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

Routledge is an imprint of the Taylor & Francis Group

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

“To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk”

©selection and editorial matter Allan Bird 2002;

©the entries Routledge 2002

All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

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


′.0952–dc21 2001019952

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

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


List of contributors



How to use this book

Thematic entry list






Entries A-Z





Editorial team

Volume editor

Allan Bird

University of Missouri, St. Louis

Consultant editors

Nigel Campbell

University of Manchester

Mitsuyo Hanada

Keio University

Stephen Nicholas

University of Melbourne

Thomas Roehl

Western Washington University

Shane J.Schvaneveldt

Weber State University

Joop Stam

Erasmus University

Mark Tilton

Purdue University

Mitsuru Wakabayashi

Nagoya University

Eleanor D.Westney

Massachusetts Institute of Technology

Hideki Yoshihara

Kobe University

James C.Abegglen

Asia Advisory Service KK

Tetsuo Abo

Teikyo University

Raj Aggarwal

Kent State University

Nathaniel O.Agola

Nagoya University

List of contributors

Christine L.Ahmadjian

Columbia University

Jennifer Amyx

Research School of Pacific and Asian Studies,

Australian National University

Marie Anchordoguy

University of Washington

viii Contributors

Fumie Ando

Nanzan University

Hirotaka Aoki

Tokyo Institute of Technology

David M.Arase

Claremont College, Pomona

William Barnes

University of Portland

Michael Beeman

US Department of Commerce

Theodore Bestor

Harvard University

Mary Yoko Brannen

San Jose State University

Robert Brown

Greenebaum, Doll & McDonald Pllc,

Louisville, KY

Ronda Roberts Callister

Utah State University

Meika Clucas

California Polytechnic State University

Alexandra Cohen

California Polytechnic State University

Richard A.Colignon

Duquesne University

Tim Craig

University of Victoria, Canada

Edwin C.Duerr

San Francisco State University

Mitsuko S.Duerr

San Francisco State University

Dayo Fawibe

University of Missouri, St. Louis

David Flath

NCSU Department of Economics

Michael Gerlach

University of California, Berkeley

Georgios Giakatis

Tokyo Institute of Technology

Susumu Hagiwara

Hosei University

Ehud Harari

Hebrew University of Jerusalem

Hitoshi Higuchi

Shinshu University

James E.Hodder

University of Wisconsin

Ippei Ichige

Aoyama Gakuin University

Ralph Inforzato

JETRO Chicago

Kenji Ishihara

Association for International Cooperation of Agriculture

Hiroshi Itagaki

Musashi University

Tetsuya Iwasaki

Shinshu University

Megumi Katsuta

Aoyama Gakuin University

Martin Kenney

University of California, Davis

Harold Kerbo

California Polytechnic State University

Jo-Seoul Kim

Shinshu University

Hiroki Kondo

Shinshu University

Aya Kubota

Aoyama Gakuin University

Hiroshi Kumon

Hosei University

James R.Lincoln

University of California, Berkeley

Terri R.Lituchy

California Polytechnic State University

Leonard H.Lynn

Case Western Reserve University

Mark Mason

Yale University

Aki Matsunga

Aoyama Gakuin University

John A.McKinstry

California Polytechnic State University

Mari Miura

University of Tokyo

Dario Ikuo Miyake

University of São Paulo

Shintaro Mogi

Shinshu University

Sean Mooney


Tetsu Morishima

Aoyama Gakuin University

Kazuharu Nagase

Shinshu University

Takeshi Nakajo

Chuo University

Jay Nelson

SS Media, New York

Stephen Nicholas

University of Melbourne

Keith A.Nitta

University of California, Berkeley

Kazahiro Okazaki

Aichi Institute of Technology

Soyeon Park

Aoyama Gakuin University

Vladimir Pucik


William Purcell

University of New South Wales

Jörg Raupach-Sumiya

German Institute for Japanese Studies

Thomas Roehl

Western Washington University

Contributors ix

Elizabeth L.Rose

University of Auckland

Pernille Rudlin

Brighton, UK

Ulrike Schaede

University of California, San Diego

Mark J.Scher

Institute for Financial Affairs, New York

Shane J.Schvaneveldt

Weber State University

Roblyn Simeon

San Francisco State University

Ron Singleton

Western Washington University

Michael Smitka

Washington and Lee University

Lucrezia Songini

Bocconi University

Brenda Sternquist

Michigan State University

Yasuo Sugiyama

University of Tokyo

Noriya Sumihara

Tenri University

Margaret Takeda

Aoyama Gakuin University

Sumihiro Takeda

Aoyama Gakuin University

Ogiwara Takeshi

Aoyama Gakuin University

Jay Tate

University of California, Berkeley

Mark Tilton

Purdue University

De-bi Tsao

Tokyo Institute of Technology

William M.Tsutsui

University of Kansas

x Contributors

Tsutomu Tsuzuki

Shinshu University

Victor K.Ujimoto

University of Guelph

Robert Uriu

University of California, Irvine

Terri Ursacki

University of Calgary

Chikako Usui

University of Missouri, St. Louis

Carien Van Mourik

Eramus University Rotterdam

Steven Vogel

University of California, Berkeley

Mitsuru Wakabayashi

Nagoya University

Eleanor D.Westney

Massachusetts Institute of Technology

Michael A.Witt

Harvard University

Bernard Wolf

York University Canada

Heung-wah Wong

University of Hong Kong

Brian Woodall

Georgia Institute of Technology

Takehiko Yasuda

Shinshu University

Masanori Yasumoto

Shinshu University

Toru Yoshikawa

Nihon University

Patrick Ziltener

Max Planck Institute for the Study of

Societies, Germany


Over the last several years I have found myself paying closer attention to the acknowledgements that precede most books. Perhaps it is simply a sign of advancing maturity or age, but I have become more curious about who people choose to recognize as contributing to a particular effort.

After all, there are a host of people associated with any published work, and an even larger number involved in support of the research that goes into a scholarly volume. It is with that thought in mind that I sat down to pen a note of recognition for those who have contributed to this volume.

An encyclopedia is, by its very nature, the offspring of myriad parents—an insight I knew with my head at the outset of this undertaking. Now, at the conclusion, I know it with my heart as well.

It is only fitting, before proceeding on to introduce the volume itself, to recognize those many individuals who have contributed to this effort.

Though it is impossible to acknowledge everyone, certain people stand out for both their personal contribution, their insightful counsel or their guiding spirit.

I was aided in the difficult task of surveying an ill-defined academic field by an able group of colleagues who served as Consulting Editors. I stand in admiration of each of them individually.

Collectively they served as a brain trust in helping to identify the breadth and depth of the volume. Part of their task was to help set the markers which would define the amorphous field we chose to label “Japanese business and management.”

Though named elsewhere in this volume, I would be remiss not to personally acknowledge their contribution here: Nigel Campbell, Manchester

University; Mitsuyo Hanada, Keio University;

Stephen Nicholas, Melbourne University; Thomas Roehl, University of Western Washington;

Joop Stam, Erasmus University; Mark Tilton,

Purdue University; Mitsuru Wakabayashi,

Nagoya University; Eleanor Westney Massachusetts Institute of Technology; and Hideki

Yoshihara, Kobe University

Possibly the greatest challenge confronting the compilation of any encyclopedia is the myriad detail that must be sorted through. Once entries have been defined, authors must be identified and contacted, manuscripts for each entry must be received and reviewed, revisions requested, completed entries properly formatted, and the final product forwarded to the publishers. The task is difficult enough without the added challenge of working with academic scholars, who as a group, give added meaning to the phrase “herding cats.”

I was ably assisted in the process of managing all these details by three research assistants. Indeed, truth be told, I was the inept professor doing what

I could to assist them. I began the project with

Alexandra Cohen, who did much of the initial organizing and preparation of databases. With about year to go in completing the project Alex headed off to Germany to continue her studies there. Before leaving she selected and trained her replacement, Erin Montgomery Several months later I moved from the California Polytechnic

State University in San Luis Obispo to the University of Missouri-St. Louis. It fell upon Erin to see that all databases, files and records were organized so thoroughly that “not even Dr. Bird” can foul them up. In St. Louis, with little help from me, Dayo Fawibe picked up where Erin had left off and helped carry the project through to completion.

xii Acknowledgements

In addition to an excellent trio of research assistants, I have been blessed to have very solid clerical and administrative support. In San Luis

Obispo, Sharon R.Leib helped to hide my mutlitude of shortcomings while I tried to juggle my responsibilities as editor with my duties as area coordinator. In St. Louis, Kathleen

Mohrmann provided a calm and cheerful personality while taking care of the details involved with setting up life at a new university thereby allowing me to concentrate on the encyclopedia.

In addition to the many authors who contributed to this volume, I have enjoyed the support of numerous colleagues. Each in their own way offered words of encouragement and support as well as providing examples of scholarship on which I might model my own humble efforts. In particular, I would like to thank Roger Dunbar

(New York University), Kiyohiko Ito (Univerity of Hawaii, Manoa), Gil Latz (Portland State University), Harold Kerbo, Colette Frayne and Lynn

Metcalf (California Polytechnic State University),

Tish Robinson (Univeristy of California,

Berkeley), Schon Beechler (Columbia University), Martha Maznevski (I M D), Mark

Mendenhall (University of Tennessee-

Chattanooga) and Joyce Osland (University of


There were several other individuals who, with one exception, had little direct involvement with this volume, but who nevertheless contributed to its creation through their impact on my life as an academic. In my first years in college,

Lloyd Laughlin taught me to how to think critically and respectfully At a time when I was a simple undergraduate student Sidney Chang saw a path for me to take and pushed me in that direction. In Japan, Gregory Clark challenged my understanding of Japan and convinced me that my “future is in studying business, not history”

Susumu Takamiya served as a wise and gentle mentor during my few short years at the Sanno

Institute of Business Administration. Finally

James C.Abegglen provided a model of abiding interest in Japan and keen insight into Japanese business and management.

This volume would not have been possible without the strong support of a very talented staff at Routledge who provided not only counsel and direction, but also timely and much-needed encouragement along the way In particular, Fiona

Cairns was instrumental in getting this project off the ground and underway The matching bookend to Fiona was Dominic Shryane, who was largely responsible for bringing it to a successful conclusion.

A “thank you” is also due to Kyle, Allyson,

Jared and Campbell. They think what I do is okay

Lastly I would like to thank my wife, Diane, whose constant love and support over the past twenty-three years has enabled and allowed me to do what I do. It is hard for me to envision what I have done here as worthwhile without someone to share it with.

Allan Bird

St. Louis, Missouri



From 1979 to 1989 the world witnessed the arrival of a global economic superpower. During this ten-year period Japanese foreign direct investment (FDI) totaled $67.5 billion. Of all Japanese investment overseas, nearly 50 percent occurred within the USA. On a world scale, by

1993 Japanese firms had been so successful that

281 of Businessweek’s Global 1,000 were Japanese firms.

In light of these developments, one would anticipate a well-developed interest in Japanese firms among business executives, government administrators and management scholars. Yet, an analysis of the leading journals in the management field (Administrative Science Quarterly, Strategic

Management Journal, Academy of Management Jour-

nal, and Academy of Management Review) reveals a dramatically different story. Of the roughly two thousand articles and research notes published in these four journals from 1980 through 1994, less than 3 percent address or directly relate to either the domestic or international behaviors of

Japanese firms or their employees. The situation is only slightly better when it comes to the coverage of Japanese firms in practitioner periodicals such as Harvard Business Review or Sloan Manage-

ment Review, or in business periodicals such as the

Financial Times, The Economist, Businessweek and For-


At first blush an observer might conclude that

Western management scholars are guilty of gross ethnocentrism. Although a severe case of parochialism may be part of the explanation, I believe a more benign interpretation is available.

Japanese practices are fundamentally different from those found in the West, particularly the

USA. Additionally Japan is located in Asia, far away from many of the academics and journalists interested in business. Lacking fluency in Japanese, and in the absence of writings by Japanese academics and authors in English or other Western Languages, it has been more difficult for non-

Japanese to gain an accurate understanding.

In the past three decades a body of work sufficient to spark further interest and desire to learn about Japanese business has developed. Unfortunately much of it is specialized. There is no single source to which a person interested in Japanese business can turn to find out specific practices, learn about distinctive concepts or identify key personalities or institutions. The Encyclopedia

of Japanese Business is intended to address this deficiency

There are several general sources on Japan, among them the Cambridge Encyclopedia of Japan and Kodansha’s Japan: An Illustrated Encyclopedia.

However, these give short shrift to the Japanese business system or the environment in which it operates. In a similar vein, there are encyclopedias of international busines and of specific business disciplines such as marketing and finance.

Unfortunately these volumes provide, at best, limited coverage of specific Japanese business concepts, practices, individuals or entities. More recently MIT Press has published The MIT Ency-

clopedia of the Japanese Economy. As its name implies, this book focuses specifically on economics, which of course has a large overlap with business and management. However, again, it misses important areas of business and management.

Aims of the Encyclopedia

The aim of the Encydopedia is to offer an accessible and readable reference source of interest to

xiv Introduction both the non-specialist and the specialist seeking information on specific aspects of Japanese business. Though focused primarily on post-Second

World War developments, practices and related concepts, entries on history provide grounding in the past. An effort was made to position the writing and content of entries such that they encourage use of the volume by both non-specialists (a journalist wanting background on the

Tokyo Stock Exchange or a student looking for information on Toyota) and specialists (a management scholar interested in the use of shokutaku

shain (contract employees) in human resource staffing strategies). Additionally entries are oriented toward more recent developments and topics. However, a strong commitment was also made toward providing appropriate historical context for understanding Japanese business culture.


Encyclopedias, representing as they do a snapshot of current knowledge about a field, suffer obsolescence almost from their moment of conception. This is even more the case when compiling knowledge and understanding about a field that is in a constant state of flux. The Japanese business system and its environment are undergoing rapid and widespread change. Mergers, acquisitions and company failures have taken place at a fast clip during the 1990’s and into the new millennium. Additionally government ministries have undergone significant restructuing as well as some mergers of their own. In many cases, both in the private and public sectors, changes have been accompanied by changes in names. For example, the Ministry of International Trade and

Industry (MITI) is now operating as the Ministry of Economics, Trade and Industry (METI).

No doubt further changes will take place in the next several years, generating additional shortcomings in the titles and contents of entries. Nevertheless, a concerted attempt has been made by authors and editors to see that all entries are accurate and up-to-date.


The structure of the Encydopedia consists of one volume divided into fourteen topical categories.

Individual entries are in one of four lengths. Firstlevel entries run about 2000 words in length, second-level entries are approximately 1000 words, third-level entries 500 words and fourth-level entries 150 words. The first paragraph of each entry follows a format in which basic information is provided upfront, followed by historical background which, in turn, is followed by a deeper discussion. Entries were prepared in this manner so that readers anxious to gain a quick overview could read the first few paragraphs, while those readers requiring more detail could proceed deeper into the longer entries.

Cross-referencing within the volume allows the reader to see and follow connections among topics. Furthermore, authors of longer entries have provided selected readings so that those readers wishing to pursue a topic further may do so.


In commenting on the creation of this encyclopedia, contributing authors frequently voiced two observations. When asked to write on a particular topic, they would usually respond that “surely someone has already written a clear explanation” of this topic or that issue. Then, upon further reflection, occasionally accompanied by a quick search in the library they would express surprise that no one had. “After all,” as one author said about a topic he had been asked to write on, “this is widely understood by everyone doing research in the area.” The second observation followed from the first, and usually came after completion 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 have been ordered both alphabetically and categorically. Entries can be searched using either approach. The categories are namely:

• Economics

• Finance

• General Management/Business Administration

• Government Institutions/Business-Government

• History

• Human Resource Management

• Influential Industries

• Influential Japanese Companies

• Influential Social/Business Entities

• Influential Social/Business Personalities

• Industrial Relations

• Japanese Business Overseas

• Manufacturing

• Marketing and Distribution

• Research and Development

Entries for topics and terms which are commonly referred to in English using either the original

Japanese or the English translation are cross-referenced with both terms. For example, the entry

Keidanren can be searched using either that name or the English translation, Federation of Economic Organizations. Cross-references appear in bold type. Related entries are also noted in the

See also section at the conclusion of each entry

Where deemed appropriate, entries also include a further readings section, where authors have identified several books or articles helpful to the reader in providing further coverage of the topic.


agricultural co-operatives appreciating yen bad debt

Bank of Japan

Banking Act of 1982 banking crises bubble economy city banks consumption tax

Development Bank of Japan dollar shock in 1971 dual structure theory economic growth economic ideology

Heisei boom income doubling plan

Izanagi boom

Japan Development Bank liberalization of financial markets main bank system sarakin unemployment


banking crises capital markets corporate finance cross-shareholdings debt/equity ratios postal savings promissory note shareholder weakness takeovers venture capital industry

Thematic entry list

General management/business administration

accounting in Japan bankruptcies bottom-up decision making processes business ethics commercial code competition contracts corporate governance daihyoken environmental and ecological issues habatsu industrial groups (keiretsu) joint stock corporation joint ventures

Kansai culture kansayaku madogiwa zoku maruyu mochiai

Naniwashi bushi negotiations nemawashi nihonteki keiei nikkei jin office ladies (OL) organizational learning restructuring ringi seido salaryman small- and medium-sized firms stockholders general assembly strategic partnering supply chain management in Japan three sacred treasures white-collar workers

women’s roles zaibatsu

Government institutions/business-government relations

administrative guidance (gyosei shido) agricultural policy amakudari cartels dango depressed industries

Depressed Industries Law, 1978 deregulation environmental regulations

Fair Trade Commission foreign aid industrial policy industrial regions

Japan Inc.

madoguchi shido men in charge of MoF

Ministry of Construction

Ministry of Finance

Ministry of International Trade and Industry

Rengo trade barriers trade negotiations


American occupation banto

Buddhism distribution system geography guilds (za and kabunakama) history of the labour movement ie industrial efficiency movement

Meiji restoration

Post-WWII recovery

Prince Shotoku’s 17 Article Constitution

Samurai, role of

Tokugawa period wartime legacy

Thematic entry list xvii

Human resource management

allowances and non-salary compensation appraisal systems burakumin contract employees education system genba-shugi human relations management internal labour markets karoshi lifetime employment outplacement permanent employee seniority promotion shukko

Industrial relations

enterprise unions foreign workers

Japan Productivity Center for Socio-Economic


Ministry of Labour


Influential industries

airline industry automotive industry banking industry computer industry construction industry electronics industry motorcycle industry pharmaceuticals industry retail industry software industry telecommunications industry

Influential Japanese companies


Arabian Oil

Bank of Tokyo


Daiei, Inc

Daiichi Kangyo Bank

Export-Import Bank of Japan

xviii Thematic entry list foreign companies in Japan

Fuji Photo Film gaishikei kigyou

Honda Motor Co. Ltd.

ITOCHU Corporation

Ito-Yokado Company Ltd.

Japan Airlines

Japan National Railways


Kirin Brewery Company

Kyocera Corporation

Long-Term Credit Bank of Japan

Marubeni Corporation

Matsushita Electric Industrial Company

Limited (MEI)

Mitsubishi Corporation

Mitsui & Co., Ltd.

Mitsukoshi, Ltd.


Nintendo Co. Ltd.

Nippon Telegraph and Telephone (NTT)

Nissan Motor Company

Nomura Securities

Norin Chukin Bank

Seven-Eleven Japan

Sharp Corporation


Sumitomo Corporation



Yamato Transportation

Influential social/business personalities

Abegglen, James C.

Cole, Robert

Deming, W.Edwards

Dodge, Joseph M.

Dokoh, Toshio

Dore, Ronald

Fukuzawa, Yukichi

Hayakawa, Tokuji

Hayato, Ikeda

Honda, Soichiro

Inamori, Kazuo

Ishikawa, Kaoru

Iwasaki, Yataro

Johnson, Chalmers

Juran, Joseph M.

Koike, Kazuo

Komiya, Ryutaro

Matsushita, Kounosuke

Minomura, Rizaemon

Morita, Akio

Nakauchi, Isao

Nonaka, Ikujiro

Ohmae, Kenichi

Ono (Ohno), Taichi

Shibusawa, Eiichi

Shingo, Shigeo

Taguchi, Genichi

Tanaka, Kakuei

Ueno, Yoichi

Influential social/business entities

Central Union of Agricultural Cooperatives industry and trade associations

Japan Association of Corporate Executives

Japan Automobile Manufacturers Association

Japan Chamber of Commerce and Industry

Japan External Trade Organization

Japan Federation of Economic Organizations

Japan Federation of Employers’ Associations

Keio University

Liberal Democratic Party

Nihon Keizai Shimbun sokaiya

Tokyo University

Japanese business overseas

economic crisis in Asia general trading companies

Japanese business in Africa

Japanese business in Australia

Japanese business in Canada

Japanese business in China

Japanese business in Germany

Japanese business in Italy

Japanese business in Korea and Taiwan

Japanese business in Latin America

Japanese business in Mexico

Japanese business in Southeast Asia

Japanese business in the Middle East

Japanese business in the UK

Japanese business in the United States of


Japanese investment patterns

Japanese MNEs localization

New United Motor Manufacturing Inc.

(NUMMI) overseas business of small- and medium-sized enterprises overseas education overseas production overseas R&D

US investment in Japan


5S campaign

ISO issues

Japanese Industrial Standards (JIS) just-in-time kaizen quality control circles quality management standard setting subcontracting system suggestion systems total productive maintenance

Toyota production system

Marketing and distribution


Thematic entry list xix after-sales pricing

Akihabara central wholesale markets chugen consumer movement creative houses

Dentsu department stores discounters e-commerce konbini (convenience stores)

Large Retail Store Law, 1974 marketing in Japan one-to-one marketing pricing practices social marketing superstores tonya

Tsukiji market

Research and development

export and import of technology firm strategies for technology patent system product development research cooperatives science and technology policy

VLSI Research Cooperative


Abegglen, James C.

The most influential author on Japanese business and management, Abegglen’s pioneering work, The Japanese Factory, set the focus and direction of future analyses of the Japanese management system. To date, he has authored or co-authored ten books, including two other volumes receiving significant attention: Kaisha: The

Japanese Corporation (with George Stalk, Jr:) and

Sea Change: Pacific Asia as The New World Industrial

Center. Abegglen first came to Japan in 1945, living and working there a majority of time since then. In 1965 he was one of the founding officers of the Boston Consulting Group (BCG) and established BCG’s Tokyo office. Eighteen years later he established Asia Advisory Services.

Abegglen also remained active in academia through his position as a faculty member at

Sophia University where he was director of the 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 because of his active commentary on Japanese business through his writings in business periodicals, both in and out of Japan.

The Japanese Factory (1958) was a detailed examination of the patterns of social life and influence relations in a Japanese factory In his analysis,

Abegglen pointed out a key difference from the

American factory in that a person entering the employment of a Japanese factory was making a lifetime commitment. He argued that this extraordinary commitment helped to explain both the all-consuming demands that management exacted from workers in terms of loyalty and also the depth of concern management demonstrated for the total welfare of those employees. In addition to lifetime employment, Abegglen also identified how rewards were based on group, not individual, performance. He also drew attention to the emphasis on length of tenure over pure merit-based criteria in promotion decisions. He concluded that

Japan’s pattern of industrialization differed from the US and other Western countries as a consequence of the larger social and cultural context in which Japanese work organizations were embedded.

In 1985, Kaisha: The Japanese Corporation had an equally profound impact on a western business community trying to understand the foundation of competitiveness on which Japanese firms were achieving market share worldwide. It outlined both the strengths and weaknesses of

Japanese corporations.

Further reading

Abegglen, J.C. (1958) The Japanese Factory, Glencoe, IL:

The Free Press.

Abegglen, J.C. and Stalk, G., Jr. (1985) Kaisha: The Japa-

nese Corporation, New York: Basic Books.


accounting in Japan

Accounting standards and financial reporting in

Japan are similar in many ways to US and International Accounting Standards; however,

2 accounting in Japan differences exist. Differences also exist in accounting standard setting and regulations.

Accounting standard setting and regulations

Accounting standards and regulations are strongly influenced by governmental agencies and laws in Japan. Three primary sets of laws must be considered when analyzing accounting and reporting standards in Japan. The Commercial

Code, administered by the Ministry of Justice, prescribes accounting standards for limited liability companies (kabushiki kaisha). The Commercial Code has a strong legal focus and is primarily concerned with creditor and shareholder protection. The Securities and Exchange Law, administered by the Ministry of Finance, applies to companies that list their stock on exchanges. The primary interest of the Securities Laws is to provide information for investor decision making.

The final influential law affecting Japanese accounting standards is the Corporate Income Tax

Law. This law basically requires that income and deductions for tax purposes also be the same as those used for financial accounting purposes.

These three laws are the primary laws and regulations governing accounting and financial reporting in Japan.

Accounting rules and standards

Accounting rules and standards are concerned with how the accounts are measured and how amounts are calculated. As previously noted, the

Commercial Code, Securities Laws and Corporate Income Tax Laws generally determine specific accounting rules and standards.

Accounts and notes receivable are based on amounts owed to the company. The calculation of the allowance for doubtful accounts is usually based on the amount allowed by tax law. This is in contrast to the USA, where the estimate of future bad debts is based on the amount that will prove uncollectible.

Recent changes in accounting for marketable securities now require firms to use the year-end market values of the securities for valuation purposes. This is in contrast to historical cost that was previously used. Pending changes require that changes in market values of securities classified as “trading” securities be reflected in income for the period. In contrast to trading securities, unrealized changes in the value of securities classified as “available for sale” are reflected in shareholders’ equity and do not affect current period income. Accounting for investments in securities that result in over 20 percent ownership of the investee is discussed below.

Accounting for inventories in Japan is similar to most countries. The company may value inventory using either the historical cost or the lower of cost or market value. Typically historical cost is used. The lower of cost or market method requires that the decline in value be significant (at least 50 percent) before adjustments to market are made, thus inventories may be overstated to some extent. Inventory cost may be based on specific, identifiable values if available, or cost flow assumptions, such as FIFO, LIFO or average cost, may be used. Replacement cost is not allowed. The same accounting method must be used for both financial accounting and tax purposes.

Tangible assets, such as buildings and equipment, are recorded at historical cost. Revaluation is not permitted. Thus, land accounts in the financial statements may be overstated in view of the recent decline in Japanese land values. Depreciation is based on amounts allowed for tax purposes, and typically calculated by one of the accelerated methods. Land is not depreciable. Leased tangible assets that transfer the risks and rewards of ownership to the lessee are accounted for as capitalized leases and treated in a similar manner to purchased assets. However, capitalization of leases is not a common practice in Japan.

The valuation of intangible assets depends on the nature of the asset. Internally generated goodwill is not recognized. Purchased goodwill is capitalized and amortized over five years, although there are proposals to increase the amortization period to twenty years. Goodwill generated in the acquisition of another company is measured based on the book value of the net assets acquired instead of fair market value. Research and development expenditures may be capitalized and amortized over five years, although most companies write off the expenses in the year incurred.

Accounting for longer term investments in other companies is determined by the degree of

accounting in Japan 3 ownership. The equity method is used for investments that represent 20–50 percent ownership of the investee and for joint ventures. Investments of over 50 percent ownership in subsidiaries are consolidated and discussed below. Business combinations are accounted for as a purchase. Generally the pooling method is not allowed.

A major change in Japanese accounting has been in accounting for employer provided pensions. In the past, pension liabilities and expenses were accounted for on a “pay as you go” basis.

The result was a significant understatement of pension liabilities. Recent changes now require that pension liabilities be accounted for using accrual concepts and market valuations. The funding status of the company’s pension plans must also be disclosed. These adjustments and changes are expected to have significant effects on the financial statements of Japanese firms.

Deferred taxes arise when the timing of income and expenses for financial accounting purposes is different from the recognition for income tax purposes. Deferred tax accounting is common in the financial statements of many other countries; however, it is rare in Japan. Basically recognition of deferred tax assets is not allowed and usually firms will not recognize deferred tax liabilities, even in consolidated financial statements. Typically there is no need for deferred taxes since the tax code requires that most items of income and expenses be treated the same for both financial accounting and tax purposes.

Leased assets in Japan are usually accounted for as operating leases and charged to expense when incurred. Currently capitalized lease accounting may apply in a few limited cases; however, the trend is toward requiring capitalized leases in the future.

The consolidation of foreign subsidiaries requires the translation of foreign currency accounts into yen equivalents. Assets and liabilities of foreign subsidiaries are translated using the exchange rate in effect at the end of the year, and income statement items are generally translated using the average exchange rate for the year. Translation adjustments are recorded as an asset or liability on the balance sheet.

An additional major difference between Japanese accounting and accounting in other countries, such as the USA, is the use of reserves.

Reserves are often used in Japanese accounting, but rare in the USA. The reserves basically represent appropriations of income or retained earnings and generally do not contain a cash component. The Commercial Code requires companies to maintain legal reserves. The legal reserve represents an annual allocation or appropriation of income equal to at least 10 percent of cash dividends and bonuses to directors.

The annual appropriation is required until the reserve is equal to 35 percent of capital stock.

Thereafter, appropriations are voluntary The requirement for a legal reserve is an example of the focus on creditor protection by discouraging excessive dividends and bonuses to directors. In addition, discretionary reserves are permitted and have led some analysts to conclude that managers of Japanese firms use reserves to smooth income or manage earnings.

A final noteworthy accounting practice in Japan, and one that differs from most countries, is the charging of directors’ bonuses directly to retained earnings instead of an expense against income for the period. The bonuses are viewed as a distribution of corporate profits instead of an expense.

Financial reporting

Financial reporting is concerned with how accounting information is presented or reported in the basic financial statements. Both the Commercial Code and the Securities and Exchange

Law require firms to file a business report, a balance sheet, income statement, proposed statement of appropriations of retained earnings and supplemental schedules. However the format, classification, extent of disclosure and type of supplemental information differs between the two agencies. Examples of supplemental information required by the Commercial Code include:

• changes in capital stock and reserves

• changes in bonds payable and other debt instruments

• changes in fixed assets and accumulated depreciation

• disclosure of debt guarantees and disclosure of collateralized assets

4 aadministrative guidance

• extensive disclosure of related party transactions, such as with subsidiaries, directors and controlling shareholders

• ownership of subsidiaries (and reciprocal ownership)

The Securities and Exchange Law requires similar information to be filed with the Ministry of

Finance. The Ministry of Finance requires additional disclosure of information such as details of pension obligations: marketable securities, subsequent events, intangible assets and so on. A cash flow statement and six month cash flow forecast is also required, but is not audited. Additional forecasts, such as for capital expenditures and debt retirement, are required to be filed with the Ministry but are usually not disclosed in the shareholder reports.

Consolidated financial statements are also required of firms that are listed on security exchanges and subject to the Securities and

Exchange Laws. The consolidated statements include the balance sheet and income statement, but are expanded to include a cash flow statement. A subsidiary’s financial statements are consolidated with those of the parent company if the parent owns over 50 percent of the subsidiary company’s stock. It is important to note that there are regulations that allow exclusions of some subsidiaries from the consolidated group. The requirement for consolidated financial statements has increased the transparency of the firm’s activities and led to disclosure of losses by unprofitable subsidiaries.

The format of the financial statements varies depending on the filing requirements. However, the balance sheet requires that assets, liabilities and equity be classified separately and that current assets and current liabilities be distinguished from long-term items. The income statement has an additional section for special gains and losses, but the definition of special gains and losses is not as restrictive as the definition of extraordinary 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.

The Ministry of Finance also requires footnote disclosure of the major segments of a firm’s operations. The segments are classified by line of business and by geographical sector. Specifically each segment’s turnover (sales revenue), assets and operating income must be disclosed.

Each company must have a statutory auditor who attests to the financial statements. The statutory auditor is usually not a Certified Public Accountant and often is an employee of the firm.

Companies are required to have an audit by an independent Certified Public Accountant if they are listed on a stock exchange, or for unlisted companies, if their share capital is over 500 million yen or liabilities exceed 20 billion yen.


Japan’s accounting standards, rules and reporting requirements are similar in many ways to those of other countries, and are becoming more harmonized in response to global economic forces. Many differences remain, however, and the rules are somewhat complicated by the multiagency standard setting process.

Further reading

Choi, F.D.S., Frost, C.A. and Meek, G.K. (1999) Inter-

national Accounting, 3rd edn, Englewood Cliffs, NJ:

Prentice Hall.

Haskins, M.E., Ferris, K.R. and Selling, T.C. (2000)

International Financial Reporting and Analysis: A Concep-

tual Emphasis, 2nd edn, Boston: Irwin McGraw Hill.

Kiyomitsu Arai (1994) Accounting in Japan, Tokyo: Institute for Research in Business Administration,

Waseda University Tokyo, Japan.

KPMG Peat Marwick (1993) Comparison of Japanese and

U.S. Reporting and Financial Practices, Tokyo, Japan.

Nobes, C. and Parker, P. (1998) Comparative Interna-

tional Accounting, 5th edn, London: Prentice Hall




administrative guidance

The term “administrative guidance” or gyosei shido refers to non-codified, extralegal regulation

administrative guidance 5 whereby a ministry attempts to induce certain behavior in a company or industry with the aim of realizing an administrative goal. The process is typically not transparent and the resulting regulation has a strong situational character, because rules may be invoked or revoked at the discretion of the ministry without cabinet or parliamentary approval. During the heyday of industrial policy in the 1950s and 1960s, administrative guidance was the predominant regulatory tool used to align business strategies and public policy goals.

There are two forms of administrative guidance: written and oral. Written guidance typically establishes industry-wide rules that are valid in the medium run and published in one volume at the end of the fiscal year. An example of written guidance would be a notification (tsutatsu) from the Ministry of Finance’s (MOF) Insurance Bureau that life insurance companies are allowed to invest a lower or higher maximum percentage of their total assets in the stock market, effective from a certain date. Oral guidance typically remains undisclosed and involves delicate conversations between ministry officials and industry representatives. For instance, when the Nikkei 225 stock index fell significantly in the early 1990s,

MOF officials called up several investment banks and in the course of a jovial conversation pointed out just how detrimental they thought the depressed stock market was for the overall economy

In reaction, the banks were said to have bought large positions in Japan’s flagship companies.

Enforcement is based on a quid pro quo, or “carrot and stick,” approach. Companies know that if they follow the ministry’s “advice” they may reap rewards later, whereas refusal to comply may lead the ministry to obstruct future business opportunities. “Carrots” are offered by the ministry in the form of subsidies or lenient regulation, whereas the “stick” may be a threat to withhold a business license, curb an import quota or give preferential treatment to a competitor. Because compliance is voluntary there is effectively no legal recourse for firms subjected to administrative guidance. Neither is there a legal means for the regulating ministry to enforce its guidance.

Importantly administrative guidance is not usually a “one-way street” with the ministry unilaterally designing all the rules. Precisely because it is extralegal, ministries have to ensure that the regulation garners sufficient industry support to be meaningful. The process of designing guidance therefore often entails sending a draft of a new rule to the trade association concerned, to be discussed and modified by the presidents of the leading companies. The association then reports the presidents’ opinion to the ministry In this sense, administrative guidance often emerges out of discussions between bureaucrats and the regulated industry.

The trade association’s function in monitoring the implementation of rules is as important as their input in regulatory policy creation. After a new rule has been issued by the ministry the regulatees themselves often assume the task of ensuring adherence. It is much easier for the firms in an industry rather than bureaucrats to observe the market behavior of their competitors. Because it is extralegal and informal, administrative guidance invites cheating, and it can only be enforced with group pressure and controls by the industry concerned. Given that administrative guidance builds on self-regulation for enforcement, it can be either extremely effective (if all companies agree to comply) or completely ineffective

(if they choose to ignore the ministry’s guidance).

Changes in the 1980s

Two major currents combined to diminish ministerial leverage with which to enforce administrative guidance in the 1980s. First, as companies grew and became world competitors, the “carrots” offered by their ministries, such as access to loans or foreign exchange, became less appealing. Second, deregulation and the opening of financial markets undermined the effectiveness of both “carrots” and “sticks.”

The primary “carrots,” or rewards, that ministries used for implementing industrial policy in the postwar period came in two forms: (a) access to and allocation of imported and scarce raw materials, and (b) opening of new business opportunities through such means as granting licenses, subjecting product innovation to approval, or furnishing low-interest loans through public financial institutions. The allocation of raw materials and foreign technology worked well until

6 advertising

1965, when a revision of the Foreign Investment

Law diminished the Ministry of International

Trade and Industry’s (MITI) control over foreign reserve allocation. The revision of the Foreign Exchange and Trade Law in 1980 further curtailed MITI’s command over trade flows. No longer could the ministry reward cooperative firms through the allocation of scarce raw material imports.

Second, changes in financial markets in the

1980s seriously undercut the ministries’ ability to punish manufacturing firms and banks that resisted administrative guidance. With the development of the bond and stock markets, firms became less dependent on bank financing, so banking regulation no longer translated into manufacturing guidance. As manufacturing firms became more able to raise funds abroad, the government’s threat of punishing mavericks by blocking access to loans became meaningless. For the banks, deregulation meant less dependence on

Ministry of Finance (MOF) licenses and approvals. Yet the need for constant monitoring remained greatest in the banking industry and banks continued to stay close to their regulators by designating MOF-tan.

Thus, the liberalization of trade rules and access to financial markets in the 1980s undermined government guidance of both the manufacturing and the financial sectors. While the practice continues to be more institutionalized and extensive than moral suasion in other countries, the effectiveness of guidance depends increasingly on the willingness of industry to cooperate, with ministries having fewer means at their disposals to create such willingness.

Further reading

Johnson, C. (1982) MITI and the Japanese Miracle: The

Growth of Industrial Policy 1925–1875, Stanford, CA:

Stanford University Press.

Schaede, U. (2000) Cooperative Capitalism: Self-Regula-

tion, Trade Associations, and the Antimonopoly Law in

Japan, Oxford: Oxford University Press.

Upham, F. (1987) Law and Social Change in Postwar Ja-

pan, Cambridge, MA: Harvard University Press.



Advertising in Japan is typified by its lack of product focus. Many advertisements don’t show the product at all. Rather than promoting product features or brand, Japanese advertising generally strives to promote a positive image of the company producing the product. This soft-sell style of advertising has long been described by Westerners as image, or mood advertising. While message content is of utmost importance in advertising in the West, in Japan, the method of conveying the message is more important.

The soft-sell approach in Japanese advertising is a direct influence of Japan’s culturally ingrained avoidance of the direct approach. Japanese ads are designed to appeal to the target audience’s emotions. To achieve this, advertisements tend to place heavy emphasis on visual imagery and less on written copy. The resulting advertisements build a positive image of the corporation placing the advertisement, and thus their products, while providing very little detailed product information.

In general, Japanese advertising has traditionally focused on building a corporation’s image.

Vying to capture the viewers’ attention in the deluge of advertising, advertisements tend to be oriented around building a positive image of a corporation. In many cases this results in advertisements where the product is not shown, let alone mentioned. Such ads tend to have a signoff with the corporate name.

The theory behind this image advertising is that if a consumer has a good impression of a corporation, they would tend to buy that company’s products. Product branding has not gained the 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 also feature prominently in print advertisements.

One reason advertisements in Japan can omit product description is the wealth of product information available in other venues. A visit to a retailer provides the consumer with a wealth of highly descriptive complimentary product catalogues. Further detailed product information can be found in the many magazines dedicated to supplying in-depth product reviews.

The one glaring exception to the soft-sell approach is in the case of products for which

after-sales pricing 7 detailed information in the form of brochures and magazine reviews is not available. An example is advertising for products such as washing detergents which will often contain straightforward messages and demonstrations of the product’s cleansing properties.

Due to the Japanese culture of group conformity, Japanese ads are targeted towards the group, rather than to the individual. Horizontal identification is important. Advertisements that are perceived as containing an authoritarian tone, such as a hard sell from an authority figure, are rejected. Similarly ads containing a blatant message of vertical aspiration to a higher social station are also suspect. Successful advertisements in Japan aim to build empathy with the target group. A common method is featuring the product’s acceptance by a peer, who is often also a celebrity.

The lack of comparison ads in Japan has also been attributed to Japan’s group culture. It has been argued that advertisements that compared a firm’s product to that of a competitor would be rejected by Japanese consumers. However, in the few cases where comparative ads have been run, it was found that Japanese consumers did not reject them. Most likely the dearth of comparative advertisements in Japan is due to many ad agencies having more than one client per industry category and to industry self-regulation.

Regardless of the many quirks of advertising in Japan, the nation is flooded with advertising, from poles, to digital text messages broadcast to small television to cloth placards attached to telephone screens inside taxis. There are two reasons for the prevalence of advertising in Japan.

One is the insatiable Japanese demand for information which results in nationwide newspapers with circulation in the millions. The other is the relatively lax laws and regulations on advertising. Most industries are encouraged to conduct self-regulation regarding advertising. In addition, most media also regulate what they will, and will not, allow in an advertisement.

Acquiring mass media ad space in Japan is extremely expensive as well as highly competitive.

Both newspaper and magazine ad space is limited by restrictions on the number of pages available for advertising. Television has only five nationwide terrestrial stations, although satellite and cable penetration are growing.

A major factor in acquiring space in the mass media is the fact that not every ad agency can buy space. To buy space, an agency must have an account with the media vehicle in question, and these vehicles don’t give the accounts away easily As a result, very few of Japan’s ad agencies can buy ad space directly Rather, they have the larger agencies buy the space for them. Once ad space is acquired, getting an ad noticed among the clutter of mass media advertising is a continuous challenge for advertisers and their agencies. This is especially true in the case of television, where the majority of spots are mainly of fifteensecond length.

A typical solution to the problems particular to advertising in Japan is the use of celebrities, both

Japanese and foreign. Estimates put the use of celebrities in Japanese commercials at between 60 to 70 percent. These celebrities range from Japanese comedians to pop singers, and from Hollywood box office stars to foreign scientists. The use of celebrities is believed to help a commercial stand out from the competition, as well as to link a corporation’s image with that of the celebrity Generally these celebrities do not appear as spokespersons for a product, rather, their appearance has little to do with the product.


after-sales pricing

After-sales pricing, or ato-gime, is pricing which takes place after a product has been sold and delivered. It is a reflection of weak price competition. The opposite of ato-gime is jangime (pricing at the time of sale). Such pricing, though standard in the West, is unusual enough in certain Japanese industries to require a special term.

In a market economy buyers shop around for the best value. Shoppers look at quality service and price, while producers compete to give shoppers the best deal. When buyers shop around, supply and demand forces determine how much they pay for the product they end up buying. If supplies are plentiful and demand is weak, shoppers can bargain for a lower price. If supplies are

8 aafter-sales pricing scarce and there is much demand, sellers will be in a strong position and able to raise prices.

However, both shopping and competing have costs. It takes time for shoppers to look around and it may be hard to find out how reliable a particular supplier is. Shoppers may prefer to stick with particular producers so that they can save shopping time and be confident in the quality of the goods they buy even if they have to pay a bit more. Competing is also tough on sellers. Intense price competition brings down prices and can even drive firms out of business. Thus, both buyers and sellers have reasons to avoid constant shopping around on the basis of price. When buyers are not choosing their suppliers on the basis of price, they typically base prices on producers’ costs. But if a sale is not based on price, the door is left open for negotiations over the exact price to drag out long after the sale and delivery has been made.

There are three types of after-sales pricing.

First, when sellers are engaged in a cartel, it may take a while for them to decide on final prices in industries in which costs fluctuate considerably

The primary example of this is the petrochemical industry. During the 1970s and early 1980s, when petroleum prices were rising sharply petrochemical producers tried hard to get buyers to pay the full cost of expensive petroleum feedstocks they used to make their products.

Even though in principle buyers were supposed to pay the full cost of production, the petrochemical companies found that they were being forced to compete on price and were losing money To solve this problem, the petrochemical industry adopted a price-fixing formula in 1983 to set prices for petrochemicals based on the cost of feedstocks, which has been in effect ever since. Of course each company knows how much it had spent on feedstocks by the time it delivered its chemicals, but chemical producers want to be sure that the formula is implemented uniformly and that there is no price competition.

So all the chemical producers wait until the government publishes average prices for the main feedstock, naphtha. Because the industry is pricing on the basis of a cartel, and because it needs to wait for these price figures, pricing of products throughout the petrochemical industry is delayed for several months.

Second, if the cartel is waiting to decide on a price, but the cartel relies on the good will of buyers, the cartel needs to negotiate over a final price with buyers as a group. This is in fact how industry-wide pricing in the petrochemical industry has worked. Prices in the industry have been modified by considerations of two factors. Prices may be modified to favor either sellers or buyers who are in a particularly difficult financial position. That is, prices may be modified in the opposite direction from market pressures. Or alternatively prices may be modified with the market, in favor of either buyers or sellers depending on supply-demand conditions. Typically whichever side is in a favorable position argues during negotiations that cost-based, after-sales pricing should be abandoned because it is oldfashioned and succeeds in using this rhetorical ploy to adjust prices in its favor.

Finally after-sales pricing may take place between individual buyers and sellers based on these same considerations of fairness and market conditions. Most commonly this kind of after-sales pricing serves as a discount on a cartel-based price.

The broad purpose of after-sales pricing is to modify prices somewhat in uncompetitive markets with high prices. However, after-sales pricing brings certain disadvantages. The lack of transparent prices makes it more difficult for a new firm to enter a market and attract customers with low prices. In a market where there are no definite prices at the time of sale, it is difficult for the new entrant to know what price it is competing against. Foreign firms trying to break into the

Japanese glass market have made this complaint.

Second, when prices are undecided for as long as a year, as they are sometimes in the chemical industry it becomes difficult for firms to carry out normal accounting procedures. How do firms know what their revenues, expenses, and profits are when prices are left dangling? However, the chief problem with after-sales pricing is that it is a symptom of weak price competition in Japanese industries such as chemicals, glass and pharmaceuticals. Weak price competition fails to give producers incentives to cut costs and become more productive.

See also: cartels; competition; pricing practices

agricultural cooperatives 9

Further reading

Tilton, M. (1996) Restrained Trade: Cartels in Japan’s Basic

Materials Industries, Ithaca, NY: Cornell University



agricultural cooperatives

Modern agricultural cooperatives began in Japan following the land reform carried out by the Occupation Forces after the Second World War. The land reform took the form of the state purchase of tenant farm land from landowners and subsequent sale thereof to tenant farmers, creating a large number of very small owner-farmers with an average of 1.1 hectares of farm land. However, because these small-scale owner-farmers could not expect to bring about agricultural development individually an attempt was made at united efforts in improving productivity and living standards through mutual aid and cooperation among farmers. Accordingly the Agricultural

Cooperative Society Law was enacted after the land reform was started. The law was modeled after cooperative group principles of 1936 and the US law on cooperatives. Cooperative organizations had also been in existence in Japan for half a century beginning with the Industrial Cooperative Society Law which was enacted in 1900.

Agricultural cooperatives thus can be described as cooperative societies seeking to make a fresh start on the basis of industrial cooperatives (sangyo


The difference between industrial and agricultural cooperatives lay in their respective membership: industrial cooperatives’ membership could include not only farmers, but also fishermen, foresters, businessmen in commerce and industry as well as consumers, while the agricultural cooperative was intended to be a craft union composed of farmers as its regular members.

The organizational structure, consisting of unit agricultural cooperatives at the municipal level and federations established at the prefectural and national levels according to their respective business functions, has been attributable to the tradition of industrial cooperative societies.

Agricultural cooperatives can be divided into two groups: single-purpose agricultural cooperatives organized for the purpose of marketing specific types of farm products (dairy farming, horticulture, fruit culture, stock farming, etc.) and multipurpose agricultural cooperatives engaging in activities in the field of loan and credit extension, mutual aid insurance, welfare (health and medical care), consultation and guidance, and economic (marketing and purchasing) services.

Agricultural cooperatives are generally called

nokyo in Japanese. When people refer to nokyo, they usually have the latter type of cooperatives in mind. These cooperatives are based on communities involved with rice culture or production of crops and other farm products.

Agricultural cooperatives have a total membership of 9,128,000 (as of 1998), consisting of

5,344,000 regular members and 3,784,000 associate members (non-farmers such as consumers).

The number of agricultural cooperatives stood at 1,411 in the year 2000. The government is promoting the amalgamation of agricultural cooperatives, and the number of cooperatives is expected to fall to 570 by 2010.

Observing specific fields of services provided by agricultural cooperatives as of fiscal 1997, marketing/distribution totaled ¥5.7 trillion (comprising of ¥1.6 trillion from rice, ¥1.35 trillion from vegetables and ¥3.8 billion from livestock), and purchasing amounted to a total of ¥2.9 trillion

(made up of ¥478.6 billion for feedstuff, ¥611.3

billion for oil products, ¥357.2 billion for fertilizers and ¥342.4 billion for agricultural machinery). The percentage shares of the agricultural cooperatives to the total amount of sales and purchases made by the agricultural sector have been on the decline in recent years: for example, agricultural cooperatives accounted for 60 percent of vegetable sales and 60 percent of the purchase of agricultural chemicals made by member farmers. The percentage of farming households using the services of agricultural cooperatives has also been falling. Revenues from marketing and purchasing services were down 20 percent and

12 percent respectively from those in fiscal 1985.

In the area of credit activities, the balance of savings deposited with agricultural cooperatives as of the end of fiscal 1998 stood at ¥69 trillion, accounting for 7.4 percent of the entire deposits and savings in Japan. On the fund application side, the outstanding loan balance amounted to

10 agricultural policy

¥22 trillion, bringing the ratio of loans to deposits to a little under 30 percent. Most funds received as deposits and savings by individual cooperatives are in turn deposited with the prefectural credit federations of agricultural cooperatives (Shinnoren) and the Norin Chukin Bank.

Because agricultural cooperatives’ credit services are operated in parallel with other lines of business, the amount of deposits/savings held by each operating entity is small, only about ¥34.1 billion. Cooperative deposits/savings are characterized by disproportionately high percentages of personal savings (83.5 percent) and time deposit

(79.4 percent). The percentages of personal loans and long-term loans are also high at 81.5 percent and 87.3 percent, respectively of total cooperative loans outstanding. Unlike ordinary city banks, agricultural cooperatives specialize in retail banking. With the progress of financial deregulation, cooperatives have been increasing their focus on retail banking. Against this backdrop, entities in other business categories have moved into rural areas for new opportunities, putting downward pressure on operating income.

Accordingly gross profits from agricultural cooperative business dropped to 35.4 percent from

40 percent.

The mutual aid services of cooperatives correspond to life insurance and non-life insurance business in the private sector. With a total of ¥34 trillion in outstanding plan balance, agricultural cooperatives’ mutual aid plans account for 13.4

percent of the life insurance market and 15.35

percent of the non-life insurance market. Agricultural cooperatives boast the second largest assets after Nippon Life Insurance Co. in terms of their life insurance portfolio, and are the top non-life insurer in Japan in terms of the total amount of non-life insurance. The National

Mutual Insurance Federation of Agricultural Cooperatives (Zenkyoren) has ¥34 trillion in total assets, accounting for 24.0 percent of the agricultural cooperatives’ gross operating income.

The mutual aid insurance business is the second largest business area after credit activities, and represents the most profitable operating area.

Advice on farming and better living are offered to member farmers as a non-profit undertaking, and are funded by revenues from the cooperatives’ credit, mutual aid and economic activities. Co-operatives provide member farmers with advice on not only production but also marketing and distribution with a view to improving farming operation and management. Better living guidance is related to consumer activities and involves health/medical care services for farmers.

In the area of medical care in particular, welfare federations are organized in twelve prefectures.

With over 20,000 beds, they operate the largest number of hospitals after the Japanese Red Cross

Society As public medical institutions, these hospitals contribute to the development of medical services in the community.

In the past when they were part of industrial cooperative societies, Japanese agricultural cooperatives, together with other agricultural organizations, were fostered by the State as institutions for exercising agricultural policies. With the change in agricultural policies, however, agricultural cooperatives have had to face critical tests.

Liberalization of agricultural trade and financial deregulation since 1990 have not allowed cooperative development of farms, but forced the realignment of the three-tiered organizational structure and rationalization of individual cooperatives. Future challenges for the agricultural cooperatives include whether these new developments can be implemented in concurrence with the primary structure of existing cooperatives which are based on the function of rural communities.

Confronted by broad changes in Japanese agriculture, the declining number of people who may in future be engaged in agriculture and the progress of urbanization in rural areas, agricultural cooperatives are uncertain about their direction. It is possible that they may develop as cooperative organizations within the community more broadly encompassing not only farmers but also consumers and smaller businesses in commerce and industry.


agricultural policy

Agricultural policies in Japan after the Second

World War started with land reform. The central policy focus was on the securing of the food supply and controlling its distribution in a time

agricultural policy 11 when a planned economy and food shortages continued from prewar days. With the revival of the economy in 1950, however, domestic resource development began. Development of wild land and land reclamation projects were pursued for the purpose of enlarging arable land areas. This was because during the period of so-called economic independence in the late 1950s, food accounted for as high as one-third of the total imports, which placed pressure on foreign exchange availability and imposed restrictions on the import of raw materials for use by exporting industries. The business community thus called for the attainment of self-sufficiency in food.

During the 1960s, when Japan entered into a period of high economic growth, industrial combines centering on steel production and petrochemical complexes were constructed in the

Pacific belt zone in accordance with the National

Income Doubling Program. Even in this period, a policy of food self-sufficiency was maintained in order to avoid consuming foreign currency reserves through food imports, reflecting constraints on the balance of payments which were serious fiscal and financial issues. The income disparity that existed between rural and urban areas was regarded as a problem, and the Agricultural Basic Law was enacted in 1961 with the intention to raise farm product prices, particularly rice prices, in order to prevent the rapid migration of the labor force from rural to urban areas. Rice prices rose 10 percent or more in the

1960s. At the same time, as a result of the introduction of farm machinery as well as progress in production technologies such as fertilizers and agricultural chemicals, food self-sufficiency was attained in the latter half of the 1960s. From the

1970s and thereafter, implementation of rice production adjustment and treatment of surplus rice surfaced as major issues. Shortly after achieving food self-sufficiency however, the importation of farm products was called for because of the need to further promote imports as a result of high economic growth. There was no longer a balance of payments constraint. Subsequently starting with livestock products, the importation of all kinds of farm products accelerated. Throughout the 1970s, agricultural policies focused mainly on rice. Although rice prices were kept in check, production adjustment subsidies and voluntarily marketed rice premiums were provided to serve as additional means of income redistribution.

Japan’s industrial structure underwent significant changes around 1977. Companies, having overcome the oil shock, promoted lean management. Emphasis shifted from the petrochemical/ heavy industries to microelectronics (ME). Globalization progressed sharply In the period of high economic growth, agriculture had a role in attaining food self-sufficiency because of Japan’s inadequate foreign currency reserves. In subsequent years, it played a two-pronged role. One role was to provide a stable food supply at low prices, and another was to act as a regulating valve to control the labor force in keeping with the cyclical fluctuation of the economy A stable food supply at low prices was subsequently satisfied by farm product trade liberalization, and the role of a regulating valve to control the labor force was played by workers in the tertiary industry rather than those in the primary industry From the latter half of the 1970s, those concerned with agriculture have advocated regionalism together with the idea of settlement zones in the Third

Comprehensive National Development Plan.

Non-farming households have come to account for 60 percent of the agricultural community. Political and economic roles of rural areas have also undergone transformation.

Deregulation of agricultural product trade, which began with liberalization of beef and oranges, started to affect rice in the 1980s. The Second Ad Hoc Commission on Administrative

Reform (Second Rincho) was established in 1981.

The Commission called for the reduction of price support for rice and other agricultural products, on the assumption that trade in agricultural products would be fully deregulated. Agricultural policies would shift their emphasis from an income redistribution function to agricultural life environment enhancement projects, including farm road construction/farming village drainage projects in addition to agricultural infrastructure construction program. The Agricultural Basic

Law was reorganized into the Basic Law of Food,

Agriculture and Rural Areas. The new Law emphasizes the importance of food security and the multifunctional roles of agriculture in the community This Basic Law’s key points are as follows:

12 airline industry

1 The establishment of a basic plan and setting of food self-sufficiency ratio targets. The target for the food self-sufficiency ratio is to be established with the aim of improving the food self-sufficiency ratio and to serve as a guideline for domestic agricultural production and food consumption, while identifying issues which farmers and other relevant parties should address.

2 Development of a food policy emphasizing consumers. Guidelines for a healthy dietary pattern are to be set, the public’s knowledge of food consumption broadened, and relevant information provided.

3 Establishment of a desired agricultural structure and development of farm management policies. Measures are to be taken to encourage efficient and stable farm management and to construct an agricultural structure in which such management can play a major part. Measures are to be taken to revitalize family farming, and to promote the incorporation of management.

4 Measures to ensure price formation reflecting appropriate market evaluation and management stability.

5 Maintaining and improving the natural cyclical function of agriculture. Agricultural production is to be developed in harmony with the environment through the proper use of agricultural chemicals and fertilizers and by improving soil fertility.

6 Compensation for disadvantages in agricultural production in hilly and mountainous areas. Support is to be provided (in the form of direct subsidies) to help maintain adequate agricultural production activities.


airline industry

In a rapidly changing and highly competitive global business environment, Japan’s airline industry has faced considerable challenges during the

1990s. The three major airlines in Japan, Japan

Airlines (JAL), All Nippon Airways (ANA) and

Japan Air System have all been affected by the prolonged recession in Japan, the steeply appre-

ciating yen, rising fuel prices, high airport usage and landing fees, and the deregulation of the domestic airline industry.


Deregulation of the Japanese aviation industry commenced in 1985 with the granting of permission to ANA and JAS to operate internationally

In March 1986, ANA began scheduled international service from Tokyo to Guam. Until then,

JAL was the only Japanese carrier allowed to fly regularly scheduled international routes and the

Ministry of Transport coordinated all domestic routes served by Japanese airlines. In 1986, the

Japanese government relinquished its investment in JAL and JAL became a private corporation.

As a part of the government administrative reform movement, the previous system of route allocation was abolished. Deregulation eventually resulted in the removal of restrictions on overlapping or multitracking routes and the partial liberation of air fares. A significant result of deregulation was the take off of Skymark Airlines in September 1998 and the commencement of daily service from Haneda Airport to Fukuoka at half the cost in air fares charged by other domestic carriers. Equally important was the fact that Skymark Airlines was the first new airline to be established in Japan in over thirty-five years.

Another new airline that marked its inaugural flight in 1998 was Hokkaido International Airlines (Air Do) which commenced three daily round-trip flights in December between Haneda

Airport and the New Chitose Airport in Sapporo,

Hokkaido. The substantially lower airfares provided by the new upstart airlines meant increased domestic competition for the other three dominant carriers.

According to Civil Aviation Bureau statistics, the Tokyo-Hokkaido and Tokyo-Fukuoka routes are the two busiest in the world, with an annual traffic of approximately 8 million and 7 million passengers respectively. Thus, in order to remain competitive, both Skymark and Air Do have instituted unique means of keeping their operational costs low. For example, Air Do flight attendants do not serve drinks or meals on their flights, however, they do have the additional task of cleaning and maintaining the cleanliness of aircraft.

Skymark does not use printed tickets but makes

airline industry 13 use of thermal paper which can be inspected by staff and thus does not require expensive automated ticket readers. Not only does Skymark attempt to keep costs down, it also generates additional revenue by selling advertising space on the exterior of its aircraft fuselages.

Strategic management

The economic turbulence experienced by Japanese airlines during the 1990s was not limited to domestic routes only but extended to international routes as well. In 1994, the Transport Ministry issued a warning to JAL, ANA and JAS to reduce their labor costs in order to remain competitive with other international airlines. As a result, these three airlines postponed their plans to hire new flight attendants that year. In the meantime, JAL had already begun a program to reduce its labor costs by employing foreign flight attendants on a limited contractual basis. These foreign flight attendants were based overseas where the cost of living was substantially lower than in Japan.

Another cost-cutting measure instituted by JAL and ANA was to reduce the overall number of employees. JAL planned to reduce its personnel from 22,000 to 17,000 in the period from 1994 to

1998. Similarly ANA planned to reduce its personnel from 15,000 to 13,500 by 1995. At ANA, this was carried out through early retirement schemes and special bonus programs for flight attendants over thirty years of age. The social impact of these reductions on employee morale was considerable as the traditional concept of life-

time employment at major Japanese corporations was rapidly eroded.

In keeping with the traditional employment practices of many large Japanese corporations, annual pay increases were based on one’s seniority or length of service with one’s company. As a result of this practice, annual labor costs increased regardless of productivity. Thus JAL, for example, has opted for expanded use of its lower cost subsidiaries such as JAL Express (JEX) on more domestic flights, JALways (formerly Japan Air

Charter JAZ) for international routes, and J Air and its Okinawa-based affiliate, Japan Transocean

Air for regional commuter flights.

Japan Airlines’ strategy to transfer more routes to JAL subsidiaries resulted in improved productivity as determined by the International Civil

Aviation Organization (ICAO) measure of cost per available ton kilometer (ATK). In 1997, JAL’s cost to travel 1 kilometer carrying 1 metric ton 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 use of aircraft and personnel. Similar cost-cutting measures were also instituted by All Nippon Airways and Japan Air System. Both airlines restructured their workforce, froze new hiring and transferred less profitable routes to subsidiaries or to affiliated companies. For example, All Nippon Airways’ subsidiaries Air Nippon (ANK) and

Nippon Cargo Airlines (NCA) have lower operational costs as their employees are paid less for doing similar work

A major problem faced by both domestic and international airlines operating in and to Japan is the excessively high landing fee, which far exceeds that charged at other major airports. For example, the overall landing fee for a Boeing 747–

400 at the New Tokyo International Airport,

Narita, is $11,807, nearly triple the $4,361 fee for

New York and nearly double the landing fee of

$6,685 for Paris. Furthermore, the Japanese government has set a very high fuel tax. Ballantyne

(2000:19) reports that for JAL alone, fees and fuel tax account for some 24 percent of the domestic operating costs and 14 percent of total operating costs. There is very little likelihood of a lower landing fee or lower fuel tax as there are limited airport slots available.

Resource optimization

In addition to changes in human resources management to improve productivity Japanese airlines have had to resort to other means to maintain global outreach and competitive advantage. The management strategies employed by each of the

Japanese airlines, however, differed somewhat in addressing issues that developed from the liberalization of global aviation markets. In October

1999, All Nippon Airways joined the Star Alliance, which consists of several leading airlines such as United Airlines, Lufthansa, Air Canada,

SAS, Thai, Ansett Australia and several other airlines. In contrast, as of August 2000, Japan

14 airline industry

Airlines has not joined a major alliance but has continued to establish code-shared arrangements with various airlines that belong to competing alliances. Similarly, Japan Air System has embarked on code-shared routes but not as extensively as JAL.

One major benefit of joining an alliance or code-shared arrangement with other airlines is that customers are able to take advantage of a much wider and seamless airline route network.

At the same time, both customer services (such as more convenient flight schedules, joint use airport lounges, and reciprocal frequent flyer programs) and operational services (flight and briefings, maintenance, ramp facilities, and catering) are considerably enhanced.

Another major benefit accruing from an alliance partnership, from an operational perspective, is that maintenance employees and the deployment of spare parts along the route network can be reduced through the reciprocal provision of both personnel and essential parts and equipment. The avoidance of duplication results in savings that can be passed on to customers.

Kizuki system

The success of an alliance, code-sharing or related partnership arrangement ultimately depends on the firm understanding and integration of human factors throughout the system. In the case of Japan Airlines maintenance, the company has developed a system of responsibility known as the kizuki system which consists of a group of dedicated engineers and mechanics to maintain and monitor the performance of the aircraft to which they are assigned. The term kizuki is a combination of ki, which refers to aircraft, and zuki, which means “to stick to.” A keen sense of responsibility and special attachment to each aircraft assigned to the maintenance personnel are developed by having the names of the team leaders and their titles—for example chief engineer or mechanic— prominently displayed on the cockpit bulkhead.

Group loyalty and pride in the well-being of the crew and flight safety are thus achieved. Maintenance crew members must be well coordinated in their scheduling of tasks to cover the various shift cycles necessary to handle various aircraft arrivals and departures.

From a productivity perspective, the kizuki system and kaizen in Japanese aviation is best illustrated by the educational and training programs provided by the major Japanese airlines. In order to develop human resources management skills in addition to various technical skills, courses on the principles of management and organizational behavior, error management, risk assessment, quality standards, problem consciousness and creativity are provided. From a kaizen perspective, discussions are held on how to examine and improve the organization as well as specific procedures associated with daily tasks that can be instituted.

Technological change and crew resource management

For Japan Airlines, All Nippon Airways and Japan Air System, the introduction of advanced jet aircraft and the computerization of the cockpit created an urgent requirement to integrate human knowledge into their traditional training curricula. The traditional perspective on organizational behavior in which operational directives flowed from the captain to his crew was no longer satisfactory for the highly complex computerized flight management system. Since human errors do occur when programming flight plan data, new procedures required a cross-checking of procedures and data inputs prior to executing instructions via the flight management system.

New training procedures focused initially on improving cockpit communication between the captain and his first officer. This enabled them to operate as a cohesive team in which greater situation awareness was achieved and maintained during flight. At the outset, the concept was known as Cockpit Resource Management; however, with the inclusion of extremely sophisticated flight entertainment and other medical systems on modern jumbo aircraft, it became necessary to expand the concept to Crew Resource Management (CRM) to recognize the important role provided by flight attendants.

CRM training programs at the three major

Japanese airlines differ slightly in their contents as each of the airlines has different operating routes and conditions as well as different corpo-

Ajinomoto 15 rate cultures. However, the basic conceptual and philosophical elements are similar in that the main objective is to provide a greater appreciation and respect for what each crew member’s skills and responsibilities are so that crucial decisions can be made on the basis of having full knowledge of a given situation. Situation awareness at all times during a flight is most important from a flight safety perspective.

Future outlook

The challenges resulting from the deregulation of the Japanese aviation industry are being met directly by Japanese airlines through restructur-

ing of their respective organizations and by joining alliances or by entering into code-shared arrangements with other airlines. The benefits that have accrued from these strategies are at best short-term solutions. The rapidly evolving technological changes in the aviation industry have proceeded much more rapidly than the institutional changes necessary to accommodate the technology-driven economic circumstances.

Japan’s aviation industry must recognize the highly competitive global aviation environment as well as the domestic transportation environment. In the deregulated market, sweeping reductions in personnel and wage cuts can only be a short-term measure. The increasing surplus of airline capacity will impact on Japanese airlines through competitive airfare pricing, and thus, reduced revenue. This calls for greater rationalization of routes through either alliances, or bilateral code-sharing arrangements on international routes.

On the Japanese domestic scene, the new startup airlines have not impacted on the major airlines to any great extent as airport slots are limited and thus competition has been controlled indirectly. The greatest competition in the nation’s most heavily travelled corridor, however, comes from the shinkansen bullet train service. It remains to be seen whether or not the airlines will not only lower their airfares but also provide more frequent service through better scheduling and avoidance of simultaneous flight departures.

Further reading

Ballantyne, T. (2000) “Deregulation,” Orient Aviation

July: 16–19.

Saito, M. (1993) “Challenges to Human Factors Issues in JAL Maintenance,” in Human Factors in Aviation,

Montreal: International Air Transport Association,


Ujimoto, V (1997) “Changes, Challenges, and Choices in the Japanese Aviation Industry: The Development of Crew Resource Management in Japan Airlines,” in H.Millward and J.Morrison (eds), Japan

at Century’s End, Halifax: Fernwood Publishing Ltd,


Yamamori, H. (1993) “Keeping CRM is Keeping the

Flight Safe,” in E.L.Weiner, B.G.Kanki and

R.L.Helmreich (eds), Cockpit Resource Management,

New York: Academic Press, 399–420.



In 1908, Dr. Kikunae Ikeda discovered that glutamic acid was a source of flavoring for food and immediately patented his discovery He named the seasoning Ajinomoto and sold his discovery to Saburonosuke Suzuki in 1917, the founder and first president of Suzuki Shoten.

Suzuki subsequently changed the company name to Ajinomoto Co., Inc. due to the success of the

Ajinomoto brand.

Today, Ajinomoto has four main product segments in the food business: seasoning, edible oils, processed foods, and beverages and dairy products. In the seasoning segment, the company has many products. Most Japanese housewives have used seasonings such as Cook-Do and Gohan

Ga Susumu Kun seasonings designed to enhance flavor and save cooking time for busy housewives.

Ajinomoto has always focused upon expanding its product line to meet the tastes of people as well as serve their need for time savings and convenience.

In the chemicals segment, there are three main product lines: amino science, feed-use amino acids and pharmaceuticals. These lines include such products as sweeteners, pharmaceutical intermediates, functional nutritional foods and ingredients for cosmetics and toiletries.

16 Akihabara

In the amino science segment, Ajinomoto uses amino acids as raw materials in clinical nutrition products, gastrointestinal medicines and hypertension medications. Because of continuously changing eating habits and increasing health consciousness, the demand for a sweetener by amino acid has been increasing. These products are in

Japan as well as in North America, Europe, Southeast Asia, and South Africa. In the feed-use amino acids segment, Ajinomoto has a 35 percent worldwide market share for feeds containing lysine. In the pharmaceuticals segment, Ajinomoto focuses research and product development on health issues such as diabetes, infusions, clinical nutrition, gastrointestinal diseases and cardiovascular diseases.

In fiscal 1999, worldwide sales topped ¥8 trillion ($800 million) of which foods accounted for

72.2 percent, fine chemicals for 16.2 percent and other products 11.6 percent. Ajinomoto is the sixth largest company in the food industry in Japan. Although its domestic market share has remained stable, recently it has become more difficult for

Ajinomoto to expand its business in Japan, due to fierce competition and changing economic factors. Thus, the company has focused efforts on building its business overseas, which still only accounts for about 15 percent of its overall sales.

Currently the Ajinomoto seasoning is sold in more than 100 countries. Since Ajinomoto opened its first overseas office in New York in 1917, the company has internationalized its business. Today the company’s products are produced and sold all over the world. Recently Ajinomoto expanded into China, Vietnam and Myanmar. The company’s strategy for globalization is to understand each country’s situation and to behave like a domestic company. In spite of health warnings about the possible ill effects of monosodium glutamate, annual worldwide sales are growing at about 6 percent per year. Ajinomoto now supplies almost one-third of the global market for monosodium glutamate




Akihabara, commonly referred to as Electric

Town or Electric City is an area in downtown

Tokyo famous for its concentration of shops selling electrical and electronic products. Located in the Kanda district of Tokyo, the area is crowded with large shops where electronic goods of all varieties are sold at a discount, and small stalls in the side streets and under the elevated train tracks where electronic parts are sold.

In Japan, and to a lesser extent overseas,

Akihabara is famous as a showcase for Japanese electronic technology. In Akihabara, practically any electric gadget or appliance can be found, from digital audio recorders the size of a stick of gum to the latest handheld organizers that let you surf the internet, to more mundane items such as washers and refrigerators. The area is also well known for its discounted prices.

With so many stores crammed in the few blocks surrounding Akihabara station carrying electronic products, competition is fierce. Each store vies with its hundred’s of competitors to carry the latest, the smallest, the most powerful versions of differing goods. Store displays change from day to day depending on what new goods have come in. Price competition is also strong, and most stores, in an effort to keep prices low, spend the bare minimum on interior design. Products are stacked on metal shelves, or from the floor to the ceiling. Price cards are usually handwritten, as are posters outside the stores announcing the day’s specials. The stalls selling electronic components are tiny cubicles crammed with items in a layout only understood by the stall keeper.

Above all, the noise, the crowds, and the hustle and bustle of Akihabara resemble an open-air flea market more than a clearing center of sophisticated high-tech product.

The area where Akihabara is located was originally the site of a vast clearing. This open field was created by local authorities as a firebreak after a devastating fire ravaged Tokyo in 1870.

Eventually the clearing was surrounded by trees, and became known as Akibonohara, the Field of

Autumn Leaves. In 1890, the Sobu train line built a train station on Akibonohara. Yet, a misinterpretation of the three kanji (ideograms) forming the station name “Akibonohara” resulted in the pronunciation of the name as Akihabara.

When Tokyo’s Yamanote line also reached

Akihabara station with elevated train tracks in the early twentieth century Akihabara became a

allowances and non-salary compensation 17 major center of goods being transported throughout the capital. Yet the impetus for Akihabara’s rise as a commercial district was the elevated train tracks themselves. During Japan’s immediate postwar period, hundreds of black-marketers set up stalls beneath the tracks in Akihabara. At the time, the majority sold hard to get radio and electrical parts. As Japan’s economy entered its high growth period in the 1960s, Akihabara’s stallkeepers began expanding their wares to include household appliances such as refrigerators, televisions and washing machines, as post-war demand for these items surged.

Over the years, Akihabara’s storekeepers became respectable merchants, and their presence attracted established electronic retailers. Yet the influence of Akihabara’s black market days lives on in its free-wheeling style and its hodgepodge of shops and stalls. It is estimated that within the multiple square blocks occupied by Akihabara, there are now over 600 stores selling electric and electronic equipment and parts.

The main street running through the heart of

Akihabara, Chuo-dori, is lined with stores that sell the latest electronic gadgets and appliances.

Many stores specialize in particular goods, such as household appliances, computers, or audio equipment. However, most carry a wide variety of goods like phones, fax machines, computers, heaters, air conditioners, televisions, VCRs, video games and so on. The majority of these shops have a small floor space, but are several stories high and covered with neon signs. Many of the larger stores segregate their products by floor, with washers and dryers on one floor, fax machines and telephones on another, and cellular phones on yet another.

Specialty stores, such as those that concentrate only on audio-visual equipment, or on digital cameras and camcorders, abound. There are also many duty-free shops crammed with electronic goods for export, catering to the many tourists who visit Akihabara. In addition, there are discount stores carrying huge arrays of electronic gadgets at discounted prices, and also stores that exclusively carry used electronic products.

As well as the specialty stores lining the main street, a few hundred stalls filled with hundreds of products are still located beneath the train tracks. These stalls have only enough room for the vendor, and are stocked with thousands of electronic components, such as capacitors, vacuum tubes, adapters, transistors, circuit boards, etc. The do-it-yourself fanatic can find any part needed, regardless of how obscure it may be.

With the rise of the computer generation, in the latter 1990s a large number of shops have emerged in Akihabara that exclusively carry computers, peripherals and software. Many Japanese high-tech companies use Akihabara either to test new products’ acceptance, or to conduct consumer surveys. With its concentration of well over

600 stores dealing exclusively with electrical and electronic goods, Akihabara draws crowds of consumers daily Japanese electronic firms continuously make use of this fact to test new products’ marketability. The lifespan of some of these products in Akihabara is less than one month. Those that prove successful are taken to full production and released nationwide, and eventually to overseas markets. Consumer surveys are also carried out so often in Akihabara that shoppers have been known to complain that filling out survey forms takes more time than shopping.


allowances and non-salary compensation

Allowances and other non-salary benefits comprise an important portion of an average Japanese employee’s overall compensation package.

Though the actual percentage amount of an employee’s total compensation package tied up in allowances and non-salary benefits may vary significantly based on several key factors, estimates generally set it at somewhere between 25 and 35 percent. The specific types of allowances remain fairly stable across industries and across firms within an industry. However, the size of specific allowances is often closely aligned with a company’s relative ranking within the industry and the industry’s relative position within the private sector. In the latter part of the twentieth century adjustments in allowances and non-salary compensation often occupied a more central position during the spring labor offensive (shunto), than did hourly wage and semi-annual bonuses.

18 allowances and non-salary compensation

Allowances and non-compensation benefits reflect both the historical roots of Japanese organizations and a pragmatic approach to addressing the current economic and sociocultural constraints of modern Japan. The practice of providing allowances and benefits, over and above wages and salary can be traced back to the ie of pre-

Meiji Japan. For example, loyal banto and tedai

(clerks) in the merchant houses could expect some assistance from the ie in buying their own house or in renting living quarters. In the immediate postwar period, at a time when many firms were confronted with liquidity problems, allowances represented one way of attracting and retaining employees without having to significantly increase cash outlays for wages and salaries. During extended periods of economic growth in the 1960s and 1970s, and into the 1980s when Japanese economic prosperity was at its height, allowances remained a critical component of the average employee’s compensation package because the benefits had come to be seen as an integral part of the overall package, and because the value of some allowances represented a significant value not available outside the firm. For example, newly hired single salarymen (see salaryman) are often housed in company dorms where the monthly rent may be less than one-third the cost of comparable housing on the open market.

The effect of having such a large number of allowances and having them constitute such a large percentage of an employee’s total compensation package is not inconsequential in its impact on intra-firm and inter-firm wage differentials. In the case of inter-firm differentials, employees of two firms may start out with monthly salaries that differ by only five or six thousand yen. However, once differences in allowances are factored in the final amount of difference can be in excess of ¥30,000 or more.

Calculated over a full year, such a difference becomes substantial.

A second effect of allowances is to dilute the impact of merit-based increases in salary. Allowances are provided on a non-merit basis to all employees. For example, an outstanding single employee living in a company apartment receives the same housing allowance as does an average single employee in the same apartment. Similarly allowances can also reduce the differential effect of tenure. A thirty-year-old married employee with two pre-school children will receive the same family allowance as a married middle manager with two high school-age children.

A typical package of allowances and non-compensation benefits would include the following: family allowance (covering both spouse and children); housing allowance; transportation allowance; paid holidays; paid annual vacation; leaves of absence; company-sponsored health insurance; company-subsidized home loans at favorable terms; and access to special consideration and discount packages through company-arranged consumer goods and services purchasing programs. The relative size of these benefits has, over time, come to be fairly standard among firms.

Nevertheless, there are important differences from industry to industry and from firm to firm. These differences reflect variances in working conditions, geographical factors and a firm’s relative position within the industry and corporate culture and personnel practices. Top-ranked firms tend to offer more generous allowances than lower ranked firms. With regard to differences in corporate culture and personnel practices, many corporations have developed distinctive orientations reflecting underlying corporate values which then become codified in personnel practices that become institutionalized over time.

In the case of the corporate values, Pioneer, for example, has always tended to provide more generous family allowances than other firms in the electronics industry.

Family allowance

Family allowance refers to a monthly allowance that is paid to employees to cover the additional cost of supporting dependents. It assumes that employees (who are overwhelmingly male) are the sole income-earner in the household and therefore require additional support to fulfill this role. Indeed, married employees are referred to as “income earners.” Although there is some variation in how the allowance is calculated, in most firms the allowance for the first dependent—which is assumed to be the spouse—will be significant.

The incremental increase in allowance for a second dependent and any others thereafter will be significantly lower. For example, in 1991 Toyota

allowances and non-salary compensation 19 paid a monthly family allowance of ¥19,500 for the first dependent and ¥3,500 for a second dependent. Variations on this allowance tend to occur in two areas. Although rare, some firms make no distinction between the first dependent and subsequent dependents. In firms where this is the case, the first dependence allowance is usually lower than industry average, but the subsequent dependent allowance is two to three times higher. The second area where firms may vary their practice is whether the size of allowance for subsequent dependents will vary based on number; that is, the allowance is larger for the second dependent than it is for the third or fourth. Again, in some firms the allowance per dependent remains constant regardless the number of dependents, in others it will decrease. Returning to the

Toyota example, the allowance for dependents two and three would have been ¥3,500 each, but the allowance for a third or more dependents would have dropped to ¥2,000 each. By comparison, in that same year, Daihatsu Motors paid a first dependent allowance of ¥13,000 and a second dependent (and all subsequent dependents) allowance of ¥3,500. Differences between Toyota and Daihatsu in first dependent allowance reflect their relative positions within the automotive industry whereas differences in second and subsequent dependent allowances reflect differences in corporate culture and personnel practice. This type of difference persists across all allowances.

(possibly by means of a companysubsidized lowinterest rate mortgage) by that age.

To understand variations in housing allowances, compare two companies: Fujitsu and

Toshiba in the mid-1990s. At Fujitsu, a housing allowance is available to single employees over twenty-two years old until they reach thirty Income earners (married employees) will receive an allowance for thirteen years or age forty which ever comes first. For both singles and income earners, this salary varies by geographic location and is lower for singles. For income earners, Tokyo and Kanagawa employees the most, followed by those in Osaka, Hyogo, Chiba and Tokyo satellites receiving less and employees anywhere else in Japan receiving the least. For singles, the first two classifications remain, however, single employees outside of the Tokyo and Osaka metropolitan areas receive no housing allowance.

Toshiba divides housing along geographic lines as well, with those in Tokyo receiving more than those outside metropolitan areas. Also, singles receive a lower allowance than income earners.

Lastly Toshiba provides a supplement to those employees not in company housing, but renting on their own.

Transportation allowance

Many companies provide transportation allowance to employees working in metropolitan areas or in areas where it is expensive or unrealistic for employees to use their own transportation to get to and from work. The typical allowance covers the cost of train and bus passes from the residence to work.

Housing allowance

Of all the allowances that companies provide, the greatest variation can be found in the housing allowance. Differences in the geographic location of employment create the need for most companies to develop contingencies. For example, the cost of housing for a single employee working at a corporate headquarters in Osaka may be significantly higher than the cost a single-family dwelling for a married employee working at a manufacturing facility in Matsue. Marital status and whether an employee has an apartment or a single-family dwelling are two other factors influencing housing allowance policy Finally many companies place an age cap on the housing allowance, usually 40 years old. Employees are expected to have purchased their own home

Non-salary benefits

Non-salary benefits include such items as holidays, paid vacations and leaves of absence.

There are twelve national holidays, although the norm in most companies is to have all twelve days off, there is widespread variation among those companies that do observe all twelve, ranging from eleven days all the way down to four. Additional holidays may include the company’s founding day and personal memorial days (involving familial responsibilities relating to religious observances).

20 amakudari

Paid vacation days vary by tenure. Most companies offer 14–15 paid vacation days after the first year, up to a maximum of twenty days after ten years of service. Given the tendency of most employees not to take their full allotment of paid vacation days, companies also have policies pertaining to the transfer of vacation days from one year to the next. In a few firms, employees can transfer vacation days over a two-year period, but for the vast majority the limit on transfers is no more than one year.

Companies grant leaves of absence for marriage, funeral services and childbirth. As with the family allowance, there is widespread variation across firms, most often reflecting firm-specific choices. The longest leaves are granted for mourning. For a spouse, parent or child, the average leave granted is seven days. For one’s own grandparents or brothers and sisters, the average is five days. Leaves for other relations tend be shorter: a spouse’s parents (five days), grandchildren (three days), children’s spouses (two days) and aunts and uncles (one day). Leave for what are classified as happy events—marriage, spouse’s childbirth and children’s marriage—average five days, three days and three days respectively.

Changes over time

The variety and size of allowances companies offer has evolved over time in response to economic pressures and to changing mores regarding what companies should and should not do for their employees. More recently particularly in the

1990s, the trend has been to reduce the size of allowances and increase the size of the base salary component in the overall compensation calculation. A change has been the lowering impact of company rank within industry on allowances.

In response to an aging workforce, a labor shortage among new recruits, increased competition and the presence of non-Japanese firms offering a variety of, for Japanese, non-typical incentives such as stock options, Japanese firms have been experimenting. As with other elements of the

Japanese management system, this is an area where further changes will occur, though their direction is difficult to predict.

See also: lifetime employment; seniority promotion

Further reading

Brown, C., Nakata, Y., Reich, M. and Ulman, L. (1997)

Work and Pay in the United States and Japan, New York:

Oxford University Press.

Japan Council of Metalworkers’ Union (Annual) Wages

and Working Conditions, Tokyo.

Tachibanaki, T. (1996) Wage Determination and Distribu-

tion in Japan, New York: Oxford University Press.



Amakudari (descent from heaven) refers to the reemployment of high-ranking civil servants to key positions in diverse sectors of Japanese society upon their retirement from the central bureaucracy The literal translation as “descent from heaven” invokes the cultural symbolism of working in the bureaucracy and implies a distinction between the life of the sacred and the profane.

Before the Second World War, civil servants worked directly for the emperor who was considered sacred, a god, and the embodiment of the Japanese nation. Bureaucrats were seen as in heaven by their noble and sacred work for the god and the nation. Upon retirement, bureaucrats were viewed as descending in status by reemployment in the profane world of material self-interest.

The pressures arising out of the seniority system within ministries feed amakudari. Entering civil servants, upon passing the civil servant exam

(type 1) and being selected to the ministry receive extensive training and advance together as a cohort. As they reach their forties, their career mobility options begin to narrow. There are few section chief positions, fewer bureau chief positions, and only one vice-ministership for each ministry The final weeding out process comes when a new vice-minister is chosen and all the new vice-minister’s classmates and earlier cohorts resign to insure that the new vice-minister has absolute seniority within the ministry. Ultimately everyone must “descend” because of the

amakudari 21 unremitting pressure from new entering classes advancing from below. The usual retirement age for the vice-minister is slightly over fifty but retirement age varies across ministries. The new vice-minister and the chief of the Secretariat are responsible for finding the retiring officials good positions in the private or public sectors.

Discussion of amakudari has increasingly penetrated the western literature on Japanese social structure, especially within the topics of the Japanese “power structure,” “Iron Triangle” or “Ja-

pan Inc.” Amakudari is viewed as a key institutional arrangement fusing relationships among the political, economic and bureaucratic operations.

This imagery of amakudari as power structure is partially the result of perceived differences between the USA and Japan. The USA tends to separate the executive bureaucracy from the economic market and legislative political processes with the conviction that separate spheres produce the best results for everyone. This separation is celebrated in principles of checks and balances, the laissez-faire tradition, an open market economy and a weak state bureaucracy with strict limits on government regulation. Japan, by contrast, is characterized as fusing these linkages through extensive formal and informal relationships in the belief that these ties induce cooperation and produce the best outcome for all.


Conventional usage of amakudari is generic. It simply means the different ways in which civil servants exploit their positions for post-retirement careers. Analytic usage differentiates the major paths of amakudari by destinations. The most widely known definition of amakudari is a movement to profit-making enterprises and is subject to legal restrictions. The second form of amakudari is a movement to public corporations that are established by law and financed in part from public funds. It is sometimes called “sideslip”

(yokosuberi) and is not subject to legal restrictions.

The third form of amakudari is a movement into the political world, by becoming a candidate for election to the Diet. It is sometimes called “position exploitation” (chii riyo) and is usually open to those who served in choice national or regional posts suitable for building political support. Another, though less well-known, form of amakudari is a movement from central government to local government or industrial associations. Finally

amakudari may involve a sequence of retirement positions in the career of an ex-civil servant. This multi-step retirement process is called “migratory bird” (wataridori). Wataridori among some public corporations is regulated by the Diet, but it is a prevalent, institutionalized pattern of re-employment among top level ex-civil servants. These five forms of amakudari are interrelated. Discussion of all the paths provides a more holistic appreciation of why amakudari constitutes a key element of the Japanese power structure.

History of amakudari

There is no consensus on the origin of amakudari.

In part, this ambiguity results from different interpretations of what constitutes amakudari. It began as a diffuse movement of individuals between ministries and the private sector or public offices reaching back to at least the beginning of the Meiji period (1868–1912). However, after the Second

World War these diffuse flows became controlled and routinized within the administrative apparatus of each ministry and agency.

There are scattered references to the movement of government officials into the business sector that occurred during the early Meiji period. A popular novelist and social critic, Uchida

Roan (1868–1929) used the term amakudaru

(noun form of amakudari) in his social criticism, entitled Shakai hyakumenso (Society of Kaleidoscope) published in 1902. Uchida may be the one who coined the term amakudari. Later scholars wrote of an emerging distinction in forms of retirement (amakudari and chii riyo) between ‘economic’ and ‘social’ ministries. Kubota (1969) and

Garon (1987) suggest that after the First World

War those retiring from ‘economic’ ministries, such as the Ministry of Finance and the Ministry of Agriculture and Commerce, drew on “contacts with business clientele” to take top positions in private corporations (amakudari). Retiring bureaucrats from “social” bureaucracies, such as Home

Ministry tended to remain within government or joined political parties, often with cabinet appointments (chii riyo).

22 amakudari

The pivotal distinction for identifying the origin of amakudari is whether one defines it as a routinized personnel movement orchestrated by the ministries, or a movement based exclusively on individual initiative. Amakudari before the Second World War was individually negotiated and primarily restricted to retired army and navy personnel. After the war the number of yokosuberi expanded as the number of public corporations rose and ministries assumed more responsibility for placing their retirees. A recent survey of highranking exofficials by Cho (1995) found that three times as many amakudari officials attributed their retirement positions to ministry placements instead of individual contacts.

Different views of amakudari

There is general agreement among scholars on the existence of amakudari but there are disagreements over its interpretation. Chalmers Johnson

(1974, 1978) popularized the concept of amakudari in his discussion of the Japanese developmental state. He suggested amakudari as “maintaining coordination and cooperative interactions among the iron triangle of Japanese power elites—an aspect of what the Japanese call nemawashi (‘preparing the groundwork’) and what foreigners describe as consensual decision making among the bureaucracy the conservative party and the business community.” According to Johnson, the cooperation and avoidance of conflict attributed to “national character” is really the outgrowth of institutions like amakudari facilitating common orientations and cooperative ties between the government, private sector, and the political world.

Daniel Okimoto (1989) built on Johnson’s work by discussing amakudari in the context of numerous relationships that make Japan’s industrial policy effective. He called the public-private relationships “the network of ad hoc, informal ties that give industrial policy and governmentbusiness interactions the resilience and adaptability for which Japan is renowned.” For Okimoto,

amakudari is the best unobtrusive indicator of relative bureaucratic power vis-à-vis other ministries.

Other scholars, such as Peter Evans (1995) and T.J.Pempel (1998), see amakudari as ties binding the bureaucracy and private corporations and representing the basis of “state embeddedness” resulting in policy effectiveness. Like Johnson and

Okimoto, these authors treat amakudari as a flexible and principal empirical illustration, not of elite cohesion per se, but of the embeddedness of the developmental state (using Japan as the archetypal developmental state). Evans views amakudari as providing institutionalized channels for the continual negotiation and re-negotiation of goals and policy Similarly Pempel (1998) sees amakudari as the “blurring of the line between elected officials and career civil servants” and the development and maintenance of ties between private interests and particular ministries of the central government. To Pempel, amakudari is the stuff of inter-elite cooperation and alliances, fusing of the state with the public and private sectors, providing the basis for stability and development.

