ENCYCLOPEDIA OFJAPANESE BUSINESSAND MANAGEMENT

ENCYCLOPEDIA OFJAPANESE BUSINESSAND MANAGEMENT

Edited by Allan Bird

London and New York

First published 2002by Routledge

11 New Fetter Lane, London EC4P 4EE

Simultaneously published in the USA and Canadaby 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.

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

All rights reserved. No part of this book may be reprinted orreproduced or utilized in any form or by any electronic,mechanical, or other means, now known or hereafter

invented, including photocopying and recording, or in anyinformation storage or retrieval system, without permission in

writing from the publishers.

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

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

Includes bibliographical references and index.1. Japan—Gommerce—Encyclopedias. 2. Industrial management—Japan—Encyclopedias. 3. Corporations, Japanese—Management—Encyclopedias.

4. Business enterprises—Japan—Encyclopedias. 5. Japan—Commerce—Dictionaries. 6. Japanese language—Dictionaries-English. I. Title: Japanese

business and management. II. Bird, Allan.HF1001 .E467 2001

1650′.0952–dc21 2001019952

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

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

Contents

List of contributors vii

Acknowledgements xi

Introduction xiii

How to use this book xv

Thematic entry list xvi

Entries A-Z 1

Index 483

James C.AbegglenAsia Advisory Service KK

Tetsuo AboTeikyo University

Raj AggarwalKent State University

Nathaniel O.AgolaNagoya University

Christine L.AhmadjianColumbia University

Jennifer AmyxResearch School of Pacific and Asian Studies,

Australian National University

Marie AnchordoguyUniversity of Washington

Nigel CampbellUniversity of Manchester

Mitsuyo HanadaKeio University

Stephen NicholasUniversity of Melbourne

Thomas RoehlWestern Washington University

Shane J.SchvaneveldtWeber State University

Joop StamErasmus University

Mark TiltonPurdue University

Mitsuru WakabayashiNagoya University

Eleanor D.WestneyMassachusetts Institute of Technology

Hideki YoshiharaKobe University

List of contributors

Contributors

Editorial team

Volume editor

Allan Bird

University of Missouri, St. Louis

Consultant editors

viii Contributors

Fumie AndoNanzan University

Hirotaka AokiTokyo Institute of Technology

David M.AraseClaremont College, Pomona

William BarnesUniversity of Portland

Michael BeemanUS Department of Commerce

Theodore BestorHarvard University

Mary Yoko BrannenSan Jose State University

Robert BrownGreenebaum, Doll & McDonald Pllc,

Louisville, KY

Ronda Roberts CallisterUtah State University

Meika ClucasCalifornia Polytechnic State University

Alexandra CohenCalifornia Polytechnic State University

Richard A.ColignonDuquesne University

Tim CraigUniversity of Victoria, Canada

Edwin C.DuerrSan Francisco State University

Mitsuko S.DuerrSan Francisco State University

Dayo FawibeUniversity of Missouri, St. Louis

David FlathNCSU Department of Economics

Michael GerlachUniversity of California, Berkeley

Georgios GiakatisTokyo Institute of Technology

Susumu HagiwaraHosei University

Ehud HarariHebrew University of Jerusalem

Hitoshi HiguchiShinshu University

James E.HodderUniversity of Wisconsin

Ippei IchigeAoyama Gakuin University

Ralph InforzatoJETRO Chicago

Kenji IshiharaAssociation for International Cooperation

of Agriculture

Hiroshi ItagakiMusashi University

Tetsuya IwasakiShinshu University

Megumi KatsutaAoyama Gakuin University

Martin KenneyUniversity of California, Davis

Harold KerboCalifornia Polytechnic State University

Jo-Seoul KimShinshu University

Hiroki KondoShinshu University

Aya KubotaAoyama Gakuin University

Hiroshi KumonHosei University

James R.LincolnUniversity of California, Berkeley

Terri R.LituchyCalifornia Polytechnic State University

Leonard H.LynnCase Western Reserve University

Contributors ix

Mark MasonYale University

Aki MatsungaAoyama Gakuin University

John A.McKinstryCalifornia Polytechnic State University

Mari MiuraUniversity of Tokyo

Dario Ikuo MiyakeUniversity of São Paulo

Shintaro MogiShinshu University

Sean MooneyG2

Tetsu MorishimaAoyama Gakuin University

Kazuharu NagaseShinshu University

Takeshi NakajoChuo University

Jay NelsonSS Media, New York

Stephen NicholasUniversity of Melbourne

Keith A.NittaUniversity of California, Berkeley

Kazahiro OkazakiAichi Institute of Technology

Soyeon ParkAoyama Gakuin University

Vladimir PucikIMD

William PurcellUniversity of New South Wales

Jörg Raupach-SumiyaGerman Institute for Japanese Studies

Thomas RoehlWestern Washington University

Elizabeth L.RoseUniversity of Auckland

Pernille RudlinBrighton, UK

Ulrike SchaedeUniversity of California, San Diego

Mark J.ScherInstitute for Financial Affairs, New York

Shane J.SchvaneveldtWeber State University

Roblyn SimeonSan Francisco State University

Ron SingletonWestern Washington University

Michael SmitkaWashington and Lee University

Lucrezia SonginiBocconi University

Brenda SternquistMichigan State University

Yasuo SugiyamaUniversity of Tokyo

Noriya SumiharaTenri University

Margaret TakedaAoyama Gakuin University

Sumihiro TakedaAoyama Gakuin University

Ogiwara TakeshiAoyama Gakuin University

Jay TateUniversity of California, Berkeley

Mark TiltonPurdue University

De-bi TsaoTokyo Institute of Technology

William M.TsutsuiUniversity of Kansas

x Contributors

Tsutomu TsuzukiShinshu University

Victor K.UjimotoUniversity of Guelph

Robert UriuUniversity of California, Irvine

Terri UrsackiUniversity of Calgary

Chikako UsuiUniversity of Missouri, St. Louis

Carien Van MourikEramus University Rotterdam

Steven VogelUniversity of California, Berkeley

Mitsuru WakabayashiNagoya University

Eleanor D.WestneyMassachusetts Institute of Technology

Michael A.WittHarvard University

Bernard WolfYork University Canada

Heung-wah WongUniversity of Hong Kong

Brian WoodallGeorgia Institute of Technology

Takehiko YasudaShinshu University

Masanori YasumotoShinshu University

Toru YoshikawaNihon University

Patrick ZiltenerMax Planck Institute for the Study of

Societies, Germany

Over the last several years I have found myselfpaying closer attention to the acknowledgementsthat precede most books. Perhaps it is simply asign of advancing maturity or age, but I havebecome more curious about who people chooseto recognize as contributing to a particular effort.After all, there are a host of people associatedwith any published work, and an even largernumber involved in support of the research thatgoes into a scholarly volume. It is with thatthought in mind that I sat down to pen a note ofrecognition for those who have contributed tothis volume.

An encyclopedia is, by its very nature, the off-spring of myriad parents—an insight I knew withmy 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 intro-duce the volume itself, to recognize those manyindividuals who have contributed to this effort.Though it is impossible to acknowledge every-one, certain people stand out for both their per-sonal contribution, their insightful counsel or theirguiding spirit.

I was aided in the difficult task of surveyingan ill-defined academic field by an able group ofcolleagues who served as Consulting Editors. Istand in admiration of each of them individually.Collectively they served as a brain trust in help-ing to identify the breadth and depth of the vol-ume. Part of their task was to help set the markerswhich would define the amorphous field we choseto label “Japanese business and management.”Though named elsewhere in this volume, I wouldbe remiss not to personally acknowledge theircontribution here: Nigel Campbell, ManchesterUniversity; Mitsuyo Hanada, Keio University;

Stephen Nicholas, Melbourne University; Tho-mas Roehl, University of Western Washington;Joop Stam, Erasmus University; Mark Tilton,Purdue University; Mitsuru Wakabayashi,Nagoya University; Eleanor Westney Massachu-setts Institute of Technology; and HidekiYoshihara, Kobe University

Possibly the greatest challenge confronting thecompilation of any encyclopedia is the myriaddetail that must be sorted through. Once entrieshave been defined, authors must be identified andcontacted, manuscripts for each entry must bereceived and reviewed, revisions requested, com-pleted entries properly formatted, and the finalproduct forwarded to the publishers. The task isdifficult enough without the added challenge ofworking with academic scholars, who as a group,give added meaning to the phrase “herding cats.”I was ably assisted in the process of managing allthese details by three research assistants. Indeed,truth be told, I was the inept professor doing whatI could to assist them. I began the project withAlexandra Cohen, who did much of the initialorganizing and preparation of databases. Withabout year to go in completing the project Alexheaded off to Germany to continue her studiesthere. Before leaving she selected and trained herreplacement, Erin Montgomery Several monthslater I moved from the California PolytechnicState University in San Luis Obispo to the Uni-versity of Missouri-St. Louis. It fell upon Erin tosee that all databases, files and records were or-ganized so thoroughly that “not even Dr. Bird”can foul them up. In St. Louis, with little helpfrom me, Dayo Fawibe picked up where Erin hadleft off and helped carry the project through tocompletion.

Acknowledgements

In addition to an excellent trio of research as-sistants, I have been blessed to have very solidclerical and administrative support. In San LuisObispo, Sharon R.Leib helped to hide mymutlitude of shortcomings while I tried to jugglemy responsibilities as editor with my duties asarea coordinator. In St. Louis, KathleenMohrmann provided a calm and cheerful per-sonality while taking care of the details involvedwith setting up life at a new university therebyallowing me to concentrate on the encyclopedia.

In addition to the many authors who contrib-uted to this volume, I have enjoyed the supportof numerous colleagues. Each in their own wayoffered words of encouragement and support aswell as providing examples of scholarship onwhich I might model my own humble efforts. Inparticular, I would like to thank Roger Dunbar(New York University), Kiyohiko Ito (Univerityof Hawaii, Manoa), Gil Latz (Portland State Uni-versity), Harold Kerbo, Colette Frayne and LynnMetcalf (California Polytechnic State University),Tish Robinson (Univeristy of California,Berkeley), Schon Beechler (Columbia Univer-sity), Martha Maznevski (IMD), MarkMendenhall (University of Tennessee-Chattanooga) and Joyce Osland (University ofPortland).

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

Lloyd Laughlin taught me to how to think criti-cally and respectfully At a time when I was asimple undergraduate student Sidney Chang sawa path for me to take and pushed me in that di-rection. In Japan, Gregory Clark challenged myunderstanding of Japan and convinced me thatmy “future is in studying business, not history”Susumu Takamiya served as a wise and gentlementor during my few short years at the SannoInstitute of Business Administration. FinallyJames C.Abegglen provided a model of abidinginterest in Japan and keen insight into Japanesebusiness and management.

This volume would not have been possiblewithout the strong support of a very talented staffat Routledge who provided not only counsel anddirection, but also timely and much-needed en-couragement along the way In particular, FionaCairns was instrumental in getting this projectoff the ground and underway The matchingbookend to Fiona was Dominic Shryane, whowas largely responsible for bringing it to a suc-cessful conclusion.

A “thank you” is also due to Kyle, Allyson,Jared and Campbell. They think what I do is okayLastly I would like to thank my wife, Diane,whose constant love and support over the pasttwenty-three years has enabled and allowed meto do what I do. It is hard for me to envisionwhat I have done here as worthwhile withoutsomeone to share it with.

Allan BirdSt. Louis, Missouri

xii Acknowledgements

Background

From 1979 to 1989 the world witnessed the ar-rival of a global economic superpower. Duringthis ten-year period Japanese foreign direct in-vestment (FDI) totaled $67.5 billion. Of all Japa-nese investment overseas, nearly 50 percentoccurred within the USA. On a world scale, by1993 Japanese firms had been so successful that281 of Businessweek’s Global 1,000 were Japanesefirms.

In light of these developments, one wouldanticipate a well-developed interest in Japanesefirms among business executives, governmentadministrators and management scholars. Yet, ananalysis of the leading journals in the manage-ment field (Administrative Science Quarterly, StrategicManagement Journal, Academy of Management Jour-nal, and Academy of Management Review) reveals adramatically different story. Of the roughly twothousand articles and research notes publishedin these four journals from 1980 through 1994,less than 3 percent address or directly relate toeither the domestic or international behaviors ofJapanese firms or their employees. The situationis only slightly better when it comes to the cover-age of Japanese firms in practitioner periodicalssuch as Harvard Business Review or Sloan Manage-ment Review, or in business periodicals such as theFinancial Times, The Economist, Businessweek and For-tune.

At first blush an observer might conclude thatWestern management scholars are guilty of grossethnocentrism. Although a severe case of paro-chialism may be part of the explanation, I be-lieve a more benign interpretation is available.Japanese practices are fundamentally differentfrom those found in the West, particularly theUSA. Additionally Japan is located in Asia, far

away from many of the academics and journal-ists interested in business. Lacking fluency in Japa-nese, and in the absence of writings by Japaneseacademics and authors in English or other West-ern Languages, it has been more difficult for non-Japanese to gain an accurate understanding.

In the past three decades a body of work suf-ficient to spark further interest and desire to learnabout Japanese business has developed. Unfor-tunately much of it is specialized. There is nosingle source to which a person interested in Japa-nese business can turn to find out specific prac-tices, learn about distinctive concepts or identifykey personalities or institutions. The Encyclopediaof Japanese Business is intended to address this de-ficiency

There are several general sources on Japan,among them the Cambridge Encyclopedia of Japanand Kodansha’s Japan: An Illustrated Encyclopedia.However, these give short shrift to the Japanesebusiness system or the environment in which itoperates. In a similar vein, there are encyclope-dias of international busines and of specific busi-ness disciplines such as marketing and finance.Unfortunately these volumes provide, at best, lim-ited coverage of specific Japanese business con-cepts, practices, individuals or entities. Morerecently MIT Press has published The MIT Ency-clopedia of the Japanese Economy. As its name im-plies, this book focuses specifically on economics,which of course has a large overlap with busi-ness and management. However, again, it missesimportant areas of business and management.

Aims of the Encyclopedia

The aim of the Encydopedia is to offer an acces-sible and readable reference source of interest to

Introduction

both the non-specialist and the specialist seekinginformation on specific aspects of Japanese busi-ness. Though focused primarily on post-SecondWorld War developments, practices and relatedconcepts, entries on history provide groundingin the past. An effort was made to position thewriting and content of entries such that they en-courage use of the volume by both non-special-ists (a journalist wanting background on theTokyo Stock Exchange or a student looking forinformation on Toyota) and specialists (a man-agement scholar interested in the use of shokutakushain (contract employees) in human resourcestaffing strategies). Additionally entries are ori-ented toward more recent developments and top-ics. However, a strong commitment was alsomade toward providing appropriate historicalcontext for understanding Japanese business cul-ture.

Structure

The structure of the Encydopedia consists of onevolume divided into fourteen topical categories.Individual entries are in one of four lengths. First-level entries run about 2000 words in length, sec-ond-level entries are approximately 1000 words,third-level entries 500 words and fourth-levelentries 150 words. The first paragraph of eachentry follows a format in which basic informa-tion is provided upfront, followed by historicalbackground which, in turn, is followed by adeeper discussion. Entries were prepared in thismanner so that readers anxious to gain a quickoverview could read the first few paragraphs,while those readers requiring more detail couldproceed deeper into the longer entries.

Cross-referencing within the volume allows thereader to see and follow connections among top-ics. Furthermore, authors of longer entries haveprovided selected readings so that those readerswishing to pursue a topic further may do so.

Timeliness

Encyclopedias, representing as they do a snap-shot of current knowledge about a field, sufferobsolescence almost from their moment of con-ception. This is even more the case when com-piling knowledge and understanding about a fieldthat is in a constant state of flux. The Japanesebusiness system and its environment are under-going rapid and widespread change. Mergers,acquisitions and company failures have takenplace at a fast clip during the 1990’s and into thenew millennium. Additionally government min-istries have undergone significant restructuing aswell as some mergers of their own. In many cases,both in the private and public sectors, changeshave been accompanied by changes in names. Forexample, the Ministry of International Trade andIndustry (MITI) is now operating as the Minis-try of Economics, Trade and Industry (METI).No doubt further changes will take place in thenext several years, generating additional short-comings in the titles and contents of entries. Nev-ertheless, a concerted attempt has been made byauthors and editors to see that all entries are ac-curate and up-to-date.

Conclusion

In commenting on the creation of this encyclope-dia, contributing authors frequently voiced twoobservations. When asked to write on a particu-lar topic, they would usually respond that “surelysomeone has already written a clear explanation”of this topic or that issue. Then, upon furtherreflection, occasionally accompanied by a quicksearch in the library they would express surprisethat no one had. “After all,” as one author saidabout a topic he had been asked to write on, “thisis widely understood by everyone doing researchin the area.” The second observation followedfrom the first, and usually came after completionof an entry: it is good to get all of this informa-tion organized and gathered into a single source.This, of course, was the purpose of publishingthis volume all along. We hope you will agree—itwas good to pull this information together in oneplace.

xiv Introduction

This is an easy to use book. The articles/topicshave been ordered both alphabetically and cat-egorically. Entries can be searched using eitherapproach. The categories are namely:

• Economics• Finance• General Management/Business Administra-

tion• Government Institutions/Business-Govern-

ment• History• Human Resource Management• Influential Industries• Influential Japanese Companies• Influential Social/Business Entities• Influential Social/Business Personalities

How to use this book

• Industrial Relations• Japanese Business Overseas• Manufacturing• Marketing and Distribution• Research and Development

Entries for topics and terms which are commonlyreferred to in English using either the originalJapanese or the English translation are cross-ref-erenced with both terms. For example, the entryKeidanren can be searched using either that nameor the English translation, Federation of Eco-nomic Organizations. Cross-references appear inbold type. Related entries are also noted in theSee also section at the conclusion of each entry

Where deemed appropriate, entries also in-clude a further readings section, where authors haveidentified several books or articles helpful to thereader in providing further coverage of the topic.

Economics

agricultural co-operativesappreciating yenbad debtBank of JapanBanking Act of 1982banking crisesbubble economycity banksconsumption taxDevelopment Bank of Japandollar shock in 1971dual structure theoryeconomic growtheconomic ideologyHeisei boomincome doubling planIzanagi boomJapan Development Bankliberalization of financial marketsmain bank systemsarakinunemployment

Finance

banking crisescapital marketscorporate financecross-shareholdingsdebt/equity ratiospostal savingspromissory noteshareholder weaknesstakeoversventure capital industry

General management/business administration

accounting in Japanbankruptciesbottom-up decision making processesbusiness ethicscommercial codecompetitioncontractscorporate governancedaihyokenenvironmental and ecological issueshabatsuindustrial groups (keiretsu)joint stock corporationjoint venturesKansai culturekansayakumadogiwa zokumaruyumochiaiNaniwashi bushinegotiationsnemawashinihonteki keieinikkei jinoffice ladies (OL)organizational learningrestructuringringi seidosalarymansmall- and medium-sized firmsstockholders general assemblystrategic partneringsupply chain management in Japanthree sacred treasureswhite-collar workers

Thematic entry list

women’s roleszaibatsu

Government institutions/business-govern-ment relations

administrative guidance (gyosei shido)agricultural policyamakudaricartelsdangodepressed industriesDepressed Industries Law, 1978deregulationenvironmental regulationsFair Trade Commissionforeign aidindustrial policyindustrial regionsJapan Inc.madoguchi shidomen in charge of MoFMinistry of ConstructionMinistry of FinanceMinistry of International Trade and IndustryRengotrade barrierstrade negotiations

History

American occupationbantoBuddhismdistribution systemgeographyguilds (za and kabunakama)history of the labour movementieindustrial efficiency movementMeiji restorationPost-WWII recoveryPrince Shotoku’s 17 Article ConstitutionSamurai, role ofTokugawa periodwartime legacy

Human resource management

allowances and non-salary compensationappraisal systemsburakumincontract employeeseducation systemgenba-shugihuman relations managementinternal labour marketskaroshilifetime employmentoutplacementpermanent employeeseniority promotionshukko

Industrial relations

enterprise unionsforeign workersJapan Productivity Center for Socio-Economic

DevelopmentMinistry of LabourSohyo

Influential industries

airline industryautomotive industrybanking industrycomputer industryconstruction industryelectronics industrymotorcycle industrypharmaceuticals industryretail industrysoftware industrytelecommunications industry

Influential Japanese companies

AjinomotoArabian OilBank of TokyoCanonDaiei, IncDaiichi Kangyo BankExport-Import Bank of Japan

Thematic entry list xvii

foreign companies in JapanFuji Photo Filmgaishikei kigyouHonda Motor Co. Ltd.ITOCHU CorporationIto-Yokado Company Ltd.Japan AirlinesJapan National RailwaysKaoKirin Brewery CompanyKyocera CorporationLong-Term Credit Bank of JapanMarubeni CorporationMatsushita Electric Industrial Company

Limited (MEI)Mitsubishi CorporationMitsui & Co., Ltd.Mitsukoshi, Ltd.NECNintendo Co. Ltd.Nippon Telegraph and Telephone (NTT)Nissan Motor CompanyNomura SecuritiesNorin Chukin BankSeven-Eleven JapanSharp CorporationSonySumitomo CorporationToshibaToyotaYamato Transportation

Influential social/business entities

Central Union of Agricultural Cooperativesindustry and trade associationsJapan Association of Corporate ExecutivesJapan Automobile Manufacturers AssociationJapan Chamber of Commerce and IndustryJapan External Trade OrganizationJapan Federation of Economic OrganizationsJapan Federation of Employers’ AssociationsKeio UniversityLiberal Democratic PartyNihon Keizai ShimbunsokaiyaTokyo University

Influential social/business personalities

Abegglen, James C.Cole, RobertDeming, W.EdwardsDodge, Joseph M.Dokoh, ToshioDore, RonaldFukuzawa, YukichiHayakawa, TokujiHayato, IkedaHonda, SoichiroInamori, KazuoIshikawa, KaoruIwasaki, YataroJohnson, ChalmersJuran, Joseph M.Koike, KazuoKomiya, RyutaroMatsushita, KounosukeMinomura, RizaemonMorita, AkioNakauchi, IsaoNonaka, IkujiroOhmae, KenichiOno (Ohno), TaichiShibusawa, EiichiShingo, ShigeoTaguchi, GenichiTanaka, KakueiUeno, Yoichi

Japanese business overseas

economic crisis in Asiageneral trading companiesJapanese business in AfricaJapanese business in AustraliaJapanese business in CanadaJapanese business in ChinaJapanese business in GermanyJapanese business in ItalyJapanese business in Korea and TaiwanJapanese business in Latin AmericaJapanese business in MexicoJapanese business in Southeast AsiaJapanese business in the Middle EastJapanese business in the UK

xviii Thematic entry list

Japanese business in the United States ofAmericaJapanese investment patternsJapanese MNEslocalizationNew United Motor Manufacturing Inc.(NUMMI)overseas business of small- and medium-sized

enterprisesoverseas educationoverseas productionoverseas R&DUS investment in Japan

Manufacturing/production

5S campaignISO issuesJapanese Industrial Standards (JIS)just-in-timekaizenquality control circlesquality managementstandard settingsubcontracting systemsuggestion systemstotal productive maintenanceToyota production system

Marketing and distribution

advertising

after-sales pricingAkihabaracentral wholesale marketschugenconsumer movementcreative housesDentsudepartment storesdiscounterse-commercekonbini (convenience stores)Large Retail Store Law, 1974marketing in Japanone-to-one marketingpricing practicessocial marketingsuperstorestonyaTsukiji market

Research and development

export and import of technologyfirm strategies for technologypatent systemproduct developmentresearch cooperativesscience and technology policyVLSI Research Cooperative

Thematic entry list xix

Abegglen, James C.

The most influential author on Japanese busi-ness and management, Abegglen’s pioneeringwork, The Japanese Factory, set the focus and di-rection of future analyses of the Japanese man-agement system. To date, he has authored orco-authored ten books, including two other vol-umes receiving significant attention: Kaisha: TheJapanese Corporation (with George Stalk, Jr:) andSea Change: Pacific Asia as The New World IndustrialCenter. Abegglen first came to Japan in 1945, liv-ing and working there a majority of time sincethen. In 1965 he was one of the founding offic-ers of the Boston Consulting Group (BCG) andestablished BCG’s Tokyo office. Eighteen yearslater he established Asia Advisory Services.Abegglen also remained active in academiathrough his position as a faculty member atSophia University where he was director of theuniversity’s Institute of Comparative Culturefrom 1987 to 1990. Although he did not coin theterm “Japan, Inc.,” he is widely associated with itbecause of his active commentary on Japanesebusiness through his writings in business peri-odicals, both in and out of Japan.

The Japanese Factory (1958) was a detailed ex-amination of the patterns of social life and influ-ence relations in a Japanese factory In his analysis,Abegglen pointed out a key difference from theAmerican factory in that a person entering theemployment of a Japanese factory was making alifetime commitment. He argued that this extraor-dinary commitment helped to explain both theall-consuming demands that management exacted

from workers in terms of loyalty and also thedepth of concern management demonstrated forthe total welfare of those employees. In additionto lifetime employment, Abegglen also identifiedhow rewards were based on group, not individual,performance. He also drew attention to the em-phasis on length of tenure over pure merit-basedcriteria in promotion decisions. He concluded thatJapan’s pattern of industrialization differed fromthe US and other Western countries as a conse-quence of the larger social and cultural contextin which Japanese work organizations were em-bedded.

In 1985, Kaisha: The Japanese Corporation hadan equally profound impact on a western busi-ness community trying to understand the foun-dation of competitiveness on which Japanesefirms were achieving market share worldwide. Itoutlined both the strengths and weaknesses ofJapanese 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.

ALLAN BIRD

accounting in Japan

Accounting standards and financial reporting inJapan are similar in many ways to US and Inter-national Accounting Standards; however,

A

differences exist. Differences also exist in account-ing standard setting and regulations.

Accounting standard setting and regulations

Accounting standards and regulations arestrongly influenced by governmental agencies andlaws in Japan. Three primary sets of laws mustbe considered when analyzing accounting and re-porting standards in Japan. The CommercialCode, administered by the Ministry of Justice,prescribes accounting standards for limited liabil-ity companies (kabushiki kaisha). The Commer-cial Code has a strong legal focus and is primarilyconcerned with creditor and shareholder protec-tion. The Securities and Exchange Law, admin-istered by the Ministry of Finance, applies tocompanies that list their stock on exchanges. Theprimary interest of the Securities Laws is to pro-vide information for investor decision making.The final influential law affecting Japanese ac-counting standards is the Corporate Income TaxLaw. This law basically requires that income anddeductions for tax purposes also be the same asthose used for financial accounting purposes.These three laws are the primary laws and regu-lations governing accounting and financial report-ing in Japan.

Accounting rules and standards

Accounting rules and standards are concernedwith how the accounts are measured and howamounts are calculated. As previously noted, theCommercial Code, Securities Laws and Corpo-rate Income Tax Laws generally determine spe-cific accounting rules and standards.

Accounts and notes receivable are based onamounts owed to the company. The calculationof the allowance for doubtful accounts is usuallybased on the amount allowed by tax law. This isin contrast to the USA, where the estimate offuture bad debts is based on the amount that willprove uncollectible.

Recent changes in accounting for marketablesecurities now require firms to use the year-endmarket values of the securities for valuation pur-poses. This is in contrast to historical cost thatwas previously used. Pending changes requirethat changes in market values of securities classi-

fied as “trading” securities be reflected in incomefor the period. In contrast to trading securities,unrealized changes in the value of securities clas-sified as “available for sale” are reflected in share-holders’ equity and do not affect current periodincome. Accounting for investments in securitiesthat result in over 20 percent ownership of theinvestee is discussed below.

Accounting for inventories in Japan is similarto most countries. The company may value in-ventory using either the historical cost or thelower of cost or market value. Typically histori-cal cost is used. The lower of cost or marketmethod requires that the decline in value be sig-nificant (at least 50 percent) before adjustmentsto market are made, thus inventories may be over-stated to some extent. Inventory cost may bebased on specific, identifiable values if available,or cost flow assumptions, such as FIFO, LIFOor average cost, may be used. Replacement costis not allowed. The same accounting method mustbe used for both financial accounting and tax pur-poses.

Tangible assets, such as buildings and equip-ment, are recorded at historical cost. Revaluationis not permitted. Thus, land accounts in the finan-cial statements may be overstated in view of therecent decline in Japanese land values. Deprecia-tion is based on amounts allowed for tax purposes,and typically calculated by one of the acceleratedmethods. Land is not depreciable. Leased tangi-ble assets that transfer the risks and rewards ofownership to the lessee are accounted for as capi-talized leases and treated in a similar manner topurchased assets. However, capitalization of leasesis not a common practice in Japan.

The valuation of intangible assets depends onthe nature of the asset. Internally generated good-will is not recognized. Purchased goodwill is capi-talized and amortized over five years, althoughthere are proposals to increase the amortizationperiod to twenty years. Goodwill generated inthe acquisition of another company is measuredbased on the book value of the net assets acquiredinstead of fair market value. Research and devel-opment expenditures may be capitalized and am-ortized over five years, although most companieswrite off the expenses in the year incurred.

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

2 accounting in Japan

ownership. The equity method is used for invest-ments that represent 20–50 percent ownershipof the investee and for joint ventures. Investmentsof over 50 percent ownership in subsidiaries areconsolidated and discussed below. Business com-binations are accounted for as a purchase. Gen-erally the pooling method is not allowed.

A major change in Japanese accounting hasbeen in accounting for employer provided pen-sions. In the past, pension liabilities and expenseswere accounted for on a “pay as you go” basis.The result was a significant understatement ofpension liabilities. Recent changes now requirethat pension liabilities be accounted for usingaccrual concepts and market valuations. Thefunding status of the company’s pension plansmust also be disclosed. These adjustments andchanges are expected to have significant effectson the financial statements of Japanese firms.

Deferred taxes arise when the timing of in-come and expenses for financial accounting pur-poses is different from the recognition for incometax purposes. Deferred tax accounting is com-mon in the financial statements of many othercountries; however, it is rare in Japan. Basicallyrecognition of deferred tax assets is not allowedand usually firms will not recognize deferred taxliabilities, even in consolidated financial state-ments. Typically there is no need for deferredtaxes since the tax code requires that most itemsof income and expenses be treated the same forboth financial accounting and tax purposes.

Leased assets in Japan are usually accountedfor as operating leases and charged to expensewhen incurred. Currently capitalized lease ac-counting may apply in a few limited cases; how-ever, the trend is toward requiring capitalizedleases in the future.

The consolidation of foreign subsidiaries re-quires the translation of foreign currency accountsinto yen equivalents. Assets and liabilities of for-eign subsidiaries are translated using the exchangerate in effect at the end of the year, and incomestatement items are generally translated using theaverage exchange rate for the year. Translationadjustments are recorded as an asset or liabilityon the balance sheet.

An additional major difference between Japa-nese accounting and accounting in other coun-tries, such as the USA, is the use of reserves.

Reserves are often used in Japanese accounting,but rare in the USA. The reserves basically rep-resent appropriations of income or retained earn-ings and generally do not contain a cashcomponent. The Commercial Code requires com-panies to maintain legal reserves. The legal re-serve represents an annual allocation orappropriation of income equal to at least 10 per-cent of cash dividends and bonuses to directors.The annual appropriation is required until thereserve is equal to 35 percent of capital stock.Thereafter, appropriations are voluntary The re-quirement for a legal reserve is an example ofthe focus on creditor protection by discouragingexcessive dividends and bonuses to directors. Inaddition, discretionary reserves are permitted andhave led some analysts to conclude that manag-ers of Japanese firms use reserves to smooth in-come or manage earnings.

A final noteworthy accounting practice in Ja-pan, and one that differs from most countries, isthe charging of directors’ bonuses directly to re-tained earnings instead of an expense against in-come for the period. The bonuses are viewed asa distribution of corporate profits instead of anexpense.

Financial reporting

Financial reporting is concerned with how ac-counting information is presented or reportedin the basic financial statements. Both the Com-mercial Code and the Securities and ExchangeLaw require firms to file a business report, abalance sheet, income statement, proposed state-ment of appropriations of retained earnings andsupplemental schedules. However the format,classification, extent of disclosure and type ofsupplemental information differs between thetwo agencies. Examples of supplemental infor-mation required by the Commercial Code in-clude:

• changes in capital stock and reserves• changes in bonds payable and other debt in-

struments• changes in fixed assets and accumulated de-

preciation• disclosure of debt guarantees and disclosure

of collateralized assets

accounting in Japan 3

• extensive disclosure of related party transac-tions, such as with subsidiaries, directors andcontrolling shareholders

• ownership of subsidiaries (and reciprocalownership)

The Securities and Exchange Law requires simi-lar information to be filed with the Ministry ofFinance. The Ministry of Finance requires addi-tional disclosure of information such as details ofpension obligations: marketable securities, sub-sequent events, intangible assets and so on. Acash flow statement and six month cash flow fore-cast is also required, but is not audited. Addi-tional forecasts, such as for capital expendituresand debt retirement, are required to be filed withthe Ministry but are usually not disclosed in theshareholder reports.

Consolidated financial statements are also re-quired of firms that are listed on security ex-changes and subject to the Securities andExchange Laws. The consolidated statements in-clude the balance sheet and income statement,but are expanded to include a cash flow state-ment. A subsidiary’s financial statements are con-solidated with those of the parent company if theparent owns over 50 percent of the subsidiarycompany’s stock. It is important to note that thereare regulations that allow exclusions of some sub-sidiaries from the consolidated group. The re-quirement for consolidated financial statementshas increased the transparency of the firm’s ac-tivities and led to disclosure of losses by unprof-itable subsidiaries.

The format of the financial statements variesdepending on the filing requirements. However,the balance sheet requires that assets, liabilitiesand equity be classified separately and that cur-rent assets and current liabilities be distinguishedfrom long-term items. The income statement hasan additional section for special gains and losses,but the definition of special gains and losses isnot as restrictive as the definition of extraordi-nary items required in the USA. Also, prior pe-riod adjustments are included in the special gainor loss section as opposed to a restatement of re-tained earnings.

The Ministry of Finance also requires foot-note disclosure of the major segments of a firm’soperations. The segments are classified by line

of business and by geographical sector. Specifi-cally each segment’s turnover (sales revenue),assets and operating income must be disclosed.

Each company must have a statutory auditorwho attests to the financial statements. The statu-tory auditor is usually not a Certified Public Ac-countant and often is an employee of the firm.Companies are required to have an audit by anindependent Certified Public Accountant if theyare listed on a stock exchange, or for unlistedcompanies, if their share capital is over 500 mil-lion yen or liabilities exceed 20 billion yen.

Summary

Japan’s accounting standards, rules and report-ing requirements are similar in many ways tothose of other countries, and are becoming moreharmonized in response to global economicforces. Many differences remain, however, andthe rules are somewhat complicated by the multi-agency 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: In-stitute for Research in Business Administration,Waseda University Tokyo, Japan.

KPMG Peat Marwick (1993) Comparison of Japanese andU.S. Reporting and Financial Practices, Tokyo, Japan.

Nobes, C. and Parker, P. (1998) Comparative Interna-tional Accounting, 5th edn, London: Prentice HallEurope.

RON SINGLETONKAZAHIRO OKAZAKI

administrative guidance

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

4 aadministrative guidance

whereby a ministry attempts to induce certainbehavior in a company or industry with the aimof realizing an administrative goal. The processis typically not transparent and the resulting regu-lation has a strong situational character, becauserules may be invoked or revoked at the discre-tion of the ministry without cabinet or parliamen-tary approval. During the heyday of industrialpolicy in the 1950s and 1960s, administrativeguidance was the predominant regulatory toolused to align business strategies and public policygoals.

There are two forms of administrative guid-ance: written and oral. Written guidance typicallyestablishes industry-wide rules that are valid inthe medium run and published in one volume atthe end of the fiscal year. An example of writtenguidance would be a notification (tsutatsu) fromthe Ministry of Finance’s (MOF) Insurance Bu-reau that life insurance companies are allowed toinvest a lower or higher maximum percentage oftheir total assets in the stock market, effective froma certain date. Oral guidance typically remainsundisclosed and involves delicate conversationsbetween ministry officials and industry repre-sentatives. For instance, when the Nikkei 225stock index fell significantly in the early 1990s,MOF officials called up several investment banksand in the course of a jovial conversation pointedout just how detrimental they thought the de-pressed stock market was for the overall economyIn reaction, the banks were said to have boughtlarge positions in Japan’s flagship companies.

Enforcement is based on a quid pro quo, or “car-rot and stick,” approach. Companies know thatif they follow the ministry’s “advice” they mayreap rewards later, whereas refusal to comply maylead the ministry to obstruct future business op-portunities. “Carrots” are offered by the minis-try in the form of subsidies or lenient regulation,whereas the “stick” may be a threat to withholda business license, curb an import quota or givepreferential treatment to a competitor. Becausecompliance is voluntary there is effectively nolegal recourse for firms subjected to administra-tive guidance. Neither is there a legal means forthe regulating ministry to enforce its guidance.

Importantly administrative guidance is notusually a “one-way street” with the ministry uni-laterally designing all the rules. Precisely because

it is extralegal, ministries have to ensure that theregulation garners sufficient industry support tobe meaningful. The process of designing guid-ance therefore often entails sending a draft of anew rule to the trade association concerned, tobe discussed and modified by the presidents ofthe leading companies. The association then re-ports the presidents’ opinion to the ministry Inthis sense, administrative guidance often emergesout of discussions between bureaucrats and theregulated industry.

The trade association’s function in monitor-ing the implementation of rules is as importantas their input in regulatory policy creation. Aftera new rule has been issued by the ministry theregulatees themselves often assume the task ofensuring adherence. It is much easier for the firmsin an industry rather than bureaucrats to observethe market behavior of their competitors. Becauseit is extralegal and informal, administrative guid-ance invites cheating, and it can only be enforcedwith group pressure and controls by the indus-try concerned. Given that administrative guid-ance builds on self-regulation for enforcement, itcan be either extremely effective (if all compa-nies 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 min-isterial leverage with which to enforce adminis-trative guidance in the 1980s. First, as companiesgrew and became world competitors, the “car-rots” offered by their ministries, such as accessto loans or foreign exchange, became less appeal-ing. Second, deregulation and the opening of fi-nancial markets undermined the effectiveness ofboth “carrots” and “sticks.”

The primary “carrots,” or rewards, that min-istries used for implementing industrial policyin the postwar period came in two forms: (a) ac-cess to and allocation of imported and scarce rawmaterials, and (b) opening of new business op-portunities through such means as granting li-censes, subjecting product innovation to approval,or furnishing low-interest loans through publicfinancial institutions. The allocation of raw ma-terials and foreign technology worked well until

administrative guidance 5

1965, when a revision of the Foreign InvestmentLaw diminished the Ministry of InternationalTrade and Industry’s (MITI) control over for-eign reserve allocation. The revision of the For-eign Exchange and Trade Law in 1980 furthercurtailed MITI’s command over trade flows. Nolonger could the ministry reward cooperativefirms through the allocation of scarce raw mate-rial imports.

Second, changes in financial markets in the1980s seriously undercut the ministries’ abilityto punish manufacturing firms and banks thatresisted administrative guidance. With the devel-opment of the bond and stock markets, firms be-came less dependent on bank financing, sobanking regulation no longer translated intomanufacturing guidance. As manufacturing firmsbecame more able to raise funds abroad, the gov-ernment’s threat of punishing mavericks by block-ing access to loans became meaningless. For thebanks, deregulation meant less dependence onMinistry of Finance (MOF) licenses and approv-als. Yet the need for constant monitoring remainedgreatest in the banking industry and banks con-tinued to stay close to their regulators by desig-nating MOF-tan.

Thus, the liberalization of trade rules and ac-cess to financial markets in the 1980s underminedgovernment guidance of both the manufacturingand the financial sectors. While the practice con-tinues to be more institutionalized and extensivethan moral suasion in other countries, the effec-tiveness of guidance depends increasingly on thewillingness of industry to cooperate, with minis-tries having fewer means at their disposals to cre-ate such willingness.

Further reading

Johnson, C. (1982) MITI and the Japanese Miracle: TheGrowth of Industrial Policy 1925–1875, Stanford, CA:Stanford University Press.

Schaede, U. (2000) Cooperative Capitalism: Self-Regula-tion, Trade Associations, and the Antimonopoly Law inJapan, Oxford: Oxford University Press.

Upham, F. (1987) Law and Social Change in Postwar Ja-pan, Cambridge, MA: Harvard University Press.

ULRIKE SCHAEDE

advertising

Advertising in Japan is typified by its lack of prod-uct focus. Many advertisements don’t show theproduct at all. Rather than promoting productfeatures or brand, Japanese advertising generallystrives to promote a positive image of the com-pany producing the product. This soft-sell styleof advertising has long been described by West-erners as image, or mood advertising. While mes-sage content is of utmost importance inadvertising in the West, in Japan, the method ofconveying the message is more important.

The soft-sell approach in Japanese advertisingis a direct influence of Japan’s culturally ingrainedavoidance of the direct approach. Japanese adsare designed to appeal to the target audience’semotions. To achieve this, advertisements tendto place heavy emphasis on visual imagery andless on written copy. The resulting advertisementsbuild a positive image of the corporation placingthe advertisement, and thus their products, whileproviding very little detailed product information.

In general, Japanese advertising has tradition-ally focused on building a corporation’s image.Vying to capture the viewers’ attention in the del-uge of advertising, advertisements tend to be ori-ented around building a positive image of acorporation. In many cases this results in adver-tisements where the product is not shown, letalone mentioned. Such ads tend to have a sign-off with the corporate name.

The theory behind this image advertising is thatif a consumer has a good impression of a corpo-ration, they would tend to buy that company’sproducts. Product branding has not gained thestature in Japan that it enjoys elsewhere in theworld. As a result, most television commercialsend with the corporation’s name and logo, whichalso feature prominently in print advertisements.

One reason advertisements in Japan can omitproduct description is the wealth of product in-formation available in other venues. A visit to aretailer provides the consumer with a wealth ofhighly descriptive complimentary product cata-logues. Further detailed product information canbe found in the many magazines dedicated to sup-plying in-depth product reviews.

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

6 advertising

detailed information in the form of brochures andmagazine reviews is not available. An example isadvertising for products such as washing deter-gents which will often contain straightforwardmessages and demonstrations of the product’scleansing properties.

Due to the Japanese culture of group con-formity, Japanese ads are targeted towards thegroup, rather than to the individual. Horizontalidentification is important. Advertisements thatare perceived as containing an authoritariantone, such as a hard sell from an authority fig-ure, are rejected. Similarly ads containing a bla-tant message of vertical aspiration to a highersocial station are also suspect. Successful adver-tisements in Japan aim to build empathy with thetarget group. A common method is featuring theproduct’s acceptance by a peer, who is often alsoa celebrity.

The lack of comparison ads in Japan has alsobeen attributed to Japan’s group culture. It hasbeen argued that advertisements that compareda firm’s product to that of a competitor would berejected by Japanese consumers. However, in thefew cases where comparative ads have been run,it was found that Japanese consumers did notreject them. Most likely the dearth of compara-tive advertisements in Japan is due to many adagencies having more than one client per indus-try category and to industry self-regulation.

Regardless of the many quirks of advertisingin Japan, the nation is flooded with advertising,from poles, to digital text messages broadcast tosmall television to cloth placards attached to tel-ephone screens inside taxis. There are two rea-sons for the prevalence of advertising in Japan.One is the insatiable Japanese demand for infor-mation which results in nationwide newspaperswith circulation in the millions. The other is therelatively lax laws and regulations on advertis-ing. Most industries are encouraged to conductself-regulation regarding advertising. In addition,most media also regulate what they will, and willnot, allow in an advertisement.

Acquiring mass media ad space in Japan is ex-tremely expensive as well as highly competitive.Both newspaper and magazine ad space is lim-ited by restrictions on the number of pages avail-able for advertising. Television has only five

nationwide terrestrial stations, although satelliteand cable penetration are growing.

A major factor in acquiring space in the massmedia is the fact that not every ad agency canbuy space. To buy space, an agency must havean account with the media vehicle in question,and these vehicles don’t give the accounts awayeasily As a result, very few of Japan’s ad agenciescan buy ad space directly Rather, they have thelarger agencies buy the space for them. Once adspace is acquired, getting an ad noticed amongthe clutter of mass media advertising is a con-tinuous challenge for advertisers and their agen-cies. This is especially true in the case of television,where the majority of spots are mainly of fifteen-second length.

A typical solution to the problems particularto advertising in Japan is the use of celebrities, bothJapanese and foreign. Estimates put the use of ce-lebrities in Japanese commercials at between 60to 70 percent. These celebrities range from Japa-nese comedians to pop singers, and from Holly-wood box office stars to foreign scientists. The useof celebrities is believed to help a commercial standout from the competition, as well as to link a cor-poration’s image with that of the celebrity Gener-ally these celebrities do not appear asspokespersons for a product, rather, their appear-ance has little to do with the product.

SEAN MOONEY

after-sales pricing

After-sales pricing, or ato-gime, is pricing whichtakes place after a product has been sold and de-livered. It is a reflection of weak price competi-tion. The opposite of ato-gime is jangime (pricing atthe time of sale). Such pricing, though standardin the West, is unusual enough in certain Japa-nese industries to require a special term.

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

after-sales pricing 7

scarce and there is much demand, sellers will bein a strong position and able to raise prices.

However, both shopping and competing havecosts. It takes time for shoppers to look aroundand it may be hard to find out how reliable aparticular supplier is. Shoppers may prefer to stickwith particular producers so that they can saveshopping time and be confident in the quality ofthe goods they buy even if they have to pay a bitmore. Competing is also tough on sellers. Intenseprice competition brings down prices and caneven drive firms out of business. Thus, both buy-ers and sellers have reasons to avoid constantshopping around on the basis of price. Whenbuyers are not choosing their suppliers on thebasis of price, they typically base prices on pro-ducers’ costs. But if a sale is not based on price,the door is left open for negotiations over theexact price to drag out long after the sale anddelivery has been made.

There are three types of after-sales pricing.First, when sellers are engaged in a cartel, it maytake a while for them to decide on final prices inindustries in which costs fluctuate considerablyThe primary example of this is the petrochemi-cal industry. During the 1970s and early 1980s,when petroleum prices were rising sharply pet-rochemical producers tried hard to get buyers topay the full cost of expensive petroleumfeedstocks they used to make their products.Even though in principle buyers were supposedto pay the full cost of production, the petro-chemical companies found that they were beingforced to compete on price and were losingmoney To solve this problem, the petrochemicalindustry adopted a price-fixing formula in 1983to set prices for petrochemicals based on the costof feedstocks, which has been in effect eversince. Of course each company knows howmuch it had spent on feedstocks by the time itdelivered its chemicals, but chemical producerswant to be sure that the formula is implementeduniformly and that there is no price competition.So all the chemical producers wait until the gov-ernment publishes average prices for the mainfeedstock, naphtha. Because the industry is pric-ing on the basis of a cartel, and because it needsto wait for these price figures, pricing of prod-ucts throughout the petrochemical industry isdelayed for several months.

Second, if the cartel is waiting to decide on aprice, but the cartel relies on the good will of buy-ers, the cartel needs to negotiate over a final pricewith buyers as a group. This is in fact how in-dustry-wide pricing in the petrochemical indus-try has worked. Prices in the industry have beenmodified by considerations of two factors. Pricesmay be modified to favor either sellers or buyerswho are in a particularly difficult financial posi-tion. That is, prices may be modified in the op-posite direction from market pressures. Oralternatively prices may be modified with themarket, in favor of either buyers or sellers de-pending on supply-demand conditions. Typicallywhichever side is in a favorable position arguesduring negotiations that cost-based, after-salespricing should be abandoned because it is old-fashioned and succeeds in using this rhetoricalploy to adjust prices in its favor.

Finally after-sales pricing may take place be-tween individual buyers and sellers based onthese same considerations of fairness and mar-ket conditions. Most commonly this kind of af-ter-sales pricing serves as a discount on acartel-based price.

The broad purpose of after-sales pricing is tomodify prices somewhat in uncompetitive mar-kets with high prices. However, after-sales pric-ing brings certain disadvantages. The lack oftransparent prices makes it more difficult for anew firm to enter a market and attract customerswith low prices. In a market where there are nodefinite prices at the time of sale, it is difficult forthe new entrant to know what price it is compet-ing against. Foreign firms trying to break into theJapanese glass market have made this complaint.

Second, when prices are undecided for as longas a year, as they are sometimes in the chemicalindustry it becomes difficult for firms to carryout normal accounting procedures. How do firmsknow what their revenues, expenses, and profitsare when prices are left dangling? However, thechief problem with after-sales pricing is that it isa symptom of weak price competition in Japa-nese industries such as chemicals, glass and phar-maceuticals. Weak price competition fails to giveproducers incentives to cut costs and becomemore productive.

See also: cartels; competition; pricing practices

8 aafter-sales pricing

Further reading

Tilton, M. (1996) Restrained Trade: Cartels in Japan’s BasicMaterials Industries, Ithaca, NY: Cornell UniversityPress.

MARK TILTON

agricultural cooperatives

Modern agricultural cooperatives began in Japanfollowing the land reform carried out by the Oc-cupation Forces after the Second World War. Theland reform took the form of the state purchaseof tenant farm land from landowners and subse-quent sale thereof to tenant farmers, creating alarge number of very small owner-farmers withan average of 1.1 hectares of farm land. How-ever, because these small-scale owner-farmerscould not expect to bring about agricultural de-velopment individually an attempt was made atunited efforts in improving productivity and liv-ing standards through mutual aid and coopera-tion among farmers. Accordingly the AgriculturalCooperative Society Law was enacted after theland reform was started. The law was modeledafter cooperative group principles of 1936 andthe US law on cooperatives. Cooperative orga-nizations had also been in existence in Japan forhalf a century beginning with the Industrial Co-operative Society Law which was enacted in 1900.Agricultural cooperatives thus can be describedas cooperative societies seeking to make a freshstart on the basis of industrial cooperatives (sangyokumiai).

The difference between industrial and agri-cultural cooperatives lay in their respective mem-bership: industrial cooperatives’ membershipcould include not only farmers, but also fisher-men, foresters, businessmen in commerce andindustry as well as consumers, while the agricul-tural cooperative was intended to be a craft un-ion composed of farmers as its regular members.The organizational structure, consisting of unitagricultural cooperatives at the municipal leveland federations established at the prefectural andnational levels according to their respective busi-ness functions, has been attributable to the tradi-tion of industrial cooperative societies.

Agricultural cooperatives can be divided intotwo groups: single-purpose agricultural

cooperatives organized for the purpose ofmarketing specific types of farm products (dairyfarming, horticulture, fruit culture, stock farming,etc.) and multipurpose agricultural cooperativesengaging in activities in the field of loan and creditextension, mutual aid insurance, welfare (healthand medical care), consultation and guidance, andeconomic (marketing and purchasing) services.Agricultural cooperatives are generally callednokyo in Japanese. When people refer to nokyo,they usually have the latter type of cooperativesin mind. These cooperatives are based on com-munities involved with rice culture or produc-tion of crops and other farm products.Agricultural cooperatives have a total member-ship of 9,128,000 (as of 1998), consisting of5,344,000 regular members and 3,784,000 asso-ciate members (non-farmers such as consumers).The number of agricultural cooperatives stoodat 1,411 in the year 2000. The government ispromoting the amalgamation of agricultural co-operatives, and the number of cooperatives is ex-pected to fall to 570 by 2010.

Observing specific fields of services providedby agricultural cooperatives as of fiscal 1997, mar-keting/distribution totaled ¥5.7 trillion (compris-ing of ¥1.6 trillion from rice, ¥1.35 trillion fromvegetables and ¥3.8 billion from livestock), andpurchasing amounted to a total of ¥2.9 trillion(made up of ¥478.6 billion for feedstuff, ¥611.3billion for oil products, ¥357.2 billion for fertiliz-ers and ¥342.4 billion for agricultural machin-ery). The percentage shares of the agriculturalcooperatives to the total amount of sales and pur-chases made by the agricultural sector have beenon the decline in recent years: for example, agri-cultural cooperatives accounted for 60 percentof vegetable sales and 60 percent of the purchaseof agricultural chemicals made by member farm-ers. The percentage of farming households us-ing the services of agricultural cooperatives hasalso been falling. Revenues from marketing andpurchasing services were down 20 percent and12 percent respectively from those in fiscal 1985.

In the area of credit activities, the balance ofsavings deposited with agricultural cooperativesas of the end of fiscal 1998 stood at ¥69 trillion,accounting for 7.4 percent of the entire depositsand savings in Japan. On the fund applicationside, the outstanding loan balance amounted to

agricultural cooperatives 9

¥22 trillion, bringing the ratio of loans to depos-its to a little under 30 percent. Most funds re-ceived as deposits and savings by individualcooperatives are in turn deposited with the pre-fectural credit federations of agricultural coop-eratives (Shinnoren) and the Norin Chukin Bank.Because agricultural cooperatives’ credit servicesare operated in parallel with other lines of busi-ness, the amount of deposits/savings held by eachoperating entity is small, only about ¥34.1 bil-lion. Cooperative deposits/savings are character-ized by disproportionately high percentages ofpersonal savings (83.5 percent) and time deposit(79.4 percent). The percentages of personal loansand long-term loans are also high at 81.5 percentand 87.3 percent, respectively of total coopera-tive loans outstanding. Unlike ordinary citybanks, agricultural cooperatives specialize in re-tail banking. With the progress of financial de-regulation, cooperatives have been increasingtheir focus on retail banking. Against this back-drop, entities in other business categories havemoved into rural areas for new opportunities,putting downward pressure on operating income.Accordingly gross profits from agricultural co-operative business dropped to 35.4 percent from40 percent.

The mutual aid services of cooperatives cor-respond to life insurance and non-life insurancebusiness in the private sector. With a total of ¥34trillion in outstanding plan balance, agriculturalcooperatives’ mutual aid plans account for 13.4percent of the life insurance market and 15.35percent of the non-life insurance market. Agri-cultural cooperatives boast the second largestassets after Nippon Life Insurance Co. in termsof their life insurance portfolio, and are the topnon-life insurer in Japan in terms of the totalamount of non-life insurance. The NationalMutual Insurance Federation of Agricultural Co-operatives (Zenkyoren) has ¥34 trillion in total as-sets, accounting for 24.0 percent of theagricultural cooperatives’ gross operating income.The mutual aid insurance business is the secondlargest business area after credit activities, andrepresents the most profitable operating area.

Advice on farming and better living are of-fered to member farmers as a non-profit under-taking, and are funded by revenues from thecooperatives’ credit, mutual aid and economic ac-

tivities. Co-operatives provide member farmerswith advice on not only production but also mar-keting and distribution with a view to improvingfarming operation and management. Better liv-ing guidance is related to consumer activities andinvolves health/medical care services for farmers.In the area of medical care in particular, welfarefederations are organized in twelve prefectures.With over 20,000 beds, they operate the largestnumber of hospitals after the Japanese Red CrossSociety As public medical institutions, these hos-pitals contribute to the development of medicalservices in the community.

In the past when they were part of industrialcooperative societies, Japanese agricultural coop-eratives, together with other agricultural organi-zations, were fostered by the State as institutionsfor exercising agricultural policies. With thechange in agricultural policies, however, agricul-tural cooperatives have had to face critical tests.Liberalization of agricultural trade and financialderegulation since 1990 have not allowed coop-erative development of farms, but forced the rea-lignment of the three-tiered organizationalstructure and rationalization of individual coop-eratives. Future challenges for the agricultural co-operatives include whether these newdevelopments can be implemented in concur-rence with the primary structure of existing co-operatives which are based on the function ofrural communities.

Confronted by broad changes in Japanese ag-riculture, the declining number of people whomay in future be engaged in agriculture and theprogress of urbanization in rural areas, agricul-tural cooperatives are uncertain about their di-rection. It is possible that they may develop ascooperative organizations within the communitymore broadly encompassing not only farmers butalso consumers and smaller businesses in com-merce and industry.

KENJI ISHIHARA

agricultural policy

Agricultural policies in Japan after the SecondWorld War started with land reform. The cen-tral policy focus was on the securing of the foodsupply and controlling its distribution in a time

10 agricultural policy

when a planned economy and food shortagescontinued from prewar days. With the revival ofthe economy in 1950, however, domestic resourcedevelopment began. Development of wild landand land reclamation projects were pursued forthe purpose of enlarging arable land areas. Thiswas because during the period of so-called eco-nomic independence in the late 1950s, food ac-counted for as high as one-third of the totalimports, which placed pressure on foreign ex-change availability and imposed restrictions onthe import of raw materials for use by exportingindustries. The business community thus calledfor the attainment of self-sufficiency in food.

During the 1960s, when Japan entered into aperiod of high economic growth, industrial com-bines centering on steel production and petro-chemical complexes were constructed in thePacific belt zone in accordance with the NationalIncome Doubling Program. Even in this period,a policy of food self-sufficiency was maintainedin order to avoid consuming foreign currency re-serves through food imports, reflecting con-straints on the balance of payments which wereserious fiscal and financial issues. The incomedisparity that existed between rural and urbanareas was regarded as a problem, and the Agri-cultural Basic Law was enacted in 1961 with theintention to raise farm product prices, particu-larly rice prices, in order to prevent the rapidmigration of the labor force from rural to urbanareas. Rice prices rose 10 percent or more in the1960s. At the same time, as a result of the intro-duction of farm machinery as well as progress inproduction technologies such as fertilizers andagricultural chemicals, food self-sufficiency wasattained in the latter half of the 1960s. From the1970s and thereafter, implementation of rice pro-duction adjustment and treatment of surplus ricesurfaced as major issues. Shortly after achievingfood self-sufficiency however, the importation offarm products was called for because of the needto further promote imports as a result of higheconomic growth. There was no longer a balanceof payments constraint. Subsequently startingwith livestock products, the importation of allkinds of farm products accelerated. Throughoutthe 1970s, agricultural policies focused mainly onrice. Although rice prices were kept in check, pro-duction adjustment subsidies and voluntarily

marketed rice premiums were provided to serveas additional means of income redistribution.

Japan’s industrial structure underwent signifi-cant changes around 1977. Companies, havingovercome the oil shock, promoted lean manage-ment. Emphasis shifted from the petrochemical/heavy industries to microelectronics (ME). Glo-balization progressed sharply In the period of higheconomic growth, agriculture had a role in at-taining food self-sufficiency because of Japan’sinadequate foreign currency reserves. In subse-quent years, it played a two-pronged role. Onerole was to provide a stable food supply at lowprices, and another was to act as a regulating valveto control the labor force in keeping with the cy-clical fluctuation of the economy A stable foodsupply at low prices was subsequently satisfiedby farm product trade liberalization, and the roleof a regulating valve to control the labor forcewas played by workers in the tertiary industryrather than those in the primary industry Fromthe latter half of the 1970s, those concerned withagriculture have advocated regionalism togetherwith the idea of settlement zones in the ThirdComprehensive National Development Plan.Non-farming households have come to accountfor 60 percent of the agricultural community. Po-litical and economic roles of rural areas have alsoundergone transformation.

Deregulation of agricultural product trade,which began with liberalization of beef and or-anges, started to affect rice in the 1980s. The Sec-ond Ad Hoc Commission on AdministrativeReform (Second Rincho) was established in 1981.The Commission called for the reduction of pricesupport for rice and other agricultural products,on the assumption that trade in agricultural prod-ucts would be fully deregulated. Agricultural poli-cies would shift their emphasis from an incomeredistribution function to agricultural life envi-ronment enhancement projects, including farmroad construction/farming village drainageprojects in addition to agricultural infrastructureconstruction program. The Agricultural BasicLaw was reorganized into the Basic Law of Food,Agriculture and Rural Areas. The new Law em-phasizes the importance of food security and themultifunctional roles of agriculture in the com-munity This Basic Law’s key points are as fol-lows:

agricultural policy 11

1 The establishment of a basic plan and set-ting of food self-sufficiency ratio targets. Thetarget for the food self-sufficiency ratio is tobe established with the aim of improving thefood self-sufficiency ratio and to serve as aguideline for domestic agricultural produc-tion and food consumption, while identify-ing issues which farmers and other relevantparties should address.

2 Development of a food policy emphasizingconsumers. Guidelines for a healthy dietarypattern are to be set, the public’s knowledgeof food consumption broadened, and rel-evant information provided.

3 Establishment of a desired agricultural struc-ture and development of farm managementpolicies. Measures are to be taken to encour-age efficient and stable farm managementand to construct an agricultural structure inwhich such management can play a majorpart. Measures are to be taken to revitalizefamily farming, and to promote the incorpo-ration of management.

4 Measures to ensure price formation reflect-ing appropriate market evaluation and man-agement stability.

5 Maintaining and improving the natural cy-clical function of agriculture. Agriculturalproduction is to be developed in harmonywith the environment through the proper useof agricultural chemicals and fertilizers andby improving soil fertility.

6 Compensation for disadvantages in agricul-tural production in hilly and mountainousareas. Support is to be provided (in the formof direct subsidies) to help maintain adequateagricultural production activities.

KENJI ISHIHARA

airline industry

In a rapidly changing and highly competitive glo-bal business environment, Japan’s airline indus-try has faced considerable challenges during the1990s. The three major airlines in Japan, JapanAirlines (JAL), All Nippon Airways (ANA) andJapan Air System have all been affected by theprolonged recession in Japan, the steeply appre-ciating yen, rising fuel prices, high airport usage

and landing fees, and the deregulation of thedomestic airline industry.

Deregulation

Deregulation of the Japanese aviation industrycommenced in 1985 with the granting of permis-sion to ANA and JAS to operate internationallyIn March 1986, ANA began scheduled interna-tional service from Tokyo to Guam. Until then,JAL was the only Japanese carrier allowed to flyregularly scheduled international routes and theMinistry of Transport coordinated all domesticroutes served by Japanese airlines. In 1986, theJapanese government relinquished its investmentin JAL and JAL became a private corporation.As a part of the government administrative re-form movement, the previous system of route al-location was abolished. Deregulation eventuallyresulted in the removal of restrictions on over-lapping or multitracking routes and the partialliberation of air fares. A significant result of de-regulation was the take off of Skymark Airlinesin September 1998 and the commencement ofdaily service from Haneda Airport to Fukuokaat half the cost in air fares charged by other do-mestic carriers. Equally important was the factthat Skymark Airlines was the first new airline tobe established in Japan in over thirty-five years.Another new airline that marked its inauguralflight in 1998 was Hokkaido International Air-lines (Air Do) which commenced three dailyround-trip flights in December between HanedaAirport and the New Chitose Airport in Sapporo,Hokkaido. The substantially lower airfares pro-vided by the new upstart airlines meant increaseddomestic competition for the other three domi-nant carriers.

According to Civil Aviation Bureau statistics,the Tokyo-Hokkaido and Tokyo-Fukuoka routesare the two busiest in the world, with an annualtraffic of approximately 8 million and 7 millionpassengers respectively. Thus, in order to remaincompetitive, both Skymark and Air Do have in-stituted unique means of keeping their operationalcosts low. For example, Air Do flight attendantsdo not serve drinks or meals on their flights, how-ever, they do have the additional task of cleaningand maintaining the cleanliness of aircraft.Skymark does not use printed tickets but makes

12 airline industry

use of thermal paper which can be inspected bystaff and thus does not require expensive auto-mated ticket readers. Not only does Skymark at-tempt to keep costs down, it also generatesadditional revenue by selling advertising spaceon the exterior of its aircraft fuselages.

Strategic management

The economic turbulence experienced by Japa-nese airlines during the 1990s was not limited todomestic routes only but extended to interna-tional routes as well. In 1994, the Transport Min-istry issued a warning to JAL, ANA and JAS toreduce their labor costs in order to remain com-petitive with other international airlines. As a re-sult, these three airlines postponed their plans tohire new flight attendants that year. In the mean-time, JAL had already begun a program to re-duce its labor costs by employing foreign flightattendants on a limited contractual basis. Theseforeign flight attendants were based overseaswhere the cost of living was substantially lowerthan in Japan.

Another cost-cutting measure instituted by JALand ANA was to reduce the overall number ofemployees. JAL planned to reduce its personnelfrom 22,000 to 17,000 in the period from 1994 to1998. Similarly ANA planned to reduce its per-sonnel from 15,000 to 13,500 by 1995. At ANA,this was carried out through early retirementschemes and special bonus programs for flightattendants over thirty years of age. The socialimpact of these reductions on employee moralewas considerable as the traditional concept of life-time employment at major Japanese corpora-tions was rapidly eroded.

In keeping with the traditional employmentpractices of many large Japanese corporations,annual pay increases were based on one’s senior-ity or length of service with one’s company. As aresult of this practice, annual labor costs increasedregardless of productivity. Thus JAL, for exam-ple, has opted for expanded use of its lower costsubsidiaries such as JAL Express (JEX) on moredomestic flights, JALways (formerly Japan AirCharter JAZ) for international routes, and J Airand its Okinawa-based affiliate, Japan TransoceanAir for regional commuter flights.

Japan Airlines’ strategy to transfer more routes

to JAL subsidiaries resulted in improved produc-tivity as determined by the International CivilAviation Organization (ICAO) measure of costper available ton kilometer (ATK). In 1997, JAL’scost to travel 1 kilometer carrying 1 metric tonwas approximately 53 cents, compared to theworld average of 47 cents. By fiscal 1998, JAL’sATK was reduced to 48 cents through efficientuse of aircraft and personnel. Similar cost-cuttingmeasures were also instituted by All Nippon Air-ways and Japan Air System. Both airlines restruc-tured their workforce, froze new hiring andtransferred less profitable routes to subsidiariesor to affiliated companies. For example, All Nip-pon Airways’ subsidiaries Air Nippon (ANK) andNippon Cargo Airlines (NCA) have lower op-erational costs as their employees are paid lessfor doing similar work

A major problem faced by both domestic andinternational airlines operating in and to Japan isthe excessively high landing fee, which far ex-ceeds that charged at other major airports. Forexample, 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 forNew York and nearly double the landing fee of$6,685 for Paris. Furthermore, the Japanese gov-ernment has set a very high fuel tax. Ballantyne(2000:19) reports that for JAL alone, fees and fueltax account for some 24 percent of the domesticoperating costs and 14 percent of total operatingcosts. There is very little likelihood of a lowerlanding fee or lower fuel tax as there are limitedairport slots available.

Resource optimization

In addition to changes in human resources man-agement to improve productivity Japanese airlineshave had to resort to other means to maintainglobal outreach and competitive advantage. Themanagement strategies employed by each of theJapanese airlines, however, differed somewhat inaddressing issues that developed from the liber-alization of global aviation markets. In October1999, All Nippon Airways joined the Star Alli-ance, which consists of several leading airlinessuch as United Airlines, Lufthansa, Air Canada,SAS, Thai, Ansett Australia and several otherairlines. In contrast, as of August 2000, Japan

airline industry 13

Airlines has not joined a major alliance but hascontinued to establish code-shared arrangementswith various airlines that belong to competingalliances. Similarly, Japan Air System has em-barked on code-shared routes but not as exten-sively as JAL.

One major benefit of joining an alliance orcode-shared arrangement with other airlines isthat customers are able to take advantage of amuch wider and seamless airline route network.At the same time, both customer services (suchas more convenient flight schedules, joint use air-port lounges, and reciprocal frequent flyer pro-grams) and operational services (flight andbriefings, maintenance, ramp facilities, and cater-ing) are considerably enhanced.

Another major benefit accruing from an alli-ance partnership, from an operational perspec-tive, is that maintenance employees and thedeployment of spare parts along the route net-work can be reduced through the reciprocal pro-vision of both personnel and essential parts andequipment. The avoidance of duplication resultsin savings that can be passed on to customers.

Kizuki system

The success of an alliance, code-sharing or re-lated partnership arrangement ultimately dependson the firm understanding and integration ofhuman factors throughout the system. In the caseof Japan Airlines maintenance, the company hasdeveloped a system of responsibility known asthe kizuki system which consists of a group of dedi-cated engineers and mechanics to maintain andmonitor the performance of the aircraft to whichthey are assigned. The term kizuki is a combina-tion of ki, which refers to aircraft, and zuki, whichmeans “to stick to.” A keen sense of responsibil-ity and special attachment to each aircraft assignedto the maintenance personnel are developed byhaving the names of the team leaders and theirtitles—for example chief engineer or mechanic—prominently displayed on the cockpit bulkhead.Group loyalty and pride in the well-being of thecrew and flight safety are thus achieved. Mainte-nance crew members must be well coordinatedin their scheduling of tasks to cover the variousshift cycles necessary to handle various aircraftarrivals and departures.

From a productivity perspective, the kizuki sys-tem and kaizen in Japanese aviation is best illus-trated by the educational and training programsprovided by the major Japanese airlines. In orderto develop human resources management skillsin addition to various technical skills, courses onthe principles of management and organizationalbehavior, error management, risk assessment,quality standards, problem consciousness andcreativity are provided. From a kaizen perspective,discussions are held on how to examine and im-prove the organization as well as specific proce-dures associated with daily tasks that can beinstituted.

Technological change and crew resourcemanagement

For Japan Airlines, All Nippon Airways and Ja-pan Air System, the introduction of advanced jetaircraft and the computerization of the cockpitcreated an urgent requirement to integrate hu-man knowledge into their traditional training cur-ricula. The traditional perspective onorganizational behavior in which operational di-rectives flowed from the captain to his crew wasno longer satisfactory for the highly complexcomputerized flight management system. Sincehuman errors do occur when programming flightplan data, new procedures required a cross-check-ing of procedures and data inputs prior to ex-ecuting instructions via the flight managementsystem.

New training procedures focused initially onimproving cockpit communication between thecaptain and his first officer. This enabled them tooperate as a cohesive team in which greater situ-ation awareness was achieved and maintainedduring flight. At the outset, the concept wasknown as Cockpit Resource Management; how-ever, with the inclusion of extremely sophisticatedflight entertainment and other medical systemson modern jumbo aircraft, it became necessaryto expand the concept to Crew Resource Man-agement (CRM) to recognize the important roleprovided by flight attendants.

CRM training programs at the three majorJapanese airlines differ slightly in their contentsas each of the airlines has different operatingroutes and conditions as well as different corpo-

14 airline industry

rate cultures. However, the basic conceptual andphilosophical elements are similar in that the mainobjective is to provide a greater appreciation andrespect for what each crew member’s skills andresponsibilities are so that crucial decisions canbe made on the basis of having full knowledge ofa given situation. Situation awareness at all timesduring a flight is most important from a flightsafety perspective.

