administration as with industrial policy. In contrast to Sahashi's self-description as a 'domestic-use-only bureaucrat,' his successors were 'cosmopolitan nationalists.''
The passing of the Kishi- Shiina line did not mean the end of high-speed growth. Whereas Japanese productivity had grown at a rate of 9.5 percent on an average annual basis between 1950 and 1967, it increased to 10 percent during 196773 and held steady at 8.3 percent during 197879, following the severe effects of the oil shock. By the end of the 1970's Japan and its ally, the United States, together produced each year about 35 percent of the total new output of the planet and engaged in almost 20 percent of the world's total trade. Japan had become a rich nation. The real legacy of people like Sahashi was not their 'control bureaucrat' mentality but their having shown the nation how to change its industrial structure in order to meet changes in the economic environment, and how to do so without relinquishing the advantages of either democracy or competition. Thanks to MITI, Japan came to possess more knowledge and more practical experience of how to phase out old industries and phase in new ones than any other nation in the world.
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Eight
Internationalization
During the decade from the recession of 1965 to the recession after the first 'oil shock' (1974), the paths of MITI and of Japan first diverged and then came back together again. Japan attained the zenith of its postwar economic growth, but MITI suffered from a classic case of the greatest bureaucratic infirmity of allfulfillment of mission and loss of function. One issue after another plagued the ministry in this eraindustrial pollution, revolts against its administrative guidance, charges of corrupt collusion with big business, inflation, public dismay at some of the consequences of its industrial location policy (especially the virtual depopulation of some Japan Sea coast prefectures, such as Shimane, and the overcrowding of the Tokyo-to-Kobe industrial zone), and serious damage to relations with Japan's main economic partner, the United States, because of trade imbalances, an undervalued yen, and Japanese procrastination in implementing capital liberalization.
By the mid-1970's the ministry began to show renewed strength: it successfully redefined its mission, changed its personnel, gave itself a new structure, and shed the parts of its heritage that were no longer relevantand all the while it reasserted those elements that Japan still needed. The oil crisis and all of its ramifications gave the ministry a new lease on life. MITI's primary problem at the time was to understand what changes were needed, to answer its critics, and to hold off rivals, such as the Ministry of Finance, who saw advantages for themselves in MITI's weakened influence. One official characterized 196869 as the worst year in MITI's history, and Vice-Minister Morozumi Yoshihiko (197173) referred to the years leading up to the basic reform of the ministry in July 1973 as a 'long, dark tunnel.'
1
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It all began with capital liberalization. After Japan had joined the OECD in 1964with more reservations to the OECD's capital liberalization code than any of the sixteen other members except Spain and Portugalthe country seemed to forget that reasonably free movement of capital among the signatory nations was one of the OECD's fundamental goals. However, there were many foreigners who were quick to remind the Japanese that they had agreed to end restrictions on direct foreign investment in the Japanese economy. Japan gained several advantages from membership in the OECD, including greater ease in floating its securities in overseas markets; and it was itself, of course, a major investor in Korea, Taiwan, and Southeast Asia. The slowness of Japanese compliance first came up in May 1965 at the Japanese-American Financial Leaders Conference. Demands that Japan liberalize were made again in July at the Japanese-American Joint Committee on Trade and the Economy, repeated in December at the Business International convention in Tokyo, and repeated again in February 1966 at the OECD itself.
2
The very thought of capital liberalization struck terror in the hearts of MITI officials and Japanese industrial leaders. In their view trade liberalization had meant only meeting world competition in terms of products (quality, design, price, and so forth), a level at which Japan had worked out the successful strategy of importing technology from Europe and America, combining it with Japanese labor power, and then offering to the market products that were able to compete profitably with those of other countries. But capital liberalization meant competition at every level of an enterprisein technology, capital resources, managerial skills, and all the rest. The low levels of capitalization of Japanese firms, a consequence of the indirect financing system invented during the capital shortage of the Korean War period, made them easy targets for foreign acquisition. The issue, of course, was nationalistic rather than economicthe belief on the part of some Japanese that the United States had for all intents and purposes 'bought' Western Europeand was about to buy Japan, as well.
MITI had long feared that some such catastrophe might easily occur, and during the recession of 1965 (particularly after the bankruptcy of Sanyo* Special Steel), it began to deride what it called Japan's 'cherry-blossom-viewing and sake-drinking economy,' by which it meant numerous low equity, over- invested firms wholly dependent upon government-guaranteed bank loans.
3
If such firms could not even survive a domestic recession in a hothouse economy, how were they going to compete with the Fords, du Ponts, and IBMs of the world? The ministry argued that the solution to these problems was
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to promote large-scale mergers in order to produce concentrations of economic power on a par with the United States and West Germany. It wanted to reduce the 'big six' steel companies to, say, two or three, and the automobile manufacturers from ten (Daihatsu, Fuji, Honda, Hino, Isuzu, Mitsubishi, Nissan, Suzuki, Toyo * Kogyo*, and Toyota) to two (Nissan and Toyota). The problem with this approach was that it was hard to merge Japanese firms, given their company unions, lifetime employment systems, and keiretsu affiliations. Moreover, such a policy would put MITI squarely on the side of big business, or even worse, of zaibatsu business. Some observers reinterpreted MITI's old slogan of 'scrap and build' (first applied to the coal industry) to mean 'scrap medium and smaller enterprises' and 'build Mitsubishi Heavy Industries.'
4
As it turned out, MITI had less to fear from medium and smaller enterprises than it did from some very big businesses themselves. And it had forgotten all about the Fair Trade Commission.
Before these problems developed, MITI got an assist from the top leaders of business, but for reasons more connected with the Sumitomo Metals Company incident than with capital liberalization itself. Inayama Yoshihiro, the president of Yawata Steel, had been so appalled by the 'Sahashi, minister; Miki, vice-minister' controversy and the public squabbling over market shares in the steel industry that in January 1966 he proposed to Nagano Shigeo, president of Fuji Steel, that they merge their two companies. This would produce one steel company so large that it would create a genuine hierarchy in the industry, and, he hoped, conditions of stable oligopoly. Nagano responded favorably. In order to create a forum in which these negotiations could be pursued, in March 1966 the leaders of the main industrial federations formed a policy board, or 'business general staff,' named the Industrial Problems Research Association (Sangyo* Mondai Kenkyu* Kai, called 'Sanken' for short). The big steel merger was Sanken's greatest achievement (it became inactive thereafter), but its formation coincided with the rise of the capital liberalization issue, and the association therefore decided to address the problem of mergers for all major industries as well as for steel.
