liabilities. Infringers of moral rights can rights include rights to reproduce, leases to pub- also be forced to take appropriate measures to lic commercial records, and to request payment. restore the author’s lost honor. patent system 357

Japan is a party to many international copy- however, cannot be made until publication fol- right agreements, including the Berne Conven- lowing examination. tion, UNESCO Treaty Convention for To receive a patent, an article or process must Protection of Producers of Phonograms against be patentable. Patentability is only available to Unauthorized Duplication of Their Phonograms, high-grade inventions of articles or industrial and International Convention for the Protection processes. Patentability is not available to items of Performers, Producers of Phonograms and that could potentially injure public order, morals Broadcasting Organizations. or health. Patentability also requires the article or process be new. This means it could not have been described in written publications distributed Patents in Japan or any foreign country or in any other prior patent application. The scope of the patent Patent rights are created by application and regis based on the description of scope in the patent istration with the Patent Office. The same rules application. Third parties can apply to the Patent apply to Japanese registrants and foreigners re- Office for a non-binding, advisory opinion on siding or doing business in Japan. The patent scope. rights of foreigners living abroad and not doing Japan is a first-to-file nation. This means a business in Japan, however, are governed by any patent will be issued to the first to file, not the applicable treaty between Japan and the first to invent. If several applications covering the foreigner’s nation, and by the one year rule of same article or process are filed on the same day the International Convention. The Convention no patent will be issued until the applicants re- gives parties one year to apply for a patent in any solve who has priority. In addition to examining country that has signed the convention, with the applications, the Patent Office has jurisdiction year measured from first filing in another signa- over invalidity of patents, appeals from decisions tory country. Non-resident foreigners must ap- of examiners refusing to issue patents, and amend- ply for patent rights through a local attorney or ments to issued patents. Appeals from the Patent patent agent. Office are taken to the Tokyo High Court. Applications must be in Japanese. Since July Since July 1, 1995, a patent term is twenty 1, 1995, applicants may file specifications, draw- years from date of application. On application, ings and abstracts in English as long as a Japa- the term may be extended for a maximum of five nese translation is submitted within two months. years if the invention could not have been used If requested by the applicant or an interested third for two years or more due to data accumulation party examiners of the Patent Office will review required under the Agricultural Chemicals Con- the patent application. The request must be made trol Law or Pharmaceutical Affairs Law. Patents within seven years of the date that the patent cease on expiration of the term, abandonment or application is filed. Examiners must review the invalidation by the Patent Office. patent based on patentability. Patents are property rights and can be trans- On January 1, 1996, the post-grant opposition ferred voluntarily (license, pledge) or involuntar- system was introduced, under which third par- ily (on death or by claim of creditors). To be ties can object to patents after issuance but within effective, such transfers (other than inheritance) six months of public notice of patent issuance. must be registered with the Patent Office. In case For patents filed before January 1, 1996, third of co-owned patents, the approval of all owners parties must object within three months after is required. Applications are also transferable. publication of the examined application. There are two types of patent licenses. Exclu- Patent applications are made public in the Pat- sive licenses giving another party exclusive rights ent Gazette 18 months after patent application is to a patent must be in writing and registered with made. From public disclosure, applicants can the Patent Office. Such licenses grant the licen- claim infringement and seek compensation see exclusivity even against the original owner. against infringers. Compensation is based on As such, the exclusive licensee can seek injunc- normal royalty rates. Collection under the claim, tive relief and civil damages for its injuries. 358 patent system

Under ordinary licenses, the licensee has the interested third party filing an invalidation action right to use a patent, but not exclusively The with the Patent Office. Infringement actions in- owners (and possibly third parties) have the right volving the same parties will be stayed pending to use the patented article or process. Such li- the result of any invalidation action. censes arise by contract, compulsory order of the Patent Office or the Ministry of Economics, Trade Designs and Industry (formerly MITI), or under law (such as an employer’s right to use its employ- Designs can be protected under a process similar ees’ inventions, as discussed below). The rem- to that for patents. There are three requirements edies of ordinary licensees are limited. They for protection: the designs must be of a new vari- usually cannot obtain an injunction, although ety have an industrial nature, and relate to form, they can seek damages. Although not required pattern, coloring or a combination. Designs are by law, registration with the Patent Office has different from patents and utility models in that the advantage of confirming licensee’s rights they need not have a practical use, they can sim- against third parties. ply relate to ornamentation. Patent owners can be required to grant a li- To register a design, an application is filed with cense in three instances. First, the Director Gen- the Patent Office. The application is checked for eral of the Patent Office may grant such compliance with statutory requirements and ex- compulsory licenses if the patented invention has amined on the merits. No publication, however, not been worked in Japan for more than three is made. If the application is approved, the de- consecutive years. Second, the Minister of Eco- sign is registered. After registration, a design can nomics, Trade and Industry may also grant them be challenged for noncompliance with statutory if in the public interest. Third, the owner of an requirements. The term of protection is fifteen improvement patent can request a license from years from registration. the owner of the underlying patent. Employees have rights to inventions not in the Plant species and semiconductor integrated scope of their work. In Japan, such inventions circuits are called not in service. In such cases, any ex- Some protection exists in Japan for improvements clusive license from the employee to its employer in plant species and circuitry of semiconductor prior to invention is unenforceable. Employees integrated circuits. Japan is a party to the Patent are entitled to reasonable compensation for not- Cooperation Treaty and the Agreement on Trade- in-service inventions. Related Aspects of Intellectual Property Rights.

Utility models Trademarks Although related to patents, a separate statute, A trademark is any written character, sign, de- the Utility Model Law, covers utility model rights. sign, solid body or combination, whether or not Inventions entitled to protection as utility mod- with a color, which is used to distinguish a prod- els do not need to be as high grade as those seek- uct or service as coming from a particular source. ing patent protection. They must, however, have The source may be a manufacturer, producer, a practical utility in terms of form, composition wholesaler, or retailer. or assembly. Covered models are entitled to the Only trademarks registered with the Patent same protection as patents. The term of protec- Office are entitled to protection. To register, an tion is six years from application date. The Patent application covering the trademark must be filed Office does not examine utility model applica- with the office. The proposed trademark must tions. Instead, an applicant applies to the Patent be distinctive. Additionally it must not resemble Office for a search report on prior applications. marks of international organizations, govern- If none exists, it can give a warning to the alleged ments, and registered or widely-known trade- infringer along with a copy of the search report. marks for the same or similar goods or services; A third party can challenge a utility model by an nor may it be a red cross, or injurious to public permanent employee 359 morals. Since April 1, 1992, service marks can off except under extreme economic conditions. be registered. The term of trademark rights is Permanent employees are also known as ten years from date of registration. Additional salarymen (see salaryman), however, that deno- ten-year renewals are possible. tation applies only to white-collar workers. Per- Foreign trademarks can be registered in Japan. manent employees may also occupy blue-collar Japan is a party to the Trademark Law Treaty. or production floor positions. Contract employ- Trademarks are transferable. They can be trans- ees or temporary employees represent the alter- ferred separate from the underlying business. In native to permanent employees, having less case of a trademark covering two or more prod- expected of them by the enterprise and receiving ucts, the trademark may be split. Trademark li- less in return. censes are also permitted. To be effective, transfers Permanent employees are found primarily in must be registered with the Patent Office. In case larger enterprises, although medium-size enter- of co-ownership, all owners must consent to the prises may also offer some employees permanent transfer or license. status. Historically the percentage of permanent Trademarks can infringe previously registered employees has probably never exceeded 30 per- patents, utility rights, designs or copyrights. In cent of the labor force. One study of companies such case, they cannot be used without the con- listed on the first rank of the Tokyo Stock Exchange sent of the prior, conflicting owner. An infringer calculated the percentage of permanent employ- is subject to an injunction, civil damages or crimi- ees in those companies at 25 percent in 1974. By nal action. Any interested party can seek to in- 1993, just 17 percent of the employees were so validate a registered trademark. The grounds can classed. However, observers disagree on both the be failure to satisfy registration requirements, definition and the proper calculation of what con- improper use, or non-use for more than three stitutes a permanent, or regular, employee. In 1997, years. Brown et al. (1997), using a different method of calculation, concluded that the number of permanent employees was significantly higher, upwards Trade Names of 75 percent in some sectors. Trade names can be registered. Once registered, Differences in definitions of what constitutes a third party in the same municipal area cannot a permanent or regular work address a more fun- use the same or similar name for the same type damental issue: the widespread disparity in work of business. Infringers are subject to injunction hours and conditions, and in compensation and and civil damages. Company trade names must benefits across employees designated as perma- indicate the type of company (e.g, partnership or nent. The prolonged recession of the 1990s has corporation). Personal trade names can be trans- further clouded the situation by eroding the im- ferred or inherited, but to be enforceable must plicit agreement underpinning the permanent be recorded. Trade names are valid until cancelled employment agreement. Even very large compa- by the holder, or by petition of a third party show- nies are no longer able to make implicit, but firm ing that it has not been used for two years. guarantees that permanent employees will not be let go. ROBERT BROWN permanent employee See also: lifetime employment; outplacement Also known as regular employees (seishain or Further reading hirashain), workers in this category occupy a posi- Brown, C., Nakata, Y., Reich, M. and Ulman, L. (1997) tion roughly equivalent to exempt employees in Work and Pay in the United States and Japan, New York: the USA. Permanent employees accept ove-time Oxford University Press. work, flexible job assignments, job rotations, job Tachibanaki, T. (1996) Wage Determination and Distribu- transfers, job retraining, temporary or permanent tion in Japan, New York: Oxford University Press. assignment to affiliated firms in exchange for employment security; that is, they will not be laid ALLAN BIRD 360 pharmaceuticals industry pharmaceuticals industry firms. To make this environment even more comfortable, foreign firms were encouraged to license The Japanese pharmaceuticals industry is com- their pharmaceuticals to local firms, filling out prised of firms that primarily serve the Japanese the portfolio of the local pharmaceutical. Moreo- internal market. Japan has a universal coverage ver, foreign firms were restricted from register- health care system. Therefore, a discussion of the ing drugs in their own name in Japan. Restrictions industry must include an explanation of those on foreign firms generally applied to pharmaceu- aspects of the health care system that impact the ticals firms as well. Thus, most foreign firms de- strategies of the pharmaceutical firms in Japan. cided to let Japanese firms market their products The domestic market focus of the firms in the under contract. Japanese pharmaceuticals industry has put these The Japanese pharmaceutical firms were firms at a competitive disadvantage as the indus- obliged to share this wealth in the protected mar- try evolves worldwide. Japanese firms are increas- ket, however. In the West, the prescribing of drugs ing their research and development efforts and is kept separate from the actual sale of these prod- expanding their international activities, but they ucts. In Japan, however, the doctor who prescribes remain behind the competitive levels of their the drug also profits from the sale of these prod- American and European counterparts. ucts. Since the doctor can choose the drugs to The Japanese demand for pharmaceuticals is prescribe, the system has evolved into a bilateral the second largest, after the United States. Japa- monopoly that requires the pharmaceutical firms nese consume about 13 percent of the developed to bid for the business of the doctors. The doc- world’s pharmaceuticals, compared to 42 percent tors, having received the drugs at a discount from for the United States. Sales in the industry have the pharmaceutical firms, can sell the drugs to been flat over the period from 1995–2000. Takeda patients at the government-regulated fixed price, Chemical Industries and Sankyo are the largest pocketing the difference. This revenue was a Japanese firms, but their pharmaceuticals sales major part of the income of many doctors in pri- are much less than half of the sales of the large vate practice. To keep the business of the doc- North American firms. No Japanese firm ranks tors, the firms not only provide discounts, but in the top ten of the pharmaceutical industry also provide services and information to the doc- worldwide, in contrast to many other Japanese tors. To keep the business of the doctors, the firms industries where Japanese firms are more likely feel pressure to have a full line of pharmaceuti- to appear as world leaders. The other top do- cals products. This has led to a licensing of drugs mestic firms are as follows, in order of sales in from abroad, but it also has led to a desire to 1999, Yamanouchi, Daiichi, Eisai, Shionogi, copy any drug developed by another domestic Taisho, Fujisawa, and Banyu. Only at the tenth rival. This excessive variety of drugs has become ranking do we observe any firm with foreign con- most significant in the antibiotics area, where the trol, with Merck having substantial ownership in profusion of “me-too” drugs has led to increas- Banyu. New entrants in the industry have come ingly resistant strains of bacteria in Japan. from increased foreign firm activity and from The Japanese health care system thus intro- firms that diversify out of related technologies. duced substantially different incentives for Japa- Kirin (beer fermentation technology) and Kyowa nese pharmaceutical firms. These health care Hakko (fermentation) and Asahi Kasei (chemi- system elements led the Japanese firms to develop cals) are examples of some of the new players. differently from those in other markets, and made The Japanese government, via the Ministry it hard to transplant any strategy to other mar- of Health and Welfare, shielded the industry kets. during the immediate postwar period. The gov- Starting in 1975, three changes impacted the ernment set high prices for drugs. The firms were industry putting pressure on the industry to allowed, under Japanese laws, to copy drugs de- change its ways of doing business. First, Japanese veloped overseas merely by altering the process laws on intellectual property changed. Second, in making the pharmaceuticals. This obviously Japanese health care cost increases forced the reduced the requirement for R&D for the local government to become more concerned about pharmaceuticals industry 361 cost controls. Third, Japanese government rules drug is relatively inexpensive by that time in its on foreign firm participation in the market were economic life, then it is hard to market a generic loosened, allowing foreign firms to more easily alternative. Note also that the price of the drug is set up their own operations in Japan. More detail no longer based on the cost of development, but on the impact of each of these changes follows. on its efficacy Unless the firm can spend its research and development resources effectively and generate products that have significant medical Changing laws on intellectual property value, it is unlikely to be handsomely rewarded In 1975, Japan adjusted its laws on intellectual for its innovative activity property to be consistent with those of developed countries. Japan by that time had developed suf- The investment climate for foreign firms ficient technology of its own that required similar protection. Thus the combination of domestic The change in the environment for foreign firms and foreign pressure for change increased. Japa- came somewhat later, but by the middle of the nese pharmaceutical firms could no longer use a 1980s, foreign firms could develop their own different production process to produce the same operations in Japan rather freely They could take drug. For the Japanese pharmaceuticals firms, this advantage of the change in the patent laws to change required them to increase their expendi- protect their position in the Japanese market. tures on technology either via licensing of the They could register their own products in Japan. foreign drugs, or via an increase in the domestic Restrictions on investment had been generally R&D that they performed. liberalized starting in the early 1970s. The new Foreign Exchange Control Law in 1980 allowed them to move funds freely across the border. The Pricing pressures result was an increase in marketing by the for- As the costs of medical care continued to increase, eign firms and a gradual development of their Japan in the 1970s was faced with major budget R&D facilities in the Japanese market as well. By pressures as the rate of growth in the economy the late 1990s, this resulted in a market share for slowed. This put increased pressure on a system directly marketed foreign pharmaceuticals of that had allowed the firms in the industry to earn about a quarter of the Japanese market. With the high profits. Around a third of Japanese health option to operate in Japan now open to them, care costs came from expenditure on pharmaceu- foreign firms were much less likely to license their ticals. The government made several changes that attractive products to Japanese competitors. forced the firms to become more innovative. The prices for new products were set at a lower level The changing nature of competition in the unless the drug was a significant improvement in pharmaceuticals industry efficacy compared to existing drugs on the market. A “me-too” drug to match the portfolio of The result of these changes is an industry that is another firm would not be very profitable under trying to change to become more focused on the these rules. In addition, the prices allowed for a research and development function. This has led drug were decreased each year. Thus, even a to a substantial increase in R&D effort on the part blockbuster drug would gradually lose its profit- of Japanese firms, both internally and via alli- ability as the government lowered the prices of ances. The strongest firms in the older system the drug over time. Note the difference in pric- were those firms with the widest network of doc- ing strategy that this implies compared to the tors, and the best system of marketing. Under system in the United States. The US pattern of the changed environment, firms that had devel- high prices until the patent expires is not found oped a less conventional, domestically focused in Japan. The gradual reduction in prices makes program of research could be successful as well the price of a drug at the end of its patent life in the industry. This was the approach used by relatively low. Thus, there is much less activity many of the “outsider” firms such as Kyowa in the generic drug market. If the brand name Hakko and Asahi Kasei. In their other industries, 362 pharmaceuticals industry these firms had faced more competition. They marketers and doctors in the domestic market. had seen less incremental innovation and more The foreign-bred innovation can provide that radical changes in technology and competitive entry. position. Market shares became less stable in this New players in the industry often find that period, and strategies of firms tended to change they do not have within their own organization more over time as the innovative results allowed the full complement of skills necessary to be com- for changes in the path of pharmaceuticals devel- petitive in the industry For these firms, foreign opment. partners allow them to acquire access to the mix The firms in the industry also changed their of skills they need to be competitive in the mar- attitude toward international cooperation. Previ- ket. These Japanese firms often have skills in the ously firms were content to contract for avail- bulk processing of drugs, a result of the fermen- able drugs with the established firms. After the tation technology that bought them access to the changes in the 1980s, we observe a variety of industry Foreign biotech firms are natural allies alliances with overseas firms, both to develop and of these players, as scaling up the volume of prod- take advantage of domestically produced drugs. uct for clinical testing and later for actual com- It should be noted that we have not yet observed mercial sales is essential for a biotech firm’s another type of cooperation, mergers of Japanese success in the marketplace. firms. Except in the case of Green Cross, a com- The changes faced by the Japanese pharma- pany tainted by scandal, no major firm has been ceuticals industry have led to substantially greater involved in merger, in sharp contrast to the situ- variety in the strategies within this industry. In ation in Europe and North America. the less regulated industry firms have chosen a This move toward more research and devel- variety of paths to deal with the changed envi- opment has introduced much more variety into ronment. The Japanese industry continues to the strategies of the firms in the industry Some struggle against the major players in the world firms have deepened their established relation- marketplace and in Japan. Individual products ships with domestic research institutes and indi- are successfully sold internationally such as vidual doctors. If that network was strong, like it Yamanouchi’s Pepcid. Yet even here, Yamanouchi was with the largest firms, then international ac- felt that it did not have the worldwide marketing tivities can mainly focus on getting the greatest to take advantage of the discovery. Merck thus and fastest return on the increasingly capable could share in the profits for this revolutionary domestic innovative organization. The role of discovery. The limited scale of the domestically overseas labs in this type of company is to assure focused industry limits competitiveness, even as fast approval, and to assure that the appropriate the R&D expenditures of companies as a percent- uses of the drugs are identified in the various age of sales approach Western company levels. markets. While foreign firms have continued to increase If a firm is not as confident in its domestic their presence in Japan, there is evidence that the network of research, it is possible to use the in- above changes in strategy have allowed Japanese ternational markets to develop the truly innova- firms to maintain their competitive position in tive products that will allow these firms to the Japanese marketplace and at times to be com- compete more effectively in the domestic mar- petitive in world markets as well. This type of ket. For this type of firm, the organizational re- fast-changing environment is going to be faced quirements for a strong international by an increasing number of domestically oriented commitment are much higher. They must iden- industries in the Japan of the twenty-first century. tify a good source of innovation, either at a uni- Thus, the behavior of firms in the pharmaceuti- versity or via a researcher who can lead their cals industry and the experience of the industry own laboratory They must then be sure that as a whole, provide possible insights into how their organization can work with these outsiders similarly domestic-oriented industries may evolve to take full advantage of the innovation. Note in the future. that this type of firm is more likely to be smaller, and needs to find a way to get the attention of THOMAS W.ROEHL post-Second World War recovery 363 post-Second World War introduced, Western technology was imported, recovery the Bank of Japan was established, the transportation and communications infrastructure was Japan’s recovery from the Second World War enhanced, and there was high labor mobility during the first decade of the postwar period lay across regions and economic classes. These con- the foundation for the nation’s “economic ditions produced levels of prewar economic miracle,” the period of rapid economic growth growth that compared favorably with those of (kodo seicho) that would continue until 1973. While other countries and helped transform the Japa- many of the factors that underlay Japan’s post- nese economy from a primarily agricultural state war economic success existed prior to the war, to an industrial state capable of creating a formi- occupation-period social and economic reforms, dable war machine. Nevertheless, few observers the taming of inflation under the “Dodge Plan,” in the early postwar period foresaw a particularly and the demand for Japanese goods created by bright economic future for Japan. The country’s the Korean War were critical in getting the chief competitive advantage was seen to be its economy back on its feet and setting the stage cheap labor. When asked in 1950 about future for sustained economic expansion in the decades trade possibilities with the United States, John to follow. Foster Dulles, a key US policy maker on Japan, suggested that Japan might focus on shirts, The situation at the end of the war pajamas, or cocktail napkins.

When the Second World War ended with Japan’s Occupation-era economic reforms official surrender aboard the US battleship Mis- souri on September 2, 1945, the Japanese economy Allied military occupation of Japan began in Au- had been shattered. The war had destroyed a gust 1945 and lasted until April 28, 1952, when fourth of Japan’s national wealth and assets, a the San Francisco Peace Treaty signed by Japan fourth of its buildings, and 82 percent of its ship- and forty-eight other nations in September 1951 ping. The nation’s economic output had dropped went into effect. Nominally it was the Allies who to pre-First World War levels. Tokyo and other occupied Japan, but in reality the occupation large cites had been reduced to rubble by the forces were overwhelmingly American. They Allied bombing campaign. Inflation was high, were headed by General Douglas MacArthur, unemployment was widespread, and there were who was appointed Supreme Commander of the severe food shortages. Over 6 million Japanese Allied Powers (SCAP) and whose ideas and per- civilians and soldiers returned home from over- sonality dominated the occupation era. seas to find a country that could not support them. A primary goal of the occupation was to rid On top of this, a generation of Japanese business Japan of militarism, and the Americans believed leaders were being purged by the Allied Occupa- that the best way to do this was to create a demo- tion force in an effort to break up the zaibatsu, cratic society. In 1946, MacArthur and his advi- Japan’s large corporate groups, which had coop- sors drafted a new Japanese Constitution, which erated closely with the military in building up went into effect on May 3, 1947. The new Con- the country’s war capabilities. stitution made the Emperor a “symbol” of the Not all was bleak, however, as Japan also pos- nation rather than its political head, abolished sessed some important economic assets. From the the army and navy gave women the right to vote, Tokugawa period (1603–1867), Japan had in- and renounced war as a sovereign right of the herited a relatively well-educated population, high nation. The occupation also sought to democra- levels of savings for investment, advanced agri- tize the economy in order to achieve a broader cultural technology and a strong infrastructure and more even distribution of wealth and of own- of roads and irrigation. From the beginning of ership of the means of production. To achieve the Meiji period (1868–1912) through the 1930s, this, occupation leaders introduced anti-trust the foundations of economic strength had con- measures, land reform, and labor reform. tinued to be built: compulsory education was In 1946–47, occupation authorities technically 364 post-Second World War recovery dissolved the zaibatsu, which had cooperated the occupation, and the percentage of unionized closely with the military before and during the workers rose from 3.2 percent in 1945 to 53 per- war, by requiring them to auction off shares held cent by 1948. by their family-owned holding companies. Ten With unemployment high—13 million Japanese holding companies, Japan’s two largest trading workers were without jobs in 1946—and inflation companies, and twenty-six of the nation’s largest running out of control, many union leaders industrial corporations were dissolved. Over a pushed for radical action. There were widespread two-year period, 1.4 million company shares were strikes. On May Day in 1946, in the largest dem- sold to the public. In 1947, the occupation au- onstration in the nation’s history more than 2 thorities introduced a new Antimonopoly Law million people took to the streets to demand wage and other legislation, modeled after American increases, political power, and worker control of anti-trust laws, designed to break up existing factories. A turning point came when a general monopolistic companies and prevent the forma- strike, which all of Japan’s unions planned to tion of new ones. A Fair Trade Commission participate in and which threatened to shut down was also established to watch over business and the country was called for February 1, 1947. prevent monopolistic practices. MacArthur, uncomfortable with the socialist di- The occupation program with perhaps the rection in which Japan’s labor movement was most wide-reaching consequences for Japanese moving, banned the strike and began a purge of society was land reform. The goal of this was to radical union leaders, including many commu- redistribute the land of absentee landowners to nists. However, even with occupation authorities the tenant farmers who had been farming it. withdrawing their active support of labor unions, Landowners were allowed to keep up to 7.5 acres strikes and labor-management conflict continued of land to farm themselves, plus an additional to increase. (It was not until the 1960s that labor- 2.5 acres of tenanted land. (Larger plots were al- management cooperation emerged in Japan.) lowed in Hokkaido.) The rest was purchased by The change in attitude toward labor unions the government and resold to existing tenants at was part of a more general shift in occupation bargain prices. The result was a drastic redistri- policy that resulted from the onset of the Cold bution of wealth that contributed to a conver- War. This shift later became known as “the re- gence in the standard of living and helped create verse course.” By 1948, tensions between the a new middle class. It also brought income eq- United States and the Soviet Union were rising uity and stability to the agricultural sector, con- over the spread of communism, causing Ameri- tributing to a rapid increase in agricultural can policy makers to revise their thinking about production and ensuring a stable food supply In Japan’s place in the postwar world. The new view creating many small plots of farmland, however, was that the USA could not afford to have a weak the land reform program prevented farmers from Japan; rather, Japan was to be a strong Pacific attaining economies of scale. As a result, Japa- ally in the fight against communism. George nese agriculture remained inefficient and later Kennan, a major architect of early Cold War US came to be heavily subsidized. foreign policy recommended after a visit to Ja- Prior to and during the war, wages and union pan that “no more reform legislation should be activity were suppressed by the military and the pressed. The emphasis should shift from reform zaibatsu. Occupation authorities reversed this by to economic recovery” (Kennan 1967). This encouraging the formation of labor unions and policy shift became more pronounced with the setting standards for working conditions and victory of communists in China in 1949 and the compensation. The Japanese government was outbreak of the Korean War the following year. pushed into enacting the Labor Union Law of One change it brought about was a suspension 1946, the Labor Relations Adjustment Act of of the policy of breaking up large companies; 1946, and the Labor Standards Law of 1947. emphasis was instead shifted to encouraging in- Unions were quickly formed in every sector of creased production by existing companies to the economy Four and a half million Japanese strengthen Japan’s productive capacity. Another workers joined labor unions in the first year of effect was that the US began to pressure Japan to post-Second World War recovery 365 rearm and side with America in the Cold War. but to cut subsidies. Without government funds, Although a police reserve force—the forerunner thousands of firms went bankrupt. Public and of Japan’s Self-Defence Force—was established in private companies laid off over 2 million work- 1950, pressure to rearm further was resisted by ers in 1949, and national production, which had Prime Minister Shigeru Yoshida, who feared that been on the rise, stalled. At this point, Japan’s the military expenditures rearming would entail economy was rescued from what might have been would damage Japan’s fragile economic recov- a severe recession by an event that some called a ery. In the San Francisco Peace Treaty a deal was “divine gift:” an unexpected demand for Japa- struck: Japan would regain its independence in nese goods brought about by the Korean War. exchange for allowing the US to keep its military bases on Japan soil. The Korean War and the beginning of sustained rapid growth Taming inflation In June 1950, war broke out on the Korean Pen- One of the most difficult postwar problems Ja- insula between North Korea, backed by the So- pan faced was inflation. In the first three years viet Union, and South Korea, backed by the after the war, as the Japanese government printed United States. Japan was used as a supply base money at a high rate to pay off war bonds and for American and United Nations forces, creat- finance government spending, inflation ran ram- ing a sudden and large demand for Japanese-made pant: prices rose by 364.5 percent in 1946, 195.9 goods. The result was a “procurement boom:” percent in 1947, and 165.6 percent in 1948. The between 1950 and 1954, the US spent almost $3 government attempted to control inflation billion in Japan for military supplies, and the Japa- through price controls and by freezing assets, but nese economy grew quickly Although inflation these policies were not effective. Finally in Feb- resumed for a time during this period, the eco- ruary 1949, the USA sent Joseph Dodge to Ja- nomic benefits were far greater: production expan as economic and financial advisor. Dodge panded, jobs were created, and the exports was a Detroit banker who had been credited with brought in much-needed foreign reserves, which stopping runaway inflation in postwar Germany could be used to import technology. and his policies in Japan, which became known By the mid-1950s, Japan’s economic miracle as the “Dodge Plan,” consisted basically of bal- was underway and postwar pessimists were about ancing the budget, so that the government would to be proven wrong. In 1955, the Japanese not need to print money to finance its spending. economy surpassed its former peak size, and over An official exchange rate was also established, at the next two decades a remarkable record of eco- 360 yen to the US dollar. nomic expansion was achieved, with annual GNP The Dodge Plan was successful in controlling growth averaging 9.1 percent in 1955–60, 9.8 inflation; as the fiscal budget was tightened, prices percent in 1960–5, and 12.1 percent in 1965–70. stabilized, enabling price controls to be lifted. Equally important, the economy evolved from a However, the tight fiscal policy also pushed the reliance on cheap labor—textile firms were Japan’s economy toward recession. A major user of gov- largest companies in the 1950s—to a focus on ernment funds had been the Reconstruction progressively more capital and technology-inten- Bank, which was established in January of 1947 sive industries such as steel, automobiles, and for the purpose of accelerating the recovery of electronics. Japanese industry The Reconstruction Bank made loans to public corporations and issued See also: American occupation; economic growth bonds, using the proceeds to subsidize key industries such as coal, fertilizers, electric power, Further reading iron, and machinery Most of these bonds were purchased by the Bank of Japan. Forced to bal- Dower, J. (1999) Embracing Defeat: Japan in the Wake of ance the budget, the government had no choice World War II, New York: W.W.Norton 366 postal savings

Ito, T. (1992) The Japanese Economy, Cambridge, MA: with a significant resource in its future economic MIT Press. and social development. Kawai, K. (1960) Japan’s American Interlude, Chicago: Indeed, the postal savings forms and posters University of Chicago Press. of the late Meiji and Taisho eras (1900–25) docu- Kennan, G.E (1967) Memoirs: 1925–1950, Boston: ment the appeals used by the post office to en- Little, Brown. courage individuals to save, both for their Kosai, Y. (1997) “The Postwar Japanese Economy: personal future prosperity and for the prosperity 1945–1973,” in K.Yamamura, The Economic Emergence and development of the nation. One of the postal of Japan, New York: Cambridge University Press. savings system’s unique attributes, and the probable basis for its early mass appeal, was the fact TIM CRAIG that at one time it accepted deposits as small as one-half a sen (¥1= 100 sen). In the mid-1880s, Finance Minister Matsukata postal savings brought postal savings funds under the control of the Ministry of Finance and directed their Japan’s postal savings system was introduced in use towards national goals. The success of the the nineteenth century when, according to the system grew and postal savings deposit campaigns prevalent moral attitudes of the late Edo period, were initiated at various times to remedy specific saving was not socially condoned. A popular say- problems. For example, during the inflation fol- ing admonished that “trying to get one sen (cent) lowing the First World War, a campaign was to last from one day to the next was shameful.” launched to encourage savings to stem spending At that time there were no banks or other private and absorb the excess liquidity that had resulted institutions in Japan interested in personal sav- from the war. ings, either in the cities or the rural areas. De- As the Japanese economy developed, the postal spite such conditions Maejima Hisoka, founder savings system was able to respond to the chang- of Japan’s national postal system (1871), intro- ing circumstances. Some of the issues besides duced, a Japanese postal savings system which inflation that the postal savings system helped he based upon first-hand observations of the Brit- the government confront included providing ish postal savings system. Maejima had been pump-priming for private sector support to new greatly impressed with the positive role he per- and developing industries, development and ceived the postal saving system to be playing in modernization of infrastructure, non-inflationary English society. Through his relentless efforts, in funding of government deficits, pumping up the May 1875 post office branches for the first time economy during recessions, and at times stabiliz- began accepting deposits at eighteen locations in ing capital markets. Historically however, its downtown Tokyo and at one office in Yokohama. foremost goal has been economic development. The number of post offices rapidly expanded to Starting in the postwar period and until the rural regions soon thereafter. Japan was the fourth end of 2000, postal savings funds were lent to country to establish postal savings and the first the Fiscal Investment Loan Program (FILP) (zaisei in a developing economy. toyushi—the so-called “zaito system”), managed by The Japanese postal savings system was insti- the Ministry of Finance. Major recipients of FILP tuted at a time when Japan had just left behind funding included the Japan Development Bank centuries of feudalism and isolation. Its leaders (JDB), which allocated funds for industrial de- had taken note of the foreign indebtedness of the velopment to meet national and regional devel- Ottoman and Chinese empires. After its own opment goals. Other public policy-based postal savings system was set up, the Japanese institutions which received FILP funds during state was able to forswear all foreign borrowings this period included the Export-Import Bank for the next thirty years (until the advent of the of Japan; regional development finance institu- Russo-Japanese War). It can be said that the es- tions, such as the Hokkaido-Tohoku Develop- tablishment of a postal savings system at such a ment Corporation and the Okinawa critical juncture in its history provided Japan Development Finance Corporation; the Japan postal savings 367

Finance Corporation for Small Businesses and postal, savings and life insurance services in ru- the People’s Finance Corporation, which provide ral areas to fulfill their mandate. A good case can loans for small and medium-sized firms; and also be made that the postal savings system helps the Housing Loan Corporation for housing fi- keep the private sector “honest,” and that, in the nance. absence of competitive pressures from the postal Whatever the policy intention, political trade- savings system, the private sector banking has offs were involved in the FILP system. During shown little innovation on its own, and in the the 1990s a majority of funds for developmental past made few efforts to provide competitively purposes were not channeled through the JDB priced retail banking services and products for or other government-owned banks and policy- the general public. based financial institutions, but instead were The success of the postal savings system, how- directly parceled out to designated quasi-govern- ever, can be chiefly attributed to the fact that Ja- mental companies such as the Japan Highway pan’s 24,537 post offices function as collection Company and other politically well-connected points for its savings system, far outstripping the recipients of infrastructure development funds 16,000 branches of all 110 banks, savings and tied to construction and real estate industries in- loans, and other financial institutions in Japan. terests. Political considerations were never far In fact, Japanese people are on average within from such an investment/disbursement system 1.1 kilometers from a post office, while bank favoring rural provincial areas rather than urban branches are typically found clustered in busi- industrial centers. ness districts. Of the 3,235 cities and municipali- Critics have questioned the continued need ties that have post offices, some 567 are without for and the efficiency of these types of develop- banks. This widely based infrastructure of post ment-lending practices in the presence of a de- offices offers tremendous economies of scale, es- veloped capital market. Others have pointed to pecially in reaching out to rural areas where there the separation between the collection function by would be little profit margin for a stand-alone the postal savings system and the disbursement institution such as a bank. function by FILP as an underlying cause of inef- For many years now, Japan’s private banking ficiency. Indeed, for the past several years, the sector has called for the break-up and privatiza- Postal Savings Bureau lobbied to invest the funds tion of the postal savings system, envying the it collects in the financial markets on its own, huge amount of individuals’ deposit the postal thereby bypassing the policy-based designated- savings system continues to garner. At the end finance FILP system. Beginning April 2001, the of March 2000, there was ¥260 trillion in per- reorganized Postal Savings Agency was given sonal savings on deposit in the system, repre- discretion over the investment of collected funds senting 36 percent of all personal savings on thereby opening it to market risk. deposit in Japan, and nearly equal to the com- Critics from the banking industry have also bined personal savings deposited among all pri- complained of the unfair advantages given the vate sector commercial institutions—that is, all postal savings system by its numerous exemp- city regional, and second-tier regional banks— tions, including from national and local taxes of making Japan’s postal savings system the largest all types and payments to the Deposit Insurance financial institution in the world. Since 1990, Corporation. It is also exempt from Bank of Ja- there has been a steady flight to safety with pan reserve requirements and the payment of banking deposits contracting and with marked dividends that private banks make to their share- increases annually in the size and number of de- holders. On the other hand, banks have been al- positors in postal savings accounts as public con- lowed for many years to offer the same products fidence in Japan’s banking system increasingly that postal savings offer their clients, but have erodes. not done so. Postal savings officials counter criti- When Maejima first established the Japanese cisms of its supposed competitive advantage by postal service, he appointed prominent individu- pointing to the costs they must bear in providing als in rural areas as local postmasters who, in 368 pricing practices

turn, provided postal station facilities at little or ume etc.) and returns of unsold goods (whereby no cost. Even today, some 80 per cent of Japan’s producers promise to accept returns of goods on post office buildings are privately owned by their the condition that the retailer follow its guidance postmasters, most having inherited their positions on price or other matters). These shokanko prac- for many generations. Needless to say these post- tices reinforce the bargaining power of the pro- masters are a powerful force in regional and na- ducer/assembler over the retailer/supplier. tional politics. Together with the postal workers union, they have been able to foil banking industry efforts to marginalize or abolish Japan’s postal After-sales price adjustment savings system. The postal service has materially improved After-sales price adjustment (ato-gime) has long the quality of financial services available to the been the dominant practice in intermediate prod- general public, offering products such as life in- ucts, such as steel, lumber, auto parts, and glass. surance and pension plans (both managed sepa- The producer indicates a “standard price” (tatene) rately from postal savings), as well as a to a general wholesaler, who then indicates a stan- nationwide network of 21,796 automatic teller dard price to a regional wholesaler, etc., but the machines that can be used to make deposits, final transaction price is determined only after withdrawals, credit card payments, or to pay the product has been sold to the end user and utility bills or transfer payments to anywhere in the actual market price been established. Based Japan without the fees exacted by banks. Banks on this market price, the producer determines are just now beginning to compete in response to the margins of its wholesalers that are often spe- consumer pressures. cialized and exclusive. Combined with an intri- Although some critics have argued that the cate rebate structure, this creates a system under entire infrastructure of the postal savings system which the profit structure within the entire chain is subsidized by revenues from postal operations, of wholesalers and retailers can become depen- cost analysis shows there is no such subsidy. In dent on the producer. Yet, the producer’s powers fact, without the multiple use of the existing in- to squeeze the suppliers’ or distributors’ profits frastructure, the postal system would find it diffi- are counterbalanced by the producers’ depen- cult to sustain mail delivery operations in many dency on the specialized wholesalers: if all pro- rural areas on its own. ducers have exclusive wholesalers, switching is impossible. Through the ato-gime system, most intermedi- Further reading ate product prices are negotiated post hoc. The Scher, M.J. and Yoshino N. (2002) Postal Savings Systems system is extremely opaque, and it is unclear to in Asia, Tokyo: United Nations University Press. what extent intermediate product prices may be fixed, since the actual end prices are unknown. MARK J.SCHER Yet, no anti-trust case has been brought against after-sales price adjustment, mostly because es- pricing practices tablishing evidence of coercion is impossible. While some industries moved away from ato-gime The Japanese wholesale and distribution system in the 1990s, it remains the predominant pricing is characterized by three predominant pricing mechanism in many intermediate product mar- practices that serve to (a) link wholesalers and kets. retailers exclusively to one producer, or suppliers to one assembler; (b) to maintain product Suggested retail price prices at desired levels; and possibly (c) to create entry barriers by tying up retailers or suppliers. The dominant pricing practice for consumer Pricing practices are directly linked to other “cus- products is that of suggesting a retail price (kibo tomary trade practices” (shokanko) such as rebates kakaku), especially for end-products in industries (discounts to the retailer depending on sales vol- dominated by specialized retail outlets (such as Prince Shotoku’s Seventeen-Article Constitution 369

cars, electric appliances, or cosmetics). In theory ond, in the past the law has allowed for exemp- the manufacturer indicates a retail price but the tions from the general rule of (a) daily use con- retailer is free to determine the eventual price. sumer products, allegedly so that the price can While widely practiced in the USA and Europe, indicate quality (until the 1970s); (b) pharmaceu- suggesting a retail price is even more common in ticals and cosmetics; and (c) copyrighted materi- Japan. According to a poll in the early 1990s, 85.5 als such as books and records. In the 1950s, the percent of all manufacturers indicated a resale first of these three categories was used not only price for their product. A problem with anti-trust for toothpaste, soap, men’s white shirts, or cara- legislation occurs when the producer entices or mel candy but also in designated strategic export coerces the retailer to stick to the suggested price. products such as cameras. In several subsequent One example of effective price suggestions is reviews of the system, the list of exempted prod- the stationery industry Pens and pencils typically ucts was progressively shortened: by the 1970s, have a price printed on the product and sell for only consumer products under ¥1000 could be this price at most stores. Yet, while this is de facto exempted, and by the 1990s, only pharmaceuti- price maintenance, Japan’s Fair Trade Commis- cals and copyrighted works (such as books) were sion (JFTC) has allowed the practice to continue, legally allowed to uphold retail price mainte- maintaining that it is unaware that retailers are nance. forced to follow the recommendation.

Further reading Retail price maintenance Flath, D. (1989) “Vertical Restraints in Japan,” Japan A stronger version of “suggested retail prices,” and the World Economy 1:187–203. retail price maintenance (saihanbai kakaku iji koi) Kawagoe, K. (1997) Dokusen kinshi-ho—kyoso shakai no is an anti-trust violation, except in a few speci- feanesu (The Antimonopoly Law—The Fairness of a fied industries. Under this system, the producer Competitive Society), Tokyo: Kinzai. determines the final retail price (sometimes Ramseyer, M. (1985) “The Costs of the Consensual printed on the container) and enforces this price Myth: Antitrust Enforcement and Institutional Bar- by monitoring the retail system and punishing riers to Litigation in Japan,” Yale Law Journal 94 (3): violators through measures such as penalty pay- 604–45. ments or interruption of shipments. Producers Schaede, U. (2000) Cooperative Capitalism: Self-Regula- may pursue pro-competitive goals with this prac- tion, Trade Associations, and the Antimonopoly Law in tice, such as ensuring good after-service or re- Japan, Oxford: Oxford University Press. gional product availability However, maintaining ULRIKE SCHAEDE retail prices can also be used to prevent discounts and competition, or to enforce price cartels among producers (because any price deviation is attrib- Prince Shotoku’s Seventeen-Article utable to the producer). In the USA, retail price Constitution maintenance is considered per se illegal; it is illegal even without proof of restricted prices or com- Issued by Prince Shotoku (Shototku Taishi, 573– petition. In Japan, it is in principle illegal for a 621) in 604, the seventeen articles were Japan’s manufacturer to restrict the sales price. first constitution. The articles present a code of Yet retail price maintenance remains wide- morals by which the ruling class should live, spread in Japan for two primary reasons. First, it rather than a set of rules by which a government is rarely used such that the anti-trust authority could be maintained. The articles are firmly could easily prove a violation, because suggest- rooted in Buddhist and Confucian ideals. The ing a retail price is permitted. Even if the JFTC central thesis of the articles is the divine nature can prove that retailers were coerced, the law of authority and the responsibility of both supe- does not prescribe more stringent measures than rior and subordinate to respect one another. a cease-and-desist order without penalties. Sec- The first article lays out the basic notions of 370 product development

superior and subordinate responsibilities and of new products and to changes in existing prod- emphasizes the importance of respect, temperance ucts. It involves interactions across functions, such and harmony: as research, product engineering, process engineering, manufacturing, and marketing, usually Harmony is to be valued, and an avoid- (though not necessarily) within a single company ance of wanton opposition to be honoured. Since the early 1980s, product development has All persons are influenced by class-feelings, been a focus of research not only in the field of and there are few who are intelligent. Hence technology management but also in strategy (as there are some who disobey their lords and a critical element of competitive advantage) and fathers or who maintain feuds with the the study of organizations (as a venue of interac- neighbouring villages. But when those tions across groups with different professional above are harmonious and those below are specializations). From the mid-1980s to the mid- friendly and there is concord in the discus- 1990s, Japanese “best practice” in product devel- sion of business, right views of things gain opment had a significant impact both on academic spontaneous acceptance. Then what is there paradigms and on companies around the world. that cannot be accomplished? However, like so many other features of Japan’s business system, the potential weaknesses of Japa- The ideals of the Seventeen-Article Constitution nese product development became increasingly exerted a profound influence within Japanese evident after the collapse of the bubble economy culture and society. While directed toward the in the early 1990s. ruling class, the ideals can easily be applied to Research on product development processes other relationships where there are superiors and in Japanese firms began in the mid-1980s, pio- subordinates. For this reason, they were often neered by a group of researchers at Hitotsubashi espoused in business organizations in the pre- University in Tokyo (Imai et al. 1985; Takeuchi Meiji era. The Meiji restoration brought about and Nonaka 1986). Interest among Western a renewed interest in, and respect for, the impe- scholars and managers grew quickly driven by rial family and of imperial guidance. Under these the widespread recognition that Japan’s leading circumstances, it was only natural the Seventeen- companies excelled not only in manufacturing Article Constitution would again be brought for- but also in developing products that were well- ward as foundation for moral leadership. received by customers around the world. In a In the second half of the twentieth century range of industries, including consumer electron- Japanese business leaders still invoke the articles ics, autos, cameras, copiers, and computers, prod- and promote their acceptance as a foundation for uct development exhibited several strengths: management philosophy. Yoshio Maruta, a former president of Kao. was typical of such lead- • speed (relatively short development cycles ers, actively circulating copies of the articles to from initial product concept to product employees and colleagues as well as developing launch); his own management philosophy based on the • high productivity (fewer engineering hours re- articles. quired for product development); • design for manufacturability (product designs that ALLAN BIRD facilitated a smooth transfer into production, with few quality problems); product development • rapid incremental improvement (each new product quickly followed by sequences of new Product development is the process by which, and improved generations); through a combination of technological knowl- • effective use of external technology (a willingness edge (“seeds”) and information about market- among engineers to draw on technologies place opportunities (“needs”), an idea is embodied and componentry generated outside their in a usable product and is sold to customers. Prod- firm, a trait envied by many American R&D uct development refers both to the development managers, who complained of their product development 371

engineers’ NIH— “Not-Invented-Here”—re- differed significantly from US practices in the sistance to technology that their organiza- mid-1980s, they were picked up and emulated tions did not generate themselves). by US companies over the succeeding decade, particularly in the auto industry. Understanding how Japanese companies gener- Practices at the organizational level, however, ated and sustained these features of product de- were more deeply rooted in the Japanese busi- velopment involved research at three interrelated ness system, and proved less easy for foreign com- levels of analysis: the product development petitors to emulate. These centered on human project, the firm itself, and the firm’s external resource management practices and on the or- networks, with the greatest attention focused on ganization of R&D. Japan’s human resource man- the first level, the project. Some of the most de- agement practices included the systematic transfer tailed research at all three levels has been carried of engineers across functions, to carry techno- out in the context of the automobile industry logical and organizational knowledge and to fa- (Clark and Fujimoto 1991; Cusumano and cilitate effective and rapid communication in Nobeoka 1996). Fundamental patterns seemed product development (Kusunoki and Numagami to hold, however, across industries, especially at 1997). Even within the R&D function, engineers the project level. The key feature of project-level were often transferred within a product family processes in Japanese firms has been dense and either to work on subsequent generations of a rapid cross-functional communications, based on particular product, or to participate in new prod- the following practices: uct development in a closely related area. Cross- functional transfers were eased by the shared • overlapping phases, where the next phase of socialization of personnel in standardized entry- a project begins while the preceding one is level training programs, in which all new employ- still in progress, with dense interactions ees who had graduated from university including across the team members involved in each engineers, went through a common orientation phase, and at least some members are in- to the company including some first-hand expo- volved in multiple phases; sure to production and sales. The locus of re- • cross-functional project membership, with sponsibility for the engineers’ careers was clearly project team members from production and assigned to the company not the individual engi- from marketing involved from the beginning neer. This also enabled companies to send their stages of the project; engineers on assignments to outside sources of • “heavyweight project manager,” meaning a technology (universities, government laborato- single project leader with authority and re- ries, other companies) to bring new technologies sponsibility for the entire product develop- back to the company. ment process, from concept creation and the The organizational structure of Japanese com- interface with marketing through process panies also played a role in product development engineering. processes: companies tended to co-locate process engineering and incremental product devel- Takeuchi and Nonaka (1986) compared these opment with manufacturing, in engineering practices to the US standard practice in the mid- centers or divisional laboratories built in or close 1980s with a sports metaphor: the US model re- to factories (see Fruin 1997). This facilitated the sembled a relay race, in which the “baton” of the speedy transfer of technology from development product design was passed from one specialized into manufacturing and also encouraged rapid group to another, whereas the Japanese model incremental product and process improvement, resembled a rugby game, in which team mem- since design improvements rarely needed to be bers interacted intensively to move the ball down sent back to the central facility for technical in- the field. US firms tended to use another meta- puts. Especially in electronics, the divisional labo- phor to describe the interaction between engi- ratories in the development factories were neering and manufacturing: “throwing it over the entrusted with incremental improvement of prod- wall.” Although Japanese project-level practices ucts and variations on product platforms, while 372 promissory notes corporate laboratories focused on fundamental Further reading technology development and the development of Clark, K.B. and Fujimoto, T. (1991) Product Develop- significantly new products. ment Performance: Strategy, Organization., and Manage- Finally, product development in Japanese com- ment in the World Auto Industry, Boston: Harvard panies involved close cooperation with an exter- Business School Press. nal network of key suppliers. Clark and Fujimoto Cusumano, M.A. and Nobeoka, K. (1996) “Strategy (1991) identified the importance of “black box” Structure, and Performance in Product Develop- suppliers in the Japanese auto industry where the ment: Observations from the Auto Industry” in auto firm provides suppliers with general specifi- T.Nishiguchi (ed.), Managing Product Development, cations and entrusts them with the completion New York: Oxford University Press, 75–120. of the designs. These key suppliers were involved Fruin, W.M. (1997) Knowledge Works: Managing Intellec- in the product development process at an early tual Capital at Toshiba, New York: Oxford Univer- stage, resulting in “parallel engineering” where sity Press. suppliers were designing components in parallel Fujimoto, T. (1997) “The Dynamic Aspect of Product with (and in close cooperation with) the product Development Capabilities: An International Com- design process. This shortened the development parison in the Automobile Industry” in A.Goto and process, especially since Japanese firms have tra- H.Odagiri (eds), Innovation in Japan, New York: ditionally relied on their suppliers for significantly Oxford University Press, 56–99. more of the final value added of the product. Imai, K., Nonaka, I. and Takeuchi, H. (1985) “Man- As the strengthening yen eroded Japan’s manu- aging the Product Development Process: How Japa- facturing competitiveness and as both US and nese Companies Learn and Unlearn,” in K.Clark, Asian competitors learned from the Japanese pro- R.Hayes, and C.Lorenz (eds), The Uneasy Alliance: duction system, many Japanese companies re- Managing the Productivity-Technology Dilemma, Boston: sorted increasingly to their product development Harvard Business School Press, 330–81. capabilities to maintain their competitive advan- Kusunoki, K. and Numagami, T. (1997) “Intrafirm tage. Steady streams of new products and new Transfers of Engineers in Japan,” in A.Goto and models of existing products came out of their H.Odagiri (eds), Innovation in Japan, New York: R&D organizations, encouraged during the bub- Oxford University Press, 173–203. ble economy of the late 1980s and early 1990s Liker, J.K., Ettlie, J. and Campbell, J.C. (eds) (1995) by the seemingly insatiable appetite of Japanese Engineered in Japan: Japanese Technology Management consumers for novelty and by the flow of re- Practices, New York: Oxford University Press. sources into R&D. The collapse of the bubble Nonaka, I. and Takeuchi, H. (1995) The Knowledge-Cre- economy left many Japanese firms with a prolif- ating Company: How Japanese Companies Create the Dy- eration of closely related and marginally differ- namics of Innovation, New York: Oxford University entiated products. As Fujimoto (1997) put it, Press. Japanese firms may have developed lean produc- Takeuchi, H. and Nonaka, I. (1986) ‘The New Prod- tion, but they had fallen into “fat design,” or ex- uct Development Game,” Harvard Business Review cessive product complexity and proliferation. In 64 (1): 137–46. the 1990s, many firms engaged in pruning and rationalizing their product lines, trying to re-fo- ELEANOR D.WESTNEY cus their product development by applying stricter business-based criteria for R&D invest- promissory notes ments. A promissory note is a legal paper by which the See also: electronics industry; export and import maker promises to pay a sum certain to the payee of technology; firm strategies for technology; in- or due holder (holder in due course) at a definite dustrial policy; Nonaka Ikujiro; overseas research time, that is the date of maturity. By issuing a and development; patent system; research coop- promissory note, therefore, the maker is obliged eratives; science and technology policy; software to pay to payee or due holder. Apart from exer- industry; VLSI Research Cooperative cising the right, the payee may endorse the note promissory notes 373 and negotiate it with others. The issue of a prom- ¥1,112 trillion. The use of promissory notes, issory note is subject to a stamp tax. however, is in decline due to tax evasion and di- Promissory notes have been extensively used versification in the means of payment. In 1997 as a means of payment (item) and of extending the Tokyo Clearing House cleared 100 million credit. At present in Japan, most promissory notes items including checks, bills, and others, com- take the form of a uniform instrument defined pared with 141 million items for ¥4,033 trillion by the Japanese Bankers Association (Zenkoku in 1990. Ginko Kyokai, or Zenginkyo) and delivered by financial institutions to their current account holders. Financial institutions do not clear promissory Further reading notes using any other form, and can refuse to deal with the issuer in cases where they elect not Maeda, H. (1999) Tegata Kogitte Ho (Bills and Notes to honor the bill, which may often lead to bank- Law), Tokyo: Yuuhikaku. ruptcy of the issuer. Oda, H. (1997) Basic Japanese Laws, Oxford: Oxford The payment of promissory notes is made University Press. possible by a clearing system, in which all finan- Seki, T. (1996) Kin-yu Tegata Kogitte Ho (Financial Bills cial institutions in a designated area gather in the and Notes Law), Tokyo: Shadanhojin Shoji Houmu clearing house every business day and present Kenkyukai. notes to be collected from each other. Clearing Yoshihara, S., Kaizuka, K., Rouyama, S. and Kanda, houses are designated by the Minister of Justice, H. (2000) Kin-yu Jitsumu Daijiten (Dictionary of Pro- and currently number 185 throughout Japan. But fessional Financing), Tokyo: Kabushiki Gaisha most clearing takes place in that of Tokyo. The Kinzai. total value cleared in 1997 was ¥1,516 trillion, of which the Tokyo Clearing House handled KAZUHARU NAGASE Q

quality control circles six registered QCC representing many different companies. The first QC circle conference was Quality control circles (usually referred to in Ja- held in 1963, and regional chapters of QC cir- pan as QC circles or QCC) are small groups con- cles were organized in 1964. The number of reg- sisting of front-line employees who control and istered circles increased to 10,000 by 1970 and improve the quality of their work processes, prod- experienced another period of rapid increase in ucts and services on an ongoing basis. These small the early 1980s, reaching an all-time high of nearly groups operate autonomously utilize quality con- 30,000 circles in 1984. As of 2000, the number trol concepts and techniques, draw upon their of registered circles was 4,594. It should be noted, members’ creativity and promote self- and mu- however, that QCCs have evolved into various tual-development. Their aim is to develop mem- forms within individual Japanese companies, and bers’ capabilities, make the workplace more vital most of these small groups do not formally regis- and satisfying, improve customer satisfaction and ter with the QCC headquarters. contribute to their company and society. Worldwide attention to Japan’s QC circle phe- QC circles originated in post-Second World nomenon was initiated by J.M.Juran’s presenta- War Japan as one of the important elements of tion on the subject at the European Organization company-wide quality control, along with the for Quality Control conference held in Stockholm utilization of statistical techniques by engineers in 1966. Lockheed Missiles and Space Company and technical staff, and the implementation by is generally recognized as being the first Western top and middle management of systematic or- company to introduce QCCs, which it did after ganizational improvement activities such as policy a study mission to Japan in 1973. By the late management. With the increasing recognition of 1970s, countries in Asia, America, and Europe the importance of quality control in the had introduced QCCs or similar small group workplace, the magazine Genba to QC: Quality Con- activities, with the first international QC circle trol for the Foreman was first published in April 1962 convention held in 1978. By the mid-1980s, the with a targeted readership of supervisors and quality circle boom in many Western countries workers. (The magazine was later to be retitled was beginning to pass, though many companies FQC in 1973 and QC Circles in 1988). In its first continued to involve employees in quality im- issue, the magazine called for the formation of provement activities under different formats and QC circles in the workplace. Also at that time, names such as process action teams. Today QC the QC Circle Headquarters was founded within circle activities are found in more than seventy the Japanese Union of Scientists and Engineers. countries or regions, with Japan and other Asian The first circle to be registered with the QCC countries being the most active practitioners. Headquarters was from Nippon Telegraph and A QC circle is usually comprised of from five Telephone. By March 1963, there were thirty- to seven members who work together in a single quality management 375 unit work area. Typically the foreman directly neering, and other departments and have spread overseeing QC activities or one of the members to service industries such as hospitals, banks, with seniority serves as the leader of the circle. hotels and retailing. Accompanying these In some cases, front-line employees with the same changes, variant forms of QC circle activities have duties at different workplaces also join together emerged, including “joint QC circles” which un- to form a circle. Most circles hold meetings once dertake problems that cross workplace bounda- or twice a month, though frequency varies de- ries, “theme-oriented QC circles” which involve pending on the theme or subject a particular cir- people facing similar problems within different cle is working on. The themes taken up by QCCs workplaces, and “sub-circles” and “theme leader” are diverse, including quality cost, or safety is- structures. The range of techniques and meth- sues at the workplace, operational efficiency and ods used by QCCs also has expanded, and QCCs improvement, problems related to internal or often have become involved in other company external customers, or how to create a bright and initiatives such as occupational safety manage- satisfying workplace. ment, value analysis/engineering, and total pro- QC circle activities have several distinguish- ductive maintenance (TPM). ing features. They provide a mechanism which mutually supports employees in: (1) learning a See also: quality management; total productive rational way of thinking and scientific/problem management solving methods through the study of quality control principles and techniques, (2) building Further reading teamwork and fostering discussion among employees with shared work knowledge and expe- Cole, R. (1989) Strategies for Learning: Small Group Ac- rience, and (3) contributing to the company by tivities in American, Japanese, and Swedish Industry, Ber- solving problems in the workplace. In carrying keley CA: University of California Press out these activities, QC circles typically employ Ishikawa, K. (ed.) (1984) Quality Control Circles at Work: a common set of improvement tools, such as the Cases from Japan’s Manufacturing and Service Sectors, seven tools of QC. Other distinguishing features Portland OR: Productivity Press. include the use of the eight-step QC story as a Lillrank, P. and Kano, N. (1989) Continuous Improve- guide for problem solving, as well as the charac- ment: Quality Control Circles in Japanese Industry, Ann teristic way in which QCCs are organized and Arbor, MI: Center for Japanese Studies, Univer- operate. sity of Michigan. Benefits typically enjoyed by companies with QC Circle Headquarters, JUSE (1996) QC Circle Koryo: QC circle activities include: (1) the development General Principles of the QC Circle, Tokyo: JUSE Press. of employees that are highly motivated and have ——(1997) How to Operate QC Circle Activities, Tokyo: JUSE the capability necessary to tackle problems which Press. the company faces; (2) improvement in quality TAKESHI NAKAJO and productivity that, in turn leads to an increase in customer satisfaction; and (3) the achievement of broader company goals including contribut- quality management ing to the improvement of society Some challenges faced by companies when Quality management is defined as a system of carrying out QC circle activities include sustain- means for economically producing goods or ser- ing enthusiasm and activity levels of QCCs as vices to satisfy the needs of the customer. Lead- well as adapting to changing values regarding life- ing Japanese companies have come to be known time employment, work and private life. Larger for a variety of best practices in quality manage- organizations usually establish a position or de- ment that have greatly influenced the develop- partment with responsibilities for administration ment of quality management worldwide, and promotion of QCC activities. particularly during the 1980s. The cheap and Though originating in manufacturing depart- shoddy image held by “Made in Japan” goods ments, QC circles are now found in sales, engi- after the Second World War was replaced by a 376 quality management reputation for high quality and reliability. The During the 1950s, quality management gained history and major players behind this transfor- increasing acceptance among Japanese manufac- mation will be outlined first, followed by a dis- turers, though the emphasis originally was on cussion of the conceptual, methodological and applying statistical methods in manufacturing organizational features of Japanese quality man- activities. By the late 1950s to early 1960s, lead- agement. ing companies were extending quality management to include marketing, design, manufacturing, sales and other functional areas. History and development At the same time, employees at all levels of the Though there was a very limited awareness and organization were becoming involved in quality practice of quality control methods before the control and improvement. A major vehicle for Second World War, the major origins of Japa- the involvement of frontline employees was nese quality management can be traced to the through quality control circles beginning in the post-Second World War occupation era. Troubled early 1960s. In this way Japanese quality man- by frequent problems with the telephone system, agement was broadening to become a truly com- the occupation’s General Headquarters had pany-wide activity unlike in the USA and other American experts give extended seminars on countries where quality typically was in the hands management, including quality control, to man- of quality specialists and was not a management agers in the telecommunications industry in 1949. priority. Also, during the early postwar years, two non- From the 1960s through the 1980s, Japan ex- profit organizations were established that were perienced a quality management boom. During to become influential leaders in the development this time, quality management matured as a com- and promotion of Japan’s quality movement: the pany-wide activity and was extended to a corpo- Union of Japanese Scientists and Engineers rate group-wide level. Also, beginning in the (JUSE) and the Japanese Standards Association 1970s, some Japanese service industries began (JSA). These organizations also began to offer formal quality management efforts. By the mid- educational programs on quality control in 1949, 1970s, J.M. Juran estimates that Japanese indus- and in that same year JUSE established its first try had caught up with and begun to surpass Quality Control Research Group. Western industry in its ability to create quality It was to this receptive environment that JUSE products. Evidence from a number of industries invited W.Edwards Deming, an American ex- emerged to substantiate the Japanese quality ad- pert, to lecture on statistical quality control in vantage. One particularly detailed study on the Japan in 1950 and again in 1951. The lecture room air conditioner manufacturing industry notes were published and Deming donated the showed startlingly large gaps in quality perform- royalties to JUSE. Using these funds, in 1951 ance in the early 1980s (see Garvin 1988). For JUSE established the Deming Prize to honor example, while Japanese manufacturers had de- individuals and to recognize companies excelling fective rates of 0.0 to 0.3 percent for incoming in the implementation of quality management. parts and materials, American manufacturers Over time, the Deming Prize was to prove itself experienced defective rates of 0.8 to 16.0 percent. as a powerful vehicle for advancing the Japanese In other words, even the worst performing Japa- quality movement. In 1954, another American nese manufacturer was still nearly three times quality expert, J.M.Juran, was invited by JUSE better than the best performing American manu- to lecture in Japan. In that and later visits, Juran facturer. Similarly large gaps were found for as- presented a more managerial approach to qual- sembly-line defect rates and service call rates. ity. It should be noted that senior executives Other studies on televisions, memory chips, and formed the audience for several of Deming’s and automobiles, likewise showed higher quality lev- Juran’s lecture series, symbolic of the high de- els for Japanese-made products. gree of awareness and support that Japanese top Spurred by these dramatic quality differences, managers were to give to their companies’ qual- Western companies showed an immense interest ity efforts. throughout the 1980s in learning and adopting quality management 377