Pempel, however, sees the bases of this fusion as undergoing substantial changes in the 1990s.

In contrast, some authors challenge the notion of amakudari representing elite cohesion and policy effectiveness. Calder (1989) questions the utility of amakudari as a mechanism of elite cohesion much less bureaucratic dominance. Instead,

amakudari simply “broadens the access of less economically powerful firms.” The bureaucracy exercises a limited influence through amakudari since it is mostly concentrated in second tier, weak private corporations, not in top corporations and banks. Other authors, following Calder, maintain amakudari is not sufficient to affect industrial direction since it involves a small number of firms

(less than 10 percent of the listed firms in any one year) and takes place mostly in small, not large firms. In addition, they point to a weakening significance of former officials in political office since the 1990s as the number of former civil servants in political office declines.

In summary various scholars agree on a high level of interaction, communication and cooperation among politicians, career bureaucrats and business people throughout the postwar era, but they disagree on the interpretation of amakudari as important inter-institutional relations. To some authors, amakudari represents elite cohesion provid ing the stability flexibility and effectiveness of state policy. Others question the effectiveness of this type of elite cohesion. Further, some authors distinguish different forms of

amakudari (for example, amakudari, yokosuberi, chii

American occupation 23

riyo, and wataridori) that represent distinct analytic and empirical phenomena. Finally scholars are in agreement that inter-institutional (inter-elite) relations began changing in the 1990s, though they differ on the degree of change, its interpretation, and direction. International markets, a new electoral system, a realignment of voters, weakening linkages of the major keiretsu, and a reduction in the policy tools of the bureaucrats are seen as causes of changing relations among the bureaucracy private sector and the legislature.


There is substantial recognition that Japan is a network society and the Japanese state is a network state embedded in Japanese society

Amakudari is but one type of network between the state and Japanese society among a myriad of crisscrossing, overlapping, and multiplex relationships. However, amakudari is the apex of networks. Amakudari and amakudari-like processes operate everywhere in Japan, including the personnel movements from large to medium and medium to small affiliated companies. Similar personnel movements take place from the central bureaucracy to local governments and from local governments to private and public sectors and local political offices. Thus, any analysis of

amakudari is at best a “biopsy” of the networking.

In this sense, we only scratch the surface of a fundamental socioeconomic Japanese institution.

See also: nemawashi

Evans, P. (1995) Embedded Autonomy: States and Indus-

trial Transformation, Princeton, NJ: Princeton University Press.

Garon, S. (1987) The State and Labor in Modern Japan,

Berkeley CA: University of California Press.

Inoki, T. (1995) “Japanese Bureaucrats at Retirement: the Mobility of Human Resources from

Central Government to Pubic Corporations,” in

H.Kim et al. (eds), The Japanese Civil Service and

Economic Development, Oxford: Clarendon Press,


Johnson, C. (1974) “The Reemployment of Retired

Government Bureaucrats in Japanese Big Business,”

Asian Survey 14:953–65.

——(1978) Japan’s Public Policy Companies, Washington,

DC: American Enterprise Institute for Public Policy


Koh, B.C. (1991) Japan’s Administrative Elite, Berkeley

CA: University of California Press.

Kubota, A. (1969) Higher Civil Servants in Postwar Japan:

Their Social Origins, Educational Backgrounds, and Ca-

reer Patterns, Princeton, NJ: Princeton University


Okimoto, D. (1989) Between MITI and the Market: Japa-

nese Industrial Policy for High Technology, Stanford, CA:

Stanford University Press.

Pempel, T.J. (1998) Regime Shifts: Comparative Dynamics

of the Japanese Economy, Ithaca, NY: Cornell University Press.

Schaede, U. (1995) “The ‘Old Boy’ Network and Government-Business Relationships in Japan,” Journal

of Japanese Studies 21 (2): 293–317.

Usui, C. and Colignon, R. (1995) “Government Elites and Amakudari in Japan, 1963–1992,” Asian Survey

35 (7): 682–98.


Further reading

Blumenthal, T. (1985) “The Practice of Amakudari within the Japanese Employment System,” Asian

Survey 25 (3): 310–21.

Calder, K. (1989) “Elites in an Equalizing Role: Exbureaucrats as Coordinators and Intermediaries in the Japanese Government-Business Relationship,”

Comparative Politics 21 (4): 379–404.

Cho, K.C. (1995) “Nihon no Seifu & Kigyo kankei to

Seifu Shigen Douin no Osmotic Networker to shite no Amakudari,” Ph.D. dissertation, Tsukuba University Japan.

American occupation

By August of 1945 Japan lay utterly defeated, completely at the mercy of the victors. Fortunately for Japan, what the USA wished was to transform Japan from an authoritarian, militaristic, elitist and internally exploitative society into a society more like its own, which the Americans saw as more pluralistic, democratic, egalitarian, and without the influence of a virtually uncontrolled military which had caused so much suffering throughout Asia (see wartime legacy), and

24 American occupation indeed within Japan itself. The United States virtually ruled Japan for over six years, instituting many changes and reforms. All in all, observers both American and Japanese evaluate the American occupation of Japan as highly successful.

By 1944, although it was not clear how long the war would last, everyone on the American side knew that the end was near in terms of Japan’s ability to sustain military conflict. There was considerable debate within the War Department and in congress over such issues as what should happen to the Japanese emperor. It was decided that when the war ended a large contingent of administrators would go to Japan and force major changes in Japanese institutions.

Above the administrators in authority would be the United States Army; President Roosevelt chose General Douglas MacArthur to be supreme commander of the occupation administration, even though the President did not personally like the general and considered him a likely future presidential candidate for the Republican party.

Initial stages

The first Occupation officials arrived on Japanese soil August 30, 1945, fifteen days after Japanese representatives signed the formal surrender.

The situation did not bode well for implementing an ambitious plan for virtually remaking a modern society The first problem envisioned by the victors was getting the Japanese to go along with reforms dictated by its former enemy. The war had seen some of the most bitter and desperate fighting in history; physical destruction of

Japanese cities was on a scale never experienced before in any country. Originally planned as a joint effort between the allied nations most directly involved in fighting against Japan: the USA,

Britain, the Soviet Union, and China. It was difficult to see how any kind of successful policy making could take place among nations who were suspicious of and at times even hostile toward one another. The American who was to preside over the mix was characterized by some as a rightwing ideologue with a mountainous ego.

In spite of all this, the six years and eight months of the formal Occupation of Japan was in the judgment of most observers a surprisingly positive and liberating force for Japan, as well as an advertisement of some of the best qualities of

American culture. The fear of a resentful and hostile Japanese populace was instantly wiped away by the courtesy and cooperation of people at all levels, from ordinary citizens to high-ranking officials in the government from the very beginning. Japan had lost the war, the Emperor had declared so; there was a new ultimate authority in the nation, and almost all Japanese as a matter of course directed the same sincere respect toward it as they had to the old authority.

The problem of the multinational character of the Occupation turned out to be partially solved by the image of General MacArthur as an egomaniac. It had been agreed upon among the

USA and its allies that Japan would be administered by the Allied Council for Japan (ACJ) with representation from all four nations mentioned above. Legally General MacArthur, as Supreme

Commander of the Allied Powers (SCAP), was nothing more than chairman of that body. However, MacArthur simply refused to share power with any non-American. He and his subordinates completely ignored ACJ, never once acting on any of its suggestions, and taking no note at all of its many complaints. It was in every respect an American occupation.

Although MacArthur was always firmly in command, the Occupation was not in the strictest sense a military government. He was very serious about carrying out this historically important mission successfully. Later in his memoirs he explained that what he wanted to accomplish was first to end the military power of Japan and punish war criminals, then to build sound representative government, enfranchise women, liberate farmers and workers, liberalize education, decentralize economic power, establish a free and responsible press, and finally to separate church and state. In a few cases the plan could not be completely realized, but it is remarkable how close SCAP came to fulfillment of those goals.

Before Occupation administrators could get started, three important tasks were given to the

US military: demilitarization of the country identification and punishment of people Americans considered to be war criminals, and untangling

American occupation 25 the human mess of Japanese abroad and non-

Japanese in Japan, the result of invasion, colonization and forced labor. The two million soldiers and sailors of the Imperial Army who were still in Japan, for the most part simply went home, demilitarizing themselves. Six million Japanese, about half military personnel and half civilians, were returned from territory Japan no longer controlled. Three million Taiwanese and Korean laborers, many brought to Japan by force, were brought back to their homelands by the US Navy.

A series of war crimes trials, begun prior to the end of the war in the Philippines, continued on in Japan for two years. This was the only aspect of the Occupation that was truly international: the trials were conducted by judges from eleven nations including Australia, Canada,

France, India, the Netherlands, New Zealand, and the Philippines together with the four nations of the ACJ. In all, about 6,000 people were indicted as war criminals. Seven men were convicted as

Class A war criminals and were hanged in September 1948, including General Tojo Hideki,

Prime Minister and war minister from 1941–

1944. Sixteen other Class A criminals were sentenced to life imprisonment by the international tribunal, and two others given shorter prison terms. Interestingly far more Class C (lower level personnel charged with minor atrocities) criminals were actually put to death in trials conducted in Yokohama by the US Eighth Army over 700 in total.

There was considerable support in Washington and elsewhere for putting the Emperor on trial for war crimes. However, General

MacArthur staunchly opposed the idea, arguing that if the Emperor were humiliated in such a way it would turn many Japanese against the aims of the Occupation, and make the task of reform far more difficult, perhaps even dangerous. As with most matters in the early days of the Occupation, he got his way.

Reforming Japan

The actual administration of the conquered nation was given over to various SCAP administrative sections, or missions as they were called, roughly equivalent to the branches of the Japanese bureaucracy Personnel were selected from the appropriate sector of US society related to its mission. Businessmen and a few professors of business for the economics mission which worked mainly with the Finance Ministry and the Ministry of International Trade and Industry; labor leaders for the mission related to labor relations which worked mainly with the Labor Ministry and so on. They were defined as “advisors,” and stayed behind the scenes, issuing SCAP “administrative guidance,” a concept the Japanese were completely familiar with from the role customarily played by their own bureaucracies. It was Japanese government bureaucrats who actually carried out the policies, with SCAP personnel having little direct contact with the local population.

A new constitution was drawn up by

MacArthur’s staff and virtually forced on the Japanese. It was the most significant factor in the democratization of Japan, establishing sovereignty with the people through two popularly elected houses of the Diet, giving women the right to vote, clarifying the status of the Emperor as a mere figurehead, limiting the power of the police, denouncing war for all time, and providing for a host of further democratic guarantees. It was first presented to the Japanese public on

March 7, 1946 as a product of the Japanese government, but obvious direct translations from

English in the document suggested otherwise.

Initially SCAP planned to completely dismantle the Japanese economic system by shipping industrial equipment to the countries most damaged by Japan in the war. MacArthur eventually decided on a more moderate policy of dissolving the zaibatsu and establishing anti-monopoly laws.

Originally established with government sponsorship, the zaibatsu system was closed in the sense that once it was put into place, no new large industrial competition was permitted. Suppression of the zaibatsu ushered in a new wave of entrepreneurial energy. Enterprises with fresh ideas joined the older established order, some enjoying great success, companies such as Honda Motors and

Sony Electronics, companies which were to contribute significantly to Japan’s version of the postwar “economic miracle.” This window of

26 appraisal systems opportunity for new industrial organizations to reach the top tier of Japan’s economy began to close somewhat in the 1960s, but it never returned to totally exclusive zaibatsu levels. The most enduring Occupation reforms put in place by the

SCAP sections related to land reforms, labor reforms and education reforms.

At war’s end, about 70 percent of Japanese farmers were tenants. Under SCAP guidance, the

Diet outlawed absentee landlordism, forced landowners to sell their land to the government at very low prices, and sold it to the farmers for nominal sums, effectively transferring land to the people who actually worked it. Rent for the small percentage of land that remained under tenancy was fixed by government regulation. Today farms remain small by the standards of industrial nations, but are highly productive per acre. This reform changed most farmers from tenant peasants to small businessmen; their standard of living increased dramatically during the years following land reform, and today they are among the most prosperous small farmers in the world.

A labor movement had begun in Japan in the

1920s, but by the 1930s the government had completely quashed it; work stoppage was treated as an act of treason. With the full compliance of the

Supreme Commander, considered a conservative

Republican, SCAP officials, some labor leaders themselves, pushed through the Diet a trade union law which guaranteed workers, including public service employees and teachers, the right to organize, engage in collective bargaining, and strike. A labor standards law was designed by

SCAP setting maximum working hours, vacation, safety and sanitation safeguards, sick leaves, accident compensation, and restrictions on the hours and conditions under which women and children could work. Some of the provisions of the labor laws were later modified by the Japanese, and in some cases standards have been ignored, but the overall impact of SCAP labor reforms was extremely favorable for the working public, creating conditions comparable with other industrial democracies.

Touching by far the most people were SCAP education reforms. Pre-war education in Japan was modeled somewhat on a European elitist system, completely controlled by the national government, and considered by SCAP an instrument of ultra-nationalist and racist propaganda. The entire system was completely redesigned in both structure and philosophy to conform to American ideas; a new 6–3-3–4 structure of elementary education through college was set up under the direction of local school boards, including the

Parent Teacher Association (PTA) which still plays a powerful role in Japanese education.

Higher education was greatly popularized, with over 170 new universities and about 200 new junior colleges coming into existence.

Further reading

Cohen, T. (1987) Remaking Japan: The American Occupa-

tion as a New Deal, New York: The Free Press.

Hane, M. (1996) Eastern Phoenix: Japan Since 1945, Boulder, CO: Westview Press.

James, D.C. (1975) The Years of MacArthur, Boston:


Kawai, K. (1960) Japan’s American Interlude, Chicago:

University of Chicago Press.

Reischauer, E.O. (1950) “Broken Dialogue with Japan,”

Foreign Affairs, October.


appraisal systems

The appraisal system in a typical large or medium-size Japanese firm follows the policies and principles gradually elaborated in the “boom years” of Japanese management during the 1980s.

Although always a core part of the Japanese employment practices, it has not received as much research attention as some other features of Japanese management. However, the evolution of

“Japanese” performance appraisal illustrates well the challenges and dilemmas facing Japanese companies today in the field of human resource management.

Appraisal process

How does the Japanese appraisal mechanism work? Typically periodic appraisals of employee performance are conducted three or four times a year. Performance evaluations usually precede

appraisal systems 27 salary increase decisions due in April of each year, the summer and winter bonus determination, and the annual career development review, with timing dependent on the employee’s status or position. In some firms, the evaluation for the annual salary increase and the career development review may be combined to reduce the number of evaluations; in others, yet another set of evaluations takes place every time an employee becomes eligible for a promotion.

During the appraisal, employees are compared to other members of their peer group and ranked accordingly. Who is in the peer group? At the start of one’s career, the core peer group is the cohort of entry: employees of equal educational level (e.g. college graduates) who joined the firm during the same year. After the first promotion, the comparisons are more complex. Managers can be ranked within the original cohort, or against all others with similar tenure in the same grade, or two rankings can be combined. In this case, the rating score reflects not only employee performance relative to their peers, but also their years of tenure in particular positions.

As in many Western firms, the evaluation criteria depend on the position class. For example, one set of criteria is used up to the level of a supervisor, another for those in higher positions.

Typically the evaluations for professional employees and managers have four major components:

(1) scores measuring job-related abilities such as human relations skills, business judgment, coordination, and planning; (2) scores measuring jobrelated attributes such as creativity leadership, and reliability; (3) scores measuring personalityrelated attributes such as sociability flexibility confidence; and finally (4) a single achievement score.

The idea behind the multiple scores is to create an environment where the employee is not made to feel that the “bottom line”—which may sometimes be beyond his control—is the only dimension of the evaluation.

There are some conceptual similarities between categories of job-related abilities and attributes and “competency models” increasingly popular in Western organizations. However, while the competency model is usually a cornerstone for an in-depth developmental discussion with the employee, direct feedback on appraisal results is still rather rare in most Japanese firms.

Only a few firms have a formal policy requiring performance feedback. In most cases, feedback is recommended, but the form of feedback is left to the discretion of individual managers. Starting the appraisal process with a self-evaluation by the employee is now an increasingly popular practice, a major change from the times when even blank appraisal forms were considered confidential.

With respect to performance feedback, there is still a widespread belief among many personnel executives that the ability to solicit information about one’s standing in the organization through “back channels” is a legitimate part of the appraisal process itself, a mark of how well the employee mastered informal communication.

In other words, “If you have to ask, you can’t be that good.”

Even if individual supervisors are willing to provide performance rating feedback to subordinates, they often cannot do more than inform an employee about what ratings were suggested. Appraisal items are marked first by the direct supervisor, then the scores are reviewed by at least two other higher level managers or executives, with an emphasis on the harmonization of standards across departments and divisions, and at each level the initial scores are subject to modification.

Finally as most companies use some version of the forced distribution approach, ratings are also adjusted at the corporate level so the final results fit the corporate guidelines. The results of these adjustments are not always transmitted back to the first-level evaluator.

However, from the first year on the job, salary increases each year contain some variance for merit, which, although very small in absolute amounts, may convey appropriate messages to employees and impart status differences within the cohort. As the information on the average increase for a given cohort is usually distributed through the company union, employees can have a reasonably good idea where they stand. Ranking results can be inferred by comparing one’s paycheck with those of the peer group or with announced average salary increases. Obviously those who received higher than the average increase encourage informal comparisons to make their success known. Those receiving less than the average would rather avoid it.

28 appraisal systems

Coexistence of competition and cooperation

Intensive appraisals occur regularly from the very first year a new employee enters the firm. These evaluations clearly discriminate among employees. They have a major impact on employees’ future careers, but they are a closely held secret.

Therefore, the competitive nature of the appraisal and the resulting intra-cohort rankings are not very visible during the first ten-twelve years of tenure in the organization. This led many observers of Japanese companies to observe that performance evaluation in large Japanese firms is long term, based on years of careful judgments and comparisons and that competition for promotion does not start until later in one’s career.

While the first observation is correct, the second is not. In fact, when the consequences of ranking within the cohort become visible, it is usually too late to do anything about it. In most firms, the chances for recovery from low ratings are slim

(see seniority promotion).

The fierce internal competition could create a hostile, individualistic work environment were it not for two characteristics of the Japanese work system: group-based organizations and vague job descriptions. Usually performance is evaluated relative to similar groups in the company and, therefore, each employee must cooperate with colleagues to achieve the best results. Even the best individual performers will not succeed if their unit does not perform well. What is rewarded most is credibility and ability to get things done in cooperation with others. The competition with peers is keen, but its focal point is building cooperative networks with the same people who are rivals for future promotions. This emphasis on cooperation serves as a powerful check on a divisive competitiveness.

The invisible race creates constant fears of lagging behind and being outperformed. At the same time, even those who are left behind do not have to fear losing their jobs; the system encourages internal competition while maintaining social harmony inside the organization. For an extended period of time, the vast majority of employees are treated as potential “winners,” with only small differences between the top and the middle of the cohort, as opposed to a typical Anglo-Saxon system focused on early identification of highpotential “winners” with corresponding salary differentiations. The effect is to elicit full dedication and loyalty from the employees, engaging them in unending competition for as long as possible.

When the cumulative impact of less than perfect rankings becomes visible in salary or promotions late in an employee career, there is always a socially acceptable way out—after all, one works hard for the company not for money or promotions—one explanation of why work commitment of male employees in large Japanese firms tends to increase with age.

Problems with Japanese-style appraisals

The objective of the traditional Japanese appraisal system is to induce employees to work hard on behalf of the firm. Over the years it was remarkably effective, but its fundamental contradictions are now quite apparent. One major problem with the system is that in the long run, it inevitably leads to risk-avoidance. Because the chances for recovery from a low ranking are slim, employees may focus on not making any mistakes, rather than on taking the initiative.

With high job security for anyone with at least close to average performance, and no incentives for bold actions, there is no surprise that the culture in many Japanese firms today resembles more a mediocre and complacent planned economy bureaucracy than the fearless global competitor of the 1980s.

The inability to manage performance is the core of the problem. The system was created in a period of rapid growth where dealing with low performance was not much of an issue—an occasional kata-tataki (tap on the shoulder—selective dismissal) was a sufficient deterrent and reminder to everyone to play by the rules. But what to do about a committed ‘salaryman’ who works hard for long hours, yet the added value from all this effort is poor?

In the past, there were enough positions to

‘park’ such an employee as madogiwazoku (group by the window) until retirement, or in an affiliate firm, without hurting the overall results of the firm. However, two trends made such arrangements increasingly problematic. Lower growth

appreciating yen 29 rates and bulging cohorts of middle management—the results of hiring sprees of more than two decades ago—clogged the hierarchy. With estimates of up to 40–60 percent of middle managers in some firms being placed in phantom jobs, the formerly virtuous cycle of competition and cooperation has degenerated into a vicious cycle of ballooning cost and paralyzed decision making.

In addition, the odds have changed. While in the past employees had a reasonable chance to be promoted at least to middle-management position, it is now all too visible that most will not make it; there is simply no more room at the top.

Therefore, there is not much incentive to compete, and without internal competition, the much praised work ethic has declined very quickly With most white-collar jobs still secure, the low output does not have any consequences, and the annual appraisal becomes an empty ritual.

A related problem with Japanese appraisal is that it is very difficult to implement in a global context, making it virtually impossible for a Japanese multinational to unify its organization in one global structure. Foreign employees generally resent the lack of direct feedback, but the lack of experience with face-to-face performance review dialogue is a serious handicap facing Japanese managers working overseas. An even more fundamental flaw is the simple fact that the labor market structures overseas are different, and the incentives embedded in the traditional Japanese appraisal—a slow but sure rise to the top—do not have much meaning.

An increasing number of firms now require managers to conduct an appraisal interview with the employee and also to inform the employee about the appraisal results. An unintended but predictable consequence is that the distribution of ratings become slanted with a vast majority of employees ranked as average or better, making it even more difficult to address the performance problems.

Early identification of high potentials is meant to stem the outflow of talent to foreignowned firms. What it does is making obvious what was hidden before, namely that long-term decisions regarding an employee’s career are made rather early. However, while the chosen few may appreciate the early recognition, for the majority of employees this is not good news.

The combination of “early identification-no reselection” is just another factor lowering employee commitment.

In summary marginal adjustments will not be of much help. The fundamental roadblock in reforming the Japanese appraisal system is the unwillingness to deal with the consequences.


Current changes

When the performance of a firm declines, recalibrating the appraisal process is the usual first response. Japan is no exception. Influenced by appraisal innovations introduced by foreignowned companies, many firms are modifying evaluation criteria, or adjusting the appraisal cycle to incorporate 360-degree feedback. However, the major impact, some of it unintended, comes from changes in two areas: communication with the employee during and after the appraisal, and early and visible identification of high-potential employees.

appreciating yen

Appreciating yen (AY), often called “high yen” is not simply a phrase meaning the strong value of the Japanese currency It refers more broadly to a ceaseless upward trend, with sharp fluctuations, in the currency value of yen. This trend has had distinctive impacts on the Japanese economy and its international relations in the post-Bretton

Woods era after the “Nixon shock” of 1971.

What is AY? Following the breakdown in 1973 of the multilateral pegged exchange rate system, a floating exchange rate regime was established.

As part of the original system established at

Bretton Woods, the yen was set at $1: ¥360. Under the floating exchange rate system, the value of the yen increased nearly fourfold. In spring of

1995 the rate stood at about 11: ¥80. In spring of 2001 it had retreated to $ 1: ¥108. This increase in currency value has had a direct impact on the continuous huge foreign trade and current account surpluses sustained by Japan over

30 appreciating yen a nearly thirty year period. The strength of the currency has been based mainly on the strong competitive power and the tremendous export potential of Japanese manufacturing industries such as electronics, automobile, and machine industries. AY has appeared most obvious when seen in light of the performance of the US dollar, which has depreciated over the long-term trend.

The depreciation of the US dollar is ascribed to the declining competitive power of American industries in the 1970s and 1980s, a period during which the US also accumulated large foreign trade deficits. The US foreign trade deficit stems mainly from purchase of Japanese imports and, since the 1980s, also purchases from many East

Asian countries.

Another important feature of AY is the heavy and steep up and down movements of the exchange rate of yen that have pressured Japanese industries and firms to adapt to such urgent changes in every half a decade. The 36 percent

AY from ¥360 in July 1971 to ¥264 in July 1973 was the first such movement. The second occurred between December 1975 and October

1978 when there was a 66 percent AY from ¥306 to ¥184 in October 1978. There was a third significant movement resulting beginning with a rate of ¥260 in May of 1985. The economic expansion and high interest rate policies of the

Reagan administration, followed by the Plaza

Agreement in September 1985 led to a 109 percent appreciation to ¥124 in May 1988. There was another appreciation, this one of 88 percent, between April 1990 (¥158) and April 1995

(¥84). The first four months of 1995 were witness to one of the more cataclysmic shifts. In early January the rate stood at $1: ¥100. By mid

April of 1995, it had appreciated to $1: ¥79, as much as 20 percent AY in three months (around

70 percent annual rate of change) from ¥100 in the early January, decisively smashing any possible chance of economic recovery in Japan since the breakdown of the bubble economy in the early 1990s.

What are the mechanism and effects of AY?

There is a “general theory” on the mechanism of a floating exchange rate system. This theory states that the floating system can adjust automatically to recover the balance of a foreign trade surplus or deficit between two countries as a result of the nominal increase (decrease) in foreign currency prices of export (import) goods in the trade surplus country (vice versa). However, the historical experiences since 1973 of Japan and US have proven that this mechanism does not necessarily work in such a symmetrical way depending on the managerial constitution of companies in both countries. It is important to note that especially in Japan there has been a unique mechanism for firms to accelerate successively the processes of AY. In many cases, until the 1980s in particular, Japanese companies did not raise the US dollar prices of their export goods by the same degree as yen was appreciating, which means that they preferred to keep their market shares of exports in lieu of maintaining their profit margins. This is very much a

Japanese orientation to competition, and stands in contrast to the typical response of US companies in international markets. In addition, “J-

Curve” effects (time lag effects due to export prices determined at contract) and the increase of “follow on” exports of parts and components and equipment to subsidiary plants abroad caused Japan’s foreign trade surplus to continue to increase. A vicious cycle seemed to ensue in which the yen appreciated, resulting in a larger trade surplus and leading Japanese firms to accept lower profit margins, leading to an appreciation of the yen, and so on.

The AY cycle, along with the “trade friction” between Japan and the USA, has propelled Japanese foreign direct investment (FDI) since the early 1980s. Because an AY implies and reflects high expressed price values for domestic human resources and materials it is more advantageous for Japanese multinational enterprises to implement local manufacturing abroad. In this context, it is especially noteworthy that AY after the

1980s has played a critical role particularly in supporting the “miracle of economic growth” in the larger East Asian region. Here, AY was not only an important factor in determining the location of Japanese FDI, it was a significant factor in the promotion of technology transfer. It was also a factor in Asian countries realizing a more competitive edge in international markets as their own currencies depreciated vis-à-vis the yen.

Arabian Oil 31

What are the main problems of AY? From a macroeconomic perspective, the cyclical and un stable nature deeply affects Japanese firms and the economy. The large scale ups and downs in exchange rates affect basic price levels in Japan and its international economic relations. From a microeconomic perspective, firms and individuals must implement ‘risk management’ plans to deal with the irregularly fluctuating foreign exchange. Particularly for export-oriented firms such as Toyota and Sony a single AY movement against the US dollar can result directly in the loss of several billion yen in their financial accounts. Another serious problem is foreign exchange losses for investors in foreign portfolio assets. In Japan such huge losses occurred in the third AY period, 1985–8, when many of Japanese institutional investors such as life insurance companies were heavily damaged. Notwithstanding such experience, Japanese private portfolio investors as well as public institutions such as the

Bank of Japan have again built up enormous portfolio assets abroad. At the start of the twentyfirst century overseas portfolio assets were more than $ 1 trillion, mostly in the USA.

This situation is also reflected on the US approach to foreign exchange known as “high dollar policy”. The main purpose of this policy has been to prevent the US economy from getting caught up in a “vicious circle”—i.e. sharp depreciation of the dollar followed by a rise of prices in import goods and then a rise in the domestic price level, a rise in interest rates and a collapse of stock markets.

Further reading

Abo, T. (ed.) (1994) Hybrid Factory: The Japanese Produc-

tion System in the United States, Oxford: Oxford University Press.

Kawai, M. (1996) “The Japanese Yen as an International Currency: Performance and Prospects,” in

R.Sato, R.V.Ramachandran and H. Hori (eds), Or-

ganization., Performance and Equity: Perspectives on the

Japanese Economy, Dordrecht: Kluwer Academic Publishers.


Arabian Oil

Founded in 1958, with annual sales of approximately $1.8 billion in 1999, Arabian Oil is Japan’s largest oil producer. The Tokyo-based firm used to operate the Khafji oilfield, a large offshore oilfield in the former neutral zone on the

Saudi Arabia—Kuwait border. As a result, the

Saudi Arabian and Kuwaiti government owned

11 percent of its publicly traded stock and 60 percent of its disposition rights on crude oil production.

Japan imports 99.7 percent of its oil supply of only which 15 percent is produced by Japanese companies. In 1998, Arabian Oil produced

280,000 barrels per day 150,000 barrels of which were exported to Japan and accounted for 4 percent of Japan’s total oil imports from oilfields mined by Japanese companies. However, in February

2000 it lost an important forty-year-old concession in the Saudi Arabian section of the neutral zone due to its unwillingness to meet Saudi Arabia’s demands for a mine railway infrastructure investment. Japanese officials argued that a study showed the proposed mine railway would be certain to run at a loss for a long time. However, the company still continues to drill from the portion of the oilfield controlled by the Kuwaiti government.

In November 2000, Japan and Iran reached an agreement that gives Japanese oil companies negotiating rights to a portion of the Azadegan oilfield in Iran, the world’s largest underdeveloped oilfield. This field has a potential to produce 400,000 barrels a day This new source of oil is expected to help the Ministry of Economics, Trade and Industry (METI) plan to raise the ratio of oil produced by Japanese companies.

To combat the loss of rights to drill in the Saudi

Arabia section of the Khafji field, Arabian Oil hopes to begin producing in Vietnam, while continuing oil and gas production in offshore China and the Gulf of Mexico. Crude oil represents most of Arabian Oil’s sales; the remainder comes from petroleum products. It has four consolidated subsidiaries located in Japan, the Cayman islands, the United States and Norway.

See also: Japanese business in the Middle East


32 automotive industry

ASIAN ECONOMIC CRISIS see economic crisis in Asia

ATO-GIME see after-sales pricing

automotive industry

From 1980 through 1993 Japan was the world’s largest automobile producer, turning out a peak of 13.5 million units in 1990. Today output is stalled at 10 million units, though another 5.5

million were produced overseas, including 3.1

million in NAFTA. In addition, consolidation in

1999 and 2000 left Toyota and Honda the only two independent firms, with Nissan, Mazda,

Isuzu and Mitsubishi under foreign control. Still, the majority of domestic employment is with suppliers, not assemblers, and with 880,000 employees the auto industry is the second largest manufacturing sector (after electronics). Once dealerships, gas stations and so on are included, the sector accounts for about 5 percent of the economy and vehicles alone for 15 percent of

Japan’s total exports.

Japan’s history shaped the industry Motorization began with Model T buses imported after the 1923 earthquake destroyed Tokyo’s trolley system. Ford and General Motors soon set up assembly plants, and in 1936 Ford was preparing to build an integrated facility as its vanguard plant in Asia. But war closed these firms and led to import restrictions that lasted from 1936 through the 1970s. Instead of having efficient (albeit foreign-owned) producers, trade barriers encouraged entry and in the early 1950s Japan was burdened with a large number of inefficient, poorquality makers. Three-wheel vehicles comprised the largest segment until 1962, and sales of passenger cars only surpassed those of trucks in

1968. New entry ceased in 1964, when Honda began regular production, while several early entrants exited, including Prince in 1966. Nine producers of cars and light trucks survived until

2000, with another two firms producing primarily heavy trucks.

From the 1940s, output remained divided among multiple firms in a variety of product segments. Costs remained high; total production was under 2 million units in 1965 and just over 5 million in 1970, including exports. Management faced many challenges. One was simply to increase capacity given the rapidly growing domestic market. But firms were also aware of their high costs and poor quality and the crowded domestic market generated strong rivalry Capital market liberalization and lower trade barriers, targeted for 1971, added the threat of future foreign competition. A positive dynamic developed: costs could clearly be lowered each year, and quality improved; firms thus actively sought out new ideas both at home and abroad. By the late

1960s they were competitive in the small car market in the USA, where their major rival was not the American Big Three but rather

Volkswagen. By the late 1970s the Japanese firms had established a reputation for high quality.

This rapid improvement reflected the introduction of the set of management techniques known as “lean” production. Supporting implementation was senior management, who with few exceptions came from careers based in factory management and engineering; noticeably absent were people from finance and marketing. Firms were thus highly receptive to the best in industrial engineering techniques, including statistical process control (SPC), continuous improvement


and total quality management (TQM), as well as flow-dominated factory layout, rapid tooling changes and “just-in-time” (JIT) production scheduling, implemented at Toyota through the use of kanban cards. These techniques, developed during the 1950s and early 1960s, were widely publicized at the time in the business press and engineering journals. Implementation, however, was achieved in stages, with assemblers putting them in place in the latter 1960s and suppliers in the 1970s. This helped bring about large gains in quality and productivity following the first oil crisis of 1973.

Suppliers were critical because they are more important than assembly both in terms of employment (77 percent of the industry total) and costs. After the Second World War, existing assemblers spun off most internal parts manufacturing, while new entrants used outside suppliers from the start, thereby lessening their capital requirements. Another impetus was a strong labor movement that won employment guarantees at the firm level. By turning to suppliers, assemblers

automotive industry 33 were able to raise output without expanding their own employment until well into the 1960s.

Coordinating the supply chain was a challenge. By the 1960s direct suppliers were organized into kyoryoku-kai, formal supplier associations. Purchasing departments oversaw the interaction of suppliers with engineering at the development end and with the factory once vehicles entered production, and also organized consulting efforts that diffused the latest in manufacturing and management techniques to them. With interfirm organization built up over decades—most ties date back to 1960 or earlier— the cumulative benefits of ongoing relationships improved the capabilities of the supply base as a whole, raising the quality and lowering the cost of the finished vehicle.

Supporting this relationship were clear pricing rules, using standard cost models as a starting point, that made setting the terms of transactions less fractious. In turn, assemblers typically contracted the full production run of four or more years to a single supplier, and (conditional on quality and delivery and general cost competitiveness), suppliers could generally count on customers trying to give sufficient orders for keeping their capacity utilized. Within this ongoing relationship, rules of thumb for sharing the gains from engineering improvements gave suppliers the incentive to develop and implement new designs and manufacturing methods, and share new ideas with their customers. With assemblers marketing several separate product lines, they could have two-three firms supplying brakes, seats or other components; suppliers could and did periodically lose business to rivals, keeping them honest. On the flip side, most large parts firms sold to several different assemblers, though there was less overlap among suppliers to Nissan and

Toyota due to capacity and geographic considerations. Together, these two features speeded the diffusion of best practice throughout the industry.

Suppliers also became integral to vehicle engineering and development. Within the auto companies, stylists, and product and process engineers were organized in platform teams. This facilitated overlapping different elements of the overall process, and such simultaneous engineering speeded product development, cutting costs and improving market fit. Supplier input was crucial. They contributed about half of total engineering hours, coordinated in part through “design-in” (the colocation of supplier staff at their customers). In general, Japanese suppliers tended to do more

“black box” work, developing parts to performance specifications, while US suppliers worked to blueprints supplied by their customers. (In the latter 1990s the USA and the EU industries converged rapidly towards the Japanese model.)

On the opposite end of the industry is vehicle distribution and repair. As in most other markets, users in Japan buy from franchised dealers, not from the assemblers themselves. Dealers in

Japan are typically large, multi-store operations with an exclusive prefectural-level sales territory a legacy of the 1950s, when few dealerships were needed while registration procedures made it difficult to sell across prefectural boundaries. At the same time, the initially limited but geographically dispersed customer base—plus expensive real estate in major urban markets—meant that salesmen visited likely customers, rather than waiting for potential buyers at dealership sites. As the market expanded, dealers set up new sales branches within their existing sales territory; until recently they were prohibited by their franchise contracts from “dualing,” selling the cars of more than one maker. But with selling labor intensive, even in good times new cars were relatively unprofitable.

Instead, dealers’ profits relied upon a local monopoly on vehicle repairs and on shaken, the mandatory inspection of cars required every two—three years by the Ministry of Transport.

High fees from inspections (at one time $ 1,500 or more) and fat margins on repairs more than compensated for the low profitability of vehicle sales. Because inspections became annual after the tenth year, few cars were kept after that point.

The market for used cars thus remained thin, and (again unlike in the USA) was not a significant source of profits. Without “dualing” imports were unimportant; the few firms that specialized in foreign cars (such as Yanase Motors) were lowvolume operations with few sales points, focusing on high-margin models, and handling many makes in parallel. This, together with the cost of setting up an independent distribution system, kept foreign penetration low. However, firms that

34 automotive industry made the requisite investments, such as BMW after 1982, increased their sales volume and earned high profits.

The distribution system is now in flux. The prefectural scope of the typical franchise meant that from the assembler’s perspective a dealer was too big to fail. Toyota did well after 1982, and its dealers thus had the resources to expand into the newly prosperous suburbs. In contrast, Nissan’s sales stagnated, and it had to bail out several major dealers, but managers from corporate headquarters proved no more adept at running dealerships than the unlucky entrepreneurs whom they replaced, and had no resources to expand to the suburbs. This vicious circle made it even more difficult to maintain sales volume.

The incipient weakness of this structure hit home with the 25 percent drop in sales after 1990.

Of course, some dealers overextended themselves during the “bubble” (as Mazda did at the corporate level, trying to match Toyota’s five sales channels despite its much smaller size). In addition, deregulation of the shaken in 1996 led to both fewer inspections and lower prices. Combined with the market downturn following the consumption tax hike in April 1997, the majority of dealerships operated in the red during 1998–

2000, and required subsidies from car makers to stay in business. This is surely a source of unease in the entire industry even at Toyota, Honda and Suzuki, whose domestic sales have held up best.

International sales began with truck exports to developing country markets in the 1950s. Passenger car exports came later, when the success of the Volkswagen Beetle in the late 1960s expanded the market for compact cars in the USA.

New US emissions regulations in 1970 and the oil crises of 1973 and 1979 further boosted the small car segment to a peak of one-third of all sales. Rather than developing their own small cars, the Big Three turned to Japanese makers as a source of captive imports, with General Motors taking equity stakes in Isuzu and Suzuki, Ford in Mazda, and Chrysler in Mitsubishi Motors.

Helped by good quality and a favorable exchange rate, Japanese producers captured the majority of this new segment, some 2 million vehicles in

1980, or about 20 percent of the US market. (In contrast, Japanese firms fared poorly in Europe, with its many producers of small cars, and significant import barriers.)

In the USA, seven Japanese firms vied for share, keeping profits modest. They likely would have exited the market when the small car segment faded in the mid-1980s, as happened with

European imports in both the 1950s and 1960s.

But in the spring of 1981 the Reagan administration asked the Japanese government to impose a

VER (“voluntary” export restraint) of 1.68 million units. Despite public handwringing (and genuine confusion among executives), Japanese firms soon realized the benefits of a formal cartel, and raised prices for popular models by as much as 25 percent. Since only a limited number of cars could be sold, firms also had an incentive to move upscale and the VER provided the profits needed to develop bigger vehicles. Finally the

VER encouraged local “transplant” assembly since parts were not subject to import restrictions.

Honda opened the first such plant in 1982, and by the end of the 1980s eight producers had operations in either the USA or Canada. This process accelerated after the Plaza Accord of 1986, when the steep appreciation of the yen made parts imports from Japan unattractive.

These ventures proved surprisingly successful. There are now twenty assembly engine and transmission plants in the USA and Canada run by Japanese car makers, and at least 300 plants run by “transplant” suppliers. In 1999 they accounted for 3 million units, 18 percent of NAFTA output. The transplants initially focused on small vehicles, with low profit margins, but Honda and

Toyota now produce more cars than Chrysler, and all are rushing to launch products in the minivan, SUV and pickup truck segments. Drawing upon their experience in the US, Japanese firms then expanded into the EU. Most chose

Britain as their base, but the strong pound later hurt sales elsewhere in Europe. Japanese firms, however, dominate Asian markets, lagging only in China and Korea, and are expanding in Latin


What of the future? The industry built 1.5

million units of new plants inside Japan at the start of the 1990s, leaving it with roughly 15 million units capacity But between the collapse of the “bubble” and the strong yen, domestic output appears likely to remain closer to 10 million

automotive industry 35 units. While Honda and Toyota have done well in the USA, and minicar demand has expanded inside Japan, profits have otherwise proved elusive, both at home and abroad. Adjustment to this unpleasant reality has been slow. During the

1990s several temporary upturns lulled the industry with hopes that plant closures could be forestalled. The steep recession that began with the consumption tax increase of April 1997 dashed these hopes, and a wholesale restructuring of the industry is underway. Ford took control of Mazda in 1996, and General Motors has

49 percent of Isuzu, giving it de facto control. In

1999 Nissan was taken over by Renault, and in

2000 DaimlerChrysler took a potentially controlling stake in Mitsubishi. General Motors has increased its positions at Suzuki and Fuji Heavy

Industries (Subaru), and Toyota absorbed

Daihatsu and Hino. (The fate of Nissan Diesel is still unclear). Toyota and Honda thus remain the only independent producers. A similar process of realignment will follow in the parts sector:

Bosch (Germany) and Delphi (USA), for example, have already taken over suppliers historically associated with Nissan. In addition, while imports might appear to comprise a trivial 6 percent share of the market, they are concentrated in the highmargin luxury segment, and foreign firms now have potential additional sales channels through their new Japanese subsidiaries.

The future entails many management challenges. New owners must restructure and absorb their purchases, despite little or no experience operating in Japan. Meanwhile, Toyota and Honda— and many suppliers—are only now grappling with overseas operations that will end up more important than their domestic ones. Finally an aging labor force and overall high wages make it likely that much parts production will move offshore, making factory management more complex. Japan will remain a major producer, with domestic output of 10–11 million units and strengths in engineering small vehicles, but it is almost certainly past its heyday.



bad debt

Bad debt, more commonly referred to as “nonperforming” or “bad loans,” are amounts loaned by banks but which fail to generate returns. Precise definitions vary from country to country but, however defined, regulatory authorities generally require banks to set aside capital to cover potential losses arising from bad debt becoming unrecoverable debt.

In Japan, the definition of non-performing loans was more restrictive than generally accepted standards in other advanced industrial countries until the latter 1990s. Before fiscal year 1994, for example, loans to borrowers in legal bankruptcy or considerably past due were classified as nonperforming but restructured loans were not. From fiscal year 1995 on, however, regulatory authorities progressively widened the definition. Today definitions of bad debt in Japan fall in line with globally accepted standards.

essentially as an intermediary lending deposits to third parties, a rise in amounts of debt not repaid also means that the chances of a bank not having the money needed to return a depositor’s money rises. If a bank then becomes insolvent and fails, confidence in other banks also drops and depositors may rush to withdraw deposits.

Such a run on the banks can, in turn, lead to a liquidity crunch. At any given time, most banks will not have the cash on hand to pay out every depositor, since a significant portion of deposits will be tied up in loans extended to customers.

Thus, even solvent banks have the potential to collapse when another bank fails due to excessive bad debt. A rapid increase in amounts of bad debt in any nation’s financial system should thus be a phenomenon of concern to policy makers and regulatory authorities.

Repercussions of bad debt

Bad debt has a number of repercussions. The presence of large amounts of non-performing loans impairs the capital ratios of banks, thereby shrinking the amount of capital banks have available to lend to other borrowers. In this way large amounts of non-performing loans may induce credit crunches where potentially productive ventures are unable to obtain sufficient capital because capital is tied up in unproductive investments.

Since deposit-taking financial institutions serve

Sources of bad debt

Bad debt arises for a number of reasons. Excessive risk-taking by management is often a primary cause. This was the case in the latter 1980s when banks loaned funds for speculative purposes. Bad debt may also arise from an economic downturn.

When the economy enters a recession, as Japan’s did twice in the 1990s, company profits tend to fall, making it more difficult for borrowers to repay debt. Because of this correlation between economic performance and bad debt levels, banks and their regulators often initially delay in aggressively addressing non-performing loan problems, hoping that bad debt will simply shrink to an acceptable level with an economic recovery.

Bank of Japan 37

Bad debt is also commonly spurred by exogenous shocks. For example, the Great Hanshin

Earthquake that struck the Kobe area in Japan in

1995 destroyed the business foundations of many companies, and therefore led to a surge in bad debt for banks with heavy lending in this region.

Likewise, dramatic shifts in exchange rates or in oil prices may affect the profit bases of particular sectors of the economy with a high dependence on imported materials or export markets, suddenly making them unable to repay debts.

debt. With the use of public funds, banks were required for the first time to disclose amounts of non-performing loans to the public. Although banks carried out record write-offs and recorded record losses in 1999 and 2000, the continued economic downturn and decline in asset prices led the number of corporate bankruptcies to continue to climb and additional bad debt to emerge.

Japanese banks therefore remained burdened with large amounts of non-performing loans as they entered the twenty-first century.

Procedures for dealing with bad debt and the financial crisis of the 1990s

Prior to the collapse of Japan’s asset bubble in

1991, financial institutions infrequently encountered distress due to high levels of non-performing loans. If a bank did face insolvency as a result of high levels of bad debt, the Ministry of Fi-

nance (MOF) arranged a “rescue merger” behind the scenes, relying on a stronger bank to absorb the weaker. In an era of heavy regulation, stronger banks had incentives to participate in such rescue procedures, for doing so meant gaining valuable retail branches. With the 1991 bursting of the nation’s asset bubble, however, all

Japanese banks became burdened with large amounts of non-performing loans and limited deregulation meant that the relatively stronger banks had fewer incentives to assist in “rescue mergers.”

The magnitude of nonperforming loans in the

Japanese banking sector only began to be revealed to the public in 1995, when a Finance Ministry official testified in the Diet concerning the grave condition of the housing and loan corporations called jusen. Even then, only estimates of aggregate totals for the banking sector as a whole were revealed. Aggressive measures to deal with the high levels of bad debt in the banking system were postponed by authorities until the eruption of acute financial crisis in 1997–8. By this time, the magnitude of non-performing loans in the

Japanese banking system was estimated at close to one trillion dollars.

In 1998 and 1999, the government injected public funds into a number of Japan’s large commercial banks in an attempt to boost their capital bases and aid them in the disposal of their bad

Further reading

Amyx, J. (2000) “Political Implications to Far-reaching

Banking Reforms in Japan: Implications for Asia,” in G.Noble and J.Ravenhill (eds), The Asian Finan-

cial Crisis and the Architecture of Global Finance, New

York: Cambridge University Press, 132–51.


Bank of Japan

The Bank of Japan (BOJ), the nation’s central bank, was established in 1882 by the Finance

Minister as a joint undertaking of government and business. The BOJ’s mission is to lay the foundation for sound economic development through the maintenance of price stability and ensuring the stability of the financial system. To fulfill this mission, it issues and manages banknotes, implements monetary policy, provides financial settlement services, manages the business of Japanese government securities, acts as a representative of the Ministry of Finance (MOF) in the foreign exchange markets, compiles data, and carries out economic analysis and research.

The BOJ’s Policy Board serves as the highest decision-making body of the bank.

Monetary policy

The BOJ implements monetary policy through setting the official discount rate and through market operations. Both activities influence interest rates and interest rates, in turn, affect various price levels. The discount rate is the standard rate of interest on loans made by the central bank to private financial institutions. Loose monetary policy

38 Bank of Japan

(low rates) makes it easier for banks to attract loan customers because it enables them to make loans at lower interest rates. In general, the central bank raises the rate when the economy becomes overheated and lowers the rate when there are deflationary trends.

Through market operations, the Bank guides the key unsecured overnight call money rate.

From 1950–91, the BOJ also influenced the availability of credit through the exercise of “window guidance” or madoguchi shido. Through “window guidance,” the BOJ indicated to commercial banks the amount of lending it deemed proper.

In the late 1980s, prolonged expansionary monetary policy by the BOJ fueled a speculative asset “bubble” of unprecedented magnitude. In

February 1987, the BOJ dropped the discount rate to a (then) postwar historic low of 2.5 percent and held this rate until May 1989. With an abundance of “cheap” money available, many companies and individuals borrowed for the purposes of speculative investment and from 1987 to 1989, the Tokyo Stock Exchange Nikkei 225 Average nearly doubled in value. The eventual tightening of monetary policy however, led to a bursting of this bubble.

In attempting to shore up banks burdened with massive amounts of non-performing loans or dead debts that emerged from the bubble’s collapse, the central bank again loosened monetary policy In April 1995, the discount rate was lowered to a new historic low of 1 percent and then further lowered to 0.5 percent in September 1995.

In an emergency measure extending from February 1999 through August 2000, the BOJ also set the target overnight call rate at zero percent following a series of financial institution bankruptcies.

To prevent financial institutions from falling prey to the “moral hazard” of regarding infusions of capital from the BOJ as a form of insurance, the

BOJ conducts regular on-site examinations of those financial institutions with accounts at the central bank.

The rescue operations of the BOJ saved large banks from failure in the Banking Crisis of 1927.

The BOJ also came to the aid of Yamaichi Securities and other brokerages in 1965. More recently the BOJ provided funds in 1994 and the years thereafter to execute schemes for facilitating the rescue of credit unions and banks burdened with massive amounts of nonperforming loans.

International activities

The BOJ’s international activities are threefold.

First, the Bank engages in international transactions by providing yen accounts to central banks and government institutions overseas. Second, the

Bank plays a central role in monitoring and intervening, when necessary in currency markets.

For example, in the 1990s, the BOJ’s massive interventions in the form of dollar buying were key to suppressing the strength of the yen and making up for the shortfall between Japan’s current and capital accounts. Finally the BOJ’s international activities also involve participation in international forums such as the meetings of the

Bank for International Settlements (BIS), G7, and the International Monetary Fund.

Ensuring stability of the financial system

The BOJ provides and maintains a settlement system for financial transactions between financial institutions. Funds are transferred across the current account held by each financial institution at the central bank. The BOJ also serves as the lender of last resort to financial institutions facing liquidity problems, extending uncollateralized loans to financial institutions if the stability of the financial system is perceived to be in danger.

The new Bank of Japan Law

For most of the postwar period, the BOJ lacked independence. Monetary policy strongly reflected the influence of the MOF and the Bank’s decision-making autonomy was also compromised by the conduct of its personnel and budget matters.

The MOF appointed the BOJ’s executive auditors and comptroller and had the power to dismiss Bank officials, including the governor. The

BOJ budget also required approval by the Finance


With the 1997 passage of the New Bank of

Japan Law and the enactment of this law in April

1998, however, the central bank gained greater independence in the conduct of monetary policy and more autonomy in personnel matters. The

Banking Act of 1982 39 new law also introduced greater transparency into decision-making processes within the BOJ. The central bank’s budget remains subject to MOF approval.

The impetus for the new BOJ Law was the recognition of the MOF’s undue influence over the BOJ in its conduct of monetary policy in the bubble period and the linkage of this policy breakdown to the nation’s prolonged recession and financial crisis in the 1990s. Reorganization of the central bank under the new law was also accelerated by the emergence of scandals in the latter

1990s. These scandals centered on dubious interactions between BOJ officials and private financial institutions.

Further reading

Bank of Japan Annual Review (annual) Tokyo: Bank of


Cargill, T, Hutchison, M. and Ito, T. (1997) The Politi-

cal Economy of Japanese Monetary Policy, Cambridge,

MA: MIT Press.

Yamawaki, T. (1998) Nihon Ginko no Shinjitsu (The Truth of the Bank of Japan), Tokyo: Diamond-sha.


Bank and BOT, with BOT being the only commercial bank to be authorized with such powers). This privileged position helped the BOT to develop a reputation as a professional bank of international finance, in turn helping it to dominate the Japanese inter-bank foreign exchange markets.

In 1996, the BOT merged with Mitsubishi

Bank, to become Tokyo-Mitsubishi Bank. This new colossal bank, with combined assets of ¥72.8

trillion, 36 percent larger than the title-holder

Sumitomo Bank and more than five times bigger than America’s Citibank, became the world’s largest bank. It is still one of the largest banks in the world with subsidiaries and associated banks on five continents.

In its domestic business, the bank provides a full array of commercial banking services. Its international banking services include investment financing. The Tokyo-Mitsubishi Bank has most recently assisted the Export-Import Bank of Ja-

pan and the Overseas Economic Co-operation

Fund in extending credit. It is a major commissioned bank for foreign bonds issued in yen denominations.

Bank of Tokyo

The Bank of Tokyo (BOT) was founded in 1880 as the Yokohama Specie Bank, which contributed to the internationalization of domestic industries through international finance operations. After the Second World War, in 1946, the bank was reorganized as a commercial bank, and the Bank of Tokyo was established. In 1952, the BOT opened its first foreign branches in New York and

London, and in 1954 the BOT became Japan’s only specialized foreign exchange bank. In 1962 the BOT was authorized to issue debentures (a type of bond) to support its yen funding. The debentures issued by BOT were abbreviated as

Wari-To (discounted-Tokyo), and represented a service where the bank offered individual investors the ability to purchase bonds. In Japan a limited number of financial institutions were authorized to issue debentures (authorized banks are long term credit banks, the Norin Chukin

Bank, Shyoko Chukin Bank, Shinkin Central

Further reading

Blanden, M. (1995) “Japan,” The Banker, 145(836): 26.

Cashmore, N., Ramillano, M., Playfair, A., Shimomura,

K. and Horsburgh, K. (1996) “The Best Banks in

Foreign Exchange,” Asiamoney 7 (3): 21.

Shale, T. (1995) “Or the World’s Greatest Bank?”

Euromoney 31, May.

“Bank of Tokyo Wins U.S. Clients Through Credit

System,” (1994) Nihon Keizai Shimbun, October 16.


Banking Act of 1982

The Banking Act of 1982 represented the first comprehensive revision of the Banking Law of

1927. The Act governed the behavior of all “ordinary” banks in Japan and served as the legal basis for the on-site inspections carried out periodically by the Inspections Bureau in the Minis-

try of Finance (MOF). The Act’s purpose was to maintain the smooth flow of credit and financing while at the same time protecting depositors

40 Banking Act of 1982 by ensuring prudent management of the banking business (Article 1). Its passage in the Diet on May 25, 1981 and enactment on April 1, 1982 followed decades of debate and numerous unsuccessful attempts by the Ministry of Finance

(MOF) to draft a banking law revision.

The beginning of securitization of the banking sector

The Banking Act of 1982 was most notable for its provisions widening the scope of business for banks. More specifically the Act marked the beginning of the securitization of the Japanese banking sector.

The issuance of large amounts of government debt in the 1970s affected the profit margins of banks because banks comprised the government bond syndicate, absorbing government bonds at below market and holding them until the Bank

of Japan (BOJ) reabsorbed them. With a surge in debt issues, however, banks began to show significant losses from their government bond holdings. As a result, they demanded the right to retail government bonds. Although MOF made adjustments at the margins in response to these profit concerns of banks—including altering accounting methods for government bonds—the banks remained dissatisfied. In 1978, the banks boycotted the issue of long-term government bonds. This action spurred the government to seek alternative measures to resolve the problem.

The provisions eventually contained in the

Banking Act of 1982 permitted banks to enter the part of the securities business involving the sale of government bonds to the public. This outcome, however, was the product of a fierce battle between the banking and securities industries.

Brokerages naturally opposed entry by banks into any aspect of the securities industry seeing it as an encroachment on their turf. The MOF therefore was forced to broker a compromise that enabled banks to avoid losses on government bonds but at the same time compensated the brokerages for the limited entry by banks into their business territory.

In the Act’s final provisions, banks were permitted to invest in equities and bonds on their own behalf, underwrite and offer for sale government and other public bonds, act as securities agents, and loan securities as ancillary businesses. With this newly granted permission, major Japanese banks were able to turn to bond dealing and investment as a new source of profits. Receiving permission to enter the government bond business was especially important for the

city banks, whose major borrowers and depositors were corporations making the shift away from capital-intensive undertakings at this time.

As a concession to brokerages, securities companies were permitted to start lending money secured by government bonds.

Notably the Banking Act of 1982 did not entirely settle the debate over banks entering the securities business, however. Many other areas of the securities business remained closed to the banking sector and plans for major changes thereafter became replaced by a step by step liberalization process. Brokerages continued to fiercely resist the encroachment upon their territory by banks, thereby impeding efforts to do away more quickly with compartmentalization of the financial industry

Supporting the status quo with disclosure requirements

A significant feature of the Banking Act of 1982

(as well as of its predecessor, the Banking Act of

1927) was its lack of explicit details regarding banking regulations, leaving these instead to ad-

ministrative guidance. Thus, MOF officials continued to enjoy a large degree of discretion in carrying out banking regulation. In the past, the ministry had preferred this approach to formally legislating changes, as the strategy of obtaining cooperation enabled the ministry to maintain a great deal of flexibility in response while also enjoying discretionary authority. In the years leading up to the passage of the Banking Act of 1982, however, the ministry found reliance on extralegal administrative guidance to be a double-edged sword. Instances of bank defiance of MOF guidance were on the rise. In the lead up to the passage of the Banking Act, therefore, the ministry in fact sought to formalize some of its guidance, drafting proposals for stricter disclosure requirements to be included as part of the Banking Act legislation.

MOF officials believed that consolidation of

banking crises 41 the sector was needed to make the banking industry more efficient. Since the deposit insurance scheme was not credibly funded, the ministry hoped to eliminate the weakest banks through mergers rather than inducing failures. The weaker banks had little incentive to cooperate in such mergers, however, since the ministry’s implicit guarantee against failure remained in place.

Thus, MOF officials sought tougher disclosure requirements as a means of facilitating the needed consolidation.

The All Japan Bankers’ Federation, Zenginkyo, opposed the MOF’s proposal, however, and fiercely lobbied Liberal Democratic Party (LDP) officials to veto the proposal on their behalf. The banking industry’s critical role as a provider of large amounts of political funds helped it gain the LDP’s sympathy In the end, the banking industry was able to foil the MOF’s attempt to introduce more market discipline and the status quo

vis-à-vis disclosure was upheld. The MOF’s failure on the disclosure issue was compounded as well by its failure to obtain legal authority to dispose of bad bank management.

Other provisions

The Banking Act of 1982 also incorporated for the first time an upper lending limit on the sum that could be loaned to a single party thereby reducing the risk of excessively concentrated borrowing. Loans to a single customer could not exceed 20 percent of capital and surplus funds

(Supplementary Provisions, Article 4). This upper limit on lending had previously been specified through MOF circulars rather than by law but was made into law at the behest of the Financial System Research Council.

Further reading

Rosenbluth, F. (1989) Financial Politics in Contemporary

Japan, Ithaca, NY: Cornell University Press.

banking crises


The decade of the 1990s was characterized by a series of banking crises in Japan. In this period, major banks and securities firms in Japan were allowed to fail for the first time in the post-Second World War era. In the 1990s Japanese banks and securities firms failed primarily due to large proportions of non-performing loans. The proximate cause of these banking problems seems to be the 1990 bursting of the asset price bubble of the late 1980s. By the end of the 1990s, many large and small Japanese banks were insolvent and non-performing loans were estimated to be over $ 1 trillion and, on average, over 20 percent of Japanese bank assets. Non-performing assets were undoubtedly much higher than 20 percent at many banks.

It has been contended that only liberal accounting procedures permitted most banks to satisfy the Basel capital standards, while implicit government guarantees prevented depositor runs.

In spite of these guarantees and accounting treatments, Japanese banks continued to face severe liquidity problems in financial markets and several Japanese banks have had to be rescued or closed in the later half of the 1990s. The origin of this recent banking crisis in Japan can be traced to the poor state of the Japanese economy and the collapse of asset prices in the beginning of the 1990s. While there have been a number of banking crises in Japan, especially in the 1920s, the 1990s crisis was the first major crisis in the post-Second World War era.

On August 30, 1995, Hyogo Bank, a mid-sized regional bank with about $37 billion in total assets, became the first commercial bank in Japan to fail since the end of the Second World War.

While all depositors were paid, in a departure from the traditional ‘convoy system’ shareholders and non-depositor creditors of Hyogo Bank suffered losses. As in the past, the business of

Hyogo bank was reorganized with funds from its major owners, other large banks, and taken over by a new entity Payments associated with this resolution depleted all deposit insurance funds and the government announced that it would not allow any of the country’s twenty largest banks to fail before the year 2000.

Nevertheless, three major institutions failed in

1997, Sanyo Securities on November 4, Hokkaido

Takushoku Bank on November 17, and Yamaichi

Securities on November 24. Similarly two major institutions also failed in 1998, Long-Term Credit

Bank of Japan on October 23 and Nippon Credit

42 banking crises

Bank on December 13. Other Japanese financial institutions continued to fail intermittently in

1999 and 2000. Why has the banking crisis in

Japan lasted for all of the 1990s and is still continuing in early 2001?

Until recently the Japanese banking system was heavily regulated and segmented. Different types of banks were permitted to serve only a certain type of customer. For example, city banks specialized in short-term loans, long-term credit banks specialized in long-term developmental loans, and trust banks specialized in the money management business. In addition to banks, Japan also has numerous financial institutions and cooperatives that specialize in lending to small businesses, agriculture, forestry and fisheries, securities finance companies, insurance companies, and government financial institutions. The largest holder of savings in Japan, the Postal Savings

System, is part of the last category.

Like other central banks, the Bank of Japan must balance the conflicting objectives of providing confidence in the system for financial intermediation to take place while limiting the moral hazard costs of rescuing banks in trouble. With an emphasis on stability in bank regulation, all bank deposits in Japan are insured by the government and, from the Second World War until the mid-1990s, no Japanese bank had been allowed to fail. Typically a merger partner would be found for an ailing bank and in the so-called “convoy escort system,” major competitor banks were expected to contribute funds for such rescues. In this system, bank relationships with commercial customers were long-term in nature, there was little competition, innovation, or push for efficiency among banks, and any change was slow and limited by the slowest bank in a group. Public disclosure of loan quality capital ratios, and other data by banks in Japan has generally been of relatively low quality. For example, Japanese banks were not required to report non-performing loans until 1993 and were not required to use US and international standards for such reports until 1998.

In recent years, driven by technology and globalization, the Japanese financial system is being gradually deregulated. Trading in new financial instruments was progressively permitted all through the 1980s, derivatives markets were allowed by the late 1980s, and interest rates were deregulated in the early 1990s. The 1993 Financial System Reform Act dismantled barriers between banking and securities businesses and the implementation of the ‘Big Bang’ set of financial deregulations was started in 1998.

Based on this brief review, we can now begin to answer why have Japanese banks been in crisis since the beginning of the 1990s and continued to fail in the second half of the 1990s? One reason seems to be the sudden collapse of asset prices in the first part of the 1990s. But why has the crisis lasted so long? One reason may be that

Japanese regulators initially may have hoped to grow out of the crisis as bank profits rose with economic recovery. However, economic recoveries in Japan in the 1990s have been weak and short-lived. In addition, there has been little political will to inject the money needed to rescue

Japanese banks, especially since the government in Tokyo is a coalition government and the bank-

ing industry and its regulators have been tainted by corruption scandals. Another explanation notes that Japanese banks have not developed credit analysis capabilities having depended on government directed and collateralized lending and, given the generally poor levels of disclosure, nor have they been subject to market discipline.

Under the prevailing amaku dari practice where retiring senior regulators were virtually guaranteed senior positions with the institutions they regulated, it is contended that bank regulation in

Japan has been less than fully effective. However, bank regulation may also have lost its effectiveness as Japan gradually moved to a more market-oriented economy and financial system.

While there are many causes of this continuing banking crisis in Japan, Japanese banks must be restructured to reduce or eliminate non-performing loans from their balance sheets so that they can restart lending. This will require government funds and decisive action by the government.

It would also be useful if Japanese banks develop better credit assessment skills, improve disclosure, and become more subject to market discipline.

Further reading

Aggarwal, R. (ed.) (1999) Restructuring Japanese Business

for Growth, Boston, MA: Kluwer Academic Publishers.

banking industry 43

Genay H. (1998) “Assessing the Condition of Japanese

Banks: How Informative are Accounting Earnings?”

FRB Chicago Economic Perspectives 4:12–34.

Hanazaki, M. and Horiuchi, A. (2000) “Is Japan’s Financial System Efficient?” Oxford Review of Economic

Policy 16 (2): 61–73.

Hoshi, T. (2000) “What Happened to Japanese Banks?”

Bank of Japan, IMES Discussion Paper Series, 2000-

E-7, March.

Hoshi, T. and Kashyap, A. (1999) “The Japanese Banking Crisis: Where Did It Come From and How

Will It End?” NBER Macroeconomics Annual 129–201.

Motonishi, T. and Yashikawa, H. (1999) “Causes of the Long Stagnation of Japan During the 1990s:

Financial or Real?” Journal of Japanese and Interna-

tional Economies 12 (2): 181–200.


banking industry

Japan’s banking industry began in the early

Tokugawa period with the development of exchange houses and money lending stores within the family of enterprises of the great merchant houses or ie. These merchant banking operations were to become the banks of the zaibatsu family groups, as they were known starting in the early modern period through the prewar period. These groups are still in operation today including

Mitsui group (Sakura Bank), Sumitomo group and bank, Konoike household (Sanwa Bank).

Most merchant banking operations were not granted commercial banking licenses until the

1890 Banking Act.

The Meiji leadership of Japan’s early modern period, seeking to promote economic development through modernization of its financial system, first adopted the US banking model. The

National Bank Act of 1872 created a system of national chartered banks with the authority to issue bank notes. By 1879, 153 banks had been chartered, but their demise was equally rapid.

Over-issuance of notes by the banks led to inflation, and limited capitalization led to quick bank failures, largely due to inexperience with lending risk on the part of the former samurai owners, who used their government retirement bonds as capital.

The failure of the National Bank model and the pressing need to stabilize the economy next led the Meiji genro (oligarchic leadership) of the

“elder statesman period” to the adoption of a

European model based upon the establishment of a central bank. On the initiative of Meiji Finance Minister Matsukata, the charters of more than thirty central banks were examined, after which a decision was made in favor of the German model. In 1882 the Bank of Japan (BOJ) was created. The Reichsbank model was chosen

(notwithstanding apocryphal stories of the selection of the Belgium model) and was reaffirmed at the BOJ’s rechartering in 1942 because it gave the maximum amount of power to the Ministry

of Finance (MOF) to the exclusion of any parliamentary authority.

Chief among the reasons for the founding of the Bank of Japan was the need to regulate and control Japan’s currency. The BOJ was given the sole right to issue currency. It took the government four years, until 1886, however, to accumulate enough gold to redeem the still outstanding private bank notes. This action initiated what proved to be the beginning of a long history of government bailouts of the commercial banking sector. Another decade was required to accumulate an adequate gold reserve before the Bank of Japan could achieve its ultimate goal in 1897 of placing Japan on the gold standard.

From the late nineteenth century to the present, the Ministry of Finance, which wields active control over the banking sector, has managed Japan’s economic development policies.

Matsukata, who was noted for his predilection for autocratic control, ruled the MOF for twenty years and was responsible for initiating the practice of using of the banking system for policybased finance, which characteristic has identified

Japan’s banking system for most of the past 120 years.

First enunciated by Matsukata, government banking policy aimed to create a system that was non-competitive and highly segmented. This system was designed to meet the specific needs of business for short-term financing, long-term commercial goals, foreign exchange and commerce requirements, and the establishment of savings banks. Specialized public sector policy-based financial institutions were established to promote economic development, industrial, regional, ex-

44 banking industry port and import trade, colonial development and, until the end of the Second World War, to finance

Japan’s military economy. It was Matsukata’s expectation that the Ministry of Finance would control the activities of all of these institutions. This segmented system lasted until the liberalization of the financial sector took place a century later in the 1990s.

The only notable exception to the tight control wielded by the central bank occurred during the post-First World War decade when the government’s laissez-faire policies let loose a period of free-wheeling financial markets. This period came to an abrupt end with the 1927 banking crisis, which followed the Bank of Japan’s dubious discounting of bills as a relief measure after the Great

Kanto Earthquake (1923). Eventually a panic run ensued on a number of banks, which were thought to be holding the worthless paper. The subsequent collapse of many banks led the Ministry of Finance to take a direct hand in the failing banking industry The government took over ownership of a number of the failing banks, reorganizing and consolidating them. The newly organized banks were soon pressed into the service of the emerging military economy of the


The bank-centered financing regime gave the

Ministry of Finance a considerable amount of power in directing economic development policy particularly in comparison to its inability to direct the equity-capital markets. In the tight credit conditions of the postwar period, the main bank

system, in which banks were the chief suppliers of corporate finance, became the MoF’s principal mechanism of rationing funds.

In the 1980s the rapid expansion of credit provided by banks for speculative investment in real estate and construction was one of the main sources fueling what later became known as the

“bubble economy” The collapse of the bubble led to the most profound recession since the end of the Second World War. Today non-performing loans still carried by the banks are estimated to range from upwards of ¥63.3 trillion to twice that amount, and have led to consolidations and mergers within the commercial banking sector as well as the bankruptcy of two of Japan’s three long-term credit banks. This in turn has resulted in the creation (to date) of four giant holding companies which encompass all of Japan’s remaining city banks together with trust banks.

After the revaluation of the yen following the

1985 Plaza Accord agreement, Japanese banks took a proactive role in financing the expansion of Japanese direct investment overseas, most conspicuously the development by companies and industries of subsidiary operations overseas, the acquisition of existing companies, and the building of new production facilities. In North America in the 1980s, every Japanese city bank and longterm credit bank, followed by more than 65 regional banks, all opened branch offices in New

York as well as another 120 branches in other

US cities. Their lending to construction and the real estate market in the USA led to a collapse in the US real estate bubble in the early 1990s, as it had earlier in Japan.

This pattern was repeated in the mid-1990s by Japanese banks which engaged in similar lending for speculative investment in Asia. Their extensive lending to companies in the region led to speculation in real estate and local equities markets. The number of Japanese bank branches in

Hong Kong exceeded their number in New York.

The collapse of the resulting speculative bubble, which had been financed by Japanese bank lending, helped precipitate the Asian financial crisis of 1997.

Throughout the postwar period, until financial liberalization policies were instituted in the

1990s, the financial sector was strictly segmented into the following categories of shortterm lending institutions: city banks, regional banks, and sogo (mutual) banks. The city banks were large-scale commercial banks with nationwide franchises that served primarily as chief main banks to major commercial clients, such as the large-cap firms listed in the First Section of the Tokyo Stock Exchange (TSE). Among this group of banks were the then so-called Big Six, which were the main banks for the giant kigyo

shudan (corporate enterprise groups) of the same names: Mitsui (later re-named Sakura),

Sumitomo, and Mitsubishi Banks, all former

zaibatsu banks, and for the so-called bankcentered groups: Daiichi Kangyo (DKB),

Sanwa, and Fuji Banks. Another half-dozen city banks had largely regional client bases. The

Bank of Tokyo was also a city bank. Formerly

banking industry 45 government owned, it was a specialized foreign exchange bank with a large clientele among

Japanese corporations doing business overseas.

The second category of commercial banks was the more than sixty-five regional banks. Their commercial base as main banks was among medium-sized businesses (typically Second Section firms listed on the TSE) and large privately held firms. They also enjoyed the patronage of large corporations in their regions but not usually with main bank status.

The third category of short-term lending institutions were the sogo (mutual) banks which were re-chartered as second-tier regional banks in the late 1980s. These banks catered primarily to small-scale corporations and privately held businesses within their regions. The legal distinctions between the city banks, the regional banks, and the second-tier regional banks were erased in the

1990s when they were all reclassified as commercial banks, but they still have retained their characteristic markets.

The long-term credit banks were organized to provide long-term financing, principally through the sale of long-term debentures. The Hypothec

Bank of Japan, organized by the government in

1896, was the first bank of its type in Japan and was modeled after the Credit Foncier of France.

As its name implies, this land-collateral based bank made loans secured by agricultural properties. The purpose of the bank was to provide longterm credits for agricultural and enterprise development. In addition, local banks known as

Agricultural and Industrial Banks were established in each prefecture between 1897 and 1900.

The capital of these banks was held by individuals and the prefectural governments. Similar to the Hypothec Bank in function, they raised funds by issuing debentures. In 1921 they were amalgamated to become the Hypothec Bank’s regional branches.

In 1900 the Industrial Bank of Japan (IBJ), patterned after France’s Credit Mobilier, was established. Its purpose was to provide long-term developmental loans for vital industries, such as shipping, iron and steel, and chemicals, usually for a term of at least five years. Local government bonds as well as debentures, shares of companies, mortgages of land and buildings, factories, ships, and railways could be used as loan collateral. The IBJ’s operations were supervised by the government, and it also raised funds through the sale of debentures. A large share of its capital stock, some 43 percent, was raised in the London market and held by foreigners. In the 1930s the bank was reorganized to provide long-term credits for industries supporting the military economy.

In the postwar period three long-term credit banks registered under the Long-Term Credit Act

(1952) for the purpose of providing long-term loans to industry: a newly organized Long-Term

Credit Bank of Japan, the Industrial Bank of

Japan, and later the Nippon Credit Bank, successor to the Hypothec Bank. Up until the 1980s their distinctive ability to offer long-term credit became blurred as city banks also began extending long-term loans on a de facto basis by the rollover of short-term credits. Seeking to regain profits from the loss of their market share to the city banks, the Long-Term Credit Bank and Nippon Credit Bank ultimately became casualties of the non-performing high-risk loans they had made for construction and real estate and would declare bankruptcy. The Industrial Bank of Japan, the strongest of the three, merged with

Daiichi Kangyo Bank and Fuji Bank to form the Mizuho Financial Holding Group.

The Yokohama Specie Bank (YSB) was created by the government with the mandate of financing foreign trade. Until 1880 almost all foreign exchange in Japan had been conducted by foreign-owned banks. When currency depreciations led to extreme fluctuations in exchange rates making foreign commerce difficult, the government created the Yokohama Specie Bank in order to bring this problem under control. The

YSB held the exclusive franchise to deal in foreign exchange until the end of the First World

War when commercial banks were allowed to enter the foreign exchange market. Following the

Second World War the bank was reorganized as the Bank of Tokyo and once again held until the

1970s the exclusive authority to deal in foreign exchange. In the 1990s the bank merged with

Mitsubishi Bank.

The Savings Bank Act of 1890 was passed to protect depositors, who were mostly peasants.

By 1901 there were 2,355 independent savings and deposit banks. Although the government

46 bankruptcies earlier sought to consolidate them, it was not until 1943 that the Ministry of Finance ordered them closed and the personal savings they held transferred into commercial banks to strengthen financing for the war effort. At this point individual and household savings became a large component of main bank system profits. Today, the only remaining savings deposit takers are the

shinkin (non-profit financial cooperatives) and the

postal savings system. The commercial banking system for many years has called for the breakup and privatization or the outright abolishment of the postal savings system, which comes under the supervision of the Ministry of

Posts and Telecommunications rather than the

Ministry of Finance.

Since the late 1990s and up to the present, many changes have taken place in the consolidation of Japan’s banking industry The number of bank failures continues apace as a result of the ongoing non-performing loan crisis, which are chiefly loans to real estate and construction interests. This problem continues to plague the financial sector since the collapse of the bubble economy of the late 1980s and has driven the trend to takeovers and mergers among financial institutions.

The recent enactment of the Financial Holding Company Act has made it possible for commercial banks to merge without reducing their

cross-shareholdings in client firms. The Act also permits different categories of banks—commercial, long-term, and trust banks—as well as securities firms and insurance companies to join together, in essence, granting them universal banking capabilities. This liberalization overturns existing financial segmentation policies first laid down by the Ministry of Finance in the nineteenth century and reinforced in the postwar Ameri-

can occupation period by the incorporation of the principles of United States’ Glass-Steagall Act within Article 65 of Japan’s Banking Law. As of today all of Japan’s top city banks, remaining longterm credit bank (IBJ), and most of its trust banks, together with several insurance companies have been merged into four megabanks.

As mentioned earlier, one of the paramount difficulties facing the banking industry today is the continuing non-performing loans problem, which has withstood both the creation and demise of the unsuccessful Financial Reconstruction Commission (1997–2001). Other problems confronting the banking industry include the still growing non-performing loan portfolio of the regional banks, the entry of foreign financial competitors into Japan’s formerly closed financial markets, as well as new domestic competitors, such as retailers and manufacturers which have set up new institutions offering financial services.

Despite the injection of public funds to recapitalize the banks and the near-zero interest-rate policy of the Bank of Japan, banks have refused to issue new loans due to the continuing declining value of bank-held shares in their client firms which severely lowers their capital/asset ratio requirements.

Further reading

Scher, M.J. (1996) Japanese Interfirm Networks and Their

Main Banks, London: Macmillan and New York:

St. Martin’s Press.

Scher, M.J. and Beechler, S.L. (1994) “Japanese Banking in the U.S.—From Transient Advantage to Strategic Failure,” Working Paper Series, Center on

Japanese Economy and Business, New York: Columbia University.



Bankruptcy involves an individual or corporation seeking legal protection from creditors because of insolvency Comparatively speaking, the incidence of corporate bankruptcy in postwar

Japan has been extremely high. In 1977, for example, more than 18,000 firms went bankrupt in

Japan, while in the same year fewer than 800 firms went bankrupt in the United States.

Firms may go bankrupt for a number of reasons. In general, however, the number of bankruptcies tends to rise substantially when an economy enters recession, experiences a shock in the presence of latent business weakness, or undergoes structural changes. Until the latter

1970s, most companies that went bankrupt in

Japan did so as a result of temporary critical conditions. From the latter 1970s through the 1980s, however, structural causes were more often the

bankruptcies 47 reason. In the 1990s, unsound investments made during Japan’s “bubble” period of the latter 1980s were a primary cause of failure, as asset prices declined continuously over the course of the decade.

The “dual-structure economy” and bankruptcy patterns

A distinctive feature of corporate bankruptcy patterns in Japan until the latter 1990s was the concentration of these failures almost exclusively in

small and medium-sized firms. The failure of large corporations was extremely rare. In 1993, for example, of the total number of bankruptcies leaving debts of ten million yen or more, over 99 percent were accounted for by small and medium enterprises with a capitalization of less than 100 million yen.

The heavy concentration of bankruptcies among smaller firms reflected the dual structure of the Japanese economy Extensive subcontracting by large corporations to smaller firms meant that the smaller firms played the role of shock absorber in periods of economic downturn.

Smaller firms typically engaged in work for a single larger firm but the larger firms retained numerous subcontractors. When economic shocks hit, then, subcontractors—financially dependent on the larger firms—tended to bear the brunt of the pain and go under in high numbers.

In contrast to the vulnerability of small and medium-sized firms, the safety net for large corporations was distinctively strong in Japan. Although large Japanese corporations maintained a high degree of dependence on bank-centered financing, most companies developed a long-term relationship with a so-called main bank, through which the corporation procured the majority of its funds and all of its financial services. Close monitoring by the main bank meant that problems were often caught before they led a firm to reach the point at which liquidation was the only option. And, if a corporate borrower did become financially distressed, debt claims were often renegotiated. The main bank’s role in the shadow of bankruptcy also might include the supply of emergency funds or the arrangement of financing for the distressed firm through cooperation with other banks. This means of addressing problems was seen as less costly than liquidation. Life-

time employment practices in large firms meant the underdevelopment of a labor market for midcareer employees. Therefore, employees left jobless due to bankruptcy were likely to find reemployment difficult. In smaller firms, in contrast, the expectation of lifetime employment was not as firmly entrenched, the labor market was more mobile, and re-employment was easier to find.

Occasionally the monitoring mechanisms of the main bank system fell short, however. This was the case with Sanko Kisen, a Japanese shipping company with the largest tanker fleet in the world that filed for protection from creditors in

1985 after many years of over-expansion. Such high-profile bankruptcies were extremely rare through the mid-1990s, however.

The extraordinary commitment of banks to large corporate borrowers was supplemented by government support both in the prevention of bankruptcy and in support of rescues in cases when large corporations approached the brink of insolvency In the financial sector, for example, the fear of bankruptcy was never real until the mid-1990s. Under the so-called convoy approach to regulating financial institutions, failure was not an option. Competition was suppressed by the Ministry of Finance (MOF) so that no firm moved forward so fast as to leave any others behind. If a financial institution nonetheless came under financial distress, the Finance Ministry arranged for a stronger bank to absorb the ailing one. When necessary as in the case of

Yamaichi Securities in 1965, the Bank of Japan stepped in to supply funds to prevent failure, in the interests of financial system stability. Avoiding bankruptcy meant protecting depositors and helped maintain confidence in the financial system.

Heavy regulation in many other sectors of the

Japanese economy also guarded against “excessive competition” that might otherwise have led to bankruptcy and protected companies from being exposed fully to market forces. These regulations typically included strict entry and exit requirements, price controls and other means to induce companies to cooperate even as they competed.

48 bankruptcies

Surge in bankruptcies in the latter 1990s

After Japan’s asset bubble burst in 1991, many companies struggled under the weight of high interest payments on large debts and sluggish revenues. Massive amounts of fiscal stimulus, government efforts to prop up the stock market, and low interest rates initially staved off large-scale bankruptcies. Lax accounting and disclosure standards by banks and their borrowers also helped postpone bankruptcy for many ailing firms and their financiers. Companies often transferred debts to subsidiaries or paper companies. Because consolidated accounting practices were not in place, this enabled parent companies to erase the debt from their books and thereby mask their financial distress. Banks also developed practices to avoid the classification of loans as non-performing. One commonly used means involved banks issuing new loans to companies to enable them to pay the interest on existing loans.

These efforts at hiding problems and postponing reckoning with financial distress became increasingly inadequate, however, as the nation moved into the second half of the 1990s decade.

In the fiscal year 1996, the level of debt left by corporate bankruptcies reached the highest in history to that point, spurred by an increase in largescale bankruptcies of bubble-floated finance companies. The high amounts of debt left by bankruptcies in the four years thereafter reflected the emergence of a number of large-scale bankruptcies such as department store operator Sogo, listed on the First Section of the Tokyo Stock Exchange, and major financial institutions.

The rise in large-scale bankruptcies from 1999 on also was a byproduct of a new system of financial regulation put in place in October 1998.

Regulatory authorities tightened disclosure requirements and asset classification standards for banks, moves that translated into increased pressure on borrowers to restructure. At the same time, an infrastructure for dealing with insolvent banks was established, meaning that problems with delinquent loans could be dealt with more aggressively While restructuring, mergers and acquisitions, and tie-ups with foreign firms were able to stave off bankruptcy for some firms as the economy continued to flounder, others succumbed. The number of bankruptcies resulting from falling sales and the inability to collect account receivables soared in 2000 on the backdrop of slowed growth, weak consumer spending, and the reluctance of banks to extend new credit or roll over loans to troubled firms. The retail and construction sectors were hit particularly hard in this period.

Small and medium-sized companies also found conditions to be harsh in the latter 1990s.

In 1998, amid a sharp credit crunch and financial system instability the government adopted a special thirty trillion yen loan guarantee program for small and medium-sized enterprises.

Despite these efforts to prop up weak companies, however, thousands of firms taking out loans ended up insolvent. The number of failures of semipublic companies (ventures between the public and private sectors) also increased in the second half of the 1990s and accelerated further in 1998 and 1999, damaging the financial health of local governments.

Developments in bankruptcy legislation

Japanese bankruptcy laws were relatively strong and included the removal of top management.

Yet, they were rarely used in the case of large corporations over the postwar period. Until 2000, bankruptcy procedures were undertaken in accordance with the Composition Law. The introduction of the Civil Rehabilitation Law on April

1 of this year, however, made it easier for small and midsize companies to declare bankruptcy and began to speed up the corporate rehabilitation process. The new law has led to a surge in bankruptcy applications.

Under the law, companies may apply for court protection and dispose of debt even before their liabilities exceed their assets. As a result, the new law has given rise to some distrust between banks and their borrowers, as banks now have incentives to try to collect as many loans as possible before borrowers go bankrupt. This changed bank behavior contrasts sharply with that behavior observed when the main bank system functioned effectively in earlier periods.

The new law also permits debtors to initiate bankruptcy proceedings and allows managers to stay in their positions. The Ministry of Justice

banto 49 furthermore revised bankruptcy-related laws in

2000 so that the overseas assets of failed firms operating across national borders would fall within the scope of Japanese bankruptcy proceedings. This change enabled the recovery of loans from such assets by creditors in a more orderly fashion than in the past. The absence of such a provision had impeded plans by Yamaichi Securities Co. to restructure its operations prior to its voluntary closure in November 1997.

Rise in personal bankruptcies following the bursting of the bubble

The 1990s saw many changes in the level of personal bankruptcies as well. In this decade, the number of cases of personal bankruptcy rose tenfold. In 1991, cases of personal bankruptcy doubled on the year with the bursting of the speculative asset bubble to number approximately

23,000. Although the incidence of personal bankruptcy rose somewhat in the years thereafter, numbers surged significantly in 1996. And, in fiscal year 1998, the number of cases exceeded

100,000 for the first time.

The record high numbers of personal bankruptcies reflected the strain placed on household finances by rising unemployment levels and the growth in the consumer loan industry Consumer debt doubled in the 1990s decade and non-bank consumer loan companies—not subject to the Interest Rate Restriction Law—were able to charge exorbitant interest rates on loans.

Many individuals were also driven into bankruptcy after serving as guarantors for collateralfree loans extended by non-banks to small enterprises.

The surge in personal bankruptcies had a significant impact on Japanese society perhaps most notably in the incidence of suicide. Nearly 3,000 individuals were reported to have committed suicide in fiscal year 1998, due to excessive personal debts.

Further reading

Pascale, E. and Rohlen, T. (1983) “The Mazda Turnaround,” Journal of Japanese Studies 9(2): 219–63.

Saxonhouse, G. (1979) “Industrial Restructuring in Japan,” Journal of Japanese Studies 5(2): 289–320.



Banto was the highest position of authority within a traditional merchant house, equivalent to head clerk. Within smaller merchant houses, the banto often held near absolute authority in business decisions. In larger houses, there might be several banto, in which case one would be designated

shihainin, chief manager. Banto could use their own savings to set business on the side. They were also permitted to have a separate household and commute to work. If his business were successful he might be given permission to set up his own, separate house, bekke. In such instances, he still had an obligation of loyalty to his former house. He would demonstrate that loyalty by regularly paying his respects to the house and by assisting it as called upon. Failure to honor his obligations could result in recision of the bekke and a return to his former House.

One enduring and popular type of tale is of the loyal banto who, through daring, cleverness or great courage rescues the house from financial distress or ruin. Typical of this type of tale is the example of Minomura Rizaemon, who saved

Mitsui from bankruptcy and guided it onto greatness.

The characteristics and role of the banto foreshadow several distinctive aspects of what has come to be known as the Japanese management system. Banto worked their way up to the position through a process of apprenticeship and demonstration of skill. Young men would enter the house at the age of twelve or thirteen and be assigned the rank of detchi. For a period of five to six years the detchi would learn to read and write, to do math, and how to handle many of the small tasks and routines of the house. At seventeen or 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 demonstrated superior skill and business acumen would be promoted to banto. This practice of entering the house at an early age and then working 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 day Japanese firms (see internal labor markets).

In a similar vein, the opportunity given banto to branch out and start one’s own business draws a close parallel to the modern day practice of corporate spin-offs whereby successful units within the company are allowed, even encouraged, to separate from the parent organizations and achieve their own measure of independence. Such spin-offs continue to maintain close ties to their parents and, in some instances, rescue them from financial difficulties.

Further reading

Hirschmeier, J. and Yui, T. (1981) The Development of

Japanese Business, 2nd edn, London: Allen & Unwin.


bottom-up decision-making processes

The Japanese, so-called “bottom-up” decisionmaking process has launched many an organizational change effort seeking to uphold consensus in hopes of delivering smooth and efficient implementation marked by strong employee ownership. While it is true that implementation of organizational decisions tends to proceed more smoothly in Japanese organizations, this is not because the outcomes come about by consensus, nor because they are bottom instigated.

Rather, the key to Japanese decision-making is its distinctive emphasis on information gathering.

After an idea is formulated in a Japanese company it is explained, discussed, and confirmed by all those who might have input into or be affected by the decision. This procedure called ringi


is most accurately understood as a political confirmation-authorization process. First, the initiator writes a proposal in the form of a ringisho.

The proposal is then circulated to all who might be able to input critical information into the decision and to all who will be affected by it. The initiator (or an emissary) will then meet with each decision-making contributor one or more times to discuss at length the various elements of the proposal. This critical aspect of the process is called nemawashi, preparing the ground for optimal germination.

Once all aspects of the decision have been analyzed and confirmed, each contributor affixes his/her seal (hanko) to the ringi-sho document and it is then sent to top management for final approval—or disapproval. Given the extremely competitive nature of Japanese firms both within and without Japan, it would be naive to perpetuate an understanding of “bottom-up” as delegation of strategic decision-making to middle managers and line workers. On the contrary an important decision cannot be confirmed without ultimate approval by top management. Furthermore, it is more the norm that the initial idea is passed down from top-level executives.

The ringi-sho itself can be seen as an instrument that gives opportunity to participate in the decision-making process, documents the record of approval, and transmits a decision to organizational units affected by it. Finally it is used as a corporate record that serves to protect the continuity of corporate policies.

The net used to gather pertinent information for decision making is therefore rather large and widely cast. In addition, most of the information-gathering discussions are conducted oneon-one and face-to-face bases to promote trust, avoid public confrontation and encourage complete and open sharing of ideas. Decision making in the Japanese style is consequently time-consuming.

Advances in communication technology such as the facsimile (fax) of the 1990s and electronic mail (e-mail) in the latter part of the decade, have increased the speed of some aspects of the decision-making process. For instance, some of the information gathering is currently done through these communication media. However, nemawashi continues to be done one-on-one, and face-to-face thereby preserving the value of frankness while minimizing conflict.