Future outlook

The challenges resulting from the deregulationof the Japanese aviation industry are being metdirectly by Japanese airlines through restructur-ing of their respective organizations and by join-ing alliances or by entering into code-sharedarrangements with other airlines. The benefitsthat have accrued from these strategies are at bestshort-term solutions. The rapidly evolving tech-nological changes in the aviation industry haveproceeded much more rapidly than the institu-tional changes necessary to accommodate thetechnology-driven economic circumstances.Japan’s aviation industry must recognize thehighly competitive global aviation environmentas well as the domestic transportation environ-ment. In the deregulated market, sweeping re-ductions in personnel and wage cuts can only bea short-term measure. The increasing surplus ofairline capacity will impact on Japanese airlinesthrough competitive airfare pricing, and thus, re-duced revenue. This calls for greater rationaliza-tion of routes through either alliances, or bilateralcode-sharing arrangements on internationalroutes.

On the Japanese domestic scene, the newstartup airlines have not impacted on the majorairlines to any great extent as airport slots arelimited and thus competition has been control-led indirectly. The greatest competition in thenation’s most heavily travelled corridor, how-ever, comes from the shinkansen bullet train serv-ice. It remains to be seen whether or not theairlines will not only lower their airfares but alsoprovide more frequent service through betterscheduling and avoidance of simultaneous flightdepartures.

Further reading

Ballantyne, T. (2000) “Deregulation,” Orient AviationJuly: 16–19.

Saito, M. (1993) “Challenges to Human Factors Issuesin JAL Maintenance,” in Human Factors in Aviation,Montreal: International Air Transport Association,187–195

Ujimoto, V (1997) “Changes, Challenges, and Choicesin the Japanese Aviation Industry: The Develop-ment of Crew Resource Management in Japan Air-lines,” in H.Millward and J.Morrison (eds), Japanat Century’s End, Halifax: Fernwood Publishing Ltd,150–60.

Yamamori, H. (1993) “Keeping CRM is Keeping theFlight Safe,” in E.L.Weiner, B.G.Kanki andR.L.Helmreich (eds), Cockpit Resource Management,New York: Academic Press, 399–420.

VICTOR K.UJIMOTO

Ajinomoto

In 1908, Dr. Kikunae Ikeda discovered thatglutamic acid was a source of flavoring for foodand immediately patented his discovery Henamed the seasoning Ajinomoto and sold his dis-covery to Saburonosuke Suzuki in 1917, thefounder and first president of Suzuki Shoten.Suzuki subsequently changed the company nameto Ajinomoto Co., Inc. due to the success of theAjinomoto brand.

Today, Ajinomoto has four main product seg-ments in the food business: seasoning, edible oils,processed foods, and beverages and dairy prod-ucts. In the seasoning segment, the company hasmany products. Most Japanese housewives haveused seasonings such as Cook-Do and GohanGa Susumu Kun seasonings designed to enhanceflavor and save cooking time for busy housewives.Ajinomoto has always focused upon expandingits product line to meet the tastes of people aswell as serve their need for time savings and con-venience.

In the chemicals segment, there are three mainproduct lines: amino science, feed-use amino ac-ids and pharmaceuticals. These lines include suchproducts as sweeteners, pharmaceutical interme-diates, functional nutritional foods and ingredi-ents for cosmetics and toiletries.

Ajinomoto 15

In the amino science segment, Ajinomoto usesamino acids as raw materials in clinical nutritionproducts, gastrointestinal medicines and hyper-tension medications. Because of continuouslychanging eating habits and increasing health con-sciousness, the demand for a sweetener by aminoacid has been increasing. These products are inJapan as well as in North America, Europe, South-east Asia, and South Africa. In the feed-use aminoacids segment, Ajinomoto has a 35 percent world-wide market share for feeds containing lysine. Inthe pharmaceuticals segment, Ajinomoto focusesresearch and product development on health is-sues such as diabetes, infusions, clinical nutrition,gastrointestinal diseases and cardiovascular dis-eases.

In fiscal 1999, worldwide sales topped ¥8 tril-lion ($800 million) of which foods accounted for72.2 percent, fine chemicals for 16.2 percent andother products 11.6 percent. Ajinomoto is the sixthlargest company in the food industry in Japan. Al-though its domestic market share has remainedstable, recently it has become more difficult forAjinomoto to expand its business in Japan, dueto fierce competition and changing economic fac-tors. Thus, the company has focused efforts onbuilding its business overseas, which still only ac-counts for about 15 percent of its overall sales.

Currently the Ajinomoto seasoning is sold inmore than 100 countries. Since Ajinomoto openedits first overseas office in New York in 1917, thecompany has internationalized its business. To-day the company’s products are produced andsold all over the world. Recently Ajinomoto ex-panded into China, Vietnam and Myanmar. Thecompany’s strategy for globalization is to under-stand each country’s situation and to behave likea domestic company. In spite of health warningsabout the possible ill effects of monosodium gluta-mate, annual worldwide sales are growing atabout 6 percent per year. Ajinomoto now sup-plies almost one-third of the global market formonosodium glutamate

MARGARET TAKEDAAYA KUBOTA

Akihabara

Akihabara, commonly referred to as ElectricTown or Electric City is an area in downtown

Tokyo famous for its concentration of shops sell-ing electrical and electronic products. Located inthe Kanda district of Tokyo, the area is crowdedwith large shops where electronic goods of allvarieties are sold at a discount, and small stalls inthe side streets and under the elevated train trackswhere electronic parts are sold.

In Japan, and to a lesser extent overseas,Akihabara is famous as a showcase for Japaneseelectronic technology. In Akihabara, practicallyany electric gadget or appliance can be found,from digital audio recorders the size of a stick ofgum to the latest handheld organizers that let yousurf the internet, to more mundane items suchas washers and refrigerators. The area is also wellknown for its discounted prices.

With so many stores crammed in the fewblocks surrounding Akihabara station carryingelectronic products, competition is fierce. Eachstore vies with its hundred’s of competitors tocarry the latest, the smallest, the most powerfulversions of differing goods. Store displays changefrom day to day depending on what new goodshave come in. Price competition is also strong,and most stores, in an effort to keep prices low,spend the bare minimum on interior design. Prod-ucts are stacked on metal shelves, or from thefloor to the ceiling. Price cards are usually hand-written, as are posters outside the stores announc-ing the day’s specials. The stalls selling electroniccomponents are tiny cubicles crammed with itemsin a layout only understood by the stall keeper.Above all, the noise, the crowds, and the hustleand bustle of Akihabara resemble an open-air fleamarket more than a clearing center of sophisti-cated high-tech product.

The area where Akihabara is located was origi-nally the site of a vast clearing. This open fieldwas created by local authorities as a firebreak af-ter a devastating fire ravaged Tokyo in 1870.Eventually the clearing was surrounded by trees,and became known as Akibonohara, the Field ofAutumn Leaves. In 1890, the Sobu train line builta train station on Akibonohara. Yet, a misinter-pretation of the three kanji (ideograms) formingthe station name “Akibonohara” resulted in thepronunciation of the name as Akihabara.

When Tokyo’s Yamanote line also reachedAkihabara station with elevated train tracks inthe early twentieth century Akihabara became a

16 Akihabara

major center of goods being transported through-out the capital. Yet the impetus for Akihabara’srise as a commercial district was the elevated traintracks themselves. During Japan’s immediatepostwar period, hundreds of black-marketers setup stalls beneath the tracks in Akihabara. At thetime, the majority sold hard to get radio and elec-trical parts. As Japan’s economy entered its highgrowth period in the 1960s, Akihabara’s stall-keepers began expanding their wares to includehousehold appliances such as refrigerators, tel-evisions and washing machines, as post-war de-mand for these items surged.

Over the years, Akihabara’s storekeepers be-came respectable merchants, and their presenceattracted established electronic retailers. Yet theinfluence of Akihabara’s black market days liveson in its free-wheeling style and its hodgepodgeof shops and stalls. It is estimated that within themultiple square blocks occupied by Akihabara,there are now over 600 stores selling electric andelectronic equipment and parts.

The main street running through the heart ofAkihabara, Chuo-dori, is lined with stores thatsell the latest electronic gadgets and appliances.Many stores specialize in particular goods, suchas household appliances, computers, or audioequipment. However, most carry a wide varietyof goods like phones, fax machines, computers,heaters, air conditioners, televisions, VCRs, videogames and so on. The majority of these shopshave a small floor space, but are several storieshigh and covered with neon signs. Many of thelarger stores segregate their products by floor,with washers and dryers on one floor, fax ma-chines and telephones on another, and cellularphones on yet another.

Specialty stores, such as those that concentrateonly on audio-visual equipment, or on digital cam-eras and camcorders, abound. There are alsomany duty-free shops crammed with electronicgoods for export, catering to the many touristswho visit Akihabara. In addition, there are dis-count stores carrying huge arrays of electronicgadgets at discounted prices, and also stores thatexclusively carry used electronic products.

As well as the specialty stores lining the mainstreet, a few hundred stalls filled with hundredsof products are still located beneath the traintracks. These stalls have only enough room for

the vendor, and are stocked with thousands ofelectronic components, such as capacitors,vacuum tubes, adapters, transistors, circuitboards, etc. The do-it-yourself fanatic can findany part needed, regardless of how obscure it maybe.

With the rise of the computer generation, inthe latter 1990s a large number of shops haveemerged in Akihabara that exclusively carry com-puters, peripherals and software. Many Japanesehigh-tech companies use Akihabara either to testnew products’ acceptance, or to conduct con-sumer surveys. With its concentration of well over600 stores dealing exclusively with electrical andelectronic goods, Akihabara draws crowds of con-sumers daily Japanese electronic firms continu-ously make use of this fact to test new products’marketability. The lifespan of some of these prod-ucts in Akihabara is less than one month. Thosethat prove successful are taken to full productionand released nationwide, and eventually to over-seas markets. Consumer surveys are also carriedout so often in Akihabara that shoppers have beenknown to complain that filling out survey formstakes more time than shopping.

SEAN MOONEY

allowances and non-salarycompensation

Allowances and other non-salary benefits com-prise an important portion of an average Japa-nese employee’s overall compensation package.Though the actual percentage amount of anemployee’s total compensation package tied upin allowances and non-salary benefits may varysignificantly based on several key factors, esti-mates generally set it at somewhere between 25and 35 percent. The specific types of allowancesremain fairly stable across industries and acrossfirms within an industry. However, the size ofspecific allowances is often closely aligned with acompany’s relative ranking within the industryand the industry’s relative position within theprivate sector. In the latter part of the twentiethcentury adjustments in allowances and non-sal-ary compensation often occupied a more centralposition during the spring labor offensive (shunto),than did hourly wage and semi-annual bonuses.

allowances and non-salary compensation 17

Allowances and non-compensation benefits re-flect both the historical roots of Japanese organi-zations and a pragmatic approach to addressingthe current economic and sociocultural con-straints of modern Japan. The practice of provid-ing allowances and benefits, over and above wagesand 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 someassistance from the ie in buying their own houseor in renting living quarters. In the immediatepostwar period, at a time when many firms wereconfronted with liquidity problems, allowancesrepresented one way of attracting and retainingemployees without having to significantly increasecash outlays for wages and salaries. During ex-tended periods of economic growth in the 1960sand 1970s, and into the 1980s when Japanese eco-nomic prosperity was at its height, allowances re-mained a critical component of the averageemployee’s compensation package because thebenefits had come to be seen as an integral partof the overall package, and because the value ofsome allowances represented a significant valuenot available outside the firm. For example, newlyhired single salarymen (see salaryman) are of-ten housed in company dorms where the monthlyrent may be less than one-third the cost of com-parable housing on the open market.

The effect of having such a large number ofallowances and having them constitute such alarge percentage of an employee’s total compen-sation package is not inconsequential in its im-pact on intra-firm and inter-firm wagedifferentials. In the case of inter-firm differentials,employees of two firms may start out withmonthly salaries that differ by only five or sixthousand yen. However, once differences in al-lowances are factored in the final amount of dif-ference can be in excess of ¥30,000 or more.Calculated over a full year, such a difference be-comes substantial.

A second effect of allowances is to dilute theimpact of merit-based increases in salary. Allow-ances are provided on a non-merit basis to allemployees. For example, an outstanding singleemployee living in a company apartment receivesthe same housing allowance as does an averagesingle employee in the same apartment. Similarlyallowances can also reduce the differential effect

of tenure. A thirty-year-old married employeewith two pre-school children will receive the samefamily allowance as a married middle managerwith two high school-age children.

A typical package of allowances and non-com-pensation benefits would include the following:family allowance (covering both spouse and chil-dren); housing allowance; transportation allow-ance; paid holidays; paid annual vacation; leavesof absence; company-sponsored health insurance;company-subsidized home loans at favorableterms; and access to special consideration anddiscount packages through company-arrangedconsumer goods and services purchasing pro-grams. The relative size of these benefits has, overtime, come to be fairly standard among firms.Nevertheless, there are important differences fromindustry to industry and from firm to firm. Thesedifferences reflect variances in working condi-tions, geographical factors and a firm’s relativeposition within the industry and corporate cul-ture and personnel practices. Top-ranked firmstend to offer more generous allowances thanlower ranked firms. With regard to differencesin corporate culture and personnel practices,many corporations have developed distinctiveorientations reflecting underlying corporate val-ues which then become codified in personnelpractices that become institutionalized over time.In the case of the corporate values, Pioneer, forexample, has always tended to provide more gen-erous family allowances than other firms in theelectronics industry.

Family allowance

Family allowance refers to a monthly allowancethat is paid to employees to cover the additionalcost of supporting dependents. It assumes thatemployees (who are overwhelmingly male) arethe sole income-earner in the household andtherefore require additional support to fulfill thisrole. Indeed, married employees are referred toas “income earners.” Although there is some varia-tion in how the allowance is calculated, in mostfirms the allowance for the first dependent—whichis assumed to be the spouse—will be significant.The incremental increase in allowance for a sec-ond dependent and any others thereafter will besignificantly lower. For example, in 1991 Toyota

18 allowances and non-salary compensation

paid a monthly family allowance of ¥19,500 forthe first dependent and ¥3,500 for a second de-pendent. Variations on this allowance tend tooccur in two areas. Although rare, some firmsmake no distinction between the first dependentand subsequent dependents. In firms where thisis the case, the first dependence allowance is usu-ally lower than industry average, but the subse-quent dependent allowance is two to three timeshigher. The second area where firms may varytheir practice is whether the size of allowance forsubsequent dependents will vary based on num-ber; that is, the allowance is larger for the seconddependent than it is for the third or fourth. Again,in some firms the allowance per dependent re-mains constant regardless the number of depen-dents, in others it will decrease. Returning to theToyota example, the allowance for dependentstwo and three would have been ¥3,500 each, butthe allowance for a third or more dependentswould have dropped to ¥2,000 each. By com-parison, in that same year, Daihatsu Motors paida first dependent allowance of ¥13,000 and a sec-ond dependent (and all subsequent dependents)allowance of ¥3,500. Differences between Toyotaand Daihatsu in first dependent allowance reflecttheir relative positions within the automotive in-dustry whereas differences in second and subse-quent dependent allowances reflect differences incorporate culture and personnel practice. Thistype of difference persists across all allowances.

Housing allowance

Of all the allowances that companies provide, thegreatest variation can be found in the housingallowance. Differences in the geographic locationof employment create the need for most compa-nies to develop contingencies. For example, thecost of housing for a single employee working ata corporate headquarters in Osaka may be sig-nificantly higher than the cost a single-familydwelling for a married employee working at amanufacturing facility in Matsue. Marital statusand whether an employee has an apartment or asingle-family dwelling are two other factors in-fluencing housing allowance policy Finally manycompanies place an age cap on the housing al-lowance, usually 40 years old. Employees are ex-pected to have purchased their own home

(possibly by means of a companysubsidized low-interest rate mortgage) by that age.

To understand variations in housing allow-ances, compare two companies: Fujitsu andToshiba in the mid-1990s. At Fujitsu, a housingallowance is available to single employees overtwenty-two years old until they reach thirty In-come earners (married employees) will receivean allowance for thirteen years or age forty whichever comes first. For both singles and incomeearners, this salary varies by geographic locationand is lower for singles. For income earners, To-kyo and Kanagawa employees the most, followedby those in Osaka, Hyogo, Chiba and Tokyo sat-ellites receiving less and employees anywhere elsein Japan receiving the least. For singles, the firsttwo classifications remain, however, single em-ployees outside of the Tokyo and Osaka metro-politan areas receive no housing allowance.Toshiba divides housing along geographic linesas well, with those in Tokyo receiving more thanthose outside metropolitan areas. Also, singles re-ceive a lower allowance than income earners.Lastly Toshiba provides a supplement to thoseemployees not in company housing, but rentingon their own.

Transportation allowance

Many companies provide transportation allow-ance to employees working in metropolitan ar-eas or in areas where it is expensive or unrealisticfor employees to use their own transportation toget to and from work. The typical allowance cov-ers the cost of train and bus passes from the resi-dence to work.

Non-salary benefits

Non-salary benefits include such items as holi-days, paid vacations and leaves of absence.There are twelve national holidays, although thenorm in most companies is to have all twelvedays off, there is widespread variation amongthose companies that do observe all twelve,ranging from eleven days all the way down tofour. Additional holidays may include the com-pany’s founding day and personal memorialdays (involving familial responsibilities relatingto religious observances).

allowances and non-salary compensation 19

Paid vacation days vary by tenure. Most com-panies offer 14–15 paid vacation days after thefirst year, up to a maximum of twenty days afterten years of service. Given the tendency of mostemployees not to take their full allotment of paidvacation days, companies also have policies per-taining to the transfer of vacation days from oneyear to the next. In a few firms, employees cantransfer vacation days over a two-year period, butfor the vast majority the limit on transfers is nomore than one year.

Companies grant leaves of absence for mar-riage, funeral services and childbirth. As with thefamily allowance, there is widespread variationacross firms, most often reflecting firm-specificchoices. The longest leaves are granted formourning. For a spouse, parent or child, the av-erage leave granted is seven days. For one’s owngrandparents or brothers and sisters, the aver-age is five days. Leaves for other relations tendbe shorter: a spouse’s parents (five days), grand-children (three days), children’s spouses (twodays) and aunts and uncles (one day). Leave forwhat are classified as happy events—marriage,spouse’s childbirth and children’s marriage—av-erage five days, three days and three daysrespectively.

Changes over time

The variety and size of allowances companies of-fer has evolved over time in response to economicpressures and to changing mores regarding whatcompanies should and should not do for theiremployees. More recently particularly in the1990s, the trend has been to reduce the size ofallowances and increase the size of the base sal-ary component in the overall compensation cal-culation. A change has been the lowering impactof company rank within industry on allowances.In response to an aging workforce, a labor short-age among new recruits, increased competitionand the presence of non-Japanese firms offeringa variety of, for Japanese, non-typical incentivessuch as stock options, Japanese firms have beenexperimenting. As with other elements of theJapanese management system, this is an areawhere further changes will occur, though theirdirection is difficult to predict.

See also: lifetime employment; seniority promo-tion

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) Wagesand Working Conditions, Tokyo.

Tachibanaki, T. (1996) Wage Determination and Distribu-tion in Japan, New York: Oxford University Press.

ALLAN BIRD

amakudari

Amakudari (descent from heaven) refers to the re-employment of high-ranking civil servants to keypositions in diverse sectors of Japanese societyupon their retirement from the central bureau-cracy The literal translation as “descent fromheaven” invokes the cultural symbolism of work-ing in the bureaucracy and implies a distinctionbetween the life of the sacred and the profane.Before the Second World War, civil servantsworked directly for the emperor who was con-sidered sacred, a god, and the embodiment ofthe Japanese nation. Bureaucrats were seen as inheaven by their noble and sacred work for thegod and the nation. Upon retirement, bureau-crats were viewed as descending in status by re-employment in the profane world of materialself-interest.

The pressures arising out of the seniority sys-tem within ministries feed amakudari. Enteringcivil servants, upon passing the civil servant exam(type 1) and being selected to the ministry re-ceive extensive training and advance together asa cohort. As they reach their forties, their careermobility options begin to narrow. There are fewsection chief positions, fewer bureau chief posi-tions, and only one vice-ministership for eachministry The final weeding out process comeswhen a new vice-minister is chosen and all thenew vice-minister’s classmates and earlier cohortsresign to insure that the new vice-minister hasabsolute seniority within the ministry. Ultimatelyeveryone must “descend” because of the

20 amakudari

unremitting pressure from new entering classesadvancing from below. The usual retirement agefor the vice-minister is slightly over fifty but re-tirement age varies across ministries. The newvice-minister and the chief of the Secretariat areresponsible for finding the retiring officials goodpositions in the private or public sectors.

Discussion of amakudari has increasingly pen-etrated the western literature on Japanese socialstructure, especially within the topics of the Japa-nese “power structure,” “Iron Triangle” or “Ja-pan Inc.” Amakudari is viewed as a key institutionalarrangement fusing relationships among the po-litical, economic and bureaucratic operations.This imagery of amakudari as power structure ispartially the result of perceived differences be-tween the USA and Japan. The USA tends toseparate the executive bureaucracy from the eco-nomic market and legislative political processeswith the conviction that separate spheres producethe best results for everyone. This separation iscelebrated in principles of checks and balances,the laissez-faire tradition, an open market economyand a weak state bureaucracy with strict limitson government regulation. Japan, by contrast, ischaracterized as fusing these linkages through ex-tensive formal and informal relationships in thebelief that these ties induce cooperation and pro-duce the best outcome for all.

Definitions

Conventional usage of amakudari is generic. It sim-ply means the different ways in which civil ser-vants exploit their positions for post-retirementcareers. Analytic usage differentiates the majorpaths of amakudari by destinations. The mostwidely known definition of amakudari is a move-ment to profit-making enterprises and is subjectto legal restrictions. The second form of amakudariis a movement to public corporations that are es-tablished by law and financed in part from pub-lic funds. It is sometimes called “sideslip”(yokosuberi) and is not subject to legal restrictions.The third form of amakudari is a movement intothe political world, by becoming a candidate forelection to the Diet. It is sometimes called “posi-tion exploitation” (chii riyo) and is usually open tothose who served in choice national or regionalposts suitable for building political support. An-

other, though less well-known, form of amakudariis a movement from central government to localgovernment or industrial associations. Finallyamakudari may involve a sequence of retirementpositions in the career of an ex-civil servant. Thismulti-step retirement process is called “migratorybird” (wataridori). Wataridori among some publiccorporations is regulated by the Diet, but it is aprevalent, institutionalized pattern of re-employ-ment among top level ex-civil servants. These fiveforms of amakudari are interrelated. Discussionof all the paths provides a more holistic apprecia-tion of why amakudari constitutes a key elementof the Japanese power structure.

History of amakudari

There is no consensus on the origin of amakudari.In part, this ambiguity results from different in-terpretations of what constitutes amakudari. It be-gan as a diffuse movement of individuals betweenministries and the private sector or public officesreaching back to at least the beginning of the Meijiperiod (1868–1912). However, after the SecondWorld War these diffuse flows became controlledand routinized within the administrative appara-tus of each ministry and agency.

There are scattered references to the move-ment of government officials into the businesssector that occurred during the early Meiji pe-riod. A popular novelist and social critic, UchidaRoan (1868–1929) used the term amakudaru(noun form of amakudari) in his social criticism,entitled Shakai hyakumenso (Society of Kaleido-scope) published in 1902. Uchida may be the onewho coined the term amakudari. Later scholarswrote of an emerging distinction in forms of re-tirement (amakudari and chii riyo) between ‘eco-nomic’ and ‘social’ ministries. Kubota (1969) andGaron (1987) suggest that after the First WorldWar those retiring from ‘economic’ ministries,such as the Ministry of Finance and the Ministryof Agriculture and Commerce, drew on “contactswith business clientele” to take top positions inprivate corporations (amakudari). Retiring bureau-crats from “social” bureaucracies, such as HomeMinistry tended to remain within government orjoined political parties, often with cabinet appoint-ments (chii riyo).

amakudari 21

The pivotal distinction for identifying the ori-gin of amakudari is whether one defines it as aroutinized personnel movement orchestrated bythe ministries, or a movement based exclusivelyon individual initiative. Amakudari before the Sec-ond World War was individually negotiated andprimarily restricted to retired army and navy per-sonnel. After the war the number of yokosuberiexpanded as the number of public corporationsrose and ministries assumed more responsibilityfor placing their retirees. A recent survey of high-ranking exofficials by Cho (1995) found that threetimes as many amakudari officials attributed theirretirement positions to ministry placements in-stead of individual contacts.

Different views of amakudari

There is general agreement among scholars onthe existence of amakudari but there are disagree-ments over its interpretation. Chalmers Johnson(1974, 1978) popularized the concept of amakudariin his discussion of the Japanese developmentalstate. He suggested amakudari as “maintaining co-ordination and cooperative interactions amongthe iron triangle of Japanese power elites—an as-pect of what the Japanese call nemawashi (‘prepar-ing the groundwork’) and what foreignersdescribe as consensual decision making amongthe bureaucracy the conservative party and thebusiness community.” According to Johnson, thecooperation and avoidance of conflict attributedto “national character” is really the outgrowth ofinstitutions like amakudari facilitating common ori-entations and cooperative ties between the gov-ernment, private sector, and the political world.

Daniel Okimoto (1989) built on Johnson’swork by discussing amakudari in the context ofnumerous relationships that make Japan’s indus-trial policy effective. He called the public-privaterelationships “the network of ad hoc, informalties that give industrial policy and government-business interactions the resilience and adaptabil-ity for which Japan is renowned.” For Okimoto,amakudari is the best unobtrusive indicator of rela-tive bureaucratic power vis-à-vis other ministries.

Other scholars, such as Peter Evans (1995)and T.J.Pempel (1998), see amakudari as ties bind-ing the bureaucracy and private corporations andrepresenting the basis of “state embeddedness”

resulting in policy effectiveness. Like Johnson andOkimoto, these authors treat amakudari as a flex-ible and principal empirical illustration, not of elitecohesion per se, but of the embeddedness of thedevelopmental state (using Japan as the arche-typal developmental state). Evans views amakudarias providing institutionalized channels for the con-tinual negotiation and re-negotiation of goals andpolicy Similarly Pempel (1998) sees amakudari asthe “blurring of the line between elected officialsand career civil servants” and the developmentand maintenance of ties between private inter-ests and particular ministries of the central gov-ernment. To Pempel, amakudari is the stuff ofinter-elite cooperation and alliances, fusing of thestate with the public and private sectors, provid-ing the basis for stability and development.Pempel, however, sees the bases of this fusion asundergoing substantial changes in the 1990s.

In contrast, some authors challenge the no-tion of amakudari representing elite cohesion andpolicy effectiveness. Calder (1989) questions theutility of amakudari as a mechanism of elite cohe-sion much less bureaucratic dominance. Instead,amakudari simply “broadens the access of less eco-nomically powerful firms.” The bureaucracy ex-ercises a limited influence through amakudari sinceit is mostly concentrated in second tier, weak pri-vate corporations, not in top corporations andbanks. Other authors, following Calder, main-tain amakudari is not sufficient to affect industrialdirection since it involves a small number of firms(less than 10 percent of the listed firms in anyone year) and takes place mostly in small, notlarge firms. In addition, they point to a weaken-ing significance of former officials in political of-fice since the 1990s as the number of former civilservants in political office declines.

In summary various scholars agree on a highlevel of interaction, communication and coopera-tion among politicians, career bureaucrats andbusiness people throughout the postwar era, butthey disagree on the interpretation of amakudarias important inter-institutional relations. To someauthors, amakudari represents elite cohesionprovid ing the stability flexibility and effective-ness of state policy. Others question the effec-tiveness of this type of elite cohesion. Further,some authors distinguish different forms ofamakudari (for example, amakudari, yokosuberi, chii

22 amakudari

riyo, and wataridori) that represent distinct analyticand empirical phenomena. Finally scholars arein agreement that inter-institutional (inter-elite)relations began changing in the 1990s, thoughthey differ on the degree of change, its interpre-tation, and direction. International markets, a newelectoral system, a realignment of voters, weak-ening linkages of the major keiretsu, and a reduc-tion in the policy tools of the bureaucrats are seenas causes of changing relations among the bu-reaucracy private sector and the legislature.

Limitations

There is substantial recognition that Japan is anetwork society and the Japanese state is a net-work state embedded in Japanese societyAmakudari is but one type of network between thestate and Japanese society among a myriad ofcrisscrossing, overlapping, and multiplex relation-ships. However, amakudari is the apex of net-works. Amakudari and amakudari-like processesoperate everywhere in Japan, including the per-sonnel movements from large to medium andmedium to small affiliated companies. Similarpersonnel movements take place from the centralbureaucracy to local governments and from localgovernments to private and public sectors andlocal political offices. Thus, any analysis ofamakudari is at best a “biopsy” of the networking.In this sense, we only scratch the surface of afundamental socioeconomic Japanese institution.

See also: nemawashi

Further reading

Blumenthal, T. (1985) “The Practice of Amakudariwithin the Japanese Employment System,” AsianSurvey 25 (3): 310–21.

Calder, K. (1989) “Elites in an Equalizing Role: Ex-bureaucrats as Coordinators and Intermediaries inthe Japanese Government-Business Relationship,”Comparative Politics 21 (4): 379–404.

Cho, K.C. (1995) “Nihon no Seifu & Kigyo kankei toSeifu Shigen Douin no Osmotic Networker to shiteno Amakudari,” Ph.D. dissertation, Tsukuba Uni-versity Japan.

Evans, P. (1995) Embedded Autonomy: States and Indus-trial Transformation, Princeton, NJ: Princeton Univer-sity Press.

Garon, S. (1987) The State and Labor in Modern Japan,Berkeley CA: University of California Press.

Inoki, T. (1995) “Japanese Bureaucrats at Retire-ment: the Mobility of Human Resources fromCentral Government to Pubic Corporations,” inH.Kim et al. (eds), The Japanese Civil Service andEconomic Development, Oxford: Clarendon Press,213–34.

Johnson, C. (1974) “The Reemployment of RetiredGovernment Bureaucrats in Japanese Big Business,”Asian Survey 14:953–65.

——(1978) Japan’s Public Policy Companies, Washington,DC: American Enterprise Institute for Public PolicyResearch.

Koh, B.C. (1991) Japan’s Administrative Elite, BerkeleyCA: 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 UniversityPress.

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 Dynamicsof the Japanese Economy, Ithaca, NY: Cornell Univer-sity Press.

Schaede, U. (1995) “The ‘Old Boy’ Network and Gov-ernment-Business Relationships in Japan,” Journalof Japanese Studies 21 (2): 293–317.

Usui, C. and Colignon, R. (1995) “Government Elitesand Amakudari in Japan, 1963–1992,” Asian Survey35 (7): 682–98.

RICHARD COLIGNON

American occupation

By August of 1945 Japan lay utterly defeated,completely at the mercy of the victors. Fortunatelyfor Japan, what the USA wished was to trans-form Japan from an authoritarian, militaristic,elitist and internally exploitative society into asociety more like its own, which the Americanssaw as more pluralistic, democratic, egalitarian,and without the influence of a virtually uncon-trolled military which had caused so much suf-fering throughout Asia (see wartime legacy), and

American occupation 23

indeed within Japan itself. The United States vir-tually ruled Japan for over six years, institutingmany changes and reforms. All in all, observersboth American and Japanese evaluate the Ameri-can occupation of Japan as highly successful.

By 1944, although it was not clear how longthe war would last, everyone on the Americanside knew that the end was near in terms of Ja-pan’s ability to sustain military conflict. Therewas considerable debate within the War Depart-ment and in congress over such issues as whatshould happen to the Japanese emperor. It wasdecided that when the war ended a large contin-gent of administrators would go to Japan andforce major changes in Japanese institutions.Above the administrators in authority would bethe United States Army; President Rooseveltchose General Douglas MacArthur to be su-preme commander of the occupation adminis-tration, even though the President did notpersonally like the general and considered him alikely future presidential candidate for the Re-publican party.

Initial stages

The first Occupation officials arrived on Japa-nese soil August 30, 1945, fifteen days after Japa-nese representatives signed the formal surrender.The situation did not bode well for implement-ing an ambitious plan for virtually remaking amodern society The first problem envisioned bythe victors was getting the Japanese to go alongwith reforms dictated by its former enemy. Thewar had seen some of the most bitter and des-perate fighting in history; physical destruction ofJapanese cities was on a scale never experiencedbefore in any country. Originally planned as ajoint effort between the allied nations most di-rectly involved in fighting against Japan: the USA,Britain, the Soviet Union, and China. It was dif-ficult to see how any kind of successful policymaking could take place among nations who weresuspicious of and at times even hostile towardone another. The American who was to presideover the mix was characterized by some as a right-wing ideologue with a mountainous ego.

In spite of all this, the six years and eightmonths of the formal Occupation of Japan was

in the judgment of most observers a surprisinglypositive and liberating force for Japan, as well asan advertisement of some of the best qualities ofAmerican culture. The fear of a resentful andhostile Japanese populace was instantly wipedaway by the courtesy and cooperation of peopleat all levels, from ordinary citizens to high-rank-ing officials in the government from the very be-ginning. Japan had lost the war, the Emperor haddeclared so; there was a new ultimate authorityin the nation, and almost all Japanese as a matterof course directed the same sincere respect to-ward it as they had to the old authority.

The problem of the multinational characterof the Occupation turned out to be partiallysolved by the image of General MacArthur as anegomaniac. It had been agreed upon among theUSA and its allies that Japan would be adminis-tered by the Allied Council for Japan (ACJ) withrepresentation from all four nations mentionedabove. Legally General MacArthur, as SupremeCommander of the Allied Powers (SCAP), wasnothing more than chairman of that body. How-ever, MacArthur simply refused to share powerwith any non-American. He and his subordinatescompletely ignored ACJ, never once acting onany of its suggestions, and taking no note at allof its many complaints. It was in every respectan American occupation.

Although MacArthur was always firmly incommand, the Occupation was not in the strict-est sense a military government. He was very se-rious about carrying out this historicallyimportant mission successfully. Later in his mem-oirs he explained that what he wanted to accom-plish was first to end the military power of Japanand punish war criminals, then to build soundrepresentative government, enfranchise women,liberate farmers and workers, liberalize educa-tion, decentralize economic power, establish a freeand responsible press, and finally to separatechurch and state. In a few cases the plan couldnot be completely realized, but it is remarkablehow close SCAP came to fulfillment of thosegoals.

Before Occupation administrators could getstarted, three important tasks were given to theUS military: demilitarization of the country iden-tification and punishment of people Americansconsidered to be war criminals, and untangling

24 American occupation

the human mess of Japanese abroad and non-Japanese in Japan, the result of invasion, coloni-zation and forced labor. The two million soldiersand sailors of the Imperial Army who were stillin 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 con-trolled. Three million Taiwanese and Koreanlaborers, many brought to Japan by force, werebrought back to their homelands by the US Navy.

A series of war crimes trials, begun prior tothe end of the war in the Philippines, continuedon in Japan for two years. This was the only as-pect of the Occupation that was truly interna-tional: the trials were conducted by judges fromeleven nations including Australia, Canada,France, India, the Netherlands, New Zealand, andthe Philippines together with the four nations ofthe ACJ. In all, about 6,000 people were indictedas war criminals. Seven men were convicted asClass A war criminals and were hanged in Sep-tember 1948, including General Tojo Hideki,Prime Minister and war minister from 1941–1944. Sixteen other Class A criminals were sen-tenced to life imprisonment by the internationaltribunal, and two others given shorter prisonterms. Interestingly far more Class C (lower levelpersonnel charged with minor atrocities) crimi-nals were actually put to death in trials conductedin Yokohama by the US Eighth Army over 700in total.

There was considerable support in Washing-ton and elsewhere for putting the Emperor ontrial for war crimes. However, GeneralMacArthur staunchly opposed the idea, arguingthat if the Emperor were humiliated in such away it would turn many Japanese against the aimsof the Occupation, and make the task of reformfar more difficult, perhaps even dangerous. Aswith most matters in the early days of the Occu-pation, he got his way.

Reforming Japan

The actual administration of the conquered na-tion was given over to various SCAP administra-tive sections, or missions as they were called,

roughly equivalent to the branches of the Japa-nese bureaucracy Personnel were selected fromthe appropriate sector of US society related to itsmission. Businessmen and a few professors ofbusiness for the economics mission which workedmainly with the Finance Ministry and the Minis-try of International Trade and Industry; laborleaders for the mission related to labor relationswhich worked mainly with the Labor Ministryand so on. They were defined as “advisors,” andstayed behind the scenes, issuing SCAP “admin-istrative guidance,” a concept the Japanese werecompletely familiar with from the role customar-ily played by their own bureaucracies. It was Japa-nese government bureaucrats who actuallycarried out the policies, with SCAP personnelhaving little direct contact with the local popula-tion.

A new constitution was drawn up byMacArthur’s staff and virtually forced on the Japa-nese. It was the most significant factor in the de-mocratization of Japan, establishing sovereigntywith the people through two popularly electedhouses of the Diet, giving women the right tovote, clarifying the status of the Emperor as amere figurehead, limiting the power of the po-lice, denouncing war for all time, and providingfor a host of further democratic guarantees. Itwas first presented to the Japanese public onMarch 7, 1946 as a product of the Japanese gov-ernment, but obvious direct translations fromEnglish in the document suggested otherwise.

Initially SCAP planned to completely disman-tle the Japanese economic system by shipping in-dustrial equipment to the countries most damagedby Japan in the war. MacArthur eventually de-cided on a more moderate policy of dissolvingthe zaibatsu and establishing anti-monopoly laws.Originally established with government sponsor-ship, the zaibatsu system was closed in the sensethat once it was put into place, no new large in-dustrial competition was permitted. Suppressionof the zaibatsu ushered in a new wave of entrepre-neurial energy. Enterprises with fresh ideas joinedthe older established order, some enjoying greatsuccess, companies such as Honda Motors andSony Electronics, companies which were to con-tribute significantly to Japan’s version of the post-war “economic miracle.” This window of

American occupation 25

opportunity for new industrial organizations toreach the top tier of Japan’s economy began toclose somewhat in the 1960s, but it never returnedto totally exclusive zaibatsu levels. The most en-during Occupation reforms put in place by theSCAP sections related to land reforms, labor re-forms and education reforms.

At war’s end, about 70 percent of Japanesefarmers were tenants. Under SCAP guidance, theDiet outlawed absentee landlordism, forced land-owners to sell their land to the government atvery low prices, and sold it to the farmers fornominal sums, effectively transferring land to thepeople who actually worked it. Rent for the smallpercentage of land that remained under tenancywas fixed by government regulation. Today farmsremain small by the standards of industrial na-tions, but are highly productive per acre. Thisreform changed most farmers from tenant peas-ants to small businessmen; their standard of liv-ing increased dramatically during the yearsfollowing land reform, and today they are amongthe most prosperous small farmers in the world.

A labor movement had begun in Japan in the1920s, but by the 1930s the government had com-pletely quashed it; work stoppage was treated asan act of treason. With the full compliance of theSupreme Commander, considered a conservativeRepublican, SCAP officials, some labor leadersthemselves, pushed through the Diet a trade un-ion law which guaranteed workers, including pub-lic service employees and teachers, the right toorganize, engage in collective bargaining, andstrike. A labor standards law was designed bySCAP setting maximum working hours, vacation,safety and sanitation safeguards, sick leaves, ac-cident compensation, and restrictions on thehours and conditions under which women andchildren could work. Some of the provisions ofthe labor laws were later modified by the Japa-nese, and in some cases standards have been ig-nored, but the overall impact of SCAP laborreforms was extremely favorable for the work-ing public, creating conditions comparable withother industrial democracies.

Touching by far the most people were SCAPeducation reforms. Pre-war education in Japanwas modeled somewhat on a European elitistsystem, completely controlled by the national gov-ernment, and considered by SCAP an instrument

of ultra-nationalist and racist propaganda. Theentire system was completely redesigned in bothstructure and philosophy to conform to Ameri-can ideas; a new 6–3-3–4 structure of elemen-tary education through college was set up underthe direction of local school boards, including theParent Teacher Association (PTA) which stillplays a powerful role in Japanese education.Higher education was greatly popularized, withover 170 new universities and about 200 new jun-ior 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, Boul-der, CO: Westview Press.

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

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

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

JOHN A.McKINSTRY

appraisal systems

The appraisal system in a typical large or me-dium-size Japanese firm follows the policies andprinciples gradually elaborated in the “boomyears” of Japanese management during the 1980s.Although always a core part of the Japanese em-ployment practices, it has not received as muchresearch attention as some other features of Japa-nese management. However, the evolution of“Japanese” performance appraisal illustrates wellthe challenges and dilemmas facing Japanese com-panies today in the field of human resource man-agement.

Appraisal process

How does the Japanese appraisal mechanismwork? Typically periodic appraisals of employeeperformance are conducted three or four times ayear. Performance evaluations usually precede

26 appraisal systems

salary increase decisions due in April of each year,the summer and winter bonus determination, andthe annual career development review, with tim-ing dependent on the employee’s status or posi-tion. In some firms, the evaluation for the annualsalary increase and the career development re-view may be combined to reduce the number ofevaluations; in others, yet another set of evalua-tions takes place every time an employee becomeseligible for a promotion.

During the appraisal, employees are comparedto other members of their peer group and rankedaccordingly. Who is in the peer group? At thestart of one’s career, the core peer group is thecohort of entry: employees of equal educationallevel (e.g. college graduates) who joined the firmduring the same year. After the first promotion,the comparisons are more complex. Managerscan be ranked within the original cohort, oragainst all others with similar tenure in the samegrade, or two rankings can be combined. In thiscase, the rating score reflects not only employeeperformance relative to their peers, but also theiryears of tenure in particular positions.

As in many Western firms, the evaluation cri-teria depend on the position class. For example,one set of criteria is used up to the level of a su-pervisor, another for those in higher positions.Typically the evaluations for professional employ-ees and managers have four major components:(1) scores measuring job-related abilities such ashuman relations skills, business judgment, coor-dination, and planning; (2) scores measuring job-related attributes such as creativity leadership,and reliability; (3) scores measuring personality-related attributes such as sociability flexibility con-fidence; and finally (4) a single achievement score.The idea behind the multiple scores is to createan environment where the employee is not madeto feel that the “bottom line”—which may some-times be beyond his control—is the only dimen-sion of the evaluation.

There are some conceptual similarities be-tween categories of job-related abilities and at-tributes and “competency models” increasinglypopular in Western organizations. However,while the competency model is usually a corner-stone for an in-depth developmental discussionwith the employee, direct feedback on appraisalresults is still rather rare in most Japanese firms.

Only a few firms have a formal policy requiringperformance feedback. In most cases, feedbackis recommended, but the form of feedback is leftto the discretion of individual managers. Start-ing the appraisal process with a self-evaluationby the employee is now an increasingly popularpractice, a major change from the times wheneven blank appraisal forms were considered con-fidential.

With respect to performance feedback, thereis still a widespread belief among many person-nel executives that the ability to solicit informa-tion about one’s standing in the organizationthrough “back channels” is a legitimate part ofthe appraisal process itself, a mark of how wellthe employee mastered informal communication.In other words, “If you have to ask, you can’t bethat good.”

Even if individual supervisors are willing toprovide performance rating feedback to subordi-nates, they often cannot do more than inform anemployee about what ratings were suggested. Ap-praisal items are marked first by the direct super-visor, then the scores are reviewed by at least twoother higher level managers or executives, withan emphasis on the harmonization of standardsacross departments and divisions, and at eachlevel the initial scores are subject to modification.Finally as most companies use some version ofthe forced distribution approach, ratings are alsoadjusted at the corporate level so the final resultsfit the corporate guidelines. The results of theseadjustments are not always transmitted back tothe first-level evaluator.

However, from the first year on the job, sal-ary increases each year contain some variancefor merit, which, although very small in absoluteamounts, may convey appropriate messages toemployees and impart status differences withinthe cohort. As the information on the averageincrease for a given cohort is usually distributedthrough the company union, employees can havea reasonably good idea where they stand. Rank-ing results can be inferred by comparing one’spaycheck with those of the peer group or withannounced average salary increases. Obviouslythose who received higher than the average in-crease encourage informal comparisons to maketheir success known. Those receiving less thanthe average would rather avoid it.

appraisal systems 27

Coexistence of competition andcooperation

Intensive appraisals occur regularly from the veryfirst year a new employee enters the firm. Theseevaluations clearly discriminate among employ-ees. They have a major impact on employees’future careers, but they are a closely held secret.Therefore, the competitive nature of the appraisaland the resulting intra-cohort rankings are notvery visible during the first ten-twelve years oftenure in the organization. This led many observ-ers of Japanese companies to observe that per-formance evaluation in large Japanese firms islong term, based on years of careful judgmentsand comparisons and that competition for pro-motion does not start until later in one’s career.While the first observation is correct, the secondis not. In fact, when the consequences of rankingwithin the cohort become visible, it is usually toolate to do anything about it. In most firms, thechances for recovery from low ratings are slim(see seniority promotion).

The fierce internal competition could create ahostile, individualistic work environment were itnot for two characteristics of the Japanese worksystem: group-based organizations and vague jobdescriptions. Usually performance is evaluatedrelative to similar groups in the company and,therefore, each employee must cooperate withcolleagues to achieve the best results. Even thebest individual performers will not succeed if theirunit does not perform well. What is rewardedmost is credibility and ability to get things donein cooperation with others. The competition withpeers is keen, but its focal point is building coop-erative networks with the same people who arerivals for future promotions. This emphasis oncooperation serves as a powerful check on a divi-sive competitiveness.

The invisible race creates constant fears of lag-ging behind and being outperformed. At the sametime, even those who are left behind do not haveto fear losing their jobs; the system encouragesinternal competition while maintaining social har-mony inside the organization. For an extendedperiod of time, the vast majority of employeesare treated as potential “winners,” with only smalldifferences between the top and the middle ofthe cohort, as opposed to a typical Anglo-Saxon

system focused on early identification of high-potential “winners” with corresponding salary dif-ferentiations. The effect is to elicit full dedicationand loyalty from the employees, engaging themin unending competition for as long as possible.When the cumulative impact of less than perfectrankings becomes visible in salary or promotionslate in an employee career, there is always a so-cially acceptable way out—after all, one workshard for the company not for money or promo-tions—one explanation of why work commitmentof male employees in large Japanese firms tendsto increase with age.

Problems with Japanese-style appraisals

The objective of the traditional Japanese ap-praisal system is to induce employees to workhard on behalf of the firm. Over the years it wasremarkably effective, but its fundamental con-tradictions are now quite apparent. One majorproblem with the system is that in the long run,it inevitably leads to risk-avoidance. Because thechances for recovery from a low ranking areslim, employees may focus on not making anymistakes, rather than on taking the initiative.With high job security for anyone with at leastclose to average performance, and no incentivesfor bold actions, there is no surprise that the cul-ture in many Japanese firms today resemblesmore a mediocre and complacent plannedeconomy bureaucracy than the fearless globalcompetitor of the 1980s.

The inability to manage performance is thecore of the problem. The system was created in aperiod of rapid growth where dealing with lowperformance was not much of an issue—an occa-sional kata-tataki (tap on the shoulder—selectivedismissal) was a sufficient deterrent and reminderto everyone to play by the rules. But what to doabout a committed ‘salaryman’ who works hardfor long hours, yet the added value from all thiseffort is poor?

In the past, there were enough positions to‘park’ such an employee as madogiwazoku (groupby the window) until retirement, or in an affiliatefirm, without hurting the overall results of thefirm. However, two trends made such arrange-ments increasingly problematic. Lower growth

28 appraisal systems

rates and bulging cohorts of middle manage-ment—the results of hiring sprees of more thantwo decades ago—clogged the hierarchy. Withestimates of up to 40–60 percent of middle man-agers in some firms being placed in phantom jobs,the formerly virtuous cycle of competition andcooperation has degenerated into a vicious cycleof ballooning cost and paralyzed decision mak-ing.

In addition, the odds have changed. While inthe past employees had a reasonable chance tobe promoted at least to middle-management po-sition, it is now all too visible that most will notmake it; there is simply no more room at the top.Therefore, there is not much incentive to com-pete, and without internal competition, the muchpraised work ethic has declined very quickly Withmost white-collar jobs still secure, the low outputdoes not have any consequences, and the annualappraisal becomes an empty ritual.

A related problem with Japanese appraisal isthat it is very difficult to implement in a globalcontext, making it virtually impossible for a Japa-nese multinational to unify its organization in oneglobal structure. Foreign employees generally re-sent the lack of direct feedback, but the lack ofexperience with face-to-face performance reviewdialogue is a serious handicap facing Japanesemanagers working overseas. An even more fun-damental flaw is the simple fact that the labormarket structures overseas are different, and theincentives embedded in the traditional Japaneseappraisal—a slow but sure rise to the top—do nothave much meaning.

Current changes

When the performance of a firm declines,recalibrating the appraisal process is the usual firstresponse. Japan is no exception. Influenced byappraisal innovations introduced by foreign-owned companies, many firms are modifyingevaluation criteria, or adjusting the appraisal cycleto incorporate 360-degree feedback. However, themajor impact, some of it unintended, comes fromchanges in two areas: communication with theemployee during and after the appraisal, and earlyand visible identification of high-potential employ-ees.

An increasing number of firms now requiremanagers to conduct an appraisal interview withthe employee and also to inform the employeeabout the appraisal results. An unintended butpredictable consequence is that the distributionof ratings become slanted with a vast majority ofemployees ranked as average or better, making iteven more difficult to address the performanceproblems.

Early identification of high potentials ismeant to stem the outflow of talent to foreign-owned firms. What it does is making obviouswhat was hidden before, namely that long-termdecisions regarding an employee’s career aremade rather early. However, while the chosenfew may appreciate the early recognition, for themajority of employees this is not good news.The combination of “early identification-noreselection” is just another factor lowering em-ployee commitment.

In summary marginal adjustments will not beof much help. The fundamental roadblock in re-forming the Japanese appraisal system is the un-willingness to deal with the consequences.

VLADIMIR PUCIK

appreciating yen

Appreciating yen (AY), often called “high yen” isnot simply a phrase meaning the strong value ofthe Japanese currency It refers more broadly to aceaseless upward trend, with sharp fluctuations,in the currency value of yen. This trend has haddistinctive impacts on the Japanese economyand its international relations in the post-BrettonWoods era after the “Nixon shock” of 1971.

What is AY? Following the breakdown in 1973of the multilateral pegged exchange rate system,a floating exchange rate regime was established.As part of the original system established atBretton Woods, the yen was set at $1: ¥360. Un-der the floating exchange rate system, the valueof the yen increased nearly fourfold. In spring of1995 the rate stood at about 11: ¥80. In springof 2001 it had retreated to $ 1: ¥108. This in-crease in currency value has had a direct impacton the continuous huge foreign trade andcurrent account surpluses sustained by Japan over

appreciating yen 29

a nearly thirty year period. The strength of thecurrency has been based mainly on the strongcompetitive power and the tremendous exportpotential of Japanese manufacturing industriessuch as electronics, automobile, and machine in-dustries. AY has appeared most obvious whenseen 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 tothe declining competitive power of American in-dustries in the 1970s and 1980s, a period duringwhich the US also accumulated large foreigntrade deficits. The US foreign trade deficit stemsmainly from purchase of Japanese imports and,since the 1980s, also purchases from many EastAsian countries.

Another important feature of AY is the heavyand steep up and down movements of the ex-change rate of yen that have pressured Japaneseindustries and firms to adapt to such urgentchanges in every half a decade. The 36 percentAY from ¥360 in July 1971 to ¥264 in July 1973was the first such movement. The second oc-curred between December 1975 and October1978 when there was a 66 percent AY from ¥306to ¥184 in October 1978. There was a third sig-nificant movement resulting beginning with arate of ¥260 in May of 1985. The economic ex-pansion and high interest rate policies of theReagan administration, followed by the PlazaAgreement in September 1985 led to a 109 per-cent appreciation to ¥124 in May 1988. Therewas another appreciation, this one of 88 percent,between April 1990 (¥158) and April 1995(¥84). The first four months of 1995 were wit-ness to one of the more cataclysmic shifts. Inearly January the rate stood at $1: ¥100. By midApril of 1995, it had appreciated to $1: ¥79, asmuch as 20 percent AY in three months (around70 percent annual rate of change) from ¥100 inthe early January, decisively smashing any possi-ble chance of economic recovery in Japan sincethe breakdown of the bubble economy in theearly 1990s.

What are the mechanism and effects of AY?There is a “general theory” on the mechanism ofa floating exchange rate system. This theorystates that the floating system can adjust auto-matically to recover the balance of a foreign

trade surplus or deficit between two countries asa result of the nominal increase (decrease) in for-eign currency prices of export (import) goods inthe trade surplus country (vice versa). However,the historical experiences since 1973 of Japanand US have proven that this mechanism doesnot necessarily work in such a symmetrical waydepending on the managerial constitution ofcompanies in both countries. It is important tonote that especially in Japan there has been aunique mechanism for firms to accelerate suc-cessively the processes of AY. In many cases,until the 1980s in particular, Japanese companiesdid not raise the US dollar prices of their exportgoods by the same degree as yen was appreciat-ing, which means that they preferred to keeptheir market shares of exports in lieu of main-taining their profit margins. This is very much aJapanese orientation to competition, and standsin contrast to the typical response of US compa-nies in international markets. In addition, “J-Curve” effects (time lag effects due to exportprices determined at contract) and the increaseof “follow on” exports of parts and componentsand equipment to subsidiary plants abroadcaused Japan’s foreign trade surplus to continueto increase. A vicious cycle seemed to ensue inwhich the yen appreciated, resulting in a largertrade surplus and leading Japanese firms to ac-cept lower profit margins, leading to an apprecia-tion of the yen, and so on.

The AY cycle, along with the “trade friction”between Japan and the USA, has propelled Japa-nese foreign direct investment (FDI) since theearly 1980s. Because an AY implies and reflectshigh expressed price values for domestic humanresources and materials it is more advantageousfor Japanese multinational enterprises to im-plement local manufacturing abroad. In this con-text, it is especially noteworthy that AY after the1980s has played a critical role particularly in sup-porting the “miracle of economic growth” in thelarger East Asian region. Here, AY was not onlyan important factor in determining the locationof Japanese FDI, it was a significant factor in thepromotion of technology transfer. It was also afactor in Asian countries realizing a more com-petitive edge in international markets as their owncurrencies depreciated vis-à-vis the yen.

30 appreciating yen

What are the main problems of AY? From amacroeconomic perspective, the cyclical and unstable nature deeply affects Japanese firms andthe economy. The large scale ups and downs inexchange rates affect basic price levels in Japanand its international economic relations. From amicroeconomic perspective, firms and individu-als must implement ‘risk management’ plans todeal with the irregularly fluctuating foreign ex-change. Particularly for export-oriented firmssuch as Toyota and Sony a single AY movementagainst the US dollar can result directly in theloss of several billion yen in their financial ac-counts. Another serious problem is foreign ex-change losses for investors in foreign portfolioassets. In Japan such huge losses occurred in thethird AY period, 1985–8, when many of Japa-nese institutional investors such as life insurancecompanies were heavily damaged. Notwithstand-ing such experience, Japanese private portfolioinvestors as well as public institutions such as theBank of Japan have again built up enormousportfolio assets abroad. At the start of the twenty-first century overseas portfolio assets were morethan $ 1 trillion, mostly in the USA.

This situation is also reflected on the US ap-proach to foreign exchange known as “high dol-lar policy”. The main purpose of this policy hasbeen to prevent the US economy from gettingcaught up in a “vicious circle”—i.e. sharp depre-ciation of the dollar followed by a rise of prices inimport goods and then a rise in the domestic pricelevel, a rise in interest rates and a collapse of stockmarkets.

Further reading

Abo, T. (ed.) (1994) Hybrid Factory: The Japanese Produc-tion System in the United States, Oxford: Oxford Uni-versity Press.

Kawai, M. (1996) “The Japanese Yen as an Interna-tional Currency: Performance and Prospects,” inR.Sato, R.V.Ramachandran and H. Hori (eds), Or-ganization., Performance and Equity: Perspectives on theJapanese Economy, Dordrecht: Kluwer Academic Pub-lishers.

TETSUO ABO

Arabian Oil

Founded in 1958, with annual sales of approxi-mately $1.8 billion in 1999, Arabian Oil is Ja-pan’s largest oil producer. The Tokyo-based firmused to operate the Khafji oilfield, a large off-shore oilfield in the former neutral zone on theSaudi Arabia—Kuwait border. As a result, theSaudi Arabian and Kuwaiti government owned11 percent of its publicly traded stock and 60percent of its disposition rights on crude oil pro-duction.

Japan imports 99.7 percent of its oil supply ofonly which 15 percent is produced by Japanesecompanies. In 1998, Arabian Oil produced280,000 barrels per day 150,000 barrels of whichwere exported to Japan and accounted for 4 per-cent of Japan’s total oil imports from oilfields minedby Japanese companies. However, in February2000 it lost an important forty-year-old concessionin the Saudi Arabian section of the neutral zonedue to its unwillingness to meet Saudi Arabia’s de-mands for a mine railway infrastructure invest-ment. Japanese officials argued that a study showedthe proposed mine railway would be certain to runat a loss for a long time. However, the companystill continues to drill from the portion of the oil-field controlled by the Kuwaiti government.

In November 2000, Japan and Iran reachedan agreement that gives Japanese oil companiesnegotiating rights to a portion of the Azadeganoilfield in Iran, the world’s largest underdevel-oped oilfield. This field has a potential to pro-duce 400,000 barrels a day This new source ofoil is expected to help the Ministry of Econom-ics, Trade and Industry (METI) plan to raise theratio of oil produced by Japanese companies.

To combat the loss of rights to drill in the SaudiArabia section of the Khafji field, Arabian Oilhopes to begin producing in Vietnam, while con-tinuing oil and gas production in offshore Chinaand the Gulf of Mexico. Crude oil represents mostof Arabian Oil’s sales; the remainder comes frompetroleum products. It has four consolidated sub-sidiaries located in Japan, the Cayman islands,the United States and Norway.

See also: Japanese business in the Middle East

DAYO FAWIBE

Arabian Oil 31

ASIAN ECONOMIC CRISIS see economiccrisis in Asia

ATO-GIME see after-sales pricing

automotive industry

From 1980 through 1993 Japan was the world’slargest automobile producer, turning out a peakof 13.5 million units in 1990. Today output isstalled at 10 million units, though another 5.5million were produced overseas, including 3.1million in NAFTA. In addition, consolidation in1999 and 2000 left Toyota and Honda the onlytwo independent firms, with Nissan, Mazda,Isuzu and Mitsubishi under foreign control. Still,the majority of domestic employment is with sup-pliers, not assemblers, and with 880,000 employ-ees the auto industry is the second largestmanufacturing sector (after electronics). Oncedealerships, gas stations and so on are included,the sector accounts for about 5 percent of theeconomy and vehicles alone for 15 percent ofJapan’s total exports.

Japan’s history shaped the industry Motoriza-tion began with Model T buses imported afterthe 1923 earthquake destroyed Tokyo’s trolleysystem. Ford and General Motors soon set upassembly plants, and in 1936 Ford was prepar-ing to build an integrated facility as its vanguardplant in Asia. But war closed these firms and ledto import restrictions that lasted from 1936through the 1970s. Instead of having efficient (al-beit foreign-owned) producers, trade barriers en-couraged entry and in the early 1950s Japan wasburdened with a large number of inefficient, poor-quality makers. Three-wheel vehicles comprisedthe largest segment until 1962, and sales of pas-senger cars only surpassed those of trucks in1968. New entry ceased in 1964, when Hondabegan regular production, while several early en-trants exited, including Prince in 1966. Nine pro-ducers of cars and light trucks survived until2000, with another two firms producing prima-rily heavy trucks.

From the 1940s, output remained dividedamong multiple firms in a variety of product seg-ments. Costs remained high; total production wasunder 2 million units in 1965 and just over 5

million in 1970, including exports. Managementfaced many challenges. One was simply to in-crease capacity given the rapidly growing domes-tic market. But firms were also aware of their highcosts and poor quality and the crowded domes-tic market generated strong rivalry Capital mar-ket liberalization and lower trade barriers,targeted for 1971, added the threat of future for-eign competition. A positive dynamic developed:costs could clearly be lowered each year, andquality improved; firms thus actively sought outnew ideas both at home and abroad. By the late1960s they were competitive in the small carmarket in the USA, where their major rival wasnot the American Big Three but ratherVolkswagen. By the late 1970s the Japanese firmshad established a reputation for high quality.

This rapid improvement reflected the intro-duction of the set of management techniquesknown as “lean” production. Supporting imple-mentation was senior management, who with fewexceptions came from careers based in factorymanagement and engineering; noticeably absentwere people from finance and marketing. Firmswere thus highly receptive to the best in indus-trial engineering techniques, including statisticalprocess control (SPC), continuous improvement(kaizen) and total quality management (TQM),as well as flow-dominated factory layout, rapidtooling changes and “just-in-time” (JIT) produc-tion scheduling, implemented at Toyota throughthe use of kanban cards. These techniques, devel-oped during the 1950s and early 1960s, werewidely publicized at the time in the business pressand engineering journals. Implementation, how-ever, was achieved in stages, with assemblersputting them in place in the latter 1960s and sup-pliers in the 1970s. This helped bring about largegains in quality and productivity following thefirst oil crisis of 1973.

Suppliers were critical because they are moreimportant than assembly both in terms of em-ployment (77 percent of the industry total) andcosts. After the Second World War, existing as-semblers spun off most internal parts manufac-turing, while new entrants used outside suppliersfrom the start, thereby lessening their capital re-quirements. Another impetus was a strong labormovement that won employment guarantees atthe firm level. By turning to suppliers, assemblers

32 automotive industry

were able to raise output without expanding theirown employment until well into the 1960s.

Coordinating the supply chain was a chal-lenge. By the 1960s direct suppliers were organ-ized into kyoryoku-kai, formal supplierassociations. Purchasing departments oversawthe interaction of suppliers with engineering atthe development end and with the factory oncevehicles entered production, and also organizedconsulting efforts that diffused the latest inmanufacturing and management techniques tothem. With interfirm organization built up overdecades—most ties date back to 1960 or earlier—the cumulative benefits of ongoing relationshipsimproved the capabilities of the supply base as awhole, raising the quality and lowering the costof the finished vehicle.

Supporting this relationship were clear pric-ing rules, using standard cost models as a start-ing point, that made setting the terms oftransactions less fractious. In turn, assemblerstypically contracted the full production run offour or more years to a single supplier, and (con-ditional on quality and delivery and general costcompetitiveness), suppliers could generally counton customers trying to give sufficient orders forkeeping their capacity utilized. Within this ongo-ing relationship, rules of thumb for sharing thegains from engineering improvements gave sup-pliers the incentive to develop and implement newdesigns and manufacturing methods, and sharenew ideas with their customers. With assemblersmarketing several separate product lines, theycould have two-three firms supplying brakes, seatsor other components; suppliers could and did pe-riodically lose business to rivals, keeping themhonest. On the flip side, most large parts firmssold to several different assemblers, though therewas less overlap among suppliers to Nissan andToyota due to capacity and geographic consid-erations. Together, these two features speeded thediffusion of best practice throughout the indus-try.

Suppliers also became integral to vehicle en-gineering and development. Within the auto com-panies, stylists, and product and process engineerswere organized in platform teams. This facilitatedoverlapping different elements of the overall proc-ess, and such simultaneous engineering speededproduct development, cutting costs and improv-

ing market fit. Supplier input was crucial. Theycontributed about half of total engineering hours,coordinated in part through “design-in” (the co-location of supplier staff at their customers). Ingeneral, Japanese suppliers tended to do more“black box” work, developing parts to perform-ance specifications, while US suppliers workedto blueprints supplied by their customers. (In thelatter 1990s the USA and the EU industries con-verged rapidly towards the Japanese model.)

On the opposite end of the industry is vehicledistribution and repair. As in most other mar-kets, users in Japan buy from franchised dealers,not from the assemblers themselves. Dealers inJapan are typically large, multi-store operationswith an exclusive prefectural-level sales territorya legacy of the 1950s, when few dealerships wereneeded while registration procedures made it dif-ficult to sell across prefectural boundaries. At thesame time, the initially limited but geographicallydispersed customer base—plus expensive real es-tate in major urban markets—meant that sales-men visited likely customers, rather than waitingfor potential buyers at dealership sites. As themarket expanded, dealers set up new salesbranches within their existing sales territory; untilrecently they were prohibited by their franchisecontracts from “dualing,” selling the cars of morethan one maker. But with selling labor intensive,even in good times new cars were relatively un-profitable.

Instead, dealers’ profits relied upon a local mo-nopoly on vehicle repairs and on shaken, the man-datory inspection of cars required everytwo—three years by the Ministry of Transport.High fees from inspections (at one time $ 1,500or more) and fat margins on repairs more thancompensated for the low profitability of vehiclesales. Because inspections became annual afterthe 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 signifi-cant source of profits. Without “dualing” importswere unimportant; the few firms that specializedin foreign cars (such as Yanase Motors) were low-volume operations with few sales points, focus-ing on high-margin models, and handling manymakes in parallel. This, together with the cost ofsetting up an independent distribution system,kept foreign penetration low. However, firms that

automotive industry 33

made the requisite investments, such as BMWafter 1982, increased their sales volume andearned high profits.

The distribution system is now in flux. Theprefectural scope of the typical franchise meantthat from the assembler’s perspective a dealer wastoo big to fail. Toyota did well after 1982, and itsdealers thus had the resources to expand into thenewly prosperous suburbs. In contrast, Nissan’ssales stagnated, and it had to bail out several ma-jor dealers, but managers from corporate head-quarters proved no more adept at runningdealerships than the unlucky entrepreneurswhom they replaced, and had no resources toexpand to the suburbs. This vicious circle madeit even more difficult to maintain sales volume.

The incipient weakness of this structure hithome with the 25 percent drop in sales after 1990.Of course, some dealers overextended themselvesduring the “bubble” (as Mazda did at the corpo-rate level, trying to match Toyota’s five sales chan-nels despite its much smaller size). In addition,deregulation of the shaken in 1996 led to bothfewer inspections and lower prices. Combinedwith the market downturn following the con-sumption tax hike in April 1997, the majority ofdealerships operated in the red during 1998–2000, and required subsidies from car makers tostay in business. This is surely a source of un-ease in the entire industry even at Toyota, Hondaand Suzuki, whose domestic sales have held upbest.

International sales began with truck exportsto developing country markets in the 1950s. Pas-senger car exports came later, when the successof the Volkswagen Beetle in the late 1960s ex-panded the market for compact cars in the USA.New US emissions regulations in 1970 and theoil crises of 1973 and 1979 further boosted thesmall car segment to a peak of one-third of allsales. Rather than developing their own smallcars, the Big Three turned to Japanese makers asa source of captive imports, with General Mo-tors taking equity stakes in Isuzu and Suzuki, Fordin Mazda, and Chrysler in Mitsubishi Motors.Helped by good quality and a favorable exchangerate, Japanese producers captured the majorityof this new segment, some 2 million vehicles in1980, or about 20 percent of the US market. (Incontrast, Japanese firms fared poorly in Europe,

with its many producers of small cars, and sig-nificant import barriers.)

In the USA, seven Japanese firms vied forshare, keeping profits modest. They likely wouldhave exited the market when the small car seg-ment faded in the mid-1980s, as happened withEuropean imports in both the 1950s and 1960s.But in the spring of 1981 the Reagan administra-tion asked the Japanese government to impose aVER (“voluntary” export restraint) of 1.68 mil-lion units. Despite public handwringing (andgenuine confusion among executives), Japanesefirms soon realized the benefits of a formal car-tel, and raised prices for popular models by asmuch as 25 percent. Since only a limited numberof cars could be sold, firms also had an incentiveto move upscale and the VER provided the prof-its needed to develop bigger vehicles. Finally theVER encouraged local “transplant” assemblysince parts were not subject to import restrictions.Honda opened the first such plant in 1982, andby the end of the 1980s eight producers had op-erations in either the USA or Canada. This proc-ess accelerated after the Plaza Accord of 1986,when the steep appreciation of the yen made partsimports from Japan unattractive.

These ventures proved surprisingly success-ful. There are now twenty assembly engine andtransmission plants in the USA and Canada runby Japanese car makers, and at least 300 plantsrun by “transplant” suppliers. In 1999 they ac-counted for 3 million units, 18 percent of NAFTAoutput. The transplants initially focused on smallvehicles, with low profit margins, but Honda andToyota now produce more cars than Chrysler,and all are rushing to launch products in theminivan, SUV and pickup truck segments. Draw-ing upon their experience in the US, Japanesefirms then expanded into the EU. Most choseBritain as their base, but the strong pound laterhurt sales elsewhere in Europe. Japanese firms,however, dominate Asian markets, lagging onlyin China and Korea, and are expanding in LatinAmerica.

What of the future? The industry built 1.5million units of new plants inside Japan at thestart of the 1990s, leaving it with roughly 15 mil-lion units capacity But between the collapse ofthe “bubble” and the strong yen, domestic out-put appears likely to remain closer to 10 million

34 automotive industry

units. While Honda and Toyota have done wellin the USA, and minicar demand has expandedinside Japan, profits have otherwise proved elu-sive, both at home and abroad. Adjustment tothis unpleasant reality has been slow. During the1990s several temporary upturns lulled the in-dustry with hopes that plant closures could beforestalled. The steep recession that began withthe consumption tax increase of April 1997dashed these hopes, and a wholesale restructur-ing of the industry is underway. Ford took con-trol of Mazda in 1996, and General Motors has49 percent of Isuzu, giving it de facto control. In1999 Nissan was taken over by Renault, and in2000 DaimlerChrysler took a potentially control-ling stake in Mitsubishi. General Motors has in-creased its positions at Suzuki and Fuji HeavyIndustries (Subaru), and Toyota absorbedDaihatsu and Hino. (The fate of Nissan Diesel isstill unclear). Toyota and Honda thus remain theonly independent producers. A similar processof realignment will follow in the parts sector:Bosch (Germany) and Delphi (USA), for exam-

ple, have already taken over suppliers historicallyassociated with Nissan. In addition, while importsmight appear to comprise a trivial 6 percent shareof the market, they are concentrated in the high-margin luxury segment, and foreign firms nowhave potential additional sales channels throughtheir new Japanese subsidiaries.