Japanese-style quality management. Other turn- Some areas of notable activity in the 1990s, ing points included the 1980 broadcast in the however, included the push by Japanese compa- USA of the NBC television documentary If Ja- nies for certification to ISO 9000, the interna- pan Can…-Why Can’t We?, which introduced tional standard for quality management systems. Deming’s past activity in Japan to a wide audi- At first, Japanese firms showed little interest in ence. Also attracting attention was the awarding the standard due to the perception that their own of the Deming Prize in 1981 to Yokogawa quality performance levels were high and would Hewlett-Packard, which in the process had trans- not benefit from ISO 9000’s rudimentary con- formed itself from H-P’s worst to best-perform- formance-based approach. When it became clear ing division. Though a great number and variety that ISO 9000 was becoming a market require- of organizations and individuals contributed to ment, however, Japanese firms earnestly began the dissemination of Japanese quality manage- certification efforts on a wide scale. Other devel- ment abroad, the role of Japanese joint venture opments included the introduction of alternative and affiliated companies merits special note. Sev- awards to the Deming Prize. Affiliated with the eral such companies, including Yokogawa Japan Productivity Center for Socio-Economic Hewlett-Packard, Fuji Xerox, Texas Instruments Development, the Japan Quality Award was Japan, IBM Japan, Aisin Warner, and Mazda, launched with an award system and criteria simi- served as models and information conduits for lar to the Baldridge Award in the USA. Also, in interpreting and transferring Japanese best prac- 2000 JUSE established a new category of awards, tices to overseas counterparts. The profound ef- Japan Quality Recognition Awards, to comple- fect of Japanese quality management on ment the Deming Prize. One award recognizes world-wide practice was readily seen in many achievement in TQM and is positioned as a step- quality-related articles and training manuals of ping-stone to the Deming Prize, while another the early 1980s which often contained direct award recognizes the development of innovative translations of the original Japanese concepts and quality methods or systems. approaches. Also during this time, the Deming Application Prize was opened up to overseas ap- Concepts and methods plicants, with Florida Power and Light becoming the first overseas recipient in 1989 followed by Over the course of its development, Japanese Taiwan Phillips (1991) and AT&T Power Systems quality management has come to be character- (1994). ized by a number of concepts, tools, and meth- Since the 1990s, quality management has re- ods. In some cases, these are new contributions ceived less prominence in Japan. In part, this is to the practice of quality management, while in due to the fact that its major concepts and prac- other cases they are conventional ideas cast in a tices have become ingrained into corporate rou- different light or with a new emphasis. tine. At the same time, some criticism has emerged Kaizen, or the continual pursuit of improve- regarding the tendency for certain practices to ment, forms the philosophical basis for quality become ritualistic or bureaucratic, and others management and other Japanese approaches such have pointed out the need for fresh, new ideas as just-in-time and total productive maintenance. and approaches. A spate of quality and safety Japanese quality leaders speak of quality man- problems in 1999 and 2000 also raised questions agement as being a “revolution in thought” about a seeming quality malaise in segments of wherein one attains a problem-consciousness and Japanese industry. Companies whose quality seeks to prevent rather than fix problems after reputations were tarnished include a Sumitomo they have occurred. Through the repeated cycle subsidiary that used unsafe processes leading to of Plan-Do-Check-Act (PDCA), all aspects of the Tokaimura nuclear accident, Snow Brand business activity are to be evaluated and acted whose contaminated milk products caused illness upon for improvement. To carry out kaizen, Japa- in 15,000 people and Mitsubishi Motors which nese companies emphasize the need for the par- was implicated in the long-term cover-up of de- ticipation of all employees, at all levels, and in fects to avoid product recalls. all departments. This is accomplished through 378 quality management

quality control circles, quality audits by top man- pan. Through a series of matrices, QFD trans- agement, hoshin kanri and other activities described lates customer requirements into technical re- below. Also essential is a customer-orientation. quirements and product specifications. In An axiom of Japanese quality management is addition, the Japanese practice of concurrent en- “market-in—not product-out”. In another saying, gineering, wherein the product is designed in par- “the next process(es) is your customer,” Japan allel with its related production processes, has taught the important concept of recognizing in- become an accepted best practice. Also receiving ternal customers as well as external customers. worldwide attention have been the ideas and Japan was also the origin of the well-known clas- methods of Genichi Taguchi. He advocates a sification of customer expectations for product quality engineering approach that emphasizes the quality into delighters, satisfiers, and must-be/ reduction of variation, the importance of mak- dissatisfiers. ing products and processes robust to variability Japanese quality management also has empha- in operating and usage conditions, and the use of sized the scientific method through the use of data designed experiments. to make decisions, analyze problems and implement improvements. This notion is symbolized Organizational framework by sayings such as “speak with data” and “manage by the facts.” Along with this, Japanese com- The organizational implementation of Japanese panies stress the 3-gen principle of observing the style quality management can be conceptualized actual object in question (genbutsu) and actual situ- as a framework of top-down, lateral, and bottom- ation (genjitsu) at the actual location (genba) (see up activities (see Akiba et al. 1992). Just as a cloth genba shugi). To support this emphasis on data is made strong by its cross-woven threads, qual- and the involvement of all employees, Japanese ity management requires a coordinated combi- industry promoted the widespread use of a prob- nation of vertical and horizontal activities. lem-solving toolkit called the seven tools of QC: Top-down activities include hoshin kanri and Pareto diagram, cause-and-effect diagram, strati- internal quality audits by top management. Vari- fication, checksheet, histogram, graphs and con- ously translated as policy deployment or man- trol charts, and scatter diagram. Made famous in agement by policy hoshin kanri refers to a Japan and abroad through Kaoru Ishikawa’s management process for identifying goals (usu- book, Guide to Quality Control, this package of ba- ally annual) and deploying them throughout all sic tools became an important feature of Japa- levels of business planning and activity The aim nese quality management as employees at all is to focus effort and resources on a few priority levels in the organization are able to learn and issues for breakthrough improvement. Essential apply these tools. Ishikawa contended that the to hoshin kanri is a back-and-forth dialogue (called majority of quality problems could be solved with “catch ball”) between all levels and departments their use alone. Prompted by the popularity of of the organization about not only the goals, but the seven tools, JUSE later coordinated the de- also the concrete means for their achievement. velopment of another set of tools called the “new Another way that top management is involved seven tools,” or seven management tools, which in quality management is through regular re- are used for planning and for organizing and views of the quality system called quality audits understanding complex information. (QC shindan). Their purpose is not inspection, Another important aspect of Japanese quality but rather to evaluate management processes management has been its emphasis on system and provide and opportunity for discussion. design and the upstream activities of process and Typical items covered include the progress of product design. Shigeo Shingo and others em- hoshin kanri activities, the implementation status phasized the use of poka-yoke, or error-proofing of routine control and improvement activities, techniques, to design out the possibility of mis- and the status of QC circle activities. Quality takes in work processes. A widely used technique audits are usually conducted at multiple levels in for product development called quality function an organization. In a presidential audit, the com- development (QFD) was also developed in Ja- pany president reviews quality activities quality management 379 company-wide. Division and section managers into common usage to emphasize the “company- may also conduct audits within their own areas. wide” nature of quality management. Also, the Lateral activities include cross-functional man- acronym “TQC” (from Total Quality Control) agement and management of daily work. was borrowed from the US and used interchange- Crossfunctional management (kinoubetsu kanri) is ably with zenshateki hinshitsu kanri. However, to the organizational tool for interdepartmental co- distinguish the progressive Japanesestyle TQC ordination. To implement cross-functional man- from the Western-style TQC which had relied agement, permanent steering committees are more heavily on quality specialists, Japanese com- typically formed to coordinate and review panies and authors coined the English term Com- progress with regard to quality cost, and deliv- pany-Wide Quality Control (CWQC) to use ery performance. For each committee, the senior when explaining Japanese-style quality manage- managing director of the relevant functional area, ment to overseas audiences. Thus, the term such as quality is installed as committee chair and CWQC is found in many English language directors of other functional areas are included sources, while the equivalent term “TQC” is as committee members. Management of daily found throughout Japanese language sources. To work (nichijo kanri) refers to the application of the confuse matters further, the term “total quality plan-do-check-act (PDCA) cycle in each individu- management” (TQM) came into popular usage al’s routine work activities. The idea is to evalu- in Western companies during the 1980s and ate, define, and standardize all work activities and 1990s to denote their newly adopted approach where possible to extend best practices to other to quality management which was largely mod- workers and departments. eled after Japanese practices. Despite this change The principal means of bottom-up involve- in terminology overseas, Japanese companies ment in quality management activities is through continued to use the English acronym TQC do- quality control circles (QCC). Typically QC mestically up until 1996 when the Union of Japa- circles are small groups of front-line employees nese Scientists and Engineers (JUSE) made an from the same workplace who meet regularly on official change to TQM (sogoteki hinshitsu kanri). a voluntary basis to carry out quality control and improvement activities. Education and training Further reading are important aspects of QCC activity and all circle members are expected to master and apply Akiba, M., Schvaneveldt, S.J. and Enkawa, T. (1992) the seven tools of QC. Many companies and other “Service Quality and Japanese Perspectives,” in organizations sponsor QC circle conferences G.Salvendy (ed.), Handbook of Industrial Engineering, where employees present their improvement 2nd edn, New York: Wiley 2349–71. projects and often compete for awards. Garvin, D. (1988) Managing Quality, New York: The Free Press. Ishikawa, K. (1985) What Is Total Quality Control? The Terminology Japanese Way, trans. D.Lu, Englewood Cliffs NJ: Several different Japanese terms, as well as En- Prentice-Hall. glish acronyms, are commonly used when refer- Nemoto, M. (1987) Total Quality Control for Management: ring to quality management in Japan. The most Strategies and Techniques from Toyota and Toyota Gosei, basic term is hinshitsu kanri, which can be narrowly trans. D.Lu, Englewood Cliffs NJ: PrenticeHall. translated as “quality control,” though the Japa- Nonaka, I. (1995) “The Recent History of Managing nese use the term in a broader sense that may be for Quality in Japan,” in J.M.Juran (ed.), A History of equated with “quality management.” The acro- Managing for Quality, Milwaukee, WI: ASQC Qual- nym “QC” also is commonly used in Japan with ity Press, 517–52. this same generic meaning. Beginning in the Shiba, S., Graham, A. and Walden, D. (1993) A New 1960s and 1970s, as Japanese companies broad- American TQM: Four Practical Revolutions in Manage- ened the scope of quality management activities ment, Portland, OR: Productivity Press. to include more functional areas and organizational levels, the term zenshateki hinshitsu kanri came SHANE J.SCHVANEVELDT R

Rengo the formation in 1982 of Zenmin Rokyo (All-Ja- pan Council of Trade Unions in Private Indus- Rengo is the acronym for Nihon Rodo Kumiai tries); and the reorganization in 1987 of Zenmin Sorengokai, translated as the Japanese Trade Rokyo as Rengo, following the dissolution of Union Confederation. Comprising unions in both Domei, Churitsu Roren, and Shinsanbetsu. In the private sector and in the public sector, with 1989, Sohyo, formerly the largest and ideologi- total membership of approximately 8,000,000 cally most “militant” national center, consisting (about 68 percent of organized labor), it is by far primarily of public sector unions, dissolved, and the largest, the most representative, and the po- most of its affiliates joined Rengo. litically most significant national center of labor Unification was enhanced by union leaders’ organizations in Japan. However, Rengo’s author- sense of vulnerability in view of domestic socio- ity over its constituent organizations (industrial economic and demographic changes, especially unions), let alone over the enterprise unions, the following the oil crisis, and of mounting external basic and most powerful level of union organiza- pressures to open the Japanese economy to for- tion, is limited. Likewise, in the labor market, it eign competitors. Considerable gains previously is a junior partner of the government and of achieved through labor-management consultation Nikkeiren, the Japan Federation of Employers’ and cooperation at the enterprise became insuffi- Associations. cient, and had to be supplemented by state intervention. To become credible partners in public policy making, unions at all levels had not only History to close ranks, but also soften their ideological From the mid-1950s until Rengo’s establishment tone and adopt a more cooperative posture to- in 1989, Japanese unions lacked one, overarching ward the then ruling Liberal Democratic Party national center. Throughout most of this period, (LDP) and the national bureaucracy The LDP unions were affiliated either with one of several and the bureaucracy reciprocated by incorporat- rival national centers (Sohyo, Domei, Churitsu ing increasing numbers of leaders of industrial Roren, and Shinsanbetsu), or with none. Divi- unions and national centers into policy processes. sions were largely along Cold War-related ideo- This opening toward labor was facilitated by the logical lines reinforced by sectoral interests (public phase out of the Cold War and its rendering long- vs. private), and partly along diverging percep- standing ideological rifts largely irrelevant. tions of the role of unions in the place of employ- Under the assertive leadership of Yamaghishi ment, society and the polity. Akira, its first president, Rengo played a notable The main driving force for unification came role in exacerbating fission within the LDP, form- from pragmatic, non-doctrinaire leaders of un- ing the anti-LDP coalition in 1993, and institutions in the private sector. Major milestones were ing political reforms in 1994. Moreover, in Rengo 381 addition to fielding its own candidates in elec- More widely Rengo leaders make statements tions, it sought to reunify the socialist parties into on public issues directly and indirectly relating a new moderate, social democratic party that to employees. They meet Nikkeiren leaders to would play a major role in a realigning multi- iron out differences, launch joint research projects, party system, but without success. and jointly issue policy demands and proposals regarding such issues as employment security and taxation. They also participate in government- Structure and functions appointed formal shingikai, semi-formal shiteki shimon kikan, and informal forums of policy con- Among Rengo constituents, the legacy of past sultation, as well as in private-sector policy study affiliation with rival national centers, especially and advocacy forums. Sohyo and Domei, persists, albeit in different Internationally Rengo offers aid through its organizational forms and on a more moderate Japan International Labor Foundation (JILAF); scale and intensity. The unification of formerly cooperates with international NGOs; plays a lead- rival unions at the level of respective industries is ing role in the Asian branch of the ICFTU; rep- progressing, but at a snail’s pace. resents labor in the Japanese tripartite delegation Rengo’s top leaders hail from its affiliate un- to the International Labor Organization; and ions; and upon completing their term, they re- participates, together with the Ministry of Labor turn to their firm/government ministry enter and Nikkeiren, in periodic dialogues on labor is- politics, or land a managerial or advisory posi- sues with counterparts in other countries, nota- tion in union-related organizations in such areas bly Germany. as education and welfare. The administrative of- Rengo has achieved only part of its initial goals. ficials at headquarters are largely from affiliated But though ideologically conservative, it has not unions; a few “professionals” (propa in Japanese) presided over the demise of labor unionism in have been recruited directly mostly after gradua- Japan, as some observers had predicted. Rather, tion from university. it is considering new roles, defining new missions, For its rather limited finances, Rengo depends and launching new programs to invigorate all on its affiliates, which in turn are financed by their three levels of union organization. affiliate enterprise unions. The latter retain the lion’s share of individual members’ dues. Vis-à- See also: history of the labour movement; life- vis its affiliates, Rengo is largely supportive, advi- time employment sory and coordinating, rather than authoritative; it is not a “peak association” in the terminology of the literature on “neo-corporatism.” It dissemi- Further reading nates information and research results from government and other sources, including its own Koshiro, K. (ed.) (1998) Sengo gojunen: sangyo, koyo, rodo Research Institute for the Advancement of Liv- shi (Postwar 50 Years: Industry Employment ing Standards (Rengo Sogo Seikatsu Kaihatsu and Labor History), Tokyo: Nihon Rodo Kenkyu Kenkyu jo; Rengo Soken, in short). It adopts Kiko. guidelines for the annual spring labor offensive Kume, I. (1998) Disparaged Success: Labor Politics in Ja- and for union support of parties in elections. It pan, Ithaca, NY: Cornell University Press. encourages unification of affiliates in the same ——(2000) “Rodo seisaku kettei katei no seijuku to industry It seeks to adjust divergent interests of henyo” (Maturity and Transformation of Labor unions in different sectors and in industries dif- Policymaking Processes), Nihon rodo kenkyu zasshii ferently affected by globalization and deregula- (Japan Institute of Labor Journal) 475:2–13. tion. And, in view of declining union organization Rengo (annual) Seisaku seido shu: seisak seido yokyu to teigen rates, it urges reluctant affiliates and their enter- (Policy and Institutional Demands and Proposals), prise unions to organize irregular employees and Tokyo: Rengo Headquarters. the unemployed, and launches organization Shinoda, T. (1997) “Rengo and Policy Participation: drives on its own. Japanese-Style Neo-Corporatism?” in M. Sako and 382 research cooperatives

H.Sato (eds), Japanese Labour and Management in Tran- Once the council decides in favor of a project, sition, London: Routledge, 187–214. the ministry proceeds in several directions. First, it secures funding for the project, either from the EHUD HARARI Ministry of Finance or from other sources of income such as the proceeds from publicly li- research cooperatives censed betting at bicycle races. Second, it selects firms and public research laboratories to partici- Research cooperatives, also known as research pate in the project. Central criterion for firm se- consortia, are temporary alliances of potential lection is the likelihood of becoming a leader in competitors in the same industry for the purpose the new technology and in most cases, the of joint research and development. Research co- number of participant firms is less than 20. Third, operatives in Japan come in private and public if the project creates a new industry for which no forms. They first appeared in 1956 and soon industry association exists that could coordinate became part of the government industrial policy research activities, the ministry founds a new in- tool set. While the early cooperatives aimed at dustry association together with the participant catching up with the West, projects after 1980 firms. have focused on basic research. Throughout, the The implementation of the project is in the role of public funding has remained small as com- hands of the respective industry association. It pared to the United States. While organizing reserves as a coordinator for, and forum for infor- search in cooperatives has numerous theoretical mation exchange between, the participant firms advantages, empirical evidence has shown no and laboratories, which often split up into groups clear link between the presence of cooperatives to work on a small number of smaller projects. It and industry competitiveness. acts as a conduit to government by disbursing government research funds to cooperative members and reporting to the government on behalf Forms and actors of the cooperative. Finally association councils There are private and public research coopera- provide a forum for feedback from university tives in Japan. In a private cooperative, the par- researchers, who seldom participate directly in ticipant firms often found a jointly-held public cooperatives. corporation (kabushiki kaisha) to coordinate research activities. An example of this type is the Semiconductor Leading Edge Technologies Historical development and government (SELETE) cooperative, Japan’s counterpart to the funding Semiconductor Manufacturing Technology (SEMATECH) cooperative in the United States. Research cooperatives are roughly modeled on Public cooperatives involve not only firms, but the British Research Associations of the First also sponsoring government bureaucracies, in- World War. The first research cooperative in Ja- dustry and trade associations, public research pan dates to 1956, when a number of automo- laboratories, and universities. Prominent exam- tive air filter manufacturers formed a collaborative ples include the VLSI, Supercomputer, and Fifth venture. The first government-sponsored coop- Generation research cooperatives. Since public erative appeared in 1959, and in 1961, the Engi- cooperatives are at least in part publicly funded, neering Research Association Act officially the sponsoring government bureaucracy such as recognized research cooperatives and bestowed the Ministry of International Trade and Indus- a number of tax benefits on them. A total of about try (MITI) for manufacturing industries, plays 150 cooperatives have since been registered un- an important role in creating them. After an ini- der the Act; however, the actual number of re- tial proposal to undertake a public research search cooperatives is considerably higher and project, often from firms or academics, the min- not precisely known, as not all cooperatives are istry in charge of the project industry has a delib- registered. eration council (shin gikai) evaluate the proposal. The characteristics of public cooperatives restructuring 383 changed fundamentally around 1980. Projects financial risk for firms of undertaking basic re- before then focused on catching up technologi- search with unclear benefits; and the public com- cally with Western competitors. They aimed to mitment of government money to a given project produce commercializable products and lasted on after extensive expert consultations signals to average about five years. Public funding covered firms that the target technology may be viable. only part of the total research expenses and came However, empirical research has unearthed no in the form of conditional loans (hojokin), which clear link between the presence of research coop- firms were to pay back if the cooperative was eratives and industry competitiveness, and where successful (which they did for about half of all cooperatives have been successful, it is not ap- loans). Cooperatives financed through hojokin re- parent that firms would not have developed the tained the patent rights to all technologies devel- technology on theirown. oped. As Japan caught up with the technology fron- Further reading tier around 1980, the focus shifted toward basic research. Cooperative lifetimes lengthened to an Aldrich, H.E. and Sasaki, T. (1995) “R&D Coopera- average of about ten years, as basic research re- tives in the United States and Japan,” Research Policy quires more time, and public funding began to 24:301–16. cover all research expenses to make the risk as- Callon, S. (1995) Divided Sun: MITI and the Breakdown sociated with basic research more palatable to of Japanese High-Tech Industrial Policy, 1975–1993, firms. The funding scheme changed to reimburse- Stanford, CA: Stanford University Press. ments for commissioned research (itakuhi), which Okimoto, D.I. (1989) Between MITI and the Market: firms need not repay; however, all patents remain Japanese Industrial Policy for High Technology, Stanford, with the government, which licenses out the tech- CA: Stanford University Press. nology on a non-discriminatory basis. Most gov- Sakakibara, M. (1997) “Evaluating Government-Spon- ernment funding for research cooperatives has sored R&D Cooperatives in Japan: Who Benefits gone to three areas: semiconductors and com- and How?” Research Policy 26:447–73. puters, petroleum and chemicals, and power gen- MICHAEL A.WITT eration and distribution. Overall, the role of public funding in Japanese research cooperatives has been modest. Between restructuring 1960 and 1991, such funding amounted to about 0.47 percent of GDP in Japan, compared with The term, restructuring, or risutora, began to ap- about 1.32 percent over the same period in the pear in the Japanese vocabulary in the late 1980s, United States. The average government budget as exporting firms took measures to respond to per project has been about ¥8.4 billion ($76 mil- the endaka, or abrupt increase in the yen after the lion), while SEMATECH alone had received Plaza Accord in 1985. Restructuring gained mo- US$850 million from the US government by mentum in the 1990s, after the bursting of the 1996 (Sakakibara 1997). bubble economy. Mentions of risutora in the Nihon Keizai Shimbun, Japan’s leading business daily, increased from 505 in 1990 to 5,324 in A success? 1994, and it was difficult to find a firm not talk- Whether research cooperatives have been a suc- ing of restructuring. By the end of the 1990s, cessful vehicle for promoting research is subject however, “restructuring” appeared less frequently to debate. Theoretically cooperatives should be in the Japanese business press, in part because it advantageous for participating firms in a num- had become associated with downsizing. While ber of ways. Among others, the literature sug- there were very few outright layoffs during the gests that the pooling of research resources helps restructuring movement, firms used other meth- avoid wasteful duplication of research efforts and ods to reduce their workforces, and employees speeds the diffusion of technology; the contribu- and the general public correctly associated risutora tion of public funds to cooperatives alleviates the with job losses. Even during the restructuring movement in in the USA—remained rare. Nevertheless, restruc- the 1990s, Japanese firms were extremely hesi- turing had a real impact. According to Ministry tant to lay off employees. Several factors made of Labor statistics, the percentage of job separa- outright layoffs difficult. First, courts tended to tions among firms with over 1,000 employees due favor employees in lawsuits over severance. Em- to management circumstances (as opposed to re- ployers had to demonstrate pressing economic tirement and other individual circumstances) in- hardship (such as looming bankrucpty) to con- creased from 2.3 percent in 1980 to 9.3 percent duct layoffs without legal repercussions. Enter- in 1998. The unemployment rate grew to his- prise unions also opposed layoffs, preferring torically high levels (though still relatively low instead to negotiate gradual programs of labor by US standards). force reduction. Layoffs and other forms of Changes in organization structure often ac- downsizing also invited bad publicity. Pioneer companied workforce reductions. Many firms discovered this in 1993, when it gave thirty-five attempted to move towards flatter hierarchies senior employees a choice between retirement and and reduction of job titles. There was also a dismissal. This announcement was featured move in many large companies to reorganize prominently in the mass media as a harbinger of along business units rather than functional the end of permanent employment. Several weeks groups or factories. These reorganizations oc- later, Pioneer retracted its decision, allegedly due curred under the rubric of the “company sys- to concern about unfavorable publicity and pres- tem,” a term that reflected the objective of sure from its labor union. encouraging business units to act as independ- In restructuring, Japanese firms tended to ent companies, with profit and loss responsibil- adopt several measures that stopped short of ity. It is not clear how deep these changes were, outright layoffs. The first was shukko, or dispatch and how much they went beyond newspaper of employees either temporarily or permanently headlines and organizational charts. They did, to related companies. When firms exhausted their however, suggest a change in managerial think- options for shukko, as receiving firms became less ing from a company as a cohesive community to willing and able to accept redundant employees, company as a set of discrete, though related, op- they turned to other methods of downsizing. erating units. Many women in secretarial or clerical positions Another aspect of restructuring involved re- were encouraged to retire and were subsequently negotiation of long-term relationships with busi- replaced by soft-drink machines and temporary ness partners, in particular with parts suppliers employees. Firms also offered early retirement and distribution channels. Though accounts of packages to increasingly younger cohorts of male large manufacturers cutting ties to small suppli- employees. The mass media reported cases of ers attracted media attention, more common were “bullying,” in which firms harassed employees cases in which buyers reduced purchases over into resigning, though this kind of activity has several years, and provided encouragement and been difficult to verify Many firms also eliminated active assistance for its suppliers to diversify their or reduced hiring of new cohorts of graduates business opportunities. for one or more years. Though this reduced head- Foreign investors, who after the bursting of count without layoffs, it also had implications for the bubble were increasingly active and vocal the nenko joretsu system, in which successive co- investors in the Japanese stock market, welcomed horts of employees moved up a fixed promotion restructuring. Stock analysts at foreign firms hierarchy Hiring reductions left gaps in this hier- touted companies that had announced restruc- archy and increased the average age of a compa- turing programs as good investments. The Japa- ny’s labor force. nese public saw restructuring in a less positive The magnitude of restructuring among Japa- light. The unwillingness of the Japanese consumer nese companies during the 1990s did not reach to spend money a tendency that prolonged the the levels of US companies during a similar pe- post-bubble recession, was in part due to uncer- riod. Sweeping and immediate reductions of 10 tainty over future employment prospects under percent of a firm’s labor force—not uncommon continued restructuring. retail industry 385

Perhaps the best-known case of restructuring Brief history of the modern retail industry during this period occurred after Renault took a controlling stake in Nissan in 1999. Renault dis- The development of the modern retail industry patched Carlos Ghosn to serve as COO and later in Japan was marked by the opening of president. Ghosn embarked on an intense restruc- Mitsukoshi in 1904. The establishment of turing program, featuring deep cuts in employ- Mitsukoshi also symbolized a retailing “revolu- ment and severance of long-term supplier tion” at that time. The company introduced a set relationships. Even so, employment reductions of new retail techniques and management, includ- were carried out through early retirement, re- ing “cash payments and no haggling” policy di- duced hiring, and attrition rather than outright rect sourcing of merchandise from manufacturers, cuts. Ghosn at first attracted heavy criticism for selling by display rather than za-uri sales, and so unfeeling and un-Japanese behavior towards em- on. Other traditional drapery stores followed ployees and long-term stakeholders, though as Mitsukoshi, developing their stores into modern Nissan’s operating performance improved, this department stores between the end of the Taisho criticism became increasingly subdued. period and the beginning of Showa. At that time, the major clienteles for department stores was See also: lifetime employment confined to members of high society. In 1929, Ichizou Kobayashi of Hankyuu Rail- ways founded the world’s first railway store in Further reading its Osaka Umeda station. Many railway companies followed Kobayashi’s lead after the war. The Lincoln, J.R. and Nakata, Y. (1997) “The Transforma- major reason for the prosperity of railway depart- tion of the Japanese Employment System: Nature, ment stores was the rapid growth of population Depth, and Origins,” Work and Occupations 24:33– in major cities. The emergence of railway depart- 55. ment stores also widened the clienteles of depart- Mroczkowski, T. and Hanaoka, M. (1997) “Effective ment stores to include the lower-middle class Rightsizing Strategies in Japan and America: Is urban masses. There a Convergence of Employment Practices?” Department stores expanded rapidly to exploit Academy of Management Executive 11: 57–67. the high-speed economic growth of Japan in the Usui, C. and Colignon, R. (1996) “Corporate Restruc- 1960s. At the same time, supermarkets, a new turing: Converging World Pattern or Societally retail format, emerged. In 1953, Kinokuniya built Specific Embeddedness?” Sociological Quarterly 4:551– Japan’s first self-service supermarket. The rapid 78. growth of the supermarket business coincided with the emergence of a standardized consumer CHRISTINE L.AHMADJIAN market in which everyone with the wherewithal sought the same material goods. Supermarkets retail industry successfully capitalized on this market because they could offer the high-volume and low-profit The huge retail industry in Japan embodies a sales for a limited range of products that best very complex scheme of cultural categories. matched this market. Another reason for the rapid Japanese retail analysts have classified the indus- growth of the supermarket business in the 1960s try into two sections: one selling without stores was that the expansion of supermarket compa- and the other selling through stores. The former nies was not limited by the Department Store Law. consists of mail-order houses, telephone sales, Daiei outperformed Mitsukoshi and became the television shopping services and so on; the latter sales leader of all individual retailing companies includes shopping centers, middle- to small-scale in 1972. retailers (discount stores, convenience stores, Threats also came from another new retail and specialty stores), and large-scale retailers format: specialty shops. From the mid-1960s, a (primarily department stores and supermar- group of customers seeking fashionable mer- kets; see superstores). chandise emerged. Companies specializing in 386 retail industry different merchandise started to build their of its business. Ito-Yokado did not change its or- specialty shop chains all over Japan to exploit ganization, but enhanced the autonomy of each this market. individual store manager. Department stores responded to these threats in two ways. Firstly large city department stores Large-scale stores started developing shopping malls in suburban areas to cater to the ever-expanding market there, Department stores can be classified according to which further facilitated the growth of specialty their origins: those originating from the “kimono shops. Secondly some local department stores tradition” and those from the “railroad tradition.” joined the merchandise network of large-scale The former have a longer history and have thus stores and even merged with them. generally more prestige than those from the lat- In the 1970s, large-scale retailers suffered a ter. Major kimono stores included Mitsukoshi, double blow. The first was the economic down- Matsuzakaya, Isetan, Takashimaya, Sogou, and turn after the oil shock. The second was the in- Daimaru. The railroad tradition started with troduction of the new Large Retail Store Law Ichizo Kobayashi of Hankyuu Railways in 1929. that was extended to also cover general merchan- The idea was simple: railroad companies built dise stores (GMS). Large department stores re- their stores in terminals instead of in central busi- sponded by slowing down new investment and ness locations, designing them as full-blown de- laying off staff. In contrast, the large GMS partment stores from the beginning. Their adopted a diversification strategy. railroad connections enabled them to go to the After the Plaza Accord in 1985, the Japanese customers and to create their own markets. yen appreciated rapidly resulting in the Odakyuu, Keiou, and Tobu were major railway stabilization of the price of consumer goods. At stores in Tokyo. In addition, there was Sotetsu in the same time, interest rates were very low but Yokohama, Meitetsu in Nagoya, and Kintetsu, stock prices and property prices were high. The Hanshin, Hankyuu and Sanyo in the Kansai area. average salary increased rapidly because of a gen- Suupaa is a truncated loanword and is referred eral manpower shortage. These forces allowed to three forms of supermarkets. The first is called the retail market to prosper. The sales of depart- shokuhin suupaa (food supermarkets), itself modeled ment stores, especially the sales of luxury goods on the supermarkets in the USA. Shokuhin suupaa, such as jewelry rebounded very quickly Depart- by definition, must generate no less than 70 per- ment stores invested substantially in building cent of their income from food alone. The second large new stores and creating elegant sales floors is referred to specialty suupaa including apparel and for luxury goods. Daiei also continued its diver- household goods suupaa. A specialty suupaa must sification strategy in the 1980s, aggressively have a sales floor of no smaller than 500 square branching into other non-retail businesses, while meters and generate no less than 70 percent of its Ito-Yokado was determined to reform its retail sales from the merchandise it specializes in. The business by building a scientific retail manage- final form is the sougou suupaa (general supermar- ment system to improve its profitability. kets) that devote themselves not only to food sales However, the sales of department stores in the but also to the sale of a wide range of merchan- 1990s declined rapidly following the collapse of dise including textiles, household goods, furniture the bubble economy, while the cost, including and electrical appliances. Therefore, the term new land tax, salary and so forth increased sub- sougou suupaa refers to a sort of combined super- stantially. Consequently the profits of most de- market and mini-department store which is simi- partment stores continuously decreased from lar to a department store in form and should be 1992. Some retail analysts even argued that de- thought of as a GMS. partment stores were going to disappear. Large Sougou suupaas are different from department GMS experienced difficult times as well. Even stores in three major ways: the organization of Ito-Yokado, the most profitable, started record- operations, the number of outlets, and the ing a negative profit growth in 1994. Some com- social prestige attached to them. Generally most panies like Daiei chose to reform the organization department stores are located in a city’s earliest retail industry 387 established central business district to emphasize the latter are “fashion buildings,” which usually high quality goods, comprehensive customer have at least four floors, with food stores at the service, and target high-income customers. Sougou first floor, followed by fashion and variety shops, suupaas are located close to residential areas, in and finally restaurants at the top floor. These fash- order to be more easily accessible, focus mainly ion buildings are always located in city centers, on daily necessities, and target ordinary house- close to department stores or main railway sta- wives. tions. Parco of the Saison Group, 109 of Toukyuu Group, and Forus of the Jusco Group are famous fashion buildings in Japan. Shopping centers Shopping centers in Japan can be classified into Mid-sized and small retailers two types: general and specialty shopping centers. The general shopping center is a multi-func- Specialty shops refer to any store that generates tional retail format that usually includes one or more than 90 percent of its sales from a single two large-scale retailers as its core stores, supple- type of merchandise. The strength of specialty mented by various retail formats such as specialty shops lies in its expertise in their merchandise, shops and local retailers. It also houses restau- back-up service, and flexible customer service. rants, sport and leisure centers, cinemas, Specialty shops started to establish chain stores churches, and other public facilities. All these in fashion buildings, underground shopping establishments are integrated into a single retail malls, and shopping centers from the 1960s rather space, catering to different needs of the commu- than operating solely through their freestanding nity in which the shopping center is located. Gen- outlets because the former was much cheaper eral shopping centers are not just a shopping than the latter. The development of shopping complex but also a community center. centers accelerated the expansion of chains of General shopping centers require large land specialty shops. Additionally during this period areas. They are usually located in suburban ar- newly established families became individualized eas where land is much cheaper than city centers in taste and fashion conscious, and the merchan- but less accessible by trains. General shopping dise displayed in department stores no longer centers are also located at the nodes of highway appealed to them. This explains why many chain networks and provide extensive car parking fa- stores specializing in electrical appliances, shoes, cilities so that customers can go there by car. This men’s suits, books, furniture, cameras, and so on is why general shopping centers did not emerge emerged and prospered after the 1960s. Famous until cars had became popular and the popula- specialty chain stores include Best Denki (electri- tion of suburban area had grown rapidly in the cal), Chiyoda (shoes), Aoyama (men’s), 1960s. The first shopping center in Japan was Kinokuniya (books), Bic Camera (cameras), and the Tamagawa Takashimaya Shopping Center Shimashi (furniture). developed by Takashimaya in Tokyo in 1969. Konbini (convenience stores) are defined in Since then, developers have gradually established Japan as a self-service store, having a sales area large general shopping centers all over Japan. of less than 200 square meters, operating no less Famous large general shopping centers include than sixteen hours a day with no more than two MYCAL Honmoku, Hikarigaoka, Rarapouto, closing days a month, and generating less than and Harborland. 30 percent of total sales from fresh foods. The Specialty shopping centers do not have core major merchandise offered by convenience stores stores. They can be further divided into two are processed food, daily foods, fast foods, and types: extensive underground shopping centers non-food items. It is very obvious that the strength and multistory shopping buildings. The former of convenience stores lies in the “convenience” usually connect with public transport stations and demanded by the urban consumer lifestyle in large department stores within city centers. Cen- Japan. 7–11 Japan, a subsidiary of Ito-Yokado, tral Park of Nagoya is one of the most famous started Japan’s first convenience store in 1973. underground shopping malls in Japan. Most of Other large GMS subsequently established their 388 ringi seido

own convenience stores such as Daiei’s Lawson cussion system that relies on horizontal and ver- and Seiyu’s Family Mart. tical employee participation in reaching a consen- The key issues of operating a convenience sus on important organizational decisions. Two store are efficient use of space and rapid stock key features of this system are the bottom-up turnover, which are further dependent on accu- nature of employee participation and the circula- rate estimation of customers’ needs thereby avoid- tion of the ringi-sho, a proposal document, through- ing stock-outs or excess inventory. Running a out the sectional, divisional, and corporate levels convenience store successfully thus requires ad- of the organization to build consensus and com- vanced information technology and efficient mitment to company goals. However, at each physical distribution systems. Most convenience level, the formal circulation of a proposal is usu- stores had already equipped themselves with elec- ally preceded by a thorough discussion of the tronic ordering and point-of-sale systems by the details and alternative solutions. This process 1980s. captured the attention of Western managers, re- Discount stores have no clear definition but searchers, and consultants during the mid and generally refer to stores which sell merchandise late 1980s when interest in Japanese management at 20 to 30 percent discount of the price recom- peaked. mended by manufacturers. Discount stores date The ringi system can have a significant impact back to the 1970s when large GMS branched into on the effectiveness of organizational structure, other retail businesses including discount stores. strategic planning, negotiations. participation, These large GMS originally were discount stores commitment, and organizational learning. This at the beginning and they later developed them- is because ringi seido is more than just employees selves into large GMS, no longer appealing to signing off on proposals, it is also a significant the customers with low price but through offer- organizational process driven by information ing a wide range of merchandise. In the 1970s, gathering and consensus building objectives. the large GMS started to develop new discount Some of the key activities in this process include: stores that reduced price by strictly controlling operation costs, rather than by selling low-qual- • problem identification ity goods. These new discount stores successfully • information gathering/analysis overcame of the image of selling cheap but low- • informal discussion/consensus building quality goods. Discount stores grew rapidly in • formal meetings and deliberations the 1980s and reached their peak in the early • proposals circulated/revised 1990s when Japan’s economic bubble burst. Eco- • final decision and implementation nomic recession led Japanese consumers to seek value for money. Discount stores have been par- The range of these activities indicate that ringi ticularly successful in the field of cosmetics, liq- seido is a multi-step procedure that involves all uor, and imported foreign goods. levels of the organization in the attempt to decide an appropriate course of action. In giving structure to the decision-making environment of Further reading Japanese firms, this system impacts many Larke, R. (1994) Japanese Retailing, London: Routledge. key organizational functions and business strate- Niikei Ryuutsuu Shinbun (ed.) (1993) Ryuutsuu gendaishi gies. (The Modern History of Distribution), Tokyo: Japanese organizational structure places great Nihon Keizai Shinbun, Inc. emphasis on intra-firm communication. Ringi seido therefore plays a key role in company-wide com- HEUNG-WAH WONG munication and business strategies. From the open layout of offices to the active rotation of ringi seido employees throughout the Japanese firm, the focus is on building intra-firm relationships and Ringi seido is a distinguishing characteristic of Japa- avenues of communication. Once these are in nese management and refers to the proposal dis- place, it is then possible to more easily manage ringi seido 389

firm-specific information, skills, and knowledge. mobilize employees to find alternative solutions Moreover, the group orientation of Japanese cor- and share responsibility for the execution of new porate culture provides the mutual monitoring strategies. In continually sharing information and and information sharing that gives direction to delegating responsibility Japanese firms are able many organizational activities. The ringi system to foster a sense of community and enhance or- is clearly an important aspect of the communica- ganizational commitment. This approach may tions network that helps to structure organiza- explain the extensive use of company-wide cam- tional activity in Japanese firms. paigns in Japanese firms. Ringi also has an impact on the strategic plan- Finally some researchers have linked high par- ning process in Japanese firms. The literature on ticipation systems such as ringi seido to the organi- ringi generally highlights the bottom-up aspect of zational learning capabilities of Japanese firms (see the process. However, it is often the executives at Cole; Nonaka). Organizational learning relies on the top that identify a particular problem and a firm’s ability to harness the information-gath- indirectly challenge lower and middle managers ering and problem-solving abilities of individu- and their staff to find a solution. By carefully als and groups, with the goal of converting this identifying a set of key problems which the or- knowledge into sustainable company adaptation ganization faces, management lays the ground- routines. The development of problem-solving work for long-term strategic plans. Lower-level routines and procedural knowledge has been employees’ generation of alternative solutions shown to be crucial for effective quality man- sets the stage for the effective implementation of agement. product development and process consensus driven strategies. Many scholars thus innovation (see kaizen). The ringi system can thus point out that Japanese management cleverly be considered as one of the reliable problem-solv- combines the decentralization of employee par- ing and implementation processes that aid organi- ticipation with a high concentration of formal zational learning. authority As a group-oriented and consensus-driven Formal and informal negotiations are key ele- decision-making system, ringi seido can help to ments of the ringi system. The informal process create a sense of community. Although Japanese of nemawashi (root binding or sounding out) managers use the system to share responsibility helps to build consensus. This process is ex- and mobilize employee efforts, it also means that tremely important in generating alternative solu- lower ranking employees can have a significant tions to problems as well as in resolving impact on company strategy. Aside from the in- inter-group or interdivision differences. The lit- tra-firm factors mentioned above, the ringi sys- erature on intrafirm negotiations point out that tem can impact inter-firm dynamics. Contract Japanese employees and managers often employ negotiations, alliances, affiliate management and informal meetings on the job and after work to new business establishments can all be influenced suggest solutions and arrive at compromises. It by ringi seido. The process sometimes appears to is due to this type of extensive preparation and be slow and frustrating for foreigners doing busi- these behind-the-scenes informal negotiations that ness with Japanese firms. Moreover, the slower the formal circulation of the ringi-sho generally pace and less drastic decisions which result from becomes a simple process of signing off on ac- ringi seido can be a disadvantage in rapidly chang- cepted proposals. ing environments. However, since there is gener- Since the bottom-up approach of the ringi sys- ally less dissension once a decision is reached, tem involves employees in problem solving, it there tends to be faster implementation of the requires the delegation of responsibility and ac- objectives. As with other aspects of Japanese tive participation to be successful. In Japanese management, this approach to decision making organizations, the ringi seido helps to create a high is embedded in complex social relations that de- participation environment. By spreading market pend on trust and a commitment to organizational information and organizational problems objectives. throughout the firm, a sense of crisis can often be created. The goal of management is clearly to ROBLYN SIMEON S

salaryman after 1955. After the Second World War, the farming population declined drastically and the work- “Salaryman” is both an image and an occupa- ing class (skilled and unskilled workers) and the tional category that has come to represent the middle class (white-collar workers) expanded. Japanese middle class. Salaryman refers to white- Today the working class and the middle class each collar male workers employed by large modern constitute slightly over one-third of the working private sector corporations. The term embodies population. Independent small proprietors and all the stereotypical images associated with Japa- their family workers make up about a quarter of nese corporate employees: loyalty commitment the labor force. (Remaining percentages are pub- and obedience to the firm in exchange for secu- lic sector workers and those unemployed.) rity protection and rewards from the firm. Al- Precarious working conditions that character- though white-collar male employees constitute ize small business sectors are in sharp contrast to about a third of the labor force, those working in working conditions of white-collar employees of large private corporations account for less than large firms. The salaryman’s life is more stable 15 percent of the labor force. Thus, the class of and less affected by economic cycles. It provides salaryman is small numerically but serves as an secure employment and a lifestyle that is bright “ideological reference group” for the working and glamorous. The stability of the income, job population. security career outlook, and the lifestyle consti- The meaning or image of a salaryman and his tute the essence of the salaryman and salaryman relation to his firm can be compared to the samu- family rai warrior’s relation to his lord. During the The salaryman class is generally well-edu- Tokugawa period (1603–1867), samurai devoted cated. Salarymen are recruited right after gradu- themselves to feudal lords and to the expansion ation from a university accorded with apparent of the privilege and prestige of the lord’s house lifetime employment and pursue careers through and fief. Notions of loyalty and personal sacri- the firm-based internal labor market. Large cor- fice have clear parallels with the symbolic con- porations provide the salaryman with housing ception of the salaryman. Thus, the salaryman is benefits, family allowances, pensions, housing sometimes called the modern samurai or corpo- loans, and recreational benefits. In return for job rate warrior. stability economic security and corporate ben- The metaphorical comparison is powerful, but efits, a salaryman pledges his allegiance to the locating the job category of salaryman within the firm. He is expected to devote himself to the needs larger social structure may draw a clearer under- and commands of the company at the expense of standing. The Japanese word salari man (salary his personal rights and choices. man) can be traced back to the 1930s. It became The salaryman’s career path, which centers popular with the rise of the (new) middle class on the same company for his entire life, is not a samurai, role of 391 typical career path for Japanese. Given the heavy wives’ claims that their husbands’ deaths were concentration of small and medium-sized firms caused by the overwork demanded by their com- in the Japanese economy job changes are higher panies, ordering the companies to pay compen- than might be expected, especially from medium- sation. sized firms to small firms or from one small firm The celebration of Japan’s labor management to another. Overall job mobility rates in Japan practices ended abruptly in the 1990s with the are quite comparable to those in Europe. Thus, steepest slump in Japan’s postwar economy. Sud- the concept of salaryman may overlook the high denly companies rushed into restructuring and degree of labor mobility among workers in the downsizing, threatening a social contract that has large number of small enterprises. stood at the core of Japan’s success. Corporate The bright image of salaryman as a high-sta- life that was rigid but secure suddenly became tus career changed in the 1980s and 1990s. Life- insecure. Employee expectation that loyalty to the time employment, seniority-based promotion, company would be returned has been broken. and in-house training have locked salarymen into a rigid system of career attainment. A salaryman’s Further reading career is shaped and re-shaped depending on the company’s goals, allowing little autonomy over Powell, B., Takayama, H. and McCormick, J. (1995) his career development. For example, rotations “Who’s Better Off?” in M.I.White and S.Barnet of jobs are a standard part of corporate career (eds), Comparing Cultures, Boston: Bedford Books of development and salarymen are dispatched from St. Martin’s Press, 274–83. one geographical location to another. These com- Rosen, D. and Usui, C. (1994) “The Social Structure pany assignments increased the number of tanshin of Japanese Intellectual Property Law,” UCLA Pa- funin, temporary family separation. In 1985 there cific Basin Law Journal 13 (1): 32–69. were 200,000 married men who were classified Sugimoto, Y. (1997) An Introduction to Japanese Society, as tanshin funin and more than half of these men Cambridge: Cambridge University Press. were in their forties. Tanshin funin is often trig- Vogel, E.F. (1963) Japan’s New Middle Class, Berkeley gered by children’s education or family’s needs CA: University of California Press. to care for elderly parents. At the age of fifteen, GHIKAKO USUI Japanese children take the single most important examination of their lives: high school entrance exams that may well determine their future. Once samurai, role of children enter a good high school, they will have better chances of getting into good universities. Originally a kind of warrior-bodyguard, the role Parents attempt to avoid any disruption at this of the samurai was completely transformed dur- point in their children’s education. And so, ing the Tokugawa period to constitute a por- salarymen take tanshin funin. tion of a hereditary elite which stood above and Salaryman’s dedication to a company limits ruled over the bulk of the population. Samurai his position in family life to not much more than were distinguished by their appearance, by the a bread winner role. Long hours of daily com- fact that only they could carry weapons, and by muting, overtime work, and evening socializing language usage. That segment of Japanese soci- with co-workers leave very little time for personal ety developed its own style of religion, lifestyle or family leisure. Young women have begun to and entertainment, and exerted a strong influ- expect more family participation from the men. ence on the values of modern Japan. Divorce rates are rising among middle-aged cou- The word samurai brings to mind dramatic ples, with women claiming it difficult to live with images of bravery dedication to duty extremely men who have such a single-minded pursuit of developed fighting skill, a highly idealized vision work and little usefulness around the home. of masculinity Originally part of Japanese folk- Karoshi, death from overwork, is also rising and lore, those images are now shared by people all a number of lawsuits have been brought against over the world. Hollywood has in several in- companies. The courts have upheld a number of stances chosen to use themes and artifacts from 392 samurai, role of