Viewing decision making as a process rather than an event is key to understanding the time factor in the Japanese system. Gathering information and confirmation from a wide array of organizational actors one-on-one takes time. Even more time is required if several iterations of

nemawashi with the same individuals is necessary.

bubble economy 51

Once the decision has been made, however, very little time is required to take action, last-minute surprises are extremely rare, and very little resistance to implementation is encountered.

An important ramification of the Japanese-style decision-making process is that since decisions are a collective effort, a conscious mutual dependence of seniors and juniors in a company is nurtured. Responsibility in the Japanese context means a symbolic assumption of guilt. The rules of this sort of responsibility revolve around the tenets of a vertically integrated society: when something goes wrong, the most senior person presiding over the error takes the “blame.” This means that those above must rely on their subordinates not to make errors that will lead to their having to take the necessary consequences associated with symbolic responsibility such as resignation, or transfer.

Further reading

Smith, L. (1985) “Japan’s Autocratic Managers,” For-

tune, 7 January.

Whitehill, A.M. (1991) Japanese Management: Tradition

and Transition, New York: Routledge.


bubble economy

The Japanese economy in the late 1980s was characterized by what seems to be an asset price bubble. Land and stock prices reflected much speculative activity and rose to record levels that were unusually high multiples of the present value of future cash flows. Unfortunately land and stock prices collapsed in 1990 and were still less than

40 percent of their peak levels a decade later. The

Nikkei 225 stock index peaked on the last trading day of 1989 (29 December) at just below

40,000 and at that time the land below the Imperial Palace in Tokyo was reputedly worth more than all of the land and real estate in California.

The Japanese economy has suffered from highly anemic growth (of around 1 percent) for the decade of the 1990s. How did Japan, an economic

growth miracle of the post-Second World War period, develop this bubble and why is it suffering from its after-effects a decade later?

After Second World War much of the Japanese economy lay in ruins and Japanese industry and economy as well as its political and financial systems were restructured by the occupying forces led by General Douglas McArthur and his staff.

Fortunately Japan enjoyed a period of rapid economic growth in the forty-year period, 1950–90, rebuilt its economy to prewar levels by the early

1960s, and had become the second largest economy in the world by the 1970s. Unfortunately, economic growth in Japan virtually stopped at the beginning of the 1990s with the collapse of the asset price bubble. How did this asset price bubble arise?

While there may be little agreement on details 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 features of the late 1980s and 1990s episode of the speculative rise in asset prices and then their sudden decline with adverse consequences for the Japanese economy The following is a brief outline of this bubble episode, its possible causes, and a review of efforts to mitigate its negative economic consequences.

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 the value of the yen associated with the international Plaza Accord in 1985. In the late 1980s the government continued efforts to balance its budget even in the face of a recession using monetary policy as the primary means of economic stimulus. Consequently, there was an unprecedented lowering of interest rates (from 5 percent in January 1986 to 2.5 percent in February

1987) and an expansionary monetary policy starting in 1986 (in response to the recession resulting from the 1995 endaka rise in the Yen engineered by the Plaza Accord). This extraordinary episode of monetary expansion seemed to have started an asset price bubble that then characterized the late 1980s Japanese economy.

Contributing to this bubble in Japan were a number of institutional practices that accelerated the bubble with positive feedbacks. For example,

52 bubble economy as most lending in Japan tends to be based on collateral value, asset price increases led to higher collateral values and higher levels of lending which then led to higher asset prices and so forth in an ever accelerating set of self reinforcing cycles. Unfortunately there were few if any mechanisms in Japan at that time to discipline or stop the bubble in asset prices.

Between the start and end of the second half of the 1980s, stock prices rose 3.1 times (to a

Nikkei Index of 38,915) and land prices rose four times. In relative terms, for the last half of the

1980s, the ratio to GDP for land prices increased

3.67 times and for stock prices by 1.51 times with the combined ratio increasing by 4.52 times. By any measure these were extraordinary increases in asset prices unprecedented in recent Japanese history Price earnings ratios and other valuation measures for Japanese equities were in a much higher zone than similar ratios elsewhere in the world. With these highly valued assets, Japanese companies went on a spending spree buying up prime real estate and other assets in many foreign countries at what later turned out to be highly inflated values. The easy availability of money in the second half of the 1980s also led to poor investment decisions domestically.

As this late 1980s asset price bubble led to increasing inequality and other social problems including a potential breakdown of the social compact, the Japanese government and the Bank of

Japan started to take steps to deflate the bubble, raising interest rates from 2.5 percent in May 1989 to 6 percent in August 1990 and curtailing monetary growth severely also during this period.

However, instead of a soft landing, the bubble collapsed in 1990. The value of the collateral underlying most bank loans collapsed along with the asset price bubble. Consequently since the bursting of the bubble, bank lending has been restricted by the continuing high levels of nonperforming bank loans (Japanese banks had yet to be restructured a decade later). It seems that the same positive feedback cycles that accelerated

Japanese economic growth were now working in reverse accelerating the decline in Japanese economic growth. Since the bursting of this bubble in 1990, the Japanese economy has suffered a number of recessions and a very low overall rate of growth in the 1990s.

In spite of fiscal stimuli in the form of numerous government spending packages, an expansionary monetary policy and other efforts by the government, the Japanese economy has been in a state of recession or very anemic growth since the early 1990s bursting of the bubble. The government launched nine major deficit spending packages totaling about $1.2 trillion between 1992 and 1999. The Bank of Japan steadily lowered interest rates to virtually zero by the end of the

1990s. The ineffectiveness of Japanese monetary policy to stimulate the economy has led many to contend that Japan is in a liquidity trap. Given the high savings rate in Japan and its low, demographically limited long-term economic growth prospects, the savings-investment equilibrium real interest rate is estimated to be negative. Thus, given a nominal interest rate floor of zero, a positive expected rate of inflation is necessary for equilibrium. Indeed, since the mid-1990s there seems to be considerable evidence of money hoarding in Japan with significant growth of the money supply but zero or negative growth in bank lending.

However, an alternative explanation of the ineffectiveness of monetary and fiscal policies in

Japan in the 1990s may be the credit crunch associated with the high levels of non-performing loans among Japanese banks. Tankan, the Bank of Japan survey of business conditions, provides some evidence supporting the credit crunch explanation. It seems that the financial system needs to be restructured so it can contribute to economic growth with non-performing loans written off, sold, or otherwise taken off the books.

Others have contended that the failure of the

Japanese economy to respond to fiscal and monetary stimulus since 1990 can only be ended with massive structural reform and deregulation of

Japanese business and industry. Deregulation can be accomplished either in one or a few major episodes, or can be undertaken slowly allowing time for the affected firms to adjust. As may be expected, deregulation changes the competitive structure in an industry and many inefficient firms are forced out of business. Business failures create economic discomfort (for example, higher unemployment rates) and declines in consumer con fidence. While there has been slow and steady

bubble economy 53 deregulation of Japanese business and industry there have been no major changes or deregulatory moves. It is clear that Japan has chosen to deregulate only at a slow and steady pace.

Another factor constraining the economic recovery in Japan has been the bubble-related changes in political governance in Japan. The Lib-

eral Democratic Party (LDP) that had governed

Japan for most of the post-Second World War period lost its majority in the Diet, the Japanese

Parliament, soon after the collapse of the asset price bubble and Japan has been governed by a coalition of political parties since the early 1990s.

Public confidence in the government and other large institutions has also been sapped by many corruption scandals involving elite officials. In this situation, political power has been dispersed and it seems that there has been little political will for strong and decisive action to restore economic growth.

Regardless of the reasons for the failures of policies for economic recovery the Japanese economy faced a critical impasse by the end of the 1990s in terms of policies to restore economic growth. Fiscal policy options were constrained by the rapid growth of Japanese government debt in the 1990s (to $6 trillion, about 1.3 times GNP) and at the same time, monetary policy options were also limited as interest rates had already been dropped to near zero.

Before the last decade of the twentieth century Japan’s bank-centered system of capitalism was considered perhaps the best alternative for developing countries, especially in Asia. The US system with its more unfettered capitalism was considered suitable only for a highly developed and powerful country such as the USA. Indeed, many in the USA also believed that the Japanese version of industrial policy was more humane and a better alternative, even for the USA. While the dismal performance of the Japanese economy since 1990 has been a major cause for reassessing these views, the failure of the banking system in Japan also calls into question the nature and effectiveness of the Japanese bank-centered system of corporate governance where main banks closely monitored their commercial clients so that other stakeholders did not have to engage in wasteful duplicate monitoring. After all, efficient monitoring is incompatible with the emergence of massive levels of non-performing loans and bad debts that have characterized the

Japanese economy in the last decade of the twentieth century.

One explanation of this failure notes that

Japanese banks have not developed credit analysis capabilities, having depended on government directed and collateralized lending and, given the generally poor levels of disclosure, nor have they been subject to market discipline. Under the prevailing amakudari practice where retiring senior regulators were virtually guaranteed senior positions with the institutions they regulated, it is contended that bank regulation in Japan has been less than fully effective. However, bank regulation may also have lost its effectiveness as

Japan gradually moved to a more market-oriented economy and financial system. Regardless, the traditional (prior to the 1990s) Japanese system of bank-centered capitalism is now being widely questioned, even in many Asian developing countries though, this bank-centered financial system was associated with high rates of growth in the post-Second World War period until the late 1980s. Indeed, while there is widespread agreement in Japan that this old economic and financial system must be changed, there is less agreement on the form of the new system, and very little agreement on how to (and how fast to) move to a new economic and financial system.

Further reading

Aggarwal, R. (1996) “The Shape of Post-Bubble Japanese Business: Preparing for Growth in the New

Millennium,” International Executive 38 (1): 9–32.

——(ed.) (1999) Restructuring Japanese Business for Growth,

Boston, MA: Kluwer Academic Publishers.

——(1999) “Assessing the Asian Economic Crises: The

Role of Virtuous and Vicious Cycles,” Journal of

World Business 34 (4): 392–408.

Mori, N., Shiratsuka, S. and Taguchi, H. (2000) “Policy

Responses to the Post-Bubble Adjustments in Japan: A Tentative Review,” Bank of Japan, IMES

Discussion Paper Series, 2000-E-13, May.

Motonishi, T. and Yashikawa, H. (1999) “Causes of

54 Buddhism the Long Stagnation of Japan During the 1990s:

Financial or Real?” Journal of Japanese and Interna-

tional Economies 12 (2): 181–200.

Okina, K., Shirakawa, M. and Shiratsuka, S. (2000)

“The Asset Price Bubble and Monetary Policy:

Japan’s Experience in the Late 1980s and the Lessons,” Bank of Japan, IMES Discussion Paper Series, 2000-E-12, May.

Olson, M. (1982) Rise and Decline of Nations, New Haven, CT: Yale University Press.



The majority of Japanese are nominally followers of various sects of the Buddhist religion; but they also practice observances of Shinto, a nature-oriented series of religious beliefs and practices unique to Japan. Buddhism was brought both to Japan from China, and brought into Japan from China by native Japanese beginning in the sixth century AD. Buddhism and Shintoism have remained co-religions since that time. Eventually purely Japanese versions of Buddhism were developed, and in the nineteenth and twentieth centuries several new religions based loosely on

Buddhist teachings have emerged. Japan is unique in the modern world in that, while having two major religions, it is not, as is usually the case, divided by religion. Over 90 percent of the more than one hundred twenty million Japanese subscribe at least passively to both Shinto, the native religion, and Buddhism.

Toward the end of the sixth century a newly united China began to spread its cultural brilliance outward toward its periphery first to Korea, and eventually reaching Japan. Some leaders of an emerging Japanese government were greatly attracted to many aspects of Chinese civilization, its literacy sophisticated architecture, advanced metallurgy forms of urban life, and rational forms of governmental structure. Buddhism, of course, was part of it all, and

Koreans who visited Japan with Buddhist artifacts and scriptures were eagerly accepted by

Japanese as teachers. For the first and only time in Japanese history an open rivalry was evidenced between Shinto, championed by a conservative element at the center of power, and a more progressive body of aristocrats who saw

Buddhism as a hallmark of modernization and progress. Early in the seventh century the prince regent, Prince Shotoku, was eventually successful in establishing a form of Chinese Buddhism as a kind of semi-official court religion. Beyond the immediate community of the ruling elite,

Shinto in its many manifestations remained the religious orientation of the masses.

For the first five hundred years of Japanese

Buddhism it remained closely tied to the ruling nobility. Buddhist temples were sponsored by various noble families, and were more like centers of political organization and intrigue than as places to practice a religion. Buddhist scripture and rituals were generally accepted as a type of applied magic for most people who had access to them, although a few scholar/monks as early as the seventh century came to understand quite clearly the philosophical nature of Indian and

Chinese Buddhism, and their teachings had some influence over the ruling elite.

It was not until the turmoil of the early twelfth century that Buddhism actually began to function as popular religion in Japan. It was a time of uncertainty and change; civil war broke out in various places, accompanied by a shift in political power from the nobility in Kyoto to a new warrior class more closely attached to common people. Four new and purely Japanese versions of the religion appeared: Jodo (Pure Land), Jodo

Shinshu or True Jodo, Hokke or Lotus (often called Nichiren Buddhism, named after its founder the monk Nichiren), and Zen Buddhism.

All four of these new versions of the religion featured heroic leaders and simple methods of devotion which could be utilized regardless of level of intelligence or learning, occupation, sex or class. While the warrior class itself leaned strongly toward the more contemplative Zen version of

Buddhism, the other three swept across the land and are still the most prominent versions of Buddhism followed in Japan.

As ordinary people embraced popular Buddhism, they did not turn away from the native

Shinto. The two religions were given their own areas of special emphasis and have continued on

burakumin 55 until the present with a peaceful accommodation.

Shinto has come to be associated with such tasks as marriage, christening, blessing of buildings, and thousands of local rituals involving the agricultural cycle. Buddhism deals with death and the departed: funerals, memorials at intervals after death, and to a somewhat more modest degree than in Christian and Moslem societies, serves as a guide to thinking and behavior.

In response to the growing popularity and power of the new versions of Buddhism, older sects headquartered at Kyoto and Nara eventually modified the way people related to religious practices. This was done to the extent that the great bulk of Japanese Buddhist observance has been for centuries either carried out entirely by professional clergy or given over to extremely simple acts such as repeating phrases over and over. There is much depth to the purely intellectual part of Buddhism both inside and outside of

Japan; writers inspired by aspects of Japanese

Buddhist thinking now and in the past have had a respected and international audience. It is also true that Buddhism has had a significant impact on Japanese culture in an indirect way through its influence on the samurai class, and the subsequent influence that class had on modern Japan during the Meiji restoration. It must be noted, however, that except for a small segment of intellectuals and members of minority religions, the

Japanese are very casual about matters relating to religion, viewing religion as not much more than a series of rituals. “Faith,” in the Christian or Islamic sense, is a concept not intricately woven into Japanese culture.

In the nineteenth and twentieth centuries, several new religions emerged in Japan. Spka Gakkai, purported to be a reinterpretation of Buddhism, is the largest of these, and has grown to have considerable resources and influence in Japanese society.

See also: Prince Shotoku’s Seventeen-Article


Further reading

Hori, I. (ed.) (1989) Japanese Religion, Tokyo: Kodansha


Kodo, M. (1982) Introducing Buddhism, Rutland, VT:


Prebish, C.S. (1975) Buddhism: A Modern Perspective, University Park, PA: Penn State University Press.



Origins of burakumin

The term burakumin literally means “people of the hamlet,” with earlier terms eta (polluted) and hinin

(non-human), also used to label extremely low status people in Japan. The origins of burakumin people are not exactly clear and in dispute, but there are historical records going back to 600 AD of a low-status people similar to burakumin. Much like the untouchables or outcastes of ancient India, it is believed that burakumin originally had occupations that were seen as unclean or polluted in the eyes of Buddhists and Hindus, occupations such as dealing with dead animals (skinning and tanning of hides for example). However, new historical works suggest that having such occupations were not so much the cause of burakumin status but rather reinforced the status. There were several reasons a person could fall to a low position (such as being charged with criminal activity or falling into debt) and it was the limitations on what activities and occupations these people could have once in this lowly position that helped legitimize and perpetuate their status. It is also known that there were levels or degrees of this low outcaste status, with eta (polluted) being higher than hinin (non-human).

The Tokugawa stratification system

Much more is known about the status of burakumin from around the beginning of the fifteenth century When the Tokugawa or Edo period began in Japan (early 1600s), the Tokugawa Shogun imposed more rigid controls upon the population and regional opponents to consolidate and maintain power in a country that had seen nothing but regional warfare for hundreds of years.

One means of control imposed by the Tokugawa

Shogun was the institutionalization of a system of social stratification, called shi noo koo shoo

56 burakumin

(literally meaning warriors, peasants, artisans, and merchants), with rigid and mostly hereditary ranks much like the caste system of ancient India. There were four primary status positions under the emperor and ruling shogun military clan; the samurai, peasants, craftsmen and artisans, with merchants on the bottom. Following the logic of the Indian caste system, of course, there was a status grouping, since called burakumin, who were even further down the ranks of the stratification system, and were so “unclean” or “polluted” as to have no real position at all; that is, they were

“outcastes.” Unlike the Indian caste system which used the Hindu concept of reincarnation and “bad karma” (sins in a previous life) to explain a person’s position in the caste system, the shi noo

koo shoo stratification in Japan did not specifically invoke religion as a legitimating force. It is estimated that there were about half a million people in this outcaste position during the Tokugawa period of Japanese history.

Burakumin in modern Japanese history

With the fall of the Tokugawa Shogun by 1868 and the beginning of the Meiji Period, the rigid

Tokugawa stratification system was eliminated.

The new political elite of Japan formally eliminated the position of burakumin in 1871 and made discrimination against former burakumin people illegal. As has happened many times in India since the formal elimination of the old caste system, however, people considering themselves above outcastes or burakumin rioted in response to government attempts to attain more opportunity for these people. Crowds as large as 26,000 at any one time were reportedly involved in these anti-

burakumin riots, with more than 2,200 burakumin homes burned in Fukuoka during 1871.

Burakumin today

There are estimated to be about 2–3 million people of burakumin heritage in Japan today but unlike people of Korean or Chinese descent, there are no cultural, much less biological or racial, distinctions between people of burakumin heritage and all other Japanese. As recently as 1965, however, opinion polls showed that some 70 percent of Japanese people still believed people of burakumin descent were of a different race.

The negative status has remained alive, therefore, and Japanese people have gone to great lengths to determine if a person has burakumin ancestry Before parents will approve a marriage or employers will hire new employees for important positions, for example, there is often a search of past records to make sure the prospective marriage partner or employee is “clean” of burakumin ancestry. There are hundreds of detective agencies that specialize in tracking down information on burakumin ancestry contributing to a somewhat significant percent of the Japanese economy.

One of the typical methods of detecting

burakumin lineage is through old village family records. All Japanese citizens have their name listed in an official family registry. Most often this family registry is located in a small village because of the recent agricultural history of Japan with the majority of population in farming occupations until well into the twentieth century Because of strict discrimination, most burakumin lived in separate villages (or hamlets) from other Japanese and thus it was not difficult to track down a person’s burakumin heritage through examination of these village records. During the 1970s, in an attempt to further reduce discrimination against

burakumin, the Japanese government required that family registries in former burakumin villages be kept from the general public.

However, in the last three decades, Japanese government has become involved in doowa, the official term for conditions and issues related to

burakumin. Programs to reduce discrimination against burakumin (much like affirmative action programs in the United States) have shown considerable success since the late 1960s and early

1970s. It is estimated that about $30 billion was spent on these programs between the 1960s and

1993. Poverty rates are lower and educational attainment is higher. And whereas 90 percent of

burakumin married other burakumin as recently as

1960, it is now estimated that about three in four marriages by people of burakumin lineage are with people of non-burakumin ancestry.

Further reading

Buraku Mondai Kenkyujo (ed.) (1997) Buraku no Rekishi

to Kaihoo Undoo. Gendai Hen (Buraku History and

Liberalization Movement), Kyoto.

business ethics 57

Hane, M. (1982) Peasants, Rebels, and Outcastes: The Un-

derside of Modern Japan, New York: Pantheon.

Kerbo, H. and McKinstry J. (1998) Modern Japan: A

Volume in the Comparative Societies Series, New York:


Komori, T. (1990) Doowa Mondai no Kiso Chishiki (Fundamental Knowledge of Doowa Problems), Tokyo:

Akashi Shoten.

Noguchi, M. (2000) Buraku Mondai no Paradaimu Tenkan

(Paradigm Shift for the Buraku Problems), Tokyo:

Akashi Shoten.



business ethics

Business ethics has become an established discipline in Japan in the 1990s. However, there is no clear-cut definition of the term. In Japanese, keizai

(economy) is a compound word consisting of kei and zai, which means governing the world in harmony and bringing about the well-being of people. Therefore both keizai and keiei (business) include a component of ethics. In the past, however, the Japanese did not define or use the term in a similar fashion to the Western view of ethics.

However, in the early 1990s, the public was presented with scandal after scandal of governmental officials being paid huge bribes. Most officials resigned their positions, although a few were prosecuted and convicted. Because of this, business ethics has grown to become important within the

Japanese business community.

During the Meiji period (1868–1912),

Shibusawa Eiichi, a business leader, called for the unity of morality and economy He cautioned against unethical business practices. He also argued that Confucian values provided the correct path to doing business in an ethical manner. Prior to the mid-1960s, the priority of Japanese business was on economic growth. Companies were unlikely to address ethical, social or environmental issues. Even when a corporation had caused serious damage to its neighbors or consumers, unless coerced by governments, consumer groups or local communities, disputes were settled by paying a small sum of money known as mimaikin or sympathy payment.

Victims of air pollution and toxic substance poisoning in the 1950–60s became dissatisfied with mimaikin and with informal dispute resolution methods and filed lawsuits against the polluting companies. Pollution in Minamata, a small city in Kumamoto Prefecture on Kyushu, Japan’s southern island, was the first of several pollution cases. Minamata, which was mostly a fishing and agriculture society was also home to Chisso Corporation, a large factory that produced nitrogenbased chemical fertilizers and plastics. Fish, birds and cats became sick. When this spread to humans, the companied denied that they were the cause, but paid mimaikin. The cause was later shown to be mercury poisoning from the factory’s wastewater.

A second strange disease, similar to the outbreak in Minamata, was found in Niigata Prefecture. The victims’ diets consisted mostly of fish from the Agano River. The cause was mercury poisoning from a Showa Denko factory Victims filed lawsuits against the company in 1967. This was the first pollution suit against a major company in Japan.

Three months later, a lawsuit was filed in

Yokkaichi in central Japan. A company was sued for air pollution. The Yokkaichi’s court opinion criticized the government for lack of environmental planning. In 1968, a third case involved cadmium poisoning in Toyama. Finally in 1969, a case was brought against Chisso Corporation by some of the victims in Minamata. Together, these cases came to be known as the “Big Four.” These changed the field of business ethics in Japan. All four cases were decided in favor of the plaintiffs.

The companies held to have legal responsibility due to the harm caused by their business operations. Changes in regulation administrative procedures, the growth of the consumer movement were a few of the changes.

The Japanese government passed a series of statutes and established a scheme to compensate pollution victims. Polluting firms were required to pay for this scheme. The Basic Law for Environmental Pollution Control and the Environmental Agency were established. Japanese firms began to take social responsibilities more seriously

The “Big Four Pollution Suits” also gave rise to a social movement in Japan known as shimin undo

(citizens’ movements). Citizens’ movements formed around local or regional environmental

58 business ethics issues and focused on local governments for response and relief. Only rare cases, like the Big

Four, were of national scale.

A second ethical issue, the contribution of corporations to society first became an issue in Japan during the 1970s oil crisis. People resented corporations cornering the oil supply and their subsequent reluctance to sell oil. Firms were seen as anti-social, so public opinion turned against the companies. In the 1980s as corporations attempted to change from heavy industry to more sophisticated products, there was also a shift towards a greater concern for corporate social responsibility. During the bubble economy of the 1980s, the

Japanese public seemed to think that since Japanese business was efficient it must also be ethical.

Many business people also believed that their success was proof of excellent business practices.

Since the late 1980s, a series of business scandals have surfaced. They include illicit political donations, dango practices; loss compensation for favored clients in securities industries; bad loans and mismanagement of financial institutions; and the sale of HIV-tainted blood. These scandals were often industry-wide and appeared to be rooted in the Japanese way of doing business. The result was a passive trend in business ethics.

Social changes also contributed to a passive trend of business ethics by Japanese firms in the

1990s. These included public interest in the environment; international pressures to open Japanese markets; passage of product liability laws; revision of the commerce law to dilute corpo-

rate governance; and lack of empowerment of the Japan Fair Trade Commission (FTC). The

Japanese law on product liability makes it the plaintiff’s responsibility to prove design or manufacturing negligence, which is virtually impossible, especially given the complex, high-technology used in most products today. While the FTC is supposed to enforce antitrust laws, it has been called a “toothless tiger” because it is essentially powerless against the Ministry of Finance and

Ministry of International Trade and Industry,

both of which have vested interests in protecting

Japanese businesses. When the FTC has investigated powerful industries such as automotives and automotive parts, construction, glass, and paper industries, it has punished them with “recommendations.”

In the late 1990s, many cases of Japanese corporations violating business ethics continued to be reported by the Japanese media. These include payoffs to corporate racketeers, loans without collateral by banks, and disclosure of unfair trade practices. Unlike in the USA where many firms have codes of ethics and systems in place to monitor compliance, most Japanese firms do not have explicit corporate codes of conduct or business ethics. A 1996 survey by the Japanese Business

Ethics Society found that 35 percent of Japanese corporations have ethics checks by in-company committees; 25 percent of managers stress the importance of business ethics; 23 percent of firms have a code of ethics in place; and only 5 percent have introduced business ethics education into their corporations. Of the companies with ethics systems in place, 11 percent have a company ethics committee or department; 8 percent have a full-time officer in charge of ethics; 5 percent have a system for handling in-company suggestions on or complaints about company ethics; and only 3 percent have voluntary reporting of activities which run counter to the company’s ethics policy.

Companies with mission statements that include statements on ethics usually have such vague or abstract statements that they are of little help to company employees. In an influential article on business ethics in Look Japan, Koyama Hiroyuki argued that Japanese corporations must do three things in order to establish strong business ethics: (1) create a clear code of ethical business conduct showing what actions are expected in concrete terms; (2) establish a system for ensuring that the code of ethics is followed such as having an ethics officer or survey of employees; and (3) ensure everyday compliance of business ethics.

These issues continue to be prominent within the Japanese business community: corruption, industrial espionage and violation of intellectual property rights (IPR). A 1992 agreement between the USA and Japan led to a revision of Japan’s

Copyright Law. The revisions give copyright protection to foreign sound recordings before 1978; give foreign producers the right to authorize the rental of their recordings; and extend the protection period for records from 20–30 years. Intellectual property rights continued to be an issue in the Japan-US Economic Framework Talks in

business ethics 59

1994. The Japanese government agreed that the

Japanese Patent Office (JPO) would permit foreign nationals to file patent applications in English (with Japanese translations to follow) and, prior to the grant of a patent, the JPO would permit correction of translation errors. The US government agreed that the US Patent and Trademark Office (USPTO) would introduce legislation to amend US patent law to change the term of patents from seventeen years from date of grant to patent to twenty years from date of filing an application.

Industrial espionage has become more and more common in the 1990s. Japanese companies have been caught using a spy technique called

“tunneling” in which they set up a fake subsidiary and hire away the foreign, competitor company’s knowledgeable employees. In a survey on theft of intellectual property of American firms, the Japanese ranked fifth after China, Canada,

France, and India. Moles planted as employees in competitors firms are another espionage technique. Foreign businesspersons have also complained about their rooms being bugged in

Japanese hotels. Japanese businesses were widely accused of violating Intellectual Property Right laws during their earlier stages of economic development. More recently however, Japanese firms have become strong supporters of laws to protect IPR laws.

The roots of good corporate citizenship in Japan are different from the West. Japanese corporations’ views of citizenship consists of donations to local festivals. From the early 1990s, executives started to consider adopting a western style of corporate citizenship. This includes social contributions by firms to environmental groups rather than just contributions to, or sponsorships, of cultural events and the arts, mecenat. Companies are trying to protect the environment and are giving scholarships to students from less developed countries. As part of the Agreements in the Japan-US Economic Framework Talks, the

US and Japan set a common agenda for cooperation in global perspective that includes twenty working groups. Seven working groups have to do with environmental issues: environmental policy dialogue; forests; oceans; Global Observation Information Network; environmentally friendly and energy-efficient technologies; conservation; and development assistance for the environment.

According to a Mecenat Association survey

180 companies gave ¥23.6 billion in assistance to support arts and culture in 1993. In 1994, this total decreased by 13 percent; however, 190 companies provided assistance. Many companies believe that activities related to their main line of business such as research and development of pollution prevention technology constitute a social contribution. Social contributions outside of the main line of business include: mecenat, support for guide dogs for the blind, support of children whose parents have died in traffic accidents, and forest conservation. Social contributions of

Japanese corporations are becoming necessary during the economic slump. Companies have come to believe that they cannot survive without consumer support and that being good corporate citizens will give them a competitive advantage. Japanese companies are also engaging in good corporate citizenship behaviors in the USA and Europe, but appear less likely to do so in

Asia and other parts of the world.

See also: environmental regulations; overseas research and development; Japanese business in the


Further reading

Koyama, H. (1997) “What Happened to Japanese Business Ethics?” Look Japan 43 (497): 14–16.

Taka, I. (1997) “Business Ethics in Japan,” Journal of

Business Ethics 16:1499–1508.




Canon, headquartered in Tokyo and originally best known for its cameras, competes today globally with a full range of consumer and professional imaging and information products. These include not only cameras, copiers and computer peripherals familiar to consumers around the world, but also fax machines, video and broadcasting equipment, and optical products for semiconductor manufacturing and medical fields. The company has manufacturing and marketing subsidiaries in all continents, and the global Canon

Group is made up of more than 100 companies with over 80,000 employees and sales of $25 billion.

Canon’s roots date back to 1933 with the founding of Precision Optical Instruments Laboratory The laboratory was created with the aim of producing high-quality cameras capable of competing with the best in the world, such as

Leica of Germany. Within a year, the prototype of Kwanon, Japan’s first 35mm focal-plane-shutter camera, was produced, and in 1937 the orginal laboratory was reorganized as a joint-stock company under the name of Precision Optical Industry Co., Ltd. Ten years later, under the leadership of Dr. Takeshi Mitarai, the company was renamed

Canon Camera Co., Inc.

Through successive model improvements and the introduction of new cameras, Canon Camera’s reputation for quality and value soon began to gain attention outside of Japan. The company launched its international marketing efforts in 1951, and in 1955 took the first major step toward internationalization with the opening of the New York branch. Two years later the company made first inroads into Europe with the establishment of Canon Europa.

Since the 1950s Canon pursued an aggressive strategy to evolve from a specialized camera manufacturer into a versatile producer of business machines. In 1962 the company adopted its first five-year plan to diversify its product offerings. The first non-camera product was an electronic calculator, but the real breakthrough came when Canon entered the copy machine business.

It was the first company able to challenge the dominant leader with products based on its own technology. These successful diversification efforts led the company to change its name in 1969 to Canon, Inc.

Entering new markets through unique technology has always been a foundation of the

Canon business strategy. It is a company strongly focused on research and development and the creation of breakthrough products, and for that purpose maintains an extensive R&D network worldwide. Its dedication to innovation produced results: the company is consistently among the top patent recipients in the USA and ranks second in terms of patents registered in the USA in the 1990s. Canon’s current strategic objective is to secure a global leadership position in the field of digital imaging equipment and network-based application services.

Canon’s corporate philosophy of kyosei (first articulated by the former chairman Ryuzaburo

Kaku)—living and working together for the common good—is the guiding principle for Canon

capital markets 61 companies around the globe and for long-term collaborative relationships with other companies.

Within the Canon organization, the principles of

kyosei are complemented by the “three-self” concept: self-motivation, self-awareness, and self-management, reflecting Canon’s management culture of independence, innovation, and entrepreneurship.

Further reading

Sandoz, P. (1997) Canon, London: Penguin Books.


capital markets

Japan is the second largest economy in the world and the Japanese capital markets are some of the largest in the world. As in other countries, capital markets in Japan consist of the equity markets, government and corporate bond markets, and markets for longer term swaps, futures, options, and other derivatives.

The financial system in Japan is still mainly bank-centered with securities markets playing a relatively smaller role. Banks and internal financing are the main sources of funds for most companies in Japan. Companies in Japan generally have larger levels of debt in their capital structure than in the USA, with a great deal of debt in the form of short term loans that are routinely rolled over and are treated like long-term debt.

Perhaps reflecting the higher savings rate in Japan, the real cost of capital in Japan has often been lower in these than in the USA.

Although it is changing and becoming more liquid, the Japanese market for corporate control is somewhat limited as companies are often closely held and hostile offers are generally not viewed favorably. Japanese accounting and reporting standards (see accounting in Japan) reflect the culture and are generally not as stringent as in the USA. While Japan has well-developed money markets with trading in short-term government, financial institution, and corporate securities, this note will focus on capital markets, the financial markets for longer-term securities.

The first issues of equities by a Japanese company took place in 1878. The first stock exchanges in Japan were set up in 1878, with the number of stock exchanges peaking at 123 in 1895. In these early days, trading on Japanese securities exchanges was limited mainly to bonds and futures on shares. Spot trades in shares remained very thin until the modern (post-Second World War) era as the zaibatsu business groups and other major companies were held privately in a pattern of cross-holdings.

Currently, there are eight stock exchanges and a fledgling JASDAQ over-the-counter market set up in collaboration with the US-based NASDAQ.

The Tokyo Stock Exchange (TSE) is the largest stock exchange, accounting for over 85 percent of all Japanese equity market valuation and trading volume. In size, the TSE is followed by the

Osaka Stock Exchange (also a major center for trading in derivatives), and by exchanges in

Nagoya, Kyoto, Hiroshima, Fukuoka, Niigata, and Sapporo. Each of the three largest exchanges,

Tokyo, Osaka, and Nagoya, also has second sections for smaller companies. The two major stock indexes for Japanese equities are the priceweighted Nikkei 225 and the value-weighted Tokyo Stock Exchange Index, Topix. Equities in

Japan are traded in lots of 1,000 and each exchange-traded share has limits on daily price changes depending on share price category. New issues of equity in Japan are regulated by the Min-

istry of Finance. Preferential allocation of under-priced new issues is used to supplement the low (3.5 percent) underwriting expense.

Most fixed income securities are traded over the counter in Japan. Japanese bonds generally have a denomination of ¥100,000 and pay interest twice a year. The market for Japanese government bonds is now one of the largest in the world. In this market, certain bonds are identified as “benchmark bonds” and traded heavily while the prices of other bonds are based on market prices of these highly liquid bonds. The corporate bond market is less well-developed and fairly small in comparison. A large proportion of this corporate bond market consists of equitylinked bonds of financial institutions and utilities. Most corporate bonds are secured with access to the bond market limited mainly to the top corporations.

The Japanese economy in the late 1980s was characterized by what seems to be an asset price bubble (see bubble economy). Between the start

62 cartels and end of the second half of the 1980s, stock prices rose 3.1 times (to a Nikkei Index of 38,915) and land prices rose four times. In relative terms, for the last half of the 1980s, the ratio to GDP for land prices increased 3.67 times and for stock prices by 1.51 times with the combined ratio increasing by 4.52 times. By any measure these were extraordinary increases in asset prices, unprecedented in recent Japanese history. These land and stock prices reflected much speculative activity and rose to record levels that were unusually high multiples of the present value of future cash flows. The Nikkei 225 stock index peaked on the last trading day of 1989 (December 29) at just below 40,000, and at that time the land beneath the Imperial Palace in Tokyo was reputedly worth more than all of the real estate in


Unfortunately land and stock prices collapsed in 1990 and were still less than 40 percent of their peak levels a decade later. In spite of fiscal stimuli in the form of numerous government spending packages, an expansionary monetary policy and other efforts by the government, the Japanese economy has been in a state of recession or very anemic growth since the early 1990s bursting of the bubble. Compared to the second half of the

1980s, capital market activity has similarly been much lower in the 1990s. The 1990s saw the failure of many banks, securities firms, and investment banks.

In recent years, driven by technology and globalization, the Japanese financial system is being gradually deregulated. Trading in new financial instruments was progressively permitted all through the 1980s, derivatives markets were allowed by the late 1980s, and interest rates were deregulated in the early 1990s. The 1993 Financial System Reform Act dismantled barriers between banking and securities businesses and the implementation of the “Big Bang” set of financial deregulations was started in 1998. The Japanese financial system is changing and is gradually moving away from an over-reliance on banks to a more market-oriented system.

Further reading

Aggarwal, R. (1994) “Characteristics of Japanese Finance,” Global Finance Journal 5 (2):141–68.

——(1996) “The Shape of Post-Bubble Japanese Business: Preparing for Growth in the New Millennium,”

International Executive 38 (1): 9–32.

——(1999) Restructuring Japanese Business for Growth, Boston, MA: Kluwer Academic Publishers.

Mori, N., Shiratsuka, S. and Taguchi, H. (2000) “Policy

Responses to the Post-Bubble Adjustments in Japan: A Tentative Review,” Bank of Japan, IMES

Discussion Paper Series, 2000-E-13, May.

Motonishi, T. and Yashikawa, H. (1999) “Causes of the Long Stagnation of Japan During the 1990s:

Financial or Real?” Journal of Japanese and Interna-

tional Economies 12 (2): 181–200.

Takagi, S. (1993) Japanese Capital Markets, Cambridge,

MA: Blackwell Publishers.



A cartel is an agreement among independent firms to regulate prices by restricting production and competition. Restricting production makes a good or service scarce, and allows producers to be less likely to cave in to pressure from buyers to sell at lower prices. The Japanese government has encouraged cartels in order to keep prices high and help industry grow. During the late

1980s the government discontinued most legal cartels, but cartels continue unofficially sometimes with informal government blessing and support, in important industries.

The USA was the first nation to adopt strong anti-cartel legislation, in the form of the Sherman

Anti-trust Act of 1890. The primary goal of the

Sherman Anti-trust Act was to protect small farmers and business from price gouging by big business, though many economists also thought that the economy would work more efficiently if there was free competition instead of control by cartels. Neither European nations nor Japan took a strong stand against cartels in the late nineteenth and early twentieth centuries. At that time, Japan had not yet developed true cartels with formal price or production agreements in its major industries, though zaibatsu in many industries informally coordinated prices. The absence of formal cartel agreements was in contrast to Europe, and especially Germany where cartels were powerful. The Japanese government developed

cartels 63 cartel legislation in 1925, but the legislation was pro-cartel. The Important Industries Law of 1925 allowed the government to supervise cartels and gave industry associations the right to set prices and production quotas and to force companies to join cartels. As the effects of the Great Depression hit Japan in 1930, the government mandated cartels in some industries and supervised their implementation. By 1932, virtually all heavy industry was organized into cartels.

Although the goal of American antitrust legislation had been to protect small farmers and businesses from price gouging by big business, the goal of Japan’s pro-cartel legislation was to strengthen the nation’s industries by helping them support prices. Cartels played a central role in

Japan’s industrial policy both before and after the Second World War. Although neoclassical economic theory holds that cartels make an economy less efficient by distorting prices, Japanese developmentalist thinking has held that in a lateindustrializing country the state can use price distortions to promote industries that would not develop through the market. Cartels are meant to raise and stabilize prices for goods, thus encouraging investment and helping firms survive depressions.

When the Second World War ended in 1945, the victorious Allied powers occupied Japan for seven years. The occupation, which was dominated by the USA, tried to reshape Japanese institutions in order to turn Japan into a democracy which would not engage in military aggression.

As part of this process, the American authorities wrote a law banning cartels, the Anti-monopoly

Law. The Americans saw the great monopoly power of big business as responsible to a great extent for Japan’s military expansion in the 1930s and 1940s.

Most Japanese leaders saw the attempt to suppress cartels as an American plot to weaken Japan’s manufacturing industries. When the occupation ended, the Japanese government watered down the Anti-monopoly Law, opening the door to extensive cartel activity From the 1950s through the 1980s the Ministry of International

Trade and Industry (MITI) used official cartels as a core element of its industrial policy It actively encouraged the use of cartels, helped organize them, and sometimes pressured firms to participate in them through the use of adminis-

trative guidance. Cartels were used in a wide variety of industries, from concentrated industries with just a few very large firms, like steel and chemicals, to industries, like textiles, with many firms. Various kinds of cartels were used, most of which restricted production in some way

Cartels were relied on especially during times of recession, but also during times of expansion. For instance, in industries such as cement and chemicals, firms agreed to take turns building new production facilities to limit the volume of new products coming onto the market at any one time.

These cartels did not always work, and even when they did MITI would often monitor them informally to make sure they did not raise prices so high as to create large profits.

The peak period for legal cartels in Japan was from 1965 to 1972. During the 1950s many industries saw the Japan Fair Trade Commission

(JFTC) as so weak that they did not need to bother to get permission for their cartels. Until the early 1970s, political leaders and the public were largely supportive of cartels because they thought them necessary to support weak industries. In 1973, however, the public became enraged when it learned that oil refiners had used their cartel to boost profits during the crisis when the Organization of Petroleum Exporting Countries (OPEC) withheld oil supplies. This outrage gave the JFTC the political support it needed to crack down on a number of illegal cartels. In 1973 it recommended that sixty-seven industries involving thirty-three trade associations desist from monopolistic activities. In addition, for the first time the commission filed criminal charges. The oil companies that were charged did not dispute that they had conspired to fix prices and restrict output, but they argued that they were following

MITI’s administrative guidance and therefore were not guilty of violating the law. The Tokyo

High Court ruled against the oil companies in

1980, arguing that MITI did not have explicit authority to direct a cartel and that therefore the cartel was illegal.

Somewhat fewer cartels were used in the 1970s and 1980s, but nevertheless between 1978 and

1987 a number of declining industries used cartels to cut capacity and support prices under

MITI guidance. In the mid-1980s another source

64 cartels of political opposition to cartels arose, this time from the USA. Japan’s trade surpluses with the

USA grew large at that time, and Americans argued that Japan was using cartels to block access to its markets. In response to American criticism,

Japan largely abandoned officially sanctioned cartels.

Japan’s cartels become somewhat more difficult to understand at this point. It is significant that Japan no longer sponsors large numbers of legal cartels. Yet there is considerable evidence that at least some of the cartels have simply gone underground.

The steel cartel

The steel industry is a good illustration of the ways in which Japan’s government supports cartels. In order to work efficiently the integrated steel plants that make steel from iron ore and form it into products such as sheets and beams must be very large. Steel firms are therefore also large and there are few of them. It is easier to make agreements to limit competition in a concentrated industry that is one with few firms, because there is less chance that firms will cheat on the agreement. In all countries, steel is a relatively easy industry in which to form a cartel. European steel cartels were important through much of the twentieth century and American steel companies were good at informally coordinating prices until the early 1960s. But in recent decades the Japanese steel industry has been much more successful at maintaining a cartel than the steel industries of

Europe and the USA, and the reason has largely to do with support from MITI and the weakness of the JFTC.

There are five major integrated steel makers in Japan, which produce about two-thirds of Japan’s steel. Minimills, which operate cheaply by melting down scrap steel to make new steel products, compete with the integrated steel makers, but there are many products the minimills cannot make and which the integrated makers have a monopoly over. Japan’s integrated steel producers have been successful at keeping prices high and they have done so by maintaining a remarkably successful production cartel.

Demand for steel is quite sensitive to the business cycle and steel sales expand and contract by wide margins. Steel companies agree to support prices by restraining production amounts, especially when demand is weak. To spread the pain of production cuts evenly the steel companies make sure that each company always produces the exact same share of the total volume of steel coming out of Japan’s integrated steel plants. For example, Nippon Steel’s share of total integrated steel production ranged between 40.8 percent and

41.5 percent. Variation in the other four companies’ volumes of production is similarly slight. It would be impossible for the industry to keep 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 steel firm would be tempted to try to produce more during business downturns and prices would fall further than they otherwise would. By maintaining their production cartel steel companies keep their prices far higher than prices in the USA and other countries.

The steel industry and MITI deny that there is a cartel. An agreement to limit production is illegal under the Anti-Monopoly Law. How does the steel industry manage to maintain the cartel even if it is illegal?

First, MITI helps out. The Ministry of International Trade and Industry (MITI) asks firms once a quarter to submit projections of production and guides them as to how much steel they should produce. Second, the JFTC allows the firms to continue the cartel. The JFTC has issued reports on the industry and has stated that there are worrisome signs of restraints on competition that bear watching. The JFTC has investigated and fined smaller industries. But it lacks the political support and resources to go after big industries like steel that flagrantly violate the Anti-Monopoly Law.

Despite Japan’s high prices for steel, few imports make it into the market. Why do buyers not simply avoid the cartel by buying cheaper imports? In part this is because major users actually support the cartel. Big users like auto and electronics firms say they buy domestic steel in order to help assure that Japan maintains a strong steel industry, and because the Japanese steel industry provides high levels of quality and service that they value (see competition). This support from users also helps explain why the

Central Union of Agricultural Cooperatives 65 steel cartel enjoys diffuse political support and why the JFTC does not crack down on it. Yet while principal industrial users may pay the cartel’s high prices voluntarily the steel cartel reportedly threatens less committed buyers that it will cut off future supplies of Japanese steel if they buy imports. Middleman companies, including trading companies and the processing firms that cut and distribute steel, also reportedly hesitate to buy imports because of fear of retaliation from steel manufacturers. By keeping imports out, steel makers ensure that imports do not put too much downward pressure on domestic prices. This is in contrast to the USA and Europe, where large volumes of steel imports have pushed prices down.

Similar cartels operate in other concentrated industries, including chemicals, glass and cement.

Cartels do not always work, and the possibility of JFTC enforcement against them is one of the factors that prevents them from raising prices high enough to produce large profits. However, the fact that such a blatant cartel as steel has operated for so long in Japan suggests that Japan’s government is more tolerant and supportive of cartels than the governments of other industrialized countries.

Further reading

Freeman, L. (2000) Closing the Shop: Information Cartels

and Japan’s Mass Media, Princeton, NJ: Princeton

University Press.

Johnson, C. (1982) MITI and the Japanese Miracle: The

Growth of Industrial Policy, 1925–1975, Stanford, CA:

Stanford University Press.

Kikkawa, T. (1997) “Functions of Japanese Trade Associations before World War II: The Case of Cartel Organizations,” in H.Yamazaki and M.

Miyamoto (eds), Trade Associations in Business History,

International Conference on Business History Vol.

14, Proceedings of the Fuji Conference.

Noble, G. (1998) Collective Action in East Asia: How Rul-

ing Parties Shape Industrial Policy, Ithaca, NY: Cornell

University Press.

Tilton, M. (1996) Restrained Trade: Cartels in Japan’s Basic

Materials Industries, Ithaca, NY: Cornell University


Yamamura, K. (1982) “Success That Soured: Administrative Guidance and Cartels in Japan,” in

K.Yamamura (ed.), Policy and Trade Issues of the Japa-

nese Economy: American and Japanese Perspectives, Seattle, WA: University of Washington Press.


Central Union of Agricultural


The Central Union of Agricultural Cooperatives

(Zenchu) is a central organization of agricultural

cooperatives (Nokyo) established by the 1954 amendment to the Agricultural Cooperative Society Law. The amendment called for the setting up of a prefectural union of agricultural cooperatives in each prefecture, and the Central Union of Agricultural Cooperatives at the national level.

The Central Union was created for the purpose of strengthening organizational structures within the agricultural cooperative mvement, and in concrete terms, for the purpose of improving the cooperatives functions in terms of providing farm guidance, better living guidance, and audits of agricultural cooperatives’ new undertakings.

Zenchu’s purpose, therefore, were described as auditing, farm guidance, better living guidance, management guidance and agricultural administration activities. Auditing and management guidance involved the provision of services directly to agricultural cooperatives. Farm guidance was originally started as production guidance aimed at achieving increased food production and selfsufficiency of rice. Its purpose shifted in the

1960s to provide guidance on diversificattion from rice culture to stock raising, fruit growing and horticulture, and to turn respective areas into main production centers of the relevant crops.

Excess rice production became an issue in the

1970s. Major challenges at the time were the implementation of rice production adjustment and crop diversification.

In addition to these problems, increasing attention was given to the perspectives of international competition from the beginning of the

1990s. Opportunities to pursue expansion of the farmoperating scale through coordination of agricultural land use, and to nurture a new generation that would be the support and driving force of future agriculture were explored. In the area of better living guidance, Zenchu’s efforts initially

66 central wholesale markets centered on the modernization of kitchens and toilets in farmers’ households, and provision of community-based assistance such as establishment of day nurseries and lunch delivery service during the busiest farming season. Subsequently in the 1960s the focus of Zenchu’s efforts shifted to consumer activities for food safety and health management and group health checkup associated with the use of agricultural chemicals. Zenchu has recently taken part in activities relating to health care for elderly in the community.

The Central Union of Agricultural Cooperatives’ rice price struggle in the 1960s, its movements against farm product trade liberalization, and fierce protest against the government and foreign countries concerning the issue of taxation and agricultural land in urban areas in the 1970s and 1980s all helped to make its name widely known in Japan and abroad. After farm product trade liberalization, however, these activities have lost some of their former momentum. Zenchu has shifted its focus to the issue of management conditions of individual cooperatives and the problem of organizing members. Improvement of the management of agricultural cooperatives is considered by Zenchu as its most important task. To cope with financial deregulation, and maintain or improve soundness of management, agricultural cooperatives are urgently enhancing their auditing capabilities. Zenchu in the meantime is required to promote the qualitative transformation of these agricultural cooperatives as quickly as possible.


central wholesale markets

The distribution of many perishable foodstuffs in Japan is organized through a national system of central wholesale markets (chuo oroshiuri shijou) and regional wholesale markets (chihou oroshiuri

shijou). Altogether, slightly more than 1,500 wholesale markets throughout Japan trade in seafood, fresh fruits and vegetables, fresh meat, eggs and poultry, and cut flowers. Seafood and produce are the major commodities that pass through these market systems; many markets handle only one or two commodities although a few deal in all types. The structures of production and distribution for various commodities differ widely and so the market channels for each are quite distinct, although seafood and produce often converge in major urban markets.

The national market system is organized around two interlocking dimensions of vertical integration. One is the functional classification of markets at different scales and levels: central vs. regional wholesale markets, the latter further divided between production or consumption areas. This hierarchy is paralleled by and maintained through a complex system of licensing for markets and traders, which defines the scope of activity at each market level and structures the chains of transactions that link them.

Market levels

In 1998, the most recent year for which figures are available, there were 87 central wholesale markets and 1,447 regional wholesale markets in Japan. Of the central wholesale markets, 72 handled produce with a total sales value of ¥2.7

trillion; 53 handled seafood (¥2.9 trillion); 23 dealt in flowers (¥160 billion); and 10 dealt in meat products (¥240 billion). The total sales volume of regional wholesale markets, across all commodity categories and including both production and consumption regions, was ¥4.8 trillion.

Foodstuffs enter and circulate through the market system in many ways. At “upstream” markets—that is, production region markets—some of the products may go for local consumption, but producers and producer co-operatives primarily sell to brokers, processors, and agents of higherlevel urban markets. These traders, in turn, bulk or consolidate catches into larger shipments for sale or consignment in other markets “downstream,” closer to urban consumers, including central wholesale markets in large cities as well as consumption region markets. These markets break or disassemble commodity flows into lots small enough to be of use to a retailer or restaurateur. Production region markets and higherlevel regional markets depend exclusively on domestic production. Central wholesale markets receive products from lower level regional and local markets, as well as directly from individual producers, and imported foodstuffs often enter

central wholesale markets 67 the market system at this level, from trading companies and foreign producers. Consumption region markets generally depend on central wholesale markets for their supplies.

The Ministry of Agriculture, Forestry and

Fisheries (Nourinsuisanshou, also known by the acronym MAFF) charters central wholesale markets in cities with populations greater than

200,000. MAFF sets national standards, enforces policies to ensure fair trading practice, and grants licenses to the auction houses or primary wholesalers that supply these markets. Local authorities (municipal or prefectural governments), on the other hand, oversee the day-to-day operations of these markets, issue licenses for local wholesalers, and enforce local regulations governing market operations, such as setting hours of operations, allocating space, and determining specific categories of goods to be traded.

Regional wholesale markets are chartered by prefectural governments and are operated as municipal, co-operative, or private ventures (which make up roughly 85 per cent of the total). These markets are divided into those that serve “production regions” (sanchi) and those for “consumption regions” (shouhichi), generally in regional cities and suburbs. Markets in production regions are often closely linked to local branches of the national system of agricultural cooperatives

(nougyou kyoudou kumiai or noukyou) and fisheries cooperatives (gyogyou kyoudou kumiai or gyokou), which in some cases operate the local markets.

Consumption region markets are mostly owned and operated by private corporations.

Production markets funnel foodstuffs from local farmers and fishers into national distribution channels in various ways: regional brokers may purchase local products for shipment and resale to urban markets; cooperativess themselves may create a local brand for products that they sell on consignment either through the regional market or directly through urban central wholesale markets; and individual producers may bypass regional markets and consign their products directly to a central wholesale market.

The entire system operates under the Central

Wholesale Market Law (Chuo Oroshi Shijou Hou), which was originally passed in 1923 in response to the so-called “Rice Riots” of 1918. In protest against speculative trading in foodstuffs and consequent severe shortages, residents violently stormed rice and other food dealers and markets in over 100 cities and towns, until the Japanese army quelled the riots. The law, which has been revised and updated several times since then, established publicly regulated markets to prevent price-fixing, collusion, and other anti-competitive practices.

Licensing and regulation

Competitive auctions are the core mechanism of central wholesale markets to ensure that transactions are “impartial and equitable” (kouhei to kousei).

The rules and regulations under which auctions must take place are spelled out in general terms by national regulations and in minute detail by local ordinances as well as in the customary understandings that surround trade in a particular marketplace.

Primary wholesalers or auction houses, known officially as oroshiuri gyousha (wholesale dealers) or niuke gaisha (freight receivers, i.e. consignees) are licensed directly by MAFF to operate in a specific marketplace. Their licenses give them exclusive rights to make markets for products and also require them to attract a steady supply for that market’s demand. There are about 260 auction houses nationwide. (Auction houses in regional markets are licensed by prefectural authorities; there are roughly 1,700 such regional auction houses.) Many auction houses are affiliated with national chains, or keiretsu, that have similar auction houses in other major markets.

In seafood markets, for example, the Maruha

Corporation (formerly known as Taiyou

Gyogyou KK) controls a dozen subsidiary firms that operate auction houses in major central wholesale markets, and Maruha also has close ties with many other auction houses in regional markets.

Auction houses obtain products on consignment (itaku hanbai) or on their own account

(kaitsuke). Domestically consignments come directly from producers, from producer cooperatives, and from brokers operating in regional markets. Imported products, unlike domestic ones, are more likely to enter the distribution

system at the level of central wholesale markets

68 central wholesale markets rather than through regional markets. Imported products are purchased outright from foreign producers by the auction houses and their overseas affiliates, or arrive on consignment from major trading companies, joint ventures between foreign producers and Japanese food companies, and directly from foreign producers.

Auction houses sell through various forms of auctions (known collectively as seri or seri-uri, but more precisely classified as open bidding auctions

(seri) or sealed bid auctions (nyousatsu or

nyousatsuseri)). In addition, auction houses may sell products to licensed wholesalers through negotiated sales (aitai-uri). Auction houses receive commissions that are set by local regulations. The precise methods of auction and rules surrounding negotiated sales vary from marketplace to marketplace and from commodity to commodity. Auctioneers (serinin) are salaried employees of the auction houses and are individually licensed by the local authorities responsible for administering marketplaces.

Auction houses in turn sell to intermediate wholesalers (nakaoroshi gyousha or nakagainin) who are licensed by the local authorities who administer each market. Nationally there are about 6,000 intermediate wholesalers, each licensed—just like the auction houses—to operate only in a single marketplace. Many of the intermediate wholesaling firms are small family-owned businesses, some of which can trace their histories in the trade back many generations, in some cases to the markets of the feudal Tokugawa period (1600–1868). Contemporary wholesale markets, therefore, tend to be close-knit, insular, and imbued with a strong ethos of tradition, both in terms of commercial practice and in relation to Japanese food culture as an important cultural legacy.

In larger markets, intermediate wholesalers are highly specialized; at Tokyo’s enormous Tsukiji

market (where there are, respectively for seafood and produce seven and four auction houses, 953 and 126 intermediate wholesalers, and 388 and

1,018 authorized buyers) individual firms specialize in particular varieties of produce (onions or citrus fruits) or species of seafood (tuna or shrimp or octopus). In smaller markets, intermediate wholesalers may handle almost the full range of products found in the market as a whole. Intermediate wholesalers are authorized to operate their own shops within a marketplace to resell products. In addition, some marketplaces license

“authorized buyers” (generally retailers or secondary distributors) to participate in auctions, but they are not allowed to resell in the marketplace.

Nationally there are approximately 48,000 “authorized buyers.” At regional markets of all kinds, there are a total of approximately 185,000 licensed buyers.

Recent trends

Despite the enormous volume of foodstuffs that continues to pass through the national system of wholesale markets, since the 1980s its overall significance has declined, because of changes both in the structure of distribution and in consumer behavior.

People in the food and distribution industries use the term jounai ryuutsuu (distribution within the market system) to describe transactions and channels that make use of the national system of wholesale markets, auctions, and licensed dealers. This is in contrast to jougai ryuutsuu (distribution outside the market system) which refers to the non-regulated free trade in food products. As the Japanese domestic economy has changed over the past generation, jougai ryuutsuu has become much more important than it was in the past, in part because advances in communications and transportation make the shipment of perishable foodstuffs very easy nationwide, thus reducing some of the function of the nodal distribution system organized around central markets.

In addition, large-scale retailers such as supermarket chains have developed their own independent distribution channels directly linking them both to domestic producers and importers.

Large trading companies, many of which have major investments in supermarket and restaurant chains, have also become much more active in importing foodstuffs, some of which is sold through central wholesale markets, but much of which goes directly to large-scale retail chains.

Paralleling these trends are changes in Japanese consumer behavior. Traditional small-scale retailers have steadily lost sales over the past fifteen years to supermarkets and convenience stores (konbini), which handle increasingly large arrays of pre packaged and processed products.

Chugen 69

Distinct changes in the average diet and consumption patterns of average Japanese consumers have had direct impact on the sales of many of the kinds of fresh foodstuffs that the market system has traditionally handled. Wholesale markets handle less and less of the high volume sales of the most basic foodstuffs that supermarkets and restaurant chains can arrange through their own distribution networks.

Markets therefore have become more specialized at the top end of the spectrum: high quality and high value products that are in demand for premier restaurants and for discriminating consumers who continue to shop in specialty retail shops. During the boom years of the so-called

bubble economy, the market system prospered on this sector, characterized as “gaishoku [eating out] and gourmet.” However, specialization in the highest quality and highest priced spectrums of products, including many pricey imported foodstuffs, has left the wholesale market system vulnerable throughout the economic recession of the

1990s, when they have been particularly hard hit by the decline in business entertainment, more frugal consumers, and intensified competition with supermarkets and other alternative distribution systems.

Further reading

Bestor, T.C. (2002) Tokyo’s Marketplace, Berkeley CA:

University of California Press.



Chugen refers to the Japanese midyear gift-giving season. This traditional summer exchange of gifts occurs during the first two weeks of July before the Obon holiday. The giving of summer gifts originated as an offering to families that had experienced a death during the first half of the year. To this day Chugen takes place during the two weeks before the obon (the Buddhist holiday for honoring dead ancestors).

The gifts, commonly referred to as ochugen, are given as an expression of gratitude to either private individuals or work related individuals to whom the gift giver has been obliged to during the year. Many individuals send ochugen to their boss and their customers in the hopes of retaining their continued support and business. The sending of ochugen to valued customers is obligatory in Japanese corporate culture. All Japanese companies maintain a Chugen budget, for giving gifts to important customers as a means of showing the company’s appreciation of their business.

The giving of ochugen to superiors, clients, and others as an expression of gratitude for their guidance, patronage, or kindness is a well-established social and corporate custom in Japan. While the amount spent on ochugen varies, it is generally agreed that the average price is ¥5,000 each. As a result of this obligatory summer gift giving, a vast market has been created.

As the Chugen season coincides with the Japanese summer bonus season, it is a busy time of year for many Japanese retailers. Department

stores, with the largest share of Chugen sales, set up special areas dedicated to ochugen, displaying a variety of specially packaged gifts at a range of prices. Gift-wrapping and delivery services are also provided. Supermarkets and convenience stores also sell ochugen, and provide delivery service.

Competition among retailers for chugen business is fierce. Some offer free delivery for a limited range of items within a delineated delivery area, while others counter with offers of a flat delivery rate to any domestic location. Discounts are also offered on selected goods, as are monetary incentives in the form of gift certificates with purchases over a certain amount.

During the Chugen season, large retailers such as department stores and supermarkets devote entire sections exclusively to such gifts. Although gifts usually belong to high-end product categories, they tend to be practical items that can be used, or consumed, at the recipient’s home. Common gifts include boxes of soap, cooking oil, cookies, liquor, canned food, instant coffee, and beer, in addition to traditional gifts such as nori (dried seaweed), katsuobushi (dried fish), and oshinko (pickled vegetables).

Japan’s other major gift-giving season is the year-end, between December 10 and the New

Year holidays. Gifts exchanged at this time are referred to as oseibo. In general, oseibo are given to

70 city banks the same individuals to whom an ochugen was given.

city banks


City banks are major commercial banks with headquarters in a large metropolitan area and nationwide branch networks. The eight city banks rank among the world’s largest banks. Controlled, regulated and protected by the Ministry of Fi-

nance, they played a major role in bankrolling major corporations in the wartime economy and during the period of high economic growth. Illexecuted deregulation of this system commencing in the 1970s culminated in the banking mess of the 1990s, as it created a situation of moral hazard in which banks had no incentive to develop business expertise and felt free to take risky positions in the mistaken belief that the ministry would bail them out if necessary While the banking crisis seems to be under control for now, city banks still face serious challenges in the form of impending mergers, technical deficiencies, and internationalization.

Overview of the individual city banks

As of September 2000, there are eight city banks.

In alphabetical order, these are:

• Asahi Bank. Tracing its history back to 1945,

Asahi Bank is the product of the 1991 merger of two city banks, Kyowa Bank and Saitama

Bank, and adopted its present name in 1992.

Asahi Bank maintains its headquarters in Tokyo, employs 10,448 staff, and possesses a branch network of 365 offices. Its total assets (consolidated) amount to about ¥28.8

trillion, which makes Asahi Bank the seventh largest city bank in Japan and the thirtyfifth largest bank in the world.

• Bank of Tokyo-Mitsubishi. Its history reaching back to 1919, the Bank of Tokyo-

Mitsubishi is the result of the 1996 merger between Mitsubishi Bank and the Bank of

Tokyo. Headquartered in Tokyo, it employs

17,412 staff and runs 375 branch offices. With total assets (consolidated) of about ¥74.8 trillion, it is the second largest bank in Japan and the fourth largest bank in the world by assets. The Bank of Tokyo-Mitsubishi is the main bank of the Mitsubishi keiretsu (see

main bank system; zaibatsu) and plans to merge with Mitsubishi Trust & Banking,

Japan’s premier trust bank, in April 2001 to form the Mitsubishi Tokyo Financial Group.

• Daiwa Bank. Founded in 1918, Daiwa Bank grew out of the old Osaka Nomura Bank when its securities division separated and became Nomura Securities. Headquartered in Osaka, the Daiwa Bank has 7,315 employees and a branch network of 191 offices. Its total assets (consolidated) of about ¥15.4 trillion make it Japan’s smallest city bank and earn it a rank of seventy-one worldwide by assets. Daiwa Bank gained international notoriety in 1995 in a scandal involving unreported bond-trading losses of $ 1.1 billion in the USA, as a consequence of which the bank saw itself stripped of its US banking license.

• Mizuho Financial Group. Mizuho Financial

Group is the result of the September 2000 merger of Daiichi Kangyo Bank—itself the outcome of the 1971 merger of two city banks, Daiichi Bank and Nippon Kangyo

Bank—Fuji Bank, and the Industrial Bank of

Japan. Head-quartered in Tokyo, the group’s firms combined employ 33,914 staff and run

747 branch offices. With total assets (consolidated) of ¥157.2 trillion, the Mizuho

Group is the world’s largest bank. Given its constituent banks, the Mizuho Financial

Group will probably serve as the main bank of the Ikkan and the Fuyo keiretsu.

• Sakura Bank. Tracing its history back to

1876, Sakura Bank is the result of the 1990 merger of Mitsui Bank and Taiyo-Kobe

Bank, with the latter having itself grown out of a merger between Taiyo Bank and Kobe

Bank in 1973; it assumed its present name in 1992. With headquarters in Tokyo, Sakura

Bank has 14,930 employees and the largest branch network of all city banks with 438 offices. Its total assets (consolidated) are worth about ¥48.5 trillion, which makes it

Japan’s fourth-largest city bank and the world’s fifteenth largest bank by assets.

Sakura Bank is the main bank of the Mitsui

keiretsu and is scheduled to merge with

city banks 71

Sumitomo Bank into the Sumitomo Mitsui

Banking Corporation in April 2001.

• Sanwa Bank. Sanwa Bank was founded in

1933. It has its headquarters in Tokyo, employs 12,997 staff, and possesses 331 branch offices. It has total assets (consolidated) of about ¥46.9 trillion and is thus Japan’s fifthlargest city bank and the world’s seventeenth largest bank by assets. Sanwa Bank is the main bank of the Sanwa keiretsu and plans to set up a joint holding company with Tokai

Bank and Toyo Trust in April 2001.

• Sumitomo Bank. Tracing its history back to

1912, Sumitomo Bank strengthened its Tokyo business by acquiring Heiwa Sogo Bank, a regional bank, in 1986. With its headquarters in Osaka, it maintains a staff of 14,394 and possesses 353 branch offices. Total assets (consolidated) of about ¥53.8 trillion make it Japan’s third largest and the world’s ninth largest bank by assets. Sumitomo Bank is the main bank of the Sumitomo keiretsu and will merge with Sakura Bank to form the Sumitomo Mitsui Banking Corporation in April 2001.

• Tokai Bank. Tokai Bank was founded in

1941. The only city bank headquartered in

Nagoya, it employs 9,675 staff and runs a branch network of 280 offices. Its total assets (consolidated) amount to about ¥30.5

trillion, which makes it Japan’s sixth largest city bank and the world’s thirty-second largest bank ranked by assets. Tokai Bank acts as the main bank of the Tokai keiretsu and plans to create a joint holding company with

Sanwa Bank and Toyo Trust in April 2001.

Noteworthy also is the Hokkaido Takushoku

Bank, the only city bank to have failed. Headquartered in Sapporo, Hokkaido Takushoku

Bank was the smallest of all city banks when it collapsed under the burden of massive bad loans on November 17, 1997. Its demise and the subsequent bankruptcy of Japan’s fourth-largest securities firm, Yamaichi Securities, on November 24,

1997 greatly exacerbated the Japanese financial crisis of the 1990s and served to focus the attention of the government authorities on the weakness of the Japanese financial system (see

banking crises).

History and status quo

Most, though not all, of today’s city banks developed out of the “big banks” of the prewar era. In the early days of industrialization, Japan featured several thousand banks. Size varied enormously from numerous tiny banks to the “Big Five”:

Mitsui Bank (now Sakura Bank), Daiichi Bank

(later Daiichi Kangyo Bank), Mitsubishi Bank

(now Bank of Tokyo-Mitsubishi), Sumitomo

Bank, and Yasuda Bank (now Fuji Bank). These big banks played an important role for their respective zaibatsu, but overall their role in the economy was limited by strong competition with other banks and flourishing financial markets: the Big Five provided only about twenty percent of total bank loans, which in turn accounted for only about 20 percent of total assets in the economy until the 1930s.

Several factors strengthened the hand of the big banks from the late 1920s onward. First, a number of banking crises led to increased concentration in the banking sector. Second, and more importantly as the country prepared for war, banks assumed a central role in the bureaucracy’s efforts to bring the economy under control.

In order to channel funds to industries central to the war effort, the state promoted further banking concentration, specialization, and a system of “indirect finance,” in which firms received their capital through banks rather than directly from the capital markets.

Like so many aspects of the Japanese wartime economy the highly controlled and regulated system of indirect finance survived both defeat and

Allied occupation and became a cornerstone of the high-growth era. As during the war, city banks were instrumental in funneling scarce capital to major corporations (see also industrial policy).

Several phenomena were characteristic of this role: “over-loan,” that is, the over-extension of commercial loans sustained by lending from the

Bank of Japan (see madoguchi shido);

“overborrowing,” that is, the extreme dependence of corporations on bank lending; and the imbalance of bank liquidity (shikin henzai) between city banks and the smaller, local banks resulting from the inability of city banks to raise enough deposits through their relatively small branch networks to cover their large lending volumes.

72 Cole, Robert

Throughout this period of high economic growth, the city banks enjoyed a symbiotic relationship with the Ministry of Finance (MOF).

MOF used administrative guidance, price setting, protection, and restriction of competition to keep the banking system stable. Interest rates were set with spreads wide enough to keep all banks profit able, and the “convoy” (goso sendan) system ensured that the assets of all banks grew at about the same rate, their relative ranking remained unchanged, and no bank failed. Success under these conditions was arguably more dependent on good relations with the ministry than on business acumen.

This system contained the seeds of the banking mess of the 1990s. As the economy matured in the early 1970s, the combination of slower growth, high government debt, internationalization, a shift of corporate finance away from bank lending, and increasingly diversified demand for financial services gave the impetus for slow but steady deregulation. However, MOF failed to create a system of prudential regulation as deregulation proceeded and stuck to the old convoy system. This created a situation of moral hazard in which the city banks had no incentive to develop business expertise and felt free to take risky positions within Japan (especially during the bub-

ble economy) and overseas (especially in Asia) in the conviction that MOF would bail them out if necessary. However, when many of these loans went bad following the bursting of the bubble as well as the economic crisis in Asia, the resulting banking crisis turned out to be too large for MOF to handle. Hokkaido Takushoku Bank went under, other city banks presumably came close.

While a ¥ 7.45 trillion public aid package for the big banks and massive write-offs appear to have stabilized the city banks for now, they still face considerable challenges. First, it is not clear that the proposed banking mergers will show any benefits beyond making city banks bigger. Second, city banks have proved incapable of incorporating technological change. Their expertise in important areas such as risk management and sophisticated financial products remains low, as they lack the necessary specialists and have been spending too little on information technology.

Third, city banks face increasing internationalization, which impacts them not least through competition from sophisticated foreign competitors such as Citigroup entering the Japanese market.

Further reading

Field, G. (1997) Japan’s Financial System: Restoration and

Reform, London: Euromoney Publications.

Japanese Bankers Association (2000) Japanese Banks,

Tokyo: Japanese Bankers Association.

Johnson, C. (1982) MITI and the Japanese Miracle: The

Growth of Industrial Policy, 1925–1975, Stanford, CA:

Stanford University Press.

Kitagawa, H. and Kurosawa, Y. (1994) “Japan: Development and Structural Change of the Banking System,” in H.T.Patrick and Y.C.Park (eds), The Financial

Development of Japan, Korea, and Taiwan, Oxford: Oxford University Press, 18–128.

Patrick, H.T. (1999) “The Causes of Japan’s Financial

Crisis,” Pacific Economic Paper No. 288, Canberra: Australia-Japan Research Centre, 1.1–1.19.

Tsutsui, W.M. (ed.) (1999) Banking in Japan, 3 vols,

London: Routledge.

Top 1000 World Banks (2000) The Banker, July: 78–


Toyo Keizai Shinposha (2000) Japan Company Handbook:

First Section Firms, Fall 2000, Tokyo: Toyo Keizai



Cole, Robert

Educator and writer on Japanese organizational behavior. Building on the earlier work of James

Abegglen’s The Japanese Factory (1958), which focused on the factory as a key to understanding

Japanese industrialization, Cole studied the workers within the factories. Cole described how the

Japanese focus on scarcity is reflected in its economy.

Cole developed a theory of functional alternatives in which he looked at industrial relation systems by viewing their features not as unique but as functional equivalents, variations and exaggerations of tendencies common to all industrial societies (Cole 1971). Under this theory he attempted to bridge the gap between convergence theory (under which all economies would develop similar characteristics) and historical uniqueness

(under which there would be no convergence since each nation is unique).

Commercial Code 73

In his comparison of work practices in Detroit and Yokohama (Cole 1979), Cole found that while convergence did exist, there were also continuing differences as the Japanese adapted Western ideas and practices to their own needs. He described the greater worker participation among

Japanese in shop floor management. While he found a distinctive Japanese work ethic, the differences tended to lie along very specific dimensions. First, the social organization of a Japanese firm is characterized by a lack of sharp job definition. This results in a low concern with promotion to particular jobs, job performance less important to promotion, extensive job rotation, tasks perceived as group projects and low commitment of employees to particular jobs. Second, the social organization of a Japanese firm has a strong internal labor market with employees having greater career commitments to the company including low quit rate, stronger company training, employees have less job security concern, selective new employee recruitment, and low union involvement in job assignments. These differences, according to Cole, even if unique, were solutions to common problems.

such as the USA, the UK, and the Netherlands.

Meiji-era leaders were determined to prevent Japan from being colonized. In order to be internationally recognized as an equal power, modernization of the Japanese society and economic development became important goals for the Meiji government. The government sent out many scholars to Germany France, and the

USA to study industrialization, banking systems, and Western law. In the meantime, the

Japanese government embarked on the modernization of the financial system by establishing the

Ministry of Finance in 1869, promulgating a

National Bank Act in 1872, and establishing the

Tokyo Stock Exchange in 1878.

The Japanese Commercial Code was based on the German Commercial Code. Like the Constitution, the old Commercial Code was drafted by Karl Friedrich Hermann Roesler in 1890. The parts concerning companies, bills and bankruptcies were implemented in 1893, the other parts following in 1898, to be replaced by the new Commercial Code in 1899. The old Commercial Code had been considered too foreign, and was said to disregard customary business practices.

Further reading

Abegglen, J.C. (1958) The Japanese Factory: Aspects of its

Social Organization, Glencoe, IL: The Free Press.

Cole, R.E. (1971) Japanese Blue Collar: The Changing Tra-

dition, Berkeley CA: University of California Press.

——(1979) Work, Mobility, and Participation: A Comparative

Study of American and Japanese Industry, Berkeley CA:

University of California Press.


Commercial Code


The Commercial Code is part of a series of laws that also includes the Constitution, the Civil

Code, and the Criminal Code. These laws were intended to make Japan a modern state equal to western states. At the time when Japan was forced to open up its borders by the “black ships” of US Commodore Perry Japan had been forced into unequal treaties with Western states


Prewar amendments took place in 1911 and 1938.

They consisted of changes in valuation standards from market value, to lower-of-cost-and-market

(1911), to historical cost (1938). In 1950, amendments included the introduction of the authorized capital system and the non-par value stock system in order to facilitate the introduction of foreign capital. The revisions that took place in 1962 established the supremacy of accounting rules

(concerning measurement, valuation and recognition) in the Commercial Code over the regulations of the Securities and Exchange Law and the Statement of Business Accounting Principles.

The Commercial Code falls under the administration of the Ministry of Justice, whereas the latter two are under the jurisdiction of the Ministry of Finance. The 1974 revision to the Commercial Code made the audit system compatible with the audit system under the Securities and Exchange Law, and thus contributed to the unification of the Japanese accounting system.

74 competition

Later amendments occurred in 1981, 1990,

1994, and 1997, and included rules that accompanied the deregulation of Japanese financial markets and the internationalization of business in general. Examples of the first include issuance and administration of corporate bonds and derivatives. Examples of the latter include foreign investments or mergers and acquisitions. The latest revisions are a consequence of the financial and accounting Big Bangs. In 1998 the Commercial Code was amended to relax the purchase of treasury stock. From 1999 the Commercial Code permits the establishment of holding companies again. When the zaibatsu were dismantled, holding companies had been prohibited. Furthermore, since 1999, new rules include fair value for financial products. Revisions in 2000 lay down the rules for company splits. Within the framework of the accounting Big Bang, more revisions are likely to follow.


Book One of the Commercial Code is concerned with general principles, and contains chapters on regulations for carrying out the law, merchants, business registration, firm names, business account books, business users, and agents. Book

Two consists of a chapter on general principles which mainly deals with definitions, and another chapter which is concerned with stock companies, their establishment, stock, institutions, general shareholders meeting, auditing, company accounts, bonds, amendment of the articles of incorporation, increase or decrease of capital stock, liquidation, and penal regulations.

See also: joint stock corporation; zaibatsu



The Commercial Code applies to all companies.

However, for certain regulations there are exceptions based on size. For example, external audits are not required for small and medium-sized companies. For companies with a capital stock of over

¥500 million or liabilities totalling more than ¥20 billion, under the “Law concerning the exceptions to the Commercial Code regarding the audit of

kabushiki kaisha” Art. 16 stipulates that in case the external auditor concludes in its report that, as a result of the audit of the accounts, they have not found any improper items, approval by the general shareholders meeting is not necessary. A mere presentation of the contents of the financial statements is enough.

It is generally acknowledged that the Commercial Code is primarily concerned with the protection of creditors rather than shareholders. One important aspect of Roesler’s draft that remains a characteristic of the Japanese accountability system until today is the relationship between the board of directors, the statutory auditors and the general shareholders meeting. Both the statutory auditors and the board of directors are appointed by the general shareholders’ meeting. In some cases, this would be the shareholders’ only direct means of control.


Competition in Japan has certain unique features.

The fact that prices have been persistently higher than in other nations suggests that price competition is relatively weak. And while Japan has ended most of its legal cartels, informal restraints on competition appear more widespread than in many other industrialized countries. Yet competition over quality and service is intense. Japanese firms in many industries compete hard to create innovative, well-crafted goods that enjoy great success in world markets.

The question of just how competitive Japan’s markets are is hotly debated for several reasons.

The first has to do with explaining economic growth. Neoclassical economic theory holds that competitive markets promote growth, while restraints on competition take away incentives to innovate and cut costs. The Japanese economy has grown quickly during most of the post-Second World War period. During much of this time of rapid growth, the Japanese government encouraged cartels and protected domestic industries from imports. Was there intense competition anyway? If not, how did the economy grow so fast? Is neoclassical economic theory wrong about the importance of competition for economic growth? Some scholars argue deductively from neoclassical economic theory that since Japan had high rates of economic growth

competition 75 from 1952–91, and since markets must be competitive to generate rapid growth, that Japan must therefore have had an intensely competitive market. Others argue that neoclassical economic theory is wrong, and that certain restraints on competition can promote growth in late-developing economies that are struggling to accumulate capital and catch up with more advanced nations (see industrial policy).

Another reason scholars and policy makers debate the nature of competition in Japan is because of its significance for Japan’s international trade relations. Critics of Japan argue that private firms collude to keep prices high and to use their market power to keep new firms from undercutting these prices, while the government fails to enforce the nation’s Anti-Monopoly Law and uses informal regulation to help stifle competition. They hold that anti-competitive activities unfairly enable Japanese firms to keep prices high, keep imports out, and then sell cheaply overseas.

Opponents of this view argue that Japanese markets are in fact very competitive and that the difficulty foreign firms have in making sales in

Japan is because Japanese firms compete so intensely to provide excellent goods and services.

They argue that Japan’s high prices reflect the high quality of goods that consumers demand as well as high production and distribution costs and that, while there are some illegal cartels, these do not last long nor have great overall effect on prices.

As with many debates, there is truth to both positions. Japanese markets are less competitive than the markets of other industrialized nations in certain respects, but very competitive in others. Compared to the USA or the European Union, competition policy is lax, and the Japan Fair

Trade Commission is more tolerant of cartels.

Japan’s high prices suggest that price competition is weak. Japanese prices are much higher than in the USA and Western Europe. The explanation for these high prices might be partly that high distribution costs force prices up and that the yen has been overvalued. But the high distribution costs themselves appear to be due to restraints on competition in industries such as trucking or retail sales. And the yen has been high since 1985. One would think that the high prices in Japan would attract cheap imports that would put downward pressure on Japanese prices.

The fact that the expected cheap imports have not succeeded in driving down Japanese prices suggests there are barriers to new entrants in Japan’s markets.

Yet while competition over prices is weak on average, competition over quality and service is intense. What causes this difference in competition, and how does an emphasis on competition over quality and service instead of price affect the economy?

Competition can be shaped both by vertical and horizontal relations among firms. First, vertical relations between buyers and sellers in Japan are more often long-term and stable than in such countries as the USA or the UK. Buyers make a long-term commitment to buy from a particular supplier and sellers make a long-term commitment to make a particular good to the buyer’s precise specifications. Buyers and sellers do not constantly shop around for a better price, but that does not mean there is no competition.

Instead, buyers use “controlled competition” to get better prices, quality and service from sellers.

Under controlled competition, buyers have longterm relations with several suppliers. They limit their purchases to these designated suppliers, and negotiate prices with them that cover production costs. The various designated suppliers cooperate to some degree to produce the goods the buyer wants, but the buyer also pressures these suppliers to compete to provide good quality and service, and to gradually improve productivity and bring down costs. This kind of competition is common among providers of intermediate industrial goods, such as telecommunications equipment or automotive parts.

Horizontal ties among competitors producing the same good or service also can lead to an emphasis on competition over quality and service instead of price. An example of an industry in which firms compete intensely over quality and service is the petrochemical industry Japanese petrochemical companies produce ten times as many different grades of chemicals as in other countries and they are willing to make deliveries of much smaller quantities. Firms provide these fine gradations in quality and excellent service because they are competing to gain or keep customers.

76 competition

At the same time, the Japanese chemical industry charges very high prices for its goods. What explains this pattern of intense competition over quality and service and weak competition over prices? The reason Japanese companies compete intensely to produce so many fine grades of chemicals is that they have agreements not to compete over price (see after-sales pricing). The

Ministry of International Trade and Industry

has encouraged the petrochemical industry to come to an agreement not to make so many grades, but as long as firms are prevented from competing over price, they have an incentive to compete over non-price differentiations between products.

One could argue that customers really want a large variety of grades of chemicals and deliveries of tiny quantities, and that this is the main reason that Japanese chemical companies compete in this specific way One could also argue that Japan’s extraordinary levels of quality and service shows that it is one of the most competitive chemical markets in the world. However, given that we know that chemical companies have price-fixing agreements, we must conclude that it is the lack of price competition that is pushing chemical companies to instead compete over service and quality Is this wasteful? Thinking in terms of static economic efficiency that is, the efficiency of distributing resources that are available right now, the answer is yes. The result of such arrangements is that Japanese consumers pay high prices and have a lower level of consumption. On the other hand, a widespread emphasis on quality rather than price competition is one of the factors that has enabled Japanese manufacturers to be leaders in the production of high quality goods. Car companies say that they value the ability to get precisely the kind of chemical products they want and on very convenient delivery schedules. This orientation to quality over price may produce dy-

namic efficiencies. That is, it may increase the amount of resources available in the future by stimulating innovation.

People understand competition in Japan somewhat differently than in Britain or the USA. A key concept for discussing competition in Japan is “excessive competition” (kato kyoso). Excessive competition means that supplies greatly exceed demand, prices are below costs, and producers are in danger of being pushed out of business. Proponents of this concept argue that excess competition develops when firms have high sunk costs.

That is, firms have invested in production facilities, such as factories and equipment, which they cannot easily sell off or use for some other productive purpose. Firms that are stuck with big interest payments on a factory are forced to keep producing goods even if they’re not making enough money to cover the full costs of production in order to stay in business. Americans and

Britons tend to see business failure as a normal part of a market economy but the use of the term

“excessive competition” suggests many Japanese observers see it as abnormal. The term is important because it has often been used to justify government intervention to reduce competition and protect the beleaguered firms. It is this thinking which provides the political support for the restrictions on competition that the petrochemical industry uses to maintain a system of competition that emphasizes quality and service instead of price.

Perhaps the best way to understand competition in Japan is to say that it operates somewhat differently from economies such as the USA where price competition is more intense and where market relationships are more fluid. Higher prices cause some losses in efficiency but high levels of quality can also provide some advantages. Joseph Schumpeter, an Austrian economist writing in the middle of the twentieth century disagreed with neoclassical economic theory and argued that the most important kind of competition in a market economy is not over price, but over innovation. His way of thinking may explain why Japan has managed to achieve remarkable long-term economic growth even with many official cartels and high prices. Yet the long recession that began in 1991 has caused many observers both within and outside Japan to wonder whether the old formula can still work and whether Japan may need stronger price competition in order to push inefficient companies out of business and create space for new industries. Observers concerned with international trade equity argue that Japan needs more competition in its domestic markets in order to ensure that foreign firms have the same access to Japanese markets that Japanese firms enjoy overseas.

computer industry 77

Further reading

Flamm, K. (1996) Mismanaged Trade? Strategic Policy and

the Semiconductor Industry, Washington, DC: The

Brookings Institution.

Fransman, M. (1995) Japan’s Computer and Communica-

tions Industry, Oxford: Oxford University Press.

Lincoln, E. (1999). Troubled Times: U.S.-Japan Trade Re-

lations in the 1990s, Washington, DC: Brookings Institution Press.

Lynn, L.H. and McKeown, T.J. (1998) Organizing Busi-

ness: Trade Associations in America and Japan, Washington, DC: American Enterprise Institute for

Public Policy Research.

Odagiri, H. (1994) Growth through Competition, Competi-

tion through Growth: Strategic Management and the

Economy in Japan, Oxford: Oxford University Press.

Schumpeter, J. (1976) Capitalism, Socialism and Democracy,

New York: Harper Torchbooks.

Tilton, M. (1998) “Regulatory Reform and Market

Opening in Japan,” in M.Tilton and L.Carlile (eds),

Is Japan Really Changing Its Ways? Regulatory Reform

and the Japanese Economy, Washington, D C:

Brookings Institution Press.

computer industry


Japan is the only nation other than the USA to develop a competitive computer industry. With heavy state support in the 1960s and 1970s, Japanese firms were able to become world leaders in computer hardware. Their weakness has been in software, and like IBM, they missed the trend toward downsizing to smaller computers in the late 1980s. Japanese firms took over or formed key partnerships with Europe’s top computer makers in the 1980s and 1990s and today supply the world with advanced computer hardware and components.

The 1960s and 1970s


The Japanese computer industry started to develop in the 1960s, largely as a result of government initiative. To help nurture a domestic industry to catch up with IBM, the state used four primary policies: protectionism, a quasi-public computer rental company called the Japan Electronic Computer Company (JECC), financial assistance, and a variety of state-sponsored cooperative research and development projects.

These policies were critical in helping the industry create a competitive hardware industry by the late 1970s.

Protectionism included conventional tariffs and quotas, but also a variety of limitations on foreign investment, which influenced the type and quantity of machines IBM could produce in Japan, how much it had to export, how many parts it could import, and how much profit it could repatriate. IBM only got permission to produce in Japan when it agreed to license its patents at reasonable royalty fees to local firms. Similar restrictions constrained the activities of Sperry Rand

(UNIVAC computers), which was forced into a joint venture with Oki Electric, as well as other

US players such as Hewlett-Packard. While protectionism usually leads to sluggishness and inefficiency domestic competition was encouraged, requiring that firms make increasingly better machines in order to stay in business. The result was increased demand for domestic machines, which stimulated supply.

The JECC was set up in 1961, and about 50 percent of its financing came from government low-interest loans. It worked in the following way: when a user decided which specific machine it wanted to rent, it told JECC, which bought the machine from the designated maker and rented it to the user for a reasonable monthly fee. The user had to keep the computer for at least 15 months or pay a penalty When a machine was returned, the computer maker was forced to repurchase it at book value from JECC. The effect was to give Japanese domestic computer firms an immediate return on their investment. If the firms had had to finance their own rentals, they would have received returns in small monthly payments over a 4 year period. Since JECC only purchased machines users specifically asked to rent, there was a direct link to the market. If no one asked for your machine, JECC did not buy it. Thus, the firms making the best machines got the most benefit from JECC. From 1961 to 1981 the government funneled some 12 billion in loans

78 computer industry into JECC to finance computer rentals. JECC still exists today but rents only a small percentage of the total number of rented machines.

State financial aid to the computer industry came in various forms. The absolute amount of subsidies, tax benefits, and low-interest loans has been quite small compared to the huge sums the

USA funneled into Pentagon projects. But the amounts were very large compared to what the firms were investing themselves. For example, a conservative estimate suggests that from 1961–9 subsidies and tax benefits ($132 million) were equivalent to 46 percent of what the computer firms themselves were investing in R&D and plant and equipment. If we include government low interest loans, total aid ($542.8 million) was equal to 188 percent of what the firms were investing.

Indeed, the state was also providing funds for working capital. From 1970 to 1975, subsidies and tax benefits ($636.55 million) were equivalent to

57 percent of what the firms were investing, 169 percent ($ 1.88 billion) if we include government loans. Software and hardware were formally liberalized in the mid-1970s yet from 1976 through

1981 subsidies and tax benefits ($1.03 billion) were still 25.2 percent of what the firms were investing; including state loans, total aid ($3.74 billion) was still equal to 91.6 percent of what the firms were investing.

Various cooperative R&D projects, mainly focused on catching up with IBM, were conducted in the 1960s and 1970s. Their overall effect was to reduce the costs and risks of doing R&D by pooling resources and sharing R&D results. The

VLSI Project (1976–79) and the New Series

Project (1972–76) were key projects that helped

Japanese firms, especially the three dominant companies—Fujitsu, Hitachi, and NEC—catch up with IBM in hardware by the late 1970s.

Success in hardware was contingent on nurturing a competitive semiconductor industry

The R&D cooperative computer projects all involved making advances in semiconductor technology. Other policies also helped nurture the world’s most advanced memory makers, including heavy-handed state intervention to handicap foreign semiconductor makers, such as Texas Instruments, Motorola, and Fairchild in the 1960s and 1970s. With US makers focusing on bipolar semiconductors in the early 1970s, Japanese firms and MITI decided to focus on a specific niche market: memory semiconductors or

DRAMS, which were in great demand for use in calculators and watches. The technological trajectory was stable for these chips, they were highly sensitive to production economies of scale, and success depended on high-quality process technology and attention to manufacturing detail, areas where Japanese firms have traditionally excelled. Japanese firms did not get heavily involved in developing microprocessors, so-called systems on a chip. Microprocessors have a very heavy software component, an area where Japan continues to lag.