The future entails many management chal-lenges. New owners must restructure and absorbtheir purchases, despite little or no experience op-erating in Japan. Meanwhile, Toyota and Honda—and many suppliers—are only now grappling withoverseas operations that will end up more im-portant than their domestic ones. Finally an ag-ing labor force and overall high wages make itlikely that much parts production will move off-shore, making factory management more com-plex. Japan will remain a major producer, withdomestic output of 10–11 million units andstrengths in engineering small vehicles, but it isalmost certainly past its heyday.

MICHAEL SMITKA

automotive industry 35

bad debt

Bad debt, more commonly referred to as “non-performing” or “bad loans,” are amounts loanedby banks but which fail to generate returns. Pre-cise definitions vary from country to country but,however defined, regulatory authorities generallyrequire banks to set aside capital to cover poten-tial losses arising from bad debt becoming unre-coverable debt.

In Japan, the definition of non-performingloans was more restrictive than generally acceptedstandards in other advanced industrial countriesuntil the latter 1990s. Before fiscal year 1994, forexample, loans to borrowers in legal bankruptcyor considerably past due were classified as non-performing but restructured loans were not. Fromfiscal year 1995 on, however, regulatory authori-ties progressively widened the definition. Todaydefinitions of bad debt in Japan fall in line withglobally accepted standards.

Repercussions of bad debt

Bad debt has a number of repercussions. Thepresence of large amounts of non-performingloans impairs the capital ratios of banks, therebyshrinking the amount of capital banks have avail-able to lend to other borrowers. In this way largeamounts of non-performing loans may inducecredit crunches where potentially productive ven-tures are unable to obtain sufficient capital be-cause capital is tied up in unproductiveinvestments.

Since deposit-taking financial institutions serve

essentially as an intermediary lending depositsto third parties, a rise in amounts of debt notrepaid also means that the chances of a bank nothaving the money needed to return a depositor’smoney rises. If a bank then becomes insolventand fails, confidence in other banks also dropsand depositors may rush to withdraw deposits.Such a run on the banks can, in turn, lead to aliquidity crunch. At any given time, most bankswill not have the cash on hand to pay out everydepositor, since a significant portion of depositswill be tied up in loans extended to customers.Thus, even solvent banks have the potential tocollapse when another bank fails due to exces-sive bad debt. A rapid increase in amounts ofbad debt in any nation’s financial system shouldthus be a phenomenon of concern to policy mak-ers and regulatory authorities.

Sources of bad debt

Bad debt arises for a number of reasons. Exces-sive risk-taking by management is often a primarycause. This was the case in the latter 1980s whenbanks loaned funds for speculative purposes. Baddebt may also arise from an economic downturn.When the economy enters a recession, as Japan’sdid twice in the 1990s, company profits tend tofall, making it more difficult for borrowers to re-pay debt. Because of this correlation between eco-nomic performance and bad debt levels, banksand their regulators often initially delay in ag-gressively addressing non-performing loan prob-lems, hoping that bad debt will simply shrink toan acceptable level with an economic recovery.

B

Bad debt is also commonly spurred by exog-enous shocks. For example, the Great HanshinEarthquake that struck the Kobe area in Japan in1995 destroyed the business foundations of manycompanies, and therefore led to a surge in baddebt for banks with heavy lending in this region.Likewise, dramatic shifts in exchange rates or inoil prices may affect the profit bases of particularsectors of the economy with a high dependenceon imported materials or export markets, sud-denly making them unable to repay debts.

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

Prior to the collapse of Japan’s asset bubble in1991, financial institutions infrequently encoun-tered distress due to high levels of non-perform-ing loans. If a bank did face insolvency as a resultof high levels of bad debt, the Ministry of Fi-nance (MOF) arranged a “rescue merger” be-hind the scenes, relying on a stronger bank toabsorb the weaker. In an era of heavy regulation,stronger banks had incentives to participate insuch rescue procedures, for doing so meant gain-ing valuable retail branches. With the 1991 burst-ing of the nation’s asset bubble, however, allJapanese banks became burdened with largeamounts of non-performing loans and limited de-regulation meant that the relatively stronger bankshad fewer incentives to assist in “rescue merg-ers.”

The magnitude of nonperforming loans in theJapanese banking sector only began to be revealedto the public in 1995, when a Finance Ministryofficial testified in the Diet concerning the gravecondition of the housing and loan corporationscalled jusen. Even then, only estimates of aggre-gate totals for the banking sector as a whole wererevealed. Aggressive measures to deal with thehigh levels of bad debt in the banking systemwere postponed by authorities until the eruptionof acute financial crisis in 1997–8. By this time,the magnitude of non-performing loans in theJapanese banking system was estimated at closeto one trillion dollars.

In 1998 and 1999, the government injectedpublic funds into a number of Japan’s large com-mercial banks in an attempt to boost their capitalbases and aid them in the disposal of their bad

debt. With the use of public funds, banks wererequired for the first time to disclose amounts ofnon-performing loans to the public. Althoughbanks carried out record write-offs and recordedrecord losses in 1999 and 2000, the continuedeconomic downturn and decline in asset pricesled the number of corporate bankruptcies to con-tinue to climb and additional bad debt to emerge.Japanese banks therefore remained burdened withlarge amounts of non-performing loans as theyentered the twenty-first century.

Further reading

Amyx, J. (2000) “Political Implications to Far-reachingBanking Reforms in Japan: Implications for Asia,”in G.Noble and J.Ravenhill (eds), The Asian Finan-cial Crisis and the Architecture of Global Finance, NewYork: Cambridge University Press, 132–51.

JENNIFER AMYX

Bank of Japan

The Bank of Japan (BOJ), the nation’s centralbank, was established in 1882 by the FinanceMinister as a joint undertaking of governmentand business. The BOJ’s mission is to lay thefoundation for sound economic developmentthrough the maintenance of price stability andensuring the stability of the financial system. Tofulfill this mission, it issues and managesbanknotes, implements monetary policy, providesfinancial settlement services, manages the busi-ness of Japanese government securities, acts as arepresentative 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 highestdecision-making body of the bank.

Monetary policy

The BOJ implements monetary policy throughsetting the official discount rate and through mar-ket operations. Both activities influence interestrates and interest rates, in turn, affect various pricelevels. The discount rate is the standard rate ofinterest on loans made by the central bank to pri-vate financial institutions. Loose monetary policy

Bank of Japan 37

(low rates) makes it easier for banks to attractloan customers because it enables them to makeloans at lower interest rates. In general, the cen-tral bank raises the rate when the economy be-comes overheated and lowers the rate when thereare deflationary trends.

Through market operations, the Bank guidesthe key unsecured overnight call money rate.From 1950–91, the BOJ also influenced the avail-ability of credit through the exercise of “windowguidance” or madoguchi shido. Through “win-dow guidance,” the BOJ indicated to commercialbanks the amount of lending it deemed proper.

In the late 1980s, prolonged expansionarymonetary policy by the BOJ fueled a speculativeasset “bubble” of unprecedented magnitude. InFebruary 1987, the BOJ dropped the discount rateto a (then) postwar historic low of 2.5 percentand held this rate until May 1989. With an abun-dance of “cheap” money available, many compa-nies and individuals borrowed for the purposesof speculative investment and from 1987 to 1989,the Tokyo Stock Exchange Nikkei 225 Averagenearly doubled in value. The eventual tighten-ing of monetary policy however, led to a burst-ing of this bubble.

In attempting to shore up banks burdened withmassive amounts of non-performing loans ordead debts that emerged from the bubble’s col-lapse, the central bank again loosened monetarypolicy In April 1995, the discount rate was low-ered to a new historic low of 1 percent and thenfurther lowered to 0.5 percent in September 1995.In an emergency measure extending from Feb-ruary 1999 through August 2000, the BOJ alsoset the target overnight call rate at zero percentfollowing a series of financial institution bank-ruptcies.

Ensuring stability of the financial system

The BOJ provides and maintains a settlement sys-tem for financial transactions between financialinstitutions. Funds are transferred across the cur-rent account held by each financial institution atthe central bank. The BOJ also serves as thelender of last resort to financial institutions fac-ing liquidity problems, extending uncollateralizedloans to financial institutions if the stability ofthe financial system is perceived to be in danger.

To prevent financial institutions from falling preyto the “moral hazard” of regarding infusions ofcapital from the BOJ as a form of insurance, theBOJ conducts regular on-site examinations ofthose financial institutions with accounts at thecentral bank.

The rescue operations of the BOJ saved largebanks from failure in the Banking Crisis of 1927.The BOJ also came to the aid of Yamaichi Secu-rities and other brokerages in 1965. More recentlythe BOJ provided funds in 1994 and the yearsthereafter to execute schemes for facilitating therescue of credit unions and banks burdened withmassive amounts of nonperforming loans.

International activities

The BOJ’s international activities are threefold.First, the Bank engages in international transac-tions by providing yen accounts to central banksand government institutions overseas. Second, theBank plays a central role in monitoring and in-tervening, when necessary in currency markets.For example, in the 1990s, the BOJ’s massive in-terventions in the form of dollar buying were keyto suppressing the strength of the yen and mak-ing up for the shortfall between Japan’s currentand capital accounts. Finally the BOJ’s interna-tional activities also involve participation in in-ternational forums such as the meetings of theBank for International Settlements (BIS), G7, andthe International Monetary Fund.

The new Bank of Japan Law

For most of the postwar period, the BOJ lackedindependence. Monetary policy strongly reflectedthe influence of the MOF and the Bank’s deci-sion-making autonomy was also compromised bythe conduct of its personnel and budget matters.The MOF appointed the BOJ’s executive audi-tors and comptroller and had the power to dis-miss Bank officials, including the governor. TheBOJ budget also required approval by the FinanceMinister.

With the 1997 passage of the New Bank ofJapan Law and the enactment of this law in April1998, however, the central bank gained greaterindependence in the conduct of monetary policyand more autonomy in personnel matters. The

38 Bank of Japan

new law also introduced greater transparency intodecision-making processes within the BOJ. Thecentral bank’s budget remains subject to MOFapproval.

The impetus for the new BOJ Law was therecognition of the MOF’s undue influence overthe BOJ in its conduct of monetary policy in thebubble period and the linkage of this policy break-down to the nation’s prolonged recession and fi-nancial crisis in the 1990s. Reorganization of thecentral bank under the new law was also acceler-ated by the emergence of scandals in the latter1990s. These scandals centered on dubious in-teractions between BOJ officials and private fi-nancial institutions.

Further reading

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

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 Truthof the Bank of Japan), Tokyo: Diamond-sha.

JENNIFER AMYX

Bank of Tokyo

The Bank of Tokyo (BOT) was founded in 1880as the Yokohama Specie Bank, which contributedto the internationalization of domestic industriesthrough international finance operations. Afterthe Second World War, in 1946, the bank wasreorganized as a commercial bank, and the Bankof Tokyo was established. In 1952, the BOTopened its first foreign branches in New York andLondon, and in 1954 the BOT became Japan’sonly specialized foreign exchange bank. In 1962the BOT was authorized to issue debentures (atype of bond) to support its yen funding. Thedebentures issued by BOT were abbreviated asWari-To (discounted-Tokyo), and represented aservice where the bank offered individual inves-tors the ability to purchase bonds. In Japan a lim-ited number of financial institutions wereauthorized to issue debentures (authorized banksare long term credit banks, the Norin ChukinBank, Shyoko Chukin Bank, Shinkin Central

Bank and BOT, with BOT being the only com-mercial bank to be authorized with such pow-ers). This privileged position helped the BOT todevelop a reputation as a professional bank ofinternational finance, in turn helping it to domi-nate the Japanese inter-bank foreign exchangemarkets.

In 1996, the BOT merged with MitsubishiBank, to become Tokyo-Mitsubishi Bank. Thisnew colossal bank, with combined assets of ¥72.8trillion, 36 percent larger than the title-holderSumitomo Bank and more than five times biggerthan America’s Citibank, became the world’s larg-est bank. It is still one of the largest banks in theworld with subsidiaries and associated banks onfive continents.

In its domestic business, the bank provides afull array of commercial banking services. Its in-ternational banking services include investmentfinancing. The Tokyo-Mitsubishi Bank has mostrecently assisted the Export-Import Bank of Ja-pan and the Overseas Economic Co-operationFund in extending credit. It is a major commis-sioned bank for foreign bonds issued in yen de-nominations.

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 inForeign 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 CreditSystem,” (1994) Nihon Keizai Shimbun, October 16.

SUMIHIRO TAKEDA

Banking Act of 1982

The Banking Act of 1982 represented the firstcomprehensive revision of the Banking Law of1927. The Act governed the behavior of all “or-dinary” banks in Japan and served as the legalbasis for the on-site inspections carried out peri-odically by the Inspections Bureau in the Minis-try of Finance (MOF). The Act’s purpose wasto maintain the smooth flow of credit and financ-ing while at the same time protecting depositors

Banking Act of 1982 39

by ensuring prudent management of the bank-ing business (Article 1). Its passage in the Dieton May 25, 1981 and enactment on April 1, 1982followed decades of debate and numerous un-successful attempts by the Ministry of Finance(MOF) to draft a banking law revision.

The beginning of securitization of thebanking sector

The Banking Act of 1982 was most notable forits provisions widening the scope of business forbanks. More specifically the Act marked the be-ginning of the securitization of the Japanese bank-ing sector.

The issuance of large amounts of governmentdebt in the 1970s affected the profit margins ofbanks because banks comprised the governmentbond syndicate, absorbing government bonds atbelow market and holding them until the Bankof Japan (BOJ) reabsorbed them. With a surgein debt issues, however, banks began to show sig-nificant losses from their government bond hold-ings. As a result, they demanded the right to retailgovernment bonds. Although MOF made adjust-ments at the margins in response to these profitconcerns of banks—including altering accountingmethods for government bonds—the banks re-mained dissatisfied. In 1978, the banks boycottedthe issue of long-term government bonds. Thisaction spurred the government to seek alterna-tive measures to resolve the problem.

The provisions eventually contained in theBanking Act of 1982 permitted banks to enterthe part of the securities business involving thesale of government bonds to the public. This out-come, however, was the product of a fierce battlebetween the banking and securities industries.Brokerages naturally opposed entry by banks intoany aspect of the securities industry seeing it asan encroachment on their turf. The MOF there-fore was forced to broker a compromise that ena-bled banks to avoid losses on government bondsbut at the same time compensated the broker-ages for the limited entry by banks into theirbusiness territory.

In the Act’s final provisions, banks were per-mitted to invest in equities and bonds on theirown behalf, underwrite and offer for sale gov-ernment and other public bonds, act as securi-

ties agents, and loan securities as ancillary busi-nesses. With this newly granted permission,major Japanese banks were able to turn to bonddealing and investment as a new source of prof-its. Receiving permission to enter the governmentbond business was especially important for thecity banks, whose major borrowers and deposi-tors were corporations making the shift awayfrom capital-intensive undertakings at this time.As a concession to brokerages, securities compa-nies were permitted to start lending money se-cured by government bonds.

Notably the Banking Act of 1982 did not en-tirely settle the debate over banks entering thesecurities business, however. Many other areasof the securities business remained closed to thebanking sector and plans for major changes there-after became replaced by a step by step liberaliza-tion process. Brokerages continued to fiercelyresist the encroachment upon their territory bybanks, thereby impeding efforts to do away morequickly with compartmentalization of the finan-cial industry

Supporting the status quo with disclosurerequirements

A significant feature of the Banking Act of 1982(as well as of its predecessor, the Banking Act of1927) was its lack of explicit details regardingbanking regulations, leaving these instead to ad-ministrative guidance. Thus, MOF officials con-tinued to enjoy a large degree of discretion incarrying out banking regulation. In the past, theministry had preferred this approach to formallylegislating changes, as the strategy of obtainingcooperation enabled the ministry to maintain agreat deal of flexibility in response while also en-joying discretionary authority. In the years lead-ing up to the passage of the Banking Act of 1982,however, the ministry found reliance on extrale-gal administrative guidance to be a double-edgedsword. Instances of bank defiance of MOF guid-ance were on the rise. In the lead up to the pas-sage of the Banking Act, therefore, the ministryin fact sought to formalize some of its guidance,drafting proposals for stricter disclosure require-ments to be included as part of the Banking Actlegislation.

MOF officials believed that consolidation of

40 Banking Act of 1982

the sector was needed to make the banking in-dustry more efficient. Since the deposit insurancescheme was not credibly funded, the ministryhoped to eliminate the weakest banks throughmergers rather than inducing failures. Theweaker banks had little incentive to cooperate insuch mergers, however, since the ministry’s im-plicit guarantee against failure remained in place.Thus, MOF officials sought tougher disclosurerequirements as a means of facilitating the neededconsolidation.

The All Japan Bankers’ Federation, Zenginkyo,opposed the MOF’s proposal, however, andfiercely lobbied Liberal Democratic Party (LDP)officials to veto the proposal on their behalf. Thebanking industry’s critical role as a provider oflarge amounts of political funds helped it gainthe LDP’s sympathy In the end, the banking in-dustry was able to foil the MOF’s attempt to in-troduce more market discipline and the status quovis-à-vis disclosure was upheld. The MOF’s fail-ure on the disclosure issue was compounded aswell by its failure to obtain legal authority to dis-pose of bad bank management.

Other provisions

The Banking Act of 1982 also incorporated forthe first time an upper lending limit on the sumthat could be loaned to a single party therebyreducing the risk of excessively concentrated bor-rowing. Loans to a single customer could not ex-ceed 20 percent of capital and surplus funds(Supplementary Provisions, Article 4). This up-per limit on lending had previously been speci-fied through MOF circulars rather than by lawbut was made into law at the behest of the Finan-cial System Research Council.

Further reading

Rosenbluth, F. (1989) Financial Politics in ContemporaryJapan, Ithaca, NY: Cornell University Press.

JENNIFER AMYX

banking crises

The decade of the 1990s was characterized by aseries 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-Sec-ond World War era. In the 1990s Japanese banksand securities firms failed primarily due to largeproportions of non-performing loans. The proxi-mate cause of these banking problems seems tobe the 1990 bursting of the asset price bubble ofthe late 1980s. By the end of the 1990s, manylarge and small Japanese banks were insolventand non-performing loans were estimated to beover $ 1 trillion and, on average, over 20 percentof Japanese bank assets. Non-performing assetswere undoubtedly much higher than 20 percentat many banks.

It has been contended that only liberal ac-counting procedures permitted most banks tosatisfy the Basel capital standards, while implicitgovernment guarantees prevented depositor runs.In spite of these guarantees and accounting treat-ments, Japanese banks continued to face severeliquidity problems in financial markets and sev-eral Japanese banks have had to be rescued orclosed in the later half of the 1990s. The originof this recent banking crisis in Japan can be tracedto the poor state of the Japanese economy andthe collapse of asset prices in the beginning ofthe 1990s. While there have been a number ofbanking crises in Japan, especially in the 1920s,the 1990s crisis was the first major crisis in thepost-Second World War era.

On August 30, 1995, Hyogo Bank, a mid-sizedregional bank with about $37 billion in total as-sets, became the first commercial bank in Japanto fail since the end of the Second World War.While all depositors were paid, in a departurefrom the traditional ‘convoy system’ sharehold-ers and non-depositor creditors of Hyogo Banksuffered losses. As in the past, the business ofHyogo bank was reorganized with funds fromits major owners, other large banks, and takenover by a new entity Payments associated withthis resolution depleted all deposit insurancefunds and the government announced that itwould not allow any of the country’s twenty larg-est banks to fail before the year 2000.

Nevertheless, three major institutions failed in1997, Sanyo Securities on November 4, HokkaidoTakushoku Bank on November 17, and YamaichiSecurities on November 24. Similarly two majorinstitutions also failed in 1998, Long-Term CreditBank of Japan on October 23 and Nippon Credit

banking crises 41

Bank on December 13. Other Japanese financialinstitutions continued to fail intermittently in1999 and 2000. Why has the banking crisis inJapan lasted for all of the 1990s and is still con-tinuing in early 2001?

Until recently the Japanese banking systemwas heavily regulated and segmented. Differenttypes of banks were permitted to serve only acertain type of customer. For example, city banksspecialized in short-term loans, long-term creditbanks specialized in long-term developmentalloans, and trust banks specialized in the moneymanagement business. In addition to banks, Ja-pan also has numerous financial institutions andcooperatives that specialize in lending to smallbusinesses, agriculture, forestry and fisheries, se-curities finance companies, insurance companies,and government financial institutions. The larg-est holder of savings in Japan, the Postal SavingsSystem, is part of the last category.

Like other central banks, the Bank of Japanmust balance the conflicting objectives of provid-ing confidence in the system for financial inter-mediation to take place while limiting the moralhazard costs of rescuing banks in trouble. Withan emphasis on stability in bank regulation, allbank deposits in Japan are insured by the govern-ment and, from the Second World War until themid-1990s, no Japanese bank had been allowedto fail. Typically a merger partner would be foundfor an ailing bank and in the so-called “convoyescort system,” major competitor banks were ex-pected to contribute funds for such rescues. In thissystem, bank relationships with commercial cus-tomers were long-term in nature, there was littlecompetition, innovation, or push for efficiencyamong banks, and any change was slow and lim-ited by the slowest bank in a group. Public disclo-sure of loan quality capital ratios, and other databy banks in Japan has generally been of relativelylow quality. For example, Japanese banks were notrequired to report non-performing loans until 1993and were not required to use US and internationalstandards for such reports until 1998.

In recent years, driven by technology and glo-balization, the Japanese financial system is beinggradually deregulated. Trading in new financialinstruments was progressively permitted allthrough the 1980s, derivatives markets were al-lowed by the late 1980s, and interest rates were

deregulated in the early 1990s. The 1993 Finan-cial System Reform Act dismantled barriers be-tween banking and securities businesses and theimplementation of the ‘Big Bang’ set of financialderegulations was started in 1998.

Based on this brief review, we can now beginto answer why have Japanese banks been in cri-sis since the beginning of the 1990s and contin-ued to fail in the second half of the 1990s? Onereason seems to be the sudden collapse of assetprices in the first part of the 1990s. But why hasthe crisis lasted so long? One reason may be thatJapanese regulators initially may have hoped togrow out of the crisis as bank profits rose witheconomic recovery. However, economic recover-ies in Japan in the 1990s have been weak andshort-lived. In addition, there has been little po-litical will to inject the money needed to rescueJapanese banks, especially since the governmentin Tokyo is a coalition government and the bank-ing industry and its regulators have been taintedby corruption scandals. Another explanationnotes that Japanese banks have not developedcredit analysis capabilities having depended ongovernment directed and collateralized lendingand, given the generally poor levels of disclosure,nor have they been subject to market discipline.Under the prevailing amaku dari practice whereretiring senior regulators were virtually guaran-teed senior positions with the institutions theyregulated, it is contended that bank regulation inJapan has been less than fully effective. However,bank regulation may also have lost its effective-ness as Japan gradually moved to a more mar-ket-oriented economy and financial system.

While there are many causes of this continu-ing banking crisis in Japan, Japanese banks mustbe restructured to reduce or eliminate non-per-forming loans from their balance sheets so thatthey can restart lending. This will require govern-ment funds and decisive action by the government.It would also be useful if Japanese banks developbetter credit assessment skills, improve disclosure,and become more subject to market discipline.

Further reading

Aggarwal, R. (ed.) (1999) Restructuring Japanese Businessfor Growth, Boston, MA: Kluwer Academic Publish-ers.

42 banking crises

Genay H. (1998) “Assessing the Condition of JapaneseBanks: How Informative are Accounting Earnings?”FRB Chicago Economic Perspectives 4:12–34.

Hanazaki, M. and Horiuchi, A. (2000) “Is Japan’s Fi-nancial System Efficient?” Oxford Review of EconomicPolicy 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 Bank-ing Crisis: Where Did It Come From and HowWill It End?” NBER Macroeconomics Annual 129–201.

Motonishi, T. and Yashikawa, H. (1999) “Causes ofthe Long Stagnation of Japan During the 1990s:Financial or Real?” Journal of Japanese and Interna-tional Economies 12 (2): 181–200.

RAJ AGGARWAL

banking industry

Japan’s banking industry began in the earlyTokugawa period with the development of ex-change houses and money lending stores withinthe family of enterprises of the great merchanthouses or ie. These merchant banking operationswere to become the banks of the zaibatsu familygroups, as they were known starting in the earlymodern period through the prewar period. Thesegroups are still in operation today includingMitsui group (Sakura Bank), Sumitomo groupand bank, Konoike household (Sanwa Bank).Most merchant banking operations were notgranted commercial banking licenses until the1890 Banking Act.

The Meiji leadership of Japan’s early modernperiod, seeking to promote economic develop-ment through modernization of its financial sys-tem, first adopted the US banking model. TheNational Bank Act of 1872 created a system ofnational chartered banks with the authority toissue bank notes. By 1879, 153 banks had beenchartered, but their demise was equally rapid.Over-issuance of notes by the banks led to infla-tion, and limited capitalization led to quick bankfailures, largely due to inexperience with lendingrisk on the part of the former samurai owners,who used their government retirement bonds ascapital.

The failure of the National Bank model and

the pressing need to stabilize the economy nextled the Meiji genro (oligarchic leadership) of the“elder statesman period” to the adoption of aEuropean model based upon the establishmentof a central bank. On the initiative of Meiji Fi-nance Minister Matsukata, the charters of morethan thirty central banks were examined, afterwhich a decision was made in favor of the Ger-man model. In 1882 the Bank of Japan (BOJ)was created. The Reichsbank model was chosen(notwithstanding apocryphal stories of the selec-tion of the Belgium model) and was reaffirmedat the BOJ’s rechartering in 1942 because it gavethe maximum amount of power to the Ministryof Finance (MOF) to the exclusion of any par-liamentary authority.

Chief among the reasons for the founding ofthe Bank of Japan was the need to regulate andcontrol Japan’s currency. The BOJ was given thesole right to issue currency. It took the govern-ment four years, until 1886, however, to accu-mulate enough gold to redeem the stilloutstanding private bank notes. This action initi-ated what proved to be the beginning of a longhistory of government bailouts of the commer-cial banking sector. Another decade was requiredto accumulate an adequate gold reserve beforethe Bank of Japan could achieve its ultimate goalin 1897 of placing Japan on the gold standard.

From the late nineteenth century to thepresent, the Ministry of Finance, which wieldsactive control over the banking sector, has man-aged Japan’s economic development policies.Matsukata, who was noted for his predilectionfor autocratic control, ruled the MOF for twentyyears and was responsible for initiating the prac-tice of using of the banking system for policy-based finance, which characteristic has identifiedJapan’s banking system for most of the past 120years.

First enunciated by Matsukata, governmentbanking policy aimed to create a system that wasnon-competitive and highly segmented. This sys-tem was designed to meet the specific needs ofbusiness for short-term financing, long-term com-mercial goals, foreign exchange and commercerequirements, and the establishment of savingsbanks. Specialized public sector policy-based fi-nancial institutions were established to promoteeconomic development, industrial, regional, ex-

banking industry 43

port and import trade, colonial development and,until the end of the Second World War, to financeJapan’s military economy. It was Matsukata’s ex-pectation that the Ministry of Finance would con-trol the activities of all of these institutions. Thissegmented system lasted until the liberalizationof the financial sector took place a century laterin the 1990s.

The only notable exception to the tight con-trol wielded by the central bank occurred duringthe post-First World War decade when the gov-ernment’s laissez-faire policies let loose a period offree-wheeling financial markets. This period cameto an abrupt end with the 1927 banking crisis,which followed the Bank of Japan’s dubious dis-counting of bills as a relief measure after the GreatKanto Earthquake (1923). Eventually a panic runensued on a number of banks, which werethought to be holding the worthless paper. Thesubsequent collapse of many banks led the Min-istry of Finance to take a direct hand in the fail-ing banking industry The government took overownership of a number of the failing banks, re-organizing and consolidating them. The newlyorganized banks were soon pressed into the serv-ice of the emerging military economy of the1930s.

The bank-centered financing regime gave theMinistry of Finance a considerable amount ofpower in directing economic development policyparticularly in comparison to its inability to di-rect the equity-capital markets. In the tight creditconditions of the postwar period, the main banksystem, in which banks were the chief suppliersof corporate finance, became the MoF’s princi-pal mechanism of rationing funds.

In the 1980s the rapid expansion of credit pro-vided by banks for speculative investment in realestate and construction was one of the mainsources fueling what later became known as the“bubble economy” The collapse of the bubbleled to the most profound recession since the endof the Second World War. Today non-perform-ing loans still carried by the banks are estimatedto range from upwards of ¥63.3 trillion to twicethat amount, and have led to consolidations andmergers within the commercial banking sectoras well as the bankruptcy of two of Japan’s threelong-term credit banks. This in turn has resultedin the creation (to date) of four giant holding com-

panies which encompass all of Japan’s remainingcity banks together with trust banks.

After the revaluation of the yen following the1985 Plaza Accord agreement, Japanese bankstook a proactive role in financing the expansionof Japanese direct investment overseas, most con-spicuously the development by companies andindustries of subsidiary operations overseas, theacquisition of existing companies, and the build-ing of new production facilities. In North Americain the 1980s, every Japanese city bank and long-term credit bank, followed by more than 65 re-gional banks, all opened branch offices in NewYork as well as another 120 branches in otherUS cities. Their lending to construction and thereal estate market in the USA led to a collapse inthe US real estate bubble in the early 1990s, as ithad earlier in Japan.

This pattern was repeated in the mid-1990sby Japanese banks which engaged in similar lend-ing for speculative investment in Asia. Their ex-tensive lending to companies in the region led tospeculation in real estate and local equities mar-kets. The number of Japanese bank branches inHong Kong exceeded their number in New York.The collapse of the resulting speculative bubble,which had been financed by Japanese bank lend-ing, helped precipitate the Asian financial crisisof 1997.

Throughout the postwar period, until finan-cial liberalization policies were instituted in the1990s, the financial sector was strictly seg-mented into the following categories of short-term lending institutions: city banks, regionalbanks, and sogo (mutual) banks. The city bankswere large-scale commercial banks with nation-wide franchises that served primarily as chiefmain banks to major commercial clients, such asthe large-cap firms listed in the First Section ofthe Tokyo Stock Exchange (TSE). Among thisgroup of banks were the then so-called Big Six,which were the main banks for the giant kigyoshudan (corporate enterprise groups) of the samenames: Mitsui (later re-named Sakura),Sumitomo, and Mitsubishi Banks, all formerzaibatsu banks, and for the so-called bank-centered groups: Daiichi Kangyo (DKB),Sanwa, and Fuji Banks. Another half-dozen citybanks had largely regional client bases. TheBank of Tokyo was also a city bank. Formerly

44 banking industry

government owned, it was a specialized foreignexchange bank with a large clientele amongJapanese corporations doing business overseas.

The second category of commercial banks wasthe more than sixty-five regional banks. Theircommercial base as main banks was among me-dium-sized businesses (typically Second Sectionfirms listed on the TSE) and large privately heldfirms. They also enjoyed the patronage of largecorporations in their regions but not usually withmain bank status.

The third category of short-term lending in-stitutions were the sogo (mutual) banks which werere-chartered as second-tier regional banks in thelate 1980s. These banks catered primarily tosmall-scale corporations and privately held busi-nesses within their regions. The legal distinctionsbetween the city banks, the regional banks, andthe second-tier regional banks were erased in the1990s when they were all reclassified as commer-cial banks, but they still have retained their char-acteristic markets.

The long-term credit banks were organized toprovide long-term financing, principally throughthe sale of long-term debentures. The HypothecBank of Japan, organized by the government in1896, was the first bank of its type in Japan andwas modeled after the Credit Foncier of France.As its name implies, this land-collateral basedbank made loans secured by agricultural proper-ties. The purpose of the bank was to provide long-term credits for agricultural and enterprisedevelopment. In addition, local banks known asAgricultural and Industrial Banks were estab-lished in each prefecture between 1897 and 1900.The capital of these banks was held by individu-als and the prefectural governments. Similar tothe Hypothec Bank in function, they raised fundsby issuing debentures. In 1921 they were amal-gamated to become the Hypothec Bank’s regionalbranches.

In 1900 the Industrial Bank of Japan (IBJ),patterned after France’s Credit Mobilier, was es-tablished. Its purpose was to provide long-termdevelopmental loans for vital industries, such asshipping, iron and steel, and chemicals, usuallyfor a term of at least five years. Local govern-ment bonds as well as debentures, shares of com-panies, mortgages of land and buildings, factories,ships, and railways could be used as loan collat-

eral. The IBJ’s operations were supervised by thegovernment, and it also raised funds through thesale of debentures. A large share of its capitalstock, some 43 percent, was raised in the Lon-don market and held by foreigners. In the 1930sthe bank was reorganized to provide long-termcredits for industries supporting the militaryeconomy.

In the postwar period three long-term creditbanks registered under the Long-Term Credit Act(1952) for the purpose of providing long-termloans to industry: a newly organized Long-TermCredit Bank of Japan, the Industrial Bank ofJapan, and later the Nippon Credit Bank, succes-sor to the Hypothec Bank. Up until the 1980stheir distinctive ability to offer long-term creditbecame blurred as city banks also began extend-ing long-term loans on a de facto basis by therollover of short-term credits. Seeking to regainprofits from the loss of their market share to thecity banks, the Long-Term Credit Bank and Nip-pon Credit Bank ultimately became casualties ofthe non-performing high-risk loans they hadmade for construction and real estate and woulddeclare bankruptcy. The Industrial Bank of Ja-pan, the strongest of the three, merged withDaiichi Kangyo Bank and Fuji Bank to formthe Mizuho Financial Holding Group.

The Yokohama Specie Bank (YSB) was cre-ated by the government with the mandate of fi-nancing foreign trade. Until 1880 almost allforeign exchange in Japan had been conductedby foreign-owned banks. When currency depre-ciations led to extreme fluctuations in exchangerates making foreign commerce difficult, the gov-ernment created the Yokohama Specie Bank inorder to bring this problem under control. TheYSB held the exclusive franchise to deal in for-eign exchange until the end of the First WorldWar when commercial banks were allowed toenter the foreign exchange market. Following theSecond World War the bank was reorganized asthe Bank of Tokyo and once again held until the1970s the exclusive authority to deal in foreignexchange. In the 1990s the bank merged withMitsubishi Bank.

The Savings Bank Act of 1890 was passed toprotect depositors, who were mostly peasants.By 1901 there were 2,355 independent savingsand deposit banks. Although the government

banking industry 45

earlier sought to consolidate them, it was notuntil 1943 that the Ministry of Finance orderedthem closed and the personal savings they heldtransferred into commercial banks to strengthenfinancing for the war effort. At this point indi-vidual and household savings became a largecomponent of main bank system profits. Today,the only remaining savings deposit takers are theshinkin (non-profit financial cooperatives) and thepostal savings system. The commercial bank-ing system for many years has called for thebreakup and privatization or the outright abol-ishment of the postal savings system, whichcomes under the supervision of the Ministry ofPosts and Telecommunications rather than theMinistry of Finance.

Since the late 1990s and up to the present,many changes have taken place in the consolida-tion of Japan’s banking industry The number ofbank failures continues apace as a result of theongoing non-performing loan crisis, which arechiefly loans to real estate and construction in-terests. This problem continues to plague the fi-nancial sector since the collapse of the bubbleeconomy of the late 1980s and has driven thetrend to takeovers and mergers among financialinstitutions.

The recent enactment of the Financial Hold-ing Company Act has made it possible for com-mercial banks to merge without reducing theircross-shareholdings in client firms. The Act alsopermits different categories of banks—commer-cial, long-term, and trust banks—as well as secu-rities firms and insurance companies to jointogether, in essence, granting them universalbanking capabilities. This liberalization overturnsexisting financial segmentation policies first laiddown by the Ministry of Finance in the nineteenthcentury and reinforced in the postwar Ameri-can occupation period by the incorporation ofthe principles of United States’ Glass-Steagall Actwithin Article 65 of Japan’s Banking Law. As oftoday all of Japan’s top city banks, remaining long-term credit bank (IBJ), and most of its trust banks,together with several insurance companies havebeen merged into four megabanks.

As mentioned earlier, one of the paramountdifficulties facing the banking industry today isthe continuing non-performing loans problem,which has withstood both the creation and de-

mise of the unsuccessful Financial Reconstruc-tion Commission (1997–2001). Other problemsconfronting the banking industry include the stillgrowing non-performing loan portfolio of the re-gional banks, the entry of foreign financial com-petitors into Japan’s formerly closed financialmarkets, as well as new domestic competitors,such as retailers and manufacturers which haveset up new institutions offering financial services.Despite the injection of public funds to recapitalizethe banks and the near-zero interest-rate policyof the Bank of Japan, banks have refused to issuenew loans due to the continuing declining valueof bank-held shares in their client firms whichseverely lowers their capital/asset ratio require-ments.

Further reading

Scher, M.J. (1996) Japanese Interfirm Networks and TheirMain Banks, London: Macmillan and New York:St. Martin’s Press.

Scher, M.J. and Beechler, S.L. (1994) “Japanese Bank-ing in the U.S.—From Transient Advantage to Stra-tegic Failure,” Working Paper Series, Center onJapanese Economy and Business, New York: Co-lumbia University.

MARK J.SCHER

bankruptcies

Bankruptcy involves an individual or corpora-tion seeking legal protection from creditors be-cause of insolvency Comparatively speaking, theincidence of corporate bankruptcy in postwarJapan has been extremely high. In 1977, for ex-ample, more than 18,000 firms went bankrupt inJapan, while in the same year fewer than 800 firmswent bankrupt in the United States.

Firms may go bankrupt for a number of rea-sons. In general, however, the number of bank-ruptcies tends to rise substantially when aneconomy enters recession, experiences a shockin the presence of latent business weakness, orundergoes structural changes. Until the latter1970s, most companies that went bankrupt inJapan did so as a result of temporary critical con-ditions. From the latter 1970s through the 1980s,however, structural causes were more often the

46 bankruptcies

reason. In the 1990s, unsound investments madeduring Japan’s “bubble” period of the latter 1980swere a primary cause of failure, as asset pricesdeclined continuously over the course of the dec-ade.

The “dual-structure economy” andbankruptcy patterns

A distinctive feature of corporate bankruptcy pat-terns in Japan until the latter 1990s was the con-centration of these failures almost exclusively insmall and medium-sized firms. The failure oflarge corporations was extremely rare. In 1993,for example, of the total number of bankruptciesleaving debts of ten million yen or more, over 99percent were accounted for by small and mediumenterprises with a capitalization of less than 100million yen.

The heavy concentration of bankruptciesamong smaller firms reflected the dual structureof the Japanese economy Extensive subcontract-ing by large corporations to smaller firms meantthat the smaller firms played the role of shockabsorber in periods of economic downturn.Smaller firms typically engaged in work for a sin-gle larger firm but the larger firms retained nu-merous subcontractors. When economic shockshit, then, subcontractors—financially dependenton the larger firms—tended to bear the brunt ofthe pain and go under in high numbers.

In contrast to the vulnerability of small andmedium-sized firms, the safety net for large cor-porations was distinctively strong in Japan. Al-though large Japanese corporations maintaineda high degree of dependence on bank-centeredfinancing, most companies developed a long-termrelationship with a so-called main bank, throughwhich the corporation procured the majority ofits funds and all of its financial services. Closemonitoring by the main bank meant that prob-lems were often caught before they led a firm toreach the point at which liquidation was the onlyoption. And, if a corporate borrower did becomefinancially distressed, debt claims were often re-negotiated. The main bank’s role in the shadowof bankruptcy also might include the supply ofemergency funds or the arrangement of financ-ing for the distressed firm through cooperation

with other banks. This means of addressing prob-lems was seen as less costly than liquidation. Life-time employment practices in large firms meantthe underdevelopment of a labor market for mid-career employees. Therefore, employees left job-less due to bankruptcy were likely to findreemployment difficult. In smaller firms, in con-trast, the expectation of lifetime employment wasnot as firmly entrenched, the labor market wasmore mobile, and re-employment was easier tofind.

Occasionally the monitoring mechanisms ofthe main bank system fell short, however. Thiswas the case with Sanko Kisen, a Japanese ship-ping company with the largest tanker fleet in theworld that filed for protection from creditors in1985 after many years of over-expansion. Suchhigh-profile bankruptcies were extremely rarethrough the mid-1990s, however.

The extraordinary commitment of banks tolarge corporate borrowers was supplemented bygovernment support both in the prevention ofbankruptcy and in support of rescues in caseswhen large corporations approached the brinkof insolvency In the financial sector, for exam-ple, the fear of bankruptcy was never real untilthe mid-1990s. Under the so-called convoy ap-proach to regulating financial institutions, failurewas not an option. Competition was suppressedby the Ministry of Finance (MOF) so that nofirm moved forward so fast as to leave any oth-ers behind. If a financial institution nonethelesscame under financial distress, the Finance Minis-try arranged for a stronger bank to absorb theailing one. When necessary as in the case ofYamaichi Securities in 1965, the Bank of Japanstepped in to supply funds to prevent failure, inthe interests of financial system stability. Avoid-ing bankruptcy meant protecting depositors andhelped maintain confidence in the financial sys-tem.

Heavy regulation in many other sectors of theJapanese economy also guarded against “exces-sive competition” that might otherwise have ledto bankruptcy and protected companies from be-ing exposed fully to market forces. These regula-tions typically included strict entry and exitrequirements, price controls and other means toinduce companies to cooperate even as they com-peted.

bankruptcies 47

Surge in bankruptcies in the latter 1990s

After Japan’s asset bubble burst in 1991, manycompanies struggled under the weight of highinterest payments on large debts and sluggish rev-enues. Massive amounts of fiscal stimulus, gov-ernment efforts to prop up the stock market, andlow interest rates initially staved off large-scalebankruptcies. Lax accounting and disclosure stan-dards by banks and their borrowers also helpedpostpone bankruptcy for many ailing firms andtheir financiers. Companies often transferreddebts to subsidiaries or paper companies. Becauseconsolidated accounting practices were not inplace, this enabled parent companies to erase thedebt from their books and thereby mask theirfinancial distress. Banks also developed practicesto avoid the classification of loans as non-perform-ing. One commonly used means involved banksissuing new loans to companies to enable themto pay the interest on existing loans.

These efforts at hiding problems and postpon-ing reckoning with financial distress became in-creasingly inadequate, however, as the nationmoved into the second half of the 1990s decade.In the fiscal year 1996, the level of debt left bycorporate bankruptcies reached the highest in his-tory to that point, spurred by an increase in large-scale bankruptcies of bubble-floated financecompanies. The high amounts of debt left bybankruptcies in the four years thereafter reflectedthe emergence of a number of large-scale bank-ruptcies such as department store operator Sogo,listed on the First Section of the Tokyo Stock Ex-change, and major financial institutions.

The rise in large-scale bankruptcies from 1999on also was a byproduct of a new system of fi-nancial regulation put in place in October 1998.Regulatory authorities tightened disclosure re-quirements and asset classification standards forbanks, moves that translated into increased pres-sure on borrowers to restructure. At the sametime, an infrastructure for dealing with insolventbanks was established, meaning that problemswith delinquent loans could be dealt with moreaggressively While restructuring, mergers andacquisitions, and tie-ups with foreign firms wereable to stave off bankruptcy for some firms asthe economy continued to flounder, others suc-cumbed. The number of bankruptcies resulting

from falling sales and the inability to collect ac-count receivables soared in 2000 on the back-drop of slowed growth, weak consumer spending,and the reluctance of banks to extend new creditor roll over loans to troubled firms. The retailand construction sectors were hit particularlyhard in this period.

Small and medium-sized companies alsofound conditions to be harsh in the latter 1990s.In 1998, amid a sharp credit crunch and finan-cial system instability the government adopted aspecial thirty trillion yen loan guarantee pro-gram for small and medium-sized enterprises.Despite these efforts to prop up weak compa-nies, however, thousands of firms taking outloans ended up insolvent. The number of fail-ures of semipublic companies (ventures betweenthe public and private sectors) also increased inthe second half of the 1990s and accelerated fur-ther in 1998 and 1999, damaging the financialhealth of local governments.

Developments in bankruptcy legislation

Japanese bankruptcy laws were relatively strongand included the removal of top management.Yet, they were rarely used in the case of largecorporations over the postwar period. Until 2000,bankruptcy procedures were undertaken in ac-cordance with the Composition Law. The intro-duction of the Civil Rehabilitation Law on April1 of this year, however, made it easier for smalland midsize companies to declare bankruptcy andbegan to speed up the corporate rehabilitationprocess. The new law has led to a surge in bank-ruptcy applications.

Under the law, companies may apply for courtprotection and dispose of debt even before theirliabilities exceed their assets. As a result, the newlaw has given rise to some distrust between banksand their borrowers, as banks now have incen-tives to try to collect as many loans as possiblebefore borrowers go bankrupt. This changedbank behavior contrasts sharply with thatbehavior observed when the main bank systemfunctioned effectively in earlier periods.

The new law also permits debtors to initiatebankruptcy proceedings and allows managers tostay in their positions. The Ministry of Justice

48 bankruptcies

furthermore revised bankruptcy-related laws in2000 so that the overseas assets of failed firmsoperating across national borders would fallwithin the scope of Japanese bankruptcy proceed-ings. This change enabled the recovery of loansfrom such assets by creditors in a more orderlyfashion than in the past. The absence of such aprovision had impeded plans by Yamaichi Secu-rities Co. to restructure its operations prior to itsvoluntary closure in November 1997.

Rise in personal bankruptcies following thebursting of the bubble

The 1990s saw many changes in the level of per-sonal bankruptcies as well. In this decade, thenumber of cases of personal bankruptcy rose ten-fold. In 1991, cases of personal bankruptcydoubled on the year with the bursting of thespeculative asset bubble to number approximately23,000. Although the incidence of personal bank-ruptcy rose somewhat in the years thereafter,numbers surged significantly in 1996. And, infiscal year 1998, the number of cases exceeded100,000 for the first time.

The record high numbers of personal bank-ruptcies reflected the strain placed on householdfinances by rising unemployment levels and thegrowth in the consumer loan industry Con-sumer debt doubled in the 1990s decade andnon-bank consumer loan companies—not sub-ject to the Interest Rate Restriction Law—wereable to charge exorbitant interest rates on loans.Many individuals were also driven into bank-ruptcy after serving as guarantors for collateral-free loans extended by non-banks to smallenterprises.

The surge in personal bankruptcies had a sig-nificant impact on Japanese society perhaps mostnotably in the incidence of suicide. Nearly 3,000individuals were reported to have committed sui-cide in fiscal year 1998, due to excessive personaldebts.

Further reading

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

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

JENNIFER AMYX

banto

Banto was the highest position of authority withina traditional merchant house, equivalent to headclerk. Within smaller merchant houses, the bantooften held near absolute authority in businessdecisions. In larger houses, there might be sev-eral banto, in which case one would be designatedshihainin, chief manager. Banto could use their ownsavings to set business on the side. They werealso permitted to have a separate household andcommute to work. If his business were success-ful he might be given permission to set up hisown, separate house, bekke. In such instances, hestill had an obligation of loyalty to his formerhouse. He would demonstrate that loyalty byregularly paying his respects to the house and byassisting it as called upon. Failure to honor hisobligations could result in recision of the bekkeand a return to his former House.

One enduring and popular type of tale is ofthe loyal banto who, through daring, clevernessor great courage rescues the house from finan-cial distress or ruin. Typical of this type of tale isthe example of Minomura Rizaemon, who savedMitsui from bankruptcy and guided it onto great-ness.

The characteristics and role of the banto fore-shadow several distinctive aspects of what hascome to be known as the Japanese managementsystem. Banto worked their way up to the posi-tion through a process of apprenticeship and dem-onstration of skill. Young men would enter thehouse at the age of twelve or thirteen and be as-signed the rank of detchi. For a period of five tosix years the detchi would learn to read and write,to do math, and how to handle many of the smalltasks and routines of the house. At seventeen oreighteen the detchi would be promoted to the rankof tedai and be given a set salary After ten to twelveyears, usually around age thirty a tedai who haddemonstrated superior skill and business acumenwould be promoted to banto. This practice of en-tering the house at an early age and then work-ing one’s way to the top is a type of internal labor

banto 49

market comparable to what is found in presentday Japanese firms (see internal labor markets).

In a similar vein, the opportunity given bantoto branch out and start one’s own business drawsa close parallel to the modern day practice of cor-porate spin-offs whereby successful units withinthe company are allowed, even encouraged, toseparate from the parent organizations andachieve their own measure of independence. Suchspin-offs continue to maintain close ties to theirparents and, in some instances, rescue them fromfinancial difficulties.

Further reading

Hirschmeier, J. and Yui, T. (1981) The Development ofJapanese Business, 2nd edn, London: Allen & Unwin.

ALLAN BIRD

bottom-up decision-makingprocesses

The Japanese, so-called “bottom-up” decision-making process has launched many an organiza-tional change effort seeking to uphold consensusin hopes of delivering smooth and efficientimplementation marked by strong employeeownership. While it is true that implementationof organizational decisions tends to proceedmore smoothly in Japanese organizations, this isnot because the outcomes come about by con-sensus, nor because they are bottom instigated.Rather, the key to Japanese decision-making isits distinctive emphasis on information gather-ing.

After an idea is formulated in a Japanese com-pany it is explained, discussed, and confirmedby all those who might have input into or be af-fected by the decision. This procedure called ringiseido is most accurately understood as a politicalconfirmation-authorization process. First, the ini-tiator writes a proposal in the form of a ringisho.The proposal is then circulated to all who mightbe able to input critical information into the deci-sion and to all who will be affected by it. Theinitiator (or an emissary) will then meet with eachdecision-making contributor one or more timesto discuss at length the various elements of the

proposal. This critical aspect of the process iscalled nemawashi, preparing the ground for op-timal germination.

Once all aspects of the decision have beenanalyzed and confirmed, each contributor affixeshis/her seal (hanko) to the ringi-sho document andit is then sent to top management for final ap-proval—or disapproval. Given the extremely com-petitive nature of Japanese firms both within andwithout Japan, it would be naive to perpetuatean understanding of “bottom-up” as delegationof strategic decision-making to middle managersand line workers. On the contrary an importantdecision cannot be confirmed without ultimateapproval by top management. Furthermore, it ismore the norm that the initial idea is passed downfrom top-level executives.

The ringi-sho itself can be seen as an instru-ment that gives opportunity to participate in thedecision-making process, documents the recordof approval, and transmits a decision to organi-zational units affected by it. Finally it is used as acorporate record that serves to protect the conti-nuity of corporate policies.

The net used to gather pertinent informationfor decision making is therefore rather large andwidely cast. In addition, most of the informa-tion-gathering discussions are conducted one-on-one and face-to-face bases to promote trust,avoid public confrontation and encourage com-plete and open sharing of ideas. Decision mak-ing in the Japanese style is consequentlytime-consuming.

Advances in communication technology suchas the facsimile (fax) of the 1990s and electronicmail (e-mail) in the latter part of the decade, haveincreased the speed of some aspects of the deci-sion-making process. For instance, some of theinformation gathering is currently done throughthese communication media. However, nemawashicontinues to be done one-on-one, and face-to-facethereby preserving the value of frankness whileminimizing conflict.

Viewing decision making as a process ratherthan an event is key to understanding the timefactor in the Japanese system. Gathering infor-mation and confirmation from a wide array oforganizational actors one-on-one takes time. Evenmore time is required if several iterations ofnemawashi with the same individuals is necessary.

50 bottom-up decision-making processes

Once the decision has been made, however, verylittle time is required to take action, last-minutesurprises are extremely rare, and very little re-sistance to implementation is encountered.

An important ramification of the Japanese-styledecision-making process is that since decisionsare a collective effort, a conscious mutual depend-ence of seniors and juniors in a company is nur-tured. Responsibility in the Japanese contextmeans a symbolic assumption of guilt. The rulesof this sort of responsibility revolve around thetenets of a vertically integrated society: whensomething goes wrong, the most senior personpresiding over the error takes the “blame.” Thismeans that those above must rely on their subor-dinates not to make errors that will lead to theirhaving to take the necessary consequences asso-ciated with symbolic responsibility such as resig-nation, or transfer.

Further reading

Smith, L. (1985) “Japan’s Autocratic Managers,” For-tune, 7 January.

Whitehill, A.M. (1991) Japanese Management: Traditionand Transition, New York: Routledge.

MARY YOKO BRANNEN

bubble economy

The Japanese economy in the late 1980s wascharacterized by what seems to be an asset pricebubble. Land and stock prices reflected muchspeculative activity and rose to record levels thatwere unusually high multiples of the present valueof future cash flows. Unfortunately land and stockprices collapsed in 1990 and were still less than40 percent of their peak levels a decade later. TheNikkei 225 stock index peaked on the last trad-ing day of 1989 (29 December) at just below40,000 and at that time the land below the Impe-rial Palace in Tokyo was reputedly worth morethan all of the land and real estate in California.The Japanese economy has suffered from highlyanemic growth (of around 1 percent) for the de-cade of the 1990s. How did Japan, an economic

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

After Second World War much of the Japa-nese economy lay in ruins and Japanese industryand economy as well as its political and financialsystems were restructured by the occupying forcesled by General Douglas McArthur and his staff.Fortunately Japan enjoyed a period of rapid eco-nomic growth in the forty-year period, 1950–90,rebuilt its economy to prewar levels by the early1960s, and had become the second largesteconomy in the world by the 1970s. Unfortu-nately, economic growth in Japan virtuallystopped at the beginning of the 1990s with thecollapse of the asset price bubble. How did thisasset price bubble arise?

While there may be little agreement on de-tails such as the technical definition of a bubbleand the exact starting and ending dates for thebubble, there is little disagreement on the broadfeatures of the late 1980s and 1990s episode ofthe speculative rise in asset prices and then theirsudden decline with adverse consequences forthe Japanese economy The following is a briefoutline of this bubble episode, its possible causes,and a review of efforts to mitigate its negativeeconomic consequences.

The late 1980s bubble in Japan seemed to havestarted as a consequence of the efforts to fight offthe 1986 recession caused by the sudden jump inthe value of the yen associated with the interna-tional Plaza Accord in 1985. In the late 1980s thegovernment continued efforts to balance itsbudget even in the face of a recession using mon-etary policy as the primary means of economicstimulus. Consequently, there was an unprec-edented lowering of interest rates (from 5 per-cent in January 1986 to 2.5 percent in February1987) and an expansionary monetary policy start-ing in 1986 (in response to the recession result-ing from the 1995 endaka rise in the Yenengineered by the Plaza Accord). This extraordi-nary episode of monetary expansion seemed tohave started an asset price bubble that then char-acterized the late 1980s Japanese economy.

Contributing to this bubble in Japan were anumber of institutional practices that acceleratedthe bubble with positive feedbacks. For example,

bubble economy 51

as most lending in Japan tends to be based oncollateral value, asset price increases led to highercollateral values and higher levels of lendingwhich then led to higher asset prices and so forthin an ever accelerating set of self reinforcing cy-cles. Unfortunately there were few if any mecha-nisms in Japan at that time to discipline or stopthe bubble in asset prices.

Between the start and end of the second halfof the 1980s, stock prices rose 3.1 times (to aNikkei Index of 38,915) and land prices rose fourtimes. In relative terms, for the last half of the1980s, the ratio to GDP for land prices increased3.67 times and for stock prices by 1.51 times withthe combined ratio increasing by 4.52 times. Byany measure these were extraordinary increasesin asset prices unprecedented in recent Japanesehistory Price earnings ratios and other valuationmeasures for Japanese equities were in a muchhigher zone than similar ratios elsewhere in theworld. With these highly valued assets, Japanesecompanies went on a spending spree buying upprime real estate and other assets in many for-eign countries at what later turned out to behighly inflated values. The easy availability ofmoney in the second half of the 1980s also led topoor investment decisions domestically.

As this late 1980s asset price bubble led toincreasing inequality and other social problemsincluding a potential breakdown of the social com-pact, the Japanese government and the Bank ofJapan started to take steps to deflate the bubble,raising interest rates from 2.5 percent in May 1989to 6 percent in August 1990 and curtailing mon-etary growth severely also during this period.However, instead of a soft landing, the bubblecollapsed in 1990. The value of the collateral un-derlying most bank loans collapsed along withthe asset price bubble. Consequently since thebursting of the bubble, bank lending has beenrestricted by the continuing high levels of non-performing bank loans (Japanese banks had yetto be restructured a decade later). It seems thatthe same positive feedback cycles that acceleratedJapanese economic growth were now working inreverse accelerating the decline in Japanese eco-nomic growth. Since the bursting of this bubblein 1990, the Japanese economy has suffered anumber of recessions and a very low overall rateof growth in the 1990s.

In spite of fiscal stimuli in the form of numer-ous government spending packages, an expan-sionary monetary policy and other efforts by thegovernment, the Japanese economy has been ina state of recession or very anemic growth sincethe early 1990s bursting of the bubble. The gov-ernment launched nine major deficit spendingpackages totaling about $1.2 trillion between 1992and 1999. The Bank of Japan steadily loweredinterest rates to virtually zero by the end of the1990s. The ineffectiveness of Japanese monetarypolicy to stimulate the economy has led many tocontend that Japan is in a liquidity trap. Giventhe high savings rate in Japan and its low, demo-graphically limited long-term economic growthprospects, the savings-investment equilibrium realinterest rate is estimated to be negative. Thus,given a nominal interest rate floor of zero, a posi-tive expected rate of inflation is necessary for equi-librium. Indeed, since the mid-1990s there seemsto be considerable evidence of money hoardingin Japan with significant growth of the moneysupply but zero or negative growth in bank lend-ing.

However, an alternative explanation of the in-effectiveness of monetary and fiscal policies inJapan in the 1990s may be the credit crunch as-sociated with the high levels of non-performingloans among Japanese banks. Tankan, the Bankof Japan survey of business conditions, providessome evidence supporting the credit crunch ex-planation. It seems that the financial systemneeds to be restructured so it can contribute toeconomic growth with non-performing loanswritten off, sold, or otherwise taken off thebooks.

Others have contended that the failure of theJapanese economy to respond to fiscal and mon-etary stimulus since 1990 can only be ended withmassive structural reform and deregulation ofJapanese business and industry. Deregulation canbe accomplished either in one or a few majorepisodes, or can be undertaken slowly allowingtime for the affected firms to adjust. As may beexpected, deregulation changes the competitivestructure in an industry and many inefficient firmsare forced out of business. Business failures cre-ate economic discomfort (for example, higher un-employment rates) and declines in consumer confidence. While there has been slow and steady

52 bubble economy

deregulation of Japanese business and industrythere have been no major changes or deregulatorymoves. It is clear that Japan has chosen toderegulate only at a slow and steady pace.

Another factor constraining the economic re-covery in Japan has been the bubble-relatedchanges in political governance in Japan. The Lib-eral Democratic Party (LDP) that had governedJapan for most of the post-Second World Warperiod lost its majority in the Diet, the JapaneseParliament, soon after the collapse of the assetprice bubble and Japan has been governed by acoalition of political parties since the early 1990s.Public confidence in the government and otherlarge institutions has also been sapped by manycorruption scandals involving elite officials. In thissituation, political power has been dispersed andit seems that there has been little political will forstrong and decisive action to restore economicgrowth.

Regardless of the reasons for the failures ofpolicies for economic recovery the Japaneseeconomy faced a critical impasse by the end ofthe 1990s in terms of policies to restore economicgrowth. Fiscal policy options were constrainedby the rapid growth of Japanese government debtin the 1990s (to $6 trillion, about 1.3 times GNP)and at the same time, monetary policy optionswere also limited as interest rates had already beendropped to near zero.

Before the last decade of the twentieth cen-tury Japan’s bank-centered system of capitalismwas considered perhaps the best alternative fordeveloping countries, especially in Asia. The USsystem with its more unfettered capitalism wasconsidered suitable only for a highly developedand powerful country such as the USA. Indeed,many in the USA also believed that the Japaneseversion of industrial policy was more humaneand a better alternative, even for the USA. Whilethe dismal performance of the Japanese economysince 1990 has been a major cause for reassess-ing these views, the failure of the banking sys-tem in Japan also calls into question the natureand effectiveness of the Japanese bank-centeredsystem of corporate governance where mainbanks closely monitored their commercial clientsso that other stakeholders did not have to en-gage in wasteful duplicate monitoring. After all,

efficient monitoring is incompatible with theemergence of massive levels of non-performingloans and bad debts that have characterized theJapanese economy in the last decade of the twen-tieth century.

One explanation of this failure notes thatJapanese banks have not developed credit analy-sis capabilities, having depended on governmentdirected and collateralized lending and, giventhe generally poor levels of disclosure, nor havethey been subject to market discipline. Underthe prevailing amakudari practice where retiringsenior regulators were virtually guaranteed sen-ior positions with the institutions they regulated,it is contended that bank regulation in Japan hasbeen less than fully effective. However, bankregulation may also have lost its effectiveness asJapan gradually moved to a more market-ori-ented economy and financial system. Regard-less, the traditional (prior to the 1990s) Japanesesystem of bank-centered capitalism is now beingwidely questioned, even in many Asian develop-ing countries though, this bank-centered finan-cial system was associated with high rates ofgrowth in the post-Second World War perioduntil the late 1980s. Indeed, while there is wide-spread agreement in Japan that this old eco-nomic and financial system must be changed,there is less agreement on the form of the newsystem, and very little agreement on how to (andhow fast to) move to a new economic and finan-cial system.

Further reading

Aggarwal, R. (1996) “The Shape of Post-Bubble Japa-nese Business: Preparing for Growth in the NewMillennium,” International Executive 38 (1): 9–32.

——(ed.) (1999) Restructuring Japanese Business for Growth,Boston, MA: Kluwer Academic Publishers.

——(1999) “Assessing the Asian Economic Crises: TheRole of Virtuous and Vicious Cycles,” Journal ofWorld Business 34 (4): 392–408.

Mori, N., Shiratsuka, S. and Taguchi, H. (2000) “PolicyResponses to the Post-Bubble Adjustments in Ja-pan: A Tentative Review,” Bank of Japan, IMESDiscussion Paper Series, 2000-E-13, May.

Motonishi, T. and Yashikawa, H. (1999) “Causes of

bubble economy 53

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 Les-sons,” Bank of Japan, IMES Discussion Paper Se-ries, 2000-E-12, May.

Olson, M. (1982) Rise and Decline of Nations, New Ha-ven, CT: Yale University Press.

RAJ AGGARWAL

Buddhism

The majority of Japanese are nominally follow-ers of various sects of the Buddhist religion; butthey also practice observances of Shinto, a na-ture-oriented series of religious beliefs and prac-tices unique to Japan. Buddhism was broughtboth to Japan from China, and brought into Ja-pan from China by native Japanese beginning inthe sixth century AD. Buddhism and Shintoismhave remained co-religions since that time. Even-tually purely Japanese versions of Buddhism weredeveloped, and in the nineteenth and twentiethcenturies several new religions based loosely onBuddhist teachings have emerged. Japan is uniquein the modern world in that, while having twomajor religions, it is not, as is usually the case,divided by religion. Over 90 percent of the morethan one hundred twenty million Japanese sub-scribe at least passively to both Shinto, the na-tive religion, and Buddhism.

Toward the end of the sixth century a newlyunited China began to spread its cultural bril-liance outward toward its periphery first to Ko-rea, and eventually reaching Japan. Someleaders of an emerging Japanese governmentwere greatly attracted to many aspects of Chi-nese civilization, its literacy sophisticated archi-tecture, advanced metallurgy forms of urbanlife, and rational forms of governmental struc-ture. Buddhism, of course, was part of it all, andKoreans who visited Japan with Buddhist arti-facts and scriptures were eagerly accepted byJapanese as teachers. For the first and only timein Japanese history an open rivalry was evi-

denced between Shinto, championed by a con-servative element at the center of power, and amore progressive body of aristocrats who sawBuddhism as a hallmark of modernization andprogress. Early in the seventh century the princeregent, Prince Shotoku, was eventually success-ful in establishing a form of Chinese Buddhismas a kind of semi-official court religion. Beyondthe immediate community of the ruling elite,Shinto in its many manifestations remained thereligious orientation of the masses.

For the first five hundred years of JapaneseBuddhism it remained closely tied to the rulingnobility. Buddhist temples were sponsored byvarious noble families, and were more like centersof political organization and intrigue than asplaces to practice a religion. Buddhist scriptureand rituals were generally accepted as a type ofapplied magic for most people who had access tothem, although a few scholar/monks as early asthe seventh century came to understand quiteclearly the philosophical nature of Indian andChinese Buddhism, and their teachings had someinfluence over the ruling elite.

It was not until the turmoil of the early twelfthcentury that Buddhism actually began to func-tion as popular religion in Japan. It was a time ofuncertainty and change; civil war broke out invarious places, accompanied by a shift in politi-cal power from the nobility in Kyoto to a newwarrior class more closely attached to commonpeople. Four new and purely Japanese versionsof the religion appeared: Jodo (Pure Land), JodoShinshu or True Jodo, Hokke or Lotus (oftencalled Nichiren Buddhism, named after itsfounder the monk Nichiren), and Zen Buddhism.All four of these new versions of the religion fea-tured heroic leaders and simple methods of de-votion which could be utilized regardless of levelof intelligence or learning, occupation, sex orclass. While the warrior class itself leaned stronglytoward the more contemplative Zen version ofBuddhism, the other three swept across the landand are still the most prominent versions of Bud-dhism followed in Japan.

As ordinary people embraced popular Bud-dhism, they did not turn away from the nativeShinto. The two religions were given their ownareas of special emphasis and have continued on

54 Buddhism

until the present with a peaceful accommodation.Shinto has come to be associated with such tasksas marriage, christening, blessing of buildings, andthousands of local rituals involving the agricul-tural cycle. Buddhism deals with death and thedeparted: funerals, memorials at intervals afterdeath, and to a somewhat more modest degreethan in Christian and Moslem societies, servesas a guide to thinking and behavior.

In response to the growing popularity andpower of the new versions of Buddhism, oldersects headquartered at Kyoto and Nara eventu-ally modified the way people related to religiouspractices. This was done to the extent that thegreat bulk of Japanese Buddhist observance hasbeen for centuries either carried out entirely byprofessional clergy or given over to extremelysimple acts such as repeating phrases over andover. There is much depth to the purely intellec-tual part of Buddhism both inside and outside ofJapan; writers inspired by aspects of JapaneseBuddhist thinking now and in the past have hada respected and international audience. It is alsotrue that Buddhism has had a significant impacton Japanese culture in an indirect way throughits influence on the samurai class, and the subse-quent influence that class had on modern Japanduring the Meiji restoration. It must be noted,however, that except for a small segment of intel-lectuals and members of minority religions, theJapanese are very casual about matters relatingto religion, viewing religion as not much morethan a series of rituals. “Faith,” in the Christianor Islamic sense, is a concept not intricately wo-ven into Japanese culture.

In the nineteenth and twentieth centuries, sev-eral new religions emerged in Japan. Spka Gakkai,purported to be a reinterpretation of Buddhism,is the largest of these, and has grown to haveconsiderable resources and influence in Japanesesociety.

See also: Prince Shotoku’s Seventeen-ArticleConstitution

Further reading

Hori, I. (ed.) (1989) Japanese Religion, Tokyo: KodanshaInternational.

Kodo, M. (1982) Introducing Buddhism, Rutland, VT:Tuttle.

Prebish, C.S. (1975) Buddhism: A Modern Perspective, Uni-versity Park, PA: Penn State University Press.

JOHN A.McKINSTRY

burakumin

Origins of burakumin

The term burakumin literally means “people of thehamlet,” with earlier terms eta (polluted) and hinin(non-human), also used to label extremely lowstatus people in Japan. The origins of burakuminpeople are not exactly clear and in dispute, butthere are historical records going back to 600 ADof a low-status people similar to burakumin. Muchlike the untouchables or outcastes of ancient In-dia, it is believed that burakumin originally hadoccupations that were seen as unclean or pollutedin the eyes of Buddhists and Hindus, occupationssuch as dealing with dead animals (skinning andtanning of hides for example). However, new his-torical works suggest that having such occupa-tions were not so much the cause of burakuminstatus but rather reinforced the status. There wereseveral reasons a person could fall to a low posi-tion (such as being charged with criminal activ-ity or falling into debt) and it was the limitationson what activities and occupations these peoplecould have once in this lowly position that helpedlegitimize and perpetuate their status. It is alsoknown that there were levels or degrees of thislow outcaste status, with eta (polluted) beinghigher than hinin (non-human).

The Tokugawa stratification system

Much more is known about the status of burakuminfrom around the beginning of the fifteenth cen-tury When the Tokugawa or Edo period beganin Japan (early 1600s), the Tokugawa Shogunimposed more rigid controls upon the popula-tion and regional opponents to consolidate andmaintain power in a country that had seen noth-ing but regional warfare for hundreds of years.One means of control imposed by the TokugawaShogun was the institutionalization of a systemof social stratification, called shi noo koo shoo

burakumin 55

(literally meaning warriors, peasants, artisans, andmerchants), with rigid and mostly hereditaryranks much like the caste system of ancient In-dia. There were four primary status positions un-der the emperor and ruling shogun military clan;the samurai, peasants, craftsmen and artisans,with merchants on the bottom. Following the logicof the Indian caste system, of course, there was astatus grouping, since called burakumin, who wereeven further down the ranks of the stratificationsystem, and were so “unclean” or “polluted” asto have no real position at all; that is, they were“outcastes.” Unlike the Indian caste system whichused the Hindu concept of reincarnation and “badkarma” (sins in a previous life) to explain aperson’s position in the caste system, the shi nookoo shoo stratification in Japan did not specificallyinvoke religion as a legitimating force. It is esti-mated that there were about half a million peoplein this outcaste position during the Tokugawaperiod of Japanese history.

Burakumin in modern Japanese history

With the fall of the Tokugawa Shogun by 1868and the beginning of the Meiji Period, the rigidTokugawa stratification system was eliminated.The new political elite of Japan formally elimi-nated the position of burakumin in 1871 and madediscrimination against former burakumin peopleillegal. As has happened many times in India sincethe formal elimination of the old caste system,however, people considering themselves aboveoutcastes or burakumin rioted in response to gov-ernment attempts to attain more opportunity forthese people. Crowds as large as 26,000 at anyone time were reportedly involved in these anti-burakumin riots, with more than 2,200 burakuminhomes burned in Fukuoka during 1871.