the samurai tradition in making movies designed rior caste, were not warriors at all, but rather a to reach the imaginations of young people, even category at the bottom rung of a ruling aristoc- when the setting has nothing to do with Japan. racy. In Japan itself the samurai image is introduced to Samurai was a term used in some cases to refer each new generation through relatively accurate to all of the ruling aristocracy outside the court historical documentation, and through liberal nobility surrounding the Emperor in Kyoto. amounts of entertainment fantasy. When a Japa- However there were other more specific titles nese boy is born, he is typically provided with a which applied to those of the highest status in decorative samurai helmet and sword for display feudal Japan, and samurai, then and now, most on Children’s Day a symbol of the new mascu- often identified the men at the large bottom level line unit of the home. When thought of in a posi- of the Japanese ruling caste. In the eyes of ordi- tive light (which is definitely not always the case nary people, they were a kind of elite police. It is today), the self-sacrificing salaried employee of a only a slight exaggeration to state that samurai large corporation is sometimes referred to as a lived lives almost completely shut off from ordi- modern-day samurai. nary Japanese society. The word samurai, closely associated and of- The samurai caste was not a single status; some ten used interchangeably with another word, samurai had retainers of their own, and the amount bushi, both denoting warrior, had its initial wide- of pay in the form of rice made to each samurai spread application in the thirteenth century and family varied considerably Most were at the bot- continued to be used to refer to a specific and tom of the caste however, and although we can official category of Japanese men until the end of call samurai aristocrats due to their elevated sta- the nineteenth century However, glamour asso- tus and power over commoners, ordinary samu- ciated with the samurai image is actually drawn rai themselves were not usually wealthy people. from only a part of that time, roughly from the Until the very end of the regime, it was shameful early thirteenth to the beginning of the seven- for those with real power if samurai under their teenth centuries. For the final two and three-quar- command did not dress well and have the best ter centuries of its existence during the Tokugawa equipment. However, these things were issued period and its immediate aftermath, the role of to most samurai in the same way that slaves or samurai was fundamentally altered. prisoners are provided for. The Tokugawa regime transformed Japan into During the civil war period, most samurai spent a system of fiefs or feudal estates tightly control- most of their waking hours preparing for the in- led and carefully watched over by a central gov- evitable battles. They never constituted a large ernment. The crowning accomplishment of the segment of the people as a whole, probably no Tokugawa rulers was the peace the regime was more than 1 percent. Soon after 1600, as an offi- able to enforce for a very long time. Ironically in cial caste in the Tokugawa social system, and with a society ruled by warriors, all military activity no more fighting to do, samurai men began to live disappeared under the Tokugawa, and was not as long as other men; together with their fami- to appear anywhere in the land again for more lies, they came in time to constitute from 7 to 8 than ten generations. percent of the total Japanese population. Samurai During Japan’s long period of civil wars, wars were normally quartered on the castle grounds fought until the mid-1500s almost exclusively by of their master, either the daimyo of a feudal es- samurai, a great many of those warriors did not tate or the head of one of the several branches of live past the age of twenty-five. Most samurai were the Tokugawa clan. Young samurai continued to sons of samurai, but a promising peasant lad could be trained in the martial arts, but after 1600 there be trained as a samurai if he caught the attention was plenty of time for other pursuits, and over of the rulers of his estate, and stories of farm boys time samurai became a highly educated cadre, who became famous samurai are not uncommon. universally not only literate but well schooled in All that changed under the Tokugawa. Samurai history and philosophy Only samurai were allowed were made an hereditary caste; for most of the to carry weapons, and although they swaggered period of Tokugawa rule, the samurai, the war- through the streets of Tokugawa Japan with their sarakin 393 two swords in evidence, the real job for most samu- neighborhood, most sarakin were small opera- rai was as bureaucrats. tions, usually with only a single office. The attractiveness of sarakin was obvious: they See also: giri provided small, for the most part unsecured, loans and required little more than a signature. Annual interest rates, however, were exorbitant, Further reading often exceeding 100 percent. Indeed, the legal Shinoda, M. (1960) The Founding of the Kamakura limit at that time was 109.5 percent. For delin- Shogunate, New York: Columbia University Press. quent payers, collection methods were aggres- Totman, C.D. (1967) Politics in the Tokugawa Bakufu, sive, and included such things as personal visits Cambridge, MA: Harvard University Press. to one’s residence, intimidating calls to one’s Varley P.H. (1970) The Samurai, London: The Trinity employer and threats of physical violence. One Press. estimate of sarakin with yakuza ties placed the number at over 3,000. Despite their overall JOHN A.McKINSTRY unsavory image, by 1975 sarakin held 4 percent sarakin of Japan’s total consumer credit. The second half of the 1970s and early 1980s A contraction of the Japanese term “salaryman saw explosive growth among the sarakin. Their financing,” the term sarakin refers to finance com- share of consumer credit grew to nearly 14 per- panies with notoriously high interest rates or in- cent in 1982 from its 4 percent level in 1975. The volved in loan sharking operations, often with number of sarakin also grew dramatically with close ties to yakuza, the Japanese mafia. Sarakin some estimates placing the number of sarakin at emerged in the 1970s in response to an unmet roughly 220,000. Though most of these were still demand for consumer credit. Major legislative of the one-office variety four of the largest oper- reforms in the early 1980s served to rein in sarakin ated nationwide, with hundreds of offices, and practices. Legislation, however, has not helped holding individuals’ accounts numbering in the sarakin overcome the historically negative image hundreds of thousands. of moneylenders. This stands in contrast to their In 1983, the Diet passed the Loan Shark Con- US counterparts who were able to make the tran- trol Bill, reining in the growth of sarakin and sig- sition to becoming financial firms offering a wider nificantly reducing the maximum annual interest array of services. Instead, the gap for consumer rate allowed. The top rate was lowered in phases credit once filled by sarakin has been taken over from 109.5 percent to 73 percent in 1983, then to by banks and shinpan (sales finance corporations). 54.75 percent in 1986, and then to a final position of 40 percent in 1991. The legislation came about in response to widespread social concern Historical development over samkin-related suicides and disappearances. In the early 1970s, individuals seeking loans for A study by the National Police Academy identi- purposes other than to buy a house confronted fied over 1,000 suicides which it classified as sarakin- social stigma and practical challenges. Social related. It also classified 10,000 disappearances as stigma generally attached to people who found samkin-related, suspecting these people of fleeing themselves in circumstances necessitating the creditors. In a separate analysis, fifteen murders borrowing of funds. In addition to social disap- in the first four months of 1984 were also classed probation, the market for consumer lending as sarakin-related. through established banks and other lending in- Despite the 1983 legislation, numerous stitutions was not well developed. There were sarakin continued to operate as usual. In one in- numerous regulatory barriers besides which instance, the Saitama police arrested three loan dustrial demand for investment funds was swal- sharks for charging ¥40,000 interest on a three- lowing up most of the available capital. Sarakin day loan of ¥60,000, fifteen times the allowable stepped in to fill the niche. rate of ¥3,700. Such incidents prompted an in- Located near virtually every train station and vestigation by the National Tax Agency, which 394 science and technology policy concluded that 80 percent of sarakin were evad- ogy policy than their US counterparts over the ing taxes and generating incomes three times the years, the Japanese government has always spent reported average. far less as a percentage of overall national R&D Over time the Loan Shark Act took its toll. spending than the US government. The phased-in interest rates, coupled with the growth of consumer lending practices among Through the Second World War banks and shinpan led to a shakeout. From a peak of 220,000 in 1980, sarakin numbers dropped to Although the Tokugawa government (1603– 37,000 by the early 1990s. Some observers specu- 1868) severely restricted Japan’s contacts with the late that bad practices winnowed out many of outside world from the early seventeenth century the small sarakin. Poor screening processes, unso- until the mid-nineteenth century it did allow the phisticated collection methods and high levels of import of foreign books on science and technol- unrecovered loans drove out many. Those who ogy and supported the translation of many of remained pursued cooperative efforts in terms them. After Japan was opened to contact with of sharing credit information and sought scale the Western world, its government hoped to com- economies in transaction processing. bine Western technology with Japanese values, Large sarakin who survived the shakeout of thereby building a strong nation able to maintain the early 1990s are thriving at the turn of the its independence. In the late nineteenth century century Takeufuji reported 1999 earnings at foreign engineers were hired to help build a tech- nearly ¥53 billion, a 27.8 percent improvement nological infrastructure and to teach technology over 1998. Acom and Promise, two others, re- to the Japanese. Young Japanese were also sent ported similar earnings levels. At the same time, abroad to learn about technology. By 1873, more leading sarakin have dropped their top annual rates than 500 foreigners were working for the Japa- down to a range of 25.55 to 29.2 percent. Finally nese government and some 250 Japanese were consumer behavior suggests that the position of studying abroad at government expense. sarakin will remain prominent. The average level The Japanese government also began struc- of consumer debt (using the ratio of turing itself to import and adapt foreign technol- debt:disposable income) for Japanese now ex- ogy. The Ministry of Engineering (also called ceeds that of the USA. Ministry of Industry) was established in 1870 with the major mission of bringing in mining and ALLAN BIRD manufacturing technology. In 1886 the Patent Office was established. Government involvement science and technology policy in technology accelerated during the First World War. Around this time the Ministry of Educa- Japan’s science and technology policy historically tion began offering research grants for natural emphasized the importation and adaptation of science research. National Research Institutes in foreign technology. This was considered essen- such fields as electrical engineering and metal- tial to Japan’s military and economic security. lurgy were also set up. The military established After the Second World War, the focus on for- R&D centers: the Naval Research Institute, in eign technology continued, though the emphasis particular, became quite strong in the electronics shifted almost exclusively to commercially im- area, and wartime researchers at the institute, portant technologies. As Japan moved to a lead- including Morita Akio (a co-founder of Sony), ership position economically and closed its went on to become leaders in the consumer elec- technological gaps with the West in the 1960s tronics industry. and 1970s, new concerns emerged. These in- As international tensions escalated in the cluded the development of a stronger ability to 1930s, the Japanese government sought to mobi- perform basic research and to contribute to the lize its technological resources. In general, these world stock of technology. Although Japanese efforts were unsuccessful. Rivalries between the policy makers have tended to craft more coher- military services, shortages of materials, and the ent statements of national science and technol- induction of many researchers into the military science and technology policy 395 all weakened the development of Japanese tech- level body reporting to the prime minister. This nology. The severance of ties with foreign sources signified that science and technology policy was of technology in the United States and Europe formally recognized as having an important role also hurt. within the national government. In 1959 the Coun- cil for Science and Technology (CST) was estab- Postwar period lished with STA staff to make recommendations to the prime minister on the overall directions of With the end of the Second World War, US oc- Japanese science and technology policy. cupation authorities dismantled the Japanese In 1960 the CST proposed a comprehensive wartime technology policy apparatus and prohib- plan for the development of science and technol- ited research in areas such as aviation and radar. ogy in Japan over the coming decade. This was Many aviation researchers moved to the auto- part of the government’s income doubling plan. mobile industry and many of the radar research- The comprehensive plan called for the elimina- ers moved to the consumer electronics (and later tion of the technological gaps between Japan and the semiconductor) industry. the West. It recommended increasing the number In the early postwar era, Japan desperately of science and engineering universities and in- needed to import new technologies. At the time creasing spending on R&D to 2 percent of GDP, Japan was chronically short of foreign exchange, double the 1959 level. This would have been which was rigidly rationed by the government. comparable to the percentage in the UK, though A major challenge was to establish mechanisms still below the 2.7 percent being spent at the time for Japanese firms to pay foreigners for technol- by the USA. ogy. A framework for doing this was established While the STA concentrated on general poli- with the passage of the Foreign Exchange and cies and on certain national projects, such as those Foreign Trade Control Law (1949) and the For- related to nuclear energy and space exploration, eign Investment Law (1950). Under these laws, MITI shifted its interest from technology import Japanese firms applied to the government, most controls (which were being phased out as Japan often the Ministry of International Trade and joined the OECD) to policies that would promote Industry (MITI), for approval of technology the development and use of industrial technol- import agreements. If approval was granted the ogy. In its “vision” for the 1960s, MITI proposed firm was allowed the foreign currency to pay for a variety of policies for the promotion of indus- the technology. In the 1950s and 1960s some trial technology including the use of subsidies and 13,000 agreements were screened and approved tax relief. At this time the decision was also made by the government. While government involve- to build Tsukuba Science City. ment may have slowed the flow of technology In 1966, the CST issued new recommenda- into Japan, it apparently also resulted in Japanese tions on science and technology policy designed firms getting better terms than they might have to help Japan cope with the opening of its otherwise. MITI could refuse to approve agree- economy. Now the target was for R&D spending ments if the terms seemed too generous to for- to reach 2.5 percent of GDP, near the US level. eigners. It could also keep Japanese firms from The CST wanted to see a new emphasis on long- bidding against each other to raise the price of a term planning. CST’s proposed Basic Law for technology. Science and Technology however, was not passed. The emergence of modern science and technology policy Changes in the 1970s While MITI, the Ministry of Finance, and other As Japan entered the 1970s it was no longer a ministries concerned themselves with Japan’s tech- poor country and policy concerns shifted from nology import policies, other initiatives in the area economic growth to environmental protection. of science and technology and policy were begun The energy crises of the 1970s brought new in the 1950s. In 1956 the Science and Technol- interest in energy conservation and finding alter- ogy Agency (STA) was established as a cabinet- native sources of energy. Japanese policy makers 396 science and technology policy

also believed Japan had to become competitive Enrollments in science and engineering depart- in emergent new industries. In its recommenda- ments started declining in 1988. Younger Japa- tions for the 1970s, the CST gave new attention nese seemed to be turning away from an interest to technology assessment and soft science. It set in science and technology. a long-term goal of increasing Japan’s investment The CST revised the general guidelines for in R&D to 3 percent of GDP. As Japan became science and technology policy A new Science and embroiled in conflicts with its trade partners, and Technology Basic Law, based on the revisions, the Japanese became concerned about their im- was passed by the Japanese Diet in 1995. The age as a nation of copiers, there was new interest new law called for government to prepare and in international cooperation in the development implement two successive five-year basic plans. of technology. The goals of the plans were to make the Japa- MITI also issued a new vision for the 1970s nese science and technology system more inno- that called for the development of pollution con- vative and cost efficient by addressing such trol technology energy-saving technology and problems as the decline in private R&D spend- alternative sources of energy. In a 1975 interim ing, the generally poor Japanese R&D infrastruc- report, MITI called for research on nuclear future, and the obsolescence of facilities at national sion and computers. One MITI policy device was universities and national laboratories. the use of research cooperatives, made up of The guidelines pointed to other problems and industrial firms and government laboratories sup- suggested remedies. It noted, for example, the rela- ported by government subsidies and tax benefits. tive lack of mobility of Japanese researchers be- Perhaps the most publicized of these was the tween the government, private and university VLSI Research Cooperative which targeted the sectors. Under the new law, professors at national development of semiconductor technologies for universities would be freer to work as consultants use in computers. Although the VLSI consortium or in joint research with the private firms. The new is generally portrayed as having been successful law also introduced more competition amongst in accelerating Japan’s technology progress, the those applying for government research support record of the research cooperatives in general is and sought to standardize the review process. It controversial. In the 1980s MITI established new increased the number of postdoctoral fellowships R&D programs to promote “future” industries, and sought to encourage more foreign research- including new materials and biotechnology. An- ers to work in Japan. New tax deductions and sub- other new area of policy was the creation of re- sidies were offered to encourage small and medium gional technology centers. sized firms to spend more on research. The new CST believed Japan’s major priorities for the law also supported the development of regional 1980s should include a strengthening of its abil- science and technology centers. ity in basic research. Throughout the 1980s the Major changes in Japan’s administrative struc- CST worked on the development of basic guide- ture are scheduled for 2001. The STA is to be lines for a new science and technology policy for merged with the Ministry of Education, Science Japan. In a report approved by the cabinet in 1986 and Culture. STA’s Atomic Energy and Nuclear two main pillars of science and technology policy Safety Bureaus are to be moved to MITI. MITI’s were identified, basic research and internation- research institutes are to be merged into a new alization. Now the goal was to increase R&D Industrial Science and Technology Institute. The spending to 3.5 percent of GDP. Institute will be an independent administrative agency partially funded by the government, but not considered to be part of the government. After the bubble After the bursting of the bubble economy of the Distinctive features of Japan’s science and 1980s, new problems emerged for Japan’s science technology policy and technology policymakers. Corporate spending on R&D declined for the first time since the Japan’s science and technology policies have Second World War in 1992 and again in 1993. differed somewhat from those of the USA and seniority promotion 397

Western Europe. There was a much greater em- and as being rooted in the deeper values of Japa- phasis on the acquisition of foreign technology nese society However, it applies only to perma- particularly in the first few decades after the Sec- nent, or regular, employees of the firm, whose ond World War. There was little emphasis on numbers comprise a minority within the total defense spending and, partly as a consequence labor force and even within the company. More- of that, the share of R&D spending supported by over, the evidence for seniority promotion sug- the government was typically lower (20 percent gests that the practice is more textured than is in the late 1990s, compared to more than 30 per- commonly thought. In the face of a prolonged cent for the USA). Another consequence of the recession, heightened competition with non-Japa- lack of emphasis on defense spending was that nese firms both at home and abroad and a tight the Japanese government was far less able to of- labor market for college graduates, firms are fer the lure of government procurements to en- moving away from their emphasis on seniority courage the development of specific technologies. as a key criterion in promotion decisions.

Further reading Cultural foundations Callon, S. (1995) Divided Sun: MITI and the Breakdown of Japanese High-Tech Industrial Policy, 1975–1993, Harking back to pre-Meiji era ie, Japanese work Stanford, CA: Stanford University Press. organizations have had a long history of respect Goto, A. and Odagiri, H. (eds) (1997) Innovation in Ja- for seniority. At a more fundamental level, the pan, New York: Oxford University Press. foundation for seniority promotion is sociocul- Lynn, L. (1982) How Japan Innovates: A Comparison with tural norms rooted in the Confucian-based val- the U.S. in the Case of Oxygen Steelmaking, Boulder, CO: ues of respect and deference toward seniors. The Westview. assumption embedded in this value is that as a Morris-Suzuki, T. (1994) The Technological Transforma- consequence of age and experience, seniors have tion of Japan, New York: Cambridge University more knowledge and wisdom. Within a work- Press. place context, this same assumption is held. Science and Technology Agency Japan (annual) Indi- Longer tenure implies a greater knowledge of the cators of Science and Technology. Tokyo: Ministry of Fi- firm and its competitive environment that trans- nance Printing. lates into better judgment. Within the merchant ——(annual) Kagaku gijutsu hakusho (Science and Tech- houses and guilds of the pre-Meiji era, there was nology White Paper), Tokyo: Ministry of Finance good reason to accept this assumption, as indi- Printing. viduals worked their way up through apprentic- ing to someone more skilled and more LEONARD H.LYNN knowledgeable. The correlation between age, experience and knowledge/skill was more clearly seniority promotion discernible. A related rationale for the logic of seniority Known as nenko joretsu in Japanese, along with life- promotion is that given the norms in the larger time employment and enterprise unions, se- social context, employees of an organization niority promotion is considered one of the three would feel uncomfortable working for someone sacred treasures of the Japanese management younger than themselves or supervising some- system. It refers to the practice of promoting one older than themselves. In short, seniority employees on the basis of seniority in the firm promotion was deemed necessary to maintenance rather on the basis of merit. This type of promo- of good company morale and harmony. tion system is sometimes described as an “esca- Seniority promotion is also predicated on the lator,” suggesting that one steps on at the bottom notion of rewarding loyalty Advancement in rank and then automatically rises within the organiza- is recompense for working hard on the compa- tion. It is often portrayed as reflecting the collec- ny’s behalf. A refinement of this argument is that tive, egalitarian nature of Japanese organizations promotion is a form of “serial equity” in which 398 seniority promotion

the employee works hard in the early years in likely kakaricho, sub-section head) will come as exchange for the promise of greater reward and early as the fifth year. For average performers, promotion later in the career. promotion to kakaricho may not come until year seven or eight. If subsequent promotion opportunities present themselves on a four-year basis, The reality of seniority promotion and differences in rates of promotion persist, then Western discussion of seniority promotion has over a sixteen-year period high-performing and often been simplistic. A superficial case for se- average-performing members of the same cohort niority promotion is easily found in the behavior will find themselves several levels apart. When of torishimaryakukai (board of directors) at the one factors in the presence of new cohorts enter- time that a new president is selected. The tradi- ing annually and the recognition that firms have tional practice, still common, is for members of a pyramidal structure, it is difficult to countenance the torishimariyakukai (board of directors) who are a pure seniority promotion system. younger than the incoming president to resign The metaphor of promotion as an “escalator” their positions, either immediately or at the end requires some modification. First, access to the of their two-year appointment. Though this phe- escalator is highly restricted, applying only to nomenon appears to support the notion of se- permanent employees. Second, there are multi- niority promotion, it does not withstand close ple escalators—at least one for each cohort. Third, scrutiny. Under a pure seniority system, there based on performance, managers end up on es- would be no one older than the incoming presi- calators that move at different rates. Finally dent (though there might be some who were the through shukko and related practices, voluntary same age). There are other equally compelling exit and outplacement, workers are moved off explanations for what transpires with the succes- the escalator in order to make room for those sion of presidents. As the new president will have below them. a tenure of six to eight years, directors who are older have little prospect of further advancement. Age versus ability New presidents also prefer to have their own people in place, so it is natural to leave and make The conception of seniority promotion derives room for them. Elements of the values underly- from a much larger distinction between Japanese ing seniority promotion may contribute to exit and Western firms, the relative importance of age phenomena surrounding CEO succession, but and ability as criteria on which to base not only alone do not provide a compelling explanation. promotion decisions, but also decisions on com- The evidence for seniority promotion at lower pensation. The traditional Japanese system has levels of the organization is equally complex, due tended to place a greater emphasis on age as a to the length of time between promotions and criterion for both pay and promotion than is the nature of cohort recruitment. In large firms, found in Western firms. Japanese have tended to employees enter directly from university in large give age more importance. It is important to note cohorts. Japanese firms tend to hire annually in that even in Western countries, seniority carries large cohorts and employ an internal labor mar- weight and contributes both to pay and promo- ket system (see internal labor markets) in which tion decisions. However, its relative weight has job vacancies are filled from below rather than been much greater in Japan. from an external labor pool. Large, particularly There is evidence that the relative weight of traditional, firms tend to prolong the period be- age has been shifting, particularly from the 1980s fore one’s initial promotion as compared to West- onward. A tightening labor market has left new ern firms, where promotions can occur early in recruits with more options, to which they have one’s career. As a result, these cohorts tend to responded with higher levels of mobility In or- move up and through the organization as a group. der to retain them, firms have been moving up However, over time they will begin to separate promotion timetables and increasing the weight based on performance. For high performers, the of performance criteria in making promotion first promotion to a managerial position (most decisions. The presence of Western firms, which 7–11 Japan 399 no longer suffer a stigma as unstable employers, improve inventory and shelf space management has served to amplify the different options open and enhance profitability. to new recruits: fast versus slow promotion, per- Prior to the 1970s, Japanese retailing was formance versus tenure. dominated by small mom-and-pop stores and a The internationalization of Japanese firms has few large department stores. During the 1960s also forced many to confront conflicting pay and and 1970s, the retail chain Ito-Yokado built a promotion policies between Japan-based opera- growing chain of superstores—multi-story stores tions and overseas subsidiaries. The pressure to containing several types of retail outlets—in sub- standardize, or at least bring into greater conform- urban areas of Japan. The success of Ito-Yokado ity human resource management policies and and other superstores hurt the business of mom- practices has led many to opt for increasing the and-pop operations, prompting the Japanese weight of performance over age. Internationali- government to establish the Large Retail Store zation has also created a competitive environment Law to protect small shop owners. Enacted in in which seniority promotion policies placed Japa- 1974 and strengthened in 1979, the Large Retail nese firms at a competitive labor disadvantage. Store Law restricted the opening of new stores Finally many of the most dynamic industries with sales floors above a certain size and limited in twenty-first century Japan—high tech, e-com- the operating hours of new and existing large merce, financial services, telecommunications, stores. biotech—are industries without strong ties to the In 1974, Ito-Yokado secured a license from traditional Japanese management system and led Dallas-based Southland Corporation to operate by younger business leaders, often operating on 7–11 stores in Japan. Fifteen 7–11s were opened the periphery of the established, conservative in Japan in that year, and over the next twenty- business community Consequently firms in these five years the chain expanded at a rate of over industries have demonstrated a greater willing- 300 new outlets per year. With an average floor ness to break with business norms and sociocul- space of only 1,000 square feet, the stores tural values. avoided regulation under the Large Retail Store Law and competed successfully with the mom- and-pop stores on basis of long operating hours Further reading and lower prices. 7–11 Japan followed a policy of franchising stores rather than owning them, and Brown, C., Nakata, Y, Reich, M. and Ulman, L. (1997) many small retailers became 7–11 franchises. In Work and Pay in the United States and Japan, New York: 1991, Ito-Yokado bought out Southland, the Oxford University Press. owner and operator of the 7–11 chain in North Clark, R. (1979) The Japanese Company, Berkeley CA: America. In the 1990s, 7–11 was Japan’s most University of California Press. profitable retailer. Total sales in 2000 were $20 Tachibanaki, T. (1996) Wage Determination and Distribu- billion. tion in Japan, New York: Oxford University Press. 7–11 Japan owes much of its success to inno- Rohlen, T. (1974) For Harmony and Strength, Berkeley vative management, particularly the introduction CA: University of California Press. and development of point-of-sale (POS) systems that monitor the flow of every item of merchan- ALLAN BIRD dise through purchase, inventory sale, and restocking. First introduced in 1982, 7–11 Japan’s 7–11 Japan POS systems allowed two-way information flow between individual stores and company head- 7–11 Japan is Japan’s largest chain of convenience quarters, and revealed clearly and immediately stores, with 8,200 outlets nationwide. The com- which products sold well and which did not. The pany helped revolutionize retailing in Japan in profit performance of individual items replaced the 1970s and 1980s, pioneering the development supplier power as the determinant of which prod- of the convenience store industry and introduc- ucts were given shelf space. Centralized ordering computerized point-of-sale (POS) systems to ing also gave 7–11 increased bargaining power 400 shareholder weakness with distributors, resulting in more frequent and company in which they hold shares to improve smaller deliveries. investment return to shareholders. Also, because 7–11 Japan has also steadily increased the of cross-shareholding relationships, some stable number of products and services offered in its shareholders have a strong incentive not to med- stores; consumers can purchase an astounding dle with other companies’ management because variety of items, as well as make color copies, such action may be reciprocated. These arrange- send faxes, order tickets, and pay electric, gas, ments, therefore, allow management to maintain water, telephone, insurance, and NHK television strong control over the company. bills. In 2000, with further land-based growth In addition to large shareholdings by stable becoming difficult and online shopping taking off shareholders, the role of the board of directors in Japan, 7–11 Japan joined with NEC, Sony, of Japanese firms functions to allow managers to Mitsui & Co, Japan Travel Bureau and other lead- pay only minimum attention to the shareholding Japanese firms to set up an e-commerce mar- ers’ interests. Although the directors of the board ket which integrated the convenience of online are assumed to represent shareholders, they are shopping with in-store payments and merchan- not motivated to do so because they are usually dise pick-up capabilities. chosen by the president and are thus in effect junior officers of the company. Further, very few TIM CRAIG directors own stock in the company or are compensated through stock price-linked packages, shareholder weakness although such compensation plans are increasing in recent years. Thus, there is no internal Japanese managers have not had much pressure mechanism that can promote the interests of from shareholders. One of the main reasons for shareholders who seek investment returns. this is that the majority of shares in Japanese firms While shareholders of Japanese firms have had have been held by so-called stable shareholders only limited influence over management, this situ- such as affiliated or keiretsu firms, banks, and in- ation shows some sign of change due primarily surance companies. These shareholders, who are to the changing ownership structure. In recent called antei kabunushi or seisaku toshika’ in Japanese years, Japanese firms and banks have been gradu- (“stable shareholders” or “strategic investors”) ally selling their shareholdings in other compa- often have other relationships, such as lending, nies and unwinding part of their insurance sales and other commercial trades with cross-shareholdings, and share-ownership by for- the firm in which they own shares. In many cases, eign institutional investors has been increasing. these equity holdings are reciprocated among af- Although it is far from the situation in the USA, filiated firms through cross-shareholding arrange- the number of investors who are sensitive to in- ments (see cross-shareholdings). It is suggested vestment returns is increasing. that 70–75 percent of listed shares of Japanese firms are owned by stable shareholders and 15– See also: corporate governance; torishima- 20 percent of listed shares are cross-held, although riyakukai these numbers have been declining in recent years. It is commonly argued that stable sharehold- Further reading ers own shares primarily to cement and grow stable business relationships rather than to earn Abegglen, J. and Stalk, G. (1985) Kaisha: The Japanese returns on their equity investments and thus, Corporation, New York: Basic Books. shares held by stable shareholders are rarely if Charkham, J. (1994) Keeping Good Companies: A Study of ever sold. Because of these motives in Corporate Governance in Five Countries, Oxford: shareholdings, stable shareholders’ main concern Clarendon Press. has not been stock price appreciation or dividend Gerlach, M.L. (1992) Alliance Capitalism: The Social Or- incomes. Thus, stable shareholders have not been ganization of Japanese Business, Berkeley, CA: Univer- exerting much pressure on management of the sity of California Press. Shibusawa, Eiichi 401

Kester, W.C. (1991) Japanese Takeovers: The Global Con- copiers, and notebook PCs (personal comput- test for Corporate Control, Boston: Harvard Business ers). School Press. In 2000, Sharp had 60,000 employees worldwide. Almost half were working in its sixty-six TORU YOSHIKAWA overseas operations, which included representative offices, sales subsidiaries, manufacturing Sharp plants, and research and development centers in thirty different countries. Sharp Corporation is a major Japanese electronics company known as a pioneer in developing See also: electronics industry and introducing new products, including Japan’s TIM CRAIG first commercial radio and television sets, and the world’s first electronic calculator and liquid crystal display (LCD). Sharp was founded in 1912 Shibusawa, Eiichi by Tokuji Hayakawa, an inventor whose first patent was for a snap buckle called the Tokubijo. Eiichi Shibusawa (1840–1931) was a prominent In 1915, Hayakawa invented the Ever-Sharp businessman who lived during the most extraor- mechanical pencil, from which his young com- dinary changes in Japanese history Often called pany later took its name. In the 1920s Sharp the father of modern Japanese capitalism, he was moved into the field of electronics, starting with one of the most crucial agents of change during the assembly of crystal radio sets in 1925 and the Meiji and Taisho periods. His contribution the development of Japan’s first AC vacuum tube may be categorized into four areas. First, radio (the Sharp Dyne) in 1929. The company Shibusawa is known as a banker-entrepreneur developed and began mass producing televisions who helped build more than 500 companies, cov- in 1953 and microwave ovens in 1962, and elec- ering the entire spectrum of the new economy tronic desktop calculators in 1966. Second, he is known as the founder of zaikai. He Since the 1970s, Sharp has become especially advocated a new style of business policy leader- well-known as a leader in LCD and optoelectronic ship through the organization of business and technology. In 1973, Sharp introduced the world’s commerce associations that stand as a counter- first practical liquid crystal display in the form of balance to the government. Third, Shibusawa the EL-805 LCD pocket calculator. Until that pursued active roles for business associations and time, calculators had used fluorescent character leaders in international economic diplomacy es- display tubes or light-emitting diodes for the pecially in improving US-Japan relations. Fourth, number display These consumed a large amount he advocated the moral obligations of business of energy severely limiting the length of time a leaders to the community and stood at the fore- calculator could operate on batteries. Using an front of philanthropy in education and social re- LCD for the number display meant that much form. less power was required; the EL-805 could run Shibusawa was born in 1840 to a wealthy for 100 hours on a single AA battery about 1 farmer-merchant family in Chiaraijima, Saitama percent of the energy consumption of previous prefecture, a village some fifty miles northwest calculators. Although priced higher than other of Tokyo. The family had substantial land hold- calculators, the EL-805 sold well, starting a trend ings, where rice, barley indigo, and silkworms toward smaller and thinner machines. By 1979, were cultivated. At the age of fourteen, the young Sharp was producing a calculator that was only Shibusawa was brought into the family business. 1.6 mm thick. Under the stratified class system of the Tokugawa Sharp has continued to push LCD and era, business and commerce were looked down optoelectronics technologies forward, and to ap- upon and merchants were kept in the lowest class. ply these to a broad range of products, including Wealthy merchant families did not escape from electronic translators, video cameras and projec- the arbitrary use of power by the ruling samurai tors, wall-mounted televisions, fax machines, class. Shibusawa’s family’s experience was no 402 Shibusawa, Eiichi

exception. The family was often obliged to make high-profile companies he built include Oji Pa- substantial donations to their local daimyo. In rec- per, Osaka Cotton Spinning, Tokyo Chemical ognition of family “services” Shibusawa’s father Fertilizer, Shinagawa Glass, Ishikawajima Ship- was given official permission to use a surname yard, Tokyo Gas, Tokyo Electric Light, Tokyo and wear a pair of samurai swords. Though this Marine Insurance, and Tokyo Imperial Hotel. was a standard means for rewarding rich farm- Shibusawa advocated a “group-oriented” capi- ers and merchants who contributed to daimyo’s talism, with emphasis on business involvement finances, it did not mean the family received rein government policy There were two contrast- spect from the authority. ing styles of thought on capitalist development In 1861, at the age of twenty-two, Shibusawa at the beginning of Meiji. One style is represented went to Tokyo. This was a time when Japan was by Shibusawa, and the other by Iwasaki, who swept with violent confrontations between the founded the Mitsubishi zaibatsu. Iwasaki’s ideas Tokugawa Bakufu and several powerful do- were closer to a Western style of monopoly capi- mains (Satsuma, Choshu, Tosa). A struggle, trig- talism with ownership control. In contrast, gered by the Bakufu’s signing of a Treaty of Shibusawa believed that a society prospers when Commerce with the USA in 1858, ensued be- business organizations pool resources and form tween these groups. Shibusawa himself at- groups (zaikai). Top business managers would be tempted to organize a local uprising against the zaikai jin, or the people who think about the fu- Bakufu. However, by an ironic twist of fate, in- ture of the industry as a whole and lead the instead of carrying out his original intention of dustry In addition, Shibusawa wanted zaikai to overthrowing the Bakufu, he became a Bakufu stand as a counterbalance to the government, retainer at Hitotsubashi House in Kyoto, a high- opposing the heavy-handed government control ranking branch of the ruling Tokugawa family. of business and the stratified class system that Starting as a doorkeeper, Shibusawa moved up kept merchants in the lowest class. He empha- the ranks quickly as he successfully carried out sized the importance of business leading the gov- tax reform for the Hitotsubashi domain. When ernment. To nurture talent in business and to the Tokugawa Shogun decided to send his foster high status and respect for the business younger brother to the World’s Fair in Paris, world, Shibusawa organized business associa- Shibusawa was given the opportunity to accom- tions, beginning with the Tokyo Chamber of pany the young lord. The delegation departed in Commerce (Tokyo Shoko Kaigisho) in 1891 and February 1867 but was abruptly ordered to re- the Japan Federation of the Chamber of Com- turn to Japan after the Tokugawa Bakufu col- merce involving some fifteen local associations lapsed and the Meiji Emperor was restored. The in 1892. group returned from a nearly two-year study of Shibusawa’s vision was not limited to domes- Paris in late 1868. tic economic development. He advocated that In 1870 Shibusawa was unexpectedly recruited US-Japan relations be based on a multilateral into the Meiji government’s Ministry of Finance framework that included China. Furthermore, to modernize Japan’s tax and monetary systems. he initiated business/economic diplomacy He helped create the Daiichi Kokuritsu Ginko, (minkan keizai gaiko) as a distinct non-government the first national, Western-style banking institu- track of diplomacy operating at the level of busi- tion in 1873. However, he resigned from the min- ness and industrial associations. Shibusawa em- istry soon after and became chief executive officer phasized the importance of exchanging (todori) of Daiichi. He was then thirty-four years economic/business missions composed of corpo- of age. From his position at Daiichi until his re- rate leaders and representatives of business asso- tirement in 1916, Shibusawa built Western forms ciations between countries. He believed that of organizations (kabushiki kaisha) ranging from these activities are a part of corporate leaders’ paper mills and cotton spinning to railroad and responsibilities and should not be limited to gov- shipping, public utilities, life insurance, hotels and ernment level diplomacy or individual business- theaters, and resort development. Some of the men’s negotiations. shingikai 403

From the early stage of his career, Shibusawa punishments, and, very rarely to mediate con- initiated philanthropic activities in education and flicts of interests. Most government bills are be- social welfare (for example, Tokyo Yoikuin). As ing considered in shingikai prior their submission a dedicated student of the Chu Tzu school of to the National Diet (parliament). Confucianism, he emphasized “Rongo to Historically the roots of Japanese public advi- Soroban,” expressing through his business prin- sory bodies go back to the Meiji era. But it was ciples that the pursuit of profit must be guided the American occupation which, as part of a by moral obligations to the society and commu- series of democratic reforms, called for shingikai’s nity. Inspired by his observations during his tour statutory foundation and, for the first time, speci- of Europe and the USA, he considered philan- fied guidelines regarding their structure and op- thropic activities a necessity for good business eration. Initially the occupation authorities leadership and demonstration of corporate re- intended all advisory bodies to be formed on an sponsibility to the local community ad hoc basis and to be of the formal, shingikai variety. In fact, however, most of them have become “permanent,” and their members are ap- Further reading pointed for fixed, but renewable, terms. And in Kimura, M. (1991) Shibusawa Eiichi, Tokyo: Chuo due course, alongside shingikai, numerous semi- koronsha. formal bodies, misleadingly known as shiteki shimon Obata, K. (1938) An Interpretation of the Life of Viscount kikan (“private” advisory bodies), have been Shibusawa, Tokyo: Tokyo Printing Company formed by government. Some of these bodies Sakaiya, T. (1997) Twelve People Who Made Japan, To - have been similar to shingikai in salience, mem- kyo: PHP. bership composition, tasks, and functions. Shibusawa Kenkyukai (ed.) (1999) Koeki no Tsuikyusha: The occupation, and ostensibly Japanese au- Shibusawa Eiichi, Tokyo: Yamakawa Shuppansha. thorities, have three major goals for shingikai: in- jecting new ideas into government, promoting GHIKAKO USUI equitable public participation in policy processes, and safeguarding fairness in administra- shingikai tion. In fact, it has widely been argued, shingikai have failed to achieve these goals for lack of au- Translated as “deliberation councils,” shingikai is tonomy competence, and representativeness. Al- the general designation of more than 200 gov- legedly they are controlled and/or manipulated ernment-appointed public advisory bodies, also by bureaucrats who appoint their members and variously named chousakai, shinsakai, kyougikai, “service” them; they lack pertinent information kaigi, and iinkai. Established by legislation or gov- and data, other than that provided by bureau- ernment ordinance, they form a highly salient crats; and their membership is skewed in favor tip of an iceberg of formal, semiformal, and in- of business and finance, such as zaikai and informal networks of government-private sector dustry and trade associations. While justified consultation in practically all areas of public in some cases, this view is somewhat outdated, policy. especially in the case of labor policy processes, Shingikai are appointed, assisted, and steered and fails to fully grasp shingikai’s roles in the mostly by government ministries. Several, includ- complex and subtle context of policy consulta- ing some of the most famous ones, have been tion in Japan. appointed by prime ministers. Their membership is partly or wholly composed of persons from See also: industrial policy; nemawashi outside government, notably representatives of special interest groups, scholars, and even senior Further reading members of the major mass media. They are formally requested to study and deliberate new poli- Harari, E. (1997) “The Government-Media Connec- cies, to consider complaints, standards, tion in Japan: The Case of Public Advisory Bod- qualifications, authorizations, and administrative ies,” Japan Forum 9:17–38. 404 Shingo, Shigeo

Kume, I. (2000) “Roudou seisaku katei no seijuku to shukko henyou” (Maturity and Transfiguration of Labor Policy Process), Nihon roudou kenkyuu kikou Shukko refers to the practice of employee trans- 42:2–13. fers between firms. There are two types of shukko. Schwartz, F.J. (1998) Advice and Consent: The Politics of In the first, an employee retains his or her origi- Consultation in Japan, Cambridge: Cambridge Uni- nal company affiliation while transferred tempo- versity Press. rarily to another firm (zaiseki shukko). In the Sone Kenkyuukai (1995) Rinchou gata shingikai (Tem- second, the employee is transferred permanently porary Investigative Council Type Shingikai), To- (tenseki shukko). Shukko exists at all levels: from kyo: Keio Daigaku Hougakubu. junior engineers transferred temporarily for on- Sone, Y. (1998) “‘Zoku gakusha’ ga habiru shingikai the-job training, to redundant factory workers wa haishi yori kyousou wo” (Instead of Abolishing reassigned to new businesses, to retiring manag- Shingikai Strewn With “Tribal Scholars,” Make ers dispatched to run affiliates, to bankers sent to Them Competitive), Ronza 43: 106–13. reorganize a troubled firm. Shukko has three principal roles: to reduce labor costs by reallocating EHUD HARARI redundant employees, to promote inter-organizational knowledge exchange, and as a monitor- Shingo, Shigeo ing and governance device wielded by external stakeholders such as main banks or trading partners. An industrial engineer at Toyota, Shigeo Shingo Firms frequently use shukko to reduce costs. (1909–90) developed Zero Quality Control Large Japanese industrial firms transfer redun- (ZQC), which is based on preventing errors in dant employees to businesses ranging from sup- manufacturing processes, or detecting them sim- pliers and sales organizations, to affiliates in ply and immediately Key to ZQC are poka-yoke, businesses ranging from landscape maintenance mistake-proofing, devices. These are simple to real estate management. From a labor cost checks built into the process, to prevent a faulty standpoint, shukko is not costless. Firms often pay component from proceeding down the line (e.g., the difference between an employee’s previous physical blocking of an oversized piece) or to pro- wages and those in the new job. vide immediate feedback to workers regarding a Shukko also occurs routinely when an employee problem (e.g., a buzzer). Noticed quickly the reaches retirement age of 55–60. Those employ- faulty component can be repaired or removed ees who do not make it to the ultimate status of before it creates more difficult and expensive board member (torishimariyakukai) are com- problems later in the process. Shingo also devel- monly transferred to smaller affiliates, often as oped single-minute exchange of die (SMED) tech- senior managers. For the receiving firm, these niques for faster changing of tools on production managers are often valuable repositories of man- lines, providing efficiencies from the use of smaller agement skills. For the larger sending firm, shukko lot sizes. allows it to provide opportunities for advancement for younger managers while assuring jobs See also: quality management; Toyota produc- to its retirees. tion system Shukko is also an important vehicle for the transfer of knowledge between firms and their Further reading buyers and suppliers. Firms often transfer their own engineers through temporary assignments Shingo, S. (1986) Zero Quality Control: Source Inspection to work side by side with employees of suppliers and the Poka-Yoke System, Cambridge: Productivity and buyers of their products. These employees Press. retain their loyalty to the dispatching firm, and ELIZABETH L.ROSE act as a bridge between it and the receiving firm. shukko 405

In this way they are able to transfer information motion hierarchy through which older employ- and gain tacit knowledge. Through direct expo- ees with no more promotion prospects at their sure to the work rhythms and social networks of own firm are sent to smaller affiliates. Shukko is another firm, employees develop a feel for how also an important tool for the exchange of knowl- the partner operates without having to put that edge and transfer of organizational culture. knowledge in explicit form (e.g., as a set of specs Through shukko, a company gains access to the or memos). The easy exchange of employees knowledge base of the transaction partner. Even between manufacturers and suppliers has been when the shukko is permanent, the relocated em- linked to effective product development in many ployee still identifies with the dispatching com- Japanese automotive and electronics firms. pany and stays in regular contact with it. As a A third form of shukko exists at a company’s method of coordinating goals and operations and upper echelons. The boards of Japanese compa- exchanging knowledge and skill between affili- nies are heavily interlocked with those of banks ated or transacting organizations, the shukko and business partners. Manufacturers dispatch mechanism may be without peer. It plays a ma- their own managers to top executive positions at jor role in forging the strong partnerships among suppliers while banks place their own executives banks, customers, suppliers, distributors, and on boards to monitor and oversee firms to which even government ministries that characterize the they have made loans. In this respect, shukko plays Japanese business system. an important role in corporate governance. While it is very difficult to obtain data on Disadvantages shukko at the firm level, the Japanese Ministry of Labor collects and reports aggregate data on A major disadvantage of shukko is that it is more shukko. Several patterns are apparent in shukko. costly than layoffs. The originating firm usually First, large firms tend to dispatch employees to pays the difference between an employee’s wages smaller firms. Employees sent to shukko from large at his or her new job and the former one. The firms to smaller ones rarely return to their origi- need to provide new opportunities for redundant nal firm. Shukko rates tend to be higher in manu- workers through shukko has encouraged firms to facturing industries, and shukko is far more continue costly equity and business relationships common for men than women. Shukko rates also with firms that receive shukko. Shukko may also increase during recessionary times, and decrease place an unnecessary burden on the receiving during periods of growth. Nevertheless, because company since it often has little choice in whether shukko is not only a means of cost reduction, but it will accept these employees. a means to share knowledge, solidify interfirm relationships, and influence and control business See also: lifetime employment; restructuring partners, it continues even during good times. Finally shukko occurs between affiliated firms: it Further reading is very unlikely that a firm would dispatch employees to a firm with which it has no business Cole, R.E. (1979) Work, Mobility, and Participation: A Com- relationship, and shukko to a competitor is unheard parative Study of American and Japanese Industry, Ber- of. More often than not, shukko occurs between keley CA: University of California Press. firms linked by an ownership tie. Lincoln J.R. and Ahmadjian, C.L. (2000) “Shukko (Employee Transfers) and Tacit Knowledge Ex- change in Japanese Supply Networks: The Elec- Advantages tronics Industry Case,” in I.Nonaka and N. The institution of shukko has allowed large Japa- Nishiguchi (eds), Knowledge Emergence: Social, Techni- nese firms to maintain a considerable degree of cal, and Evolutionary Dimensions of Knowledge Creation, labor flexibility while maintaining the lifetime New York: Oxford University Press. employment system. Firms use shukko both as Nishiguchi, T. (1994) Strategic Industrial Sourcing: The an escape valve when faced with redundant work- Japanese Advantage, New York: Oxford University ers, and as a regular step in the nenko joretsu pro- Press. 406 small and medium-sized firms

Nonaka, I. and Takeuchi, H. (1995) The of management, preventing excessive competi- KnowledgeCreating Company: How Japanese Companies tion, stimulating demand, and ensuring fair busi- Create the Dynamics of Innovation, New York: Oxford ness opportunities. Prefectural governments, University Press. regional bureaux of the Ministry of Interna- tional Trade and Industry (MITI), Japan Ex- CHRISTINA L.AHMADJIAN ternal Trade Organization (JETRO), and Japan JAMES R.LINCOLN Small and Medium Enterprise Corporation (JSMEC) provide various kinds of assistance to small and medium-sized firms SMEs including consulting and advising, finance and training programs, and financing assistance. There are over 6.5 million small and medium- For example, the Japan Small and Medium En- sized enterprises (SMEs) in Japan. This figure terprise Corporation (JASMEC) provides: guid- reprents more than 95 percent of the business ance, advice and consulting; collection and organizations in Japan. The definition of SMEs dissemination of information; management of and small-scale enterprises was set by the Small mutual relief funds for small-scale enterprises and and Medium Enterprise Law. These definitions for preventing chain-reaction bankruptcies of vary by sector. An SME in manufacturing and small and medium-sized firms. mining is not more than 300 employees or 100 Other laws also protect SMEs such as the million yen, while a wholesale firm is not more Large Retail Store Law, which places restric- 100 employees and 30 million yen, and for retail tions on the opening of large stores. However, as and services, it is not more than fifty employees Japan is working on economic recovery and there- or 10 million yen. A small-scale enterprise in fore restructuring, some of these protections will manufacturing has not more than twenty employ- be lost. Some observers argue that SMEs will ees, while for commercial or service firms it is survive because of their maneuverability inno- not more than five employees. The largest con- vation, advances in information technology cor- centration of SMEs is in the Osaka area. porate downsizing and outsourcing of in-house SMEs have always had a significant impact operations. on the Japanese economy Out of 6.5 million pri- Challenges remain for SMEs. In a commen- vate business enterprises (excluding primary in- tary published in Japan Update (1995), Takashi dustry), SMEs accounted over 99 percent in Kitaoka, President of Mitsubishi Electric, noted 1986. Of the 54 million people employed nation- that small businesses do not prosper in Japan wide, 78–80 percent were employed in SMEs. because large companies have a monopoly on There are two main categories of SMEs in Ja- talented people. Also, history culture and the pan: subcontracting companies and independent education system encourage uniform attitudes companies. SMEs account for 52.9 percent of and discourage differences of opinion or creativ- manufacturing, 61.9 percent of wholesale, and ity. Of small manufacturing organizations, 56 77 percent of retail. Since the passage of the Small percent are subcontractors, who are dependent and Medium Enterprise Basic Law (1963), these on large parent organizations. Subcontracting ratios have remained constant for more than companies, compared to independent SMEs, are thirty years. less likely to have control over their product The Basic Law recognizes that SMEs play an prices, and introduction of technologies and man- important role in the Japanese economy The agement interventions. This in turn affects the objectives of the Law is to promote the growth organizational culture of the SME and the atti- and development of SMEs and to enhance the tudes and behaviors of employees. economic and social well being of entrepreneurs SMEs are also not likely to offer the benefits and employees of SMEs. The Law recognizes the of lifetime employment to even a minority of their special challenges that SMEs face and stipulates employees. They also experience more difficulty that the government must implement necessary in implementing some management techniques measures in such areas as modernization of equip- such as quality control circles. SMEs, on the ment, improvement of technology rationalization other hand. are more likely to hire women or to social marketing 407 be owned and operated by women. Japanese sion products. The economy has also encour- women, finding discrimination in large firms, aged SMEs to become more independent and to especially during the current recession, are start- become international. Finally because large cor- ing their own businesses in increasing numbers. porations in the retail sector have developed There are several industries in which small low-priced private brands, SMEs have also had firms dominate. SMEs control the multimedia to introduce low-cost products and private and CD-ROM markets. Originally sparked by brands in order to differentiate themselves from SMEs, large rivals have entered the market gen- the larger companies. erating some competition, but SMEs still domi- An additional issue that affects SMEs is the nate with over 6,500 titles available in 1996 (vs. increasing concern about the environment. SMEs 2,500 in 1995). used to be exempt from recycling laws. Now, The economic crisis in Asia has had a seri- medium-sized manufacturers with sales exceed- ous impact on SMEs in Japan. Many have gone ing ¥240 million and wholesalers, retailers and bankrupt, lost sales, or experienced heightened services SMEs with sales over ¥70 million have competition from large firms with lower-cost, to pay their share of the recycling. Although no overseas operations or low-cost products. The one can deny that environmental regulations are number of businesses subscribing to JASMEC’s necessary to protect the environment, they cut mutual relief funds has been increasing since the into the profits of SMEs that are already strug- mid-1980s. JASMEC has provided more funds gling. to small-scale firms: from 1.83 million accounts in 1984 to 3.86 million in 1996. A total of ¥6.1 See also: overseas business of small and medium- trillion has been provided to the following sec- sized enterprises tors: service (21.6 percent), retail (29.3 percent), manufacturing (22.1 percent), construction (13.4 Further reading percent), wholesale (4.7 percent), real estate (3.5 percent), transportation and communication (3.1 Japan Small and Medium Enterprise Corporation percent) and other sectors (2.3 percent). (JASMEC) Home Page, http://www.jsbc.go.jp/ The failure of a client can trigger chain-reac- english. tion bankruptcies among SMEs. To prevent this, TERRI R.LITUCHY JASMEC operates the Mutual Relief System for Prevention of Bankruptcies. As of 1997, there were over 740,000 accounts (150,000 loans) in social marketing wholesale and retail (39.8 percent), manufacturing (38.3 percent), construction (15 percent), Social marketing is interpreted as applying to two transportation and communications (1.6 percent), activities. Firstly the term relates to the applica- mining (0.2 percent) and other (5.1 percent) with tion of various concepts and tools of marketing, total loans of ¥301 billion. which have been developed in commercial ac- With the bursting of the bubble economy tivities, to the management of such non-profit and more large manufacturing firms moving off- organizations as universities and hospitals, or to shore for cheaper production, SMEs have be- the deployment of social reform activities such come desperate. They cannot compete with as anti-AIDS campaigns. lower-cost overseas SMEs and are receiving Secondly social marketing is understood to call fewer subcontracting jobs. However, in some for the recognition of responsibilities that com- specialized industries SMEs are finding ways to panies bear in regard to their role within society survive. In industries involving precision ma- Marketing should be carried out, and then, in chining and non-standard projects that require order to check and offset unintentional anti-so- highly skilled labor rather than mass produc- cial activities, such as pollution or the publication, SMEs are stable. They are also doing well tion of false financial statements, the marketing in semi-conductors, unmanned production lines policy of each company should include some and non-contact inspection machinery for preci- explicit contributions to society. Typically it calls 408 software industry

for building a good relationship between the com- Henkaku no Tameno Senryaku, Tokyo: Daiyamon- pany and its surrounding communities. dosha, 1995. The above notions of social marketing were Kotler, P. and Zaltman, G. (1971) “Social Marketing: introduced to Japan primarily through the works An Approach to Planned Social Change,” Journal of of Kotler and Zaltman (1971) and Lazer and Kelly Marketing 35 (7): 3–12. (1973). It is generally understood that their theo- Lazer, W. and Kelley E. (1973) Social Marketing: Perspec- ries were developed in the US in response to criti- tives and Viewpoints, Homewood, IL: Richard cal views of big business and the establishment D.Irwin. in the late 1960s, when the US saw a series of SHINTARO MOGI protests against the Vietnam War, the civil rights movements, and growing consumerism. In Japan, the term social marketing began to software industry be used among business people in the 1990s, but Japan’s large, vertically integrated hardware/soft- some precursor movements can be found. By the ware firms were able to build up their software end of the 1980s, it was generally recognized that skills in a relatively protected environment dur- Japan, the second largest economic power after ing the 1960s and 1970s. They were able to clone the USA and having deployed overseas networks IBM machines and “borrow” IBM’s software, of corporate activities, should upgrade its inter- changing it enough to make it incompatible with national contributions and realize a society that other systems. This allowed the firms to avoid would correspond to its wealth. As a result, such the heavy costs of creating and maintaining their terms as “philanthropy” and “mécénat” (the own standards or paying the American giant huge French word for patronage) gained popularity. royalty fees. This strategy backfired in the early The Association for Corporate Support of the 1980s when they were caught stealing IBM’s Arts (Kigyou Mesena Kyougikai) was founded secrets and forced to pay for use of IBM’s soft- in 1990. ware. During the 1980s they struggled to reduce After the fall of the Berlin Wall in 1989, assist- their dependence on the IBM standard by creat- ance to the former Socialist countries moving ing proprietary versions of UNIX-based systems toward the market economies required corporate and by developing a new Japanese operating sys- participation. In 1992, the United Nations Con- tem called TRON. In the early 1990s, software ference on the Environment and Development firms and the state realized that clinging to their (Earth Summit) in Rio de Janeiro, Brazil, urged closed standards was creating a serious lag be- business entities to take environmental concerns tween Japanese and US software. Thus they into considerations. These international develop- started embracing international operating system ments also contributed to the dissemination of standards such as Windows and UNIX, though the term social marketing, in the broader mean- they continue to be interested in free-of-charge, ing of society-oriented corporate activities. As a open systems standards such as TRON and consequence, social marketing is often used in LINUX. They still continue to lag significantly Japan as synonymous with society-oriented ac- behind their US counterparts, but are second only tivities provided by companies, although a dis- to the USA as a world power in the field of soft- tinction is made when experts use this term. ware. See also: business ethics; environmental and ecological issues; marketing in Japan The 1960s and 1970s Japan’s software industry grew out of the state’s Further reading efforts to promote the computer industry starting in the early 1960s. When IBM announced Kotler, P. and Roberto, E. (1989) Social Marketing: Strat- its new advanced 360 series of computers in egies for Changing Public Behavior, New York: The Free 1964, the Ministry of International Trade and Press; trans. T.Izeki, Soshal Maaketingu: Koudou Industry (MITI) promptly set up its first major software industry 409 computer project involving software, the Super NEC had technological ties with Honeywell, but High-performance Computer Project (1966–71). created its own closed standard too. To develop the project’s software, MITI helped Though the state primarily promoted hard- create the Japan Software Company a joint ven- ware throughout the 1970s, it did not completely ture among the three strongest hardware mak- ignore software. MITI was particularly con- ers—NEC, Fujitsu, and Hitachi—and the cerned about alleviating the shortage of software Industrial Bank of Japan, a bank supportive of engineers. In 1970 it created the Information state policies. The company was to develop an Processing Promotion Association (IPA) to help operating system (OS) that could run on all small, independent software houses develop three makers’ machines. But the vertically inte- standardized, general purpose applications soft- grated, hardware/software firms had no incen- ware packages with the goal of increasing the tive to follow MITI’s plan for a common number and productivity of programmers. As software standard. They were all losing heavily part of this effort, the IPA organized several in their hardware divisions even though they MITI-funded research projects. But the IPA and were locking-in users with closed standards. The its projects have not been very effective. Poorly software budget for the project was only 25 per- funding and the lack of a strong intellectual cent of the project’s total cost, reflecting the property regime to protect software inventions state’s lower priority for software than hardware contributed to the IPA’s inability to nurture new as well as the Ministry of Finance’s (MOF) re- software programs and firms. Also, since the luctance to fund what it saw as intangible prod- firms sold their software and hardware as a ucts. package incompatible with other systems, there The Japan Software Co. did not meet its am- was virtually no demand for IPA-supported soft- bitious objectives. State and corporate lack of ware packages. knowledge about software technology minimal Even had there been greater funding and bet- financial support, and contradictory incentives ter legal protection, it is unlikely the IPA and its for the firms led to its bankruptcy in 1972. Exter- projects would have been very effective because nal events also made the company obsolete. In they worked at cross-purposes with key pillars 1969, IBM, under pressure from the US Depart- of Japan’s catch-up system of capitalism. The ment of Justice’s anti-trust investigations, decided bank-centered financial system meant capital to unbundle (price and sell as separate products) markets were underdeveloped, which discour- its hardware and software. This opened up a aged the emergence of a venture capital market world of opportunity for Japanese hardware mak- and new firms. The lifetime employment and ers. IBM’s unbundling allowed Fujitsu and seniority wage systems obstructed labor mobil- Hitachi, two of Japan’s top three hardware mak- ity. The keiretsu industrial groups and other ers, to take an IBM-compatible route. Most im- loose alliances that permeate Japan’s economy portantly while tied up with anti-trust concerns, also served to create an environment in which IBM was not in a position to complain about users, loyal to their allied computer maker and small, foreign competitors essentially copying its locked into their closed standards, could not and OS and applications software. This allowed MITI would not easily switch computer systems or and the makers to focus on hardware, which they software. In this context, closed standards and could legally reverse engineer, and enabled the customized software thrived. This was not a broader strategy of competing through scale problem as long as the firms could quickly copy economies and manufacturing expertise. IBM’s software and thereby provide their Fujitsu and Hitachi modified IBM’s OS stand- locked-in users with software that met their ard enough so that it would not be compatible needs. But as IBM made it more difficult for with other IBM-based machines. And they con- clone makers to quickly respond to new IBM tinued to bundle their hardware and software. machines, it meant that users were increasingly By doing so, they locked in users, preventing stuck with software significantly inferior to soft- them from combining different brands of hardware packages based on international standards ware and software without costly adjustments. sold on the open market. 410 software industry

The state and the makers simply did not grasp worth the project’s cost (¥22.3 billion yen, or the long-term negative impact of closed stand- $131.2 million). ards. Moreover, a focus on increasing the number The TRON project was aimed at having a and productivity of software engineers was inef- uniquely Japanese OS. Announced with great fective in an industry where concept, individual fanfare and media coverage in 1984, the project creativity and proprietary but quasi-open stand- still continues today. Most agree that TRON was ards, not merely productivity of software engi- not a great standard, but the fact that the world neers and manufacturing expertise, were key was largely locked into IBM mainframe and PC (MS-DOS) standards at the time meant that even if TRON was superior, it would have had great The 1980s difficulty succeeding internationally.