The success of policies toward hardware in the 1960s and 1970s was undoubtedly dependent on several conditions. Most important was that while the firms were protected from international competition, domestic competition was strongly encouraged. Even though cooperation was sub-stantial on products, investment, and

R&D, market forces were kept intact enough to force the firms to advance technologically and cut costs in order to survive over the long term.

A broad societal consensus to allow the bureaucracy to decide what industries to target was also critical. So was a stable institution—the Ministry

of International Trade and Industry (MITI)— which had consistent policies that did not change with each new administration. A relatively large domestic market in which to gain economies of scale was important as was access to foreign markets for technology and to sell products. Overall macro-policies that encouraged savings and investment and discouraged consumption enabled Japan to remain independent of foreign loans while still investing heavily in strategic industries.

Software was not subsidized much in the

1960s and 1970s and the aid it received was generally not very effective. The real focus was on hardware not software. The firms essentially used modified versions of foreign software.

Hitachi and Fujitsu, for example, decided in the early 1970s to make IBM clones, but they modified the IBM hardware and software enough to lock customers into their closed, incompatible standards. NEC had technological ties with

Honeywell, but also created its own closed standard.

computer industry 79

The 1980s

Fujitsu and Hitachi’s strategy of “borrowing”

IBM’s software backfired in summer 1982 when they were caught stealing IBM technology in an

FBI sting case. This meant the free ride on IBM was no longer free. The firms now had to pay huge annual licensing fees to IBM. From then on, the firms tried to diversify their reliance on

IBM’s mainframe standard. In the 1980s, there was a strong move toward UNIX-based systems and an attempt to create a unique Japanese operating system standard called TRON. This latter pursuit, overly ambitious, was not successful though it still exists today

It was also in the early 1980s that Japan’s three top makers moved into supercomputers, initiated by the government in a fully-funded R&D cooperative project. By the early 1990s, they were very competitive in traditional vector supercomputers for certain types of applications. They have been less successful at making massive parallel processing machines, but are aggressively researching this area.

The 1990s

By the 1990s, Japan’s mainframe makers, like

IBM, were caught with big machines when demand soared for smaller computers. They were slow to downsize and restructure their operations, but were kept afloat by their telecommunications, semiconductor, and consumer electronics divisions. At this same time the firms’ strategy of using closed standards to lock users into their respective brands began to haunt them. The market’s dependence on fragmented, non-compatible standards denied users the positive network externalities that come with using common, compatible standards.

Concern over their growing lag in computer software reached crisis proportions in the 1990s, especially as the Internet and other software-related industries emerged. The software industry was at a crossroads: it could continue offering closed, modified versions of foreign standards or unbundle (sell hardware and software separately) and embrace open, internationally-accepted standards. The firms, users, and the government, realizing they were falling further behind in software, chose the latter path.

The 2000s

In 2000, Japanese firms are still hoping for open source solutions to prevent the total dominance of operating systems by Western firms. The computer firms are offering machines with the freeof-charge Linux operating system on them, though most experts believe Linux is too userunfriendly to become prevalent. The government is much less involved in the industry than in the past but Japan’s lag in software, massive parallel processing, and the Internet has led to an explosion of state-sponsored projects in these and other related areas.

Many argue that Japan’s efforts to support the computer industry have not been successful because Japanese firms do not currently dominate the world computer market. It is true that Japanese firms have not taken over these markets.

But their success in semiconductors, supercomputers, and the overall components of most computers is providing the nation with billions of dollars in revenues and positions them well for success in the future. Computer knowledge has also been key to their success in related areas such as computer-operated numericallycontrolled machine tools and telecommunications equipment. Indeed, other than the USA, Japan is the only nation competitive in a wide array of high-tech computer-related products.

It is clear, however, that other late developing nations such as South Korea and Taiwan have assiduously studied Japan’s industrial and corporate strategies. With significantly lower wages, they are beginning to take market share from Japan in key components such as memory chips.

To make the jump from success in hardware to software, telecommunications, and internet technologies, Japan needs to make a transition from a manufacturing superpower to a more inventionoriented nation. Making this leap involves dismantling some of the institutional arrangements that helped Japan catch up with the West but which now hinder its transition to a more inventor and entrepreneur friendly system. These arrangements include the bank-centered financial

80 construction industry system, the main bank system of corporate

governance, the keiretsu industrial groups, and various employment practices such as lifetime

employment and seniority wages. Unfortunately

Japan needs to make this change at a time when it is experiencing its deepest and longest postwar recession. There is an acute awareness of the need to change but vested interests and a weak financial system mean change will be slow.

See also: software industry; telecommunications industry

Further reading

Anchordoguy M. (1989) Computers, Inc.: Japan’s Chal-

lenge to IBM, Cambridge, MA: Harvard University


——(1994) “Japanese-American Trade Conflict and

Supercomputers,” Political Science Quarterly 109 (1):


——(1997) “Japan at a Technological Crossroads: Does

Change Support Convergence Theory?” Journal of

Japanese Studies 23:363–97.

——(2000) Japan’s Software Industry: A Failure of Institutions?” Research Policy 29:391–408.


construction industry

Construction is Japan’s largest industry accounting for approximately 15 percent of GDP at the close of the twentieth century and equivalent in absolute size to the US and Western European construction industries together. With over 10 percent of the nation’s labor force, it is the country’s largest employer, with more than twice as many workers as the auto and electronics industries combined. In contrast to those highly competitive industries, however, the construction industry has, since the late 1980s, been portrayed in Japan and abroad as the epitome of the worst features of the Japanese business system: protected, overmanned, costly and corrupt. And yet, the leading construction firms also exhibit some of the strengths associated with the best of Japanese industry: quality control, technical innovation, and reliability.

Japan’s construction industry is conventionally divided into two sectors: kenchiku (building, which is the larger sector and includes office buildings, factories, schools, and housing) and doboku

(civil engineering, which includes dams, bridges, roads, and other infrastructure projects). The distinction is long-standing: statistics on the construction industry and individual company revenues are both presented in terms of the two categories. The market is also divided into two categories: public (national, prefectural, and local governments) and private (corporations and individuals). The public sector is the primary market for civil engineering projects, although private firms such as railway companies and real estate development firms also fund major infrastructure projects. Public expenditure on construction has long been one of the main tools of economic policy in Japan: government spending on construction rises in economic downturns, with the goal of stabilizing employment and stimulating related industries such as steel, cement, and transport. In the 1980s and the 1990s, the public sector accounted for just over one-third of construction spending (with the notable exception of the construction boom of the bubble

economy; in 1990, at its peak, private sector construction accounted for nearly 80 percent of the total).

The structure of the industry is complex: there are almost as many establishments engaged in construction (over 650,000 in the late 1990s) as there are in manufacturing (770,000). These range in scale from the top general contractors, with thousands of highly qualified engineers and architects, to one-man subcontracting operations engaged in traditional carpentry. Many accounts of the industry call it a “two-tier” industry divided into modern, technologically and managerially sophisticated general contractors on the one hand and small-scale traditional subcontractors on the other. But the industry structure is far more complex than this suggests. The principal industry association for construction, the

Japan Federation of Construction Contractors

(Nihon Kensetsu-gyoo Dantai Rengookai), has a membership of ten further specialized associations (including associations for civil engineering, building, electrical power con struction, railway construction, and so on) and seventy individual

construction industry 81 companies, the largest firms in the industry. At the top of the industry status hierarchy are the top twenty-three firms, identified in the many industry guides published in Japan in terms of three categories: the Big Five (oode—Kajima, Ohbayashi,

Shimizu, Taisei, and Takenaka), which for a decade from the mid-1980s to the mid-1990s became the Big Six (with Kumagai temporarily rising from the next category); nine (or ten) “Quasi-Big” (jun-

oode) firms, and nine or ten medium-ranking

(chuuken) firms.

All of the top twenty-three firms trace their origins to the Meiji period (1868–1912) or earlier (Shimizu began in 1804, and Kajima in 1840).

When Western construction technology was introduced to Japan in the 1860s and 1870s, local construction houses served as subcontractors on projects such as railways, factories, and new government buildings. They were able to draw on capabilities accumulated on construction projects in the previous era, including castles, road-building, temples, and land reclamation, which involved both relatively advanced construction techniques and complex social organization, including subcontracting. Well before the Second

World War, the largest of the construction houses moved from the traditional household-based enterprise to more modern forms of the incorporated enterprise, including the publicly-listed joint stock company although the founding families continued to own most of the company. Indeed, to this day a distinctively large number of construction companies are dozoku-gaisha—familylinked companies—where the founding family members own significant blocks of shares and have preferential access to top management positions.

Most of the leading construction firms expanded their activities into Japan’s growing Asian colonial possessions before or during the Pacific

War. Defeat, however, focused their activities on rebuilding Japan’s infrastructure. The highgrowth era was a golden age for the construction industry and even after the first oil shock in 1973 construction spending remained at a high level.

The second oil shock in 1979, however, ushered in what industry leaders called the “winter era,” when profits fell, competition intensified, and the outlook for the industry appeared gloomy Japan’s leading firms began to adopt strategies of aggressive and proactive growth, which included engaging in project development (such as resort development, partnering with real estate firms in speculative building, and project financing), property management (especially through build-andlease projects), and international expansion

(Hasegawa 1988). The bubble economy in which

Japanese private investment in construction boomed, reinforced these aggressive strategies, and when the bubble burst in the early 1990s, most construction firms were carrying large amounts of debt and were committed to projects whose economic value had suddenly plummeted.

In the 1980s, however, the top general contractors seemed well positioned to become more global players, like their manufacturing counterparts, and for some of the same reasons. Japanese general contractors had followed their manufacturing clients in adopting quality control programs (in 1979, Takenaka was the first of several contractors to win the Deming Prize for quality). They invested more in technology development than most of their foreign counterparts: the top 20–30 general contractors maintained substantial R&D centers, and although construction accounted for only about 2 percent of the country’s total R&D expenditures, this was significantly higher than in any other nation.

Research areas in which Japanese general contractors made impressive contributions included tunneling, construction robotics, building materials, and earthquake protection. In 1986, 15 percent of the country’s engineering graduates went into the construction industry Their investments in construction technology were a major asset in winning public works contracts internationally in the 1980s. But they also were often able to draw on low-cost financing from Japanese banks and trading companies, a more controversial source of competitive advantage.

The leading general contractors also had an advantage in internationalization because of their close relationships with their Japanese clients. As

Japan’s manufacturing firms expanded their production facilities abroad, they turned to the general contractors with whom they worked in Japan to build their plants abroad. Japanese large-scale building projects have followed a “design-andbuild” model, in which a contractor’s internal staff of highly trained architects and designers develop

82 construction industry the design and its managers then supervise the construction process. This has several advantages over the “design-bid-build” model prevailing in the USA and elsewhere, in which one firm produces the design and the client then solicits bids from other companies for the actual construction.

“Design-and-build” fosters the integration of building design and the construction process, in ways comparable to the “design for manufacturability” characteristic of Japanese product design, and it enables a contractor to keep within the agreed parameters of cost and schedule. Foreign companies contracting with Japanese general contractors for buildings in Japan have been pleasantly surprised by the absence of construction delays and cost overruns. Critics of the model suggest, however, that it has produced unimaginative buildings and that clients have paid more than they would under a more competitive system. But Japanese firms accustomed to the “design-and-build” system often preferred to work with Japanese contractors when they planned production facilities abroad (Ohbayashi, for example, was the designer and contractor for Toyota’s

Kentucky plant).

As Japanese construction firms became more active abroad in the mid-1980s, and even began to win public works contracts in the USA (such as the mid-1980s subway contracts in Los Angeles and Washington, DC), US firms sought to counter by competing in the Japanese market.

But they faced formidable obstacles. Japanese public works contracts worked on a system of designated bidders, in which firms had to gain prior approval to submit bids, based on a complex array of criteria that included past project performance on Japanese projects and R&D expenditures. Newcomers could rarely qualify

Moreover, the dango system, in which companies agreed in advance on which company would submit the low bid, constituted a corrupt practice under American law. So did the system whereby winning contractors on public works were expected to make political contributions at the local or the national level that were roughly proportionate to the size of the contract. On the grounds that such practices constituted unfair trade barriers, American engineering firms and

US politicians made the opening of Japan’s construction market a major issue in trade negotiations, and in 1987 Congress voted to exclude

Japanese firms from bidding on federally funded construction projects. Japan moved slowly to address these concerns, and construction remained a major issue for negotiations through the mid-

1990s, when domestic reform pressures on the inflated costs of public works and Liberal

Democratic Party (LDP) corruption became the main force for change in public works contracts. Prosecutions of the leading general contractors for bid-rigging became more aggressive in the late 1990s, and in September 2000 a major

Fair Trade Commission inquiry targeted thirty major construction firms, including the top three general contractors.

The pressures on profit margins in public works, the slow but steady contraction of expenditures during the long economic slowdown of the 1990s, and the huge debt overhang from the aggressive investments of the bubble years have all combined to make construction one of Japan’s most troubled sectors. The Big Five have been quicker to restructure and rationalize than some of the companies immediately below them in the industry hierarchy and they are likely to survive and even flourish. But bankruptcies have been increasing among construction firms, and may become the dominant vehicle for the badly needed restructuring of the industry.

No discussion of construction in Japan would be complete without some mention of housing.

Because about 15 percent of housing construction is of prefabricated units, and because even conventional housing construction often uses manufactured sub-assemblies like unit baths, housing in Japan straddles construction and manufacturing. Japan leads the world in manufactured housing (that is, modules and subassemblies built in factories and shipped to and assembled on site). Sekisui House, for example, produces 50–60,000 units per year at five factories located throughout Japan.

Homebuyers can customize their house by choosing various frames, floor plans, colors, and so on. Prefab housing in Japan is not the low-end sector that it is in most countries; prefab housing companies cater to middle and upper-middle income customers. In contrast to the century-old general contractors, Japan’s leading housing com panies were established in the 1960s and

consumer movement 83

1970s. Prefab housing in Japan has the advantage of speedy construction, important in a country where many customers are rebuilding on the site of the old homes. It does not, however, have a significant price advantage over a house custom-built by a local contractor, although many argue that it has a quality advantage. Prefab housing firms also differ from the general contractors in having significantly higher profit levels.

See also: Ministry of Construction

Further reading

Coaldrake, W. (1990) The Way of the Carpenter: Tools and

Japanese Architecture, Tokyo: Weatherhill.

Hasegawa, S. and the Shimizu Group FS (1988) Built

by Japan: Competitive Strategies of the Japanese Construc-

tion Industry, New York: Wiley.

Levy S.M. (1990) Japanese Construction: An American Per-

spective, New York: Van Nostrand Reinhold.

——(1993) Japan’s Big Six: Inside Japan’s Construction In-

dustry, New York: McGraw-Hill.

Woodall, B. (1996) Japan Under Construction: Corruption,

Politics, and Public Works, Berkeley CA: University of

California Press.

consumer movement


Japan’s postwar economic system has often been referred to as a “producer” system, yet Japan has a large and well-organized consumer sector as well. Consumer groups have successfully lobbied for stronger health and safety regulation, especially with respect to food. More surprisingly however, Japanese consumers have crusaded against trade liberalization and economic deregulation, policies which economists would expect to improve consumer welfare substantially Only in recent years have consumer groups become somewhat more favorable toward economic liberalization (Vogel 1999).

Japan’s postwar system favored producers over consumers in many ways: financial regulation kept deposit interest rates below market levels, trade barriers allowed domestic producers to charge higher prices, weak antitrust policy allowed price cartels, and a wide range of economic regulations impeded competition, bolstered corporate profits, and increased price levels in sectors as diverse as retail and construction. Yet

Japanese consumer groups did not oppose most of these policies, and actively supported many of them.

Postwar history

The postwar consumer movement grew out of groups of housewives joining together, often for the practical purpose of collective purchases rather than for any larger political goal. Consumer groups focused on lifestyle issues, and channeled their energy more at the local level than the national. The most prominent consumer group, the Housewives’ Federation (known as

Shufuren), started in 1948 by protesting faulty matches. Shufuren then developed its own laboratory to test products for quality safety and truth in labeling. It launched campaigns to ban additives from pickled radish (takuan), to strengthen labeling requirements for juice packages, and to crack down on companies marketing whale and horse meat as beef. Shufuren and other groups consolidated their gains with a new law on labeling and marketing standards (futokeihinrui oyobi

futohyoji boshiho) in 1962. Consumer groups were not always successful in specific cases, but by mobilizing public opinion and establishing consumer protest as a credible threat they fostered a phenomenal increase in the scope and stringency of health and safety regulation.

By the 1960s, consumer groups had not only achieved some notable breakthroughs, but had gained an institutionalized role within the policy process. In 1968, the government passed the Consumer Protection Law (shohisha hogo kihonho), setting forth government and corporate responsibilities in responding to consumer concerns and creating a cabinet-level Consumer Protection Council (shohisha hogo kaigi). The government also cultivated a national network of semi-public consumer information centers

(kokumin seikatsu sentaa).

Consumer groups became even more aggressive in the late 1960s and 1970s, challenging corporations directly through public denunciation, product boycotts, and law suits. In 1969, a disgruntled former Agriculture Ministry official

84 consumer movement by the name of Takeuchi Naokazu joined others to found Japan’s most outspoken consumer group, the Consumers Union of Japan (Nisshoren). Nisshoren insisted on political neutrality refused government financial support, only enlisted private individuals as members, and brought denunciation into the strategic arsenal of the consumer movement.

In 1969, for example, it launched a campaign against cola—which it felt was unhealthy and perhaps even dangerous—by publicly accusing Coca-

Cola Japan of violating Japanese laws regarding foreign firms’ activities in Japan. In 1970, consumer groups boycotted color televisions in protest of manufacturers’ dual-pricing schemes. The groups argued that manufacturers published official prices far above the actual prices charged by most retailers, and that manufacturers and retailers used this system to get less savvy customers to pay the higher prices. The boycott resulted in a sharp decline in sales, and the government eventually convinced manufacturers to lower their prices. Although consumer groups were generally less successful in court, they used lawsuits to publicize their concerns and thereby alter corporate behavior.

Consumers vs. liberalization

When the Japanese government announced an

‘Action Program” to open its market in 1985, the major consumer groups united in opposition, arguing that the program would sacrifice consumer protection to appease the USA. They fought most vigorously against agricultural liberalization, citing three primary concerns: liberalization would undermine food self-sufficiency increase the risk of contamination or disease, and threaten the livelihood of farmers. The Japanese consumers’ stance contrasts markedly with that of similar groups in other countries that have supported trade liberalization. Public opinion polls throughout the 1980s and 1990s have shown strong public support for agricultural protection. Consumer groups have also reinforced trade protection by demanding tough regulatory standards that effectively discriminate against imports. David

Vogel has demonstrated that although consumer groups have pushed for tough standards for both domestic and foreign products, they have been particularly zealous in blocking imported products (Vogel 1992).

Since the 1980s, economists, business executives, and political leaders have campaigned for

deregulation, stressing that it could bring huge benefits for consumers. Yet the consumer groups themselves have been less than enthusiastic. They strongly opposed the privatization and deregulation of telecommunications and rail transport and other central pillars of the administrative reform program in the 1980s, and they resisted many elements of the deregulation drive in the 1990s.

Of course, one would expect consumer groups to oppose the abolition of regulations designed to ensure the safety and quality of products. But

Japanese consumers have also refused to support, and in some cases have directly opposed, the removal or relaxation of economic (price and entry) regulations—precisely the kind of deregulation that should benefit consumers the most. Consumer groups have even resisted retail deregulation, which should directly benefit consumers by bringing down retail margins. They argue that price is not everything, and that deregulation would not only hurt small retailers but could wipe out entire neighborhood shopping districts.

Particularly surprising, especially from an

American perspective, is the consumer groups’ strong opposition to marketing promotions such as gifts and coupons. These groups lobbied hard to restrict these promotions in the 1970s, and they have strongly fought off appeals to remove the restrictions in the 1990s. The US government has requested the removal of these restrictions, but consumer groups see this as US interference in Japan’s internal affairs that would only give unfair advantages to those large firms that can afford promotions.

So why have Japanese consumer groups resisted market liberalization that should enhance their economic welfare? With the overwhelming drive to catch up with the West, Japanese consumers willingly subordinated their short-term interest in lower prices and greater choice to national goals of economic growth and military strength. Throughout the period of war mobilization, the Second World War, and recovery the government actively sought to shape consumer preferences that would support these goals, organizing massive campaigns to increase savings

(hence to suppress consumption) and to buy only domestic products (Garon 1997). And the con-

consumer movement 85 sumer groups themselves actively collaborated in this effort. Through participation in national campaigns and other activities, moreover, consumer groups built up allegiances with other groups, including farm groups, trade unions, opposition parties, and environmental groups. Many of the local chapters of consumer organizations work directly with farm groups, especially the rural cooperatives, and thus feel bound by mutual ties of obligation. Other groups work closely with the traditional opposition parties. The Japan Women’s Conference (nihon fujin kaigi), for example, is allied with the Social Democratic

Party of Japan, and the New Japan Women’s

Association (shin nihon fujin no kai) with the Japan

Communist Party. These groups have been especially reluctant to embrace measures such as trade liberalization and deregulation that might threaten labor unions, the core constituents of these parties.

The Japan Consumer Cooperatives Union

(Nisseikyo), by far the largest consumer organization with 16 million members, is both a consumer group and a major retailer in its own right. Consumers join cooperatives to benefit from lower prices or to gain access to products, such as organic produce, but Nisseikyo plays a political role as well. It generally has not opposed trade liberalization—although it has not supported it either— and it does sell imported fruits and vegetables despite objections from other consumer groups.

Yet when it came to liberalizing the rice market,

Nisseikyo stood with the other groups, unified in opposition. In recent years, another network of consumer cooperatives, known as Lifestyle Clubs

(seikatsu kurabu), has become active in politics, running its own candidates for local office and promoting political participation with an emphasis on local issues (Estevez-Abe and Gelb 1998).

To understand why Japanese consumer groups did not reverse Japan’s “producer” system, we must recognize that consumer groups advocated policies that supported this system. They supported industrial investment by campaigning to increase savings; they complemented industrial policy by pushing for higher product quality standards; they reinforced trade protection by urging consumers to buy Japanese and by demanding health and safety regulations that discriminated against foreign suppliers; and they gave government ministries a pretext to limit competition and bolster corporate profits by advocating a heavy hand of regulation overall.

Signs of change?

In the early 1990s, consumer groups turned their attention to pushing through the Product Liability Law of 1994. The Consumers Federation of

Japan (Shodanren), a liaison organization for thirteen of the biggest consumer groups, organized a special national liaison committee to mobilize public support and coordinate appeals to government ministries and political parties. Consumer groups were also influential in pushing through a US-style information disclosure law in 1999.

In recent years, consumer groups have begun to develop new attitudes, albeit very slowly Most groups remain opposed to further agricultural liberalization, but they have shifted from staunch opposition to deregulation to a more nuanced stance: they welcome the elimination or relaxation of those regulations simply designed to protect industry, yet remain concerned that deregulation should not unduly disrupt social stability Meanwhile, consumers at large have substantially altered their behavior in the marketplace. With the prolonged recession and the strong yen, Japanese consumers have become more price sensitive, fueling a boom in discount-

ers and a real decline in retail prices. Although they did not support deposit interest liberalization or import liberalization, consumers have taken advantage of these changes in their savings and purchasing behavior. Over time, consumers’ changing economic behavior appears to be affecting their political role, if ever so slightly as they have become less staunchly opposed to market liberalization.

See also: consumption tax; Large Retail Store

Law 1974; marketing in Japan; pricing practices; retail industry; superstores; trade barriers; trade negotiations

Further reading

Garon, S. (1997) Molding Japanese Minds: The State in

Everyday Life, Princeton, NJ: Princeton University


86 consumption tax

Gelb, J. and Estevez-Abe, M. (1998) “Political Women in Japan: A Case Study of the Seikatsusha Network Movement,” Social Science Japan Journal


Kokumin Seikatsu Kenkyu (People’s Life Studies) (1994–6).

Maclachlan, P. (1999) “Turned Away at the Gate: The

Politics of Postwar Japanese Consumerism,” manuscript.

Vogel, D. (1992) “Consumer Protection and Protectionism in Japan,” Journal of Japanese Studies 18:119–


Vogel, S. (1999) “When Interests Are Not Preferences:

The Cautionary Tale of Japanese Consumers,” Com-

parative Politics 31:187–207.


consumption tax

The consumption tax is a Japanese version of the

European value-added tax (VAT). It was introduced in 1989 by the Tax Reform Act of 1988 and has come to be one of the main taxes within the Japanese tax system, accounting for about 20 percent of total national tax revenue.

In order to cope with a budget deficit, the aging of society and internationalization of the Japanese economy fundamental tax reform had become inevitable since the middle of the 1980s.

As part of the government’s efforts to reform the tax system, the Tax Reform Act of 1988, one of the major tax reform acts, was enacted under the slogan of “tax reform to meet the time of aging society and internationalization of the economy”

The main points of the Act were reduction and rationalization of the income tax burden, measures for more equitable distribution of the tax burden, reduction of the inheritance tax, fundamental reform of indirect taxes including the installation of the consumption tax, and reduction of the corporate tax. Besides coping with the problems touched upon above, the aims of the Act were to develop an optimal tax system, balancing income, consumption, property and other tax revenue areas, and to secure stable and sufficient revenue.

A fundamental reform of indirect taxes was needed in the context of social and economic developments such as the increase and the equalization of income standards, the diversification of consumption patterns, the larger share of service consumption, the aging of the population and so forth. In addition to these conditions, increases in expenditures and a budget deficit fostered the idea that a broader range of people should share the basic burden of paying for the maintenance costs of society. The consumption tax, which is supposed to bear widely and evenly for consumption, was considered to be a match for the idea and to ensure more stable tax revenue than do direct taxes such as income tax and corporation tax, under which revenue strongly fluctuates according to the business cycle.

Taxable items under the consumption tax are asset transfers made by enterprises within the country and imported goods (foreign goods received from bonded areas). Asset transfers includes sales and leases of assets, and provision of services. In other words, the tax is levied on consumption of goods and services and charged by sellers at the time of the sale of goods or services.

Taxpayers are enterprises and importers and, periodically they must total the tax collected on sales, deduct from this the tax paid on purchases and pay the balance to the tax authorities. As a result, consumers ultimately bear the tax. The tax bases are the counter-value of the transfers of assets and delivery value at the time of import.

The tax rate is 5 percent, including a 1 percent local consumption tax. The rate was raised from initial 3 percent in 1989 to 5 percent in 1997 by the Tax Reform Act of 1994, which introduced the local consumption tax at the same time.

The following transfers of assets are exempted from taxation in terms of non-consumption or social policy: sales and leases of land, sales of securities and means of payments, interest on loans and insurance premiums, sales of postal and revenue stamps, fees for government services, foreign exchange, medical care covered under the medical insurance laws, social welfare services, burial and crematory services, educational services and so forth.

There are some special rules for small enterprises, which were introduced in order to weaken their opposition to the consumption tax. First, small enterprises whose taxable sales during the base period are less than ¥30 million are exempt

contract employees 87 from the tax. However, this rule is not applied to newly established corporations with equity capital of ¥10 million or more. Second, small enterprises whose taxable sales during the base period are ¥200 million or less can choose to use the product of the consumption tax associated with final sales and the deemed rate of purchases as the consumption tax associated with purchase.

The deemed rates are 90 percent for wholesalers, 80 percent for retailers, 70 percent for manufacturers, 60 percent for others, and 50 percent for services. This rule, which was designed to decrease the task of tax filing for small enterprises, is called the simplified taxation system.

Since the consumption tax is a value-added tax levied at each stage of distribution of goods and services, the tax already paid in the former stage is deducted. In other words, the consumption tax paid on purchase is deducted from the consumption tax collected on sales by enterprises on the basis of its accounting records. It is has been said that using invoices is the most accurate method for determining the added value, and thus the amount of tax, and that this system also guarantees an open relationship between the tax authority consumers, and distributors in terms of filing taxes and of incorporating the tax in prices. However, an accounting method that used bookkeeping without invoices was introduced in

Japan in order to appease small enterprises that had feared their accounts would become too open, and also above board. The new method has attracted widespread criticism. According to

Kato (1994), for example, the Rengo (Union of

Japan Private Labor Unions) argued that under the new method it was difficult for the tax authority to ascertain if distributors were manipulating transaction records or keeping inaccurate records in their accounting books and not filing the taxes that consumers had paid. Although all taxpayers are required by the Tax Reform Act of

1994 to keep books plus business invoices, it is still said to be insufficient. In addition, the abovementioned measures for small enterprises have made the consumption tax more opaque and problematical, because they may allow small enterprises to collect a “subsidy” or “profit tax”

(ekizei) from consumers. When the issue of raising the consumption tax comes up in the future, the issue of transparency will certainly be raised again.

Further reading

Ishi, H. (1993) Japanese Tax System, 2nd edn, Oxford;

Tokyo: Clarendon Press.

Kato, J. (1994) The Problem of Bureaucratic Rationality: Tax

Politics in Japan, Princeton, NJ: Princeton University Press.

JETRO (2001) Illustrated Guides: Taxation Laws, Tokyo:

Japan External Trade Organization.

Ministry of Finance (2000) An Outline of Japanese Taxes,

Tokyo: Printing Bureau, Ministry of Finance.

——(2001) Outline of the Consumption Tax System, http:// www.mof.go.jp/english/zei/report/ zc001e05.htm.

contract employees


Also known as non-regular employees (the common term in Japanese is shokutaku shain), the term can also be applied to part-time and temporary workers, though there are distinctions among the three types. Each type will be discussed in greater depth below. Contract employees are distinguishable from regular or permanent employees in that the former do not have full membership in the organization, that is, they do not have access to security (lifetime employment), seniority promotion or union membership. Moreover, the full range of allowances and non-salary compen-

sation may also be outside their contracts. Contract employees constitute an important segment of the total work force in Japan. They often serve as a buffer within the labor force, their work hours expanding or shrinking based on the temper of the economy.

Contract workers usually work on one-year renewable contracts. Though they lack full access to the benefits of affiliation that permanent employees enjoy it is the custom to receive a variety of allowances and benefits. Contracts are usually renewed automatically and many workers have lengthy tenures with the firm. Except in extreme situations non-renewal of contract is a rare occurrence.

Temporary workers are those persons who

88 contracts work on contracts ranging from three to nine months. Their position in the firm is a level below that of contract workers. Contracts may be renewed somewhat automatically but there tends to be greater mobility among this segment of the workforce, with some workers wanting greater freedom to move to other firms should a good opportunity present itself. During down cycles, these workers are much less likely to have their contracts renewed. Indeed, some firms in the manufacturing sector confronted with cyclical patterns of demand rely on temporary workers to buffer their permanent labor force.

Part-time workers are predominantly female and work less than forty hours a week, though it is not unusual for them to work more than forty hours per week during certain times of year or in response to short-term pressures. Part-timers are overwhelmingly female. An OECD study estimated that females comprise 75 percent of the part-time labor force. Part-timers are not to be confused with arbuaito (a Japanization of the German “arbeit” a term which is generally applied to students working side jobs.

See also: lifetime employment; permanent employee

Further reading

Brown, C., Nakata, Y., Reich, M. and Ulman, L. (1997)

Work and Pay in the United States and Japan, New York:

Oxford University Press.

Tachibanaki, T. (1996) Wage Determination and Distribu-

tion in Japan, New York: Oxford University Press.

ALLAN BIRD vary in contents and characteristics. The civil code of Japan stipulates thirteen types: gift, sale, exchange, loan for consumption, loan for use, lease, contract of employment, contract for work, mandate, bailment, association, life annuity and compromise. The civil code provides substituting rules for the case where concerned parties do not specify rules between themselves.

When they do so, they may establish rules different from the civil code, on condition that their rules are not against public order and good morals.

A bilateral contract refers to a contract such as a sale, under which both parties assume a claim and an obligation. A unilateral contract is one such as a gift, under which only the donor is under obligation to transfer whereas the donee is exempt from obligation. Onerous contract relates to one with enumeration, and gratuitous contract without.

The consensual contract, the predominant form of contract, comes into existence once declarations of intention accord with each other. A contract in kind, on the other hand, becomes valid when the object is actually delivered, such as a loan for consumption, a loan for use, or a bailment.

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 merchants is under the jurisdiction of the Commer-

cial Code. Especially after the Second World War, a series of enactments and revisions have been undertaken to protect the economically weak and the interests of the consumer. Examples of such enactments and revisions include Land and Housing Lease Laws, Labor Standards Law, Usury

Law, Door-to-Door Sales and Other Direct Sales

Law, Installment Sales Law, the Consumer Contract Act, and the Law on Sales of Financial Products.


The contract comes into existence when a prior declaration of intention (an offer) is met by a posterior declaration of intention (an acceptance), regardless of whether consideration takes place or not. The validity is not affected either by an absence of contract under seal.

The liberty of contract refers to the right to freely choose the specific counterpart of contract and establish legal relation with it. Contracts

Further reading

Oda, H. (1997) Basic Japanese Laws, Oxford: Oxford

University Press.

Uchida, T. (1997) Minpou II (The Civil Code, vol. II),

Tokyo: The University of Tokyo Press.

Wagatsuma, S., AriizumiT. and Mizumoto, H. (1997)

corporate finance 89

Shinban Minpo 2 Saikenho (The Civil Code New Edition, vol. 2, Credit Law), Tokyo: Ichiryuusha.


corporate finance

Fundamentally corporations are financed with some combination of debt and equity. In Japan, there has been a tendency to use relatively large amounts of debt, much of it being loans via the banking system. Indeed, Japan has been characterized as having a bank-centered financial system compared with the more market-based system in the USA. Another notable characteristic is the substantial cross-shareholdings among

Japanese corporations. Progressive deregulation of the Japanese financial system has led to forecasts that the strong role of banks would disappear and much of the cross-shareholding would be unwound. While there has been some movement, these traditional aspects of Japanese corporate finance have remained very important.

Debt financing

Debt comes in a variety of forms, including differing maturities, interest rates which may or may not be fixed over time, and a host of possible repayment provisions. A particularly important characteristic is whether the debt is a market-traded instrument such as a bond, or whether it is a loan (typically not tradeable).

This distinction is important for the flexibility of terms on the borrowing. With a loan between a bank (or other financial institution) and some borrower, all the terms and provisions are potentially negotiable. For a bond or other market traded instrument (e.g. commercial paper), more standardized provisions are needed. In addition, provisions on market instruments are frequently the subject of governmental regulation, at least ostensibly to protect investors (possibly individuals) who may be less sophisticated and have inferior information compared with financial institutions such as banks. Indeed, the information which must be publicly disclosed for a bond issue may be sufficiently sensitive that a firm chooses to borrow via loans rather than disclose such information.

Another key distinction between loans versus market debt instruments is the ability of lenders to exercise control over a borrower’s behavior.

To a substantial extent, that ability depends on the number of lenders involved. With bonds or other market traded debt, there may be thousands of individuals as well as financial institutions which own portions of the debt. It is extremely difficult to coordinate such a large number of lenders, who also have potentially differing financial situations and motivations. In fact, a standard procedure for facilitating renegotiations of a firm’s debt position is to buy up most (or all) of the market-traded debt so that there are a limited number of lenders involved in the negotiations.

At the opposite extreme would be a situation where all a firm’s borrowing is from a single source; for example, a bank. In that situation, the firm can reveal information to the bank on a confidential basis. The firm and bank can negotiate whatever borrowing terms are agreeable to both. Furthermore, such terms can be renegotiated in the future much more easily than if there are many lenders involved.

In Japan, an intermediate situation has evolved in the form of the main bank system. In essence, a firm develops a close working relationship with one bank (sometimes two), which is referred to as its main bank. The main bank performs a monitoring function regarding the client firm’s behavior. This might involve bank access to confidential information regarding major proposed investments and strategic planning at the firm.

The main bank may also provide advice on a wide range of financial issues, including the desirability and terms of potential market debt or equity issues. The intensity of the main bank’s involvement is generally viewed as increasing with the indebtedness of the client.

Traditionally other lenders such as other banks and insurance companies have relied on the main bank’s monitoring to mitigate lending risks. Hence, they could lend to a monitored firm (with the main bank’s concurrence) without having to acquire as much information. If the client firm got into financial difficulties, the main bank possibly bore substantial responsibility due to either inadequate monitoring or poor advice.

This suggests a potential obligation for the main bank to compensate other lenders for its failures;

90 corporate finance a quasi-guarantee of their loans. Indeed, there have been spectacular examples where a main bank absorbed large losses due to a client’s financial difficulties while other lenders were largely unscathed. On the other hand, there have been bankruptcies where the main bank apparently did not compensate other lenders.

This illustrates that the main bank’s obligation can vary dramatically and ultimately depends on acceptable business practice within the Japanese banking community.

It has been argued that the main bank system developed in response to severely restricted financial markets in Japan. Until the early 1980s, the typical Japanese firm was not allowed to borrow outside Japan. Moreover, it could not issue market debt instruments (e.g. bonds) in Japan without bank permission. There were also restrictions on equity issues which made them a relatively unattractive funding source. Rapidly growing firms tend to need substantial amounts of external funding to supplement their own retained profits, and many Japanese firms were growing rapidly from the 1950s until the mid-1970s. During this period, the banks controlled (directly or indirectly) funding for these firms. Even if this did not create the main bank system, it surely enhanced its strength and growth.

Around 1975, the average Japanese manufacturing corporation was over 80 percent financed with debt (less than 20 percent equity; see debt/

equity ratios). Over the next fifteen years, growth rates were slower for most Japanese firms; and there was a sequential liberalization of finan-

cial markets in Japan. Access to offshore financing was also greatly enhanced, and it became an important funding source. This included not only loans from foreign financial institutions but large issues of bonds in offshore markets, particularly during the last half of the 1980s. Many of these bonds were convertible into equity shares or had attached warrants which allowed future share purchase (typically within four or five years) at a specified price. In 1987, a domestic commercial paper market came into existence, where large industrial firms could borrow short term funds via market-traded instruments. That market proved attractive and rapidly grew to a substantial size. During the last half of the 1980s, there were also substantial equity issues. Thus by 1990,

Japanese firms had a much broader set of funding sources available, had substantially lower debt/equity ratios, and overall were less dependant on the banking system.

Equity financing

Japanese equity markets have also provided some marked contrasts with the US situation.

Prior to 1970, virtually all share issues were rights offerings to a firm’s existing shareholders and priced at the stated par value for that firm’s shares. Typically this par value (often 50 yen per share) was well below the current market price.

Listing requirements, particularly on the Tokyo

Stock Exchange, caused firms to pay (if at all possible) annual dividends of at least 10 percent of par value. From a cash flow perspective, these two requirements made equity issues an expensive financing mechanism since Japanese interest rates have typically been well below 10 percent as well as being fully tax deductible for borrowers.

After the Second World War, there was a confiscation and redistribution of shares from


large holding companies, to individuals. This resulted in Japanese individuals owning roughly 70 percent of all listed shares in 1950.

However, this percentage has declined markedly and by 1990 was down to less than 25 percent.

In contrast, holdings by financial institutions

(primarily banks and insurance companies) as well as industrial firms has grown substantially.

Often these shareholdings are reciprocal, with firms owning shares in each other. This includes industrial firms owning shares in banks and vice versa. Frequently any one firm’s holdings represent a small fraction of the other firm’s outstanding shares. However, a group of such firms can collectively have a controlling fraction of the total shares. As a simplified illustration, suppose there is a group of 20 firms where each firm holds 3 percent of the shares issued by each of the other nineteen firms. Collectively 57 percent of each firm’s shares is held by other group members. This effectively blocks unfriendly takeovers and merger bidding contests such as seen in the USA.

corporate finance 91

The pattern of cross-shareholding in Japan is more complex than that simple illustration and is motivated by more than simply takeover deterrence. Cross-shareholding is prominent within

keiretsu, groups of firms with common interests and/or heritage; for example, descendants of former zaibatsu groups. It has also been used to cement long-term customer and supplier relationships outside a keiretsu. The pattern also extends to banking relationships where client firms frequently hold shares in their main bank and other important lenders, with the banks holding shares in the firm (subject to a 5 percent legal limitation). Moreover, cross-shareholding relationships in Japan tend to be very long term and are even referred to as stable shareholdings.

Except for parent firms with a majority stake in a subsidiary cross-shareholding positions are typically so dispersed that shareholders are in a weak position for exercising control over a corporation’s management. This contrasts with the main bank’s position described earlier. While the main bank is almost certainly a shareholder (typically about 5 percent), its power comes largely from being the firm’s key lender. For substantial borrowers, the main bank may be providing a modest fraction (perhaps 25 percent) of the firm’s debt; however, the bank’s view on the firm’s prospects is critical to obtaining other loans and floating bond issues. For firms with modest borrowing positions, the main bank’s influence is substantially diminished and the firm’s management has considerable autonomy from both lenders and shareholders.

After the crash

The Japanese stock market declined precipitously in 1990. This was followed slightly later by a similarly precipitous decline in real estate prices. Collectively this has been referred to as “bursting” the bubble economy, which prevailed in the late

1980s with booming stock and real estate prices.

The dramatic price declines altered the landscape for corporate financing in Japan. The number and size of new equity issues declined, with market price offerings virtually disappearing for a time. Real estate had frequently been used as collateral on bank loans, and this created serious problems for many industrial firms. In some cases, firms continued to make payments on loans whose principal amounts exceeded the current value of their assets. In other instances, borrowers defaulted. The effect on the banking system was disastrous, with virtually all banks suffering enormous losses which severely curtailed their ability to make new loans as well as to “roll over” existing loans.

In the aggregate, Japanese firms dramatically shifted their funding away from bank loans. In large part, they reduced their use of external funding, slowing their asset growth and relying more on internal funding (retained profits plus depreciation). They also relied more on the domestic bond market and, after the early 1990s, on foreign loans. The Japanese commercial paper market stopped growing, and offshore bond issues declined. The shift away from domestic bank loans reflects the difficulties experienced by the

Japanese banking system. Clearly there has been a weakening of the main bank system. However, forecasting its demise seems quite premature. On the other hand, the growth of market-based financing has probably been healthy via providing a broader and more balanced range of financing alternatives for firms.

See also: banking crises; shareholder weakness

Further reading

Campbell, J. and Hamao, Y. (1994) “Changing Patterns of Corporate Financing and the Main Bank

System in Japan,” in M.Aoki and H. Patrick (eds),

The Japanese Main Bank System: Its Relevance for Devel-

oping and Transforming Economies, Oxford: Oxford

University Press, 325–49.

Hodder, J.E. and Tschoegl, A.E. (1993) “Corporate

Finance in Japan,” in S.Takagi (ed.), Japanese Capi-

tal Markets, Cambridge, MA: Basil Blackwell, 133–


Hoshi, T. and Kashyap, A. (1999) “The Japanese Banking Crisis: Where Did It Come From and How

Will It End?” in B.S.Bernanke and J.Rotemberg

(eds), NBER Macroeconomics Annual 1999.


92 corporate governance

corporate governance

In its broadest sense, corporate governance refers to a complementary set of legal, economic, and social institutions that protect the interests of a corporation’s owners. Systems of corporate governance vary widely across the industrialized economies, reflecting the fact that different countries answer the fundamental question, “To whom does the corporation belong?” in very different ways.

The Japanese system of corporate governance is based on the notion that a company is answerable to multiple stakeholders: creditors, employees, trading partners, and society This emphasis on multiple stakeholders contrasts sharply with the shareholder focus of the Anglo-American system. The Japanese system, however, also diverges from other stakeholder-centered systems, such as that of Germany in that the obligations of a corporation to its stakeholders stem from a set of normative understandings rather than law or ownership. While Japanese corporate law, codified in the Commercial Code, spells out a system of shareholder rights and corporate obligations, this system is largely a fiction, and bears little resemblance to actual practice. Japanese corporate governance works through a web of mutual obligations, minority ownership ties, business interests, and social norms.

ers with a stake of 3 percent can demand that a board meeting be held, while a 10 percent stake gives a shareholder access to confidential financial documents (see torishi mariyakukai).

Actual practice, however, diverges considerably from the spirit if not the letter of the Commercial Code. Shareholders’ meetings tend to be short and incorporate little to no discussion. For many years, sokaiya, corporate blackmail artists, accepted payments from companies to stifle embarrassing questions from shareholders (though their activities have diminished over time). The shareholders’ meeting is little more than a rubber stamp for board appointments, dividend payments, and other important decisions mandated by the Commercial Code. Kansayaku, with their obligation to monitor the board, are in fact appointed by the president, and are mostly insiders or outsiders with very close ties to the firm who play little to no real role in governance.

The Commercial Code

The Japanese Commercial Code governs the structure and behavior of the corporation and outlines a system of corporate governance that, on paper, is very similar to that of the USA. At the core of the Commercial Code is the assumption that shareholders are the ultimate owners of the firm, and accordingly the Japanese corporate law grants broad rights to shareholders. The shareholders’ meeting, or kabunushi sokai, elects directors, or torishimariyaku, who then select management. Shareholders further elect statutory auditors, or kansayaku, who are required to monitor the board of directors, and assure that it operates in accordance with the law. The

Commercial Code grants minority shareholders even greater powers than in the USA. Sharehold-

Stakeholder governance

Japanese corporate governance, as it actually works, bears little resemblance to practices outlined in the Commercial Code. Japanese managers balance the interests of banks, employees, trading partners, and society at large. In turn, all of these stakeholders play an important role in monitoring management. While key stakeholders of Japanese firms—its banks, buyers and suppliers, and other business associates—tend to be shareholders of the firm as well, their interests are in a firm’s long-term growth and survival, rather than its ability to pay high dividends or maximize its stock price. In the 1980s, such stable shareholders held from 50–70 percent of a typical firm’s equity.

At the core of this stakeholder system are the banks. Most Japanese firms have one (sometimes two) main banks (see main bank system). Main banks not only investigate corporate finances and strategy as a prerequisite for loan approval, but also intervene actively in corporate management.

The role of the bank is most obvious in troubled firms. If a firm appears in danger of defaulting on its loans, a bank is likely to step in with a new management team, strategic direction, and financing. While banks are less vocal when it comes to

corporate governance 93 high performing firms, they nevertheless keep a close watch on management to prevent a bailout from ever becoming necessary.

Certain conditions have enabled banks to play this role. Japanese firms, heavily dependent upon bank financing for much of the postwar period, have had little choice but to submit to rigorous bank monitoring. Banks may also exert influence by placing one or two of their own executives on a firm’s board. By law, banks are forbidden to hold more than a 5 percent equity stake in a firm.

However, a firm’s other shareholders are likely to be related trust banks and insurance companies, and other firms closely related to the bank such as other members of the bank’s keiretsu, or business group.

Employees are another cornerstone of Japanese corporate governance. In general, large corporations consider providing employment stability and career advancement to seishain (fulltime employees, hired with an implicit promise of permanent employment) as a goal more important than maximizing share price. Under the permanent employment system, employees’ career prospects are closely linked to the fate of the firm, and thus, they carefully monitor management. A president who fails to take employees’ interests into account is unlikely to remain in that position for long. It is important to note, however, that unlike in Germany where employee representation on the supervisory boards of large firms is legally mandated, Japanese employees have no legal right to board representation.

Rather, their important role in the Japanese system of governance revolves on strong social norms concerning a firm’s obligation to its employees.

A further set of stakeholders are buyers and suppliers. Like employees, buyers and suppliers often have a long-term stake in the survival of a firm, in particular if they have invested in relationship-specific assets that cannot be easily used elsewhere. A supplier that has built a factory next to its main buyer, or a buyer that has invested heavily in training a supplier’s engineers in its manufacturing system, has a vital interest in the survival of its trading partner. Firms often hold minority equity stakes in their trading partners, often in conjunction with other members of their

keiretsu. Buyers, in particular, often place one or more of their own managers on a supplier’s board to provide ongoing oversight. Even so, equity stakes in buyers and suppliers tend to fall short of levels that allow control. A firm’s obligations to its buyers and suppliers, and the ability of buyers and suppliers to monitor each other, rests largely on a set of normative understandings concerning a firm’s obligations to its trading partners.

Recent changes in corporate governance

Until the bursting of the bubble economy in the early 1990s, the Japanese stakeholder-oriented system of corporate governance was praised as a key to Japan’s competitive strength. Patient capital—in the form of minority equity positions by friendly banks and trading partners—allowed firms to make long term investments rather than scramble to meet quarterly financial goals. Praise of Japanese corporate governance turned abruptly into criticism as the bubble burst, and the Japanese economy faltered during the 1990s. It was during the 1990s that the Japanese translation of the term corporate governance—copureto gabanansu or kigyo tochi—became widespread in the mass media and popular discourse. Poor corporate governance was blamed for everything from the excesses of the bubble economy to a spate of corporate scandals exposed in the 1990s. The stakeholder system was blamed for fostering insular thinking and lack of accountability A debate emerged over whether Japan should adopt what was termed the “global standard” of Anglo-

American corporate governance, or fine-tune the existing system.

While the causes of the bubble economy are complex, and it is not clear how much inadequate corporate governance was to blame, changes in the Japanese economy in the 1980s and 1990s did render the existing system less effective. Large firms, in particular, increasingly turned to capi-

tal markets rather than banks for funds. Banks had less reason to monitor firms, and firms had less reason to listen to banks. The banking crisis further diminished the credibility of banks as monitors and dispensers of managerial advice (see

banking crises). While the institutions of permanent employment and long-term buyer-supplier relationships did not disappear in the 1990s,

94 creative houses they were weakened through bouts of corporate

restructuring. The web of mutual obligation that caused firms to put the interests of these stakeholders over returns to shareholders began to unravel. Another force in the transformation of corporate governance was the increasing influence of foreign shareholders. Ownership of

Japanese shares by foreigners increased from about 5 percent in 1990 to over 13 percent in

1997 and ownership levels continued to grow through the end of the decade. These foreigners, largely US and European institutional investors and corporations, often had little ongoing business interest in the firms in which they invested, and began to demand that Japanese firms pay more attention to shareholder value.

The decade of the 1990s produced a number of changes in governance. In 1994, the filing fee for shareholder derivative suits was reduced dramatically This increased the number of shareholders attempting to sue a company for real or alleged misbehavior. In 2000, shareholders won an ¥83 billion decision against the directors of

Daiwa Bank for their role in trading improprieties in the USA. Managers of Japanese companies claimed that the real threat of shareholder suits made them far more cognizant of shareholder interests than ever before.

Other changes were implemented in board structure and compensation. Beginning in 1997, corporations were allowed to issue stock options to their board members and, by 2000, nearly 800 companies had done so (though a combination of a sinking stock market and very few options issues, made this incentive less than lucrative). A number of firms, beginning with Sony, reduced the size of their boards, often by more than half, by demoting board members with operating responsibilities to shikko yakuin, or corporate executive officers. This, it was argued, would enable the board of directors to behave more like a US corporate board, in overseeing the activities of top managers. The Ministry of Justice, urged on by the various interests of the Ministry of Inter-

national Trade and Industry, Keidanren, and foreign investors, began the process of a major overhaul of the Commercial Code to mandate more effective and realistic governance practices.

It was, however, by no means clear whether these changes were harbingers of convergence to Anglo-

American governance, attempts to fine-tune the existing system, or window-dressing to please foreign investors.

Further reading

Aoki, M. (1988) Information, Incentives, and Bargaining in

the Japanese Economy, New York: Cambridge University Press.

Aoki, M. and Patrick, H. (eds) (1994) The Japanese Main

Bank System, New York: Oxford University Press.

Charkham, J. (1995) Keeping Good Company: A Study of

Corporate Governance in Five Countries, New York: Oxford University Press.

Fukao, M. (1995) Financial Integration, Corporate Gover-

nance, and the Performance of Multinational Companies,

Washington, DC: The Brookings Institution.

Gerlach, M.L. (1992) Alliance Capitalism: The Social Or-

ganization of Japanese Business, Berkeley CA: University of California Press.

Shishido, Z. (2000) “Japanese Corporate Governance:

The Hidden Problems of Corporate Law and Their

Solutions,” The Delaware Journal of Corporate Law


creative houses


Creative houses are specialized in activities related to advertising, a major area of marketing.

The advertising industry in Japan was born during the Meiji era, when newspapers aimed toward ordinary citizens began to be published. At first they relied heavily on readers for sales and profitability but they soon realized that charges for advertisements and various announcements in the paper were a much more stable source of revenue. As the economy grew a number of leading newspapers achieved increased circulation and volume, which in turn prompted a proliferation in firms seeking space for their advertisements.

Prior to the Second World War, the main function of advertising firms was limited to brokerage activities between newspapers and advertisement sponsoring companies. Although there were some ingenious examples of advertise ment using other media such as magazines and periodicals, billboards, and publicity slips which

creative houses 95 were distributed with papers, the leading advertising firms handled only newspaper space.

In the 1950s, a number of independent radio stations began commercial broadcasting. The leading advertising firms in Japan today such as

Dentsu and Hakuhoudou, were quick to foresee the large potential of this new media, while those who neglected it never found a way to keep pace with the tremendous growth of the industry.

Commercial messages on radio proved to be much more effective than more traditional media. But when television broadcasting started, the principal media for mass advertising shifted quickly from radio to television.

With the introduction of audience polls in both radio and television broadcasting, programs began to be rated according to the audience percentage they were able to track. However, they were rated from the standpoint of attractiveness and quality. Over time, firms gradually recognized that the advertising must be carried out in line with a comprehensive and coherent marketing strategy.

The advertising firms’ function, hitherto limited to the brokerage of space and time, soon expanded to planning and production of effective commercial messages. The most important area of development was that of audio-visual messages on television, especially during the period when the entire nation became viewers following the period of economic growth.

Once the quality of commercial messages on television was put under careful scrutiny literary and artistic components such as catchy copy overall design, audio and visual effects gained importance. As a result, the contents of commercial messages were understood as a kind of synthetic, or total, art. Consequently the section of advertising firms responsible for planning and production of commercial messages was renamed the

“creative” section, in contrast to the sales section handling the traditional brokerage functions. The head of the creative section is now often called

“creative director”, and subordinates are known as “creators,” the “creative team,” or the “creative group.”

Japan’s leading advertising firms often carry out the substitute function of serving as the advertising section of several sponsors who are competing with each other. In order to avoid potential conflict of interests or leakage of secret information, the teams and sales force are grouped according to each client. In this regard, Japanese advertising firms are radically different from their

Western counterparts, the advertising agencies that adhere to the principle of one client in one industry Furthermore, the Japanese advertising firms’ scope of operation includes a variety of related activities such as planning and conduct of marketing research or its arrangement on behalf of producers, inception and management of conventions and large development projects. Due to these characteristics, they are usually referred to as advertising firms (koukoku gaisha), rather than advertising agencies.

A recent trend in the advertising industry in

Japan is to assume the entire marketing activities of producers, under the self-designation of “marketing agency” On the other hand, as an advertising firm’s client companies become ever more international and foreign agencies make inroads in Japan, alliances and cooperative arrangements are actively pursued.

The total advertising expenditure in Japan, estimated by Dentsu, was ¥5.7 trillion in 1999. Advertising firms nationwide number approximately

3,500, but only sixty or so have annual turnover above ¥10 billion. Among the latter, Dentsu

(based in Tsukiji, Chuo ward, Tokyo) is by far the largest with a turnover at ¥1.309 trillion in fiscal 1999. It is followed by Hakuhoudou (in

Shibaura, Minato ward, Tokyo, ¥673.9 billion),

Asatsu-D.K. (in Ginza, Chuo ward, Tokyo,

¥320.1 billion), Tokyu Agency (in Akasaka,

Minato ward, Tokyo, ¥182.1 billion), Daiko (in

Miyahara, Yodogawa ward, Osaka, ¥152.9 billion), and Yomiuri Koukokusha (in Ginza, Chuo ward, Tokyo, ¥110.5 billion).

Further reading

Nikkei Koukoku Kenkyujo (2000) Koukoku Hakusho

(Advertising White Paper), Tokyo: Nihonkeizaishinbunsha.

Saito, Y. (2000) 2002 Hikaku Nippon no Kaisha Koukoku

Gaisha (Comparison of Japanese Companies: The

Advertising Industry), Tokyo: Jitsumukyouikushuppan.

96 cross-shareholdings

Yamaki, T. (1994) Koukoku Yougo Jiten (Dictionary of

Advertising), Tokyo: Toyokeizaishinpousha.



It has been a common practice in Japan for pairs of firms to exchange equity shares in each other, a practice called “cross-shareholding.”

Sometimes the firms have been in the same in-

dustrial groups, sometimes they are suppliers and customers, and sometimes creditors and borrowers.

Kabushiki mochiai (mutual aid shareholding) is the Japanese term for what is customarily translated as “cross-shareholding,” that is, equity shares that two companies hold in one another. Crossshareholding, in turn, is a subset of what is known as antei kabunushi (quiescent stable shareholding), which may be held in trilateral, multilateral, or otherwise stable arrangements among companies, usually based on group and/or transactional relationships. Together, the various forms of stable shareholdings comprise some 65 percent to 70 percent of all stock issued by publicly traded corporations in Japan. The remaining shares are freely traded on the stock exchanges.

Cross-shareholding in Japan, however, represents much more than a single-dimension ownership relationship. It often also reflects other understood but unstated obligations. As will be noted, cross-shareholding arrangements in the postwar era operated as tacit mutual pacts designed to insulate the management of both sides from any market threat of hostile takeover. The purpose of most cross-shareholding is to avoid rather than confer shareholder rights, so stable shareholding relationships function as a strategy of corporate management to limit shareholder governance of the firm.

Cross-shareholding may be divided into two categories: (1) cross-shareholding between members of a horizontal corporate conglomerate group, or kigyo shudan, the core of stable shareholding arrangements, and (2) crossshareholding that reflects business relationships between suppliers and customers. In neither case is the cross-shareholding relationship intended to confer the ownership rights inherent in the Anglo-

American model of corporate governance.

Cross-shareholding arrangements between suppliers and customers are primarily a franchise to do business, a method of cementing transactional relationships.

In 1992, Japan’s Economic Planning Agency

(EPA) responded to criticism raised by the United

States in the Strategic Structural Initiative (SSI) trade negotiations that cross-shareholding promoted unfair trading practices and that Japan’s cross-shareholding and main bank system specifically locked out foreign-owned banks. In its reply EPA advanced three main economic justifications, among others, for cross-shareholding, characterizing them as “merits.”

First, it argued that cross-shareholding provides a stable source of funding for businesses by ensuring that there will be partners who will be stable investors and who will buy new issues of stock whenever needed. Second, according to

EPA, cross-shareholding strengthens the stability of corporate management by acting as a bulwark against the threat of hostile takeover. Such arrangements relieve management of the necessity of responding to excessive pressures from the capital markets, permitting it to develop operations according to a long-term perspective.

Lastly the EPA maintained, cross-shareholding stabilizes and strengthens business transactions between companies. The EPA White Paper of

1992 termed cross-shareholding a mutual “hostage” taking, which creates a captive relationship in the supply of goods or services and promotes long-term transactional relationships between cross-shareholding companies.

However, EPA accepted the point that group companies tend to do business mainly with each other, thus making it difficult for foreign investors to break into Japanese networks, and thus that extensive cross-shareholding among members of a corporate group could lead to exclusionary anti-competitive business practices:

Even though interlocking stockholding has the functions mentioned above, if it creates a relationship of ‘conspiracy’, business may become inefficient. What is more important, in selecting the customers, if it is taken into account whether or not they have in-

cross-shareholdings 97 terlocking stock holding unrelated to their individual products or substance of service, or cartel relations come into existence between competitors, competition may be limited.

(Japan Economic Planning Agency 1992:181)

In addition, scholars in Japan have long criticized the practice of cross-shareholding as limiting shareholder governance, which they have characterized as among its major “demerits,” particularly in terms of management accountability In other words, without effective oversight by shareholders of corporate operations and managerial performance, Japanese managers had little incentive to seek to maximize profits. This is typically contrasted with the United States, where shareholders, at least theoretically oversee the effectiveness of corporate management, and where the possibility exists of shareholders exercising their rights to change management if operations become too inefficient. Corporate management in the USA is thus given the incentive to focus on the more effective operation of the company for the benefit of the shareholders. In Japan, however, the mutual non-interference agreements generally implied in a Japanese cross-shareholding relationship gave Japanese corporate management an abundance of discretion in making business decisions and in regulating itself. This allowed inefficiencies to build up that produced a low return on equity Until recently declaring shareholder dividends had been neither a necessity nor even a priority concern of Japanese corporate managers. In recent years this view has been changing. Stable shareholders, in the absence of profits from capital gains, are now demanding dividends on their shareholdings.

Another significant demerit raised by critics in Japan is the potential for cross-shareholding agreements to damage and even defraud shareholders. Cross-shareholding represents an offsetting exchange of stock between companies, in most cases entailing no injection of new outside capital. For example, when a company issues

¥100 million in stock, the company uses the funds to acquire productive assets worth ¥100 million.

Most often, in cross-shareholding arrangements, when a company issues stock to a partner, there are usually no net proceeds, just the receipt of new stock in exchange; such a transaction is purely a paper one. Third-party investors in both firms might be made worse off in that their ownership share in the equity of the firm has been diluted by the increase in the number of shares without there being a corresponding increase in the earning capacity of the shares from investment. In addition, there has been an unspoken fear among third-party shareholders that any large-scale sell-off of shares into the market by a cross-shareholding partner (i.e., without either consultation or the replacement of that partner with another stable shareholder) could cause the collapse of the company’s share price in the equity market.

The widespread practice of cross-shareholding has also been criticized as having negative effects on the stock market. As cross-held shares in a company are rarely traded on the exchange, the effective market in each company’s stock is restricted to a fraction of the firm’s outstanding shares. Thus, according to this view, speculators can manipulate the market price more easily Such speculation by Japanese investors would tend to discourage outside investors, and, in overall terms, would dissuade participation of longer term investors.

Whether positive or negative on a net basis, the standard practice of enterprises holding substantial shares in other enterprises, owing primarily to the cross-shareholding phenomenon, creates an interdependency in the prices of shares.

The shares of companies holding stock in other companies are more vulnerable to share price volatility the larger the holdings of such stock.

The interdependency arises because when a firm has large holdings of shares in other companies, its own profits can depend to a significant degree on the price performance of those shares. If stock prices go up, the company earns “hidden profits” from those stocks; but if the prices of those stocks go down, they will have unrealized losses.

As the market is at least implicitly aware of these unrealized gains and losses, it affects the first firm’s own stock price. For example, Japanese companies that showed a steady rise in their core business income between 1985 and 1991, suffered unrealized losses on shares held in other companies when the stock market declined from

1989 to 1991. This resulted in a decline in their

98 cross-shareholdings own company’s stock price during those years, despite the core business profits, the effect being greater the greater the extent that they engaged in cross-shareholding.

The postwar cross-shareholding arrangements grew out of the dissolution of the zaibatsu in the initial period of the American occupa-

tion of Japan following the Second World War.

The zaibatsu were holding companies, each of which held shares in and controlled a group of firms, many of which, in turn, had controlling interests in other firms (albeit often through a minority stake). The dissolution was intended to introduce “Western” principles of corporate democracy and to dismantle the industrial underpinnings of Japanese militarism. The divestiture by the zaibatsu of their corporate holdings under the Anti-Monopoly Act of 1949 led to an increase in stock ownership by individual investors. As a result, individual investors held 69 percent of all outstanding shares in 1949, a level that would fall dramatically as crossshareholding was resurrected.

The cross-shareholding system as it existed by the 1990s was the result of three stages of major buildup: the first in the early 1950s, the second from the middle 1960s to early 1970s, and the third in the late 1980s. The corporate equity market in the early 1950s was characterized by active takeovers and free-wheeling shareholder meetings. During this period, speculators purchased stocks, which management bought back at a higher price (greenmail). Companies wanted to protect themselves by cross-shareholding.

However, the provisions of the Anti-Monopoly

Act prohibited stockholding by companies. Revision of the Act in 1953 allowed companies to invest in stocks of other companies, provided such stock holdings were not anti-competitive. The resurrection of cross-shareholding during this period was thus primarily intended to protect companies from unsolicited acquisition by speculators, who were particularly active after Japanese stock prices collapsed following the end of Japan’s economic boom during the Korean War. The 1953 easing of the Anti-Monopoly Act also raised the upper limit of shareholdings by financial institutions from 5 to 10 percent.

This first stage in the development of crossshareholding was also significant in that the former zaibatsu groups of Sumitomo, Mitsui, and

Mitsubishi re-established themselves as a new form of grouping of companies, called kigyo shudan

(corporate groups), horizontally organized conglomerates, with their trading companies and banks at the center of their groups (see below).

The second stage in the growth of crossshareholding was precipitated by the collapse of share prices in 1964–5 and the first Yamaichi Crisis (1964), in which Japan’s fourth largest securities company was faced with imminent bankruptcy. In order to boost the Japanese stock market, a special corporation, the Nihon Kyodo

Shoken (Japan Cooperative Securities Co.), was set up by the securities industry with Ministry

of Finance (MOF) administrative guidance to make major purchases of shares. Another major factor was Japan’s having become a member of the Organization for Economic Cooperation and

Development in 1964. As a condition of membership, Japanese capital markets were to be gradually deregulated, causing the MOF as well as business to become concerned about preventing hostile takeovers by foreign investors.

Once the Yamaichi bankruptcy had been averted, the Nihon Kyodo Shoken was able to sell the shares it had accumulated. Section 280 of the Commercial Act was revised so that boards of companies would be able to allocate newly issued shares to specified companies and individuals. Such allocations were made primarily to financial institutions and companies within their own group, resulting in further stabilization and concentration of stock ownership. This strengthened the afore-mentioned successors to the prewar zaibatsu groups and aided newly emerging

kigyo shudan, centered around Sanwa, Daiichi

Kangyo Bank (DKB) and Fuji Bank. As these shares were unlikely to be sold, it reduced the threat of hostile takeovers by either domestic or foreign investors.

The second stage of the growth of crossshareholding ended with the introduction of a new policy to curtail the practice. After the first

“oil shock” hit Japan in the fall of 1973, inflation rose and the price increases were seen as having been engineered by the corporations. This led, after much opposition, to adoption of the 1977

Anti-Monopoly Reform Bill, that reduced the allowed bank shareholding of company stocks from

cross-shareholdings 99

10 to 5 percent. The implementation of this reform, however, was stretched over ten years.

The third stage in the growth of cross shareholding accompanied the “’bubble period” of the late 1980s, when corporations took advantage of high and rising equity prices and flooded the stock market with new issues as a way to raise funds. By itself, this would have increased the proportion of company shares that were actively traded, relative to the “quiescent stable shares.”

However, the issuance of new cross-held shares could prevent this, which was thus the primary purpose for the issuance of such shares in this period.

This was also a period of intensive zaitech (financial engineering) investment in securities by corporations, unrelated to investment for crossshareholding purposes. That is, many companies sought to bolster their profits from gains in the rising stock market. The portfolio of the zaitech investor, like any unaffiliated investor, was strictly speculative, in anticipation of capital gains. Firms following this practice thus built up their portfolios of shares in other firms and if after several years these new shares were not traded, they would appear quite like traditional “stable” shares.

Indeed, after the stock market crashed there was little incentive to sell these shares.

In fact, when analysts observed a reduction in corporate shareholding portfolios in the late

1990s, they measured the fastest rate of dissolution as being in the stable-shareholding (antei

kabunushi) category However, it is difficult to distinguish sales of shares that had actually been part of a firm’s stable shareholding from sales of

zaitech shares which it would have been timely to sell given that the Tokyo market had temporarily regained some strength as foreign buying increased substantially in the mid-1990s and again in 2000.

Much of bank-firm cross-shareholding in Japan has taken place within groups of interrelated firms, typically with a large bank at the center

(see main bank system). Some economists suggest that the groups helped to manage risk in the

Japanese economy (Nakatani 1984). Other analysts have been critical of bank-firm crossshareholding, challenging this supposition. The shares cross-held by banks and firms became a matter of grave concern in the 1990s in part because most Japanese banks depended on the market value of stocks held in their portfolios to help satisfy capital adequacy standards. With the huge decline in the Tokyo stock market during the

1990s, at times falling to less than one-third of its

1989 peak level, banks had great difficulty in maintaining the level of capital required to meet the Basel Committee standards to operate internationally The greatest part of bank-held shares have been in each bank’s client firms.

Although there has been a decline in non-financial firms holding bank stocks, since many of these firms were importuned by their main banks to purchase their shares in the late 1980s so that the banks could meet the newly imposed capital adequacy standards, there has been little winding down of bank holdings of shares in current client firms. It is within the category of transactional relationships that one should view the shares of stock that a bank and its major client firms cross hold. The same is true for insurance companies and trust banks. They typically own shares in companies with which they do a significant amount of business, including selling insurance and pension fund products to the client firm and its employees. Such transaction-related shareholdings are considered to be separate and apart from any holdings of the client firm’s stock that these financial institutions may have in their investment portfolios.

In the midst of these changes in Japanese (and global) financial systems, the prospects for bankfirm cross-shareholding are unclear. Japanese firms increasingly have market alternatives to banks for funds and depositors increasingly have market opportunities for placements of funds.

Arm’s length, market-related financial transactions seem less amenable to the kinds of relationships that bank-firm cross-shareholding characterized.

In fact, banks continued to acquire shares in firms that have newly become main bank clients.

Asahi Bank and Tokai Bank (both with strong regional bases) and most recently firms in the

Fuji group and in Sakura Bank’s Mitsui group have also increased their holdings in order to strengthen their group’s main bank. Business in

Japan is typically conducted within highly contextualized sets of relationships and opaque rules that govern access and accountability Thus

100 cross-shareholdings far, there is little evidence of devolution in mutual shareholding arrangements on the part of banks, especially by regional banks whose clientele have very traditional notions of business relationships.

For the banks, we can conclude that two significant purposes of cross-shareholding exist: to maintain stable business relationships, i.e., transactional relations between the cross-shareholding partner companies, in other words, as a franchise to do business with each other; and second, to maintain capital adequacy standards. Firms, on the other hand, are today buying bank shares generally only if they are in difficulty and need to preserve their relationship with a bank. Crossshareholding thus continues to provide implicit relational contracts, a function that still has a role in Japanese business society


Further reading

Iwao, N. (1984) “The Economic Role of Financial Corporate Grouping,” in M.Aoki (ed.), The Economic

Analysis of the Japanese Firm, North-Holland: Elsevier

Publishing, 227–58.

Scher, M.J. (1997) Japanese Interfirm Networks and Their

Main Banks, London: Macmillan, and New York:

St. Martin’s Press.

——(1999) “Japanese Interfirm Networks: ‘High Trust’ or Relational Access?” in A.Grandore (ed.), Inter-

firm Networks: Organization and Industrial Competitive-

ness, London: Routledge, 303–18.

——(2001) “Bank-Firm Cross-Shareholding in Japan:

Why Is It, Why Does It Matter, Is It Winding

Down?” Discussion Paper No. 15, United Nations

Department of Economic and Social Affairs.




Daiei, Inc. was established by Isao Nakauchi in

April 1957 in Osaka. Shortly thereafter, Daiei expanded very rapidly to become a national general merchandising store chain. In March 1972, it outperformed Mitsukoshi and had the largest gross sales of any retailing company. Daiei is characterized by its low prices, mass sales policy aggressive mergers and acquisitions strategy business diversification, and organizational innovation. In September 1999, the company directly operated 317 stores, employing 15,603 staff. In the same year, the company was capitalized at

¥52,000 billion and the operating profit totaled

¥2.3 trillion.

Yoi moto o don don yasuku uru (Sell high quality goods inexpensively) is Nakauchi’s mission and the corporate philosophy of Daiei. This mission is reflected in the company’s pricing and store development strategies. Daiei adopted the low price and mass sales policy from the beginning, believing that low prices would stimulate sales and eventually increase profits. It has also extended its network of stores from Kansai to

Kyuushuu, Touhoku, Kantou, Hokkaidou, and

Okinawa to exploit economies of scale. In the

1990s, Daiei further expanded its network through mergers and acquisitions. In 1994 the company merged with three other retail companies. Three years later, Daiei acquired sixteen stores from Yaohan Japan. Daiei also expanded its business scale by building high-volume stores, expanding the average sales floor area from 1,500 square meters in the 1960s to over 5,000 square meters in the 1970s. This expansion enabled Daiei to include food, textile, and variety merchandise in its stores.

Daiei is also known for its rapid business diversification. In the 1980s, the Large Store Law was extended to cover supermarket chains and thus limit the expansion of Daiei. In response to this legal change, the company quickly developed other retail formats such as convenience stores

(Lawson), discount stores (D-Mart), supermarkets (Maruetsu), specialty stores (Robella), and department stores (Printempts). At the same time,

Daiei branched into hotel business, property development, finance business, restaurants, fast food business, travel, baseball, publishing and so on, turning itself into a large retail conglomerate.

To organize effectively for this rapid diversification, Daiei turned its divisions into nine independent companies, transferring most of the headquarters functions to each independent company which could thus be more flexible in satisfying ever-changing customer needs. In

December 1997, Daiei established the first holding company in postwar Japan in order to control its subsidiaries.

In 1998, the company recorded a ¥2,500 billion loss with a ¥260 billion debt. At the beginning of 1999, the company’s chairman Nakauchi appointed Tadasu Toba, the former president of

Ajinomoto and a corporate finance specialist as the company’s president, hoping that Toba could improve the company’s finance. In March 1999,

Nakauchi’s son suddenly resigned from the post of vice president. His unexpected resignation, it was said, has made the future of Daiei uncertain.

102 daihyoken

See also: retail industry

Further reading

Mizoue, U. (1998) Daiei VS Ito-Yokado (Daiei, Inc. and

Ito-Yokado Co., Ltd), Tokyo: Baru Shuppan.



Under the Japanese Commercial Code, at least one director must have the authority to represent the company to third parties and execute resolutions approved at the general shareholders meetings and the board of directors meetings

(torishimariyaku-kaigi). Such directors, called daihyo-

torishimariyaku (literally representative director) are chosen from the members of the board of directors (Commercial Code 261–1). The board of directors or torishimariyakukai can dismiss

daihyo-torishimariyaku anytime. Daihyo-

torishimariyaku hold the right to represent and sign documents for all business activities of the company (Commercial Code 261-III). Thus, even if the board of directors imposes some restriction on this right, for example to restrict the right of

daihyoken to represent only some operations or businesses of the company the company is still liable to any claims made by third parties without such knowledge.

From a legal standpoint, there are only two classes of directors in Japanese firms, daihyo-

torisimariyaku and torishimariyaku. However, most

Japanese companies have their own internal designations for various classes of directors such as

kaicho (chairperson), shacho (president), fuku-

shacho (vice president), senmu (senior managing director), and jyomu (managing director). While these internal designations have no legal foundation and thus need not be officially registered, they are often mistakenly seen as titles to indicate the right to represent the company. In order to protect the public trust in daihyo-

torishimariyaku, the company has an obligation to inform third parties without legal knowledge of

daihyoken when it has business contracts with them (Commercial Code 262).

In most Japanese firms, only higher ranking directors such as the president and a few senior executives hold daihyoken. However, the number of directors with daihyoken varies by industry and size of company. In Japanese firms with both a president and chairperson, the president is usually the highest ranking director with daihyoken.

The chairperson is a semi-retirement position for the previous president, often without daihyoken.

Such chairpersons play the role of elder statesman, attending official functions, particularly those of industry and business associations. However, in some cases, chairpersons retain the right to represent the company and continue to exert strong influence over the management of the company as well as the appointment of the president.

Thus, whether or not the chairperson holds

daihyoken reveals the relationship between the chairperson and the president. The same can be said about who else holds daihyoken and their relationship within the board and other board members.

Further reading

Bird, A. (1988) Nihon kigyo executive no kenkyu (Research on Japanese Executives), Tokyo: Sangyo Noritsu

Daigaku Shuppansha.

Charkham, J. (1994) Keeping Good Companies: A Study of

Corporate Governance in Five Countries, Oxford:

Clarendon Press.


Daiichi Kangyo Bank

Daiichi Kangyo Bank (DKB) was established in

1971 as a result of a merger between Daiichi Bank and Nippon Kangyo Bank. Dai-Ichi Bank, which was established in 1887 as a national bank, was the oldest modern bank in Japan and had contributed to the industrialization of Japan. In 1896 it became a commercial bank. Nippon Kangyo

Bank was established in 1897 as a special bank for promoting agriculture and industry In 1948 it started national lotteries for public agencies. In

1950 it became a commercial bank.

Since the merger, Daiichi Kangyo Bank (DKB) has grown to be a major global bank. During the

1970s DKB began in earnest efforts to become

dango 103 more competitive and efficient, which ultimately led to the internationalization of its business. It was listed on the Amsterdam stock exchange in

1973 and on the London, Paris and Swiss stock exchanges in 1989, well ahead of its rival banks.

During the 1990s DKB actively pursued the development of its information technology infrastructure in addition to investing in building its financial engineering capabilities, thus ensuring rapid internationalization.

In July 1997, DKB’s reputation was dealt a serious blow when it was revealed that it illegally lent billions of yen to a racketeering group or


(corporate extortionists) at about the same time other scandals were being discovered

(for example, Nomura Securities). The former chairman of DKB was arrested for violation of

Japanese Commercial Code and the bank itself was prosecuted. In reaction to this devastating turn of events, the bank began a complete overhaul of its management, replacing all top management and attempting to renew an ethical corporate culture.

Finally in September 2000, Daiichi Kangyo

Bank, Fuji Bank, and the Industrial Bank of Japan began their three way merger process under a new holding company Mizuho Holdings. This new colossal bank boasted some ¥130 trillion in assets, the largest in the world. Mizuho Financial group focuses its investment banking activities on the promotion of corporate mergers and acquisitions.

Further reading

Bremner, B. (1999) “Rebuilding the Banks: Mega-mergers are Just the Beginning; in Tokyo,” Business Week,

September 6:48.

Ishizuka, M. (1997) “Japanese Firms’ Sokaiya Ties Run

Deep,” Asian Business Vol. 33 (8): 18.



Dango, loosely translated as “agreement through consultation,” is the practice of price-fixing or bidrigging. Even though Japanese law forbids such practices, dango arrangements have been uncovered in a range of industries and activities. A popular alias for dango is “shady cartel” (yami

karuteru). In some cases, notably in bidding for public works contracts, dango arrangements take on a highly institutionalized and almost ritualistic form.

Some observers believe that dango is an offspring of the Japanese cultural proclivity for harmony and consensual decision making. While there may be some truth in such cultural explanations, it is well to note the existence of pecuniary incentives and political institutions that facilitate this shadowy behavior. For instance, the existence of well-organized industry associations enables close contact among executives of rival firms, thereby providing opportunities for wouldbe competitors to establish standards of “acceptable” market behavior and price-setting. Of course, this sort of behavior is not unknown in the United States and other countries, but Japan’s industry associations tend to play a more extensive and significant role than do their counterparts in other Western countries. In the case of bidding for public works contracts, the Japanese government’s procurement system facilitates price-fixing. In contrast to an “open bidding” system wherein all qualified firms are permitted to submit bids, the Japanese government employs a “designated bidder” system in awarding contracts for the vast majority of public works projects. Under this system, the contracting agency designates approximately ten “qualified” firms from which to accept bids on a project. The contract is awarded to the firm submitting the lowest “responsible” bid, as judged in accordance with a government-set anticipated ceiling price

(yotei kakaku). In this way the procurement system limits the sphere of competition for public works contracts. Defenders of the system argue that since public works are financed by taxpayers, it is important to ensure that they are carried out efficiently and that the work meets a high standard. In theory only contractors who have a proven track record are designated to submit bids.

Dango is also facilitated by close, mutually beneficial interactions involving industrialists, politicians, and government bureaucrats. Here, too, the case of public works is instructive. In order to ensure that they are designated to bid on a project or to assist in settling disputes concerning which firm will be the “low bidder,” construction contractors often appeal to influential allies

104 dango in the political world. Mayors, prefectural governors, and members of parliament have been known to be the object of these appeals. The use of political influence in this context is known as the “voice of heaven” (ten no koe). Not surprisingly large transfers of cash seem to accompany the invocation of heaven’s will. In fact, it is known that certain politicians demand kickbacks in the form of a prescribed percentage of the total value of the project. Given the pecuniary incentives, it is somewhat surprising that relatively few bureaucrats from the contracting agencies—in particular, officials of the Ministry of Construction—are directly implicated in scandals involving bid-rigging on public works projects. Indirectly however, the cost of bureaucratic involvement takes the form of providing “second careers” for retired officials, a practice known as amakudari

(descent from heaven). Some observers believe that firms employing ex-bureaucrats benefit not only from their technical competence, but also appear to be rewarded with strategic leaks of information concerning the allegedly confidential government-set anticipated ceiling price. Obviously prior knowledge of the ceiling price is a valuable asset when it comes time to rig bids on public works contracts.

Brokers (dangoya) play the part of determining how to apportion the illegal profits gleaned from price-fixing. In the case of public works contracts, brokers determine how much money will be transferred from the designated winner-to-be to the other members of the shadowy cartel. A popular device for accomplishing this aim is the “shady joint venture” (ura jointo). After bids are submitted on a project, the contract is awarded to the low bidder, Firm A. As the prime contractor, it is perfectly legitimate for Firm A to allocate segments of the project to specialized subcontractors. However, in a shady joint venture, the prime contractor transfers the contract to Firm B, which proceeds to pass it along to Firm C.Eventually

Firm D is hired as a specialized subcontractor.

As prime contractor and subcontractor, Firm A and Firm D can lay just claim for services rendered. But, in a shady joint venture, Firms B and

C also receive payment for service charges even though neither do any actual work.

Finally Japan’s weak penalties and lax enforcement of antimonopoly law do little to discourage would-be price-fixers from engaging in anti-competitive behavior. Indeed, until the early 1990s the maximum administrative surcharge imposed in those rare instances when violations of antimonopoly law actually came to light was a mere

0.5–2 percent of ill-gotten gains; and the maximum fine for criminal activity was a paltry 5 million yen. In contrast, those convicted of price-fixing in the United States face treble damages and the very real possibility of incarceration. Under pressure from US trade negotiators, the Japanese government agreed to strengthen anti-monopoly penalties and their enforcement.

The administrative surcharge was raised to 6 percent and the maximum fine was boosted to 100 million yen. These rather modest legal changes certainly give would-be price-fixers a bit more to think about, and they place Japanese penalties more in line with those found in some European countries. But many observers believe that the disincentives to price-fixing are not strong enough, and doubts persist about the ability of the Japan Fair Trade Commission to transform itself into anything more than a nearly toothless watchdog.

In sum, dango is deeply entwined in the mechanisms of political and economic power in Japan.

The system serves the narrow concerns of vested interests while neglecting the general welfare. Industrialists reap ill-gotten gains, retired government bureaucrats secure second careers in the private sector, and politicians rake in political contributions. Of course, the cost of this anti-competitive activity is directly borne by Japanese consumers and taxpayers. Because of its shadowy nature, it is impossible to accurately estimate the cost of this price-fixing in Japan. In the case of spending on public works projects, estimates of the inflated price tag imposed by bid-rigging range from 15 percent to as high as 50 percent or more of the total contracted amount. And Japan’s trade partners point to the dango system as nontariff barrier that unfairly disadvantages foreign firms in their efforts to gain access to Japanese markets.

Further reading

McMillan, J. (1991) “Dango: Japan’s Price-Fixing Conspiracies,” Politics and Economics 3:201–18.

debt/equity ratios 105

Schoppa, L.J. (1997) Bargaining with Japan: What Ameri-

can Pressure Can and Cannot Do, New York: Columbia University Press.

Woodall, B. (1996) Japan Under Construction: Corruption,

Politics, and Public Works, Berkeley CA: University of

California Press.


debt/equity ratios

The debt/equity ratio measures the amount of debt (bonds, bank loans, etc.) relative to equity used to finance a firm and is interpreted as an indicator of financial riskiness. Particularly during the 1970s and early 1980s, debt/equity ratios of many Japanese firms appeared extraordinarily high by US or UK standards. This led to questions regarding why Japanese financial institutions would lend to firms with high debt/equity ratios and how the apparent risks were controlled.

The debt/equity ratio is viewed as measuring financial leverage, with higher ratios indicating greater leverage. The physical analogy is that debt acts like a lever; and the longer the lever (more debt), the more weight (total assets) can be supported by a given amount of equity on the lever’s other end. This suggests an accounting perspective where a firm’s total assets must equal the sum of its liabilities (debt) plus net worth (equity). Hence, more debt allows a firm to have greater total assets for a given amount of equity.

Interest in Japanese debt/equity ratios was fueled by comparisons which suggested startling amounts of leverage for Japanese firms. Frequently these comparisons examined average values for broad groups of firms: for example, all manufacturing corporations. Often the statistic reported was the equity/total assets percentage. This statistic provides equivalent information to the debt/equity ratio when debt is interpreted as total liabilities. To illustrate, one could take the 1980 book value of total liabilities for all Japanese manufacturing corporations (reported by the

Bank of Japan) and divide by their aggregate shareholders equity (net worth) to obtain a ratio of 3.85. Alternatively one could divide net worth by total assets (net worth plus total liabilities) to obtain an equity/total asset percentage of 20.6 percent. In other words, these firms were financing roughly 20 percent of total assets with equity and

80 percent with debt: a debt/equity ratio of roughly 4. For US manufacturing corporations in 1980, the aggregate debt/ equity ratio was 1.02

and the equity/total asset percentage was 49.5

percent. The difference across the two countries is striking. Moreover, these figures represent very broad averages and suggest a major systemic difference in borrowing patterns across the two economies.

An important aspect of leverage, particularly when it reaches high levels, is that it increases the risk of financial distress. The logic is that more leverage implies larger debt payments (interest and principal), which are obligatory The larger these payments, the greater the chance that a downturn in a firm’s revenue will result in not having enough income to make the required payments. The firm may still be able to meet the payments (for eample, using cash reserves); however, if revenues remain low or decline further, the situation may become critical. Even if the firm does not default on its obligatory debt payments, the prospect of financial distress can have very negative consequences. When default risk seems substantial, lenders may decline to renew maturing loans. Similarly suppliers will be reluctant to extend trade credit (accounts payable) and instead demand cash-in-advance. Also, customers may be less willing to purchase products from firms that may not exist when replacement parts or service are needed. In addition, employees may leave for positions at other firms which seem to provide more job security. These are strong reasons to avoid even the appearance of a serious risk of financial distress. From this perspective, the Japanese debt/equity ratios appeared almost unbelievable.

There was considerable debate and analysis, particularly during the 1980s, regarding whether

Japanese firms were really that highly leveraged.

Several authors proposed adjustments for accounting differences across the two countries as well as using market values for the equity calculation. One motivation was that many Japanese firms had hidden assets (such as land and shareholdings) which were much more valuable than reflected in their accounting statements.

Typically such adjustments dramatically reduced

106 Deming, W.Edwards the apparent leverage differences, at least on average. Some analysts concluded that after such adjustments there were no significant remaining differences. Others argued that there were still broad differences in leverage patterns and that some Japanese firms remained very highly leveraged by US standards. This naturally led to questions of why lenders would provide financing to such firms or, alternatively, how financial distress risks were being controlled.

Answers to such questions were typically attributed to the main bank system, where a large

Japanese bank monitored and potentially intervened in the activities of highly-leveraged client firms. Moreover, there was an implicit quasi-guarantee that should a client firm get into financial difficulties, its main bank would organize a rescue. Thus, the main bank system was viewed as providing the mechanism for controlling financial distress risks and allowing firms to operate with high amounts of leverage.

The discussion of high debt/equity ratios for

Japanese firms subsided considerably in the early

1990s. As suggested above, accounting and market value adjustments diminished the apparent book value differences. Also, book value debt/ equity ratios for Japanese firms displayed a substantial decreasing trend starting in the mid-1970s and continuing into the 1990s. When coupled with accounting adjustments, this tended to make aggregate leverage differences between the US and Japan appear fairly minor by the early 1990s.

Subsequently discussion has focused more on the possibility that a high debt/equity ratio with main bank support can be disadvantageous if the main bank gets into financial difficulties. The banking crisis in Japan made this issue quite relevant for some firms (see banking crises).

See also: corporate finance

Further reading

Gibson, M.S. (1995) “Can Bank Health Affect Investment? Evidence From Japan,” Journal of Business 68

(3): 281–308.

Hodder, J.E. (1991) “Is the Cost of Capital Lower in

Japan?” Journal of the Japanese and International Econo-

mies 5:86–100.

Kester, W.C. (1986) “Capital and Ownership Structure: A Comparison of United States and Japanese

Manufacturing Corporations,” Financial Management

15 (1): 5–16.


Deming, W.Edwards

An American, W.Edwards Deming (1900–93) was one of the leading proponents of quality

management in Japan and the west. With his emphasis on viewing organizations as systems and on understanding the implication of variation in processes, he is widely credited with having tremendous influence on the development of

Japanese manufacturing excellence during the second half of the twentieth century. Despite

Deming’s technical background (Ph.D. in mathematical physics), his message was managerial, with simple statistical approaches advocated as useful tools to support business decisions (see


During the 1930s, Deming, an expert in statistical sampling, was exposed to Dr Walter

Shewhart’s work on statistical process control

(SPC). This sparked Deming’s interest in quality management. Shewhart’s focus was on applying SPC to production, to reduce scrap and rework. Deming recognized that the tools were more broadly applicable, to both manufacturing and services.

Immediately after the Second World War,

Deming and others (including Juran) were invited to Japan by the Japanese Union of Scientists and Engineers (JUSE) to lecture on statistical methods. In addition to SPC, Deming covered managerial issues, laying the foundations for modern quality management. His experience in the USA led him to insist that the audience include top managers, in addition to engineers and designers. Deming was convinced that quality began at the highest levels of the organization, because improvement required substantial changes in processes, which only senior management could accomplish. He argued that over 90 percent of the potential improvement fell under the control of management, rather than workers. Thus, exhorting workers to produce better quality without changing the processes and systems in which they operated, was futile.

Deming, W.Edwards 107

Deming’s impact in Japan was far-reaching.