Burakumin today

There are estimated to be about 2–3 millionpeople of burakumin heritage in Japan today butunlike people of Korean or Chinese descent, thereare no cultural, much less biological or racial, dis-tinctions between people of burakumin heritage andall other Japanese. As recently as 1965, however,opinion polls showed that some 70 percent of Japa-nese people still believed people of burakumin de-scent were of a different race.

The negative status has remained alive, there-fore, and Japanese people have gone to greatlengths to determine if a person has burakuminancestry Before parents will approve a marriageor employers will hire new employees for impor-tant positions, for example, there is often a searchof past records to make sure the prospective mar-riage partner or employee is “clean” of burakuminancestry. There are hundreds of detective agen-cies that specialize in tracking down informationon burakumin ancestry contributing to a somewhatsignificant percent of the Japanese economy.

One of the typical methods of detectingburakumin lineage is through old village familyrecords. All Japanese citizens have their namelisted in an official family registry. Most often thisfamily registry is located in a small village be-cause of the recent agricultural history of Japanwith the majority of population in farming occu-pations until well into the twentieth century Be-cause of strict discrimination, most burakumin livedin separate villages (or hamlets) from other Japa-nese and thus it was not difficult to track down aperson’s burakumin heritage through examinationof these village records. During the 1970s, in anattempt to further reduce discrimination againstburakumin, the Japanese government required thatfamily registries in former burakumin villages bekept from the general public.

However, in the last three decades, Japanesegovernment has become involved in doowa, theofficial term for conditions and issues related toburakumin. Programs to reduce discriminationagainst burakumin (much like affirmative actionprograms in the United States) have shown con-siderable success since the late 1960s and early1970s. It is estimated that about $30 billion wasspent on these programs between the 1960s and1993. Poverty rates are lower and educational at-tainment is higher. And whereas 90 percent ofburakumin married other burakumin as recently as1960, it is now estimated that about three in fourmarriages by people of burakumin lineage are withpeople of non-burakumin ancestry.

Further reading

Buraku Mondai Kenkyujo (ed.) (1997) Buraku no Rekishito Kaihoo Undoo. Gendai Hen (Buraku History andLiberalization Movement), Kyoto.

56 burakumin

Hane, M. (1982) Peasants, Rebels, and Outcastes: The Un-derside of Modern Japan, New York: Pantheon.

Kerbo, H. and McKinstry J. (1998) Modern Japan: AVolume in the Comparative Societies Series, New York:McGraw-Hill.

Komori, T. (1990) Doowa Mondai no Kiso Chishiki (Fun-damental Knowledge of Doowa Problems), Tokyo:Akashi Shoten.

Noguchi, M. (2000) Buraku Mondai no Paradaimu Tenkan(Paradigm Shift for the Buraku Problems), Tokyo:Akashi Shoten.

MEIKA CLUCASHAROLD KERBO

business ethics

Business ethics has become an established disci-pline in Japan in the 1990s. However, there is noclear-cut definition of the term. In Japanese, keizai(economy) is a compound word consisting of keiand zai, which means governing the world in har-mony and bringing about the well-being ofpeople. Therefore both keizai and keiei (business)include a component of ethics. In the past, how-ever, the Japanese did not define or use the termin a similar fashion to the Western view of ethics.However, in the early 1990s, the public was pre-sented with scandal after scandal of governmen-tal officials being paid huge bribes. Most officialsresigned their positions, although a few were pros-ecuted and convicted. Because of this, businessethics has grown to become important within theJapanese business community.

During the Meiji period (1868–1912),Shibusawa Eiichi, a business leader, called forthe unity of morality and economy He cautionedagainst unethical business practices. He also ar-gued that Confucian values provided the correctpath to doing business in an ethical manner. Priorto the mid-1960s, the priority of Japanese busi-ness was on economic growth. Companies wereunlikely to address ethical, social or environmen-tal issues. Even when a corporation had causedserious damage to its neighbors or consumers,unless coerced by governments, consumer groupsor local communities, disputes were settled bypaying a small sum of money known as mimaikinor sympathy payment.

Victims of air pollution and toxic substance

poisoning in the 1950–60s became dissatisfiedwith mimaikin and with informal dispute resolu-tion methods and filed lawsuits against the pol-luting companies. Pollution in Minamata, a smallcity in Kumamoto Prefecture on Kyushu, Japan’ssouthern island, was the first of several pollutioncases. Minamata, which was mostly a fishing andagriculture society was also home to Chisso Cor-poration, a large factory that produced nitrogen-based chemical fertilizers and plastics. Fish, birdsand cats became sick. When this spread to hu-mans, the companied denied that they were thecause, but paid mimaikin. The cause was latershown to be mercury poisoning from the facto-ry’s wastewater.

A second strange disease, similar to the out-break in Minamata, was found in Niigata Prefec-ture. The victims’ diets consisted mostly of fishfrom the Agano River. The cause was mercurypoisoning from a Showa Denko factory Victimsfiled lawsuits against the company in 1967. Thiswas the first pollution suit against a major com-pany in Japan.

Three months later, a lawsuit was filed inYokkaichi in central Japan. A company was suedfor air pollution. The Yokkaichi’s court opinioncriticized the government for lack of environmen-tal planning. In 1968, a third case involved cad-mium poisoning in Toyama. Finally in 1969, acase was brought against Chisso Corporation bysome of the victims in Minamata. Together, thesecases came to be known as the “Big Four.” Thesechanged the field of business ethics in Japan. Allfour cases were decided in favor of the plaintiffs.The companies held to have legal responsibilitydue to the harm caused by their business opera-tions. Changes in regulation administrative pro-cedures, the growth of the consumer movementwere a few of the changes.

The Japanese government passed a series ofstatutes and established a scheme to compensatepollution victims. Polluting firms were requiredto pay for this scheme. The Basic Law for Envi-ronmental Pollution Control and the Environ-mental Agency were established. Japanese firmsbegan to take social responsibilities more seriouslyThe “Big Four Pollution Suits” also gave rise to asocial movement in Japan known as shimin undo(citizens’ movements). Citizens’ movementsformed around local or regional environmental

business ethics 57

issues and focused on local governments for re-sponse and relief. Only rare cases, like the BigFour, were of national scale.

A second ethical issue, the contribution of cor-porations to society first became an issue in Japanduring the 1970s oil crisis. People resented corpo-rations cornering the oil supply and their subse-quent reluctance to sell oil. Firms were seen asanti-social, so public opinion turned against thecompanies. In the 1980s as corporations attemptedto change from heavy industry to more sophisti-cated products, there was also a shift towards agreater concern for corporate social responsibil-ity. During the bubble economy of the 1980s, theJapanese public seemed to think that since Japa-nese business was efficient it must also be ethical.Many business people also believed that their suc-cess was proof of excellent business practices.

Since the late 1980s, a series of business scan-dals have surfaced. They include illicit politicaldonations, dango practices; loss compensation forfavored clients in securities industries; bad loansand mismanagement of financial institutions; andthe sale of HIV-tainted blood. These scandalswere often industry-wide and appeared to berooted in the Japanese way of doing business. Theresult was a passive trend in business ethics.

Social changes also contributed to a passivetrend of business ethics by Japanese firms in the1990s. These included public interest in the en-vironment; international pressures to open Japa-nese markets; passage of product liability laws;revision of the commerce law to dilute corpo-rate governance; and lack of empowerment ofthe Japan Fair Trade Commission (FTC). TheJapanese law on product liability makes it theplaintiff’s responsibility to prove design or manu-facturing negligence, which is virtually impossi-ble, especially given the complex, high-technologyused in most products today. While the FTC issupposed to enforce antitrust laws, it has beencalled a “toothless tiger” because it is essentiallypowerless against the Ministry of Finance andMinistry of International Trade and Industry,both of which have vested interests in protectingJapanese businesses. When the FTC has investi-gated powerful industries such as automotivesand automotive parts, construction, glass, and pa-per industries, it has punished them with “rec-ommendations.”

In the late 1990s, many cases of Japanese cor-porations violating business ethics continued tobe reported by the Japanese media. These includepayoffs to corporate racketeers, loans without col-lateral by banks, and disclosure of unfair tradepractices. Unlike in the USA where many firmshave codes of ethics and systems in place to moni-tor compliance, most Japanese firms do not haveexplicit corporate codes of conduct or businessethics. A 1996 survey by the Japanese BusinessEthics Society found that 35 percent of Japanesecorporations have ethics checks by in-companycommittees; 25 percent of managers stress theimportance of business ethics; 23 percent of firmshave a code of ethics in place; and only 5 percenthave introduced business ethics education intotheir corporations. Of the companies with ethicssystems in place, 11 percent have a company eth-ics committee or department; 8 percent have afull-time officer in charge of ethics; 5 percent havea system for handling in-company suggestions onor complaints about company ethics; and only 3percent have voluntary reporting of activitieswhich run counter to the company’s ethics policy.Companies with mission statements that includestatements on ethics usually have such vague orabstract statements that they are of little help tocompany employees. In an influential article onbusiness ethics in Look Japan, Koyama Hiroyukiargued that Japanese corporations must do threethings in order to establish strong business eth-ics: (1) create a clear code of ethical business con-duct showing what actions are expected inconcrete terms; (2) establish a system for ensur-ing that the code of ethics is followed such ashaving an ethics officer or survey of employees;and (3) ensure everyday compliance of businessethics.

These issues continue to be prominent withinthe Japanese business community: corruption, in-dustrial espionage and violation of intellectualproperty rights (IPR). A 1992 agreement betweenthe USA and Japan led to a revision of Japan’sCopyright Law. The revisions give copyright pro-tection to foreign sound recordings before 1978;give foreign producers the right to authorize therental of their recordings; and extend the protec-tion period for records from 20–30 years. Intel-lectual property rights continued to be an issuein the Japan-US Economic Framework Talks in

58 business ethics

1994. The Japanese government agreed that theJapanese Patent Office (JPO) would permit for-eign nationals to file patent applications in Eng-lish (with Japanese translations to follow) and,prior to the grant of a patent, the JPO wouldpermit correction of translation errors. The USgovernment agreed that the US Patent and Trade-mark Office (USPTO) would introduce legisla-tion to amend US patent law to change the termof patents from seventeen years from date of grantto patent to twenty years from date of filing anapplication.

Industrial espionage has become more andmore common in the 1990s. Japanese companieshave been caught using a spy technique called“tunneling” in which they set up a fake subsidi-ary and hire away the foreign, competitor com-pany’s knowledgeable employees. In a survey ontheft of intellectual property of American firms,the Japanese ranked fifth after China, Canada,France, and India. Moles planted as employeesin competitors firms are another espionage tech-nique. Foreign businesspersons have also com-plained about their rooms being bugged inJapanese hotels. Japanese businesses were widelyaccused of violating Intellectual Property Rightlaws during their earlier stages of economic de-velopment. More recently however, Japanesefirms have become strong supporters of laws toprotect IPR laws.

The roots of good corporate citizenship in Ja-pan are different from the West. Japanese corpo-rations’ views of citizenship consists of donationsto local festivals. From the early 1990s, execu-tives started to consider adopting a western styleof corporate citizenship. This includes social con-tributions by firms to environmental groupsrather than just contributions to, or sponsorships,of cultural events and the arts, mecenat. Compa-nies are trying to protect the environment andare giving scholarships to students from less de-veloped countries. As part of the Agreements inthe Japan-US Economic Framework Talks, theUS and Japan set a common agenda for coopera-

tion in global perspective that includes twentyworking groups. Seven working groups have todo with environmental issues: environmentalpolicy dialogue; forests; oceans; Global Obser-vation Information Network; environmentallyfriendly and energy-efficient technologies; con-servation; and development assistance for the en-vironment.

According to a Mecenat Association survey180 companies gave ¥23.6 billion in assistanceto support arts and culture in 1993. In 1994, thistotal decreased by 13 percent; however, 190 com-panies provided assistance. Many companies be-lieve that activities related to their main line ofbusiness such as research and development ofpollution prevention technology constitute a so-cial contribution. Social contributions outside ofthe main line of business include: mecenat, sup-port for guide dogs for the blind, support of chil-dren whose parents have died in traffic accidents,and forest conservation. Social contributions ofJapanese corporations are becoming necessaryduring the economic slump. Companies havecome to believe that they cannot survive withoutconsumer support and that being good corpo-rate citizens will give them a competitive advan-tage. Japanese companies are also engaging ingood corporate citizenship behaviors in the USAand Europe, but appear less likely to do so inAsia and other parts of the world.

See also: environmental regulations; overseas re-search and development; Japanese business in theUSA

Further reading

Koyama, H. (1997) “What Happened to Japanese Busi-ness Ethics?” Look Japan 43 (497): 14–16.

Taka, I. (1997) “Business Ethics in Japan,” Journal ofBusiness Ethics 16:1499–1508.

TERRI R.LITUCHY

business ethics 59

Canon

Canon, headquartered in Tokyo and originallybest known for its cameras, competes today glo-bally with a full range of consumer and profes-sional imaging and information products. Theseinclude not only cameras, copiers and computerperipherals familiar to consumers around theworld, but also fax machines, video and broad-casting equipment, and optical products for semi-conductor manufacturing and medical fields. Thecompany has manufacturing and marketing sub-sidiaries in all continents, and the global CanonGroup is made up of more than 100 companieswith over 80,000 employees and sales of $25 bil-lion.

Canon’s roots date back to 1933 with thefounding of Precision Optical Instruments Labo-ratory The laboratory was created with the aimof producing high-quality cameras capable ofcompeting with the best in the world, such asLeica of Germany. Within a year, the prototypeof Kwanon, Japan’s first 35mm focal-plane-shut-ter camera, was produced, and in 1937 the orginallaboratory was reorganized as a joint-stock com-pany under the name of Precision Optical Indus-try Co., Ltd. Ten years later, under the leadershipof Dr. Takeshi Mitarai, the company was renamedCanon Camera Co., Inc.

Through successive model improvements andthe introduction of new cameras, Canon Cam-era’s reputation for quality and value soon be-gan to gain attention outside of Japan. Thecompany launched its international marketingefforts in 1951, and in 1955 took the first major

step toward internationalization with the open-ing of the New York branch. Two years later thecompany made first inroads into Europe with theestablishment of Canon Europa.

Since the 1950s Canon pursued an aggressivestrategy to evolve from a specialized cameramanufacturer into a versatile producer of busi-ness machines. In 1962 the company adopted itsfirst five-year plan to diversify its product offer-ings. The first non-camera product was an elec-tronic calculator, but the real breakthrough camewhen Canon entered the copy machine business.It was the first company able to challenge thedominant leader with products based on its owntechnology. These successful diversification ef-forts led the company to change its name in 1969to Canon, Inc.

Entering new markets through unique tech-nology has always been a foundation of theCanon business strategy. It is a company stronglyfocused on research and development and thecreation of breakthrough products, and for thatpurpose maintains an extensive R&D networkworldwide. Its dedication to innovation producedresults: the company is consistently among thetop patent recipients in the USA and ranks sec-ond in terms of patents registered in the USA inthe 1990s. Canon’s current strategic objective isto secure a global leadership position in the fieldof digital imaging equipment and network-basedapplication services.

Canon’s corporate philosophy of kyosei (firstarticulated by the former chairman RyuzaburoKaku)—living and working together for the com-mon good—is the guiding principle for Canon

C

companies around the globe and for long-termcollaborative relationships with other companies.Within the Canon organization, the principles ofkyosei are complemented by the “three-self” con-cept: self-motivation, self-awareness, and self-man-agement, reflecting Canon’s management cultureof independence, innovation, and entrepreneur-ship.

Further reading

Sandoz, P. (1997) Canon, London: Penguin Books.

VLADIMIR PUCIK

capital markets

Japan is the second largest economy in the worldand the Japanese capital markets are some of thelargest in the world. As in other countries, capi-tal markets in Japan consist of the equity mar-kets, government and corporate bond markets,and markets for longer term swaps, futures, op-tions, and other derivatives.

The financial system in Japan is still mainlybank-centered with securities markets playing arelatively smaller role. Banks and internal financ-ing are the main sources of funds for most com-panies in Japan. Companies in Japan generallyhave larger levels of debt in their capital struc-ture than in the USA, with a great deal of debt inthe form of short term loans that are routinelyrolled over and are treated like long-term debt.Perhaps reflecting the higher savings rate in Ja-pan, the real cost of capital in Japan has oftenbeen lower in these than in the USA.

Although it is changing and becoming moreliquid, the Japanese market for corporate controlis somewhat limited as companies are oftenclosely held and hostile offers are generally notviewed favorably. Japanese accounting and report-ing standards (see accounting in Japan) reflectthe culture and are generally not as stringent asin the USA. While Japan has well-developedmoney markets with trading in short-term gov-ernment, financial institution, and corporate se-curities, this note will focus on capital markets,the financial markets for longer-term securities.

The first issues of equities by a Japanese com-pany took place in 1878. The first stock exchangesin Japan were set up in 1878, with the number of

stock exchanges peaking at 123 in 1895. In theseearly days, trading on Japanese securities ex-changes was limited mainly to bonds and futureson shares. Spot trades in shares remained verythin until the modern (post-Second World War)era as the zaibatsu business groups and other ma-jor companies were held privately in a pattern ofcross-holdings.

Currently, there are eight stock exchanges anda fledgling JASDAQ over-the-counter market setup in collaboration with the US-based NASDAQ.The Tokyo Stock Exchange (TSE) is the largeststock exchange, accounting for over 85 percentof all Japanese equity market valuation and trad-ing volume. In size, the TSE is followed by theOsaka Stock Exchange (also a major center fortrading in derivatives), and by exchanges inNagoya, Kyoto, Hiroshima, Fukuoka, Niigata,and Sapporo. Each of the three largest exchanges,Tokyo, Osaka, and Nagoya, also has second sec-tions for smaller companies. The two major stockindexes for Japanese equities are the price-weighted Nikkei 225 and the value-weighted To-kyo Stock Exchange Index, Topix. Equities inJapan are traded in lots of 1,000 and each ex-change-traded share has limits on daily pricechanges depending on share price category. Newissues of equity in Japan are regulated by the Min-istry of Finance. Preferential allocation of un-der-priced new issues is used to supplement thelow (3.5 percent) underwriting expense.

Most fixed income securities are traded overthe counter in Japan. Japanese bonds generallyhave a denomination of ¥100,000 and pay inter-est twice a year. The market for Japanese gov-ernment bonds is now one of the largest in theworld. In this market, certain bonds are identi-fied as “benchmark bonds” and traded heavilywhile the prices of other bonds are based onmarket prices of these highly liquid bonds. Thecorporate bond market is less well-developed andfairly small in comparison. A large proportion ofthis corporate bond market consists of equity-linked bonds of financial institutions and utili-ties. Most corporate bonds are secured with accessto the bond market limited mainly to the top cor-porations.

The Japanese economy in the late 1980s wascharacterized by what seems to be an asset pricebubble (see bubble economy). Between the start

capital markets 61

and end of the second half of the 1980s, stockprices 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 GDPfor land prices increased 3.67 times and for stockprices by 1.51 times with the combined ratio in-creasing by 4.52 times. By any measure these wereextraordinary increases in asset prices, unprec-edented in recent Japanese history. These landand stock prices reflected much speculative ac-tivity and rose to record levels that were unusu-ally high multiples of the present value of futurecash flows. The Nikkei 225 stock index peakedon the last trading day of 1989 (December 29) atjust below 40,000, and at that time the land be-neath the Imperial Palace in Tokyo was reput-edly worth more than all of the real estate inCalifornia.

Unfortunately land and stock prices collapsedin 1990 and were still less than 40 percent of theirpeak levels a decade later. In spite of fiscal stimuliin the form of numerous government spendingpackages, an expansionary monetary policy andother efforts by the government, the Japaneseeconomy has been in a state of recession or veryanemic growth since the early 1990s bursting ofthe bubble. Compared to the second half of the1980s, capital market activity has similarly beenmuch lower in the 1990s. The 1990s saw the fail-ure of many banks, securities firms, and invest-ment banks.

In recent years, driven by technology and glo-balization, the Japanese financial system is beinggradually deregulated. Trading in new financialinstruments was progressively permitted allthrough the 1980s, derivatives markets were al-lowed by the late 1980s, and interest rates werederegulated in the early 1990s. The 1993 Finan-cial System Reform Act dismantled barriers be-tween banking and securities businesses and theimplementation of the “Big Bang” set of finan-cial deregulations was started in 1998. The Japa-nese financial system is changing and is graduallymoving away from an over-reliance on banks toa more market-oriented system.

Further reading

Aggarwal, R. (1994) “Characteristics of Japanese Fi-nance,” Global Finance Journal 5 (2):141–68.

——(1996) “The Shape of Post-Bubble Japanese Busi-ness: Preparing for Growth in the New Millennium,”International Executive 38 (1): 9–32.

——(1999) Restructuring Japanese Business for Growth, Bos-ton, MA: Kluwer Academic Publishers.

Mori, N., Shiratsuka, S. and Taguchi, H. (2000) “PolicyResponses to the Post-Bubble Adjustments in Ja-pan: A Tentative Review,” Bank of Japan, IMESDiscussion Paper Series, 2000-E-13, May.

Motonishi, T. and Yashikawa, H. (1999) “Causes ofthe 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.

RAJ AGGARWAL

cartels

A cartel is an agreement among independentfirms to regulate prices by restricting productionand competition. Restricting production makesa good or service scarce, and allows producers tobe less likely to cave in to pressure from buyersto sell at lower prices. The Japanese governmenthas encouraged cartels in order to keep priceshigh and help industry grow. During the late1980s the government discontinued most legalcartels, but cartels continue unofficially sometimeswith informal government blessing and support,in important industries.

The USA was the first nation to adopt stronganti-cartel legislation, in the form of the ShermanAnti-trust Act of 1890. The primary goal of theSherman Anti-trust Act was to protect small farm-ers and business from price gouging by big busi-ness, though many economists also thought thatthe economy would work more efficiently if therewas free competition instead of control by car-tels. Neither European nations nor Japan took astrong stand against cartels in the late nineteenthand early twentieth centuries. At that time, Ja-pan had not yet developed true cartels with for-mal price or production agreements in its majorindustries, though zaibatsu in many industriesinformally coordinated prices. The absence offormal cartel agreements was in contrast to Eu-rope, and especially Germany where cartels werepowerful. The Japanese government developed

62 cartels

cartel legislation in 1925, but the legislation waspro-cartel. The Important Industries Law of 1925allowed the government to supervise cartels andgave industry associations the right to set pricesand production quotas and to force companiesto join cartels. As the effects of the Great Depres-sion hit Japan in 1930, the government mandatedcartels in some industries and supervised theirimplementation. By 1932, virtually all heavy in-dustry was organized into cartels.

Although the goal of American antitrust legis-lation had been to protect small farmers and busi-nesses from price gouging by big business, thegoal of Japan’s pro-cartel legislation was tostrengthen the nation’s industries by helping themsupport prices. Cartels played a central role inJapan’s industrial policy both before and afterthe Second World War. Although neoclassicaleconomic theory holds that cartels make aneconomy less efficient by distorting prices, Japa-nese developmentalist thinking has held that in alateindustrializing country the state can use pricedistortions to promote industries that would notdevelop through the market. Cartels are meantto raise and stabilize prices for goods, thus en-couraging investment and helping firms survivedepressions.

When the Second World War ended in 1945,the victorious Allied powers occupied Japan forseven years. The occupation, which was domi-nated by the USA, tried to reshape Japanese in-stitutions in order to turn Japan into a democracywhich would not engage in military aggression.As part of this process, the American authoritieswrote a law banning cartels, the Anti-monopolyLaw. The Americans saw the great monopolypower of big business as responsible to a greatextent for Japan’s military expansion in the 1930sand 1940s.

Most Japanese leaders saw the attempt to sup-press cartels as an American plot to weaken Ja-pan’s manufacturing industries. When theoccupation ended, the Japanese government wa-tered down the Anti-monopoly Law, opening thedoor to extensive cartel activity From the 1950sthrough the 1980s the Ministry of InternationalTrade and Industry (MITI) used official cartelsas a core element of its industrial policy It ac-tively encouraged the use of cartels, helped or-ganize them, and sometimes pressured firms to

participate in them through the use of adminis-trative guidance. Cartels were used in a widevariety of industries, from concentrated indus-tries with just a few very large firms, like steeland chemicals, to industries, like textiles, withmany firms. Various kinds of cartels were used,most of which restricted production in some wayCartels were relied on especially during times ofrecession, but also during times of expansion. Forinstance, in industries such as cement and chemi-cals, firms agreed to take turns building new pro-duction facilities to limit the volume of newproducts coming onto the market at any one time.These cartels did not always work, and even whenthey did MITI would often monitor them infor-mally to make sure they did not raise prices sohigh as to create large profits.

The peak period for legal cartels in Japan wasfrom 1965 to 1972. During the 1950s many in-dustries saw the Japan Fair Trade Commission(JFTC) as so weak that they did not need tobother to get permission for their cartels. Untilthe early 1970s, political leaders and the publicwere largely supportive of cartels because theythought them necessary to support weak indus-tries. In 1973, however, the public became en-raged when it learned that oil refiners had usedtheir cartel to boost profits during the crisis whenthe Organization of Petroleum Exporting Coun-tries (OPEC) withheld oil supplies. This outragegave the JFTC the political support it needed tocrack down on a number of illegal cartels. In 1973it recommended that sixty-seven industries in-volving thirty-three trade associations desist frommonopolistic activities. In addition, for the firsttime the commission filed criminal charges. Theoil companies that were charged did not disputethat they had conspired to fix prices and restrictoutput, but they argued that they were followingMITI’s administrative guidance and thereforewere not guilty of violating the law. The TokyoHigh Court ruled against the oil companies in1980, arguing that MITI did not have explicitauthority to direct a cartel and that therefore thecartel was illegal.

Somewhat fewer cartels were used in the 1970sand 1980s, but nevertheless between 1978 and1987 a number of declining industries used car-tels to cut capacity and support prices underMITI guidance. In the mid-1980s another source

cartels 63

of political opposition to cartels arose, this timefrom the USA. Japan’s trade surpluses with theUSA grew large at that time, and Americans ar-gued that Japan was using cartels to block accessto its markets. In response to American criticism,Japan largely abandoned officially sanctioned car-tels.

Japan’s cartels become somewhat more diffi-cult to understand at this point. It is significantthat Japan no longer sponsors large numbers oflegal cartels. Yet there is considerable evidencethat at least some of the cartels have simply goneunderground.

The steel cartel

The steel industry is a good illustration of theways in which Japan’s government supports car-tels. In order to work efficiently the integratedsteel plants that make steel from iron ore and formit into products such as sheets and beams mustbe very large. Steel firms are therefore also largeand there are few of them. It is easier to makeagreements to limit competition in a concentratedindustry that is one with few firms, because thereis less chance that firms will cheat on the agree-ment. In all countries, steel is a relatively easyindustry in which to form a cartel. European steelcartels were important through much of the twen-tieth century and American steel companies weregood at informally coordinating prices until theearly 1960s. But in recent decades the Japanesesteel industry has been much more successful atmaintaining a cartel than the steel industries ofEurope and the USA, and the reason has largelyto do with support from MITI and the weaknessof the JFTC.

There are five major integrated steel makersin Japan, which produce about two-thirds of Ja-pan’s steel. Minimills, which operate cheaply bymelting down scrap steel to make new steel prod-ucts, compete with the integrated steel makers,but there are many products the minimills can-not make and which the integrated makers havea monopoly over. Japan’s integrated steel produc-ers have been successful at keeping prices highand they have done so by maintaining a remark-ably successful production cartel.

Demand for steel is quite sensitive to the busi-ness cycle and steel sales expand and contract by

wide margins. Steel companies agree to supportprices by restraining production amounts, espe-cially when demand is weak. To spread the painof production cuts evenly the steel companiesmake sure that each company always producesthe exact same share of the total volume of steelcoming out of Japan’s integrated steel plants. Forexample, Nippon Steel’s share of total integratedsteel production ranged between 40.8 percent and41.5 percent. Variation in the other four compa-nies’ volumes of production is similarly slight. Itwould be impossible for the industry to keepmarket shares so stable for so long in such a vola-tile market without a cartel agreement. Withoutthis careful dividing up of market shares, eachsteel firm would be tempted to try to producemore during business downturns and priceswould fall further than they otherwise would. Bymaintaining their production cartel steel compa-nies keep their prices far higher than prices inthe USA and other countries.

The steel industry and MITI deny that thereis a cartel. An agreement to limit production isillegal under the Anti-Monopoly Law. How doesthe steel industry manage to maintain the carteleven if it is illegal?

First, MITI helps out. The Ministry of Inter-national Trade and Industry (MITI) asks firmsonce a quarter to submit projections of produc-tion and guides them as to how much steel theyshould produce. Second, the JFTC allows thefirms to continue the cartel. The JFTC has is-sued reports on the industry and has stated thatthere are worrisome signs of restraints on com-petition that bear watching. The JFTC has in-vestigated and fined smaller industries. But itlacks the political support and resources to goafter big industries like steel that flagrantly vio-late the Anti-Monopoly Law.

Despite Japan’s high prices for steel, few im-ports make it into the market. Why do buyersnot simply avoid the cartel by buying cheaperimports? In part this is because major users actu-ally support the cartel. Big users like auto andelectronics firms say they buy domestic steel inorder to help assure that Japan maintains a strongsteel industry, and because the Japanese steel in-dustry provides high levels of quality and serv-ice that they value (see competition). Thissupport from users also helps explain why the

64 cartels

steel cartel enjoys diffuse political support andwhy the JFTC does not crack down on it. Yetwhile principal industrial users may pay the car-tel’s high prices voluntarily the steel cartel report-edly threatens less committed buyers that it willcut off future supplies of Japanese steel if theybuy imports. Middleman companies, includingtrading companies and the processing firms thatcut and distribute steel, also reportedly hesitateto buy imports because of fear of retaliation fromsteel manufacturers. By keeping imports out, steelmakers ensure that imports do not put too muchdownward pressure on domestic prices. This isin contrast to the USA and Europe, where largevolumes of steel imports have pushed pricesdown.

Similar cartels operate in other concentratedindustries, including chemicals, glass and cement.Cartels do not always work, and the possibilityof JFTC enforcement against them is one of thefactors that prevents them from raising prices highenough to produce large profits. However, thefact that such a blatant cartel as steel has oper-ated for so long in Japan suggests that Japan’sgovernment is more tolerant and supportive ofcartels than the governments of other industrial-ized countries.

Further reading

Freeman, L. (2000) Closing the Shop: Information Cartelsand Japan’s Mass Media, Princeton, NJ: PrincetonUniversity Press.

Johnson, C. (1982) MITI and the Japanese Miracle: TheGrowth of Industrial Policy, 1925–1975, Stanford, CA:Stanford University Press.

Kikkawa, T. (1997) “Functions of Japanese Trade As-sociations before World War II: The Case of Car-tel 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: CornellUniversity Press.

Tilton, M. (1996) Restrained Trade: Cartels in Japan’s BasicMaterials Industries, Ithaca, NY: Cornell UniversityPress.

Yamamura, K. (1982) “Success That Soured: Admin-istrative Guidance and Cartels in Japan,” in

K.Yamamura (ed.), Policy and Trade Issues of the Japa-nese Economy: American and Japanese Perspectives, Se-attle, WA: University of Washington Press.

MARK TILTON

Central Union of AgriculturalCooperatives

The Central Union of Agricultural Cooperatives(Zenchu) is a central organization of agriculturalcooperatives (Nokyo) established by the 1954amendment to the Agricultural Cooperative So-ciety Law. The amendment called for the settingup of a prefectural union of agricultural coopera-tives in each prefecture, and the Central Unionof Agricultural Cooperatives at the national level.The Central Union was created for the purposeof strengthening organizational structures withinthe agricultural cooperative mvement, and inconcrete terms, for the purpose of improving thecooperatives functions in terms of providing farmguidance, better living guidance, and audits ofagricultural cooperatives’ new undertakings.

Zenchu’s purpose, therefore, were described asauditing, farm guidance, better living guidance,management guidance and agricultural adminis-tration activities. Auditing and management guid-ance involved the provision of services directlyto agricultural cooperatives. Farm guidance wasoriginally started as production guidance aimedat achieving increased food production andselfsufficiency of rice. Its purpose shifted in the1960s to provide guidance on diversificattionfrom rice culture to stock raising, fruit growingand horticulture, and to turn respective areas intomain production centers of the relevant crops.Excess rice production became an issue in the1970s. Major challenges at the time were the im-plementation of rice production adjustment andcrop diversification.

In addition to these problems, increasing at-tention was given to the perspectives of interna-tional competition from the beginning of the1990s. Opportunities to pursue expansion of thefarmoperating scale through coordination of ag-ricultural land use, and to nurture a new genera-tion that would be the support and driving forceof future agriculture were explored. In the areaof better living guidance, Zenchu’s efforts initially

Central Union of Agricultural Cooperatives 65

centered on the modernization of kitchens andtoilets in farmers’ households, and provision ofcommunity-based assistance such as establish-ment of day nurseries and lunch delivery serviceduring the busiest farming season. Subsequentlyin the 1960s the focus of Zenchu’s efforts shiftedto consumer activities for food safety and healthmanagement and group health checkup associ-ated with the use of agricultural chemicals. Zenchuhas recently taken part in activities relating tohealth care for elderly in the community.

The Central Union of Agricultural Coopera-tives’ rice price struggle in the 1960s, its move-ments against farm product trade liberalization,and fierce protest against the government and for-eign countries concerning the issue of taxationand agricultural land in urban areas in the 1970sand 1980s all helped to make its name widelyknown in Japan and abroad. After farm producttrade liberalization, however, these activities havelost some of their former momentum. Zenchu hasshifted its focus to the issue of management con-ditions of individual cooperatives and the prob-lem of organizing members. Improvement of themanagement of agricultural cooperatives is con-sidered by Zenchu as its most important task. Tocope with financial deregulation, and maintainor improve soundness of management, agricul-tural cooperatives are urgently enhancing theirauditing capabilities. Zenchu in the meantime isrequired to promote the qualitative transforma-tion of these agricultural cooperatives as quicklyas possible.

KENJI ISHIHARA

central wholesale markets

The distribution of many perishable foodstuffsin Japan is organized through a national systemof central wholesale markets (chuo oroshiuri shijou)and regional wholesale markets (chihou oroshiurishijou). Altogether, slightly more than 1,500 whole-sale markets throughout Japan trade in seafood,fresh fruits and vegetables, fresh meat, eggs andpoultry, and cut flowers. Seafood and produceare the major commodities that pass through thesemarket systems; many markets handle only oneor two commodities although a few deal in alltypes. The structures of production and distri-

bution for various commodities differ widely andso the market channels for each are quite dis-tinct, although seafood and produce often con-verge in major urban markets.

The national market system is organizedaround two interlocking dimensions of verticalintegration. One is the functional classificationof markets at different scales and levels: centralvs. regional wholesale markets, the latter furtherdivided between production or consumption ar-eas. This hierarchy is paralleled by and main-tained through a complex system of licensing formarkets and traders, which defines the scope ofactivity at each market level and structures thechains of transactions that link them.

Market levels

In 1998, the most recent year for which figuresare available, there were 87 central wholesalemarkets and 1,447 regional wholesale marketsin Japan. Of the central wholesale markets, 72handled produce with a total sales value of ¥2.7trillion; 53 handled seafood (¥2.9 trillion); 23dealt in flowers (¥160 billion); and 10 dealt inmeat products (¥240 billion). The total sales vol-ume of regional wholesale markets, across allcommodity categories and including both pro-duction and consumption regions, was ¥4.8 tril-lion.

Foodstuffs enter and circulate through the mar-ket system in many ways. At “upstream” mar-kets—that is, production region markets—some ofthe products may go for local consumption, butproducers and producer co-operatives primarilysell to brokers, processors, and agents of higher-level urban markets. These traders, in turn, bulkor consolidate catches into larger shipments forsale or consignment in other markets “down-stream,” closer to urban consumers, including cen-tral wholesale markets in large cities as well asconsumption region markets. These marketsbreak or disassemble commodity flows into lotssmall enough to be of use to a retailer or restau-rateur. Production region markets and higher-level regional markets depend exclusively ondomestic production. Central wholesale marketsreceive products from lower level regional andlocal markets, as well as directly from individualproducers, and imported foodstuffs often enter

66 central wholesale markets

the market system at this level, from trading com-panies and foreign producers. Consumption re-gion markets generally depend on centralwholesale markets for their supplies.

The Ministry of Agriculture, Forestry andFisheries (Nourinsuisanshou, also known by the ac-ronym MAFF) charters central wholesale mar-kets in cities with populations greater than200,000. MAFF sets national standards, enforcespolicies to ensure fair trading practice, and grantslicenses to the auction houses or primary whole-salers that supply these markets. Local authori-ties (municipal or prefectural governments), onthe other hand, oversee the day-to-day operationsof these markets, issue licenses for local whole-salers, and enforce local regulations governingmarket operations, such as setting hours of op-erations, allocating space, and determining spe-cific categories of goods to be traded.

Regional wholesale markets are chartered byprefectural governments and are operated as mu-nicipal, co-operative, or private ventures (whichmake up roughly 85 per cent of the total). Thesemarkets are divided into those that serve “pro-duction regions” (sanchi) and those for “consump-tion regions” (shouhichi), generally in regional citiesand suburbs. Markets in production regions areoften closely linked to local branches of the na-tional system of agricultural cooperatives(nougyou kyoudou kumiai or noukyou) and fisheriescooperatives (gyogyou kyoudou kumiai or gyokou),which in some cases operate the local markets.Consumption region markets are mostly ownedand operated by private corporations.

Production markets funnel foodstuffs from lo-cal farmers and fishers into national distributionchannels in various ways: regional brokers maypurchase local products for shipment and resaleto urban markets; cooperativess themselves maycreate a local brand for products that they sell onconsignment either through the regional marketor directly through urban central wholesale mar-kets; and individual producers may bypass re-gional markets and consign their products directlyto a central wholesale market.

The entire system operates under the CentralWholesale Market Law (Chuo Oroshi Shijou Hou),which was originally passed in 1923 in responseto the so-called “Rice Riots” of 1918. In protestagainst speculative trading in foodstuffs and con-

sequent severe shortages, residents violentlystormed rice and other food dealers and marketsin over 100 cities and towns, until the Japanesearmy quelled the riots. The law, which has beenrevised and updated several times since then, es-tablished publicly regulated markets to preventprice-fixing, collusion, and other anti-competitivepractices.

Licensing and regulation

Competitive auctions are the core mechanism ofcentral wholesale markets to ensure that transac-tions are “impartial and equitable” (kouhei to kousei).The rules and regulations under which auctionsmust take place are spelled out in general termsby national regulations and in minute detail bylocal ordinances as well as in the customary un-derstandings that surround trade in a particularmarketplace.

Primary wholesalers or auction houses, knownofficially as oroshiuri gyousha (wholesale dealers)or niuke gaisha (freight receivers, i.e. consignees)are licensed directly by MAFF to operate in aspecific marketplace. Their licenses give themexclusive rights to make markets for products andalso require them to attract a steady supply forthat market’s demand. There are about 260 auc-tion houses nationwide. (Auction houses in re-gional markets are licensed by prefecturalauthorities; there are roughly 1,700 such regionalauction houses.) Many auction houses are affili-ated with national chains, or keiretsu, that havesimilar auction houses in other major markets.In seafood markets, for example, the MaruhaCorporation (formerly known as TaiyouGyogyou KK) controls a dozen subsidiary firmsthat operate auction houses in major centralwholesale markets, and Maruha also has closeties with many other auction houses in regionalmarkets.

Auction houses obtain products on consign-ment (itaku hanbai) or on their own account(kaitsuke). Domestically consignments come di-rectly from producers, from producer coopera-tives, and from brokers operating in regionalmarkets. Imported products, unlike domesticones, are more likely to enter the distributionsystem at the level of central wholesale markets

central wholesale markets 67

rather than through regional markets. Importedproducts are purchased outright from foreign pro-ducers by the auction houses and their overseasaffiliates, or arrive on consignment from majortrading companies, joint ventures between for-eign producers and Japanese food companies, anddirectly from foreign producers.

Auction houses sell through various forms ofauctions (known collectively as seri or seri-uri, butmore precisely classified as open bidding auctions(seri) or sealed bid auctions (nyousatsu ornyousatsuseri)). In addition, auction houses may sellproducts to licensed wholesalers through negoti-ated sales (aitai-uri). Auction houses receive com-missions that are set by local regulations. Theprecise methods of auction and rules surround-ing negotiated sales vary from marketplace tomarketplace and from commodity to commod-ity. Auctioneers (serinin) are salaried employeesof the auction houses and are individually licensedby the local authorities responsible for adminis-tering marketplaces.

Auction houses in turn sell to intermediatewholesalers (nakaoroshi gyousha or nakagainin) whoare licensed by the local authorities who administereach market. Nationally there are about 6,000 in-termediate wholesalers, each licensed—just like theauction houses—to operate only in a single mar-ketplace. Many of the intermediate wholesalingfirms are small family-owned businesses, some ofwhich can trace their histories in the trade backmany generations, in some cases to the markets ofthe feudal Tokugawa period (1600–1868). Con-temporary wholesale markets, therefore, tend tobe close-knit, insular, and imbued with a strongethos of tradition, both in terms of commercialpractice and in relation to Japanese food cultureas an important cultural legacy.

In larger markets, intermediate wholesalers arehighly specialized; at Tokyo’s enormous Tsukijimarket (where there are, respectively for seafoodand produce seven and four auction houses, 953and 126 intermediate wholesalers, and 388 and1,018 authorized buyers) individual firms special-ize in particular varieties of produce (onions orcitrus fruits) or species of seafood (tuna or shrimpor octopus). In smaller markets, intermediatewholesalers may handle almost the full range ofproducts found in the market as a whole. Inter-mediate wholesalers are authorized to operate

their own shops within a marketplace to resellproducts. In addition, some marketplaces license“authorized buyers” (generally retailers or sec-ondary distributors) to participate in auctions, butthey are not allowed to resell in the marketplace.Nationally there are approximately 48,000 “au-thorized buyers.” At regional markets of all kinds,there are a total of approximately 185,000 licensedbuyers.

Recent trends

Despite the enormous volume of foodstuffs thatcontinues to pass through the national system ofwholesale markets, since the 1980s its overall sig-nificance has declined, because of changes bothin the structure of distribution and in consumerbehavior.

People in the food and distribution industriesuse the term jounai ryuutsuu (distribution withinthe market system) to describe transactions andchannels that make use of the national system ofwholesale markets, auctions, and licensed deal-ers. This is in contrast to jougai ryuutsuu (distribu-tion outside the market system) which refers tothe non-regulated free trade in food products. Asthe Japanese domestic economy has changed overthe past generation, jougai ryuutsuu has becomemuch more important than it was in the past, inpart because advances in communications andtransportation make the shipment of perishablefoodstuffs very easy nationwide, thus reducingsome of the function of the nodal distributionsystem organized around central markets.

In addition, large-scale retailers such as super-market chains have developed their own inde-pendent distribution channels directly linkingthem both to domestic producers and importers.Large trading companies, many of which havemajor investments in supermarket and restaurantchains, have also become much more active inimporting foodstuffs, some of which is soldthrough central wholesale markets, but much ofwhich goes directly to large-scale retail chains.

Paralleling these trends are changes in Japa-nese consumer behavior. Traditional small-scaleretailers have steadily lost sales over the past fif-teen years to supermarkets and conveniencestores (konbini), which handle increasingly largearrays of pre packaged and processed products.

68 central wholesale markets

Distinct changes in the average diet and consump-tion patterns of average Japanese consumers havehad direct impact on the sales of many of thekinds of fresh foodstuffs that the market systemhas traditionally handled. Wholesale marketshandle less and less of the high volume sales ofthe most basic foodstuffs that supermarkets andrestaurant chains can arrange through their owndistribution networks.

Markets therefore have become more special-ized at the top end of the spectrum: high qualityand high value products that are in demand forpremier restaurants and for discriminating con-sumers who continue to shop in specialty retailshops. During the boom years of the so-calledbubble economy, the market system prosperedon this sector, characterized as “gaishoku [eatingout] and gourmet.” However, specialization in thehighest quality and highest priced spectrums ofproducts, including many pricey imported food-stuffs, has left the wholesale market system vul-nerable throughout the economic recession of the1990s, when they have been particularly hardhit by the decline in business entertainment, morefrugal consumers, and intensified competitionwith supermarkets and other alternative distri-bution systems.

Further reading

Bestor, T.C. (2002) Tokyo’s Marketplace, Berkeley CA:University of California Press.

THEODORE BESTOR

Chugen

Chugen refers to the Japanese midyear gift-giv-ing season. This traditional summer exchange ofgifts occurs during the first two weeks of Julybefore the Obon holiday. The giving of summergifts originated as an offering to families that hadexperienced a death during the first half of theyear. To this day Chugen takes place during thetwo weeks before the obon (the Buddhist holi-day for honoring dead ancestors).

The gifts, commonly referred to as ochugen, aregiven as an expression of gratitude to either pri-vate individuals or work related individuals towhom the gift giver has been obliged to during

the year. Many individuals send ochugen to theirboss and their customers in the hopes of retain-ing their continued support and business. Thesending of ochugen to valued customers is obliga-tory in Japanese corporate culture. All Japanesecompanies maintain a Chugen budget, for giv-ing gifts to important customers as a means ofshowing the company’s appreciation of their busi-ness.

The giving of ochugen to superiors, clients, andothers as an expression of gratitude for their guid-ance, patronage, or kindness is a well-establishedsocial and corporate custom in Japan. While theamount spent on ochugen varies, it is generallyagreed that the average price is ¥5,000 each. Asa result of this obligatory summer gift giving, avast market has been created.

As the Chugen season coincides with the Japa-nese summer bonus season, it is a busy time ofyear for many Japanese retailers. Departmentstores, with the largest share of Chugen sales,set up special areas dedicated to ochugen, display-ing a variety of specially packaged gifts at a rangeof prices. Gift-wrapping and delivery services arealso provided. Supermarkets and conveniencestores also sell ochugen, and provide delivery serv-ice.

Competition among retailers for chugen busi-ness is fierce. Some offer free delivery for a lim-ited range of items within a delineated deliveryarea, while others counter with offers of a flatdelivery rate to any domestic location. Discountsare also offered on selected goods, as are mon-etary incentives in the form of gift certificates withpurchases over a certain amount.

During the Chugen season, large retailers suchas department stores and supermarkets devoteentire sections exclusively to such gifts. Althoughgifts usually belong to high-end product catego-ries, they tend to be practical items that can beused, or consumed, at the recipient’s home. Com-mon gifts include boxes of soap, cooking oil, cook-ies, liquor, canned food, instant coffee, and beer,in addition to traditional gifts such as nori (driedseaweed), katsuobushi (dried fish), and oshinko (pick-led vegetables).

Japan’s other major gift-giving season is theyear-end, between December 10 and the NewYear holidays. Gifts exchanged at this time arereferred to as oseibo. In general, oseibo are given to

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the same individuals to whom an ochugen wasgiven.

SEAN MOONEY

city banks

City banks are major commercial banks withheadquarters in a large metropolitan area andnationwide branch networks. The eight city banksrank among the world’s largest banks. Controlled,regulated and protected by the Ministry of Fi-nance, they played a major role in bankrollingmajor corporations in the wartime economy andduring the period of high economic growth. Ill-executed deregulation of this system commenc-ing in the 1970s culminated in the banking messof the 1990s, as it created a situation of moralhazard in which banks had no incentive to de-velop business expertise and felt free to take riskypositions in the mistaken belief that the ministrywould bail them out if necessary While the bank-ing crisis seems to be under control for now, citybanks still face serious challenges in the form ofimpending mergers, technical deficiencies, andinternationalization.

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 mergerof two city banks, Kyowa Bank and SaitamaBank, and adopted its present name in 1992.Asahi Bank maintains its headquarters in To-kyo, employs 10,448 staff, and possesses abranch network of 365 offices. Its total as-sets (consolidated) amount to about ¥28.8trillion, which makes Asahi Bank the sev-enth largest city bank in Japan and the thirty-fifth largest bank in the world.

• Bank of Tokyo-Mitsubishi. Its history reach-ing back to 1919, the Bank of Tokyo-Mitsubishi is the result of the 1996 mergerbetween Mitsubishi Bank and the Bank ofTokyo. Headquartered in Tokyo, it employs17,412 staff and runs 375 branch offices. Withtotal assets (consolidated) of about ¥74.8 tril-lion, it is the second largest bank in Japan

and the fourth largest bank in the world byassets. The Bank of Tokyo-Mitsubishi is themain bank of the Mitsubishi keiretsu (seemain bank system; zaibatsu) and plans tomerge with Mitsubishi Trust & Banking,Japan’s premier trust bank, in April 2001 toform the Mitsubishi Tokyo Financial Group.

• Daiwa Bank. Founded in 1918, Daiwa Bankgrew out of the old Osaka Nomura Bankwhen its securities division separated andbecame Nomura Securities. Headquarteredin Osaka, the Daiwa Bank has 7,315 employ-ees and a branch network of 191 offices. Itstotal assets (consolidated) of about ¥15.4 tril-lion make it Japan’s smallest city bank andearn it a rank of seventy-one worldwide byassets. Daiwa Bank gained international no-toriety in 1995 in a scandal involving unre-ported bond-trading losses of $ 1.1 billion inthe USA, as a consequence of which the banksaw itself stripped of its US banking license.

• Mizuho Financial Group. Mizuho FinancialGroup is the result of the September 2000merger of Daiichi Kangyo Bank—itself theoutcome of the 1971 merger of two citybanks, Daiichi Bank and Nippon KangyoBank—Fuji Bank, and the Industrial Bank ofJapan. Head-quartered in Tokyo, the group’sfirms combined employ 33,914 staff and run747 branch offices. With total assets (con-solidated) of ¥157.2 trillion, the MizuhoGroup is the world’s largest bank. Given itsconstituent banks, the Mizuho FinancialGroup will probably serve as the main bankof the Ikkan and the Fuyo keiretsu.

• Sakura Bank. Tracing its history back to1876, Sakura Bank is the result of the 1990merger of Mitsui Bank and Taiyo-KobeBank, with the latter having itself grown outof a merger between Taiyo Bank and KobeBank in 1973; it assumed its present namein 1992. With headquarters in Tokyo, SakuraBank has 14,930 employees and the largestbranch network of all city banks with 438offices. Its total assets (consolidated) areworth about ¥48.5 trillion, which makes itJapan’s fourth-largest city bank and theworld’s fifteenth largest bank by assets.Sakura Bank is the main bank of the Mitsuikeiretsu and is scheduled to merge with

70 city banks

Sumitomo Bank into the Sumitomo MitsuiBanking Corporation in April 2001.

• Sanwa Bank. Sanwa Bank was founded in1933. It has its headquarters in Tokyo, em-ploys 12,997 staff, and possesses 331 branchoffices. It has total assets (consolidated) ofabout ¥46.9 trillion and is thus Japan’s fifth-largest city bank and the world’s seventeenthlargest bank by assets. Sanwa Bank is themain bank of the Sanwa keiretsu and plans toset up a joint holding company with TokaiBank and Toyo Trust in April 2001.

• Sumitomo Bank. Tracing its history back to1912, Sumitomo Bank strengthened its To-kyo business by acquiring Heiwa Sogo Bank,a regional bank, in 1986. With its headquar-ters in Osaka, it maintains a staff of 14,394and possesses 353 branch offices. Total as-sets (consolidated) of about ¥53.8 trillionmake it Japan’s third largest and the world’sninth largest bank by assets. Sumitomo Bankis the main bank of the Sumitomo keiretsuand will merge with Sakura Bank to formthe Sumitomo Mitsui Banking Corporationin April 2001.

• Tokai Bank. Tokai Bank was founded in1941. The only city bank headquartered inNagoya, it employs 9,675 staff and runs abranch network of 280 offices. Its total as-sets (consolidated) amount to about ¥30.5trillion, which makes it Japan’s sixth largestcity bank and the world’s thirty-second larg-est bank ranked by assets. Tokai Bank actsas the main bank of the Tokai keiretsu andplans to create a joint holding company withSanwa Bank and Toyo Trust in April 2001.

Noteworthy also is the Hokkaido TakushokuBank, the only city bank to have failed. Head-quartered in Sapporo, Hokkaido TakushokuBank was the smallest of all city banks when itcollapsed under the burden of massive bad loanson November 17, 1997. Its demise and the subse-quent bankruptcy of Japan’s fourth-largest secu-rities firm, Yamaichi Securities, on November 24,1997 greatly exacerbated the Japanese financialcrisis of the 1990s and served to focus the atten-tion of the government authorities on the weak-ness of the Japanese financial system (seebanking crises).

History and status quo

Most, though not all, of today’s city banks devel-oped out of the “big banks” of the prewar era. Inthe early days of industrialization, Japan featuredseveral thousand banks. Size varied enormouslyfrom 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), SumitomoBank, and Yasuda Bank (now Fuji Bank). Thesebig banks played an important role for their re-spective zaibatsu, but overall their role in theeconomy was limited by strong competition withother banks and flourishing financial markets:the Big Five provided only about twenty percentof total bank loans, which in turn accounted foronly about 20 percent of total assets in theeconomy until the 1930s.

Several factors strengthened the hand of thebig banks from the late 1920s onward. First, anumber of banking crises led to increased con-centration in the banking sector. Second, andmore importantly as the country prepared for war,banks assumed a central role in the bureaucra-cy’s efforts to bring the economy under control.In order to channel funds to industries central tothe war effort, the state promoted further bank-ing concentration, specialization, and a systemof “indirect finance,” in which firms received theircapital through banks rather than directly fromthe capital markets.

Like so many aspects of the Japanese wartimeeconomy the highly controlled and regulated sys-tem of indirect finance survived both defeat andAllied occupation and became a cornerstone ofthe high-growth era. As during the war, city bankswere instrumental in funneling scarce capital tomajor corporations (see also industrial policy).Several phenomena were characteristic of thisrole: “over-loan,” that is, the over-extension ofcommercial loans sustained by lending from theBank of Japan (see madoguchi shido);“overborrowing,” that is, the extreme dependenceof corporations on bank lending; and the imbal-ance of bank liquidity (shikin henzai) between citybanks and the smaller, local banks resulting fromthe inability of city banks to raise enough depos-its through their relatively small branch networksto cover their large lending volumes.

city banks 71

Throughout this period of high economicgrowth, the city banks enjoyed a symbiotic rela-tionship with the Ministry of Finance (MOF).MOF used administrative guidance, price set-ting, protection, and restriction of competition tokeep the banking system stable. Interest rates wereset with spreads wide enough to keep all banksprofit able, and the “convoy” (goso sendan) systemensured that the assets of all banks grew at aboutthe same rate, their relative ranking remainedunchanged, and no bank failed. Success underthese conditions was arguably more dependenton good relations with the ministry than on busi-ness acumen.

This system contained the seeds of the bank-ing mess of the 1990s. As the economy maturedin the early 1970s, the combination of slowergrowth, high government debt, internationaliza-tion, a shift of corporate finance away from banklending, and increasingly diversified demand forfinancial services gave the impetus for slow butsteady deregulation. However, MOF failed to cre-ate a system of prudential regulation as deregu-lation proceeded and stuck to the old convoysystem. This created a situation of moral hazardin which the city banks had no incentive to de-velop business expertise and felt free to take riskypositions within Japan (especially during the bub-ble economy) and overseas (especially in Asia)in the conviction that MOF would bail them outif necessary. However, when many of these loanswent bad following the bursting of the bubble aswell as the economic crisis in Asia, the resultingbanking crisis turned out to be too large for MOFto handle. Hokkaido Takushoku Bank went un-der, other city banks presumably came close.

While a ¥ 7.45 trillion public aid package forthe big banks and massive write-offs appear tohave stabilized the city banks for now, they stillface considerable challenges. First, it is not clearthat the proposed banking mergers will show anybenefits beyond making city banks bigger. Sec-ond, city banks have proved incapable of incor-porating technological change. Their expertise inimportant areas such as risk management andsophisticated financial products remains low, asthey lack the necessary specialists and have beenspending too little on information technology.Third, city banks face increasing internationali-zation, which impacts them not least through com-

petition from sophisticated foreign competitorssuch as Citigroup entering the Japanese market.

Further reading

Field, G. (1997) Japan’s Financial System: Restoration andReform, London: Euromoney Publications.

Japanese Bankers Association (2000) Japanese Banks,Tokyo: Japanese Bankers Association.

Johnson, C. (1982) MITI and the Japanese Miracle: TheGrowth of Industrial Policy, 1925–1975, Stanford, CA:Stanford University Press.

Kitagawa, H. and Kurosawa, Y. (1994) “Japan: Devel-opment and Structural Change of the Banking Sys-tem,” in H.T.Patrick and Y.C.Park (eds), The FinancialDevelopment of Japan, Korea, and Taiwan, Oxford: Ox-ford University Press, 18–128.

Patrick, H.T. (1999) “The Causes of Japan’s FinancialCrisis,” Pacific Economic Paper No. 288, Canberra: Aus-tralia-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: 78–110.

Toyo Keizai Shinposha (2000) Japan Company Handbook:First Section Firms, Fall 2000, Tokyo: Toyo KeizaiShinposha.

MICHAEL A.WITT

Cole, Robert

Educator and writer on Japanese organizationalbehavior. Building on the earlier work of JamesAbegglen’s The Japanese Factory (1958), which fo-cused on the factory as a key to understandingJapanese industrialization, Cole studied the work-ers within the factories. Cole described how theJapanese focus on scarcity is reflected in itseconomy.

Cole developed a theory of functional alter-natives in which he looked at industrial relationsystems by viewing their features not as uniquebut as functional equivalents, variations and ex-aggerations of tendencies common to all indus-trial societies (Cole 1971). Under this theory heattempted to bridge the gap between convergencetheory (under which all economies would developsimilar characteristics) and historical uniqueness(under which there would be no convergencesince each nation is unique).

72 Cole, Robert

In his comparison of work practices in De-troit and Yokohama (Cole 1979), Cole found thatwhile convergence did exist, there were also con-tinuing differences as the Japanese adapted West-ern ideas and practices to their own needs. Hedescribed the greater worker participation amongJapanese in shop floor management. While hefound a distinctive Japanese work ethic, the dif-ferences tended to lie along very specific dimen-sions. First, the social organization of a Japanesefirm is characterized by a lack of sharp job defini-tion. This results in a low concern with promo-tion to particular jobs, job performance lessimportant to promotion, extensive job rotation,tasks perceived as group projects and low com-mitment of employees to particular jobs. Second,the social organization of a Japanese firm has astrong internal labor market with employees hav-ing greater career commitments to the companyincluding low quit rate, stronger company train-ing, employees have less job security concern, se-lective new employee recruitment, and low unioninvolvement in job assignments. These differ-ences, according to Cole, even if unique, weresolutions to common problems.

Further reading

Abegglen, J.C. (1958) The Japanese Factory: Aspects of itsSocial 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 ComparativeStudy of American and Japanese Industry, Berkeley CA:University of California Press.

ROBERT BROWN

Commercial Code

History

The Commercial Code is part of a series of lawsthat also includes the Constitution, the CivilCode, and the Criminal Code. These laws wereintended to make Japan a modern state equal towestern states. At the time when Japan wasforced to open up its borders by the “blackships” of US Commodore Perry Japan had beenforced into unequal treaties with Western states

such as the USA, the UK, and the Netherlands.Meiji-era leaders were determined to prevent Ja-pan from being colonized. In order to be interna-tionally recognized as an equal power,modernization of the Japanese society and eco-nomic development became important goals forthe Meiji government. The government sent outmany scholars to Germany France, and theUSA to study industrialization, banking sys-tems, and Western law. In the meantime, theJapanese government embarked on the modern-ization of the financial system by establishing theMinistry of Finance in 1869, promulgating aNational Bank Act in 1872, and establishing theTokyo Stock Exchange in 1878.

The Japanese Commercial Code was basedon the German Commercial Code. Like the Con-stitution, the old Commercial Code was draftedby Karl Friedrich Hermann Roesler in 1890. Theparts concerning companies, bills and bankrupt-cies were implemented in 1893, the other partsfollowing in 1898, to be replaced by the new Com-mercial Code in 1899. The old Commercial Codehad been considered too foreign, and was said todisregard customary business practices.

Development

Prewar amendments took place in 1911 and 1938.They consisted of changes in valuation standardsfrom market value, to lower-of-cost-and-market(1911), to historical cost (1938). In 1950, amend-ments included the introduction of the authorizedcapital system and the non-par value stock sys-tem in order to facilitate the introduction of for-eign capital. The revisions that took place in 1962established the supremacy of accounting rules(concerning measurement, valuation and recog-nition) in the Commercial Code over the regula-tions of the Securities and Exchange Law andthe Statement of Business Accounting Principles.The Commercial Code falls under the adminis-tration of the Ministry of Justice, whereas the lat-ter two are under the jurisdiction of the Ministryof Finance. The 1974 revision to the Commer-cial Code made the audit system compatible withthe audit system under the Securities and Ex-change Law, and thus contributed to the unifica-tion of the Japanese accounting system.

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Later amendments occurred in 1981, 1990,1994, and 1997, and included rules that accom-panied the deregulation of Japanese financial mar-kets and the internationalization of business ingeneral. Examples of the first include issuanceand administration of corporate bonds and de-rivatives. Examples of the latter include foreigninvestments or mergers and acquisitions. Thelatest revisions are a consequence of the financialand accounting Big Bangs. In 1998 the Commer-cial Code was amended to relax the purchase oftreasury stock. From 1999 the Commercial Codepermits the establishment of holding companiesagain. When the zaibatsu were dismantled, hold-ing companies had been prohibited. Furthermore,since 1999, new rules include fair value for fi-nancial products. Revisions in 2000 lay down therules for company splits. Within the frameworkof the accounting Big Bang, more revisions arelikely to follow.

Character

The Commercial Code applies to all companies.However, for certain regulations there are excep-tions based on size. For example, external auditsare not required for small and medium-sized com-panies. For companies with a capital stock of over¥500 million or liabilities totalling more than ¥20billion, under the “Law concerning the exceptionsto the Commercial Code regarding the audit ofkabushiki kaisha” Art. 16 stipulates that in case theexternal auditor concludes in its report that, as aresult of the audit of the accounts, they have notfound any improper items, approval by the gen-eral shareholders meeting is not necessary. A merepresentation of the contents of the financial state-ments is enough.

It is generally acknowledged that the Com-mercial Code is primarily concerned with the pro-tection of creditors rather than shareholders. Oneimportant aspect of Roesler’s draft that remainsa characteristic of the Japanese accountability sys-tem until today is the relationship between theboard of directors, the statutory auditors and thegeneral shareholders meeting. Both the statutoryauditors and the board of directors are appointedby the general shareholders’ meeting. In somecases, this would be the shareholders’ only di-rect means of control.

Outline

Book One of the Commercial Code is concernedwith general principles, and contains chapters onregulations for carrying out the law, merchants,business registration, firm names, business ac-count books, business users, and agents. BookTwo consists of a chapter on general principleswhich mainly deals with definitions, and anotherchapter which is concerned with stock compa-nies, their establishment, stock, institutions, gen-eral shareholders meeting, auditing, companyaccounts, bonds, amendment of the articles ofincorporation, increase or decrease of capitalstock, liquidation, and penal regulations.

See also: joint stock corporation; zaibatsu

CARIEN VAN MOURIK

competition

Competition in Japan has certain unique features.The fact that prices have been persistently higherthan in other nations suggests that price compe-tition is relatively weak. And while Japan hasended most of its legal cartels, informal restraintson competition appear more widespread than inmany other industrialized countries. Yet compe-tition over quality and service is intense. Japa-nese firms in many industries compete hard tocreate innovative, well-crafted goods that enjoygreat success in world markets.

The question of just how competitive Japan’smarkets are is hotly debated for several reasons.The first has to do with explaining economicgrowth. Neoclassical economic theory holds thatcompetitive markets promote growth, while re-straints on competition take away incentives toinnovate and cut costs. The Japanese economyhas grown quickly during most of the post-Sec-ond World War period. During much of thistime of rapid growth, the Japanese governmentencouraged cartels and protected domestic in-dustries from imports. Was there intense compe-tition anyway? If not, how did the economygrow so fast? Is neoclassical economic theorywrong about the importance of competition foreconomic growth? Some scholars argue deduc-tively from neoclassical economic theory thatsince Japan had high rates of economic growth

74 competition

from 1952–91, and since markets must be com-petitive to generate rapid growth, that Japanmust therefore have had an intensely competi-tive market. Others argue that neoclassical eco-nomic theory is wrong, and that certainrestraints on competition can promote growth inlate-developing economies that are struggling toaccumulate capital and catch up with more ad-vanced nations (see industrial policy).

Another reason scholars and policy makersdebate the nature of competition in Japan is be-cause of its significance for Japan’s internationaltrade relations. Critics of Japan argue that pri-vate firms collude to keep prices high and to usetheir market power to keep new firms from un-dercutting these prices, while the governmentfails to enforce the nation’s Anti-Monopoly Lawand uses informal regulation to help stifle com-petition. They hold that anti-competitive activi-ties unfairly enable Japanese firms to keep priceshigh, keep imports out, and then sell cheaplyoverseas.

Opponents of this view argue that Japanesemarkets are in fact very competitive and that thedifficulty foreign firms have in making sales inJapan is because Japanese firms compete so in-tensely to provide excellent goods and services.They argue that Japan’s high prices reflect thehigh quality of goods that consumers demand aswell as high production and distribution costs andthat, while there are some illegal cartels, these donot last long nor have great overall effect onprices.

As with many debates, there is truth to bothpositions. Japanese markets are less competitivethan the markets of other industrialized nationsin certain respects, but very competitive in oth-ers. Compared to the USA or the European Un-ion, competition policy is lax, and the Japan FairTrade Commission is more tolerant of cartels.Japan’s high prices suggest that price competi-tion is weak. Japanese prices are much higher thanin the USA and Western Europe. The explana-tion for these high prices might be partly thathigh distribution costs force prices up and thatthe yen has been overvalued. But the high distri-bution costs themselves appear to be due to re-straints on competition in industries such astrucking or retail sales. And the yen has beenhigh since 1985. One would think that the high

prices in Japan would attract cheap imports thatwould put downward pressure on Japanese prices.The fact that the expected cheap imports havenot succeeded in driving down Japanese pricessuggests there are barriers to new entrants in Ja-pan’s markets.

Yet while competition over prices is weak onaverage, competition over quality and service isintense. What causes this difference in competi-tion, and how does an emphasis on competitionover quality and service instead of price affectthe economy?

Competition can be shaped both by verticaland horizontal relations among firms. First, ver-tical relations between buyers and sellers in Ja-pan are more often long-term and stable than insuch countries as the USA or the UK. Buyersmake a long-term commitment to buy from aparticular supplier and sellers make a long-termcommitment to make a particular good to thebuyer’s precise specifications. Buyers and sellersdo not constantly shop around for a better price,but that does not mean there is no competition.Instead, buyers use “controlled competition” toget better prices, quality and service from sellers.Under controlled competition, buyers have long-term relations with several suppliers. They limittheir purchases to these designated suppliers, andnegotiate prices with them that cover productioncosts. The various designated suppliers cooper-ate to some degree to produce the goods the buyerwants, but the buyer also pressures these suppli-ers to compete to provide good quality and serv-ice, and to gradually improve productivity andbring down costs. This kind of competition iscommon among providers of intermediate indus-trial goods, such as telecommunications equip-ment or automotive parts.

Horizontal ties among competitors producingthe same good or service also can lead to an em-phasis on competition over quality and serviceinstead of price. An example of an industry inwhich firms compete intensely over quality andservice is the petrochemical industry Japanese pet-rochemical companies produce ten times as manydifferent grades of chemicals as in other coun-tries and they are willing to make deliveries ofmuch smaller quantities. Firms provide these finegradations in quality and excellent service becausethey are competing to gain or keep customers.

competition 75

At the same time, the Japanese chemical indus-try charges very high prices for its goods. Whatexplains this pattern of intense competition overquality and service and weak competition overprices? The reason Japanese companies competeintensely to produce so many fine grades ofchemicals is that they have agreements not tocompete over price (see after-sales pricing). TheMinistry of International Trade and Industryhas encouraged the petrochemical industry tocome to an agreement not to make so manygrades, but as long as firms are prevented fromcompeting over price, they have an incentive tocompete over non-price differentiations betweenproducts.

One could argue that customers really want alarge variety of grades of chemicals and deliver-ies of tiny quantities, and that this is the mainreason that Japanese chemical companies com-pete in this specific way One could also arguethat Japan’s extraordinary levels of quality andservice shows that it is one of the most competi-tive chemical markets in the world. However,given that we know that chemical companieshave price-fixing agreements, we must concludethat it is the lack of price competition that ispushing chemical companies to instead competeover service and quality Is this wasteful? Think-ing in terms of static economic efficiency that is,the efficiency of distributing resources that areavailable right now, the answer is yes. The resultof such arrangements is that Japanese consum-ers pay high prices and have a lower level of con-sumption. On the other hand, a widespreademphasis on quality rather than price competi-tion is one of the factors that has enabled Japa-nese manufacturers to be leaders in theproduction of high quality goods. Car compa-nies say that they value the ability to get pre-cisely the kind of chemical products they wantand on very convenient delivery schedules. Thisorientation to quality over price may produce dy-namic efficiencies. That is, it may increase theamount of resources available in the future bystimulating innovation.

People understand competition in Japan some-what differently than in Britain or the USA. A keyconcept for discussing competition in Japan is “ex-cessive competition” (kato kyoso). Excessive com-petition means that supplies greatly exceed

demand, prices are below costs, and producers arein danger of being pushed out of business. Pro-ponents of this concept argue that excess compe-tition develops when firms have high sunk costs.That is, firms have invested in production facili-ties, such as factories and equipment, which theycannot easily sell off or use for some other pro-ductive purpose. Firms that are stuck with big in-terest payments on a factory are forced to keepproducing goods even if they’re not makingenough money to cover the full costs of produc-tion in order to stay in business. Americans andBritons tend to see business failure as a normalpart of a market economy but the use of the term“excessive competition” suggests many Japaneseobservers see it as abnormal. The term is impor-tant because it has often been used to justify gov-ernment intervention to reduce competition andprotect the beleaguered firms. It is this thinkingwhich provides the political support for the restric-tions on competition that the petrochemical indus-try uses to maintain a system of competition thatemphasizes quality and service instead of price.