The turning point in the industry was in the sum- The 1990s mer of 1982 when Japanese computer firms, desperate to get information on IBM machines In the early 1990s Japan’s computer software before they hit the market, were caught stealing industry was at a crossroads: it could continue IBM software technology. This FBI sting case offering closed, modified versions of foreign stan- sent shock waves through the industry The free dards or unbundle and embrace open, interna- ride on IBM was no longer free. The firms now tionally accepted standards such as the Wintel had to pay huge annual licensing fees to IBM. (Windows Intel) standard. It became increasingly From then on, the firms tried to diversify the stan- clear to the government, users, and makers that dards they relied on, especially their dependence the costs of closed standards were mounting and on the IBM mainframe standard. In the 1980s, that to become internationally competitive, com- there was a strong move toward UNIX-based puter producers needed to unbundle, move to- systems through the government-sponsored ward open standards, and shift their focus from Sigma Project (1985–90) and a private sector-ini- quantity to quality. tiated attempt to create a unique Japanese oper- The problems were obvious. But the solutions ating system standard called TRON. were less clear. The government, viewing soft- The Sigma Project selected UNIX, an open ware as an industry with critical spillovers onto standard, as its focus. The goal was to encourage the rest of the economy strongly favored conver- makers to unbundle by providing them with an gence with international standards even though open standard as an alternative to IBM. But the it would hurt the hardware/software makers tem- firms, desperate to lock in their customer base in porarily. MITI was acutely aware that the target- order to maximize profits, made their own closed ing policies that had worked so well in other version of UNIX-based software and bundled it industries were not working in software. The with their hardware. This meant independent firms were afraid to unbundle without assurance software makers still had little incentive to de- that all would do so. But the market was not velop new software. waiting for Japanese firms to make up their minds. In the Sigma Project, as in earlier IPA projects, By the early 1990s, Windows, Intel microproc- the state made the same mistake of seeing effi- essors and the Internet swept the globe. cient production as the software industry’s key The quickest and most politically acceptable problem. Again they focused funds and research- way to get the industry to unbundle and move ers on increasing the productivity of software toward open, internationally accepted standards engineers rather than software concepts and func- was to have foreign firms force the conversion. tions that users desired. Some analysts argue that Starting in late 1992 MITI started publishing the project pushed the industry toward the UNIX reports openly welcoming foreign software into standard much quicker than would have other- Japan. MITI did not simply want imports; it wise occurred. But even MITI and IPA officials wanted foreign firms to participate in the mar- agree that the move would have happened any- ket. This move was not so much an embracing way and that the jump-start was probably not of internationalization. Rather MITI was Sohyo 411 desperate and felt that even if the firms were for- and unpredictable and where the idea, not supe- eign, they needed to have cutting-edge software rior manufacturing techniques, is key to competi- firms in the domestic market to promote the do- tive success. Unfortunately the long, deep mestic industry and provide all Japanese firms recession in the 1990s, which started primarily with the software they needed to become more as a bad debt banking crisis, is affecting Japan’s efficient. industrial base and is slowing efforts to deal As a result, in the 1990s we saw a sharp rise quickly with their software problems. in the market share of foreign software companies. Microsoft currently dominates Japan’s pack- See also: computer industry aged software market. US hardware makers, such as Dell, Compaq, and Gateway have gained only Further reading small (1–3 percent) shares of the market. But the sudden entry of foreign hardware and software Anchordoguy M. (1989) Computers, Inc.: Japan’s Chal- makers in the early 1990s pressured Japanese lenge to IBM, Cambridge, MA: Harvard University makers to converge with internationally accepted Press. standards such as DOS, and more recently the ——(1997) “Japan at a Technological Crossroads: Does Wintel and NT standards. Change Support Convergence Theory?” Journal of While Japanese software/hardware firms have Japanese Studies 23 (2): 363–97. started offering new machines based on interna- ——(2000) “Japan’s Software Industry: A Failure of In- tional standards, the economy as a whole has been stitutions?” Research Policy 29:391–408. slow to downsize. Lock-in to proprietary stand- Baba, Y., Takai, S. and Mizuta, Y. (1996) “The User- ards means that shifting to a new standard makes Driven Evolution of the Japanese Software Indus- a company’s current software obsolete, inevita- try: The Case of Customized Software for bly slowing their conversion. Mainframes,” in D.C.Mowery (ed.), The International The government’s role in the 1990s and 2000s Computer Software Industry, Oxford: Oxford Univer- clearly declined in significance but remains im- sity Press, 104–30. portant. There are numerous ongoing national Cusumano, M. (1991) Japan’s Software Factories, Oxford: R&D projects related to software, such as for Oxford University Press. massive parallel processing machines and the MARIE ANGHORDOGUY Internet. Moreover, the state has tried to revise the copyright law to make it legal to decompile foreign software. And it has tried to institute a Sohyo voluntary quality certification scheme for software, which foreign makers say would require The General Council of Trade Unions, or Sohyo them to divulge proprietary information to gain in Japanese, was the largest trade union confed- approval. These tactics have been unsuccessful, eration in Japan from 1950 to 1989 and was a but only due to close vigilance by foreign compa- stronghold of radical unionism mainly supported nies operating in Japan as well as heavy pressure by public-sector unions. It laid the foundation for from the US government. the coordinated wage determination system known as spring labor offensive or shunto, which attempted to overcome the limits of enterprise The 2000s unions in Japan. Sohyo’s presence, however was The lag of Japanese firms in software and Internet- more striking in the realm of politics than in eco- related technologies is still growing in the 2000s. nomics. It had a huge influence over the direc- They have caught up in most hardware technolo- tion of the Japan Socialist Party (JSP) by assisting gies but their industrial system needs to change it financially and supplying candidates for public its emphasis from manufacturing to promoting office. It was politically opposed to moderate, invention and entrepreneurship. Such change private-sector unions affiliated with other labor would help industries such as software and bio- confederations, Domei (Japanese Confederation technology where technological change is rapid of Labor), and its political representative, the 412 Sohyo

Democratic Socialist Party (DSP). Sohyo’s lead- Political radicalism continued to characterize ership and influence began to erode after the oil Sohyo because the largely politically radical pub- crisis, when unions in the big, export-oriented lic sector unions constituted more than 60 per- corporations began to ally which undercut the cent of Sohyo’s membership. In contrast, Domei rivalry between Sohyo and Domei. The coop- principally consisted of private sector unions. eration of these unions eventually led to the de- When it was formed in 1964, it embraced mise of Sohyo and the birth of a new 1,360,000 members as opposed to Sohyo’s confederation, Rengo (Japanese Trade Unions 4,200,000. Sohyo comprised 2,510,000 members Confederation, JTUC in 1989. in the public sector and 1,670,000 in the private sector, whereas Domei consisted of 80,000 unionists in the public sector and 1,600,000 in the The origin of Sohyo private sector unions. From its birth, Sohyo officially supported the Sohyo was created by anti-communist trade Japan Socialist Party especially its left wing. The unionists in July 1950, and its foundation was tight relationship between Sohyo and the JSP was facilitated by the Supreme Commander of Allied called the “JSP-Sohyo bloc” which rivaled the Powers (SCAP). At its inauguration, Sohyo de- “DSP-Domei bloc.” Sohyo provided indispensa- clared that it would seek membership in the In- ble financial support to the JSP and also supplied ternational Confederation of Free Trade Unions candidates. By the mid-1970s 50 percent of the (ICFTU), which had been created in 1949 in JSP parliament in the lower house and 70 per- opposition to the communist-dominated World cent of those in the upper house were unionists Federation of Trade Unions (WFT). However, endorsed and supported by Sohyo. Among the by 1951, Sohyo had swung left. Minoru Takano Sohyo-affiliated industrial union federations, the took leadership in March 1951 at Sohyo’s sec- Japan Teachers’ Union, National Railways Work- ond congress, which rejected Japan’s rearmament. ers’ Union, and Postal Workers’ Union sent the Takano likened Sohyo’s transformation to largest numbers of representatives to the Diet. “SCAP’s hatching a chicken which turned out to be an ugly duckling.” Sohyo’s political activities The demise of Sohyo irked moderate unions, which abhorred extra- parliamentary political actions. In 1953 moder- Sohyo, once a mighty political actor, disappeared ate unions dropped out of Sohyo and eventually in 1989 as a result of the growing antagonism formed the second largest trade union confed- between the public sector unions and unions in eration, Domei. the export-oriented big corporations. This new By 1958, Takano’s leadership was contested conflict of interest cut across the political and ideo- and he was replaced by Kaoru Ohta and Akira logical rivalry between Sohyo and Domei, and Iwai. The new leaders pushed economic rather led to the total reorganization of the labor move- than political struggles and pursued a strategy of ment. joint actions for wage increases, which laid the In 1975, the Spring Offensive, International foundation for the spring labor offensive. Even Metal Workers Union-Japan Council (IMW-JG) though the new leaders emphasized the impor- and Domei agreed on wage restraint in ex- tance of economic issues, Sohyo kept its pacifism change for employment security While IMF-JC and antimonopoly stance, which crystallized in came to be a wage setter and dilute the role of the mass movement against the revision of the Sohyo, Sohyo did not support employment and US-Japan Security Treaty and the Miike industrial policies demanded by the private sec- coalminers’ strike in 1960. The defeat of Sohyo tor, which further widened the gap between the in both incidents marked a watershed. While public and private sector unions. Moreover, af- Marxist-Leninism had drawn support among filiates of the Public Employees’ Union and the young rank-and-file unionists throughout the Public Enterprise Union Council embarked on a struggles, demands for cooperative unionism strike to recover the right to strike that they lost grew among union leaders and employers. in 1948. Sohyo’s political activism accelerated sokaiya 413

the unification process of the private-sector un- Shinoda, T. (1997) “Rengo and Policy Participation: ions and the defeat of the “strike for the right to Japanese-Style Neo-Corporatism?” in M. Sako and strike” made Sohyo leaders take a more realistic H.Sato (eds), Japanese Labor and Management in Tran- approach. sition, London: Routledge, 187–214. A unification process led by big corporation MARI MIURA unions became explicit by the mid-1970s. In 1979, Sohyo leaders accepted unification led by those private-sector unions and allowed each member sokaiya industrial union to decide whether or not to join a unified confederation. Moreover, Sohyo lead- A sokaiya is a corporate extortionist who pur- ers agreed that a new confederation would seek chases a small number of shares in order to gain membership in the ICFTU, although the ICFTU access to a company’s annual stockholders’ gen- affiliation issued remained controversial, separat- eral assembly meeting (sokai) and then attempts ing Domei-affiliated unions and Sohyo’s left-wing to extract money or other benefits from the com- unionist, until the dissolution of Sohyo. In 1980, pany in exchange for ensuring that the meeting five Sohyo-affiliated private-sector unions joined is short and tranquil. While the distinction is not Zenminrokyo (Japanese Private Sector Trade always clear-cut, there are two main roles played Union Council) which developed into a unified, by sokaiya. Yato sokaiya (opposition party sokaiya) private sector labor confederation called Minkan threaten that unless they are paid off, they will Rengo, Domei and the other two confederations disrupt the assembly and embarrass top execu- were disbanded. By that time, most Sohyo-affili- tives by loudly and persistently asking board ated private sector unions had joined the new members questions about real or alleged prob- confederation, and so the inclusion of public sec- lems relating to the quality of management (poor tor unions in Minkan Rengo came onto the investments, low profits and the like) or the per- agenda. Acrimonious disputes erupted in all pub- sonal and family lives of executives (extra-mari- lic sector unions. The left-wing unionists, who tal affairs, questionable finances, etc.). Yoto wanted to defend the traditional tenets of Sohyo sokaiya undertake, for a fee, to ensure a smooth radicalism, were eventually left out of the unifi- meeting by suppressing dissent by other share- cation negotiations and formed marginal left So- holders, including other sokaiya. This may be cialist or Communist confederations. A new done by shouting them down, buying them off, unified labor confederation, Rengo was then or using physical intimidation. Sokaiya groups formed in 1989 under moderate leadership, and typically try to portray themselves as corporate Sohyo ended its thirty-nine year history. activists acting as watchdogs to protect the small investor. Some groups operate quite openly with plainly marked offices and even web sites. A Further reading common euphemism for sokaiya is tokushu kabunushi (special shareholder). Similar activities Hiwatari, N. (1999) “Employment Practices and En- are undertaken in South Korea by hecklers terprise Unionism in Japan,” in M.Blair and M.Roe known as chongheoggun and in Italy by gadflies (eds), Employees and Corporate Governance, Washing- known as disturbatori. ton, DC: The Brooking Institution, 275–313. The emergence of sokaiya can be traced back Kume, I. (1998) Disparaged Success: Labor Politics in Post- to the early Meiji period, when influential fixers war Japan, Ithaca, NY: Cornell University Press. began to assist managers, who were unaccus- Miura, M. (2000) “Did the Japan Social Party’s Activ- tomed to the intervention of outside investors due ists Commit Political Suicide: Typology of Activ- to the late introduction of the joint stock corpo- ism and Party Strategy” Shakai Kagaku Kenkyu (The ration. Their numbers exploded during the 1970s Journal of Social Science) 51:5–6, 221–51. after shareholder activism protesting the Vietnam Price, J. (1997) Japan Works: Power and Paradox in Post- War and the Minamata mercury pollution inci- war Industrial Relations, Ithaca, NY: Cornell Univer- dent revealed top executives’ vulnerability to sity Press. embarrassment at the shareholders’ meeting. 414 sokaiya

They peaked in 1982 when the National Police increased to three years and a fine of up to 3 Agency (NPA) estimated that there were over million yen, and it was made illegal for sokaiya 6,783 active sokaiya, 2,012 of whom were believed even to request a payoff (prior to this it had only to be yakuza. been illegal to accept one). Those who made To combat this problem, more and more com- threats (as opposed to requests) could receive up panies began to hold their annual stockholders’ to five years and a 5 million yen fine. The NPA assemblies on the same day in late June to make pushed both general business associations such it difficult for sokaiya to attend more than one as Keidanren (the Federation of Economic Or- meeting. By the 1990s, over 2,000 companies ganizations of Japan) and sectoral industry asso- were holding their meetings simultaneously. The ciations to issue declarations that they would not NPA dispatched over 10,000 officers to guard the deal with sokaiya and to establish task forces to meetings held that day and companies supple- ensure compliance. Some firms opened up their mented this with large numbers of private secu- shareholders’ meetings or broadcast them live on rity staff and employee volunteers. The the Internet to show they had nothing to hide Commercial Code of Japan was also revised in and posted signs indicating they would refuse to 1982 to make it illegal to pay off sokaiya. The deal with sokaiya. Nevertheless, repeated surveys offense, known as rieki kyoyo (conferring a ben- in the late 1990s showed many firms still dealing efit), prohibited the provision of any benefit to a with sokaiya. shareholder in connection with the exercise of Traditionally analysts have attributed the long- that shareholder’s rights, such as the right to ask evity of the sokaiya phenomenon in Japan to a questions or vote. Penalties could include up to cultural aversion to embarrassment and loss of six months imprisonment or a fine of 300,000 face that makes Japanese executives particularly yen. The revisions also raised the number of vulnerable to blackmail. It has also been suggested shares necessary to vote to a par value of 50,000 that structural factors such as the lower level of yen. Since most Japanese shares have a par value corporate disclosure in Japan may create a de- of 50 yen, this amounts to 1,000 shares in most mand for secrecy Sokaiya exploit this through cases. blackmail due to the unavailability or inconven- While the number of sokaiya officially reported ience in Japan of other methods of profiting from by the NPA declined to just a few hundred by negative information, such as short-selling. Both the late 1990s, many of those who fell off the arguments are compatible with the difficulty Ja- official list because they no longer owned enough pan has experienced in eradicating sokaiya activ- shares to meet the higher ownership threshold ity. did remain active and simply changed their techniques. Instead of demanding cash payments, See also: corporate governance; stockholders’ they used a variety of other mechanisms, includ- general assembly ing the sale of proprietary publications at exorbitant prices (the most common method), payments Further reading for services not used (such as rent for training facilities or beach houses), or inflated payments Szymkowiak, K. (1994) “Sokaiya: An Examination of for miscellaneous services ranging from adver- the Social and Legal Development of Japan’s Cor- tising to the leasing of potted plants. Involvement porate Extortionists,” International Journal of the Soci- with yakuza (organized crime) groups also in- ology of Law 22:123–43. creased. Such underworld ties resulted in an im- Ursacki, T.J. (2000) “Restoring the Legitimacy of Japa- plicit threat of physical injury or death in cases of nese Business in the Post-Bubble Era: Can Good non-payment which is an additional factor moti- Economics Make Good Ethics Easier?” in P.Bowles, vating executives to cooperate with sokaiya. and L.T.Woods (eds), Japan After the Economic Miracle: A series of scandals in 1997–8 which resulted In Search of New Directions, London: Kluwer Aca- in the resignation of over 100 executive and doz- demic, 37–57. ens of arrests prompted further countermeasures. West, M.D. (1999) “Information, Institutions and Ex- The penalties under the Commercial Code were tortion in Japan and the United States: Making Sony 415

Sense of Sokaiya Racketeers,” Northwestern Univer- Ministry of International Trade and Industry sity Law Review 93:767–817. (MITI) to remit foreign currency abroad, but MITI initially rejected the application because the TERRI URSACKI company was too small. Eventually Totsuka received permission, and in August 1953 Morita Sony signed a licensing agreement with Western Elec- tric. In May 1954 Totsuka introduced the first Sony Corporation is a diversified consumer elec- transistors made in Japan, and in August 1955 tronics manufacturer headquartered in Tokyo. In the company produced the first Japanese transis- 1999 its fiscal year sales totaled over $56 billion tor radio. The firm rapidly transistorized vari- and it employed 177,000 workers. As of 1999 ous other consumer electronics products, and Sony Group was comprised of over 1,000 con- experienced great success domestically and in solidated subsidiary companies, some of which export markets. are located abroad. The predecessor company to Wanting to export its products and believing Sony was Tokyo Tsushin Kogyo K.K. (Tokyo the company’s name was too difficult for foreign- Telecommunications Engineering Corporation, ers to pronounce, in 1955 Totsuka began selling also known as Totsuka), founded by Masaru products under the Sony name. “Sony” was an Ibuka in 1945. Masaru Ibuka and Akio Morita amalgamation of two words: the Latin word sonus, incorporated Totsuka on May 7, 1946; the firm which is the root of the such words as “sound” had approximately twenty employees and an ini- and “sonic,” and “sonny” meaning little son. In tial capitalization of 190,000 yen. Its major com- January 1958 Totsuka’s name was officially petitors have been Philips and Matsushita Electric changed to Sony Corporation. Industrial Corporation. Sony’s most famous product is the trinitron Totsuka’s first product was an adapter to con- tube, developed in April 1968. Many believe the vert medium-wave radios into superheterodyne, trinitron has superior picture quality to conven- or all-wave, receivers. Soon, however, the com- tional picture tubes, and it continues to be the pany branched out to make a variety of other signature Sony product. In 1975 Sony introduced electronic goods. Due to the difficult conditions the Betamax videocassette recording system; following the Second World War, most of its sales however, it lost the VCR market to the VHS were to the government and Nippon Hoso Kyokai system invented by the Japan Victor Corpora- (Japan Broadcasting Corporation). The compa- tion. This was Sony’s most serious marketing ny’s business connections with the Occupation failure. In 1979 Sony introduced a small portable Forces led to knowledge of magnetic sound re- stereo tape player, the Walkman, which proved corders and the development of a tape recorder. to be an enormous success. In October 1982 Sony Totsuka introduced the first Japanese magnetic introduced the first music CD players for the Japa- tape recorder and recording tape in August of nese consumer market. In the late 1990s Sony 1949. This was the first expression of Sony’s successfully brought out the Sony Playstation, engineering-oriented culture and philosophy of which challenged Nintendo, the market leader innovation. in video games. The invention of the transistor at Bell Labo- By the dawn of the twenty-first century Sony ratories in the United States was known to Ibuka had become a globalized firm that operated main the late 1940s, but it was not until March 1952 jor production facilities in Japan, North America, that Ibuka visited the United States for a three- and Asia. It was the first Japanese firm to under- month inspection tour to learn about tape re- take television manufacturing in the developed corder manufacturing by American companies. countries. In 1960, Sony Corporation of America While in the USA he recognized the potential of was established in the United States. Sony broke the newly invented transistors, and upon return- ground in January 1971 on its San Diego color ing to Japan Totsuka decided to pay $25,000 to television factory its first overseas factory In 1974 license the transistor technology from Western it opened its first European television factory in Electric. Totsuka had to get a permit from the Bridgend, Wales. In 1988 Sony acquired CBS 416 standard setting

Records Inc., and in 1989 Sony acquired the Trade and Industry, MITI). METI shares su- movie company Columbia Pictures Entertain- pervision of one-eighth of the 9,000 Japan Indus- ment. It was the first major Japanese company to trial Standards (JIS) with another ministry have non-Japanese members on its board of di- usually telecommunications or health. The 1949 rectors. Sony was also the first Japanese electron- Industrial Standardization Law (Kougyou ics firm to globalize and has continued to be a Hyoujunka Hou) requires that all environment, Japanese leader in this endeavor. health, and safety regulations must conform Sony has a reputation for being more West- with JIS. Quite separately the Ministry of Agri- ernized than its Japanese competitors. It prides culture supervises several hundred Japan Agri- itself on its ability to innovate and to create at- cultural Standards (JAS) for medicines, tractively designed products. For example, in a agricultural chemicals, silk yarn, foodstuffs, and break with tradition Sony announced in 1997 that forest products. Any JIS or JAS requires final it would no longer consider a graduate’s univer- approval from the relevant minister; one-tenth sity as a major factor in the hiring process in its of JIS also require companies to have their facto- subsidiaries in Japan. More than any other Japa- ries inspected and earn the right to display a “JIS nese electronics manufacturer, it has earned a mark” on their products. JIS certification and reputation for product development and engineer- other government testing have increased the po- ing prowess combined with a sophisticated sense tential for JIS to serve as trade barriers. Non- of design. Japanese firms have also complained about language barriers: 75 percent of JIS lacked an See also: electronics industry; Matsushita Elec- official English translation in 1980, 57 percent in tric Industrial Corporation; Morita, Akio 1986, and 29 percent in 1998. JISC is less a regulatory office than a small Further reading “think tank” that coordinates—partly via a “long- Lyons, N. (1976) The Sony Vision, New York: Crown range plan for the promotion of industrial stand- Publishers. ardization” issued every five years since Morita, A. (1986) Made in Japan: Akio Morita and Sony, 1961—work by outside organizations, most nota- New York: E.P.Dutton. bly the somewhat larger Japan Standards Asso- Nathan, J. (1999) Sony: The Private Life, New York: ciation (JSA, Zaidan Houjin Nihon Kikaku Houghton Mifflin. Kyoukai). Top JISC officials have sometimes Sony Corporation (1999) http://www.world.sony.-com/ served simultaneously at JSA, which functions CorporateInfo/huhou-e.html. as publishing house, lead coordinator for some prominent JIS standards, accreditor for the JIS MARTIN KENNEY mark, and general “change agent” for standardi- standard setting zation and quality management. JSA has 11,000 regular members (up dramatically from only 811 Japan’s semi-statist approach to standards has members in 1972), a staff of 160, and an annual accelerated broad adoption of new technology budget of ¥6 billion. JSA claims that half of all but also provoked trade friction. In other ad- firms take part in its conferences, courses, semi- vanced countries, the national standards organi- nars, and other activities. The agriculture minis- zation receives only a minority of its funding try established an analogous “helper” from the state, as in Europe, or is entirely mem- organization, JAS Kyoukai, in 1962. ber supported, as is ANSI in the USA. Japan’s JISC and JSA work with over 200 industry national standards organization, the Japan In- associations, most of which are ministerially “ap- dustrial Standards Committee (JISC, Nihon proved” associations (shadan houjin). Early retirees Kougyou Hyoujunka Chousakai), is a section of from the ministries preponderate as association the Standards Department within the Agency executives (senmu riji, joumu riji) and retain well- for Industrial Science and Technology (AIST) of institutionalized ties back to their former minis- the Ministry of Economy Trade, and Industry try (see amakudari; industry and trade (METI, formerly Ministry of International associations); by 1991, industry associations had standard setting 417 promulgated over 4,800 non-JIS standards. Dur- craft standards (Dai Nippon Koukuuki Kikaku). ing the 1990s, a reaction against overly special- After the war, with ministerial approval on 6 ized standards from the bubble economy led to December 1945, the Japan Standards Association broader standards foundations (zaidan houjin) be- was detached from JMA and, along with the tech- ing established (e.g., Chemical Standardization nology agency given offices inside the patent and Center) or strengthened (e.g, Japan Information standards office of the ministry of commerce and Processing Development Center). Even appar- industry. JESC was re-established as JISC in Feb- ently independent standards organizations tend ruary 1946, which issued its first postwar stand- to align with METI: the Kyoyohin Foundation, ard in September 1946. In May 1948, GHQ whose E&C Project has sought standards sup- ordered the adoption of 766 US standards and porting “simple use for everyone” since 1991, 288 Australian standards; Japan undertook rela- became a METI-approved organization in 1999. tively intensive exchanges with, and study of, JSA has increasingly led multi-sector standards standards organizations from twenty-one coun- projects (e.g., information processing, ISO 9000/ tries including Holland, Switzerland, Finland, JIS 9900 management standards). AIST research China, and Chile. The Industrial Standardization labs such as the Electrotechnical Laboratory spe- Law (Kougyou Hyoujunka Hou), which followed cially designated private or quasi-governmental in July 1949 (law no. 185; with relatively minor institutes and, more rarely academic societies all revisions in 1966, 1980, and 1997), regulates host industrial standards research. The JIS Center JISC, the issuance of JIS and the “JIS mark,” and (Kurashi to JIS sentaa) established at Tsukuba in most other aspects of Japan’s formal standards. 1995 with an annual budget of $1 million, inves- The first factory to receive the “JIS mark” was tigates precompetitive standards. Tokyo Steel’s Adachi factory in August 1950. Japan’s signal achievement in the first postwar decades was an unusually tight integration History of prewar workplace mobilization with a rapidly Although the establishment of a Japan Engineer- expanding national system of formal standards. ing Standards Committee (JESC, Kougyouhin In 1952, there were 2,509 JIS, increasing 82 per- Touitsu Chousakai) in 1920 emulated many other cent by 1957 and 166 percent by 1967. Many countries at that time, Japanese firms devoted companies and supplier associations based their more attention to standardizing company-level in-house standards and operation manuals on JIS workplace practices (hyoujun-ka) than to develop- or related industry association standards. ing formal, national standards (kikaku-ka). From Shopfloor workers—prepared by an education and 1930–7, an “external” bureau of the ministry of employee training system that produced broad, commerce and industry the Temporary Indus- rather than specialized, human capital—learned trial Rationalization Bureau (TIRB, Rinji to incrementally revise the standards governing Sangyou Gouri Kyoku), worked closely with their own work. JSA disseminated these devel- zaibatsu groups, journalists, and academics to opments to small and medium-sized firms, plan for simplification, rationalization, modern which also helped large firms rationalize their management, and formal standards. To promote supply chains. Even the broader society partici- these objectives more widely TIRB established a pated: thousands of homemakers, for example, helper organization (Nihon Kougyou Kyoukai) for decades regularly reported on consumer prod- in 1931 that merged with the Japan Management ucts awarded the JIS mark. Association (JMA) in 1942. Only 520 JES stan- Formal standards reduced industry-wide price dards existed in April 1941, but during the height levels while the involvement of shopfloor workers of the war, JMA oversaw the diffusion of 931 in standardization encouraged firms to add temporary standards (T-JES) based on simplified product features and improve quality (see kaizen). procedures. The Aircraft Technology Association Standardization aimed at price and quality (Dai Nippon Koukuu Gijutsu Kyoukai) estab- facilitated massive export drives, for example, in lished by the technology agency (gijutsuin) then facsimile machines, computer displays, and data under the prime minister’s office issued 666 air- storage technology. Occasionally as with facsimile 418 standard setting machines, Japanese firms coordinated not only firms (for example, in DVD) or dominated do- in the early development of a national standard mestically by a single firm such as Nippon Tel- but also on a shared strategy for international egraph and Telephone or NHK (such as satellite standardization. broadcasting and cable). Japan signed the GATT Standards Code Agreement on Technical Barriers to Trade Transnational standards (TBT) in 1980. Access slowly broadened; JIS technical committees first permitted non-Japa- Moreover, nation-based standard setting was nese firms to attend drafting committees in under challenge everywhere. Japanese firms 1983, to propose drafts and attend technical sought to deepen the presence of Japan-centered committees and Division of Council meetings in production networks in other countries, but they 1985, and to become registered members in faced new approaches to standard setting from 1987. Yet the locus of standardization also the USA and Europe. Anti-trust policy in the US shifted—sometimes aided by ministerial funds facilitated contests for winner-take-all control of and policies—to less conspicuous settings such as global de facto standards anywhere in the IBM or industry associations, quality control commis- AT&T supply chain (e.g. Microsoft, Intel, Cisco); sions, company president meetings, research Japan’s keiretsu rivalries often hindered similar cooperatives, ad hoc commissions, and special- strategies from developing in Japan. Meanwhile, purpose foundations (zaidan houjin). Europeans invested heavily in the development Firms on the technological frontier often of European standards that were often seamlessly favored less binding forms of cooperation than adopted by international organizations, often re- the JIS framework; moreover, as products became jecting alternative proposals by Japanese firms more networked, control of networking interfaces (e.g., condoms, medical imaging, cellular phones). by a single firm was becoming a more important Japan held relatively few secretariats at ISO and strategic asset. The number of JIS rose only 8 IEC—despite sending large delegations to almost percent between 1975 and 1989 and declined every technical committee and being the leading absolutely during most of the 1990s. The number source of overall financial contributions—and was of companies subscribing to JIS declined 23 per- often confined to the testing and refinement of cent between 1979 and 1994. proposals put forward by others. As the JIS framework weakened, ministry in- JIS influence in Asia (e.g. steel JIS in China)— tervention tended to reduce the number of com- cultivated by the Japan International Coopera- peting alternatives without preventing standards tion Agency (JICA)—has the potential to offer races from spilling over into the marketplace. some international leverage. Thus, JISC has Vigorous last-minute MITI intervention into con- long played a leading role in the Pacific Area sumer video standardization in 1976, for exam- Standards Congress (PASC) and sought to in- ple, winnowed the four contending standards crease the influence of PASC members within down to two but was unable to forestall a dec- ISO and IEC. ade-long market contest between Betamax and With hesitations, Japanese firms have sought VHS. Similarly bounded competitions broke out to integrate externally generated international in analog camcorders, videodisks, game ma- standards. Japanese firms initially criticized ISO chines, and cellular telephones. Even collabora- 9000 standards as a redundant expense, for ex- tive standards research increasingly let companies ample, but by the late 1990s Japanese firms had pursue alternative (rather than complementary) become the leading holders of ISO certifications standards; for example, in the Real Internet Con- worldwide: companies such as NEC and sortium’s next-generation router project, Hitachi Mitsutoyo offered their own ISO certification pursued a supercomputer approach, while NEC services, creating new tie-ins and opportunities tried parallel processing. Standards competitions for their core businesses, especially in Europe. were least likely in industries facing organized Similarly NTT resisted international standards demands for a single standard from foreign user in second-generation mobile telephony but in stockholders’ general assembly 419

the third generation allied quite closely with Eu- in East Asia: How Ruling Parties Shape Industrial Policy, rope-based international standards; in 1998, an Ithaca, NY: Cornell University Press, 93–122. official from the telecommunications ministry JAY TATE became the first Japanese head of the Interna- tional Telecommunications Union. After Japan signed the WTO Agreement on stockholders’ general assembly Trade-Related Aspects of Intellectual Property Rights, JIS underwent a “zero base” review dur- Japan, like most other countries, requires public ing 1997–2000: of 8,253 standards, 10 percent companies to hold an annual stockholders’ gen- were withdrawn (including 15 percent of JIS eral assembly or shareholders’ meeting (kabunushi marks) while 36 percent were already equivalent sokai), at which the investors in the firm gather to to international standards. According to changes hear reports about the company’s progress and in the JIS Law made in 1997, standards projects to vote on various proposals for the future. Un- can begin without JISC preliminary assessment, der the Commercial Code the assembly is em- and private and foreign organizations can offer powered to make decisions such as the JIS mark certification. Agriculture standards fol- appointment of directors. However, Japanese lowed: the JAS Law was revised in December shareholders’ meetings are distinguished by two 1998, and a five-year review of JAS, omitting notable characteristics: most are very short and pharmaceuticals and alcohol, began in 1999. the vast majority are held on the same day at the Ministerial influence, although trimmed in same time. As a result, in practice the role of the routine matters, has also gained new strategic shareholders’ meeting in making decisions about outlets. In 1998, MITI began approving stand- the company’s future is quite minor. Such deci- ards projects on a five-year provisional basis if sions are made elsewhere, with approval at the conflicts among firms temporarily block creation meeting a mere formality. of a JIS standard. In 2001, METI reorganized In 1997 the average length of a shareholders’ JISC to target international standards more meeting for a publicly listed company in Japan favorable to Japan. JISC staffing nominally dou- was twenty-nine minutes, with less than 5 per- bled to 225, and the number of JIS began rising cent taking more than an hour. Many lasted less for the first time in two decades. than fifteen minutes, and at more than three-quarters of the meetings no questions at all were asked from the floor. This is in sharp contrast to North Further reading American practice, where social activists, gadflies and disgruntled ordinary shareholders often drag JETRO (1995) Kokunai dantai kikaku mokuroku (List of out meetings for several hours, and some com- Domestic Industrial Group Standards), Tokyo: panies purposely hold long meetings to showcase JETRO. their plans. It is also a marked contrast to the Johnson, C. (1982) “The Rise of Industrial Policy” drama which sometimes attends shareholders’ MITI and the Japanese Miracle: The Growth of Indus- meetings in North America, where proposals trial Policy, 1925–1975, Tokyo: Charles E. Tuttle. from the floor and even fights for control of the JSA (1995) Nihon Kikaku Kyoukai 50 nen no ayumi (Japan firm are not uncommon, and where large institu- Standards Association’s Fifty-Year Walk), Tokyo: tional investors have been known to join together Nihon Kikaku Kyoukai. to vote to dismiss managers they felt were McIntyre, J.R. (ed.) (1997) Japan’s Technical Standards: underperforming. Implications for Global Trade and Competitiveness, There are several reasons for these differ- Westport, CT: Quorum. ences in the length of the shareholders’ meeting. Nakamura, S. (1993) The New Standardization: Keystone Most Japanese stock market-listed companies of Continuous Improvement in Manufacturing, trans. B. have several major shareholders such as banks, Talbot, Portland, OR: Productivity Press. trust banks, insurance companies and fellow Noble, G.W. (1998) “Standard Setting and R&D Con- keiretsu members, who together own a control- sortia in Japan’s Video Industry” in Collective Action ling stake in the company (40–70 percent). 420 stockholders’ general assembly

These shareholders deal with the company regu- of March 31, which coincides with the end of the larly on a long-term basis, and hence are regu- government’s fiscal year. These companies then larly kept up to date on its activities. They hold hold their meetings three months later, in June. their shares to solidify long-term business rela- Over time they have tended to coalesce on the tionships and will have worked out any differ- same day in late June as a measure to counteract ences well before the meeting. Thus, hostile sokaiya, who threatened to drag out and management almost always has the votes it disrupt the meetings if not paid off. By holding needs to ensure passage of its proposals. There all meetings at the same time on the same day are also no outside directors on most Japanese under heavy police protection, managers could boards, so the directors seldom engage in public ensure sokaiya were unable to attend more than power struggles. one company’s meeting each. This had the side Under a revision to the Criminal Code which effect of preventing ordinary shareholders from came into effect in 1982, in order to attend the attending more than one meeting as well. While meeting investors must hold shares with a par less than ideal from a corporate governance stand- value of at least 50,000 yen, which usually means point, this effect was welcomed by most Japanese 1,000 shares. This prevents small shareholders executives since it further ensured that the meet- from attending. Moreover, managers often pack ing would not raise any embarrassing issues. the meeting with supportive employee sharehold- A series of scandals during 1997–8 revealed ers to ensure swift and discussion-free passage of that many companies had been paying off sokaiya management proposals, and many have also re- for years, some even after earlier convictions for sorted to the use of sokaiya, corporate extortion- doing so. Pressure from the authorities and pub- ists, who will, for a fee, ensure that no embarrassing lic opinion pushed these companies to reform matters are raised by verbally or physically intimi- their approach to the shareholders’ meeting. Be- dating any troublesome attendees. ginning in 1999, several started to broadcast their Only shareholders who have held at least 1 meetings on the Internet or make other arrange- percent of the company’s shares for six months ments to be more open in order to reassure in- prior to the meeting can make proposals, and 3 vestors and others that they had indeed cut their percent is necessary to see the company’s books ties to the sokaiya. These companies have been beyond the published financial statements. Thus, joined by a number of others that have adopted smaller shareholders are precluded from using a more open approach out of a desire to attract the meeting as a forum to investigate or attack international investors, who have often been dis- management. mayed by a perceived lack of transparency in Japa- While the traditional explanation for manag- nese management. ers’ preference for short, quiet meetings was the aversion to embarrassment and loss of face in See also: corporate governance; cross- Japanese culture, some research has shown that shareholdings companies which usually have a short shareholders’ meeting suffer declines in stock price when a Further reading long meeting (over one hour) is reported in the Nakane, F. (1995) “The Commercial Code and The press. Thus, there may be a rational economic Audit Special Exceptions Law of Japan,” EHS Law element to this preference as well. Bulletin Series, EHS Vol. II, Tokyo: Eibun Horeisha Annual general meeting day is a major event Inc. with front-page coverage in all the major national West, M.D. (1999) “Information, Institutions and Ex- daily newspapers in Japan. Companies whose tortion in Japan and the United States: Making meetings have lasted more than one hour are Sense of Sokaiya Racketeers,” Northwestern Univer- prominently named. Over 90 percent of Japanese sity Law Review 93. An excerpt, “Making Sense of companies listed on the First Section of the To- Japan’s Sokaiya Racketeers,” appeared in 42.2 Law kyo Stock Exchange hold their annual meeting Quadrangle Notes 72 (summer 1999). on the same day in late June. Most Japanese companies have been encouraged to adopt a year end TERRI URSACKI strategic partnering 421 strategic partnering trust. Over the long run, this trust frequently breaks down. “Strategic partnerships”—also commonly known In partnerships and alliances out of Japan, Japa- as “strategic alliances”—are usually formed to cre- nese companies often form strategic alliances with ate competitive advantage on a worldwide basis. European companies to strengthen their ability The term “partnership” is commonly used when to compete in the European Union. They have two firms are involved, whereas “alliance” may also been actively forming alliances with Asian be used when there are two or more firms. The firms to capitalize on the opening up of Asian intention of partnerships is a long-term contrac- markets. In the USA, Japanese companies have tual relationship where firms share control over consistently had relatively poor performing alli- their firms’ resources. Firms may selectively share ances, with the exception of the auto and con- control, costs, capital, access to markets, and in- sumer electronic industry The high costs of formation and technology. Partnerships may take serving the highly competitive US market has many forms. Some more common activities in- led to disappointing operating returns for many clude: joint research projects, technology shar- Japanese firms. Strategic alliances, however, re- ing, use of product facilities, joining forces to main an attractive way for Japanese firms to en- manufacture components, assembling finished ter US markets due to the fact that Japanese products together, and marketing the partner’s companies have only had about a 30 percent suc- products. cess rate with cross-border acquisition. Cross- Historically export-minded firms in industri- border acquisitions have been unsuccessful alized nations sought partnerships with firms in because they have primarily been done on a less developed countries to export and market “hands off” basis, which prevents the collabora- products in that less developed country Such ar- tion necessary to two-way learning and minimizes rangements were often required to win local gov- the opportunity to capture value through con- ernment approval for economic activity and solidation. marketing in the less developed country. More An example of a company active in forming recently companies from different parts of the strategic partnerships is Toshiba. Japan’s oldest world form strategic partnerships and alliances and third-largest electronics company Toshiba to strengthen their mutual ability to serve whole has used strategic alliances as the cornerstone of continents. Particularly when companies lack its corporate strategy. Some of its most promi- particular resources essential for competition on nent strategic alliances are with IBM (to make the international stage, they may seek out a part- flat-panel liquid crystal displays in color for port- ner holding the keys to further expansion. Of able computers), Motorola (to design and make course, any help must be reciprocated. dynamic random access memory chips) and Ap- Although the rewards are enticing, maintain- ple Computers (to develop CD-ROM based ing partnerships is not easy Forming partner- multimedia players that plug into television ships initially is usually a challenge, but sets). The company—like many other globalizing maintaining the partnership for the long run is corporations—believes that these alliances are extremely difficult. Time and money costs of necessary because technology has become so coordination are usually expensive in the short advanced and the markets are so complex that run and can even increase in the long run. Part- no one corporation can be the best at an entire nerships often break down when one or both of process any longer. the partners feel that they are not benefiting as In Japan, more than half of all foreign entries planned, and partnerships become especially have been accomplished through strategic alli- vulnerable when one partner begins feeling ex- ances. Relatively few acquisitions of attractive ploited by the other. Collaboration between in- Japanese companies take place. Alliances in Ja- dependent companies can be very difficult pan tend to last at least 15–20 years, twice as because of language and cultural barriers. Fi- long as anywhere else. Even if both partners are nally depending on another for essential exper- not satisfied with the alliance, the costs of break- tise and capabilities is threatening and requires ing up are high; it is often difficult to find 422 subcontracting system

replacement partners. The alliances usually in- manufactured in-house or by wholly-owned sub- volve the sharing of personnel, quality control, sidiaries of the assembler. In Japan, such items product development and just-in-time inventory are produced by independent members of the systems. Historically Western companies have of- keiretsu who are willing to take the risk of estab- fered innovative products and technology in re- lishing dedicated production facilities and install- turn for access to Japanese markets. Over time, ing transaction-specific assets. Japanese firms typically learn the technology Japan’s subcontracting system comprises long- themselves and are more likely to terminate the term relational contracts for parts and compo- alliance if their partner is no longer contributing nents, with first, second and third-tier suppliers what they perceive as a fair share. In these cases stratified according to each supplier’s range and Japanese companies often buy out their partners; level of technical expertise, attitudes to risk and Japanese partners have been the acquirers in ap- relative bargaining power (Aoki 1988). However, proximately 70 percent of the terminating ven- supplier-assembler relations in Japan are not tures in Japan. Because Japanese markets can be monolithic, with practices differing between two so different and difficult to penetrate, US com- plants in the same industry and between differ- panies are still reliant on alliances with Japanese ent industries. This distinctive system of continu- competitors to learn production and marketing ous trading between manufacturers and suppliers processes. Furthermore, Japan’s government regu- rests on relational contracting that facilitates the lation and policies can make access to Japanese sharing of product knowledge and encourages markets very difficult for foreign firms, thereby system flexibility One element in the wider ar- giving Japanese companies a valuable bargain- chitecture of the Japanese firm, which includes ing chip when forming strategic alliances. interrelated work and industrial organization practices, the subcontracting system provides Japanese firms with competitive advantages Further reading through acquisition of organizational knowledge, Bleeke, J, and Ernst, D. (ed.) (1993) Collaborating to Com- establishment of organizational routines and the pete: Using Strategic Alliances and Acquisitions in the Glo- development of a cooperative ethic. bal Marketplace, New York: John Wiley and Sons. How buyers set specifications for suppliers, and how suppliers meet those specifications, de- WILLIAM BARNES fines the Japanese subcontracting system (Asanuma 1989). Subcontracting in Japan in- subcontracting system volves the transfer of codified and tacit know- how, embodied in product specifications, pricing The Japanese system of subcontracting, charac- regimes, shipment scheduling, and quality con- terized by continuity and stability in supplier-as- trol mechanisms. Such decision making and prob- sembler relationships between core firms and lem solving facilitates learning, while attenuating tiered medium and small-scale parts providers, is informational asymmetries between partners. a distinctive feature of the Japanese business sys- Suppliers learn to achieve reliability in quality and tem. This unique system of external architecture delivery and meet targeted percentage price re- evolved in response to wartime government man- ductions, over a specified time through rationali- dates, immediate postwar labour surpluses and zation or productivity improvement (Asanuma the high growth and labour short economy of 1985b). Buyers learn to commit to suppliers by the 1960s. assessing suppliers’ performance and ranking Shitauke, as subcontracting is known in Japa- suppliers into tiers. Buyer commitment and sup- nese, is symbolized by firms such as Toyota and plier reputation allow both parties to invest in NEC which are surrounded by their respective specific human capital (design engineers) and keiretsu or supplier groups. Relationship contract- physical capital (machines). For both parties, these ing as compared to spot trading is the hallmark network specific assets act as an additional in- of the Japanese subcontracting system. In the centive device to ensure contract compliance, at- West, customized components are generally tenuate opportunistic behaviour and preserve the subcontracting system 423

long-term supply relationship, given low second- include major plant suppliers have not been or- best uses and high switching costs when special- ganized. ized assets are present. Repeat contracting Subcontracting relations in Japan are wide- between buyer and supplier furthers learning and spread and pervasive. For example, Asanuma creates trust and cooperation, which also acts as (1985a) found that the cost of purchased parts an incentive for maintaining the subcontracting was as much as 70 percent of the unit production system over time. cost for any of the representative carmakers in The term “subcontractor” in Japanese has Japan. According to a survey by the Agency for been sometimes associated with the exploitative Small and Medium-Sized Enterprises, an un- use of small businesses as a buffer against busi- named manufacturer of automobiles had direct ness fluctuations by large firms, especially by relations with 122 first-tier suppliers and indirect Marxist scholars. Lower profit rates and wage relations with 5437 second-tier suppliers and rates in small firms are often cited as evidence to 41,703 third-tier suppliers. After adjusting for support this position. According to the Marxist double counting this manufacturer was the core view, large firms are able to protect their own firm of a hierarchy of 35,768 suppliers. profits by transferring the impact of cyclical Three different types of vendor supplier rela- downturns to small contractors over whom they tionships are clearly discernible within Japan’s hold monopolistic advantage, by either reducing subcontracting system. The first distinction to the orders to suppliers by a larger amount than be made is between catalogue goods (CG) and the decrease in demand for the end product or ordered goods, that is between those goods by forcing suppliers to accept less favourable which are standardized and ready-made and can terms through lower prices. The evidence to be purchased in open markets, and those com- support such exploitation is mixed. Studies of ponents that are supplied in accordance with the profit rates in manufacturing in Japan suggest purchaser’s specification. While some suppliers that whilst profit rates are lower in the small supply both marketed and ordered goods, firms firms normally associated with subcontracting tend to supply either one type or the other. than in large firms, they are higher than the aver- Ordered goods can be further divided into age for manufacturing as a whole. This view of two types of suppliers: design approved (DA) subcontracting is essentially similar to any com- vendors and design supplied (DS) vendors. DA petitive spot transaction, which might take place suppliers manufacture parts from designs made in any market. by the suppliers themselves and approved by the Essential to an understanding of subcontract- assembler. DA suppliers have a relatively unique ing in Japan is its quasi-vertical integration, more stock of production knowledge and directly sup- akin to intra-firm transacting than to spot trans- ply essential components to the prime manufac- acting. Component suppliers also play a major turer. This type of supplier may provide role in the kanban or just-in-time production components such as advanced electronic equip- system that originated in Toyota and is an exam- ment, bearings, brakes and carburettors, which ple of a structure possible only under relation- may be patented products or products in which ship contracting. Subcontracting relationships in the prime manufacturer (assembler) does not Japan overlap to some extent with Japan’s keiretsu have comparable technological expertise. DS business groupings. Many automobile suppliers suppliers, on the other hand, manufacture com- are organised in this way. Toyota for example ponents according to designs and specifications has a stable organisation of supplier firms supplied by the assembler. These suppliers gen- known as kyohokai. However, members of erally have less specialized technological exper- Toyota’s kyohokai generally include only the tise and supply less crucial components (such as larger first tier suppliers and represent only a lamps or plastic mouldings) to the primary fraction of the many thousands of suppliers. manufacturer. However, in other industries such as electronics, DS suppliers fit most closely with the popular relationships between core firms and suppliers image of the subcontractor referred to as are less well defined and similar associations that shitauke in Japanese. They are considered to have 424 subcontracting system relatively weaker bargaining power vis-à-vis the actions and suppliers’ willingness to make cus- contracting firm because they lack specialized tomized investments. Namely Japanese manu- technological expertise (Aoki 1988). As a result, facturers purchase intermediate products this type of subcontractor in Japan has long been (component parts) repeatedly from a limited under the protection of Japanese law. The shitauke number of suppliers, who are willing to make firm is a legal concept defined in Japanese law as investments specific to their purchaser in order a firm with 300 or fewer employees or with a to produce customised investments. For exam- paid-up capital of ¥100 million or less. Notwith- ple Dyer and Ouchi (1993) found, based on standing the legal and conventionally accepted their study of the Japanese automobile industry usage of the term shitauke, the subcontracting sys- that Japanese suppliers were willing to invest in tem in fact involves a continuum of contractual customized equipment and customer specific hu- relationships between a prime manufacturer and man capital and locate their plants close to the its subcontracting members, stratified according manufacturer. This allows Japanese assemblers to the technological capacities of individual sup- to reduce the level of capital tied up in invento- plying firm. The balance between these categories. Strong technical interaction between assem- ries varies between industries according to the blers and suppliers in the Japanese extent of standardization of the component be- subcontracting system, involving routine ex- ing supplied. The more standardized the compo- change in personnel and information, also al- nent, the more likely it will be supplied as a CG lows greater efficiency and faster product while the more customized the component, the development. Toyota, for example is able to de- more likely it will be supplied as a DS or DA velop a new model in just fifty months, almost component. 40 percent faster than automobile US automo- Virtually all automobile components, for ex- bile manufacturers (Dyer 1994). Finally the will- ample, are either DS or DA, while electric ma- ingness of Japanese suppliers to invest in chinery components, which are much more customised assets due to the long-term relation- standardized, have a higher proportion of CG ship characteristic of the Japanese subcontract- components (Asanuma 1989). DA and DS sup- ing system, also plays an important role in the pliers, because of the high level of customization improvement of both productivity and quality and asset specificity or their components, are improvement. This factor is often singled out as likely to be much more dependent on the prime a major reason for the strong performance of Ja- manufacturer (assembler). Large suppliers and pan’s tightly integrated production system. suppliers with technical expertise tend to supply From the suppliers’ viewpoint, there is a more catalogue goods than ordered goods, and strong incentive to acquire sufficiently high tech- of the ordered goods more DA than DS compo- nology to make their own drawings and be pro- nents. This is partly because greater technologi- moted from a DS to DA supplier and hopefully cal know-how and human resources enable these to a CG supplier so that they can reduce their firms to have substantial design and drawing ca- dependence on a single purchaser, differentiate pabilities and partly because they are in a better themselves from rival suppliers and also increase position to absorb the economies of scale that their profit margins. They are therefore moti- come from producing a large quantity of stand- vated to invest in technological acquisition and ardized products. Some CG suppliers, as a re- engineering capabilities. sult, are often large independent firms and include The nature of the contract between prime many large corporations such as NEC, manufacturer and the first-tier supplier has been Matsushita and Hitachi who themselves are articulated by Asanuma (1989). Normally the major manufacturers of finished goods. contract period between the prime contracting Perhaps the two main features of Japan’s sub- firm and its subcontractor corresponds to the contracting system which contrasts with assem- duration of a particular model. The prime con- bler-supplier relations in the West are the tracting firm guarantees not to switch suppliers long-term cooperative relationships between as- or manufacture in-house the contracted part for semblers and suppliers based on repeated inter- the life of the model. In Japan, it is quite unusual suggestion systems 425 for the subcontracting relationship between an and quality improvement are characteristic of the assembler and a supplier, once begun, to be ter- Japanese subcontracting system. minated. Relationships between assemblers and It has been suggested that the rapid advance suppliers continue on a semi-permanent basis in information technology may change the basic even through model changes, although a suppli- nature of the Japanese subcontracting system and er’s rank and bargaining position may change manufacturer-supplier relations, with manufactur- over time. ers moving increasingly to the procurement of The Japanese subcontracting system pro- standardized rather than customized parts which vides competitive advantages that include pro- could be sourced through the Internet rather than duction and contract flexibility economies of from a limited number of suppliers within their scope and specialization, and productivity im- own corporate groups. provement. Contracts between the prime manufacturer and suppliers set both the price and Further reading quantity which are determined on the estimated unit cost plus an agreed markup and on produc- Aoki, M. (1988) Information, Incentives and Bargaining in tion forecasts, but are subject to change depend- the Japanese Economy, Cambridge: Cambridge Uni- ing on fluctuations in demand and changes in versity Press. input costs. Minor changes in supplier output Asanuma, B. (1985a) “The Contractual Framework are driven through daily kanban orders from the for Parts Supply in the Japanese Automobile In- assembler which, as noted earlier, helps to keep dustry” Japanese Economic Studies, Summer: 54–78. inventory suppliers to a minimum in accordance ——(1985b) “The Organization of Parts Purchases in with the just-in-time system. More significant the Japanese Automobile Industry” Japanese Economic changes to production schedules occur on a Studies, Summer: 32–53. monthly basis, and suppliers are notified in ad- ——(1989) “Manufacturer Supplier Relationships in Ja- vance of changes in production schedules. Price pan and the Concept of Relationshipspecific Skill,” adjustments also occur when production costs Journal of the Japanese and International Economies 3:1– change. Usually changes in production volumes 30. causing increases in the fixed cost per unit of the Dyer, J. (1994) “Dedicated Assets: Japan’s Manufac- supplier are met by the assembler. Changes in turing Edge,” Harvard Business Review (November– variable costs occasioned by increases in mate- December): 174–8. rial costs are also usually met by the prime Dyer, J. and Ouchi W.G. (1993) “Japanese Style Part- manufacturer (assembler). However, increase in nerships: Giving Companies a Competitive Edge,” labor costs are usually expected to be met by the Sloan Management Review 35:51–63. supplier through productivity improvements. Odagiri, H. (1992) Growth Through Competition, Competi- Productivity improvements are generally shared tion Through Growth: Strategic Management and the Japa- between the assembler and supplier, depending nese Economy, Oxford, Clarendon Press. on whether the cost reduction is due to the initia- WILLIAM PURCELL tive and investment of the supplier or the assem- STEPHEN NICHOLAS bler. Strong incentives and competition also exist between suppliers. Suppliers who are evaluated suggestion systems positively in terms of performance may well be promoted to a higher category and allowed higher Japan’s first suggestion program was started by profit margins, while those who are poorly evalu- Kanebo Company in 1905. Kanebo modeled its ated may be demoted in rank and have lower program after executives saw similar ones at work mark-ups imposed. Poor performance may result in the United States. However, it was not until in a refusal by the assembler to place further or- the 1950s that suggestion systems became com- ders, but this is rare, and suppliers are usually monplace in Japanese companies. To an given the opportunity to redeem their position unforthcoming workforce accustomed to follow- (Asanuma 1989). In this way both competition ing top-down dictums in a vertically integrated 426 Sumitomo hierarchical society the idea of offering sugges- boxes, in the classrooms, hallways, and outside tions to superiors was not quickly accepted. How- of the principal’s office, suggestion campaign slo- ever, in the 1960s companies began to integrate gans on banners, and audio reminders via the suggestion plans with a variety of small-group public announcement system. activities such as quality control circles and jishu kanri (autonomous control) teams. This combi- Further reading nation proved more successful in generating suggestions. Cole, R.E. (1979) “Made in Japan: A Spur to US Pro- For example, in 1976, Matsushita Electric re- ductivity” Asia (May–June): 6. ported an average of fifty suggestions per pro- Hattori, I. (1985) “Product Diversification,” in Thurow duction worker in its Ibaraki television plant. In (ed.), The Management Challenge: Japanese Views, Cam- recent years, the company as a whole has been bridge, MA: MIT Press. averaging over ten suggestions per worker (fac- JETRO (1982) “Gauging and Comparing Economic tory and office workers combined). The accept- Productivity” Focus Japan, September: JS-A. ance rate at Matsushita averages about 10 percent. Keizai Koho Center (1990) An International Compari- This figure was the norm for most successful son, Tokyo. companies that depended on such input from Lillrank, P. and Kano, N. (1989) Continuous Improve- employees for idea generation. ment, Ann Arbor, MI: Center for Japanese Studies, By 1982, a survey of 512 organizations con- University of Michigan. ducted by the Japan Human Relations Associa- MARY YOKO BRANNEN tion and the Japan Suggestion System Association showed an increase in suggestions per employee to 14.74. At Hitachi Ltd. alone, 5.8 million sug- Sumitomo gestions (102.59 per person) were received. Other firms experienced levels as high as 400 sugges- Sumitomo Corporation, one of Japan’s largest and tions per employee. According to the 1982 sur- most successful trading companies, was estab- vey the largest percentage of suggestions (35 lished on 24 December, 1919. Currently it has percent) address work process improvement. 192 offices worldwide, including 158 offices in Other types of suggestions (10 percent) addressed 88 countries and thirty-four offices in Japan. In machine tools, work environment, and ways to addition to Sumitomo company offices, there are save energy resources and materials. a vast number of consolidated subsidiaries, 553, There have been continuous improvements in of which 346 are overseas and 207 are domestic. the suggestion system as it has been applied and The total number of associated companies is 214, experienced in the Japanese culture over time. of which 132 are overseas and 82 are domestic. One significant adaptation was going from a pas- Sumitomo is an increasingly global company with sive to active strategy of suggestion accumula- stock market listings in Tokyo and Frankfurt. The tion. The former involved providing suggestion number of employees in the Sumitomo Corpo- boxes for employees and waiting. The latter in- ration is 8,192, and the total number of employ- volved active campaigns educating and reward- ees working for consolidated subsidiaries is ing personnel in regards to fulfilling suggestion 33,057. The Sumitomo product lines include quotas. These innovations in the system are con- metals, machines, media, chemicals, fuel, food, gruent with the commitment of Japanese man- fiber and construction. agement to developing employees skills fully and The commercial history of the Sumitomo fam- understanding that employees can make real con- ily began when Masatomo Sumitomo, the tributions to organizational effectiveness. founder of the Sumitomo family opened a medi- By the 1990s suggestion systems have perme- cine shop and bookstore in Kyoto in the begin- ated through organizational structures into the ning of the seventeenth century Later, his heir, school system. As early as first grade at school, Tomomochi Sumitomo, created the first copper children are encouraged to make suggestions. trading com pany in Japan, which was to become Indicators include the ever-present suggestion the foundation of the future Sumitomo enterprise. superstores 427