Many credit him with changing the Japanese management approach from top-down to bottom-up

decision making processes. The Deming Prize is Japan’s highest quality award. In 1960, Deming received the Second Order Medal of the Sacred

Treasure from the emperor. Very proud of this honor, he nearly always wore the lapel pin commemorating the award. Despite his stature in Japan, he made few inroads into Western management until the early 1980s, when Ford

Motor Company and then General Motors engaged him to assist with large-scale corporate turnarounds. Ironically US interest in Deming was driven by competition from Japanese firms that had adopted his suggestions in the 1950s.

Deming advocated a complete transformation of the traditional top-down approach to management. The transformation was to be based on considering the organization as a system and managing its interrelationships, understanding statistical variation to permit data-based decisions, focusing on internal and external customers, and creating “win-win” situations in place of debilitating competition. His book Out of the Crisis (1982) described fourteen points which should serve as the basis for the transformation. Deming then worked to develop a more theoretical approach, which resulted in his “system of profound knowledge,” as described in The New Economics for Indus-

try, Government, Education (1993). He asserted that the fourteen points would follow naturally in an organization whose management was guided by the four interrelated parts of profound knowledge: appreciation for a system, knowledge about variation, theory of knowledge, and psychology.

Deming emphasized that an organization is a network of interrelated components (e.g. departments) with a single aim of gain for everyone: stockholders, employees, suppliers, customers, community and environment. Managing the interdependencies among the components is crucial, and necessary for optimization of the entire system. Independent optimization of individual components will result in suboptimization of the system. Success requires cooperation, rather than competition, among the components. Top management must guide the optimization of the system, with a focus on delighting customers, both internal and external to the organization.

Knowledge about variation

Two types of variation characterize all processes.

Common cause (system) variation is that inherent in the process. Special cause variation is due to specific, generally identifiable, events. Special causes are often resolvable by workers close to the problem. Common cause variation is generally related to process design or the consistency of incoming material. Management must resolve these issues, as front-line workers have neither the authority nor the fiscal responsibility. Common and special cause variation demand different actions. Treating common cause variation as special leads to over-adjustment of processes, which increases the system variation. Treating special cause variation as common prevents the search for a resolvable problem. SPC is based on reducing the economic loss from these two errors.

A process with only common cause variation is statistically stable; only stable processes can be used for prediction. However, stable processes are not necessarily capable of meeting specifications. To achieve process capability specifications should be established only after the process variation is understood. Taguchi loss functions can be used in place of specifications.

Theory of knowledge

Deming maintained that all management is based on prediction, and that prediction requires theory.

Knowledge is then developed through systematic revision and extension of theory, based on comparing predictions with observations. Theory which may be revised, is necessary for using information and creating knowledge. This relationship is demonstrated in Deming’s Plan-

Do-Study-Act cycle (which he called the

“Shewhart cycle”), a systematic approach to problem solving.

Ultimately organizations consist of people, and

Deming emphasized the need to understand what motivates individuals. He stressed that managers must be aware of the different factors that motivate individual people, and understand that intrinsic (internal, individual) motivation is more important than extrinsic (external) motivation.

108 Dentsu

According to Deming, the reward systems used in most organizations allow extrinsic motivation to smother intrinsic motivation, replacing simple recognition with money and removing joy from work.

Further reading

Deming, W.E. (1982) Out of the Crisis, Cambridge, MA:


—– (1993) The New Economics for Industry, Government, Edu-

cation, Cambridge, MA: CAES.

Latzko, W.J. and Saunders, D.M. (1995) Four Days with

Dr. Deming: A Strategy for Modern Methods of Manage-

ment, Reading, MA: Addison-Wesley.

Scherkenbach, W.W. (1986) The Deming Route to Qual-

ity and Productivity: Road Maps and Road Blocks, Washington, DC: CEE Press Books.



Dentsu is Japan’s largest advertising agency with almost double the billings of its number two competitor, Hakuhodo. Dentsu has dominated

Japanese advertising for a long time, and it has consistently accounted for one-quarter of

Japan’s total advertising billings. In the area of network television, Dentsu dominates to an even greater degree by buying half of the national prime time airtime. Dentsu is also ranked as one of the largest advertising agencies in the world.

Originally established in 1901 as a news telegraphic service, the name Dentsu literally means

“telegraphic communications.” Today Dentsu is a full-service mass media advertising agency that also handles below-the-line services such as events, sales promotions, transit advertising, internet advertising, direct mail, and outdoor billboards, to name a few. These activities are in keeping with Dentsu’s publicized strategy of providing “total communications services.”

The majority of Dentsu’s nearly 6,000 employees are based in Japan, where the agency has thirty-one offices nationwide. The slightly over

4,000 employees presently based in Dentsu’s headquarters in Tokyo occupy ten buildings.

These employees will be housed in Dentsu’s new headquarters in the Shiodome ward of Tokyo, which is scheduled for completion in 2002. The remainder of Dentsu’s employees in Japan are located in its five regional subsidiaries, and its affiliate and associate companies, which total 400 in number.

Dentsu also has many subsidiaries including film and video production companies, theme park and resort companies, real estate services, property management and insurance companies. Together with Young & Rubicam of the

USA, Dentsu also has a joint venture ad agency named Dentsu Young & Rubicam that is focused exclusively on the Asia/Pacific region. In addition, Dentsu maintains six fully owned overseas offices, and has subsidiaries and affiliates in forty-seven cities in thirty-four countries worldwide.

Dentsu is privately held. The two largest shareholders are two of Japan’s major news services,

Kyodo News and Jiji Press. Dentsu has announced plans for a listing on the Tokyo stock exchange in 2002.

In Japan, Dentsu’s several thousand clients include both Toyota and Honda, as well as all of

Japan’s major brewers. This is possibly due to the sheer size of Dentsu, particularly its number of employees, allowing the agency to physically separate the sections handling competing clients.

A major reason clients go to Dentsu is due to its clout with the media. The root of Dentsu’s strength with the media lies in the fact that

Dentsu has a history of assisting the various media during their launches. Dentsu helped establish the Tokyo Broadcasting System (Channel 6), and remains the network’s largest non-financial shareholder. In addition, Dentsu holds minority interests in other television stations and owns a large percentage of Video Research, Japan’s television rating service. Dentsu also conducts business with an unrivaled number of Japanese publishers. Besides creating and placing advertisements in the publishers’ magazines, Dentsu’s support extends to such activities as publicizing books and magazines and helping new publications secure a position in the media community.


department stores 109

department stores

Japanese department stores have a long history.

The earliest stores began as kimono shops, eventually growing into other product categories.

Matsuzakaya (founded 1611) originated as a

Nagoya kimono shop. Shirakiya, which is now

Tokyu Department Store began in Tokyo in 1662.

Mitsukoshi (Echigoya) began in 1673. Daimaru

(1717) Sogo (1830) and Takashimaya (1831) are some of the other early retailers. Six of the ten largest department stores in Japan originated before 1850. A second group of department stores originated as providers of daily necessities and operated in or near the railroad terminal. Their names, such as Seibu, are shared by railroad lines.

Originally the terminal department stores were considered much lower status than the kimono shop stores, but gradually the newer terminal stores gained respect as full-line department stores.

Department stores represent tradition in Japan. They offer cradle-to-grave services for their customers. About one-third of a department store’s total sales will occur during two Japanese seasonal gift-giving periods. Department stores provide gift-giving consultation, gift wrapping and home delivery Selecting gifts from a prestigious department store provides assurance that the gift is appropriate.

Since the economic bubble burst in 1990, department store sales have declined dramatically.

The top department stores in Japan in order of rank are Takashimaya, Marui, Seibu, Mitsukoshi and Isetan. The ranking of these top department stores changed little from 1990 to 2000.

Several characteristics of Japanese department stores set them apart from department stores in other parts of the world. First, Japanese department stores can be considered manufacturers’ showrooms. Only about 10 percent of the merchandise in a Japanese department store is direct purchase; the other 90 percent is return-based purchases with no inventory responsibility (shoka

shire) and consignment sales (itaku shiire). Second, sales employees are sent from the manufacturer and are compensated by the manufacturer rather than the retailer. These sales employees interact with consumers gathering market intelligence for the manufacturer. Major manufacturers sell their products in all the top ten department stores, so there is little to differentiate one department store from another. Third, department stores follow the manufacturer’s suggested retail price. Little department store merchandise is direct purchase, so manufacturers maintain the right to set and maintain price throughout the season. Seasonal sales will be determined by the manufacturer, if they are held at all.

Japanese department stores expanded to Hong

Kong, Singapore, Thailand, Taiwan, Indonesia,

Vietnam and China. By 1989, the fourteen Japanese department stores in Hong Kong held 30 percent of the department store market. Ten years later, however, most of the Japanese department stores had left Hong Kong. Some stores such as

Tokyu and Matsuzakaya simply withdrew and went home. Others such as Isetan used Hong

Kong as a departure point for operations in


There are three environmental factors that make international markets attractive: (1) domestic competition from mass merchandisers; (2) government restrictions on expansion of large department stores; and (3) the high cost of labor and land in Japan. Japanese mass merchandisers, also called supermarkets, carry clothing, appliances, and often food. Although they carry the same merchandise mix as department stores, they are not brand name discounters. They carry merchandise with brand names different from those of the traditional department stores. Often the same manufacturer will produce brand-name merchandise for department stores and brandname merchandise for supermarkets, but consumers do not associate the two brand names with each other. The difference between the positioning of the two store formats is that department stores carry a luxury image while mass merchandisers provide goods for everyday needs.

The relaxation in the large-scale retail law has made the opening of these stores easier, and in addition the recession in Japan has made customers very price-conscious. Mass merchandisers such as Ito Yokado and Mycal have been trading up, reducing the distinction between mass merchandisers and department stores.

The domestic growth of department stores was limited by the Large-Scale Retail Store Law. This law required lengthy evaluation and approval of

110 depressed industries any new large store development, severely restricting the number of new department stores, but also reducing competition for the department stores that are already present in the market. The

Large-Scale Retail Store Law motivated several

Japanese department stores to use international expansion as a growth mechanism.

Land prices and construction costs in Japan are the highest in the world. There is no early return on investment in a new building project.

It takes ten to twelve years for a new department store to become profitable in Japan, and fifteen to twenty years before it breaks even on investment costs. In places like Hong Kong, Singapore,

Taipei and Bangkok, retail footage is expensive, but it is available.

Japanese department stores also have small branch outlets around the world to provide Japanese travelers the guarantee of nearly 300 years of tradition and service.

See also: discounters; distribution system; Ito-

Yokado; Japanese business in China; Large Retail Store Law

depressed industries

In the course of a nation’s industrial development, it is inevitable that some manufacturing industries will lose their competitiveness and enter into long-term periods of economic distress and decline. Industrial decline can stem from various causes, including rising costs of production, notably those of labor and other resource inputs such as raw materials and energy; outmoded and inefficient plant technology especially relative to foreign rivals; or a shift in demand to other substitutes. Depressed industries generally lose competitiveness relative to foreign producers, and so are challenged by high levels of imports. Depressed industries are characterized by excess production capacity relative to existing demand, leading to great pressures for firms to exit the market, as well as high levels of unemployment.

Industrial decline can be divided into two stages: industrial distress, in which firms struggle to remain solvent in the face of underutilized capacity and depressed prices and profits; and true decline, in which the industry’s problems are so overwhelming that exit of large numbers of firms is the only option. Thus far, most of Japan’s declining industries have not yet entered this second phase.

Further reading

Sternquist, B. (1998) International Retailing, New York:

Fairchild Press.

——(2000) “Internationalization of Japanese Department and GMS Stores: Are There Characteristics of Profile Success?” in M. Czinkota and M.Kotabe (eds),

Japanese Retail Strategy., London: International

Thomson Business Press, 242–249.

Sternquist, B., Chung, J.E. and Ogawa, T. (2000) “Japanese Department Stores: Does Size Matter in Buyer-

Supplier Relationship?” in M.Czinkota and

M.Kotabe (eds), Japanese Retail Strategy, London:

International Thomson Business Press, 64–80.


Depressed industries in postwar Japan

Although more attention has been paid to Japan’s growth industries in the postwar period, depressed industries have also been common. In the 1950s, for instance, industries such as coal mining and various parts of the textile industry

(yarn and cloth production, weaving, etc.) had clearly lost their competitiveness, and were faced with excess capacity bankruptcy and high levels of unemployment. Others, such as silk reeling and rayon production, found demand for their products superseded by other substitute goods.

(Another entire sector of the economy agriculture, has been inefficient for most of the postwar period. Similarly a number of service sectors, including the construction industry and many industries involved in the distribution system have 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 energy-intensive materials industries, including aluminum, petrochemicals and chemical fertilizers, synthetic fibers, and minimill steel. Others, such as the shipbuilding industry suffered from the worldwide decline in demand for new ships.

Still others, such as paper and paper pulp, cement, and plywood also faced deep industrial

depressed industries 111 distress as the result of declining demand at home and abroad.

In the 1990s, former growth industries such as the integrated steel industry and the automo-

tive industry have approached industrial maturity and have experienced periods of economic distress. These problems were exacerbated by the long recession of the 1990s. The economy’s weak condition and rising levels of unemployment made more difficult the adjustment process for these new depressed industries.

Adjusting to decline: market-oriented and political solutions through the 1980s

All depressed industries in Japan have attempted to deal with their problems through market mechanisms, for instance by cutting the costs of production or by developing new sources of demand. Firms have also attempted to diversify into higher value-added production by shifting to more specialized, processed products, or into other, non-related businesses. Others have attempted to relocate production facilities abroad, either to tap into less expensive inputs (labor and raw materials) or to be closer to final demand.

Successful market-oriented adjustment to industrial decline, however, has been limited to the relatively large, capital and technology-intensive firms. Smaller firms, which have often had less access to capital and technology have been much less successful in following these economic adjustment strategies. In addition, all industries have had a hard time in drastically reducing their labor forces. Most Japanese firms—including small ones—have made an implicit guarantee to their workers not to fire them at the first sign of industrial distress. Rather, firms have resorted to such measures as cutting working hours, retraining redundant workers, and transferring excess labor to other, related firms. Again, larger firms, especially those with keiretsu ties, have been better able to pursue these options; still, all firms in Japan have tried to shield their workers to bear the full brunt of adjustment.

In the past, depressed industries in Japan have also tried to deal with their problems through political, or collective, means. Rather than letting market forces weed out the less efficient firms, which would entail long periods of depressed prices and profits for all, industries have organized to try to stabilize their industry’s conditions.

In general, these efforts have taken the form of trying to control or manage “excessive competition.” In the short term, industries have attempted to form quasi-cartels, in which all firms in the industry consent to reduce their output levels by an agreed upon amount. These efforts at bringing production in line with demand have been aimed at stabilizing prices, and therefore profits.

Above all, industries have sought to avoid cutthroat competition that would damage all firms.

In the longer term, industries have also tried to reduce overall capacity using similar, collective means. Rather than relying on the market to force out the least competitive, industries have negotiated collective agreements in which all firms are expected to reduce a negotiated percentage of their capacity.

These collective efforts have usually been negotiated on a private basis, usually within each industry’s political organization, the industry and

trade associations, or gyokai. Within these associations, firms have been able to communicate, negotiate industry-wide agreements, and to some extent enforce their collective action. In periods of acute economic distress, however, industries have often found these private enforcement mechanisms to be insufficient to curb the problem of free riding common to any cartel. Rather, industries found external enforcement mechanisms to be necessary and have often turned to the Ministry of International Trade and Indus-

try (MITI) for help, either to discipline so-called industry “outsiders” (relatively competitive firms that refuse to cooperate with industry agreements), to regulate new entry into the industry or, in some cases, to impede rising levels of imports.

The Japanese government responded with a variety of measures, especially for those industries with political clout, as well as those that are deemed to be strategically important. MITI helped industries to coordinate production and capacity cuts, often through the formation of formal “recession cartels.” In 1978 the government passed the Depressed Industries Law, which supported the capacity reduction efforts of designated industries, raised barriers to entry into the industry and made further cartelization possible.

112 Depressed Industries Law (1978)

The law also included specific provisions designed to prevent “outsider” firms from violating the industry’s capacity reduction plans. The Japanese government has also supported efforts by industries to slow down the growth of foreign imports, which would undermine domestic attempts to stabilize prices and profits. In the textile industry as one example, MITI used its powers of administrative guidance to importers and trading companies to avoid flooding the domestic market.

While Japan has avoided overt protection of its domestic market, the Japanese government has also helped to negotiate informal agreements with competing textile industries in other countries, including China, Korea, and Pakistan, to maintain an “orderly market” in Japan, akin to the

“voluntary” export restraints that the United

States has negotiated with Japan. The government has also passed measures to cushion the costs of adjustment, for instance by encouraging labor retraining and relocation, and providing inducements for diversification.

result have often been slow to adjust to changing market conditions. In the late 1990s, however, many firms, including some of Japan’s largest firms, saw no alternative but to lay off significant numbers of their core workers.

The rising level of foreign investment in Japan in the late 1990s has been a new and significant catalyst for adjustment. In the automotive industry for example, foreign participation has led to a significant restructuring of the industry.

See also: bankruptcies; cartels; industrial policy; industrial regions

Further reading

Dore, R. (1986) Flexible Rigidities: Industrial Policy and

Structural Adjustment in the Japanese Economy, 1970–

1980, Stanford, CA: Stanford University Press.

Katz, R. (1998) Japan: The System That Soured, Armonk,

NY: M.E.Sharpe.

Noble, G. (1998) Collective Action in East Asia: How Rul-

ing Parties Shape Industrial Policy, Ithaca, NY: Cornell

University Press.

Tilton, M. (1996) Restrained Trade: Cartels in Japan’s Basic

Materials Industries, Ithaca, NY: Cornell University


Uriu, R. (1996) Troubled Industries: Confronting Economic

Change in Japan, Ithaca, NY: Cornell University



Depressed industries in the 1990s

In large part because of foreign pressures, the

Japanese government in the 1990s was less able to support industry efforts to deal with distress through collective or political means, especially when such actions served to impede imports.

Japan’s ability to impede imports through informal means has also come under heavier scrutiny.

Recession and other types of government-approved cartels are less common today. Legislation specifically designed to help industries cooperate to reduce production or capacity levels have been made more generic over time. Still,

Japan’s depressed industries benefit from the many existing regulations that help them continue to stabilize their economic environment. Depressed industries have been powerful and vocal opponents of efforts to deregulate the domestic economy.

Depressed industries in the 1990s have thus had to rely more on market-oriented adjustment mechanisms. Some large firms have had success in diversifying at home or relocating production overseas. But all firms continued to struggle with the problem of shedding excess labor, and as a

Depressed Industries Law (1978)

In response to demands from a number of de-

pressed industries, the Japanese government in

May of 1978 passed this legislation, designed to help designated industries to cooperatively reduce their excess productive capacity. The Japanese economy in the late 1970s was still feeling the effects of the first oil shock, which forced many energy-intensive industries, such as aluminum smelting, synthetic fibers, and petrochemicals, to face rising production costs and the loss of competitiveness relative to foreign producers. Other industries, such as the shipbuilding industry faced a drastic drop in foreign demand. All industries in Japan were also hurt by the 40 percent appreciation of the yen between 1977 and 1978, which

deregulation 113 further undermined their export competitiveness

(see appreciating yen).

Under the provisions of the 1978 law (Tokutei

Sangyo Antei Rinji Sochiho, or Tokuanho), two-thirds of an industry’s firms had to agree to apply to the government in order to be designated as depressed. Designated industries were exempted from anti-trust laws, allowing the industry to formulate a “stabilization plan” specifying capacity reduction targets and methods. These plans were then approved by the Ministry of International

Trade and Industry, but capacity cuts remained voluntary Industries that could not scrap sufficient capacity could form an indicative cartel for the purpose of capacity reductions. The law also created a special trust fund that provided lowinterest loans to the designated industries to finance capacity reductions. In addition, the government also passed separate legislation dealing with unemployed workers in depressed industries, and for designated depressed regions.

There was a strong consensus among industry leaders, politicians, and bureaucrats in favor of the Tokuanho. Depressed industries in Japan had been struggling with excess capacity for some years prior to the legislation. Rather than allowing the market to weed out the weakest firms, which would have led to periods of depressed prices and profits for all, industries had been trying to reduce capacity through cooperative industry agreements. Industries were finding, however, that these efforts were undermined by the problem of free riding: each firm hoped that it would be someone else who cut capacity or exited the market. The Tokuanho allowed industries to develop a more formal mechanism to reduce capacity across the board, and offered financial inducements for the disposal of capacity Many of the depressed industries themselves were vocal advocates of the law, and in fact lobbied for provisions that would have given the government even greater powers to enforce their collective capacity-cutting efforts.

Japanese politicians, faced with growing criticisms for failing to act to deal with the economic crisis of the 1970s, were also in favor of the law.

The new legislation promised to help some key industrial supporters deal with their problems.

Bureaucrats from the Ministry of International

Trade and Industry also saw the Tokuanho as a way to deal with the problems of industries under its jurisdiction. MITI was especially concerned with avoiding socially disruptive bankruptcies and rising unemployment, as this would have increased the politicization of its in-

dustrial policy. Some MITI officials were also concerned with a handful of industries deemed to be strategically important.

The legislation proved effective in helping some designated industries shed their excess capacity. In most cases firms had planned to scrap these facilities even before the law was passed, but the effect of the law was to ensure that scrapping occurred. The second oil shock hit Japan soon after the legislation went into effect, making recovery of the designated industries more difficult. In addition, a number of other industries became depressed in this period. The

Tokuanho expired in June 1983, and was superseded by a similar piece of legislation, the Structural Improvement Law (Tokutei Sangyo Kozo Kaizen

Rinji Sochiho).

See also: cartels; industrial regions

Further reading

Dore, R. (1986) Flexible Rigidities: Industrial Policy and

Structural Adjustment in the Japanese Economy, 1970–

1980, Stanford, CA: Stanford University Press.

Noble, G. (1998) Collective Action in East Asia: How Rul-

ing Parties Shape Industrial Policy, Ithaca, NY: Cornell

University Press.

Tilton, M. (1996) Restrained Trade: Cartels in Japan’s Basic

Materials Industries, Ithaca, NY: Cornell University


Uriu, R. (1996) Troubled Industries: Confronting Economic

Change in Japan, Ithaca, NY: Cornell University




Deregulation refers to the reduction or elimination of government regulations over industry It is most often used to refer to the reduction of economic regulations, such as price and entry restrictions, but may also be used to refer to the reduction of social regulations, such as health and safety codes. Most advanced industrial countries

114 deregulation have experienced a broad deregulation movement since the 1980s that has redefined governmentindustry relations. The Japanese government’s approach to deregulation diverged sharply from that of the United States or Britain in that it was much more cautious in promoting competition and reducing or devolving regulatory authority

(Vogel 1996).

Popular commentators tend to use the term “deregulation” to refer to both the reduction of regulation and the promotion of competition, as if the two were necessarily associated. That is, they assume that less regulation necessarily means more competition. In the case of US airline deregulation, this is precisely what happened: the government reduced regulation and eliminated a major regulatory agency and by doing so stimulated greater competition. But in many other cases, governments have actually strengthened regulation in order to promote competition. In telecommunications, for example, most governments have increased regulation in order to foster competition with the former monopoly service providers. Thus deregulation is often a misnomer for regulatory reforms which combine market liberalization with

“reregulation,” meaning the reformulation of existing regulations or the creation of new ones.

In Japan, the deregulation movement began with the Second Provisional Commission on Administrative Reform (known as the Rincho), which presented a report in 1982 recommending sweeping bureaucratic restructuring and deregulation.

In practice, however, the Rincho and related reform commissions were more successful with privatization than with deregulation. In telecommunications, the government privatized

Nippon Telegraph and Telephone NTT and opened the telephone market to competition in

1985. In transport, the government introduced second and sometimes third carriers on select routes through a meticulously planned series of barters in which Japan Airlines (JAL), for example, would open a new route on a specific All

Nippon Airways (ANA) line, and ANA would open a new route on a JAL line in exchange. In finance, it gradually liberalized deposit interest rates from 1985 through 1994, and began the process of lowering regulatory barriers between different segments of the financial industry (such as banking, brokerage, and insurance) in 1992.

In all of these sectors, the regulatory authorities continued to manage competition after “deregulation,” controlling new entry and minimizing exit from the market. They retained a discretionary regulatory style, and resisted the devolution of regulatory responsibilities to independent agencies outside the central government ministries.

Some have argued that the failure to deregulate more thoroughly contributed to the Japanese economy’s weakness in the 1990s.

The Japanese government accelerated its deregulation program in the 1990s in the face of a severe recession combined with a full-fledged financial crisis. Manufacturers began to press for deregulation in the utility and service sectors to lower their costs, and economists and journalists advocated deregulation to address structural inefficiencies in the economy The government set up a new deregulation headquarters in the Cabinet Office in 1994, and developed a long-term plan for deregulation subject to annual progress reviews.

In the financial sector, Prime Minister

Hashimoto announced the “Big Bang” reform package in December 1996, and the government began implementation in April 1998. The package includes the deregulation of brokerage commissions, the elimination of controls on many foreign exchange transactions, and the liberalization of the asset management market. It also allows banks, securities houses, and insurance companies to cross into each others’ lines of business through holding companies.

In telecommunications, the Ministry of Posts and Telecommunications overhauled price regulation in 1994, creating new larger local dialing areas with higher initial call rates. The government then broke up NTT into one long-distance carrier and two regional carriers, although the three units remain joined within a single holding company structure. In 1998, it announced further deregulation, including the elimination of some price regulations and the reduction of interconnection charges (charges levied by NTT for other providers using its network).

In retail, the authorities phased in reforms gradually from 1990 through 1994, streamlining the approval process for large stores but still allowing the small merchants themselves to exercise considerable control. Then in 1998 the

discounters 115 government replaced the Large Retail Store Law with a new regulatory regime (effective in 2000) that devolves authority to local governments. The new system is designed to promote competition while still allowing local authorities to promote social values such as preserving the environment.

Critics argue, however, that it leaves considerable discretion in the hands of both the Ministry

of International Trade and Industry (MITI) and the local governments, and that in practice it may actually constrain competition and increase regulation.

The Japanese government has sustained a commitment to deregulation from 1980 through to the present, yet progress has come slowly due to substantial political resistance from bureaucrats, regulated industries, trade unions and consumers.

See also: airline industry; competition; consumer movement; liberalization of financial markets;

Ministry of Finance; retail industry

Further reading

Carlile, L. and Tilton, M. (eds) (1998) Is Japan Really

Changing Its Ways? Regulatory Reform and the Japanese

Economy, Washington, DC: Brookings Institution.

Management and Coordination Agency (various) Kisei

kanwa hakusho (Deregulation White Paper), Tokyo:

Okurasho Insatsukyoku.

Vogel, S. (1996) Freer Markets, More Rules: Regulatory Re-

form in the Advanced Industrial Countries, Ithaca, NY:

Cornell University Press.

——(1999) “Can Japan Disengage? Winners and Losers in Japan’s Political Economy and the Ties that

Bind Them,” Social Science Japan Journal 2: 3–21.



see Japan Development Bank


The term discounters relates to retailers who, by developing innovative distribution channels, sell commodities at a considerably lower price than the standard market price. In Japan, there have been several types of novel retailers that were designated as discounters, one after another.

The first renowned discounter in the post-Second World War period is Daiei, which opened its first store in 1957. Its founder, Isao Nakauchi, was firmly opposed to the then prevailing price maintenance practices that the leading producers administered. He deployed a large number of chain stores that provided strong buying power in regard to the existing wholesalers, and employed such innovative methods as bulk purchase by cash and direct purchase on site of production, in order to bypass the traditional distribu-

tion system and offer lower prices to customers.

As consumer needs increased rapidly throughout the postwar period of economic growth, a number of new entrepreneurs followed Nakauchi with the chain store strategy consisting of deployment of standardized stores, self-selection of merchandise in contrast to the traditional sales by clerks, and lower prices. They were generally called “super” or “supermarket” despite the fact that the Japanese outlets were much smaller than the US supermarkets and located, at this initial stage, in commercial districts rather than in suburban areas, and should fall into the category of


After the 1970s, a distinction began to be made between general merchandizing stores (GMS) and supermarkets (SM). GMS pursued a strategy of establishing branch stores nationwide, while SM, essentially focusing on fresh products

(fish, meat, and vegetables), tended to focus on regional expansion. By the late 1980s, GMS and

SM chains had become the dominant forms within the retail industry. At this time, however, a new type of discounter began to challenge GMS and SM, especially in the field of liquor retailing.

The liquor tax law in Japan stipulates a number of restrictions in regard to the distribution of alcoholic beverages. These restrictions functioned to sustain a complex and lengthy channel composed of the producers, tonya, and retailers. The new discounters developed various methods to skip intermediary stages that allowed them to lower their prices.

In the 1990s, as a result of the US-Japan Structural Talks that opened the Japanese retail industry to foreign operators, some American and

European leading retailers began to enter the

116 distribution system country. Among them, Toys R Us, which opened its first store in Japan in 1991, is known to be the first example of a “category killer.” Category killers are retailers with a chain network specializing in a specific type of commodity at discount prices.

The term refers to the fact that this type of retailer aims to capture a large share of a particular category of commodities from traditional depart-

ment stores and GMS. The term was then applied, in parallel with the term “discounters,” to the roadside low-price chain stores specializing in such fields as home electronic appliances, men’s clothing, shoes, and optical wares, and also to camera discounters located in high-traffic areas close to large railroad terminals.

Throughout the 1990s, this new type of discounter spread to other genres of commodities.

Several power centers, composed of a handful of category killer stores along with a GSM or SM, were developed following the US model of Kmart and Wal-Mart. Toward the end of the decade, however, this second generation of discounters gradually lost novelty.

Since the turn of the century a new form of discounter has emerged, under the designation of the SPA (Specialty store retailer of Private Label Apparel) or SPA type retailer. UNIQLO, the brand and store name of First Retailing Company is generally regarded as a pioneer of this type of discounting. The company designs all the clothes and related products in-house, orders production from overseas factories (especially China), and sells them exclusively in its own stores. The term SPA is also used to designate other commodity retailers that provide original products at low price, relying on overseas production in

Southeast Asia and China. An example is Daiso, a retailer that sells a variety of commodities at a uniform price of ¥100.

See also: foreign companies in Japan; Large Retail Store Law; trade negotiations

SHINTARO MOGI product or segment channels characterize the system. Compared with distribution systems in

Europe or North America, it is often considered highly inefficient. However several unique geographic, physical and social aspects of the Japanese market help to explain how the system developed and why it is so complex. In the latter half of the twentieth century and with increasing acceleration, significant changes have been taking place within the system. The most noteworthy of these are the appearance of discount retail outlets that have effectively bypassed several layers of the distribution system and the growing presence of foreign firms, a number of which have introduced innovative or more sophisticated approaches to distribution management.

With a population of over 125 million people living in an area slightly smaller than Sweden, the Japanese market is a large, but relatively compact one. Population density in the major urban areas of Kanto and Kansai ranks among the highest in the world. When combined with the historical development of the Japanese economy the result is a complex distribution system. Most of the roughly 6 million business enterprises in Japan are small. This is particularly the case in the retail sector, where over 90 percent of retail outlets employ 10 persons or less, yet account for nearly 80 percent of all retail sales. These small retail outlets fall into one of four categories: (1) specialty shops or boutiques marketing niche products to a narrow market segment; (2) single brand stores or franchises with a very close relationship to a single manufacturer; (3) convenience stores, such as 7–11, Circle K or Family Mart; and (4) traditional “mom and pop” stores serving established neighborhoods. Many outlets are located away from major thoroughfares and lack the capacity to carry inventory North Americanstyle shopping centers or European-style hypermarkets are becoming somewhat more common.

The density of the population and the high cost of land, however, have limited their growth.

distribution system

Compared to its counterparts in the West, Japan’s distribution system is complicated and difficult to navigate. Multiple vertical layers and multiple

Historical development

Several historical developments have influenced the structure of the distribution system. In the

Tokugawa period (1603–1854), during which

distribution system 117 much of the commercial infrastructure developed, wholesalers and merchants established a craft-like orientation toward their distribution activities.

Wholesalers would carry a specific product and service a defined geographical area. For example, a pickle wholesaler in the Asakusa area of Tokyo would handle only pickled or cured products and deliver them only to shops in the several kilometer area surrounding Asakusa Shrine. Similarly a

wagashi—tea cakes and candies—wholesaler would distribute only these goods, but within the same geographic region. Over time, wholesalers developed close relationships with each shop owner, leading to the establishment of highly individualized arrangements with regard to matters such as product returns and sales financing.

In the immediate post-Second World War era the emergence of large comprehensive consumer electronics and household appliance companies led to the establishment of brand or company stores. Companies such as Hitachi, Toshiba and

Matsushita signed exclusive dealership contracts with pre-existing shops as well as helped finance the opening of new ones. In exchange for carrying only the products of a single company these stores were allowed to sell the full range of products manufactured by that company. For example, a National (the domestic name for Matsushita products) dealer would sell everything from washing machines, refrigerators and air conditioners to home stereo systems, clock radios, televisions and VCRs to electric shavers, lamps, light bulbs and batteries. The manufacturers benefited from this relationship because it allowed them to create closed distribution channels, thereby enabling the removal of layers and associated margin costs.

Closed channels also made it possible for large firms to maintain price controls on products, and to carefully monitor competition among brand retailers.

In the 1980s, with the advent of a maturing market, discount houses began to surface in major metropolitan areas. Although major manufacturers tried to prevent discounters from gaining access to their products, as consumer awareness grew this became increasingly difficult. In the early 1990s the US-based Toys R Us entered the

Japanese market, further solidifying the position of discounters.

At this same time changes in consumer purchasing habits and tastes, combined with heightened competition, led to economic distress among many wholesalers in traditional product and market channels. Not surprisingly many struggling wholesalers attempted to forestall bankruptcy by expanding into new geographic areas or by trying to take on new products.

The early 1980s also saw the emergence of television shopping and catalog sales, which further eroded the margins of struggling distributors, as growth in consumer purchases from retail outlets flattened. This was followed in the 1990s by the growth of the Internet and the emergence of e-commerce websites.

System structure

The postwar Japanese distribution system evolved into a multi-layer, multi-channel system.

In the mid-1980s the average distribution channel had four layers. A manufacturer would hand off product to a primary wholesaler capable of distributing it nationwide or, at a minimum, to several major regions within Japan. The primary wholesaler would then transfer the product to a secondary wholesaler, who would cover a region of smaller geographic area. The secondary wholesaler would deliver the product to a tertiary wholesaler—often called a tonya—who would then deliver the product to a retail outlet. In short, the average product was handled four times, entailing four margins or commissions. By contrast, the average length of distribution channel in the

USA was 1.5 layers and in France it was 1.25

layers. Each additional layer incurs an added cost, thereby making the distribution of product in Japan significantly more expensive for both domestic and foreign firms.

The Japanese system is also multi-channel.

There are separate channels for separate products. Pet food is delivered through one channel, dry goods through another, soft drinks through a third and so forth. An average 2,000 meter2 supermarket in Japan may be serviced by more than thirty different wholesalers. Interestingly a single channel wholesaler would not be limited to a particular brand of product. So, for example, a personal hygiene products wholesaler would deliver to the same store competing brands of toothpaste, soap, shampoo and deodorant.

118 distribution system

To some extent, the multiple layers and channels represent a historical artifact. However, ge-

ography also plays a role. Because most retail outlets are small, the tertiary wholesaler, or tonya, often acts as a warehouse for the retailer, holding inventory and delivering it to the store on an “as needed” basis. Additionally the tonya often provides a financial service. Rather than the customary “thirty day due” payment arrangements common in North America and Europe, tonya use

promissory notes to extend credit on deliveries up to 120 days. Payment arrangements are often individualized, such that a tonya may have a different billing scheme for each retail outlet to which he delivers. Additionally return of unsold goods is an established practice, requiring the tonya, as well as secondary and primary wholesalers to move goods backwards through the channel.

Not surprisingly the distribution system has often been targeted by foreign firms as a nontariff barrier to their doing business in Japan. With established, long-term relationships to both retail outlets and manufacturers, wholesalers were historically reluctant to take on the products of foreign manufacturers. To handle foreign products was to run the risk of angering domestic manufacturers, who might in turn refuse the distribution of their products. Nor were many foreign firms adept at working with wholesalers in terms of financing arrangements or liberal returns.

The influence of foreign firms

Many significant changes in the distribution system have been brought about, either directly or indirectly by foreign firms seeking to enter the

Japanese market. There are several notable examples. When Coca-Cola entered the Japanese market in 1960, it sought to control its marketing channels, but required retailers to pay on the standard “thirty day due” terms it was accustomed to in the USA. Initial resistance was replaced by acceptance, as word of product sales spread among cooperating retailers. Although not widespread, this payment practice has continued to spread among other manufacturers and into other channels.

In a similar vein, L’Oreal and Wella introduced innovations into the beauty parlor and barbershop distribution channel by encouraging the retail sale of their hair care products. Formerly wholesalers to this channel had delivered only large, institutional products for use by the barbers and beauticians. These two European firms showed wholesalers how they could increase their sales by also distributing customer-use size product for additional point-of-purchase sales. Again, over time this innovation spread to other products and to other channels.

A Japanese company through its involvement with a US convenience store chain, introduced one of the most significant changes to the distribution system. 7–11 Japan was a US-licensed operation owned by the Ito-Yokado Group. In the

1970s it began opening 7–11s around the country 7–11 pioneered the convenience store in Japan, competing directly against “mom and pop” neighborhood stores. By staying open for longer hours, carrying a wider variety of products and by restocking shelves more frequently 7–11 effectively overwhelmed its more traditional counterparts. In the mid-1980s it borrowed Toyota’s

just-in-time concept and introduced a point-ofsale (POS) inventory that allowed them to track sales on an hourly basis. The innovation in distribution came about when the company began using its POS data to make more frequent and targeted deliveries. A typical, urban 7–11 received deliveries twice a day once before the morning 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 had grown to become the fifth largest retail operation in the world. Following its lead, other convenience stores, grocery stores and supermarkets have attempted similar approaches in managing their distribution systems.

Although other discount houses had already established themselves, Toys R Us entered Japan as the first “category killer,” that is, a large retail store that sells only one category of merchandise and often dominates competition. Its entrance was significant because Toys R Us competes on the basis of price, relying on direct purchases from manufacturers and the attendant cost savings from not having to pay wholesaler commissions.

Discount houses adopt a similar approach, but generally carry a much wider range of products.

By contrast, and of particular significance for the

Dokoh, Toshio 119 distribution system in Japan, Toys R Us sought to control only a single market segment. Its consequent overwhelming success had a devastating effect not only on toy retailers, but on the toy distribution channel. As with other distribution innovations, category killers in other market segments have moved into Japan.

less, the Dodge Line was crucial in stabilizing the volatile postwar economy and restoring it to a firm peacetime footing. The financial discipline which Dodge imposed would continue to characterize Japanese fiscal policy until the 1960s.

Further reading

The future of the distribution system

It is clear the innovations over the latter half of the twentieth century will continue to reshape the distribution system in the twenty-first century Heightened competition is removing layers and blurring distinctions among channels. Moreover, the growth of catalog and on-line shopping will further erode the power and role of the wholesalers and the traditional distribution system.

Nevertheless, the historical constraints of small outlets, limited inventory capacity long-term relationships and specialized arrangements suggest that the Japanese distribution system will continue to retain greater complexity and appear more inefficient than its Western counterparts.

Further reading

Dodwell Marketing Consultants (2000) Retail Distribu-

tion in Japan, Tokyo.


Dodge, Joseph M.

Dodge was a Detroit banker who, as financial advisor to the American occupation of Japan from 1949–52, designed policies to end Japan’s postwar hyperinflation, re-establish international trade, and restore the market mechanism in the Japanese economy Dodge’s severe austerity program, known as the “Dodge Line,” dictated the balancing of the national budget, the reform of US aid policies, the reduction of government subsidies and direct economic controls, and the setting of a single yen-dollar exchange rate.

Dodge’s deflationary policies were extremely unpopular and caused widespread fears of financial collapse before Korean War procurements buoyed Japanese industry in 1950–1. Neverthe-

Tsutsui, W.M. (1988) Banking Policy in Japan: American

Efforts at Reform During the Occupation, London:



Dokoh, Toshio

Toshio Dokoh (1896–1988) was one of the leading Japanese business leaders responsible for revitalizing Japanese industry in the aftermath of the Second World War and for reforming the

Japanese government and public corporations in the 1980s. Born in Okayama Prefecture in 1896, he graduated from the Tokyo Technical Higher

School (subsequently named the Tokyo Institute of Technology) in 1920. Upon graduation he joined the Ishikawajima Shipyard Company

(which was later renamed Ishikawajims Heavy

Industries). He ascended to the presidency of the company in 1950, and held that position for ten years. During his tenure as president, he repositioned the company to take advantage of US procurement in Japan in support of US military involvement in the Korean War. During the latter part of his presidency he engineered the merger that created Ishikawajima-Harima Heavy

Industries (IHI), and then became president of the merged company.

In 1965 Dokoh took over the reins of Toshiba and, as he had done at IHI, led another company to growth and profits. In 1972 he moved from president to chairman, retiring from that position in 1976. From 1974 to 1980 he also served as president of Keidanren, the Federation of Economic Organizations, one of the four most important business associations in Japan.

In 1981, Prime Minister Yasuhiro Nakasone asked Dokoh to head the Second Ad Hoc Commission on Administrative Reform. (The First

Ad Hoc Commission on Administrative Reform

120 dollar shock operated from 1962 to 1964.) Though the commission reviewed a broad range of governmental administrative issues, the most significant related to what should be done with Japan’s three largest public corporations: Japan National

Railways (JNR), Nippon Telegraph and Tel-

ephone (NTT) and Japan Tobacco Corporation

(JT). Under Dokoh’s leadership, the commission recommended the privatization of all three, an action that began in 1983. Dokoh passed away in Tokyo in 1988.


dollar shock

The dollar shock in 1971, generally called the

“Nixon shock” in Japan, was caused by President

Nixon’s announcement of his New Economic

Policy that led to the collapse of the Bretton

Woods system. Although the shock waves went throughout the world, Japan received the greatest shock. The reason was that the policy was viewed in Japan as an attempt to force Japan to revalue the fixed ¥360:$1 exchange rate established in 1949 that had been regarded as one of the institutional frameworks of the high-speed growth. In fact, the Nixon shock became a major turning point of the Japanese economy


In order to cope with the dollar crisis, the policy included the suspension of convertibility of dollar into gold, an across-the-board 10 percent surcharge on imports, and a 10 percent reduction in foreign aid expenditure. The goals of the policy were: the suspension of dollar’s convertibility into gold would initiate a multilateral currency adjustment; the import surcharge would force other countries to revalue their currencies

(after which it would be lifted); the costs of maintaining the world order such as foreign aid and defense expenditures should be shared more properly among major countries. Ultimately the policy sought to reduce the United States’ balance of trade deficits, the situation that had caused the dollar crisis.

In his speech announcing the New Economic

Policy on August 15, 1971, President Nixon stated: “Others should bear ‘their fair share of the burden of defending freedom around the world’ and agree to exchange-rate changes that would enable ‘major nations to compete as equals.’

There is no longer any need for the United States to compete with one hand tied behind her back.”

Three concessions were demanded of Japan: exchange rate adjustment (a large-scale revaluation of the yen), liberalization of domestic markets, and burden sharing of American global policy costs such as defense and ODA (Official Development Assistance).

In 1968, Japan became the second largest economy in the free world and its rapid increase in exports accelerated the expansion of the United

States foreign trade deficit that deepened the dollar crisis,—in other words, the international monetary crisis—and led to the Nixon shock. As a result, the USA demanded that Japan share the maintenance costs of world order in a broad sense. However, Japan’s response was delayed.

With regard to Japan’s delayed response, Angel

(1991) pointed out, “Lack of response was interpreted in the United States and Europe as evidence of Japan’s unwillingness to assume her share of the costs of maintaining the international economic system.”

Nakamura (1981) notes that at that time there were misunderstandings between Japan and the rest of the world over Japan’s international position and its economic power, namely the gradually widening gap between the Japanese perception of their own economy as a small, backward latecomer, and its evaluation by the international community as an emerging economic power. This perception gap was an underlying source of Japan’s delayed response and international economic friction as symbolized by the

Nixon shock.

Having received the Nixon shock, the Japanese government was forced to respond to foreign pressure, especially American demands.

Under the Smithsonian Agreement of December

1971, Japan accepted the upward revaluation of the yen from ¥360 to ¥308, a 16.88 percent appreciation against the dollar. The Japanese government’s statement on the Agreement noted

“there was an ‘end to the postwar system’ in the background of implementation of the multilateral currency adjustment,” and “the time has arrived when we should, domestically further increase welfare and, abroad, make still greater contributions to international society”

Dore, Ronald 121

Japan also partly accepted liberalization of domestic markets, but showed a negative attitude toward sharing the costs of defense against the so-called communist world because of constitutional constraints, strong domestic opposition, and Asian neighbors’ memories of Japanese imperialism in the prewar and wartime period. More positive actions by Japan included an expansionary fiscal policy to stimulate domestic demand and reduce the trade surplus. This led to a rapid increase in government spending on public works and social welfare.

At that time, the Japanese government had just confronted a three-pronged problem: foreign pressure, as noted above; a domestic recession that implied the end of high economic

growth; and relatively meager social welfare provision compared to that of other major countries. In order to deal with these three problems simultaneously the government adopted a system of policies centered on expansionary fiscal policy which was supposed to expand social welfare and public works, recover the economy from the recession, and reduce the trade surplus.

It was a plan that attempted a switch in growth pattern from export-led growth to fiscal policyled growth.

After the Nixon shock, other major countries openly demanded that Japan accept the burden sharing of maintenance costs of the world order and Japan began to virtually share the burden.

The “small country hypothesis” no longer held.

In this period, however, an international discretionary coordination of macroeconomic policy to maintain the world economy had not yet appeared. Consequently it is reasonable to argue that the Japanese response was an attempt at international monetary cooperation, in response to criticism that Japan was responsible for the rapid increase in trade surplus that was the cause of the international monetary crisis.

See also: income doubling plan

Higuchi, H. (1999) Zaisei Kokusaika Trends: Sekaikeizai

No Kozohenka to Nippon No Zaiseiseisaku (Fiscal Internationalization: Structural Changes of the World

Economy and Japanese Fiscal Policy), Tokyo:


Kosai, Y. (1986) The Era of High-Speed Growth: Notes on

the Postwar Japanese Economy, trans. J.Kaminski, Tokyo: University of Tokyo Press.

Nakamura, T. (1981) The Postwar Japanese Economy: Its

Development and Structure, trans. J.Kaminski, Tokyo:

University of Tokyo Press.

Uchino, T. (1978) Japan’s Postwar Economy: An Insider’s

View of its History and its Future, trans. M.A.Harbison,

Tokyo: Kodansha International.


Dore, Ronald

Ronald Dore was a British sociologist, author of many highly influential books on Japan, including City Life in Japan (1958), Land Reform in Japan

(1959), and Education in Tokugawa Japan (1964).

This historical and social research provided a strong grounding for his influential comparative study of work organization and industrial relations in a Japanese and a British manufacturing company, British Factory Japanese Factory.

His model of the Japanese enterprise as community and his exposition of late development as an explanation for the differences between the Japanese and British patterns were very influential. His later work on relational contracting in the Japanese textile industry (1986) and his writings on the importance of the Japanese model of capitalism (1987) have made him the most influential European sociologist of Japanese business.

Further reading

Angel, R.C. (1991) Explaining Economic Policy Failure: Ja-

pan in the 1969–1971 International Monetary Crisis, New

York: Columbia University Press.

Further reading

Dore, R.P. (1973) British Factory Japanese Factory, Berkeley CA: University of California Press.

——(1986) Flexible Rigidities, Stanford, CA: Stanford

University Press.

——(1987) Taking Japan Seriously, London: Athlone Press.


122 dual structure theory

dual structure theory

The dual structure economy is generally understood as a national economy that has both modern capitalistic sectors and traditional non-capitalistic sectors at the same time. The term was first introduced by Hiromi Arisawa in 1957 in an Economic White Paper and was noted as one of the distinctive characteristics of the Japanese economic system. It was also believed that effective economic growth could not take place within such an economic structure. Indeed, in a

White Paper published the previous year, the government declared, “The Japanese economy has passed its recovery process; the postwar period has ended.” Elimination of the dual structure came to be viewed as the most critical issue in modernizing the economy through rapid growth.

The 1957 White Paper argues that the most obvious distillation of the dual structure could be found in the specific structure of the labor market: large numbers of family members continued to work as laborers in both agriculture and small industry/commerce. As a result, it was common for labor relations to be non-existent or premodern in those sectors and for wage differentials to be large and varied according to firm size within the industry.

As far as the manufacturing sector was concerned, the exact wording of the White Paper report referred to the dual economy as a “polarization between small industry and large industry” In 1957, large enterprises with more than

300 employees accounted for 44 percent of total manufacturing shipment but just 27 percent of employment, while small enterprises with fewer than 100 employees accounted for 39 percent of shipment, but 42 percent of employment. Furthermore, comparing these numbers with those of the USA and Britain, Japan was characterized by significantly larger numbers of small-and-medium sized enterprises and “mom and pop” business operations: 68 percent of all enterprises had fewer than 200 employees and 34 per cent had fewer than 20 employees. In the USA, the respective figures were 40 percent and 16 percent; in Britain they were 40 percent and 16 percent.

The data unquestionably confirm the presence of a dual economic structure. Nor is there any question that this structure developed over time from the Meiji era forward, largely as a result of government policies. However, there is controversy about what other factors contributed to its development and how it can be eliminated.

The most popular theory espoused by

Miyohei Shinohara, proposed that the most important factors of the dual structure were the split labor market and the Japanese banking system that had favored large-scale industries. As large-scale industries were able to invest huge amounts in capital-intensive equipment, even in its overseas operations, with long-term loans at favorable interest rates from both banks and the government, it was able to earn high returns with a relatively small number of laborers.

Those who were not able to gain access to employment, or who were eliminated from, the large-scale capitalistic sector had no other alternative than to be absorbed into small and medium industry which offered lower income due to shortages of capital.

The typical Japanese labor system characterized by lifetime employment and a seniority system of wages has been adopted to a limited extent within large industry. Given this, Shinohara’s explanation seems rational and persuasive. However, another school of thought challenges this conclusion. Daikichi Ito argues that, because the monopoly power of large industry has so thoroughly penetrated the economic system from top to bottom, there is really not a dual structure.

Instead, the wage differentials of workers in smaller firms merely reflect the monopoly power that large firms hold over small firms, who are often their subcontractors. Other critics note that

Shinohara’s view, concentrating as it does mainly on labor and capital markets, does not take into consideration product markets in which prices are non-elastic in the monopolistic markets and vice versa.

While the positions were disputed by scholars, the government recognized the importance of providing more support to the huge number of small/medium industries that were very influential to the national economy and the people’s life. Even before the first analysis in the 1957

White Paper, the government had already established the National Finance Cooperation, a bank for small and family businesses, in 1949. This

dual structure theory 123 was followed by the Finance Cooperation for

Small and Medium Enterprises in 1953, when democratization of the economy was in progress after the Anti-Trust Law was introduced by GHQ in 1947. Soon after the Income-Doubling Program was started in 1961, the government enacted the

Minor Enterprise Law in 1963. “Modernization” was the key word for small/medium industry policy in that period. The government announced its intention to foster medium-sized enterprises that have both modern management and high technology.

Through the 1970s, the situation underwent many changes. First, when an abundant labor force abandoned the rural areas, wages rose even in small manufacturing firms and wage differentials diminished as a result. Ohkawa demonstrated that it was at this point that Japan passed

Lewis’s Turning Point. Second, many modern medium-sized enterprises emerged, and they were able to overcome, by means of high technology and skilled labor, the difficulties twice caused by oil crises. Although wage differentials still remain, as does the subcontracting system, it is difficult to argue that the dual structure still dominates the Japanese economy.

One opinion holds that a dual structure can be seen as a temporary phenomenon in the capitalistic development in latecomers. In fact, South

Korea demonstrated a similar pattern in the 1970s, although the subcontracting system did not exist. Instead, the South Korean government promoted policies aimed at encouraging “organic linkages” to develop in the domestic economy

Similar cases may be emerging in other developing countries in Asia and Southeast Asia.




In the latter half of the 1990s, as Japan struggled to recover from the recession that followed the collapse of the bubble economy e-commerce was one of the few bright spots in the nation’s economic landscape. Although Japan still lagged behind other industrialized nations in the everyday application and use of information technology

(IT), Internet use and e-commerce were expanding rapidly. At the same time, these were evolving in somewhat different directions in Japan than elsewhere, reflecting the nature of the country’s specific business and regulatory environment.

In Japan, as in other countries, IT, Internet use, and e-commerce have been and will continue to be marked by rapid and continuous change.

This entry describes the state of e-commerce as it existed in Japan in the year 2000.

The development of the Internet in Japan

The Internet got off to a slow start in Japan, due in large part to excessive regulation on the part of the Japanese government. Japan’s first Internet transmissions were sent not by Japanese but by

American engineers working for US companies which had set up Internet services for expatriates working in Japan. During the early years of the Internet, the Japanese government placed higher priority on maintaining its highly regulated telecommunications system than on promoting the development of the new technology.

Japanese companies seeking to enter the Internet market were blocked by the difficulty of obtaining the necessary licenses from the Ministry of

Posts and Telecommunications, and even when licenses were granted, the government allowed only narrowly defined applications of the Internet and was not supportive of efforts to broaden its usage.

An individual Japanese and a natural disaster are generally credited with reversing this situation. Jura Murai, often referred to as the “godfather of the Japanese Internet,” fought with government officials over the right to bring the

Internet into the country and, when faced with continuing opposition, went ahead on his own.

In 1992, Murai and his colleagues created the

Internet Initiative Japan (IIJ). IIJ’s Internet system violated the Ministry of Posts and Telecommunications’ rigid regulations, but was faster and more efficient than the government’s own system. Helped by the fact that Internet access and usage is by nature difficult to monitor, Murai’s efforts prevailed, and the government’s attempts to monopolize the Japanese Internet ended. A further boost was given to Internet usage in the aftermath of the Kobe earthquake in 1995. At a time when other communications systems failed or were inadequate, Internet transmission served as a vital means of sharing information, and this helped convince government officials of the benefits of the new technology.

Although high access charges, the dominance of English on the Web, and the slow spread of personal computers for home use prevented

Internet usage from growing as quickly as in some countries, Internet use in Japan increased steadily beginning in the mid-1990s. In 1995 it jumped

e-commerce 125 by 41 percent, the highest rate of growth in the world at that time. By the end of 1997, Japan had

11.6 million Internet users and Japanese was the second-most commonly used language on the net.

Japan’s Internet population continued to grow, reaching 16.9 million by the end of 1998 and 27 million—21.4 percent of the population—by the end of 1999. It was projected that 77 million people—60 percent of the population—would be users by the year 2005. In 1998 there were 1 million

Japanese web sites, the second highest number in the world.

wireless phone company launched i-mode, an

Internet connection service for mobile phones

(keitai denwa). By May of 2000, i-mode and similar services had 10 million subscribers and NTT

DoCoMo had become Japan’s largest Internet service provider. Hundreds of Web sites were being created for tiny cell phone screens to support mobile e-commerce, or “m-commerce.” The response rate to i-mode advertising was reported to be five times higher than that for ordinary Web ads.

Internet access in Japan

One of the biggest drags on Internet use and the development of e-commerce in Japan was slow and expensive access. In 2000, most of Japan’s

Internet users accessed the Web through the telephone network of Nippon Telegraph and Telephone Corporation (NTT), formerly a government monopoly This meant paying not only Internet access fees to an Internet Service

Provider (ISP) but also per-minute local telephone charges, which NTT had not reduced for twentythree years. With Internet fees averaging around

$ 20 per month for thirty hours of access and local telephone charges adding up to $100 or more for a heavy user, Internet use in Japan was quite costly by international standards. On top of this, many of Japan’s small ISPs lacked the scale and resources needed to secure premium bandwidth, resulting in slow and poor connections. Faster and cheaper Internet service was becoming available, however, as ISPs were consolidating to secure better international connections and broadband alternatives such as cable television and ADSL (asymmetric digital subscriber lines), which allow vast amounts of data, including moving pictures and music, to travel through the net at very high speed, were starting to be offered.

NTT was marketing a flat-rate ISDN (integrated services digital network) service in Tokyo and

Osaka that provided faster access than phone lines, while Sony had announced plans to build a wireless network to provide low-cost, high-speed

Internet access in large Japanese cities.

The Internet access mode that was growing at the greatest speed in Japan was wireless. In

1999 NTT DoCoMo, Inc., the country’s largest

The growth of e-commerce

The same type of hands-on approach that marked the Japanese government’s early regulation of the

Internet could be seen in its efforts to promote ecommerce, which by the late 1990s was seen as a major driver of economic growth in the twentyfirst century While the United States promoted

IT through deregulation, Japan did the opposite: using government subsidies and intervention to try to push development of e-commerce and other

IT sectors. For example, in 1996 the US government amended the nation’s Telecommunications

Law to remove barriers between telecommunications carriers and broadcasters in order to encourage competition, reduce connection charges, and support the growth of e-commerce. At the same time, the Japanese government set up the

Electronic Commerce Promotion Council of Japan, which together with MITI invested $476 million to try to develop Japanese e-commerce technology; by 2000 this project had produced little in the way of results.

While government efforts floundered, Japanese companies and consumers gradually embraced e-commerce. According to a Ministry of

Posts and Telecommunications White Paper issued in 2000, Japan’s e-commerce market in 1999, including advertising, totaled more than $200 billion. B2B (business-to-business) transactions dominated, with consumer spending accounting for only $3.2 billion. E-commerce was projected to expand to $1.35 trillion per year by 2005, with

$68 billion being spent on consumer goods. The explosive growth of cell phone-based Internet use was expected to stimulate sharp growth in the

B2C (business-to-consumer) sector. In 1999

126 e-commerce almost two-thirds of Japanese Internet users reported making purchases online; the major products and services being bought were consumer electronics and personal computers, automobiles, travel, office supplies, books, and software. By

2000, Japan had over 25,000 virtual shops, with new e-businesses being added at a rate of 500 to

800 per month. Online advertising expenditures totaled $68 million in 1998 but were expected to reach $1.26 billion by 2003.

Despite these figures, many industries had not yet been able to generate significant online sales.

One reason for this was that Japanese consumers did not feel comfortable using credit cards online. This led to the development of alternative payment methods, including cash at physical stores for goods ordered online. Convenience stores, which are found everywhere in Japan, were also becoming a key site for e-commerce transactions. The ‘Loppi’ system, developed by IBM and installed in convenience stores, allowed shoppers to order thousands of items online—from concert tickets to software—far more than could be stocked in an actual store. 7–11 Japan was installing terminals in its convenience stores for those who did not have Internet access at home and was teaming up with NEC, Sony Japan

Travel Bureau and other leading Japanese firms to set up an e-commerce market which integrated the convenience of online shopping with in-store payments and merchandise pickup capabilities.

One factor which slowed the growth of e-commerce in Japan was the lack of a national, comprehensive IT policy like that of Singapore, which in 1997 built a high-bandwidth telecommunications network to connect the country to the rest of the world, and Malaysia, which promoted ecommerce by enacting “cyber laws” that recognize electronic signatures and protect privacy.

Another issue was fear that e-commerce could cause job losses, by cutting out the middlemen in

Japan’s traditional multi-tiered distribution system. The Japanese preference for face-to-face contact with suppliers and customers also tended to hamper e-commerce.

Other factors were working in e-commerce’s favor, however. Women, who made up 40 percent of Japan’s Internet users, were being seen as a major engine for future e-commerce growth; female Web users were more willing to shop online than men, and appreciated the convenience of use, access to foreign companies, and new entertainment services offered by the Internet. The environment for creating new e-businesses was also improving, with the launching of the Mothers and NASDAQ Japan stock markets for startups and the financing and incubation of new e-commerce ventures by companies such as the venture capitalist and Internet holding company

Softbank, Inc. Numerous Internet data centers— facilities where corporate customers can locate their servers and connect them to the Internet and which provide security from hackers and natural disasters like earthquakes—were being set up in Japan. And every day Japan’s business press carried announcements of new e-commerce initiatives: by companies large and small, old and new, and in areas from banking, computers, and entertainment to kimonos, food, and online education.

Elements of both careful, hands-on planning— characteristic of the traditional Japanese approach to business—and the more freewheeling, spontaneous nature of dot.com entrepreneurship in California’s Silicon Valley could be seen in the various e-commerce start-up communities that were emerging in Japan. Representative of the former was Kyoto’s highly organized Kyoto Research

Park (KRP). Established by Osaka Gas Corporation, KRP provided space, service, and support for Internet start-ups in return for stock, and had built a reputation as one of Japan’s top incubators. At the other end of the spectrum was the

Bit Valley Association and organic start-up community of Tokyo’s Shibuya district. The Bit Valley Association was started in 1999 by two Tokyo

Internet pioneers as a weekly meeting/party held in a Shibuya cafe. It soon attracted thousands of participants and inspired many people, including salaried workers from large established firms, to jump into Internet businesses and establish ecommerce start-up funds.

Given the nation’s history of success in business and the eagerness of Japanese to purchase and try out new technologies, often available earlier in Japan than in other countries thanks to the leadership position enjoyed by major Japanese technology firms, it seemed certain that Japan would remain at the forefront of e-commerce well into the twenty-first century.

economic crisis in Asia 127

Further reading

Coates, K. and Tiessen, J.H. (2000) Canadian Firms, Elec-

tronic Commerce and the Japanese Market, Toronto: The

Canada-Japan Trade Council.


economic crisis in Asia

In the early 1980s the Japanese economy was booming. However, the economic bubble then burst, leading to an economic crisis in Japan that reverberated throughout Asia. Japan’s productive capacity began to exceed demand and a recurring trade surplus developed. The Japanese government was forced to adopt policies aimed at boosting internal demand and restraining production. Mandatory cutbacks in rice acreage were imposed, and voluntary restraints were applied to exports. The bursting of the bubble economy shows that supply and demand cannot be balanced by relying on a bureaucratic-led drive to stimulate domestic demand and keep the economy going. GDP growth began to decrease from 6.2 percent in 1988 to 4.3 percent in 1991 and -1.1 percent in 1992. There was also a long slump in the stock market beginning in 1990 and continuing for several years. Deflation (defure in

Japanese) led to a decrease in consumer prices and a price revolution, kakaku hakai, that came to be known as Heisei Recession. Declining corporate profits and adverse business conditions were due in part to the appreciating yen. This was also a time of lowering real estate prices and low interest rates.

Job offers also decreased in Japan, although

unemployment remained unchanged at less than

3 percent for many years. The ratio of job offers to job seekers was 1.02 in 1988 and 0.76 in 1993.

This was a recession without layoffs. Between

1992 and 1994, 8.5 percent of Japan’s companies with 1,000 or more employees cut an average of 130 new jobs. Between 1992 and 1995, manufacturing employment decreased by 8 percent. Companies said that this was accomplished by dismissing part-time and temporary workers

(6 percent), reducing overtime (24 percent), reassignments, hai-ten and shukko (18 percent), hiring freezes (13 percent), voluntary retirement

(20 percent), and extended holidays/vacations (4 percent).

In 1990, the Nikkei Index (the Japanese stock market) went from a high of 38,915 to a low of

19,781, a drop of 49 percent. It had not been 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,

Honda by 18.2 percent, and NEC by 15.6 percent), while banks and real estate firms were even harder hit (Mitsubishi Estate Co. fell by 63.7 percent, Sumitomo Bank by 56.1 percent, and

Daiichi Kangyo Bank by 46.5 percent). This first occurred in isolation, but over time the entire economy of Japan and then the economy of the entire Asian region was affected. Minister of

Finance Hashimoto closed the Tokyo Stock Exchange for a day and announced a market-rescue plan. Japanese real estate firms began to sell their holdings in the United States because Japanese banks were nervous and increased interest rates. This affected not just the USA and Europe, but the rest of Asia as well.

Many economists hold that deregulation is key for economic recovery The Japanese government must restructure the economy stimulate demand, and reform the political system. Japanese companies must upgrade their operations and lower their production costs. Prime Minister Morihiro

Hosokawa’s economic policies were not planned in advance, but developed as a result of the economic crisis. Called “Hosonomics,” this policy placed an emphasis on small government, deregulation, consumerism, deficit spending, and business-oriented government policies.

In 1996, according to a study by Dentsu Advertising, 34.5 percent of Japanese consumers believed that the economy was on course to recover.

However, consumers wanted lower prices, and were willing to accept “good enough” quality rather than “best quality.” In other words, they were still cautious about spending money In 1997, leisure businesses such as theme parks and department stores were still showing large losses.

By the end of that year, the economic problems in Japan were even worse.

The Japanese recession may have positive implications for small and medium enterprises

(SMEs) and the service industry (see small and

medium-sized firms). Some things that small

128 economic growth businesses could not do during the 1980s could be done during the recession because of lower real estate prices and lower interest rates. Labor and other resources were also now available and affordable. However, the SMEs were hard hit by the crisis and are still negative about an economic recovery.

To decrease expenses, temporary work and employment of women on a part-time basis is increasing. To decrease production costs, Japanese companies moved manufacturing operations overseas to the rest of Asia, which was also hit by the economic crisis. This allowed Japanese firms to import lower cost products. Japanese real estate firms began selling off overseas holdings. This too affected not only the United States and Europe but also the rest of Asia.

In 1997, Japan was still in a recession and the currency crisis began in Asia. There was a slowdown in growth for all ASEAN countries in

1997–98. The ASEAN four—Thailand, Indonesia, Malaysia and the Philippines—were at the center of the crisis but other Asian countries were also hard hit including Korea, Taiwan, Singapore,

Hong Kong and China. Hong Kong had its worst economic crisis since the Second World War. The

Hong Kong stock market lost more than 80 percent of its value in one year, and real estate prices plunged. Hundreds of businesses went bankrupt and unemployment doubled to greater than 4 percent (a fifteen-year high).

In all of Asia, wages were hit by the crisis.

The devaluation of the Thai baht caused workers’ monthly wages to fall from US$164 in June

1997 to $ 90 in July 1997. In Indonesia and Malaysia, wages fell by about half. Currency devaluation led to a 30–50 percent decrease in automobile prices. In order to try to prevent a recession, many governments raised taxes and increased prices on government-controlled industries and goods, such as electricity and gas. In

1998, the Korean government increased fares on airlines, buses and railways. The Malaysian government increased prices of sugar, flour, milk and other government-controlled items. However, the recession continued. Companies in Thailand, Malaysia, Korea, and elsewhere in Asia laid off employees. Many businesses shut down operations due to decreased demand and consumption in the region.

Japanese firms were hit hard by the crisis in the region. The cost of imported raw materials rose, while demand for finished products decreased. Many companies put expansion plans on hold. The Japanese government supplied financial aid, primarily through the IMF, to assist the countries in crisis.

By 2000, the economies of the region had finally begun to recover. The ASEAN countries and Korea showed growth in their gross domestic products in 1999. The consensus is that the

Asian economy is on the mend, but appropriate government policies are needed to reinforce infrastructure and create jobs in order to keep growth on track.

See also: business ethics; Heisei boom


economic growth

The postwar Japanese economy attained high growth.

Annual growth rates of gross domestic product on average for the periods of 1955–60, 1960–65 and

1965–70 were 8.9 percent, 9.0 percent and 10.9 percent respectively These rates declined somewhat to

4.4 percent and 4.1 percent in the 1970s and 1980s.

However, in the 1990s (1990–97), the economy slowed to 1.6 percent. The sections below consider the features and fundamental factors underlying the high growth periods in light of several theoretical perspectives and then discuss problems that the Japanese economy faces

Features and theoretical background of high economic growth in Japan

The high growth of the Japanese economy accompanied rapid changes in industrial structure.

In particular, industries such as metal, machinery and chemicals, grew dramatically These heavy and chemical industries comprised 20 percent of Japanese total product of manufacturing industries in 1955, but 75 percent in 1990. The machinery industry now comprises the largest share of Japanese exports. In the process of industrializa tion, a rapid concentration of the population in urban areas has been observed. At present the two largest metropolitan areas, Tokyo and Osaka, account for nearly half of the total population in Japan.

economic growth 129

Neoclassical economic growth theories explain the processes of capital accumulation and economic growth based on the saving behavior of households and the investment behavior of companies. The smaller the amount of installed equipment, the higher the return on investment for a company. Thus, aggressive investment in equipment is observed in the earlier stages of economic growth, and this lifts interest rates in the capital market. In contrast, households increase future income by consuming less and saving more when interest rates are high. Large savings by households finance large investments in equipment. In this way a higher economic growth rate is attained. As capital accumulates and income increases, returns on investment fall. Investment and saving decline and consumption increases.

The process of economic growth is thus completed.

Traditional growth models, however, cannot fully explain the cases of postwar Japan and other

Asian economies in recent years. Traditional growth models predict higher growth rates in an economy with lower income levels. Hence, the difference in per capita income among economies should converge in the long run. In reality however, the difference has been diverging rather than converging. To explain this phenomenon, two factors have been explicitly introduced into new economic growth models.

Firstly focus has been placed on capital goods other than equipment. The accumulation of human capital, which is acquired through educational investment, plays a particularly crucial role in economic growth. Differences in economic growth rates can be explained to some extent by this factor.

Secondly scale economies have been explicitly introduced into new growth theories. Scale is effective in heavy and chemical industries. In other words, the size of an industry has a positive external effect on the productivity of the companies within that industry; the larger the scale of the industry the more productivity increases.

This characteristic is opposite to the diminishing returns that are assumed in traditional economic growth theories. To establish such industries, a huge investment in equipment is necessary in the initial stages.

There are two stable equilibriums in an economy where scale merits operate: an equilibrium in which no investments are made and income levels remain low; and an equilibrium in which industries with scale economies are successfully established and high income levels attained. The former is called a “poverty trap.” In the latter equilibrium, scale economics result in the geographical concentration of capital and the labor force. With these new growth models, it is possible to explain the persistent income gap among nations. We can also say that economic growth in Japan is a “jumping process” to a better equilibrium.

However, this jumping process cannot be achieved automatically. Sufficiently large markets, entrepreneurship, positive expectations for the future, an abundant labor force, and appropriate economic policies are all indispensable. The following is an analysis of these factors in the postwar Japanese economy.

Large domestic market

Industries with effective scale economics cannot be established until huge investments in equipment are made. Markets large enough to pay for this investment are essential. Foreign markets have played a significant role in the recent industrialization of Asian economies. In Japan, however, the domestic market is more important than foreign markets. The Japanese economy had been growing since the middle of the nineteenth century Light industries, such as textile and foods, were the leading sectors in prewar Japan, and accordingly income levels were not particularly low.

Furthermore, drastic reforms such as farmland reform after the Second World War mitigated income inequalities. These factors created potentially large domestic markets for durable consumer goods.

Positive expectations for the future

To establish an industry with scale economies, several companies must simultaneously invest heavily in equipment. Of course, investments are made in anticipation of future profits. In industries with scale economies, however, companies

130 economic growth will make investments only if they do share positive expectations regarding the future size of their market. Then, a balance of coordination and competition among the companies is needed. Once the investments are made, productivity and income, and therefore the market size, increase. As a result, initial investment can produce a profit and positive expectations become self-fulfilling.

The market expands more and more, which leads to new companies entering the industry. In this way a competitive market is achieved, and this leads to further economic growth. This process can be observed in the postwar Japanese economy especially in the 1960s. In contrast, pessimistic expectations depress investment. Income and markets never grow, and pessimistic expectations thus become self-fulfilling. This process is a vicious circle in which investment for industries with scale merits is never made.

ment Bank have financed huge investments of heavy and chemical industries.

Abundant labor force

In order to establish and develop industries with effective scale economies, it is necessary to mobilize a large labor force in a short period. A huge number of young and inexpensive workers were supplied from rural areas and absorbed into the newly growing sectors in urban areas. In this way rapid changes in industrial structure and high growth of the Japanese economy were attained.

Japanese company management systems were the mechanisms used to organize the labor force efficiently.

The concentration of population in cities increased the demand for durable consumer goods.

When labor force migration stopped, wages began to increase, and companies began substituting equipment for workers, which increased the demand for machinery. These growing markets promoted industrialization and sustained high growth.

Appropriate economic policy stances

Protective trade and industrial policy are often 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.

Several Latin American nations also attempted industrialization that relied on protective policies, but failed. Their domestic markets were too small for scale to be fully realized. The expectation of perpetual protectionism and limited entry also hampered the development of entrepreneurship. In Japan, however, abundant demand and resources, as well as the efforts of the private sector, were the basic factors behind high growth. The trade and industrial policies implemented in Japan were far smaller in relative scale and were intended to be temporary From this, we can conclude that the policies were not essential.

However, it can be said that some policies played an important role in coordinating economic activities and in improving some incompleteness of financial markets. The Ministry of

International Trade and Industry may have contributed by causing companies to share positive expectations for the future and regulating them to prevent excess competition. Public finance companies such as the Japan Develop-

Summary and recent issues

Through the factors we have examined here, the

Japanese economy was able to attain high growth and catch up with the Western industrialized countries. The Japanese company management system, the relationship between the private and public sectors, and the education system operated very efficiently based on Japan’s potentially large domestic markets and abundant young labor force.

The situation today however, is drastically different. Which industries will grow is not as clear as it once was. Unclear and pessimistic expectations for the future deter companies from investment. In financial markets, many commercial banks have not yet disposed of the huge bad debts caused by overheated speculations and investments in the bubble economy era. This is a negative factor for a standard Japanese company that heavily depends on indirect finance. Because of these negative factors in both demand and supply sides, investments in new industries cannot grow. The supply of young and inexpensive

economic ideology 131 workers which would allow rapid changes in industrial structures has dried up. Rapid aging of the population is fundamentally changing the

Japanese company management system.

Goods, financial and labor markets all face problems. Abuses of the once-beneficial relationship between the private and public sectors are also coming to light. In goods markets, with industrial policies to promote not only process innovation but also product innovation, large new foreign markets can be created. Aging may create potentially large domestic markets of new types of goods and services. In financial markets, public financial organizations are still influential.

When financial markets are incomplete, the public sector should finance huge investments of growing industries. At present this duty should be transferred to competitive markets. However, though direct participation may not be called for, indirect participation by governments is necessary The nature of incomplete financial markets and the types of appropriate government participation is currently the focus of much theoretical and empirical investigation.

It is essential for these Japanese systems to change in ways that will allow them to utilize the middle-aged and older labor force and the female labor force efficiently Japanese company management systems such as employment and promotion systems are drastically changing. Appropriate social security systems to enforce these movements will also be indispensable.

Further reading

Barro, R.J. and Sala-I-Martin, X. (1995) Economic Growth,

New York: McGraw-Hill.

Grossman, G. and Helpman, E. (1991) Innovation and

Growth in the Global Economy, Cambridge, MA: MIT


Krugman, P. (1991) Geography and Trade, Cambridge,

MA: MIT Press.

Mankiw, N.G., Romer, D. and Weil, D.N. (1992) “A

Contribution to the Empirics of Economic Growth,”

Quarterly Journal of Economics 107: 407–37.

Murphy K.M., Shleifer, A. and Vishny R.W. (1989)

“Income Distribution, Market Size, and Industrialization,” Quarterly Journal of Economics 104:537–564.

——(1989) “Industrialization and the Big Push,” Journal

of Political Economy 97:1003–26.


economic ideology

Japan’s extremely rapid rise to economic power in the postwar period brought with it a much sharper interest in the Japanese economic system.

As observers both within and outside of Japan sought to explain the success of Japanese capitalism, explaining the ideological underpinnings became increasingly important. However, for both Japanese and non-Japanese alike, explaining ideology has not been particularly easy For observers weaned on free-market, neoclassical economics, Japan’s economic system often seemed a paradox. The lessons of neoclassical theory are to let flexible prices in deregulated markets delineate where resources go; this ultimately leads to greater efficiency and growth.

However, Japan grew amazingly quickly in the postwar period with capital, labor, and product

“markets” influenced heavily by government and inter-firm relationships.

The implication of neoclassical economic theory is that the Japanese economy could have grown even faster during the postwar period had it looked more like a laissez-faire economy with flexible price signals. By the 1980s, however, this began to ring hollow as many US and European industries lost significant ground to the Japanese.

Attention increasingly turned to how capitalist systems can differ in their evolution and in a particular moment in time, as well as what can be learned from those differences. Furthermore, with the collapse of the Soviet Union in the 1990s, the

Cold War pressure to view capitalism monolithically—without historical, institutional, and cultural differences—diminished. Given recognized differences, the question now for capitalist economic systems is what form they should take during different stages of development.

Ironically the early 1990s also marks the moment when the Japanese bubble economy burst, and the drawn-out struggle to revive Japan’s economy has made literature pinpointing and trumpeting the reasons for Japan’s success

132 economic ideology somewhat less compelling. The urge to define and learn from Japanese economic ideology has arguably decreased in the face of Japan’s stagnation. Indeed, the pendulum swung in the other direction in the 1990s, with many outside and inside Japan arguing for major structural reform of the economy structural reform that gives free markets a more central role. This parallels the

German experience in the 1990s as the USA and

Britain boomed while Germany struggled. Interestingly like their US counterparts in the 1980s debating the relative merits of industrial policy, policy makers and others in Japan and Germany are similarly engaged with whether, when and how to allow convergence towards more Anglo-

American practices such as a shareholder model of corporate control (see corporate govern-


Japan’s economic ideology draws some inspiration from Anglo-American neoclassical theory but it is also clear that the German schools of thought have had particular influence. German schools of economic thought and philosophy such as the historical school stress the role of the government in a “national” economy oriented towards production. Actors in a system like this engage collectively in production to increase a nation’s power. Production strengthens national power while consumption weakens that power.

Japan’s economic ideology has been labeled

“developmentalism” by those focused on the primacy of the Japanese government in economic activity Chalmers Johnson is perhaps the best known of the Western scholars for his exposition of developmentalism. Principles characterizing developmentalism in Japan include the importance of strategy and the government in directing resources, a production rather than a consumer orientation, restraint of excessive price competition, and the premium on long run firm growth and productivity rather than profit. Also distinctive is the focus on the concrete processes of production, distribution, exchange, and consumption. Japanese developmentalism is relentlessly pragmatic and not bound to any one universalistic economic theory. As such, it is relativistic, flexible, and grounded in the contemporary conditions of economic life.

Johnson and other scholars have pointed out that Japanese capitalism evolved as the country sought to industrialize rapidly due to the Western threat of superiority and that this urgency affected ideology. For the Japanese, the goal in the nineteenth century was immediate: strengthen the nation’s power in international competition.

In contrast, Anglo-American capitalism was gradually nurtured in a cultural context of individualism during the Enlightenment. In Japan, industrialization was borrowed from the West, but the laissez-faire mindset stressing the autonomy of the individual was not. In the twentieth century a military form of developmentalism had emerged in full force in response to the Great

Depression and the First World War. This was later challenged by the democratic reforms under MacArthur, but instead of resulting in a liberal free market economic system, the economy evolved into a form of developmentalism centering on trade.

This is one view of a fairly well-known school of thought on Japanese economic ideology; there are other schools, some focusing on the critical role of corporations, or of human resources, or of the market. At this point, it is safe to say that debates over capitalist economic ideology—even debates within a country over what that ideology is—are not about to end. The Japanese developmentalist model—however “stylized” it may be—remains important as a point of reference. This is especially the case for the developing world. The Russian experience provides a sobering case study in the potential pitfalls of universalist neoclassical solutions quickly administered. Deregulating Russia through Western style “shock therapy” proved to be nothing short of disastrous. The Japanese approach to development—which is more incrementalist, strategic, and sensitive to institutional and historical context—widens the constellation of possibility and enlivens the challenge of increasing economic and social welfare in all countries.

Further reading

Gao, B. (1997) Economic Ideology and Japanese Industrial

Policy, New York: Cambridge University Press.

Johnson, C. (1982) MITI and the Japanese Miracle,

Stanford, CA: Stanford University Press.


education system 133

education system

The Japanese education system has provided the foundation for twentieth-century Japanese economic success by producing an adaptable, productive work force and has become a model for developing countries, particularly in East Asia.

Growing out of roots in the Meiji restoration and modeled after the German, French and

American education systems, it is a unitary system dominated by the Ministry of Education in

Tokyo and its affiliated prefectural branches. The

Japanese education system is renowned for providing a strong education to all students, particularly in mathematics and science, but has been criticized by Japanese teachers and politicians for inhibiting creativity and causing extreme stress in some students.

The education system in Japan is structured along the American model, with six elementary school years, three middle school years, three high school years and four university years. Elementary and middle school are mandatory Students with physical and mental handicaps attend separate schools, creating greater educational uniformity. Over 99 percent of children of compulsory school age are enrolled in school, and approximately 95 percent of students complete the equivalent of high school. The Japanese school year begins in early April and is organized in trimesters that run from April to July September to

December, and January to March. Japanese students receive an average of approximately 200 days of classroom instruction.

The Ministry of Education (MOE) exerts the strongest influence on the school system, prescribing curricula, standards, and requirements; approving textbooks; providing guidance and financial subsidies accounting for nearly half of total educational expenditures; authorizing the establishment of colleges, universities, and private schools; and operating national universities, junior colleges, and technical colleges. Each prefecture also has a board of education, appointed by the prefectural governor. Prefectural boards appoint the prefectural superintendent of education with the consent of the MOE; operate prefectural high schools; license teachers; and make appointments to schools. Finally each municipality has a board of education appointed by the mayor. Municipal boards operate municipal elementary and middle schools; choose textbooks from the MOE’s approved list; and make recommendations to the prefectural board of education on the appointment and dismissal of teachers.

Historical development

Historians describe two educational revolutions in Japanese history The first occurred during the

Meiji restoration in the late nineteenth century when Japanese leaders worked to tear down neo-

Confucian educational structures and attitudes and institute modern educational practices, roles, and structures imitated from the United States,

Germany and France. From France, Meiji leaders imitated a centralized educational system run by a national Ministry of Education. Following the German model, they created a system that sorted students from the time they entered primary school into discrete career tracks. They borrowed basic curriculum from the United States.

During the 1920s, teachers pressed for American-style reforms inspired by John Dewey such as “liberal education” and “life-in-education.” The rise of the military during the 1930s, however, ensured that the centralized, state-oriented system continued.

The second educational revolution occurred after Japan’s defeat in the Second World War.

The American occupation attempted to create a more decentralized, egalitarian, and above all democratic Japanese education system. At the urging of Occupation authorities, the Japanese

Diet created a single-track 6–3–3–4 system to replace the pre-war multi-track system. Occupation authorities also mandated the establishment of neighborhood schools instead of merit-based school recruiting; established locally elected school boards; and limited the authority of the

MOE to issuing outlines, suggestions, and teaching guides.

While political liberals and the national teachers’ union embraced the reforms, Japanese political conservatives bitterly opposed them. After winning control of the government in 1955 when the Liberal Democratic Party was created, conservatives began an educational “reverse course,” passing legislation gutting the authority of local school boards, making MOE

134 education system curriculum nationally mandatory requiring that all school texts be approved by the MOE review boards, and finally striking at the single-track system by creating vocational high schools. Elementary schools, however, remained largely untouched.

In the 1980s, Japan entered a national debate on education reform. Spurred by widely reported incidents of student violence, increasing reports of bullying, and a sharp rise in “school refusers,” children psychologically unable to attend school out of fear or stress, Prime Minister Yasuhiro

Nakasone created the National Ad Hoc Council on Education Reform to further diversify the single-track system, improve the high school and university entrance examination system, increase emphasis on moral and physical education, promote internationalization of education, and improve the quality of teachers. Despite strong public interest, pervasive media coverage, support from Nikkeiren and Keidanren, and the prime minister’s personal attention, the council failed to recommend structural changes, only endorsing increased moral education and internationalization. Radical change to the educational system appears unlikely.

Elementary schools

Japanese elementary schools emphasize personal development and an experiential approach to learning, seeking to build students’ motivation and confidence, as well as personal and social skills. In particular, elementary schools stress the ability to work well in small groups through structures such as han, classroom workgroups. Han members must work together to perform academic tasks, such as making presentations and doing research, as well as non-academic tasks, such as serving lunch and cleaning the classroom and school.

Elementary students remain with the same

kumi, or class, for the entire academic year. Elementary school teachers’ top priority is to engage students in learning, not to fill their heads with facts. Accordingly teachers emphasize process, engagement, and commitment rather than discipline and outcome. At the same time, teachers work to provide students with fundamental academic skills, particularly in Japanese language and mathematics. However, no academic tracking takes place, and teachers deliberately mix students of differing academic ability in han and go to extreme lengths to ensure that all students proceed together through lessons.

Secondary schools

In contrast to elementary schools, Japanese secondary schools focus on preparing students to enter the workforce. High schools and to some extent middle schools track students and teach increasingly specialized curricula. They also stress the central importance of hard work and diligence through required moral education courses and structures such as the entrance examination system.

Like elementary schools, middle schools are neighborhood schools. Students remain with the same kumi for at least a year, while teachers specializing in an academic area rotate classrooms throughout the day Students learn the same

MOE-mandated curricula, use the same MOEapproved textbooks, and take the same classes: mathematics, Japanese language, English, science, history moral education, and physical education, with occasional art and music classes.

Middle school students’ concerns become increasingly dominated by the prefectural high school entrance examination. The examination is written to ensure that students have mastered three years of middle school course material and is dominated by facts and specifics. In order to excel, students must spend hours studying and memorizing. Proponents of the system argue it teaches students the importance of hard work, diligence, and perseverance. Based on the results of the entrance examination, a student may enter (in decreasing prestige): an elite private school, a public university prep school, a public vocational school, a general private school, or a public night school.

Education in Japanese high schools varies widely according to the type of school. In university prep schools, the mood is serious and behavior is oriented toward the national university entrance examination. Teachers are expected to pour information into students by lecture to prepare them for the university entrance examination. Students in vocational schools have fewer hours of the core

education system 135 academic subjects to allow them to study nursing, cooking, practical business skills, etc., and emphasis falls on those vocational skills. In night schools, teachers emphasize basic coping skills.

High school students are expected to continue to learn to work in groups, continuing to stay with the same kumi for a year, though han are much less prominent than in elementary school.

Instead, students participate in mandatory afterschool sports or culture clubs, where students learn to work within the sempai-kohai, or seniorjunior, relationships that will become important during their university and work lives.

Once admitted, however, almost 75 percent of university students graduate in four years and almost 90 percent graduate eventually

Coursework demands drop off significantly from high school and most students take part-time jobs.

Japanese universities have been criticized for their relatively lax instruction and poor attendance, leading to their reputation as merely credentialing institutions.

Graduate students are concentrated in a small number of elite public and private universities and make up only 4 percent of total university enrollment. Graduate studies are considered strictly in-service training for careers in academia since most Japanese employers prefer to train university graduates in-house.

Juku and yobiko

Juku encompass a large and diverse range of private, for-profit tutorial, enrichment, remedial, preparatory and cram schools. On average, students attend juku after school two and a half times per week for a total of five hours. The majority of students attending juku study English and mathematics, most in preparation for the high school or university entrance examination.

Yobiko are yuku specializing in intense training for university entrance examinations, often tailored specifically to the requirements and examinations of individual schools. Yobiko particularly cater to the 200,000 ronin in Japan, students who have failed the exams for their first-choice schools and who have elected to spend a full year preparing to take the examinations again. Because so many university students have had the ronin-yobiko experience, education in Japan has been called the 6–3–3–1–4 system. Most ronin and yobiko students are male, outnumbering female students by more than 10 to 1.

Higher education

Approximately 20 percent of high school graduates enter a four-year university about 10 percent enter a two-year junior college, and another

25 percent enter a vocational program, usually a continuation of studies begun at vocational high schools. Admission to universities and colleges is determined almost exclusively by the results of the national entrance examination, and admission to the most prestigious universities such as

Tokyo University is extremely competitive.

Strengths and weaknesses

The Japanese education system generates graduates with a high average level of capability. On the whole, Japanese students are well-disciplined and motivated. They routinely score at or near the top of international test comparisons in mathematics and science. Over 97 percent of Japanese are functionally literate, despite the demands of using a non-phonetic writing system. The Japanese education system achieves these results even though Japan spends only 2.3 percent of its GDP on primary and secondary education, much less than other industrialized countries such as the

United States.

Critics of the Japanese education system argue it is too centralized and regimented. With textbooks, curricula, and examinations set by

MOE bureaucrats, relatively little discretion for local innovation exists. In addition, the lock-step educational approach disadvantages the brightest and slowest students and marginalizes handicapped students. The system also lacks institutionalized emotional and psychological support beyond teachers, often failing to support troubled students. Finally critics argue that the examination system puts too much pressure on children at too young an age, resulting in overstressed and unhappy children. The continuing problem of bullying as well as the rise of school violence since the 1980s are symptoms of these weaknesses.

136 electronics industry

Further reading

Beauchamp, E.R. (ed.) (1991) Windows on Japanese Edu-

cation, New York: Greenwood Press.

Leestma, R. and Walberg H.J. (eds) (1992) Japanese

Educational Productivity, Ann Arbor, MI: Center for

Japanese Studies, University of Michigan.

Marshall, B.K. (1994) Learning to Be Modern: Japanese

Political Discourse on Education, Boulder, CO: Westview


Rohlen, T. and Björk, C. (eds) (1998) Education and

Training in Japan, 3 vols, London: Routledge.

United States Study of Education in Japan (1987) Japa-

nese Education Today, Washington: Government Printing Office.

electronics industry


Japan’s electronics industry includes world-leading firms in consumer electronics, semiconductors, computers and telecommunications. Most of these firms were established long before the

Second World War, but came into international prominence during the 1950s and 1960s when they began large-scale exports of transistor radios, television sets, calculators and semiconductors. The industry continued to thrive through the 1980s, as Japanese consumers became increasingly affluent, but with the end of Japan’s bubble

economy, was faced with a number of problems: relatively slow growth in domestic markets, high wages, and increasing competition from newly industrialized Asian competitors. In the late 1990s and early 2000s most of the leading Japanese electronics firms began restructuring in response to these pressures.

Origins of the industry

After Japan was opened to the West in the midnineteenth century the Japanese were quick to master the advanced technologies of the time.