Perhaps the best way to understand competi-tion in Japan is to say that it operates somewhatdifferently from economies such as the USAwhere price competition is more intense andwhere market relationships are more fluid. Higherprices cause some losses in efficiency but highlevels of quality can also provide some advan-tages. Joseph Schumpeter, an Austrian economistwriting in the middle of the twentieth centurydisagreed with neoclassical economic theory andargued that the most important kind of competi-tion in a market economy is not over price, butover innovation. His way of thinking may explainwhy Japan has managed to achieve remarkablelong-term economic growth even with many of-ficial cartels and high prices. Yet the long reces-sion that began in 1991 has caused manyobservers both within and outside Japan to won-der whether the old formula can still work andwhether Japan may need stronger price competi-tion in order to push inefficient companies out ofbusiness and create space for new industries. Ob-servers concerned with international trade equityargue that Japan needs more competition in itsdomestic markets in order to ensure that foreignfirms have the same access to Japanese marketsthat Japanese firms enjoy overseas.

76 competition

Further reading

Flamm, K. (1996) Mismanaged Trade? Strategic Policy andthe Semiconductor Industry, Washington, DC: TheBrookings 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 In-stitution Press.

Lynn, L.H. and McKeown, T.J. (1998) Organizing Busi-ness: Trade Associations in America and Japan, Wash-ington, DC: American Enterprise Institute forPublic Policy Research.

Odagiri, H. (1994) Growth through Competition, Competi-tion through Growth: Strategic Management and theEconomy in Japan, Oxford: Oxford University Press.

Schumpeter, J. (1976) Capitalism, Socialism and Democracy,New York: Harper Torchbooks.

Tilton, M. (1998) “Regulatory Reform and MarketOpening in Japan,” in M.Tilton and L.Carlile (eds),Is Japan Really Changing Its Ways? Regulatory Reformand the Japanese Economy, Washington, DC:Brookings Institution Press.

MARK TILTON

computer industry

Introduction

Japan is the only nation other than the USA todevelop a competitive computer industry. Withheavy state support in the 1960s and 1970s, Japa-nese firms were able to become world leaders incomputer hardware. Their weakness has been insoftware, and like IBM, they missed the trendtoward downsizing to smaller computers in thelate 1980s. Japanese firms took over or formedkey partnerships with Europe’s top computermakers in the 1980s and 1990s and today sup-ply the world with advanced computer hardwareand components.

The 1960s and 1970s

The Japanese computer industry started to de-velop in the 1960s, largely as a result of govern-ment initiative. To help nurture a domestic

industry to catch up with IBM, the state usedfour primary policies: protectionism, a quasi-pub-lic computer rental company called the Japan Elec-tronic Computer Company (JECC), financialassistance, and a variety of state-sponsored co-operative research and development projects.These policies were critical in helping the indus-try create a competitive hardware industry by thelate 1970s.

Protectionism included conventional tariffsand quotas, but also a variety of limitations onforeign investment, which influenced the type andquantity of machines IBM could produce in Ja-pan, how much it had to export, how many partsit could import, and how much profit it couldrepatriate. IBM only got permission to producein Japan when it agreed to license its patents atreasonable royalty fees to local firms. Similar re-strictions constrained the activities of Sperry Rand(UNIVAC computers), which was forced into ajoint venture with Oki Electric, as well as otherUS players such as Hewlett-Packard. While pro-tectionism usually leads to sluggishness and inef-ficiency domestic competition was encouraged,requiring that firms make increasingly better ma-chines in order to stay in business. The resultwas increased demand for domestic machines,which stimulated supply.

The JECC was set up in 1961, and about 50percent of its financing came from governmentlow-interest loans. It worked in the following way:when a user decided which specific machine itwanted to rent, it told JECC, which bought themachine from the designated maker and rentedit to the user for a reasonable monthly fee. Theuser had to keep the computer for at least 15months or pay a penalty When a machine wasreturned, the computer maker was forced to re-purchase it at book value from JECC. The effectwas to give Japanese domestic computer firmsan immediate return on their investment. If thefirms had had to finance their own rentals, theywould have received returns in small monthlypayments over a 4 year period. Since JECC onlypurchased machines users specifically asked torent, there was a direct link to the market. If noone asked for your machine, JECC did not buyit. Thus, the firms making the best machines gotthe most benefit from JECC. From 1961 to 1981the government funneled some 12 billion in loans

computer industry 77

into JECC to finance computer rentals. JECCstill exists today but rents only a small percent-age of the total number of rented machines.

State financial aid to the computer industrycame in various forms. The absolute amount ofsubsidies, tax benefits, and low-interest loans hasbeen quite small compared to the huge sums theUSA funneled into Pentagon projects. But theamounts were very large compared to what thefirms were investing themselves. For example, aconservative estimate suggests that from 1961–9subsidies and tax benefits ($132 million) wereequivalent to 46 percent of what the computerfirms themselves were investing in R&D and plantand equipment. If we include government lowinterest loans, total aid ($542.8 million) was equalto 188 percent of what the firms were investing.Indeed, the state was also providing funds forworking capital. From 1970 to 1975, subsidies andtax benefits ($636.55 million) were equivalent to57 percent of what the firms were investing, 169percent ($ 1.88 billion) if we include governmentloans. Software and hardware were formally lib-eralized in the mid-1970s yet from 1976 through1981 subsidies and tax benefits ($1.03 billion)were still 25.2 percent of what the firms were in-vesting; including state loans, total aid ($3.74 bil-lion) was still equal to 91.6 percent of what thefirms were investing.

Various cooperative R&D projects, mainly fo-cused on catching up with IBM, were conductedin the 1960s and 1970s. Their overall effect wasto reduce the costs and risks of doing R&D bypooling resources and sharing R&D results. TheVLSI Project (1976–79) and the New SeriesProject (1972–76) were key projects that helpedJapanese firms, especially the three dominantcompanies—Fujitsu, Hitachi, and NEC—catch upwith IBM in hardware by the late 1970s.

Success in hardware was contingent on nur-turing a competitive semiconductor industryThe R&D cooperative computer projects all in-volved making advances in semiconductor tech-nology. Other policies also helped nurture theworld’s most advanced memory makers, includ-ing heavy-handed state intervention to handicapforeign semiconductor makers, such as Texas In-struments, Motorola, and Fairchild in the 1960sand 1970s. With US makers focusing on bipolarsemiconductors in the early 1970s, Japanese

firms and MITI decided to focus on a specificniche market: memory semiconductors orDRAMS, which were in great demand for use incalculators and watches. The technological tra-jectory was stable for these chips, they werehighly sensitive to production economies ofscale, and success depended on high-qualityprocess technology and attention to manufactur-ing detail, areas where Japanese firms have tradi-tionally excelled. Japanese firms did not getheavily involved in developing microprocessors,so-called systems on a chip. Microprocessorshave a very heavy software component, an areawhere Japan continues to lag.

The success of policies toward hardware inthe 1960s and 1970s was undoubtedly depend-ent on several conditions. Most important wasthat while the firms were protected from interna-tional competition, domestic competition wasstrongly encouraged. Even though cooperationwas sub-stantial on products, investment, andR&D, market forces were kept intact enough toforce the firms to advance technologically andcut costs in order to survive over the long term.A broad societal consensus to allow the bureauc-racy to decide what industries to target was alsocritical. So was a stable institution—the Ministryof International Trade and Industry (MITI)—which had consistent policies that did notchange with each new administration. A rela-tively large domestic market in which to gaineconomies of scale was important as was accessto foreign markets for technology and to sellproducts. Overall macro-policies that encour-aged savings and investment and discouragedconsumption enabled Japan to remain independ-ent of foreign loans while still investing heavilyin strategic industries.

Software was not subsidized much in the1960s and 1970s and the aid it received was gen-erally not very effective. The real focus was onhardware not software. The firms essentiallyused modified versions of foreign software.Hitachi and Fujitsu, for example, decided in theearly 1970s to make IBM clones, but they modi-fied the IBM hardware and software enough tolock customers into their closed, incompatiblestandards. NEC had technological ties withHoneywell, but also created its own closedstandard.

78 computer industry

The 1980s

Fujitsu and Hitachi’s strategy of “borrowing”IBM’s software backfired in summer 1982 whenthey were caught stealing IBM technology in anFBI sting case. This meant the free ride on IBMwas no longer free. The firms now had to payhuge annual licensing fees to IBM. From thenon, the firms tried to diversify their reliance onIBM’s mainframe standard. In the 1980s, therewas a strong move toward UNIX-based systemsand an attempt to create a unique Japanese oper-ating system standard called TRON. This latterpursuit, overly ambitious, was not successfulthough it still exists today

It was also in the early 1980s that Japan’s threetop makers moved into supercomputers, initiatedby the government in a fully-funded R&D coop-erative project. By the early 1990s, they were verycompetitive in traditional vector supercomputersfor certain types of applications. They have beenless successful at making massive parallel process-ing machines, but are aggressively researching thisarea.

The 1990s

By the 1990s, Japan’s mainframe makers, likeIBM, were caught with big machines when de-mand soared for smaller computers. They wereslow to downsize and restructure their operations,but were kept afloat by their telecommunications,semiconductor, and consumer electronics divi-sions. At this same time the firms’ strategy of us-ing closed standards to lock users into theirrespective brands began to haunt them. Themarket’s dependence on fragmented, non-com-patible standards denied users the positive net-work externalities that come with using common,compatible standards.

Concern over their growing lag in computersoftware reached crisis proportions in the 1990s,especially as the Internet and other software-re-lated industries emerged. The software industrywas at a crossroads: it could continue offeringclosed, modified versions of foreign standards orunbundle (sell hardware and software separately)and embrace open, internationally-acceptedstandards. The firms, users, and the government,

realizing they were falling further behind in soft-ware, chose the latter path.

The 2000s

In 2000, Japanese firms are still hoping for opensource solutions to prevent the total dominanceof operating systems by Western firms. The com-puter firms are offering machines with the free-of-charge Linux operating system on them,though most experts believe Linux is too user-unfriendly to become prevalent. The governmentis much less involved in the industry than in thepast but Japan’s lag in software, massive parallelprocessing, and the Internet has led to an explo-sion of state-sponsored projects in these and otherrelated areas.

Many argue that Japan’s efforts to support thecomputer industry have not been successful be-cause Japanese firms do not currently dominatethe world computer market. It is true that Japa-nese firms have not taken over these markets.But their success in semiconductors,supercomputers, and the overall components ofmost computers is providing the nation with bil-lions of dollars in revenues and positions themwell for success in the future. Computer knowl-edge has also been key to their success in relatedareas such as computer-operated numerically-controlled machine tools and telecommunicationsequipment. Indeed, other than the USA, Japan isthe only nation competitive in a wide array ofhigh-tech computer-related products.

It is clear, however, that other late developingnations such as South Korea and Taiwan haveassiduously studied Japan’s industrial and cor-porate strategies. With significantly lower wages,they are beginning to take market share from Ja-pan in key components such as memory chips.To make the jump from success in hardware tosoftware, telecommunications, and internet tech-nologies, Japan needs to make a transition froma manufacturing superpower to a more invention-oriented nation. Making this leap involves dis-mantling some of the institutional arrangementsthat helped Japan catch up with the West butwhich now hinder its transition to a more inven-tor and entrepreneur friendly system. These ar-rangements include the bank-centered financial

computer industry 79

system, the main bank system of corporategovernance, the keiretsu industrial groups, andvarious employment practices such as lifetimeemployment and seniority wages. UnfortunatelyJapan needs to make this change at a time whenit is experiencing its deepest and longest postwarrecession. There is an acute awareness of the needto change but vested interests and a weak finan-cial system mean change will be slow.

See also: software industry; telecommunicationsindustry

Further reading

Anchordoguy M. (1989) Computers, Inc.: Japan’s Chal-lenge to IBM, Cambridge, MA: Harvard UniversityPress.

——(1994) “Japanese-American Trade Conflict andSupercomputers,” Political Science Quarterly 109 (1):35–80.

——(1997) “Japan at a Technological Crossroads: DoesChange Support Convergence Theory?” Journal ofJapanese Studies 23:363–97.

——(2000) Japan’s Software Industry: A Failure of In-stitutions?” Research Policy 29:391–408.

MARIE ANGHORDOGUY

construction industry

Construction is Japan’s largest industry account-ing for approximately 15 percent of GDP at theclose of the twentieth century and equivalent inabsolute size to the US and Western Europeanconstruction industries together. With over 10percent of the nation’s labor force, it is thecountry’s largest employer, with more than twiceas many workers as the auto and electronics in-dustries combined. In contrast to those highlycompetitive industries, however, the constructionindustry has, since the late 1980s, been portrayedin Japan and abroad as the epitome of the worstfeatures of the Japanese business system: pro-tected, overmanned, costly and corrupt. And yet,the leading construction firms also exhibit someof the strengths associated with the best of Japa-nese industry: quality control, technical innova-tion, and reliability.

Japan’s construction industry is convention-ally divided into two sectors: kenchiku (building,which is the larger sector and includes office build-ings, factories, schools, and housing) and doboku(civil engineering, which includes dams, bridges,roads, and other infrastructure projects). The dis-tinction is long-standing: statistics on the construc-tion industry and individual company revenuesare both presented in terms of the two catego-ries. The market is also divided into two catego-ries: public (national, prefectural, and localgovernments) and private (corporations and in-dividuals). The public sector is the primary mar-ket for civil engineering projects, although privatefirms such as railway companies and real estatedevelopment firms also fund major infrastructureprojects. Public expenditure on construction haslong been one of the main tools of economicpolicy in Japan: government spending on con-struction rises in economic downturns, with thegoal of stabilizing employment and stimulatingrelated industries such as steel, cement, and trans-port. In the 1980s and the 1990s, the public sec-tor accounted for just over one-third ofconstruction spending (with the notable excep-tion of the construction boom of the bubbleeconomy; in 1990, at its peak, private sector con-struction accounted for nearly 80 percent of thetotal).

The structure of the industry is complex: thereare almost as many establishments engaged inconstruction (over 650,000 in the late 1990s) asthere are in manufacturing (770,000). These rangein scale from the top general contractors, withthousands of highly qualified engineers and ar-chitects, to one-man subcontracting operationsengaged in traditional carpentry. Many accountsof the industry call it a “two-tier” industry di-vided into modern, technologically andmanagerially sophisticated general contractors onthe one hand and small-scale traditional subcon-tractors on the other. But the industry structureis far more complex than this suggests. The prin-cipal industry association for construction, theJapan Federation of Construction Contractors(Nihon Kensetsu-gyoo Dantai Rengookai), has a mem-bership of ten further specialized associations (in-cluding associations for civil engineering,building, electrical power con struction, railwayconstruction, and so on) and seventy individual

80 construction industry

companies, the largest firms in the industry. Atthe top of the industry status hierarchy are thetop twenty-three firms, identified in the many in-dustry guides published in Japan in terms of threecategories: the Big Five (oode—Kajima, Ohbayashi,Shimizu, Taisei, and Takenaka), which for a dec-ade from the mid-1980s to the mid-1990s becamethe Big Six (with Kumagai temporarily rising fromthe 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 theirorigins to the Meiji period (1868–1912) or ear-lier (Shimizu began in 1804, and Kajima in 1840).When Western construction technology was in-troduced to Japan in the 1860s and 1870s, localconstruction houses served as subcontractors onprojects such as railways, factories, and new gov-ernment buildings. They were able to draw oncapabilities accumulated on construction projectsin the previous era, including castles, road-build-ing, temples, and land reclamation, which in-volved both relatively advanced constructiontechniques and complex social organization, in-cluding subcontracting. Well before the SecondWorld War, the largest of the construction housesmoved from the traditional household-based en-terprise to more modern forms of the incorpo-rated enterprise, including the publicly-listed jointstock company although the founding familiescontinued to own most of the company. Indeed,to this day a distinctively large number of con-struction companies are dozoku-gaisha—family-linked companies—where the founding familymembers own significant blocks of shares andhave preferential access to top management posi-tions.

Most of the leading construction firms ex-panded their activities into Japan’s growing Asiancolonial possessions before or during the PacificWar. Defeat, however, focused their activities onrebuilding Japan’s infrastructure. The high-growth era was a golden age for the constructionindustry and even after the first oil shock in 1973construction spending remained at a high level.The second oil shock in 1979, however, usheredin what industry leaders called the “winter era,”when profits fell, competition intensified, and theoutlook for the industry appeared gloomy Japan’sleading firms began to adopt strategies of aggres-

sive and proactive growth, which included en-gaging in project development (such as resort de-velopment, partnering with real estate firms inspeculative building, and project financing), prop-erty management (especially through build-and-lease projects), and international expansion(Hasegawa 1988). The bubble economy in whichJapanese private investment in constructionboomed, reinforced these aggressive strategies,and when the bubble burst in the early 1990s,most construction firms were carrying largeamounts of debt and were committed to projectswhose economic value had suddenly plummeted.

In the 1980s, however, the top general con-tractors seemed well positioned to become moreglobal players, like their manufacturing counter-parts, and for some of the same reasons. Japa-nese general contractors had followed theirmanufacturing clients in adopting quality controlprograms (in 1979, Takenaka was the first of sev-eral contractors to win the Deming Prize for qual-ity). They invested more in technologydevelopment than most of their foreign counter-parts: the top 20–30 general contractors main-tained substantial R&D centers, and althoughconstruction accounted for only about 2 percentof the country’s total R&D expenditures, this wassignificantly higher than in any other nation.Research areas in which Japanese general con-tractors made impressive contributions includedtunneling, construction robotics, building mate-rials, and earthquake protection. In 1986, 15 per-cent of the country’s engineering graduates wentinto the construction industry Their investmentsin construction technology were a major asset inwinning public works contracts internationallyin the 1980s. But they also were often able todraw on low-cost financing from Japanese banksand trading companies, a more controversialsource of competitive advantage.

The leading general contractors also had anadvantage in internationalization because of theirclose relationships with their Japanese clients. AsJapan’s manufacturing firms expanded their pro-duction facilities abroad, they turned to the gen-eral contractors with whom they worked in Japanto build their plants abroad. Japanese large-scalebuilding projects have followed a “design-and-build” model, in which a contractor’s internal staffof highly trained architects and designers develop

construction industry 81

the design and its managers then supervise theconstruction process. This has several advantagesover the “design-bid-build” model prevailing inthe USA and elsewhere, in which one firm pro-duces the design and the client then solicits bidsfrom other companies for the actual construction.“Design-and-build” fosters the integration ofbuilding design and the construction process, inways comparable to the “design formanufacturability” characteristic of Japaneseproduct design, and it enables a contractor to keepwithin the agreed parameters of cost and sched-ule. Foreign companies contracting with Japanesegeneral contractors for buildings in Japan havebeen pleasantly surprised by the absence of con-struction delays and cost overruns. Critics of themodel suggest, however, that it has produced un-imaginative buildings and that clients have paidmore than they would under a more competitivesystem. But Japanese firms accustomed to the “de-sign-and-build” system often preferred to workwith Japanese contractors when they planned pro-duction facilities abroad (Ohbayashi, for exam-ple, was the designer and contractor for Toyota’sKentucky plant).

As Japanese construction firms became moreactive abroad in the mid-1980s, and even beganto win public works contracts in the USA (suchas the mid-1980s subway contracts in Los Ange-les and Washington, DC), US firms sought tocounter by competing in the Japanese market.But they faced formidable obstacles. Japanesepublic works contracts worked on a system ofdesignated bidders, in which firms had to gainprior approval to submit bids, based on a com-plex array of criteria that included past projectperformance on Japanese projects and R&D ex-penditures. Newcomers could rarely qualifyMoreover, the dango system, in which compa-nies agreed in advance on which companywould submit the low bid, constituted a corruptpractice under American law. So did the systemwhereby winning contractors on public workswere expected to make political contributions atthe local or the national level that were roughlyproportionate to the size of the contract. On thegrounds that such practices constituted unfairtrade barriers, American engineering firms andUS politicians made the opening of Japan’s con-struction market a major issue in trade negotia-

tions, and in 1987 Congress voted to excludeJapanese firms from bidding on federally fundedconstruction projects. Japan moved slowly to ad-dress these concerns, and construction remaineda major issue for negotiations through the mid-1990s, when domestic reform pressures on theinflated costs of public works and LiberalDemocratic Party (LDP) corruption becamethe main force for change in public works con-tracts. Prosecutions of the leading general con-tractors for bid-rigging became more aggressivein the late 1990s, and in September 2000 a majorFair Trade Commission inquiry targeted thirtymajor construction firms, including the top threegeneral contractors.

The pressures on profit margins in publicworks, the slow but steady contraction of expen-ditures during the long economic slowdown ofthe 1990s, and the huge debt overhang from theaggressive investments of the bubble years haveall combined to make construction one of Japan’smost troubled sectors. The Big Five have beenquicker to restructure and rationalize than someof the companies immediately below them in theindustry hierarchy and they are likely to surviveand even flourish. But bankruptcies have beenincreasing among construction firms, and maybecome the dominant vehicle for the badlyneeded restructuring of the industry.

No discussion of construction in Japan wouldbe complete without some mention of housing.Because about 15 percent of housing construc-tion is of prefabricated units, and because evenconventional housing construction often usesmanufactured sub-assemblies like unit baths,housing in Japan straddles construction andmanufacturing. Japan leads the world in manu-factured housing (that is, modules andsubassemblies built in factories and shipped toand assembled on site). Sekisui House, for ex-ample, produces 50–60,000 units per year at fivefactories located throughout Japan.Homebuyers can customize their house bychoosing various frames, floor plans, colors, andso on. Prefab housing in Japan is not the low-endsector that it is in most countries; prefab housingcompanies cater to middle and upper-middle in-come customers. In contrast to the century-oldgeneral contractors, Japan’s leading housingcom panies were established in the 1960s and

82 construction industry

1970s. Prefab housing in Japan has the advan-tage of speedy construction, important in acountry where many customers are rebuildingon the site of the old homes. It does not, how-ever, have a significant price advantage over ahouse custom-built by a local contractor, al-though many argue that it has a quality advan-tage. Prefab housing firms also differ from thegeneral contractors in having significantlyhigher profit levels.

See also: Ministry of Construction

Further reading

Coaldrake, W. (1990) The Way of the Carpenter: Tools andJapanese Architecture, Tokyo: Weatherhill.

Hasegawa, S. and the Shimizu Group FS (1988) Builtby 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 ofCalifornia Press.

ELEANOR D.WESTNEY

consumer movement

Japan’s postwar economic system has often beenreferred to as a “producer” system, yet Japan hasa large and well-organized consumer sector aswell. Consumer groups have successfully lobbiedfor stronger health and safety regulation, espe-cially with respect to food. More surprisinglyhowever, Japanese consumers have crusadedagainst trade liberalization and economic deregu-lation, policies which economists would expectto improve consumer welfare substantially Onlyin recent years have consumer groups becomesomewhat more favorable toward economic lib-eralization (Vogel 1999).

Japan’s postwar system favored producers overconsumers in many ways: financial regulationkept deposit interest rates below market levels,trade barriers allowed domestic producers tocharge higher prices, weak antitrust policy al-lowed price cartels, and a wide range of economic

regulations impeded competition, bolstered cor-porate profits, and increased price levels in sec-tors as diverse as retail and construction. YetJapanese consumer groups did not oppose mostof these policies, and actively supported many ofthem.

Postwar history

The postwar consumer movement grew out ofgroups of housewives joining together, often forthe practical purpose of collective purchasesrather than for any larger political goal. Con-sumer groups focused on lifestyle issues, andchanneled their energy more at the local levelthan the national. The most prominent consumergroup, the Housewives’ Federation (known asShufuren), started in 1948 by protesting faultymatches. Shufuren then developed its own labora-tory to test products for quality safety and truthin labeling. It launched campaigns to ban addi-tives from pickled radish (takuan), to strengthenlabeling requirements for juice packages, and tocrack down on companies marketing whale andhorse meat as beef. Shufuren and other groupsconsolidated their gains with a new law on label-ing and marketing standards (futokeihinrui oyobifutohyoji boshiho) in 1962. Consumer groups werenot always successful in specific cases, but bymobilizing public opinion and establishing con-sumer protest as a credible threat they fostered aphenomenal increase in the scope and stringencyof health and safety regulation.

By the 1960s, consumer groups had not onlyachieved some notable breakthroughs, but hadgained an institutionalized role within the policyprocess. In 1968, the government passed the Con-sumer Protection Law (shohisha hogo kihonho), set-ting forth government and corporateresponsibilities in responding to consumer con-cerns and creating a cabinet-level Consumer Pro-tection Council (shohisha hogo kaigi). Thegovernment also cultivated a national networkof semi-public consumer information centers(kokumin seikatsu sentaa).

Consumer groups became even more aggres-sive in the late 1960s and 1970s, challenging cor-porations directly through public denunciation,product boycotts, and law suits. In 1969, adisgruntled former Agriculture Ministry official

consumer movement 83

by the name of Takeuchi Naokazu joined othersto found Japan’s most outspoken consumer group,the Consumers Union of Japan (Nisshoren). Nisshoreninsisted on political neutrality refused governmentfinancial support, only enlisted private individu-als as members, and brought denunciation intothe strategic arsenal of the consumer movement.In 1969, for example, it launched a campaignagainst cola—which it felt was unhealthy and per-haps even dangerous—by publicly accusing Coca-Cola Japan of violating Japanese laws regardingforeign firms’ activities in Japan. In 1970, consumergroups boycotted color televisions in protest ofmanufacturers’ dual-pricing schemes. The groupsargued that manufacturers published official pricesfar above the actual prices charged by most retail-ers, and that manufacturers and retailers used thissystem to get less savvy customers to pay the higherprices. The boycott resulted in a sharp decline insales, and the government eventually convincedmanufacturers to lower their prices. Although con-sumer groups were generally less successful incourt, they used lawsuits to publicize their con-cerns and thereby alter corporate behavior.

Consumers vs. liberalization

When the Japanese government announced an‘Action Program” to open its market in 1985, themajor consumer groups united in opposition, ar-guing that the program would sacrifice consumerprotection to appease the USA. They fought mostvigorously against agricultural liberalization, cit-ing three primary concerns: liberalization wouldundermine food self-sufficiency increase the riskof contamination or disease, and threaten the live-lihood of farmers. The Japanese consumers’stance contrasts markedly with that of similargroups in other countries that have supportedtrade liberalization. Public opinion polls through-out the 1980s and 1990s have shown strong pub-lic support for agricultural protection. Consumergroups have also reinforced trade protection bydemanding tough regulatory standards that ef-fectively discriminate against imports. DavidVogel has demonstrated that although consumergroups have pushed for tough standards for bothdomestic and foreign products, they have beenparticularly zealous in blocking imported prod-ucts (Vogel 1992).

Since the 1980s, economists, business execu-tives, and political leaders have campaigned forderegulation, stressing that it could bring hugebenefits for consumers. Yet the consumer groupsthemselves have been less than enthusiastic. Theystrongly opposed the privatization and deregula-tion of telecommunications and rail transport andother central pillars of the administrative reformprogram in the 1980s, and they resisted manyelements of the deregulation drive in the 1990s.Of course, one would expect consumer groupsto oppose the abolition of regulations designedto ensure the safety and quality of products. ButJapanese consumers have also refused to support,and in some cases have directly opposed, the re-moval or relaxation of economic (price and en-try) regulations—precisely the kind of deregulationthat should benefit consumers the most. Con-sumer groups have even resisted retail deregula-tion, which should directly benefit consumers bybringing down retail margins. They argue thatprice is not everything, and that deregulationwould not only hurt small retailers but could wipeout entire neighborhood shopping districts.

Particularly surprising, especially from anAmerican perspective, is the consumer groups’strong opposition to marketing promotions suchas gifts and coupons. These groups lobbied hardto restrict these promotions in the 1970s, and theyhave strongly fought off appeals to remove therestrictions in the 1990s. The US governmenthas requested the removal of these restrictions,but consumer groups see this as US interferencein Japan’s internal affairs that would only giveunfair advantages to those large firms that canafford promotions.

So why have Japanese consumer groups re-sisted market liberalization that should enhancetheir economic welfare? With the overwhelmingdrive to catch up with the West, Japanese con-sumers willingly subordinated their short-terminterest in lower prices and greater choice to na-tional goals of economic growth and militarystrength. Throughout the period of war mobili-zation, the Second World War, and recovery thegovernment actively sought to shape consumerpreferences that would support these goals, or-ganizing massive campaigns to increase savings(hence to suppress consumption) and to buy onlydomestic products (Garon 1997). And the con-

84 consumer movement

sumer groups themselves actively collaboratedin this effort. Through participation in nationalcampaigns and other activities, moreover, con-sumer groups built up allegiances with othergroups, including farm groups, trade unions, op-position parties, and environmental groups. Manyof the local chapters of consumer organizationswork directly with farm groups, especially therural cooperatives, and thus feel bound by mu-tual ties of obligation. Other groups work closelywith the traditional opposition parties. The Ja-pan Women’s Conference (nihon fujin kaigi), forexample, is allied with the Social DemocraticParty of Japan, and the New Japan Women’sAssociation (shin nihon fujin no kai) with the JapanCommunist Party. These groups have been es-pecially reluctant to embrace measures such astrade liberalization and deregulation that mightthreaten labor unions, the core constituents ofthese parties.

The Japan Consumer Cooperatives Union(Nisseikyo), by far the largest consumer organiza-tion with 16 million members, is both a consumergroup and a major retailer in its own right. Con-sumers join cooperatives to benefit from lowerprices or to gain access to products, such as or-ganic produce, but Nisseikyo plays a political roleas well. It generally has not opposed trade liber-alization—although it has not supported it either—and it does sell imported fruits and vegetablesdespite objections from other consumer groups.Yet when it came to liberalizing the rice market,Nisseikyo stood with the other groups, unified inopposition. In recent years, another network ofconsumer cooperatives, known as Lifestyle Clubs(seikatsu kurabu), has become active in politics, run-ning its own candidates for local office and pro-moting political participation with an emphasison local issues (Estevez-Abe and Gelb 1998).

To understand why Japanese consumer groupsdid not reverse Japan’s “producer” system, wemust recognize that consumer groups advocatedpolicies that supported this system. They sup-ported industrial investment by campaigning toincrease savings; they complemented industrialpolicy by pushing for higher product qualitystandards; they reinforced trade protection byurging consumers to buy Japanese and by de-manding health and safety regulations that dis-criminated against foreign suppliers; and they

gave government ministries a pretext to limit com-petition and bolster corporate profits by advo-cating a heavy hand of regulation overall.

Signs of change?

In the early 1990s, consumer groups turned theirattention to pushing through the Product Liabil-ity Law of 1994. The Consumers Federation ofJapan (Shodanren), a liaison organization for thir-teen of the biggest consumer groups, organizeda special national liaison committee to mobilizepublic support and coordinate appeals to govern-ment ministries and political parties. Consumergroups were also influential in pushing througha US-style information disclosure law in 1999.

In recent years, consumer groups have begunto develop new attitudes, albeit very slowly Mostgroups remain opposed to further agricultural lib-eralization, but they have shifted from staunchopposition to deregulation to a more nuancedstance: they welcome the elimination or relaxa-tion of those regulations simply designed to pro-tect industry, yet remain concerned thatderegulation should not unduly disrupt social sta-bility Meanwhile, consumers at large have sub-stantially altered their behavior in themarketplace. With the prolonged recession andthe strong yen, Japanese consumers have becomemore price sensitive, fueling a boom in discount-ers and a real decline in retail prices. Althoughthey did not support deposit interest liberaliza-tion or import liberalization, consumers havetaken advantage of these changes in their sav-ings and purchasing behavior. Over time, con-sumers’ changing economic behavior appears tobe affecting their political role, if ever so slightlyas they have become less staunchly opposed tomarket liberalization.

See also: consumption tax; Large Retail StoreLaw 1974; marketing in Japan; pricing practices;retail industry; superstores; trade barriers; tradenegotiations

Further reading

Garon, S. (1997) Molding Japanese Minds: The State inEveryday Life, Princeton, NJ: Princeton UniversityPress.

consumer movement 85

Gelb, J. and Estevez-Abe, M. (1998) “Political Womenin Japan: A Case Study of the Seikatsusha Net-work Movement,” Social Science Japan Journal1:263–79.

Kokumin Seikatsu Kenkyu (People’s Life Studies) (1994–6).Maclachlan, P. (1999) “Turned Away at the Gate: The

Politics of Postwar Japanese Consumerism,” manu-script.

Vogel, D. (1992) “Consumer Protection and Protec-tionism in Japan,” Journal of Japanese Studies 18:119–54.

Vogel, S. (1999) “When Interests Are Not Preferences:The Cautionary Tale of Japanese Consumers,” Com-parative Politics 31:187–207.

STEVEN VOGEL

consumption tax

The consumption tax is a Japanese version of theEuropean value-added tax (VAT). It was intro-duced in 1989 by the Tax Reform Act of 1988and has come to be one of the main taxes withinthe Japanese tax system, accounting for about 20percent of total national tax revenue.

In order to cope with a budget deficit, the ag-ing of society and internationalization of the Japa-nese economy fundamental tax reform hadbecome inevitable since the middle of the 1980s.As part of the government’s efforts to reform thetax system, the Tax Reform Act of 1988, one ofthe major tax reform acts, was enacted under theslogan of “tax reform to meet the time of agingsociety and internationalization of the economy”The main points of the Act were reduction andrationalization of the income tax burden, meas-ures for more equitable distribution of the taxburden, reduction of the inheritance tax, funda-mental reform of indirect taxes including the in-stallation of the consumption tax, and reductionof the corporate tax. Besides coping with the prob-lems touched upon above, the aims of the Actwere to develop an optimal tax system, balanc-ing income, consumption, property and other taxrevenue areas, and to secure stable and sufficientrevenue.

A fundamental reform of indirect taxes wasneeded in the context of social and economic de-velopments such as the increase and the equali-

zation of income standards, the diversification ofconsumption patterns, the larger share of serviceconsumption, the aging of the population and soforth. In addition to these conditions, increasesin expenditures and a budget deficit fostered theidea that a broader range of people should sharethe basic burden of paying for the maintenancecosts of society. The consumption tax, which issupposed to bear widely and evenly for consump-tion, was considered to be a match for the ideaand to ensure more stable tax revenue than dodirect taxes such as income tax and corporationtax, under which revenue strongly fluctuates ac-cording to the business cycle.

Taxable items under the consumption tax areasset transfers made by enterprises within thecountry and imported goods (foreign goods re-ceived from bonded areas). Asset transfers in-cludes sales and leases of assets, and provision ofservices. In other words, the tax is levied on con-sumption of goods and services and charged bysellers at the time of the sale of goods or services.Taxpayers are enterprises and importers and, pe-riodically they must total the tax collected onsales, deduct from this the tax paid on purchasesand pay the balance to the tax authorities. As aresult, consumers ultimately bear the tax. Thetax bases are the counter-value of the transfers ofassets and delivery value at the time of import.The tax rate is 5 percent, including a 1 percentlocal consumption tax. The rate was raised frominitial 3 percent in 1989 to 5 percent in 1997 bythe Tax Reform Act of 1994, which introducedthe local consumption tax at the same time.

The following transfers of assets are exemptedfrom taxation in terms of non-consumption orsocial policy: sales and leases of land, sales ofsecurities and means of payments, interest onloans and insurance premiums, sales of postal andrevenue stamps, fees for government services, for-eign exchange, medical care covered under themedical insurance laws, social welfare services,burial and crematory services, educational serv-ices and so forth.

There are some special rules for small enter-prises, which were introduced in order to weakentheir opposition to the consumption tax. First,small enterprises whose taxable sales during thebase period are less than ¥30 million are exempt

86 consumption tax

from the tax. However, this rule is not applied tonewly established corporations with equity capi-tal of ¥10 million or more. Second, small enter-prises whose taxable sales during the base periodare ¥200 million or less can choose to use theproduct of the consumption tax associated withfinal sales and the deemed rate of purchases asthe consumption tax associated with purchase.The deemed rates are 90 percent for wholesal-ers, 80 percent for retailers, 70 percent for manu-facturers, 60 percent for others, and 50 percentfor services. This rule, which was designed todecrease the task of tax filing for small enterprises,is called the simplified taxation system.

Since the consumption tax is a value-addedtax levied at each stage of distribution of goodsand services, the tax already paid in the formerstage is deducted. In other words, the consump-tion tax paid on purchase is deducted from theconsumption tax collected on sales by enterpriseson the basis of its accounting records. It is hasbeen said that using invoices is the most accuratemethod for determining the added value, andthus the amount of tax, and that this system alsoguarantees an open relationship between the taxauthority consumers, and distributors in termsof filing taxes and of incorporating the tax inprices. However, an accounting method that usedbookkeeping without invoices was introduced inJapan in order to appease small enterprises thathad feared their accounts would become tooopen, and also above board. The new methodhas attracted widespread criticism. According toKato (1994), for example, the Rengo (Union ofJapan Private Labor Unions) argued that underthe new method it was difficult for the tax au-thority to ascertain if distributors were manipu-lating transaction records or keeping inaccuraterecords in their accounting books and not filingthe taxes that consumers had paid. Although alltaxpayers are required by the Tax Reform Act of1994 to keep books plus business invoices, it isstill said to be insufficient. In addition, the above-mentioned measures for small enterprises havemade the consumption tax more opaque andproblematical, because they may allow small en-terprises to collect a “subsidy” or “profit tax”(ekizei) from consumers. When the issue of rais-ing the consumption tax comes up in the future,

the issue of transparency will certainly be raisedagain.

Further reading

Ishi, H. (1993) Japanese Tax System, 2nd edn, Oxford;Tokyo: Clarendon Press.

Kato, J. (1994) The Problem of Bureaucratic Rationality: TaxPolitics in Japan, Princeton, NJ: Princeton Univer-sity 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.

HITOSHI HIGUGHI

contract employees

Also known as non-regular employees (the com-mon term in Japanese is shokutaku shain), the termcan also be applied to part-time and temporaryworkers, though there are distinctions among thethree types. Each type will be discussed in greaterdepth below. Contract employees are distinguish-able from regular or permanent employees in thatthe former do not have full membership in theorganization, that is, they do not have access tosecurity (lifetime employment), seniority promo-tion or union membership. Moreover, the fullrange of allowances and non-salary compen-sation may also be outside their contracts. Con-tract employees constitute an important segmentof the total work force in Japan. They often serveas a buffer within the labor force, their work hoursexpanding or shrinking based on the temper ofthe economy.

Contract workers usually work on one-yearrenewable contracts. Though they lack full ac-cess to the benefits of affiliation that permanentemployees enjoy it is the custom to receive a va-riety of allowances and benefits. Contracts areusually renewed automatically and many work-ers have lengthy tenures with the firm. Except inextreme situations non-renewal of contract is arare occurrence.

Temporary workers are those persons who

contract employees 87

work on contracts ranging from three to ninemonths. Their position in the firm is a level be-low that of contract workers. Contracts may berenewed somewhat automatically but theretends to be greater mobility among this segmentof the workforce, with some workers wantinggreater freedom to move to other firms should agood opportunity present itself. During downcycles, these workers are much less likely tohave their contracts renewed. Indeed, somefirms in the manufacturing sector confrontedwith cyclical patterns of demand rely on tempo-rary workers to buffer their permanent laborforce.

Part-time workers are predominantly femaleand work less than forty hours a week, though itis not unusual for them to work more than fortyhours per week during certain times of year or inresponse to short-term pressures. Part-timers areoverwhelmingly female. An OECD study esti-mated that females comprise 75 percent of thepart-time labor force. Part-timers are not to beconfused with arbuaito (a Japanization of the Ger-man “arbeit” a term which is generally applied tostudents working side jobs.

See also: lifetime employment; permanent em-ployee

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

contracts

The contract comes into existence when a priordeclaration of intention (an offer) is met by aposterior declaration of intention (an acceptance),regardless of whether consideration takes placeor not. The validity is not affected either by anabsence of contract under seal.

The liberty of contract refers to the right tofreely choose the specific counterpart of contractand establish legal relation with it. Contracts

vary in contents and characteristics. The civilcode of Japan stipulates thirteen types: gift, sale,exchange, loan for consumption, loan for use,lease, contract of employment, contract forwork, mandate, bailment, association, life annu-ity and compromise. The civil code providessubstituting rules for the case where concernedparties do not specify rules between themselves.When they do so, they may establish rules dif-ferent from the civil code, on condition that theirrules are not against public order and good mor-als.

A bilateral contract refers to a contract suchas a sale, under which both parties assume a claimand an obligation. A unilateral contract is onesuch as a gift, under which only the donor isunder obligation to transfer whereas the doneeis exempt from obligation. Onerous contract re-lates to one with enumeration, and gratuitouscontract without.

The consensual contract, the predominantform of contract, comes into existence once dec-larations of intention accord with each other. Acontract in kind, on the other hand, becomes validwhen the object is actually delivered, such as aloan for consumption, a loan for use, or a bail-ment.

The civil code is the general legal frameworkfor contracts, but a number of laws are appliedto specific types of contract. A sale between mer-chants is under the jurisdiction of the Commer-cial Code. Especially after the Second World War,a series of enactments and revisions have beenundertaken to protect the economically weak andthe interests of the consumer. Examples of suchenactments and revisions include Land and Hous-ing Lease Laws, Labor Standards Law, UsuryLaw, Door-to-Door Sales and Other Direct SalesLaw, Installment Sales Law, the Consumer Con-tract Act, and the Law on Sales of Financial Prod-ucts.

Further reading

Oda, H. (1997) Basic Japanese Laws, Oxford: OxfordUniversity Press.

Uchida, T. (1997) Minpou II (The Civil Code, vol. II),Tokyo: The University of Tokyo Press.

Wagatsuma, S., AriizumiT. and Mizumoto, H. (1997)

88 contracts

Shinban Minpo 2 Saikenho (The Civil Code New Edi-tion, vol. 2, Credit Law), Tokyo: Ichiryuusha.

KAZUHARU NAGASE

corporate finance

Fundamentally corporations are financed withsome combination of debt and equity. In Japan,there has been a tendency to use relatively largeamounts of debt, much of it being loans via thebanking system. Indeed, Japan has been charac-terized as having a bank-centered financial sys-tem compared with the more market-basedsystem in the USA. Another notable characteris-tic is the substantial cross-shareholdings amongJapanese corporations. Progressive deregulationof the Japanese financial system has led to fore-casts that the strong role of banks would disap-pear and much of the cross-shareholding wouldbe unwound. While there has been some move-ment, these traditional aspects of Japanese cor-porate finance have remained very important.

Debt financing

Debt comes in a variety of forms, including dif-fering maturities, interest rates which may ormay not be fixed over time, and a host of pos-sible repayment provisions. A particularly im-portant characteristic is whether the debt is amarket-traded instrument such as a bond, orwhether it is a loan (typically not tradeable).This distinction is important for the flexibility ofterms on the borrowing. With a loan between abank (or other financial institution) and someborrower, all the terms and provisions are poten-tially negotiable. For a bond or other markettraded instrument (e.g. commercial paper), morestandardized provisions are needed. In addition,provisions on market instruments are frequentlythe subject of governmental regulation, at leastostensibly to protect investors (possibly indi-viduals) who may be less sophisticated and haveinferior information compared with financial in-stitutions such as banks. Indeed, the informationwhich must be publicly disclosed for a bond is-sue may be sufficiently sensitive that a firmchooses to borrow via loans rather than disclosesuch information.

Another key distinction between loans versusmarket debt instruments is the ability of lendersto exercise control over a borrower’s behavior.To a substantial extent, that ability depends onthe number of lenders involved. With bonds orother market traded debt, there may be thousandsof individuals as well as financial institutionswhich own portions of the debt. It is extremelydifficult to coordinate such a large number oflenders, who also have potentially differing finan-cial situations and motivations. In fact, a stand-ard procedure for facilitating renegotiations of afirm’s debt position is to buy up most (or all) ofthe market-traded debt so that there are a limitednumber of lenders involved in the negotiations.At the opposite extreme would be a situationwhere all a firm’s borrowing is from a singlesource; for example, a bank. In that situation,the firm can reveal information to the bank on aconfidential basis. The firm and bank can nego-tiate whatever borrowing terms are agreeable toboth. Furthermore, such terms can be renegoti-ated in the future much more easily than if thereare many lenders involved.

In Japan, an intermediate situation has evolvedin the form of the main bank system. In essence,a firm develops a close working relationship withone bank (sometimes two), which is referred toas its main bank. The main bank performs amonitoring function regarding the client firm’sbehavior. This might involve bank access to con-fidential information regarding major proposedinvestments and strategic planning at the firm.The main bank may also provide advice on awide range of financial issues, including the de-sirability and terms of potential market debt orequity issues. The intensity of the main bank’sinvolvement is generally viewed as increasingwith the indebtedness of the client.

Traditionally other lenders such as otherbanks and insurance companies have relied onthe main bank’s monitoring to mitigate lendingrisks. Hence, they could lend to a monitoredfirm (with the main bank’s concurrence) withouthaving to acquire as much information. If the cli-ent firm got into financial difficulties, the mainbank possibly bore substantial responsibility dueto either inadequate monitoring or poor advice.This suggests a potential obligation for the mainbank to compensate other lenders for its failures;

corporate finance 89

a quasi-guarantee of their loans. Indeed, therehave been spectacular examples where a mainbank absorbed large losses due to a client’s fi-nancial difficulties while other lenders werelargely unscathed. On the other hand, therehave been bankruptcies where the main bankapparently did not compensate other lenders.This illustrates that the main bank’s obligationcan vary dramatically and ultimately dependson acceptable business practice within the Japa-nese banking community.

It has been argued that the main bank systemdeveloped in response to severely restricted fi-nancial markets in Japan. Until the early 1980s,the typical Japanese firm was not allowed to bor-row outside Japan. Moreover, it could not issuemarket debt instruments (e.g. bonds) in Japanwithout bank permission. There were also restric-tions on equity issues which made them a rela-tively unattractive funding source. Rapidlygrowing firms tend to need substantial amountsof external funding to supplement their ownretained profits, and many Japanese firms weregrowing rapidly from the 1950s until themid-1970s. During this period, the banks control-led (directly or indirectly) funding for thesefirms. Even if this did not create the main banksystem, it surely enhanced its strength andgrowth.

Around 1975, the average Japanese manufac-turing corporation was over 80 percent financedwith debt (less than 20 percent equity; see debt/equity ratios). Over the next fifteen years, growthrates were slower for most Japanese firms; andthere was a sequential liberalization of finan-cial markets in Japan. Access to offshore financ-ing was also greatly enhanced, and it became animportant funding source. This included not onlyloans from foreign financial institutions but largeissues of bonds in offshore markets, particularlyduring the last half of the 1980s. Many of thesebonds were convertible into equity shares or hadattached warrants which allowed future sharepurchase (typically within four or five years) at aspecified price. In 1987, a domestic commercialpaper market came into existence, where largeindustrial firms could borrow short term fundsvia market-traded instruments. That marketproved attractive and rapidly grew to a substan-tial 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 fund-ing sources available, had substantially lowerdebt/equity ratios, and overall were less depend-ant on the banking system.

Equity financing

Japanese equity markets have also providedsome marked contrasts with the US situation.Prior to 1970, virtually all share issues wererights offerings to a firm’s existing shareholdersand priced at the stated par value for that firm’sshares. Typically this par value (often 50 yen pershare) was well below the current market price.Listing requirements, particularly on the TokyoStock Exchange, caused firms to pay (if at allpossible) annual dividends of at least 10 percentof par value. From a cash flow perspective, thesetwo requirements made equity issues an expen-sive financing mechanism since Japanese interestrates have typically been well below 10 percentas well as being fully tax deductible for borrow-ers.

After the Second World War, there was a con-fiscation and redistribution of shares fromzaibatsu, large holding companies, to individu-als. This resulted in Japanese individuals owningroughly 70 percent of all listed shares in 1950.However, this percentage has declined markedlyand by 1990 was down to less than 25 percent.In contrast, holdings by financial institutions(primarily banks and insurance companies) aswell as industrial firms has grown substantially.Often these shareholdings are reciprocal, withfirms owning shares in each other. This includesindustrial firms owning shares in banks and viceversa. Frequently any one firm’s holdings repre-sent a small fraction of the other firm’s outstand-ing shares. However, a group of such firms cancollectively have a controlling fraction of the to-tal shares. As a simplified illustration, supposethere is a group of 20 firms where each firmholds 3 percent of the shares issued by each ofthe other nineteen firms. Collectively 57 percentof each firm’s shares is held by other groupmembers. This effectively blocks unfriendlytakeovers and merger bidding contests such asseen in the USA.

90 corporate finance

The pattern of cross-shareholding in Japan ismore complex than that simple illustration andis motivated by more than simply takeover de-terrence. Cross-shareholding is prominent withinkeiretsu, groups of firms with common interestsand/or heritage; for example, descendants offormer zaibatsu groups. It has also been used tocement long-term customer and supplier relation-ships outside a keiretsu. The pattern also extendsto banking relationships where client firms fre-quently hold shares in their main bank and otherimportant lenders, with the banks holding sharesin the firm (subject to a 5 percent legal limita-tion). Moreover, cross-shareholding relationshipsin Japan tend to be very long term and are evenreferred to as stable shareholdings.

Except for parent firms with a majority stakein a subsidiary cross-shareholding positions aretypically so dispersed that shareholders are in aweak position for exercising control over a cor-poration’s management. This contrasts with themain bank’s position described earlier. While themain bank is almost certainly a shareholder (typi-cally about 5 percent), its power comes largelyfrom being the firm’s key lender. For substantialborrowers, the main bank may be providing amodest fraction (perhaps 25 percent) of the firm’sdebt; however, the bank’s view on the firm’s pros-pects is critical to obtaining other loans and float-ing bond issues. For firms with modest borrowingpositions, the main bank’s influence is substan-tially diminished and the firm’s management hasconsiderable autonomy from both lenders andshareholders.

After the crash

The Japanese stock market declined precipitouslyin 1990. This was followed slightly later by a simi-larly precipitous decline in real estate prices. Col-lectively this has been referred to as “bursting”the bubble economy, which prevailed in the late1980s with booming stock and real estate prices.The dramatic price declines altered the landscapefor corporate financing in Japan. The numberand size of new equity issues declined, with mar-ket price offerings virtually disappearing for atime. Real estate had frequently been used as

collateral on bank loans, and this created seriousproblems for many industrial firms. In some cases,firms continued to make payments on loanswhose principal amounts exceeded the currentvalue of their assets. In other instances, borrow-ers defaulted. The effect on the banking systemwas disastrous, with virtually all banks sufferingenormous losses which severely curtailed theirability to make new loans as well as to “roll over”existing loans.

In the aggregate, Japanese firms dramaticallyshifted their funding away from bank loans. Inlarge part, they reduced their use of external fund-ing, slowing their asset growth and relying moreon internal funding (retained profits plus depre-ciation). They also relied more on the domesticbond market and, after the early 1990s, on for-eign loans. The Japanese commercial paper mar-ket stopped growing, and offshore bond issuesdeclined. The shift away from domestic bankloans reflects the difficulties experienced by theJapanese banking system. Clearly there has beena weakening of the main bank system. However,forecasting its demise seems quite premature. Onthe other hand, the growth of market-based fi-nancing has probably been healthy via provid-ing a broader and more balanced range offinancing alternatives for firms.

See also: banking crises; shareholder weakness

Further reading

Campbell, J. and Hamao, Y. (1994) “Changing Pat-terns of Corporate Financing and the Main BankSystem in Japan,” in M.Aoki and H. Patrick (eds),The Japanese Main Bank System: Its Relevance for Devel-oping and Transforming Economies, Oxford: OxfordUniversity Press, 325–49.

Hodder, J.E. and Tschoegl, A.E. (1993) “CorporateFinance in Japan,” in S.Takagi (ed.), Japanese Capi-tal Markets, Cambridge, MA: Basil Blackwell, 133–63.

Hoshi, T. and Kashyap, A. (1999) “The Japanese Bank-ing Crisis: Where Did It Come From and HowWill It End?” in B.S.Bernanke and J.Rotemberg(eds), NBER Macroeconomics Annual 1999.

JAMES E.HODDER

corporate finance 91

corporate governance

In its broadest sense, corporate governance re-fers to a complementary set of legal, economic,and social institutions that protect the interestsof a corporation’s owners. Systems of corporategovernance vary widely across the industrializedeconomies, reflecting the fact that different coun-tries answer the fundamental question, “To whomdoes the corporation belong?” in very differentways.

The Japanese system of corporate governanceis based on the notion that a company is answer-able to multiple stakeholders: creditors, employ-ees, trading partners, and society This emphasison multiple stakeholders contrasts sharply withthe shareholder focus of the Anglo-Americansystem. The Japanese system, however, also di-verges from other stakeholder-centered systems,such as that of Germany in that the obligationsof a corporation to its stakeholders stem from aset of normative understandings rather than lawor ownership. While Japanese corporate law, codi-fied in the Commercial Code, spells out a sys-tem of shareholder rights and corporateobligations, this system is largely a fiction, andbears little resemblance to actual practice. Japa-nese corporate governance works through a webof mutual obligations, minority ownership ties,business interests, and social norms.

The Commercial Code

The Japanese Commercial Code governs thestructure and behavior of the corporation andoutlines a system of corporate governance that,on paper, is very similar to that of the USA. Atthe core of the Commercial Code is the assump-tion that shareholders are the ultimate owners ofthe firm, and accordingly the Japanese corporatelaw grants broad rights to shareholders. Theshareholders’ meeting, or kabunushi sokai, electsdirectors, or torishimariyaku, who then select man-agement. Shareholders further elect statutoryauditors, or kansayaku, who are required to moni-tor the board of directors, and assure that it op-erates in accordance with the law. TheCommercial Code grants minority shareholderseven greater powers than in the USA. Sharehold-

ers with a stake of 3 percent can demand that aboard meeting be held, while a 10 percent stakegives a shareholder access to confidential finan-cial documents (see torishi mariyakukai).

Actual practice, however, diverges consider-ably from the spirit if not the letter of the Com-mercial Code. Shareholders’ meetings tend to beshort and incorporate little to no discussion. Formany years, sokaiya, corporate blackmail artists,accepted payments from companies to stifle em-barrassing questions from shareholders (thoughtheir activities have diminished over time). Theshareholders’ meeting is little more than a rub-ber stamp for board appointments, dividend pay-ments, and other important decisions mandatedby the Commercial Code. Kansayaku, with theirobligation to monitor the board, are in fact ap-pointed by the president, and are mostly insidersor outsiders with very close ties to the firm whoplay little to no real role in governance.

Stakeholder governance

Japanese corporate governance, as it actuallyworks, bears little resemblance to practices out-lined in the Commercial Code. Japanese manag-ers balance the interests of banks, employees,trading partners, and society at large. In turn, allof these stakeholders play an important role inmonitoring management. While key stakehold-ers of Japanese firms—its banks, buyers and sup-pliers, and other business associates—tend to beshareholders of the firm as well, their interestsare in a firm’s long-term growth and survival,rather than its ability to pay high dividends ormaximize its stock price. In the 1980s, such stableshareholders held from 50–70 percent of a typi-cal firm’s equity.

At the core of this stakeholder system are thebanks. Most Japanese firms have one (sometimestwo) main banks (see main bank system). Mainbanks not only investigate corporate finances andstrategy as a prerequisite for loan approval, butalso intervene actively in corporate management.The role of the bank is most obvious in troubledfirms. If a firm appears in danger of defaultingon its loans, a bank is likely to step in with a newmanagement team, strategic direction, and financ-ing. While banks are less vocal when it comes to

92 corporate governance

high performing firms, they nevertheless keep aclose watch on management to prevent a bailoutfrom ever becoming necessary.

Certain conditions have enabled banks to playthis role. Japanese firms, heavily dependent uponbank financing for much of the postwar period,have had little choice but to submit to rigorousbank monitoring. Banks may also exert influenceby placing one or two of their own executives ona firm’s board. By law, banks are forbidden tohold more than a 5 percent equity stake in a firm.However, a firm’s other shareholders are likelyto be related trust banks and insurance compa-nies, and other firms closely related to the banksuch as other members of the bank’s keiretsu, orbusiness group.

Employees are another cornerstone of Japa-nese corporate governance. In general, large cor-porations consider providing employmentstability and career advancement to seishain (full-time employees, hired with an implicit promiseof permanent employment) as a goal more im-portant than maximizing share price. Under thepermanent employment system, employees’ ca-reer prospects are closely linked to the fate of thefirm, and thus, they carefully monitor manage-ment. A president who fails to take employees’interests into account is unlikely to remain in thatposition for long. It is important to note, how-ever, that unlike in Germany where employeerepresentation on the supervisory boards of largefirms is legally mandated, Japanese employeeshave no legal right to board representation.Rather, their important role in the Japanese sys-tem of governance revolves on strong socialnorms concerning a firm’s obligation to its em-ployees.

A further set of stakeholders are buyers andsuppliers. Like employees, buyers and suppliersoften have a long-term stake in the survival of afirm, in particular if they have invested in rela-tionship-specific assets that cannot be easily usedelsewhere. A supplier that has built a factory nextto its main buyer, or a buyer that has investedheavily in training a supplier’s engineers in itsmanufacturing system, has a vital interest in thesurvival of its trading partner. Firms often holdminority equity stakes in their trading partners,often in conjunction with other members of theirkeiretsu. Buyers, in particular, often place one or

more of their own managers on a supplier’s boardto provide ongoing oversight. Even so, equitystakes in buyers and suppliers tend to fall shortof levels that allow control. A firm’s obligationsto its buyers and suppliers, and the ability of buy-ers and suppliers to monitor each other, restslargely on a set of normative understandings con-cerning a firm’s obligations to its trading part-ners.

Recent changes in corporate governance

Until the bursting of the bubble economy in theearly 1990s, the Japanese stakeholder-orientedsystem of corporate governance was praised as akey to Japan’s competitive strength. Patient capi-tal—in the form of minority equity positions byfriendly banks and trading partners—allowedfirms to make long term investments rather thanscramble to meet quarterly financial goals. Praiseof Japanese corporate governance turned abruptlyinto criticism as the bubble burst, and the Japa-nese economy faltered during the 1990s. It wasduring the 1990s that the Japanese translation ofthe term corporate governance—copureto gabanansuor kigyo tochi—became widespread in the massmedia and popular discourse. Poor corporate gov-ernance was blamed for everything from the ex-cesses of the bubble economy to a spate ofcorporate scandals exposed in the 1990s. Thestakeholder system was blamed for fostering in-sular thinking and lack of accountability A de-bate emerged over whether Japan should adoptwhat was termed the “global standard” of Anglo-American corporate governance, or fine-tune theexisting system.

While the causes of the bubble economy arecomplex, and it is not clear how much inadequatecorporate governance was to blame, changes inthe Japanese economy in the 1980s and 1990sdid render the existing system less effective. Largefirms, in particular, increasingly turned to capi-tal markets rather than banks for funds. Bankshad less reason to monitor firms, and firms hadless reason to listen to banks. The banking crisisfurther diminished the credibility of banks asmonitors and dispensers of managerial advice (seebanking crises). While the institutions of per-manent employment and long-term buyer-sup-plier relationships did not disappear in the 1990s,

corporate governance 93

they were weakened through bouts of corporaterestructuring. The web of mutual obligation thatcaused firms to put the interests of thesestakeholders over returns to shareholders beganto unravel. Another force in the transformationof corporate governance was the increasing in-fluence of foreign shareholders. Ownership ofJapanese shares by foreigners increased fromabout 5 percent in 1990 to over 13 percent in1997 and ownership levels continued to growthrough the end of the decade. These foreigners,largely US and European institutional investorsand corporations, often had little ongoing busi-ness interest in the firms in which they invested,and began to demand that Japanese firms paymore attention to shareholder value.

The decade of the 1990s produced a numberof changes in governance. In 1994, the filing feefor shareholder derivative suits was reduced dra-matically This increased the number of share-holders attempting to sue a company for real oralleged misbehavior. In 2000, shareholders wonan ¥83 billion decision against the directors ofDaiwa Bank for their role in trading improprie-ties in the USA. Managers of Japanese compa-nies claimed that the real threat of shareholdersuits made them far more cognizant of share-holder interests than ever before.

Other changes were implemented in boardstructure and compensation. Beginning in 1997,corporations were allowed to issue stock optionsto their board members and, by 2000, nearly 800companies had done so (though a combinationof a sinking stock market and very few optionsissues, made this incentive less than lucrative). Anumber of firms, beginning with Sony, reducedthe size of their boards, often by more than half,by demoting board members with operating re-sponsibilities to shikko yakuin, or corporate execu-tive officers. This, it was argued, would enablethe board of directors to behave more like a UScorporate board, in overseeing the activities oftop managers. The Ministry of Justice, urged onby the various interests of the Ministry of Inter-national Trade and Industry, Keidanren, andforeign investors, began the process of a majoroverhaul of the Commercial Code to mandatemore effective and realistic governance practices.It was, however, by no means clear whether thesechanges were harbingers of convergence to Anglo-

American governance, attempts to fine-tune theexisting system, or window-dressing to please for-eign investors.

Further reading

Aoki, M. (1988) Information, Incentives, and Bargaining inthe Japanese Economy, New York: Cambridge Uni-versity Press.

Aoki, M. and Patrick, H. (eds) (1994) The Japanese MainBank System, New York: Oxford University Press.

Charkham, J. (1995) Keeping Good Company: A Study ofCorporate Governance in Five Countries, New York: Ox-ford 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: Univer-sity of California Press.

Shishido, Z. (2000) “Japanese Corporate Governance:The Hidden Problems of Corporate Law and TheirSolutions,” The Delaware Journal of Corporate Law25:189–233.

CHRISTINE L.AHMADJIAN

creative houses

Creative houses are specialized in activities re-lated to advertising, a major area of marketing.The advertising industry in Japan was born dur-ing the Meiji era, when newspapers aimed to-ward ordinary citizens began to be published. Atfirst they relied heavily on readers for sales andprofitability but they soon realized that chargesfor advertisements and various announcementsin the paper were a much more stable source ofrevenue. As the economy grew a number ofleading newspapers achieved increased circula-tion and volume, which in turn prompted a pro-liferation in firms seeking space for theiradvertisements.

Prior to the Second World War, the mainfunction of advertising firms was limited to bro-kerage activities between newspapers and adver-tisement sponsoring companies. Although therewere some ingenious examples of advertisement using other media such as magazines andperiodicals, billboards, and publicity slips which

94 creative houses

were distributed with papers, the leading adver-tising firms handled only newspaper space.

In the 1950s, a number of independent radiostations began commercial broadcasting. Theleading advertising firms in Japan today such asDentsu and Hakuhoudou, were quick to foreseethe large potential of this new media, while thosewho neglected it never found a way to keep pacewith the tremendous growth of the industry.Commercial messages on radio proved to bemuch more effective than more traditional me-dia. But when television broadcasting started, theprincipal media for mass advertising shiftedquickly from radio to television.

With the introduction of audience polls in bothradio and television broadcasting, programs be-gan to be rated according to the audience per-centage they were able to track. However, theywere rated from the standpoint of attractivenessand quality. Over time, firms gradually recog-nized that the advertising must be carried out inline with a comprehensive and coherent market-ing strategy.

The advertising firms’ function, hitherto lim-ited to the brokerage of space and time, soon ex-panded to planning and production of effectivecommercial messages. The most important areaof development was that of audio-visual messageson television, especially during the period whenthe entire nation became viewers following theperiod of economic growth.

Once the quality of commercial messages ontelevision was put under careful scrutiny literaryand artistic components such as catchy copy over-all design, audio and visual effects gained impor-tance. As a result, the contents of commercialmessages were understood as a kind of synthetic,or total, art. Consequently the section of adver-tising firms responsible for planning and produc-tion of commercial messages was renamed the“creative” section, in contrast to the sales sectionhandling the traditional brokerage functions. Thehead of the creative section is now often called“creative director”, and subordinates are knownas “creators,” the “creative team,” or the “crea-tive group.”

Japan’s leading advertising firms often carryout the substitute function of serving as the ad-vertising section of several sponsors who are com-

peting with each other. In order to avoid poten-tial conflict of interests or leakage of secret infor-mation, the teams and sales force are groupedaccording to each client. In this regard, Japaneseadvertising firms are radically different from theirWestern counterparts, the advertising agenciesthat adhere to the principle of one client in oneindustry Furthermore, the Japanese advertisingfirms’ scope of operation includes a variety ofrelated activities such as planning and conductof marketing research or its arrangement on be-half of producers, inception and management ofconventions and large development projects. Dueto these characteristics, they are usually referredto as advertising firms (koukoku gaisha), rather thanadvertising agencies.

A recent trend in the advertising industry inJapan is to assume the entire marketing activitiesof producers, under the self-designation of “mar-keting agency” On the other hand, as an adver-tising firm’s client companies become ever moreinternational and foreign agencies make inroadsin Japan, alliances and cooperative arrangementsare actively pursued.

The total advertising expenditure in Japan, es-timated by Dentsu, was ¥5.7 trillion in 1999. Ad-vertising firms nationwide number approximately3,500, but only sixty or so have annual turnoverabove ¥10 billion. Among the latter, Dentsu(based in Tsukiji, Chuo ward, Tokyo) is by farthe largest with a turnover at ¥1.309 trillion infiscal 1999. It is followed by Hakuhoudou (inShibaura, 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 (inMiyahara, Yodogawa ward, Osaka, ¥152.9 bil-lion), and Yomiuri Koukokusha (in Ginza, Chuoward, Tokyo, ¥110.5 billion).

Further reading

Nikkei Koukoku Kenkyujo (2000) Koukoku Hakusho(Advertising White Paper), Tokyo: Nihonke-izaishinbunsha.

Saito, Y. (2000) 2002 Hikaku Nippon no Kaisha KoukokuGaisha (Comparison of Japanese Companies: TheAdvertising Industry), Tokyo: Jitsumuk-youikushuppan.

creative houses 95

Yamaki, T. (1994) Koukoku Yougo Jiten (Dictionary ofAdvertising), Tokyo: Toyokeizaishinpousha.

SHINTARO MOGI

cross-shareholdings

It has been a common practice in Japan forpairs of firms to exchange equity shares in eachother, a practice called “cross-shareholding.”Sometimes the firms have been in the same in-dustrial groups, sometimes they are suppliersand customers, and sometimes creditors andborrowers.

Kabushiki mochiai (mutual aid shareholding) isthe Japanese term for what is customarily trans-lated as “cross-shareholding,” that is, equity sharesthat two companies hold in one another. Cross-shareholding, in turn, is a subset of what is knownas antei kabunushi (quiescent stable shareholding),which may be held in trilateral, multilateral, orotherwise stable arrangements among companies,usually based on group and/or transactional re-lationships. Together, the various forms of stableshareholdings comprise some 65 percent to 70percent of all stock issued by publicly traded cor-porations in Japan. The remaining shares arefreely traded on the stock exchanges.

Cross-shareholding in Japan, however, repre-sents much more than a single-dimension own-ership relationship. It often also reflects otherunderstood but unstated obligations. As will benoted, cross-shareholding arrangements in thepostwar era operated as tacit mutual pacts de-signed to insulate the management of both sidesfrom any market threat of hostile takeover. Thepurpose of most cross-shareholding is to avoidrather than confer shareholder rights, so stableshareholding relationships function as a strategyof corporate management to limit shareholdergovernance of the firm.

Cross-shareholding may be divided into twocategories: (1) cross-shareholding between mem-bers of a horizontal corporate conglomerategroup, or kigyo shudan, the core of stableshareholding arrangements, and (2) cross-shareholding that reflects business relationshipsbetween suppliers and customers. In neither caseis the cross-shareholding relationship intended toconfer the ownership rights inherent in the Anglo-

American model of corporate governance.Cross-shareholding arrangements between sup-pliers and customers are primarily a franchise todo business, a method of cementing transactionalrelationships.

In 1992, Japan’s Economic Planning Agency(EPA) responded to criticism raised by the UnitedStates in the Strategic Structural Initiative (SSI)trade negotiations that cross-shareholding pro-moted unfair trading practices and that Japan’scross-shareholding and main bank system spe-cifically locked out foreign-owned banks. In itsreply EPA advanced three main economic justi-fications, among others, for cross-shareholding,characterizing them as “merits.”

First, it argued that cross-shareholding pro-vides a stable source of funding for businessesby ensuring that there will be partners who willbe stable investors and who will buy new issuesof stock whenever needed. Second, according toEPA, cross-shareholding strengthens the stabil-ity of corporate management by acting as a bul-wark against the threat of hostile takeover. Sucharrangements relieve management of the neces-sity of responding to excessive pressures fromthe capital markets, permitting it to developoperations according to a long-term perspective.Lastly the EPA maintained, cross-shareholdingstabilizes and strengthens business transactionsbetween companies. The EPA White Paper of1992 termed cross-shareholding a mutual “hos-tage” taking, which creates a captive relationshipin the supply of goods or services and promoteslong-term transactional relationships betweencross-shareholding companies.

However, EPA accepted the point that groupcompanies tend to do business mainly with eachother, thus making it difficult for foreign inves-tors to break into Japanese networks, and thusthat extensive cross-shareholding among mem-bers of a corporate group could lead toexclusionary anti-competitive business prac-tices:

Even though interlocking stockholding hasthe functions mentioned above, if it createsa relationship of ‘conspiracy’, business maybecome inefficient. What is more impor-tant, in selecting the customers, if it is takeninto account whether or not they have in-

96 cross-shareholdings

terlocking stock holding unrelated to theirindividual products or substance of service,or cartel relations come into existence be-tween competitors, competition may be lim-ited.

