A HISTORY OF JAPAN'S GOVERNMENT-BUSINESS RELATIONSHIP The Passenger Car Industry CENTER FOR JAPANESE STUDIES THE UNIVERSITY OF MICHIGAN MICHIGAN PAPERS IN JAPANESE STUDIES No. 20 A HISTORY OF JAPAN'S GOVERNMENT-BUSINESS RELATIONSHIP The Passenger Car Industry by PHYLLIS A. GENTHER Ann Arbor Center for Japanese Studies The University of Michigan 1990 Open access edition funded by the National Endowment for the Humanities/ Andrew W. Mellon Foundation Humanities Open Book Program. © 1990 Center for Japanese Studies The University of Michigan 108 Lane Hall Ann Arbor, MI 48109-1290 Library of Congress Cataloging-in-Publication Data Genther, Phyllis Ann. A history of Japan's government-business relationship: the passenger car industry / by Phyllis A. Genther. p. x, 242. cm. 23 — (Michigan Papers in Japanese Studies : no 20) Thesis (doctoral)—George Washington University. Includes bibliographical references. ISBN 0-939512-40-8 1. Automobile Industry and trade—Government policy—Japan—History. I. Title. II. Series. HD9710.J32G46 1990 338.4'76292'0952-dc20 89-77218 CIP Index: AEIOU, Inc. oo Printed in the United States ISBN 978-0-939512-40-9 (paper) ISBN 978-0-472-12807-5 (ebook) ISBN 978-0-472-90207-1 (open access) The text of this book is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License: https://creativecommons.org/licenses/by-nc-nd/4.0/ CONTENTS PREFACE ix CHAPTER 1: GOVERNMENT-BUSINESS RELATIONSHIPS IN GLOBAL COMPETITION 1 The Automobile Industry 2 Perspectives on Government-Business Relationships 5 The Domestic Perspective 6 The Japan Perspective 7 Conclusion 11 CHAPTER 2: THE INDUSTRY'S EARLY YEARS 15 Origins 15 The Meiji Era 15 The Early Entrepreneurs 17 The Military Subsidy Program 18 The Arrival of Ford and General Motors 22 Impact of the Early Era 23 Government Intervention 24 Economic and Political Context 24 The "Isuzu" Standardized Car 25 The Emergence of Toyota and Nissan 28 The Automobile Manufacturing Law 30 Summary 33 Wartime Controls 33 Conclusion 38 CHAPTER 3: TURMOIL AND RECONSTRUCTION 43 Postwar Situation 43 The Automobile Industry's Status 44 Early Reorganization 44 SCAP Automobile Policy 48 VI Early Government Support 52 MCFs Five-Year Plan 52 The Reconstruction Finance Bank 55 Hard Times 56 The Dodge Line 56 The Toyota Reorganization 57 The Korean War Boom 59 Conclusion 63 CHAPTER 4: A CONSENSUS FORMED 69 Introduction 69 Three Challenges 70 Domestic Opposition 70 The Import Problem 73 Foreign Capital 79 Policy Actions To Support Passenger Car Development 83 Protective Measures 84 Developmental Measures 87 Conclusion 90 CHAPTER 5: CONSOLIDATION AND EXPANSION 99 Introduction 99 Creating Domestic Demand 100 The People's Car Project 100 Other Public Policies 105 Automotive Parts Indust^ Promotion 108 The Industry's Early Development 108 Technology Tieups 109 Operation Roll-Up 111 Machinery Promotion Act 112 Parts Company Mergers 115 Conclusion 116 CHAPTER 6: INTERNATIONALIZATION 123 Introduction 123 Arrangements for Liberalization 123 Reorganization Plans 130 The Selection 133 The Three Group Concept 135 Vll Industry Reaction 140 Special Measures Law for the Promotion of Designated Industries 142 Preparation for Capital Liberalization 145 The Merger Movement 147 The U.S.-Japan Negotiations 152 Conclusion 155 CHAPTER 7: COMPETITIVENESS ACHIEVED 165 The Final Transition 165 Foreign Capital Tieups 165 The Mazda Bailout 169 Emission Control 171 The Export Takeoff 177 Export Promotion 178 Export Tension 181 Development of the Automobile Issue 182 The Voluntary Export Restraint Agreement 186 Impact of the Restraints 190 Conclusion 191 CHAPTER 8: CONCLUSION 201 The Factors 202 Cultural and Historical Lessons 202 Administrative Rules 204 Competitiveness 206 Economic Importance 207 Summary 209 Competitive Implications 210 Policy Implications 212 Conclusion 215 BIBLIOGRAPHY 217 INDEX 233 PREFACE Interdependence between the United States and Japan increases daily and with it concern over the relative economic role of each country during the 1990s. As a result, the two countries will remain high on each other's corporate and public policy agendas for the foreseeable future. Concern increasingly is being expressed differently than in the past as the United States and Japan reach a new stage in their trade relationship. American domination of the relationship has ended, and overt Japanese tariff and nontariff barriers have been largely eliminated. The outstanding issues now revolve around deeper structural and cultural issues, including how industrial policies and government-business relationships affect global competitiveness and flexibility. At the beginning of the 1980s, it was the U.S.