At the same time, the company entered into the Uchida, Y. (1995) Shosya, Tokyo, Japan: Kyouikusya business of running copper mines, with the Besshi Publishing. Copper Mine established in 1690. Besshi contin- MARGARET TAKEDA ued to produce copper and contribute to IPPEI ICHIGE Sumitomo for more than 280 years until its end in 1973. A new Western technique was introduced superstores to the Besshi Copper Mine in the beginning of the Meiji Era (1868), and copper production in- The superstore is not a native Japanese retail cat- creased rapidly. The increase in copper produc- egory. The closest category is suupaa, a truncated tion allowed the company to diversify into a loanword used to refer to three forms of super- variety of business ventures. markets. The first is called shokuhin suupaa (food The Sumitomo zaibatsu (a monopolistic group supermarkets), itself modeled on supermarkets of companies run by one family) grew out of this in the USA. Shokuhin suupaa, by definition, must Japanese merchant house to become one of the generate not less than 70 percent of their income largest zaibatsu in Japan, controlling some 135 from food alone. The second refer to specialty companies by 1945. Sumitomo was so successful suupaa including apparel and household goods and influential that it is widely credited with turn- suupaa. A specialty suupaa must have a sales floor ing the country into a modern, capitalist society of no smaller than 500 square meters and gener- as Japan gradually opened up to the rest of the ate no less than 70 percent of its sales from the world during the latter part of the nineteenth and merchandise it specializes in. The final form is first half of the twentieth centuries. sougou suupaa (general supermarkets) that devote When the Second World War ended in 1945, themselves not only to food sales but also to the all zaibatsu in Japan were dissolved and holding sale of a wide range of merchandise, including companies were banned. As a result, affiliated textiles, household goods, furniture and electri- companies had to begin independent business op- cal appliances. Therefore, the term sougou suupaa erations. Sumitomo was likewise dissolved, and refers to a sort of combined supermarket and each company of Sumitomo started out on its mini-department store which is similar to a de- own as an independent company. But very soon partment store in form and should be thought of thereafter, as with all former zaibatsu, the compa- as a general merchandise store (GMS). nies regrouped into modern day “keiretsu” and The category of suupaa can be seen as the re- were back in business as a powerhouse group of sult of a historical process in which Japanese bor- companies. rowed the concept of supermarket chains from The Sumitomo Corporation has maintained the USA in the 1950s and domesticated the con- its high status in Japan, being regarded as the cept into things Japanese. At that time, some re- “Big 3 and Best 1,” indicating that they rank in tailers adopted most elements of supermarket third place in terms of sales and in first place in operations such as self-service techniques, mass terms of employment. Generally, Sumitomo’s merchandising, and pricing, but widened the business management ability has a respected repu- range of merchandise to include textile, variety tation. The Sumitomo Group has a hard-and-fast furniture, electrical appliances, and so forth rather rule that the sales staff must not manage. So than confine themselves solely to food sales. They management staff are highly trained and, in turn, also built large stores from the outset to house are responsible for the training of their sales staff. the wide range of merchandise. In the 1960s, With the help of their management system, these retailers established chain stores all over Sumitomo Corporation has reaped vast profits Japan. This is how sougou suupaa were developed. and is a major success story in Japan. At the same time, some small grocery shops chose to stick to the American format of supermarkets and became shokuhin suupaa. Other retailers ap- Further reading plied the concept of supermarkets to sell non-food Kearns, R.L. (1992) Zaibatsu America. New York: The merchandise such as apparel and household Free Press. goods. This is the origin of specialty suupaa. 428 superstores

Among the above three forms of supermar- tele, and staffing. Japanese retail experts classify kets, sougou suupaa is closest to the concept of merchandise into two categories according to superstores. Sougou suupaa can be classified into customers’ purchasing behavior. The first is called national, regional, and local. A national sougou luxury merchandise (kaimawari hin) which refers suupaa must, by definition, operate outlets across to such items as high fashion, jewelry and so on. more than four prefectures. Secondly it must also The purchasing frequency of luxury merchan- have a network of outlets in two or more of the dise is low and customers tend to be choosy The following cities: Tokyo, Osaka, and Nagoya. The second category consists of daily necessities Daiei group, Seiyu group, and Ito-Yokada group (moyori hin) such as food, daily items, and house- are several well-known examples. A regional hold utensils. Unlike luxury merchandise, the sougou suupaa must run stores across four prefec- purchasing frequency of daily necessities is high. tures. The former Yaohan Japan is a good exam- Customers tend to shop in stores convenient to ple. The differences between national and them such as those close to their places of resi- regional sougou suupaa in corporate strength and dence. reputation have been significant. Finally a local In order to maintain their high status, most sougou suupaa is defined as a supermarket that department stores have adopted a merchandis- operates outlets across three prefectures such as ing policy that centers on luxury merchandise Marunaka. supplemented by daily necessities. In contrast, Large department stores are sometimes called sougou suupaa focus mainly on daily necessities. superstores because of their operation scale. Moreover, department stores stress textiles, while However, department stores and sougou suupaa sougou suupaa focus on food and daily necessities. differ in three major ways: the organization of Generally sales of textile merchandise alone have operations, the number of outlets, and the social constituted 40 to 60 percent of the total sales of prestige attached to them. Sougou suupaas are self- department stores. service operations, with chain-style organization— High-quality goods and comprehensive cus- in other words, with separate merchandising and tomer services result in high prices, which them- store operations—while department stores are not selves contribute to prestige. Sougou suupaa, due differentiated according to these functions. The to their emphasis on daily necessities, are less second characteristic of supermarkets is their large expensive. In fact, low prices were the raison d’être number of outlets. Daiei, for instance, directly of supermarkets when they started to flourish in operated 317 stores all over Japan in 2000. In the 1960s. contrast, Isetan operates only seven outlets. De- Moreover, in order to be consistent with their partment stores and sougou suupaa are also differ- high status, most department stores, especially ent in terms of social prestige: their respective those from the “kimono tradition,” have located statuses are rooted in their histories and are re- their stores in the earliest established central busi- lated to the physical locations of their stores. ness districts, such as the Ginza in Tokyo. Such Department stores, especially those such as locations can give department stores an atmos- Mitsukoshi of the so-called “kimono tradition,” phere of tradition and exclusiveness that attract can boast longer histories than supermarkets— rich customers. Sougou suupaa, on the other hand, and, in Japanese business generally a long corpo- have located their stores close to residential areas, rate history tends to be related positively in in order to be more easily accessible. The key con- consumers’ minds, to quality and prestige. The sideration here is convenience, as wealthy custom- “goodwill” created and sustained by stores over ers have never constituted their core clientele. a long period of time thus leads to a good corpo- See also: Daiei; Ito-Yokado; retail industry rate image. Looking at differences in their business strategies suggests some meaningful connections be- Further reading tween the categorical distinctions of prestige and Larke, R. (1994) Japanese Retailing, London: Routledge. such elements as merchandising policies, customer services, price, location strategies, clien- HEUNG-WAH WONG supply chain management in Japan 429 supply chain management in Japan percent in 2000. This will require increased use of information technology and customer relation- In Japan as in other countries, supply chain manship management (CRM) systems, together with agement (SCM) refers to the integration and significant reductions in total manufacturing lead- management of the business processes that link time. original suppliers with producers, distributors, Many supply chains in Japan are still formed and ultimately consumers. The objective is to largely along keiretsu lines, but are moving increas- optimize the responsiveness and cost performance ingly towards an open network model. The burst- of the entire supply chain, rather than focus nar- ing of the bubble economy and various rowly on business activities within any one com- competitive factors have pushed companies to pany. Since the 1990s, SCM has received look for suppliers outside their own keiretsu affili- considerable attention worldwide. Certain Japa- ation. The increasing numbers of Internet-based nese business practices, most notably those of transactions and the emergence of e-markets for Toyota and its keiretsu group members, have been the purchase of supplies have also accelerated the recognized by many as providing an early proto- move towards network supply chains. At the same type of supply chain management (see Toyota time, it should be noted that many companies production system). Subsequently Japanese in- never had keiretsu affiliations or have always been dustry has looked to the USA as a leader in in- a supplier to more than one keiretsu group. Other novating SCM, particularly for utilizing industries, such as fashion apparel, had never information technology and the Internet. developed close relationships among members in In its development, supply chain management their supply chains. Textile manufacturers, ap- has drawn upon many aspects of Toyota’s busi- parel manufacturers, and retailers independently ness practices. In fact, many top managers in Ja- determined their own production and ordering pan use the terms supply chain and “demand schedules based on their own individual sales chain” interchangeably borrowing terminology forecasts. Due to this lack of information sharing from Toyota’s pull-system of production which and coordination, retailers routinely experienced initiates the production of parts only as they are 20 percent opportunity costs and apparel manu- actually used, or demanded, by downstream facturers had 30 percent obsolescence of inven- stages of the production system or supply chain. tories. To address these problems in the fashion The aspect of the Toyota production system most apparel supply chain, the former Ministry of relevant to SCM is its extensive degree of infor- International Trade and Industry or MITI mation sharing between supply chain members. (now the Ministry of Economy Trade and Indus- For example, Toyota provides information on new try METI) launched the Quick Response Archi- car models to first-tier suppliers who then work tecture Initiative (QRAI) in 1998. Through a one together with Toyota to design the parts. Toyota and a half year project involving multiple enti- also provides a rough production schedule to parts ties, several improved business approaches were suppliers one-month in advance, and then places proposed including the introduction of quantity the actual purchase order ten days in advance. flexibility contracts, information sharing, synchro- Consequently suppliers have adequate time to nized schedules with small lot sizes for produc- prepare materials without maintaining perpetual tion and delivery, continuous optimization of inventories. Toyota’s dealer network also provides production and delivery schedules, and other demand forecasts to Toyota one month in ad- operational techniques of SCM. vance, and finalizes purchase orders ten days in Information sharing is widely recognized as advance based on a mix of actual customer or- the most important issue for supply chain man- ders and forecasted demand. Toyota then se- agement, whereas the obstacles to efficient SCM quences its final assembly of automobiles are generally recognized to be (1) long lead times, according to the dealer delivery schedule. Aim- (2) too many stages in the supply chain, and (3) ing to increase the responsiveness of its supply demand uncertainty and independent decision chain, Toyota has set a goal to build 70 percent making. Many excellent examples of reducing of cars to customer order by 2010, up from 30 production lead-time exist in Japanese industry 430 supply chain management in Japan

including Toyota. For eliminating redundant stead have outsourced the logistics function to stages in the supply chain, the retailer, Ito- third-party logistics providers. Another area of Yokado, provides a good example with its intro- activity for many companies has been to better duction of a vendor managed inventory program synchronize their logistics planning with manu- for daily necessity items. To deal with demand facturing planning. uncertainty some manufacturers have begun Since the late 1990s, most large Japanese firms implementing Internet-based design and order- have established departments with responsibili- ing systems, such as Sharp’s system for micro- ties for supply chain management. Furthermore, wave ovens. To coordinate decision making, some almost all consulting companies, as well as in- companies have introduced continuous replen- dustry and trade associations, have SCM divi- ishment planning (CRP) systems. For example, sions. Organizations that have actively organized Japan’s multitude of small stationery shops conferences and promoted SCM in Japan include launched a cooperative logistics system in 1998 the Japan Institute of Logistic Systems and a Japa- and then extended it into an “efficient supply nese branch of the US-based Supply Chain Coun- chain management system” in which continuous cil. replenishment planning is the core. Using this See also: distribution system system, member companies, including manufacturers such as Pentel, as well as distributors and retailers have targeted to reduce average inven- Further reading tories by up to 50 percent, average shortages to (1998) “Tokushu 1: Sapurai chien senryaku/ Tokusyu zero, and average delivery cost by 50 percent. 2: Baryu chien saikouchiku” ((Special Issue on Sup- While the term “supply chain” typically reply Chain Strategy and Value Chain Restructur- fers to inter-firm linkages, many large Japanese ing), Diamond Harvard Bijinesu 23(6). companies also speak of managing their own “in- (1999) “Tokushu: Sapurai chien manejimento” (Spe- ternal supply chains” (kigyounai sapurai chien). As cial Issue on Supply Chain Management) Opereshonzu part of efforts to improve their internal supply Risaachi, Keiei no Kagaku 44(6). chains, Sony and National/Panasonic (1999) “Kaigishiryou No.1, No.2” (Proceedings of (Matsushita), for example, have integrated their Logistics Software Conference, Vols 1–2), Rojisuteiku various manufacturing resources in order to sim- Sofuto-uea Zenkoku Kaigi, Tokyo: Nihon Rojisuteikusu plify and enhance the efficiency of procurement Sisutemu Kyoukai. and manufacturing. Many Japanese companies have eliminated their logistics activities and in- DE-BI TSAO T

Taguchi, Genichi principal-agent view of the corporation developed in US and British economics, the “principal,” or Taguchi (1924) has made important contributions owner, then has the right to control the “agents,” to technical aspects of quality management. He or managers, who run an organization. It is the developed the quality loss function, based on the manager’s duty to maximize profit; by maximiz- notion that any deviation from a target value cre- ing profit, the manager maximizes share prices ates user dissatisfaction (loss to society). Losses for shareholders. Managers who do not do this associated with being very close to the target are suffer falling share prices and the eventual threat small, but increase quickly (parabolically) with of unwanted (or hostile) takeovers. Because of distance from the goal. This approach is very this constant pressure, managers fall in line and different from the traditional view of an accept- maximize profits for shareholders. All of this enable range (specification limits), focusing instead sures rapid and efficient resource allocation in on a specific target. Taguchi aims toward unifor- the economy This view of corporate governance mity rather than compliance with specifications. is common in the USA, but has only recently Emphasizing robustness in both design and pro- gained ground in Japan and Germany. cess, Taguchi also popularized a simplified ver- The belief in the ultimate efficiency of takeo- sion of statistical design of experiments. While vers may be one reason why they occur in the his approach displeases statisticians by not fully USA. Another reason is related to the relative specifying interactions between variables, many ease with which a determined acquirer of shares engineers find it to be more accessible than tradi- can obtain a majority stake in the US context. tional experimental design. Although many deterrents to takeovers have been invented over the course of the past two decades, Further reading US and British capital markets tend to be much more fluid than their Japanese counterparts. Yet Phadke, M.S. (1989) Quality Engineering using Robust a third possible reason, although usually not Design, Englewood Cliffs, NJ: Prentice Hall. mentioned by economists, is that the underlying ELIZABETH L.ROSE work culture in the USA is permissive of takeovers. US employees may not identify themselves takeovers with the fate of one company to the degree that Japanese employees might. With well-developed A takeover occurs when one company (indi- external labor markets, US employees may also vidual, or institution) acquires control rights of a have more opportunity to change jobs if dissatis- target company. Control rights are usually ob- fied with a current employer. tained through the buying of more than 51 per- In contrast to the US corporate governance cent of a firm’s shares. In the typical environment, many observers in the 1980s and 432 Tanaka, Kakuei

1990s argued that the managers of large Japa- bank system is under extreme stress, there are nese firms traditionally see themselves not as still relatively few takeovers in Japan. Japan just agents for shareholders, but as agents for the recently witnessed its very first domestic hostile firm’s core employees and for other firm takeover attempt in 2000, when a former top Japa- stakeholders. Instead of maximizing short-term nese bureaucrat made headlines with a hostile profit (hence share price), managers focused on takeover bid of Shoei, a raw silk maker which other goals such as firm growth and the long-run now makes batteries. The bid failed, but the bid- maximization of employee well being. At least der went on to reinvent himself as an “activist” partly because of this, managers and employees shareholder interested in exercising shareholder may have not been disposed to wanting to grow voice to affect change. Activist shareholders buy- the firm through external takeovers or mergers. ing large stakes in a company and attempting to Instead, Japanese firms were inclined to grow persuade recalcitrant managers to change may internally including through the creation of sub- achieve some influence. However, there are many sidies. In contrast to the US model, this view of reasons why employees and managers may re- firm control was also theorized to be efficient. sist, including their belief that these shareholders Employees with job security good pay and firm may damage, rather than help, the long-run vi- specific training are productive employees con- ability of their firm. cerned with quality; higher productivity and quality for the firm translates to greater long-term efficiency and growth. Further reading Takeovers were said to be rare for several reasons. First, the form of ownership was said to be Kester, W.C. (1991) Japanese Takeovers: The Global Quest important as a deterrent. The stylized facts for for Corporate Control, Boston: Harvard Business the postwar Japanese financial system are that School Press. arm’s length, speculative shareholders have tra- Odagiri, H. (1992) Growth through Competition, Competi- ditionally played very little role in corporate de- tion through Growth, Oxford: Oxford University cision making. Because a significant percentage Press. (often a majority) of the Japanese firm’s capital WILLIAM BARNES providers are “patient” and not willing to sell shares, this was said to block out unwanted takeovers and shield the firm from speculation in the Tanaka, Kakuei capital markets (see main bank system; cross- shareholdings). As some researchers have also Kakuei Tanaka was Prime Minister of Japan from pointed out, firms that do not have shares held July 6, 1972 to November 26, 1974. Tanaka is by large patient investors were also not taken over best known for creating big money politics and in Japan, so the relevant deterrent may be not be his involvement in the Lockheed scandal. Tanaka, related to ownership. Hiroyuki Odagiri and oth- however, represents a transition in the political ers stressed the importance of firm culture, and economy of Japan. He rose to power as one of labor practices in deterring takeovers. If employ- the first in a long line of “professional politicians,” ees view the firm as a community they are likely as the Yoshida School of ex-bureaucrat politicians to view an offer of a takeover (whether friendly declined. In the heady days of economic expan- or hostile) as an intrusion. Also because of the sion, when the flows of money and votes involved specificity of Japan’s internal labor markets, it enormous public works projects, Tanaka created is quite difficult to mesh one firm’s labor prac- the “dual power structure” of Japanese politics in tices with another’s. which unofficial power brokers, like Tanaka, con- Although takeovers are slowly increasing in trolled major political offices. Japan and the corporate governance model is in In April 1947, Tanaka won election as Pro- flux, the evidence that US-style takeovers will gressive Party representative from Niigata. From take hold in Japan is not conclusive. Although here he began his involvement in massive gov- cross-shareholdings are unraveling and the main ernment spending on infrastructure (roads, telecommunications industry 433 bridges, tunnels) to remodel the archipelago. In addition, Tanaka systematically used the re- Tanaka’s talents were in raising money and or- gional branches of the benefited construction ganizing people. His money pipeline was rooted companies as bases for the political campaigns of in numerous ghost corporations that speculated local gundan politicians. in stocks and real estate. Tanaka’s national Tanaka’s lieutenants (Kanamaru, Takeshita power base was a group of conservative Diet and Ozawa) continued Tanaka-style politics and members called gundan (army unit). He built his broadened their base into foreign aid and the gundan on patron-client relations, providing finance sectors. However, by the mid-1980s scan- money for loyalty and votes. dals rocking the legitimacy of the LDP, a bal- From 1976 to 1983, the years between his ar- looning budget deficit, a 3 percent sales tax, rest and the trial verdict, he used his gundan to changing US—Japanese relations, and world criti- convert the Liberal Democratic Party (LDP), cism of Japan during the Gulf War all led to the the bureaucracy and business into an intercon- destablization of the politics of the gundan. nected system of money and power. He became known as “Shadow Shogun of Mejiro” (the prime minister’s residence). For example, by 1980 Further reading Tanaka’s gundan was the largest faction in the LDP. All three prime ministers during Tanaka’s Junnosuke, M. (1995) Contemporary Politics in Japan, Ber- trial (Ohira in 1978, Suzuki in 1980, and keley CA: University of California Press. Nakasone in 1982) owed their positions to Schlesinger, J. (1997) Shadow Shoguns, New York: Simon Tanaka. In response, Ohira gave the gundan four & Schuster. of twenty-one cabinet positions; Suzuki gave six and Nakasone gave eight positions. RICHARD A.COLIGNON Tanaka worked the bureaucracy with flattery services and payoffs. He raised the salary of executives of public corporations, pleasing bureau- telecommunications industry crats intent on retirement to these corporations. Tanaka was so well received by bureaucrats that Japan’s telecommunications industry is second he was called upon to adjudicate jurisdictional in size and technological advancement to that of boundaries among the ministries and agencies. the United States. Government control of the Yet his most characteristic form of influence was industry in the form of the monopoly firm, the his flagrant attempts to buy allies among the bu- Nippon Telegraph and Telephone Company reaucrats, particularly in the Ministry of Con- (NTT), was of critical importance up through struction. Tanaka paid their travel expenses and the 1970s. State control allowed for heavy invest- providing expensive gifts along with statements ment in the industry and protected it from for- of sympathy for their low salaries. eign inroads, leading to a high quality reliable Tanaka’s connection with business was basi- system by the late 1970s. When NTT was par- cally a pork-barrel relationship. Tanaka advo- tially privatized in 1985 (the government still cated for and protected business, for example, owns the majority of the shares), the Ministry of by passing pro-business tax cuts. He lobbied for Post and Telecommunications (MPT) gained in- individual businesses and negotiated mergers. creased regulatory authority over the industry. By the 1960s, construction spending was a main MPT’s policies, the deep recession in Japan in pillar of the economy equaling 20 percent of the 1990s, the politicized environment within GDP and 10 percent of employment. Tanaka which NTT operates, and NTT’s sluggishness often controlled dango bid rigging, because of in moving into new technologies such as those the opaque process of awarding government related to the Internet, have weakened NTT and contracts, which comprised 30–40 percent of all its family of firms. While Japan leads the world construction. In return, Tanaka received be- in cell phone technology in the early 2000s, it tween a 1–3 percent kickback on the contracts. lags in most other telecom technologies. 434 telecommunications industry

The 1950s, 1960s, and 1970s ment went to the big four makers: Fujitsu, NEC, Oki, and Hitachi. The R&D was done collabora- NTT was created as a public corporation in 1952 tively amongst the firms and NTT’s advanced just as the US Occupation of Japan was ending. labs. Ties between NTT and the firms were ce- Three key factors contributed to NTT’s auspi- mented by the practice of amakudari, the retire- cious beginning. First, NTT set sail at a time when ment of NTT officials onto the boards of NTT the international environment was very favorable family firms. NTT nurtured the firms and in re- and the technological trajectory was clear. Close turn the firms took care of retiring NTT officials. relations with Bell Laboratories of the USA pro- The NTT family system worked well through vided NTT with significant technological assis- the 1970s. By the late 1970s NTT had met its tance during this period, when Japanese two key goals of providing direct dial service companies essentially reverse-engineered AT&T throughout the country and eliminating the back- products. log of phone orders. Second, NTT was established at a time when Because of its large budgets and impact on Japan was pouring its efforts into building up the growth rates and employment, politicians did try entire economy No longer interested or able un- to influence NTT’s investment decisions. To pro- der Article 9 of the constitution to defend itself tect its autonomy as well as to assure the political militarily Japan turned to a strategy of defense stability and pro-business policies required for its through a strong economy and technological base. objectives, NTT made indirect campaign contri- The telecom industry and NTT were a key part butions to politicians. More specifically by pay- of this strategy. Indeed, NTT became Japan’s ing high prices for equipment, NTT provided Pentagon, a protected safe haven for research to family firms with the extra funds they needed to strengthen the nation’s technological base. make significant campaign contributions. Politi- Third, an innovative system of financing al- cal interference in NTT’s affairs was kept in bal- lowed for heavier investment in NTT than oth- ance up until the late 1970s. In the 1980s erwise would have been possible. Up until the technological change, a shift in the international early 1980s, a system of telephone subscriber environment, the nation’s deteriorating national bonds, used only in Japan, required that phone debt problem, and the erosion of the consensus users purchase a ¥100,000 government bond among state actors on how to use NTT for the ($300-$400 depending on the exchange rate) to national purpose led to increased politicization get a phone. This money was returned to the of NTT and the erosion of an effective state- subscriber after ten years. This system funneled guided strategy toward the industry. a huge amount of up-front money into the industry much more than the government alone could The 1980s and 1990s have provided. Phone users also supported NTT through high installation fees (still ¥72,000 or By the late 1970s NTT had met its key goals. $720 in 2000). NTT did not profit heavily from But now that it had caught up with the west in these large fees. Rather, the money was used to basic phone infrastructure, it needed a new mis- pay high prices to the firms that made equipment sion in an era when the technological path was for NTT. These firms, members of the so-called no longer clear. Political, economic and techno- NTT family include NEC, Fujitsu, Oki, and logical conditions were changing, leading to a Hitachi. NTT bought equipment from family discussion over privatizing and breaking up NTT. firms on a cost-plus basis, much like the Penta- This discussion was stimulated in part by the US gon in the USA. In short, money from phone government’s break-up of AT&T and the British users was used to build up a strong telecom in- government’s privatization of British Telecom dustry and a strong set of telecom firms. (BT). When NTT needed equipment, it met with At this same time, various scandals raised its family of firms to discuss the product and set questions about NTT’s inefficient management specifications based on NTT’s proprietary stand- and its overall legitimacy as a protected national ards. Orders for sophisticated switching equip- monopoly Corporate users started complaining telecommunications industry 435

about NTT’s low-quality data communications coffers. and MPT gained vast regulatory powers services and its high prices. The USA, facing that had formerly been held by NTT. growing deficits with Japan, started pressuring While MPT professes to be increasing user NTT to procure foreign telecom equipment. benefits and nurturing new firms, Japan’s telecom Once doubts were raised about NTT’s future, charges remain quite high by international stand- state and corporate actors with strong stakes in ards, and competition is weak. Competition only the outcome realized that NTT would be priva- exists in cell phones and long-distance markets, tized and possibly divested and decided it may but even then MPT keeps prices relatively high as well be changed to their benefit. and tightly controls entrants. NTT’s dominance The key actors had different motivations for of local calls and the fact that all long-distance privatizing and breaking up NTT. The Ministry carriers have to pay NTT high connection fees of Finance (MOF) wanted NTT to be privatized to connect to its local lines has become a major so it could sell NTT shares to reduce the nation’s trade issue between the US and Japan in the early rising debt. Big business wanted the debt prob- 2000s. Growing domestic constituencies are also lem to be solved without tax hikes and thus complaining about NTT’s dominance. As long favored privatization. The Ministry of Interna- as NTT is largely a government-owned firm en- tional Trade and Industry (MITI), which over- meshed in a political environment in which it is a saw the computer, semiconductor, and other major provider of public works and cannot fire manufacturing industries, wanted to wrestle con- workers, it is destined to lag in cutting edge tech- trol over the telecommunications industry which nologies and communications services. was in MPT’s jurisdiction. MPT bureaucrats The decision to divest NTT was delayed from believed that if NTT was privatized and broken 1985 to 1990, 1990 to 1995 and again to 1996. up, MPT would gain regulatory powers that The delay was largely due to MOF’s concern that would make it a powerful policy agency like MITI divestiture would hurt NTT’s stock price as well and MOE Non-NTT family firms were pressing as NTT’s strong opposition to the proposal. In for the giant’s privatization because they wanted 1996 a compromise was reached to break NTT a piece of NTT’s pie. into three firms: one local company covering east- In short, the motivation for privatizing and ern Japan, one local company covering western breaking-up NTT was primarily political. While Japan, and a long-distance firm. But these three couched in terms of economic efficiency user firms, together with other NTT spin-offs such as benefits, and long-term competitiveness, the de- the mobile phone giant, NTT DoCoMo, have bate was really driven by a power struggle. Thus, been put under an umbrella holding company. what had been an effective industrial policy to- There is consensus that this “break-up” is hav- ward NTT and the industry up through the 1970s ing little impact on competition. The “break-up” disintegrated into political squabbling. Various compromise allows the Japanese government to actors tried to manipulate NTT for their own tell the USA that it has broken up NTT and saves purposes with little attention given to the long- the face of MPT, which has long been pushing term competitiveness of the industry and user for a break-up. It also allows NTT to say it was benefits. There was no longer a strong state con- not broken up but instead strengthened through sensus on how to use NTT for the national in- integration under a holding company. terest and the result was serious politicization of NTT and an over twenty-year debate over whether to privatize and break up the telecom- The 2000s munications giant. NTT was partially privatized in 1985 (the Japan lags the west in Internet use, high fees and government stated it would hold 30 percent of other advanced telecommunications services with the stock indefinitely and held two-thirds of the the exception of the cellular phone. While mo- stock until the late 1990s). MOF and MPT were bile phones meet the needs of Japanese citizens, the big winners in the partial privatization. MOF who spend long hours commuting, the high rate could sell NTT stock to help shore up national of cell phone usage is also the result of the high 436 three sacred treasures cost of installing a regular phone line. Indeed, Johnson, C. (1989) “MITI, MPT, and the Telecom there are now more cell phone subscribers than Wars,” in C.Johnson, L.Tyson, and J.Zysman (eds), those for installed lines. Politics and Productivity, Cambridge, MA: Ballinger. There is a sense of crisis in the industry in the Vogel, S. (1996) Freer Markets, More Rules, Ithaca, NY: 2000s just as there is in many high tech sectors. Cornell University Press. Japan has succeeded in manufacturing high qual- MARIE ANGHORDOGUY ity goods and now it needs to become a more inventor and entrepreneur-friendly nation. Ja- pan’s success in mobile phones has only been in three sacred treasures Japan because of its closed standards. But NTT The “three treasures” is a culturally-tinged eu- DoCoMo is planning to offer an internationally phemism for the most commonly cited elements compatible standard in its next generation cell of the Japanese management system: enterprise phones. As for the Internet, while use is grow- unions, lifetime employment and seniority ing, there are many barriers to its full-fledged use promotion. These distinctive aspects of the tra- other than high local phone rates. These include ditional post-Second World War Japanese firm close interfirm keiretsu ties, lifetime employment were first identified in James Abegglen’s pioneer- and seniority wage practices that make it diffi- ing work, The Japanese Factory. Proponents of Japa- cult to restructure firms to gain efficiencies from nese-style management argue that these three the Internet, traditional reliance on personal con- elements are the key to Japanese success in hu- tacts, and the like. man resource management. There is a growing debate over whether the The “sacred treasures” is a reference to the state should sell all its NTT shares to allow the mirror, sword and jewel, three objects accorded giant to restructure itself to compete internation- great reverence in Japanese mythological history ally But even if the government does sell its shares, which are viewed as tokens of the emperor’s le- the politics of the situation, especially given the gitimate authority The actual mirror, sword and deep recession, will most likely work against any jewel are located, one each, at Japan’s three most dramatic change in NTT in the foreseeable fu- important Shinto shrines: Izumo, Atsuta, and ture. Ise. See also: computer industry; software industry Further reading Further reading Abegglen, J.C. (1958) The Japanese Factory: Aspects of its Social Organization, Glencoe, IL: The Free Press. Anchordoguy M. (1989) Computers, Inc.: Japan’s Chal- lenge to IBM, Cambridge, MA: Harvard University ALLAN BIRD Press. ——(2000) “Building a Telecommunications Industry: Tokugawa period The Developmental State and the Nippon Tele- graph and Telephone Company” and “The The period of formal rule by the fifteen Tokugawa Politicization and Erosion of the Developmental shoguns (1600–1868), often called the Edo Pe- State: Japan’s Telecommunications Industry 1980– riod, was a time of tight control of a central gov- 2000,” working papers. ernment over more than 250 feudal estates. Japan Fransman, M. (1995) Japan’s Computer and Communica- was cut off from the outside world during most tions Industry: The Evolution of Industrial Giants and Glo- of the Tokugawa period. Social ranking was bal Competitiveness, Oxford: Oxford University Press. strictly enforced with the warrior and noble caste Ian, G. (1991) “Re-regulation, Competition and New on top and everyone else beneath. It was a time Industries in Japanese Telecommunications,” in of peace and relatively strong commercial devel- S.Wilks and M.Wright (eds), The Promotion and Regu- opment in Japan’s cities, with the political capital lation of Industry in Japan, New York: St. Martin’s at Edo experiencing spectacular growth in power Press. and size. The Tokugawa period began with the Tokugawa period 437 victory of the Tokugawa forces and their allies at forced to give up a degree of autonomy especially the battle of Sekigahara in 1600, enduring until military autonomy and acquiesce to a central 1868, the year of abdication of the last Tokugawa political power. Following the assassination of Shogun and the official start of the Meiji period. Nobunaga in 1582, the mantel of centralized au- The regime was the ultimate power in the land thority over the feudal estates fell to the flamboy- for almost all of that time. What happened dur- ant former peasant, Hideyoshi, who helped pave ing the Tokugawa period both in direct and indi- the way for the Tokugawa regime by moving yet rect reaction to policies of the regime, is of more authority in the direction of central power. overwhelming importance in understanding the Tokugawa Ieyasu was a man born to a time character of modern Japan. and to a station in life characterized by armed In comparison with other regimes over the past struggle, intrigue, military alliances both overt few centuries, the central authority established and secret, subversion of authority and other as- by the Tokugawa clan shortly after 1600 was re- pects of extreme individual and societal insecu- markable in many ways. It lasted for two and rity Perhaps it was natural that his passion in life one-half centuries, ruling over one of the most was to create stability and establish power over populous nations of the world, wielding together the land that would pass on to his heirs indefi- and controlling a political system extending more nitely He was clever enough to understand that than a thousand miles from northeast to south- this could not be accomplished merely through west, with areas cut off from each other by moun- military domination. Several radical policies tain ranges difficult to cross even now. The degree were instigated during the first decade of rule of rearrangement of a large society and the tech- which literally changed the face of Japan. Those niques used for tightly controlling such a society daimyo whom the regime did not trust because are impressive even by contemporary standards. they had opposed Tokugawa’s bid for control The regime brought lasting peace to a society were relocated, literally ordered to move estates which had institutionalized nearly continual civil to areas far from the capital, construct new cas- war for more than a hundred years. Effective tles, and make a home for themselves central authority was instituted over a nation that where more reliable daimyo could keep an eye on had not had more than brief periods of central them. government for nearly a thousand years. It ruled The new regime decided not to rule from the to a surprising degree by written decree, at a time Kansai area, around Kyoto and Osaka, which had when mass-production of written materials was been the political and commercial center of Ja- limited and difficult to disseminate. Following its pan for most of its history up to then. An enor- initial hundred years or so, the Tokugawa regime mous castle project was begun by Ieyasu, was the government of one of the most literate continued by his son Hidetada, and finally com- and orderly societies prior to the twentieth cen- pleted by his grandson Iyemitsu in the area close tury. to the mouth of the Edo River. There was a small Tokugawa Ieyasu, founder of the Tokugawa castle already there, but nothing else. As had hap- regime, the first of fifteen men to serve as Sho- pened once before in Japanese history in the late gun, or secular ruler of Japan, during the thirteenth century a military government set up Tokugawa period, did not simply spring up and for business before permanent structures were put an end to the period of civil wars by himself built for it, with officials living and working in or with his own military forces. The unification tents. As before it was called bakufu, tent govern- of Japan under a single military leader, bringing ment. The name stuck and the Tokugawa regime an end at least temporarily to the struggle for was always referred to by people who lived un- power among the larger feudal estates, had been der it as bakufu, which came to mean simply “the accomplished more than thirty years before the government.” beginning of the Tokugawa period by the great If any of the people who saw the area around warlord Oda Nobunaga. Unification did not construction of the castle could have been trans- mean the disappearance of feudal estates, but the posed ahead 150 years they would surely have estates and the daimyo who headed them were been astounded at what lay around them. They 438 Tokugawa period would have found themselves in the middle of and it was clear to large numbers of them that one of the largest cities on earth. The castle at its Edo was the place to be. Secular power had center was actually a walled city within a city shifted firmly to the new capital of Edo, and by Covering more than twice the area of the present- 1700 it passed both Kyoto and Osaka becoming day Imperial palace, home and work place to a the largest city of Japan, and indeed, as stated bureaucracy of hundreds of samurai who kept above, one of the largest in the world. detailed records of activities throughout the land. Outside, a city spread beyond the castle for miles, Sakoku-rei with more than a hundred temples, more than two hundred large estates for the elite, and homes During the rule of Oda Nobunaga and Hideyoshi, for close to a million Japanese of lesser ranking. and for the last thirty years or so of the civil wars preceding unification of Japan under Oda, Euro- peans had begun to have a hand in Japanese Sankin kotai power politics. They introduced firearms, which What spawned the rapid and extensive urban completely changed the character of warfare in development was something called in Japanese Japan, and Christianity was embraced by some sankin kotai, usually rendered in English as “alter- daimyo, a result of close relations some warlords native residence.” It was an elaborate hostage had with specific groups of Dutch, Portuguese system whereby all daimyo were forced to con- or Spanish. Oda had actually encouraged struct a residence compound on grounds close Christianity in Japan as a way of offsetting the to the Tokugawa castle in Edo, and to physically power of large Buddhist groups, some with pri- reside in that residence for one-half of each year. vate military units, headquartered near the capi- During the other six months when a daimyo was tal at Kyoto. Tokugawa Ieyasu apparently allowed to return and attend to affairs of his do- considered this incursion of foreigners and a for- main (within limits of the may rules and regula- eign religion to be a threat to the Tokugawa tions constantly being issued and revised from regime’s absolute power. Christianity was the bakufu), his parents if they were alive, his wife, banned, and all foreigners ordered to leave Ja- and his children had to take his place in the Edo pan. The regime then took the radical step of mansion. The program did not run on the honor closing Japan off from the outside world. Japa- system. Personnel assigned to be at the mansion nese living abroad were given a few years to re- were verified at intervals by bakufu samurai, and turn, and then when sakoku-rei, literally “locked checkpoints were established along roads lead- country rule,” went fully into effect in 1639 ing to Edo at which every person in a daimyo pro- (twenty-three years after the death of Ieyasu), no cession going either toward or away from the one could leave or enter the country There were capital was checked against a list prepared in ad- a few exceptions such as Deshima island in vance and forwarded to Tokugawa officials man- Nagasaki harbor which Dutch and Chinese ships ning the checkpoints. were allowed to visit on occasion, and one branch During the first few decades of the seven- family of the Tokugawa clan was allowed to trade teenth century there were more than 250 with the Ryukyu islands, then under Chinese wealthy aristocrats living in the general area of control. But for the most part, Japan was sealed Edo castle. They all needed many things: hous- off from the world, officially for more than two ing, clothing, artifacts for preparing food, food hundred years. itself, and they had needs beyond these, things such as domestic help, entertainment, reading material, and all sorts of personal items. An Edo culture enormous consumer market had been made to spring up out of nowhere. Most peasants were Although for the bulk of the Japanese popula- tied to the land and under the control of the tion, the peasants, life remained austere and dif- daimyo. Merchants and craftsmen, on the other ficult, the Tokugawa period ushered in a highly hand, were free to locate wherever they liked, developed and relatively prosperous urban Tokyo University 439

culture in Edo and other large cities. It is some- Tsukahira, T.G. (1970) Feudal Control in Tokugawa Ja- what ironic how this came about, because the pan: The Sankin-Kotai System, Cambridge, MA: driving force behind the explosion of urban cul- Harvard University Press. ture was the lowest ranked category of Japanese. JOHN A.McKINSTRY The regime based its economic policy on controlling land and the products of the land. The entire population was officially frozen into occu- Tokyo University pation castes based on a type of Japanese interpretation of the theories of Sung Dynasty Standing at the top the hierarchy of the Japanese new-Confucianism. At the top, representing a university system is the government-financed and little less than 10 percent of the population were operated Tokyo University It is more central to the warrior elite and court nobility with the Im- the selection of leadership in the governmental perial family at the top of this category and the and economic life of the nation than that of any samurai at the bottom. According to theory the university in any other country. Tokyo Univer- peasants were ranked next in line, but in reality sity graduates dominate top government and they were the most exploited and abused of all business leadership positions. Only the brightest categories. Craftsmen were ranked next in the students (or at least, the best test takers) in Japan four-part system, and the bottom of the list were sit for entrance examinations to Tokyo Univer- merchants, people seen by the ruling warrior class sity and entrance is a virtual guarantee of career as parasites who served no real national purpose. success. The warrior/noble class held all political power, There are more than 500 universities in Ja- but a new kind of power was emerging in Japan, pan, second only to the United States in number the power of money By bringing lasting peace to and per capita. About twenty Japanese universi- the land, the Tokugawa regime created conditions ties are particularly respected as places where of stability and predictability which were very quality graduates are produced and which are favorable to the one rank they held in greatest recruiting grounds for leadership for important contempt: merchants. Business thrived in urban private and government employers. It is widely Japan, with some members of the merchant class agreed that within that group of twenty or so, becoming very wealthy creating markets for five universities stand out above the rest as elite elaborate material and non-material products. schools: Tokyo University the two private uni- The industrial revolution had passed them by and versities, Keio University and Waseda Univer- in the realm of technology Edo Japan fell behind sity (both also in Tokyo), Kyoto University and Europe. However Tokugawa Japan was run with Hitotsubashi, also located in Tokyo. Entry into great administrative skill, and (often in spite of these elite schools is sought after by the brightest the heavy hand of the samurai officials) the cul- of Japan’s youth, and to be a graduate of one of tural life of its cities was as vibrant and intricate these top five universities is an advantage in any as any city of its time. career. Around the world, other famous universities See also: guilds; Meiji restoration have played a prominent role in providing leadership in countries around the world: Oxford, Harvard, Moscow University the University of Further reading Paris, Chulalongkorn University are examples. Dore, R. (1984) Education in Tokugawa Japan, London: It is no exaggeration to state that none of these Athlone Press. institutions even comes close to Tokyo Univer- Lehmann, J.-P. (1982) The Roots of Modern Japan, Lon- sity as a place where future leaders are provided don: Macmillan. for a nation. It is a large institution with about Murayama, M. (1974) Studies in the Intellectual History of seven thousand undergraduate, and about seven Tokugawa Japan, Tokyo: University of Tokyo Press. thousand graduate students. The student body Totman, C.D. (1967) Politics in the Tokugawa Bakufu, of Tokyo University is highly selected; it is ex- Cambridge, MA: Harvard University Press. tremely difficult to pass the examination for 440 Tokyo University entrance. The faculty is, as one would imagine, of leadership, based not on heredity but upon quite distinguished. However, some observers specific skills and training, upon understanding have concluded that the quality of scholarship of modern systems of administration, upon and academic programs is not commensurate knowledge of a wider world. with its position in such an advanced society. During the final half-century of the Japan is often depicted as a society dominated Tokugawa regime, a growing fear of the price of by three significant power sources, what some isolation and ignorance of the outside world was have called the “iron triangle:” the elected gov- openly expressed by people within the govern- ernment, the bureaucracy and the large corpora- ment. Several small institutes were established to tions. The proportion of people at the top of each familiarize a cadre of samurai with whatever in- of these power sources who have graduated from formation was available about foreign societies. that one institution provides evidence of the over- A few studied the Dutch language, and there whelming importance of Tokyo University in the was more knowledge of the outside world circu- leadership of Japanese society More than twenty lated within that small group than is generally people have held the office of prime minister since believed. Meiji leaders consolidated these insti- the end of the Second World War; ten of them tutes immediately after taking the reigns of con- have been graduates of Tokyo University That trol, and by 1877, nine years into the new same kind of concentration of graduates can be regime, they were all merged into an institution found in top bureaucratic posts and among top copied from European and American models leaders in banking and industry. with faculties of agriculture, economics, engi- To underscore the narrowness of condition- neering, law, letters, medicine and science. In ing of Japanese life at the top, all ten of the post- 1886 the institution was officially titled Tokyo war prime ministers mentioned above graduated Imperial University. After the Second World from a single department of the university the War the name was shortened to the present To- Faculty of Law (which, as is the case in all Japa- kyo University. nese universities, does not grant law degrees, but This government institution was not the only administers a rather general undergraduate pro- center of learning during the early Meiji period. gram). For the various ministries of the national In fact the private school which later came to be bureaucracy a more strategic center of power than known as Keio University actually predated the for similar agencies in the United States or Brit- beginning of Tokyo University having its begin- ain, graduates of the Faculty of Law of Tokyo nings the very first year of Meiji in 1858. Waseda University are even more in evidence. For im- came into existence a little later, in 1882. How- portant ministries such as the Ministry of Fi- ever, Tokyo University was then, and remains nance, Ministry of International Trade and today the primary training institute for top Japa- Industry, and the Foreign Ministry graduates of nese leadership. Tokyo University have always made up more than 70 percent of top-level personnel. See also: Men in charge of MOF While such a narrowly concentrated channeling of leadership identification and con- Further reading ditioning may seem extraordinary clearly unprecedented in contemporary advanced societies, Cutts, R.L. (1997) An Empire of Schools: Japan’s Universi- history reveals a rather simple answer for it: To- ties and the Molding of a National Power Elite, Armonk, kyo University was founded precisely to play NY: M.E.Sharpe. such a role, and it has to date never relinquished Kerbo, H.R. and McKinstry, J.A. (1995) Who Rules that role. Leadership in the Tokugawa period Japan: The Inner Circles of Economic and Political Power, had been rooted largely in heredity. Young men Westport, CT: Praeger. who conceived of and brought to realization the Koh, B.C. (1989) Japan’s Administrative Elite, Berkeley Meiji restoration were quick to grasp that if the CA: University of California Press. new society could hope to compete with West- ern powers, it was essential to have a new kind JOHN A.McKINSTRY tonya 441

tonya Ya, a leading food products wholesaler founded in 1885, expanded its business through the ac- In a modern society where the social division of quisition of a sole distributor license from Japan labor prevails, consumer products (commodities) Brewery (presently Kirin Brewery Co., Ltd.), and reach the consumers through a successive pro- from the Tsuneyoshi Okura Brewery a sake cess of transactions, which is called a distribu- maker, for preservative-free sake that Meiji-Ya it- tion system. The last stage of transaction that self had proposed. involves consumers, is designated as retail or re- On the other hand, tonya also held the posi- tail distribution, and relates to the function of tion of allocating merchandize of high demand distribution vis-à-vis consumers, which is assumed to individual retailers under its networks. As the by those called “retailers” (kouri gyousha or kouri). tonya also sold merchandize to retailers on credit All the other transactions in the distribution pro- spanning a certain period, it acted as a credit in- cess, including purchases by retailers, are known stitution for both ends of the distribution chan- as intermediary distribution, but the term is rather nel. This financial role provided the tonya with an notional and often replaced by the term “whole- overwhelming power to control the whole distri- saling” (oroshiuri gyousha or oroshi). bution process. The tonya generally retained this In Japan, the term tonya has traditionally been power throughout the periods when producers used to designate the wholesalers (individual and and retailers were fragmentary and small in collective) that specialize in the intermediary func- scale. tions in distribution. The term derives from toi A Japanese saying, still in use, Souwa ton-ya ga or toi maru, the section of medieval seigniorial orosanai (tonya does not wholesale), relates to the domain in charge of storage and transport of practical lesson that life never proceeds as one impost. As commercial activities grew, this sec- hopes, and derives from the historical fact that tion became independent from landowners and the tonya exerted very strong influence on the expanded to transport and warehouse businesses. everyday life of the ordinary people and some- During the Muromachi period (1336–1573), they times abused it for profit. The hegemony of tonya widened the scope of operations into such areas still persists today in areas where production and as transactions of commodities and provision of distribution structures are fragmentary Exem- accommodation and other services for peddlers, plary commodities are the fresh vegetables and the then retailers. These business entities were fish, and publishing. called toiya, and the appellation was transformed After the Second World War, the consumer to tonya after the Meiji restoration. goods industry grew rapidly throughout the pe- Until the mid-twentieth century, when the riods of economic growth. In the 1960s so-called capitalistic economy in Japan reached the point mass production and mass consumption was her- of mass consumer society the tonya’s role in re- alded. Mass production led to the birth of na- gard to producers and retailers was significant. tionwide producers in a variety of commodities, Producers that lacked sales know-how or finan- while mass consumption was spurred and accel- cial strength to run their business often accorded erated by mushrooming superstore (supermar- to a strong tonya the exclusive license to sell par- ket) chains (see superstores). As large-scale ticular or all items that they produced. In return, nationwide operators increasingly dominated producers received some money before the pur- both ends of the distribution channel in Japan, chase of their product by consumers took place, the intricate traditional intermediary distribution which was a critical arrangement in the formers’ industry the tonya system, was put under ques- cash flow management. To n y a with abundant fi- tion along with the practices of tonya to often im- nancial resources thus functioned as de facto lend- pose arbitrary and unilateral terms of ers to producers. transactions. To n y a also assumed the marketing function for In the early 1960s, Shuji Hayashi, a professor producers that relied on the tonya to sell their prod- at the University of Tokyo, called for moderniza- ucts, by proposing modifications or additions of tion of the distribution system in line with that of items. In the pre-Second World War period, Meiji- the country’s industrial development under the 442 tonya