Telegraph service was inaugurated between Tokyo and Yokohama in 1869. In the 1870s the government established a university-level program in electrical engineering and electrical research laboratories. By the end of the nineteenth century Japanese had built electric power plants, begun producing electric light bulbs, and introduced telephone service. In 1905, the Japanese

Navy used wireless telegraphy to defeat a Russian fleet in the Russo-Japanese War.

The origins of modern electronics engineering in Japan are commonly dated to 1925, when radio broadcasting began. By this time Japanese researchers were amongst the most advanced in the world in some areas of electronics. Yagi

Hidetsugu and Uda Shintaro invented the Yagi antenna in 1926. The Yagi became the most widely used radio and television antenna in the world. That same year, Takayanagi Kenjiro was one of the first in the world to produce an allelectronic television image (Japanese sources credit Takayanagi with being the first).

Foreign firms were deeply involved in the early

Japanese electronics industry Western Electric established a Japanese subsidiary in 1899 that later became today’s NEC. In 1905 General Electric

(GE) took a controlling interest in Tokyo Electric Lighting, which used GE technology to become Japan’s leading producer of light bulbs. Five years later, GE exchanged heavy electrical equipment technology in return for 24.5 percent of the equity of Shibaura Electric Works. This helped

Shibaura to become Japan’s largest producer of generators and other heavy electrical equipment.

Tokyo Electric and Shibaura later merged to form

Tokyo Shibaura Electric, today’s Toshiba.

Westinghouse Electric, a US firm, worked in partnership with Mitsubishi to establish Mitsubishi

Electric in 1921. Similarly in 1923 Germany’s

Siemens and Furukawa Electric formed Fuji Electric. A Fuji spin-off, Fujitsu, later became one of

Japan’s “big five” firms in the industrial electronics industry.

Other major Japanese electronics firms that were established before the Second World War remained independent of foreign interests. Hitachi was established in 1908 as a shop repairing electric pumps and other equipment at a mine. It became a separate firm in 1920. Matsushita (the consumer electronics giant which also uses the

National, Panasonic and Quasar brand names) was established in 1918. Sharp was initially established in 1912 as a metal processing firm. Its founder invented a mechanical pencil (the “Ever

Sharp”) from which the company eventually took its brand name. The company began making radio sets in 1925.

electronics industry 137

During the late 1930s the foreign firms were forced out of Japan. One consequence of this was that Japan had less access to foreign technology.

The Japanese electronics firms were also required to stop producing home appliances and to concentrate on military electronics.

The electronics industry after the Second

World War

New opportunities contributed to the explosive growth of the Japanese electronics industry after the Second World War (see post-Second World

War recovery). First of all, the American occu-

pation authorities promoted the rapid introduction of commercial radio (and later television) broadcasting, believing this would help foster the development of democracy Secondly large numbers of talented electronics engineers were suddenly available to work on commercial products.

The military research institutions had been closed down and research on radar and other technologies that could contribute to remilitarization was banned. Finally much of the technology developed in the West during the 1930s and 1940s suddenly became available to the Japanese. By

1949 nearly 200 Japanese firms were producing radios. Two former naval researchers started

Tokyo Telecommunications Engineering

(Totsuko) to repair radios and to make various electrical devices. In 1958 Totsuko changed its name to Sony.

As the demand for radios approached saturation, television provided another big boost for the Japanese electronics industry Television broadcasting began in 1953, and in January of that year Sharp marketed the first Japanese-made television set. Sharp was not alone. Nearly forty

Japanese firms had signed technology transfer agreements with RCA, then the leading source of television technology (see export and import

of technology).

In 1953 Sony signed an agreement to import transistor technology from Western Electric. Most of the other Japanese electronics firms soon signed their own agreements. Although US firms were ahead of Sony in marketing transistor radios,

Sony offered a combination of price and size that almost instantly attracted a huge market. By 1959 more than one hundred Japanese companies were making transistor radios. In 1960 transistor radios generated more export earnings for Japan than any other industry except shipbuilding.

Japanese firms also began the production of transistors. At the time transistor production was highly labor-intensive and Japanese companies were able to hire thousands of young women,

“transistor girls,” to manufacture the transistors at approximately ten cents per hour. This helped

Japan to become the world’s largest transistor producer.

As Japanese consumers became more affluent in the late 1950s, demand increased for a variety of electrical and electronic products: rice cookers, electric fans, washing machines, refrigerators, and stereos. The utilities needed heavy electrical equipment and there was unprecedented growth in telephone service.

Challenges and growth in the 1960s and


Although Japan continued its rapid economic

growth through the 1960s and into the early

1970s, special challenges faced the electronics industry. New transistors were developed that eliminated low labor cost as a major competitive advantage. This and the later development of the integrated circuit (IC) shifted competitive advantage in semiconductors from Japan to the United

States. Meanwhile, the most important consumer product in Japan, the black and white television set, was reaching market saturation. By the early

1960s, about 90 percent of Japanese households had television sets.

The electronics firms quickly made the transition to the production of color television sets.

Although the sets produced in the mid-1960s may have been inferior to those available in Europe and the United States, the Japanese market was protected until Japanese firms could catch up with their foreign competitors. In 1970 color television sets accounted for one-third of total electronics industry sales. As this market, in turn, moved towards saturation the consumer electronics firms began introducing new products such as video tape recorders. In the case of monochrome and color televisions, the Japanese had trailed the USA and Europe by several years. Now they were in

138 electronics industry the vanguard in introducing a major new consumer electronics product to world markets.

In 1969, another key product for the Japanese electronics industry was introduced. Sharp began selling a Large Scale Integrated Circuit (LSI) calculator. Some fifty other Japanese firms quickly brought out their calculators beginning what became known as “the calculator wars.” Only two firms survived the resulting competition. Just as the transistor radio had supported the birth of a

Japanese semiconductor industry the calculator supported the next phase of development of the industry Although the LSI and later Very Large

Scale Integrated Circuit (VLSI) technologies had been developed in the United States, US firms developed increasingly complex forms of this technology for use in defense applications. The

Japanese concentrated on simpler, cheaper, more reliable integrated circuits that served especially well in consumer applications. The Japanese government played some role in nurturing the development of the technological capacities of the semiconductor industry In a controversial piece of policy it delayed the entry of Texas Instruments into the Japanese market. It also orchestrated the formation of research cooperatives, such as the

VLSI Research Cooperative, to speed the development of technology.

The 1980s: years of triumph

During the 1980s it seemed as though the progress of Japanese industry was unstoppable. Although

Japan no longer enjoyed the economic growth of earlier decades, Japan was now the world’s second largest economy and had passed the United

States to lead the world in per capita GDP.

By 1985 Japanese firms and their affiliates produced some 80 percent of the world’s video recorders. Sony’s Walkman, introduced in 1979, was a worldwide hit through the decade and later.

Throughout the 1980s lists of the world ten largest semiconductor products typically included five or six Japanese firms. Indeed, by the late 1980s

Japanese firms had more than half of the world market for semiconductors. The Japanese also moved to an early lead in the development and use of computer-aided machine tools, industrial robots and other factory automation technologies.

There were problems, however. Wage costs which had been a source of competitive advantage, were now a competitive weakness for Japan.

Trade frictions with the USA and other countries made it politically impossible to sustain export growth. Some Japanese firms had built or bought off-shore production facilities in the 1970s, and in the 1980s this became a growing trend.

The 1990s and 2000s

In the 1990s the Japanese electronics industry faced severe difficulties. The collapse of the bubble economy at the end of 1989 undermined consumer confidence. Domestic markets for consumer electronics goods were largely saturated.

Competitors were beginning to emerge in other parts of East Asia. The economic crisis in Asia in the late 1990s further aggravated the situation.

During the 1990s sales of consumer electronics products dropped in half. This weakness in demand was also devastating for the semiconductor firms, which still relied on consumer products to take one-third of their output.

The trend towards offshore production continued. By 1998 Japan’s electronics firms had some eight hundred production facilities in other 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 firms were actually made in Japan, and only about one-third of the video recorders.

The “big five” Japanese industrial electronics firms, Toshiba, N EC, Hitachi, Fujitsu and

Mitsubishi Electric, and the largest consumer electronics firm, Sony were all experiencing new difficulties. Toshiba, for example, experienced its first losses in nearly a quarter of a century. The large vertically integrated giant Japanese electronics firms that had seemed unstoppable in the

1980s were now seen as unwieldy and poorly focused because of their size. Many of them were re-structuring and entering into international alliances, most often with US partners.

Further reading

Anchordoguy M. (1989) Computers, Inc.: Japan’s Chal-

lenge to IBM, Cambridge, MA: Harvard University


enterprise unions 139

Aoyama, Y. (1991) Kaden (Home Electronics). Tokyo:

Nihon Keizai Shimbun.

Lynn, L. (1998) “The Commercialization of the Transistor Radio in Japan: The Functioning of an Innovation Community,” IEEE Transactions of Engineering

Management 45(August): 220–29.

Methe, D. (1991) Technological Competition in Global In-

dustries, New York: Quorum.

Nathan, J. (1999) Sony: The Private Life, New York:


Partner, S. (1999) Assembled in Japan: Electrical Goods and

the Making of the Japanese Consumer, Berkeley CA:

University of California Press.


most important of these are degree of concentration in industry government regulation, and path dependency during the formative years.

Zensen Doumei (Textile Workers Union) is an example of a highly centralized national union, whose affiliated enterprise unions are

PAEUs. Jidousha Souren (Automobile Workers

Union) is a loosely-structured national federation of enterprise unions and so its affiliate enterprise unions are HAEUs.

enterprise unions

There are two kinds of workers in the world: employees and independent craftsmen. Employees are organized into unions according to their plant, establishment or enterprise. Furthermore, employee trade unions usually include enterprisebased organizational units within their organization. Can such enterprise-based organizational units of unions be called “enterprise unions?” If so, every trade union in the world, with the exception of craft unions, can be termed an enterprise union. In order to avoid confusion, it is necessary to provide a definition of enterprise union. Enterprise unions are those unions which are organized on the basis of enterprises or establishments and which are more or less autonomous with regard to national unions.

Organizational autonomy of the enterprise union,

vis-à-vis the national union applies to collective bargaining, finance and staff.

Types of enterprise union

Enterprise unions can be classified into two types according to their degree of autonomy with respect to national unions: highly-autonomous unions and partially-autonomous unions, referred to here as HAEU and PAEU, respectively. Such autonomy depends on the power-relations among enterprise unions affiliated with the national union and with the national headquarters of their national union. Various characteristics determine the organizational structure of trade unions. The

Overview of major trade unions in Japan

Incorrect images of Japanese trade unions are widespread in the world, even among industrial relations professionals. One such popular but erroneous view is that most trade unions in Japan are “enterprise unions.” The second incorrect stereotype is the view that “enterprise union” is a sugar-coated phrase for “company-dominated union,” a union which is essentially obedient to and cooperative with management. The former stereotype is examined first.

In 1999, there were twenty-three national unions in Japan that had over one hundred thousand union members:

Jichirou (Local Government Employees Union)

Jidousha Souren (Automobile Workers Union)



Denki Rouren (Electrical Equipment Workers Union) 740,000

Zenken Souren (Construction Workers Union) 715,000

Zensen Doumei (Textile Workers Union)

JAM (Metal Machinery Workers Union)

Nikkyouso (Teachers Union)

Seiho Rouren (Life Insurance Workers Union)





Jouhou Rouren (Communications Workers Union) 266,000

Denryoku Souren (Electrical Power Workers Union) 257,000

Jichi Rouren (Local Government Employees

Union—left wing)

CSG Rengou (Chemical Workers Union)

Nippon Ih Rouren (Hospital Workers Union)

Tekkou Rouren (Steel Workers Union)

Kokukou Rouren (Central Government Employees






Sitetsu Souren (Private Railway Workers Union)

Zentei (Postal Workers Union)

Zenginren (Bank Employees Union)





Zenkyou (Teachers Union—left wing)

Unyu Rouren (Trucking Workers Union)

Shougyou Rouren (Retail Workers Union)




140 enterprise unions

Zousen Juki Rouren (Shipbuilding and Heavy

Machinery Workers Union) 123,000

Shokuhin Rengou (Food and Drink Workers Union) 110,000

Total number of members 7,644,000

There were approximately 11,706,000 union members in 1999, with an estimated union density of about 22.2 percent. The ratio of major national union members to total union members is 65.3 percent, and the trade union movement in Japan has been much more vigorous in the public and the highly concentrated private sectors than in the less concentrated private sectors where small firms are dominant. Enterprise unions do not exist in the public sector at all because public corporations were largely privatized in the 1980s and public sector enterprises as such do not yet exist. One-third of all organized workers are public employees and have “enterprise unions”. The third largest union in the private sector, Zenken Souren (Construction Workers

Union), is a craft union whose members are skilled craftsmen such as carpenters or plumbers. Craft unions are not enterprise unions. In

Japan, pure enterprise unions are very few. Most enterprise unions belong to national unions and are allied with other enterprise unions within the same national union in their struggle against management and government. The national union is an alliance of enterprise unions within the same industry.

Which type of union is more numerous, the

HAEU or PAEU? In postwar Japan, wage negotiations, and consequently wage determination, have been highly centralized. Therefore, enterprise unions are not very autonomous in their negotiations with employers, these being coordinated at the national level by the headquarters of their national unions or by the national federation of national unions. Since 1955, wage negotiations in Japan have been concentrated in the spring and synchronized and/or coordinated at the national level. This wage determination practice has been called “spring offensive.” The wage negotiations themselves are conducted mostly at the enterprise level, and collective agreements are signed firm by firm, and by the leaders of the respective enterprise unions and management.

However, these enterprise-level negotiations are coordinated by the concerted actions of both parties at the national level. Under these circumstances, enterprise unions are unable to maintain a high degree of autonomy and in this sense

PAEUs are more dominant than HAEUs in Japan.

The pure enterprise union is the exception in

Japan. Affiliated enterprise unions are very similar to union locals affiliated with national unions in the US. Are there any distinctions between the Zen Toyota Rouren (an enterprise union), which is affiliated with the Jidousha Souren (a national union), and the GM Department (an enterprise union) of the UAW (a national union)?

In terms of organizational structure there does exist a slight difference.

Unique characteristics of Japanese enterprise unions

Generally speaking, industrial societies are becoming similar, an indication that the convergence theory of history is also valid in the field of industrial relations. But national uniqueness does not disappear so long as it is appropriate for and does not hinder the economic and societal development of the society In terms of organizational structure, Japanese enterprise unions have a few unique features compared with similar labor organizations of foreign countries. Firstly enterprise unions in Japan are distinctive in regard to membership eligibility. In Japan, both white-collar and blue-collar workers join the same enterprise union, without exception. In the case of blue-collar workers, members retain their union status until they are promoted to general foremen and white-collar workers usually lose membership eligibility when they are promoted to kachou (section chief). In the Republic of Korea, the bottom organizations of national unions are enterprise unions but white-collar employees do not usually join these unions. In the USA, white-collar workers are organized separately.

The second distinctive feature of enterprise unions in Japan is the alignment of union members. Enterprise unions are organized according to the organizational structure of the enterprise or company. Skilled tradesmen or professionals do not have their own organizational chapter within the enterprise union. For example, a medical doctor (company doctor or company clinic

enterprise unions 141 doctor) belongs to the hospital or clinic section of the enterprise union; there is no separate branch within the organization for professional people in the enterprise union. Medical doctors, nurses, technicians, clinic clerks and janitors join the same union chapter and meet at the same union conference.

The third feature that is characteristic of most

Japanese enterprise unions is their dual role in relation to management. Enterprise unions engage in collective bargaining with management and at the same time take part in joint consultation committees as partners to make the enterprise more competitive and to enhance its profitability. This two-faceted nature of the enterprise union raises serious questions for both practitioners as well as scholars of industrial relations in Japan and abroad. Collective bargaining is a process for resolving antagonism and disputes between employers and employees, and it presupposes the existence of adversarial relations between the parties. But union participation in management or the decision-making process and partnership between employers and employees rests upon an opposite philosophy namely that the parties share mutual interests and are like “a crew in a life boat” (Gemeinschaft in

German). Enterprise unions in Japan engage in wage negotiations annually and sometimes strike to win their demands. At the same time, enterprise unions meet and discuss managerial matters with employers at least four times a year at the roushi kyougi kai (union-management conference).

Controversy over the nature of the enterprise union

Enterprise unions play a balancing act between their roles as collective bargaining agents and management collaborators. Is it possible for a union to do that? There have been heated controversies about this in postwar Japan. Some practitioners and scholars assert that enterprise unions are not bona fide unions, that they are companydominated labor organizations in nature, and that they must be destroyed and replaced with bonafide trade unions. This type of leftist opinion is called

dappi ron (casting off argument) and one of the slogans of such proponents is “towards industrial unionism.” Other practitioners and scholars evaluate union participation in management highly and praise enterprise unions as the most advanced organizational form of trade unionism today. This type of participationist view is called

yougo ron (defense of enterprise union).

Today practitioners are losing interest in the debate but industrial relations scholars and labor historians are enthusiastically discussing the problem. After the collapse of the Soviet Union, Marxists are becoming even less influential among intellectuals and at the same time such radical opinions of trade unionism are fading even among academics.

Past, present and future of enterprise unions

Enterprise unions were hastily organized in the latter half of 1946, with the strong support of the

Occupation Army SCAP (Supreme Commander of Allied Powers) ordered the government of Japan to enact labor legislation for the democratization of Japan, and the Diet (Parliament) rapidly enacted the Trade Union Act in December of

1945. The Act was implemented in April of 1946.

During the war, workers had been organized in enterprise-based patriotic organizations called

sanpou, short for Sangyou Houkoku Kai (Industrial Patriotic Association). Sanpous were the forerunners of enterprise unions. Blue-collar as well as white-collar workers joined the sanpou, which was engaged in both negotiation and participation. The reason that the trade union movement in Japan was able to deeply take root in enterprises in a short period of time was the historical good luck of the War and the Occupation, times during which employers’ were easily deprived of their management prerogatives. Enterprise unionism was one of the “war babies.”

The enterprise union is the most appropriate type of organization for a trade union playing the double roles of negotiation and participation.

Recently the Dunlop Commission in the USA recommended the introduction of enterprise-union organizations to promote union—management cooperation. The enterprise union is one institutional model of present-day industrial democracies in which worker participation and

142 environmental and ecological issues employment security is growing increasingly important. The enterprise union provides unions with three organizational advantages: (1) participation in the creation of rule-making for work;

(2) enhancing employees’ career development; and (3) maintaining employment security.

Further reading

Koike, K. (1977) Shokuba no Rodo Kumiai to Sanka (Workplace Labor Union and Participation).

Oukochi, K. (ed.) (1956) Rodo Kumiai no Seisei to Soshiki

(Formation and Organization of Labor Unions), in

Sengo Rodo Kumiai no Jittai (Realities of Postwar Labor Unions), Tokyo: Tokyo University Press.

Roshi Kankei no Nihibei Hikaku (Comparative Labor Relations in Japan and the US), Tokyo: Toyokeizai

Shinpo Sha.

Shirai, T. (1979) Kigyoubetsu Kumiai (Enterprise Unions),

Tokyo Chuo Koron Sha.


environmental and ecological issues

Alternately described as an environmental outlaw or an environmental performance leader,

Japan’s record with regard to the natural environment has been filled with a complex mix of environmental tragedies and triumphs. During its high economic growth years of the 1950s and

1960s, Japan experienced environmental degradation that was without historical precedent.

While Japan continues to be criticized for such practices as whaling and importation of tropical hardwoods, Japan also merits recognition for its subsequent achievement of world-class performance on several environmental measures. Recently the involvement of Japanese business in environmental issues has been undergoing a notable transformation as it attempts to shift from a reactive orientation to a more proactive stance.

During the late 1990s and early 2000s in particular, leading Japanese companies have actively worked to improve their environmental performance through greener technology purchasing, operations, accounting and other means. At the same time, the Japanese economy as a whole continues to face considerable challenges in achieving environmentally sustainable development.


While medieval Japan had experienced instances of severe forest depletion and watershed erosion, the first major case of industrial pollution began in the 1880s with the Ashio Copper Mine in

Tochigi, where mining wastes poisoned the region’s rivers and lands. Though other cases of industrial pollution continued to emerge throughout Japan, one that eventually attracted worldwide attention was Chisso Corporation’s discharge of mercury compounds into Minamata

Bay Eventually thousands of Minamata residents suffered debilitating effects or even died due to mercury poisoning from eating contaminated fish.

Though human cases were first reported in 1956 with the probable cause determined soon afterward, cover-ups and denials by Chisso with the backing of the Ministry of International Trade

and Industry (MITI) delayed an official confirmation of Chisso’s responsibility until a 1968 announcement by the Ministry of Welfare. In the meantime, outbreaks of several other pollutionrelated diseases occurred, including itai-itai disease from cadmium poisoning in Toyama,

Yokkaichi asthma named after the city by that name and its smog-emitting petrochemical industrial complex, and yet another case of mercury poisoning in Niigata prefecture. The severity of widespread pollution led one international observer to liken Japan to a test case of unrestrained industrialization that the rest of the world was watching, much as coal miners once watched the canary in the cage.

Increasing public concern during the 1960s about widespread air and water pollution eventually resulted in government action, with the

1967 passage of the first basic environmental protection law. Due to industry pressure, however, this law contained a clause that environmental protection was to be pursued in

“harmony with sound economic development.”

Intense public concern continued, however, and led to a special Diet session in 1970 that passed fourteen strict environ mental laws and abolished the “harmony” clause. Japan’s Environment Agency was established soon afterward in

1971. With the later passage of more laws and the creation of a number of innovative regulatory approaches, the 1970s and 1980s can be

environmental and ecological issues 143 characterized as a period of active technocratic environmental policy for pollution abatement and energy conservation, though industry pressure did win some later concessions. Air pollution levels for sulfur dioxide fell from their 1967 peak to become the lowest per capita among

OEGD nations. Such improvements were due to a combination of energy conservation, fuel conversion, economic structural change, and technology investment. At its peak in 1975, investment in pollution control accounted for 20 percent of capital investment, several times higher than other OECD nations. By 1989,

Japanese companies operated three-fourths of the world’s desulpherization and denitrification units. Spurred by the “oil shocks” of the 1970s and with the guidance of MITI, Japanese industry also achieved the world’s highest level of energy efficiency Energy consumption and carbon dioxide emissions remained nearly level from

1970 to 1987 even while the index of industrial production increased by 70 percent, with a majority of this effect attributable to improved energy efficiency (Watanabe 1997). As a result of

R&D and investments in energy conservation and pollution control, Japan came to be a world leader in many environmental technologies.

Recent issues

The 1990s marked a new era for Japan and the environment. At the international level, Japan was increasing its environmental diplomacy efforts and attempting to position itself as an environmental leader in the global community Domestically a new wave of environmental legislation was passed, including an ambitious new basic environmental law. In the years afterward, several additional laws were enacted dealing with packaging, energy conservation, recycling of automobiles and household appliances, pollutant release and transfer registration, and the creation of a

“sustainable recycling-based society” (junkan-gata

shakai). In 2001, Japan’s Environment Agency was raised to ministry status. During the 1990s, the

Japanese business community also experienced a shift in its environmental stance, as being

“green” became an increasingly important business issue. Symbolizing this was Keidanren’s release of a Global Environmental Charter in 1991

(later updated in 1996) that notes the responsibility of corporations to protect the global environment and its resources. By the late 1990s and early 2000s, the Japanese business press was regularly reporting on corporate environmental initiatives and companies touted their accomplishments in frequent press releases.

Representing this rise in Japanese corporate environmentalism was the “ISO 14000 boom,” referring to the intense interest shown in the international standard for environmental management systems released October, 1996.

Certification activity was initially highest among export-oriented industries such as consumer electronics, but quickly extended to other industries and even local government bodies. As of

January 2001, Japan’s number of certifications ranked highest internationally at 5,338, double the number for the next highest country Germany and nearly four times that of the UK or


Besides corporate image and meeting market requirements, improving eco-efficiency is another motivation behind this activity as companies try to reduce wastes and resource consumption. A number of Japanese firms, including Kirin Brewery NEC and Honda, have announced that their plants have achieved “zero emissions,” where practically all the waste stream is recycled in some way rather than hauled to a landfill. Some firms are increasing their efforts at recycling and remanufacturing parts for reuse in new products. Fuji Xerox, for example, first modeled its remanufacturing efforts after Xerox in the USA, but reports that it has since improved upon and overtaken Xerox.

Also, stricter laws on packaging and recycling are motivating companies to design products with lower end-of-life costs.

Forming the subject of MITI’s Eco-Vision report, environment-related businesses have been another area of activity Many firms have established divisions or subsidiaries to provide environmental services and others have increased their efforts at developing and marketing clean technologies and systems. Besides green process technologies, many firms have also been successful in developing market-leading green products.

144 environmental regulations

Japanese firms lead in such areas as battery technology hybrid cars, solder-free electronics products, and consumer goods with ultra-low power consumption.

Corporate environmental reports, though rare in the early 1990s, are now becoming de rigueur.

Also, by 2000, one in five firms surveyed by

Nikkei had initiated environmental accounting.

Though savings are achieved in some areas, early reports generally showed overall environmental costs several times larger than environmental savings. In addition, a Nikkei survey showed nearly one in four companies as having established environmental criteria for procurement decisions. Also, Japan’s first eco-funds for investors began in the summer of 1999, with Toyota,

NEC, Sony NTT, Matsushita, Fujitsu, and Ricoh among the more popular companies for investment.

resources. The challenge, however, is that Japan’s own biological capacity to provide those resources was less than one-sixth of that required.

Further reading

Environment Agency (2000) Kankyo Hakusho (Quality of the Environment in Japan) Tokyo: Gyousei.

Ishizu, T., Ichie, M. and Shimizu, M. (1993) Japanese

Corporate Response to Global Environmental Issues, Japan

Development Bank Research Report No. 36, Tokyo: Japan Development Bank. Nikkei Ecology, Tokyo: Nikkei Business Publications (monthly).

Tsuru, S. (1999) The Political Economy of the Environment:

The Case of Japan, Vancouver, BC: UBC Press.

Tsuru, S. and Weidner, H. (eds) (1989) Environmental

Policy in Japan, Berlin: Edition Sigma Bohn.

Watanabe, C. (1997) “The Role of Technology in Energy/Economy Interactions: A View from Japan,” in Y.Kaya and K.Yokobori (eds), Environment, En-

ergy, and Economy, Tokyo: United Nations University Press, 199–231.



Japan has achieved a dramatic turnaround from the 1960s and 1970s when it was known as a

“showcase for industrial pollution.” Nevertheless, its progress is far from complete. Development and public works projects routinely take precedence over nature conservation. Biodiversity faces serious threats. Reports of illegal dumping of wastes are not uncommon. A reliance on incineration of wastes has led to dioxin levels far higher than other countries. Also, due to its high population density and relative lack of natural resources, Japan will continue to face the challenge of sustaining its economic well being. According to a 2001 cross-national comparison conducted by the World Economic Forum, Japan ranked behind most industrialized nations on its index measuring environmental sustainability at twentysecond, with Finland ranking first, Canada third,

Australia seventh, USA eleventh, Germany fifteenth, and the UK sixteenth. Yet another study from the 2000 Living Planet Report compared the ecological footprint of various nations: the land and sea area necessary to meet their consumption of food, materials, and energy According to this study Japan’s eco-footprint on a per capita basis was among the smallest of the industrialized nations due to relatively efficient use of

environmental regulations

Before the 1970s, Japan’s environmental policy focused on anti-pollution measures by directly controlling emissions from factories and power plants. Rapid growth in Japan in the 1970s and

1980s, however, led to increased pollution. Domestically Japanese businesses were criticized for being concerned only for growth and for being the cause of pollution and ecological destruction.

The attitude of Japanese firms led to lawsuits by victims of pollution. In the 1980s the focus of environmental policies shifted to automobiles and other vehicles. The Japanese government introduced several laws and regulations to deal with pollution caused by automobiles. There were also tougher regulations on diesel engine emissions.

In 1993, new pollution laws and environmental regulations were introduced. These environmental regulations covered everything from air pollution and soil pollution to solid waste management treatment systems and hazardous waste emissions systems.

Not surprisingly these new regulations have

export and import of technology 145 also led to rapid growth in the Japanese environmental system industry. Total production has been over ¥1.5 trillion in recent years. This is due to strong demand for replacement of environmental facilities constructed in the 1970s and for new systems that improve the quality of the environment. Solid waste treatment systems account for 40 percent of this demand. The market is dominated by demand from the government for new recycling technologies and by laws on recycling packages and containers. This has caused the Japanese industry for environmental systems to be a showcase for the most advanced technologies in the world, although US controls on hazardous emissions are tougher than the controls in Japan.

The Japan Environmental Association uses a life-cycle assessment (LCA) to determine if products are environmentally friendly. The Association considers products friendly when they use few resources, emit no waste during production, save energy and are easily broken down to permit recycling. In 1996, the Association revised its “eco-mark” system to promote production and use of products that are environmentally friendly.

Products that meet the LCA are allowed to display this new mark on their packaging.

In 1997 new recycling legislation was passed.

The law divides responsibility for the separation and collection of containers and packaging between local government, businesses and consumers. Due to increasing household garbage, discarded cans, bottles, and plastic containers account for over 60 percent of garbage by volume and must now be recycled. By 2000, businesses using containers and packages must treat and recycle packages and containers. PET (polyethylene terephthalate) bottles are a problem since the government does not yet have the technology to recycle them, although some cities and municipalities already have separate collections of PET bottles (from 1.8 percent of container waste in 1995 to 14 percent in 2000, and expected to rise to a rate of 27 percent in 2005).

Dioxin pollution is another major environmental issue in Japan. Ninety percent of dioxin pollution comes from the incineration of garbage such as plastics (PCBs). The dioxins enter the atmosphere as soot particles falling into soil, rivers and oceans. They enter the food chain through drinking water, and fish and livestock used for human consumption. New legal regulations on dioxin emissions from refuse incineration were established in 1997 amending both the

Waste Disposal Law and the Air Pollution Control Law.

Eco-business has seen new opportunities in Japan due to these environmental protection regulations. The Ministry of International Trade

and Industry (MITI) predicts rapid growth in environmental support, waste and recycling, environmental conservation, environmental friendly energy and environmental friendly products. By

2010, MITI expects eco-business in Japan to be a ¥3.5 trillion market.

See also: business ethics


export and import of technology

Japan’s rapid economic expansion, both in the years between the Meiji restoration (1868) and the Second World War and in the first three or four decades after the war, is often credited to its efficient utilization of technologies developed in the West. Japan is still the world’s largest importer of technology. As Japan became a technology super-power in the 1970s, it also began to emerge as a significant exporter of technology Today it is second only to the United States in the value of technology exported.

Prewar imports of technology

Japan began systematically importing technology in the seventh century when it brought in weaving, pottery lacquer ware, mining, metallurgy and farming technologies from China.

Technology was also acquired from Korea. In the late sixteenth century the Portuguese brought Western guns and artillery to Japan.

The Japanese quickly developed the ability to produce their own firearms and even introduced some refinements.

During much of the Tokugawa Period (1603–

1868) contact with the outside world was severely restricted. Foreign books (except for those on

146 export and import of technology

Christianity) however, could be brought in beginning in 1720. Since the Dutch were the only

Westerners allowed to trade with Japan, it was

Dutch-language books on Western science and technology that were imported. A government official produced a Dutch-Japanese dictionary in

1745. In 1774 a book on anatomy was translated into Japanese. The book demonstrated the universality of Western science and inspired translations of books on astronomy physics, chemistry and botany. In 1808 the government established a special office for the translation of Western books.

In 1853 and 1854 a US naval squadron under Commodore Perry visited Tokyo Bay to pressure the Japanese government to open Japan to trade. The squadron demonstrated such achievements of Western technology as the steam engine and the telegraph. The obvious military advantages that technology gave the Westerners caused both the central Tokugawa government and the regional rulers to strive to absorb military and related technologies as quickly as possible. Some ninety young Japanese were sent abroad to study Western technology and institutions. The Tokugawa government requested

Dutch and French help to build facilities to make iron and build ships.

Efforts to assimilate Western technology reached a fever pitch during the Meiji Era (1868–

1912). By 1873 some 250 young Japanese were abroad studying Western technology and administrative practices. The Ministry of Industry

(Komusho, also called Ministry of Engineering) played a key role in the adoption of foreign technology from 1870–85. The Ministry and other parts of the Japanese government hired some two or three thousand foreign technical experts in the late nineteenth century Englishmen were put in charge of Japan’s rail and telegraph systems, and

Germans served as experts on medicine and medical education. Large numbers of American and

French technical advisors were also hired.

The foreign experts had the highest salaries in the Japanese government at the time. Providing for their transportation, housing and entertainment was also very expensive. By 1879 the high cost of the foreigners, plus the desire of the

Japanese to become as independent as possible, led the government to move aggressively to replace the foreigners with Japanese who had studied technology abroad or who had been trained by the foreign employees.

The Japanese often found it necessary to make major adaptations before they could use foreign technology. In 1897, for example, the

Japanese government planned a world-class integrated iron and steel works at Yawata. Since

Germany had the world leading blast furnace technology at the time, Germans were hired to design the construction of the blast furnace and supervise its construction. German foremen and workers were also hired to supervise operations.

The technology however, was not suited to the types of coke available in Japan and the plant was forced to shut down. The Germans were sent home and Japanese successfully redesigned and operated the steel works. Japan’s growing mastery of imported Western technology was further demonstrated in 1905 when the Japanese navy used wireless telegraphy to decisively defeat a Russian fleet.

Despite these successes, the Japanese sometimes had to rely on on-going foreign support to effectively use imported technology. In the electrical industry for example, Japanese firms relied heavily on the capital, patents and technical guidance of Western firms. General Electric provided technology and took a stake in Toshiba.

Mitsubishi Electric was formed with the participation of Westinghouse. Fujitsu was formed as a joint venture between Fuji Electric and Siemens.

Japan imported far more technology than it exported in the decades before the Second World

War, but there were some consequential Japanese technology exports. Perhaps the best known of these was the sale of patent rights for the Toyota

Automatic Loom to Platt Brothers of Great Britain in 1929. The proceeds financed Toyota’s entry into the automobile business. Other prewar

Japanese technologies, notably the Yagi antenna

(invented in 1926), also came to be used widely around the world.

Despite the strong realization that Japan needed foreign technology to maintain its economic and military security the Japanese periodically became concerned about the risk of being overly dependent on foreign technology.

In 1896, for example, Japanese shipyards were forbidden to use imported ship parts. During the

export and import of technology 147

1930s foreign firms such as General Electric,

Western Electric, and Westinghouse were forced to turn their Japanese operations over to their

Japanese partners.

Postwar technology import control policies

In the years following the Second World War,

Japan’s leaders were again convinced that Japan needed to import technology to catch up with the West. At the time Japan suffered from chronic balance of payments deficits, and the government tightly controlled foreign currency. Firms wanting to import technology during the 1950s and

1960s had to get the foreign exchange to pay for it from the government. Approval was required from the most relevant Ministry most often the

Ministry of International Trade and Industry

(MITI). Government staff reviewed the proposed agreements to ensure that the Japanese buyer was not paying too much or being unduly restricted in using the technology and that the agreement was beneficial to the Japanese economy Government controls were substantially eased in the

1960s as Japan joined the OECD and changed its status in the IMF, but the currency control laws remained in effect until 1980. Since then

Japanese government controls over technology trade have been closer to those in other developed countries.

There is a long-standing controversy over whether the restrictive controls in the 1950s and

1960s benefited or harmed the Japanese economy

Some observers conclude that government intervention in technology import must have been harmful. They cite Sony’s import of transistor technology. MITI delayed Sony’s agreement to import the technology from Western Electric because Sony was then a small and unknown company. While Sony did successfully import and commercialize the transistor, some argue that it might have done so more quickly and at lower cost without government intervention. They further suggest that there may have been other firms that failed to surmount bureaucratic barriers, costing Japan even greater economic success in the

1950s and 1960s. The Japanese-language literature mentions another instance where government intervention apparently raised costs to

Japanese importers of technology. In 1958, two firms signed agreements to import polypropylene production technology from Italy MITI did not approve the agreements. When Japanese firms finally did import the technology the cost was substantially higher.

Those arguing that the technology import control policies benefited Japan point out that government intervention allowed a pooling of the limited experience of Japanese firms with international agreements, put government pressure on the side of the Japanese negotiators, kept Japanese firms from bidding against each other (raising the price of a technology), encouraged foreign firms to sell technology to Japanese firms (because of government guaranteed payments), and kept

Japanese firms from using technology agreements to monopolize the Japanese markets. These claims are supported by well-documented cases in the steel and computer industries. It has also been pointed out that only two or three example of apparent harm caused by the policies have appeared in the literature.

Japan’s technology imports

During the 1950s the Japanese government approved more than one thousand “A” technology import agreements (in which the effective life of the agreement was more than a year and payment was to be made in foreign currency). US firms were the technology suppliers for two-thirds of these agreements. About half the agreements were in just three industries: electrical/electronics, chemicals and steel/non-ferrous metals. The

USA continues to supply about two-thirds of

Japan’s technology imports, though today most of the imports are in electronics and computer software.

Japan’s postwar technology exports

Japan’s technology exports were relatively stagnant through the 1950s, and overwhelmingly concentrated in Asia. In 1960 the Japanese steel industry achieved a breakthrough by signing its first major contract for the export of technology.

The recipient of the technology was a Brazilian company which paid nearly six million dollars for technical guidance in building a steel plant.

In 1963 Japanese steel makers made their first

148 Export-Import Bank of Japan technology exports to advanced Western countries, and in 1974 steel became Japan’s first industry to achieve a technology trade surplus. The steel industry continued to generate large revenues for its technology as Japanese firms entered into technology agreements with firms in the

United States and elsewhere. The construction and textile industries also enjoyed surpluses during the 1970s, but Japan had huge technology trade deficits in electronics, telecommunications and transportation.

By the late 1970s, Japan was second only to the United States in R&D spending and Japan’s technology exports continued to increase during the 1980s and 1990s. In 1983 Japan achieved a surplus in automotive technology trade, and in

1993 in electronics. By the mid-1990s Japan had passed the UK to become the world’s second largest exporter of technology after the USA. In the late 1990s Japan’s annual technology exports were valued at about 70 billion dollars, compared to nearly five times that amount for the USA.

Nearly half of Japan’s technology exports (44 percent) went to the United States, but 34 percent went to Asia (especially Taiwan, South Korea,

China and Thailand, which accounted for 22 percent of total exports). Some 85 percent of the exports were in automobiles and electrical goods/ electronics.

There has been controversy over the benefits of Japan’s technology export practices compared to those of other advanced nations. Hatch and

Yamamura (1996) argue that Japanese firms carefully control the transfer of technology to other parts of Asia, allowing only the slow transfer of relatively old technologies. The result is an everwidening gap between Japan and other Asian countries. Yamashita (1998) agrees that Japanese firms exercise more control in technology transfers, but characterizes this as allowing a more efficient transfer that benefits the recipients.

See also: industrial policy; science and technology policy

Further reading

Hatch, W. and Yamamura, K. (1996) Asia in Japan’s

Embrace, Cambridge: Cambridge University Press.

Lynn, L. (1982) How Japan Innovates: A Comparison with

the U.S. in the Case of Oxygen Steelmaking, Boulder, CO:

Westview Press.

——(1998) “Japan’s Technology-Import Policies in the

1950s and 1960s: Did They Increase Industrial

Competitiveness?” International Journal of Technology

Management 15(6/7): 556–67.

Ozawa, T. (1974) Japan’s Technological Challenge to the West,

1950–1974, Cambridge, MA: MIT Press.

Partner, S. (1999) Assembled in Japan: Electrical Goods and

the Making of the Japanese Consumer., Berkeley CA:

University of California Press.

Peck, M. and Tamura, S. (1976) “Technology” in

H.Patrick and H.Rosovsky (eds), Asia’s New Giant,

Washington, DC: Brookings Institution, 525–85.

Samuels, R. (1994). “Rich Nation, Strong Army:” National

Security and the Technological Transformation of Japan,

Ithaca, NY: Cornell University Press.

Yamashita, S. (1998) “Japanese Investment Strategy and

Technology Transfer in East Asia,” in H.Hasegawa

and G.Hook (eds), Japanese Business Management,

London: Routledge, 61–79.


Export-Import Bank of Japan

Originally called the Japan Export Bank,

ExportImport Bank of Japan (Nihon

Yushutsunyuu Ginkou) was one of the principal governmentfunded financial institutions in Japan.

Headquartered in Tokyo, it provided wide ranges of services, engaging primarily in overseas investment financing and trade financing.

The Japan Export Bank was established in

1950, but changed its name in 1952 to the Export-Import Bank of Japan when it expanded its activities to include import financing. The bank’s principal activity was the provision of low-cost loans to support corporate growth. Such activities included, for instance, credits for exports of heavy industrial products and imports of raw materials in bulk as well as financing ships and industrial plants in order to promote the export of Japanese products. In the 1960s the bank provided loans to Japanese ventures for overseas investments and expanding of overseas resources.

The Export-Import Bank of Japan also provided yen loans to developing countries in order to allow them to import from Japan, these loans in

Export-Import Bank of Japan 149 particular constituted a large portion of the bank’s activities. The bank limited the uses of its loans to Japanese investors to three general purposes:

(1) to finance the equity of ownership in overseas ventures; (2) to provide debt capital to overseas ventures; and (3) to finance the purchase of plants and equipment from Japanese firms, to be installed in overseas ventures.

The Export-Import Bank of Japan came under growing pressure from other countries, particularly from the United States, to make changes to its onesided trade policies and its growing trade surpluses. As a result of foreign pressures, the bank began to develop some programs to assist in management of the global economy. In 1986 it began to work with the World Bank and the

Asian Development Bank in co-financing loans to developing countries.

In October 1999 the Export-Import Bank of

Japan merged with the Overseas Economic Cooperation Fund of Japan, forming the Japan Bank for International Cooperation (JBIC), a government financial institution facilitating crossborder economic cooperation. The purpose of the Japan

Bank for International Cooperation is to contribute to the development of Japan and the international economy and community through undertaking lending and other financial operations.

Among these operations are the promotion of

Japanese exports, imports and Japanese economic activities overseas, the development of stability of the international financial order and the economic and social development of economic stability in developing areas. The Japan Bank for

International Cooperation functions in accordance with the principle that it shall not compete with commercial financial institutions and has taken the general responsibility for: (1) financing to contribute to the promotion of Japan’s exports or imports and overseas economic activities, and to the stability of international financial order; and (2) financing to contribute to economic and social development and the economic stability in overseas developing regions. It will also combine the knowledge and enterprise, which the two institutions have accumulated, and the synergy effect of the merger will hopefully prove beneficial to the Japan Bank of International Cooperation.



Fair Trade Commission

Japan’s Fair Trade Commission (FTC) is the country’s sole competition policy agency responsible for the enforcement of the nation’s Antimonopoly Law as well as two additional statutes promoting protection of small business and consumers. The FTC, created in 1947 according to the mandate of occupying American forces after the Second World War, is based on the US independent commission-style of government agency

Its powers appear broad on paper, and include quasi-legislative (rule-making powers) and quasijudicial functions (independent hearing and appeal procedures) in addition to its administrative role. In spite of its powers, however, the agency has been buffeted consistently by opposing forces for much of its history thereby having a deleterious effect on the overall importance of competition policy in Japan.

Organization and function

Organizationally the FTC is headed by a commission of five members appointed by the prime minister and confirmed by the Diet for five-year terms, one of whom acts as the chairman of the

FTC. Since the early 1950s, appointments to the

Commission traditionally have been made from former officials of a select group of government ministries. These patterns of appointments are widely perceived to have compromised the agency’s independence. By the mid-1990s, however, these appointment patterns changed so that the industrial and finance ministries no longer had a dominant presence on the Commission.

The agency is staffed by career civil servants who undertake the day-to-day work of the agency although a small but significant number of these employees also have come from other ministries.

Japan’s Antimonopoly Law has features similar to other such laws in advanced industrialized countries, including prohibition of private monopolization, unreasonable restraints of trade (cartels, boycotts, etc.), and unfair trade practices. The former two are punishable by administrative or criminal measures and, in the case of restraints of trade, by fixed surcharges on illegal activity.

Measures against unfair trade practices are limited to orders to cease illegal activities and take appropriate remedies. The Antimonopoly Law was passed with additional provisions unique to

Japan’s competition policy regime, such as a ban on holding companies to prevent the re-formation of industrial groups, or zaibatsu.

The FTC also enforces unfair business practice laws. One helps provide small business with some protection from larger companies in their business dealings, and another protects consumers from misleading advertising and aggressive advertising promotions. It should be noted that the restrictions on promotions and premiums, while playing some consumer protection role, also appears to have limited competition in the retail sector.


The FTC has had a difficult history for much of its existence, even having been threatened with

firm strategies for technology 151 complete abolition from time to time, particularly during periods when Japan’s conservative Lib-

eral Democratic Party (LDP) has held a strong majority in the Diet. The introduction of US-inspired antimonopoly legislation in 1947 directly challenged pre-Second World War and in particular wartime industrial practices of government and industry-led control associations, turning

Japan’s industrial, political, and bureaucratic elite against the agency and its legislative mandate.

The US Occupation’s anti-zaibatsu program, including dissolution and restrictions under the Antimonopoly Law, also was an additional factor.

Conservative forces began consistent efforts from the late 1940s to emasuclate competition policy through efforts such as weakening the

Antimonopoly Law, drawing up legal exemptions to the Law, and circumventing the Law through the formation of cartels among businesses to be led by bureaucrats in other agencies. The FTC survived complete abolition through the 1950s and 1960s by weakening its standards, failing to take on high-profile cases, and appealing to small business and other groups to support the agency and its role.

The FTC re-emerged during the early 1970s when inflation and suspected price rises by cartels became an important political issue. The FTC took on a high-profile case against oil companies in the wake of the 1973 oil shock and followed with an active anti-cartel campaign. The attention enabled a strengthening of the Antimonopoly

Law in 1977, including the addition of mandatory surcharges on cartel activity. As inflation faded and as the LDP emerged again as the dominant party in the 1980s, the FTC de-emphasized active enforcement in favor of a defensive program to encourage compliance with the law.

The rise of Japan’s industrial might by the late

1980s brought international scrutiny of Japan’s industrial structure and business practices that were perceived to keep foreign companies out of

Japan’s domestic market. Strong pressure was brought to bear on Japan by the United States to strengthen measures against anti-competitive practices. As a result, the FTC again emerged with a stronger profile. Cartel surcharges were raised, among other measures. The FTC also began stronger efforts to enforce the law, including intermittent use of referrals of criminal acts to Japan’s Public Prosecutors Office. By the end of the 1990s, the dissolution of the Left in Japanese politics and an economic downturn enabled the repeal of the ban on holding companies. The

FTC nonetheless remained able to continue with a cautious but moderate level of enforcement of the Law.

Current status

The FTC’s overall profile in the Japanese government today is much improved from its position during the 1950s and 1960s. However, the agency remains among the more cautious competition policy agencies in advanced countries for a variety of institutional as well as political reasons. The fact that the FTC has been embattled for much of its existence has had a critical impact on the attention that Japanese companies have paid to competition policy in their overall business activities. This is particularly relevant because the agency until very recently effectively has controlled access to, interpretation of, and remedies and punishments under the Antimonopoly Law. Direct access to the courts to file

Antimonopoly Law grievances now is allowed for lesser violations under unfair methods of trade provisions.

Further reading

Beeman, M. (1997) “Public Policy and Economic Competition in Japan,” D.Phil Thesis, University of Oxford.

Hadley E. (1970) Antitrust in Japan, Princeton, NJ:

Princeton University Press.

Iyori, H. and Uesugi, A. (1994) The Antimonopoly Laws

and Policies of Japan, New York: Federal Legal Publications.

Matsushita, M. (1993) International Trade and Competi-

tion Law in Japan, New York: Oxford University


Tilton, M. (1996) Restrained Trade, Ithaca, NY: Cornell

University Press.


firm strategies for technology

Firm strategy for technology is roughly divided into goal setting in technology development and

152 firm strategies for technology the formulation of the means to obtain the goals set. Setting a goal in this context means the selection of a technology domain to which firm resources are allocated. To formulate the means to acquire technologies, alternative methods such as in-house development, alliances with other companies, license contracts and acquisitions of companies are considered. In addition, the approach to innovation—whether a company achieves its targeted performance through means of radical innovation or by accumulating incremental innovations—could be included in the formulation of means.

Selection of technology domain

The key characteristic of Japanese companies in terms of the selection of technology domain is homogeneity with its competitors. Many companies tend to select a similar domain to that of their competitors. As a result, many unremarkable companies may compete against each other in the same industry. This occurs because firms believe that by mimicking competitors’ technologies and products they can avoid being in a weak position in the market. This strategy seems to run contrary to the general theory of strategic management, which proposes that firms should accumulate distinct technical resources, and introduce differentiated products in the market.

Lacking distinctive or differentiated products,

Japanese firms often compete on the basis of price. But intensified price competition with homogeneous competitors is likely to decrease company profits, and hurt a company’s ability to make long-term investments as well. In this sense, Japanese firm strategy is often regarded as irrational.

However, Japanese firms have succeeded in some industries by using a mimic strategy For example, the Japanese color television industry was successful by adopting homogeneous technologies. As changes in televisions production technology began to occur with the adoption of transistors and integrated circuits, Japanese firms copied one another, while American firms did not follow suit. Led by Motorola, only a few US companies adopted these technological innovations early on. But the leading companies in Japan—Matsushita, Sony, Toshiba, and others—followed the innovation of Hitachi immediately. As a result, intense competition in the product market occurred, and Japanese companies boosted their frequency of new product de-

velopment in order to compete in a tough market.

In turn, the cost performance of Japanese products was remarkably improved, leading to the defeat by Japanese companies of US competitors in US markets. Although the selection of similar technology can intensify competition in an industry it can also lead to mutual learning among competitors and the development of related industries.

As a result, products and manufacturing processes can be improved quickly in comparison with foreign competitors.

The matter of the homogeneous selection of technologies has sparked interest from a different direction in more recent times. The adoption of a unified technical standard in an industry particularly in high-tech industries, has become important. The underlying reason for this tendency is the spread of products connected to the diffusion of its complementary goods, such as application software for personal computers (PCs). To produce these types of products, companies prefer developing and manufacturing products with a unified standard as opposed to having to compete among companies with different standards in the same market. A good illustration of competition over a technical standard is the wellknown case of a videocassette recorder (VCR) standard among Japanese companies. In the 1970s the Betamax standard developed by Sony and

VHS standard promoted by Matsushita and JVC competed head-to-head in the consumer VCR market. Though considered technologically inferior to Betamax, the VHS standard eventually won out. The major factor in VHS’s predominance in the market was the spread of VHS-complementary goods: software and product. The

VHS standard defeated the Betamax standard, even though it was introduced to the market much later than Betamax.

Means of technology acquisition

The means to acquire technology are: in-house development, alliances with other companies, license contracts and the acquisition of a company that has valuable technologies. From the end of

5S campaign 153 the Second World War to the 1960s, technology introduction by means of license contracts was the primary means by which Japanese firms accomplished their technology development goals.

After the 1970s, however, the rate of in-house technology development was increased, which is preferable in terms of the long-term growth prospects of companies. In fact, new products developed by Japanese companies, such as the consumer

VCR and facsimiles, have increased remarkably.

Also in the field of intermediate goods, such as

LCD and industrial robots, Japanese technology developed in-house has surged ahead of other countries.

However, in the 1980s and 1990s, companies began to focus on technical alliances and acquisitions. The speed of technology development has increased, while the ability to develop technology in-house remains relatively unchanged due to the long time it takes to develop technological capabilities in-house. Increasingly Japanese firms have sought alliances with firms outside Japan.

For example, a Japanese drug manufacturer,

Takeda Chemical Industries, Ltd, tied up with

Abbott Laboratories and succeeded in developing a new medicine for prostate cancer, Leuplin.

However, compared with the behavior of firms in the United States, these methods are not as widespread in Japan.

toms, rather than that of deliberate strategic choice by corporate executives. Thus some researchers express doubts about the innovation capability of Japanese companies, especially with regard to their ability to achieve radical innovation. They argue that the Japanese system of training engineers, the labor market, the corporate culture and other features of the Japanese system create obstacles to pursuing a technology strategy that focuses on new radical technology development. However, it cannot be easily determined that one is better for the progress of technology than the other, and the tendency of adopting an incremental approach does not necessarily mean a low ability for technical innovation.

Further reading

Finan, W.F. and Frey J. (1994) Nihon no gijutsu ga abunai

(Japanese Technology at Bay), Tokyo: Nihonkeizai


Porter, M.E. (1985). Competitive Advantage: Creating and

Sustaining Superior Performance, New York: The Free


Rosenbloom, R. and Cusumano, M. (1987) “Technological Pioneering and Competitive Advantage: The

Birth of the VCR Industry” California Management

Review 29 (4): 51–76.

Shintaku, J. (1994) Nihon kigyo no kyoso senryaku (Competitive Strategy of Japanese Corporations), Tokyo:



Approach to technical innovation

In terms of their approach to technical innovation, Japanese companies focus on incremental innovation rather than radical innovation. With regard to technical innovation, although the introduction of epoch-making technology often attracts great attention and is viewed as being central to technological progress, the accumulation of incremental innovations often brings great progress in technological advances as well. Frequent introduction of new products with incremental innovations has the advantage of making use of the “learning by using” of customers and the experience of manufacturing in contributing to the progress of technology.

Many studies tend to view the technology orientation of Japanese firms as an inevitable consequence of Japanese institutions and cus-

5S campaign

The 5S campaign is a technique used by Toyota and other Japanese firms to establish and maintain a quality environment in the organization.

The name stands for five Japanese words: seiri,

seiton, seiso, seiketsu, and shitsuke.

Seiri means structure or organize. An example would be to throw away rubbish. Seiton means systematize or neatness. A typical example would be the quick retrieval of a document.

Seiso means sanitize or cleanliness. It is an individual’s responsibility to keep the workplace clean. Seiketsu is standardize or standardization.

154 foreign aid

Shitsuke means self-discipline, in other words, following the 5S’s daily.


foreign aid

In line with postwar Japan’s emphasis on nonmilitary contributions to international society

Japan’s foreign aid has been limited to official development assistance (ODA) and disaster relief aid. Since its origins in early postwar bilateral reparation agreements, Japan’s foreign aid grew to be the single largest aid program in the late 1980s, and it retains that status as of 2001 despite growing domestic pressure for budget cuts.

The Potsdam Declaration (1945) which set the

Allied Powers conditions for peace with Japan called on the latter to pay war reparations to all victims of Japanese wartime aggression. The San

Francisco Peace Treaty (1951) narrowed this by limiting Japan’s reparation obligation only to countries that suffered losses as a direct consequence of Japanese occupation. As postwar Japan re-established ties to its Asian neighbors, the reparation obligation in each case became a key initial hurdle to normalized bilateral relations.

Japan’s situation at that time played a critical role in determining its reparations policy and subsequent ODA policy. As a war-devastated country seeking to rebuild its industrial base and recapture export markets, Japan decided to make reparations in kind, not in cash. Reparations would typically come in the form of industrial plant and equipment. This assisted the recipient’s industrialization and generated export orders for Japanese industry The Japanese government also adopted a request-based system. This required the recipient country to submit specific project requests to Tokyo for review.

But because the reparation countries often did not have the technical expertise to identify and design industrial projects, in practice Japanese businesses active in these markets would fill this void.

Japan joined the Development Assistance

Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) in 1961. DAC was formed at American initiative to coordinate the Western countries’ economic assistance efforts and raise its effectiveness. Japan’s reparation programs were recognized as economic assistance, but they came under critical scrutiny within DAC because of their thinly veiled export promotion emphasis. Pressure was put on Japan to make new aid commitments that were more concessional and genuinely beneficial to the recipient economy Over the years the

DAC and its members have played a key role in moving Japan’s ODA away from its original character.

Through its aid programs Japan has offered developing countries valuable access to its high quality industrial products and engineering services. In return for granting this benefit Japan has been able to gain recipient cooperation in addressing Japan’s problems of foreign resource dependence and competitiveness in a global economy

Over the years Japan has used aid projects to secure stable long-term supplies of critical energy resources, raw materials, and food resources.

With the emergence of the borderless economy

Japan has used its aid to help Japanese firms globalize production by helping developing countries build industrial parks and regulatory environments hospitable to Japanese firms seeking to move production overseas.

Japan also offered its aid program to the West as an alliance contribution during the Cold War.

Starting from the mid-1960s Japan offered aid as support for US containment policy in Asia. In the 1970s and 1980s it offered rapid growth in its aid spending as a non-military contribution to winning the Cold War and as a salve for trade friction with its western trading partners. In the

1990s Japan attempted to use its aid to gain a larger role in international security matters by promulgating new aid principles in 1991 that conditioned ODA upon the recipients’ development, procurement, and exports of weapons. It followed this up with a symbolic and temporary cut in grant aid to China after that country’s nuclear bomb test in 1995. In the aftermath of the Asian financial crisis of 1997–8 Japan made new funding pledges for Asian currency stability. At the start of the new millennium, Japan is emphasizing the use of its aid to help narrow the so-called digital divide and to address problems of the heavily indebted developing countries.

foreign companies in Japan 155

On the domestic front, the Japanese government has confronted widening calls for greater

ODA transparency and reform from the late

1980s to the present. It attempted to deal with this by producing an ODA Program Outline in

1992 that laid down a broad and flexible set of policy principles. In response to pressures for increased effectiveness and breadth of concern Japan moved to include non-governmental organizations (NGOs) in the identification and implementation of aid projects and programs, and aid to address environmental problems became more salient in aid policy in the 1990s. Continuing aid scandals and revelations of misuse, however, along with tightening budgetary constraints throughout the 1990s led to the first ever ODA budget cut in 1997. The prospect at present is for arrested budget growth and perhaps a gradual decline in real spending terms.

Japan’s aid administration has long been noted for its opaque and bureaucratic character. The

Foreign Ministry has the role of representing Japan’s aid policy to external actors. Behind this window, however, the realities of policy making are more complicated. Aid policy is coordinated inside the domestic political system by four central government bureaucratic actors, i.e., the Ministry of Foreign Affairs, the Ministry of Finance

(MOF), the Ministry of International Trade

and Industry (MITI), and the Economic Planning Agency In addition, some fourteen other main government ministries and agencies play more specialized roles in those aspects of aid that fall into their respective areas of competence. With respect to policy implementation, the Japan International Cooperation Agency (JICA) administers most of Japan’s grant aid and the Japan

Bank for International Cooperation administers the bulk of loan aid.

In 1999 net ODA disbursements totaled $15.3

billion with almost two-thirds allocated to countries in East and South Asia. This regional distribution reflects Japan’s traditional pattern of aid-giving. In other respects, however, the breakdown of Japanese aid has changed. The balance of bilateral and multilateral aid has shifted from roughly a 2:3 ratio to a 3:4 ratio in the 1990s, reflecting perhaps some degree of Japanese disappointment at its weak leadership role in multilateral institutions relative to the size of its financial contributions. With respect to bilateral aid, the share of technical aid has increased markedly to over 30 percent while the share of loans has decreased to little more than 40 percent. This reflects a shift in emphasis away from heavy infrastructure projects toward debt relief, technical training, and programs to improve the welfare of poorer population segments.

Further reading

Arase, D. (1995) Buying Power: The Political Economy of

Japan’s Foreign Aid, Boulder, CO: Lynne Rienner.

Development Assistance Committee, Organisation for

Economic Cooperation and Development (annual)

DAC Journal: Development Cooperation Report, Paris:


Economic Cooperation Bureau, Ministry of Foreign

Affairs (annual) Japan’s ODA Annual Report, Tokyo,

Japan: Ministry of Foreign Affairs.


foreign companies in Japan

The history of foreign companies in Japan parallels the development and transformation of

Japan’s economy and also serves as a proxy for its increasing openness to foreign ideas and cultures. Very few foreign companies were active in

Japan prior to the Second World War, since Japan made few efforts to open itself to foreign products, its consumers or middle class were very small and not very exposed to non-Japanese cultures, and Japan’s distance from other markets made the conduct of business there difficult.

Nevertheless, a few companies did persist in at least establishing relationships and business in

Japan. Of those, many were invited to Japan to provide specific know-how or product knowledge that Japan could not provide for itself. For instance, the Swiss food giant Nestlé first opened a representative office in Yokohama in 1913 in order to provide milk products to Japan’s populace.

Other foreign companies operating in Japan during the 1920s and 1930s, but which had origins in the countries allied against Japan in the Second World War, were shut down or were effectively banished from Japan during the war.

After the war, foreign majority ownership of

Japanese companies was prohibited by law, but

156 foreign companies in Japan the presence of military government and soldiers from the victorious powers influenced the growth of an environment of admiration for foreign lifestyles and, as a result, for foreign products. Many of the largest and most profitable foreign companies in Japan today for example, first set up operations in Japan or began exporting to Japan in the two decades following the war.

As Japan’s society grew increasingly affluent in the 1950s and 1960s, interest in Japan among globalizing foreign companies grew, and during many of those years Japan ran a trade deficit.

But Japanese companies and government policies designed to completely protect key domestic industries (such as agriculture and distribution) combined to ensure that foreign companies would not be able to dominate specific industries and destroy their mostly smaller domestic competitors. For example, a 1956 Department Store Law protected small retailers and strengthened their ability to keep unwanted competitors out of their community And revisions to Japan’s Shogyo Ho, or Commercial Code, during the 1960s encouraged domestic companies to issue new shares and place them with friendly customers, suppliers and companies in their industrial groups. Not only would this strengthen keiretsu ties, but it would also provide insurance against unwanted foreign takeover attempts. As a result, the few foreign companies that were allowed to set up whollyowned subsidiaries in Japan, such as IBM in 1960, were forced to license most or all of their basic patents and technologies to their eventual Japanese competitors as a condition of doing so. Or, like the foreign oil companies, they were allowed to set up operations for the specific purpose of ensuring Japan’s access to essential commodities and supplies. Other successful major foreign companies formed joint ventures in Japan, such as

Hewlett-Packard with Yokogawa Electric and

McDonald’s with Fujita. A number of Chinese and Korean-owned businesses also set up operations in Japan during this time; today they account for the majority of foreign companies in


Many foreign companies soon learned that the dynamics of competition in Japan were different from those they were used to in their home markets or other markets where they competed. The willingness of Japanese companies to accept lower profits in order to obtain greater market share, the existence of exclusionary buying networks among Japanese producers and suppliers, the existence of a host of “non-tariff” or administrative barriers to trade and investment, the existence of a complex and multi-tiered physical distribution

system for many different types of products, the often greater importance of relationships, quality and service (instead of price) in buying decisions, and opaque and often arbitrary regulatory guidance and decision making, have all combined to cause difficulties for a variety of foreign companies seeking to grow their businesses in Japan.

Occasionally these problems attained a high profile or became entangled with domestic politics, as in the case of the Lockheed bribery scandal that caused the resignation of the Japanese prime minister in 1976, but more frequently foreign companies like Procter & Gamble grew to appreciate the need to modify or design their products specifically for Japan, or manufacture in Japan rather than try to import. Or in the case of General

Motors, to put the steering wheel on the right rather than the left.

In the 1970s and 1980s, certain foreign products and brands grew popular with Japan’s middle-class society including German luxury cars such as BMW, French and Italian beauty and fashion brands such as Louis Vuitton and Gucci, and U S consumer and food brands like

McDonald’s and Coca-Cola. Increases in tourism abroad by Japanese families, and a strong yen, helped expose Japanese families to foreign brands for the first time. But Japan’s growing affluence in the 1980s, its trade surplus with the rest of the world, and its increasing acquisitions or establishment of operations in its traditional export markets, increased the interest of other countries in stimulating structural changes in Japan’s domestic market that would stimulate domestic consumption, increase importation of foreign goods, and lower the trade surplus. This resulted in many cases of friction between Japanese and foreign companies competing in the same industry and also between foreign governments and the government of Japan. Negotiations between governments and among governments and specific industries often resulted in explicit agreements by Japan to increase imports, loosen regulations or ‘non-trade barriers, open specific industries for

foreign companies in Japan 157 foreign investment, reduce restric tions on foreign ownership, protect intellectual property curtail exports, or implement reforms to give foreign companies a ‘level playing field’ when competing in Japan. A variety of such negotiations, involving numerous industries ranging from textiles in the early 1980s to Internet access in the late

1990s, have taken place over the past two decades and continue today and have collectively had a major impact on the ability of foreign companies to enter and grow their companies in Japan.

Japan’s capital market development also played a role in foreign companies’ Japan strategies (see

capital markets), as foreign firms such as IBM which had major Japanese operations took their

Japanese units public in the 1970s and early 1980s as a way of emphasizing their dedication to the local market and solidify their ties to customers and suppliers. The popularity of listing in Japan died down in the early 1990s as Japan’s stock market fell, but picked up again in the late 1990s as technology companies such as Oracle listed shares of their Japan operations on the local market. Today the existence of NASDAQ Japan demonstrates the involvement of foreigners in Japan’s capital market institutions.

At present, foreign companies are entering and growing in Japan in a variety of ways, using numerous strategies and tactics to increase their prospects of success. Smaller firms or those with niche products, technologies or services often contract with middlemen of various kinds (such as agents, representatives, distributors or webmalls). Larger companies (such as General

Motors, Starbucks, and Unisys) are able to arrange partnerships and alliances in Japan, which may or may not include the formation of joint ventures or the taking of equity in their Japanese partner. For companies seeking to acquire major positions in the Japanese market immediately mergers and acquisitions or transactions which provide operating control of an already existing

Japanese company (such as Renault with Nissan) have become far more frequent, and the availability of distressed companies (or those excessively burdened by their debt) and those open to management buyouts has increased markedly in recent years (companies such as Cargill, Merrill

Lynch and General Electric have made outright acquisitions of major bankrupt companies in recent years). Foreign companies (such as AutoLiv and other global automotive systems suppliers) are also increasingly using relationships established first in their native regions with Japanese manufacturers operating abroad, to expand into

Japan with customer relationships already established. Those wishing to establish new operations on the ground are able to take advantage of the availability of qualified native staff, as well as lower costs for advertising, office space, travel, staff and entertainment. Still other companies like

US-based Boeing have established and maintained significant Japanese business while successfully avoiding the creation of Japanese competition, by making potential Japanese competitors like Mitsubishi and Kawasaki Heavy Industries significant suppliers to their commercial airplane manufacturing operations.

Foreign companies can rely on a variety of organizations and programs to support their operations and employees in Japan. Japan is the only major economy whose government has established an agency whose specific objective is to increase the level of imports to Japan, encourage foreign direct investment in the country and otherwise provide assistance to foreign companies seeking to do business in Japan. The Japan Ex-

ternal Trade Organization (JETRO) was initially created to promote Japanese exports, but now operates offices around the world and all over Japan to assist foreign companies and help them make the contacts they need to increase their Japanese business. Among its various actions, it promotes the existence of specific “foreign access zones,” which offer incentives for foreign companies which choose to establish operations in specific, often rural, prefectures. It also provides temporary office space, library facilities, and other services helpful primarily to small and medium-sized foreign companies. Other Japanese national government bodies, such as Japan Development Bank, provide financing or offer specific programs, incentives and discounts designed to encourage investment by foreign companies, including large manufacturers, in Japan. And individual prefectures and municipalities often sponsor their own programs designed to ease the entry or investment of foreign companies in their regions.

158 foreign workers

Many of the countries whose companies have come to Japan in significant numbers have themselves established both government and/or nonprofit support organizations and chambers of commerce in Japan. Organizations such as the

American Chamber of Commerce in Japan

(ACCJ), the European Business Community Organization in Japan, and Deutsche Industrie und

Handelskammer in Japan (DIHKJ) are examples of membership organizations providing information services, programs and events for their respective business communities in Japan. In addition, often specific states, regions or provinces of a country establish offices in Japan, both to promote the Japan business interests of their home companies, as well as to seek Japanese investment in their state and prefecture abroad.

Today certain foreign companies dominate their industries in Japan. Coca-Cola obtains fully

20 percent of its global operating profit from Japan, despite a host of competitors in Japan’s various beverage markets. Microsoft holds greater than a 90 percent share of the PC operating system market in Japan. American Family Life Assurance Company (AFLAC) receives more than

80 percent of its business from its Japanese sales of cancer and other specialty health insurance.

Service industries such as healthcare, nursing, eldercare, financial services, Internet, and environmental technology are in many cases wide open and solicitous of foreign technology and investment. Early in 2001 a British company BS

Group, made an acquisition in one of Japan’s largest yet most traditional industries, that of pachinko, and it is rare today to find a Japanese industry in which foreign companies do not participate at least marginally.

On the other hand, certain Japanese industries have proven too difficult or inaccessible for foreign companies to make significant inroads to date. These include the construction industry, the telecommunications industry dominated by the Japanese government through its (until recently) majority ownership in dominant telephone carrier Nippon Telegraph and

Telephone (NTT), and the agriculture industry.

In automobiles, foreign car brands still only achieve (as of 2000) 6 percent share of all vehicles sold in Japan. In fact, foreign companies play a much smaller overall role in Japan’s economy and account for a much smaller proportion of total employment, than in other developed economies in which they compete.

Nevertheless, because of relatively low share to date in Japan, and the recent weakness of an increasing number of previously formidable domestic competitors, foreign companies may find

Japan’s enormous market to be one of their last great growth markets as the new century dawns.


foreign workers

Japan continues to have the most homogeneous population of all major industrial nations in the world. Approximately 3 percent of Japan’s overall population could be described as other than culturally ethnically and racially Japanese, and this 3 percent is made up primarily of Koreans and Chinese. Both Taiwan and Korea were longterm colonies of Japan until the Second World

War, and many of these Chinese and Koreans in

Japan today were forced to migrate to Japan with the labor shortage during the war. Most of these people have remained in Japan in subsequent generations but continue to hold Korean or Taiwanese citizenship, partly because of Japan’s highly restrictive naturalization laws.

The number of foreign workers in Japan, however, has been growing in recent years. At first the increase in foreign workers was induced by the economic boom of the 1980s. Although

Japan is currently experiencing a severe economic recession, this trend persists; the number of foreign workers is now over 600,000, or about

1 percent of the nation’s working population. To a large degree, the need for foreign workers persists even during Japan’s long economic stagnation from the early 1990s because, as is common with advanced industrial nations, the more affluent and well-educated Japanese population is unwilling to perform unattractive jobs which are characterized by the so called 3Ks: kiken (dangerous), kitanai (dirty), and kitsui (demanding). Japan faces a looming crisis because of a rapidly aging population due to a serious drop in the birth rate and an increasing life expectancy that has already put Japan ahead of all other nations.

This looming labor shortage crisis is made more

foreign workers 159 critical for Japan’s future because typical solutions of immigration and increased female labor participation are culturally resisted in Japan.


During the mid-1980s and 1990s Japan began exporting jobs to Southeast Asia as the yen dramatically increased in value. If Japan is to keep existing factories and offices operating in Japan and stop short of moving most production to other countries, the immigration of foreign workers into Japan would seem the most logical solution. This is a solution all of the advanced industrial nations in Europe and North America have followed to at least some degree. But it is a solution that creates extensive resistance among the Japanese people. Japanese government surveys continue to show that Japanese people are uncomfortable among foreigners and the unfavorable treatment many foreign workers have received in Japan in recent years has caused public conflict.

When Japan experienced a serious labor shortage during the period of rapid industrialization of its economy in the mid-1960s, there was a strong demand to import foreign workers from countries such as Korea and Taiwan. However, the Japanese labor minister at the time argued against this idea, since he feared that the importation of foreign laborers might deter the nation from promoting the welfare of domestic workers and improving working conditions. Then again the same decisions were made by subsequent labor ministers in the 1970s. Japan managed without importing foreign laborers, partly thanks to the massive introduction of labor saving technologies in various industries, as well as a large labor pool in rural areas. There is growing awareness, however, that sooner or later the looming labor shortage because of the “baby bust” will demand more foreign workers.

By the late 1980s, the Japanese Diet approved several amendments to its Immigration Control and Refugee Recognition Law that became effective in 1990. The new law expands the number of job categories for which the country will accept foreign workers; from eighteen categories to a total of twenty-eight categories. These are mostly professional categories such as lawyers, accountants, medical personnel, and researchers.

However, the law also attempts to tighten up regulations and control the inflow of unskilled and semi-skilled foreign workers. It imposes sanctions on those who try to recruit or hire illegal unskilled foreign workers. The increase in the number of legal residence and work categories allows a variety of professional workers as well as the descendants of Japanese immigrants abroad, up to the third generation, to work and reside legally in Japan for a specified period of time.

In terms of controlling illegal immigration, the new law has had a temporary deterrent effect.

Before the law took effect, about 30,000 illegal workers left Japan for fear of arrest. The new visa agreement made it very difficult to obtain a visa, and contributed to the reduction of the number of visitors.

The new law also allows some unskilled labor in through the following categories: (1) company trainees, which has become a way for employers to bring in low-wage foreign workers for unskilled, manual labor jobs where little training is involved; and (2) students of post-secondary (except for university) institutions, including language and vocational schools. They can work for a limited number of hours per week.

Under this law, the only group of foreigners who can legally work full-time in simple labor jobs in Japan is nikkeijin, foreigners with Japanese ancestry. The legal status of nikkeijin workers led to the replacement of illegal foreigners with

nikkeijin by many companies. Even with these provisions created for employers to obtain unskilled workers, Japan still maintains the position that the nation does not allow unskilled laborers.

Thus, the new law has been criticized because it does not directly address the labor shortage in unskilled labor jobs.

Further reading

Kitagawa, T. (1992) “Social Research on Japanese

South American Immigrant Workers in

Oizumimachi, Gunma Prefecture: The Settling

Down Motivation and Infrastructure for Acceptance,” in K.Yamashita (ed.), Hito no Kokusaika ni

kansuru Soogooteki Kenkyuu (Comprehensive Research of Internationalization of People), Tokyo: Department of Sociology Tokyo University.

160 Fuji Photo Film

Komai, H. (1991) “Are Foreign Trainees in Japan Disguised Cheap Laborers?” Migration World Magazine


Morita, K. and Sassen, S. (1994) “The New Illegal Immigration in Japan 1980–1992,” International Migra-

tion Review 28:153–63.

Murashita, H. (1999) Gaikokujin Roodoosha Mondai no

Seisaku to Ho (Government Polities and Laws Regarding Foreign Worker Problems), Osaka: Keizai

Hooka Daigaku Shuppan Bu.


Fuji Photo Film

Fuji Photo Film Co., Ltd was established on January 20, 1934. Fuji Photo began as a division of

Dainihon Celluloid Company. At that time,

Dainihon Celluloid was attempting to cooperate with Kodak, Inc. of the United States in order to learn new techniques of film production and processing, because it lacked the technological sophistication necessary to compete. However,

Kodak refused to help, and Fuji Photo went on to learn how to produce photo film on its own.

As the company grew and developed, it diversified into many film-related businesses, globalized and became the one of the largest photo film companies in the world.

Currently Fuji Photo is a global company with over 37,551 employees worldwide, distributed across ninety-two subsidiaries. Fuji Photo’s capital stands at ¥40,363 million as of March 31,

1999, with net sales ¥1,437,810 million and net income of ¥71,540 million for the fiscal year ending March 31, 1999. Fuji Photo’s businesses include imaging systems, photo finishing systems and information systems. These activities are spread across divisions: general photo and imaging, advanced photo systems, camera and movie film, digital photo systems (Fuji developed the first digital camera in 1988), recording media

(including video tapes and CDs), office imaging information systems, printing systems, medical instruments, and high-functional industrial material.

Within the global photo film industry Fuji

Photo holds the largest market share in Japan (70 percent) and ranks second in the world. Its international success started over fifty years ago when

Fuji Photo began an optical products export business in 1949. Fuji Photo began exporting photo film to Asia and South America in 1954, slowly developing its overseas markets. During this time,

Fuji Photo took on the role as exemplar for other

Japanese companies that followed its lead in internationalizing operations and services. By taking a leadership role, Fuji Photo dominated the photo film market in Japan by 1960. In 1962,

Fuji Photo Film developed a partnership with

Xerox UK to form what is now considered to be one of the most successful joint venture companies in the history of business, Fuji Xerox. This joint venture project helped Fuji Photo to solidify its international presence and reform its image over the next few years.

Future growth for Fuji Photo will depend on the strength of their existing operations around the world. It plans to expand its digital based business as part of a drive to dominate “imaging and information.” So far, success within this growth industry has been mixed. Fuji Photo has 20 percent market share in digital cameras in the world, which, although high, places it third compared to its Japanese rivals, Olympus and Sony. Fuji Photo’s goal for the future is to be number one in the world in the digital imaging business.

Further reading

Arai, T. (1995) The Real Ability of the Lion, Fuji Film, The

Nikkan Kogyo Shinbun, Ltd.

Barron, D. (1997) “Integrated Strategy Trade Policy and Global Competition,” California Management Re-

view 39(2): 145.

Fuji Photo Film Co., Ltd. (1984) 50 Years History of Fuji

Photo Film, Tokyo Fuji Shoshun Fuirumu Kabushiki




Fukuzawa, Yukichi

Born in 1835 in southern Kyushu, Yukichi

Fukuzawa was perhaps the most influential man of the Meiji era who did not serve in government.

He was trained in “Dutch Learning,” the study

Fukuzawa, Yukichi 161 of Western society literature and science through books and materials introduced into Japan via

Dutch traders who had restricted trade with Japan on a small island at Nagasaki. After teaching

Dutch in Edo (present-day Tokyo), he switched over to a study of English in response to the influx of foreigners involved in trading at

Yokohama. In 1860 and 1862 he accompanied embassies to the USA and Europe respectively

Upon his return he founded a school in Edo which, in time, became Keio University, the leading private university in Japan in terms of educating top business leaders. He subsequently published, in 1875, The Encouragement of Learning, which laid out his ideas on education. More than

700,000 copies of the book were sold.



GAISHIKEI KIGYOU see foreign companies in Japan


Genba-shugi literally means “shop-floorism.” This is a management philosophy that dictates that, as far as possible, the process of production of goods and services must be controlled at the shopfloor level by shop people. The set of policies and practices designed for implementing this idea is called the shop-floor approach, and is commonly observed in Japanese factories. Genba-shugi includes a variety of participative and bottom-up approaches used for managing the process of production based on empowerment of the shop workers and delegation of decision-making authority to the shop-floor level. Genba indicates the

“actual site” where all important processes take place, and people who run the genba are considered to have full power and responsibilities for controlling what is going on there. Therefore, to successfully implement this idea, systematic delegation of authority from management and engineering sections to genba leaders and workers is indispensable. Also important is empowerment of the shop through extensive training of genba workers in the skills and knowledge of production management, and sharing day-to-day business and production-related information with them. In other word, systematic human resource development at the shop-floor level and extensive information sharing by managers and engineers with shop people constitute critical conditions for practicing genba-shugi successfully.

The power exercised by production teams in

Japanese shops is not derived from the institutionalized group autonomy embedded in the work group which seeks to maintain independent authority relative to management, as is the

Scandinavian model of autonomous work groups.

Rather, power is delegated by management to the shop-floor level on the basis of established accountability of the shop, and in terms of policies and targets set by management. Thus, genba-shugi works effectively when management deploys set policies with clear goals of production to which

genba teams commit. In this sense, genba-shugi is a method of shop management co-operation for the accomplishment of goals of production.

In Japan, the tradition of corporate unionism helped co-operation between management and the shop develop very quickly after the Second

World War, based on the idea of genba-shugi. The concept also facilitated a “win-win” spirit within the firm between management and employees.

Both parties recognized that responding to market needs quickly by providing reliable products with relatively low costs was essential to winning and growing in competitive markets. Therefore, all parties concerned in the firm—managers, engineers, technicians, and operating workers— started to explore methods for responding to market needs by studying through quality con-

trol circles and experimenting based on kaizen activities at the shop-floor level. The fruits of their co-operation were shared through the other components of the Japanese style of management, namely lifetime employment, seniority-based wage increases and promotion, biannual bonuses,

genba-shugi 163 welfare provisions and so forth. In Japan, the genba is recognized as the ultimate source of competitive strength and all efforts are placed on improving production processes in order to perfect genba-shugi.

Consequently the shop sometimes experiences increasing pressure, and stress increases. When this happens, the weight of expectations associated with genba-shugi will become excessive for team members and work will become overwhelming (see karoshi)

Organization for the practise of genba-shugi

Hanada and Yoshikawa (1991) characterize the organization for genba-shugi practices in Japan as being soft, having flexible boundaries, sustained by face-to-face communication networks and implementing extensive on-the-job training, compared to the hard, hierarchical, manual-based and occupational skill-based organizations of Western society. In other words, in order to practice

genbashugi, the organization of factories must be constructed by overlapping roles in which taskrelated skills, knowledge, information and responsibilities can be shared extensively so that all people concerned particularly managers, foremen and operators, can co-operate easily through efficient interpersonal communication networks.

Likewise, Wakabayashi and Graen (1991) demonstrated that a transplant organization developed by a company in the Toyota group in the

USA was based on empowered teams with technical and information support provided by supervisors, managers and staff engineers. They pointed out that human resource development for establishing effective team-based factory organization in the cross-cultural context was a key to successful transfer of the Toyota production

system (TPS) to the USA.

Commonly a team consists of one team leader, one or two sub-leaders and ten to fifteen operating workers called associates. One supervisor or foreperson supervises several teams. Roughly 20–

30 associates work under the supervisor. Since a team leader and sub-leader(s) are synonymous with hancho and kumicho of the home plant respectively in terms of position roles and functions, developing a genba organization with a Japanesestyle team structure was considered to be the foundation on which further technology transfer would take place in order to practice genba-

shugi production in the USA.

To effect a transfer of genba-shugi, this firm first categorized knowledge and skills considered mandatory for running the genba shop and then organized them into a team structure as follows (see

Table 1)

The above arguments suggest that empowerment of a team comprised of qualified team members is a key to this type of shop-floor approach.

Particularly a powerful leader must possess appropriate qualifications of extensive quality control skills and management knowledge, problem-identifying and solving skills, long-range planning skills, all practical skills related to work subordinates are conducting, skills of training subordinates, writing manuals, conducting kaizen improvement, handling emergencies and so forth.

It is clear these skills overlap with those of engineers and managers. Therefore, engineers and managers must be able to work closely with shop sub-leaders and associates in order to run the shop smoothly. Genba-shugi is impossible without teams empowered with management authorities through delegation, competent team leaders and qualified team members organized into a soft and overlapping work system. In particular, continuous development of team members through extensive knowledge-sharing and skill is essential for successful implementation of a shop-floor approach.

Practices associated with genba-shugi

Practices conducted at the shop-floor level are closely associated with policies and goals set by management. Houshin-kanri (policy deployment) is one of the methods by which management policies and specific goals of production are delivered to the shop, with the provision of necessary resources and authority for achieving them. Managers, supervisors and engineers monitor the production process and assist the genba workers in realizing policies and goals. Normally quality improvement and cost reduction are the two major areas where policies and goals are set.

First, genba-shugi must be initiated through empowerment of team members. To build team capabilities, 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 speaking, everybody becomes capable of handling everyone else’s job by going through a planned job rotation and on-the-job training.

Multiple job holding by multi-skilled workers makes possible interchangeable job assignment.

It also helps each person detect mistakes made by others, and encourages fixing them before the process is completed. These practices also lead to members feeling a sense of belonging to an effective team and further nurturing a team spirit.

Second, maintaining genba in a clean and orderly manner becomes an important responsibility for each team member. Typically the 5Ss are practiced for this purpose: seiri (orderliness), seiton

(aligning), seisou (sweeping), seiketsu (cleanliness) and shitsuke (discipline). These 5Ss constitute preconditions for implementing further cost saving and quality production programs in genba-shugi

(see 5S campaign).

Third, a variety of team-based small group activities can be practiced for quality improvement and cost reduction at the shop-floor level. QCC

(quality control circle) and kaizen (incremental improvement) activities are two common ones.

These programs become engines and foundations for the more extensive TQM (total quality management) or TQC program for the entire firm, which must be rooted within team activities at the shopfloor level.

Fourth, entire production systems such as

Toyota’s TPS that incorporate just-in-time and

general trading companies 165


practices must depend on the genba-shugi philosophy. Since the ultimate goal of TPS is deploying policies and empowering teams to enable them to satisfy market needs in technical and costrelated issues by improving the quality and reducing muda (waste) of all kinds (materials, energy defects, efforts, time, transport, etc.), genbashugi must be pursued to its maximum benefit. Moreover, what is known as jidouka (self-control) systems in TP S involving F M S (flexible manufacturing systems), fail-proof devices, an

andon (lantern) line-stop mechanism all depend on initiatives of empowered teams at the shopfloor level.

Finally in future, genba-shugi practices will increase in importance because employees are becoming more and more empowered and organizations are becoming flatter. Management is talking more directly with employees at the shop-floor level. Moreover, information technology and the evolution of new organization systems are changing the nature of the shop and



general trading companies

General trading companies (sogo shosha) are traditionally defined as integrated international trading enterprises engaged in importing and exporting a wide range of merchandise. Sogo shosha themselves like to claim that an increasing proportion of their profit comes from investment in various projects around the world, undertaken not only to boost trading relationships but also for pure capital gain. This shift to investment is the latest in a series of business transitions by

sogo shosha, who have been declared obsolete in every decade since the 1960s but have so far managed successfully to reinvent themselves, with only a few casualties along the way.

Although sogo shosha are usually considered to be unique to Japan because of the range and scale of their business activities and their pivotal role in each keiretsu, many Japanese business scholars prefer to point out their similarity to Western trading companies and multinationals in general, both past and present. It is important to remember that

sogo shosha are by origin trading, not manufacturing conglomerates. They have close links to other manufacturers in their keiretsu, however, and often have joint venture manufacturing companies with these manufacturers. Sogo shosha supply other

keiretsu members with raw materials and sell their finished and semi-finished products on the domestic and international markets. Thus, as they react to the changing needs of their clients, their patterns of overseas expansion and business development have many parallels with other multinationals. There is some evidence that their

keiretsu ties are weakening, however, due to post-

bubble economy restructuring and mergers.

Partly as a result of their ties with keiretsu companies across a range of key industries, sogo shosha are also heavily intertwined with the fate of the

Japanese economy to the extent that Japanese

GNP growth is often the most statistically significant predictor of their trading transactions growth rates. Sogo shosha still handle a major proportion of Japan’s international trade, coordinating 30 percent of Japan’s exports and 50 percent of its imports. This sense of ‘representing Japan’ permeates their business strategy and has prevented them from becoming truly global operations, in the sense of having key clients and senior managers originating from outside Japan. This is illustrated by the surprisingly large proportion of turnover represented by domestic transactions.

According to the Japan Foreign Trade Council, the combined sales of the eighteen sogo shosha are around one trillion dollars a year, of which 12 percent comes from exports, 15 percent from imports, 24 percent from offshore trading and 49 percent from domestic trading. Although the scale of their trading transactions has led to the top five sogo shosha being named as some of the world’s largest companies, their market capitalization would not justify this claim. Furthermore their net profits are only a fraction of a percentage of their turnover and their employee totals worldwide are not much more than 10,000, even for the largest companies.

There are around 8,000 import/export companies in Japan, but only eighteen are recognized as sogo shosha by the Japan Foreign Trade Council

(which represents Japanese trading companies).

The more common interpretation includes only the nine largest companies: ITOCHU Corporation, Kanematsu Corporation, Marubeni

166 general trading companies

Corporation, Mitsubishi Corporation, Mitsui

& Co Ltd., Nichimen Corporation, Nissho Iwai

Corporation, Sumitomo Corporation and

Tomen Corporation. Recently however,

Kanematsu has been excluded from this group, following a restructuring which halved its staff and sold off its textiles and energy businesses.

The remaining nine smaller companies are:

Chori Co, Ltd., Iwatani International Corporation, Kawasho Corporation, Kinsho-Mataichi

Corporation, Nagase & Co Ltd., Nissei Sangyo

Co. Ltd, Sumikin Bussan Corporation, Toshoku

Ltd. and Toyota Tsusho Corporation. The latter is the only trading company that is growing rapidly and has ambitions to enter the ranks of the top five trading companies by acquiring or taking a stake in other failing trading companies.

Okura and Co was also part of the official group of sogo shosha until it filed for bankruptcy in 1998.

General trading companies are engaged in all industrial sectors from resource development to advanced technology including energy such as oil and gas; metals such as iron and steel and nonferrous metals; machinery including automobiles, ships, airplanes and industrial machinery and equipment; chemicals including petrochemical products; general merchandise, sporting and leisure goods, medical equipment, construction and property development, and information and communications including satellites and mobile phones, software and services such as retailing.

In addition to trading and business investments, general trading companies also offer services such as financing, transportation and logistics, research and consulting, marketing and project coordination.


Due to their pivotal role in the Japanese economy the variety of work and possibility of international postings that sogo shosha offer, they are a highly popular employment choice for Japanese university graduates. Sogo shosha employees are therefore well represented amongst the alumni of

Japan’s elite universities, and consequently have high level contacts ranging across government and business circles. These contacts further enhance their usefulness as facilitators for entry into the Japanese market for foreign companies.

Sogo shosha are also well-known for their benevolent, perhaps overwhelming care of their employees, in excess even of Japanese high standards.

As well as the usual fringe benefits of dormitories, subsidized accommodation and life-time employment, many sogo shosha offer employee marriage bureaux, higher than average salaries and retirement packages and very generous expatriation benefits. With the latest restructuring, however, some of these benefits are being cut and the complex hierarchies associated with lifetime employment are being de-layered. It is noticeable too that trading companies have been slipping down the student employer popularity rankings in the 1990s, largely due to being identified with the “old” and failing Japanese economic structure.


Most general trading companies started merchant businesses during the Tokugawa period (1623–

1853) but formally established themselves in the

Meiji era (1868–1912) as specialty trading companies: Mitsui as a silk and rice merchant,

Sumitomo as a copper refining and sales company Mitsubishi as a shipping and shipbuilding company and so on. In fact the use of the term

sogo shosha to describe trading companies only became popular in the mid-1950s, when foreign trade was resumed after the Second World War and the Japanese economy began to revive. Indeed, many of the prewar specialty trading companies only became general trading companies in the first two decades after the war.

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 politicians to take advantage of the Meiji government’s industrial promotion policy The trading companies took up the challenge of wresting control of Japan’s trade from the foreign merchants who had a near monopoly on Japan’s foreign commerce and shipping after the enforced opening of Japan, following two centuries of isolation.