(Japan Economic Planning Agency 1992:181)

In addition, scholars in Japan have long criticizedthe practice of cross-shareholding as limitingshareholder governance, which they have char-acterized as among its major “demerits,” particu-larly in terms of management accountability Inother words, without effective oversight by share-holders of corporate operations and managerialperformance, Japanese managers had little incen-tive to seek to maximize profits. This is typicallycontrasted with the United States, where share-holders, at least theoretically oversee the effec-tiveness of corporate management, and where thepossibility exists of shareholders exercising theirrights to change management if operations be-come too inefficient. Corporate management inthe USA is thus given the incentive to focus onthe more effective operation of the company forthe benefit of the shareholders. In Japan, how-ever, the mutual non-interference agreementsgenerally implied in a Japanese cross-shareholdingrelationship gave Japanese corporate managementan abundance of discretion in making businessdecisions and in regulating itself. This allowedinefficiencies to build up that produced a low re-turn on equity Until recently declaring share-holder dividends had been neither a necessitynor even a priority concern of Japanese corpo-rate managers. In recent years this view has beenchanging. Stable shareholders, in the absence ofprofits from capital gains, are now demandingdividends on their shareholdings.

Another significant demerit raised by criticsin Japan is the potential for cross-shareholdingagreements to damage and even defraud share-holders. Cross-shareholding represents an offset-ting exchange of stock between companies, inmost cases entailing no injection of new outsidecapital. For example, when a company issues¥100 million in stock, the company uses the fundsto acquire productive assets worth ¥100 million.Most often, in cross-shareholding arrangements,when a company issues stock to a partner, thereare usually no net proceeds, just the receipt of

new stock in exchange; such a transaction ispurely a paper one. Third-party investors in bothfirms might be made worse off in that their own-ership share in the equity of the firm has beendiluted by the increase in the number of shareswithout there being a corresponding increase inthe earning capacity of the shares from invest-ment. In addition, there has been an unspokenfear among third-party shareholders that anylarge-scale sell-off of shares into the market by across-shareholding partner (i.e., without eitherconsultation or the replacement of that partnerwith another stable shareholder) could cause thecollapse of the company’s share price in the eq-uity market.

The widespread practice of cross-shareholdinghas also been criticized as having negative effectson the stock market. As cross-held shares in acompany are rarely traded on the exchange, theeffective market in each company’s stock is re-stricted to a fraction of the firm’s outstandingshares. Thus, according to this view, speculatorscan manipulate the market price more easily Suchspeculation by Japanese investors would tend todiscourage outside investors, and, in overallterms, would dissuade participation of longerterm investors.

Whether positive or negative on a net basis,the standard practice of enterprises holding sub-stantial shares in other enterprises, owing prima-rily to the cross-shareholding phenomenon,creates an interdependency in the prices of shares.The shares of companies holding stock in othercompanies are more vulnerable to share pricevolatility the larger the holdings of such stock.The interdependency arises because when a firmhas large holdings of shares in other companies,its own profits can depend to a significant degreeon the price performance of those shares. If stockprices go up, the company earns “hidden prof-its” from those stocks; but if the prices of thosestocks go down, they will have unrealized losses.As the market is at least implicitly aware of theseunrealized gains and losses, it affects the firstfirm’s own stock price. For example, Japanesecompanies that showed a steady rise in their corebusiness income between 1985 and 1991, suf-fered unrealized losses on shares held in othercompanies when the stock market declined from1989 to 1991. This resulted in a decline in their

cross-shareholdings 97

own company’s stock price during those years,despite the core business profits, the effect beinggreater the greater the extent that they engagedin cross-shareholding.

The postwar cross-shareholding arrange-ments grew out of the dissolution of the zaibatsuin the initial period of the American occupa-tion of Japan following the Second World War.The zaibatsu were holding companies, each ofwhich held shares in and controlled a group offirms, many of which, in turn, had controllinginterests in other firms (albeit often through aminority stake). The dissolution was intended tointroduce “Western” principles of corporate de-mocracy and to dismantle the industrial under-pinnings of Japanese militarism. The divestitureby the zaibatsu of their corporate holdings underthe Anti-Monopoly Act of 1949 led to an in-crease in stock ownership by individual inves-tors. As a result, individual investors held 69percent of all outstanding shares in 1949, a levelthat would fall dramatically as cross-shareholding was resurrected.

The cross-shareholding system as it existed bythe 1990s was the result of three stages of majorbuildup: the first in the early 1950s, the secondfrom the middle 1960s to early 1970s, and thethird in the late 1980s. The corporate equity mar-ket in the early 1950s was characterized by ac-tive takeovers and free-wheeling shareholdermeetings. During this period, speculators pur-chased stocks, which management bought backat a higher price (greenmail). Companies wantedto protect themselves by cross-shareholding.However, the provisions of the Anti-MonopolyAct prohibited stockholding by companies. Re-vision of the Act in 1953 allowed companies toinvest in stocks of other companies, provided suchstock holdings were not anti-competitive. The res-urrection of cross-shareholding during this periodwas thus primarily intended to protect compa-nies from unsolicited acquisition by speculators,who were particularly active after Japanese stockprices collapsed following the end of Japan’s eco-nomic boom during the Korean War. The 1953easing of the Anti-Monopoly Act also raised theupper limit of shareholdings by financial institu-tions from 5 to 10 percent.

This first stage in the development of cross-shareholding was also significant in that the

former zaibatsu groups of Sumitomo, Mitsui, andMitsubishi re-established themselves as a newform of grouping of companies, called kigyo shudan(corporate groups), horizontally organized con-glomerates, with their trading companies andbanks at the center of their groups (see below).

The second stage in the growth of cross-shareholding was precipitated by the collapse ofshare prices in 1964–5 and the first Yamaichi Cri-sis (1964), in which Japan’s fourth largest securi-ties company was faced with imminentbankruptcy. In order to boost the Japanese stockmarket, a special corporation, the Nihon KyodoShoken (Japan Cooperative Securities Co.), wasset up by the securities industry with Ministryof Finance (MOF) administrative guidance tomake major purchases of shares. Another majorfactor was Japan’s having become a member ofthe Organization for Economic Cooperation andDevelopment in 1964. As a condition of mem-bership, Japanese capital markets were to begradually deregulated, causing the MOF as wellas business to become concerned about prevent-ing hostile takeovers by foreign investors.

Once the Yamaichi bankruptcy had beenaverted, the Nihon Kyodo Shoken was able tosell the shares it had accumulated. Section 280 ofthe Commercial Act was revised so that boardsof companies would be able to allocate newly is-sued shares to specified companies and individu-als. Such allocations were made primarily tofinancial institutions and companies within theirown group, resulting in further stabilization andconcentration of stock ownership. This strength-ened the afore-mentioned successors to the pre-war zaibatsu groups and aided newly emergingkigyo shudan, centered around Sanwa, DaiichiKangyo Bank (DKB) and Fuji Bank. As theseshares were unlikely to be sold, it reduced thethreat of hostile takeovers by either domestic orforeign investors.

The second stage of the growth of cross-shareholding ended with the introduction of anew policy to curtail the practice. After the first“oil shock” hit Japan in the fall of 1973, inflationrose and the price increases were seen as havingbeen engineered by the corporations. This led,after much opposition, to adoption of the 1977Anti-Monopoly Reform Bill, that reduced the al-lowed bank shareholding of company stocks from

98 cross-shareholdings

10 to 5 percent. The implementation of this re-form, however, was stretched over ten years.

The third stage in the growth of crossshareholding accompanied the “’bubble period”of the late 1980s, when corporations took advan-tage of high and rising equity prices and floodedthe stock market with new issues as a way to raisefunds. By itself, this would have increased theproportion of company shares that were activelytraded, relative to the “quiescent stable shares.”However, the issuance of new cross-held sharescould prevent this, which was thus the primarypurpose for the issuance of such shares in thisperiod.

This was also a period of intensive zaitech (fi-nancial engineering) investment in securities bycorporations, unrelated to investment for cross-shareholding purposes. That is, many companiessought to bolster their profits from gains in therising stock market. The portfolio of the zaitechinvestor, like any unaffiliated investor, was strictlyspeculative, in anticipation of capital gains. Firmsfollowing this practice thus built up their portfo-lios of shares in other firms and if after severalyears these new shares were not traded, theywould appear quite like traditional “stable” shares.Indeed, after the stock market crashed there waslittle incentive to sell these shares.

In fact, when analysts observed a reduction incorporate shareholding portfolios in the late1990s, they measured the fastest rate of dissolu-tion as being in the stable-shareholding (anteikabunushi) category However, it is difficult to dis-tinguish sales of shares that had actually beenpart of a firm’s stable shareholding from sales ofzaitech shares which it would have been timely tosell given that the Tokyo market had temporar-ily regained some strength as foreign buying in-creased substantially in the mid-1990s and againin 2000.

Much of bank-firm cross-shareholding in Ja-pan has taken place within groups of interrelatedfirms, typically with a large bank at the center(see main bank system). Some economists sug-gest that the groups helped to manage risk in theJapanese economy (Nakatani 1984). Other ana-lysts have been critical of bank-firm cross-shareholding, challenging this supposition. Theshares cross-held by banks and firms became amatter of grave concern in the 1990s in part be-

cause most Japanese banks depended on the mar-ket value of stocks held in their portfolios to helpsatisfy capital adequacy standards. With the hugedecline in the Tokyo stock market during the1990s, at times falling to less than one-third of its1989 peak level, banks had great difficulty inmaintaining the level of capital required to meetthe Basel Committee standards to operate inter-nationally The greatest part of bank-held shareshave been in each bank’s client firms.

Although there has been a decline in non-fi-nancial firms holding bank stocks, since many ofthese firms were importuned by their main banksto purchase their shares in the late 1980s so thatthe banks could meet the newly imposed capitaladequacy standards, there has been little wind-ing down of bank holdings of shares in currentclient firms. It is within the category of transac-tional relationships that one should view theshares of stock that a bank and its major clientfirms cross hold. The same is true for insurancecompanies and trust banks. They typically ownshares in companies with which they do a signifi-cant amount of business, including selling insur-ance and pension fund products to the client firmand its employees. Such transaction-relatedshareholdings are considered to be separate andapart from any holdings of the client firm’s stockthat these financial institutions may have in theirinvestment portfolios.

In the midst of these changes in Japanese (andglobal) financial systems, the prospects for bank-firm cross-shareholding are unclear. Japanesefirms increasingly have market alternatives tobanks for funds and depositors increasingly havemarket opportunities for placements of funds.Arm’s length, market-related financial transac-tions seem less amenable to the kinds of relation-ships that bank-firm cross-shareholdingcharacterized.

In fact, banks continued to acquire shares infirms that have newly become main bank clients.Asahi Bank and Tokai Bank (both with strongregional bases) and most recently firms in theFuji group and in Sakura Bank’s Mitsui grouphave also increased their holdings in order tostrengthen their group’s main bank. Business inJapan is typically conducted within highlycontextualized sets of relationships and opaquerules that govern access and accountability Thus

cross-shareholdings 99

far, there is little evidence of devolution in mu-tual shareholding arrangements on the part ofbanks, especially by regional banks whose clien-tele have very traditional notions of business re-lationships.

For the banks, we can conclude that two sig-nificant purposes of cross-shareholding exist: tomaintain stable business relationships, i.e., trans-actional relations between the cross-shareholdingpartner companies, in other words, as a franchiseto do business with each other; and second, tomaintain capital adequacy standards. Firms, onthe other hand, are today buying bank shares gen-erally only if they are in difficulty and need topreserve their relationship with a bank. Cross-shareholding thus continues to provide implicitrelational contracts, a function that still has a rolein Japanese business society

Further reading

Iwao, N. (1984) “The Economic Role of Financial Cor-porate Grouping,” in M.Aoki (ed.), The EconomicAnalysis of the Japanese Firm, North-Holland: ElsevierPublishing, 227–58.

Scher, M.J. (1997) Japanese Interfirm Networks and TheirMain 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 WindingDown?” Discussion Paper No. 15, United NationsDepartment of Economic and Social Affairs.

MARK J.SCHER

100 cross-shareholdings

.

Daiei

Daiei, Inc. was established by Isao Nakauchi inApril 1957 in Osaka. Shortly thereafter, Daieiexpanded very rapidly to become a national gen-eral merchandising store chain. In March 1972,it outperformed Mitsukoshi and had the largestgross sales of any retailing company. Daiei is char-acterized by its low prices, mass sales policy ag-gressive mergers and acquisitions strategybusiness diversification, and organizational inno-vation. In September 1999, the company directlyoperated 317 stores, employing 15,603 staff. Inthe 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 qualitygoods inexpensively) is Nakauchi’s mission andthe corporate philosophy of Daiei. This missionis reflected in the company’s pricing and storedevelopment strategies. Daiei adopted the lowprice and mass sales policy from the beginning,believing that low prices would stimulate salesand eventually increase profits. It has also ex-tended its network of stores from Kansai toKyuushuu, Touhoku, Kantou, Hokkaidou, andOkinawa to exploit economies of scale. In the1990s, Daiei further expanded its networkthrough mergers and acquisitions. In 1994 thecompany merged with three other retail compa-nies. Three years later, Daiei acquired sixteenstores from Yaohan Japan. Daiei also expandedits business scale by building high-volume stores,expanding the average sales floor area from 1,500square meters in the 1960s to over 5,000 square

meters in the 1970s. This expansion enabled Daieito include food, textile, and variety merchandisein its stores.

Daiei is also known for its rapid business di-versification. In the 1980s, the Large Store Lawwas extended to cover supermarket chains andthus limit the expansion of Daiei. In response tothis legal change, the company quickly developedother retail formats such as convenience stores(Lawson), discount stores (D-Mart), supermar-kets (Maruetsu), specialty stores (Robella), anddepartment stores (Printempts). At the same time,Daiei branched into hotel business, property de-velopment, finance business, restaurants, fast foodbusiness, travel, baseball, publishing and so on,turning itself into a large retail conglomerate.

To organize effectively for this rapid diversifi-cation, Daiei turned its divisions into nine inde-pendent companies, transferring most of theheadquarters functions to each independent com-pany which could thus be more flexible in satis-fying ever-changing customer needs. InDecember 1997, Daiei established the first hold-ing company in postwar Japan in order to con-trol its subsidiaries.

In 1998, the company recorded a ¥2,500 bil-lion loss with a ¥260 billion debt. At the begin-ning of 1999, the company’s chairman Nakauchiappointed Tadasu Toba, the former president ofAjinomoto and a corporate finance specialist asthe company’s president, hoping that Toba couldimprove the company’s finance. In March 1999,Nakauchi’s son suddenly resigned from the postof vice president. His unexpected resignation, itwas said, has made the future of Daiei uncertain.

D

See also: retail industry

Further reading

Mizoue, U. (1998) Daiei VS Ito-Yokado (Daiei, Inc. andIto-Yokado Co., Ltd), Tokyo: Baru Shuppan.

HEUNG-WAH WONG

daihyoken

Under the Japanese Commercial Code, at leastone director must have the authority to repre-sent the company to third parties and executeresolutions approved at the general shareholdersmeetings and the board of directors meetings(torishimariyaku-kaigi). Such directors, called daihyo-torishimariyaku (literally representative director) arechosen from the members of the board of direc-tors (Commercial Code 261–1). The board ofdirectors or torishimariyakukai can dismissdaihyo-torishimariyaku anytime. Daihyo-torishimariyaku hold the right to represent and signdocuments for all business activities of the com-pany (Commercial Code 261-III). Thus, even ifthe board of directors imposes some restrictionon this right, for example to restrict the right ofdaihyoken to represent only some operations orbusinesses of the company the company is stillliable to any claims made by third parties with-out such knowledge.

From a legal standpoint, there are only twoclasses of directors in Japanese firms, daihyo-torisimariyaku and torishimariyaku. However, mostJapanese companies have their own internal des-ignations for various classes of directors such askaicho (chairperson), shacho (president), fuku-shacho (vice president), senmu (senior managingdirector), and jyomu (managing director). Whilethese internal designations have no legal founda-tion and thus need not be officially registered,they are often mistakenly seen as titles to indi-cate the right to represent the company. In orderto protect the public trust in daihyo-torishimariyaku, the company has an obligation toinform third parties without legal knowledge ofdaihyoken when it has business contracts withthem (Commercial Code 262).

In most Japanese firms, only higher ranking

directors such as the president and a few seniorexecutives hold daihyoken. However, the numberof directors with daihyoken varies by industry andsize of company. In Japanese firms with both apresident and chairperson, the president is usu-ally the highest ranking director with daihyoken.The chairperson is a semi-retirement position forthe previous president, often without daihyoken.Such chairpersons play the role of elder states-man, attending official functions, particularlythose of industry and business associations. How-ever, in some cases, chairpersons retain the rightto represent the company and continue to exertstrong influence over the management of the com-pany as well as the appointment of the president.Thus, whether or not the chairperson holdsdaihyoken reveals the relationship between thechairperson and the president. The same can besaid about who else holds daihyoken and their re-lationship within the board and other board mem-bers.

Further reading

Bird, A. (1988) Nihon kigyo executive no kenkyu (Researchon Japanese Executives), Tokyo: Sangyo NoritsuDaigaku Shuppansha.

Charkham, J. (1994) Keeping Good Companies: A Study ofCorporate Governance in Five Countries, Oxford:Clarendon Press.

TORU YOSHIKAWA

Daiichi Kangyo Bank

Daiichi Kangyo Bank (DKB) was established in1971 as a result of a merger between Daiichi Bankand Nippon Kangyo Bank. Dai-Ichi Bank, whichwas established in 1887 as a national bank, wasthe oldest modern bank in Japan and had con-tributed to the industrialization of Japan. In 1896it became a commercial bank. Nippon KangyoBank was established in 1897 as a special bankfor promoting agriculture and industry In 1948it started national lotteries for public agencies. In1950 it became a commercial bank.

Since the merger, Daiichi Kangyo Bank (DKB)has grown to be a major global bank. During the1970s DKB began in earnest efforts to become

102 daihyoken

more competitive and efficient, which ultimatelyled to the internationalization of its business. Itwas listed on the Amsterdam stock exchange in1973 and on the London, Paris and Swiss stockexchanges in 1989, well ahead of its rival banks.During the 1990s DKB actively pursued the de-velopment of its information technology infra-structure in addition to investing in building itsfinancial engineering capabilities, thus ensuringrapid internationalization.

In July 1997, DKB’s reputation was dealt aserious blow when it was revealed that it illegallylent billions of yen to a racketeering group orsokaiya (corporate extortionists) at about thesame time other scandals were being discovered(for example, Nomura Securities). The formerchairman of DKB was arrested for violation ofJapanese Commercial Code and the bank itselfwas prosecuted. In reaction to this devastatingturn of events, the bank began a complete over-haul of its management, replacing all top man-agement and attempting to renew an ethicalcorporate culture.

Finally in September 2000, Daiichi KangyoBank, Fuji Bank, and the Industrial Bank of Ja-pan began their three way merger process undera new holding company Mizuho Holdings. Thisnew colossal bank boasted some ¥130 trillion inassets, the largest in the world. Mizuho Financialgroup focuses its investment banking activitieson the promotion of corporate mergers and ac-quisitions.

Further reading

Bremner, B. (1999) “Rebuilding the Banks: Mega-merg-ers are Just the Beginning; in Tokyo,” Business Week,September 6:48.

Ishizuka, M. (1997) “Japanese Firms’ Sokaiya Ties RunDeep,” Asian Business Vol. 33 (8): 18.

SUMIHIRO TAKEDA

dango

Dango, loosely translated as “agreement throughconsultation,” is the practice of price-fixing or bid-rigging. Even though Japanese law forbids suchpractices, dango arrangements have been uncov-ered in a range of industries and activities. Apopular alias for dango is “shady cartel” (yami

karuteru). In some cases, notably in bidding forpublic works contracts, dango arrangements takeon a highly institutionalized and almost ritualis-tic form.

Some observers believe that dango is an off-spring of the Japanese cultural proclivity for har-mony and consensual decision making. Whilethere may be some truth in such cultural expla-nations, it is well to note the existence of pecuni-ary incentives and political institutions thatfacilitate this shadowy behavior. For instance, theexistence of well-organized industry associationsenables close contact among executives of rivalfirms, thereby providing opportunities for would-be competitors to establish standards of “accept-able” market behavior and price-setting. Ofcourse, this sort of behavior is not unknown inthe United States and other countries, but Japan’sindustry associations tend to play a more exten-sive and significant role than do their counter-parts in other Western countries. In the case ofbidding for public works contracts, the Japanesegovernment’s procurement system facilitatesprice-fixing. In contrast to an “open bidding”system wherein all qualified firms are permittedto submit bids, the Japanese government employsa “designated bidder” system in awarding con-tracts for the vast majority of public worksprojects. Under this system, the contractingagency designates approximately ten “qualified”firms from which to accept bids on a project. Thecontract is awarded to the firm submitting thelowest “responsible” bid, as judged in accordancewith a government-set anticipated ceiling price(yotei kakaku). In this way the procurement sys-tem limits the sphere of competition for publicworks contracts. Defenders of the system arguethat since public works are financed by taxpay-ers, it is important to ensure that they are carriedout efficiently and that the work meets a highstandard. In theory only contractors who have aproven track record are designated to submit bids.

Dango is also facilitated by close, mutually ben-eficial interactions involving industrialists, politi-cians, and government bureaucrats. Here, too,the case of public works is instructive. In orderto ensure that they are designated to bid on aproject or to assist in settling disputes concern-ing which firm will be the “low bidder,” construc-tion contractors often appeal to influential allies

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in the political world. Mayors, prefectural gover-nors, and members of parliament have beenknown to be the object of these appeals. The useof political influence in this context is known asthe “voice of heaven” (ten no koe). Not surpris-ingly large transfers of cash seem to accompanythe invocation of heaven’s will. In fact, it is knownthat certain politicians demand kickbacks in theform of a prescribed percentage of the total valueof the project. Given the pecuniary incentives, itis somewhat surprising that relatively few bureau-crats from the contracting agencies—in particu-lar, officials of the Ministry of Construction—aredirectly implicated in scandals involving bid-rig-ging on public works projects. Indirectly how-ever, the cost of bureaucratic involvement takesthe form of providing “second careers” for re-tired officials, a practice known as amakudari(descent from heaven). Some observers believethat firms employing ex-bureaucrats benefit notonly from their technical competence, but alsoappear to be rewarded with strategic leaks of in-formation concerning the allegedly confidentialgovernment-set anticipated ceiling price. Obvi-ously prior knowledge of the ceiling price is avaluable asset when it comes time to rig bids onpublic works contracts.

Brokers (dangoya) play the part of determininghow to apportion the illegal profits gleaned fromprice-fixing. In the case of public works contracts,brokers determine how much money will betransferred from the designated winner-to-be tothe other members of the shadowy cartel. A popu-lar device for accomplishing this aim is the “shadyjoint venture” (ura jointo). After bids are submit-ted on a project, the contract is awarded to thelow bidder, Firm A. As the prime contractor, it isperfectly legitimate for Firm A to allocate seg-ments of the project to specialized subcontrac-tors. However, in a shady joint venture, the primecontractor transfers the contract to Firm B, whichproceeds to pass it along to Firm C.EventuallyFirm D is hired as a specialized subcontractor.As prime contractor and subcontractor, Firm Aand Firm D can lay just claim for services ren-dered. But, in a shady joint venture, Firms B andC also receive payment for service charges eventhough neither do any actual work.

Finally Japan’s weak penalties and lax enforce-ment of antimonopoly law do little to discourage

would-be price-fixers from engaging in anti-com-petitive behavior. Indeed, until the early 1990sthe maximum administrative surcharge imposedin those rare instances when violations of anti-monopoly law actually came to light was a mere0.5–2 percent of ill-gotten gains; and the maxi-mum fine for criminal activity was a paltry 5 mil-lion yen. In contrast, those convicted ofprice-fixing in the United States face treble dam-ages and the very real possibility of incarcera-tion. Under pressure from US trade negotiators,the Japanese government agreed to strengthenanti-monopoly penalties and their enforcement.The administrative surcharge was raised to 6 per-cent and the maximum fine was boosted to 100million yen. These rather modest legal changescertainly give would-be price-fixers a bit more tothink about, and they place Japanese penaltiesmore in line with those found in some Europeancountries. But many observers believe that thedisincentives to price-fixing are not strongenough, and doubts persist about the ability ofthe Japan Fair Trade Commission to transformitself into anything more than a nearly toothlesswatchdog.

In sum, dango is deeply entwined in the mecha-nisms of political and economic power in Japan.The system serves the narrow concerns of vestedinterests while neglecting the general welfare. In-dustrialists reap ill-gotten gains, retired govern-ment bureaucrats secure second careers in theprivate sector, and politicians rake in political con-tributions. Of course, the cost of this anti-com-petitive activity is directly borne by Japaneseconsumers and taxpayers. Because of its shad-owy nature, it is impossible to accurately estimatethe cost of this price-fixing in Japan. In the caseof spending on public works projects, estimatesof the inflated price tag imposed by bid-riggingrange from 15 percent to as high as 50 percent ormore of the total contracted amount. And Japan’strade partners point to the dango system as non-tariff barrier that unfairly disadvantages foreignfirms in their efforts to gain access to Japanesemarkets.

Further reading

McMillan, J. (1991) “Dango: Japan’s Price-Fixing Con-spiracies,” Politics and Economics 3:201–18.

104 dango

Schoppa, L.J. (1997) Bargaining with Japan: What Ameri-can Pressure Can and Cannot Do, New York: Colum-bia University Press.

Woodall, B. (1996) Japan Under Construction: Corruption,Politics, and Public Works, Berkeley CA: University ofCalifornia Press.

BRIAN WOODALL

debt/equity ratios

The debt/equity ratio measures the amount ofdebt (bonds, bank loans, etc.) relative to equityused to finance a firm and is interpreted as anindicator of financial riskiness. Particularly dur-ing the 1970s and early 1980s, debt/equity ratiosof many Japanese firms appeared extraordinar-ily high by US or UK standards. This led toquestions regarding why Japanese financial insti-tutions would lend to firms with high debt/eq-uity ratios and how the apparent risks werecontrolled.

The debt/equity ratio is viewed as measuringfinancial leverage, with higher ratios indicatinggreater leverage. The physical analogy is that debtacts like a lever; and the longer the lever (moredebt), the more weight (total assets) can be sup-ported by a given amount of equity on the le-ver’s other end. This suggests an accountingperspective where a firm’s total assets must equalthe sum of its liabilities (debt) plus net worth (eq-uity). Hence, more debt allows a firm to havegreater total assets for a given amount of equity.

Interest in Japanese debt/equity ratios wasfueled by comparisons which suggested startlingamounts of leverage for Japanese firms. Fre-quently these comparisons examined averagevalues for broad groups of firms: for example,all manufacturing corporations. Often the statis-tic reported was the equity/total assets percent-age. This statistic provides equivalent informationto the debt/equity ratio when debt is interpretedas total liabilities. To illustrate, one could takethe 1980 book value of total liabilities for all Japa-nese manufacturing corporations (reported by theBank of Japan) and divide by their aggregateshareholders equity (net worth) to obtain a ratioof 3.85. Alternatively one could divide net worthby total assets (net worth plus total liabilities) toobtain an equity/total asset percentage of 20.6 per-

cent. In other words, these firms were financingroughly 20 percent of total assets with equity and80 percent with debt: a debt/equity ratio ofroughly 4. For US manufacturing corporationsin 1980, the aggregate debt/ equity ratio was 1.02and the equity/total asset percentage was 49.5percent. The difference across the two countriesis striking. Moreover, these figures represent verybroad averages and suggest a major systemic dif-ference in borrowing patterns across the twoeconomies.

An important aspect of leverage, particularlywhen it reaches high levels, is that it increasesthe risk of financial distress. The logic is that moreleverage implies larger debt payments (interestand principal), which are obligatory The largerthese payments, the greater the chance that adownturn in a firm’s revenue will result in nothaving enough income to make the required pay-ments. The firm may still be able to meet thepayments (for eample, using cash reserves); how-ever, if revenues remain low or decline further,the situation may become critical. Even if the firmdoes not default on its obligatory debt payments,the prospect of financial distress can have verynegative consequences. When default risk seemssubstantial, lenders may decline to renew matur-ing loans. Similarly suppliers will be reluctant toextend trade credit (accounts payable) and insteaddemand cash-in-advance. Also, customers maybe less willing to purchase products from firmsthat may not exist when replacement parts or serv-ice are needed. In addition, employees may leavefor positions at other firms which seem to pro-vide more job security. These are strong reasonsto avoid even the appearance of a serious risk offinancial distress. From this perspective, the Japa-nese debt/equity ratios appeared almost unbeliev-able.

There was considerable debate and analysis,particularly during the 1980s, regarding whetherJapanese firms were really that highly leveraged.Several authors proposed adjustments for ac-counting differences across the two countries aswell as using market values for the equity calcu-lation. One motivation was that many Japanesefirms had hidden assets (such as land andshareholdings) which were much more valuablethan reflected in their accounting statements.Typically such adjustments dramatically reduced

debt/equity ratios 105

the apparent leverage differences, at least on av-erage. Some analysts concluded that after suchadjustments there were no significant remainingdifferences. Others argued that there were stillbroad differences in leverage patterns and thatsome Japanese firms remained very highlyleveraged by US standards. This naturally led toquestions of why lenders would provide financ-ing to such firms or, alternatively, how financialdistress risks were being controlled.

Answers to such questions were typically at-tributed to the main bank system, where a largeJapanese bank monitored and potentially inter-vened in the activities of highly-leveraged clientfirms. Moreover, there was an implicit quasi-guar-antee that should a client firm get into financialdifficulties, its main bank would organize a res-cue. Thus, the main bank system was viewed asproviding the mechanism for controlling finan-cial distress risks and allowing firms to operatewith high amounts of leverage.

The discussion of high debt/equity ratios forJapanese firms subsided considerably in the early1990s. As suggested above, accounting and mar-ket value adjustments diminished the apparentbook value differences. Also, book value debt/equity ratios for Japanese firms displayed a sub-stantial decreasing trend starting in the mid-1970sand continuing into the 1990s. When coupledwith accounting adjustments, this tended to makeaggregate leverage differences between the USand Japan appear fairly minor by the early 1990s.Subsequently discussion has focused more on thepossibility that a high debt/equity ratio with mainbank support can be disadvantageous if the mainbank gets into financial difficulties. The bankingcrisis in Japan made this issue quite relevant forsome firms (see banking crises).

See also: corporate finance

Further reading

Gibson, M.S. (1995) “Can Bank Health Affect Invest-ment? Evidence From Japan,” Journal of Business 68(3): 281–308.

Hodder, J.E. (1991) “Is the Cost of Capital Lower inJapan?” Journal of the Japanese and International Econo-mies 5:86–100.

Kester, W.C. (1986) “Capital and Ownership Struc-

ture: A Comparison of United States and JapaneseManufacturing Corporations,” Financial Management15 (1): 5–16.

JAMES E.HODDER

Deming, W.Edwards

An American, W.Edwards Deming (1900–93)was one of the leading proponents of qualitymanagement in Japan and the west. With hisemphasis on viewing organizations as systemsand on understanding the implication of varia-tion in processes, he is widely credited with hav-ing tremendous influence on the development ofJapanese manufacturing excellence during thesecond half of the twentieth century. DespiteDeming’s technical background (Ph.D. in math-ematical physics), his message was managerial,with simple statistical approaches advocated asuseful tools to support business decisions (seeIshikawa).

During the 1930s, Deming, an expert in sta-tistical sampling, was exposed to Dr WalterShewhart’s work on statistical process control(SPC). This sparked Deming’s interest in qual-ity management. Shewhart’s focus was on apply-ing SPC to production, to reduce scrap andrework. Deming recognized that the tools weremore broadly applicable, to both manufacturingand services.

Immediately after the Second World War,Deming and others (including Juran) were in-vited to Japan by the Japanese Union of Scien-tists and Engineers (JUSE) to lecture on statisticalmethods. In addition to SPC, Deming coveredmanagerial issues, laying the foundations formodern quality management. His experience inthe USA led him to insist that the audience in-clude top managers, in addition to engineers anddesigners. Deming was convinced that qualitybegan at the highest levels of the organization,because improvement required substantialchanges in processes, which only senior manage-ment could accomplish. He argued that over 90percent of the potential improvement fell underthe control of management, rather than work-ers. Thus, exhorting workers to produce betterquality without changing the processes and sys-tems in which they operated, was futile.

106 Deming, W.Edwards

Deming’s impact in Japan was far-reaching.Many credit him with changing the Japanese man-agement approach from top-down to bottom-updecision making processes. The Deming Prizeis Japan’s highest quality award. In 1960, Demingreceived the Second Order Medal of the SacredTreasure from the emperor. Very proud of thishonor, he nearly always wore the lapel pin com-memorating the award. Despite his stature in Ja-pan, he made few inroads into Westernmanagement until the early 1980s, when FordMotor Company and then General Motors en-gaged him to assist with large-scale corporateturnarounds. Ironically US interest in Demingwas driven by competition from Japanese firmsthat had adopted his suggestions in the 1950s.

Deming advocated a complete transformationof the traditional top-down approach to manage-ment. The transformation was to be based onconsidering the organization as a system and man-aging its interrelationships, understanding statis-tical variation to permit data-based decisions,focusing on internal and external customers, andcreating “win-win” situations in place of debili-tating competition. His book Out of the Crisis (1982)described fourteen points which should serve asthe basis for the transformation. Deming thenworked to develop a more theoretical approach,which resulted in his “system of profound knowl-edge,” as described in The New Economics for Indus-try, Government, Education (1993). He asserted thatthe fourteen points would follow naturally in anorganization whose management was guided bythe four interrelated parts of profound knowl-edge: appreciation for a system, knowledge aboutvariation, theory of knowledge, and psychology.

Deming emphasized that an organization is anetwork of interrelated components (e.g. depart-ments) with a single aim of gain for everyone:stockholders, employees, suppliers, customers,community and environment. Managing theinterdependencies among the components is cru-cial, and necessary for optimization of the entiresystem. Independent optimization of individualcomponents will result in suboptimization of thesystem. Success requires cooperation, rather thancompetition, among the components. Top man-agement must guide the optimization of the sys-tem, with a focus on delighting customers, bothinternal and external to the organization.

Knowledge about variation

Two types of variation characterize all processes.Common cause (system) variation is that inher-ent in the process. Special cause variation is dueto specific, generally identifiable, events. Specialcauses are often resolvable by workers close tothe problem. Common cause variation is gener-ally related to process design or the consistencyof incoming material. Management must resolvethese issues, as front-line workers have neitherthe authority nor the fiscal responsibility. Com-mon and special cause variation demand differ-ent actions. Treating common cause variation asspecial leads to over-adjustment of processes,which increases the system variation. Treatingspecial cause variation as common prevents thesearch for a resolvable problem. SPC is based onreducing the economic loss from these two er-rors.

A process with only common cause variationis statistically stable; only stable processes can beused for prediction. However, stable processesare not necessarily capable of meeting specifica-tions. To achieve process capability specificationsshould be established only after the process vari-ation is understood. Taguchi loss functions canbe used in place of specifications.

Theory of knowledge

Deming maintained that all management is basedon prediction, and that prediction requires theory.Knowledge is then developed through system-atic revision and extension of theory, based oncomparing predictions with observations. Theorywhich may be revised, is necessary for using in-formation and creating knowledge. Thisrelationship is demonstrated in Deming’s Plan-Do-Study-Act cycle (which he called the“Shewhart cycle”), a systematic approach to prob-lem solving.

Ultimately organizations consist of people, andDeming emphasized the need to understand whatmotivates individuals. He stressed that manag-ers must be aware of the different factors thatmotivate individual people, and understand thatintrinsic (internal, individual) motivation is moreimportant than extrinsic (external) motivation.

Deming, W.Edwards 107

According to Deming, the reward systems usedin most organizations allow extrinsic motivationto smother intrinsic motivation, replacing simplerecognition with money and removing joy fromwork.

Further reading

Deming, W.E. (1982) Out of the Crisis, Cambridge, MA:CAES.

—– (1993) The New Economics for Industry, Government, Edu-cation, Cambridge, MA: CAES.

Latzko, W.J. and Saunders, D.M. (1995) Four Days withDr. 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, Wash-ington, DC: CEE Press Books.

ELIZABETH L.ROSE

Dentsu

Dentsu is Japan’s largest advertising agency withalmost double the billings of its number twocompetitor, Hakuhodo. Dentsu has dominatedJapanese advertising for a long time, and it hasconsistently accounted for one-quarter ofJapan’s total advertising billings. In the area ofnetwork television, Dentsu dominates to aneven greater degree by buying half of the na-tional prime time airtime. Dentsu is also rankedas one of the largest advertising agencies in theworld.

Originally established in 1901 as a news tel-egraphic service, the name Dentsu literally means“telegraphic communications.” Today Dentsu isa full-service mass media advertising agency thatalso handles below-the-line services such asevents, sales promotions, transit advertising,internet advertising, direct mail, and outdoor bill-boards, to name a few. These activities are inkeeping with Dentsu’s publicized strategy of pro-viding “total communications services.”

The majority of Dentsu’s nearly 6,000 employ-ees are based in Japan, where the agency hasthirty-one offices nationwide. The slightly over4,000 employees presently based in Dentsu’sheadquarters in Tokyo occupy ten buildings.

These employees will be housed in Dentsu’s newheadquarters in the Shiodome ward of Tokyo,which is scheduled for completion in 2002. Theremainder of Dentsu’s employees in Japan arelocated in its five regional subsidiaries, and itsaffiliate and associate companies, which total 400in number.

Dentsu also has many subsidiaries includingfilm and video production companies, themepark and resort companies, real estate services,property management and insurance compa-nies. Together with Young & Rubicam of theUSA, Dentsu also has a joint venture ad agencynamed Dentsu Young & Rubicam that is focusedexclusively on the Asia/Pacific region. In addi-tion, Dentsu maintains six fully owned overseasoffices, and has subsidiaries and affiliates inforty-seven cities in thirty-four countries world-wide.

Dentsu is privately held. The two largest share-holders are two of Japan’s major news services,Kyodo News and Jiji Press. Dentsu has an-nounced plans for a listing on the Tokyo stockexchange in 2002.

In Japan, Dentsu’s several thousand clients in-clude both Toyota and Honda, as well as all ofJapan’s major brewers. This is possibly due tothe sheer size of Dentsu, particularly its numberof employees, allowing the agency to physicallyseparate the sections handling competing clients.

A major reason clients go to Dentsu is due toits clout with the media. The root of Dentsu’sstrength with the media lies in the fact thatDentsu has a history of assisting the variousmedia during their launches. Dentsu helped es-tablish the Tokyo Broadcasting System (Chan-nel 6), and remains the network’s largestnon-financial shareholder. In addition, Dentsuholds minority interests in other television sta-tions and owns a large percentage of Video Re-search, Japan’s television rating service. Dentsualso conducts business with an unrivalednumber of Japanese publishers. Besides creatingand placing advertisements in the publishers’magazines, Dentsu’s support extends to such ac-tivities as publicizing books and magazines andhelping new publications secure a position in themedia community.

SEAN MOONEY

108 Dentsu

department stores

Japanese department stores have a long history.The earliest stores began as kimono shops, even-tually growing into other product categories.Matsuzakaya (founded 1611) originated as aNagoya kimono shop. Shirakiya, which is nowTokyu Department Store began in Tokyo in 1662.Mitsukoshi (Echigoya) began in 1673. Daimaru(1717) Sogo (1830) and Takashimaya (1831) aresome of the other early retailers. Six of the tenlargest department stores in Japan originated be-fore 1850. A second group of department storesoriginated as providers of daily necessities andoperated in or near the railroad terminal. Theirnames, such as Seibu, are shared by railroad lines.Originally the terminal department stores wereconsidered much lower status than the kimonoshop stores, but gradually the newer terminalstores gained respect as full-line departmentstores.

Department stores represent tradition in Ja-pan. They offer cradle-to-grave services for theircustomers. About one-third of a departmentstore’s total sales will occur during two Japaneseseasonal gift-giving periods. Department storesprovide gift-giving consultation, gift wrapping andhome delivery Selecting gifts from a prestigiousdepartment store provides assurance that the giftis appropriate.

Since the economic bubble burst in 1990, de-partment store sales have declined dramatically.The top department stores in Japan in order ofrank are Takashimaya, Marui, Seibu, Mitsukoshiand Isetan. The ranking of these top departmentstores changed little from 1990 to 2000.

Several characteristics of Japanese departmentstores set them apart from department stores inother parts of the world. First, Japanese depart-ment stores can be considered manufacturers’showrooms. Only about 10 percent of the mer-chandise in a Japanese department store is directpurchase; the other 90 percent is return-basedpurchases with no inventory responsibility (shokashire) and consignment sales (itaku shiire). Second,sales employees are sent from the manufacturerand are compensated by the manufacturer ratherthan the retailer. These sales employees interactwith consumers gathering market intelligence forthe manufacturer. Major manufacturers sell their

products in all the top ten department stores, sothere is little to differentiate one department storefrom another. Third, department stores followthe manufacturer’s suggested retail price. Littledepartment store merchandise is direct purchase,so manufacturers maintain the right to set andmaintain price throughout the season. Seasonalsales will be determined by the manufacturer, ifthey are held at all.

Japanese department stores expanded to HongKong, Singapore, Thailand, Taiwan, Indonesia,Vietnam and China. By 1989, the fourteen Japa-nese department stores in Hong Kong held 30percent of the department store market. Ten yearslater, however, most of the Japanese departmentstores had left Hong Kong. Some stores such asTokyu and Matsuzakaya simply withdrew andwent home. Others such as Isetan used HongKong as a departure point for operations inChina.

There are three environmental factors thatmake international markets attractive: (1) domes-tic competition from mass merchandisers; (2) gov-ernment restrictions on expansion of largedepartment stores; and (3) the high cost of laborand land in Japan. Japanese mass merchandisers,also called supermarkets, carry clothing, appli-ances, and often food. Although they carry thesame merchandise mix as department stores, theyare not brand name discounters. They carry mer-chandise with brand names different from thoseof the traditional department stores. Often thesame manufacturer will produce brand-namemerchandise for department stores and brand-name merchandise for supermarkets, but con-sumers do not associate the two brand nameswith each other. The difference between the po-sitioning of the two store formats is that depart-ment stores carry a luxury image while massmerchandisers provide goods for everyday needs.The relaxation in the large-scale retail law hasmade the opening of these stores easier, and inaddition the recession in Japan has made custom-ers very price-conscious. Mass merchandiserssuch as Ito Yokado and Mycal have been tradingup, reducing the distinction between mass mer-chandisers and department stores.

The domestic growth of department stores waslimited by the Large-Scale Retail Store Law. Thislaw required lengthy evaluation and approval of

department stores 109

any new large store development, severely re-stricting the number of new department stores,but also reducing competition for the departmentstores that are already present in the market. TheLarge-Scale Retail Store Law motivated severalJapanese department stores to use internationalexpansion as a growth mechanism.

Land prices and construction costs in Japanare the highest in the world. There is no earlyreturn on investment in a new building project.It takes ten to twelve years for a new departmentstore to become profitable in Japan, and fifteento twenty years before it breaks even on invest-ment costs. In places like Hong Kong, Singapore,Taipei and Bangkok, retail footage is expensive,but it is available.

Japanese department stores also have smallbranch outlets around the world to provide Japa-nese travelers the guarantee of nearly 300 yearsof tradition and service.

See also: discounters; distribution system; Ito-Yokado; Japanese business in China; Large Re-tail Store Law

Further reading

Sternquist, B. (1998) International Retailing, New York:Fairchild Press.

——(2000) “Internationalization of Japanese Departmentand GMS Stores: Are There Characteristics of Pro-file Success?” in M. Czinkota and M.Kotabe (eds),Japanese Retail Strategy., London: InternationalThomson Business Press, 242–249.

Sternquist, B., Chung, J.E. and Ogawa, T. (2000) “Japa-nese Department Stores: Does Size Matter in Buyer-Supplier Relationship?” in M.Czinkota andM.Kotabe (eds), Japanese Retail Strategy, London:International Thomson Business Press, 64–80.

BRENDA STERNQUIST

depressed industries

In the course of a nation’s industrial development,it is inevitable that some manufacturing indus-tries will lose their competitiveness and enter intolong-term periods of economic distress and de-cline. Industrial decline can stem from various

causes, including rising costs of production, no-tably those of labor and other resource inputssuch as raw materials and energy; outmoded andinefficient plant technology especially relative toforeign rivals; or a shift in demand to other sub-stitutes. Depressed industries generally lose com-petitiveness relative to foreign producers, and soare challenged by high levels of imports. De-pressed industries are characterized by excessproduction capacity relative to existing demand,leading to great pressures for firms to exit themarket, as well as high levels of unemployment.

Industrial decline can be divided into twostages: industrial distress, in which firms strug-gle to remain solvent in the face of underutilizedcapacity and depressed prices and profits; andtrue decline, in which the industry’s problemsare so overwhelming that exit of large numbersof firms is the only option. Thus far, most of Ja-pan’s declining industries have not yet enteredthis second phase.

Depressed industries in postwar Japan

Although more attention has been paid to Japan’sgrowth industries in the postwar period, de-pressed industries have also been common. Inthe 1950s, for instance, industries such as coalmining and various parts of the textile industry(yarn and cloth production, weaving, etc.) hadclearly lost their competitiveness, and were facedwith excess capacity bankruptcy and high levelsof unemployment. Others, such as silk reelingand rayon production, found demand for theirproducts superseded by other substitute goods.(Another entire sector of the economy agricul-ture, has been inefficient for most of the postwarperiod. Similarly a number of service sectors, in-cluding the construction industry and many in-dustries involved in the distribution system havealso suffered from a relative lack of efficiency.)

In the 1970s the rapidly rising price of oil fol-lowing the twin oil shocks staggered a number ofenergy-intensive materials industries, includingaluminum, petrochemicals and chemical fertiliz-ers, synthetic fibers, and minimill steel. Others,such as the shipbuilding industry suffered fromthe worldwide decline in demand for new ships.Still others, such as paper and paper pulp, ce-ment, and plywood also faced deep industrial

110 depressed industries

distress as the result of declining demand at homeand abroad.

In the 1990s, former growth industries suchas the integrated steel industry and the automo-tive industry have approached industrial matu-rity and have experienced periods of economicdistress. These problems were exacerbated by thelong recession of the 1990s. The economy’s weakcondition and rising levels of unemploymentmade more difficult the adjustment process forthese new depressed industries.

Adjusting to decline: market-oriented andpolitical solutions through the 1980s

All depressed industries in Japan have attemptedto deal with their problems through marketmechanisms, for instance by cutting the costs ofproduction or by developing new sources of de-mand. Firms have also attempted to diversify intohigher value-added production by shifting tomore specialized, processed products, or intoother, non-related businesses. Others have at-tempted to relocate production facilities abroad,either to tap into less expensive inputs (labor andraw materials) or to be closer to final demand.

Successful market-oriented adjustment to in-dustrial decline, however, has been limited to therelatively large, capital and technology-intensivefirms. Smaller firms, which have often had lessaccess to capital and technology have been muchless successful in following these economic ad-justment strategies. In addition, all industries havehad a hard time in drastically reducing their laborforces. Most Japanese firms—including smallones—have made an implicit guarantee to theirworkers not to fire them at the first sign of indus-trial distress. Rather, firms have resorted to suchmeasures as cutting working hours, retraining re-dundant workers, and transferring excess laborto other, related firms. Again, larger firms, espe-cially those with keiretsu ties, have been better ableto pursue these options; still, all firms in Japanhave tried to shield their workers to bear the fullbrunt of adjustment.

In the past, depressed industries in Japan havealso tried to deal with their problems throughpolitical, or collective, means. Rather than lettingmarket forces weed out the less efficient firms,which would entail long periods of depressed

prices and profits for all, industries have organ-ized to try to stabilize their industry’s conditions.In general, these efforts have taken the form oftrying to control or manage “excessive competi-tion.” In the short term, industries have attemptedto form quasi-cartels, in which all firms in theindustry consent to reduce their output levels byan agreed upon amount. These efforts at bring-ing production in line with demand have beenaimed at stabilizing prices, and therefore profits.Above all, industries have sought to avoid cut-throat competition that would damage all firms.In the longer term, industries have also tried toreduce overall capacity using similar, collectivemeans. Rather than relying on the market to forceout the least competitive, industries have negoti-ated collective agreements in which all firms areexpected to reduce a negotiated percentage oftheir capacity.

These collective efforts have usually been ne-gotiated on a private basis, usually within eachindustry’s political organization, the industry andtrade associations, or gyokai. Within these asso-ciations, firms have been able to communicate,negotiate industry-wide agreements, and to someextent enforce their collective action. In periodsof acute economic distress, however, industrieshave often found these private enforcementmechanisms to be insufficient to curb the prob-lem of free riding common to any cartel. Rather,industries found external enforcement mecha-nisms to be necessary and have often turned tothe Ministry of International Trade and Indus-try (MITI) for help, either to discipline so-calledindustry “outsiders” (relatively competitive firmsthat refuse to cooperate with industry agree-ments), to regulate new entry into the industryor, in some cases, to impede rising levels of im-ports.

The Japanese government responded with avariety of measures, especially for those indus-tries with political clout, as well as those that aredeemed to be strategically important. MITIhelped industries to coordinate production andcapacity cuts, often through the formation of for-mal “recession cartels.” In 1978 the governmentpassed the Depressed Industries Law, which sup-ported the capacity reduction efforts of designatedindustries, raised barriers to entry into the in-dustry and made further cartelization possible.

depressed industries 111

The law also included specific provisions designedto prevent “outsider” firms from violating the in-dustry’s capacity reduction plans. The Japanesegovernment has also supported efforts by indus-tries to slow down the growth of foreign imports,which would undermine domestic attempts tostabilize prices and profits. In the textile industryas one example, MITI used its powers of admin-istrative guidance to importers and trading com-panies to avoid flooding the domestic market.While Japan has avoided overt protection of itsdomestic market, the Japanese government hasalso helped to negotiate informal agreements withcompeting textile industries in other countries,including China, Korea, and Pakistan, to main-tain an “orderly market” in Japan, akin to the“voluntary” export restraints that the UnitedStates has negotiated with Japan. The governmenthas also passed measures to cushion the costs ofadjustment, for instance by encouraging labor re-training and relocation, and providing induce-ments for diversification.

Depressed industries in the 1990s

In large part because of foreign pressures, theJapanese government in the 1990s was less ableto support industry efforts to deal with distressthrough collective or political means, especiallywhen such actions served to impede imports.Japan’s ability to impede imports through infor-mal means has also come under heavier scrutiny.Recession and other types of government-ap-proved cartels are less common today. Legisla-tion specifically designed to help industriescooperate to reduce production or capacity lev-els have been made more generic over time. Still,Japan’s depressed industries benefit from themany existing regulations that help them continueto stabilize their economic environment. De-pressed industries have been powerful and vocalopponents of efforts to deregulate the domesticeconomy.

Depressed industries in the 1990s have thushad to rely more on market-oriented adjustmentmechanisms. Some large firms have had successin diversifying at home or relocating productionoverseas. But all firms continued to struggle withthe problem of shedding excess labor, and as a

result have often been slow to adjust to changingmarket conditions. In the late 1990s, however,many firms, including some of Japan’s largestfirms, saw no alternative but to lay off significantnumbers of their core workers.

The rising level of foreign investment in Ja-pan in the late 1990s has been a new and signifi-cant catalyst for adjustment. In the automotiveindustry for example, foreign participation hasled to a significant restructuring of the industry.

See also: bankruptcies; cartels; industrial policy;industrial regions

Further reading

Dore, R. (1986) Flexible Rigidities: Industrial Policy andStructural 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: CornellUniversity Press.

Tilton, M. (1996) Restrained Trade: Cartels in Japan’s BasicMaterials Industries, Ithaca, NY: Cornell UniversityPress.

Uriu, R. (1996) Troubled Industries: Confronting EconomicChange in Japan, Ithaca, NY: Cornell UniversityPress.

ROBERT URIU

Depressed Industries Law (1978)

In response to demands from a number of de-pressed industries, the Japanese government inMay of 1978 passed this legislation, designed tohelp designated industries to cooperatively reducetheir excess productive capacity. The Japaneseeconomy in the late 1970s was still feeling theeffects of the first oil shock, which forced manyenergy-intensive industries, such as aluminumsmelting, synthetic fibers, and petrochemicals, toface rising production costs and the loss of com-petitiveness relative to foreign producers. Otherindustries, such as the shipbuilding industry faceda drastic drop in foreign demand. All industriesin Japan were also hurt by the 40 percent appre-ciation of the yen between 1977 and 1978, which

112 Depressed Industries Law (1978)

further undermined their export competitiveness(see appreciating yen).

Under the provisions of the 1978 law (TokuteiSangyo Antei Rinji Sochiho, or Tokuanho), two-thirdsof an industry’s firms had to agree to apply tothe government in order to be designated as de-pressed. Designated industries were exemptedfrom anti-trust laws, allowing the industry to for-mulate a “stabilization plan” specifying capacityreduction targets and methods. These plans werethen approved by the Ministry of InternationalTrade and Industry, but capacity cuts remainedvoluntary Industries that could not scrap suffi-cient capacity could form an indicative cartel forthe purpose of capacity reductions. The law alsocreated a special trust fund that provided low-interest loans to the designated industries to fi-nance capacity reductions. In addition, thegovernment also passed separate legislation deal-ing with unemployed workers in depressed in-dustries, and for designated depressed regions.

There was a strong consensus among indus-try leaders, politicians, and bureaucrats in favorof the Tokuanho. Depressed industries in Japan hadbeen struggling with excess capacity for someyears prior to the legislation. Rather than allow-ing the market to weed out the weakest firms,which would have led to periods of depressedprices and profits for all, industries had been try-ing to reduce capacity through cooperative in-dustry agreements. Industries were finding,however, that these efforts were undermined bythe problem of free riding: each firm hoped thatit would be someone else who cut capacity orexited the market. The Tokuanho allowed indus-tries to develop a more formal mechanism to re-duce capacity across the board, and offeredfinancial inducements for the disposal of capac-ity Many of the depressed industries themselveswere vocal advocates of the law, and in fact lob-bied for provisions that would have given the gov-ernment even greater powers to enforce theircollective capacity-cutting efforts.

Japanese politicians, faced with growing criti-cisms for failing to act to deal with the economiccrisis of the 1970s, were also in favor of the law.The new legislation promised to help some keyindustrial supporters deal with their problems.Bureaucrats from the Ministry of InternationalTrade and Industry also saw the Tokuanho as a

way to deal with the problems of industries un-der its jurisdiction. MITI was especially con-cerned with avoiding socially disruptivebankruptcies and rising unemployment, as thiswould have increased the politicization of its in-dustrial policy. Some MITI officials were alsoconcerned with a handful of industries deemedto be strategically important.

The legislation proved effective in helpingsome designated industries shed their excess ca-pacity. In most cases firms had planned to scrapthese facilities even before the law was passed,but the effect of the law was to ensure that scrap-ping occurred. The second oil shock hit Japansoon after the legislation went into effect, mak-ing recovery of the designated industries moredifficult. In addition, a number of other indus-tries became depressed in this period. TheTokuanho expired in June 1983, and was super-seded by a similar piece of legislation, the Struc-tural Improvement Law (Tokutei Sangyo Kozo KaizenRinji Sochiho).

See also: cartels; industrial regions

Further reading

Dore, R. (1986) Flexible Rigidities: Industrial Policy andStructural 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: CornellUniversity Press.

Tilton, M. (1996) Restrained Trade: Cartels in Japan’s BasicMaterials Industries, Ithaca, NY: Cornell UniversityPress.

Uriu, R. (1996) Troubled Industries: Confronting EconomicChange in Japan, Ithaca, NY: Cornell UniversityPress.

ROBERT URIU

deregulation

Deregulation refers to the reduction or elimina-tion of government regulations over industry Itis most often used to refer to the reduction ofeconomic regulations, such as price and entryrestrictions, but may also be used to refer to thereduction of social regulations, such as health andsafety codes. Most advanced industrial countries

deregulation 113

have experienced a broad deregulation movementsince the 1980s that has redefined government-industry relations. The Japanese government’sapproach to deregulation diverged sharply fromthat of the United States or Britain in that it wasmuch more cautious in promoting competitionand reducing or devolving regulatory authority(Vogel 1996).

Popular commentators tend to use the term “de-regulation” to refer to both the reduction of regu-lation and the promotion of competition, as if thetwo were necessarily associated. That is, they as-sume that less regulation necessarily means morecompetition. In the case of US airline deregula-tion, this is precisely what happened: the govern-ment reduced regulation and eliminated a majorregulatory agency and by doing so stimulatedgreater competition. But in many other cases, gov-ernments have actually strengthened regulationin order to promote competition. In telecommu-nications, for example, most governments haveincreased regulation in order to foster competitionwith the former monopoly service providers. Thusderegulation is often a misnomer for regulatoryreforms which combine market liberalization with“reregulation,” meaning the reformulation of ex-isting regulations or the creation of new ones.

In Japan, the deregulation movement beganwith the Second Provisional Commission on Ad-ministrative Reform (known as the Rincho), whichpresented a report in 1982 recommending sweep-ing bureaucratic restructuring and deregulation.In practice, however, the Rincho and related re-form commissions were more successful with pri-vatization than with deregulation. Intelecommunications, the government privatizedNippon Telegraph and Telephone NTT andopened the telephone market to competition in1985. In transport, the government introducedsecond and sometimes third carriers on selectroutes through a meticulously planned series ofbarters in which Japan Airlines (JAL), for ex-ample, would open a new route on a specific AllNippon Airways (ANA) line, and ANA wouldopen a new route on a JAL line in exchange. Infinance, it gradually liberalized deposit interestrates from 1985 through 1994, and began theprocess of lowering regulatory barriers betweendifferent segments of the financial industry (suchas banking, brokerage, and insurance) in 1992.

In all of these sectors, the regulatory authoritiescontinued to manage competition after “deregu-lation,” controlling new entry and minimizing exitfrom the market. They retained a discretionaryregulatory style, and resisted the devolution ofregulatory responsibilities to independent agen-cies outside the central government ministries.Some have argued that the failure to deregulatemore thoroughly contributed to the Japaneseeconomy’s weakness in the 1990s.

The Japanese government accelerated its de-regulation program in the 1990s in the face of asevere recession combined with a full-fledged fi-nancial crisis. Manufacturers began to press forderegulation in the utility and service sectors tolower their costs, and economists and journalistsadvocated deregulation to address structural in-efficiencies in the economy The government setup a new deregulation headquarters in the Cabi-net Office in 1994, and developed a long-termplan for deregulation subject to annual progressreviews.

In the financial sector, Prime MinisterHashimoto announced the “Big Bang” reformpackage in December 1996, and the governmentbegan implementation in April 1998. The pack-age includes the deregulation of brokerage com-missions, the elimination of controls on manyforeign exchange transactions, and the liberaliza-tion of the asset management market. It also al-lows banks, securities houses, and insurancecompanies to cross into each others’ lines of busi-ness through holding companies.

In telecommunications, the Ministry of Postsand Telecommunications overhauled price regu-lation in 1994, creating new larger local dialingareas with higher initial call rates. The govern-ment then broke up NTT into one long-distancecarrier and two regional carriers, although thethree units remain joined within a single holdingcompany structure. In 1998, it announced fur-ther deregulation, including the elimination ofsome price regulations and the reduction of in-terconnection charges (charges levied by NTTfor other providers using its network).

In retail, the authorities phased in reformsgradually from 1990 through 1994, streamliningthe approval process for large stores but still al-lowing the small merchants themselves to exer-cise considerable control. Then in 1998 the

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government replaced the Large Retail Store Lawwith a new regulatory regime (effective in 2000)that devolves authority to local governments. Thenew system is designed to promote competitionwhile still allowing local authorities to promotesocial values such as preserving the environment.Critics argue, however, that it leaves consider-able discretion in the hands of both the Ministryof International Trade and Industry (MITI)and the local governments, and that in practice itmay actually constrain competition and increaseregulation.

The Japanese government has sustained acommitment to deregulation from 1980 throughto the present, yet progress has come slowly dueto substantial political resistance from bureau-crats, regulated industries, trade unions and con-sumers.

See also: airline industry; competition; consumermovement; liberalization of financial markets;Ministry of Finance; retail industry

Further reading

Carlile, L. and Tilton, M. (eds) (1998) Is Japan ReallyChanging Its Ways? Regulatory Reform and the JapaneseEconomy, Washington, DC: Brookings Institution.

Management and Coordination Agency (various) Kiseikanwa 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 Los-ers in Japan’s Political Economy and the Ties thatBind Them,” Social Science Japan Journal 2: 3–21.

STEVEN VOGEL

DEVELOPMENT BANK OF JAPANsee Japan Development Bank

discounters

The term discounters relates to retailers who, bydeveloping innovative distribution channels, sellcommodities at a considerably lower price thanthe standard market price. In Japan, there have

been several types of novel retailers that weredesignated as discounters, one after another.

The first renowned discounter in the post-Sec-ond World War period is Daiei, which openedits first store in 1957. Its founder, Isao Nakauchi,was firmly opposed to the then prevailing pricemaintenance practices that the leading produc-ers administered. He deployed a large numberof chain stores that provided strong buying powerin regard to the existing wholesalers, and em-ployed such innovative methods as bulk purchaseby cash and direct purchase on site of produc-tion, in order to bypass the traditional distribu-tion system and offer lower prices to customers.

As consumer needs increased rapidly through-out the postwar period of economic growth, anumber of new entrepreneurs followed Nakauchiwith the chain store strategy consisting of deploy-ment of standardized stores, self-selection of mer-chandise in contrast to the traditional sales byclerks, and lower prices. They were generallycalled “super” or “supermarket” despite the factthat the Japanese outlets were much smaller thanthe US supermarkets and located, at this initialstage, in commercial districts rather than in sub-urban areas, and should fall into the category ofsuperstores.

After the 1970s, a distinction began to be madebetween general merchandizing stores (GMS)and supermarkets (SM). GMS pursued a strat-egy of establishing branch stores nationwide,while SM, essentially focusing on fresh products(fish, meat, and vegetables), tended to focus onregional expansion. By the late 1980s, GMS andSM chains had become the dominant formswithin the retail industry. At this time, however,a new type of discounter began to challenge GMSand SM, especially in the field of liquor retailing.The liquor tax law in Japan stipulates a numberof restrictions in regard to the distribution of al-coholic beverages. These restrictions functionedto sustain a complex and lengthy channel com-posed of the producers, tonya, and retailers. Thenew discounters developed various methods toskip intermediary stages that allowed them tolower their prices.

In the 1990s, as a result of the US-Japan Struc-tural Talks that opened the Japanese retail indus-try to foreign operators, some American andEuropean leading retailers began to enter the

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country. Among them, Toys R Us, which openedits first store in Japan in 1991, is known to be thefirst example of a “category killer.” Category kill-ers are retailers with a chain network specializingin a specific type of commodity at discount prices.The term refers to the fact that this type of re-tailer aims to capture a large share of a particularcategory of commodities from traditional depart-ment stores and GMS. The term was then ap-plied, in parallel with the term “discounters,” tothe roadside low-price chain stores specializingin such fields as home electronic appliances, men’sclothing, shoes, and optical wares, and also tocamera discounters located in high-traffic areasclose to large railroad terminals.

Throughout the 1990s, this new type of dis-counter spread to other genres of commodities.Several power centers, composed of a handful ofcategory killer stores along with a GSM or SM,were developed following the US model of Kmartand Wal-Mart. Toward the end of the decade,however, this second generation of discountersgradually lost novelty.

Since the turn of the century a new form ofdiscounter has emerged, under the designationof the SPA (Specialty store retailer of Private La-bel Apparel) or SPA type retailer. UNIQLO, thebrand and store name of First Retailing Com-pany is generally regarded as a pioneer of thistype of discounting. The company designs all theclothes and related products in-house, orders pro-duction from overseas factories (especially China),and sells them exclusively in its own stores. Theterm SPA is also used to designate other com-modity retailers that provide original products atlow price, relying on overseas production inSoutheast Asia and China. An example is Daiso,a retailer that sells a variety of commodities at auniform price of ¥100.

See also: foreign companies in Japan; Large Re-tail Store Law; trade negotiations

SHINTARO MOGI

distribution system

Compared to its counterparts in the West, Japan’sdistribution system is complicated and difficultto navigate. Multiple vertical layers and multiple

product or segment channels characterize thesystem. Compared with distribution systems inEurope or North America, it is often consideredhighly inefficient. However several unique geo-graphic, physical and social aspects of the Japa-nese market help to explain how the systemdeveloped and why it is so complex. In the latterhalf of the twentieth century and with increasingacceleration, significant changes have been tak-ing place within the system. The most notewor-thy of these are the appearance of discount retailoutlets that have effectively bypassed several lay-ers of the distribution system and the growingpresence of foreign firms, a number of which haveintroduced innovative or more sophisticated ap-proaches to distribution management.

With a population of over 125 million peopleliving in an area slightly smaller than Sweden,the Japanese market is a large, but relatively com-pact one. Population density in the major urbanareas of Kanto and Kansai ranks among the high-est in the world. When combined with the his-torical development of the Japanese economy theresult is a complex distribution system. Most ofthe roughly 6 million business enterprises in Ja-pan are small. This is particularly the case in theretail sector, where over 90 percent of retail out-lets employ 10 persons or less, yet account fornearly 80 percent of all retail sales. These smallretail outlets fall into one of four categories: (1)specialty shops or boutiques marketing nicheproducts to a narrow market segment; (2) singlebrand stores or franchises with a very close rela-tionship to a single manufacturer; (3) conveniencestores, such as 7–11, Circle K or Family Mart;and (4) traditional “mom and pop” stores serv-ing established neighborhoods. Many outlets arelocated away from major thoroughfares and lackthe capacity to carry inventory North American-style shopping centers or European-style hyper-markets are becoming somewhat more common.The density of the population and the high costof land, however, have limited their growth.

Historical development

Several historical developments have influencedthe structure of the distribution system. In theTokugawa period (1603–1854), during which

116 distribution system

much of the commercial infrastructure developed,wholesalers and merchants established a craft-likeorientation toward their distribution activities.Wholesalers would carry a specific product andservice a defined geographical area. For example,a pickle wholesaler in the Asakusa area of Tokyowould handle only pickled or cured products anddeliver them only to shops in the several kilome-ter area surrounding Asakusa Shrine. Similarly awagashi—tea cakes and candies—wholesaler woulddistribute only these goods, but within the samegeographic region. Over time, wholesalers devel-oped close relationships with each shop owner,leading to the establishment of highly individu-alized arrangements with regard to matters suchas product returns and sales financing.

In the immediate post-Second World War erathe emergence of large comprehensive consumerelectronics and household appliance companiesled to the establishment of brand or companystores. Companies such as Hitachi, Toshiba andMatsushita signed exclusive dealership contractswith pre-existing shops as well as helped financethe opening of new ones. In exchange for carry-ing only the products of a single company thesestores were allowed to sell the full range of prod-ucts manufactured by that company. For exam-ple, a National (the domestic name for Matsushitaproducts) dealer would sell everything from wash-ing machines, refrigerators and air conditionersto home stereo systems, clock radios, televisionsand VCRs to electric shavers, lamps, light bulbsand batteries. The manufacturers benefited fromthis relationship because it allowed them to cre-ate closed distribution channels, thereby enablingthe removal of layers and associated margin costs.Closed channels also made it possible for largefirms to maintain price controls on products, andto carefully monitor competition among brandretailers.

In the 1980s, with the advent of a maturingmarket, discount houses began to surface in ma-jor metropolitan areas. Although major manufac-turers tried to prevent discounters from gainingaccess to their products, as consumer awarenessgrew this became increasingly difficult. In theearly 1990s the US-based Toys R Us entered theJapanese market, further solidifying the positionof discounters.

At this same time changes in consumer pur-

chasing habits and tastes, combined with height-ened competition, led to economic distress amongmany wholesalers in traditional product and mar-ket channels. Not surprisingly many strugglingwholesalers attempted to forestall bankruptcy byexpanding into new geographic areas or by try-ing to take on new products.

The early 1980s also saw the emergence oftelevision shopping and catalog sales, which fur-ther eroded the margins of struggling distribu-tors, as growth in consumer purchases from retailoutlets flattened. This was followed in the 1990sby the growth of the Internet and the emergenceof e-commerce websites.

System structure

The postwar Japanese distribution systemevolved into a multi-layer, multi-channel system.In the mid-1980s the average distribution chan-nel had four layers. A manufacturer would handoff product to a primary wholesaler capable ofdistributing it nationwide or, at a minimum, toseveral major regions within Japan. The primarywholesaler would then transfer the product to asecondary wholesaler, who would cover a regionof smaller geographic area. The secondary whole-saler would deliver the product to a tertiarywholesaler—often called a tonya—who would thendeliver the product to a retail outlet. In short, theaverage product was handled four times, entail-ing four margins or commissions. By contrast,the average length of distribution channel in theUSA was 1.5 layers and in France it was 1.25layers. Each additional layer incurs an added cost,thereby making the distribution of product in Ja-pan significantly more expensive for both domes-tic and foreign firms.

The Japanese system is also multi-channel.There are separate channels for separate prod-ucts. Pet food is delivered through one channel,dry goods through another, soft drinks througha third and so forth. An average 2,000 meter2supermarket in Japan may be serviced by morethan thirty different wholesalers. Interestingly asingle channel wholesaler would not be limitedto a particular brand of product. So, for exam-ple, a personal hygiene products wholesalerwould deliver to the same store competing brandsof toothpaste, soap, shampoo and deodorant.

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To some extent, the multiple layers and chan-nels represent a historical artifact. However, ge-ography also plays a role. Because most retailoutlets are small, the tertiary wholesaler, or tonya,often acts as a warehouse for the retailer, holdinginventory and delivering it to the store on an “asneeded” basis. Additionally the tonya often pro-vides a financial service. Rather than the custom-ary “thirty day due” payment arrangementscommon in North America and Europe, tonya usepromissory notes to extend credit on deliveriesup to 120 days. Payment arrangements are oftenindividualized, such that a tonya may have a dif-ferent billing scheme for each retail outlet to whichhe delivers. Additionally return of unsold goodsis an established practice, requiring the tonya, aswell as secondary and primary wholesalers tomove goods backwards through the channel.

Not surprisingly the distribution system hasoften been targeted by foreign firms as a non-tariff barrier to their doing business in Japan. Withestablished, long-term relationships to both re-tail outlets and manufacturers, wholesalers werehistorically reluctant to take on the products offoreign manufacturers. To handle foreign prod-ucts was to run the risk of angering domesticmanufacturers, who might in turn refuse the dis-tribution of their products. Nor were many for-eign firms adept at working with wholesalers interms of financing arrangements or liberal re-turns.