slogan of Ryuutsuu Kakumei (revolution in distri- among the latter. The application of information bution). His proposal was that leading producers and telecommunications technologies made it and large retailers should deal directly with each possible for chain store headquarters to collect other, or that the intermediary distribution should sales and inventory data of individual stores on be eliminated altogether in order to have an effi- an item-by-item basis using point-of-sale (POS) cient distribution system. technology. These data were useful to avoid ex- Contrary to these arguments, however, the cessive inventory or opportunity loss, and increas- number of wholesalers continued to increase until ingly were transmitted to producers in order to into the 1980s. Three factors were influential. streamline logistics. Firstly the considerable expansion of the con- In the late 1980s, the bubble economy in Ja- sumer market in Japan also made room for the pan, coupled with endaka, brought about a series traditional small retailers to increase (but often of speculative purchases of foreign real estate. with new business formats), to which the tradi- This prompted Japan’s trade partners, especially tional wholesalers responded by slimming down the USA, to demand that Japan open its domes- and diversification in the commodities and serv- tic market to foreign operators. The complex and ice that they provided. inefficient structure of the country’s intermedi- Secondly organized retail firms such as ary distribution system became one of the heated superstores, needing to control the inventory and issues in trade negotiations. It was then that the timely purchase of an ever-increasing array of term tonya acquired international recognition, and items on their shelves, regarded the tonya as a the tonya system was thought, not only by for- means of outsourcing to bear this function. The eigners but also at home, to be a major barrier tonya did not only eagerly assume it but also par- against free entry and one of the principal fac- ticipated in the marketing activities of superstores tors contributing to high retail prices in the coun- with suggestions and proposals under the self- try. designation of “retail support” partners. In 1991, Toys R Us, an American toy retailer, Thirdly the importance of tonya for the lead- began deploying a chain network in Japan. The ing producers of consumer goods did not dimin- company’s strategy was to skip tonya or the inter- ish either. Since the tonya controlled a wide range mediary distribution stages as extensively as pos- of distribution channels and outlets, a stable rela- sible, and to make direct purchases in bulk from tionship with a large tonya gave producers a producers in order to lower the costs. After Toys number of advantages in the exchange of rebates R Us, a number of foreign retailers began to make and sales promotion fees paid to the former. inroads with identical strategies. Firstly the producers could readily make use of These changes reactivated the once-rejected the existing retail networks under the control of argument that the tonya system should be elimi- the tonya. Secondly they could expect that the tonya nated. The fact that the number of wholesalers would purchase the minimum lot of production was in decline and that chain operators control- necessary to cover the initial investment. And led a considerable share within each regional thirdly the tonya could, to a certain extent, func- market, seems to have further strengthened the tion as a shield against fluctuations of demand, views that direct transactions between produc- which allowed producers to dispatch their prod- ers and retailers will dominate. ucts in an orderly fashion. Around the turn of the twenty-first century Due to these factors, the tonya system retained the world’s leading retailers have established vari- importance through the 1960s and 1970s, even if ous systems of procurement and purchase not so powerful as in the prewar period when through the Internet. Wal-Mart pioneered this their hegemony was almost absolute. By the end approach with Retailers Market Xchange.com, of the 1980s, however, traditional forms of retail which prompted its competitors to launch simi- business had lost ground within the Japanese re- lar B2B (Business to Business) or “marketplace” tail industry. The main arena of competition networks such as WorldWide Retail Exchange shifted, from the one between the traditional re- and GlobalNetX-change. In line with foreign com- tailers and the chain operators, to competition panies, several leading Japanese retailers have torishimariyakukai 443

announced their intention to participate in one of senior managers at the top of the organiza- of these networks, and the purchase volume is tion. gradually increasing. In most US and UK companies, these two Surrounded with a rapidly changing environ- responsibilities are differentiated more clearly ment, many tonya are struggling to rediscover than in Japan. In US firms, for example, the board some new and proper function in relation to proof directors meets and reviews the performance ducers and retailers. The additional functions of the company and ratifies policy decisions that sought include logistical support, assistance to the are likely to have a major influence on the com- lineup of merchandises, information management pany’s performance. Once the board ratifies such and its maintenance, and finance. However, as policies, professional managers, led by the shacho the whole economy of Japan tends to be defla- (equivalent to a chief executive officer in West- tionary after the collapse of the bubble economy ern firms), take responsibility for the general the retail industry itself has been experiencing a management of the company. It is common in structural slump. The situation, in turn, makes it US and Western European firms for the Chief inevitable that the tonya system will undergo a Executive Officer (CEO) and several senior ex- period of restructuring and consolidation. ecutives to simultaneously hold general manager posts as well as positions on the board in order See also: after-sales pricing; Daiei; deregulation; to accurately represent management’s position on guilds; Ito-Yokado; marketing in Japan; pricing various decisions made at the board level. Be- practices; promissory notes cause of this arrangement, the distinction between the board’s responsibility to shareholders and general managers’ responsibility for policy devel- Further reading opment and implementation is clearly demar- Hayashi, S. (1963) Ryuutsuu Kakumei (Revolution in cated, though some overlap does exist. Distribution), Tokyo: Chuuoukouronsha. In Japan, the distinction between shareholder trusteeship and general management duties is SHINTARO MOGI more ambiguous. On average only one director in thirty is an outside director, i.e., one who does torishimariyakukai not have some area of operational responsibility within the company. In fact, most directors are The official title for executives at the highest level promoted from posts as department heads, and, of a Japanese firm is torishimariyaku, translated as though they are promoted to the torishimariyakukai, “director.” As a group, these torishimariyaku com- continue to carry out their responsibilities as de- prise the Japanese firm’s formal board of direc- partment heads. Nevertheless, directors with de- tors, torishimariyakukai. The activities of the partment head duties have a different relationship torishimariyakukai differ substantially from its US to the firm than their non-director counterparts. or Western European counterparts. When elected to the board and appointed as di- Historically torishimariyakukai were based on a rectors, the new executive formally retires from Western model of organization in which respon- the company and collects a retirement bonus. He sibility at the top was divided into two general is then immediately re-hired as a director of the categories: shareholder trusteeship and general company with a two-year appointment to the management. Shareholder trusteeship refers to board. the responsibility of members of the board of Further comparisons of torishimariyakukai with directors to protect the interests of shareholders boards in the USA and UK reveal that through oversight of the firm’s professional man- torishimariyakukai appear to be 25 to 30 percent agers. Duties pertaining to the administration of larger. However, such a comparison is mislead- company policies and day-to-day operational ac- ing. The double duty that a Japanese executive tivities of the firm fall under the category of “gen- performs implies that, to make a proper compari- eral management” and fall under the purview of son with Western firms, both directors and gen- the professional managerial cadre, usually a set eral managers should be included. When general 444 torishimariyakukai

managers are included in the calculation, the size There are a number of reasons why sharehold- of torishimariyakukai is actually smaller. ers hold little sway over the torishimariyakukai. In prewar days there were numerous outside directors. These outside directors viewed themselves Torishimariyakukai structure and function as independents who were charged mainly with The torishimariyakukai includes all directors as well carrying out the duties of shareholder trustee- as kansayaku, the firm’s internal auditors. The ship. With only one in thirty directors originat- formal torishimariyakukai is not a sovereign body. ing from outside in Japanese boardrooms today No legal powers are granted it under Japanese torishimariyakukai are in a position to resist attempts commercial law, although the law requires that to change their nearly unassailable control over there be one. Generally the torishimariyakukai meets the company Additionally as noted above, from less than once a month. Under a Western model the immediate postwar years up to the early 1980s of the firm, boards of directors make final deci- many companies employed sokaiya to silence sions on whether or not to approve long-range shareholders who might raise uncomfortable plans. For example, 35 per cent of boards in the questions or challenge the board during the gen- US authorize long-range plans. In the UK that eral shareholders’ meeting. The final reason figure approaches 65 per cent. In Japan, by con- shareholders have little influence on directors and trast, only 13 per cent of boards surveyed are the torishimariyakukai has to do with the composi- involved in the authorization of long-range plans. tion of shareholders. In most large corporations, Though the torishimariyakukai is assumed to small shareholders account for just over 30 per represent shareholders, this is largely a fiction. cent of outstanding shares. Institutional investors Directors are selected by the CEO, summarily are responsible for the lion’s share of company approved by the formal board, and then voted stocks. But unlike the USA or UK, where insti- on at the general shareholders’ meetings once a tutional investors consist mainly of pension funds year. Even at the general shareholders’ meeting and insurance companies, Japanese institutional it is unlikely that shareholders will have much investors consist mainly of a company’s main power to influence the choice of directors as votes bank and affiliated companies. This group of in- are usually vested by proxy in the formal board stitutional investors does not seek control of the itself and companies may enlist the aid of sokaiya, company even though it has ownership. strong arms with ties to the yakuza, who intimi- Members within the torishimariyakukai can be date vocal shareholders from asking embarrass- divided in two ways, by legal authority and by ing questions. Though legislation in 1983 hierarchical rank. Under Japanese commercial outlawed sokaiya, they are still widely influential. law at least one director must be granted author- The average annual shareholder’s meeting lasts ity to represent the company to third parties and twenty-five minutes. to sign documents for it. This representative au- At the same time that shareholders appear thority daihyoken, is usually reserved for CEOs powerless to influence the torishimariyakukai, Japa- and selected senior officers. The number of ex- nese commercial law grants them broad power ecutives possessing representative authority var- to call it to accountability A shareholder with as ies by company size and by industry Banks have few as 3 per cent of a company’s stock can re- the largest number of executives vested with such quest that the civil courts remove a director. Simi- power per torishimariyakukai of any industry in larly such a shareholder can demand that a board Japan. meeting be held within two weeks of a request Torishimariyakukai have a pronounced hierar- for such a meeting. Comparable power does not chy which can range from as few as three differ- exist for shareholders with equally small stock ent levels to as many as seven. The average positions in US firms. Finally shareholders in number of levels is six. These are, in descending possession of 10 per cent or more of a compa- order of rank: chairman, vice-chairman, presi- ny’s stock can claim access to confidential finan- dent, vice-president, senior managing director, cial statements relating to a company’s managing director, and director. The level most performance. frequently omitted in companies is that of torishimariyakukai 445

vice-chairman. Additionally the authority associ- quently there are likely to be other organs operated with each level is relatively clear for all posi- ating within it which fulfill the policy formula- tions from vice-president on down. However, the tion role more effectively. Two types of organs relationship between chairman and president is which firms have developed to do so are the ambiguous and varies by company and by spe- jomukai, executive committee, and kaigitai, ad hoc cific occupants of those positions. In some com- committees. Related to its decision-making weak- panies the chairman is the supreme authority ness is the changing nature of organizational struc- within the torishimariyakukai, while in others the ture in Japanese companies, which is altering chairman is a figurehead and the president is the decision systems and increasing pressure for line true powerholder. Differences in power arrange- management responsibility to be vested in one ments at the top of torishimariyakukai appear to be individual. based solely on the preferences of the individu- The presence of habatsu. factions based on als involved and not on any formal or informal school ties or common background, can create policy within companies. schisms within a torishimariyakukai if not kept in The structure of the torishimariyakukai and the check. Traditionally factions are kept in check manner in which it carries out the dual responsi- through the use of crisis management approaches. bility of general management and shareholder The large number of baby-boom managers who trusteeship lead to some advantages for the com- have reached the age of promotability to direc- pany First, the combining of top management’s tor, is increasing the likelihood of greater politi- responsibilities into one body leads to a smaller cal behavior within torishimariyakukai in the future. operating unit at the top and contributes to a Because torishimariyakukai carry out general potential for greater flexibility than is usually managerial duties as well as directoral duties, possible in US and Western European compa- there is no clear distinction between policy mak- nies where the responsibilities are divided and ers and policy-implementers. Consequently the the number of executives and directors compris- group making policy may tend to become entan- ing the top echelon of the company is larger. The gled in operational decisions. This can lead to a second advantage is the freedom from pressure tendency to focus on departmental problems for short-term returns that the torishimariyakukai within the firm rather than on comprehensive, has by virtue of both the weak position of the whole-firm issues. shareholder and the fact that institutional share- Weaknesses in the ability of torishimariyakukai holders do not seek to exercise their right to con- regarding policy and strategy formulation have trol the firm. This freedom gives it greater latitude not gone unnoticed. In response, many compa- in developing long-range policy and strategy for nies have established executive committees to take the firm. over responsibility for decision making in this There are, a number of disadvantages and area. Executive committees are usually comprised weaknesses with the torishimariyakukai. First, the of a CEO and four to six senior officers, usually smaller size of the operating unit increases the of managing director rank or higher. In 1984 over likelihood that power within the group can be 90 per cent of companies listed on the Tokyo seized by just one or two executives in key posi- Stock Exchange had operating jomukai. In most tions. A second weakness is that the freedom from large companies, jomukai meet once a week or shareholder pressure can also constitute freedom more often if required, with the planning depart- from accountability. This weakness is further ment acting as its clerical office and support staff. exacerbated by the fact that only directors with managerial assignments within the company have Further reading extensive knowledge about the company In most instances, shareholders do not have access to Bird, A. (1988) Nihon kigyo executive no kenkyu (Research sufficient information so as to make informed on Japanese Executives), Tokyo: Sangyo Noritsu choices at shareholder meeting elections. Daigaku Shuppansha. Torishimariyakukai do not usually function ef- Clark, R. (1979) The Japanese Company, New Haven, fectively as decision making bodies. Conse- CT: Yale University Press. 446 Toshiba

Kono, T. (1984) Strategy and Structure of Japanese Enter- itable than its overseas markets. It is also a “re- prise, London: Macmillan. luctant” MNE because of its heavy reliance on Mills, G. (1981) On the Board, Aldershot: Gower. human-relations, Japanese-style management, and Okumura, A. (1982) Nihon no toppu manejimento (Japa- a production system that is deeply influenced by nese Top Management), Tokyo: Daiyamondosha. the socio-cultural environment in Japan. Addi- Shimizu, R. (1986) Top Management in Japanese Firms, tionally Japanese-type engineering and manufac- Tokyo: Chikura Shobo. turing technologies at most domestic Toshiba plants have been so typical in their worksite-ori- ALLAN BIRD ented methods such as “all member participation- style” that it is not easy to effectively transfer such Toshiba methods into different social backgrounds. There- fore, the company has preferred to implement Toshiba Corporation, along with Hitachi and the main part of its strategic R&D and manufac- Mitsubishi, is one of the three big “integrated” turing activities at its home facilities and to ex- electric and electronics companies in Japan. As port its products to foreign markets. A good the world’s eighth largest integrated company in example of this is its semiconductor business. the industry it has over 198,000 employees and Semiconductor production depends largely on annual sales of over US$40 billion worldwide as economies of scale, the huge size of plant and of 1999. With its long history since 1875 (1939 equipment and high level of maintenance skills as Tokyo Shibaura Electric Co. and 1978 Toshiba for such machines are carried out at Toshiba’s Corporation), it developed from a heavy electric domestic laboratories and plants while its major company to a “one set” electrical and electronic Japanese competitors such as NEC and Fujitsu manufacturer. It is one of the most innovative have been more active in setting up and organiz- companies in Japan, manufacturing a large num- ing worldwide networks of semiconductor plants. ber of Japan’s first products such as telegraphs, It was not until the mid-1990s when the “ruleless” incandescent lamps, radio receivers, laptop PCs appreciation of the yen finally dissuaded the com- and the world’s first 16-megabit NAND type pany from relying on a domestic production EEPROM. management approach (see appreciating yen). Toshiba has been a typical conservative and Since then, Toshiba has begun deploying very reluctant Japanese multinational enterprise actively international alliance initiatives in its semi- (MNE) in terms of overseas production activi- conductor business with western companies. ties, in comparison with active MNE-type con- On the other hand, Toshiba has pursued a sumer electric and electronics companies such as merger and acquisition (M&A) strategy to start Matsushita, Sanyo and Sony. Globalization is many of its foreign operations, a distinctive fea- now its most important initiative, expanding over- ture of Toshiba relative to other Japanese MNEs. seas production facilities and extending interna- Of the six major production plants for television tional strategic alliance with GE, IBM, Siemens, and semiconductors in developed countries, three Time-Warner, and so forth. Its manufacturing and (in the USA and UK) were joint ventures or development range from medical electronics acquisitions, though all were bought out and be- equipment to highly integrated DRAM, to tur- came wholly owned subsidiaries. Toshiba is one bine generators to multi-media systems composed of the most innovative electric companies in Ja- of information and communication systems, in- pan in the sense that international strategic alli- cluding audio-visual, which are led by DVD and ances were employed from the beginning of its media entertainment such as movies, music and founding, and continue to play a major role in publication businesses. developing new products. This may reflect The major reasons for the “conservative” na- Toshiba’s historical experience, especially the long ture of Toshiba’s overseas business activities are alliance relationship between Toshiba (and its as follows. Historically its domestic market, rely- antecedents) and GE through licensing and joint ing on its traditional brand name and based on a venture agreements since the late 1880s. reputation of innovative products were more prof- It appears that this experience has provided a total productive maintenance 447 strong foundation for recent strategic alliances in means to support manufacturing firms in seek- its global business activities. One evidence of this ing superior equipment effectiveness, an essen- is the joint-venture semiconductor production tial condition to accomplishing the goals of quality contract with IBM in 1995. At its newest large cost, delivery performance, safety and employee scale plant in the US, Toshiba appears to at last morale. In its narrowest sense, TPM involves the have been able to overcome the limit of scale at transfer of various maintenance-related duties to Toshiba America Electronic components, which the machine operators themselves. TPM has was a reorganization of a small American inte- evolved, however, into a broad managerial ap- grated circuit plant acquired by Toshiba. The al- proach that involves multiple business functions liance relationship with IBM, which will be with the aim of strengthening production capa- changed to a wholly owned Toshiba operation bilities and corporate competitiveness. Along with from 2001, was one of the critical factors for the just-in-time (JIT) and TQM (see quality man- success in terms of the scale of investment money agement), TPM forms the third leg of a triad of and market, and the cooperation for developing approaches adopted by many companies to at- process technologies. It is also interesting to note tain world-class manufacturing excellence. that Toshiba also has joint-venture production The initial development of TPM took place contracts with Motorola in Japan and a close joint in the late 1960s from a productive maintenance R&D with Siemens and IBM. The first one will program conceived by Denso, a member of the be converted to a wholly owned operation by Toyota Group. Denso’s purpose was to enable Motorola with which Toshiba will continue a sustainable implementation of the Toyota pro- contract of processing on commission. The out- duction system/JIT, which depends on highly come of these strategic alliance activities is the reliable equipment. However, credit for the fur- rationalization of Toshiba’s world-wide R&D and ther development and diffusion of TPM is given production activities to the Japan Institute of Plant Maintenance With this effort complete, Toshiba will initiate (JIPM), a private non-profit organization that a globalization strategy focused in “Six Sigma” offers an array of services concerning plant methodology a Westernized TQM (total quality maintenance management and technology. A management) system for promoting the transfor- former officer of JIPM, Seiichi Nakajima, con- mation of Toshiba’s overall management that is tributed to the dissemination of the early defini- expected to advance the “creative destruction.” tion and propositions of TPM. The diffusion of Toshiba is striving to create a new corporate cul- TPM outside Japan gained momentum in 1988 ture worldwide. This is a notable challenge for with the English translation of one of such a traditional large Japanese company. Nakajima’s books, Introduction to TPM. Also during the 1980s, TPM spread from its original base in fabrication and assembly industries, such Further reading as automobiles, auto parts and machinery into Abo, T. (ed.) (1994) Hybrid Factory, Oxford: Oxford process industries, such as chemicals, food, pa- University Press. per and pulp. Today TPM has been adopted by ——(1998) “Toshiba’s Overseas Production Activities: a myriad of companies in many industries Seven Large Plants in the USA, Mexico, the UK, world-wide. Germany and France,” in H.Mirza (ed.), (1998) The definition of TPM, as well as its purpose Global Competitive Strategies in the New World Economy, and scope, have undergone numerous refine- Cheltenham: Edward Elgar. ments over the years, building upon its original base in the production and maintenance func- TETSUO ABO tions. Driving these changes was the perception that to improve the efficiency of the production total productive maintenance system to the fullest extent, activities confined to the production system were not enough. Over Total productive maintenance (zen-in sanka no seisan time, TPM came to be implemented with a com- hozen), or TPM, was developed in Japan as a pany-wide scope, prompting JIPM in 1989 to 448 total productive maintenance

formulate a broader definition of TPM, stating Typically OEE in ordinary manufacturers ranges that it means to: from 40 percent to 60 percent. The goal of TPM is to elevate OEE to 85 percent or more, imply- 1 build a corporate constitution that maximises ing that production output can be doubled the effectiveness of the production system; through better use of existing resources. Progress 2 organize a practical shop-floor system for pre- toward this goal is made by systematically identi- venting all types of losses throughout the fying and then minimizing or eliminating the di- entire life cycle of the production system (en- verse kinds of losses that hamper production suring zero accidents, zero defects, and zero system effectiveness. These losses are typically failures); classified into sixteen major loss categories includ- 3 involve all departments, including producing failures, set-ups and adjustments, cutting blade tion, development, sales and administration; changes, start-up, minor stoppages and idling, 4 ensure participation of every member, rang- reduced speed, and defects or rework, as well as ing from top management to frontline op- other factors related to workers and the produc- erators; tion system. 5 accomplish zero losses through the activities Originally TPM focused on the immediate of overlapping small groups. production system with the establishment of the following “five pillars”: (1) equipment efficiency TPM is more than a methodology or package of improvement through project teams (kobetsu tools. It has become a philosophy and system- kaizen); (2) autonomous maintenance (jishu hozen); atized approach for manufacturing management. (3) planned maintenance; (4) education and train- By emphasizing employee participation, teaming; and (5) initial phase equipment management. work, development of maintenance skills, and With the enlargement of TPM’s Scope and pur- continuous improvement (see kaizen), TPM nur- pose over time, the fifth pillar evolved into initial tures a culture where operators develop owner- phase management for new products and equip- ship of their equipment and work side by side ment, and additional guidelines were added in with managers and engineers to strengthen the the form of three more pillars: (6) quality main- effectiveness of operations. One means of em- tenance system; (7) effective administrative sys- ployee participation is through TPM overlapping tem; and (8) safety and environmental small groups. While these groups share some management system. similarity to quality control circles in the sense While the approaches used to implement JIT that groups of employees carry out improvement or TQM vary by company JIPM advocates a activities and further develop their skills, some standard, twelve-step program for implementing important points of difference are that TPM’s TPM. The first five steps are of a preparatory groups are built into the permanent, formal or- nature: (1) announcing TPM implementation; (2) ganization and involve employees at each level beginning introductory TPM education; (3) es- of the organization from top management down tablishing an organization to promote TPM; (4) to frontline level. defining basic TPM policies and goals; and (5) Another major feature of TPM is the produc- formulating a master plan for TPM implementa- tive maintenance (seisan hozen) approach which tion. Following these, step (6) is the kickoff of incorporates such disciplines as maintenance pre- actual TPM implementation. Next, step (7) invention design, reliability engineering, and volves installing the first four pillars of TPM, maintainability engineering so as to enhance the while steps (8) to (11) involve the implementa- economic efficiency of equipment investment over tion of the last four pillars of TPM, respectively. the equipments’ life cycle. Finally step (12) is for completing TPM imple- The primary equipment evaluation metric mentation, evaluating its outcomes and setting adopted by TPM is “overall equipment effective- future goals. ness (OEE),” which considers the up-time avail- Since 1971, JIPM has conferred TPM Awards ability of equipment, actual output compared to to plants excelling in the implementation of TPM. standard, and conformance quality of outputs. Separate categories are established for small and Toyota 449 large applicants. The highest level of recognition sorbed its sales subsidiary Toyota Motor Sales, is the Award for World Class TPM Achievement, and the producers Daihatsu (minicars) and Hino with several other award levels for TPM Achieve- (heavy trucks), adding them to the existing set of ment, Consistent TPM Commitment, and TPM six affiliated assemblers (Toyota Auto Body Kanto Excellence. In recent years, there has been a Auto Works and others). The firm also has large steady increase in the number of applicants from stakes in parts suppliers, including Denso and outside Japan. Aishin Seiki. However, it has not been active in Sometimes confused with TPM, 5S cam- acquisitions overseas, and in most markets oper- paigns aim to establish good housekeeping prac- ates through “greenfield” manufacturing facilities. tices for clean and orderly facilities and have It remains heavily committed to the auto indus- become popular in manufacturing and service in- try; its ventures in housing construction, trade dustries. 5S activities can be implemented inde- and finance (and more recently telecommunica- pendently of TPM, but manufacturers often tions and the Internet) account for only 14 per- incorporate them as a foundation for the autono- cent of revenue. mous maintenance pillar of TPM. The defining event in Toyota’s history was a brush with bankruptcy in 1949, avoided only by a bank bailout. At that time its sales operations Further reading were spun off into a separate company as were Japan Institute of Plant Maintenance Web Site, http:// several parts operations (including a steel mill and www.jipm.or.jp. the forerunner of Denso, currently the world’s Nakajima, S. (1988) Introduction to TPM: Total Productive fourth largest automotive parts manufacturer with Maintenance, Cambridge, MA: Productivity Press. $12 billion in sales). This meant that while Toyota Nakajima, S. et al. (eds) (1996) TPM—Total Productive proper remained focused on core engineering and Maintenance—Encyclopedia, Tokyo: JIPM. manufacturing operations, it could not force out- Shirose, K. (ed.) (1996) TPM New Implementation Pro- put onto dealers. In turn Toyota Motor Sales con- gram in Fabrication and Assembly Industries, Tokyo: centrated on developing dealers, but as the sole JIPM. purchaser of output, it could interject marketing Suzuki, T. (ed.) (1994) TPM in Process Industries, Port- concerns into vehicle design and corporate strat- land, OR: Productivity Press. egy. Furthermore, the bailout made it clear that it needed to work with parts makers. It responded DARIO IKUO MIYAKE by bringing in consultants in 1952–3 to help set Toyota up guidelines, including a program of ongoing technical and management consulting for its sup- Toyota is the largest firm in the Japanese auto pliers. industry with about 40 percent of the domestic Toyota is known for innovative management. market, and consolidated revenue (fiscal year Drawing heavily upon Japan’s postwar produc- 2000) of $120 billion and worldwide sales of 5.4 tivity movement, and with the executive suite million units. Production began in 1937, driven dominated by engineers and factory managers, by the fascination of Toyoda Kiichiro with autos, it emphasized a “flow” approach to manufactur- and drawing upon his family’s textile machinery ing, epitomized in what only later came to be fortune. As late as 1966, however, trucks were its known as JIT (just-in-time) production. Imple- largest product, and virtually all sales were do- mented on the shop floor by kanban tags that mestic. Today 60 percent of revenue comes from authorized the “pull” of parts from upstream overseas sales, dominated by North America, and operations, it required the ability to change dies foreign production accounts for one-third of out- rapidly calling for careful attention to machine put. However, the rise in the foreign share is not maintenance and maintaining a “level” produc- all positive: in part it reflects a drop in domestic tion schedule that minimized the variation in daily production of 1 million units since 1990. output. In addition, this drew upon a labor rela- Toyota is a participant in the global consolidations environment and a no-layoff policy that fa- tion of the auto industry. Domestically it has ab- cilitated developing a skilled workforce amenable 450 Toyota production system to operating and maintaining multiple machines, Japanese producers to enter into overseas pro- while bearing responsibility for quality control duction (its Georgetown, Kentucky plant began and participating in systematic productivity im- operations in 1988, following the success of the provement activities (quality control circles, 1984 NUMMI joint venture with General Mo- TQC and so on). JIT was only systematically tors in Fremont, California). It now has ten manu- implemented within the firm in the late 1960s, facturing sites in NAFTA, assembling over 1 and among suppliers from 1970, with a particu- million units, including full-sized pickups and lar boost from the sales downturn in 1974 fol- sport utility vehicles aimed at the domestic lowing the first oil crisis. NAFTA market. Likewise, within the EU it now Toyota also is an early adopter of “platform has plants in the UK and France, as well as op- teams” for product development, which kept erations in Mercosur and in Southeast and East engineers from becoming compartmentalized Asia, with its most recent venture in Tianjin, within the vehicle design and engineering proc- China. Despite its success in the USA and its ess. Improved feedback allows otherwise discrete strong share in many export markets, the firm stages of this process to be overlapped—body still must deal with significant overcapacity within engineering and die design are initiated before Japan. Its profitability in export markets has also all the details of styling are locked into place— been hurt in recent years by the strong yen and allowing a new vehicle to be developed more (in the EU) the strong British pound. Finally given quickly. This generates both cost savings and its parochial roots in rural Aichi Prefecture, the potentially a better fit to the market with the firm must develop the long-run ability to man- shorter lag between styling choices and the com- age operations around the world. mencement of sales. In addition, coordination MICHAEL SMITKA between different functional specialties—for example, manufacturing engineers and stylists—facilitates developing cars that are easier to make Toyota production system and have higher intrinsic quality With many high- volume models, however, Toyota has been con- Also known as “lean production,” the Toyota pro- servative in implementing new technology and duction system (TPS) is an integrated approach styling trends, generally waiting until after other to achieving the efficiencies of mass production firms have proven their acceptance in the mar- with small production volumes. Developed by ketplace. Toyota Motor Corporation in the 1950s, TPS is Despite its reputation for manufacturing prow- based on the elimination of waste throughout the ess, Toyota was not always successful domesti- process of design and manufacturing, and relies cally It lagged at home in the late 1960s, and again heavily on just-in-time (JIT) production, the in parts of the 1980s and the latter 1990s. In gen- building of quality and productivity into produc- eral, however, it suffered fewer downturns than tion processes, and the continuous and incremen- its rivals, and was able to maintain a stronger tal improvement of quality (kaizen). This and more profitable dealer network; indeed, approach to quality management is credited Toyota’s marketing strengths are probably the with Toyota’s remarkable global success in the biggest element in its overall success. One ele- automotive industry during the second half of ment was a full-line product strategy made possi- the twentieth century. ble by affiliate firms specializing initially in TPS was developed by Taiichi Ono, who was low-volume cars. These firms now make Toyota’s Toyota Motor Corporation’s chief production light and heavy trucks and its minicars—over 40 engineer in the post-Second World War period, percent of Toyota-badged vehicles—while Toyota with the support of Eiji Toyoda, the company’s focuses on regular passenger cars. managing director. This alternative to mass pro- Toyota did particularly well as an exporter in duction was born of necessity Immediately fol- the late 1970s and early 1980s, earning the nick- lowing the war, Toyota faced considerable capital name “Toyota Bank” for the profits it accumu- constraints. Unlike the large Western automobile lated. Nevertheless, it was the last of the major manufacturers, Toyota’s production volumes Toyota production system 451

were small, a few thousand vehicles per year, customization of finished product, providing in- compared with 7,000 per day at Ford Motor Com- creased customer satisfaction. pany’s River Rouge plant in Detroit. Toyota had The purpose behind standardized work and neither the financial backing nor the scale of pro- continuous, incremental improvement of quality duction to implement the western mass produc- is to permit the organization to respond quickly tion approaches. Ono recognized the need to to changing demand patterns, while eliminating develop flexible production processes that were waste throughout the system. Adhering to rig- not dependent on huge production volumes of idly defined standard operating procedures re- individual vehicle models to be economical. TPS sults in less variation in outcomes, making process involves great flexibility in terms of both produc- outcomes and quality more predictable. This fa- tion equipment and workers. The system focuses cilitates the arrangement of production activities on designing processes that create cost reductions into a single, continuous flow, which involves through the elimination of waste. This extends careful balancing of production scheduling. Given far beyond the machines on the factory floor, and their direct knowledge regarding the production includes the management of employees, inven- processes, employees are empowered to assist in tory control, and supply chain management. Both making the processes progress more smoothly suppliers and customers are expected to cooper- and quickly. ate in the common quest for ever-better quality and productivity Very much in line with the teachings of Deming, TPS is an integrated system that People has three key aspects: jidoka (literally “self-work- change”), JIT (see kanban), and standardized People are crucial to TPS. Implementation of the work with kaizen. system requires a workforce that is both highly Jidoka refers to self-regulation of the entire skilled and very motivated. Labor problems at process, either automatically or through human Toyota in the late 1940s created an environment intervention. Preferably machines are designed that facilitated the development of such a to detect problems (such as malfunctions, qual- workforce, as unions negotiated for lifetime ity problems, or delays) and to stop the produc- employment for their members, as well as pay tion line when problems are encountered. Many based on seniority rather than specific job func- such poka-yoke (mistake-proofing) devices were tion, with bonuses based on the company’s prof- developed by Shingo during his tenure at Toyota. itability. In return, workers agreed to accept When such mechanical solutions are unavailable, increased flexibility in their work assignments. workers have the authority and the responsibil- These developments meant that Toyota and ity to stop the production line immediately rather its workers had a strong, mutual commitment to than waiting for supervisory or managerial au- each other, which made TPS feasible. The long- thorization. Jidoka permits the clear identification term nature of the employment relationship of trouble spots and prevents poor quality out- made it logical for the company to expend reput from being sent to the customer (internal or sources on continuously enhancing workers’ external), while reducing the need for inspectors. skills, as it would benefit from their Toyota-spe- With jidoka, quality is constantly being built into cific knowledge and experience for many years production processes. to come. Workers perceived value in initiating Consistent application of JIT principles process improvements, given their emotional throughout the system permits each customer and financial stakes in the company’s success. order to be processed with speed and efficiency This mutual relationship became a cornerstone not necessarily in large batches of similar mod- of TPS. els. Because parts are delivered as needed all Workers face rigid work rules in TPS. Pro- through the system, inventory is reduced, which duction procedures are tightly choreographed, means that quality problems are obvious quickly with workers participating in their development. and less floor space is required to store work in While adhering strictly to the rules, workers are process. In addition, JIT facilitates the encouraged to develop ways to revise them, to 452 Toyota production system generate improvements. Both quality control Supply chain management circles and suggestion systems are used extensively with workers offered the security that effi- The coordination of the engineering, manufac- ciency improvements will not result in job losses. turing, and delivery of the thousands of parts in Workers are also encouraged to request help a vehicle is a monumental task. Toyota’s approach when necessary. The routing of the help request to supply chain management, based on long-term, is specific, with one person explicitly responsible cooperative relationships, recognizes the interde- for reacting quickly Production-related informa- pendency of suppliers and customers and differs tion is shared widely in the plant, with andon substantially from those of most Western auto- boards which detail daily production targets, cars motive firms. produced, equipment breakdowns, etc., visible Western firms have traditionally awarded from every workstation. Cross-training is exten- fixed-term contracts to suppliers based on the sive, and managers are expected to be able to do lowest bid, creating short-term perspectives re- the jobs of all the people they supervise. garding the customer-supplier relationship. In this system, suppliers are placed in competitive situations against each other and the customer. West- Reducing cost by eliminating waste ern automobile firms have also traditionally done their component design in-house, with minimal In TPS, eliminating waste in systems is the pri- input from suppliers regarding manufacturing mary approach to reducing costs. For example, feasibility or the potential for improvements. Sup- mass production systems have typically been pliers tend to work only on their own compo- characterized by considerable worker redun- nents, with little information regarding the dancy due to narrow job descriptions, high interface of their part with the larger system; such worker absenteeism, and a hierarchical struc- information is considered proprietary to the au- ture. Ono viewed this redundancy as wasteful. tomotive firm. The competitive nature of this In contrast, TPS employs a team structure, in contract system provides incentives for suppliers which teams have latitude with respect to how to warehouse large inventories of product, mak- they accomplish their assigned operations. The ing quality problems difficult to detect. cross-training of the team members provides Toyota adopted a different approach, empha- flexibility. The team leader performs assembly sizing long-term relationships with their suppli- tasks and fills in for absent workers. Time is allo- ers and cooperation, rather than competition. cated for teams to work together to develop pro- Suppliers are organized in functional tiers. First- cess improvements, for kaizen and waste tier suppliers have design responsibilities. As reduction. part of Toyota’s product development team, Another distinction between TPS and mass their engineering work is done in cooperation production systems is the treatment of rework. with that for other vehicle systems being de- Western mass production systems have long resigned by other suppliers. Second-tier suppliers lied on rework to correct quality problems late in are responsible for manufacturing; their custom- the production process. While this approach is ers are the first-tier suppliers. The suppliers tend now widely seen as inefficient and ineffective, to be quite specialized. Because they do not com- Ono recognized the waste inherent in rework in pete against each other, cooperation is facili- the early 1950s, noting that the system allows a tated. process problem to go unnoticed for too long. There are generally equity cross-holdings be- Instead, he developed TPS such that each worker tween Toyota and the first-tier suppliers, and has the authority to stop the production line im- among the first-tier suppliers. The result of this mediately if a problem emerges that he or she relationship is not complete vertical integration, cannot fix. As a plant becomes mature in its im- as often practiced in the West, but partial inte- plementation of TPS, this approach results in gration. Permanent and temporary personnel minimal rework, few line stoppages, lower costs, transfers among Toyota and the suppliers and higher quality. strengthen the long-term relationships. trade barriers 453

These structured and long-term customer- While successful implementation of TPS is supplier relationships serve to reduce variation context-specific, the system is not unique to in both process and product, and fit well with the Toyota, to Japan, to the automotive industry or systems approach to product development that to the manufacturing sector. TPS was used suc- characterizes TPS. Teamwork and coordination cessfully in New United Motor Manufacturing at lower levels in the organizational hierarchy Incorporated (NUMMI), the 1984 joint venture permit a faster design process, which leads to in- between Toyota and General Motors in Fremont, creased responsiveness and faster response to California that was Toyota’s first automotive as- changing market conditions. sembly site in the USA. The other North Ameri- can Toyota plants (such as Georgetown, Kentucky established in 1988) use TPS, with some very Risks associated with TPS minor modifications to accommodate cultural The primary risk in TPS is that the unceasing differences between US and Japanese workers. elimination of waste reduces organizational slack. The Toyota Supplier Support Center (TSSC), There is little redundancy in the system to pro- established in Lexington, Kentucky in 1992, provide a safety net. JIT reduces inventory levels vides assistance to companies interested in im- (or shifts them down the supply chain), making plementing TPS. This free help is provided to the system vulnerable to external shocks (e.g., firms in a variety of industries; no affiliation with weather, accidents, and natural disasters). JIT Toyota is necessary. thus requires processes that are in control. Ono TPS is credited with allowing Toyota Motor believed that the lack of a safety net would serve Corporation to develop from a small, domestic to focus the attention of everyone in the system manufacturer in the 1950s to an international toward anticipating and addressing problems power by the 1980s. The combination of jidoka, before they became serious. JIT, and kaizen, with emphases on people and on The lack of slack can be stressful for workers. the reduction of waste, has produced a flexible The assumption is that the increased intellectual system that enables considerable responsiveness challenge associated with working in a TPS en- to customers. vironment creates intrinsic rewards (see Deming). Management has the responsibility of Further reading ensuring that workers have the training and skills to undertake the additional responsibilities. Cusumano, M. (1985) The Japanese Automobile Industry: Technology and Management at Nissan and Toyota, Cam- bridge, MA: Harvard University Press. Knowledge creation and transferability Monden, Y (1983) The Toyota Production System, Atlanta, One of the most powerful aspects of TPS is its GA: Institute of Industrial Engineers. tacit nature, which makes it individual to an or- Spear, S. and Bowen, H.K (1999) “Decoding the DNA ganization and, therefore, very difficult for com- of the Toyota Production System,” Harvard Business petitors to imitate. Workers are trained to seek Review (September–October): 96–106. the root causes of problems, rather than grab- Womack, J.P., Jones, D.T. and Roos, D. (1991) The bing at quick solutions. The combination of stan- Machine that Changed the World: The Story of Lean Pro- dardized work with kaizen leads workers to use duction, New York: HarperPerennial. the scientific method to conduct repeated con- ELIZABETH L.ROSE trolled experiments. This continuous experimentation makes possible the type of organizational trade barriers learning and knowledge creation described by Nonaka, essentially creating kaizen of kaizen, con- From the initial postwar period onward, Japan tinuous improvement of both the process and the has been embroiled in a series of trade conflicts. approach to improving. This is extremely pow- Though some of these have involved foreign erful, and creates solutions that are specific to market penetration by Japanese firms, the vast the organization. majority have focused on the inability of foreign 454 trade barriers firms to access the Japanese market. Potential less than 3 per cent and the lowest of all OECD exporters to Japan have confronted a host of ob- countries. Nevertheless, the average can be mis- stacles. Foreign firms setting up operations in Ja- leading because there are still products, such as pan have found themselves equally hampered. leather goods, for which the tariff remains quite Over time, the nature of these barriers to trade high. and market entry has shifted from formal gov- Another formal trade barrier can be found in ernment controls to a variety of non-governmen- the technical standards that the government im- tal and informal constraints and, eventually to poses on all manner of products. It has not been the removal of most barriers. Nonetheless, Japan unusual for Japan to reject internationally ac- is still viewed as one of the most difficult markets cepted product design and safety standards in in the world to penetrate. favor of its own. Foreign laboratory test data or Formal barriers to trade were put in place im- product certifications were, similarly not usually mediately following the Second World. These recognized by Japan. This often meant that for- formal controls included foreign exchange con- eign firms had to arrange for products previously trols, import quotas, high tariffs and restrictions tested in their home country to be re-tested in on the type and nature of permissible foreign di- Japanese laboratories. Further exacerbating frus- rect investment. The primary purpose was to al- tration over inability to access the Japanese mar- low Japanese firms to rebuild unhindered by ket was a routine custom of not informing foreign foreign competition as well as to allow the gov- firms as to why their products did not meet government to strategically deploy its limited foreign ernment standards or what could be done to bring reserves. Consequently Japan has developed a them into compliance. reputation for not “playing fair” in trade of In the case of food, chemical or other sub- invward foreign direct investment. In fact, Japan stances, the Japanese employed a policy of “posi- was kept out of the General Agreement on Tar- tive listing,” meaning only substances listed by iffs and Trade (GATT) until 1955, eighteen years the government were permitted. Non-listed sub- after the agreement was initially reached, because stances were not permitted, and obtaining per- of its unfair trade practices. mission often involved an elaborate, costly and The strong recovery and subsequent rapid time-consuming process. Moreover, various regu- growth of the Japanese economy led to increas- lating agencies were known to share product data ing liberalization in the late 1960s and early 1970s. with domestic Japanese competitors of import- This was, in part, a response to external trade ing firms. friction resulting from Japan’s aggressive export As Japan entered the 1980s, there was a feel- of first textiles in the early 1960s followed by steel ing that the increasing international profile of its in the late 1960s. Threat of trade sanctions and MNCs and concerns over reciprocity would lead demands for reciprocity particularly by the USA, to significant easing trade friction and removal provided a powerful incentive for removing or of trade barriers. However, the conflict simply reducing the formal barriers. Still, the pace of lib- moved from formal to informal, or what came to eralization has been reluctant and remarkably be know as “non-tariffbarriers.” Non-tariff barri- slow. Exchange controls were not removed until ers include a host of government and industry 1980, and other financial controls remained in practices which effectively close out foreign com- place through the 1990s. Similarly import quo- petition. For example, during the 1980s the Japa- tas tended to be dropped only in response to ex- nese government lifted nearly all restrictions on ternal pressure—gaiatsu—and only for the specified foreign participation in government tenders, how- industry or market. At present, import quotas ever, the qualifying conditions, filing deadlines remain for only a few selected, primarily agricul- and processing procedures effectively precluded tural products. most foreign firms from bidding. The complex, In a similar vein, tariffs on Japanese goods have multi-layer, multi-channel distribution system gradually lowered over time. Again, reductions was seen as another type of non-tariff barrier. tended to come only on the heels of external criti- Wholesalers would often resist distributing for- cism or pressure. The current average tariff is eign products because they competed directly trade barriers 455 with domestic products they were already han- more expensive Japanese rice, but it did not work dling. out that way Many retailers did not mix the rice, From 1980 forward there have been at least but sold the California rice separately At the be- eight packages of market opening measures aimed hest of Japanese farmers and agricultural coop- at removing informal barriers to trade. For in- eratives, the Japanese government issued new stance, in 1980 foreign firms were finally allowed regulations specifically requiring California rice to use the Japan Industrial Standard (JIS) mark from being sold in its pure form. The new regu- on their products. This was significant—and also lations required it to be mixed with rice from other indicative of the type of non-tariff barriers that regions of America. In addition, Japan imposed foreign firms faced—because in numerous cases, a 580 percent import tariff, thereby removing its industry associations had agreed to limit pur- price advantage over domestic rice. The Japanese chases of parts and materials to only products government then used the $2.7 billion rice im- carrying the JIS mark. port tariff revenues to subsidize Japanese rice Despite these various packages, Japanese trade farmers. Under the GATT minimum-access rule, surpluses with other countries have remained Japan has been forced to comply by importing high. Its surplus with the US was over $ 50 bil- more foreign rice each year. The Japan govern- lion in the early 1990s. In fact, 1993 Japan trade ment is currently stockpiling the surplus rice and surplus jumped 20 percent to about $60.5 bil- using the imported rice in processed foods, not lion. Sixty percent of Japan’s trade surplus with in its pure form. In 2000, rice tariffs were a World the United States was attributable to automobiles Trade Organization (WTO) agenda item. Japa- and car parts. Because Japan put artificial trade nese farmers are concerned that more imported barriers around its auto and the auto parts mar- rice will mean more competition. kets, the US imposed sanctions on Japan. In 1995, Because of its past history and the continuing Japan agreed to begin to open its automobile and large number of trade barriers, including non- parts markets to American companies. tariff barriers and protective regulations that Ja- The current generation of trade barriers con- pan has erected, many developed countries, stitutes a complex mix of government, industry particularly the USA, do not believe that Japan and consumer group initiatives that often require is committed to the elimination of trade barriers aggressive, creative and persistent means to over- or to the overall cause of free trade. The current come. The experience of California rice export- US approach is to pressure Japan to set targets. ers provides an instructive case study. In 1993, a Japan’s response is that targets would harm the bad rice harvest in Japan led to a significant price free trade system and any bilateral deal with the hike in domestic rice. The government tried to USA would violate GATT. prevent rice imports and to encourage Japanese For years, the United States tried to get Japan consumers to buy government-subsidized, expen- to decrease its trade barriers and open its mar- sive Japanese rice. However, the Rice Accord kets through voluntary export restraints, sector- under GATT prevented Japan from using import specific talks, and structural adjustment measures. quotas and other previously identified non-tariff A textile agreement was signed in 1974 where barriers. So in 1994, the Japanese enacted a new textile exports from Japan were restricted. NTT law requiring that no specific foreign rice could gave foreign companies fair opportunities to com- be sold as such. Rather it had to be a mix, spe- pete in 1980, NTT’s procurement of foreign prod- cifically 30 percent Japanese, 50 percent Califor- ucts increased from 3.8 billion yen in 1980 to nia, Chinese and Australian, and 20 percent Thai. 152 billion yen in 1995. There were agreements The rice from these four sources differ signifi- in wood products, steel, telecommunications, cantly in appearance and taste. Not surprisingly transportation, semi-conductors, fish products, Japanese consumers found the mixture unappeal- meat and citrus fruits, copyright protection on ing. Japanese consumers particularly did not like sound recordings, paper products, and comput- the Chinese or Thai rice. The Japanese govern- ers. Between the mid-1970s and mid-1990s, Ja- ment had hopes the taste and appearance of the pan and the United States signed over twenty-two foreign mix would lead consumers to buy the different trade agreements. In 1994, Japan and 456 trade negotiations the US had the Economic Framework Talks. The foreign firms from competing. The Japanese gov- main sectors covered in these talks had to do with: ernment is beginning to put pressure on firms to government procurement, insurance, automobiles stop these practices. However, there is still fric- and auto parts, export promotion and competition over trade imbalance between Japan and the tiveness, intellectual property rights, flat glass, rest of the world. As deficits with Japan remain financial services, inward direct investment and large, more and more countries are putting pres- buyer-supplier relationships, deregulation and sure on Japan to eliminate its trade barriers. If competition policy global challenges, bilateral not, other countries will expand trade barriers cooperation on advancing science and technol- against Japanese companies. For example, the ogy and human resources development. For ex- United States may put up trade barriers against ample, the main point of agreement in Japanese autos and car parts that would hurt the automobiles and auto parts had to do with the Japanese auto industry. promotion of dealerships, and strengthening of JETRO has also changed its focus. It is now the function of the Fair Trade Commission. As a more involved with promotion of imports to Ja- result, over 42,000 US cars were newly registered pan. JETRO has organized numerous trade mis- in Japan in 1995, up 19 percent from 1994. sions for foreign firms to Japan; it has hosted Even with many Japan—US agreements exhibits and fairs to assist foreign importers. Since signed, many people in the United States believe the mid-1990s, the Japanese have had a working that little was accomplished. According to the group monitoring the progress of the Deregula- Economic Strategy Institute, US exports to Ja- tion Action Plan. In 1995 the Japanese govern- pan would increase more than $55 billion if Ja- ment drafted a deregulation program, with a first pan eliminated its trade barriers, $44 billion in review in 1996. Measures to facilitate competi- service exports. In 1995, Japan worldwide exports tion and fair trade include increasing the person- were $443 billion up 12 percent from 1994. Im- nel working in The Japanese Fair Trade ports also increased to $337 billion up 22.3 per- Commission to 200 employees in 1998; and a cent. Therefore, Japan’s trade surplus decreased review was conducted for the sectors for which by 11.6 percent to a four-year low of $ 107 bil- the application of the Antimonopoly Law has lion. In trade with the US, Japan’s surplus seems been waived, so that the system was abolished to peak in 1994 at $67.3 billion and has decreased by the end of 1998. to $49.2 billion in 1996. JETRO stated that three changes in Japan’s See also: business ethics; economic crisis in Asia; trade structure helped to decrease the surplus. Japanese business in the USA These include: imports and exports to developing countries surpassed developed countries; Further reading growth in exports have been difficult because of The Japan Times, Japan-US Economic Handbook the economy whereas imports are easier; and ration of current account surplus to Japan’s nomi- TERRI R.LITUCHY nal GDP fell. Furthermore, changes in Japan’s trade structure are due to moves by Japanese com- trade negotiations panies to adapt to changing conditions such as shifting manufacturing overseas, globalization, Japan in the postwar period has engaged in a and concentration of production in Southeast seemingly constant series of negotiations with its Asia. major foreign trading partners, usually led by the While Japan has recently removed many im- United States, that have been designed to curb port quotes and duties, non-tariff barriers still its export competitiveness and to increase the prevent foreign firms from entering the Japanese openness of the Japanese market. The American markets. These include the Large Retail Store Chamber of Commerce in Japan counts some Law; the informal job-bidding systems which goes forty-five major agreements negotiated between on behind closed doors; and the common prac- Japan and the United States between 1980 and tice of below-cost bidding, all of which eliminate 1996. Negotiations have covered the entire range trade negotiations 457 of goods and services: agricultural products such In the late 1970s protectionist pressures in the as rice, citrus, beef, and tobacco; materials in- USA continued to rise, in part due to the rapid dustries including steel, aluminum, chemicals, increase in Japan’s overall surplus as well as grow- wood, and paper; manufactures such as footwear, ing exports in politically sensitive industries. textiles, and automobiles; high technology indus- During the Carter administration, the USA ne- tries including semiconductors, supercomputers gotiated a long series of bilateral agreements that and satellites; and services such as construction, sought to slow Japanese exports. An oft-used telecommunications, aviation, insurance, and fi- policy tool was the voluntary export restraint, nancial services. used in industries such as televisions, footwear, Through the mid-1990s the Japanese govern- steel, and automobiles. Japanese producers were ment was relatively responsive to foreign trade generally not in the position to say no to these demands, although more reluctantly and more demands for export restraint, since failure to do slowly than its trading partners had desired. Since so risked more protectionist measures by the US the mid-1990s, however, Japan has shown an in- Congress. In most cases these industries were creasing willingness to resist bilateral trade pres- dependent on exports to the US market; when sures, and now strongly prefers to deal with trade faced with the choice of having no access to that problems in a multilateral setting. (Trade nego- market or abiding by the VER, most chose the tiations are distinct from other efforts to reduce latter. (It also turns out that at least one industry Japan’s trade surplus, such as alterations in the automobiles, indirectly ended up benefiting from dollar-yen exchange rate, or pressures on the Japa- the VER, as it encouraged Japanese firms to nese government to increase domestic demand export higher-value added automobiles to the through monetary or macroeconomic policies.) USA.)