The earlier trading companies were given licenses to export the products in which Japan had a comparative advantage, such as silk, rice and tea. Latecomers such as Mitsubishi concentrated first of all on fighting off P&O for shipping lines out of

general trading companies 167

Japan and then on transferring technology from

Britain for shipbuilding, in order to reduce dependency on foreign ship purchases. The trading companies quickly diversified into mining, manufacturing and transportation, evolving into

zai batsu. These various divisions were spun out into separate companies, with the sales divisions becoming the prewar predecessors of the post war

sogo shosha.

The First World War proved a major boost to some of the trading companies and a disaster for others. Those who speculated heavily in metal and did not control their finances failed, such as

Masuda, Shimada, Furukawa, Kuhara, Mogi,

Yuasa, Takada and Suzuki Shoten. Mitsui Bussan by contrast avoided speculation and maintained a steady and high profit level, profiting from the shortage of goods and ships in wartime.

Mitsubishi Shoji’s period of growth and consolidation did not come until the 1930s, however, when its strengths in heavy industry drew it into the rearmament and Asian expansion of Japan.

These two companies were the nearest to a prewar form of sogo shosha in terms of range of products and international presence. By 1938, Mitsui

Bussan and Mitsubishi Shoji employed 7,000 people and had trading transactions of ¥2bn ($560m) each.

The trading companies were dissolved, along with their fellow zaibatsu member companies, by the Supreme Command of the Allied Powers as holders of excessive economic power in 1947. Historical ties were never completely severed, however, and with the pressures of the Korean War, they were allowed to regroup in the 1950s.

Mitsubishi Shoji was the first to become a true

sogo shosha, opening offices around the world to cover a range of products in 1954–5. Mitsui

Bussan was slower to regroup, with its final merger taking place in 1959. Marubeni, Itochu and Sumitomo were specialty trading houses until the 1960s.

The 1960s were supposed to herald the “setting sun” for sogo shosha, as the liberalization of

Japan’s trade meant that specific categories of trade were no longer allocated to them by the government, so they would have to compete for business. In fact, the 1960s were a time of vigorous expansion for sogo shosha, with their combined annual sales growing over 900 percent between

1960 and 1973. This was partly due to mergers, inflation and yen reevaluations but also because of their ability to diversify into news industries and to integrate their businesses upstream and downstream.

In the 1970s sogo shosha facilitated the overseas investments of Japanese manufacturers, often taking a stake in their foreign subsidiaries, or setting up joint ventures for distribution and warehousing. They also became conduits for Japan’s increasing Overseas Development Assistance projects in Africa and the Middle East.

Sogo shosha’s raison d’etre was questioned again in the 1980s, a decade which was supposed to be a “winter” for them. In the early 1980s, the second oil crisis and the Iran-Iraq war had a serious impact on their growth and profitability as did the depressed state of the Japanese economy The development of the bubble economy from the mid-1980s revived their fortunes, however, and led them to direct their resources into zaitech and other financing functions.

The 1990s have largely been a decade of restructuring and writing off of bad debts arising from zaitech failures, although there have been some new initiatives in information technology retailing and Asian investment.


Sogo shosha use their international networks to collect and analyze information, which they then pass on to their headquarters or even to government agencies. This latter activity has sometimes led sogo shosha to be accused of espionage, particularly by US politicians and journalists. The importance of the information gathering function has necessitated major investments in information and communication technology including satellite communication and dedicated electronic networks. Unsurprisingly sogo shosha have recently combined their knowledge of information and communication technology and trading to become involved in setting up e-commerce networks and business-to-business exchanges.

The traditional function of sogo shosha is the procurement and distribution of goods. This function has its roots in Japan’s status as a resource poor country and a major importer of raw materials. The importation of fuel, iron ore, foods and

168 geography so on into Japan has led to the logical extension of their business into actual investment and development of coal mining, oil fields, and agriculture overseas. Sogo shosha often act as the coordinators of these highly complex projects, as well as acting as financiers. Whereas in previous decades investment had been undertaken as a way of securing scarce resources or boosting trading relationships with major customers, investment activity is increasingly looked on by sogo

shosha as a profit center in its own right, for pure capital gain. Sogo shosha are therefore starting to compete more directly with Japan’s struggling banks and investment houses in areas such as mergers and acquisitions and investment funds.

Further reading

Arai, S. (1991) Shoshaman: A Tale of Corporate Japan, Berkeley CA and Los Angeles: University of California Press.

Yonekawa, S. (ed.) (1990) General Trading Companies: A

Comparative and Historical Study, Tokyo: United Nations University Press.

Yoshino, M.Y., and Lifson, T.B. (1986) The Invisible Link:

Japan’s Sogo Shosha and the Organization of Trade, Cambridge, MA: MIT Press.

Young, A.K. (1979) The Sogo Shosha: Japan’s Multina-

tional Trading Companies, Tokyo: Charles E. Tuttle




Japan is made up of a chain of four mountainous islands: Honshu, the main island, Hokkaido in the north, Kyushu to the south,and Shikoku the smallest off the coast of southern Honshu, together with several hundred lesser islands. The total landmass of Japan is about 145,000 square miles; its elongated nature is revealed by the fact that although Japan stretches over 1,800 miles from northeast to southwest (from 25 to 45 degrees latitude), no point in Japan is more than seventy-five miles from the sea. Until the modern era, Japan was relatively isolated physically from the Asian mainland, left free to develop its own cultural system.

In considering geography and its relationship to social and historical factors, Britain and Japan offer some interesting similarities. Both are made up of large islands and have between 100,000 and 150,000 square miles of territory; both are located off the coast of continents, which are home to long civilized traditions. Both have received influence from those traditions, but have been isolated enough to retain a distinct identity.

They share basically similar climates and both were the first in their respective areas to industrialize. The two nations have used the sea with unusual effectiveness for military and commercial pursuits. But the similarities only hold in a very general comparison.

Climate in Japan is more varied than the climate of Britain, more reminiscent of the climate along the US eastern seaboard. Hokkaido has quite cold winters and mild summers. The weather in the center of Japan near Tokyo is quite like that of the Washington, DC area, cool to cold in winter, with muggy hot days in late summer. Okinawa, the southernmost part of Japan, is Japan’s winter playground.

Japan is far more isolated from its continent than Britain. By contrast, Japan lies approximately ninety miles off the Korean Peninsula. For humans to swim from England to France is a challenging but completely possible undertaking.

Japan is also very close to some Russian held islands in the north, but cultural influences have never come from those places. From Japan to the main body of its nearest historical contact, Korea, there is more than a hundred miles of ocean.

In terrain, as well, the British Isles and the Japanese islands are quite dissimilar. Britain is relatively flat, while Japan is more like a larger version of Switzerland, with dramatic stretches of mountainous terrain in many interior areas, with smaller mountains and hills covering all areas with the exception of a few interior valleys and relatively small coastal plains.

For several hundred years, Japan’s population has been about double that of Britain; early in the twenty-first century it stands at a little over

125,000,000. Japan has, on the other hand, less than half the arable land for farming that Britain has, and although the Japanese employ intensive farming techniques and some of Japan’s soil is quite fertile, Japan imports a high percentage of

giri 169 its food products, being self-sufficient only in a few products such as green vegetables and rice.

The Japanese islands are situated on the western edge of what has been called the “Ring of

Fire,” an area of seismic volatility stretching from the Philippines up along the Asian mainland, across the Aleutian Islands and down the west coast of North and South America. There are more than sixty active volcanoes in Japan, and modest quakes of 2.5 or less on the Richter scale occur somewhere in Japan almost daily. Large quakes causing loss of life and great destruction have been recorded throughout Japanese history including the catastrophic Great Kanto Earthquake of 1923 which brought enormous damage to Tokyo and environs and cost the lives of over

100,000 people, and the more recent Great

Hanshin Earthquake which struck the city of

Kobe in 1995.

With only two navigable rivers (and both of those for less than one hundred miles), aside from fresh water fishing, rivers have not played an important role in Japanese life. The ocean, on the other hand, is deeply woven into Japanese culture in many ways. It has served to protect it from foreign military power, provided a considerable percentage of the Japanese diet, and throughout history has been a chief medium for moving people and things. It is interesting to observe that because of the mountainous terrain and proximity of ocean waterways, the Japanese, unique among sophisticated societies, never developed any practical system of animal-pulled carriages.

The human population of Japan is not as spread out over the land as is that of Britain. A few areas are extremely densely populated, and others, for example the long arm of northern

Honshu called by the Japanese the Tohoku region, are considered to be underpopulated. A corridor about 350 miles long, but only forty miles wide, running from northeast of Tokyo, down the Pacific coast through the city of Nagoya, and then on southwest to and including the three cities of the Kansai area—Osaka, Kyoto, Kobe—is home to almost half of the entire Japanese population, even though in land mass it represents just onefiftieth of the nation.

As late as the end of the Second World War, less than half the population of Japan lived in urban areas, with very rapid urbanization occurring since that time. Partly because of events which occurred during the Tokugawa period, the capital city of Tokyo plays a role similar to that of Paris or London in their respective societies. It has the largest concentration of population in the industrialized world, and while Osaka,

Sapporo, Kyoto, and Fukuoka together with a few other cities are important centers of culture and commerce, Tokyo is the center of political, economic, entertainment and international activity of the nation.

See also: Kansai culture

Further reading

Noh, T. and Kimura, J.C. (eds) (1989) Japan: A Re-

gional Geography of an Island Nation, Tokyo: Teikoku


Reischauer, E.O. (1981) The Japanese, Rutland, VT:


Trewartha, G. (1990) Japan, a Geogmphy, Madison, WI:

University of Wisconsin Press.



Ethics and morality in Japan are not as tied to universal concepts of good and bad as in societies which have been influenced by monotheistic religions such as Christianity and Islam. For the

Japanese, behaving properly relates less to absolute rules of conduct than in the West, and is more tied to how well people fulfill obligation within relationships. A highly developed sensitivity to duty and obligation owed to others has resulted in a specialized vocabulary of terms relating to such phenomena. Giri is one of those terms.

Introducing giri to people not familiar with Japan carries with it the danger of exaggeration.

Giri is real, and its effects on relations between people and institutions are real, but its imprint on contemporary Japanese society is quite subtle; in fact, hardly noticeable until one gets well beneath the surface of everyday life. The word

giri is heard frequently. But used for its traditional meaning, to refer to a somewhat more conscious and formalized sense of obligation to people and organizations, the term is not actually used often

170 giri in Japan today. When it is used that way it is often employed in a negative sense, such as referring to someone who is judged not trustworthy as in giri shirazu no hito, literally a person who does not know giri. The reason for its frequent use is simply because it has over the past seventy or eighty years come to be the most popular word for “in-law;” a wife’s mother is referred to as giri

no okaasan, and a husband’s older sister as giri no


It is not exactly clear which came first: giri with the samurai, later filtering down to influence more general cultural themes, or in the reverse direction, giri as a more general cultural theme which the samurai formalized. Whatever the answer to that question is, we know that what giri came to mean in Japanese life was first articulated in the fourteenth century a time when the warrior elite began to eclipse the court nobility in Kyoto as the dominant force in Japan. But it is quite possible that the basic idea of giri, in a more diffuse and less formal sense, was an important part of the way people and communities establish order and at all levels as far back as there has been anything recognizable as Japanese society Any human group, in order to function in a cooperative way over time, has to be tied together with some kind of basic outline of ethics and morality.

In societies which came to be dominated by monotheism, the agents and interpretations of

God serve much of this purpose. Societies such as China and Japan that have not had significant experience with a single, prescribed set of guides for behavior and relationships have to rely on something else. In China, bonds of kinship and extended clan ties have traditionally been the anchors of ethics and morality For the Japanese, it seems that a conscious type of mutual obligation, both ascribed by formal social roles, and achieved through deeds of behavior, has served more typically than elsewhere to underlay the rules of morality.

The fifteenth and sixteenth centuries in Japan were a time of desperate struggles for power and dominance in various regions throughout the country. Survival of any han, the autonomous mini-states of feudal Japan, depended on military prowess, and the virtues of loyalty devotion, faithfulness, honor, sacrifice, together with skill in swordsmanship and other forms of combat, came, by natural selection, to constitute the special culture of bushido., the way of the warrior (see samu-


role of).

Four terms relating to the formal sense of duty arose from bushido. Gimu, similar to giri, usually used in regard to an abstract entity such as the state. On, a related concept, referred to formal obligation owed to persons and institutions in an ascribed sense, for example to one’s feudal lord, and to parents. During the Meiji period, Japanese were taught that they owed obligation to the nation, symbolized by on owed to the Emperor. Giri was obligation owed because of some service or help rendered. One owed giri to a teacher of calligraphy or swordsmanship, or to someone who rendered assistance in battle. The fourth term, ninjo, was the feelings of affection and longing pulling in the opposite direction, feelings which if acted on could cause a samurai to violate the code of bushido by failing to carry out his duty. Japanese drama through the centuries institutionalized the pull of affection against the demands of duty. The dilemma of the giri/ninjo, in which giri always wins, has been the subject of

Japanese drama through the ages, from kabuki through to modern motion pictures.

Ethics and morality continue to be somewhat less tied to universal concepts of good and evil, and more directed toward connection to people and organizations. Words such as on and giri, which in the twentieth century came to be used more or less interchangeably sound old-fashioned to people in contemporary Japan, but their force can still be discerned in the sensitivity Japanese have to what is owed to other people. In Japan the lessons of reciprocity are given a special importance. Gifts must always be repaid with concomitant worth. The first words uttered upon subsequent meeting of someone who has hosted a person in any way are, Kono aida wa domo,

“Thank you for the (nice) time.” For any adult to neglect to do so would be more than impolite, it would represent for many Japanese, a breach of decency.

See also: business ethics

Further reading

Benedict, R. (1946) The Chrysanthemum and the Sword:

Patterns of Japanese Culture, Boston: Houghton Mifflin.

guilds 171

Keene, D. (1961) Major Plays of Chikamatsu, New York:

Columbia Univesity Press.

Nakane, C. (1970) Japanese Society, Berkeley CA: University of California Press.



The earliest Japanese guilds (za) were formed in the eleventh century while trade associations

(nakama) were established during the Tokugawa

period (1603–1868). These farmers’ and merchants’ associations formulated and enforced market rules for their industries in a growing economy to create trade in the absence of legal institutions and to safeguard market participants from deception and fraud. Thus, guilds and

nakama are predecessors of today’s trade associations. Their early formation and sophisticated organizational structures reflect both the vigor and drive of the Tokugawa-period economy and the merchants’ vital contributions to creating and maintaining their own markets.

Early history: Za

The earliest groupings that can be considered cooperatives were the muyin, groups of farmers in the Heian period who submitted dues so that a few group members could go on a pilgrimage to the Ise Shrine every year (something no farmer could have afforded on his own). The first records of a merchants’ guild date from the year 1092, when a group of merchants in Kyoto established market hours and rules. As the economy began to develop in various regions of the country the

za grew stronger. They had exclusive membership, created barriers to entry and set product prices on their markets. During the continuing wars and territorial disputes of the fifteenth and sixteenth centuries, the za became increasingly powerful by assuming control over regional tax barriers and domain borders.

In 1603, Oda Nobunaga (the first of the three unifiers) assumed military control over Japan. He understood that one primary source of power and wealth of the local landlords were the guilds. To weaken these landlords, Oda instituted a policy of rakuichi-rakuza (free the markets, open the za).

Under this policy all za were prohibited, except for those with special permission, such as the mints (the gold za or kinza, the silver za or ginza— located in what today is central Tokyo—and the copper za or zeniza). The new Tokugawa government also introduced a division of society that put merchants at the bottom of the hierarchy and created a new leadership class of administrative officials (the former samurai) who had money to spend and wanted products to buy. In the absence of laws and courts, associations surreptitiously re-emerged to design mechanisms of enforcing trade agreements. After 1670, the

Shogunate gave up on its attempts to outlaw the groupings, and nakama (literally “among those who know each other”) flourished.

The earliest full-fledged nakama we know of were the wholesalers and shippers (tonya) along the Tokaido, followed by public bath-houses

(1650), hairdressers (1659) and money changers

(1679). All of these were awarded licenses (kabu, literally “shares”) by the government because they were considered to play important social roles

(maintaining public hygiene, banking). From the entrepreneurs’ perspective, the licensing system enabled them to control their markets. Outsiders were not allowed to practice in the profession. This meant that all stationary and successful entrepreneurs were members of a trade association.

Nakama organization

The organizational structure of the nakama was remarkably similar to that of today’s trade associations. At the biennial general meeting (sokai), members elected directors. There was one standing (long-term) director, resembling today’s senior administrative director, as well as annual and monthly directors. The main tasks of a board of directors were: (1) to collect taxes and donations to the Shogunate and domain chiefs from members; (2) to evaluate and admit new members;

(3) to punish transgressions of nakama rules (typically by prohibiting the infringer from producing or trading for a certain period); (4) to maintain contacts with other associations about the good standing of merchants; (5) to establish quality controls in the industry; (6) to set uniform prices for the industry’s products or services; and (7) to

172 guilds hold social functions such as arranging gifts to shrines and temples or end-of-the-year parties.

To engage in a certain business, an entrepreneur had to become a member of the nakama.

Once admitted, the member had to move into the nakama’s quarter. Living in one area facilitated the monitoring of a member’s business behavior, creditworthiness, and pricing.

Economic functions

Nakama engaged in trade-enhancing activities, ranging from structuring market rules to guaranteeing the creditworthiness of their members.

Specifically by establishing fixed and regular market hours, nakama brought merchants of different trades together. By limiting markets to members and monitoring their behavior, nakama kept markets clear from charlatans and swindlers.

Because a member’s standing was guaranteed by its nakama, a credit economy could develop. In

Osaka this even led to the establishment of a rice futures exchange in 1730, where trading positions were kept on the books and settled at the end of a three-month trading period. Not only did these settlement systems make things easier, in many instances they made trade possible in the first place, thus leading to the creation of new markets. By enforcing quality controls, the nakama further reduced the potential for fraud on the marketplace. In the event of deception, the nakama had rules for settlements and punishment. Social stigma was attached as well, as most nakama had an elaborate code of honor. Finally nakama often administered the widespread apprenticeship system and enforced rules against the poaching of apprentices by competing merchants.

In addition to enhancing the trade mechanisms of the time, the nakama also ensured that their members would be profitable by limiting competition. In particular, most nakama enforced a “fair profit” system, whereby the directors described binding product prices that enabled merchants to earn a stable, but not exorbitant, profit margin. By way of their organization, nakama also established barriers to entry In many cases, the number of outstanding kabu for nakama was limited, and only after an incumbent member had quit or died could a new merchant enter the group. Even groups that did not issue kabu were very careful in selecting as new members only merchants who would not undermine the group’s standing. Moreover, nakama imposed strict boycott rules: members were not allowed to trade with merchants that were not a member of a

nakama. Occasionally an additional entry barrier was employed in the form of minimum requirements that were set so high that only incumbent firms could fulfil them (e.g., a certain shipping volume was required before a wholesaler could enter a shipping nakama).

By inviting and enabling sophisticated trade practices, creating markets, restricting access, and ensuring stable profit margins, the nakama contributed greatly to the economic development of

Japan. Businesses grew steadily, and markets developed around the country On the downside, precisely because the nakama were so protective and restrictive, they hindered technology transfer among industries and often served to slow technological progress and innovation. This became apparent when Japan opened up in the

1860s: some basic artisan trades were world-class, but the country lagged behind in many industrial areas.

Shogunate policies towards nakama

In the course of the Tokugawa period, the

Shogunate changed its policies towards trade associations several times. This was particularly visible during the three major economic reforms of

1720, the 1780s, and the 1830s.

In 1720, Shogun Tokugawa Yoshimune faced huge budget deficits and inflation in most products other than rice. To realign finances and prices, he embarked on major fiscal reforms and officially licensed all nakama. By issuing kabu to the associations, he could charge licensing fees and taxes to increase the goverment’s tax revenue. He also asked the nakama to set or maintain certain prices, and in particular to increase the price for rice while curbing inflation elsewhere. This was the first time that trade associations were used as an instrument of public policy implementation.

The effects of Yoshimune’s reforms were shortlived. Pro-business policies after his reforms granted associations more freedom to regulate their own markets, and in turn the nakama were

guilds 173 charged ever higher taxes and fees. The nakama passed these taxes on to their customers by way of higher prices, which severely affected the

samurais’ standard of living. The Kansei Reform of the 1780s was also aimed at fiscal restructuring. To curb the increasing influence of business and cut their monopolistic pricing powers, the largest nakama were dissolved. However, since small associations were allowed to continue and the previous groups soon reassembled, these attempts at breaking up industry association once again proved futile.

The Tempo Reform of the 1830s brought about an interesting real-world experiment with market institutions, as it rested on the complete abolition of all trade associations, with the goal of curbing merchants’ influence and power. What the reformers had overlooked was that this move halted all the trade-creating and trade-supporting mechanisms supplied by the nakama, and thus toppled the pillars of the market system. The policies were revised in 1857 when nakama were allowed to operate again, albeit with open membership and free market access.

Modern associations

This last policy move coincided with the opening of the country after 1853. The Meiji Restoration of 1868 led to a complete reorganization of government. All nakama were asked to dissolve.

Again, because this significantly limited trade in an increasingly uncertain environment, many associations continued to operate surreptitiously.

The new Meiji government did not pass a new

Commercial Code until 1893, but, understanding the merchants’ plight, it began to actively support the formation of local Chambers of

Commerce and trade associations in the 1870s.

As some of the modern industries grew at the beginning of the twentieth century the large firms began to found their own, large-firm trade associations, plus over-arching federations, such as the predecessor of Keidanren in 1917. A distinct differentiation of trade associations into small-firm cooperatives and large-firm groups emerged during the Taisho years (1911–25).

As Japan moved towards a war economy in the 1930s, trade associations and cooperatives were increasingly called upon to gear their industries towards the war effort. However, the government’s attempts at complete economic control and rationing were consistently undermined by circumvention on the black market. To enforce production and distribution controls, the Key Industries Association Ordinance of

1941 established control associations (toseikai) in every narrowly defined industry. The toseikai were headed by the leading businessmen in their industries, and their function was to implement input and output plans and punish any deviation from these plans. In 1942, the Transfer and Administrative Authority Law even gave official legal authority to the toseikai to punish violations.

Interestingly while the toseikai were an attempt to increase government controls over industry in the end they only increased industry’s controls over itself. By receiving official enforcement rights, the toseikai leaders could structure their own rules while upholding the appearance of cooperation with the government.

Beginning in 1945, the U S Occupation

Forces demanded that all toseikai be dissolved.

Many of the existing groups simply adopted slightly different names but maintained staff and directors. While a purge of business leaders by the Occupation affected many executives in the leading firms, their proteges, who had also been active in the associations before, assumed leadership and continued many of the old policies. In

1947, the USA helped Japan draft and pass a new Antimonopoly Law as well as a highly restrictive Trade Association Law. This law was so prohibitive that business lobbied very heavily to have it abolished as soon as the Occupation ended in 1953. Some of the competition rules for trade associations were subsumed in the revised Antimonopoly Law of 1953, but in much more lenient form. This more lenient wording and interpretation of anti-trust statutes allowed trade associations to continue significant industry self-regulation throughout the postwar period.

Further reading

Miyamoto, M. (1958) Kabu nakama no kenkyu (Research on Kabu Nakama), Tokyo: Yuhikaku.

174 guilds

Okazaki, T. (1999) Edo no shijo keizai (The Market

Economy of Edo), Tokyo: Kodansha.

Schaede, U. (1989) “Forwards and Futures in

Tokugawa-Period Japan: A New Perspective on the

Dojima Rice Market,” Journal of Banking and Finance


——(2000) “The Historical Development of Self-Regulation by Japan’s Trade Associations,” in U.Schaede,

Cooperative Capitalism: Self-Regulation, Trade Associations,

and the Antimonopoly Law in Japan, Oxford: Oxford

University Press, ch. 7.

Sheldon, C.D. (1958) The Rise of the Merchant Class in

Tokugawa Japan 1600–1868: An Introductory Survey,

New York: Russell & Russell.

Yamamura, K. (1973) “The Development of Za in Medieval Japan,” Business History Review 47: 438–65.




Habatsu, or “clique,” refers to a significant component of the social organization in Japanese companies. Japanese organizations are structured primarily around small groups for decision making, socialization, organizational learning and career development. These small groups reflect both the cultural and historical roots of modern

Japanese organization. For example, it is theorized that Japanese small group decision making is an indirect derivative of rice paddy culture, in which all members of the community play a role within a system of small groups (Hayashi 1988). Others argue that it is the historical significance of feudal governance which has influenced the strong adherence to group allegiance within organizations (Whitehill 1991). In any case, it is clear that the small group as a unit of decision making is a cornerstone of Japanese social organization.

Habatsu represents one version of this small group phenomenon.

Habatsu represent informal groups within organizations to which membership is mandatory and loyalty is paramount. Membership in the

habatsu means for employees that they must obey habatsu rules and seek to achieve habatsu goals, even in the case when habatsu-related goals are contradictory to overall company goals. Thus,

habatsu can be both a constructive and destructive force in the organization. Habatsu membership influences employee and management decision making on such things as overall company policy strategic goals, personnel policy and even budgetary decisions. The habatsu influence is often unspoken and implicit, yet it is felt very clearly and strongly by management and employees alike.

So, who becomes a member of a habatsu? In

Japanese organizations most employees belong to one informal group or another. But, whereas cliques in American companies are often based upon common interests, sports or community activities, Japanese habatsu are based upon unalterable criteria. Examples of habatsu membership criteria include graduating from the same university growing up in the same prefecture (state), or coming from the same hometown. Because these criteria are unchangeable for the employee,

habatsu membership is considered to be involuntary as well as permanent.

As mentioned, habatsu can be a powerful force within the power structure of Japanese organizations. Since they have their own internal, vertical hierarchy they can disrupt attempts at companywide programs aimed at employee development, such as career planning, employee development and or promotion systems. They can influence company wide long-term planning, budgetary decision making and even marketing strategies.

Depending on the longevity of the habatsu in the organization and the power with which members exercise their desires, habatsu are sometimes considered the invisible power structure (operating like an underground or parallel economy) within the Japanese organization (Whitehill 1991).

Habatsu can also have a direct impact on company strategy. A powerful habatsu can influence the outcome of major organizational decisions, through its implicit support or defeat. Since

176 Hayakawa, Tokuji members of habatsu can be fiercely loyal to their leaders, it is in the highest interest of upper management to gain the support of habatsu leadership on any major decision facing the organization.

One of the most enduring forms of habatsu in

Japanese organizations is the gaku-batsu or university clique. Gaku-batsu members are fiercely loyal to the alumni of their university and offer preferential treatment for their members. In some

Japanese organizations, hiring, staffing, promotion and even compensation systems are heavily influenced by gaku-batsu membership, making this form of clique more than just an informal influence on the organization. These systems can be so rigid that even in the cases of exceptional ability talent or effort by a non-member of a powerful gaku-batsu, rewards (promotion, extra compensation) are not forthcoming. Only those who are members of the powerful gaku-batsu can expect to be treated favorably and provided career advancement.

Recently the increasing level of foreign competition in Japan has begun to erode the strong tradition of habatsu power in Japanese social organization. Japanese companies are beginning to embrace human resource management practices which are contradictory in nature to the habatsu system. One example is performance management, which relies on the objective assessment of employee contribution to company goals in order to determine promotion and pay In this meritbased, professionally oriented system there is no room for feudal like preference for special groups solely based upon fixed membership criteria.

Habatsu may even impact globalization attempts by Japanese companies. According to

Rosalie Tung (1991), Japanese organizations cannot professionalize their operations while clinging to outdated social mechanisms like habatsu.

Since professionalism is the foundation for globalization efforts (standardization of practices, performance management systems based upon fair, unbiased criteria), informal small group structures such as habatsu may act as an impediment to the long-term competitiveness of Japanese companies.

Still, habatsu continue to thrive in many of the larger, established Japanese firms. As evidence of this, the importance placed upon entry into top universities in Japan is still largely a function of the effect of gaku-batsu membership on career success for Japanese employees. Acceptance to, graduation from and then membership in a top university gakubatsu is still believed to be the key ingredient for success in Japan. Until these gaku-

batsu lose some of their power and influence, it may be difficult for Japanese companies to professionalize their management systems.

Further reading

Hayashi, S. (1988) Culture and Management in Japan, Tokyo: University of Tokyo Press.

Ouchi, W. (1981) Theory Z, New York: Addison-Wesley

Rohlen, T. (1974) For Harmony and Strength, Berkeley

CA: University of California Press.

Tung, R. (1984) Key to Japan’s Strength: Human Power,

Lexington, KY: D.C.Heath and Co.

Whitehill, A. (1991) Japanese Management: Tradition and

Transition, London: Routledge.

Hayakawa, Tokuji


Hayakawa, the inventor of the snap belt buckle and the mechanical pencil, was an entrepreneur and founder of Sharp Corporation. Born in Tokyo in 1894, Hayakawa set up his first business, a metalwork business employing two other people that produced a snap belt buckle, the “Tokubijo.”

Hayakawa came up with the idea after being annoyed in a theatre by a man sitting nearby who kept playing with his belt. Three years later, in

1915, he invented the “Ever Ready Sharp” pencil. This was the original mechanical pencil and quickly acquired the nickname “Ever-Sharp” because it did not requiring sharpening. At this time

Hayakawa also founded the Hayakawa Electric

Industry Co., Ltd, the predecessor of the current

Sharp Corporation.

On September 1, 1923, Hayakawa’s entire manufacturing facility was destroyed in the Great

Kanto Earthquake. In December of that year he relocated to Osaka and set up Hayakawa Metal

Works and undertook research on radio technology Two years later, in 1925, he built his first crystal radio set. Mass production of radio sets began shortly thereafter. By 1930 the company had pioneered numerous product innovations

history of the labor movement 177 and established itself as a leading electronics manufacturer.

Hayakawa carried his creative capabilities onto the production floor. His mass production facilities developed a reputation for quality and efficiency. Masaru Ibuka and Akio Morita credit their visit to his factory floor with helping them hone their own manufacturing skills when the fledgling Sony (then known as Totsuko) was first getting off the ground.

In 1970, Hayakawa stepped down as president and became chairman. In 1980, the company formally changed its name to Sharp Corporation in honor of his “Ever-Sharp” pencil. Hayakawa died in 1981 at the age of 86, after building the Sharp

Corporation into a world leader in electronic products. The company’s creativity and dedication to quality reflect his core values as its founder.


Heisei boom

The Heisei boom refers to an expansion of the

Japanese economy that began in November 1986 and lasted until roughly July 1991. The economic expansion was one of the longest in Japan’s postwar economic history It was marked by extraordinary growth, peaking at 5.6 percent in 1990.

The high growth came to halt in 1991, and was followed by three years of macroeconomic stagnation and subsequently by economic recession through the end of the decade. The Heisei boom subsequently came to be called the “bubble boom” or the bubble economy. The name

“Heisei” derives from the name of the imperial era in the Japanese calendar during which the most dramatic rises in the economy occurred.

In Japan’s postwar history there have been three significant periods of economic expansion.

The first took place from 1958–61 and was known as the Iwato boom. The second boom took place between October 1965 and July 1970.

The Izanagi boom (named after a mythical Japanese figure) saw fifty-seven months of uninterrupted economic expansion, and came to an end shortly before the International Exposition opened in Osaka. The third significant period was the Heisei boom.

Although similar to the other two in several respects, there were also significant differences.

Property prices rose during and then slumped after all three booms. However, the drop in land values was extreme in the Heisei boom. So inflated were land values during this period that several economists noted, in theory one could purchase the entire state of California, including all of its buildings, plants and equipment, in exchange for the plot of land on which the imperial palace was situated.

A second similarity is found in the high level of investment in plant and equipment during each of the three booms. However, again the Heisei boom differed in that much of the financing for this investment derived primarily from the issuance of stock, rather than by obtaining financing through banks and other lending institutions.

Stock issues reached a peak of ¥8.848 trillion in

1989, but dropped precipitously to ¥3.792 trillion in 1990. The decline continued on a downward trend hitting ¥807.7 billion in 1991 and

¥419.9 billion in 1992. In short, there was a drastic decline in the rate of capital increase.

Finally the Heisei boom remains significant because of the length of the recession that followed it due to a snowballing effect of loss of confidence that rippled through the economy The longest postwar recession previously took place over a thirty-six-month period from March 1980 to February 1983, following the second oil shock.

The Heisei boom broke that record, and the Japanese economy struggled through the remainder of the 1990s.

See also: economic crisis in Asia


history of the labor movement

The term “labor movement” can be generally understood as a sustained and organized joining together of employees, or wage earners, to advance common interests. By joining together, employees increase their power and their ability to bargain with employers over employee concerns such as wages, working hours, and working conditions. Labor unions—identifiable, permanent associations of employees engaging in collective action—are often the result of labor

178 history of the labor movement movements, but not always. Strikes and labor disturbances, for example, are much older than unions.

In Europe, then the USA, and then Japan, the labor movement was primarily sparked by the

Industrial Revolution, a time of great economic and social upheaval. Labor unions first started with small associations of craft employees threatened by new mass production methods. Craftsmen such as printmakers and metalworkers faced the prospect of being undercut by lower cost production methods and of passing into permanent wage earning status. For these skilled employees working under the supervision of a master hoping to later become masters of a craft themselves, the new mass production methods represented an unpalatable loss of autonomy status, and creativity and unions represented a way to counterbalance these losses.

Paralleling the spread of mass production, the labor movement and the formation of unions occurred first in Europe, primarily Britain, where labor was plentiful and land and capital equipment were scarce. To increase their relative value, employees in Europe quickly learned the power of acting collectively In the USA, with abundant land, there was ample opportunity for individuals to seek self-employment when there was dissatisfaction with wage employment. This meant that individual employees, with more alternatives, had more bargaining power than their European counterparts, and unionization did not arrive in the USA as soon or with as much intensity.

In both Europe and the USA, as mass production and markets continued to spread and to nationalize, unions began to nationalize as well, with industry-wide and national unions becoming commonplace by the mid-1800s in the USA.

By the mid-1900s, the AFL-CIO was a huge national union representing over 15 million employees in a large constellation of industries including auto and steel. The tendency to organize across employers and industries in the USA and in Europe continues to this day By the end of the twentieth century a common Western view was that meaningful unions are organized across employers within an industry With anything less, the power of collective action is diminished and unions are more at the mercy of particular employers. Because of this belief, many Western observers have been critical of the Japanese propensity to unionize by employer in enterprise unions, and not by industry.

Japan’s labor movement has waxed and waned like other labor movements, and there are several distinct phases that are important. Interestingly the later phases are really when the labor movement and labor management relations took on a cast commonly seen as “Japanese,” characterized by lifetime employment, seniority wages, and enterprise unions. Before 1900, early craft workers in Japan—accustomed to autonomy and applying their skills in different settings—were not inclined to appreciate the discipline of factory work, similar to their Western counterparts. They also had significant power because management still needed their skills and had not learned how to direct labor in an organized way Management therefore had to rely on these relatively skilled workers to do a wide variety of jobs dependably and well, even though many workers were not willing to commit themselves to one organization. Furthermore, there was also little job security for them. Although there were attempts to organize a union movement towards the end of this period, it was largely unsuccessful.

Around the beginning of the twentieth century coincident with increased specialization of work in Japanese large manufacturers, management began to try to impose a more coherent, authoritarian form of control on employees, coupling this with the rhetoric of “beautiful customs” such as paternal care and worker obedience. Typical company strategies at this point included greater control over the work process, more efficient labor, and cultivation of foremen who would identify with the long-term fate of the company.

Initial paternal practice was largely rhetorical, but increased in substance during periods of strong labor challenges. Employers were still wrestling with problems of high turnover, and this, coupled with occasional union pressure, led to wage hikes, bonuses, and welfare programs such as retirement pay all designed to promote commitment to the firm. From this point, through the First

World War and up to the Second World War, the groundwork for more stable patterns of labor

Honda Motor 179 management was laid. Employee expectations of job security wages based on seniority and employer expectation of commitment from employees emerged in this period. However, actual practice differed from expectations, and it was only after the Second World War that this gap narrowed.

There was significant labor strife in this period, particularly around the First World War.

Like unions in other countries, Japanese unions gained economic strength from the expanded demand for labor as the economy boomed. Strike activity increased, and the growing economic strength of unions helped lead to political concessions. However, union leaders were also routinely incarcerated. By the early 1930s, union membership as a percentage of the industrial workforce peaked at 8 percent. By the late 1930s, the Japanese government had imprisoned many of the labor leaders with socialist leanings, and by 1940 independent labor unions were abolished completely organizing unions into company by company political cells. These cells preempted the formation of autonomous labor unions in order to suppress disputes and advance the war effort.

After the Second World War, the Supreme

Commander of Allied Powers (SCAP) imposed labor laws that initially strengthened and led to a more democratic labor movement. The Labor

Union Law enacted in 1945 officially recognized labor unions and their right to strike. Two other laws, the Labor Relations Adjustment Law and the Labor Standards Law, further elaborated the rights of unions and employees and curtailed the power of employers to break up independent unions. Unionization increased rapidly from this period, climbing to 55 percent of the workforce by

1949. The union desire for consistent and fair treatment by managers echoed concerns voiced before the war. These legal and newly powerful labor unions helped to bring fundamental change to the structure of labor relations in the first postwar decade, building on the past.

However, it was also during this period that radical elements of the labor movement rose up and were forcefully put down, with the help of

SCAP. Ultimately, the labor movement was effectively split by management, and the resultant labor relations version that arose—now characterized as the three sacred treasures—was management-led. At the same time, however, workers did become a much greater part of the organization and were accorded a status that they did not have before. With job security seniority wages, and enterprise unions, coupled with rapid eco-

nomic growth, many blue-collar employees were able to achieve their broader goals of stability and middle-class status, something that did not exist for them before.

Further reading

Gordon, A. (1985) The Evolution of Labor Relations in Ja-

pan: Heavy Industry, 1853–1955, Cambridge, MA:

Harvard University Press.

Taira, K. (1970) Economic Development and the Labor

Market in Japan, New York: Columbia University Press.


Honda Motor

Established in 1946 by Soichiro Honda, Honda

Motor is the leading manufacturer of motorcycles in the world. It is also one of Japan’s top five automobile manufacturers. Its reputation is built on excellence in engineering and design of engines. Along with Sony, Honda has been one of the fastest growing companies in the post-Second

World War era. It rose to prominence in Japan in the 1950s when it grew from having a 20 percent share of the domestic market to a 44 percent market share, surpassing the former leader


The company’s major breakthrough in international markets came in 1962, when Honda successfully penetrated and then captured the US motorcycle market. With its innovative advertising campaign and the slogan, “You meet the nicest people on a Honda,” it transformed the perception of motorcycles from that of a wild machine favored by rebels to that of an economical, mainstream mode of transportation. In the 1980s it moved aggressively into the three-wheel and all-terrain vehicle (ATV) markets. It is also a

180 Honda, Soichiro strong competitor in the small engine market of lawn mowers, portable generators, and other similar products.

Honda is one of the most widely known Japanese companies in the world. In the early 1960s

Honda committed to an overseas production strategy that it has consistently implemented, first with motorcycles, later with automobiles and small engines. As a result, Honda has generally experienced less criticism from host country governments than its Japanese automotive and motorcycle counterparts, many of which set up production facilities only reluctantly Honda’s

Marysville, Ohio plant for example, was established in 1982 as the first Japanese automotive facility in the United States.

Honda is consistently rated among the top ten companies preferred to work for in Japan. It also has a reputation for innovation in both its products and its managerial policies. The foundation for this reputation is the company’s commitment to excellence in engineering through individual initiative and experimentation. One example of this is the company’s annual inventor’s fair. Employees working on their own time and with modest support from Honda, compete as individuals and teams to create new and unusual products.

In 1992 Honda became embroiled in a scandal in the United States involving illegal payments of cash and gifts totaling $ 50 million over a fifteen-year period. At that time, Honda fired key executives implicated in the scandal. Between

1994 and 1997, eighteen former executives were convicted. The scandal grew out of the effects of the voluntary import restraints placed on Japanese automotive makers in 1981. The demand for Honda’s cars rose precipitously creating a situation in which dealers were coerced to make illegal payments in order to get shipments.

See also: automotive industry

Further reading

Lynch, S. (1997) Arrogance and Accords: The Inside Story of

the Honda Scandal, Dallas, TX: Pecos Press.

Nelson, D., Moody P.E. and Mayo, R. (1998), Powered

by Honda: Developing Excellence in Global Enterprise, New

York: John Wiley & Sons.

Otsuki, S., Tanaka, F. and Sakurai, Y. (1996) Good Mile-

age: The High-Performance Business Philosophy of Soichiro

Honda, New York: Weatherhill.


Honda, Soichiro

Soichiro Honda (1906–91) was a Japanese inventor and automobile executive, and founder of

Honda Motor Company the world-famous manufacturer of motorcycles and automobiles.

Honda was born in 1906 in a small town near

Hamamatsu in Shizuoka Prefecture, where his father was a blacksmith. As a child he was fascinated by machinery and when the first automobile appeared in his village during his primary school days, he decided that he would one day build cars himself. At the age of fifteen, Honda became an apprentice at an automobile repair shop in Tokyo. Pressed into intensive on-the-job training when the 1923 Tokyo earthquake forced most of the shop’s employees to return to their homes, he became an accomplished mechanic, and in 1928 he opened his own auto repair shop in Hamamatsu.

Honda’s skills as an inventor became evident when he began building racing cars in his spare time. Through innovations such as tilting the engine to the left so that the car could more easily negotiate left turns, improving engine cooling by adding an extra radiator, and fashioning the valve seats out of heat-conducting metal, his cars won many races. Although a crash at the finish of the

1936 All-Japan Speed Rally ended his career behind the wheel, Honda’s interest in racing continued, leading to the success of Honda motorcycles and racecars in international racing competition in later decades.

In 1937, Honda decided to try his hand at manufacturing piston rings. Studying metal casting 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 hard years of trials and failure he was finally able to produce piston rings that met Toyota’s quality standards. His company became a supplier to

Toyota in 1940.

When the Second World War ended, Honda sold his company to Toyota and used the proceeds to buy a large drum of medical alcohol.

human relations management 181

This he installed in his home, where he made whiskey and spent a year partying with friends and playing the shakuhachi (Japanese flute).

In 1946, refreshed, Honda established the

Honda Technical Research Institute, the forerunner of Honda Motor Company in Hamamatsu.

His new company began by modifying the small engines that the Japanese military had used for radios and attaching them to bicycles. He then began producing his own engines, and went into the production of motorcycles. In 1949 he teamed up with Takeo Fujisawa, who became co-founder of Honda Motor Company. The two worked together as equal partners until their retirement in

1973, with Honda in charge of technological development and Fujisawa responsible for management of the company.

Further reading

Otsuki, S., Tanaka, F. and Sakurai, Y. (1996) Good Mile-

age: The High Performance Business Philosophy of Soichiro

Honda, New York: Weatherhill.

Sakiya, T. (1982) Honda Motor: The Men, The Manage-

ment, The Machines, Tokyo: Kodansha International.


human relations management

Human relations management refers to the type of work system found in Japanese companies, in particular, how Japanese companies manage their personnel. The human relations approach relies on the assumption that an employee enters the company as a “clean slate.” Thus, human relations management focuses upon interpersonal skill development, teamwork, flexibility and generalist knowledge. The study of human relations management focuses upon the functional divisions of management, namely the work system, recruitment, training, compensation and labor relations.

The work system in Japanese companies is structured around small group activities and decentralized decision making. The primary focus in this approach is upon the promotion of cooperation among workers in order to sustain an internal workforce over the long term. Small group activities serve as a tool to involve employees in decision making while promoting interpersonal conflict resolution and close personal relations.

Additionally small group activities promote group level learning, which improves implicit communication and company specific knowledge development. Therefore, the work system facilitates the building of a “company mindset” and strong corporate culture (Nonaka and Takeuchi 1998).

Recruitment in the human relations system is based upon long-term external relationships with the company. The system of recruiting only new school graduates is still the norm in Japan. Recruitment into a Japanese company most often centers on achieving a fit between the personality of the individual and the company culture.

This is because recruitment is designed to provide stable human capital for the long term versus short-term (strategic) skill or knowledge.

Males and females are recruited for different roles in the organization, as are white-collar (university graduates) and blue-collar (high school or junior college graduates) employees, but the delineation among employees is confined mainly to these categories.

Training and development in the Japanese system emphasizes an evolutionary process of education and training designed to mold an individual into the ideal corporate employee. Onthe-job training, or OJT, is the primary method of training for the Japanese employee. OJT is learning by observing and doing, with little or no systematic measurement or evaluation. This system of knowledge development is sometimes supplemented by education and training for employees outside the company, as in study abroad scholarships or technical training assignments, but is largely confined to company-specific employee development.

Compensation and promotion are based upon a seniority system. The seniority system assumes a slow, steady progression of employee development which occurs at roughly the same time for all employees. Thus, the length of employment determines the amount of change in pay and or status of the individual. This is in direct contrast to a performance-based system in which individual effort and output determine the amount of compensation and the rate of advancement. Although the seniority system has often been criticized as promoting mediocrity and dampening innovation

182 human relations management in the organization, its main purpose, to maintain harmonious relations among employees, has been successful over time.

Labor relations in a human relations management system relies on the family structure of Japanese organizations to allow a unique “company union” system to persist. Whereas in the Western labor union tradition there is an adversarial relationship between management and workers,

Japanese managers and line staff are members of the same union. Again, the focus of Japanese unions is to promote quality or work-life issues much more than the traditional Western unions which negotiate mainly on issues of compensation and safety.

Further reading

Abegglen, J.C. and Stalk, G. (1985) Kaisha: The Japa-

nese Corporation, New York: Basic Books.

Inohara, H. (1990) Human Resource Development in Japa-

nese Companies, Tokyo: Asian Productivity Organization.

Nonaka, I, and Takeuchi, H. (1998) The Knowledge

Creating Company: How Japanese Companies Create the

Dynamics of Innovation, Oxford: Oxford University


Whitehill, A.M. (1991) Japanese Management, London:




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 purposefully extending the household collective beyond relationships bound purely by blood, the ie has continued to serve from Japanese medieval times to the present as the basic unit of a cohesive social structure that eventually built the “Japanese economic miracle.”

The toyo kanji (ideograph) for family Ie, shown in Figure 1, illustrates its roots. The ideograph consists of two elements: a roof over a pig, a domesticated animal in a dwelling. This image succinctly symbolizes the importance placed upon the household’s economic role over the human aspects of a conjugal nuclear family The conjugal nuclear family is subordinate to the Ie. The

Ie’s significance as an economic collective has, in fact, brought added relevance to the word’s other meanings.

The ie concept of the household unit may be traced back to ancient times and has its earliest roots in the cooperative nature of traditional agricultural production. Later, in the seventh century Confucian concepts were imported from

China and adapted by the elite classes, providing fundamental support for the ie ideology. The fo-

Figure 1

cus of Confucian doctrine was the cult of the family In general, it prescribed: the hierarchical relations between members; personal loyalty consisting of reciprocal duties and obligations; ritual observances of these reciprocities; contractual arrangements between groups patterned after family relationships. Diffusion of Confucian ideas to all social orders did not occur until much later, during the Tokugawa period. Until then, peasant family members were scattered as serfs among the noble classes within the feudal order.

Buddhism also had a profound effect on Japanese culture. Its social impact, through an emphasis on the cultivation of humility and the subordination of individual ambition for a collective good, cannot be overestimated, particularly in regard to its implicit support for key

Confucian values. Confucianism and Buddhism were complementary to the ujigami, patron deities of the native Shinto local god system. Together the three evolved into a family religion,


184 Ie commonly referred to as ancestor worship, which was virtually universal in Tokugawa Japan. The brief daily ceremony before the family shrine was a constant reminder to household members of their obligations to the ie.

The ie was the most basic economic, political, and social collective unit of a society that was itself governed by precepts of giri, obligations and duties to superiors, and on, benevolence to inferiors. Within the ie, the most important criterion by which to evaluate action and behavior was how well it served the group. In such a collectively oriented society the individual hardly existed as a distinct entity and failure to fulfill one’s obligations was considered selfish, or even cowardly. This ie ideological system suited Japan’s oligarchic feudal system quite well. The daimyo

(feudal lord) was referred to as shushin (lordparent) and the followers as ienoko (children of the family). First adopted by the warrior class, the samu-

rai, the ie house system later informed the business and social practices of the merchant and the artisan classes as these groups increased in economic importance.

The giri psychology of moral obligation and duty provided stability to the two and one-half centuries of peace and tranquillity of Tokugawa

Japan, following a hundred years of civil wars.

After the Battle of Sekigahara in 1600, Tokugawa hegemony was established and a class structure imposed that was to become largely immutable.

Its rigid hierarchy popularly known as the

shinokosho (warrior, farmer, artisan, merchant classes), declared the peasants second only to the

samurai in the social pecking order, although they ranked last economically.

By the mid-1700s the whole of Japanese society was comprised of economic units based on households reinforced by a religious cult of the family. During this Pax Tokugawa, every effort was made to suppress change in order to maintain the social structure. Tokugawa government policy sought to settle peasants permanently in stable villages and establish the ie as the basic unit of society During the seventeenth and eighteenth centuries, land and tenant rights were promulgated among the peasantry making it possible for individual farming households to establish themselves. Family units could then remain intact through successive generations. Thus formalized by law, the peasantry began to adopt the family values of the samurai household codes.

The ie was seen first and foremost as an ongoing enterprise rather than as a sanguineous family unit. Once an ie was established, its continuity through successive generations was of major concern to its members. If there was no son, a daughter’s husband would be adopted into the household to assume the family name and eventually inherit the household. If there were no children at all, a son or daughter would be adopted and, with his or her spouse, carry on the household. Kinship blood ties were not as important as the suitability of the candidate to manage the affairs of the household, particularly in a merchant family. Although a son would normally be considered first choice to inherit, if unsuited to the task he might be sent to establish his own branch household while a longtime faithful employee would be chosen as successor, married to a daughter, and adopted into the household.

Although the laws of inheritance allowed for only one heir so as to preserve the property of the household, custom provided for the establishment of branch households for additional offspring and loyal apprentices who had become part of the ie. It is these last two attributes, the adoption of a non-blood member as heir and the indivisibility of inherited property that distinguishes the Japanese institution of the ie from other East

Asian family/ kinship enterprise systems, such as in China and Korea.

The harsh living conditions of the Tokugawa period made the division of property among offspring nearly impossible, so that only the wealthiest families were able to bestow any assets on a second or third son. However, high mortality rates during the Tokugawa period and into the modern period meant that second or third sons could be adopted into other households in the same or neighboring villages.

It was most common that, in the formative stages of the household enterprise, the direct management of the ie was in the hands of family members for the first two generations. As the business grew in stability and size, however, often by the third generation, competent managers who had grown up in the ie from early childhood and had been promoted from detchi (apprentice) to tedai

(salesperson) and then banto (manager), were

Ie 185 ready to assume the management operations of an expanded business. It was often at this stage in the development of the Ie that management of the mise (store) became physically separated from the oku (back living quarters), symbolically marking the progression from a nuclear family business to an extended family business. For ie that had grown to a very large scale, such as Mitsui, it was imperative that non-family member managers be given authority since there could not possibly be a sufficiently large talent pool within the Mitsui family itself.

The banto was permitted to marry at age twenty-five and was then provided by the master with a bekke (separate house). Those who continued to work within the honke (main house) were guaranteed their livelihood after retirement.

Those bekke that operated a business were financed and given a share of the goodwill by the

honke, whether in the same or a different type of business. Apprentices for the main house were selected from among the sons of the bekke, thus maintaining the fictive kinship relationship.

The successful collectivist centered development of the Japanese firm differed sharply from the weakened role of the household firm in Western Europe, which was superseded by the creation in early seventeenth century England and the Netherlands of the joint stock company form

(see joint stock corporation).

The Japanese family firm in the ie system was able to develop many of the attributes of a Western-style corporation while retaining the motivational aspects of a household business: (1) perpetuation of the firm by training of suitable successors from within the ie; (2) securing the loyalty of management to the household by the use of fictive kinship status; (3) the indivisibility of the ie and its assets, which tended to constrain the ability of any one individual stakeholder to act on his own against the overall interests of the household.

The origins of the zaibatsu and its successors the keiretsu (vertically grouped companies) and

kigyo shudan (horizontally grouped corporate firms) are found in the establishment of the merchant family houses of the Tokugawa period. The extended household enterprises or family associations, such as the Konoike, Sumitomo, and

Mitsui groups, were all engaged in different types of businesses and strategies. They were active in developing the capital resources and a household enterprise management system during the early

Tokugawa period that enabled them to continue to prosper during the industrialization era of the

Meiji period.

The management style which enabled the development of the merchant household style business was based on a distinctive concept of kinship, namely of non-blood, fictive kinship-based economic units. In a household style business nonblood related individuals function together as a simulated kinship group. Even when the internal structure of a modern industrial enterprise grows beyond a small-sized business, traditional patterns of on and giri continue. Subsidiaries and sub-units assume the traditional obligations to their employees. Similarly the traditional distinctions between insider and outsider are in play in the modern notion of the “lifetime employee,” a modern-day embodiment of the traditional apprentice, an adoptive member of the ie (household).

In the postwar period the most sought after jobs for new university graduates are those not only with a prestigious company but also with a secure “family” culture. Although, only some 30 percent of Japanese industrial workers were considered to have “lifetime” status; an employee would still be classified as “temporary” or “parttime” even after working twenty years for the firm. The so-called temporary employee remains outside the network of reciprocities, without share in the ie or job security.

The attributes of the postwar Japanese style management, such as the lifetime employment system, seniority promotion. and a paternalistic policy towards employees, have their historical basis in the annals of medieval seventeenth century merchant households. Ie household codes governing the management of family businesses contained specific regulations on the theory and practice of long-term employment, seniority and the good treatment of employees.

The process of modernization in Japan may be viewed, in some very fundamental aspects, as the continuous development of native institutions rather than as the result of the abrupt introduction of Western ideas in the Meiji period of the late nineteenth century The values and beliefs associated with the ie household concept are

186 Ikeda, Hayato alive not only in family-operated businesses but are reflected in the relationships and practices within firms and within industrial groups. The concepts that came to be inherent in ie provided foundation for the transformation of Japanese household enterprise across the centuries into the present day forms as member firms of large corporate enterprise groups (kigyo shudan) and

keiretsu. Ie prepared the way for the great trading houses and their commercial banks, known as the zaibatsu in the prewar period. Finally ie

“house” practices not only prefigured the relationship for the kigyo shudan, of today but, more significantly the development of Japanese firms as group entities, prototypic of the formation of relationships between industrial groups, both big and small, throughout Japanese society and its economy.

tered the National Cancer Center. In October, he announced his resignation, and the entire

Ikeda Cabinet resigned in November. He passed away on August 13, 1965. He was awarded the

Grand Cordon of the Supreme Order of the

Chrysanthemum that same year.

Further reading

Ito, M. (1985) Hayato Ikeda and His Times, Tokyo: Asahi


Kobayashi, K. (1989) Hana mo Arashi mo: Prime Minister

Hayato Ikeda’s Ambitions, Tokyo: Kodansha.



Further reading

Nakane, C. (1970) Japanese Society, Berkeley CA and

Los Angeles: University of California Press.

Scher, M.J. (1997) Japanese Interfirm Networks and Their

Main Banks, London: Macmillan, and New York:

St Martin’s Press.


Ikeda, Hayato

Hayato Ikeda was born in the Hiroshima prefecture in 1899. In March 1925, he graduated Kyoto

Teikoku University (presently Kyoto University)

Department of Law, and entered the Ministry

of Finance. He became the chief of National

Taxation at the Ministry of Finance in 1941, and the Vice-Minister of Finance in 1947. In 1952, he became Minister of International Trade and Industry.

In 1960 the First Ikeda Cabinet was formed, and the government set the Shotoku-Baizo-Keikaku

(Double Income Policy). The success of this policy formed the basis of Japan’s phenomenal economic growth during the next few decades. Japan formally became a member of the Organization for

Economic Cooperation and Development

(OECD) in April, 1964.

In September of that year (1964), Ikeda en-

Inamori, Kazuo

Born in 1932, Kazuo Inamori is the founder of two multibillion dollar companies: Kyocera Corporation, which is the world leader in manufacturing ceramic casings for semiconductors, and

DDI Corporation, the second-largest telephone company in Japan. He is viewed by many as one of the greatest entrepreneurs of post-Second

World War Japan along with Akio Morita and

Soichiro Honda.

As a student, Inamori failed to get into any of the prestigious high schools, colleges, or companies. He later received a degree in chemical engineering from Kagoshima University and in 1955 went to work for Shofu Industries, a Kyoto-based manufacturer of electronics. In 1959, at the age of twenty-seven, he quit Shofu because the company management would not pursue his vision of a ceramic business, and started Kyocera with seven colleagues.

Inamori’s business philosophy has strong religious overtones. For example, Kyocera’s corporate motto is “respect the divine and love people.”

His teachings are a mixture of Zen, Zig Ziglar and motivational speaking. He has written two books that have been translated to English: A

Passion for Success and For People For Profit.


income doubling plan 187

income doubling plan

The National Income Doubling Plan (Kokumin

Shotoku Baizo Keikaku) decided by the Ikeda Cabinet in 1960 has been called the “Income Doubling Plan” and is the most famous government economic plan in post-Second World War Japan.

The then Prime Minister, Hayato Ikeda, taking a hint from Professor Ichiro Nakayama’s theory of wage-doubling, announced that his government would double national income within ten years from 1961 to 1970.

The political and economic background of the plan was the following. On the one hand, 1960 was the year for renewal of the United States—

Japan Security Treaty concluded in 1951, which gave the United States the right to station troops and maintain military bases in Japan. The treaty renewal, which did little to change the basic situation, gave rise to strong opposition and political turmoil. After Prime Minister Kishi Nobusuke’s resignation in 1960, he was succeeded by Ikeda, who tried to overcome the political crisis, which had also been triggered by the Mitsui-Miike Coal

Mine Strike, the postwar period’s largest laborcapital confrontation. In this context, the announcement of the plan had an aspect of political appeasement.

On the other hand, the Japanese economy though reconstructed after the destruction of the

Second World War, was still weak and fragile domestically as well as internationally Although rapid growth had begun in 1955, achieving full employment and balancing international accounts were still the biggest challenges facing Japan. The

Ikeda plan also had to address these challenges.

The plan stated its goal as follows: “the ultimate aim is to move toward a conspicuous increase in the national standard of living and the achievement of full employment. To that end, the maximal stable growth of the economy must be contrived.” The target set in order to maximize stable growth was to double national income and

GNP within ten years. The target level for GNP in 1970 was set at ¥26 trillion (at 1958 values), double the GNP for 1960. Therefore, average annual growth had to reach 7.2 percent over the decade. In actuality the plan called for an average annual rate of 9 percent for the first three years.

Five major problems had to be solved in order for the plan to reach this target. First, infrastructure bottlenecks that impeded further growth had to be solved by increasing government investment. The expansion of the private sector was creating bottlenecks due to lack of roads, harbors, factory sites and so forth. Second, in order to achieve economic independence, the modernization of national industrial structure had to be promoted. This called for the

Americanization of Japanese industry, or in other words, the introduction of Fordism. Third, the promotion of international trade and cooperation had to be increased. Fourth, the improvement of human capabilities and advancement of science and technology was emphasized and promoted. For example, one approach was to set up a number of new colleges of science and engineering. Fifth, mitigating the negative side effects of the dual structures of the economy (see

dual structure theory) and securing social stability was established as a major focus. This was a response to problems that accompanied rapid

economic growth: the need to reduce wage differentials between large and small companies, to reduce income gaps between agricultural and manufacturing sectors, and to diminish regional income disparities. The type of approach embodied in the income-doubling plan can be viewed as one element of Japanese-style welfare state.

The plan’s policies can be broken down into two main thrusts: economic growth and appeasement. Although it is difficult to evaluate the full effects of the plan itself, the Medium-

Term Economic Plan introduced by the Sato

Cabinet in 1965 replaced the plan halfway through its lifespan. The Japanese economy continued to grow at the highest rate of any major economy in the world and, as a result, exceeded the target of ¥26 trillion, reaching nearly ¥40 trillion in 1970. The actual average annual growth rate in the period from 1961 to 1970 was

11.6 percent.

Due to its high rate of growth, Japan attained almost full employment and economic independence in the middle of 1960s, mitigating to some extent the dual structure economy and becoming the second largest economy in the free world. However, the high rate of growth caused

188 industrial efficiency movement distortions in the economy such as price increases, overpopulation in urban areas and depopulation in rural areas, pollution, and so forth.

Indeed the main objective of the above-touch behind introducing the Medium-Term Economic Plan was to correct these distortions.

Japan’s economic planning, as carried out officially by the Cabinet, began with the five-year plan for economic self-support put forward in

1955. Since that time the government has introduced fourteen further plans. The most recent plan is called the Ideal Socioeconomy and Policies for Economic Rebirth (1999–2010).

Japan’s economic plans possess three basic characteristics. First, they indicate the “desired direction of economic and social development;” second, they indicate the policy direction the government should take in order to achieve these ends; third, they indicate behavior guidelines for people and for business. On the whole, the planned figures fall somewhere between predictions and guidelines. Few government or business leaders consider the national economic plan as a rigid, binding plan that must be followed by the government. Instead it is viewed as a longterm forecast, with some flavor of wishful thinking by the plan-makers.

Especially in the case of the Income Doubling

Plan, Komiya (1990) suggests that the “announcement effect” or “propaganda effect” on economic growth seems to have been quite substantial.

Ikeda and the plan pulled together a national consensus for economic growth and defined the era of high growth that had already begun.

See also: dollar shock

Further reading

Komiya, R. (1990) The Japanese Economy: Trade, Indus-

try, and Government, Tokyo: University of Tokyo


Kosai, Y. (1986) The Era of High-Speed Growth: Notes on

the Postwar Japanese Economy, trans. J.Kaminski, Tokyo: University of Tokyo Press.

Nakamura, T. (1981) The Postwar Japanese Economy: Its

Development and Structure, trans. J.Kaminski, Tokyo:

University of Tokyo Press.

Uchino, T. (1978) Japan’s Postwar Economy: An Insider’s

View of its History and its Future, trans. M.A.Harbison,

Tokyo: Kodansha International.


industrial efficiency movement

The industrial efficiency movement (nouritsu

undou) was a series of initiatives starting in the period 1910–20 that aimed to modernize labor and production management practices in Japanese industry. Inspired by American models, and especially by Frederick Winslow Taylor’s theories of scientific management, Japanese reformers sought to systematize and rationalize inefficient, customary production methods.

Adapting imported theories to Japanese conditions, the proponents of industrial efficiency pioneered managerial ideologies and techniques which would become the hallmarks of Japanesestyle management (Nihon teki keiei) after the

Second World War.

The age of efficiency

Japan’s industrial efficiency movement paralleled similar drives to modernize factory management practices in the United States and Europe.

Taylor’s work on the systematic rationalization of production was a crucial catalyst in this international effort and his classic book, The Principles

of Scientific Management, was published in Japanese only two years after its American release in 1911.

Taylorite methods and the broader notion of efficiency captured the imagination of many in industrializing Japan, from engineers to academics to the general public: new books and journals dedicated to management issues proliferated, many universities introduced courses on

Taylorism, and expositions featuring the latest managerial advances attracted thousands of interested spectators.

Although the Japanese mania for efficiency seemed to some a passing fad of the 1910s, important figures in private industry and the government embraced the Taylorite message and actively promoted the adoption of techniques such as time-and-motion study standardization and incentive wages. During the 1920s, thanks

industrial efficiency movement 189 in part to the work of Yoichi Ueno and other early management consultants, scientific management spread steadily through Japan’s modern industries, especially textiles, electrical goods and the national railways. Reformers encountered opposition from some intellectuals and labor groups that criticized Taylorism as dehumanizing, exploitative and excessively materialistic.

Nonetheless, Taylorite practices appear to have engendered significantly less hostility from shopfloor workers in Japan than was the case in either the USA or Europe. An important reason for this was the fact that Japanese management reformers, sensitive to their nation’s particular economic and cultural conditions, sought to adapt

Taylorism ideologically and methodologically to

Japanese realities. Tempering scientific management’s mechanistic rationality and managerial elitism with more concern for the well-being of workers, proponents of industrial efficiency endeavored to develop a more humane Taylorism for application in Japan.

Depression and war

After the onset of the Great Depression, Japan’s management reformers were increasingly integrated into the industrial rationalization movement (sangyou gourika undou), a major government-sponsored program to increase productivity limit competition and stabilize industry during the global economic crisis. As part of this broader effort, the industrial efficiency movement, which during the 1920s had been a loosely organized, uncoordinated and largely private sector initiative, became more centralized, streamlined, and professional. With official subsidization and encouragement, a series of new campaigns aimed at the modernization of factory management were launched during the 1930s.

Despite the early achievements of the industrial efficiency movement, proponents recognized that much improvement was still possible, especially as labor productivity in Japan continued to lag behind US and European levels. Some ambitious reformers even looked toward the establishment of Fordist mass production, a dramatic extension of the logic and methodologies of

Taylorism. Yet such a dream remained beyond the reach of prewar Japanese industry which lacked adequate markets, capital and technology to make the leap to American-style assembly lines.

Indeed, even incremental Taylorization proved impossible for many Japanese employers: under the straightened circumstances of the depression, mass layoffs and work intensification seemed easier solutions than the scientific analysis of production.

The coming of the Second World War and the realization that industrial power was as important as military might in modern “total war” brought an unprecedented surge of interest in efficiency and management reform. Japanese

Taylorites were readily mobilized and the application of scientific management was trumpeted as the patriotic duty of manufacturers. But despite heightened appreciation of Japan’s need for managerial modernization, actual progress on the shop floor was slow in an environment of constant dislocation, endemic shortages and imperfect central planning. Standardization and specialization proved elusive through the war and, in the end only a few industries realized even limited assembly line production. Nonetheless, wartime developments did lay sound foundations for the sweeping reform of management practices and the attainment of mass production in the postwar years: most importantly as the number of trained, professional managers swelled during the war, the vision of a humanized recasting of

Taylorism was widely embraced as a specifically

Japanese approach to modern production and labor management.


Although the industrial efficiency movement is usually taken to have ended with Japan’s defeat in 1945, its intellectual and methodological legacies suffused the major management reform efforts of the postwar period. For example, Taylorite ideologies—including the assumption that prosperity would neutralize class conflict and the abiding faith in apolitical managerial expertism—came to characterize the productivity movement, a USsponsored drive to modernize Japanese industry and labor relations. Meanwhile, familiar Taylorite practices such as time-and-motion study became the technical building blocks of the famed Toyota

production system and were widely embraced

190 industrial groups as Japan made the postwar transition to a modern, mass production economy.

Japan’s particular heritage of scientific management may have had its greatest impact, however, on the postwar quality control movement.

Over a decades-long process of trial and error, quality advocates sought to realize the vision of a humanized Taylorism, fusing the scientific remaking of the workshop (through statistical analysis and rigorous standardization) with new means for engaging and motivating labor such as qual-

ity control circles. The distinctive patterns and conspicuous successes of Japanese quality man-

agement—and, indeed, of contemporary Japanese production and labor management as a whole— derived in large part from the formative influence of the industrial efficiency movement.

See also: Japan Productivity Center for Socio-

Economic Development

Further reading

Okuda, K. (1985) Hito to keiei: Nihon keiei kanrishi kenkyuu

(Men and Management: Research in Japanese

Managerial History), Tokyo: Manejimento-sha.

Sasaki, S. (1987) “Scientific Management Movements in Pre-War Japan,” in S.Yasuoka and H. Morkiawa

(eds), Japanese Yearbook on Business History: 1987, Tokyo: Japan Business History Institute.

Tsutsui, W.M. (1998) Manufacturing Ideology: Scientific

Management in Twentieth-Century Japan, Princeton, NJ:

Princeton University Press.


industrial groups (keiretsu)

Keiretsu is a Japanese word that defies exact translation. A literal rendering into English might be

“succession,” in the sense of a sequence of entities joined together, as links in a chain. The word

keiretsu is used to refer to business groups including (1) the six groups centered around the large

Japanese banks (also called financial groups, financial keiretsu, or horizontal keiretsu), (2) the groups of firms centered around the forty or so largest industrial companies of Japan (also called enterprise groups or vertical keiretsu), (3) the subcontracting groups that are an important component of several of the groups centered around the large industrial companies, and (4) directed marketing channels (also called distribution

keiretsu). This entry is confined to the first two of these, which we will refer to respectively as the financial keiretsu and the enterprise groups. Both are also called industrial groups.

Financial keiretsu

The financial keiretsu are the postwar reincarnations of the prewar zaibatsu. After the end of the

Second World War, the American occupation authorities directed the dismantling of the zaibatsu.

These measures included the divestiture of share interlocks, dissolution and abolition of holding companies, and appropriation and disbursement of shares held by the zaibatsu families. Soon after the Occupation ended, and continuing until about

1960, many of the firms previously affiliated with the major zaibatsu or the successors of such firms re-established their old shareholding interlocks.

The large commercial banks among these firms became major stockholders in most of the other members of their respective reconstituted groups.

Besides the progeny of the big four zaibatsu

Mitsui, Mitsubishi, Sumitomo, and Fuyo (formerly Yasuda)—the six financial keiretsu include the Dai-Ichi Kangyo group, consisting mainly of former members of the smaller Kawasaki and

Furukawa zaibatsu, and the Sanwa group that had no prewar antecedent.

There are different ways of ascertaining which companies belong to which financial keiretsu. The clearest evidence of affiliation is appearance on the roster of monthly “presidents’ club” meetings of any one of the six respective groups. These rosters are public, though the agendas of the meetings are not. A few companies belong to more than one presidents’ club—Hitachi belongs to three of them—but these are the rare exceptions.

The rosters of the presidents’ clubs exhibit little change from one year to the next, and the changes that do occur are mostly the result of mergers.

Altogether, the members of the six presidents’ clubs in 1995 numbered 185 companies, including most but not all of the largest companies in

Japan. Some of the large companies not on the rosters of presidents’ clubs include Honda Motor, Matsushita, Sony and Fuji Film.

industrial groups 191

The presidents’ club companies span a wide selection of industries. In fact, the economist

Miyazaki Yoshikazu famously characterized the financial keiretsu as organized on the basis of the

“complete-set principle” (wan setto shugi); that is, each of them comprised of at least one company in each major industry. In industry after industry the members of the differing financial keiretsu compete with one another. For instance, Toyota,

Mitsubishi Motors, Nissan, Daihatsu and Isuzu are each affiliated with a different keiretsu. Kirin

Brewery belongs to the Mitsubishi presidents’ club, but Sapporo Breweries belongs to the Fuyo presidents’ club. There are many other similar examples. The financial keiretsu are not simply cartels, coalitions of suppliers of similar products.

Rather, they represent suppliers of differing products, and in many instances, fellow members of the same presidents’ club trade with one another.

Japan’s Fair Trade Commission has periodically surveyed the extent of transactions between fellow members of same presidents’ clubs. In 1980 it reported that 20 percent of the sales of presidents’ club manufacturing firms were to fellow members of the same clubs, and 12 percent of purchases were from fellow club members. These are all very large companies, most of whose transactions are probably with smaller firms, outside the presidents’ clubs, so the Fair Trade Commission data does suggest a disposition towards trade between fellow members of the same financial


Presidents’ club members borrow principally but not exclusively from fellow members. The single largest lender to each of them is usually the city bank that belongs to the same presidents’ club as the company itself. In the usual pattern, loans from the presidents’ club city bank account for 10 percent to 20 percent of any other fellow presidents’ club member’s total outstanding debt.

The presidents’ club trust bank holds another 5 percent to 10 percent of each fellow member’s debt and the life insurance company 1 percent to

5 percent. The balance of a typical presidents’ club company’s total borrowing is from outside the group, including borrowing from financial members of other presidents’ clubs than the one of affiliation. Presidents’ club members also borrow from the three long-term credit banks, the city banks not affiliated with the six financial

keiretsu, and from the regional banks. Since 1980, large Japanese companies have been allowed access to international financial markets as a source of funds, but still rely quite heavily upon domestic loans.

Another visible linkage among fellow presidents’ club members is cross-shareholding. The average fractions of outstanding shares held within the respective presidents’ clubs in 1997 were Sumitomo (22.2 percent), Mitsubishi (27.3

percent), DaiIchi Kangyo (11.3 percent), Sanwa

(15.8 percent), Mitsui (15.1 percent), and Fuyo

(15.5 percent), but about half of these shares were held by financial institutions of the respective groups. The Antimonopoly Law of Japan limits the extent of shares that banks and insurance companies may hold in any one company Since 1987 these limits have been set at 5 percent for banks and 7 percent for insurance companies. Few banks or insurance companies hold share interests approaching these limits. The shareholding of banks in the companies to which they lend is an important aspect of Japan’s bank-centered system of financial intermediation.

About one-third of the (non-ordered) pairs of nonfinancial companies belonging to a same presidents’ club are directly linked with one another by cross-shareholding, and in about half of these instances, the cross-shareholding is reciprocal. Typically the share interest of any one presidents’ club company in another lies around

1 percent. In other words, the crossshareholding ties are usually insufficient to confer a controlling interest. Cross-shareholding between nonfinancial members of differing presidents’ clubs is unusual.

The financial keiretsu occupy a sizeable niche in the Japanese economy. Together, the six presidents’ clubs in 1997 accounted for about oneeighth of the sales of nonfinancial businesses in

Japan, one-seventh of the paid-in capital, and oneeighth of the net profit.

Enterprise groups

The groups of firms centered, respectively around a number of the largest industrial companies are also referred to as keiretsu and as industrial groups.

There is no standard term of reference for them but here let us refer to them as enterprise groups.

192 industrial groups

The prominent examples are listed in Table 2 below. Quite a few of the forty firms identified there as leaders of enterprise groups are themselves members of a keiretsu presidents’ club.

The enterprise groups generally include myriad subsidiaries as well as independent subcontractors and other suppliers, and some also include wholesalers and retailers of the group’s products. Trading ties within the respective enterprise groups may be presumed to be much more extensive than is generally true in the financial keiretsu. Also the shareholding of the enterprise group leader in the other members is typically strong enough to confer de facto control, not merely a silent financial interest. The enterprise groups are more tightly knit than the financial keiretsu.

The combined assets of the forty enterprise groups listed in Table 2 approached 10 percent of the total assets of all industrial firms in Japan, in 1994. In other words, the scale of the forty largest enterprise groups roughly corresponds to that of all the industrial members of the presidents’ clubs of the six financial keiretsu.

Business scholars have offered various conjectures regarding the fundamental rationale behind Japan’s industrial groups. The financial

keiretsu owe something to their zaibatsu antecedents. The companies’ long history of profitable trade and cooperation with one another has engendered a mutual sense of trust within the respective financial keiretsu, and enhanced their shared reputations in dealings with outsiders.

These reputations represent a true business advantage and one that the companies are loathe to abandon. If the companies’ early histories had not included the fact that each lay within the control orbit of the same respective zaibatsu then these advantages of group affiliation might never have been realized and perpetuated. The Sanwa financial keiretsu, unlike the others, has no prewar antecedent but from its origin it imitated the proven success of the others and so required their example.

Bank dominance of financial intermediation in Japan is another factor buttressing the financial keiretsu. Regulations and other factors that inhibited companies from raising external funds in securities markets gave rise to the main bank system in Japan, in which banks supplied the greater share of external funds and also therefore developed close relationships with loan clients. The main bank for any one member of a financial

keiretsu was naturally the main bank for all because given the various group members’ active commerce with one another, information about each one’s creditworthiness also bore on that of the others. This very fact further inclined the companies to perpetuate their special ties with one another; the implied information spillovers lowered their costs of borrowing.

The enterprise groups represent a form of economic organization that is less vertically integrated than some conceivable alternatives. In the market economy vertical integration will proceed further when the costs of transacting through the price system are greater and the costs of administering a directed system of production are lower.

Factors bearing on transaction costs include the extent of the market, the weight of reputation effects, the sophistication of contracts and the degree of government interference with private contracts. The large scale of the Japanese market, the durability of trading ties in Japan, and the laxity of Japan’s anti-trust laws all contribute to the organization of production into enterprise groups rather than into fully vertically integrated enterprises.

Table 2 Companies that head the forty most significant enterprise groups. Presidents’ club memberships are stated in parent heses.

1801 Taisei (Fuyo)

2503 Kirin Brewery (Mitsubishi)

2914 Japan Tobacco

3402 Toray Industries (Mitsui)

3407 Asahi Chemical Industry (Dai-Ichi)

3863 Nippon Paper Industries (Mitsui, Fuyo)

4010 Mitsubishi Chemical Industries (Mitsubishi)

4204 Sekisui Chemical (Sanwa)

4452 Kao Corp.

4502 Takeda Chemical Industries

4901 Fuji Photo Film

5001 Nippon Oil Co.

5108 Bridgestone Corp.

5201 Asahi Glass (Mitsubishi)

5401 Nippon Steel

5404 NKK (Fuyo)

5711 Mitsubishi Materials (Mitsubishi)

industrial policy 193

5802 Sumitomo Electric Industries (Sumitomo)

6326 Kubota (Fuyo)

6501 Hitachi (Fuyo, Sanwa, Dai-Ichi)

6502 Toshiba (Mitsui)

6503 Mitsubishi Electric (Mitsubishi)

6701 NEC (Sumitomo)

6702 Fujitsu (Dai-Ichi)

6752 Matsushita Electric Industrial Co.

6758 Sony Corp.

7011 Mitsubishi Heavy Industries (Mitsubishi)

7201 Nissan Motor (Fuyo)

7203 Toyota Motor (Mitsui)

7267 Honda Motor Co.

7751 Canon (Fuyo)

8031 Mitsui (Mitsui)

8058 Mitsubishi (Mitsubishi)

8263 Daei

8264 Ito-Yokado Co.

8591 Orix (Sanwa)

8801 Mitsui Estate development (Mitsui)

9501 Tokyo Electric Power Co.

9613 NTT

JR-Higashi Nihon

Source: T.Y.Keizai (1996) Kigyo keiretsu soran (Handbook of

Keiretsu Enterprises), Tokyo.

Further reading

Flath, D. (1996) ‘The Keiretsu Puzzle,” Journal of the

Japanese and International Economies 10:101–21.

Gerlach, M. (1993) Alliance Capitalism: The Social Orga-

nization of Japanese Business, Berkeley CA: University of California Press.

Hadley E. (1970) Antitrust in Japan, Princeton, NJ:

Princeton University Press.

Miyazaki, Y. (1967) “Rapid Economic Growth in Post-

War Japan—With Special Reference to ‘Excessive

Competition’ and the Formation of ‘Keiretsu,’” The

Developing Economies 5:329–50.


industrial policy

Industrial policy consists of government actions to influence the economic behavior of specific industries, firms, and other economic actors, for the achievement of broadly defined political goals.

Industrial policy is designed to affect specific industries differentially and so is distinct from general economic policies that influence the economy as a whole, overall aggregate demand, economic welfare, and the like. In general, industrial policy involves actions that anticipate or at times contradict market signals, with the goal of channeling resources to (or away from) selected industries, leading to developmental outcomes that would not have occurred had market forces been allowed to operate freely Industrial policy generally operates on the supply-side, influencing private investment decisions in directions consistent with broader political goals. A key concept in industrial policy is the creation of comparative advantage: rather than maximizing efficient production while taking existing factor endowments as a given, a government can use industrial policy incentives to change a country’s factor endowments.

In the postwar period the Japanese government has provided a range of policy incentives, both positive and negative, to influence private sector behavior. Industrial policy was designed first to help the Japanese economy recover, and then to foster the development of industries with high growth potential, particularly those that embodied advanced technology. In general, Japan’s industrial policy has focused on the promotion of capital and technology-intensive production, and has sought to shift the country’s entire industrial structure in these directions. Another focus of

Japan’s industrial policy has been on international trade: many policies have sought to increase the export competitiveness of Japanese products, and at times have shielded domestic industries from international competition.

Scholars do not agree on the nature of Japan’s industrial policy goals, and the extent to which the state has been insulated from political and societal pressures. Many have argued that state bureaucrats have been able to define and pursue relatively coherent national-level goals such as improving Japan’s international power position through rapid industrialization or achieving national economic and technological autonomy

Others stress the economic motivations behind industrial policy such as raising factor productivity and national incomes, and overcoming socalled “market failures.” Still others argue that industrial policy has been more politicized,

194 industrial policy subject to the influence of political actors or affected industries. An academic consensus is emerging that describes Japan’s industrial policy as the product of a negotiated balance between the goals of the state and the sometimes conflicting interests of the private sector.

especially those deemed to be important for Japan’s military capabilities. In the 1930s and then during the Second World War, the Japanese government became increasingly involved in the economy especially in order to direct resources to war-related industries. During the war, the government semi-nationalized a number of industries through the so-called control boards (toseikai), in an effort to sustain the war effort.

Japan’s early industrial policy

Japan’s rapid industrialization in the Meiji era is often associated with the industrial policies followed by the new government. The Meiji leadership recognized that Japan lagged behind the

European countries in terms of industrial strength, technology and military capabilities.

Unless Japan could rapidly increase its national strength it would be unable to protect its national sovereignty or preserve its economic autonomy and thus would be vulnerable to the fate that was befalling many others in Asia: imperialism. The

Meiji leadership, under the slogan fukoku kyohei, or “rich nation, strong army” thus embarked on a sustained effort to upgrade Japan’s industrial capabilities and to achieve economic and military parity with the West.

In addition to the government’s massive effort to create a modern government administrative structure, the state also took the lead in using industrial policy to modernize the Japanese economy The government realized that Japan was an economic “latecomer,” and that the private sector lacked adequate capital, technology and entrepreneurial skills to create crucial large-scale and capital-intensive industries. Rather than relying on market forces, the Japanese government intervened in the market by creating a number of state-run “model firms” in such industries as textiles, steel, and shipbuilding. These firms were in part designed to induce private Japanese entrepreneurs to create firms of their own, and most were soon sold off to private sector entrepreneurs.

Other government industrial policies included the promotion and financing of the import of advanced technology and the development of exports, particularly in the textile industry.

In subsequent decades, the government’s industrial policy role became more indirect. State policy continued to promote exports and to encourage investment in strategic industries, and

Japanese industrial policy during the era of rapid growth

The government’s direct involvement in the economy was drastically reduced following

Japan’s defeat in the war. In the postwar period the Japanese government has not relied heavily on public or state-owned firms. Rather, industrial policy has relied on more indirect measures, including inducements, guidance, and threatened punishments, to influence private sector behavior.

In the postwar period industrial policy has been the responsibility of the Ministry of Inter-

national Trade and Industry (MITI), created in 1949. (Prior to this, MITI was known as the

Ministry of Commerce and Industry or MCI; in

January 2001 the ministry was renamed the Ministry of Economics, Trade and Industry or

METI.) The creation of MITI ushered in a period of rapid industrial development and growth.

Between 1950 and 1973, the country’s gross national product grew by an average of more than

10 percent per year, a record of sustained development that was unprecedented, in Japan or anywhere. At the same time, Japan’s industrial structure shifted from agriculture to manufacturing and services, and from light to heavy industry By the end of this period a growing number of Japanese industries had reached the forefront of international competitiveness, and Japan had become a highly successful exporter. These achievements can be attributed at least in part to industrial policy although analysts still disagree on the extent.

The decades of fast economic growth up through the oil shocks of the 1970s, the period of the so-called “Japanese miracle,” can be considered industrial policy’s “golden age.” During this

industrial policy 195 period the Japanese government enjoyed a number of advantages, particularly the benefit of a national consensus on economic growth and control over scarce resources and policy tools, that allowed it to design and implement a relatively coherent industrial policy.

The national consensus on the need for economic recovery permeated Japanese society during the first two decades following the war. Not only government officials, but also the conservative politicians, small and large businesses, and labor, all generally agreed on the need to focus the country’s energy on economic growth. Opponents of a focus on industrialization had been weakened either during the war or in the period of the US occupation.

Japan’s industrial policy was also more effective in this period because the state controlled access to a number of scarce resources that the private sector desperately needed. Particularly in the early postwar years, most Japanese industries faced acute shortages of critical resources, especially capital and technology. It was the government’s ability to influence the availability of these resources that gave it some early leverage over the behavior of the private sector.

Most importantly the state was able to control to an extent the flow of capital. The government at the time had control over foreign exchange, and was able to allocate this scarce resource to favored industries. The government was also able to use a system of “industrial finance” to favor selected industries. MITI, working with the Ministry of Finance, was able to use government loans from the Japan Development

Bank (JDB) as a signal to the private sector. These

JDB “policy loans” amounted to a government stamp of approval; industries that received these loans could then usually borrow all that they needed from the private sector. MITI also was able to offer low-interest loans to selected industries through the annual Fiscal and Investment

Loan Plan (FILP), which were drawn from Japan’s huge national postal savings system. This system of savings represented a pool of capital that the government could direct to the private sector on relatively easy terms

The closed nature of the Japanese economy in this period also made industrial policy more effective. The government’s role has been referred to as that of a “gatekeeper,” with some influence over what was allowed to enter and leave Japan.

The government was able to restrict the import of competitive manufactures through relatively high industrial tariffs and quotas. These allowed

Japan to protect its targeted industries and in particular the so-called “infant industries” that would have been overwhelmed if exposed to open competition with more established, more efficient foreign competitors. The Japanese government was also able to influence to an extent access to foreign technology. MITI in particular tried to encourage the import of technologies deemed essential and to discourage those that were not.

In addition, MITI played a critical early role in helping to “untie” technology using its ability to restrict access to the Japanese market to allow

Japanese firms to obtain foreign technology without permitting inward investment.

Japan’s industrial policy also focused on the promotion of exports. In addition to early “infant industry” protection, export sectors were provided with incentives such as tax exemptions and direct and indirect subsidies. State support was often withdrawn once the industry was able to compete on its own in international markets. The

Japanese government was also active in compelling, or allowing, key export industries to become more concentrated through mergers. Japan’s industrial policy thus influenced the country’s industrial structure in two ways: the shift to capitaland technology-intensive industries, and the shift toward an oligopolistic structure within each industry.

A final factor that made Japan’s industrial policy more coherent was the so-called “advantages of a follower:” Japan could use the example of the industrialized nations as a blueprint for its own industrial development. Early on, it was clear to government officials, politicians, and the business community that Japan needed to rebuild some basic infrastructure industries. One of the earliest postwar industrial policy efforts was the

“priority production plan” in which the government helped rebuild four key industries: electric power, coal mining, steel, and shipbuilding. In ensuing years it was also clear to most that Japan needed to develop certain basic industries, notably steel, chemicals and energy-related industries.

It was also clear which would be the “industries

196 industrial policy of the future,” not only in terms of high levels of income and value-added, but also in terms of their

“strategic” importance to the industrial economy.

In subsequent decades the state provided support to a broad range of industries, including general and precision machinery automobiles, and consumer electronics. Most of the chosen industries were those that enjoyed high growth potential or were deemed to be potentially competitive in international markets.

Industrial policy after the oil shocks

Many of the factors that made industrial policy seemingly coherent in the high-growth era were gradually breaking down over time. By the time of the oil shocks of the 1970s, which ushered in a period of stable growth, Japan’s industrial policy had become less coherent and more politicized.

First, as Japan caught up with the industrialized nations, the consensus on growth gradually broke down. By the 1960s many in Japan had come to recognize the costs of high-speed industrialization, most notably industrial pollution. In addition, the population increasingly demanded that more attention be paid to general quality of life issues such as improving housing and public infrastructure. At the same time, a growing number of industries clamored for industrial policy support from the state, including many small and medium-sized firms and depressed in-

dustries that had lost their international competitiveness. Many of these less-favored firms relied on support from politicians to press their demands on industrial policy bureaucrats.

As the result of these changes, Japan’s industrial policy after the oil shocks became less “strategic” and more redistributive in nature. Industrial policy in this era continued to focus on highgrowth industries and the promotion of exports, but now also was involved in improving housing, welfare-related infrastructure, and regional development. In addition, a growing portion of industrial policy efforts was now devoted to propping up the less efficient sectors in the economy.

Japan’s industrial policy was also less effective in this era because industries were no longer as dependent on the resources the state had to offer. As the Japanese economy grew, many of

Japan’s industries were able to develop their own sources of capital and technology. As a result, many industries had become less dependent on, and thus less receptive to, the inducements offered by the state’s industrial policy.

At the same time, the Japanese government was in the process of losing many of its industrial policy tools, largely because of external factors.

As the condition for joining the international economic organizations, Japan was forced to substantially lower its tariffs on imported goods, and was later compelled to liberalize its foreign exchange laws. Another important change in this period was the rising level of international scrutiny of Japan’s industrial policy In the early postwar period Japan, as a “small economy” whose actions did not have a great impact on its trading partners, was able to make its industrial policy without much outside interference. But as the

Japanese economy gained in export competitiveness, its actions now clearly impinged on its trading partners. Foreign governments now put growing pressures on Japan to refrain from using its industrial policy to give unfair advantages to

Japanese industries.

Japan’s industrial policy in this era also was made more complicated because many of its industries had reached the forefront of technology.

Without the advantages of a follower, it was less clear which industries of the future were the most promising or strategic. One key shift in this period was the support of the “knowledge-intensive” industries. In particular, MITI became involved in public-private research and development efforts, for instance the VLSI (Very Large

Scale Integrated) Circuit project (see VLSI Re-

search Cooperative). The Japanese state continued to provide incentives for future technologies, but with a more mixed success rate. Although industries such as semiconductors and computers developed in part because of state support, industrial policy was less successful in industries such as aerospace and computer software.

Reassessing industrial policy after the bubble

The long period of stagnant growth in the 1990s has led many scholars to reassess the nature and effectiveness of Japan’s industrial policy Many have noted that Japan’s earlier industrial policy

industrial regions 197 was not infallible, often citing MITI’s failure to recognize the future competitiveness of firms such as Sony and Honda, and its failures in industries such as aerospace. Others have argued that

Japan’s industrial policy has led to a chronic problem of excess capacity in that it has been more effective in inducing firms to invest, but less effective in forcing firms to divest or exit the industry. Rather, industrial policy more recently has often been used to shield industries suffering from excess capacity from the costs of economic adjustment, leading to a Japanese economy that is less efficient and competitive.