The influence of foreign firms

Many significant changes in the distribution sys-tem have been brought about, either directly orindirectly by foreign firms seeking to enter theJapanese market. There are several notable ex-amples. When Coca-Cola entered the Japanesemarket in 1960, it sought to control its market-ing channels, but required retailers to pay on thestandard “thirty day due” terms it was accus-tomed to in the USA. Initial resistance was re-placed by acceptance, as word of product salesspread among cooperating retailers. Although notwidespread, this payment practice has continuedto spread among other manufacturers and intoother channels.

In a similar vein, L’Oreal and Wella introducedinnovations into the beauty parlor and barber-

shop distribution channel by encouraging the re-tail sale of their hair care products. Formerlywholesalers to this channel had delivered onlylarge, institutional products for use by the bar-bers and beauticians. These two European firmsshowed wholesalers how they could increase theirsales by also distributing customer-use size prod-uct for additional point-of-purchase sales. Again,over time this innovation spread to other prod-ucts and to other channels.

A Japanese company through its involvementwith a US convenience store chain, introducedone of the most significant changes to the distri-bution system. 7–11 Japan was a US-licensed op-eration owned by the Ito-Yokado Group. In the1970s it began opening 7–11s around the coun-try 7–11 pioneered the convenience store in Ja-pan, competing directly against “mom and pop”neighborhood stores. By staying open for longerhours, carrying a wider variety of products andby restocking shelves more frequently 7–11 ef-fectively overwhelmed its more traditional coun-terparts. In the mid-1980s it borrowed Toyota’sjust-in-time concept and introduced a point-of-sale (POS) inventory that allowed them to tracksales on an hourly basis. The innovation in dis-tribution came about when the company beganusing its POS data to make more frequent andtargeted deliveries. A typical, urban 7–11 receiveddeliveries twice a day once before the morningrush hours and once before the evening rush. Asa result of its ability to keep high demand prod-uct fresh and on the shelf, by 1990 7–11 Japanhad grown to become the fifth largest retail op-eration in the world. Following its lead, other con-venience stores, grocery stores and supermarketshave attempted similar approaches in managingtheir distribution systems.

Although other discount houses had alreadyestablished themselves, Toys R Us entered Japanas the first “category killer,” that is, a large retailstore that sells only one category of merchandiseand often dominates competition. Its entrancewas significant because Toys R Us competes onthe basis of price, relying on direct purchases frommanufacturers and the attendant cost savingsfrom not having to pay wholesaler commissions.Discount houses adopt a similar approach, butgenerally carry a much wider range of products.By contrast, and of particular significance for the

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distribution system in Japan, Toys R Us soughtto control only a single market segment. Its con-sequent overwhelming success had a devastatingeffect not only on toy retailers, but on the toydistribution channel. As with other distributioninnovations, category killers in other market seg-ments have moved into Japan.

The future of the distribution system

It is clear the innovations over the latter half ofthe twentieth century will continue to reshapethe distribution system in the twenty-first cen-tury Heightened competition is removing layersand blurring distinctions among channels. More-over, the growth of catalog and on-line shoppingwill further erode the power and role of the whole-salers and the traditional distribution system.Nevertheless, the historical constraints of smalloutlets, limited inventory capacity long-term re-lationships and specialized arrangements suggestthat the Japanese distribution system will con-tinue to retain greater complexity and appearmore inefficient than its Western counterparts.

Further reading

Dodwell Marketing Consultants (2000) Retail Distribu-tion in Japan, Tokyo.

ALLAN BIRD

Dodge, Joseph M.

Dodge was a Detroit banker who, as financialadvisor to the American occupation of Japanfrom 1949–52, designed policies to end Japan’spostwar hyperinflation, re-establish interna-tional trade, and restore the market mechanismin the Japanese economy Dodge’s severe auster-ity program, known as the “Dodge Line,” dic-tated the balancing of the national budget, thereform of US aid policies, the reduction of gov-ernment subsidies and direct economic controls,and the setting of a single yen-dollar exchangerate.

Dodge’s deflationary policies were extremelyunpopular and caused widespread fears of finan-cial collapse before Korean War procurementsbuoyed Japanese industry in 1950–1. Neverthe-

less, the Dodge Line was crucial in stabilizing thevolatile postwar economy and restoring it to afirm peacetime footing. The financial disciplinewhich Dodge imposed would continue to char-acterize Japanese fiscal policy until the 1960s.

Further reading

Tsutsui, W.M. (1988) Banking Policy in Japan: AmericanEfforts at Reform During the Occupation, London:Routledge.

WILLIAM M.TSUTSUI

Dokoh, Toshio

Toshio Dokoh (1896–1988) was one of the lead-ing Japanese business leaders responsible for re-vitalizing Japanese industry in the aftermath ofthe Second World War and for reforming theJapanese government and public corporations inthe 1980s. Born in Okayama Prefecture in 1896,he graduated from the Tokyo Technical HigherSchool (subsequently named the Tokyo Instituteof Technology) in 1920. Upon graduation hejoined the Ishikawajima Shipyard Company(which was later renamed Ishikawajims HeavyIndustries). He ascended to the presidency of thecompany in 1950, and held that position for tenyears. During his tenure as president, he reposi-tioned the company to take advantage of US pro-curement in Japan in support of US militaryinvolvement in the Korean War. During the lat-ter part of his presidency he engineered themerger that created Ishikawajima-Harima HeavyIndustries (IHI), and then became president ofthe merged company.

In 1965 Dokoh took over the reins of Toshibaand, as he had done at IHI, led another com-pany to growth and profits. In 1972 he movedfrom president to chairman, retiring from thatposition in 1976. From 1974 to 1980 he alsoserved as president of Keidanren, the Federationof Economic Organizations, one of the four mostimportant business associations in Japan.

In 1981, Prime Minister Yasuhiro Nakasoneasked Dokoh to head the Second Ad Hoc Com-mission on Administrative Reform. (The FirstAd Hoc Commission on Administrative Reform

Dokoh, Toshio 119

operated from 1962 to 1964.) Though the com-mission reviewed a broad range of governmentaladministrative issues, the most significant re-lated to what should be done with Japan’s threelargest public corporations: Japan NationalRailways (JNR), Nippon Telegraph and Tel-ephone (NTT) and Japan Tobacco Corporation(JT). Under Dokoh’s leadership, the commis-sion recommended the privatization of all three,an action that began in 1983. Dokoh passedaway in Tokyo in 1988.

ALLAN BIRD

dollar shock

The dollar shock in 1971, generally called the“Nixon shock” in Japan, was caused by PresidentNixon’s announcement of his New EconomicPolicy that led to the collapse of the BrettonWoods system. Although the shock waves wentthroughout the world, Japan received the great-est shock. The reason was that the policy wasviewed in Japan as an attempt to force Japan torevalue the fixed ¥360:$1 exchange rate estab-lished in 1949 that had been regarded as one ofthe institutional frameworks of the high-speedgrowth. In fact, the Nixon shock became a majorturning point of the Japanese economy

In order to cope with the dollar crisis, thepolicy included the suspension of convertibilityof dollar into gold, an across-the-board 10 per-cent surcharge on imports, and a 10 percent re-duction in foreign aid expenditure. The goals ofthe policy were: the suspension of dollar’s con-vertibility into gold would initiate a multilateralcurrency adjustment; the import surcharge wouldforce other countries to revalue their currencies(after which it would be lifted); the costs of main-taining the world order such as foreign aid anddefense expenditures should be shared moreproperly among major countries. Ultimately thepolicy sought to reduce the United States’ bal-ance of trade deficits, the situation that had causedthe dollar crisis.

In his speech announcing the New EconomicPolicy on August 15, 1971, President Nixonstated: “Others should bear ‘their fair share ofthe burden of defending freedom around theworld’ and agree to exchange-rate changes that

would enable ‘major nations to compete as equals.’There is no longer any need for the United Statesto compete with one hand tied behind her back.”Three concessions were demanded of Japan: ex-change rate adjustment (a large-scale revaluationof the yen), liberalization of domestic markets,and burden sharing of American global policycosts such as defense and ODA (Official Devel-opment Assistance).

In 1968, Japan became the second largesteconomy in the free world and its rapid increasein exports accelerated the expansion of the UnitedStates foreign trade deficit that deepened the dol-lar crisis,—in other words, the international mon-etary crisis—and led to the Nixon shock. As aresult, the USA demanded that Japan share themaintenance costs of world order in a broadsense. However, Japan’s response was delayed.With regard to Japan’s delayed response, Angel(1991) pointed out, “Lack of response was inter-preted in the United States and Europe as evi-dence of Japan’s unwillingness to assume hershare of the costs of maintaining the internationaleconomic system.”

Nakamura (1981) notes that at that time therewere misunderstandings between Japan and therest of the world over Japan’s international posi-tion and its economic power, namely the gradu-ally widening gap between the Japaneseperception of their own economy as a small, back-ward latecomer, and its evaluation by the inter-national community as an emerging economicpower. This perception gap was an underlyingsource of Japan’s delayed response and interna-tional economic friction as symbolized by theNixon shock.

Having received the Nixon shock, the Japa-nese government was forced to respond to for-eign pressure, especially American demands.Under the Smithsonian Agreement of December1971, Japan accepted the upward revaluation ofthe yen from ¥360 to ¥308, a 16.88 percent ap-preciation against the dollar. The Japanese gov-ernment’s statement on the Agreement noted“there was an ‘end to the postwar system’ in thebackground of implementation of the multilat-eral currency adjustment,” and “the time has ar-rived when we should, domestically furtherincrease welfare and, abroad, make still greatercontributions to international society”

120 dollar shock

.

Japan also partly accepted liberalization of do-mestic markets, but showed a negative attitudetoward sharing the costs of defense against theso-called communist world because of constitu-tional constraints, strong domestic opposition,and Asian neighbors’ memories of Japanese im-perialism in the prewar and wartime period. Morepositive actions by Japan included an expansion-ary fiscal policy to stimulate domestic demandand reduce the trade surplus. This led to a rapidincrease in government spending on public worksand social welfare.

At that time, the Japanese government hadjust confronted a three-pronged problem: for-eign pressure, as noted above; a domestic reces-sion that implied the end of high economicgrowth; and relatively meager social welfareprovision compared to that of other major coun-tries. In order to deal with these three problemssimultaneously the government adopted a sys-tem of policies centered on expansionary fiscalpolicy which was supposed to expand social wel-fare and public works, recover the economyfrom the recession, and reduce the trade surplus.It was a plan that attempted a switch in growthpattern from export-led growth to fiscal policy-led growth.

After the Nixon shock, other major countriesopenly demanded that Japan accept the burdensharing of maintenance costs of the world orderand Japan began to virtually share the burden.The “small country hypothesis” no longer held.In this period, however, an international discre-tionary coordination of macroeconomic policy tomaintain the world economy had not yet ap-peared. Consequently it is reasonable to arguethat the Japanese response was an attempt at in-ternational monetary cooperation, in response tocriticism that Japan was responsible for the rapidincrease in trade surplus that was the cause ofthe international monetary crisis.

See also: income doubling plan

Further reading

Angel, R.C. (1991) Explaining Economic Policy Failure: Ja-pan in the 1969–1971 International Monetary Crisis, NewYork: Columbia University Press.

Higuchi, H. (1999) Zaisei Kokusaika Trends: SekaikeizaiNo Kozohenka to Nippon No Zaiseiseisaku (Fiscal Inter-nationalization: Structural Changes of the WorldEconomy and Japanese Fiscal Policy), Tokyo:Gakubunsha.

Kosai, Y. (1986) The Era of High-Speed Growth: Notes onthe Postwar Japanese Economy, trans. J.Kaminski, To-kyo: University of Tokyo Press.

Nakamura, T. (1981) The Postwar Japanese Economy: ItsDevelopment and Structure, trans. J.Kaminski, Tokyo:University of Tokyo Press.

Uchino, T. (1978) Japan’s Postwar Economy: An Insider’sView of its History and its Future, trans. M.A.Harbison,Tokyo: Kodansha International.

HITOSHI HIGUGHI

Dore, Ronald

Ronald Dore was a British sociologist, author ofmany highly influential books on Japan, includ-ing City Life in Japan (1958), Land Reform in Japan(1959), and Education in Tokugawa Japan (1964).This historical and social research provided astrong grounding for his influential compara-tive study of work organization and industrialrelations in a Japanese and a British manufac-turing company, British Factory Japanese Factory.His model of the Japanese enterprise as com-munity and his exposition of late developmentas an explanation for the differences betweenthe Japanese and British patterns were very in-fluential. His later work on relational contract-ing in the Japanese textile industry (1986) andhis writings on the importance of the Japanesemodel of capitalism (1987) have made him themost influential European sociologist of Japa-nese business.

Further reading

Dore, R.P. (1973) British Factory Japanese Factory, Berke-ley CA: University of California Press.

——(1986) Flexible Rigidities, Stanford, CA: StanfordUniversity Press.

——(1987) Taking Japan Seriously, London: Athlone Press.

ELEANOR D.WESTNEY

Dore, Ronald 121

dual structure theory

The dual structure economy is generally under-stood as a national economy that has both mod-ern capitalistic sectors and traditionalnon-capitalistic sectors at the same time. The termwas first introduced by Hiromi Arisawa in 1957in an Economic White Paper and was noted asone of the distinctive characteristics of the Japa-nese economic system. It was also believed thateffective economic growth could not take placewithin such an economic structure. Indeed, in aWhite Paper published the previous year, thegovernment declared, “The Japanese economyhas passed its recovery process; the postwar pe-riod has ended.” Elimination of the dual struc-ture came to be viewed as the most critical issuein modernizing the economy through rapidgrowth.

The 1957 White Paper argues that the mostobvious distillation of the dual structure couldbe found in the specific structure of the labor mar-ket: large numbers of family members contin-ued to work as laborers in both agriculture andsmall industry/commerce. As a result, it was com-mon for labor relations to be non-existent or pre-modern in those sectors and for wage differentialsto be large and varied according to firm sizewithin the industry.

As far as the manufacturing sector was con-cerned, the exact wording of the White Paperreport referred to the dual economy as a “polari-zation between small industry and large indus-try” In 1957, large enterprises with more than300 employees accounted for 44 percent of totalmanufacturing shipment but just 27 percent ofemployment, while small enterprises with fewerthan 100 employees accounted for 39 percent ofshipment, but 42 percent of employment. Fur-thermore, comparing these numbers with thoseof the USA and Britain, Japan was characterizedby significantly larger numbers of small-and-me-dium sized enterprises and “mom and pop” busi-ness operations: 68 percent of all enterprises hadfewer than 200 employees and 34 per cent hadfewer than 20 employees. In the USA, the re-spective figures were 40 percent and 16 percent;in Britain they were 40 percent and 16 percent.

The data unquestionably confirm the presenceof a dual economic structure. Nor is there any

question that this structure developed over timefrom the Meiji era forward, largely as a result ofgovernment policies. However, there is contro-versy about what other factors contributed to itsdevelopment and how it can be eliminated.

The most popular theory espoused byMiyohei Shinohara, proposed that the most im-portant factors of the dual structure were thesplit labor market and the Japanese banking sys-tem that had favored large-scale industries. Aslarge-scale industries were able to invest hugeamounts in capital-intensive equipment, even inits overseas operations, with long-term loans atfavorable interest rates from both banks and thegovernment, it was able to earn high returnswith a relatively small number of laborers.Those who were not able to gain access to em-ployment, or who were eliminated from, thelarge-scale capitalistic sector had no other alter-native than to be absorbed into small and me-dium industry which offered lower income dueto shortages of capital.

The typical Japanese labor system character-ized by lifetime employment and a seniority sys-tem of wages has been adopted to a limited extentwithin large industry. Given this, Shinohara’s ex-planation seems rational and persuasive. How-ever, another school of thought challenges thisconclusion. Daikichi Ito argues that, because themonopoly power of large industry has so thor-oughly penetrated the economic system from topto bottom, there is really not a dual structure.Instead, the wage differentials of workers insmaller firms merely reflect the monopoly powerthat large firms hold over small firms, who areoften their subcontractors. Other critics note thatShinohara’s view, concentrating as it does mainlyon labor and capital markets, does not take intoconsideration product markets in which pricesare non-elastic in the monopolistic markets andvice versa.

While the positions were disputed by schol-ars, the government recognized the importanceof providing more support to the huge numberof small/medium industries that were very influ-ential to the national economy and the people’slife. Even before the first analysis in the 1957White Paper, the government had already estab-lished the National Finance Cooperation, a bankfor small and family businesses, in 1949. This

122 dual structure theory

was followed by the Finance Cooperation forSmall and Medium Enterprises in 1953, whendemocratization of the economy was in progressafter the Anti-Trust Law was introduced by GHQin 1947. Soon after the Income-Doubling Programwas started in 1961, the government enacted theMinor Enterprise Law in 1963. “Modernization”was the key word for small/medium industrypolicy in that period. The government announcedits intention to foster medium-sized enterprisesthat have both modern management and hightechnology.

Through the 1970s, the situation underwentmany changes. First, when an abundant laborforce abandoned the rural areas, wages rose evenin small manufacturing firms and wage differen-tials diminished as a result. Ohkawa demon-strated that it was at this point that Japan passedLewis’s Turning Point. Second, many modern

medium-sized enterprises emerged, and they wereable to overcome, by means of high technologyand skilled labor, the difficulties twice caused byoil crises. Although wage differentials still remain,as does the subcontracting system, it is difficultto argue that the dual structure still dominatesthe Japanese economy.

One opinion holds that a dual structure canbe seen as a temporary phenomenon in the capi-talistic development in latecomers. In fact, SouthKorea demonstrated a similar pattern in the 1970s,although the subcontracting system did not ex-ist. Instead, the South Korean government pro-moted policies aimed at encouraging “organiclinkages” to develop in the domestic economySimilar cases may be emerging in other develop-ing countries in Asia and Southeast Asia.

JO-SEOL KIM

dual structure theory 123

e-commerce

In the latter half of the 1990s, as Japan struggledto recover from the recession that followed thecollapse of the bubble economy e-commerce wasone of the few bright spots in the nation’s eco-nomic landscape. Although Japan still lagged be-hind other industrialized nations in the everydayapplication and use of information technology(IT), Internet use and e-commerce were expand-ing rapidly. At the same time, these were evolv-ing in somewhat different directions in Japan thanelsewhere, reflecting the nature of the country’sspecific business and regulatory environment.

In Japan, as in other countries, IT, Internetuse, and e-commerce have been and will continueto be marked by rapid and continuous change.This entry describes the state of e-commerce asit existed in Japan in the year 2000.

The development of the Internet in Japan

The Internet got off to a slow start in Japan, duein large part to excessive regulation on the partof the Japanese government. Japan’s first Internettransmissions were sent not by Japanese but byAmerican engineers working for US companieswhich had set up Internet services for expatri-ates working in Japan. During the early years ofthe Internet, the Japanese government placedhigher priority on maintaining its highly regu-lated telecommunications system than on promot-ing the development of the new technology.Japanese companies seeking to enter the Internetmarket were blocked by the difficulty of obtain-

ing the necessary licenses from the Ministry ofPosts and Telecommunications, and even whenlicenses were granted, the government allowedonly narrowly defined applications of the Internetand was not supportive of efforts to broaden itsusage.

An individual Japanese and a natural disasterare generally credited with reversing this situa-tion. Jura Murai, often referred to as the “godfa-ther of the Japanese Internet,” fought withgovernment officials over the right to bring theInternet into the country and, when faced withcontinuing opposition, went ahead on his own.In 1992, Murai and his colleagues created theInternet Initiative Japan (IIJ). IIJ’s Internet sys-tem violated the Ministry of Posts and Telecom-munications’ rigid regulations, but was faster andmore efficient than the government’s own sys-tem. Helped by the fact that Internet access andusage is by nature difficult to monitor, Murai’sefforts prevailed, and the government’s attemptsto monopolize the Japanese Internet ended. Afurther boost was given to Internet usage in theaftermath of the Kobe earthquake in 1995. At atime when other communications systems failedor were inadequate, Internet transmission servedas a vital means of sharing information, and thishelped convince government officials of the ben-efits of the new technology.

Although high access charges, the dominanceof English on the Web, and the slow spread ofpersonal computers for home use preventedInternet usage from growing as quickly as in somecountries, Internet use in Japan increased stead-ily beginning in the mid-1990s. In 1995 it jumped

E

by 41 percent, the highest rate of growth in theworld at that time. By the end of 1997, Japan had11.6 million Internet users and Japanese was thesecond-most commonly used language on the net.Japan’s Internet population continued to grow,reaching 16.9 million by the end of 1998 and 27million—21.4 percent of the population—by theend of 1999. It was projected that 77 million peo-ple—60 percent of the population—would be us-ers by the year 2005. In 1998 there were 1 millionJapanese web sites, the second highest numberin the world.

Internet access in Japan

One of the biggest drags on Internet use and thedevelopment of e-commerce in Japan was slowand expensive access. In 2000, most of Japan’sInternet users accessed the Web through the tele-phone network of Nippon Telegraph and Tele-phone Corporation (NTT), formerly agovernment monopoly This meant paying notonly Internet access fees to an Internet ServiceProvider (ISP) but also per-minute local telephonecharges, which NTT had not reduced for twenty-three years. With Internet fees averaging around$ 20 per month for thirty hours of access andlocal telephone charges adding up to $100 or morefor a heavy user, Internet use in Japan was quitecostly by international standards. On top of this,many of Japan’s small ISPs lacked the scale andresources needed to secure premium bandwidth,resulting in slow and poor connections. Fasterand cheaper Internet service was becoming avail-able, however, as ISPs were consolidating to se-cure better international connections andbroadband alternatives such as cable televisionand ADSL (asymmetric digital subscriber lines),which allow vast amounts of data, including mov-ing pictures and music, to travel through the netat very high speed, were starting to be offered.NTT was marketing a flat-rate ISDN (integratedservices digital network) service in Tokyo andOsaka that provided faster access than phonelines, while Sony had announced plans to build awireless network to provide low-cost, high-speedInternet access in large Japanese cities.

The Internet access mode that was growingat the greatest speed in Japan was wireless. In1999 NTT DoCoMo, Inc., the country’s largest

wireless phone company launched i-mode, anInternet connection service for mobile phones(keitai denwa). By May of 2000, i-mode and simi-lar services had 10 million subscribers and NTTDoCoMo had become Japan’s largest Internetservice provider. Hundreds of Web sites werebeing created for tiny cell phone screens to sup-port mobile e-commerce, or “m-commerce.” Theresponse rate to i-mode advertising was reportedto be five times higher than that for ordinary Webads.

The growth of e-commerce

The same type of hands-on approach that markedthe Japanese government’s early regulation of theInternet could be seen in its efforts to promote e-commerce, which by the late 1990s was seen as amajor driver of economic growth in the twenty-first century While the United States promotedIT through deregulation, Japan did the opposite:using government subsidies and intervention totry to push development of e-commerce and otherIT sectors. For example, in 1996 the US govern-ment amended the nation’s TelecommunicationsLaw to remove barriers between telecommuni-cations carriers and broadcasters in order to en-courage competition, reduce connection charges,and support the growth of e-commerce. At thesame time, the Japanese government set up theElectronic Commerce Promotion Council of Ja-pan, which together with MITI invested $476million to try to develop Japanese e-commercetechnology; by 2000 this project had producedlittle in the way of results.

While government efforts floundered, Japa-nese companies and consumers gradually em-braced e-commerce. According to a Ministry ofPosts and Telecommunications White Paper is-sued in 2000, Japan’s e-commerce market in 1999,including advertising, totaled more than $200 bil-lion. B2B (business-to-business) transactionsdominated, with consumer spending accountingfor only $3.2 billion. E-commerce was projectedto expand to $1.35 trillion per year by 2005, with$68 billion being spent on consumer goods. Theexplosive growth of cell phone-based Internet usewas expected to stimulate sharp growth in theB2C (business-to-consumer) sector. In 1999

e-commerce 125

almost two-thirds of Japanese Internet users re-ported making purchases online; the major prod-ucts and services being bought were consumerelectronics and personal computers, automobiles,travel, office supplies, books, and software. By2000, Japan had over 25,000 virtual shops, withnew e-businesses being added at a rate of 500 to800 per month. Online advertising expenditurestotaled $68 million in 1998 but were expected toreach $1.26 billion by 2003.

Despite these figures, many industries had notyet been able to generate significant online sales.One reason for this was that Japanese consum-ers did not feel comfortable using credit cardsonline. This led to the development of alterna-tive payment methods, including cash at physi-cal stores for goods ordered online. Conveniencestores, which are found everywhere in Japan, werealso becoming a key site for e-commerce transac-tions. The ‘Loppi’ system, developed by IBM andinstalled in convenience stores, allowed shoppersto order thousands of items online—from concerttickets to software—far more than could bestocked in an actual store. 7–11 Japan was in-stalling terminals in its convenience stores forthose who did not have Internet access at homeand was teaming up with NEC, Sony JapanTravel Bureau and other leading Japanese firmsto set up an e-commerce market which integratedthe convenience of online shopping with in-storepayments and merchandise pickup capabilities.

One factor which slowed the growth of e-com-merce in Japan was the lack of a national, com-prehensive IT policy like that of Singapore, whichin 1997 built a high-bandwidth telecommunica-tions network to connect the country to the restof the world, and Malaysia, which promoted e-commerce by enacting “cyber laws” that recog-nize electronic signatures and protect privacy.Another issue was fear that e-commerce couldcause job losses, by cutting out the middlemen inJapan’s traditional multi-tiered distribution sys-tem. The Japanese preference for face-to-face con-tact with suppliers and customers also tended tohamper e-commerce.

Other factors were working in e-commerce’sfavor, however. Women, who made up 40 per-cent of Japan’s Internet users, were being seen asa major engine for future e-commerce growth;female Web users were more willing to shop

online than men, and appreciated the convenienceof use, access to foreign companies, and new en-tertainment services offered by the Internet. Theenvironment for creating new e-businesses wasalso improving, with the launching of the Moth-ers and NASDAQ Japan stock markets for start-ups and the financing and incubation of newe-commerce ventures by companies such as theventure capitalist and Internet holding companySoftbank, Inc. Numerous Internet data centers—facilities where corporate customers can locatetheir servers and connect them to the Internetand which provide security from hackers andnatural disasters like earthquakes—were being setup in Japan. And every day Japan’s business presscarried announcements of new e-commerce ini-tiatives: by companies large and small, old andnew, and in areas from banking, computers, andentertainment to kimonos, food, and online edu-cation.

Elements of both careful, hands-on planning—characteristic of the traditional Japanese approachto business—and the more freewheeling, sponta-neous nature of dot.com entrepreneurship in Cali-fornia’s Silicon Valley could be seen in the variouse-commerce start-up communities that wereemerging in Japan. Representative of the formerwas Kyoto’s highly organized Kyoto ResearchPark (KRP). Established by Osaka Gas Corpo-ration, KRP provided space, service, and supportfor Internet start-ups in return for stock, and hadbuilt a reputation as one of Japan’s top incuba-tors. At the other end of the spectrum was theBit Valley Association and organic start-up com-munity of Tokyo’s Shibuya district. The Bit Val-ley Association was started in 1999 by two TokyoInternet pioneers as a weekly meeting/party heldin a Shibuya cafe. It soon attracted thousands ofparticipants and inspired many people, includ-ing salaried workers from large established firms,to jump into Internet businesses and establish e-commerce start-up funds.

Given the nation’s history of success in busi-ness and the eagerness of Japanese to purchaseand try out new technologies, often available ear-lier in Japan than in other countries thanks to theleadership position enjoyed by major Japanesetechnology firms, it seemed certain that Japanwould remain at the forefront of e-commerce wellinto the twenty-first century.

126 e-commerce

Further reading

Coates, K. and Tiessen, J.H. (2000) Canadian Firms, Elec-tronic Commerce and the Japanese Market, Toronto: TheCanada-Japan Trade Council.

TIM CRAIG

economic crisis in Asia

In the early 1980s the Japanese economy wasbooming. However, the economic bubble thenburst, leading to an economic crisis in Japan thatreverberated throughout Asia. Japan’s productivecapacity began to exceed demand and a recur-ring trade surplus developed. The Japanese gov-ernment was forced to adopt policies aimed atboosting internal demand and restraining produc-tion. Mandatory cutbacks in rice acreage wereimposed, and voluntary restraints were appliedto exports. The bursting of the bubble economyshows that supply and demand cannot be bal-anced by relying on a bureaucratic-led drive tostimulate domestic demand and keep theeconomy going. GDP growth began to decreasefrom 6.2 percent in 1988 to 4.3 percent in 1991and -1.1 percent in 1992. There was also a longslump in the stock market beginning in 1990 andcontinuing for several years. Deflation (defure inJapanese) led to a decrease in consumer pricesand a price revolution, kakaku hakai, that came tobe known as Heisei Recession. Declining corpo-rate profits and adverse business conditions weredue in part to the appreciating yen. This wasalso a time of lowering real estate prices and lowinterest rates.

Job offers also decreased in Japan, althoughunemployment remained unchanged at less than3 percent for many years. The ratio of job offersto job seekers was 1.02 in 1988 and 0.76 in 1993.This was a recession without layoffs. Between1992 and 1994, 8.5 percent of Japan’s compa-nies with 1,000 or more employees cut an aver-age of 130 new jobs. Between 1992 and 1995,manufacturing employment decreased by 8 per-cent. Companies said that this was accomplishedby 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 (4percent).

In 1990, the Nikkei Index (the Japanese stockmarket) went from a high of 38,915 to a low of19,781, a drop of 49 percent. It had not beenbelow 20,000 since 1987. Large companies’ shareprices 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 per-cent), while banks and real estate firms were evenharder hit (Mitsubishi Estate Co. fell by 63.7 per-cent, Sumitomo Bank by 56.1 percent, andDaiichi Kangyo Bank by 46.5 percent). Thisfirst occurred in isolation, but over time the en-tire economy of Japan and then the economy ofthe entire Asian region was affected. Minister ofFinance Hashimoto closed the Tokyo Stock Ex-change for a day and announced a market-res-cue plan. Japanese real estate firms began to selltheir holdings in the United States because Japa-nese banks were nervous and increased interestrates. This affected not just the USA and Europe,but the rest of Asia as well.

Many economists hold that deregulation is keyfor economic recovery The Japanese governmentmust restructure the economy stimulate demand,and reform the political system. Japanese compa-nies must upgrade their operations and lowertheir production costs. Prime Minister MorihiroHosokawa’s economic policies were not plannedin advance, but developed as a result of the eco-nomic crisis. Called “Hosonomics,” this policyplaced an emphasis on small government, deregu-lation, consumerism, deficit spending, and busi-ness-oriented government policies.

In 1996, according to a study by Dentsu Ad-vertising, 34.5 percent of Japanese consumers be-lieved that the economy was on course to recover.However, consumers wanted lower prices, andwere willing to accept “good enough” qualityrather than “best quality.” In other words, theywere still cautious about spending money In 1997,leisure businesses such as theme parks and de-partment stores were still showing large losses.By the end of that year, the economic problemsin Japan were even worse.

The Japanese recession may have positive im-plications for small and medium enterprises(SMEs) and the service industry (see small andmedium-sized firms). Some things that small

economic crisis in Asia 127

businesses could not do during the 1980s couldbe done during the recession because of lowerreal estate prices and lower interest rates. Laborand other resources were also now available andaffordable. However, the SMEs were hard hit bythe crisis and are still negative about an economicrecovery.

To decrease expenses, temporary work andemployment of women on a part-time basis is in-creasing. To decrease production costs, Japanesecompanies moved manufacturing operationsoverseas to the rest of Asia, which was also hit bythe economic crisis. This allowed Japanese firmsto import lower cost products. Japanese real es-tate firms began selling off overseas holdings. Thistoo affected not only the United States and Eu-rope but also the rest of Asia.

In 1997, Japan was still in a recession and thecurrency crisis began in Asia. There was aslowdown in growth for all ASEAN countries in1997–98. The ASEAN four—Thailand, Indone-sia, Malaysia and the Philippines—were at thecenter of the crisis but other Asian countries werealso hard hit including Korea, Taiwan, Singapore,Hong Kong and China. Hong Kong had its worsteconomic crisis since the Second World War. TheHong Kong stock market lost more than 80 per-cent of its value in one year, and real estate pricesplunged. Hundreds of businesses went bankruptand unemployment doubled to greater than 4 per-cent (a fifteen-year high).

In all of Asia, wages were hit by the crisis.The devaluation of the Thai baht caused work-ers’ monthly wages to fall from US$164 in June1997 to $ 90 in July 1997. In Indonesia and Ma-laysia, wages fell by about half. Currency devalu-ation led to a 30–50 percent decrease inautomobile prices. In order to try to prevent arecession, many governments raised taxes andincreased prices on government-controlled indus-tries and goods, such as electricity and gas. In1998, the Korean government increased fares onairlines, buses and railways. The Malaysian gov-ernment increased prices of sugar, flour, milk andother government-controlled items. However, therecession continued. Companies in Thailand, Ma-laysia, Korea, and elsewhere in Asia laid off em-ployees. Many businesses shut down operationsdue to decreased demand and consumption inthe region.

Japanese firms were hit hard by the crisis inthe region. The cost of imported raw materialsrose, while demand for finished products de-creased. Many companies put expansion planson hold. The Japanese government supplied fi-nancial aid, primarily through the IMF, to assistthe countries in crisis.

By 2000, the economies of the region had fi-nally begun to recover. The ASEAN countriesand Korea showed growth in their gross domes-tic products in 1999. The consensus is that theAsian economy is on the mend, but appropriategovernment policies are needed to reinforce in-frastructure and create jobs in order to keepgrowth on track.

See also: business ethics; Heisei boom

TERRI R.LITUCHY

economic growth

The postwar Japanese economy attained high growth.Annual growth rates of gross domestic product onaverage for the periods of 1955–60, 1960–65 and1965–70 were 8.9 percent, 9.0 percent and 10.9 per-cent respectively These rates declined somewhat to4.4 percent and 4.1 percent in the 1970s and 1980s.However, in the 1990s (1990–97), the economyslowed to 1.6 percent. The sections below considerthe features and fundamental factors underlying thehigh growth periods in light of several theoretical per-spectives and then discuss problems that the Japaneseeconomy faces

Features and theoretical background of higheconomic growth in Japan

The high growth of the Japanese economy ac-companied rapid changes in industrial structure.In particular, industries such as metal, machin-ery and chemicals, grew dramatically Theseheavy and chemical industries comprised 20 per-cent of Japanese total product of manufacturingindustries in 1955, but 75 percent in 1990. Themachinery industry now comprises the largestshare of Japanese exports. In the process ofindustrializa tion, a rapid concentration of thepopulation in urban areas has been observed. Atpresent the two largest metropolitan areas, To-kyo and Osaka, account for nearly half of thetotal population in Japan.

128 economic growth

Neoclassical economic growth theories explainthe processes of capital accumulation and eco-nomic growth based on the saving behavior ofhouseholds and the investment behavior of com-panies. The smaller the amount of installed equip-ment, the higher the return on investment for acompany. Thus, aggressive investment in equip-ment is observed in the earlier stages of economicgrowth, and this lifts interest rates in the capitalmarket. In contrast, households increase futureincome by consuming less and saving more wheninterest rates are high. Large savings by house-holds finance large investments in equipment. Inthis way a higher economic growth rate is at-tained. As capital accumulates and income in-creases, returns on investment fall. Investmentand saving decline and consumption increases.The process of economic growth is thus com-pleted.

Traditional growth models, however, cannotfully explain the cases of postwar Japan and otherAsian economies in recent years. Traditionalgrowth models predict higher growth rates in aneconomy with lower income levels. Hence, thedifference in per capita income among economiesshould converge in the long run. In reality how-ever, the difference has been diverging rather thanconverging. To explain this phenomenon, two fac-tors have been explicitly introduced into new eco-nomic growth models.

Firstly focus has been placed on capital goodsother than equipment. The accumulation of hu-man capital, which is acquired through educa-tional investment, plays a particularly crucial rolein economic growth. Differences in economicgrowth rates can be explained to some extent bythis factor.

Secondly scale economies have been explic-itly introduced into new growth theories. Scale iseffective in heavy and chemical industries. Inother words, the size of an industry has a posi-tive external effect on the productivity of the com-panies within that industry; the larger the scaleof the industry the more productivity increases.This characteristic is opposite to the diminishingreturns that are assumed in traditional economicgrowth theories. To establish such industries, ahuge investment in equipment is necessary in theinitial stages.

There are two stable equilibriums in an

economy where scale merits operate: an equilib-rium in which no investments are made and in-come levels remain low; and an equilibrium inwhich industries with scale economies are suc-cessfully established and high income levels at-tained. The former is called a “poverty trap.” Inthe latter equilibrium, scale economics result inthe geographical concentration of capital and thelabor force. With these new growth models, it ispossible to explain the persistent income gapamong nations. We can also say that economicgrowth in Japan is a “jumping process” to a bet-ter equilibrium.

However, this jumping process cannot beachieved automatically. Sufficiently large markets,entrepreneurship, positive expectations for the fu-ture, an abundant labor force, and appropriateeconomic policies are all indispensable. The fol-lowing is an analysis of these factors in the post-war Japanese economy.

Large domestic market

Industries with effective scale economics cannotbe established until huge investments in equip-ment are made. Markets large enough to pay forthis investment are essential. Foreign marketshave played a significant role in the recent indus-trialization of Asian economies. In Japan, how-ever, the domestic market is more important thanforeign markets. The Japanese economy had beengrowing since the middle of the nineteenth cen-tury Light industries, such as textile and foods,were the leading sectors in prewar Japan, and ac-cordingly income levels were not particularly low.Furthermore, drastic reforms such as farmlandreform after the Second World War mitigated in-come inequalities. These factors created poten-tially large domestic markets for durableconsumer goods.

Positive expectations for the future

To establish an industry with scale economies,several companies must simultaneously investheavily in equipment. Of course, investments aremade in anticipation of future profits. In indus-tries with scale economies, however, companies

economic growth 129

will make investments only if they do share posi-tive expectations regarding the future size of theirmarket. Then, a balance of coordination and com-petition among the companies is needed. Oncethe investments are made, productivity and in-come, and therefore the market size, increase. Asa result, initial investment can produce a profitand positive expectations become self-fulfilling.The market expands more and more, which leadsto new companies entering the industry. In thisway a competitive market is achieved, and thisleads to further economic growth. This processcan be observed in the postwar Japanese economyespecially in the 1960s. In contrast, pessimisticexpectations depress investment. Income andmarkets never grow, and pessimistic expectationsthus become self-fulfilling. This process is a vi-cious circle in which investment for industrieswith scale merits is never made.

Appropriate economic policy stances

Protective trade and industrial policy are oftensaid to have supported Japan’s industrializationand economic growth. However, these did notplay as important a role as they are said to have.Several Latin American nations also attemptedindustrialization that relied on protective poli-cies, but failed. Their domestic markets were toosmall for scale to be fully realized. The expecta-tion of perpetual protectionism and limited entryalso hampered the development of entrepre-neurship. In Japan, however, abundant demandand resources, as well as the efforts of the privatesector, were the basic factors behind highgrowth. The trade and industrial policies imple-mented in Japan were far smaller in relative scaleand were intended to be temporary From this,we can conclude that the policies were not essen-tial.

However, it can be said that some policiesplayed an important role in coordinating eco-nomic activities and in improving some incom-pleteness of financial markets. The Ministry ofInternational Trade and Industry may havecontributed by causing companies to share posi-tive expectations for the future and regulatingthem to prevent excess competition. Public fi-nance companies such as the Japan Develop-

ment Bank have financed huge investments ofheavy and chemical industries.

Abundant labor force

In order to establish and develop industries witheffective scale economies, it is necessary to mobi-lize a large labor force in a short period. A hugenumber of young and inexpensive workers weresupplied from rural areas and absorbed into thenewly growing sectors in urban areas. In this wayrapid changes in industrial structure and highgrowth of the Japanese economy were attained.Japanese company management systems were themechanisms used to organize the labor force effi-ciently.

The concentration of population in cities in-creased the demand for durable consumer goods.When labor force migration stopped, wages be-gan to increase, and companies began substitut-ing equipment for workers, which increased thedemand for machinery. These growing marketspromoted industrialization and sustained highgrowth.

Summary and recent issues

Through the factors we have examined here, theJapanese economy was able to attain high growthand catch up with the Western industrializedcountries. The Japanese company managementsystem, the relationship between the private andpublic sectors, and the education system oper-ated very efficiently based on Japan’s potentiallylarge domestic markets and abundant young la-bor force.

The situation today however, is drasticallydifferent. Which industries will grow is not asclear as it once was. Unclear and pessimistic ex-pectations for the future deter companies from in-vestment. In financial markets, many commercialbanks have not yet disposed of the huge bad debtscaused by overheated speculations and invest-ments in the bubble economy era. This is a nega-tive factor for a standard Japanese company thatheavily depends on indirect finance. Because ofthese negative factors in both demand and sup-ply sides, investments in new industries cannotgrow. The supply of young and inexpensive

130 economic growth

workers which would allow rapid changes in in-dustrial structures has dried up. Rapid aging ofthe population is fundamentally changing theJapanese company management system.

Goods, financial and labor markets all faceproblems. Abuses of the once-beneficial relation-ship between the private and public sectors arealso coming to light. In goods markets, with in-dustrial policies to promote not only process in-novation but also product innovation, large newforeign markets can be created. Aging may cre-ate potentially large domestic markets of newtypes of goods and services. In financial markets,public financial organizations are still influential.When financial markets are incomplete, the pub-lic sector should finance huge investments ofgrowing industries. At present this duty shouldbe transferred to competitive markets. However,though direct participation may not be called for,indirect participation by governments is neces-sary The nature of incomplete financial marketsand the types of appropriate government partici-pation is currently the focus of much theoreticaland empirical investigation.

It is essential for these Japanese systems tochange in ways that will allow them to utilize themiddle-aged and older labor force and the femalelabor force efficiently Japanese company manage-ment systems such as employment and promo-tion systems are drastically changing. Appropriatesocial security systems to enforce these move-ments 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 andGrowth in the Global Economy, Cambridge, MA: MITPress.

Krugman, P. (1991) Geography and Trade, Cambridge,MA: MIT Press.

Mankiw, N.G., Romer, D. and Weil, D.N. (1992) “AContribution 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 Industrial-ization,” Quarterly Journal of Economics 104:537–564.

——(1989) “Industrialization and the Big Push,” Journalof Political Economy 97:1003–26.

HIROKI KONDO

economic ideology

Japan’s extremely rapid rise to economic powerin the postwar period brought with it a muchsharper interest in the Japanese economic system.As observers both within and outside of Japansought to explain the success of Japanese capital-ism, explaining the ideological underpinningsbecame increasingly important. However, forboth Japanese and non-Japanese alike, explain-ing ideology has not been particularly easy Forobservers weaned on free-market, neoclassicaleconomics, Japan’s economic system oftenseemed a paradox. The lessons of neoclassicaltheory are to let flexible prices in deregulatedmarkets delineate where resources go; this ulti-mately leads to greater efficiency and growth.However, Japan grew amazingly quickly in thepostwar period with capital, labor, and product“markets” influenced heavily by government andinter-firm relationships.

The implication of neoclassical economictheory is that the Japanese economy could havegrown even faster during the postwar period hadit looked more like a laissez-faire economy withflexible price signals. By the 1980s, however, thisbegan to ring hollow as many US and Europeanindustries lost significant ground to the Japanese.Attention increasingly turned to how capitalistsystems can differ in their evolution and in a par-ticular moment in time, as well as what can belearned from those differences. Furthermore, withthe collapse of the Soviet Union in the 1990s, theCold War pressure to view capitalismmonolithically—without historical, institutional,and cultural differences—diminished. Given rec-ognized differences, the question now for capi-talist economic systems is what form they shouldtake during different stages of development.

Ironically the early 1990s also marks the mo-ment when the Japanese bubble economyburst, and the drawn-out struggle to revive Ja-pan’s economy has made literature pinpointingand trumpeting the reasons for Japan’s success

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somewhat less compelling. The urge to defineand learn from Japanese economic ideology hasarguably decreased in the face of Japan’s stagna-tion. Indeed, the pendulum swung in the otherdirection in the 1990s, with many outside andinside Japan arguing for major structural reformof the economy structural reform that gives freemarkets a more central role. This parallels theGerman experience in the 1990s as the USA andBritain boomed while Germany struggled. Inter-estingly like their US counterparts in the 1980sdebating the relative merits of industrial policy,policy makers and others in Japan and Germanyare similarly engaged with whether, when andhow to allow convergence towards more Anglo-American practices such as a shareholder modelof corporate control (see corporate govern-ance).

Japan’s economic ideology draws some inspi-ration from Anglo-American neoclassical theorybut it is also clear that the German schools ofthought have had particular influence. Germanschools of economic thought and philosophy suchas the historical school stress the role of the gov-ernment in a “national” economy oriented to-wards production. Actors in a system like thisengage collectively in production to increase anation’s power. Production strengthens nationalpower while consumption weakens that power.Japan’s economic ideology has been labeled“developmentalism” by those focused on the pri-macy of the Japanese government in economicactivity Chalmers Johnson is perhaps the bestknown of the Western scholars for his exposi-tion of developmentalism. Principles characteriz-ing developmentalism in Japan include theimportance of strategy and the government indirecting resources, a production rather than aconsumer orientation, restraint of excessive pricecompetition, and the premium on long run firmgrowth and productivity rather than profit. Alsodistinctive is the focus on the concrete processes ofproduction, distribution, exchange, and consump-tion. Japanese developmentalism is relentlesslypragmatic and not bound to any one universalisticeconomic theory. As such, it is relativistic, flex-ible, and grounded in the contemporary condi-tions of economic life.

Johnson and other scholars have pointed outthat Japanese capitalism evolved as the country

sought to industrialize rapidly due to the West-ern threat of superiority and that this urgencyaffected ideology. For the Japanese, the goal inthe nineteenth century was immediate: strengthenthe nation’s power in international competition.In contrast, Anglo-American capitalism wasgradually nurtured in a cultural context of indi-vidualism during the Enlightenment. In Japan,industrialization was borrowed from the West,but the laissez-faire mindset stressing the au-tonomy of the individual was not. In the twenti-eth century a military form of developmentalismhad emerged in full force in response to the GreatDepression and the First World War. This waslater challenged by the democratic reforms un-der MacArthur, but instead of resulting in a lib-eral free market economic system, the economyevolved into a form of developmentalismcentering on trade.

This is one view of a fairly well-known schoolof thought on Japanese economic ideology; thereare other schools, some focusing on the criticalrole of corporations, or of human resources, orof the market. At this point, it is safe to say thatdebates over capitalist economic ideology—evendebates within a country over what that ideol-ogy is—are not about to end. The Japanesedevelopmentalist model—however “stylized” itmay be—remains important as a point of refer-ence. This is especially the case for the develop-ing world. The Russian experience provides asobering case study in the potential pitfalls ofuniversalist neoclassical solutions quickly admin-istered. Deregulating Russia through Westernstyle “shock therapy” proved to be nothing shortof disastrous. The Japanese approach to devel-opment—which is more incrementalist, strategic,and sensitive to institutional and historical con-text—widens the constellation of possibility andenlivens the challenge of increasing economic andsocial welfare in all countries.

Further reading

Gao, B. (1997) Economic Ideology and Japanese IndustrialPolicy, New York: Cambridge University Press.

Johnson, C. (1982) MITI and the Japanese Miracle,Stanford, CA: Stanford University Press.

WILLIAM BARNES

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education system

The Japanese education system has provided thefoundation for twentieth-century Japanese eco-nomic success by producing an adaptable, pro-ductive work force and has become a model fordeveloping countries, particularly in East Asia.Growing out of roots in the Meiji restorationand modeled after the German, French andAmerican education systems, it is a unitary sys-tem dominated by the Ministry of Education inTokyo and its affiliated prefectural branches. TheJapanese education system is renowned for pro-viding a strong education to all students, particu-larly in mathematics and science, but has beencriticized by Japanese teachers and politicians forinhibiting creativity and causing extreme stressin some students.

The education system in Japan is structuredalong the American model, with six elementaryschool years, three middle school years, three highschool years and four university years. Elemen-tary and middle school are mandatory Studentswith physical and mental handicaps attend sepa-rate schools, creating greater educational uniform-ity. Over 99 percent of children of compulsoryschool age are enrolled in school, and approxi-mately 95 percent of students complete theequivalent of high school. The Japanese schoolyear begins in early April and is organized in tri-mesters that run from April to July September toDecember, and January to March. Japanese stu-dents receive an average of approximately 200days of classroom instruction.

The Ministry of Education (MOE) exerts thestrongest influence on the school system, prescrib-ing curricula, standards, and requirements; ap-proving textbooks; providing guidance andfinancial subsidies accounting for nearly half oftotal educational expenditures; authorizing theestablishment of colleges, universities, and pri-vate schools; and operating national universities,junior colleges, and technical colleges. Each pre-fecture also has a board of education, appointedby the prefectural governor. Prefectural boardsappoint the prefectural superintendent of educa-tion with the consent of the MOE; operate pre-fectural high schools; license teachers; and makeappointments to schools. Finally each municipal-ity has a board of education appointed by the

mayor. Municipal boards operate municipal el-ementary and middle schools; choose textbooksfrom the MOE’s approved list; and make recom-mendations to the prefectural board of educationon the appointment and dismissal of teachers.

Historical development

Historians describe two educational revolutionsin Japanese history The first occurred during theMeiji restoration in the late nineteenth centurywhen Japanese leaders worked to tear down neo-Confucian educational structures and attitudesand institute modern educational practices, roles,and structures imitated from the United States,Germany and France. From France, Meiji lead-ers imitated a centralized educational system runby a national Ministry of Education. Followingthe German model, they created a system thatsorted students from the time they entered pri-mary school into discrete career tracks. They bor-rowed basic curriculum from the United States.During the 1920s, teachers pressed for Ameri-can-style reforms inspired by John Dewey suchas “liberal education” and “life-in-education.” Therise of the military during the 1930s, however,ensured that the centralized, state-oriented sys-tem continued.

The second educational revolution occurredafter Japan’s defeat in the Second World War.The American occupation attempted to create amore decentralized, egalitarian, and above alldemocratic Japanese education system. At theurging of Occupation authorities, the JapaneseDiet created a single-track 6–3–3–4 system toreplace the pre-war multi-track system. Occupa-tion authorities also mandated the establishmentof neighborhood schools instead of merit-basedschool recruiting; established locally electedschool boards; and limited the authority of theMOE to issuing outlines, suggestions, and teach-ing guides.

While political liberals and the national teach-ers’ union embraced the reforms, Japanese po-litical conservatives bitterly opposed them. Afterwinning control of the government in 1955when the Liberal Democratic Party was cre-ated, conservatives began an educational “re-verse course,” passing legislation gutting theauthority of local school boards, making MOE

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curriculum nationally mandatory requiring thatall school texts be approved by the MOE reviewboards, and finally striking at the single-tracksystem by creating vocational high schools. El-ementary schools, however, remained largelyuntouched.

In the 1980s, Japan entered a national debateon education reform. Spurred by widely reportedincidents of student violence, increasing reportsof bullying, and a sharp rise in “school refusers,”children psychologically unable to attend schoolout of fear or stress, Prime Minister YasuhiroNakasone created the National Ad Hoc Councilon Education Reform to further diversify the sin-gle-track system, improve the high school anduniversity entrance examination system, increaseemphasis on moral and physical education, pro-mote internationalization of education, and im-prove the quality of teachers. Despite strongpublic interest, pervasive media coverage, sup-port from Nikkeiren and Keidanren, and theprime minister’s personal attention, the councilfailed to recommend structural changes, only en-dorsing increased moral education and interna-tionalization. Radical change to the educationalsystem appears unlikely.

Elementary schools

Japanese elementary schools emphasize personaldevelopment and an experiential approach tolearning, seeking to build students’ motivationand confidence, as well as personal and socialskills. In particular, elementary schools stress theability to work well in small groups through struc-tures such as han, classroom workgroups. Hanmembers must work together to perform aca-demic tasks, such as making presentations anddoing research, as well as non-academic tasks,such as serving lunch and cleaning the classroomand school.

Elementary students remain with the samekumi, or class, for the entire academic year. El-ementary school teachers’ top priority is to en-gage students in learning, not to fill their headswith facts. Accordingly teachers emphasize proc-ess, engagement, and commitment rather thandiscipline and outcome. At the same time, teach-ers work to provide students with fundamentalacademic skills, particularly in Japanese language

and mathematics. However, no academic track-ing takes place, and teachers deliberately mix stu-dents of differing academic ability in han and goto extreme lengths to ensure that all students pro-ceed together through lessons.

Secondary schools

In contrast to elementary schools, Japanese sec-ondary schools focus on preparing students toenter the workforce. High schools and to someextent middle schools track students and teachincreasingly specialized curricula. They also stressthe central importance of hard work and diligencethrough required moral education courses andstructures such as the entrance examination sys-tem.

Like elementary schools, middle schools areneighborhood schools. Students remain with thesame kumi for at least a year, while teachers spe-cializing in an academic area rotate classroomsthroughout the day Students learn the sameMOE-mandated curricula, use the same MOE-approved 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 in-creasingly dominated by the prefectural highschool entrance examination. The examinationis written to ensure that students have masteredthree years of middle school course material andis dominated by facts and specifics. In order toexcel, students must spend hours studying andmemorizing. Proponents of the system argue itteaches students the importance of hard work,diligence, and perseverance. Based on the resultsof the entrance examination, a student may en-ter (in decreasing prestige): an elite private school,a public university prep school, a public voca-tional school, a general private school, or a pub-lic night school.

Education in Japanese high schools varieswidely according to the type of school. In univer-sity prep schools, the mood is serious and behavioris oriented toward the national university entranceexamination. Teachers are expected to pour infor-mation into students by lecture to prepare themfor the university entrance examination. Studentsin vocational schools have fewer hours of the core

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academic subjects to allow them to study nursing,cooking, practical business skills, etc., and empha-sis falls on those vocational skills. In night schools,teachers emphasize basic coping skills.

High school students are expected to continueto learn to work in groups, continuing to staywith the same kumi for a year, though han aremuch less prominent than in elementary school.Instead, students participate in mandatory after-school sports or culture clubs, where studentslearn to work within the sempai-kohai, or senior-junior, relationships that will become importantduring their university and work lives.

Juku and yobiko

Juku encompass a large and diverse range of pri-vate, for-profit tutorial, enrichment, remedial, pre-paratory and cram schools. On average, studentsattend juku after school two and a half times perweek for a total of five hours. The majority ofstudents attending juku study English and math-ematics, most in preparation for the high schoolor university entrance examination.

Yobiko are yuku specializing in intense trainingfor university entrance examinations, often tai-lored specifically to the requirements and exami-nations of individual schools. Yobiko particularlycater to the 200,000 ronin in Japan, students whohave failed the exams for their first-choice schoolsand who have elected to spend a full year prepar-ing to take the examinations again. Because somany university students have had the ronin-yobikoexperience, education in Japan has been calledthe 6–3–3–1–4 system. Most ronin and yobiko stu-dents are male, outnumbering female studentsby more than 10 to 1.

Higher education

Approximately 20 percent of high school gradu-ates enter a four-year university about 10 per-cent enter a two-year junior college, and another25 percent enter a vocational program, usually acontinuation of studies begun at vocational highschools. Admission to universities and collegesis determined almost exclusively by the resultsof the national entrance examination, and admis-sion to the most prestigious universities such asTokyo University is extremely competitive.

Once admitted, however, almost 75 percentof university students graduate in four years andalmost 90 percent graduate eventuallyCoursework demands drop off significantly fromhigh school and most students take part-time jobs.Japanese universities have been criticized for theirrelatively lax instruction and poor attendance,leading to their reputation as merely credentialinginstitutions.

Graduate students are concentrated in a smallnumber of elite public and private universitiesand make up only 4 percent of total universityenrollment. Graduate studies are consideredstrictly in-service training for careers in academiasince most Japanese employers prefer to train uni-versity graduates in-house.

Strengths and weaknesses

The Japanese education system generates gradu-ates with a high average level of capability. Onthe whole, Japanese students are well-disciplinedand motivated. They routinely score at or nearthe top of international test comparisons in math-ematics and science. Over 97 percent of Japaneseare functionally literate, despite the demands ofusing a non-phonetic writing system. The Japa-nese education system achieves these results eventhough Japan spends only 2.3 percent of its GDPon primary and secondary education, much lessthan other industrialized countries such as theUnited States.

Critics of the Japanese education system ar-gue it is too centralized and regimented. Withtextbooks, curricula, and examinations set byMOE bureaucrats, relatively little discretion forlocal innovation exists. In addition, the lock-stepeducational approach disadvantages the bright-est and slowest students and marginalizes handi-capped students. The system also lacksinstitutionalized emotional and psychological sup-port beyond teachers, often failing to supporttroubled students. Finally critics argue that theexamination system puts too much pressure onchildren at too young an age, resulting in over-stressed and unhappy children. The continuingproblem of bullying as well as the rise of schoolviolence since the 1980s are symptoms of theseweaknesses.

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Further reading

Beauchamp, E.R. (ed.) (1991) Windows on Japanese Edu-cation, New York: Greenwood Press.

Leestma, R. and Walberg H.J. (eds) (1992) JapaneseEducational Productivity, Ann Arbor, MI: Center forJapanese Studies, University of Michigan.

Marshall, B.K. (1994) Learning to Be Modern: JapanesePolitical Discourse on Education, Boulder, CO: WestviewPress.

Rohlen, T. and Björk, C. (eds) (1998) Education andTraining in Japan, 3 vols, London: Routledge.

United States Study of Education in Japan (1987) Japa-nese Education Today, Washington: Government Print-ing Office.

KEITH A.NITTA

electronics industry

Japan’s electronics industry includes world-lead-ing firms in consumer electronics, semiconduc-tors, computers and telecommunications. Mostof these firms were established long before theSecond World War, but came into internationalprominence during the 1950s and 1960s whenthey began large-scale exports of transistor ra-dios, television sets, calculators and semiconduc-tors. The industry continued to thrive throughthe 1980s, as Japanese consumers became increas-ingly affluent, but with the end of Japan’s bubbleeconomy, was faced with a number of problems:relatively slow growth in domestic markets, highwages, and increasing competition from newlyindustrialized Asian competitors. In the late 1990sand early 2000s most of the leading Japanese elec-tronics firms began restructuring in response tothese pressures.

Origins of the industry

After Japan was opened to the West in the mid-nineteenth century the Japanese were quick tomaster the advanced technologies of the time.Telegraph service was inaugurated between To-kyo and Yokohama in 1869. In the 1870s the gov-ernment established a university-level programin electrical engineering and electrical researchlaboratories. By the end of the nineteenth cen-tury Japanese had built electric power plants,begun producing electric light bulbs, and intro-

duced telephone service. In 1905, the JapaneseNavy used wireless telegraphy to defeat a Rus-sian fleet in the Russo-Japanese War.

The origins of modern electronics engineer-ing in Japan are commonly dated to 1925, whenradio broadcasting began. By this time Japaneseresearchers were amongst the most advanced inthe world in some areas of electronics. YagiHidetsugu and Uda Shintaro invented the Yagiantenna in 1926. The Yagi became the mostwidely used radio and television antenna in theworld. That same year, Takayanagi Kenjiro wasone of the first in the world to produce an all-electronic television image (Japanese sourcescredit Takayanagi with being the first).

Foreign firms were deeply involved in the earlyJapanese electronics industry Western Electric es-tablished a Japanese subsidiary in 1899 that laterbecame today’s NEC. In 1905 General Electric(GE) took a controlling interest in Tokyo Elec-tric Lighting, which used GE technology to be-come Japan’s leading producer of light bulbs. Fiveyears later, GE exchanged heavy electrical equip-ment technology in return for 24.5 percent of theequity of Shibaura Electric Works. This helpedShibaura to become Japan’s largest producer ofgenerators and other heavy electrical equipment.Tokyo Electric and Shibaura later merged to formTokyo Shibaura Electric, today’s Toshiba.Westinghouse Electric, a US firm, worked in part-nership with Mitsubishi to establish MitsubishiElectric in 1921. Similarly in 1923 Germany’sSiemens and Furukawa Electric formed Fuji Elec-tric. A Fuji spin-off, Fujitsu, later became one ofJapan’s “big five” firms in the industrial electron-ics industry.

Other major Japanese electronics firms thatwere established before the Second World Warremained independent of foreign interests. Hitachiwas established in 1908 as a shop repairing elec-tric pumps and other equipment at a mine. It be-came a separate firm in 1920. Matsushita (theconsumer electronics giant which also uses theNational, Panasonic and Quasar brand names)was established in 1918. Sharp was initially es-tablished in 1912 as a metal processing firm. Itsfounder invented a mechanical pencil (the “EverSharp”) from which the company eventually tookits brand name. The company began making ra-dio sets in 1925.

136 electronics industry

During the late 1930s the foreign firms wereforced out of Japan. One consequence of this wasthat Japan had less access to foreign technology.The Japanese electronics firms were also requiredto stop producing home appliances and to con-centrate on military electronics.

The electronics industry after the SecondWorld War

New opportunities contributed to the explosivegrowth of the Japanese electronics industry afterthe Second World War (see post-Second WorldWar recovery). First of all, the American occu-pation authorities promoted the rapid introduc-tion of commercial radio (and later television)broadcasting, believing this would help foster thedevelopment of democracy Secondly large num-bers of talented electronics engineers were sud-denly available to work on commercial products.The military research institutions had been closeddown and research on radar and other technolo-gies that could contribute to remilitarization wasbanned. Finally much of the technology devel-oped in the West during the 1930s and 1940ssuddenly became available to the Japanese. By1949 nearly 200 Japanese firms were producingradios. Two former naval researchers startedTokyo Telecommunications Engineering(Totsuko) to repair radios and to make variouselectrical devices. In 1958 Totsuko changed itsname to Sony.

As the demand for radios approached satura-tion, television provided another big boost forthe Japanese electronics industry Televisionbroadcasting began in 1953, and in January ofthat year Sharp marketed the first Japanese-madetelevision set. Sharp was not alone. Nearly fortyJapanese firms had signed technology transferagreements with RCA, then the leading sourceof television technology (see export and importof technology).

In 1953 Sony signed an agreement to importtransistor technology from Western Electric. Mostof the other Japanese electronics firms soon signedtheir own agreements. Although US firms wereahead of Sony in marketing transistor radios,Sony offered a combination of price and size thatalmost instantly attracted a huge market. By 1959more than one hundred Japanese companies were

making transistor radios. In 1960 transistor ra-dios generated more export earnings for Japanthan any other industry except shipbuilding.

Japanese firms also began the production oftransistors. At the time transistor production washighly labor-intensive and Japanese companieswere able to hire thousands of young women,“transistor girls,” to manufacture the transistorsat approximately ten cents per hour. This helpedJapan to become the world’s largest transistor pro-ducer.

As Japanese consumers became more affluentin the late 1950s, demand increased for a varietyof electrical and electronic products: rice cook-ers, electric fans, washing machines, refrigerators,and stereos. The utilities needed heavy electricalequipment and there was unprecedented growthin telephone service.

Challenges and growth in the 1960s and1970s

Although Japan continued its rapid economicgrowth through the 1960s and into the early1970s, special challenges faced the electronics in-dustry. New transistors were developed that elimi-nated low labor cost as a major competitiveadvantage. This and the later development of theintegrated circuit (IC) shifted competitive advan-tage in semiconductors from Japan to the UnitedStates. Meanwhile, the most important consumerproduct in Japan, the black and white televisionset, was reaching market saturation. By the early1960s, about 90 percent of Japanese householdshad television sets.

The electronics firms quickly made the tran-sition to the production of color television sets.Although the sets produced in the mid-1960s mayhave been inferior to those available in Europeand the United States, the Japanese market wasprotected until Japanese firms could catch up withtheir foreign competitors. In 1970 color televi-sion sets accounted for one-third of total electron-ics industry sales. As this market, in turn, movedtowards saturation the consumer electronics firmsbegan introducing new products such as videotape recorders. In the case of monochrome andcolor televisions, the Japanese had trailed the USAand Europe by several years. Now they were in

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the vanguard in introducing a major new con-sumer electronics product to world markets.

In 1969, another key product for the Japaneseelectronics industry was introduced. Sharp be-gan selling a Large Scale Integrated Circuit (LSI)calculator. Some fifty other Japanese firms quicklybrought out their calculators beginning what be-came known as “the calculator wars.” Only twofirms survived the resulting competition. Just asthe transistor radio had supported the birth of aJapanese semiconductor industry the calculatorsupported the next phase of development of theindustry Although the LSI and later Very LargeScale Integrated Circuit (VLSI) technologies hadbeen developed in the United States, US firmsdeveloped increasingly complex forms of thistechnology for use in defense applications. TheJapanese concentrated on simpler, cheaper, morereliable integrated circuits that served especiallywell in consumer applications. The Japanese gov-ernment played some role in nurturing the de-velopment of the technological capacities of thesemiconductor industry In a controversial pieceof policy it delayed the entry of Texas Instrumentsinto the Japanese market. It also orchestrated theformation of research cooperatives, such as theVLSI Research Cooperative, to speed the de-velopment of technology.

The 1980s: years of triumph

During the 1980s it seemed as though the progressof Japanese industry was unstoppable. AlthoughJapan no longer enjoyed the economic growth ofearlier decades, Japan was now the world’s sec-ond largest economy and had passed the UnitedStates to lead the world in per capita GDP.

By 1985 Japanese firms and their affiliates pro-duced some 80 percent of the world’s video re-corders. Sony’s Walkman, introduced in 1979,was a worldwide hit through the decade and later.Throughout the 1980s lists of the world ten larg-est semiconductor products typically included fiveor six Japanese firms. Indeed, by the late 1980sJapanese firms had more than half of the worldmarket for semiconductors. The Japanese alsomoved to an early lead in the development anduse of computer-aided machine tools, industrialrobots and other factory automation technolo-gies.

There were problems, however. Wage costswhich had been a source of competitive advan-tage, were now a competitive weakness for Japan.Trade frictions with the USA and other countriesmade it politically impossible to sustain exportgrowth. Some Japanese firms had built or boughtoff-shore production facilities in the 1970s, and inthe 1980s this became a growing trend.

The 1990s and 2000s

In the 1990s the Japanese electronics industryfaced severe difficulties. The collapse of thebubble economy at the end of 1989 underminedconsumer confidence. Domestic markets for con-sumer electronics goods were largely saturated.Competitors were beginning to emerge in otherparts of East Asia. The economic crisis in Asiain the late 1990s further aggravated the situation.During the 1990s sales of consumer electronicsproducts dropped in half. This weakness in de-mand was also devastating for the semiconduc-tor firms, which still relied on consumer productsto take one-third of their output.

The trend towards offshore production con-tinued. By 1998 Japan’s electronics firms hadsome eight hundred production facilities in otherparts of Asia and an additional four hundred inother parts of the world. Only about 10 percentof the color television sets produced by Japanesefirms were actually made in Japan, and only aboutone-third of the video recorders.

The “big five” Japanese industrial electronicsfirms, Toshiba, NEC, Hitachi, Fujitsu andMitsubishi Electric, and the largest consumer elec-tronics firm, Sony were all experiencing new dif-ficulties. Toshiba, for example, experienced itsfirst losses in nearly a quarter of a century. Thelarge vertically integrated giant Japanese electron-ics firms that had seemed unstoppable in the1980s were now seen as unwieldy and poorlyfocused because of their size. Many of them werere-structuring and entering into international al-liances, most often with US partners.

Further reading

Anchordoguy M. (1989) Computers, Inc.: Japan’s Chal-lenge to IBM, Cambridge, MA: Harvard UniversityPress.

138 electronics industry

Aoyama, Y. (1991) Kaden (Home Electronics). Tokyo:Nihon Keizai Shimbun.

Lynn, L. (1998) “The Commercialization of the Tran-sistor Radio in Japan: The Functioning of an Inno-vation Community,” IEEE Transactions of EngineeringManagement 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:Houghton-Mifflin.

Partner, S. (1999) Assembled in Japan: Electrical Goods andthe Making of the Japanese Consumer, Berkeley CA:University of California Press.

LEONARD H.LYNN

enterprise unions

There are two kinds of workers in the world:employees and independent craftsmen. Employ-ees are organized into unions according to theirplant, establishment or enterprise. Furthermore,employee trade unions usually include enterprise-based organizational units within their organiza-tion. Can such enterprise-based organizationalunits of unions be called “enterprise unions?” Ifso, every trade union in the world, with the ex-ception of craft unions, can be termed an enter-prise union. In order to avoid confusion, it isnecessary to provide a definition of enterpriseunion. Enterprise unions are those unions whichare organized on the basis of enterprises or es-tablishments and which are more or less autono-mous with regard to national unions.Organizational autonomy of the enterprise union,vis-à-vis the national union applies to collectivebargaining, finance and staff.

Types of enterprise union

Enterprise unions can be classified into two typesaccording to their degree of autonomy with re-spect to national unions: highly-autonomousunions and partially-autonomous unions, referredto here as HAEU and PAEU, respectively. Suchautonomy depends on the power-relations amongenterprise unions affiliated with the nationalunion and with the national headquarters of theirnational union. Various characteristics determinethe organizational structure of trade unions. The

most important of these are degree of concentra-tion in industry government regulation, and pathdependency during the formative years.

Zensen Doumei (Textile Workers Union) isan example of a highly centralized national un-ion, whose affiliated enterprise unions arePAEUs. Jidousha Souren (Automobile WorkersUnion) is a loosely-structured national federationof enterprise unions and so its affiliate enterpriseunions are HAEUs.

Overview of major trade unions in Japan

Incorrect images of Japanese trade unions arewidespread in the world, even among industrialrelations professionals. One such popular but er-roneous view is that most trade unions in Japanare “enterprise unions.” The second incorrect ste-reotype is the view that “enterprise union” is asugar-coated phrase for “company-dominatedunion,” a union which is essentially obedient toand cooperative with management. The formerstereotype is examined first.