Efforts to curb Japanese exports Opening the Japanese market Trade negotiations with Japan through the 1970s In the early 1980s trade negotiations shifted to a were mainly motivated by the desire to deal with focus on gaining greater access to the Japanese the social and economic costs of Japan’s rising market. In the context of rapidly rising Japanese exports. Although Japan ran overall trade defi- trade surpluses, its foreign trade partners pointed cits with the USA until 1965, its export competi- to the closed nature of the economy as the main tiveness in certain industries led to rising social aspect of Japan’s “unfair” or “adversarial” trad- and economic costs in many of its trading part- ing practices. ners. Early trade negotiations with Japan were Formal tariffs on imported goods were not the designed to deal with these costs by slowing Japa- main problem. Although Japan had enjoyed rela- nese exports, particularly in the textile industry tively high tariffs in the immediate postwar pe- In the early 1950s, for instance, rapidly rising riod, as the Japanese economy recovered and Japanese exports of cotton textiles led to grow- exports began to grow, Japan was gradually ing calls for protectionism in major markets in forced to lower these barriers to imports. As the the USA and Europe. In 1955 the US govern- condition for joining the international economic ment negotiated a bilateral agreement with Ja- organizations, and then during successive rounds pan in which the industry agreed to curtail its of international tariff negotiations, Japan agreed exports to the USA. American efforts to curb to reduce its formal tariff barriers. Although it Japanese exports of synthetic fibers and textiles faced criticisms for its reluctance to remove tar- in the late 1960s also resulted in the Japanese iffs until after the protected industry was com- government agreeing to voluntarily reduce its petitive, by the 1970s Japan could argue that it exports of this type of textile. When the Japa- maintained the lowest level of tariffs on manu- nese industry refused to abide by these curtail- factured goods in the industrialized world. (Ja- ments, the result was a period of intense and pan did maintain some tariffs and quotas in acrimonious negotiations with the USA, now politically sensitive sectors such as rice and leather known as the Textile Wrangle. products.) 458 trade negotiations

Despite the formal openness of the Japanese and forest products. MOSS talks were later ex- market, a growing list of foreign exporters com- tended to include autos and auto parts. Trade plained that their access to the market was still negotiations were also carried out in other sec- being impeded by hidden, or non-tariff, barriers. tors, most notably civil aviation, citrus and beef. As the Japanese trade surplus continued to grow, The US government identified the specific barri- Japan’s trading partners became convinced that ers that blocked imports in each particular in- the Japanese market was substantially closed. A dustry and applied pressures on the Japanese popular metaphor compared the Japanese mar- government to remove them. ket to an onion: even if one could identify and A key focus of US-Japan negotiations in this remove one layer of protection, one would then period involved the semiconductor industry. In find another layer of protection underneath, and 1986 the two countries completed the Semicon- so on. Furthermore, critics charged that Japan’s ductor Agreement, in which the Japanese govern- closed economy gave its firms an unfair advan- ment agreed to stop its firms from “dumping” tage, providing them with a safe haven in which semiconductors in foreign markets, and (in a con- they could earn excess profits that could then be fidential side letter to the agreement) to increase used to finance “export offenses” against foreign foreign sales of semiconductors in the Japanese markets. market. The US government later imposed a to- Foreign complaints centered on three aspects tal of $300 million in retaliatory tariffs against Japa- of the Japanese political economy: government nese exports to the USA when it decided that Japan policy business practices, and economic structure. had not complied with either of these provisions. Foreign critics pointed to many of Japan’s indus- The Bush administration continued to seek trial policies that served to nurture or protect its increased access to the Japanese market through domestic industries. Key Japanese industries had a combination of approaches. As before, the USA enjoyed government regulations that afforded pressed for lower tariffs and stronger trade rules them implicit protection or the ability to “man- through multilateral trade negotiations. On a bi- age competition”—for instance restrictions on lateral basis, the USA and Japan negotiated in a entry into an industry the ability to engage in number of sectors, including construction, autos cartel-like behavior, and implicit and explicit re- and auto parts, paper, and other sectors. In addi- strictions that made it difficult for foreign firms tion, the Bush administration initiated the Struc- to invest in Japan. Foreign partners also com- tural Impediments Initiative (SII) in 1989. Rather plained about the collusive nature of business than dealing with specific trade barriers on a case- practices in Japan, in which many industries took by-case basis, the USA now tried to identify more advantage of a weak antitrust environment to generic barriers to imports in the Japanese “cooperate” in exclusionary business practices. economy including the keiretsu system, distribu- Foreign governments thus called for the strength- tion, and weak anti-trust provisions. ening of Japan’s anti-trust rules and enforcement A major shift in the US approach to trade procedures. Finally foreign partners pointed to a negotiations with Japan occurred early in the number of structural features of Japan’s economy Clinton administration: a “results-oriented” ap- that were seen as impediments to imports, includ- proach that sought some form of market share ing the keiretsu cross-shareholdings, and the dis- target. The US government stopped short of of- tribution system. ficially asking for explicit numerical targets, how- Trade negotiations in the 1980s focused on ever, which were strongly opposed by the the identification and removal of specific barri- Japanese government. It asked instead for “quan- ers to trade. In the first half of the decade, these titative indicators” that would be used to meas- negotiations were mostly carried out on an in- ure increases in foreign exports to Japan. This dustry-by-industry basis. The Reagan adminis- distinction was lost on the Japanese government, tration, for instance, initiated the which insisted that US demands amounted to Market-Oriented Sector-Specific, or MOSS, talks, “managed trade.” After intense negotiations from in four general areas: telecommunications, elec- 1993 through 1995, the USA backed down from tronics, medical equipment and pharmaceuticals, these demands. Tsukiji market 459

Trade negotiations after the Framework shifted into recession, and the need to cooperate with Japan on regional security issues. The USA Prior to the Framework the Japanese government has shifted away from a focus on sectoral trade had usually followed a predictable negotiating barriers, and instead has applied more general style: after a long period of denying or resisting pressure on deregulation in the hopes of increas- trade demands, Japan would eventually and of- ing competition in the Japanese economy The ten at the last minute, offer some sort of conces- USA also continues its efforts to strengthen anti- sion that would be enough to placate foreign trade trust enforcement in Japan. demands. An agreement would invariably be For its part, the Japanese government has re- reached, but only after acrimonious negotiations lied more and more on a multilateral approach and, quite often, the threat of sanctions by the to trade negotiations with the USA. In 1996 a USA. top MITI official went so far as to declare that During the late 1980s, however, the Japanese “the era of bilateralism is over.” Although Japan government gradually formed a harder line to- continued trade negotiations with the USA in this ward US trade demands. During a period in period, it has refused to discuss anything resem- which Japan was growing in power relative to bling numbers or indicators, or even the removal the USA, it was becoming increasingly resentful of specific barriers to trade. Japan has instead at what were seen as ever-escalating and “unfair” demonstrated a clear preference to deal with US US trade demands. The 1986 Semiconductor trade demands in a multilateral setting. In par- Agreement, and the US sanctions that followed, ticular, Japan has sought to use the new dispute convinced a number of Japanese government of- settlement mechanisms of the WTO rather than ficials, particularly in the Ministry of Interna- engaging in direct trade negotiations with the tional Trade and Industry (MITI), that Japan USA. should no longer give in to US demands. Japa- nese officials also resented the 1988 revision of See also: foreign companies in Japan; trade bar- the US Trade Act, which included the so-called riers; US investment in Japan Super 301 provision that required the US government to identify and remove foreign “unfair Further reading trade practices,” a provision that was seen as clearly aimed at Japan. In addition, the strength- American Chamber of Commerce in Japan (1997) ening of the multilateral trading system, includ- Making Trade Talks Work: Lessons From Recent History, ing the creation of the World Trade Organization, Tokyo: American Chamber of Commerce in Japan. gave Japan a viable alternative to dealing with Encarnation, D. (1992) Rivals Beyond Trade: America Versus the USA on a bilateral basis. Japan in Global Competition, Ithaca, NY: Cornell The US demands during the Framework talks, University Press. which were deemed by Japan to be the equiva- Lincoln, E. (1999) Troubled Times: U.S.-Japan Trade Re- lent of numerical targets, led to a galvanizing of lations in the 1990s, Washington, DC: The Brookings opinion in the Japanese government. To the sur- Institution. prise of many Japan stuck to its hard-line posi- Schoppa, L. (1997) Bargaining With Japan: What Ameri- tion all the way through the 1995 conclusion of can Pressure Can and Cannot Do, New York: Colum- the Framework negotiations. For the first time, it bia University Press. was the USA rather than Japan that retreated at Tyson, L. (1992) Who’s Bashing Whom?: Trade Conflict in the final moment. High-Technology Industries, Washington, DC: Institute Trade negotiations in the last half of the 1990s for International Economics. have been less politicized and controversial, at ROBERT URIU least compared to the pre-Framework situation. The USA toned down its market access demands Tsukiji market on Japan, for a variety of reasons: Japan’s growing resistance to bilateral pressures, the recovery The Tsukiji market is the largest single whole- in the USA economy as the Japanese economy sale market for seafood products in Japan, 460 Tsukiji market probably in the world. The marketplace—offi- tuna, octopus, shrimp, live fish, fish paté, etc.), cially Tokyo Chuo Oroshiuri Shijo, Tsukiji Shijo each represented by a gyokai (trade association) (Tokyo Central Wholesale Market, Tsukiji Mar- that negotiates specific terms of trade with the ket)—is the flagship of Tokyo’s wholesale market wholesale auction houses. Each trading commu- system, a network of fifteen main and branch nity forms a semi-autonomous institution within markets for fresh and semi-processed seafood, the market, affecting and affected by its economic, fruits and vegetables, meat, and flowers. In political, and social relationships with producers, 1998, Tsukiji’s seafood auctions had a total an- auctioneers, market administrators, and the par- nual sales volume of approximately ¥583 bil- ticular subset of Tsukiji’s clientele that is attracted lion. The auctions handled 623,000 metric tons to the products this specialized group of traders of seafood (approximately 2.3 million kilograms handles. Members of each gyokai are further dis- per trading day), down about 20 percent from tinguished among themselves according to their the market’s peak year, 1987. Tsukiji’s reach is highly specialized individual market niches (e.g., global, and increasingly large percentages of the suppliers to high-end vs. mass-market sushi chefs; products sold at Tsukiji’s auctions are imported. suppliers to supermarkets vs. retail fishmongers). Tsukiji is a spot market organized around com- Since the 1970s, the Japanese fishing industry petitive auctions among licensed participants. The has undergone major structural changes, in part regulated institutional structure carefully defines triggered by the spread of 200-mile fishing limits roles within the auction system in order to limit throughout the world as well as domestic eco- vertical integration “above” and “below” the auc- nomic realignments and rising labor costs. Do- tions. Through informal trading alliances, how- mestic production of seafood has declined ever, most traders maintain relationships with sharply; in 1975, the Japanese government calcu- long-term partners both upstream and down- lated the ratio of domestic production to con- stream. Currently Tsukiji’s auctions are supplied sumption of seafood at 100 percent and run by seven large brokerages (niuke gaisha, self-sufficiency; in 1997, the ratio was 60 percent. consignees, or oroshi gyosha, primary wholesalers) In 1980 gross domestic production of fish, shell- who accept seafood on consignment from pro- fish and seaweed totaled 10.6 million metric tons ducers, regional brokers, and importers, or pur- and 1.7 million metric tons of imports; in 1997, chase it directly on their own account. Several of domestic production was 6.9 million and imports these brokerages are affiliated with parallel auc- were 6.0 million metric tons. Major Japanese fish- tion firms that supply other major urban mar- ing corporations have largely withdrawn from kets; these keiretsu were organized around some direct fishing operations and shifted into food of the large fishing companies (for example, Taiyo importing, processing, and distribution. Major Gyogyo KK, now known as Maruha Corpora- trading firms have made direct investments in tion) that dominated Japanese seafood produc- foreign seafood production and have established tion and distribution until the 1970s. Brokerages direct distribution channels with supermarkets sell at auctions six days a week, charging regu- and restaurant chains, both sectors that have in- lated commissions on sales, on terms set by na- creased greatly during the last twenty years. As a tional and municipal regulations. The licensed result of these and other changes in Japanese auctioneers (serinin) are employees of these seven domestic consumption patterns, the overall per- firms. centage of fresh and frozen seafood that passes Their customers are independent intermedi- through Tsukiji and other wholesale seafood ate wholesalers (nakaoroshi gyosha) whose licenses markets has shrunk; increasingly large amounts permit them to buy at auction and to operate stalls of seafood go directly from producers to retailers within the marketplace to resell seafood to retail- (in a distribution pattern known as jogai ryutsu, ers, chefs, and processors. There are a total of meaning channels that do not pass through regu- 1,677 licenses for intermediate wholesalers, cur- lated wholesale markets). Since the early 1990s, rently held by about 900 separate firms. These Tsukiji’s sales have actually declined in both vol- intermediate wholesalers are divided among a ume and value; the market has become increas- dozen and a half trade specialties (for example, ingly specialized on high-end products, a category Tsukiji market 461 which has suffered during the prolonged stagna- family-run shops that can trace long histories of tion of the 1990s. involvement with the marketplace, in some cases Like many major urban marketplaces through- stretching back generations to the Nihonbashi out the world, Tsukiji is a significant historical marketplace. The market as a whole is steeped and cultural landmark. Tokyo’s seafood market in the lore of Japanese cuisine and traditions of has been located at Tsukiji, near the city center mercantile life. In particular, the so-called “outer along the banks of the Sumida River just a few market” (jogai shijo), several square blocks of tiny blocks east of the Ginza, since 1923, when it shops that sell to both a wholesale clientele and moved there from Nihonbashi, where the city’s ordinary shoppers, located just north of the offi- major fish market had been located just outside cial market (referred to as the “inner market” (jonai the gates of Edo castle since the early seventeenth shijo or simply jonai)), is a popular and colorful shop- century. Until the 1860s the Nihonbashi market- ping area for gourmets and bargain hunters seek- place operated as a system of feudal guild mo- ing both culinary and cultural tradition. nopolies; from the 1860s through the 1920s it Tsukiji’s future is in doubt, however. Because functioned as a speculative cartel, which engaged of changing patterns of distribution, as well as in flagrant bribery of government officials. In the congested transportation and antiquated market 1920s, a new Central Wholesale Market Law facilities, plans are now being drawn up to relo- established uniform regulations for urban mar- cate the official marketplace to another site, pos- kets for perishable foods. The Kanto earthquake sibly in Toyosu, across the mouth of the Sumida of 1923 destroyed most of central Tokyo and River. New facilities would probably not be forced the market’s relocation to its present site. ready until around 2010. If this move takes Tsukiji officially began operation under the terms place, major changes in the structure of the mar- of the Central Wholesale Market Law in 1935. ketplace are also likely and the numbers of li- During the Second World War, civilian food sup- censed participants will probably be plies were severely rationed and Tsukiji sus- dramatically reduced. pended ordinary commercial functions. Rationing ended in 1950, and the marketplace was recon- See also: central wholesale markets stituted along much the same lines it continues to follow at present. Further reading Despite the major transformations in the in- Bestor, T.C. (2002) Tokyo’s Marketplace, Berkeley CA: stitutional structure of the marketplace, as well University of California Press. as in conditions of supply and demand, Tsukiji’s businesses continue to include many small-scale, THEODORE BESTOR U

Ueno, Yoichi management. In 1921, he founded the Industrial Efficiency Institute, a research, consulting and A management consultant, writer and educator, educational organization, and in 1927 established Yoichi Ueno (1883–1957) was a pioneer in the the Japan Efficiency Federation, a national um- industrial efficiency movement and the most brella group of management associations. He also prominent advocate of American management chartered a Japanese branch of the Taylor Soci- techniques in Japan during the interwar period. ety During the 1930s and the Second World War, As Japan’s foremost proponent of Frederick Ueno’s consulting practice declined and he turned Winslow Taylor’s theories of scientific manage- more to writing and teaching: his encyclopedic ment, Ueno authored dozens of works on busi- Nooritsu handobukku (Efficiency Handbook) was ness administration, industrial psychology and published in 1939 and he opened a management personal development. In addressing the mate- academy (now SANNO University) in 1942. rial and spiritual dilemmas of modern society During the American occupation. thanks to his Ueno sought to develop a holistic vision of eco- experience with modern administrative tech- nomic life that fused Japanese cultural traditions niques, Ueno was appointed one of the three to Taylorite methods and ideals. original commissioners of the National Person- A graduate of Tokyo University in psychol- nel Authority. He continued to lecture on scien- ogy Ueno became interested in industrial man- tific management until his death. agement in the 1910s, when Taylor’s As the premier interpreter of Taylorism in revolutionary ideas swept through Japanese busi- mid-twentieth-century Japan, Ueno had a pro- ness circles. Inspired by Taylor’s pursuit of the found influence on the evolution of Japanese utmost efficiency in the production process, Ueno management practices. Although dedicated to became a self-taught expert in scientific manage- the rationalizing principles of scientific management, lecturing and writing extensively on the ment, Ueno was no mere translator or mindless latest American advances. His reputation was imitator of American managerial trends. Ueno, made in the early 1920s after he attained remark- for example, had deep respect for Confucian able results as one of Japan’s first management morality and Zen doctrine, and he attempted to consultants. Applying the techniques of scientific align Japan’s cultural heritage with the demands management—time-andmotion study job simpli- of modern management. Trained as a psycholo- fication, standardization—Ueno significantly gist rather than an engineer, Ueno focused on boosted labor productivity in the factories of Lion the human element in industry rejecting the Toothpowder, Fukusuke Tabi and other manu- mechanistic, dehumanizing elements of Ameri- facturers. can mass production. He also questioned Through the 1920s, Ueno spearheaded efforts Taylorism’s faith in self-interest (and its conse- to modernize Japanese labor and production quent emphasis on incentive wages), stressing US investment in Japan 463

instead cooperation, mutual understanding and exchange they are considered employed even if unity of purpose in managing a complex organi- they decline the offer. zation. Ueno’s conviction that effective manage- Another difference is the treatment of stay-at- ment had to combine a systematic, scientific home parents. In the USA, if a housewife regis- quest for efficiency with a concern for the hu- ters at a government employment office, she is manity and well-being of workers would come considered unemployed. In Japan, she would not to characterize Japanese managerial practices in be, since she did not previously have a job. Work- the high-growth years after the Second World ers with jobs but seeking new jobs are also treated War. differently. In the USA, if they apply for a new job, they are considered unemployed. In Japan, they are not. Further reading For these reasons, many writers have argued Tsutsui, W.M. (forthcoming) “The Way of Efficiency: that national employment statistics are only valid Ueno Yooichi and Scientific Management in Twen- for comparisons within the same nation. Reflect- tieth-Century Japan,” Modern Asian Studies. ing differences in calculations, they point out that Ueno, Y. (1967) Ueno Yooichi den (The Life of Ueno they are misleading when compared from one Yoichi), Tokyo: Sangyoo Nooritsu Tanki Daigaku. country to another. Writers who have nevertheless tried to adjust WILLIAM M.TSUTSUI Japanese unemployment statistics to US standards have increased Japanese numbers signifi- unemployment cantly For instance, Hachiro Koyama, former chief executive officer of Smith-Kline Beckman Traditionally Japan is viewed as having a lower Japan, argued that Japan’s quoted 2.8 percent unemployment rate than that prevailing in other unemployment rate, if calculated in accordance developed and developing nations. Quoted un- with US methods, would be 7.3 percent. employment in Japan can run from one-half to one-third of the stated rate of the US and Euro- ROBERT BROWN pean nations. The declared unemployment rate of Japan does not, however, tell the entire factors. employment story. It hides a number of US investment in Japan unrecorded factors. As early as 1980, the Ministry of Labor ad- United States foreign direct investment (FDI) in mitted that different criteria were used in the US Japan has been strikingly limited throughout the and Japan, adding that the Japanese rate would modern period. The first American firms estab- rise if US criteria were applied. In 1987, the Min- lished operations in Japan during the latter half istry of Labor also admitted that the Japanese of the nineteenth century, yet these firms per- rate counts military personnel as employed, while formed only limited trade and trade-related op- the US does not include them in its calculations. erations and were confined to a small number of More importantly in the USA laid-off work- treaty ports such as Yokohama and Kobe. ers are immediately classified as unemployed. In Roughly a dozen US manufacturing firms, to- Japan, if they continue to receive any salary pay- gether with a handful of banking and insurance ments (regardless of how small), they are not companies, had set up modest facilities in Japan counted as unemployed. Similarly in the USA by the early 1930s, yet Japan hosted far less US unemployed workers are treated as unemployed FDI throughout the pre-Second World War pe- until they start work. In Japan, they are consid- riod than did major European economies such ered employed as soon as they accept a job offer, as the United Kingdom, Germany and France. even if the work will not start for up to thirty Indeed, official US data for the year 1936 sug- days. If a job applicant in the USA declines a job gest that the UK alone was host to more than offer, he or she is still considered unemployed. ten times the quantity of accumulated US FDI In Japan, if they are offered a job through a labor in Japan in that year. 464 US investment in Japan

Nor did the relative amounts of US FDI in recipient) country factors. Often backed by do- Japan increase substantially during the ensuing mestic firms fearful of foreign competition and decades. In wartime and occupation, of course, for other reasons, the Japanese government pre- virtually no new US direct investment entered vented or deterred US direct investment in Ja- the country and much of the previous investment pan for well more than a century Host country was literally destroyed. Yet even during Japan’s policies can be divided into a number of more or high-growth postwar period the level of US FDI less distinct phases. The Japanese authorities remained extraordinarily limited. By 1965, for first permitted US (and certain other foreign) example, Mexico and Brazil each hosted greater companies to directly invest in Japan in 1859 quantities of accumulated US FDI than did Ja- upon the conclusion of a series of bilateral com- pan, and by 1980 Japan still lagged considerably mercial treaties, but such investments were behind other major industrialized countries as a strictly limited to the treaty ports. Host govern- host to US FDI. ment policy entered a second phase in 1899, The amount of US FDI in Japan increased when in exchange for revision of the so-called significantly during the latter half of the 1990s, unequal treaties, Japan permitted US firms to yet in comparative terms still remains quite mod- directly invest throughout the nation with rela- est. The US government reported that between tively few encumbrances. the end of 1994 and the end of 1999, the total This second phase came to an end in 1931 value of accumulated US FDI in Japan on an when the Japanese government, under the increas- historical cost basis grew from roughly $34 bil- ing sway of the military began to institute increas- lion to almost $48 billion, which represents an ingly strict controls over the operation of US and increase of some 40 percent. Included in that lat- most other foreign direct investors. The period ter total are such large and high-profile invest- of war and occupation, during the decade of the ments as the acquisition of the Long-Term Credit 1940s, constitutes yet a third distinct stage in host Bank of Japan by a US consortium led by government treatment of US business. Virtually Ripplewood and a number of major direct in- all US direct investment was expropriated and vestments by General Electric and other large US then turned over to local business interests dur- firms. Yet even at the end of 1999, Japan—still the ing the Second World War, but even during the world’s second largest economy—ranked just sixth American-led occupation period local officials— among host countries to US FDI, trailing the often at the behest of the occupiers—prevented United Kingdom, Canada, the Netherlands, Swit- US companies from entering or resuming their zerland and Germany. Indeed, as Japan entered businesses in Japan. the new millennium, its huge economy played The Japanese authorities initiated a fourth host to just 4.2 percent of total US FDI abroad. stage of policy when they passed and then ap- Why has there been so little US FDI in Ja- plied a complex set of rules and regulations un- pan? Clearly part of the explanation stems from der the Foreign Investment Law of 1950. This home (or source) country considerations. Some law, which effectively screened out most FDI for US firms, for example, lacked requisite knowl- more than two decades, was part of Japan’s larger edge of Japanese language, customs and business strategy during this period to disocourage fresh practices to successfully enter and expand in Ja- inflows of direct investment from abroad but pan. Other American companies apparently did encourage fresh inflows of foreign technology. not make adequate efforts to break into the mar- Powerful domestic companies played key roles ket, or chose to limit or withdraw from ongoing in this screening process, and the few large US operations. And some US multinationals lacked firms that did manage to enter Japan in these the patience necessary to succeed in a country years, such as Coca-Cola, IBM, and Texas In- notorious for the long lead times required before struments, generally had to satisfy the demands adequate returns are realized on direct invest- of their domestic competitors before gaining of- ments. ficial government approval to invest. Yet the primary explanation for low levels of In more recent years, however, the principal US FDI in Japan stems from a series of host (or barriers to greater US FDI in Japan have US investment in Japan 465 originated in the Japanese private sector. Under- portunities to hire quality local employees. Sec- developed secondary labor markets, for exam- ond, the declining cost of Japanese real estate ple, have contributed to the host of challenges and related cost factors have substantially US firms must confront in order to hire qualified brought down the cost of office space and resi- Japanese employees often frightened of losing dential housing for foreign executives. Third, their jobs if their foreign employer downsizes or the gradual unwinding of intra-corporate departs and they are left unemployed. The high shareholdings between keiretsu firms and other costs of living, real estate and other aspects of changing features of Japanese industrial organi- doing business in Japan similarly discourage zation and practice spell new opportunities for greater US investment. And, perhaps most im- US firms to enter Japan via merger and acquisi- portantly high levels of intracorporate tion. Finally in recent years powerful sectors of shareholdings between allied members of the the Japanese bureaucracy such as the Ministry same business groups make US acquisitions of of Economy Trade and Industry (or METI, the many Japanese companies unusually difficult to former MITI) as well as prefectural and munici- accomplish. pal government agencies have come to appreci- What are the prospects for US FDI in Japan? ate some of the many benefits foreign companies Although numerous factors will continue to de- can bring to Japan. This important change has ter many American companies from undertak- led to the adoption of new government policies ing major new investments, some recent and programs which encourage rather than developments point to modestly increasing lev- hinder the entry of US direct investment in Ja- els in the foreseeable future. pan. First, the mobility of the Japanese labor force has been increasing in recent years, and this See also: American occupation; trade barriers should stimulate renewed investment interest among American firms as they discover new op- MARK MASON V

venture capital industry 1963. Following the model of the American Small Business Investment Act of 1958, it intended to Estimates on the size of the Japanese venture capi- foster VC investment into innovative small firms tal (VC) industry and the invested stock and flow and led to the establishment of three semi-public of VC funds face similar problems of precise defi- VC firms called Small Business Investment Com- nition and accurate recording as in other coun- panies (SBICs) in Tokyo, Nagoya, and Osaka. tries. The most acknowledged sources for In contrast to the US model, these firms are not empirical data on the Japanese VC industry are allowed to provide loans, but are required to in- the semi-annual survey of the Venture Enterprise vest in equity or equity-linked securities of small, Center (VEC), a semi-public institution founded but profitable, dividend-paying enterprises with by the Ministry of International Trade and a nominal capital of less than ¥300 million in Industry (MITI) in 1974, and the joint annual one of twenty-eight designated industrial fields. survey by the Nihon Keizai Shimbun and the The investment guidelines determine that the Nikkei Research Institute of Industry and Mar- SBICs assume substantial risk by taking a share kets, the results of which are compiled in the an- of no less than 15 percent and up to 50 percent nual Nikkei Venture Capital Yearbook. The VEC of a portfolio company’s equity. survey distinguishes between direct capital invest- The history of Japan’s private VC industry is ments by VC firms and investments into part- comparatively short and marked by distinct pe- nerships, and subdivides the invested funds into riods. The first wave of private VC investment equity-only equity plus near-equity and equity occurred between 1970 and 1973 and was led by plus near-equity plus debt. As of September 1999 Japanese banks and security firms which were it reports a total amount of ¥722 billion equity inspired by the take-off of VC in the USA and plus near-equity funds managed by eighty-three backed by ample cash reserves piled up during VC firms. According to the Nikkei survey 108 the high growth period. Altogether eight firms VC firms committed ¥268 billion for new invest- were established, starting with the independent ment in venture firms during 1999. Thus, com- Kyoto Enterprise Development (KED), and fol- pared to the over $46 billion raised by 409 VC lowed by Nippon Enterprise Development funds in 1999 in the USA, the domestic Japanese (NED), a joint venture between the Long-Term VC industry is still small. Credit Bank of Japan, the Daiichi Kangyo Bank and the ITOCHU general trading com- History pany. The establishment of Japan’s largest VC firm, the Japan Associated Finance Company The origins of the Japanese VC industry date (JAFCO), a listed affiliate of Nomura Securities, back to the enactment of the Small and Medium- also dates back to this period. The first wave of Sized Business Investment Development Law in Japanese VC was short-lived and the majority of venture capital industry 467 the funds ended in high losses which was par- vestment banks, and the rapid rise of internet- tially due to the oil shocks of the 1970s, but more related VC firms led by Softbank Corporation. so due to inexperience and inflexibility in VC management as well as the enforcement of stricter Characteristics of Japan’s VC industry regulations by the Ministry of Finance (MoF) in regard to listing and accounting standards for The Japanese VC industry is highly concen- young growth firms. trated and dominated by affiliates of financial in- The second wave of private VC investment stitutions and semi-public funds. As of March occurred between 1982 and 1986, triggered by 31, 1999, the top ten Japanese VC firms man- the emergence of Silicon Valley and liberaliza- aged about two-third of the reported venture in- tion of financial markets in Japan. Improve- vestment of ¥806 billion, with ments in the regulatory environment such as the Nomura-affiliated JAFCO, Daiwa-affiliated relaxation of listing requirements for the OTC Nippon Investment & Finance Company and Ja- market and the Tokyo Stock Exchange Second pan Asia Investment Company alone command- Section, the liberalization in the use of warrants, ing a 42 percent share. In regard to the stock of or the introduction of a rating system created a managed funds, the semi-public SBICs account more favorable environment for VC investment for significant investment shares, notably the in Japan. In addition to the six firms remaining Tokyo Small and Medium Business Develop- from the first period, over fifty new VC firms ment Fund and the Osaka Small and Medium were established and investment grew to a size- Business Development Fund. At the same time, able amount with a focus on high-tech firms in smaller funds composed of individual venture areas like electronics or new materials. Further- capitalists and partnerships as well as, more im- more, the first investment partnership (toshi jigyo portantly pensions funds, are negligible as a kumiai) was established by JAFCO in 1982, source of VC in Japan mainly due to Japan’s thereby providing venture capitalists with an op- regulatory framework. Until the passage of the tion for risk diversification. The rapidly appre- Limited Partnership Act for Venture Capital In- ciating yen after the Plaza Accord followed by a vestment (toshi jigyo yugen sekinnin kumiaho) of No- series of large-scale bankruptcies of well-known vember 1998 liabilities of investor partnerships venture businesses led to a collapse of the sec- were not limited, thereby increasing the risk for ond VC wave in 1986. However, despite the de- individual venture capitalists. In regard to pen- cline in domestic VC investment, Japanese sion funds investment that nowadays contrib- investment into USA and European venture utes over half of the VC in the US regulatory funds increased. Most notable are investments deficiencies are considered to be a significant by Japanese corporations into high-tech venture barrier to an increase of VC investment by insti- firms in the field of computer hardware and soft- tutional investors in Japan. Japan lacks rules and ware or biotechnology in the California area with regulations like the US Employee Retirement the commercial objective to gain access to emerg- Income Security Act (ERISA) that, by means of ing technologies and to initiate future business an amendment to the “prudent man” rule in partnerships. 1979, permitted investment of pension money From the beginning of the 1990s the Japanese into high-risk assets like VC funds and, thereby VC industry experienced a significant, though contributed largely to the surge in US VC in- unsteady increase in the level of equity-linked VC vestment. investment as second-tier financial institutions like A second important obstacle for VC invest- regional banks, mutual loan and savings banks, ment in Japan relates to regulations for initial or cooperative associations, as well as more and public offering (IPO) procedures. Although the more firms independent from financial institu- relaxation of the listing standards for securities tions were established. Since the late 1990s Ja- on the OTC market in 1983 resulted in a surge pan’s VC system is becoming more diversified of new listings in the late 1980s and early 1990s, and versatile due to market entry by large-scale it still requires fifteen to twenty years on average funds of well-known foreign VC firms and infor a company to obtain a listing on the Japanese 468 venture capital industry

OTC market, as compared to an average of five tween the VC firms and their portfolio compa- years in the USA. These long time requirements nies is, in general, distant and at arm’s length, for an IPO, combined with high cultural barri- exchange of information is limited, and board ers to MBOs or mergers and acquisitions in Ja- membership of the venture capitalist an excep- pan constrain the options for a viable exit strategy tion. In fact, until 1995, the anti-monopoly law by the venture capitalist. The establishment of prohibited board membership of employees of the Mother’s Section at the Tokyo Stock Ex- VC firms in their portfolio companies. In addi- change as well as the foundation of NASDAQ tion, Japanese venture capitalists are said to lack Japan, a joint venture between NASDAQ, sufficient industry experience and management Softbank Corporation and the Osaka Stock Ex- expertise due to their finance-related career change, in 1999 is a major step to stimulate fu- background. ture growth of VC investment in Japan, as both Many of the differences between VC in Japan exchanges explicitly target young growth firms and the USA or Europe can be explained by and thereby widen the options for a smooth and structural and regulatory factors. Next to finan- speedy exit. cial regulations in regard to listing requirements Compared to the USA, Japanese VC firms or pension management, insufficient incentive usually are more risk averse and conservative schemes for venture capitalists such as stock op- reflecting their strong affiliation to financial insti- tion plans or tax breaks for “business angels” are tutions. Investments usually concentrate on later often quoted as examples. Regulations are also stage companies in their business expansion phase held responsible for insufficient exchange be- and on bridge/mezzanine finance prior to an IPO, tween academic research and business causing a while high risk, early stage investments into seed lack of involvement by university professors and or start-up firms are rather limited. These pat- researchers with the VC community Next to dif- terns reveal substantial differences between Ja- ferences in the regulatory framework, it is ar- pan and the USA in regard to the underlying gued that the state of Japan’s VC industry philosophy of the VC business. Seed and early reflects distinct features of Japan’s industrial cul- stage investment lie at the heart of the US-style ture. One such feature is the predominant posi- VC, because during these phases VC firms are tion of large Japanese corporations as a major provided with ample opportunities to generate source for new technologies and innovations. By value added for venture firms, while at the same means of diversification, in-house company ven- time foundations for high financial returns are tures, and corporate spin-offs, large companies created. Japanese VC firms often pursue multi- have repeatedly succeeded in establishing new ple objectives. Due to their affiliation with banks growth areas, thereby replacing or crowding out or security firms, they not only aim for high capi- VC investment. Furthermore, the predomi- tal gains, but also for access to profitable under- nance of long-term employment practices and writing or future lending business. the existence of internal labor markets are be- A further contrast between US and Japanese- lieved to limit labor mobility to discourage entre- style venture capital is the nature of the relation- preneurship, and to make recruitment of ship between the VC firm and the venture qualified employees by new enterprises more company. US VC firms usually maintain a close difficult. Finally cultural impediments to entre- relationship with their portfolio companies, en- preneurship are cited as yet another reason for gage in active monitoring, and provide various Japan’s underdeveloped VC business by point- value-adding services, management support and ing to the high risks of entrepreneurial failure expertise in respect to business planning, mar- within the Japanese cultural context and to the keting, organization or personnel. They regu- strong social concerns for stability However, larly exchange information and become actively these culture-based arguments are often dis- involved in company affairs through board puted by referring to the large number of small membership. In Japan, VC investment is usually and medium-sized firms and independent, not associated with an active monitoring and mid-sized companies (chusho kigyo), and their im- governance role. Instead, the relationship be- portant role for Japan’s economic development. VLSI Research Cooperative 469

Nevertheless, since the beginning of the 1990s success. In 1989, Dataquest estimated Japan’s the Japanese government has expressed its con- market share in 256k and 1Mb integrated cir- cern with the faltering corporate start-up rate and cuits at 92 percent and 96 percent respectively has enacted a series of policies and legal changes Success is also reflected in the fact that when the in order to foster a US-style VC business. Meas- US government and a consortium of US firms ures include tax incentives, special funds for loans set up Sematech (the Semiconductor Manufac- and loan guarantees for young technology firms, turing Technology Initiative) in 1987, they used the permission of limited liability partnership, as the VLSI Cooperative as both a justification and well as changes in the commercial and tax code an example. in regard to stock options and “angel tax deduc- The cooperative was a clear attempt by MITI tions.” These measures reflect an important shift to shape the pace and direction of one of Japan’s in the policy towards small and medium-sized key high-tech industries—integrated circuits—by enterprises from protection of existing small firms increasing funding and encouraging the sharing towards fostering of an entrepreneurial culture. of information. The government provided ¥300 million and the companies as a group contributed another ¥400 million. While not a signifi- Further reading cant amount when spread over a five-year period, Borton, J.W. (ed.) (1992) Venture Japan: How Growing it sent a symbolic signal about the perceived im- Companies Worldwide Can Tap Into the Japanese Venture portance of the industry Probably of more im- Capital Markets, London/New York: Woodhead- portance was the encouraging of information Faulkner. sharing among the five firms. Fujitsu, Hitachi, Clark, R. (1987) Venture Capital in Britain, America and Mitsubishi, NEC and Toshiba are fierce competi- Japan, London/Sydney: Croom Helm. tors across a range of markets. There was deep Hurwitz, S.L. (1999) The Japanese Venture Capital Indus- concern as to whether or not the five would be try, Cambridge, MA: MIT Japan Program 99–04, willing to work together. However, MITI had also Center of International Studies, Massachusetts In- concluded that the increasing competitiveness of stitute of Technology. the US computer industry required Japanese Mizuno, H., Hayashi, A. and Miura, I. (eds) (1998) firms to cooperate. Bencha Handobukku (Venture Handbook), Tokyo: It is unclear to what extent information shar- Nikkan Kogyo Shimbunsha. ing took place within the cooperative. Over its Nihon Keizai Shimbunsha/Nikkei Sangyo Shohi five-year lifespan, about 100 engineers were in- Kenkyujo (2000) Nikkei bencha bijinesu nenkan (Nikkei volved. They were divided into three project Venture Business Yearbook), Tokyo: Nihon Keizai teams: materials development, wafer size and Shimbunsha. production process equipment. Company representation was not equally distributed across JÖRG RAUPACH-SUMIYA teams, and some companies appear to have dominated particular projects. Whether this was a VLSI Research Cooperative conscious attempt to control the project or, instead, represented the varying strengths of firms The Very Large-Scale Integrated Circuit Research in different technological areas is hard to con- Cooperative was a government sponsored re- clude. Given that the firms were fierce competi- search effort involving the Ministry of Interna- tors and that the collectivist nature of Japanese tional Trade and Industry (MITI) and five organizations discourages horizontal communi- major domestic computer companies: Fujitsu, cation among firms, even modest information NEC, Hitachi, Toshiba and Mitsubishi. The sharing can be seen as an important accomplish- cooperative held together for five years, from ment. 1975–9, and was touted as the vehicle by which Another school of thought argues against the Japan would gain superiority in integrated cir- importance of the VLSI Cooperative Research cuit (IC) manufacture, specifically 256k DRAM Project. They note that Oki Electric, the one and higher. The project is generally considered a major computer firm to not join the cooperative, 470 VLSI Research Cooperative remained competitive in the IC industry (despite ecommunications equipment in order to insure taking twice as long as the other five to reach quality. production). It also noteworthy that three new- The VLSI Cooperative Research Project took comers to IC production—Matsushita, Sanyo and place in a period in which Western concerns about Sharp—were able to enter the DRAM market at Japan, Inc. was widespread. Western observers this time. Finally critics of the cooperative point noted the close relationship between MITI and out that the most significant firm in the IC indus- the private industrial sectors. The cooperative try did not participate in the project, but contrib- project reinforced the perception that Japanese uted more to IC production technology between government and businesses were competing in 1974 and 1980 than the cooperative. Nippon global markets as a partnership. Telegraph and Telephone, at the time a quasi- public organization under the regulation of the See also: administrative guidance Ministry of Posts and Telecommunications, maintained several laboratories. Though not an equip- Further reading ment maker, it worked closely with supplier firms, often sending its own engineers to supplier firm Methé, D. (1991) Technological Competition in Global In- research centers. The research centers and close dustries, New York: Quorum. relationships with suppliers was justified on the grounds that NTT set specifications for all tel- ALLAN BIRD W

wartime legacy government directed the occupation authorities to remove from an active role in Japanese society One can only speculate what Japan would be like all “exponents of militant nationalism and aggres- today had the military not come to dominate for- sion.” In Japan, figuring out just who was an ex- eign policy in the late 1920s. If that had not hap- ponent of militant nationalism and aggression was pened, Japan would never have provoked war in not so easy and there was great disagreement China, never taken over Manchuria, never de- within the occupation government over who signed and carried out an invasion in Southeast should be purged. All officers of the Imperial Asia, and never drawn the United States into the army and navy were officially purged. Top gov- Pacific War. These things of course did happen, ernment bureaucrats were also an easy target, and and they led to disastrous defeat for Japan in several thousand were duly removed from their 1945. Results of Japan’s wartime experience and positions. Members of patriotic societies, groups behavior continue to be debated, but some of the of government, business and military personnel effects are quite clear and can be interpreted in who had conspired to further Japan’s interests both positive and negative ways. on the mainland, and some teachers and pub- For Americans, the Second World War lasted lishers were dismissed from their posts. The num- for a little less than four years; for Europeans it ber of people in the above categories was quite was six years or more in duration. For the Japa- large. About 80,000 in all were purged, in addi- nese it was over a much longer period; the coun- tion to 120,000 army officers. try had been involved in virtually non-stop When SCAP turned to the business commu- military struggle since early in 1931. It is true nity however, there was more controversy than that involvement in war in the early 1930s was ever. SCAP officials responsible for identifying not nearly of the intensity and scale that it grew business leaders to be purged had come to know to be from 1942 through 1945, but the outpour- many of the business leaders during the business ing of human and material resources over such restructuring negotiations immediately after the an extended area, and over such an extended pe- occupation began. There was strong sentiment riod of time, was bound to leave its mark on Japa- among SCAP officials that removing the most nese society proven business minds from the scene would seriously hamper Japan’s economic recovery mak- The Purge ing some sort of radical take-over of the government more likely After much internal In addition to the international war crimes trials wrangling, about 1,500 business leaders were which resulted in a little over four hundred people added to the purge list; deducting voluntary res- being hanged and several thousand imprisoned ignations from that number, only about 450 busi- (see American occupation), the United States ness leaders were actually purged by SCAP. 472 wartime legacy

History will record that on the whole the purge The Self Defense Force of today has not, and did not have a serious effect on Japanese recov- under current conditions, cannot function with ery or any other aspect of the society. The great even a shadow of the power and influence of the majority of those purged were “unpurged” in prewar and wartime Japanese military On aver- 1951; three years later when Japan was again fully age, the Japanese are as anti-war in outlook as sovereign, all restrictions under the occupation the people of any large society and while China purges were nullified. Several of those purged and other nations fear a rebirth of aggressive returned to positions of leadership, including militarism in Japan, one legacy of the war is that Hatoyama Ichiro who became prime minister in Japan was transformed from a warlike and ag- 1954, and Kishi Nobusuke, who followed him in gressor society into one which is not likely to 1956. cause trouble to anyone through military means for the foreseeable future. Anti-war ideology Postwar reforms Although a military government did not officially run Japan during the war years, the military was The totality of defeat, together with the obvious an extremely powerful and influential focus of benign intentions of the conquerors, created in authority For three years the minister of war, a Japan an openness for change and a willingness general, served as prime minister, and a huge to discard the past to a degree quite rarely seen amount of Japan’s wealth was subsumed by in any society at any time. Some of the enthusi- Japan’s army and navy forces, subsumed for the asm for American-inspired change and reform express purpose of preparing for and executing wore off over time; some aspects of the occupa- war. The Japanese people knew where to place tion reforms were frankly not appropriate for Ja- the blame for the catastrophic destruction rained pan. On the whole, however, the occupation freed upon their nation. War planners in military uni- Japan from some of its own confining themes; it form together with their clients in the industrial was said by many Japanese that defeat and occu- cartels had led them to ruin, a set of events which pation liberated Japan from itself: in land reform, planted a deep core of fear and resentment in the labor relations, with a new and more open edu- minds of the great majority of the Japanese people cational system, with an economy less tied to a toward war and toward anything associated with few wealthy families, in many ways. A liberating military institutions. wind blew through Japan with the occupation, Most people in Japan today were not alive to bringing reforms which the Japanese themselves see the pain of war when it was brought upon probably could not have instituted. Left to itself, the nation, but the memory is nourished through any society has a difficult time wresting power the media, by the substantial left-leaning faction from vested interests in attempting reforms. De- of Japanese politics, and with the national observ- feat in war and temporary authority vested in an ance of the nuclear bombing of Hiroshima and objective outside force offered a chance to rede- Nagasaki each August. When the war ended, the sign aspects of Japan’s institutional framework. Japanese military was not only discredited, it was Some of that redesign has had a lasting and posi- virtually removed as an active force in economic tive effect on the culture and society and political life. During the first few years of the American occupation, six generals and one civil- End of aristocracy ian were hanged as class A war criminals, and 400 more as class C war criminals. Several hun- For hundreds of years, hereditary feudal elite had dred other individuals were sentenced to prison run Japan. During the Meiji period, on the other for terms ranging from a few years to life. Al- hand, education and economic performance came though these punishments were handed down to be more important than connection to an aris- by an international war crimes tribunal, there was tocratic past; indeed Japan seemed to make more not much expression of sympathy for the defend- progress in overcoming a traditional caste like ants from the Japanese population at large. ranking system than some European societies wartime legacy 473 such as England or Italy. But in spite of the im- When Japanese reflect on the war, they are most pressive degree to which Japan was able in a very likely to call to mind the people of Japan as vic- short span of time to throw off the bonds of feu- tims of the carpet bombing of their capital and dalism, even after modernization it remained a several other cities, victims of the dropping of highly stratified society The new middle class, nuclear bombs on Hiroshima and Nagasaki, vic- dynamic as it was, was surrounded on three sides tims of the miserable conditions of ordinary by a large impoverished peasantry growing work- people at war’s end. For Japan’s neighbors, it is ing class, not much better off, and a very small quite another matter. People and governments in privileged elite. Korea, China, and several countries of Southeast The “privileged elite” included people who Asia are more likely to conjure up images of in- lived lives hardly imaginable by ordinary people vasion, brutal treatment at the hands of Japanese due to their great wealth, and other privileges as military personnel, forced labor, imposed foreign part of the formal nobility A peerage was put into currency images which continue to influence the place during the Meiji period composed of five way Japan is seen and dealt with. ranks (see Meiji restoration), roughly equivalent In 1998, South Korea finally lifted some of its to the peerage ranks traditionally used in Europe, ban on Japanese popular culture, but there re- with about 900 families making up the official mains virulent anti-Japanese sentiment in some Japanese titled nobility Some of the families at quarters of the population, in some cases en- the center of the largest zaibatsu were incorpo- couraged by the government. A museum on the rated into the peerage, and several top industri- outskirts of Seoul, isited by thousands of school alists who remained outside the peerage were children each year, exhibits in vivid fashion listed among the wealthiest men in the world. some of the cruelty of Japanese against Koreans Had Japan not been defeated in war, it is prob- during the colonial period. China has been criti- able that the peerage system would have remained cal of Japan for not owning up to the brutal intact, and those wealthy families of commoners behavior of the Japanese Army during its long would still be in a privileged place, exerting in- occupation of China. Chinese government offi- fluence at the top of economic and political life. cials monitor political events in Japan, with an Reforms discussed above included to a large eye on right-wing groups, feared by many Chi- measure ending hereditary privilege and power nese as potentially a rebirth of Japanese milita- in Japan. Indeed it can be argued that, at least for rism. the two and one-half decades following the war, Japan has to a significant degree repaired its Japan became a model of egalitarian society un- reputation in Southeast Asia through trade and paralleled among capitalist nations, significantly economic investment, but there remain unpleas- more so than its great teacher, the United States. ant memories for those who lived through Japa- The power of great wealth and advantages asso- nese incursion into their lands, and for some of ciated with social connections began to re-emerge the older generation, Japan is always looked upon as important factors in Japan during the 1970s with suspicion. and 1980s, and there is evidence that family ties function today in some ways reminiscent of the Further reading old aristocracy. In spite of this, however, the top of power and influence in Japanese society will Baerwald, H.H. (1959) The Purge of Japanese Leaders not likely ever again be as closed to those not under the Occupation, Berkeley CA: University of born to it as it was in the years prior to and dur- California Press. ing the war. Gibney F. (1992) The Pacific Century: America and Asia in a Changing World, New York: Scribner’s Sons. Hachiya, M. (1965) Hiroshima Diary, ed. and trans. Relations with Asian nations W.Wells, Chapel Hill, NC: University of North One rather powerful wartime legacy has been Carolina Press. the way events during the war have been kept Jansen, M. (1975) Japan and China: From War to Peace, alive in the collective memories of other Asians. Chicago: Rand McNally. 474 white-collar workers

Kerbo, H.R. and McKinstry, J.A. (1995) Who Rules dundant. As more emphasis is placed on spe- Japan: The Inner Circles of Economic and Political Power, cialization and individual skills, white-collar Westport, CT: Praeger. workers are finding that they need to systematically improve their abilities to survive in a com- JOHN A.McKINSTRY petitive labor market. The Ministry of Labor anticipates an increase white-collar workers in labor movement activity as a result or because of such changes in the working environment. The The term “white-collar worker” refers to salaried ministry’s goal is to encourage employment sta- male workers in Japanese organizations. The term bility for the white-collar worker while allowing “salaryman” is synonymous in Japan for white- the labor market to become more dynamic. Train- collar worker. “Salaryman” was used in Japan as ing schemes and re-employment programs will far back as the Meiji period (1868–1912) to refer be the focus of the Ministry of Labor in its ef- to salaried workers in desk jobs. Today it refers forts to stabilize the careers of the white-collar specifically to white-collar male workers. Salaried worker. female workers are referred to as “career women.” The white-collar worker in Japan designs his life on the expectation of a guarantee of lifetime Further reading employment, the promise of increasing wages for the length of his working life (seniority pay), and Chinone, K. (1996) “Coping With Freedom: Can the representation in decision-making within the com- Salaryman Change His Spots?” Tokyo Business Today pany (company union). He joins the company 64 (1): 28–32. upon graduation from college, is educated by it, Hitoshi, C. (1997) “Salaryman Today and Into Tomor- and remains loyal to the company in spite of low row,” Compensation and Benefits Review 29 (5): 67–75. wages while he is young because the seniority Mantsun, M. (1997) “How Permanent Was Permanent system guarantees that his salary will eventually Employment?: Patterns of Organizational Mobil- grow and his job will be secure. ity in Japan,” Work and Occupations 24 (1). However, recent data suggest that Japan’s Toshiaki, O. (1999) “Report on Labor Trends in Ja- employment system is in transition and perhaps pan,” Ministry of Labor White Paper, Tokyo. is moving away from the lifetime employment White, O. (1996) “Japanese Seek Skilled Workers Over model and shrinking the number of white-collar Cheap Labor,” World Trade 9:66. workers. Mid-career recruitment in large enterprises, even for top executives, is growing. With MARGARET TAKEDA an aging workforce, less committed young workers, and pressing needs for skilled specialists, women’s roles employers are adjusting their permanent employment and seniority reward systems. Workers are Women’s roles in the post-Second World War seeking greater job mobility and not relying on era have centered on the dual roles of wife-mother the company for their career development and and secondary worker. Women have participated job security. in the labor force at high levels, but the develop- In addition, as employment restructuring ment of economic and social institutions have moves forward, white-collar workers will even- shaped their roles to complement male breadwin- tually find themselves being downsized because ners. Women are expected to support their they are a group having no special qualifications husband’s careers. This usually involves complete that are valued in the labor market. Most of their devotion to their husband’s company nurturing skills come from on-the-job training and job rota- of the children, and caring for aging parents. The tions within their companies, making their rapid expansion of the new middle class since knowledge and skills non-transferable. Ad- the mid-1950s gave rise to a new image of the vances in technology and computers made the ideal of housewife: a woman that is free from the jobs previously held by administrative staff re- labor intensive work the previous generation of women’s roles 475 women endured. The increasing level of educa- The ideology of the middle-class housewife, tional competition among children since the 1970s which accentuated the division of gender roles intensified women’s responsibilities in children’s was particularly strong in the 1970s and 1980s. education. Thus, contrary to the popular image For example, an overwhelming majority of of Japanese women who devote themselves to women, 76 percent, supported the gender divi- the family the “traditional” women’s roles are not sion of work and family in 1982. This number so traditional as one might think. More recent had decreased to 56 percent in 1992. Similarly trends show a growing ambivalence on the part women’s support for withdrawal from the labor of young women in their acceptance of women’s force during middle-age years was 71 percent in dual roles. The direction of change is not yet clear. 1972, 74 percent in 1983, and 64 percent of Historically high rates of female labor force women in 1990. Women’s support for work ca- participation are due to the size of the traditional reers without disruptions was 12 percent in sector (agriculture, fishing and forestry) and the 1972, 17 percent in 1983, and 14 percent in strong presence of small family-owned enter- 1990. Educated women, who are more likely to prises. The traditional sector, absorbing the larg- marry educated men who can provide the eco- est segment of the work force until about 1960, nomic security of the middle class, were less declined to account for less than 10 percent by likely to return to work in their middle-age years 1980. The decline in the traditional sector was than those with only a high school education. offset by the expansion of the secondary (manu- The weak correlation between the level of wom- facturing, construction, and mining) and tertiary en’s education and their employment during the (service and trade) sectors. The secondary sec- years of middle age is still pronounced today. tor absorbed 20 percent of the work force in 1960 The image of middle-class women may ob- and 27 percent in 1987. The service sector ac- scure the complexities of women’s dual roles counted for 37 percent in 1960 and 63 percent in and the implications for society. Corporate poli- 1987. Continuing industrialization opened new cies related to hiring, training and promotion, as employment opportunities to young women in well as socialization at home and the education the factories and modern corporations in urban systems, all contribute to woman’s dual roles as centers. wife-mother and secondary worker. Women Women combined their economic and family supply full-time labor when they are young, and roles within the traditional industries that offered they support their husband’s career after they flexibility in working schedules. Only those are married. Women perform types of jobs that women who could afford not to work stopped are drastically different from those of men of working upon marriage or having children. The similar age. When young, women work full-time contraction of traditional industries reduced fam- in auxiliary or dead end jobs, young men are ily enterprise workers. The concomitant growth placed in more responsible positions and go of the modern economy increased female employ- through the firm-based internal labor market. ment outside the home, accentuating the tempo- Once leaving their jobs upon marriage or having rary withdrawal from the labor force for many children, middle-aged women who need to sup- women. The withdrawal from the labor force plement their family income re-enter the labor during child-bearing years and the re-entry into market as part-time or temporary (non-regular the work force in middle age was most pro- full-time) workers. In 1990, within a group of nounced in the 1970s and early 1980s, with 55 working women aged 34–55, 51 percent held percent of women aged 25–34 not working. More full time positions, 43 percent held part-time or recent patterns are a reversal to the earlier trend. temporary positions, and 6 percent were self- The dip during the childbearing years has gradu- employed. ally decreased, and in 1990 the labor force par- Until about 1980 men and women showed a ticipation rates among women aged 25–34 striking normative and behavioral consensus on returned to the 50 percent level, but is still lower the proper age of marriage. Incorporating this than the rates among women of the same age norm and expecting women to leave the com- group before 1960 (55 percent). pany to raise a family employers have been re- 476 women’s roles

luctant to invest heavily in training women. For gan to offer a two-track hiring system for women, example, large firms actively recruit male univer- the general clerical track (ippanshoku) and the sity graduates but seek women who have a high management track (sogoshoku), the number of school or two-year college degree. While male women who took advantage of the new hiring workers receive in-house training and are re- system did not increase. The management track warded on the basis of seniority women are pre- promises career advancement, but in exchange, cluded from such investment from the very women are expected to work like men, emulat- beginning. Such corporate practices perpetuate a ing “corporate samurai” careers. The long com- pattern whereby women perform less responsi- mute and working hours, extensive overtime, ble work until they marry or have children. attendance at social events after work, and trans- Most parents monitor their son’s education fers are all prerequisites to corporate career ad- more carefully than their daughter’s education vancement. Women are reluctant to seek the because of the close relationship between educa- managerial track out of concern that the trans- tion and future occupational success. Japanese fers and long working hours will conflict with women enter college in higher numbers than do their family needs. In 1990, less than 15 percent men (46 percent vs. 41 percent in 1993), but half of large private firms assigned relocation to of them go to junior colleges rather than four- women as part of career development. Lack of year universities (whereas more than 90 percent maternity leave and child-care facilities are addi- of men go to four-year universities). A four-year tional barriers to women who are committed to university education for daughters is considered career advancement. Employers do not groom a barrier to finding employment and a hindrance women for future promotion, and women fail to to their chances for a good marriage. Thus, par- aspire to and to apply for such positions. In 1990 ents are hesitant to push their daughters through women held only 2.2 percent of managerial posi- the “examination hell” demanded for entry into tions in large firms. elite universities. Higher education for daughters In contrast to the “hostile” corporate environ- is viewed more in terms of general educational ment in which women hit a “concrete ceiling,” development in preparation for meeting a man the public sector is much more hospitable to who will bring high social status and economic women’s needs and career development. Gender security Such socialization leads to a lack of ca- equality is acknowledged and women are re- reer aspiration and a more family-oriented career warded with equal pay for equal work and their among young women. jobs are protected by maternity leave policies. Yet, Working women, especially those who are even in the public sector, women in leadership committed to their work careers, have been aware positions are few, accounting for less than 2 per- of the systematic inequalities imposed by the cor- cent of the managerial class. porate system, and as early as the 1960s they Women’s entry into managerial positions is sought legal redress. Clauses stipulating that inversely related to the size of the firm. Accord- women must retire at marriage or pregnancy were ing to a study by the Women’s Bureau of the litigated first. In the 1960s and 1970s, the courts Ministry of Labor, the probability that a woman awarded several female workers back wages and holds a kacho position (section manager) is ten an injunction that barred large corporations from times greater in the small firms and a bucho posi- using mandatory retirement at marriage clauses tion (division manager) is thirty times greater. In in contracts (for example, the 1966 Sumitomo addition, there are a large number of female own- Cement case). Earlier successful litigation cases ers of small and medium-size firms. Retail wom- guaranteed women’s rights to work and promo- en’s or children’s clothing was the most common tions. However, discriminatory hiring and train- business headed by a female president in 1989. ing practices remained firmly in place, at least Studies show that these women are not necessar- until the passage of the Equal Employment Op- ily highly educated. They are more likely to be portunity Law (EEOL) of 1986. married and have children than their counter- Most observers maintain that the EEOL has parts in large firms. These women appear to come not been a success. Even though large firms be- from families that encourage work in small and women’s roles 477 medium-sized businesses, with their parents (es- concrete structural and institutional changes that pecially fathers) providing the role model. In ad- promote long-range employment opportunities dition, studies on career progression of female for women and a new family division of labor. managers suggest that women typically rose to According to this view, the postponement of their position by working around the dominant marriage and women’s reluctance to raise chil- male career pattern, rather than by competing dren are far from the advancement of women’s within it. new roles. During the booming economy of the 1980s, Japan experienced a severe nationwide labor shortage and “women power” was one of the big- Further reading gest catch phrases in corporate job advertisements. The government recognized the need to Adler, N.J. (1993) “Competitive Frontiers, Women support working women’s needs (child care, flexi Managers in the Triad,” International Studies of Man- time, elder care). Studies report that multinational agement and Organization 23 (2): 3–23. corporations made a positive impact on working Awaya, N. and Phillips, D. (1996) “Popular Reading: women as they recruited diverse workers based The Literary World of the Japanese Working on ability. However, there are also reports that Women,” in A.Iwamura (ed.), Re-imaging Japanese Japanese multinational firms operating in the US Women, Berkeley CA: University of California Press, hired more Japanese women in managerial posi- 244–70. tions in their American offices than they did in Brington, M.C. (1993) Women and the Economic Miracle, their home operations. More studies are needed Berkeley CA: University of California Press. to assess the impact of multinational corporations Clammer, J. (1997) Contemporary Urban Japan, Oxford: in women’s employment. Blackwell. Currently Japan faces an uncertain trend. Since Department of Labor Women’s Bureau (1992) the economic bubble burst in 1989, young women “Women Workers: Outlook to 2005,” Facts on Work- are struggling with a very tight job market, and ing Women 92 (1): 1–7. they are postponing marriage. The average age Inoue, T. and Ehara, Y (eds) (1995) Women’s Data Book, of marriage for women rose from twenty-five in Tokyo: Yuhikaku. 1975 to twenty-eight in 1995, and in the Tokyo Saso, M. (1990) Women in the Japanese Workplace, Lon- area, it is thirty-one. Women on average are hav- don: Hilary Shipman. ing 1.39 children, one of the lowest birth rates in Steinhoff, P.G. and Tanaka, K. (1993) “Women Man- the world. Some observers interpret these changes agers in Japan,” International Studies of Management and as a “quiet revolution,” with women initiating a Organization 23 (2): 25–48. re-negotiation of gender roles. According to this Usui, C. (1994) “Do American Models of Female Ca- view, young women are disillusioned with Japa- reer Attainment Apply to Japanese?” Center for nese men and marriages that only constrain them International Studies, Occasional paper No. 9408, and so have become more selective in their life University of Missouri-St. Louis. course options. Others, however, paint a more pessimistic picture by pointing to the absence of GHIKAKO USUI Y