-Japan automobile crisis that presaged the new stage of bilateral trade relations by bringing the issue of industrial policy, and with it that of government-business relationships, to the forefront of the trade debate. Despite the economic and political importance of the U.S.- Japan relationship and the extensive attention paid to automotive trade, few American scholars or policy makers are familiar with the history of Japanese government-business relations, either generally or for specific industries such as passenger cars. This book hopefully helps in a small way to fill that gap in our knowledge and, thus, to help strengthen the foundation from which we make public policy decisions about bilateral trade. The few existing English-language books about the Japanese automobile industry contain little discussion of government-business relations. Japanese-language books contain even less. Michael Cusumano's book, The Japanese Automobile Industry, focuses primarily on the development of corporate strategies and tech- nology. It is valuable in helping us understand how business posi- tioned itself but tells us little about the formation of public policy. While C.S. Chang's study, The Japanese Auto Industry and the U.S. Market, briefly discusses certain policy actions, it contains no framework of how Japan arrived at decisions. In addition, it does not cover the important events of the American Occupation. Other IX books such as William Duncan's U.S.-Japan Automobile Diplomacy and David Halberstarn's The Reckoning provide useful information on particular aspects of the industry's history. This book represents with some minor modifications my doctoral dissertation. I particularly acknowledge the support and guidance of Eleanor M. Hadley, to whom I owe the great majority of my knowledge about the Japanese economy. I am indebted to my other professors at George Washington University, especially Gaston Sigur and Benjamin Nimer, who helped oversee my disser- tation. I also thank Takafusa Nakamura for sponsoring my study at the University of Tokyo and for allowing me to be part of his graduate seminar. In addition, I am grateful for the support received from my friends and former colleagues at the Japan Economic Institute who generously allowed me the time necessary to pursue my doctorate and later provided needed workspace to write the original disserta- tion after I returned from Japan. I also appreciate the generosity of many people in Japan who made my research possible: the Matsumoto and Takasaki families who allowed me to share their homes, Yoshio Nakamura and others at Keidanren, Kazuko Maekawa, Kyoko Nakamura, and Hiroshi Ando. Many individuals in the Japanese government, automobile industry, and academia willingly shared their time and knowledge with me. My dissertation also could not have been completed without the support provided by a Fulbright Fellowship that funded my research in Japan. I am especially proud to have received one of the first two grants funded by the GARIOA/Fulbright Alumni Associa- tion of Japan. The Association for Asian Studies aided by providing a travel grant for research in Michigan. CHAPTER 1 GOVERNMENT-BUSINESS RELATIONSHIPS IN GLOBAL COMPETITION During the 1980s, American policy makers repeatedly raised the issue of the Japanese government-business relationship as part of the industrial policy debate. Some portrayed the relationship as more effective than that of the United States and stressed the Japanese government's ability to intervene in, and restructure, the economy. At the same time, other policy makers continued staunchly to defend the separation of government and business as the essential ingredient of a strong market economy. They claimed that Japanese industrial policies with their special government- business relationship have been ineffective at best and counterproductive at worst. These opposing perceptions were used to help to justify both interventionist and free trade policies in the United States. By doing so, a debate arose over whether or not certain government-business relationships can provide advantages in global competition by making public policies more effective and business more competitive. This book examines the debate by investigating interactions between the Japanese government and the Japanese automobile industry from the industry's origins to the implementation of volun- tary restraints on automobile exports to the United States in 1981. It starts with the premise that government-business relation- ships exist and are far more complex than usually depicted by those who attempt to use them either to justify or to counter government intervention. It defines the relationships as institutional structures within which states and private companies interact and work together, or fail to work together, to formulate and implement commercial