Most recently Japan’s industrial policy practices have been at the center of the ongoing debate on deregulation. Many of Japan’s industrial policy regulations, which at one time served to nurture and protect infant industries or to stabilize competition in the domestic market, are now being blamed for stifling innovation and preventing the Japanese economy from regaining its competitiveness. Industries that benefit from these regulations—often the less competitive, inward-oriented sectors—have been very powerful opponents of substantial deregulation. On the other hand, complaints about excessive regulation have come not only from

Japan’s trading partners but also from many of

Japan’s more competitive, export-oriented industries. Industrial policy bureaucrats thus find themselves in a dilemma as to which side of Japan’s dual economy to support.

The current emphasis on the problems and failures of industrial policy is perhaps as exaggerated as the earlier belief that industrial policy was a main reason for Japan’s economic success.

Scholars still disagree in their assessment of the effectiveness of Japan’s industrial policy. Many have argued that industrial policy was especially effective in its earlier phases, as it helped Japan recover from the devastation of the war and get back on the high-growth track relatively quickly; counterfactually we need to consider whether the economy would have grown as fast as it did with-

out the industrial policy that Japan followed. But as the Japanese economy matured and reached the frontiers of technology the coherence and effectiveness of its industrial policy was already beginning to decline even before the economy stagnated in the 1990s. Japan’s more recent economic problems have bolstered the position of those who stress the potential downside risks of government intervention in the market.

See also: administrative guidance; amakudari; cartels; competition; declining industries; Fair

Trade Commission; industry and trade associations; industrial regions; Johnson, Chalmers; shingikai

Further reading

Calder, K. (1995) Strategic Capitalism: Private Business and

Public Purpose in Japanese Industrial Finance, Princeton,

NJ: Princeton University Press.

Callon, S. (1995) Divided Sun: MITI and the Breakdown

of Japanese High-Tech Industrial Policy, Stanford, CA:

Stanford University Press.

Johnson, C. (1982) MITI and the Japanese Miracle: The

Growth of Industrial Policy, 1925–1975, Stanford, CA:

Stanford University Press.

Katz, R. (1998) Japan: The System That Soured, Armonk,

NY: M.E.Sharpe.

Noble, G. (1998) Collective Action in East Asia: How Rul-

ing Parties Shape Industrial Policy, Ithaca, NY: Cornell

University Press.

Okimoto, D. (1989) Between MITI and the Market: Japa-

nese Industrial Policy for High Technology, Stanford, CA:

Stanford University Press.

Samuels, R. (1994) Rich Nation, Strong Army: National

Security, Ideology, and the Transformation of Japan, Ithaca,

NY: Cornell University Press.

Tilton, M. (1996) Restrained Trade: Cartels in Japan’s Basic

Materials Industries, Ithaca, NY: Cornell University


Uriu, R. (1996) Troubled Industries: Confronting Economic

Change in Japan, Ithaca, NY: Cornell University



industrial regions

There are three primary industrial regions in Japan. In order of size and importance they are the

Tokyo-Yokohama regions, the Osaka and greater Kansai region, and Nagoya and the

Chubu region. These three regions stretch consecutively along the eastern side of Honshu (the

198 industrial regions largest island in the Japanese archipelago) beginning in the north with Tokyo and extending down to Osaka. Taken as a whole their combined geographic area is also home to roughly

30 percent of the Japanese population.

Tokyo is the largest city in Japan with a population in its twenty-three wards exceeding 8 million. The larger metropolitan area has a population of 11.9 million. It is the national capital and ranks number one among all cities for number of corporate headquarters. Not surprisingly it is the hub of the Kanto region. Tokyo harbor is the third largest seaport in Japan, and

Narita International Airport is the largest airport in terms of passenger and cargo. In addition to the nearly thirty other towns that comprise the remainder of the Tokyo metropolitan region, the six prefectures surrounding Tokyo—Chiba,

Gumma, Ibaraki, Kanagawa, Saitama and

Gumma—are also considered part of this industrial region. They are home to thousands of large, medium and small manufacturers, assembly plants and warehouses.

The other hub of this industrial region, in

Kanagawa prefecture, is Yokohama, situated on

Tokyo Bay 30 kilometers southwest of Tokyo.

With a population approaching 4 million, it is

Japan’s second largest city and possesses the largest seaport in Japan. It handles roughly 15 percent of Japan’s foreign trade. This is not surprising given its historical importance. In 1859 it became the most influential seaport in all of Japan as a result of its proximity to Tokyo, the national capital. Yokohama soon attracted a large number of foreign residents, most of them connected with

European and American trading and shipping companies. For that reason, Yokohama has tended to have a more international atmosphere than its big sister, Tokyo, nearby.

The Kanagawa region immediately surrounding Yokohama became the site of major manufacturing facilities, which used the nearby port for exporting their products overseas and even domestically within Japan. As a result, the area around Yokohama ranks near the top in terms of manufacturing output for general and electrical machinery.

The second major industrial region is located in the Kansai region and has as its main hub the historical commercial capital of Japan, Osaka. The two other large cities in this region are Kyoto, the imperial capital of Japan for more than a millennium, and Kobe, a second major port city to the region. The six prefectures surrounding

Osaka—Hyogo, Kyoto, Mie, Nara, Shiga, and

Wakayama—encompass the second largest concentration of industrial capacity after the Tokyo-

Yokohama region.

Osaka is the third largest city in Japan and is the site of the second largest stock market, again after Tokyo. From the ninth century until well into the twentieth century Osaka was the commercial center of Japan. It was the birthplace of five of Japan’s general trading companies:

ITOCHU, Marubeni, Mitsui. Nissho Iwai and

Sumitomo. It is also home to Matsushita Electric Industrial, the largest electrical appliance manufacturer in the world. The Osaka region’s chemical and petroleum industries rank number one in terms of production capacity and the steel industry ranks second only to the

Tokyo region.

From the Meiji restoration (1858) onward,

Osaka witnessed an erosion of its commercial importance as business activity shifted to Tokyo and the munificent government contracts that marked the era of Japan’s push toward rapid industrialization in the latter half of the nineteenth century

Mitsui typified this exodus from Osaka to Tokyo when it moved its corporate headquarters in 1873.

The trend of Osaka firms moving corporate headquarters to Tokyo has continued for well over

100 years. It was given additional impetus in the immediate postwar era, as the American occu-

pation had a tendency to further concentrate power and control of resources in Tokyo.

In the past decade, however, the region’s fortunes have taken a turn for the better. For one, the Tokyo-Yokohama region simply ran out of room for further significant industrial expansion.

Because of its well-developed infrastructure and historical position, the Osaka became the heir apparent for future growth. This shift has been buttressed by several aggressive development projects. The first of these was the Kansai International Airport, built on a man-made island in

Osaka Bay The project was the culmination of a thirty-year project by government and business leaders to significantly upgrade the commercial and cargo air facilities in the region. The airport

industry and trade associations 199 opened in 1994 and its impact on bringing more foreign investment into the region appears significant. A second major project involved a joint business-government effort to build a cluster of large high-tech research parks and government research centers in a completely new city. Kansai

Science City can be considered a Kansai counterpart to Tsukuba, the Kanto city known for its government and corporate research facilities. In many respects, Kansai Science City represents an effort by the central and local governments to replicate the success of Tsukuba in the Kansai region.

Nagoya and the Chubu region, locating roughly midway between Tokyo and Osaka, are the third major industrial region of Japan. Nagoya is Japan’s fourth largest city with a population of approaching 2.5 million. It is located in Aichi prefecture and is considered the main city of the

Chubu region, which includes the surrounding prefectures of Gifu, Mie, Nagano and Shizuoka.

Because Toyota, Honda. Mitsubishi and Suzuki are headquartered in the region and have their major manufacturing there, the Nagoya region accounts for over 50 percent of all vehicles manufactured in Japan. Just as Toyota City is a key automotive producer, two other cities claim similar honors in two other industries. Seto is an established center for ceramics, which explains why

Noritake and several lesser fine china manufacturers are headquartered in the region.

Ichinomiya, in nearby Gifu prefecture, is a major center for textiles.

See also: Kansai culture


industry and trade associations

Trade associations (jigyosha dantai) have played an important role in Japan’s early economic development (see guilds). In the control economy during the Second World War, existing industry groups were transformed into “control associations” (toseikai). In every industry a control association was in charge of designing and implementing the rationing of input materials and output quotas. After the war, a large number of associations continue to be importantly involved in industrial policy and regulation (interacting with bureaucrats), lobbying and policy planning

(interacting with politicians), as well as intra-industry and inter-industry negotiations on joint product development, production curtailment, and self-regulation.

Over time, the pendulum of government involvement in trade association activities has swung back and forth. During the Edo period, the Shogunate at times ignored the guilds and at other times used them for its policy purposes.

The Meiji period saw more active government interest in business affairs, and the Taisho period less. The immediate postwar years were a period of particularly high government involvement, so much so that it often looked as if the ministries unilaterally imposed policies onto industries.

Because in those years the interests of the bureaucrats and those of industry were often intertwined, it was difficult to determine whether bureaucrats were bending to industry pressure in designing certain policies, or industry was shaped to the interests of government. This may have led to an exaggeration of the role of ministries in industrial policy design and implementation. When the ministerial leverage over industry by way of administrative guidance and indus-

trial policy began to decline in the 1980s, the pendulum of government involvement in industry also began to swing back, and trade association activities of self-regulation became increasingly important and visible.


The wartime control associations were based on very narrowly defined industries, often by product category. Although these control groups were forced to dissolve under the Occupation, many of them simply changed their names and continued to exist to support the recovery of their member firms. As a result, there are more trade associations in Japan than in many other countries. For instance, even in the 1990s, there were separate associations for pens, pencils, ballpoint pens, fountain pens, highlighting pens, and whiteout ink.

As of 1997, a total of 15,437 trade associations were registered with Japan’s Fair Trade Com-

mission (FTC). Of these, roughly 2,100 were

200 industry and trade associations

“incorporated” (zaidan hojin), i.e., they held a license from their cognizant ministry and had to submit annual reports. In contrast, 9,700 were

“voluntary”, with no immediate ties to a regulator, while 3,500 were cooperatives based on special small-firm legislation that exempted these associations from certain anti-trust rules.

In a sample of 1,200 trade associations in 1990, the median (representative) association had eighty member firms, four staff, twenty directors, and a budget of 70 million yen; these numbers were similar to US associations except for budget, which was, on average, more than five times larger in Japan (Schaede 2000). Given that budgets are financed through membership dues and

Japanese firms are typically members of several associations, Japanese companies incur significant expenses from association membership.

committee meetings (which occur in large numbers at frequent intervals); publishing a newsletter; collecting industry statistics; conducting research on foreign market access; collecting opinions on policy issues and contacting related associations; organizing educational programs and seminars; organizing trade shows and other industry promotion; and processing information from the cognizant ministry for distribution to member firms. In large associations, several of the staff are shukko, employees from member firms on a twoyear secondment. During the stints at the association, shukko learn about their industries and meet a large number of people with whom to maintain networks as their careers develop.


The governing body of every trade association is the “general meeting” (sokai). Typically once a year all members meet to vote on general issues such as changes in the by-laws. Very large associations also hold annual conventions (taikai) which are high-profile events and often feature as speakers representatives from the cognizant ministries and politicians. Substantial policy decisions are delegated to the board of directors

(rijikai), which meets monthly. The directors (riji), as well as the association’s president, are member company presidents who are officially elected at the general meeting and are usually the presidents of the largest firms in the industry.

Directly under the president, the staff of the association is headed by one senior administrative director (senmu riji) who is a member of the board of directors but as a long-term employee provides institutional memory among the rotating directors. This person also acts as a liaison between the member firms, the association, and the outside world. In those associations that hire retired government officials or “old boys” for closer contacts with their regulators, this person typically assumes the position of senior administrative director.

Below the senior administrator, a number of staff people are in charge of administrative functions, including: organizing committee and sub-


Trade associations fulfil a wide range of functions which require different organization. For instance, for influential lobbying, associations must be large, but for effective cooperation they should be small. Japanese industries have addressed this tradeoff between size and effectiveness by creating a pyramid with focused, small associations at the bottom, industry umbrella associations in the middle, and large, over-arching federations, such as Keidanren, at the top. Thus, different types of associations specialize in different functions within the political economy In general, there are three categories of functions: (1) administrative (information exchange), (2) economic (self-regulation and ministry/business relations), and (3) political

(lobbying and politicians/business relations).

While all associations engage in information exchange, large federations typically engage more in lobbying, whereas the focused industry-based associations are more concerned with economic functions.

Studies in corporate management attest to the importance of information and knowledge for businesses to reduce uncertainty in strategy decisions, avoid duplication, and cooperate on new technologies. In particular, if firms want to cooperate, the most important condition for a sustainable agreement is the frequent exchange of information, because it facilitates monitoring.

Understanding this, Japan’s trade associations have crafted systems of institutionalized information exchange through committee meetings

industry and trade associations 201 at various junior and executive levels. These frequent meetings provide formal and informal opportunities to interpret complicated signals from competitors and related markets, and to respond to them. Japanese anti-trust law does not require that a lawyer be present at these meetings, and because the antitrust authority has never interfered with the extensive and multi-layered committee structure, the exchange of critical data, including prices and costs, appears to be quite customary in some industries.

Trade associations and regulation

The fundamental economic function of trade associations is to ensure a constant flow of discussion between officials at the ministries and the associations they regulate. Activities that formalize these contacts include long-standing deliberation councils (shingikai), holding joint seminars on special policy issues, or a ministry paying the association to undertake a feasibility study for their industry.

As for what ministries do for associations, at the most basic level the bureaucrats structure a bargaining situation and assume the role of referee for the negotiation. A well-known example of an outcome of this process are research coop-

eratives. Upon discussion with all affected industries and companies through their associations, MITI may formulate the basic plan and offer subsidies as incentives for a group of firms to engage in joint research (importantly

Japanese ministries rarely offer subsidies to individual firms). Since firms do not typically like to disclose technology-related information, without a referee they may be unable to agree on a project.

Another example can be found in maturing, or structurally depressed, industries. By creating negotiations among firms regarding capacity reductions, a ministry can fulfil its own goals of phasing in unemployment in the industry.

From the perspective of the regulating ministries, trade associations are important and helpful both in formulating and implementing regulation. First, the understaffed ministries need associations to provide them with aggregate information on industry such as sales, investments, or inventory as well as industry-specific knowledge of products, standards, etc. Because many trade associations collect data on foreign markets, ministries often use them as informants in international trade negotiations. Second, rather than contacting individual firms, the regulators typically negotiate policy issues with the association.

This is particularly useful when the ministry is drafting administrative guidance, which does not need cabinet approval but is negotiated just between the regulator and the industry Third, trade associations are instrumental in monitoring compliance with informal regulation. As Japan does not have specific supervisory agencies

(except for the financial industries since 1998), the ministries are at the same time responsible for policy formulation and enforcement. In most industries, understaffed ministries rely on the trade associations for administering industry selfenforcement.

Finally trade associations also engage in autonomous self-regulation, without the involvement of ministries. “Self-regulation” refers to a process by which a trade association designs the rules of trade for that industry and enforces these rules through self-designed sanctions. What types of rules associations create depends on the specific circumstances and competitive environment of their industries. Fundamentally these rules can be either “administrative” and trade-enhancing

(for example, through standard or quality requirements, or rules on advertisement and ethical behavior), or they can be “protective” and traderestricting (through price agreements, restricting markets or customers, restricting market access, or an exclusive distribution system). Although industries differ in the extent and types of their self-regulation, the practice is widespread. One reason is that the boundaries between administrative and protective self-regulation are difficult to define, and even protective self-regulation is not necessarily always found to be in violation of the anti-trust statutes.


Trade associations participate in the policy-making process in various ways. At the formal level, association representatives often participate in the government’s deliberation councils. More informally business tries to influence political decisions through informal meetings and small gifts. For

202 internal labour markets instance, large associations typically procure the best tickets to sumo wrestling bouts or kabuki and

no performances, to give them to politicians who hold influence over their industry.

Above all, trade associations play a major role in party donations. To the extent that comparative data are available, the ranking of sources for political donations in Japan are almost the opposite from the USA. Whereas in the mid-1990s, donations to US parties came primarily from individuals with corporations only contributing 6 percent of the total, in Japan individuals accounted for 10 percent of all party financing whereas corporations provided more than 30 percent. Importantly Japanese companies channel their contributions through their trade associations. The associations in turn give directly to the party up to the legal limit of 100 million yen per year, and also channel funds to the ultimate umbrella organization, Keidanren. Under the

LDP one-party rule between 1955 and 1993, all industries were most interested in lobbying the

LDP, and Keidanren was continuously one of its strongest supporters. The system was interrupted when the LDP briefly lost its majority in the

Lower House in 1993.


The decline in ministerial leverage over industry due to deregulation and market liberalization is further increasing the importance of trade associations in Japan’s political economy. Whereas associations have always self-regulated to a significant degree, their activities are becoming more important as antitrust authorities allow significant exchange of information and rule-making by associations, while many ministries do not strictly supervise or monitor their industries. Some industries self-regulate to open their markets and expose their member firms to full competition, whereas others create entry barriers to protect incumbent firms. Many of these firms have been able to weather the extended recession of the 1990s thanks to the activities of their trade associations.

Further reading

Procassini, A. (1995) Competitors in Alliance: Industry As-

sociations, Global Rivalries, and Business-Government Re-

lations, Westport, CT: Quorum Books.

Schaede, U. (2000) Cooperative Capitalism: Self-Regula-

tion, Trade Associations, and the Antimonopoly Law in

Japan, Oxford: Oxford University Press.

Young, M. (1991) “Structural Adjustment of Mature

Industries in Japan: Legal Institutions, Industry Associations and Bargaining,” in S. Wilks and

M.Wright (eds). The Promotion and Regulation of In-

dustry in Japan, New York: St. Martin’s Press, 135–



internal labour markets

A central premise behind the idea of “internal labour markets” (ILMs) is that many of the rules determining economic outcomes for employees are written inside the firm rather than outside in an external labor market. When employees work for long time periods in one firm, understanding internal firm rules becomes critical if one wants to understand the organization of work, wages, how and why employees change jobs, and other labor outcomes. Of course, the internal rules may vary substantially across individual firms, industries, national boundaries, and time periods.

Early literature on internal labor markets was

US based. Clark Kerr—who focused on US labor market institutions in the 1950s—first made the point that there was a central boundary between what was happening in the firm and the activity in “external” labor markets. His distinction was important because prevailing neoclassical economic theory implied that the boundary was not significant: the laws of supply and demand in the labor market affect everyone in the same way

Kerr and others began to argue that this is not necessarily the case; the internal, firm-specific rules affect internal employees in ways that are independent of an external labor market. John

Dunlop, who originally coined the term “internal labor markets” in the 1960s, first focused on the job ladders that he saw within US firms. Much of this early research was narrowly focused on detailing ILMs within blue-collar, union-dominated manufacturing industries in the USA. More recent work has focused on the differences between ILMs in different manufacturing work models, between manufacturing models and services, and across national boundaries. This is particularly true in the last two decades as US,

internal labour markets 203

Japanese, and European firms set up transplants and joint ventures. In the USA in Freemont, California, the N U MMI joint venture between

Toyota and General Motors generated extreme interest because of its early success with a significantly different model of work using US employees.

Because of the longer documented job tenure for Japanese employees relative to their Western counterparts, analyzing and understanding internal labor markets has been a primary concern of those studying Japanese labor markets. James

Abegglen and Ronald Dore were among the first non-Japanese scholars to document Japanese style employment practices that characterize I LMs, including the “three pillars” of

lifetime employment, seniority promotion

and wages, and enterprise unions. The stylized facts on Japanese and US ILMs are now very familiar. Kazuo Koike and many others have been careful to point out that comparisons can often be misleading, and the differences revolve around degree. Some of the more common stylized differences are: (1) executive and manager pay vs. average employee pay is more compressed in Japan; (2) job security for core employees at large Japanese firms is greater than in their US counterparts; (3) job rotation, employee participation, and training is emphasized much more strongly; and (4) the delineation between blue-collar and white-collar work tends to be more ambiguous, with movement from bluecollar ranks to white-collar work.

The study of Japanese internal labor markets has recently become much more fine-grained, with scholars increasingly concerned about what we can learn from different ILM systems. Early comparative work was often static and described

Japanese ILMs as uniquely Japanese. Even if seen as efficient and effective in the Japanese context, many argued that particular ILM practices could not be transferred across national culture. However, the weight of opinion now sees ILM practices as dynamic and in a constant state of evolution within particular countries. Also, crossnational diffusion of differences can and often does occur.

At the same time, there is growing agreement that the rules making up a particular internal labor market “model” do tend to have a self-reinforcing logic and should be evaluated and understood as a whole. For example, narrow job classifications, wage attachment to a specific job, and few restrictions on the ability of the firm to lay off workers are practices that tend to be mutually reinforcing. Broader job classifications, wages attached to individuals rather than a job, and greater job security are also practices that are selfreinforcing. The former model is essentially a traditional American model, while the latter is commonly associated with Japanese firms and particular US and other non-Japanese firms modifying their traditional work systems (now commonly labeled as “high-performance work systems”).

In the post-Second World War period, many observers saw the character and smooth functioning of internal labor markets within Japanese firms as a source of relative economic strength.

To encourage cooperation and commitment from employees, flexibility in job assignments in the firm, and effective employee participation in online problem solving, Japanese firms provided firm-specific training, relatively high job security and compressed wages based largely on seniority. More effective on-line problem solving and a commitment to the firm ensured rising productivity and product market success for Japanese firms.

Japan’s internal labor markets worked well in the context of a high and stable growth environment with tight labor markets, and few cyclical disturbances. With high growth and scarce labor, it makes good sense to build an internal labor market system that attracts, trains and keeps good workers. Rapidly growing firms also allow quick promotion internally for qualified employees committed to firm success. With no large, unexpected declines in demand, the relative expense of guaranteeing employment and training employees is low. This is especially the case with a corporate landscape dominated by firms utilizing the same strategies.

Sustained lower growth in Japan during the

1990s has increased pressure to de-regulate

“rigid” internal labor markets and to increase the efficiency of external labor markets. With low growth, Japanese firms with relatively permanent

204 Ishikawa, Kaoru employment guarantees can quickly become topheavy. The temptation to cut expenses by reducing employees has increased as traditional options such as farming out core employees to subsidiaries (shukko) are exhausted. Meanwhile, those employees who are let go are finding it harder to find work in a weak external labor market.

How, then, will Japan’s labor markets change?

Many Japanese firms are still reluctant to give up the benefits of an internal labor market that effectively encourages firm specific skill acquisition and meaningful employee participation. Even as non-Japanese firms continue to appreciate Japanese ILM practices, Japanese firms continue to search for ways to adapt to a persistently difficult economic environment. This search includes experimentation with more “Western” practices like performance-based pay less overall security for employees, and a firm decision matrix that gives shareholders more power. However, to what extent practices like these should be and will be adopted remains unclear.

data, and its presentation using charts and diagrams. He developed the widely-employed causeand-effect (fishbone) diagram for understanding relationships in processes; it is often called the

“Ishikawa diagram.” Ishikawa espoused an holistic view of quality arguing that it is much broader than simple product quality but rather an all-encompassing way of managing people and processes.

Further reading

Ishikawa, K. (1976) Guide to Quality Control, Tokyo: Asian

Productivity Organization.


Further reading

Abegglen, J.C. (1958) The Japanese Factory: Aspects of its

Social Organization, Glencoe, IL: The Free Press.

Dore, R. (1973) British Factory, Japanese Factory, Berkeley CA: University of California Press.

Gordon, A. (1985) The Evolution of Labor Relations in Ja-

pan: Heavy Industry, 1853–1955, Cambridge, MA:

Harvard University Press.

Koike, K. (1988) Understanding Industrial Relations in Mod-

ern Japan, New York: St. Martin’s Press.


Ishikawa, Kaoru

Kaoru Ishikawa (1915–89) was a pioneer in the development of quality management in Japan, with a particular impact on the spread of quality

control circles. He emphasized company-wide participation in quality and worked to develop a set of simple statistical tools, usable by workers at all levels of the organization. Making invaluable contributions to the implementation of concepts introduced by Deming and Juran, Ishikawa promoted the careful collection of process-related

ISO issues

ISO is a group of five standards set by the International Organization for Standardization that are generic guidelines and models for ensuring the quality of a company’s goods and services. Some companies see ISO as a management tool, while others see it as a trade barrier.

ISO 9000 and total quality are not the same thing. However, ISO 9000 can be part of a larger total quality management (TQM) environment.

Organizations that have achieved a high level of quality may already have the criteria for ISO

9000 in place. This is the case in Japan. It is a major reason why Japanese firms have not adopted ISO 9000 to the extent that businesses in other countries have. Many Japanese firms do not see the need for ISO 9000 certification since the Japanese are known for quality and already have many of their own quality processes in place. The Japanese also have their own awards for quality such as the Deming Award. Some researchers believe firms such as Toyota would have little to gain from ISO certification since their products are recognized as world class in terms of quality. Many Japanese firms set their sights on one of the best-known quality awards, the Deming Prize. Deming Prizes are almost exclusively won by Japanese firms, with three exceptions (Florida Light & Power, Taiwan Tube, and Lucent Technology). In Japan, five years af-

ISO issues 205 ter a company has received the Deming Prize, it is eligible to compete for the Japan Quality Control Prize. Only a few organizations, including

Toyota, have won this award, thereby showing their commitment to continuous quality improvement.

Today the new versions of ISO 9000 include principles of total quality management and continuous improvement from Japan. Quality Improvement and therefore ISO 9000 is important from organizations’ and suppliers’, as well as customers’ perspective. At a time of increasing globalization, ISO 9000 provided an international standard for quality For example, European Union (EU) members made ISO 9000 compliance part of their safety laws and many EU companies require suppliers to be ISO certified. However, there are no laws requiring I SO certification to export or sell to Europe. Nevertheless, it is a competitive advantage. The standards do not apply to products or services themselves, but rather to the process. They are an assurance that the certified firm has in place a quality system enabling it to meet its stated quality As Japanese companies continue to move manufacturing facilities to developing countries, they have become more interested in having their subsidiaries as well as their suppliers ISO

9000 certified.

In the summer of 2000, ISO standard officials from 46 countries met in Kyoto, Japan to sign off on revisions to the year 2000 version of the ISO series. However, Japan as well as France voiced objections to these new standards. The new standards are streamlined and focus more on tracking processes, on continuous improvement, and on customer satisfaction.

In addition to global recognition of the importance of high-quality products and services is the growing worldwide concern for the environment.

ISO 14000 is a newly established certification system of environmental standards. The ISO Committee developed an environmental management system that could be applied to firms around the world. It provides companies with a structure for an environmental management system that will ensure that all operational processes are consistent and effective and that will achieve the stated environmental objectives of a given organization.

It attempts to balance socio-economic and business needs with environmental protection and pollution prevention.

In Japan, with environmental issues becoming a public issue and with growing governmental regulations around environmental issues, firms are looking into ISO 14000 certification as a way of demonstrating their commitment to the environment, to be “good corporate citizens” and as a competitive advantage. Firms such as Toyota and Denso have sought ISO 14000 certification in their plants in Japan and abroad.

It is important to note that Japanese companies are not trying to modify existing operations to implement ISO 14000. Instead, they are creating new operations that meet the ISO 14000 criteria. As of 1999, more than 2100 Japanese companies have already been certified. According to one report, about 1000 Japanese companies per year are applying for certification.

Overseas, Japanese firms such as Sony and

Toyota in the United States have made public commitments to ISO 14000 standards.

Japanese companies are also starting to recognize suppliers who are more environmentally friendly For example, Witt (1999) states that

Matsushita Electric has a program of “green sourcing.” It gives priority to companies with ISO

14000 certification. These suppliers do over $2 billion in business with Matsushita.

In the United States, Sony and Toyota, as well as Ford, have made public commitments to ISO

14000 standards. Additionally numerous Japanese firms have stated that they plan to have all of their overseas operations both ISO 9000 and

ISO 14000 certified in the future.

Further readings

Witt, C. (1999) “ISO 14000 revisited,” Material Han-

dling Engineering 54 (11): 22.

Zuckerman, A. (2000) “Start Preparing for Revised ISO

9000 Standards,” Metal Center News 40 (11): 5–6.


206 Ito-Yokadou


Ito-Yokado Company Ltd was established by

Masatoshi Itou, currently Ito-Yokado group’s honorary chairman in Tokyo in April 1958.

Masatoshi successfully developed the company into a retail conglomerate over the next fortytwo years. Ito-Yokado is characterized by its profitoriented policy and scientific management. In

February 2000, the company directly operated

176 stores, employing 16,514 staff. In 1999, the company was capitalized at ¥46,674 million and sales totaled ¥1,490,709 million.

In the 1960s, Ito-Yokado aggressively expanded its supermarket chains. In contrast with

Daiei’s nationwide expansion, Ito-Yokado chose to build its new stores in the Tokyo area to maintain the company’s domination there. It became the second largest retailer in Japan in terms of total sales in 1981.

Ito-Yokado also operated its own department stores (for example, York Matsuzakaya), discount stores (Daikuma), specialty shops (Merian), supermarkets (York Benimaru), and convenience 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 agreement with the Southland Corporation to run the convenience store business in Japan in 1973, and was renamed 7–11 Japan in 1978. In 1996, 7–11

Japan became the first company to record profits of ¥100,000 million in Japan.

Ito-Yokado also branched out into restaurants

(Denny’s Japan), mail order (Shop America Japan), food production (Aiwai Foods), real estate

(Urawa Building), and finance (Union Lease).

However, the company is still less diverse than


In the 1980s, Ito-Yokado could no longer increase its profit simply by building new stores because of the introduction of the Large Store

Law. The company unlike Daiei with its diversification strategy decided to fundamentally reform its management system. In 1982, Ito-Yokado formed an operation reform committee to carry out a five-stage reform to improve its profitability. The first and second stage aimed at improving the inventory, increasing the stock turnover, and reducing the opportunity losses. In the third stage, Ito-Yokado introduced the POS (point of sale) system to implement “item-by-item inventory control,” which enabled the company to detect sales trends for each item of merchandise and subsequently develop a selling strategy which would then be tested again using sales data. The fourth stage was to develop new products. Ito-

Yokado adopted the concept of “team merchandising,” whereby the company based on the sales data, came up with product ideas and then worked with manufacturers, wholesalers, and other collaborators as a team to develop new products.

The company started to expand again in the final stage. First, Ito-Yokado started to extend its store network to western Japan, building stores rapidly in the Kansai area from 1995. The second expansion took place overseas. In 1996, Ito-

Yokado established a joint venture with a Chinese retail company in China, aimed at building a nationwide store chain there. Simultaneously the company allied with Wal-Mart and Metro Group to develop new merchandise.

See also: retail industry

Further reading

Mizoue, U. (1998) Daiei VS Ito-Yokado (Daiei, Inc and

Ito-Yokado Co., Ltd), Tokyo: Baru Shuppan.

Okamoto, H. (1998) Yokado guruupu: koushuueki no

shisutemu kakushin (Yokado Group: System Reform

For High Profit), Tokyo: Baru Shuppan.



In 1858, at the age of fifteen, Chubei Ito began work as a linen trader. In 1872 he established

“Benichu,” a fabric shop in Osaka. From this humble beginning emerged one of Japan’s largest sogo shosha (general trading company). Building upon its strengths in the burgeoning textile industry in late nineteenth-century Japan, Ito expanded the business into thread and yarn. In

1914 he formally re-organized under the name

C.Itoh & Company and the firm came to insinuate itself into all aspects of the textile trade, from threads and yarns to finished goods, from arranging for the purchase, shipment and delivery of

Iwasaki, Yataro 207 milling machines to the export of textiles worldwide. In 1918 Ito divided the company, forming a second trading company, Marubeni.

During the Second World War, C.Itoh & Co.

merged with Marubeni and several manufacturers, including Kureha Cotton Spinning and

Amagasaki Nail. However, as part of the Ameri-

can occupation’s policy of breaking up zaibatsu, in 1949 C. Itoh, Marubeni, Kureha and several related firms were separated.

In the postwar era, C.Itoh established itself as an aggressive sales company. It has consistently led its industry in sales. In 1992, to reflect a more international identity it formally changed its name to ITOCHU. As of 2000 the company was organized into seven divisions: textiles; automobile industrial machinery; aerospace, electronics and multimedia; energy metals and minerals; chemicals, forest products and general merchandise; food; and finance, realty insurance and logistics services.

As with other general trading companies,

ITOCHU has been involved in numerous largescale projects around the world. It achieved particular visibility in the early 1980s when, at the height of Japan-US trade friction over automobiles, it facilitated a joint venture between General Motors and Toyota which became the

NUMMI operation in Fremont, California.

See also: general trading companies


Iwasaki, Yataro

Born December 11, 1834 in Inokuchi Village,

Shikoku island, in the Tosa clan domain (now

Kochi Prefecture), Yataro Iwasaki was the founder of the Mitsubishi zaibatsu. Frustrated by discrimination because of the family’s status as lowranking samurai and appalled by the way Japan’s trade was subordinated to foreign concerns, he swiftly gained a reputation for being impetuous and aggressive but also possessing a shrewd business sense and excellent negotiating skills. Iwasaki was imprisoned for six months in 1856–7 for libeling the government, after his father had been beaten up by an Inokuchi village headman. His abilities were nonetheless recognized by a leading Tosa clan figure, Yoshida Toyo, who became his teacher in 1858 and recommended Iwasaki for a commercial post in Nagasaki, in 1859. In

Nagasaki Iwasaki first came into contact with scholars of Chinese classics, doctors of Western medicine and foreign technology. His lack of languages frustrated him in his quest for knowledge, so he returned home before he was supposed to, and was discharged from his post by the Tosa clan as a punishment.

Despite this setback he was able to reacquire a higher ranking title for the family in 1861, and in the following year he married Kise, with whom he had five children; Masaya, Yasuya,

Masako, Hisaya and Haruji. Iwasaki reclaimed rice fields and managed forests in Inokuchi until

1867, when he was reappointed as a clan official and transferred to the Nagasaki branch. It was in

Nagasaki that he came to deal with later business partners such as Thomas Glover, buying steamships and munitions from them. Iwasaki became head of the clan’s Osaka branch in

1869, which was then separated from the Tosa clan management and set it up as a private firm,

Tsukumo Shokai, in 1870. Some historians date this as the beginning of the Mitsubishi zaibatsu although Iwasaki was not officially the head of the company at that time. The company was renamed Mitsubishi Shokai in 1873, taking the name from the three water chestnut diamondshaped leaves that formed the Iwasaki family crest. This change in name probably marks the point at which Iwasaki gained full control over the company.

Iwasaki saw the spirit of contributing to the company’s prosperity as the same as contributing to the nation’s prosperity. This philosophy led to Iwasaki volunteering his ships for delivering munitions for the Japanese government’s

Taiwan Expedition in 1874. Until 1881 Iwasaki could be considered to be a seisho, a merchant who made use of government contacts to build a commercial empire. Iwasaki’s particular government support was from Toshimichi Okubo and other progressive bureaucrats. In 1875 he petitioned the Japanese government for a loan to buy the Shanghai Line of the Pacific Mail, which was granted on Okubo’s recommendation, as part of the government’s shipping promotion policy. In

1876, when another powerful rival appeared, the

208 Izanagi boom

Peninsular and Oriental Steam Navigation Company of the United Kingdom, Iwasaki reduced his own salary by half, made sixteen workers redundant and cut the salaries of his executives by a third, in order to engage in a rate cutting war.

P&O eventually withdrew their Yokohama-Kobe line in August 1876, and Iwasaki celebrated his victory by inviting them and other foreign shipping companies to a lavish banquet, where he asked for their future cooperation.

Iwasaki also helped the government suppress the Satsuma Rebellion in 1877 through providing transport for troops and munitions, from which he made a tidy profit and further consolidated his shipping monopoly. On July 8, 1878 the government decorated Iwasaki with the

Fourth Order of Merit with the Grand Cordon of the Rising Sun, the first time a non-bureaucrat had received such an honor.

However, after the assassination of Okubo in

1878, Iwasaki had only one protector left in the government, Shigenobu Okuma. Okuma’s faction fell from power after senior ministers decided not to accept his radical democratic ideas for a constitution. The new faction in power suspected

Okuma, Iwasaki and other allies of plotting to overthrow them. Iwasaki found himself being 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 be involved in politics.

Nonetheless the attacks continued and the government established a new steamship company to compete against Mitsubishi in 1882. Iwasaki stated his view that having two large companies competing with each other would only weaken

Japan’s nascent maritime industry but decided not to campaign publicly to stop the formation of the new company Instead he paid off the remainder of the loans from the government for ship purchasing, cut costs and upgraded the shipping services, in order to ready the company for a price war. This war ended with the merger of the new company with Mitsubishi’s shipping activities in 1885, to form the Nippon Yusen Kaisha, several months after the death of Iwasaki, aged fifty.

Mitsubishi was able to continue throughout

Iwasaki’s frequent illnesses in the 1880s thanks to the able staff whom Iwasaki had hired. Iwasaki was encouraged in scholarly activities by his literary family as a child and this respect for intellect undoubtedly made Iwasaki keen to hire educated people for his company This habit of hiring intelligent, independent-minded staff rather conflicted with Iwasaki’s autocratic style. He outlined his official position in his Rissha Teisai (The

Style of Establishing the Company), where he stated that all key decisions were to be made by the president. Nonetheless, Iwasaki sometimes found himself overruled, as in the instance of his close friend and famous educationalist, Yukichi

Fukuzawa, collaborating with Iwasaki’s younger brother Yanosuke and another Mitsubishi employee, Shoda Heigoro, to persuade Iwasaki to buy the failing Takashima Coal Mine in 1880. It was businesses such as this which Iwasaki’s heirs were to build up into the diverse conglomerate for which the Mitsubishi name became famous.

See also: general trading companies

Further reading

Hensankai (ed). (1967) Iwasaki Yataro Den, Tokyo: University of Tokyo Press.


Izanagi boom

The Izanagi boom (October 1965-July 1970) refers to the postwar unprecedented prosperity that lasted for fifty-seven consecutive months. This period saw the second-highest level of economic growth in Japanese history. Under the Eisaku Sato

Administration, the Japanese economy grew rapidly mostly due to dependence on exportation and the power of Japanese financial standing in

Asia and the world. Also, the Japanese economy was recovering from a period between 1956–65 in which economic growth was restricted by the deterioration of international income and expenditure. The substantial growth rate reached 11.6

percent (the average between 1966–70) and GNP grew to third place among capitalist countries

(behind only West Germany and the USA).

During this period, individual consumption, investment in private facilities, and exporting worked together toward a balanced expansion

Izanagi boom 209 for the economy. Consumer electrical products such as cars, air conditioners, and color televisions expanded into mainstream use, thus fueling a boom in the consumer electronics industry in which Japanese companies were poised for success: the market expansion for autos was 17 percent per year, air conditioning equipment 5 percent, and color televisions 25 percent. The color television was at the height of popularity during this period. And air conditioning systems were fast becoming staple household and industry items, coming into wide use in department stores around 1970.

The profitability due to trade income increased to its high point and then the tide shifted away from high growth, mostly due to the maturing of the Japanese economy. By the time of the International Exposition hosted in Osaka in July 1970, the Izanagi boom was over. The peak price of the average Japanese stock was ¥2,534 in April

1970, and it is said that the decline of the stock market during the three months prior to the Exposition signaled the end of the Izanagi boom.

The Izanagi boom was a period during which steel production doubled along with the volume of oil refined and the output of aluminum. But these increases took place without any change in the methods of production, meaning a corresponding increase in the amount of waste created. Pollution became and still is a huge problem, with cases being brought to court one after another, spurring the creation of the first laws on environment pollution control. The Japanese government understood the need for industry to invest in environmentally friendly technology and a new position, that of Director General of the

Environment Agency was established.

Further reading

Hitomi, H. (1996) Nihonsi-B Yougosyu, Tokyo:


Ikeda, Y. (1997) Seiji EKeizai (Political Economy), Tokyo: Shimizushoin.




Japan Airlines

Japan Airlines Company Ltd. (JAL) was founded on August 1, 1951, as Japan’s national flag carrier. Exactly two years later, on August 1, 1953, the so-called JAL Law was passed by the Japanese government and, on October 1 of the same year, it provided half of the new company’s capital investment. Government support continued until November 18, 1987, at which time the government sold its 34.5 percent stake and JAL became a fully privatized company.

During its initial start-up phase, JAL flights operated only on domestic routes. On February 2,

1954, the first international route was inaugurated between Tokyo, Honolulu, and San Francisco.

Six years later, on August 12, 1960, JAL entered the jet age when a DC8–32 made its inaugural non-stop flight between Tokyo and San Francisco.

JAL’s international route expansion continued the following year with the introduction of a transpolar route which linked Tokyo, Anchorage, Paris and London. Five years later, the Tokyo-San Francisco flights were extended to New York.

From 1970 forward, JAL remained positioned with the most technologically advanced aircraft to meet the challenges of both domestic and international competition. During the decade-long recession of the 1990s in Japan, as well as in the rest of Asia, its revenues steadily eroded. Moreover, the deregulation of the aviation industry in

Japan resulted in greater domestic competition with the creation of two new domestic airlines in

Japan. Subsequently Japan’s aviation laws were revised on February 1, 2000 and this resulted in additional domestic competition as carriers were allowed to set their own ticket prices.

The introduction of technologically advanced aircraft, the computerization of the flight management systems in both air and ground environments, and the highly competitive deregulated business environment have required JAL to undertake a thorough review of its human resources training and productivity By 1994, JAL had initiated massive cost-cutting measures by reducing its full-time workforce by nearly 4,300 and by hiring, on a limited contract basis, part-time non-

Japanese flight attendants. Another strategy employed by JAL to cope with the highly competitive business environment was to use its low-cost subsidiaries: JAL Express (JEX) for domestic flights and JAL-ways for international flights.

In June 1998, Isao Kaneko became the first

JAL president and chief executive officer to advance from the labour management division, thus signifying a major change in the selection of JAL leaders who have traditionally come from the sales and corporate planning departments.

Further reading

Japan Airlines (1999) A More Competitive JAL Group,

Tokyo: Japan Airlines.

Norris, G. and Wagner, M. (1996) Boeing 777, Osceola,

WI: Motorbooks International.

Orlady H.W. and Orlady L. (1999) Human Factors in

Multi-Crew Flight Operations, Aldershot: Ashgate.

Ujimoto, K.V (1997) “Changes, Challenges, and

Choices in the Japanese Aviation Industry: The

Development of Crew Resource Management in

Japan Association of Corporate Executives 211

Japan Airlines,” in H.Millward and J.Morrison

(eds), Japan at Century’s End, Halifax: Fernwood,


Yamamori, H. (1993) “Keeping CRM is Keeping the

Flight Safe,” in E.L.Wiener, B.G.Kanki and

R.L.Helmreich (eds), Cockpit Resources Management,

New York: Academic Press, 399–420.


Japan Association of Corporate


Founded in 1946 by eighty-three business leaders seeking to contribute to the reconstruction of the economy the Keizai Doyukai (Japan Association of Corporate Executives) is distinctive among business associations in Japan. Its membership in 2000 included 1,500 senior executives from over 900 large corporations. A distinguishing characteristic of Keizai Doyukai is that members are expected to participate in association affairs as individuals, letting go of their corporate identities. A second characteristic is that members are expected to adopt a far-reaching and long-term perspective in addressing issues that span a range of political, economic and social matters. In striving to maintain an independent position with the larger business and social community Keizai

Doyukai conducts its own in-depth studies, research projects and discussions. It also actively pursues a dialogue with government officials, labor organizations, political parties and other business organizations. It is one of the most influential business organizations in Japan and, along with the Japan Chamber of Commerce and Industry

(Nihon Shoko Kaigisho), the Japan Federation of Employer’s Associations (Nikkeiren), and the

Federation of Economic Organizations

(Keidanren), is one of the four “voices of business” in Japanese society.

For purpose of research, discussion and coordination, the association is structured into three basic areas. Policy committees address a host of primarily domestic matters. As of 2001, there were fifteen standing committees. These were as follows: Committee on Corporate Management;

Committee on Employment Issues; Committee on Financial Markets; Committee on Fiscal and

Tax Policy; Committee on Public Administration:

Economy; Committee on Social Security Reforms; Committee on Political Affairs; Committee on Judiciary Reforms; Committee on

Education; Committee on Environment, Resources and Energy; Committee on Issues Concerning Metropolitan Areas; Committee on

Foreign Relations and National Security Issues;

Committee on Socioeconomic Principles for the

Twenty-First Century; Committee on E-

Economy; and Committee on New Technology

Strategies. As is evident from the committee names, the interests of the association include but also extend well beyond business and economic matters and address a host of important political and social matters.

A second group of committees within the association fall under the title, International Affairs

Committees. The groups, of which there are five, focus on geographical regions and their relation to Japan. Finally a third grouping of activities falls under the title of Discussion and Study Programs.

These include the following: Industrial Discussion Groups; Seminar on Current Topics; Global Forum; Committee for the Future; Senior

Executives’ Discussion Group; and Discussion

Group of New Members.

Keizai Doyukai has been criticized as being elitist and exclusive. It has also been criticized as a “harmonizing voice” in support of Keidanren.

There is no doubt that its membership, comprised as it is of very senior executives from the largest corporations, reads like a Who’s Who list. It is also true that a comparison of the membership of the two organizations has a high degree of overlap. At the same time, the association has taken positions at variance with Keidanren on a number of matters. Perhaps more importantly Keizai

Doyukai, with its unique purpose and perspective, provides a venue where individuals have room to speak their own minds. Whether those minds have become inextricably entangled with the corporation mindset from whence they come will, in all likelihood, remain a point of debate.

What is not debatable is the large influence that the association wields within the Japanese business community.


212 Japan Automobile Manufacturers Association

Japan Automobile Manufacturers


The Japan Automobile Manufacturers Association, Inc. (JAMA) or Jikoukai was established on

April 3, 1967, with the objectives of encouraging the development of the Japanese automotive

industry and contributing to the progress of society (the first Japan-US automobile meeting was held in the same year). The former Automotive

Industrial Association and Midget Motor Manufacturers’ Association of Japan were merged into one association, Jikoukai. Since then the organization has been the leading association of the automobile industry in Japan.

The purpose of founding JAMA was to enable the industry to address a host of issues as a unified entity The impending liberalization of capital was a particularly pressing matter, and as

JAMA’s activities would also include the promotion of exports, issues of traffic safety exhaust emissions and international trade were also points which needed to be considered.

The new association’s membership did not include all the members of the two previous organizations. Many members of the Midget Motor

Manufacturers’ Association of Japan entered into a new cooperative relationship with JAMA, while other companies, especially chassis manufacturers actually merged into JAMA.

JAMA consisted of the fifteen founding member manufacturers: Aichi Kikai, Isuzu, Kawasaki,

Suzuki, Daihatsu, Toyota, Toyo Kogyo, Nissan,

Nissan Diesel, Hino, Fuji Heavy Industries,

Bridgestone Cycle, Honda. Mitsubishi Heavy Industries, and Yamaha. The first chairman of

JAMA was Katsuji Kawamata, president of Nissan

Motor Co., who had also served as chairman of the Automotive Industrial Association, JAMA’s predecessor. Since then, either the chief executives of Toyota or Nissan have been elected as chairman. Some elected executives of the thirteen domestic motorcycle and automobile member manufactures have been installed in the board of directors, which is comprised of a chairman, five vice-chairmen, a president, an executive vicepresident and a secretary general.

JAMA has been the contact organization regarding the export, overseas developments and the internationalization of the automobile industry in Japan since its inception. JAMA opened branches abroad to deal with these matters: the

Paris office was opened in 1969; the New York office was opened in 1970; the Washington office was opened in 1976; Japan Automobile

Manufacturers Association of Canada was opened in 1986; and the European office was opened in Brussels in 1990. A commerce mission was dispatched to the Association of Southeast Asian Nations (AS EAN) in 1995 in response to the advance of Japanese manufacturers into ASEAN. In 1996 a Singapore office was opened.

JAMA has standing general committees and special vehicle committees. The general committees consist of the technical administration committee, the safety and environmental technology committee, environment committee, the traffic affairs committee, the distribution committee, the taxation committee, the international affairs committee, the parts & materials committee and the electronic information exchange committee, and these committees deal with various issues in the automobile industry. The special vehicle committees consist of the mini-vehicle committee, the motorcycle committee, and the heavy vehicle committee. These committees deal with the matters based on type of car, such as exhaust emission standards.

JAMA has an administration under the supervision of a vice-chairman and associates. The administration is divided into the administration department, the planning and coordination office, the traffic affairs department, the business affairs department, the technical department, environment department and the international department. The administration regularly issues several publications, provides information, helps to adjust different opinions in the industry holds international conferences, helps negotiations and carries out industry research.

JAMA’s activities under the general committees and the administration were: (1) research projects related to production, distribution, trade and consumption of automobiles; (2) the rationalization of automobile production, setting and promoting policies concerning improvements in manufacturing techniques; (3) setting and promoting policies concerning the automobile trade and international exchanges; and (4) other

Japan Automobile Manufacturers Association 213 projects in order to achieve its objectives. Concretely, JAMA carries out the following:

• production of yearly quarterly monthly and other publications to provide information about the automobile industry and international trade;

• provision information about traffic safety fuel reduction, environmental preservation, and so on;

• participation in international conferences related to automobiles;

• joint research and information exchanges about automobiles, auto parts and auto materials, as well as global environment issues with various organizations in many countries;

• cooperation in the attainment of international agreements regarding various automobile standards such as those relating to safety and the environment;

• research in order to set future roles in the automobile industry and to set future directions in international society;

• opinion adjustment concerning global environment problems in the broader industrial world as a whole;

• issuance of position statements on behalf of the automobile industry in Japan;

• compiliation of statistical data related to the automobile industry in Japan and the announcement of the result of statistical analyses;

• research and investigations related to the automobile industry in Japan, and the publication of research results.

In addition to these activities, JAMA set up a meeting for the study of a reduction in working hours in 1992 in order to deal with the problems of fatigue caused by overwork and economic stagnation. Consequently the application for employment adjustment subsidies started in 1993. Since the early 1990s JAMA has dealt with environmental and safety matters, and has promoted exchange and discussion of different opinions with

American and European makers about supplying materials to Japanese makers.

With the improvement of automobiles’ efficiency and reliability the progress of environmental measures concerning exhaust emission standards, recycling, and waste disposal has received increasing attention. In addition, taking steps to cope with safety problems has recently taken on increased importance. JAMA seeks to shape these developments in ways that lead to automotive innovations being in harmony with society.

In response to increasing concerns about various environmental issues, Japanese automobile manufacturers have sought to solve these issues by introducing new technologies such as electronics. They also conduct research and develop new materials for automobile manufacture and also develop alternative energy sources. For instance,

Japanese manufacturers are experimenting with new perspectives such as establishing internal organizations to deal exclusively with specific issues and developing charters for comprehensive environmental action. Their objective is to carry out decisive, effective measures across the spectrum, from development and design, through manufacturing and sales, to the eventual scrapping and recycling of their products.

In this context, JAMA established forums in its organization to comprehensively assess and address these issues. Since the 1970s JAMA has promoted collection and salvage of discarded automobiles. Since the late 1980s it has dealt with global pollution of the environment, such as greenhouse gas emissions. Moreover, in 1994 an environment department was established to address environmental problems on behalf of the automobile industry. The organization also considers traffic safety owing to an increase in the number of traffic accidents. While various measures to promote traffic safety have been introduced by the government, requiring the cooperation of vehicle users with respect to, for example, the mandatory use of seatbelts and helmets, Japanese manufacturers have also been actively pursuing programs to ensure traffic safety.

The JAMA action plan which is now being carried out demands further improvements in automobile safety features, new traffic safety campaigns and educational activities, improvement of driving conditions such as road infrastructure development, and close government-industry cooperation on traffic accident analysis through the

Institute for Traffic Accident Research and Data

Analysis, founded jointly by the government and

214 Japan Automobile Manufacturers Association public sectors in 1992. JAMA has carried out its activities broadly: it sets up various kinds of new committees and meetings regarding traffic safety implements various traffic safety campaigns, studies the actual nature of vehicle uses, prepares and publishes statistical data, and conducts public relations to deepen understanding of the automobile industry.

While economic internationalization is progressing, Japanese automobile companies have developed export activities to various countries as well as improving their local production in those countries. Since the 1960s, Japanese automobile manufacturers have been asked for assistance in the import of materials and the development of self-subsistence capabilities in several countries.

To cope with these requests, JAMA assists Japanese makers and foreign makers in mutual understanding at the private sector level by offering a venue for the exchange of opinions and affording opportunities to negotiate with one another.

At the government level in Japan and the

United States, the Japan-US automobile meeting was held in 1967; two Japan-US summit meetings took place in 1992; and the Japan-US auto parts meeting was held in 1993. From 1981 to

1994 voluntary export restraints (VER) for the

US market were carried out. At the private sector level, however, significant efforts have also been made to resolve automobile trade issues between Japan and the United States. JAMA also serves as a mediator between Japan and the

United States at the private sector level.

In terms of local parts procurement, Japanese makers are actively promoting industry-level cooperation. In 1977, and also in 1980, JAMA dispatched a mission to the United States to promote the purchase of auto parts. In 1987, the first JAMA-

MEMA Liaison Committee Meeting was held in

Tokyo to exchange opinions concerning the purchase of US-made auto parts. Fifteen meetings had been held as of 1995. A series of general conferences and discussion meetings organized by the Japan Automobile Manufacturers Association

(JAMA), the U S Motor and Equipment

Manufacturers Association (MEMA) were first held in 1987 for the purpose of promoting US auto parts to Japanese manufacturers.

In 1990 the first One-on-One Auto Parts Business Development Meeting, co-sponsored by

JAMA and MEMA, was held in Las Vegas for the purpose of promoting negotiations between

US parts makers and Japanese automakers. Five meetings had been held as of 1995. In 1991 a report on “Replacement Parts for Japanese Vehicles in the US“was released, and in 1993 a meeting was held in Tokyo for the purpose of promoting closer cooperation between the US and Japanese auto industries. In the meeting, eleven Japanese automakers announced voluntary plans to purchase US-made parts. These meetings have led to the implementation of specific initiatives aimed at establishing closer business ties between Japanese manufacturers and US parts suppliers, including joint committees, the publication of materials explaining the “designin” process of Japanese manufacturers, the compilation of industry contact lists, and the organization of special events designed to enhance cooperation and mutual awareness.

In Europe, JAMA-mediated negotiations have led to adjustments between Japan and Europe.

JAMA held Japan-UK automobile meetings on twenty-three occasions from 1975 to 1992, and held a meeting with European automobile manufacturers in Paris in 1985. In the late 1980s, the rapid advance of Japanese manufacturers into the

European market brought about problems concerning the rate of self-subsistence in the field.

For these kinds of situations, JAMA has promoted adjustments and negotiations between Japan and

Europe at the private sector level.

Japanese manufacturers are actively promoting industry-level cooperation to obtain local parts. In 1995 JAMA held a joint conference with the European Automotive Components and

Equipment Industries Association (CLEPA) in

Paris, where decision makers from eighty selected

European suppliers met with representatives of

Japanese manufacturers to explore potential business opportunities. Japanese manufacturers are also working hard to expand business ties with automotive parts firms in Canada, Europe, Asia and Australia with JAMA’s assistance. Some of their initiatives have been outlined in the JAMA

Action Plan for International Cooperation released by the Japan Automobile Manufacturers

Association in June 1995.


Japan Development Bank 215

Japan Chamber of Commerce and


The Japan Chamber of Commerce and Industry

(JCCI) or Nihon Shoko Kaigisho is the overarching association to which all local and regional chambers belong. Its membership consists of the 523 (as of 1999) local chambers of commerce, whose collective member firms total

1.64 million. It operates as the primary representative of the concerns of small and medium-size enterprises throughout the country. It is, in many respects, the counterpart of Keidanren, which represents primarily the interests of large corporations. JCCI coordinates discussion among local chambers and formulates concerns and recommendations that it then proposes to government ministries and agencies. It also assists in the implementation of initiatives growing out of those recommendations. Other functions of JCCI include the dissemination of information on government policies and programs affecting chamber members, human resource training and development programs, and information sharing and coordination of joint efforts with business organizations outside of Japan with similar interests and concerns. It is one of the most influential business organizations in Japan and, along with the Japan Association of Corporate Ex-

ecutives (Keizai Doyukai), the Japan Federation

of Employers’ Associations (Nikkeiren), and the

Federation of Economic Organizations

(Keidanren), is one of the four “voices of business” in Japanese society.

The first local chambers of commerce and industry in Japan were established in Tokyo, Osaka and Kobe in 1878. In the next few years, enterprises in other cities followed suit. Fourteen years after the first local chambers were established, fifteen of them met in Tokyo to establish the Japan Chamber of Commerce and Industry.

Local chambers in Japan are designated as

“corporations with special status” and operate under the Chambers of Commerce Act. Under this special status, local chamber membership is open to companies both large and small. However, the bulk of active chamber membership is among small and medium-size firms. Chambers are also required to maintain political neutrality and are prohibited from engaging in political activities. They are also prohibited from for-profit activities. The local chambers are independent and self-governing; they do not operate under the direction of the JCCI.

JCCI supports about 5,500 business consultants who are located in the local chambers to provide counsel and guidance to small and medium-sized businesses on a host of matters including advances and innovation in management practices, financial issues, and tax matters. In support of these consultants, JCCI carries out various research projects and field studies which it disseminates to the local chapters.

JCCI also works to assist business members of the local chambers in recruiting and training skilled employees. It offers standardized certification tests in English, bookkeeping and accounting, word processing, salesmanship and abacus-based calculation. Annually JCCI tests roughly two million people.

Beginning in the 1980s and expanding rapidly in the 1990s, JCCI has worked with the local chambers to enhance its services in helping

Japanese firms find foreign partners and vice versa. In 2000, JCCI handled over 15,000 inquiries from abroad regarding potential trade opportunities with business outside Japan. In support of its international activities, it published the quarterly JCCI Business Guide. It also provides assistance by helping local chambers in the issuance of certificates of origin, of which over 1 million are issued each year. As small and medium-size

Japanese firms have expanded their activities into foreign markets, the role of JCCI within the larger

Japanese business and economic community has grown, as has its influence.


Japan Development Bank

The Japan Development Bank (JDB) was chartered in 1951 and is the modern incarnation of the many specialized public policy-based banks which were created at the end of the nineteenth and beginning of the twentieth century to promote economic development and implement the policies of the Ministry of Finance under the long

216 Japan Development Bank tenure of the autocratic Meiji Finance Minister,

Matsukata Masayoshi.

The JDB’s most immediate predecessor was the Reconstruction Finance Bank (RFB) (1947–

9) which was the only financial institution in the immediate postwar period capable of helping to revive key industries such as the coal, iron and steel, electric power, and chemical industries. The chief failing of the FRB was that, because its funding came directly from the Bank of Japan, repayments of loans to the FRB were at interest rates far below the hyperinflation rate of the postwar period. In effect, the loans made by the FRB became a form of government grants to private industry outside the scrutiny of the Allied occupation forces, or, for that matter, parliamentary authorities.

The problems of the FRB reflected the fact that postwar reconstruction had to be placed on a more sound financial footing which would provide long-term credits to industry. The creation of JDB, as well as the chartering of long-term credit banks in 1952 (see banking industry), were designed to address this need through their authority to provide intermediate long-term funds by the issuance of five-year debentures. In JDB’s case, most of their debentures in the early years were purchased by the Ministry of Finance’s Fiscal Investment Loan Program (FILP) whose main source of funds was from deposits from the postal

savings system, as well as postal pension schemes and government pension plans.

The chief mechanism in directing funding for targeted industries was by the so-called “cowbell effect” in which JDB led the private sector banks to join in lending to the targeted industry and/or specific firms. Although it was rarely the majority supplier of funds within any given syndicate of loans for a particular enterprise, JDB was able to organize support as a result not only of its diligent project appraisal and credit analysis of the enterprise, but also because of an implicit government guarantee of J DB’s policy-based initiatives and the ability of the

Ministry of Finance (MOF) to bestow upon cooperative banks favorable consideration in regulatory matters. Of equal, if not greater, importance to the participation of private sector banks in the lending syndicate was the opportunity for these institutions to reap considerable main bank rewards with a lesser commitment of their own funds to the client firm (see main

bank system). JDB as a government-owned institution is prohibited from taking deposits or serving as a main bank.

Over the years the national policy mission of

JDB, as determined in an inter-ministerial government agency committee, changed with the development of Japan’s economy Initially in the early 1950s JDB provided funding for reconstruction of the electric power, coal mining, ocean shipping, and iron and steel industries. In the late

1950s to the early 1960s the emphasis shifted to catching up with advanced countries in the synthetic fiber, oil refinery nuclear power generation, machinery and electronics industries. By the late

1960s and into the early 1970s policy emphasis was directed towards social welfare and environmental considerations in urban and residential land development, pollution prevention, welfare facilities, private railroads, and further development of new technology. In the late 1970s and early 1980s energy policy received priority with lending directed towards energy conservation and the development of alternative energy sources.

In the late 1980s and early 1990s JDB’s key mission was directed towards promoting the structural adjustment of industry and industrial research and development.

Lending policy in the present period is targeted towards livelihood and lifestyle, the improvement of living standards, social welfare-related facilities, regional revitalization, urban transportation, information and telecommunications, and the fostering of new businesses.

The name of the bank has also been changed to the Development Bank of Japan (DBJ). This change in part reflects the bank’s assumption of remnants of the Hokkaido Takushoku Bank, a failed city bank with a strong regional base in northern Japan. This bank’s demise was due to its extensive exposure in non-performing real estate loans, dating back to the bubble period of the late 1980s. It is a testament to the due diligence of JDB that it suffered only one-tenth the rate of non-performing loans that still continue to plague the entire private commercial banking sector.

Japan Federation of Economic Organizations 217

Further reading

Scher, M.J. (1996) Japanese Interfirm Networks and Their

Main Banks, London: Macmillan and New York:

St. Martin’s Press.


Japan External Trade Organization

Japan External Trade Organization (JETRO) or

Nihon Boeki Shinkokai, is comprised of JETRO headquarters in Tokyo, JETRO Osaka, thirtysix local offices throughout Japan, and eighty offices in fifty-eight countries. JETRO is Japan’s official trade promotion organization. Originally established in 1951 as the Japan Export Research

Trade Organization, its original purpose was to collect and distribute information on foreign markets to Japanese manufacturers and exporters. In 1954, the institution was restructured into the Japan External Trade Recovery Organization with capabilities to display Japanese products at trade exhibitions, providing overseas market research and providing a trade inquiry service. At this time the Ministry of International Trade

and Industry (MITI) began to oversee JETRO’s activities. JETRO attained its current status as a public corporation in 1958 when a law was passed that officially outlined its functions and its operational framework. As a result of this legal transition, 25 July 1958 is said to be the year JETRO was established.

JETRO’s role changed as Japan’s global competitiveness increased. In the early 1980s, JETRO began to implement a variety of programs toencourage imports and expand foreign investment in Japan. In 1985, the Made in USA Fair was organized in Nagoya along with other exhibitions in Tokyo, Yokohama, and Kitakyushu. In

1993, JETRO’s first Business Support Center was established in Tokyo to be followed by centers in

Yokohama, Nagoya, Osaka, Kobe, and Fukuoka.

These facilities function as temporary offices for foreign companies needing support while doing market research and establishing contacts in Japan.

JETRO publishes extensive English periodicals, marketing reports, fact books, business guides, and numerous other materials to assist foreign business executives in doing business in and exporting to Japan. JETRO organizes large trade exhibitions on behalf of foreign companies in such areas as healthcare and environmental equipment in Japan. Product import specialists in the information technology and consumer products sectors are sent to overseas markets for individual consultations with companies regarding export potential for the Japanese market.

J ETRO also organizes seminars on Japan’s economy business trends and assists foreign business development missions. In addition, JETRO maintains extensive business libraries in Tokyo, and in overseas offices, which are open to business executives. J ETRO’s presence on the internet includes regularly updated market reports, background information, current articles from periodicals, and instructions for participation in JETRO programs.

In the United States, JETRO staffs regional offices in New York, Chicago, Los Angeles, San

Francisco, Houston, Denver and Atlanta. Additionally “Senior Trade Advisors” are assigned to work directly with state trade officials in a number of states, and with individual companies to facilitate local efforts to trade with Japan.

JETRO merged with the Institute of Developing Economies (IDE) in July 1998. IDE’s focus on economic research on the developing economies of Asia complements JETRO’s extensive global business development activities.


Japan Federation of Economic


The Japan Federation of Economic Organizations or Keidanren (an abbreviation of its name in Japanese, Keizai Dantai Rengokai) was established on

August 16, 1946. Its membership as of 2001 stands at 1,007 firms (sixty-five of these firms are non-Japanese) and 118 industry and trade groups representing all of Japan’s key industrial sectors.

Keidanen’s primary purpose is to coordinate the discussion and subsequent resolution of major problems confronting the Japanese business community whether domestically or abroad. Given

218 Japan Federation of Employers’ Associations its large size and broad scope of purpose, its work is structured around committees that focus on specific industry sectors as well as particular topics. It is one of the most influential business organizations in Japan and, along with the Japan

Association of Corporate Executives (Keizai

Doyukai), the Japan Federation of Employers’

Associations (Nikkeiren), and the Japan Cham-

ber of Commerce and Industry (Nihon Shoko

Kaigisho), is one of the four “voices of business” in Japanese society.

Keidanren was established as part of the effort to reorganize the business sector of Japanese society in the postwar era. As its influence grew, in 1952 it absorbed the Japanese Industrial Council, in a move that increased its membership and expanded its influence. In addition to its close interaction with Japanese government bureaucracy it was also active in the political realm and is credited with playing an important role in the creation of the Liberal Democratic Party, which was established in 1955. Its participation in the political arena was significant until 1975, when political contributions became more tightly regulated. Its influence has also waned as Japanese companies have become global players and the influence of non-Japanese firms within Japan has grown.

Leadership of the organization is drawn from among the largest and most influential companies in Japan. Among its past chairmen are such business leaders as Toshio Dokoh (CEO of both

Toshiba and Ishikawajima-Harima Heavy Industries) and Akio Morita (CEO of Sony). In addition to position papers and policy statements,

Keidanren also develops charters which it encourages member firms and organizations to sign. A recent example is the Keidanren Global Environment Charter, which sets forth guidelines and standards for environmentally responsible economic activity. The organization is involved in an array of public relations efforts, including seminars and conferences. It also publishes position papers and several periodical and occasional publications. This range of activities is directed at both gathering and shaping public opinion on matters pertaining to business and the economy in Japan.

As Japanese companies have become more active within the world economy and as the Japanese economy became increasingly influential within the world economy especially during the

1980s, Keidanren has sought to develop ties with influential business and economic organizations outside of Japan. At the same time, it has increased its efforts to build closer relationships with various groups including labor, consumer and special interest non-profit organizations domestically.


Japan Federation of Employers’


The Japan Federation of Employers’ Associations or Nihon Keieisha Dantai Renmei, more commonly known as Nikkeiren, was established on

April 12, 1948. Founded in a context of frequent labor disputes, Nikkeiren was launched to promote solidarity among employers and better relationships between labor and management. One of Japan’s four key economic organizations and identified as part of the zaikai, Nikkeiren has historically wielded considerable clout with the government over the postwar period. The organization’s membership is comprised of sixty industry associations and forty-seven prefectural employers’ associations. Member associations represent the whole range of industries.


Nikkeiren’s activities include the articulation of policy proposals, requests to the government, and position statements based on the conclusions reached at regular meetings and on findings from survey research. The organization presents these to member organizations and corporate employers, the government, political parties, and related ministries and agencies and works to have these policies implemented. Nikkeiren also sends representatives to government deliberation councils to ensure that managerial views are reflected in the development of government policy The organization furthermore publishes a number of period icals, including a weekly newsletter, the

Nikkeiren Times, and a monthly journal, Monthly


Nikkeiren has been well represented on the

Japan Federation of Employers’ Associations 219 government’s Labor Legislation Council. The organization also maintains close ties with the Min-

istry of Labor and the Ministry of Health and

Welfare, and has had an influential voice in the selection of the Labor Minister. Nikkeiren furthermore maintains close ties to the Labor Subcommittee of the LDP’s Policy Committee and to the Social Welfare Committees of both houses in the Diet. The association holds frequent informal meetings with government officials and politicians as well.

Since 1951, Nikkeiren has served as the official voice of Japanese employers in the International Labor Organization (ILO) and one of

Nikkeiren’s Policy Board members serves simultaneously as a member of the ILO Governing

Body. Nikkeiren has also actively participated in the activities of the International Organization of Employers (IOE) and taken part in the work of the Organization for Economic Co-operation and Development (OECD) through the activities of the OECD’s Business and Industry Advisory Committee (BIAC). In addition, Nikkeiren’s

International Cooperation Center furthers human resource development abroad by bringing managers from overseas for training in Japan.

and the other business organizations—arguing that national economic viability was contingent on a stable political situation—were furthermore very influential in pushing for a merger between the

Liberal and Democratic Parties to form the Lib-

eral Democratic Party (LDP) in 1955.

Since the 1960s, Nikkeiren’s emphasis has focused more on the promotion of cooperation between labor and management. In 1974, when

Japan was confronted with economic difficulties arising from the first oil crisis, for example,

Nikkeiren established a task force to study repercussions in the area of labor relations. Nikkeiren’s efforts since have focused in particular on human resource development, management ethics, orderly and harmonious relationships within corporations, and social and economic progress through corporate activities. The organization has been particularly active as a voice in articulating management concerns in regard to changes in the employment, personnel, social security and education systems.

Evolution of role

In its early years, Nikkeiren was regarded as the most powerful and unified of Japan’s four main business organizations. This unity came about because of greater agreement in the business community in the 1950s and 1960s over the need to confront labor than on other aspects of economic activities. Nikkeiren was highly sensitive to the activities of those political parties supporting labor, and especially to the activities of the Communist Party The association was then known as “fighting Nikkeiren” since it focused its efforts on addressing labor offensives.

Leaders of Nikkeiren helped play a role in the

1955 establishment of the Economic Reconstruction Council, an organization that pooled political contributions from zaikai. This council was intended to strengthen the zaikai’s position vis-à-

vis the leftist movement while at the same time helping to prevent the political scandals often arising out of close relationships between individual companies and individual politicians. Nikkeiren

Spring labor negotiations

Every year, Nikkeiren’s Committee for the Study of Labor issues a report in January examining the current Japanese economy and labor issues.

This report then serves as the basis for spring wage negotiations, also known as the “spring labor offensive” or shunto. Major changes in the industrial and employment structures, record high unemployment rates, and a widening of the gap between strong and weak firms within particular industries have changed the character and needs of labor negotiations since the latter 1990s, however.

Management and labor in individual companies settle labor negotiations and wage agreements. Yet, in the past, unions demanded identical wage increases and simultaneous replies from management. In a context of economic growth, long-term employment within a single firm, and a seniority system of promotions, this strategy seemed to work well. Since the 1990s, however corporate earnings have come to vary widely even within the same industry. As a result, it has become increasingly difficult for industry unions to make unified demands. At the same time, employers are

220 Japan Federation of Employers’ Associations switching to pay systems that emphasize merit over seniority. As a result of these developments, the traditional negotiating practice between

Nikkeiren and labor unions has become increasingly outdated and the need for annual labor negotiations questioned. In twenty-first century

Japan, it is no longer as desirable or feasible to work towards the adoption of uniform wage and working conditions across companies or industries.

Nikkeiren’s position in the 2001 spring labor negotiations reflected adjustment to this changed environment. Opposing uniform wage increases,

Nikkeiren called instead for individual companies to raise their labor expenses to appropriate levels. The organization also proposed that work sharing should be introduced as an issue in the negotiations and that priority should be placed on stable employment over wage increases.

clining birthrate and aging population will also change Japan’s labor force participation rate in the future and thereby affect labor supply trends.

In response to concerns over the tendency towards declining consumption that typically accompanies a declining population, Nikkeiren has spoken out in favor of relaxed immigration laws.

Finally a number of corporate and management scandals in the 1990s raised the profile of business ethics in Nikkeiren’s activities. The organization has advocated the establishment of higher standards of behavior. At the same time, however, Nikkeiren has expressed alarm at rulings in 2000 concerning the responsibility of corporate directors for failure to carry out proper risk management, seeing the burden of responsibility placed on Japanese management as excessive.

Challenges to labor-management relations in recent years

Other dramatic changes in the economic and business environment in the 1990s posed additional challenges to labor-management relations. The prolonged economic downturn led companies to rectify high cost structures through cuts in employment. Growing labor mobility arising from the change in industrial structure, corporate restructuring, diversification in the modes of employment and changing employment expectations have also been an outgrowth of the economic downturn. Notably the number of temporary employees has grown steadily since the introduction of the Manpower Dispatching Business Law in 1999. These changes have spurred Nikkeiren to work together with Rengo (the Japanese Trade

Union Confederation) to determine what kinds of labor-management relations might best serve

Japan in this transitional period.

Nikkeiren’s activities have focused increasingly on working to expand skill training to enhance employability The organization is engaged in building an information network to enhance labor mobility and enable companies to better meet employment needs. In addition, Nikkeiren advocates deregulation in the economic and labor fields and the establishment of private sector leadership in the economy as a means of creating jobs. A de-

Merger with Keidanren

For many years, Nikkeiren and the Japan Fed-

eration of Economic Organizations, Keidanren, proved complementary Although there was considerable overlap in memberships, the division of labor was fairly clear: Nikkeiren was the leading player in shaping corporate policies regarding labor and wages while Keidanren focused on other business issues. In the 1990s, however,

Keidanren became increasingly concerned with social security and social welfare issues such as pension reform and medical insurance programs, areas that had traditionally been the domain of

Nikkeiren. The increasing overlap in issue area focus, combined with the declining role for

Nikkeiren in annual labor negotiations and calls for restructuring and streamlining of business organizations in line with similar trends in corporate Japan, eventually resulted in pressure for the two organizations to merge. In September 2000,

Nikkeiren and Keidanren announced their plans to create a more unified voice to articulate Japanese business interests. The merger, to be carried out in 2002, will result in a new organization called the Japan Business Federation.

Some regional employers’ associations have expressed opposition to the merger between

Keidanren and Nikkeiren. Nikkeiren membership at the local employers’ association level includes some small and medium-sized firms

Japan, Inc. 221 whose interests have not traditionally been represented in Keidanren. Keidanren’s primary members tend to be large companies with headquarters located in Tokyo. Local employers’ associations are also wary of the trend towards centralization of power in Tokyo and fear that region-specific concerns may become increasingly overshadowed by national or Tokyocentered concerns.

The different legal status of the two business organizations also complicates the merger process. While Nikkeiren operated as a voluntary body Keidanren operated as an incorporated association. To carry out the merger, Nikkeiren will be dissolved and then absorbed by Keidanren, a process that to some symbolizes the likely overshadowing of the Nikkeiren elements by

Keidanren elements in the new organization. The merger is expected to have some clear positive benefits, however. In addition to bringing a potentially greater business influence over the formation of government policies and eliminating redundancies in the respective activities of the two groups, the merger is expected to lead to an increased volume of information available to members.

Further reading

Chitoshi, Y. (1968) Big Business in Japanese Politics, New

Haven, CT: Yale University Press.

The Current Labor Economy in Japan (annual), Tokyo: Japan Federation of Employers’ Associations.

Nikkeiren Position Paper (annual), Tokyo: Japan Federation of Employers’ Associations.

Japan, Inc.


“Japan, Inc.” is a widely used phrase in referring to Japan’s industrial system, with a changing meaning that reflects the changing views of

Japan’s economy over several decades. Apparently first used in an article in Fortune magazine in the mid-1930s, the term vanished from the business vocabulary until the mid-1960s when it was given currency in several speeches and articles. It served usefully as a brief description of the generally supportive interaction between government and business, with relations rather like that in a conglomerate, Japan, Incorporated, whose businesses were free to compete within the broad limits of common overall goals and consensus. Audiences still at that time had little knowledge of Japan’s economy and still only marginal interest. “Japan, Inc.” was a useful way of describing Japan’s economic management system to naive audiences.

As Japan’s industrial growth continued and as trade frictions with the United States intensified, the phrase began to take on a more sinister tone, and became a way of encapsulating what was seen as a conspiratorial Japan in which business entities marched in unison to instructions from an all-powerful central government. This view was very much reinforced as some US academic studies provided legitimacy to the view that the Ministry of International Trade and Indus-

try (MITI) was the entire determinant of Japan’s industrial structure, competitive frameworks and trade policy “Japan, Inc.” became the quick reference to this unfair conspiracy which served to explain Japan’s success. This was for business and government in the United States at least a much more palatable explanation for Japan’s competitive success than different levels of competence in the market place, and appealed to widely held paranoid feelings of being attacked by a sinister enemy.

Much of the rapid and wide currency of the phrase no doubt derived from a US Department of Commerce publication, Japan, The Govern-

ment-Business Relationship: A Guide for the American

Businessman, issued in early 1972. The Japanese translation, Kabushiki Kaisha Nippon, appeared in

Tokyo only a few months after the US edition.

The book provided a very good definition of the

Japan, Inc. phrase, using the conglomerate analogue, and describes most positively government-business interaction in Japan. The three detailed industry case studies in the book, of computers, autos and steel, similarly give little support for the more sinister and conspiratorial echoes.

Even now, after so long a time, “Japan, Inc.” remains a very much used, and misused, phrase.

Perhaps it is distance that blurs complexity and makes a simple (and misleading) phrase useful to newsmen and others when speaking of Japan.

222 Japan National Railways

Unfortunately, the negative nuances of the phrase are also long-lived, serving as one measure of how little we seem to have learned about the intricacies of Japan’s business systems.

Further reading

Kaplan, E.J. (1972) Japan, the Government-Business Rela-

tionship. A Guide for the American Businessman, Washington, DC: U.S. Government Printing Office.

Shomushohen, B. (1972). Kabushiki Kaisha Nippon, Tokyo: Simul Press.


Japan National Railways

Japan has long placed great emphasis on its railway system, believing it to be an important means of fostering economic development. As early as

1872, an opening ceremony was held for a rail line running between Shimbashi, near Tokyo, and

Yokohama. By 1874, service between Osaka and

Kobe began. Three years later, the service was extended from Osaka to Kyoto. By 1880, railways were running in the northern-most island,

Hokkaido. In 1882, service opened between

Shimbashi and Nihombashi, and in 1889, the

Tokaido line between Shimbashi and Kobe began. In the same year, the Kyushu Railway Company began operations between Hakata and


The 1890s saw continued expansion of Japan’s rail system. Kyushu Railway Company opened another line from Moji to Kumamoto in 1891, the same year that Nippon Railway Company began running trains between Ueno in Tokyo and Aomori. Japan’s first steam locomotive was produced in Kobe in 1893, with the Kyoto Electric Railway opening in 1895. At the end of the decade, the Kansei Railway Company line between Nagoya and Osaka began. In the new century Japan continued to develop its rail system.

The Sanyo Railway Company began to operate between Kobe and Shimonoseki in 1901, and the

Kobu Railway Company began running electric and steam locomotives between Iidamachi and

Nakano from 1904.

Up to then, the railways had been privately owned. To create more cooperation between the lines as well as put government backing behind them, the National Railways Law was passed in

1906, with private railways taken over by the government in the following year. Throughout the next several decades the national railways continued to make progress in new trackage and in technical developments. Some of the developments during this time were electric locomotives, colored signal lamps, automatic couplers for passenger cars, ticket vending machines and automatic door openers. Japan’s first subway was introduced in Tokyo at this time, as well as a number of tunnels being built.

In 1949, following the devastation of rail lines during the Second World War, the rail system was reorganized with the creation of Japan National Railway (JNR). In the years that followed,

JNR continued to develop the nation’s rail system. In 1956, the Tokaido line between Tokyo and Kobe was electrified. In 1964, at the time of the Tokyo Olympics, the Tokaido Shinkansen

(high-speed service) line opened between Tokyo and Osaka. Other high-speed lines followed:

Osaka to Okayama in 1972, Okayama to Hakata in 1975, Nigata to Omiya and Morioka in 1982, and Omiya to Ueno in 1985. By this time, there were five types of railway operating organizations in Japan: JNR, local government railways, private railway companies (mintetsu), joint local government and private railways known as the third sector, and Teito Rapid Transit Authority for local commuters.

In 1987, Japan National Railways was privatized. At that time, there were about 27,600 km of railway lines, and 345 billion passengers per km. Freight transportation was about 21 billion tons per km. The reason for the privatization was

JNR’s tremendous operating and accumulated deficits and labor problems. At the time of privatization, accumulated deficits were written off, and labor cuts were made. As a result of the privatization, JNR was split into six passenger companies, one freight company and other organizations. The passenger companies were regionally based: Hokkaido, East, Central, West,

Shikoku and Kyushu. Since they were no longer government-owned, National was not included in their names. For instance, the northernmost

Japan Productivity Center for Socio-Economic Development 223 regional company was named Hokkaido Japan


Further reading

Noda, M., Harada, K., Aoki, E. and Oikawa, Y. Japa-

nese Railway: The Establishment and Development, Railway History Series, Tokyo: Nihon Keizai



Japan Productivity Center for

Socio-Economic Development

The Japan Productivity Center for Socio-Economic Development (JPC-SED) is a private, nonprofit tripartite association of management, academics and labor circles. As its organizational mission, JPC-SED seeks to further strengthen the productivity movement in Japan and abroad. It came into being in 1994 when the Japan Productivity Center (JPG) merged with its sister organization, the Social and Economic Congress of

Japan (SECJ). Established in 1955, JPC was a major channel for acquiring advanced management technology from the USA and Europe and disseminating it throughout Japan. SECJ was established in 1973 to develop a national consensus by addressing social and economic macro-issues. The new organization combines

SECJ’s expertise in research with the productivity techniques that JPC has developed. Although the Japanese government played a major role in the initial establishment of the two organizations, it was not involved in their evolution beyond that point.

JPC-SED’s major role is the study and formulation of policy proposals concerning three major issues: reform of various social systems, productivity enhancement and structural economic reform, and development of the international economy balanced with conservation of the global environment. Its most significant accomplishment has been its promotion of the productivity movement in Japan. A significant difference between JPG-SED and other similar organizations abroad is that the former employs a human resource-centered approach, while the latter often advocate a technology-centered perspective.

Additionally JPC-SED acts as a human resources development organization. Through various seminars and outreach programs, it educates managers of Japanese companies about the latest techniques and trends of corporate management and economics. The fees from these seminars are the major source of income for JPC-SED. Consequently JPC-SED is not dependent financially on other organizations.

In order to propose solutions to the problems that the Japanese society and economy face, the

JPC-SED has formed committees consisting of leaders and experts from various fields such as management, economics, and sociology. There are fifteen committees that carry out studies and surveys on issues such as social policy welfare, employment, management innovation, and society in the information age. Although typically long term, these committees are not permanent, but change according to the issues that emerge.

The members of the committees disclose the results of these studies to the public in the form of policy proposals. These proposals are typically presented to the prime minister’s cabinet, appear in the leading mass media, and often are compared to the proposals made by Ministry of In-

ternational Trade and Industry (MITI).

JPC-SED disseminates its knowledge and experiences to overseas countries. It is the national representative to the Asian Productivity Organization, an inter-governmental regional organization established in 1961 to increase productivity in the countries of Asia and the Pacific region. Also, JPC-S ED instituted the Japan

Quality Award in 1995, an annual award that recognizes excellence of management quality in companies.

See also: industrial efficiency movement

Further reading

Japan Productivity Center Staff (1989), New Paradigm

of Productivity Movement in Japan,. Portland, OR: Productivity Press Inc.


224 Japanese business in Africa

Japanese business in Africa

In contrast with other regions, Japanese business have only an insignificant presence in Africa. This situation can be attributed to both the lackluster economic performance of the region, and the physical distance between Japan and the African continent. However, two significant trends can be noticed: the uneven presence of Japanese businesses within the various African countries, and the adoption of certain distinctive aspects of Japanese management practices.

Japanese businesses are concentrated in a few

African countries, while a large number of countries have a negligible presence, if not a total absence, of Japanese enterprises. Within the

Sub-Saharan African countries, the largest number of Japanese businesses and investment can be found in South Africa. In northern Africa, Egypt has the largest number of Japanese businesses and investment. The other countries that have a relatively significant share of Japanese presence include Kenya, Tanzania and Ethiopia in eastern Africa, Zambia, Namibia and

Swaziland in southern Africa, and Senegal and the Ivory Coast in West Africa. The Japanese businesses found in Africa are mostly found in the natural resources, manufacturing and commercial services sectors. Investments in natural resource extraction and processing are in such product areas as agricultural products, copper, and other precious metals. Businesses in the manufacturing sector are mainly involved in transport equipment, electrical machinery and electrical appliance assembly and manufacturing.

The branches of some of the more established and larger Japanese trading companies dominantly represent commercial businesses.

Two clear issues emerge with regard to the uneven distribution and relatively insignificant presence of Japanese businesses in Africa. First, the African region is still not a favorable recipient of Japanese investment. Second, business between the region and Japanese companies is still conducted through international trade. The presence of branch offices of major Japanese trading companies in the capitals of many African countries attests to the fact that Japanese business in

Africa is still by and large at an explorative or information collection stage. This is more so for the countries having a negligible presence of Japanese corporations. It can also be noticed that some of the Japanese trading and manufacturing companies use their presence in one African country as a strategic position for gauging the regional economic trends. A case in point is that of companies based in South Africa, Kenya and Egypt, which use these strategic vantage points to gauge the economic trends within the larger regions of southern Africa, eastern Africa, and northern Africa, respectively.

In sharp contrast to the negligible presence of

Japanese business in Africa, it is quite common to find certain elements of the Japanese management style practiced by both foreign affiliates and indigenous firms in various African countries.

This is true for both the manufacturing and service industry The use of Japanese management practices can be largely attributed to the branch offices of one international consulting company.

This consulting firm had previously learned the

Japanese system of management for use in their

European division. While jointly working with their European counterparts, the firm’s African division consultants became interested in the Japanese management system. This interest finally culminated in the adoption of the Japanese management system into the consulting firm’s product portfolio. This has resulted in the wide use of certain aspects of the Japanese management system in Africa, albeit with varying levels of success.

The most commonly found aspects of the Japanese management system are quality control systems, kaizen activities to reduce waste, elements of the just-in-time production system, factory layout changes, and multi-skill training for shopfloor workers. Adoption of the Japanese quality control system can be found in large manufacturing enterprises in a number of African nations.

Clearly discernible are the quality task groups and the new concept that quality starts at the beginning of the production process with raw material acquisition, rather than at the end of the production line. There are also a number of manufacturers that have changed their factory layout by introducing cells and bringing machines closer together. Even though the lack of a community of parts and components suppliers has prohibited the complete adoption of the

Japanese business in Australia 225 just-in-time system of production, many manufacturers use the kanban system to organize production activities in their factories. Against the background of production inefficiency and rampant wastage, many factories have found kaizen to be an appealing method for reducing wastage and effecting incremental small changes in the entire production process. Another aspect of the

Japanese management style that many African factories have found quite appealing, is the human resource management system for factory floor workers, placing emphasis on multi-skill training. However, there has been mixed performance in the adoption of the Japanese management system, with the emphasis on failure; generally the performance has been very dismal. This can be attributed to management failure in several areas: poor approach to quality issues, resistance from middle management and the workforce, unreliable suppliers and poor quality of parts and components, and short-term output maximization at the cost of preventive maintenance.

In the future, an increase in the presence of

Japanese business will largely depend on positive economic performance, political tranquility and a generally favorable investment climate in

Africa. It is also an interesting fact that in the last half of the 1990s there have been a number of

Japanese delegations visiting a few African countries (South Africa, Kenya, Ethiopia and Zambia) on fact-finding missions on the general investment climate in Africa. Such visits may signal a relative increase in economic exchanges and possibly be followed by direct investment from

Japanese companies. As such, any significant presence of Japanese business in Africa will follow a pattern in which certain favored first-in-line countries will act as a window from which the strategic monitoring of both national and regional economic conditions and opportunities will be undertaken. Nevertheless, it is quite difficult to project as to when there will be any significant

Japanese investments in Africa.

Further reading

Kaplinsky R. and Posthuma, A. (1994) Easternization:

The Spread of Japanese Management Techniques to Devel-

oping Countries, London: Frank Cass.


Japanese business in Australia

Japan is Australia’s most important business partner in terms of both inward investment and overall trade. Japanese business interests in Australia are also substantial and represent 5 percent of

Japan’s total global investment (see Japanese in-

vestment patterns), making Australia the third largest recipient of Japanese foreign direct investment (FDI) behind the USA and the UK. Japanese business in Australia has been concentrated in agriculture, mining, automobiles and finance with a recent growth of investment in real estate and tourism.

The development of offshore operations in

Australia has taken place in a series of waves. In the 1960s and early 1970s Japanese business investment in Australia was mainly “resource seeking” and was focused around raw material extraction, with Australia traditionally being Japan’s largest supplier of iron ore and coking coal.

In the 1970s “market-seeking” FDI intended to offset trade barriers saw substantial Japan investments in the Australian automobile and electronics industries with the establishment of local manufacturing operations by major Japanese companies including Toyota, Nissan, NEC, Sanyo and later Mitsubishi. These investments preceded by almost a decade similar investments in the USA and Europe. Japanese business investment in Australia from the mid-1980s to the early

1990s witnessed a new wave of investment in real estate, tourism, and services, making Australia the largest recipient of Japanese investment in these categories next to the USA. Australia also became one of the top 10 recipients of Japanese finance-related investment as Japanese banks established a succession of affiliates in Australia.

Over 700 Japanese business firms operate in

Australia and directly employ more than 45,000 local workers or about 0.5 percent of the workforce. In addition, some 180 Australian subcontractors and major suppliers to Japanese businesses employ an additional 263,000 workers, making a total of 308,000 people employed in

Japanese or Japanese-related companies. This represents 3.7 percent of Australia’s total full-time workforce. Japanese manufacturing firms, while representing only 15 percent of Japanese investment in Australia employ 34 percent of all di