Yamato Transportation War, the company’s activities had resumed fully by 1949, and the scope of operations was ex- Yamato is the pioneering company of truck haul- tended to overland legs of air and sea cargo, road age in Japan and the leading firm in the over- haulage between railway terminus and ports, and night delivery service of small parcels, which it packaging. In the 1950s, the principal mode of introduced to the country in 1976. As of 1999, cargo transport in Japan began to shift from rail- Yamato Transport handled 836 million parcels, way (Japan National Railways) to trucking. which represented a 35.6 percent share of the Yamato was comparatively late in establishing the industry. At the end of June, 2000, the company long haul operation, and it was only in 1960 that possessed 31,690 vehicles, linking its networks the company started the Tokyo-Osaka service. of 2,702 depots, storage points, and transship- Due to high competition, Yamato suffered from ment centers throughout the country. It has low profitability throughout the 1960s. 87,658 employees nationwide. The total operat- Masao Ogura, who succeeded his father in ing revenue for fiscal 1999 was ¥744 billion, with 1971 as president, was inspired by visiting UPS operating profit of ¥32 billion and recurring profit and started, in 1976, overnight delivery service of ¥32 billion. of parcels focusing on individual customers in Yasuomi Ogura laid the company’s founda- the Kanto area under the name of Takkyu-bin tion when he began a charter truck haulage serv- (home express). Contrary to the prevailing be- ice with four lorries at Kyobashi, Tokyo, in 1919, lief that the business was not feasible, Yamato’s at a time when there were only 204 lorries in simple and innovative concept of uniform pric- Japan. In early times, Ogura struggled to find ing and overnight delivery was a stunning suc- customers, since carriage by motor vehicles was cess. In 1986, the company extended its considerably more expensive than by horse- geographical scope to overseas destinations drawn ones. In 1923, he signed an exclusive con- through a cooperative agreement with UPS. The tract of delivery with Mitsukoshi, the first coverage of its parcel collection and delivery serv- department store in Japan, which made his busi- ice was extended to all of Japan by 1989. Mean- ness much more stable. while, Yamato developed new services such as Four years later, Ogura attended an interna- transporting skiing and golf equipment to site tional conference of road cargo transport compa- from home, articles of perishable food by tem- nies in London, and visited Carter-Patterson, a perature-controlled vehicles, delivery at desig- British company which operated scheduled long nated times, book delivery and home moving. In haul transport linking networks for collection and the 1990s, this leader of the overnight delivery delivery Inspired by this, he started, between service industry began “cash on delivery” serv- Tokyo and Yokohama, the first scheduled bulk ice of items marketed by direct mailing compa- road transport in Japan two years later. This serv- nies and Internet retailers. ice was extended to the Kanto area by 1935. After a disruption during the Second World SHINTARO MOGI Z

zaibatsu and Uekusa 1976) emphasized the economic power of the zaibatsu and their central role in ex- Literally “financial clique(s),” zaibatsu refers to the ecuting the industrial plans of Japan’s wartime business groups that dominated the Japanese government. But the continued growth in Japan’s economy throughout much of the prewar and economy after the war, with the reconstituted wartime period. These are typically divided into zaibatsu clearly playing a major role, has led in two categories: the four groups centered around the past two decades to alternative, efficiency- the well-established names of Mitsui, Mitsubishi, oriented, explanations. Reinforcing this search for Sumitomo, and Yasuda (Fuji), which were widely affirmative explanations is evidence that family- diversified across finance, industry and com- based industrial networks have also been central merce; and a larger number of emerging groups in other fast-growing economies (such as Korea (shinko, or new, zaibatsu) with substantial economic and Taiwan). It has become increasingly clear that power in a more limited range of industries. Post- business groups are not simply vestigial “cartels” war economic reforms initiated by the Occupa- of a pre-anti-trust world, but a fundamental fea- tion forced out the families that had dominated ture of many developing economies. many of the groups, as well as their top manage- The emergence of zaibatsu in Japan is the prod- ment, but the 1950s saw the reconstitution of the uct of several factors. One of these is the strong zaibatsu as keiretsu groupings based around the role played by the state in early modern Japan. same nucleus of prewar companies. Modern industries like the railroads were owned The zaibatsu is an organizational form of con- and managed by the government during the early siderable substantive and theoretical significance. years of Meiji. Even when these industries were Japan’s private sector development in key indus- later sold off to private investors, it was to entre- tries like banking, international trade, and new preneurs that maintained close relationships to technologies was dominated by zaibatsu firms from government and who continued to benefit from the late 1800s until Japan’s defeat in the Second government largesse. Political connections were World War. Even today zaibatsu descendents are scarce, and those who had them stood to benefit disproportionately represented among Japan’s across a range of industries. Meiji entrepreneurs financial, trading, and high-tech companies. like Yataro Iwasaki, founder of Mitsubishi, cul- Moreover, in their early years, the zaibatsu were tivated close ties to the finance minister, which leaders in introducing new management and or- resulted in direct and indirect subsidies from the ganization systems into the Japanese economy government for his shipping line to help beat for- including the employment guarantees that later eign competition. He then used these ties to ex- became institutionalized as “lifetime employ- pand into warehousing and insurance. Similarly ment.” Eiichi Shibusawa (the founder of present-day Earlier postwar research (Hadley 1970; Caves Toshiba) used his political acquaintances to start 480 zaibatsu

many other companies, including those in the critical stages in the development of a technol- banking, paper, textile, and brewing industries. ogy were able to reduce entrepreneurial risks, Another consideration was simultaneous de- providing important advantages to large, well- velopments in the Japanese financial system. organized producers. It was the leading zaibatsu Unlike the USA and UK, where independent that had the financial wherewithal, the political stock markets developed early as an important connections, and the overseas contacts to promote source of external capital, corporate financing in development of Japan’s frontier industries: buy- Japan came primarily through private, non-mar- ing foreign technology and product licenses, fund- ket mechanisms—wealthy entrepreneurs, zaibatsu ing learning missions to and from Japan, investing families, and commercial banks. Japan’s banking in supply and distribution infrastructure, and in- system developed rapidly in the 1870s and 1880s, vesting in plant and equipment. Three institu- and prior to most other Western industries in tions were vital in this: the group bank helped to Japan. Several decades later, banks with close ties raise capital that was used in expansion projects; to merchant houses and industrial clients were the group trading firm provided international and well positioned to take advantage of a wave of overseas intelligence and resource support; and banking consolidation forced by financial crises, the head office coordinated overall resource allo- creating the concentrated financial centers that cation through a small team of decision makers. continue today Reinforcing these ties were lax This is not a complete explanation, however, securities regulation and opaque accounting sys- since hierarchical organizations have their own tems that made Japanese securities markets, un- limitations. They may lack internal capital, tech- til the postwar period, the locus of unsavory nical, or managerial resources necessary to con- speculation rather than serious investment. trol all of the stages along the production process. The primary explanation for zaibatsu develop- Worse, they are frequently poorly adapted to ment, however, must be traced back to the or- handling the process of industrial change itself. ganizational requirements of Japan’s catch-up Head office employees often had little experience economy and especially the way in which the in the technical and market requirements of zaibatsu managed the competing tensions it was emerging industries, and were often more adept facing in a world of rapid industrial change: the at managing financial and strategic affairs (moni- need for strategic centralization, on the one hand, toring subsidiary accounts, cultivating political and the need for operational decentralization, on relationships, etc.) than they were at handling the other. Forces pushing toward strategic cen- local operations. tralization were reflected in attempts by Japanese Therefore, while the centralized zaibatsu head groups to reallocate resources among enterprises office managed overall strategic decisions over based on some notion of collective interest. Catch- resource allocation, it often allowed considerable up required investments in technical, managerial, autonomy to managers at the level of the enter- and organizational learning, as well as institution prise or line of business over just how those rebuilding along a chain of relations extending from sources would be allocated, especially during research and development through prototyping Japan’s rapid diversification in the 1920s and to final production and sales. Various stages along 1930s. These forces toward operational decen- the chain were often underdeveloped: key up- tralization were reflected in the process of spin- stream materials or component supplies might ning off new enterprises organizationally be lacking; potential downstream customers had segregated from the head office. Where there to be convinced to commit to new products of was rapid expansion into promising new tech- uncertain value and longevity; and basic know- nologies or markets, group executives found, how concerning how to link the various stages this relative autonomy promoted a more entre- was scarce. Making this even more challenging, preneurial attitude in its local managers and also all of the pieces in the chain had to be accom- provided an independent focus for strategic part- plished simultaneously and rapidly to compete nerships. successfully with Western competitors. By segregating activities, the head office was Firms that developed internal capabilities at able to accomplish two important objectives. First, zaibatsu 481 it provided greater autonomy for localized deci- legacy on which Japan’s postwar economy would sions and incentives to operate and created a more build. Important transformations in Japan’s cor- entrepreneurial environment in the satellite op- porate systems during the wartime period had eration. Rather than applying the standardized already shifted the emphasis away from the tra- rules and procedures of the central organization, ditional capitalist notion of enterprise—as an in- spin-off companies were granted a higher degree strument of profit for shareholder owners—to one of autonomy to develop new and locally appro- in which the company’s managers and workers priate procedures to follow and were provided became the dominant stakeholder. Much of what strong managerial incentives toward venture we now think of as central features of the Japa- growth. A degree of control was no doubt given nese economy took root then, as the planners in up by the head office, but the underlying logic Japan’s wartime machine found that stabilizing was that the agency costs produced by a weak- industrial relations and internalizing capital mar- ened administrative control structure are kets made it easier to control strategic enterprises oftentimes less important than the organizational than was the case under a more market-like sys- flexibility and entrepreneurial initiative that re- tem. sults. This evolution continued after the war, as tense A second major advantage of zaibatsu-based labor-management relations gave way to accom- growth was its usefulness in building of relations modation based around the idea of long-term outside of the group. By segregating operations, employment guarantees, internal promotion, and the zaibatsu were able to create a coherent organi- company-based unions. The internal labor zational focus for localized strategic alliances with markets that developed in large enterprises re- other companies. The partner firm’s investments, quired careful management of the “core” personnel, and other resource contributions could workforce, leading to heavy reliance on external be directed toward a limited set of activities. This subcontractors to handle fluctuations in produc- had the advantages of concentrating the partner’s tion output. It also required cultivation of stable efforts while at the same time protecting the core shareholders willing to overlook short-term per- firm from undue external influence by the part- formance problems in favor of long-term busi- ner over its own operations. In addition, the re- ness growth. While occupation reforms sulting operation was freer than the core firm to introduced the “rationalization” of some of these pursue new markets and customers (especially financial and corporate governance relations, they those involving firms that might, due to strategic did not eliminate the densely connected, inter- conflicts, be reluctant to deal directly with the company hierarchy that had developed during parent firm). the war. Indeed, despite the fact that the occupa- These dual pressures—one toward integration tion set out to eliminate the zaibatsu from the Japa- and the other toward disintegration—operated nese economy economic reforms initiated by the throughout the prewar period as centripetal and occupation actually helped to institutionalize a centrifugal forces continually defining and rede- tighter, better organized, more zaibatsu-like net- fining organizational boundaries as groups and work architecture throughout Japan’s business their member firms evolve over time. Given the system. Corporate financial policies across Japa- special needs of Japan’s enterprises, and the re- nese industry saw an increase in bank financing source limits they faced, it made sense to lever- and a continued decline of dividend payouts as age what resources were available across as broad companies reinvested profits into plant expan- a set of business opportunities as possible. At the sions and new businesses. And a new generation same time, Japanese leaders found it useful to of professional managers took over Japan’s larg- have a stable “core” of enterprise groups that est companies, with managerial pay becoming less could be counted on to have both the broad ca- and less tied to company performance, while pabilities necessary to make complex expansion labor markets became increasingly internalized, projects work and to be reliable and trustworthy as they had already become in zaibatsu enterprises. in carrying them out. Interestingly after largely disappearing from The basic zaibatsu model provided a significant the Japanese lexicon, the zaibatsu terminology has 482 zaibatsu

reappeared in recent years. One reason for this is tures by taking minority stakes in ventures and the revision of the Commercial Code in 1997 then building in synergies through a web of cross- which lifted the ban on holding companies that investments in sales and technology much as the had been originally imposed to dissolve the zaibatsu did before the war. zaibatsu. While the primary intentions of the reform were to facilitate the closing or selling of Further reading failing businesses, critics pointed to the irony of Caves, R. and Uekusa, M. (1976) Industrial Organization returning to a prewar form of organization to in Japan, Washington, DC: The Brookings Institu- restructure Japanese industry. Some also worried tion. that lifting the ban would revive conditions that Gerlach, M.L. (1992) Alliance Capitalism: The Social Or- had led to the economic concentration and mili- ganization of Japanese Business, Berkeley CA: Univer- tary expansion of the 1930s. sity of California Press. This terminology has also re-appeared in the Gordon, A. (1985) The Evolution of Labor Relations in context of Japan’s emerging information indus- Japan: Heavy Industry, 1853–1955, Cambridge, MA: tries. Masayoshi Son, founder of Softbank, is Council on East Asian Studies, Harvard Univer- among those who now refer to his emerging sity. empire as a “zaibatsu” to tap into historical con- Hadley E. (1970) Antitrust in Japan, Princeton, NJ: nections to Japan’s earlier era of entrepreneurial Princeton University Press. capitalism. The key feature of this model is that Softbank seeks to gain implicit control in ven- MICHAEL GERLAGH Index

5S campaign 153–4, 164 allowances 17–20 7–11 Japan 399–400 amakudari (descent from heaven) 20–3 7dream.com 317 bid-rigging (dango) 104 distribution system 118 Ministry of Construction 305 e-commerce 126 Ministry of Finance 308 Ito-Yokado 206 America see United States of America konbini 268, 269 American occupation 23–6 7dream.com 317 Anti-monopoly Law 63 dissolution of toseikai 173 Abegglen, J.C. 1 Dodge, J.M. 119 accounting 2–4 enterprise unions 141 acquisition of technology 152–3 post-Second World War recovery 363–5 administrative guidance (gyosei shidd) 4–6, 40 amino acids 15–16 advertising 6–7 ANA see All Nippon Airways creative houses 94–6 ancestor worship 183–4 Dentsu 108 ancestry burakumin 56 motorcycle industry 322 antei kabanushi (stable shareholders) 400 see also marketing Anti-monopoly law Africa 224–5 cross-shareholdings 98 after-sales pricing (ato-gime) 7–9, 368 Fair Trade Commission 150–1 aging anti-trust measures domestic markets 131 Depressed Industries Law (1978) 113 lifetime employment 282 post-Second World War recovery 364 agricultural cooperatives 9–10 Apple Computers 421 Central Union of 65–6 appraisal systems 26–9 agricultural policy 10–12 appreciating yen (AY) (high yen) 29–31 aid, foreign 154–5 Arabian Oil 31 air pollution 142–3 aristocracy 472–3 airline industry 12–15 Asahi Bank 70 see alsoindividual airlines ASEAN countries 128 Ajinomoto 15–16 Asia Akihabara 16–17 economic crisis 127–8 All Nippon Airways (ANA) 12–14 wartime legacy 473 alliances assembly plants 423–4 airline industry 13–14 assets 2, 3, 52 strategic 421–2, 446–7 Association of Corporate Executives 211 technology acquisition 153 ato-gime see after-sales pricing 484 Index

auction houses (primary wholesalers) 67–8, banto 49–50 459–61 barriers to trade 453–6 audits 4, 73 Basic Law of Food, Agriculture and Rural Australia 225–7 Areas 11–12 just-in-time 226 behavior, giri 169–71 kaizen 226 benefits see non-salary compensation Mitsui 226 bento 268 quality control 226 bid-rigging (dango) 103–5 Toyota 225 Big Bang reforms 279 Automobile Manufacturers Association Big Four Pollution Suits 57–8 (JAMA) 212–14 board of directors (torishimariyakukai) 443–6 automotive industry 32–5, 212–14 BOJ see Bank of Japan Canadian investments 227 bonds Honda Motor 179–80 corporate finance 89, 90 New United Motor Manufacturing government 61 Incorpo-rated 330–1 Nomura Securities 337–9 Nissan 337 books, history of imports 146 Toyota 449–53 booms, economic 177, 208–9 United States of America 245–6 bottom-up decision making 50–1 autonomous control (jishu kanri) 426 nihonteki keiei 333 AY see appreciating yen organizational learning 346 box lunches see bento bad debt 36–7, 46 brand stores 117 bakufu (tent governments) 437, 438 Britain see United Kingdom balance sheets 4 brokerages, Tsukiji market 460 balanced budget principle 307 bubble economy 44, 51–4 Bank of Japan (BOJ) 37–9 Asian economic crisis 127 bubble economy 52 capital markets 61–2 creation 43 corporate finance 91 role in banking crises 42 corporate governance 93 window guidance (madoguchi shido) 286–7 cross-shareholdings 99 Bank of Tokyo 39 Heisei boom 177 banking United States of America 246 bad debt 36–7 Buddhism 54–5, 183–4 corporate finance 89–91 budget, national 307 corporate governance 92–3 building see construction industry crises 41–3 burakumin 55–7 cross-shareholdings 99–100 bureaucracy industry 43–6 amakudari 20–3 main bank system 288–91 shingikai 403 Nomura Securities 337–9 bushi (warriors) 392 Norin Chukin Bank 339–40 business ethics 57–9 postal savings 366–8 business negotiation, naniwa bushi 325 regulation 53 buyers as stakeholders 93 scandals 103 buying and selling 75 tan system 302 window guidance (madoguchi shido) 286–7 calculators 138 Banking Act of 1982 39–41 Canada bankruptcies 46–9 automotive industry investment 227 Index 485

business 227–8 civil code, contracts 88 Honda 228 civil engineering see construction industry Toyota 228 civil servants 20–3, 304–5 Canon 60–1 climate 168 capital cliques see habatsu liberalization 310 cohort recruitment 398 Toyota 255 Cold War 154, 364–5 capital markets 61–2, 157 Cole, R. 72–3 capitalism collective bargaining 141 dual structure theory 122–3 Commercial Code 73–4 Japanese version 53, 131–2 accounting 2, 3–4 Shibusawa, E. 401–3 corporate governance 92 career paths of salarymen 390–1 daihyoken 102 “carrot and stick” enforcement 5–6 common cause variation 107 cars see automotive industry communication, negotiations 326–9 cartels 62–5 companies, foreign 155–8 after-sales pricing (ato-gime) 8 compensation (remuneration) automotive industry 34 allowances and non-salary benefits 17–20 Fair Trade Commission 151 human relations management 181–2 see also dango compensation (restitution) 57–8 castes 392, 436, 472–3 competition 74–7 category killer retailers 116, 118–19 after-sales pricing (ato-gime) 7–8 celebrities in advertising 7 Akihabara electronic products 16 cell phones see mobile phones appraisal systems 28 Central Union of Agricultural Cooperatives deregulation 113–15 (Zenchu) 65–6 Fair Trade Commission 150–1 central wholesale markets 66–9 financial market liberalization 276–7 centralization, strategic 480 foreign companies in Japan 156–7 certification, ISO 9000 204–5 impact on lifetime employment 282–3 chain stores motorcycle industry 321–2 Daiei 101–2 pharmaceuticals industry 361–2 discounters 115–16 technology domain selection 152 Nakauchi, Isao 324 see also excessive competition Chamber of Commerce 215 computer industry 77–80, 325–6 chemical industry concrete ceilings, women in corporate Ajinomoto 15–16 environment 476 competition 75–6 conflict resolution, negotiations 326–7 Marubeni 293 consolidated financial statements 4 children 133–6 construction industry 80–3 China Construction, Ministry of 303–6 Buddhist influence 54 consumer credit 393–4 business 229 consumer movement 83–6 relations 473 consumption tax 86–7 Toyota 229 contract employees 87–8 see also Asia; contracts 88–9 Southeast Asia control associations (toseikai) 173, 199 Chubu region 199 control methods 259 Chugen 69–70 convenience stores (konbini) 268–70, citizenship, corporate 59 399–400 city banks 44–5, 70–2 convoy system 42, 47, 72, 276, 287, 307–8 486 Index

cooperatives human relations management 181 agricultural 9–10 influence of W.E.Deming 106–7 research 382–3 nemawashi 329–30 Very Large-Scale Integrated Circuit Re- ringi seido 388–9 search 469–70 decline, industrial 110 copyright 356–7 deference 397 Corporate Executives Association 211 deliberation councils (shingikai) 403–4 corporate finance 89–91 Deming Prize 204–5 corporate governance 92–4 Deming, W.E. 106–8 bank-centered system 53 democratization 24–5 main bank system 288–91 demographics takeovers 431–2 economic growth 130–1 Corporate Income Tax Law 2 foreign workers 158–9 corporate warriors (salarymen) 390–1 Dentsu 108 corporations, business ethics 57–9 department stores 109–10 Council for Science and Technology (CST) Ito-Yokado 399 395 Mitsukoshi 317–18 creative houses 94–6 retail industry 385–7 credit activities, agricultural cooperatives 9–10 depressed industries 110–13 Crew Resource Management (CRM) 14–15 deregulation 113–15 crime 414 agriculture 11 crises airline industry 12–13, 15 Asian economic 127–8 Asian economic crisis 127 banking 41–3, 44 banking 42 CRM see Crew Resource Management consumer movement 84 cross-shareholdings 96–100 financial markets 277–8 corporate finance 91 industrial policy 197 mochiai 318–19 Japanese economy 52–3 CST see Council for Science and Technology see also regulation culture, group 7 descent from heaven see amakudari currency appreciating yen 29–31 designs, patent system 358 customers, one-to-one marketing 343–4 developing countries 456 development DAC see Development Assistance Committee overseas 354–5 Daiei 101–2, 115 product 370–2 daihyoken 102 Development Assistance Committee (DAC) Daiichi Kangyo Bank (DKB) 102–3 154 daimyo 437, 438 Development Bank of Japan (DBJ) 216 Daiwa Bank 70 developmentalism 132 dango 103–5 differentials 18 DBJ see Development Bank of Japan dioxin pollution 144, 145 death from overwork (karoshi) 391 directors (daihyoken) 102 debt directors (torishimariyaku) 443–6 bad 36–7 discounters 115–16 bankruptcies 46–9 discrimination 56, 407 corporate finance 89–90 disputes 326–7 equity ratios 105–6 distribution 116–19 decentralization 480 automotive industry 33–4 decision making foodstuffs 66–9 bottom-up 50–1, 333 konbini 269 Index 487

Tsukiji market 459–61 Sony 415–16 division system, Matsushita Electric 297 Toshiba 446–7 DKB see Daiichi Kangyo Bank United States of America 246 Dodge, J.M. 119 elementary schools 134 Dokoh, T. 119–20 employees dollar shock (Nixon) 120–1 contract 87–8 domains, technology 152 corporate governance 93 Domei 412 nihonteki keiei 332–4 domestic market 129 office ladies (OL) 341–2 Dore, R. 121 outplacement 347–8 double-loop learning 345–6 see also employment; industrial relations; downsizing, white-collar workers 474 labor force Draft Law on Temporary Measures for Employers’ Associations Federation 218–21 Promotion of Specified Manufacturing employment Industries 310–11 airline industry 13 dual structure economy 47, 122–3, 432 Asian economic crisis 127–8 Dutch Learning 146, 161 dual structure theory 122–3 duty, giri 169–71 enterprise unions 139–42 foreign workers 158–60 e-commerce 124–7 general trading companies 166 Earth Summit 1992 408 internal labor markets 202–4 earthquakes 169 labor movement history 177–9 ecological issues see environmental and lifetime 280–3, 332 ecological issues Ministry of Labor 312–15 economic growth 51, 74–5, 128–31, 187–8 permanent employees 359 Economic Organizations, Federation 217–18 white-collar workers 474 economic reforms 363–5 women 341–2, 474–7 economics see also employees; industrial relations; labor growth 51, 74–5, 128–31, 187–8 force; unemployment ideology 131–2 engineers: Ono, T. 344 scale 129–30 enterprise groups 191–3 Edo culture 438–9 enterprise unions 139–42 see also Tokugawa period entrepreneurs 479–80 education 133–6 environmental and ecological issues 142–5 American occupation reforms 26 ISO 14000 205 overseas 350–1 Ministry of International Trade and Indus- women 475–6 try 311 EEOL see Equal Employment Opportunity Law Equal Employment Opportunity Law (EEOL) efficiency 476 industrial movement 188–90 equity financing, corporate finance 90–1 multinational enterprises 251–2 espionage 59, 167 production 462–3 ethics 57–9, 169–71 total productive maintenance 447–9 examinations 134–5 Electric Town see Akihabara excessive competition (kato kyoso) electrical products 16–17 concept 76 electronic games 335–6 industrial decline 111 electronics industry 136–9 motorcycle industry 322 Matsushita Electric Industrial Corporation exchange of knowledge, shukko 404–6 294–5 exchange rates Sharp 401 appreciating yen 29–31 488 Index

dollar (Nixon) shock 120–1 foreign trade, banking 45 experience curves, motorcycle industry 321–2 foreign workers 158–60 experimental design 431 Germany 231 Export-Import Bank of Japan 148–9 Nikkei jin 335 exports research and development 354–5 technology 147–8 franchises see also imports 7–11 Japan 399–400 automotive industry 33–4 failed banking institutions 41–2 FTC see Fair Trade Commission Fair Trade Commission (FTC) 150–1 Fuji Photo Film 160 family allowance 18–19 Fukuzawa, Y. 160–1 family separation (tanshin funin) 391 farmers 9–10, 26 gaku-batsu (university cliques) 176, 266 FDI see foreign direct investment games, Nintendo 335–6 Federation of Economic Organizations 217–18 GATT see General Agreement on Tariffs and Federation of Employers’ Associations 218–21 Trade feedback, appraisal systems 27, 29 genba-shugi (shop-floor approach) 162–5 fiefdoms 392 genchika see localization film, photographic 160 General Agreement on Tariffs and Trade FILP see Fiscal Investment and Loan Program (GATT) 454, 455 finance General Council of Trade Union (Sohyo) 411–13 companies 393–4 General Motors (GM) 330–1 corporate 89–91 general trading companies (sogo shosha) 165–8 market liberalization 276–80 Australia 226 tan system 302 ITOCHU 206–7 see also banking Mitsubishi 316–17 Finance, Ministry of 306–9 Mitsui 317 financial cliques (zaibatsu) 479–82 genkyoku (original bureaus) 309 financial keiretsu 190–1, 318 geography 168–9 financial reporting 3–4 Germany financial services business 229–32 Nomura Securities 337–9 foreign employees 231 Norin Chukin Bank 339–40 history 229–30 postal savings 366–8 labor laws 230–1 firm strategies for technology 151–3 middle managers 231 Fiscal Investment and Loan Program (FILP) gifts 69–70, 88 307, 366–8 giri 169–71, 184 floating exchange rate system, appreciating yen global management 250 30 globalization food Sony 415–16 Ajinomoto 15–16 strategic partnering 421 consumer movement 83, 85 GM see General Motors self-sufficiency 11, 12 goal setting 151–2 wholesale markets 66–9 goso sendan/goso sendan hoshiki see convoy system foreign aid 154–5 governance, corporate 92–4 foreign companies in Japan 155–8, 361 government foreign direct investment (FDI) 248, 351–3 bubble-related changes 53 American 463–5 see also civil servants; individual Ministries; appreciating yen 30 Liberal Democratic Party foreign relations, Meiji restoration 300–1 group culture Index 489

advertising 7 technology 145–7 habatsu 175–6 see also exports ie 183–6 Inamori, K. 186 group orientated capitalism 402 Income Doubling Plan 187–8, 274, 395 growth, economic 51, 74–5, 128–31 indirect taxation 86–7 guilds (za) 171–4 Industrial Bank of Japan (IBJ) 45 gundan (army units) 433 industrial efficiency movement (nouritsu undou) gyokai (trade associations) 460 188–90, 462–3 gyosei shido see administrative guidance industrial groups see keiretsu industrial policy 254 habatsu 175–6, 266 administrative guidance 5–6 Hatoyama, I. 273 cartels 62–5 Hayakawa, T. 176–7 industrial relations 139–42, 177–9, 220, 240 health care 10 Industrial Standards 247–8 Heisei boom 177 industrialization high yen see appreciating yen economic ideology 132 higher education 135 environmental and ecological issues 142–5 hirashain see permanent employees industries, depressed 110–12 Hitachi 238 industry Hokkaido Takushoku Bank 71, 72 airline 12–15 holidays 19–20 associations 199–202, 247 Honda 179–80 automotive 32–5, 449–53 Canada 228 banking 43–6 Italy 233 chemical 15–16, 293 motorcycle industry 320–3 computer 77–80 Honda, S. 180–1 construction 80–3 Hosonomics 127 dual structure theory 122–3 household units, ie 183–6 electronics 136–9, 294–5, 401, 415–16, 446–7 housewives 475 finance 302, 393–4 housing 19, 82–3 see also banking human relations management 181–2 food 15–16 human resource adjustments 347–8 manufacturing 351–4, 423 Meiji restoration 300 i-mode (Internet) 125 motorcycle 320–3 IBJ see Industrial Bank of Japan petrochemical 75–6 IBM 77, 79 pharmaceutical 15–16, 360–2 antitrust investigations 409 policy 193–7 software cloning 408 primary regions 197–9 strategic partnering 421 research and development 396 ideology retail 16–17, 385–8, 427–8, 441–3 anti-war 472 scale economics 129–30 economic 131–2 seafood 459–61 middle-class housewife 475 small and medium-sized enterprises 406–7 ie 183–6 software 408–11 Ikeda, H. 186, 187, 274 steel 64–5 ILMs see internal labor markets subcontracting 422–5 image, advertising 6 telecommunications 433–6 immigration 159 textile 457 imports transport 478 490 Index

venture capital 466–9 business 232–4 inflation 365 Honda 233 information exchange 327–8 Japan External Trade Organization 232 information gathering Sony 233 bottom-up decision making 50 Ito, D. 122 general trading companies (sogo shosha) 167–8 Ito-Yokado 206, 399 information sharing 469 ITOCHU 206–7 information technology 124–7 Iwasaki, Y. 207–8 inheritance customs 184 Iwato boom 177 initial public offering (IPO) 467–8 Izanagi boom 177, 208–9 innovation 153, 296–7 intangible assets 2 JAFCO see Japan Associated Finance Company intellectual property 58–9, 361 JAL see Japan Airlines intermediate wholesalers (nakaoroshi gyosha) 460 JAMA see Japan Automobile Manufacturers internal labor markets (ILMs) 202–4 Association internal supply chains (kigyouai sapurai chien) Japan Air System (JAS) 12–14 430 Japan Airlines (JAL) 12–14, 210–11 International Organization for Standardization Japan Associated Finance Company (JAFCO) (ISO) 204–5 466–7 international trade Japan Automobile Manufacturers Association barriers 453–6 (JAMA) 212–14 negotiations 456–9 Japan Bank for International Cooperation International Trade and Industry, Ministry of (JBIC) 149 309–12 Japan Chamber of Commerce (JCCI) 215 internationalization 399 Japan Development Bank (JDB) 215–17 Internet Japan Electronic Computer Company (JECC) e-commerce 124–7 77–8 NEC 325–6 Japan External Trade Organization (JETRO) slow uptake 435–6 157, 217, 232 inventories 2, 259 Saudi Arabia 242 see also kanban United Kingdom 243 investment United States of America 245 accounting 2–3 Japan Fair Trade Commission (JFTC) 63–5 American 463–5 Japan, Inc. 221–2 appreciating yen 31 Japan Productivity Center for Socio-Economic Canadian automotive industry 227 Development JPC-SED) 223 economic growth 129–30 Japan Socialist Party (JSP) 411–12 patterns 248–50 Japan Software Company 409 shareholder weakness 400–1 Japan Standards Association (JSA) 416–17 United Kingdom 243–4 Japanese Confederation of Labour (Domei) 412 venture capital industry 466–9 Japanese Industrial Standards (JIS) 247–8, World War II 248–9 416–18, 455 IPO see initial public offering Japanese management system, banto 49–50 ippanshoku (general clerical track) 476 Japanese-style management see nihonteki keiei Iran 242–3 Japanese Trade Union Confederation see Rengo iron triangle 440 Japanization, British industry 244 Ishikawa, K. 204 JAS see Japan Air System ISO see International Organization for JBIC see Japan Bank for International Standardi-zation Cooperation Italy JDB see Japan Development Bank Index 491

JECC see Japan Electronic Computer Company karoshi (death from overwork) 265, 391 JETRO see Japan External Trade Organization kato kyoso see excessive competition JFTC see Japan Fair Trade Commission Keidanren 220–1 jidoka (self-regulation) 451 Keio University 266 jigyosha dantai see trade associations keiretsu (industrial groups) 190–3, 318, 427, 429 Jiminto see Liberal Democratic Party kibo kakaku (suggested retail price) 368–9 JIS see Japanese Industrial Standards kigyouai sapurai chien (internal supply chains) 430 jishu kanri (autonomous control) 426 kinship 184, 185 JIT see just-in-time approach Kirin Brewery 266–7 Jiyu Minshu To see Liberal Democratic Party Kishi, N. 273–4 Johnson, C. 132, 254 kizuki system 14 joint stock corporation (kabushiki kaisha) knowledge 107 255–6, 263 Kobe earthquake 124 joint ventures 256–7 Koike, K. 267 Latin America 237 Komiya, R. 268 Taiwan 234 konbini 268–70 Toyota 256 Korea 234–7 United States of America 246 Korean War 365 JSA see Japan Standards Association Kyocera 270 JSP see Japan Socialist Party kyosei 60–1 juku 135 Juran, J.M. 257 Labor, Ministry of 312–15 just-in-time (JIT) approach 257–9 labor force 314 7–11 Japan 269 contract employees 87–8 Australia 226 dual structure theory 122–3 kaizen 258 economic growth 130–1 kanban 261 foreign workers 158–60 multinational enterprises 251–2 mobility 391 operational efficiency 251–2 white-collar workers 474 quality management 258 women 474–7 Toyota production system 258 see also employees; employment; industrial see also supply chain management rela-tions labor laws, Germany 230–1 kabushiki kaisha 255–6, 263 labor markets kaizen 260–1 seniority promotion 397–9 airline industry 14 takeovers 431–2 Australia 226 labor movement 177–9 just-in-time approach 258 labor negotiations 219–20 multinational enterprises 252–3 labor reforms 364 quality management 377–8 ladies, office 341 Southeast Asia 240 land reform TPS 453 agricultural cooperatives 9 kanban 258, 261 agricultural policy 10–11 Kanebo Company 425–6 American occupation 26 Kansai culture 261–3 post-Second World War recovery 364 Kansai region 198–9 Large Retail Store Law 109–10, 271–3 kansayaku 263–4 Latin America 237 Kanto 262 laws Kao 264 accounting 2, 3–4 492 Index

agriculture 9, 11–12 corporate finance 89–90 Banking Act of 1982 39–41 cross-shareholdings 99 bankruptcy 48–9 financial keiretsu 192 Commercial Code 73–4 management environmental protection 142–3, 144–5 airline industry 13–15 Equal Employment Opportunity Law appraisal systems 26–9 (1986) 476 automotive industry 32 investment 466 banto 49–50 New Bank of Japan 38–9 convenience stores 399 retail 406 Deming, W.E. 106–8 trade 395 Korea 235–6 see also individual laws naniwa bushi 325 LCA see life-cycle assessment nihonteki keiei 332–5 LDP see Liberal Democratic Party openness 420 leadership 440 quality 375–9 lean production 450–3 sacred treasures 397 learning, organizational 344–7 Southeast Asia 240–1 leaves of absence 20 supply chain 429–30, 452–3 see also holidays Taiwan 235–6 leverage, debt/equity ratios 105–6 three pillars 332–3 Liberal Democratic Party (LDP) 218, 219, Ueno, Y. 462–3 273–6 women 476–7 leaders 273–5 manufacturing Tanaka 433 automotive industry 32–5 liberalization overseas production 351–4 consumer movement 83, 84–5 subcontracting 423 financial markets 276–80 market debt instruments see bonds trade and capital 310 Market-Orientated Sector-Specific (MOSS) life-cycle assessment (LCA) 145 talks 458 lifetime employment (shushin koyo) 249, 280–3 market-oriented adjustments 111, 112 nihonteki keiei 332 marketing 291–2 United States 246 one-to-one 343–4 white-collar workers 474 marketing information system (MIS) 264 limited liability corporations see yugen gaisha markets loan sharks (sarakin) 393–4 capital 61–2 loans central wholesale 66–9 bad debt 36–7 domestic 129 corporate finance 89 internal labor 202–4 lobbying 200, 201–2 Marubeni 292–3 localization 283–5 maruyu 293–4 Long-Term Credit Bank of Japan (LTCB) mass media see media 285 Matsushita long-term credit banks 45 Mexico 238 LTC B see Long-Term Credit Bank of Japan televisions 227 Matsushita Electric Industrial Corporation MacArthur, Douglas 24–5 (MEI) 294–5 madogiwa zoku 286 Matsushita, K. 295–8 madoguchi shido (window guidance) 286–7 media mafia (yakuza) 393 advertising 7 main bank system 288–91 creative houses 94–5 Index 493

Dentsu 108 United Kingdom 244 Nihon Keizai Shimbun 331 United States of America 246 meetings, industry and trade associations 200 Mitsui 317 MEI see Matsushita Electric Industrial Australia 226 Corporation Bussan 226 Meiji restoration 194, 298–301 Minomura, R. 315–16 MEMA see Motor and Equipment United Kingdom 244 Manufacturers Association Mitsukoshi 317–18 merchandising strategies 428 Mizuho Financial Group 70 MERCOSUR see Southern Common Market MNEs see multinational enterprises mercury poisoning 57, 142 mobile phones 435–6 mergers 220–1 MOC see Ministry of Construction Mexico 238 mochiai 318–19 see also Latin America modernization, Income Doubling Plan 187 Middle East 241–3 MOF see Ministry of Finance middle managers, Germany 231 mofutan 301–3 militant nationalism 471 MOL see Ministry of Labor mimaikin (sympathy payment) 57 monetary policy mimic strategies 152 Bank of Japan 37–8 Minamata pollution case 57, 142 bubble economy 52 minimum wage policy 313–14 monopolies Ministry of Agriculture, Forestry and Fisheries American occupation 63 (MAFF) 67 NTT 433, 434–5 Ministry of Construction (MOC) 303–6 Sumimoto Corporation 426–7 Ministry of Education (MOE) 133–4 morality giri 169–71 Ministry of Finance (MOF) 306–9 Morita, A. 319–20 administrative guidance 5, 6 Morita, Y. 320 bad debt 37 MOSS see Market-Orientated Sector-Specific Bank of Japan 38–9, 43 talks Banking Act of 1982 39–41 motivation, Deming, W.E. 107–8 city banks 71–2 Motor and Equipment Manufacturers history 255 Association (MEMA) 214 mofutan 301–3 motorcycle industry 320–3 multinational enterprises 253 Honda Motor 179–80 Ministry of International Trade and Industry see also automotive industry (MITI) 309–12 multinational enterprises (MNEs) 250–4 cartels 63–4 features 252–3 depressed industries 111–12 profitability 252–3 industrial policy 194–5 multinationalization 283–5 Japan External Trade Organization 217 mutual aid services 10 Japan, Inc. 221 mutual (sogo) banks 45 multinational enterprises 252 Ministry of Labor (MOL) 219, 312–15 Nagoya 199 Minomura, R. 315–16 nakama see trade associations MIS see marketing information system nakaoroshi gyosha (intermediate wholesalers) MITI see Ministry of International Trade and 460 Industry Nakauchi, Isao 324 Mitsubishi 316–17 naniwa bushi 325 origins 207–8 naniwa melodies see naniwa bushi Shoji, Australia 225, 226 NASDAQ Japan 468 494 Index

National Income Doubling Plan see Income one-to-one marketing 343–4 Doubling Plan Ono, T. 257, 344 National Railways 222–3 operating systems (OS) 408–10 National Research Institutes 394 operational efficiency 251–2 National Tax Agency 394 oral administrative guidance 5 NEC 246, 325–6 organizations negotiations 325, 326–9 bottom-up decision making 50–1 nemawashi 276, 329–30 Deming, W.E. 106–7 nenko joretsu (seniority promotion) 280, 397–9 habatsu 175–6 neoclassical economic growth 129, 131 hierarchical 480 New Bank of Japan Law 38–9 learning 344–7 New United Motor Manufacturing partnership 469–70 Incorporated (NUMMI) 330–1, 450, 453 quality management 378–9 newspapers, Nihon Keizai Shimbun 331 ringi seido 388–9 Nihon Keizai Shimbun 331 seniority promotion 397–9 Nihon Rodo Kumiai Sorengokai see Rengo Shibusawa E. 401–3 nihonteki keiei 332–5 shukko 404–6 Nikkei see Nihon Keizai Shimbun sokaiya 419–20 Nikkei jin 335 suggestions 425–6 Nintendo 335–6 torishimariyakukai 443–6 Nippon Telegraph and Telephone (NTT) TPM 447–9 336–7, 433–6 white-collar workers 474 Nissan 244, 246, 337 zaibatsu 479–82 Nixon shock see dollar shock zaikai 402 nobility 473 organized crime (yakuza) 414 nokyo see agricultural cooperatives OS see operating systems Nomura Securities 337–9 Osaka 198–9, 262–3 non-performing loans see bad debt outplacement 347–8 non-salary compensation 17–20 overseas non-tariff barriers 454–6 development 354–5 Nonaka, Ikujiro 339 education 350–1 Norin Chukin Bank 339–40 motorcycle manufacturing plants 322–3 nouritsu undou see industrial efficiency movement production 249, 322–3, 351–4 NTT see Nippon Telegraph and Telephone research 354–5 NUMMI see New United Motor Manufactur- small and medium-sized enterprises ing Incorporated 348–50

obligation, giri 169–71 part-time workers 88 Occupation of Japan see American occupation see also employees ochugen (gifts) 69–70 partnerships, strategic 421–2, 453 ODA see official development assistance Patent Office 394 office ladies (OL) 341–2 patents 356–9, 357–8 official development assistance (ODA) 154–5 peer groups 27 Ohmae, K. 342–3 pensions 3 oil 31, 196 performance appraisal see appraisal systems see also petrochemical industry peripheral employees 280, 281 OJT see on-the-job-training permanent employees (hirashain or sieshain) 359 OL see office ladies see also salarymen on-the-job-training (OJT) 267 petrochemical industry after-sales pricing (atogime) 8 Index 495

Arabian Oil 31 promissory notes 372–3 competition 75–6 promotion pharmaceutical industry 360–2 nihonteki keiei 332–3 Ajinomoto 15–16 seniority 397–9 plans, economic 187–8 protectionism 77 plant species, patent system 358 pull system 261 platform teams 450 purging, post-war 471–2 poka-yoke (mistake-proofing) 451 policy quality control circles (QC circles) 374–5 agricultural 10–12 quality management 375–9 aid 155 Deming, W.E. 106–7 banking 43–6 genba-shugi 164 industrial 5–6, 62–5, 130, 193–7 Industrial Standards 247 minimum wage 313–14 Ishikawa, K. 204 monetary 37–8, 52 Juran 257 science and technology 394–7 just-in-time approach 258 political governance, bubble-related changes 53 Southeast Asia 240 politicians, Tanaka 432–3 see also kaizen politics, depressed industries 111–13 pollution R & D see research and development business ethics 57 radio 136, 137 environmental and ecological issues railways 16–17 142–5 ratios, debt/equity 105–6 population 168, 169 recessions 127–8 positive listing 454 recruitment 181 post-Second World War recovery 363–6 recycling 143, 145 postal savings 216, 366–8 reforms power structures 21 American occupation 25–6 prefabricated housing 82–3 Big Bang 279 presidents’ clubs 190–1 economic 363–5 pressure groups 83–6 education 26, 133–4 price 368–9 labor, post-Second World War recovery after-sales (ato-gime) 7–9, 368 364 competition 75, 152 land 9, 10–11, 26, 364 pharmaceuticals industry 361 postwar 472 retail price maintenance (saihanbai kakaku iji tax 86 koi) 369 regional banks 45 suggested retail (kibo kakaku) 368–9 regular employees see permanent employees price-fixing (dango) 103–5 regulation Prince Shotoku’s Seventeen-Article administrative guidance 4–6 Constitution 369–70 banking 42, 53, 302–3 privatization, NTT 433, 435 e-commerce 125 privileged elite 473 trade associations 201 product development 370–2 see also deregulation production regulations control methods 259 accounting 2–4 efficiency 447–9, 462 environmental 144–5 genba-shugi (shop-floor approach) 162–5 wholesale markets 67–8 overseas 351–4 relationship contracting 422 profitability 252–3 relationships 183–6, 327 496 Index religion salarymen 286, 390–1 Buddhism 54–5 samurai 390, 391–3, 438 ie 183–4 sankin kotai 438 Shintoism 54–5 Sanwa Bank 70–1 Rengo (Nihon Rodo Kumiai Sorengokai) 220, sarakin 393–4 380–2 Sato, E. 274 reparations, war 154 Saudi Arabia reporting, financial 3–4 business 242 research cooperatives 382–3 JETRO 242 research and development (R & D) 396 unemployment 242 computer industry 78 savings construction industry 81 banking industry 45–6 overseas 354–5 maruyu 293–4 pharmaceuticals industry 361–2 postal 366–8 product development processes 370–2 SBICs see Small Business Investment reserves, accounting 3 Companies responsibility scale economics 129–30 business ethics 57–8 scandals decision making 51 banking 103 restructuring (risutora) 383–5 business ethics 57, 58 retail industry 385–8 dango 104 7–11 Japan 399–400 SCAP (Supreme Commander of the Allied Akihabara 16–17 Powers) 24–6 Chugen season 69 labor laws 179 Daiei 101–2 labor legislation 141 department stores 109–10 purges 471–2 discounters 115–16 schools 134–5 konbini 268–70 science and technology policy 394–7 Large Retail Store Law 109–10, 271–3 scientific management 462 Mitsukoshi 317–18 SCM see supply chain management prices 368–9 seafood industry 459–61 superstores 427–8 Second Provincial Commission on tonya 441–3 Administrative Reform (Rincho) 114 retirement, amakudari 20–3 secondary schools 134–5 rice 11 securities Rincho (Second Provincial Commission on accounting 2 Administrative Reform) 114 Nomura Securities 337–9 ringi-seido (ringi-sho) 50, 388–9 Securities and Exchange Law 2, 3–4 risk, debt/equity ratios 105–6 securitization 40 risk-avoidance, appraisal systems 28 seisaku toshika (strategic investors) 400 risutora see restructuring seishain see permanent employees rules see regulations Self Defense Force 472 ruling caste 392 self-regulation 201, 451 selling see buying and selling sacred treasures 397, 436 semiconductors saihanbai kakaku iji koi (retail price maintenance) computer industry 78 369 electronics industry 137, 138 sakoku-rei 438 patent system 358 Sakura Bank 70 seniority promotion (nenko joretsu) 280, 397–9 salaries see compensation; wages serial equity 398 Index 497 serinin (auctioneers) 460 sogo shosha see general trading companies service sector investment, UK 244–5 sogoshoku (management track) 476 Seventeen-Article Constitution, Prince Sohyo 411–13 Shotoku’s 369–70 sokaiya 413–14, 420, 444 shareholder weakness 400–1 Sony 415–16 shareholders Italy 233 governance 97 Mexico 238 influence 443–5 origins 319–20 meetings 92 United Kingdom 244 sokaiya 413–14, 444 sougou suupaa 427–8 stable 400 Southeast Asia trusteeship 443 business 238–41 shares Japanese management styles 240–1 cross-shareholdings 96–100 kaizen 240 equity financing 90–1 labor relations 240 Sharp 176–7, 401 management styles 240–1 Sherman Anti-trust Act 62 quality control 240 Shibusawa, E. 401–3 Toyota 240–1 shingikai 403–4 post World War II recovery 239 Shingo, S. 259, 404 Southern Common Market (MERCOSUR) shinjinrui 265 237 Shinohara, M. 122 special cause variation 107 shinpan (sales finance corporations) 393–4 Spring labor negotiations 219–20 Shintoism 54–5 stable shareholders 400 shipping 207–8 stakeholders, governance 92–3, 97 shitauke (subcontracting system) 422–5 standards shoguns, Tokugawa period 436–9 accounting 1–3 shop-floor approach see genba-shugi industry associations 247 shopping centres 387 ISO issues 204–5 see also retail industry setting 416–19 short-term lending institutions 44–5 technical 152 Shotoku’s Seventeen-Article Constitution, trade associations 247 Prince 369–70 statistics, unemployment 463 shukko 384, 404–6 steel 64–5, 147–8 shushin koyo see lifetime employment stock exchanges 61 Sigma Project 410 stock market 97 single-loop learning 345–6 stockholders’ general assembly 413–14, 419–20 SM see supermarkets stocks, Nomura Securities 337–9 Small Business Investment Companies (SBICs) stores see retail industry 466 strategic centralization 480 small and medium-sized enterprises (SMEs) strategic management, airline industry 13 127–8, 348–50, 406–7 strategic partnering 421–2 social contributions, business ethics 59 strategies, technology development 151–3 social marketing 407–8 stratification of society 55–6 social reform, Shibusawa, E. 401–3 strikes 179 societal stratification 55–6 subcontracting system 422–5 Socio-Economic Development Productivity sudden death syndrome see karoshi Center 223 suggested retail price (kibo kakaku) 368–9 software 78–9, 408–11 suggestion systems 425–6 sogo (mutual) banks 45 suicide 49 498 Index

Sumimoto Corporation 426–7 Nippon Telegraph and Telephone Sumitomo Bank 71 Corporation 336–7 supermarkets (SM) televisions Daiei 101–2 electronics industry 136, 137–8 discounters 115 Matsushita 227 Ito-Yokado 206 temporary workers 88, 127, 128 see also kanban see also employees superstores 427–8 tertiary wholesalers (tonya) 117–18 suppliers textile industry 457 automotive industry 32–3 Textile Wrangle 457 stakeholders 93 “thirty day due” payment arrangements 118 subcontracting 422–5 three fundamental labor laws 313 tiered 452 three pillars (sacred treasures) 332–3, 397–9, supply chain management (SCM) 429–30, 436 452–3 see also enterprise unions; lifetime supply and demand 7–8 employment; seniority promotion Supreme Commander of the Allied Powers see tiered suppliers 452 SCAP Tokai Bank 71 surveys, Ministry of Labor 313 Tokuanho see depressed industries suupaa (superstores) 427–8 Tokugawa Bakufu collapse 402 sympathy payment see mimaikin Tokugawa Ieyasu 436, 438 Tokugawa period 226, 390, 391–3, 436–9 tacit knowledge 346 ending 298–9 Taguchi, G. 431 ie 184, 185 Taiwan Osaka 262 business 234–7 policy 394 joint ventures 234 stratification system 55–6 management features 235–6 trade associations (nakama) 171, 172–3 takeovers 431–2 tokushu kabunushi 413 tan system 301–3 Tokyo 198 Tanaka, K. 274–5, 432–3 Tokyo, Bank of 39 tangible assets 2 Tokyo-Mitsubishi Bank 39, 70 tanshin funin (family separation) 391 Tokyo Stock Exchange 61 tariffs, international trade 453–6, 457–8 Tokyo University 439–40 tax, consumption 86–7 Tokyo-Yokohama industrial region 197–8 tax evasion, sarakin 394 tonya (tertiary wholesalers) 117–18, 441–3 taxation, accounting 3 torishimariyakukai 263–4, 266, 443–6 Taylorism 188–90 toseikai (control associations) 173 teams, genba-shugi (shop-floor approach) 162–5 Toshiba 421, 446–7 technology total productive maintenance (TPM) 447–9 acquisition 394–7 total quality management, ISO 9000 204–5 airline industry 14–15 Toyota 330–1, 449–50 export and import 145–8 Australia 225 firm strategies 151–3 Canada 228 see also science and technology policy capital 255 telecommunications 433–6 China 229 deregulation 114 joint ventures 256 e-commerce 124–7 just-in-time system 257–9 electronics industry 136–9 Southeast Asia 240–1 supply chain management 429 Index 499

United Kingdom 244 history of labor movement 177–9 United States of America 246 nihonteki keiei 333 Toyota production system (TPS) 450–3 Sohyo 411–13 Toys R Us 118–19 United Arab Emirates 242 TPM see total productive maintenance United Kingdom (UK) TPS see Toyota production system business 243–5 trade future 245 developing countries 456 geographical comparison 168–9 general trading companies (sogo shosha) 165–8 investment 243–4 international 453–9 Japan External Trade Organization 243 liberalization 310 Japanization of industry 244 negotiations 456–9 Mitsubishi 244 see also exports; imports Mitsui 244 trade associations Nissan 244 gyokai 460 service sector investment 244–5 jigyosha dantai 199–202 Sony 244 nakama 171–3 Toyota 244 standards 247 United States of America (US) trade barriers 82, 225, 453–6 anti-trust legislation 62–3 trade names 359 business 245–7 Trade Organizations see Japan External Trade construction industry competition 82 Organization investment in Japan 463–5 Trade Union Confederation see Rengo Japanese automotive industry 33–5 trade unions 26, 411–13 Japanese education reform 133 see also enterprise unions; industrial Motor and Equipment Manufacturers relations; labor movement; unions Association 214 trademarks 358–9 Occupation of Japan 23–6 training 181 trade friction 305–6, 311–12 transfers (shukko) 404–6 see also American occupation transistors 137 university cliques (gaku-batsu) 176 transnational standards 418–19 UNIX-based systems 408, 410 transport industry Yamato 478 US see United States of America transportation allowance 19 utility models, patent system 358 TRON project 408, 410 Tsukiji market 459–61 vacations see holidays Tsukuba Science City 395 value-added tax see consumption tax VC see venture capital industry Ueno, Y. 462–3 VCRs see videocassette recorders UK see United Kingdom vendors, subcontracting 423–4 unemployment 463 venture capital (VC) industry 466–9 Ministry of Labor 314–15 VER see voluntary export restraint Saudi Arabia 242 Very Large-Scale Integrated Circuit (VLSI) see also employment Research Cooperative 469–70 unfair trade policies 459 video games, Nintendo 335–6 unification, Rengo 380–1 videocassette recorders (VCRs) 297 unions VLSI see Very Large-Scale Integrated Circuit enterprise 139–42 Research Cooperative 500 Index

volcanoes 169 see also American occupation voluntary export restraint (VER) 34, 302 written administrative guidance 5

wages yakuza (organized crime) 393, 414 appraisal systems 27–8 Yamaha 320, 322 Asian economic crisis 128 Yamaichi Crisis (1964) 98 enterprise unions 140 Yamato Transportation 478 Ministry of Labor 313–14 yen nihonteki keiei 332–3 appreciating 29–31 see also compensation (remuneration) dollar (Nixon) shock 120 war crime punishments 25, 471, 472 impact on lifetime employment 282 warrior caste (samurai) 391–3 yobiko 135 wartime legacy 471–4 Yokohama 198 waste 452 yokowamkyoku (inter-industry bureaus) 309, 310 Western civilization 299, 300 Yoshida, S. 273–4 Western technology 145–7 yugen gaisha 263 white-collar workers 474 see also salarymen za see guilds wholesale markets 66–9, 459–61 zaibatsu 479–82 wholesalers 117–18, 441–3 American occupation reforms 25–6 window guidance (madoguchi shido) 286–7 cross-shareholdings 98 women Matsushita ruling 297 employment 128, 313 reincarnations as financial keiretsu 190, 192 Internet usage 126 Sumitomo 427 office ladies 341–2 zaikai 402 roles 474–7 Zenchu see Central Union of Agricultural small and medium-sized enterprises 407 Cooperatives workgroups 286 Zero Quality Control (ZQC) 404 World War II 239, 248 ZQC see Zero Quality Control