In 1999, there were twenty-three national un-ions in Japan that had over one hundred thou-sand union members:

Jichirou (Local Government Employees Union) 1,017,000

Jidousha Souren (Automobile Workers Union) 768,000

Denki Rouren (Electrical Equipment Workers Union) 740,000

Zenken Souren (Construction Workers Union) 715,000

Zensen Doumei (Textile Workers Union) 585,000

JAM (Metal Machinery Workers Union) 500,000

Nikkyouso (Teachers Union) 365,000

Seiho Rouren (Life Insurance Workers Union) 351,000

Jouhou Rouren (Communications Workers Union) 266,000

Denryoku Souren (Electrical Power Workers Union) 257,000

Jichi Rouren (Local Government Employees

Union—left wing) 249,000

CSG Rengou (Chemical Workers Union) 214,000

Nippon Ih Rouren (Hospital Workers Union) 172,000

Tekkou Rouren (Steel Workers Union) 170,000

Kokukou Rouren (Central Government Employees

Union) 168,000

Sitetsu Souren (Private Railway Workers Union) 167,000

Zentei (Postal Workers Union) 155,000

Zenginren (Bank Employees Union) 149,000

Zenkyou (Teachers Union—left wing) 143,000

Unyu Rouren (Trucking Workers Union) 136,000

Shougyou Rouren (Retail Workers Union) 124,000

enterprise unions 139

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 unionmembers in 1999, with an estimated union den-sity of about 22.2 percent. The ratio of majornational union members to total union membersis 65.3 percent, and the trade union movementin Japan has been much more vigorous in thepublic and the highly concentrated private sec-tors than in the less concentrated private sectorswhere small firms are dominant. Enterpriseunions do not exist in the public sector at all be-cause public corporations were largely privatizedin the 1980s and public sector enterprises as suchdo not yet exist. One-third of all organized work-ers are public employees and have “enterpriseunions”. The third largest union in the privatesector, Zenken Souren (Construction WorkersUnion), is a craft union whose members areskilled craftsmen such as carpenters or plumb-ers. Craft unions are not enterprise unions. InJapan, pure enterprise unions are very few. Mostenterprise unions belong to national unions andare allied with other enterprise unions within thesame national union in their struggle against man-agement and government. The national union isan alliance of enterprise unions within the sameindustry.

Which type of union is more numerous, theHAEU or PAEU? In postwar Japan, wage nego-tiations, and consequently wage determination,have been highly centralized. Therefore, enter-prise unions are not very autonomous in theirnegotiations with employers, these being coordi-nated at the national level by the headquarters oftheir national unions or by the national federa-tion of national unions. Since 1955, wage nego-tiations in Japan have been concentrated in thespring and synchronized and/or coordinated atthe national level. This wage determination prac-tice has been called “spring offensive.” The wagenegotiations themselves are conducted mostly atthe enterprise level, and collective agreements aresigned firm by firm, and by the leaders of therespective enterprise unions and management.However, these enterprise-level negotiations arecoordinated by the concerted actions of both par-

ties at the national level. Under these circum-stances, enterprise unions are unable to maintaina high degree of autonomy and in this sensePAEUs are more dominant than HAEUs in Ja-pan.

The pure enterprise union is the exception inJapan. Affiliated enterprise unions are very simi-lar to union locals affiliated with national unionsin the US. Are there any distinctions betweenthe Zen Toyota Rouren (an enterprise union),which is affiliated with the Jidousha Souren (anational union), and the GM Department (anenterprise union) of the UAW (a national union)?In terms of organizational structure there doesexist a slight difference.

Unique characteristics of Japaneseenterprise unions

Generally speaking, industrial societies are be-coming similar, an indication that the convergencetheory of history is also valid in the field of in-dustrial relations. But national uniqueness doesnot disappear so long as it is appropriate for anddoes not hinder the economic and societal devel-opment of the society In terms of organizationalstructure, Japanese enterprise unions have a fewunique features compared with similar labor or-ganizations of foreign countries. Firstly enterpriseunions in Japan are distinctive in regard to mem-bership eligibility. In Japan, both white-collar andblue-collar workers join the same enterpriseunion, without exception. In the case of blue-col-lar workers, members retain their union statusuntil they are promoted to general foremen andwhite-collar workers usually lose membership eli-gibility when they are promoted to kachou (sec-tion chief). In the Republic of Korea, the bottomorganizations of national unions are enterpriseunions but white-collar employees do not usu-ally join these unions. In the USA, white-collarworkers are organized separately.

The second distinctive feature of enterpriseunions in Japan is the alignment of union mem-bers. Enterprise unions are organized accordingto the organizational structure of the enterpriseor company. Skilled tradesmen or professionalsdo not have their own organizational chapterwithin the enterprise union. For example, a medi-cal doctor (company doctor or company clinic

140 enterprise unions

doctor) belongs to the hospital or clinic sectionof the enterprise union; there is no separatebranch within the organization for professionalpeople in the enterprise union. Medical doctors,nurses, technicians, clinic clerks and janitors jointhe same union chapter and meet at the sameunion conference.

The third feature that is characteristic of mostJapanese enterprise unions is their dual role inrelation to management. Enterprise unions en-gage in collective bargaining with managementand at the same time take part in joint consulta-tion committees as partners to make the enter-prise more competitive and to enhance itsprofitability. This two-faceted nature of the en-terprise union raises serious questions for bothpractitioners as well as scholars of industrial rela-tions in Japan and abroad. Collective bargainingis a process for resolving antagonism and dis-putes between employers and employees, and itpresupposes the existence of adversarial rela-tions between the parties. But union participa-tion in management or the decision-makingprocess and partnership between employers andemployees rests upon an opposite philosophynamely that the parties share mutual interestsand are like “a crew in a life boat” (Gemeinschaft inGerman). Enterprise unions in Japan engage inwage negotiations annually and sometimesstrike to win their demands. At the same time,enterprise unions meet and discuss managerialmatters with employers at least four times a yearat the roushi kyougi kai (union-management con-ference).

Controversy over the nature of theenterprise union

Enterprise unions play a balancing act betweentheir roles as collective bargaining agents andmanagement collaborators. Is it possible for aunion to do that? There have been heated con-troversies about this in postwar Japan. Some prac-titioners and scholars assert that enterprise unionsare not bona fide unions, that they are company-dominated labor organizations in nature, and thatthey must be destroyed and replaced with bonafidetrade unions. This type of leftist opinion is calleddappi ron (casting off argument) and one of theslogans of such proponents is “towards indus-

trial unionism.” Other practitioners and scholarsevaluate union participation in managementhighly and praise enterprise unions as the mostadvanced organizational form of trade unionismtoday. This type of participationist view is calledyougo ron (defense of enterprise union).

Today practitioners are losing interest in thedebate but industrial relations scholars and laborhistorians are enthusiastically discussing the prob-lem. After the collapse of the Soviet Union, Marx-ists are becoming even less influential amongintellectuals and at the same time such radicalopinions of trade unionism are fading even amongacademics.

Past, present and future of enterpriseunions

Enterprise unions were hastily organized in thelatter half of 1946, with the strong support of theOccupation Army SCAP (Supreme Commanderof Allied Powers) ordered the government of Ja-pan to enact labor legislation for the democrati-zation of Japan, and the Diet (Parliament) rapidlyenacted the Trade Union Act in December of1945. The Act was implemented in April of 1946.During the war, workers had been organized inenterprise-based patriotic organizations calledsanpou, short for Sangyou Houkoku Kai (Indus-trial Patriotic Association). Sanpous were the fore-runners of enterprise unions. Blue-collar as wellas white-collar workers joined the sanpou, whichwas engaged in both negotiation and participa-tion. The reason that the trade union movementin Japan was able to deeply take root in enter-prises in a short period of time was the historicalgood luck of the War and the Occupation, timesduring which employers’ were easily deprived oftheir management prerogatives. Enterprise union-ism was one of the “war babies.”

The enterprise union is the most appropriatetype of organization for a trade union playingthe double roles of negotiation and participation.Recently the Dunlop Commission in the USArecommended the introduction of enterprise-un-ion organizations to promote union—managementcooperation. The enterprise union is one institu-tional model of present-day industrial democra-cies in which worker participation and

enterprise unions 141

employment security is growing increasingly im-portant. The enterprise union provides unionswith three organizational advantages: (1) partici-pation 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 (Work-place Labor Union and Participation).

Oukochi, K. (ed.) (1956) Rodo Kumiai no Seisei to Soshiki(Formation and Organization of Labor Unions), inSengo Rodo Kumiai no Jittai (Realities of Postwar La-bor Unions), Tokyo: Tokyo University Press.

Roshi Kankei no Nihibei Hikaku (Comparative Labor Re-lations in Japan and the US), Tokyo: ToyokeizaiShinpo Sha.

Shirai, T. (1979) Kigyoubetsu Kumiai (Enterprise Unions),Tokyo Chuo Koron Sha.

SUSUMU HAGIWARA

environmental and ecological issues

Alternately described as an environmental out-law or an environmental performance leader,Japan’s record with regard to the natural envi-ronment has been filled with a complex mix ofenvironmental tragedies and triumphs. Duringits high economic growth years of the 1950s and1960s, Japan experienced environmental degra-dation that was without historical precedent.While Japan continues to be criticized for suchpractices as whaling and importation of tropicalhardwoods, Japan also merits recognition for itssubsequent achievement of world-class perfor-mance on several environmental measures. Re-cently the involvement of Japanese business inenvironmental issues has been undergoing a no-table transformation as it attempts to shift from areactive orientation to a more proactive stance.During the late 1990s and early 2000s in par-ticular, leading Japanese companies have activelyworked to improve their environmental perfor-mance through greener technology purchasing,operations, accounting and other means. At thesame time, the Japanese economy as a whole con-tinues to face considerable challenges in achiev-ing environmentally sustainable development.

History

While medieval Japan had experienced instancesof severe forest depletion and watershed erosion,the first major case of industrial pollution beganin the 1880s with the Ashio Copper Mine inTochigi, where mining wastes poisoned theregion’s rivers and lands. Though other cases ofindustrial pollution continued to emerge through-out Japan, one that eventually attracted world-wide attention was Chisso Corporation’sdischarge of mercury compounds into MinamataBay Eventually thousands of Minamata residentssuffered debilitating effects or even died due tomercury poisoning from eating contaminated fish.Though human cases were first reported in 1956with the probable cause determined soon after-ward, cover-ups and denials by Chisso with thebacking of the Ministry of International Tradeand Industry (MITI) delayed an official confir-mation of Chisso’s responsibility until a 1968 an-nouncement by the Ministry of Welfare. In themeantime, outbreaks of several other pollution-related diseases occurred, including itai-itai dis-ease from cadmium poisoning in Toyama,Yokkaichi asthma named after the city by thatname and its smog-emitting petrochemical indus-trial complex, and yet another case of mercurypoisoning in Niigata prefecture. The severity ofwidespread pollution led one international ob-server to liken Japan to a test case of unrestrainedindustrialization that the rest of the world waswatching, much as coal miners once watched thecanary in the cage.

Increasing public concern during the 1960sabout widespread air and water pollution even-tually resulted in government action, with the1967 passage of the first basic environmentalprotection law. Due to industry pressure, how-ever, this law contained a clause that environ-mental protection was to be pursued in“harmony with sound economic development.”Intense public concern continued, however, andled to a special Diet session in 1970 that passedfourteen strict environ mental laws and abol-ished the “harmony” clause. Japan’s Environ-ment Agency was established soon afterward in1971. With the later passage of more laws andthe creation of a number of innovative regula-tory approaches, the 1970s and 1980s can be

142 environmental and ecological issues

characterized as a period of active technocraticenvironmental policy for pollution abatementand energy conservation, though industry pres-sure did win some later concessions. Air pollu-tion levels for sulfur dioxide fell from their 1967peak to become the lowest per capita amongOEGD nations. Such improvements were dueto a combination of energy conservation, fuelconversion, economic structural change, andtechnology investment. At its peak in 1975, in-vestment in pollution control accounted for 20percent of capital investment, several timeshigher than other OECD nations. By 1989,Japanese companies operated three-fourths ofthe world’s desulpherization and denitrificationunits. Spurred by the “oil shocks” of the 1970sand with the guidance of MITI, Japanese indus-try also achieved the world’s highest level of en-ergy efficiency Energy consumption and carbondioxide emissions remained nearly level from1970 to 1987 even while the index of industrialproduction increased by 70 percent, with a ma-jority of this effect attributable to improved en-ergy efficiency (Watanabe 1997). As a result ofR&D and investments in energy conservationand pollution control, Japan came to be a worldleader in many environmental technologies.

Recent issues

The 1990s marked a new era for Japan and theenvironment. At the international level, Japan wasincreasing its environmental diplomacy effortsand attempting to position itself as an environ-mental leader in the global community Domesti-cally a new wave of environmental legislation waspassed, including an ambitious new basic envi-ronmental law. In the years afterward, severaladditional laws were enacted dealing with pack-aging, energy conservation, recycling of automo-biles and household appliances, pollutant releaseand transfer registration, and the creation of a“sustainable recycling-based society” (junkan-gatashakai). In 2001, Japan’s Environment Agency wasraised to ministry status. During the 1990s, theJapanese business community also experienceda shift in its environmental stance, as being“green” became an increasingly important busi-ness issue. Symbolizing this was Keidanren’s re-

lease of a Global Environmental Charter in 1991(later updated in 1996) that notes the responsi-bility of corporations to protect the global envi-ronment and its resources. By the late 1990s andearly 2000s, the Japanese business press was regu-larly reporting on corporate environmental ini-tiatives and companies touted theiraccomplishments in frequent press releases.

Representing this rise in Japanese corporateenvironmentalism was the “ISO 14000 boom,”referring to the intense interest shown in the in-ternational standard for environmental manage-ment systems released October, 1996.Certification activity was initially highest amongexport-oriented industries such as consumerelectronics, but quickly extended to other indus-tries and even local government bodies. As ofJanuary 2001, Japan’s number of certificationsranked highest internationally at 5,338, doublethe number for the next highest country Ger-many and nearly four times that of the UK orUSA.

Besides corporate image and meeting marketrequirements, improving eco-efficiency is an-other motivation behind this activity as compa-nies try to reduce wastes and resourceconsumption. A number of Japanese firms, in-cluding Kirin Brewery NEC and Honda, haveannounced that their plants have achieved “zeroemissions,” where practically all the wastestream is recycled in some way rather thanhauled to a landfill. Some firms are increasingtheir efforts at recycling and remanufacturingparts for reuse in new products. Fuji Xerox, forexample, first modeled its remanufacturing ef-forts after Xerox in the USA, but reports that ithas since improved upon and overtaken Xerox.Also, stricter laws on packaging and recyclingare motivating companies to design productswith lower end-of-life costs.

Forming the subject of MITI’s Eco-Vision re-port, environment-related businesses have beenanother area of activity Many firms have estab-lished divisions or subsidiaries to provide envi-ronmental services and others have increasedtheir efforts at developing and marketing cleantechnologies and systems. Besides green processtechnologies, many firms have also been success-ful in developing market-leading green products.

environmental and ecological issues 143

Japanese firms lead in such areas as battery tech-nology hybrid cars, solder-free electronics prod-ucts, and consumer goods with ultra-low powerconsumption.

Corporate environmental reports, though rarein the early 1990s, are now becoming de rigueur.Also, by 2000, one in five firms surveyed byNikkei had initiated environmental accounting.Though savings are achieved in some areas, earlyreports generally showed overall environmentalcosts several times larger than environmentalsavings. In addition, a Nikkei survey showednearly one in four companies as having estab-lished environmental criteria for procurementdecisions. Also, Japan’s first eco-funds for inves-tors began in the summer of 1999, with Toyota,NEC, Sony NTT, Matsushita, Fujitsu, and Ricohamong the more popular companies for invest-ment.

Challenges

Japan has achieved a dramatic turnaround fromthe 1960s and 1970s when it was known as a“showcase for industrial pollution.” Nevertheless,its progress is far from complete. Developmentand public works projects routinely take prece-dence over nature conservation. Biodiversity facesserious threats. Reports of illegal dumping ofwastes are not uncommon. A reliance on incin-eration of wastes has led to dioxin levels far higherthan other countries. Also, due to its high popu-lation density and relative lack of natural re-sources, Japan will continue to face the challengeof sustaining its economic well being. Accordingto a 2001 cross-national comparison conductedby the World Economic Forum, Japan rankedbehind most industrialized nations on its indexmeasuring environmental sustainability at twenty-second, with Finland ranking first, Canada third,Australia seventh, USA eleventh, Germany fif-teenth, and the UK sixteenth. Yet another studyfrom the 2000 Living Planet Report comparedthe ecological footprint of various nations: theland and sea area necessary to meet their con-sumption of food, materials, and energy Accord-ing to this study Japan’s eco-footprint on a percapita basis was among the smallest of the indus-trialized nations due to relatively efficient use of

resources. The challenge, however, is that Japan’sown biological capacity to provide those resourceswas less than one-sixth of that required.

Further reading

Environment Agency (2000) Kankyo Hakusho (Qualityof the Environment in Japan) Tokyo: Gyousei.

Ishizu, T., Ichie, M. and Shimizu, M. (1993) JapaneseCorporate Response to Global Environmental Issues, JapanDevelopment Bank Research Report No. 36, To-kyo: Japan Development Bank. Nikkei Ecology, To-kyo: 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) EnvironmentalPolicy in Japan, Berlin: Edition Sigma Bohn.

Watanabe, C. (1997) “The Role of Technology in En-ergy/Economy Interactions: A View from Japan,”in Y.Kaya and K.Yokobori (eds), Environment, En-ergy, and Economy, Tokyo: United Nations Univer-sity Press, 199–231.

SHANE J.SCHVANEVELDT

environmental regulations

Before the 1970s, Japan’s environmental policyfocused on anti-pollution measures by directlycontrolling emissions from factories and powerplants. Rapid growth in Japan in the 1970s and1980s, however, led to increased pollution. Do-mestically Japanese businesses were criticized forbeing concerned only for growth and for beingthe cause of pollution and ecological destruction.The attitude of Japanese firms led to lawsuits byvictims of pollution. In the 1980s the focus ofenvironmental policies shifted to automobiles andother vehicles. The Japanese government intro-duced several laws and regulations to deal withpollution caused by automobiles. There were alsotougher regulations on diesel engine emissions.In 1993, new pollution laws and environmentalregulations were introduced. These environmen-tal regulations covered everything from air pol-lution and soil pollution to solid wastemanagement treatment systems and hazardouswaste emissions systems.

Not surprisingly these new regulations have

144 environmental regulations

also led to rapid growth in the Japanese environ-mental system industry. Total production hasbeen over ¥1.5 trillion in recent years. This isdue to strong demand for replacement of envi-ronmental facilities constructed in the 1970s andfor new systems that improve the quality of theenvironment. Solid waste treatment systems ac-count for 40 percent of this demand. The mar-ket is dominated by demand from the governmentfor new recycling technologies and by laws onrecycling packages and containers. This hascaused the Japanese industry for environmentalsystems to be a showcase for the most advancedtechnologies in the world, although US controlson hazardous emissions are tougher than the con-trols in Japan.

The Japan Environmental Association uses alife-cycle assessment (LCA) to determine if prod-ucts are environmentally friendly. The Associa-tion considers products friendly when they usefew resources, emit no waste during production,save energy and are easily broken down to per-mit recycling. In 1996, the Association revisedits “eco-mark” system to promote production anduse of products that are environmentally friendly.Products that meet the LCA are allowed to dis-play this new mark on their packaging.

In 1997 new recycling legislation was passed.The law divides responsibility for the separationand collection of containers and packaging be-tween local government, businesses and consum-ers. Due to increasing household garbage,discarded cans, bottles, and plastic containers ac-count for over 60 percent of garbage by volumeand must now be recycled. By 2000, businessesusing containers and packages must treat and re-cycle packages and containers. PET (polyethyleneterephthalate) bottles are a problem since the gov-ernment does not yet have the technology to re-cycle them, although some cities andmunicipalities already have separate collectionsof PET bottles (from 1.8 percent of containerwaste in 1995 to 14 percent in 2000, and expectedto rise to a rate of 27 percent in 2005).

Dioxin pollution is another major environ-mental issue in Japan. Ninety percent of dioxinpollution comes from the incineration of gar-bage such as plastics (PCBs). The dioxins enterthe atmosphere as soot particles falling into soil,rivers and oceans. They enter the food chain

through drinking water, and fish and livestockused for human consumption. New legal regula-tions on dioxin emissions from refuse incinera-tion were established in 1997 amending both theWaste Disposal Law and the Air Pollution Con-trol Law.

Eco-business has seen new opportunities in Ja-pan due to these environmental protection regu-lations. The Ministry of International Tradeand Industry (MITI) predicts rapid growth inenvironmental support, waste and recycling, en-vironmental conservation, environmental friendlyenergy and environmental friendly products. By2010, MITI expects eco-business in Japan to bea ¥3.5 trillion market.

See also: business ethics

TERRI R.LITUCHY

export and import of technology

Japan’s rapid economic expansion, both in theyears between the Meiji restoration (1868) andthe Second World War and in the first three orfour decades after the war, is often credited to itsefficient utilization of technologies developed inthe West. Japan is still the world’s largest importerof technology. As Japan became a technologysuper-power in the 1970s, it also began to emergeas a significant exporter of technology Today it issecond only to the United States in the value oftechnology exported.

Prewar imports of technology

Japan began systematically importing technol-ogy in the seventh century when it brought inweaving, pottery lacquer ware, mining, metal-lurgy and farming technologies from China.Technology was also acquired from Korea. Inthe late sixteenth century the Portuguesebrought Western guns and artillery to Japan.The Japanese quickly developed the ability toproduce their own firearms and even introducedsome refinements.

During much of the Tokugawa Period (1603–1868) contact with the outside world was severelyrestricted. Foreign books (except for those on

export and import of technology 145

Christianity) however, could be brought in be-ginning in 1720. Since the Dutch were the onlyWesterners allowed to trade with Japan, it wasDutch-language books on Western science andtechnology that were imported. A governmentofficial produced a Dutch-Japanese dictionary in1745. In 1774 a book on anatomy was translatedinto Japanese. The book demonstrated the uni-versality of Western science and inspired transla-tions of books on astronomy physics, chemistryand botany. In 1808 the government establisheda special office for the translation of Westernbooks.

In 1853 and 1854 a US naval squadron un-der Commodore Perry visited Tokyo Bay to pres-sure the Japanese government to open Japan totrade. The squadron demonstrated such achieve-ments of Western technology as the steam en-gine and the telegraph. The obvious militaryadvantages that technology gave the Westernerscaused both the central Tokugawa governmentand the regional rulers to strive to absorb mili-tary and related technologies as quickly as possi-ble. Some ninety young Japanese were sentabroad to study Western technology and institu-tions. The Tokugawa government requestedDutch and French help to build facilities to makeiron and build ships.

Efforts to assimilate Western technologyreached a fever pitch during the Meiji Era (1868–1912). By 1873 some 250 young Japanese wereabroad studying Western technology and admin-istrative practices. The Ministry of Industry(Komusho, also called Ministry of Engineering)played a key role in the adoption of foreign tech-nology from 1870–85. The Ministry and otherparts of the Japanese government hired some twoor three thousand foreign technical experts in thelate nineteenth century Englishmen were put incharge of Japan’s rail and telegraph systems, andGermans served as experts on medicine and medi-cal education. Large numbers of American andFrench technical advisors were also hired.

The foreign experts had the highest salariesin the Japanese government at the time. Provid-ing for their transportation, housing and enter-tainment was also very expensive. By 1879 thehigh cost of the foreigners, plus the desire of theJapanese to become as independent as possible,led the government to move aggressively to re-

place the foreigners with Japanese who had stud-ied technology abroad or who had been trainedby the foreign employees.

The Japanese often found it necessary tomake major adaptations before they could useforeign technology. In 1897, for example, theJapanese government planned a world-class inte-grated iron and steel works at Yawata. SinceGermany had the world leading blast furnacetechnology at the time, Germans were hired todesign the construction of the blast furnace andsupervise its construction. German foremen andworkers were also hired to supervise operations.The technology however, was not suited to thetypes of coke available in Japan and the plantwas forced to shut down. The Germans weresent home and Japanese successfully redesignedand operated the steel works. Japan’s growingmastery of imported Western technology wasfurther demonstrated in 1905 when the Japa-nese navy used wireless telegraphy to decisivelydefeat a Russian fleet.

Despite these successes, the Japanese some-times had to rely on on-going foreign support toeffectively use imported technology. In the elec-trical industry for example, Japanese firms reliedheavily on the capital, patents and technical guid-ance of Western firms. General Electric providedtechnology and took a stake in Toshiba.Mitsubishi Electric was formed with the partici-pation of Westinghouse. Fujitsu was formed as ajoint venture between Fuji Electric and Siemens.

Japan imported far more technology than itexported in the decades before the Second WorldWar, but there were some consequential Japanesetechnology exports. Perhaps the best known ofthese was the sale of patent rights for the ToyotaAutomatic Loom to Platt Brothers of Great Brit-ain in 1929. The proceeds financed Toyota’s en-try into the automobile business. Other prewarJapanese technologies, notably the Yagi antenna(invented in 1926), also came to be used widelyaround the world.

Despite the strong realization that Japanneeded foreign technology to maintain its eco-nomic and military security the Japanese peri-odically became concerned about the risk ofbeing overly dependent on foreign technology.In 1896, for example, Japanese shipyards wereforbidden to use imported ship parts. During the

146 export and import of technology

1930s foreign firms such as General Electric,Western Electric, and Westinghouse were forcedto turn their Japanese operations over to theirJapanese partners.

Postwar technology import control policies

In the years following the Second World War,Japan’s leaders were again convinced that Japanneeded to import technology to catch up withthe West. At the time Japan suffered from chronicbalance of payments deficits, and the governmenttightly controlled foreign currency. Firms want-ing to import technology during the 1950s and1960s had to get the foreign exchange to pay forit from the government. Approval was requiredfrom the most relevant Ministry most often theMinistry of International Trade and Industry(MITI). Government staff reviewed the proposedagreements to ensure that the Japanese buyer wasnot paying too much or being unduly restrictedin using the technology and that the agreementwas beneficial to the Japanese economy Govern-ment controls were substantially eased in the1960s as Japan joined the OECD and changedits status in the IMF, but the currency controllaws remained in effect until 1980. Since thenJapanese government controls over technologytrade have been closer to those in other devel-oped countries.

There is a long-standing controversy overwhether the restrictive controls in the 1950s and1960s benefited or harmed the Japanese economySome observers conclude that government inter-vention in technology import must have beenharmful. They cite Sony’s import of transistortechnology. MITI delayed Sony’s agreement toimport the technology from Western Electric be-cause Sony was then a small and unknown com-pany. While Sony did successfully import andcommercialize the transistor, some argue that itmight have done so more quickly and at lowercost without government intervention. They fur-ther suggest that there may have been other firmsthat failed to surmount bureaucratic barriers, cost-ing Japan even greater economic success in the1950s and 1960s. The Japanese-language litera-ture mentions another instance where govern-ment intervention apparently raised costs toJapanese importers of technology. In 1958, two

firms signed agreements to import polypropyleneproduction technology from Italy MITI did notapprove the agreements. When Japanese firmsfinally did import the technology the cost wassubstantially higher.

Those arguing that the technology import con-trol policies benefited Japan point out that gov-ernment intervention allowed a pooling of thelimited experience of Japanese firms with inter-national agreements, put government pressure onthe side of the Japanese negotiators, kept Japa-nese firms from bidding against each other (rais-ing the price of a technology), encouraged foreignfirms to sell technology to Japanese firms (becauseof government guaranteed payments), and keptJapanese firms from using technology agreementsto monopolize the Japanese markets. These claimsare supported by well-documented cases in thesteel and computer industries. It has also beenpointed out that only two or three example ofapparent harm caused by the policies have ap-peared in the literature.

Japan’s technology imports

During the 1950s the Japanese government ap-proved more than one thousand “A” technologyimport agreements (in which the effective life ofthe agreement was more than a year and pay-ment was to be made in foreign currency). USfirms were the technology suppliers for two-thirdsof these agreements. About half the agreementswere in just three industries: electrical/electron-ics, chemicals and steel/non-ferrous metals. TheUSA continues to supply about two-thirds ofJapan’s technology imports, though today mostof the imports are in electronics and computersoftware.

Japan’s postwar technology exports

Japan’s technology exports were relatively stag-nant through the 1950s, and overwhelmingly con-centrated in Asia. In 1960 the Japanese steelindustry achieved a breakthrough by signing itsfirst major contract for the export of technology.The recipient of the technology was a Braziliancompany which paid nearly six million dollarsfor technical guidance in building a steel plant.In 1963 Japanese steel makers made their first

export and import of technology 147

technology exports to advanced Western coun-tries, and in 1974 steel became Japan’s first in-dustry to achieve a technology trade surplus. Thesteel industry continued to generate large rev-enues for its technology as Japanese firms enteredinto technology agreements with firms in theUnited States and elsewhere. The constructionand textile industries also enjoyed surpluses dur-ing the 1970s, but Japan had huge technologytrade deficits in electronics, telecommunicationsand transportation.

By the late 1970s, Japan was second only tothe United States in R&D spending and Japan’stechnology exports continued to increase duringthe 1980s and 1990s. In 1983 Japan achieved asurplus in automotive technology trade, and in1993 in electronics. By the mid-1990s Japan hadpassed the UK to become the world’s second larg-est exporter of technology after the USA. In thelate 1990s Japan’s annual technology exportswere valued at about 70 billion dollars, comparedto nearly five times that amount for the USA.Nearly half of Japan’s technology exports (44 per-cent) went to the United States, but 34 percentwent to Asia (especially Taiwan, South Korea,China and Thailand, which accounted for 22 per-cent of total exports). Some 85 percent of theexports were in automobiles and electrical goods/electronics.

There has been controversy over the benefitsof Japan’s technology export practices comparedto those of other advanced nations. Hatch andYamamura (1996) argue that Japanese firms care-fully control the transfer of technology to otherparts of Asia, allowing only the slow transfer ofrelatively old technologies. The result is aneverwidening gap between Japan and other Asiancountries. Yamashita (1998) agrees that Japanesefirms exercise more control in technology trans-fers, but characterizes this as allowing a more ef-ficient transfer that benefits the recipients.

See also: industrial policy; science and technol-ogy policy

Further reading

Hatch, W. and Yamamura, K. (1996) Asia in Japan’sEmbrace, Cambridge: Cambridge University Press.

Lynn, L. (1982) How Japan Innovates: A Comparison withthe U.S. in the Case of Oxygen Steelmaking, Boulder, CO:Westview Press.

——(1998) “Japan’s Technology-Import Policies in the1950s and 1960s: Did They Increase IndustrialCompetitiveness?” International Journal of TechnologyManagement 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 andthe Making of the Japanese Consumer., Berkeley CA:University of California Press.

Peck, M. and Tamura, S. (1976) “Technology” inH.Patrick and H.Rosovsky (eds), Asia’s New Giant,Washington, DC: Brookings Institution, 525–85.

Samuels, R. (1994). “Rich Nation, Strong Army:” NationalSecurity and the Technological Transformation of Japan,Ithaca, NY: Cornell University Press.

Yamashita, S. (1998) “Japanese Investment Strategy andTechnology Transfer in East Asia,” in H.Hasegawaand G.Hook (eds), Japanese Business Management,London: Routledge, 61–79.

LEONARD H.LYNN

Export-Import Bank of Japan

Originally called the Japan Export Bank,ExportImport Bank of Japan (NihonYushutsunyuu Ginkou) was one of the principalgovernmentfunded financial institutions in Japan.Headquartered in Tokyo, it provided wide rangesof services, engaging primarily in overseas invest-ment financing and trade financing.

The Japan Export Bank was established in1950, but changed its name in 1952 to the Ex-port-Import Bank of Japan when it expanded itsactivities to include import financing. The bank’sprincipal activity was the provision of low-costloans to support corporate growth. Such activi-ties included, for instance, credits for exports ofheavy industrial products and imports of rawmaterials in bulk as well as financing ships andindustrial plants in order to promote the exportof Japanese products. In the 1960s the bank pro-vided loans to Japanese ventures for overseas in-vestments and expanding of overseas resources.The Export-Import Bank of Japan also providedyen loans to developing countries in order to al-low them to import from Japan, these loans in

148 Export-Import Bank of Japan

particular constituted a large portion of the bank’sactivities. The bank limited the uses of its loansto Japanese investors to three general purposes:(1) to finance the equity of ownership in over-seas ventures; (2) to provide debt capital to over-seas ventures; and (3) to finance the purchase ofplants and equipment from Japanese firms, to beinstalled in overseas ventures.

The Export-Import Bank of Japan came un-der growing pressure from other countries, par-ticularly from the United States, to make changesto its onesided trade policies and its growing tradesurpluses. As a result of foreign pressures, thebank began to develop some programs to assistin management of the global economy. In 1986it began to work with the World Bank and theAsian Development Bank in co-financing loansto developing countries.

In October 1999 the Export-Import Bank ofJapan merged with the Overseas Economic Co-operation Fund of Japan, forming the Japan Bankfor International Cooperation (JBIC), a govern-ment financial institution facilitating crossbordereconomic cooperation. The purpose of the JapanBank for International Cooperation is to contrib-

ute to the development of Japan and the interna-tional economy and community through under-taking lending and other financial operations.Among these operations are the promotion ofJapanese exports, imports and Japanese economicactivities overseas, the development of stabilityof the international financial order and the eco-nomic and social development of economic sta-bility in developing areas. The Japan Bank forInternational Cooperation functions in accord-ance with the principle that it shall not competewith commercial financial institutions and hastaken the general responsibility for: (1) financingto contribute to the promotion of Japan’s exportsor imports and overseas economic activities, andto the stability of international financial order;and (2) financing to contribute to economic andsocial development and the economic stability inoverseas developing regions. It will also combinethe knowledge and enterprise, which the two in-stitutions have accumulated, and the synergy ef-fect of the merger will hopefully prove beneficialto the Japan Bank of International Cooperation.

ALEXANDRA COHEN

Export-Import Bank of Japan 149

Fair Trade Commission

Japan’s Fair Trade Commission (FTC) is thecountry’s sole competition policy agency respon-sible for the enforcement of the nation’s Anti-monopoly Law as well as two additional statutespromoting protection of small business and con-sumers. The FTC, created in 1947 according tothe mandate of occupying American forces afterthe Second World War, is based on the US inde-pendent commission-style of government agencyIts powers appear broad on paper, and includequasi-legislative (rule-making powers) and quasi-judicial functions (independent hearing and ap-peal procedures) in addition to its administrativerole. In spite of its powers, however, the agencyhas been buffeted consistently by opposing forcesfor much of its history thereby having a deleteri-ous effect on the overall importance of competi-tion policy in Japan.

Organization and function

Organizationally the FTC is headed by a com-mission of five members appointed by the primeminister and confirmed by the Diet for five-yearterms, one of whom acts as the chairman of theFTC. Since the early 1950s, appointments to theCommission traditionally have been made fromformer officials of a select group of governmentministries. These patterns of appointments arewidely perceived to have compromised theagency’s independence. By the mid-1990s, how-ever, these appointment patterns changed so thatthe industrial and finance ministries no longer

had a dominant presence on the Commission.The agency is staffed by career civil servants whoundertake the day-to-day work of the agency al-though a small but significant number of theseemployees also have come from other ministries.

Japan’s Antimonopoly Law has features simi-lar to other such laws in advanced industrializedcountries, including prohibition of private mo-nopolization, unreasonable restraints of trade (car-tels, boycotts, etc.), and unfair trade practices. Theformer two are punishable by administrative orcriminal measures and, in the case of restraintsof trade, by fixed surcharges on illegal activity.Measures against unfair trade practices are lim-ited to orders to cease illegal activities and takeappropriate remedies. The Antimonopoly Lawwas passed with additional provisions unique toJapan’s competition policy regime, such as a banon holding companies to prevent the re-forma-tion of industrial groups, or zaibatsu.

The FTC also enforces unfair business prac-tice laws. One helps provide small business withsome protection from larger companies in theirbusiness dealings, and another protects consum-ers from misleading advertising and aggressiveadvertising promotions. It should be noted thatthe restrictions on promotions and premiums,while playing some consumer protection role, alsoappears to have limited competition in the retailsector.

History

The FTC has had a difficult history for much ofits existence, even having been threatened with

F

complete abolition from time to time, particularlyduring periods when Japan’s conservative Lib-eral Democratic Party (LDP) has held a strongmajority in the Diet. The introduction of US-in-spired antimonopoly legislation in 1947 directlychallenged pre-Second World War and in par-ticular wartime industrial practices of governmentand industry-led control associations, turningJapan’s industrial, political, and bureaucratic eliteagainst the agency and its legislative mandate.The US Occupation’s anti-zaibatsu program, in-cluding dissolution and restrictions under the An-timonopoly Law, also was an additional factor.

Conservative forces began consistent effortsfrom the late 1940s to emasuclate competitionpolicy through efforts such as weakening theAntimonopoly Law, drawing up legal exemptionsto the Law, and circumventing the Law throughthe formation of cartels among businesses to beled by bureaucrats in other agencies. The FTCsurvived complete abolition through the 1950sand 1960s by weakening its standards, failing totake on high-profile cases, and appealing to smallbusiness and other groups to support the agencyand its role.

The FTC re-emerged during the early 1970swhen inflation and suspected price rises by car-tels became an important political issue. The FTCtook on a high-profile case against oil companiesin the wake of the 1973 oil shock and followedwith an active anti-cartel campaign. The atten-tion enabled a strengthening of the AntimonopolyLaw in 1977, including the addition of manda-tory surcharges on cartel activity. As inflationfaded and as the LDP emerged again as the domi-nant party in the 1980s, the FTC de-emphasizedactive enforcement in favor of a defensive pro-gram to encourage compliance with the law.

The rise of Japan’s industrial might by the late1980s brought international scrutiny of Japan’sindustrial structure and business practices thatwere perceived to keep foreign companies out ofJapan’s domestic market. Strong pressure wasbrought to bear on Japan by the United States tostrengthen measures against anti-competitivepractices. As a result, the FTC again emergedwith a stronger profile. Cartel surcharges wereraised, among other measures. The FTC alsobegan stronger efforts to enforce the law, includ-ing intermittent use of referrals of criminal acts

to Japan’s Public Prosecutors Office. By the endof the 1990s, the dissolution of the Left in Japa-nese politics and an economic downturn enabledthe repeal of the ban on holding companies. TheFTC nonetheless remained able to continue witha cautious but moderate level of enforcement ofthe Law.

Current status

The FTC’s overall profile in the Japanese gov-ernment today is much improved from its posi-tion during the 1950s and 1960s. However, theagency remains among the more cautious com-petition policy agencies in advanced countries fora variety of institutional as well as political rea-sons. The fact that the FTC has been embattledfor much of its existence has had a critical impacton the attention that Japanese companies havepaid to competition policy in their overall busi-ness activities. This is particularly relevant be-cause the agency until very recently effectivelyhas controlled access to, interpretation of, andremedies and punishments under the Antimo-nopoly Law. Direct access to the courts to fileAntimonopoly Law grievances now is allowedfor lesser violations under unfair methods of tradeprovisions.

Further reading

Beeman, M. (1997) “Public Policy and Economic Com-petition in Japan,” D.Phil Thesis, University of Ox-ford.

Hadley E. (1970) Antitrust in Japan, Princeton, NJ:Princeton University Press.

Iyori, H. and Uesugi, A. (1994) The Antimonopoly Lawsand Policies of Japan, New York: Federal Legal Publi-cations.

Matsushita, M. (1993) International Trade and Competi-tion Law in Japan, New York: Oxford UniversityPress.

Tilton, M. (1996) Restrained Trade, Ithaca, NY: CornellUniversity Press.

MICHAEL BEEMAN

firm strategies for technology

Firm strategy for technology is roughly dividedinto goal setting in technology development and

firm strategies for technology 151

the formulation of the means to obtain the goalsset. Setting a goal in this context means the selec-tion of a technology domain to which firm re-sources are allocated. To formulate the means toacquire technologies, alternative methods suchas in-house development, alliances with othercompanies, license contracts and acquisitions ofcompanies are considered. In addition, the ap-proach to innovation—whether a companyachieves its targeted performance through meansof radical innovation or by accumulating incre-mental innovations—could be included in the for-mulation of means.

Selection of technology domain

The key characteristic of Japanese companies interms of the selection of technology domain ishomogeneity with its competitors. Many compa-nies tend to select a similar domain to that oftheir competitors. As a result, many unremark-able companies may compete against each otherin the same industry. This occurs because firmsbelieve that by mimicking competitors’ tech-nologies and products they can avoid being in aweak position in the market. This strategy seemsto run contrary to the general theory of strategicmanagement, which proposes that firms shouldaccumulate distinct technical resources, and in-troduce differentiated products in the market.Lacking distinctive or differentiated products,Japanese firms often compete on the basis ofprice. But intensified price competition with ho-mogeneous competitors is likely to decreasecompany profits, and hurt a company’s ability tomake long-term investments as well. In thissense, Japanese firm strategy is often regarded asirrational.

However, Japanese firms have succeeded insome industries by using a mimic strategy Forexample, the Japanese color television industrywas successful by adopting homogeneous tech-nologies. As changes in televisions productiontechnology began to occur with the adoption oftransistors and integrated circuits, Japanese firmscopied one another, while American firms didnot follow suit. Led by Motorola, only a few UScompanies adopted these technological innova-tions early on. But the leading companies in Ja-pan—Matsushita, Sony, Toshiba, and

others—followed the innovation of Hitachi imme-diately. As a result, intense competition in theproduct market occurred, and Japanese compa-nies boosted their frequency of new product de-velopment in order to compete in a tough market.In turn, the cost performance of Japanese prod-ucts was remarkably improved, leading to thedefeat by Japanese companies of US competitorsin US markets. Although the selection of similartechnology can intensify competition in an indus-try it can also lead to mutual learning among com-petitors and the development of related industries.As a result, products and manufacturing proc-esses can be improved quickly in comparison withforeign competitors.

The matter of the homogeneous selection oftechnologies has sparked interest from a differ-ent direction in more recent times. The adoptionof a unified technical standard in an industry par-ticularly in high-tech industries, has become im-portant. The underlying reason for this tendencyis the spread of products connected to the diffu-sion of its complementary goods, such as appli-cation software for personal computers (PCs). Toproduce these types of products, companies pre-fer developing and manufacturing products witha unified standard as opposed to having to com-pete among companies with different standardsin the same market. A good illustration of com-petition over a technical standard is the well-known case of a videocassette recorder (VCR)standard among Japanese companies. In the 1970sthe Betamax standard developed by Sony andVHS standard promoted by Matsushita and JVCcompeted head-to-head in the consumer VCRmarket. Though considered technologically in-ferior to Betamax, the VHS standard eventuallywon out. The major factor in VHS’s predomi-nance in the market was the spread of VHS-com-plementary goods: software and product. TheVHS standard defeated the Betamax standard,even though it was introduced to the marketmuch later than Betamax.

Means of technology acquisition

The means to acquire technology are: in-housedevelopment, alliances with other companies, li-cense contracts and the acquisition of a companythat has valuable technologies. From the end of

152 firm strategies for technology

the Second World War to the 1960s, technologyintroduction by means of license contracts wasthe primary means by which Japanese firms ac-complished their technology development goals.After the 1970s, however, the rate of in-house tech-nology development was increased, which is pref-erable in terms of the long-term growth prospectsof companies. In fact, new products developedby Japanese companies, such as the consumerVCR and facsimiles, have increased remarkably.Also in the field of intermediate goods, such asLCD and industrial robots, Japanese technologydeveloped in-house has surged ahead of othercountries.

However, in the 1980s and 1990s, companiesbegan to focus on technical alliances and acquisi-tions. The speed of technology development hasincreased, while the ability to develop technol-ogy in-house remains relatively unchanged dueto the long time it takes to develop technologicalcapabilities in-house. Increasingly Japanese firmshave sought alliances with firms outside Japan.For example, a Japanese drug manufacturer,Takeda Chemical Industries, Ltd, tied up withAbbott Laboratories and succeeded in develop-ing a new medicine for prostate cancer, Leuplin.However, compared with the behavior of firmsin the United States, these methods are not aswidespread in Japan.

Approach to technical innovation

In terms of their approach to technical innova-tion, Japanese companies focus on incrementalinnovation rather than radical innovation. Withregard to technical innovation, although the in-troduction of epoch-making technology often at-tracts great attention and is viewed as beingcentral to technological progress, the accumula-tion of incremental innovations often brings greatprogress in technological advances as well. Fre-quent introduction of new products with incre-mental innovations has the advantage of makinguse of the “learning by using” of customers andthe experience of manufacturing in contributingto the progress of technology.

Many studies tend to view the technologyorientation of Japanese firms as an inevitableconsequence of Japanese institutions and cus-

toms, rather than that of deliberate strategicchoice by corporate executives. Thus some re-searchers express doubts about the innovationcapability of Japanese companies, especially withregard to their ability to achieve radical innova-tion. They argue that the Japanese system oftraining engineers, the labor market, the corpo-rate culture and other features of the Japanesesystem create obstacles to pursuing a technologystrategy that focuses on new radical technologydevelopment. However, it cannot be easily de-termined that one is better for the progress oftechnology than the other, and the tendency ofadopting an incremental approach does not nec-essarily mean a low ability for technical innova-tion.

Further reading

Finan, W.F. and Frey J. (1994) Nihon no gijutsu ga abunai(Japanese Technology at Bay), Tokyo: NihonkeizaiShinbunsha.

Porter, M.E. (1985). Competitive Advantage: Creating andSustaining Superior Performance, New York: The FreePress.

Rosenbloom, R. and Cusumano, M. (1987) “Techno-logical Pioneering and Competitive Advantage: TheBirth of the VCR Industry” California ManagementReview 29 (4): 51–76.

Shintaku, J. (1994) Nihon kigyo no kyoso senryaku (Com-petitive Strategy of Japanese Corporations), Tokyo:Yuhikaku.

YASUO SUGIYAMA

5S campaign

The 5S campaign is a technique used by Toyotaand other Japanese firms to establish and main-tain 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 exam-ple would be to throw away rubbish. Seitonmeans systematize or neatness. A typical exam-ple would be the quick retrieval of a document.Seiso means sanitize or cleanliness. It is an indi-vidual’s responsibility to keep the workplaceclean. Seiketsu is standardize or standardization.

5S campaign 153

Shitsuke means self-discipline, in other words, fol-lowing the 5S’s daily.

TERRI R.LITUCHY

foreign aid

In line with postwar Japan’s emphasis on non-military contributions to international societyJapan’s foreign aid has been limited to officialdevelopment assistance (ODA) and disaster re-lief aid. Since its origins in early postwar bilat-eral reparation agreements, Japan’s foreign aidgrew to be the single largest aid program in thelate 1980s, and it retains that status as of 2001despite growing domestic pressure for budgetcuts.

The Potsdam Declaration (1945) which set theAllied Powers conditions for peace with Japancalled on the latter to pay war reparations to allvictims of Japanese wartime aggression. The SanFrancisco Peace Treaty (1951) narrowed this bylimiting Japan’s reparation obligation only tocountries that suffered losses as a direct conse-quence of Japanese occupation. As postwar Ja-pan re-established ties to its Asian neighbors, thereparation obligation in each case became a keyinitial hurdle to normalized bilateral relations.

Japan’s situation at that time played a criticalrole in determining its reparations policy andsubsequent ODA policy. As a war-devastatedcountry seeking to rebuild its industrial base andrecapture export markets, Japan decided tomake reparations in kind, not in cash. Repara-tions would typically come in the form of indus-trial plant and equipment. This assisted therecipient’s industrialization and generated ex-port orders for Japanese industry The Japanesegovernment also adopted a request-based sys-tem. This required the recipient country to sub-mit specific project requests to Tokyo for review.But because the reparation countries often didnot have the technical expertise to identify anddesign industrial projects, in practice Japanesebusinesses active in these markets would fill thisvoid.

Japan joined the Development AssistanceCommittee (DAC) of the Organization for Eco-nomic Cooperation and Development (OECD)in 1961. DAC was formed at American initiative

to coordinate the Western countries’ economicassistance efforts and raise its effectiveness. Ja-pan’s reparation programs were recognized aseconomic assistance, but they came under criti-cal scrutiny within DAC because of their thinlyveiled export promotion emphasis. Pressure wasput on Japan to make new aid commitments thatwere more concessional and genuinely benefi-cial to the recipient economy Over the years theDAC and its members have played a key role inmoving Japan’s ODA away from its originalcharacter.

Through its aid programs Japan has offereddeveloping countries valuable access to its highquality industrial products and engineering serv-ices. In return for granting this benefit Japan hasbeen able to gain recipient cooperation in address-ing Japan’s problems of foreign resource depend-ence and competitiveness in a global economyOver the years Japan has used aid projects to se-cure stable long-term supplies of critical energyresources, raw materials, and food resources.With the emergence of the borderless economyJapan has used its aid to help Japanese firms glo-balize production by helping developing coun-tries build industrial parks and regulatoryenvironments hospitable to Japanese firms seek-ing to move production overseas.

Japan also offered its aid program to the Westas an alliance contribution during the Cold War.Starting from the mid-1960s Japan offered aid assupport for US containment policy in Asia. Inthe 1970s and 1980s it offered rapid growth in itsaid spending as a non-military contribution towinning the Cold War and as a salve for tradefriction with its western trading partners. In the1990s Japan attempted to use its aid to gain alarger role in international security matters bypromulgating new aid principles in 1991 that con-ditioned ODA upon the recipients’ development,procurement, and exports of weapons. It followedthis up with a symbolic and temporary cut ingrant aid to China after that country’s nuclearbomb test in 1995. In the aftermath of the Asianfinancial crisis of 1997–8 Japan made new fund-ing pledges for Asian currency stability. At thestart of the new millennium, Japan is emphasiz-ing the use of its aid to help narrow the so-calleddigital divide and to address problems of the heav-ily indebted developing countries.

154 foreign aid

On the domestic front, the Japanese govern-ment has confronted widening calls for greaterODA transparency and reform from the late1980s to the present. It attempted to deal withthis by producing an ODA Program Outline in1992 that laid down a broad and flexible set ofpolicy principles. In response to pressures for in-creased effectiveness and breadth of concern Ja-pan moved to include non-governmentalorganizations (NGOs) in the identification andimplementation of aid projects and programs, andaid to address environmental problems becamemore salient in aid policy in the 1990s. Continu-ing aid scandals and revelations of misuse, how-ever, along with tightening budgetary constraintsthroughout the 1990s led to the first ever ODAbudget cut in 1997. The prospect at present is forarrested budget growth and perhaps a gradualdecline in real spending terms.

Japan’s aid administration has long been notedfor its opaque and bureaucratic character. TheForeign Ministry has the role of representing Ja-pan’s aid policy to external actors. Behind thiswindow, however, the realities of policy makingare more complicated. Aid policy is coordinatedinside the domestic political system by four cen-tral government bureaucratic actors, i.e., the Min-istry of Foreign Affairs, the Ministry of Finance(MOF), the Ministry of International Tradeand Industry (MITI), and the Economic Plan-ning Agency In addition, some fourteen othermain government ministries and agencies playmore specialized roles in those aspects of aid thatfall into their respective areas of competence. Withrespect to policy implementation, the Japan In-ternational Cooperation Agency (JICA) admin-isters most of Japan’s grant aid and the JapanBank for International Cooperation administersthe bulk of loan aid.

In 1999 net ODA disbursements totaled $15.3billion with almost two-thirds allocated to coun-tries in East and South Asia. This regional distri-bution reflects Japan’s traditional pattern ofaid-giving. In other respects, however, the break-down of Japanese aid has changed. The balanceof bilateral and multilateral aid has shifted fromroughly a 2:3 ratio to a 3:4 ratio in the 1990s,reflecting perhaps some degree of Japanese dis-appointment at its weak leadership role in multi-lateral institutions relative to the size of its financial

contributions. With respect to bilateral aid, theshare of technical aid has increased markedly toover 30 percent while the share of loans has de-creased to little more than 40 percent. This re-flects a shift in emphasis away from heavyinfrastructure projects toward debt relief, techni-cal training, and programs to improve the wel-fare of poorer population segments.

Further reading

Arase, D. (1995) Buying Power: The Political Economy ofJapan’s Foreign Aid, Boulder, CO: Lynne Rienner.

Development Assistance Committee, Organisation forEconomic Cooperation and Development (annual)DAC Journal: Development Cooperation Report, Paris:OECD.

Economic Cooperation Bureau, Ministry of ForeignAffairs (annual) Japan’s ODA Annual Report, Tokyo,Japan: Ministry of Foreign Affairs.

DAVID M.ARASE

foreign companies in Japan

The history of foreign companies in Japan paral-lels the development and transformation ofJapan’s economy and also serves as a proxy forits increasing openness to foreign ideas and cul-tures. Very few foreign companies were active inJapan prior to the Second World War, since Ja-pan made few efforts to open itself to foreign prod-ucts, its consumers or middle class were verysmall and not very exposed to non-Japanese cul-tures, and Japan’s distance from other marketsmade the conduct of business there difficult.Nevertheless, a few companies did persist in atleast establishing relationships and business inJapan. Of those, many were invited to Japan toprovide specific know-how or product knowledgethat Japan could not provide for itself. For in-stance, the Swiss food giant Nestlé first opened arepresentative office in Yokohama in 1913 in or-der to provide milk products to Japan’s populace.Other foreign companies operating in Japan dur-ing the 1920s and 1930s, but which had originsin the countries allied against Japan in the Sec-ond World War, were shut down or were effec-tively banished from Japan during the war.

After the war, foreign majority ownership ofJapanese companies was prohibited by law, but

foreign companies in Japan 155

the presence of military government and soldiersfrom the victorious powers influenced the growthof an environment of admiration for foreign life-styles and, as a result, for foreign products. Manyof the largest and most profitable foreign compa-nies in Japan today for example, first set up op-erations in Japan or began exporting to Japan inthe two decades following the war.

As Japan’s society grew increasingly affluentin the 1950s and 1960s, interest in Japan amongglobalizing foreign companies grew, and duringmany of those years Japan ran a trade deficit.But Japanese companies and government policiesdesigned to completely protect key domestic in-dustries (such as agriculture and distribution)combined to ensure that foreign companies wouldnot be able to dominate specific industries anddestroy their mostly smaller domestic competi-tors. For example, a 1956 Department Store Lawprotected small retailers and strengthened theirability to keep unwanted competitors out of theircommunity And revisions to Japan’s Shogyo Ho,or Commercial Code, during the 1960s encour-aged domestic companies to issue new shares andplace them with friendly customers, suppliers andcompanies in their industrial groups. Not onlywould this strengthen keiretsu ties, but it wouldalso provide insurance against unwanted foreigntakeover attempts. As a result, the few foreigncompanies that were allowed to set up wholly-owned subsidiaries in Japan, such as IBM in 1960,were forced to license most or all of their basicpatents and technologies to their eventual Japa-nese competitors as a condition of doing so. Or,like the foreign oil companies, they were allowedto set up operations for the specific purpose ofensuring Japan’s access to essential commoditiesand supplies. Other successful major foreign com-panies formed joint ventures in Japan, such asHewlett-Packard with Yokogawa Electric andMcDonald’s with Fujita. A number of Chineseand Korean-owned businesses also set up opera-tions in Japan during this time; today they ac-count for the majority of foreign companies inJapan.

Many foreign companies soon learned that thedynamics of competition in Japan were differentfrom those they were used to in their home mar-kets or other markets where they competed. Thewillingness of Japanese companies to accept lower

profits in order to obtain greater market share,the existence of exclusionary buying networksamong Japanese producers and suppliers, the ex-istence of a host of “non-tariff” or administrativebarriers to trade and investment, the existence ofa complex and multi-tiered physical distributionsystem for many different types of products, theoften greater importance of relationships, qual-ity and service (instead of price) in buying deci-sions, and opaque and often arbitrary regulatoryguidance and decision making, have all combinedto cause difficulties for a variety of foreign com-panies seeking to grow their businesses in Japan.Occasionally these problems attained a high pro-file or became entangled with domestic politics,as in the case of the Lockheed bribery scandalthat caused the resignation of the Japanese primeminister in 1976, but more frequently foreign com-panies like Procter & Gamble grew to appreciatethe need to modify or design their products spe-cifically for Japan, or manufacture in Japan ratherthan try to import. Or in the case of GeneralMotors, to put the steering wheel on the rightrather than the left.

In the 1970s and 1980s, certain foreign prod-ucts and brands grew popular with Japan’s mid-dle-class society including German luxury carssuch as BMW, French and Italian beauty andfashion brands such as Louis Vuitton and Gucci,and US consumer and food brands likeMcDonald’s and Coca-Cola. Increases in tour-ism abroad by Japanese families, and a strong yen,helped expose Japanese families to foreign brandsfor the first time. But Japan’s growing affluencein the 1980s, its trade surplus with the rest of theworld, and its increasing acquisitions or estab-lishment of operations in its traditional exportmarkets, increased the interest of other countriesin stimulating structural changes in Japan’s do-mestic market that would stimulate domestic con-sumption, increase importation of foreign goods,and lower the trade surplus. This resulted inmany cases of friction between Japanese and for-eign companies competing in the same industryand also between foreign governments and thegovernment of Japan. Negotiations between gov-ernments and among governments and specificindustries often resulted in explicit agreementsby Japan to increase imports, loosen regulationsor ‘non-trade barriers, open specific industries for

156 foreign companies in Japan

foreign investment, reduce restric tions on for-eign ownership, protect intellectual property cur-tail exports, or implement reforms to give foreigncompanies a ‘level playing field’ when compet-ing in Japan. A variety of such negotiations, in-volving numerous industries ranging from textilesin the early 1980s to Internet access in the late1990s, have taken place over the past two dec-ades and continue today and have collectivelyhad a major impact on the ability of foreign com-panies to enter and grow their companies in Ja-pan.

Japan’s capital market development also playeda role in foreign companies’ Japan strategies (seecapital markets), as foreign firms such as IBMwhich had major Japanese operations took theirJapanese units public in the 1970s and early 1980sas a way of emphasizing their dedication to thelocal market and solidify their ties to customersand suppliers. The popularity of listing in Japandied down in the early 1990s as Japan’s stockmarket fell, but picked up again in the late 1990sas technology companies such as Oracle listedshares of their Japan operations on the local mar-ket. Today the existence of NASDAQ Japan dem-onstrates the involvement of foreigners in Japan’scapital market institutions.

At present, foreign companies are entering andgrowing in Japan in a variety of ways, using nu-merous strategies and tactics to increase theirprospects of success. Smaller firms or those withniche products, technologies or services oftencontract with middlemen of various kinds (suchas agents, representatives, distributors orwebmalls). Larger companies (such as GeneralMotors, Starbucks, and Unisys) are able to ar-range partnerships and alliances in Japan, whichmay or may not include the formation of jointventures or the taking of equity in their Japanesepartner. For companies seeking to acquire majorpositions in the Japanese market immediatelymergers and acquisitions or transactions whichprovide operating control of an already existingJapanese company (such as Renault with Nissan)have become far more frequent, and the avail-ability of distressed companies (or those exces-sively burdened by their debt) and those open tomanagement buyouts has increased markedly inrecent years (companies such as Cargill, MerrillLynch and General Electric have made outright

acquisitions of major bankrupt companies in re-cent years). Foreign companies (such as AutoLivand other global automotive systems suppliers)are also increasingly using relationships estab-lished first in their native regions with Japanesemanufacturers operating abroad, to expand intoJapan with customer relationships already estab-lished. Those wishing to establish new operationson the ground are able to take advantage of theavailability of qualified native staff, as well aslower costs for advertising, office space, travel,staff and entertainment. Still other companies likeUS-based Boeing have established and main-tained significant Japanese business while success-fully avoiding the creation of Japanesecompetition, by making potential Japanese com-petitors like Mitsubishi and Kawasaki Heavy In-dustries significant suppliers to their commercialairplane manufacturing operations.

Foreign companies can rely on a variety of or-ganizations and programs to support their op-erations and employees in Japan. Japan is the onlymajor economy whose government has estab-lished an agency whose specific objective is toincrease the level of imports to Japan, encourageforeign direct investment in the country and oth-erwise provide assistance to foreign companiesseeking to do business in Japan. The Japan Ex-ternal Trade Organization (JETRO) was ini-tially created to promote Japanese exports, butnow operates offices around the world and allover Japan to assist foreign companies and helpthem make the contacts they need to increasetheir Japanese business. Among its various ac-tions, it promotes the existence of specific “for-eign access zones,” which offer incentives forforeign companies which choose to establish op-erations in specific, often rural, prefectures. It alsoprovides temporary office space, library facilities,and other services helpful primarily to small andmedium-sized foreign companies. Other Japanesenational government bodies, such as Japan De-velopment Bank, provide financing or offer spe-cific programs, incentives and discounts designedto encourage investment by foreign companies,including large manufacturers, in Japan. And in-dividual prefectures and municipalities oftensponsor their own programs designed to ease theentry or investment of foreign companies in theirregions.

foreign companies in Japan 157

Many of the countries whose companies havecome to Japan in significant numbers have them-selves established both government and/or non-profit support organizations and chambers ofcommerce in Japan. Organizations such as theAmerican Chamber of Commerce in Japan(ACCJ), the European Business Community Or-ganization in Japan, and Deutsche Industrie undHandelskammer in Japan (DIHKJ) are examplesof membership organizations providing informa-tion services, programs and events for their re-spective business communities in Japan. Inaddition, often specific states, regions or prov-inces of a country establish offices in Japan, bothto promote the Japan business interests of theirhome companies, as well as to seek Japanese in-vestment in their state and prefecture abroad.

Today certain foreign companies dominatetheir industries in Japan. Coca-Cola obtains fully20 percent of its global operating profit from Ja-pan, despite a host of competitors in Japan’s vari-ous beverage markets. Microsoft holds greaterthan a 90 percent share of the PC operating sys-tem market in Japan. American Family Life As-surance Company (AFLAC) receives more than80 percent of its business from its Japanese salesof cancer and other specialty health insurance.Service industries such as healthcare, nursing,eldercare, financial services, Internet, and envi-ronmental technology are in many cases wideopen and solicitous of foreign technology and in-vestment. Early in 2001 a British company BSGroup, made an acquisition in one of Japan’s larg-est yet most traditional industries, that of pachinko,and it is rare today to find a Japanese industry inwhich foreign companies do not participate atleast marginally.

On the other hand, certain Japanese industrieshave proven too difficult or inaccessible for for-eign companies to make significant inroads todate. These include the construction industry,the telecommunications industry dominated bythe Japanese government through its (until re-cently) majority ownership in dominant tel-ephone carrier Nippon Telegraph andTelephone (NTT), and the agriculture industry.In automobiles, foreign car brands still onlyachieve (as of 2000) 6 percent share of all vehi-cles sold in Japan. In fact, foreign companies playa much smaller overall role in Japan’s economy

and account for a much smaller proportion oftotal employment, than in other developed econo-mies in which they compete.

Nevertheless, because of relatively low shareto date in Japan, and the recent weakness of anincreasing number of previously formidable do-mestic competitors, foreign companies may findJapan’s enormous market to be one of their lastgreat growth markets as the new century dawns.

JAY NELSON

foreign workers

Japan continues to have the most homogeneouspopulation of all major industrial nations in theworld. Approximately 3 percent of Japan’s over-all population could be described as other thanculturally ethnically and racially Japanese, andthis 3 percent is made up primarily of Koreansand Chinese. Both Taiwan and Korea were long-term colonies of Japan until the Second WorldWar, and many of these Chinese and Koreans inJapan today were forced to migrate to Japan withthe labor shortage during the war. Most of thesepeople have remained in Japan in subsequentgenerations but continue to hold Korean or Tai-wanese citizenship, partly because of Japan’shighly restrictive naturalization laws.

The number of foreign workers in Japan,however, has been growing in recent years. Atfirst the increase in foreign workers was inducedby the economic boom of the 1980s. AlthoughJapan is currently experiencing a severe eco-nomic recession, this trend persists; the numberof foreign workers is now over 600,000, or about1 percent of the nation’s working population. Toa large degree, the need for foreign workers per-sists even during Japan’s long economic stagna-tion from the early 1990s because, as is commonwith advanced industrial nations, the more afflu-ent and well-educated Japanese population is un-willing to perform unattractive jobs which arecharacterized by the so called 3Ks: kiken (danger-ous), kitanai (dirty), and kitsui (demanding). Ja-pan faces a looming crisis because of a rapidlyaging population due to a serious drop in thebirth rate and an increasing life expectancy thathas already put Japan ahead of all other nations.This looming labor shortage crisis is made more

158 foreign workers

critical for Japan’s future because typical solu-tions of immigration and increased female laborparticipation are culturally resisted in Japan.

Immigration

During the mid-1980s and 1990s Japan beganexporting jobs to Southeast Asia as the yen dra-matically increased in value. If Japan is to keepexisting factories and offices operating in Japanand stop short of moving most production toother countries, the immigration of foreign work-ers into Japan would seem the most logical solu-tion. This is a solution all of the advancedindustrial nations in Europe and North Americahave followed to at least some degree. But it is asolution that creates extensive resistance amongthe Japanese people. Japanese government sur-veys continue to show that Japanese people areuncomfortable among foreigners and the unfa-vorable treatment many foreign workers have re-ceived in Japan in recent years has caused publicconflict.

When Japan experienced a serious labor short-age during the period of rapid industrializationof its economy in the mid-1960s, there was astrong demand to import foreign workers fromcountries such as Korea and Taiwan. However,the Japanese labor minister at the time arguedagainst this idea, since he feared that the impor-tation of foreign laborers might deter the nationfrom promoting the welfare of domestic workersand improving working conditions. Then againthe same decisions were made by subsequentlabor ministers in the 1970s. Japan managed with-out importing foreign laborers, partly thanks tothe massive introduction of labor saving technolo-gies in various industries, as well as a large laborpool in rural areas. There is growing awareness,however, that sooner or later the looming laborshortage because of the “baby bust” will demandmore foreign workers.

By the late 1980s, the Japanese Diet approvedseveral amendments to its Immigration Controland Refugee Recognition Law that became ef-fective in 1990. The new law expands the numberof job categories for which the country will ac-cept foreign workers; from eighteen categoriesto a total of twenty-eight categories. These aremostly professional categories such as lawyers,

accountants, medical personnel, and researchers.However, the law also attempts to tighten up regu-lations and control the inflow of unskilled andsemi-skilled foreign workers. It imposes sanctionson those who try to recruit or hire illegal unskilledforeign workers. The increase in the number oflegal residence and work categories allows a va-riety of professional workers as well as the de-scendants of Japanese immigrants abroad, up tothe third generation, to work and reside legallyin Japan for a specified period of time.

In terms of controlling illegal immigration, thenew law has had a temporary deterrent effect.Before the law took effect, about 30,000 illegalworkers left Japan for fear of arrest. The newvisa agreement made it very difficult to obtain avisa, and contributed to the reduction of thenumber of visitors.

The new law also allows some unskilled laborin through the following categories: (1) companytrainees, which has become a way for employersto bring in low-wage foreign workers for un-skilled, manual labor jobs where little training isinvolved; and (2) students of post-secondary (ex-cept for university) institutions, including lan-guage and vocational schools. They can work fora limited number of hours per week.

Under this law, the only group of foreignerswho can legally work full-time in simple laborjobs in Japan is nikkeijin, foreigners with Japaneseancestry. The legal status of nikkeijin workers ledto the replacement of illegal foreigners withnikkeijin by many companies. Even with theseprovisions created for employers to obtain un-skilled workers, Japan still maintains the positionthat the nation does not allow unskilled laborers.Thus, the new law has been criticized because itdoes not directly address the labor shortage inunskilled labor jobs.

Further reading

Kitagawa, T. (1992) “Social Research on JapaneseSouth American Immigrant Workers inOizumimachi, Gunma Prefecture: The SettlingDown Motivation and Infrastructure for Accep-tance,” in K.Yamashita (ed.), Hito no Kokusaika nikansuru Soogooteki Kenkyuu (Comprehensive Researchof Internationalization of People), Tokyo: Depart-ment of Sociology Tokyo University.

foreign workers 159

Komai, H. (1991) “Are Foreign Trainees in Japan Dis-guised Cheap Laborers?” Migration World Magazine20:13–17.

Morita, K. and Sassen, S. (1994) “The New Illegal Im-migration in Japan 1980–1992,” International Migra-tion Review 28:153–63.

Murashita, H. (1999) Gaikokujin Roodoosha Mondai noSeisaku to Ho (Government Polities and Laws Re-garding Foreign Worker Problems), Osaka: KeizaiHooka Daigaku Shuppan Bu.

MEIKA CLUCAS

Fuji Photo Film

Fuji Photo Film Co., Ltd was established on Janu-ary 20, 1934. Fuji Photo began as a division ofDainihon Celluloid Company. At that time,Dainihon Celluloid was attempting to cooperatewith Kodak, Inc. of the United States in order tolearn new techniques of film production and pro-cessing, because it lacked the technological so-phistication necessary to compete. However,Kodak refused to help, and Fuji Photo went onto learn how to produce photo film on its own.As the company grew and developed, it diversi-fied into many film-related businesses, globalizedand became the one of the largest photo film com-panies in the world.

Currently Fuji Photo is a global company withover 37,551 employees worldwide, distributedacross ninety-two subsidiaries. Fuji Photo’s capi-tal stands at ¥40,363 million as of March 31,1999, with net sales ¥1,437,810 million and netincome of ¥71,540 million for the fiscal year end-ing March 31, 1999. Fuji Photo’s businesses in-clude imaging systems, photo finishing systemsand information systems. These activities arespread across divisions: general photo andimaging, advanced photo systems, camera andmovie film, digital photo systems (Fuji developedthe first digital camera in 1988), recording media(including video tapes and CDs), office imaginginformation systems, printing systems, medicalinstruments, and high-functional industrial ma-terial.

Within the global photo film industry FujiPhoto holds the largest market share in Japan (70percent) and ranks second in the world. Its inter-national success started over fifty years ago when

Fuji Photo began an optical products export busi-ness in 1949. Fuji Photo began exporting photofilm to Asia and South America in 1954, slowlydeveloping its overseas markets. During this time,Fuji Photo took on the role as exemplar for otherJapanese companies that followed its lead in in-ternationalizing operations and services. By tak-ing a leadership role, Fuji Photo dominated thephoto film market in Japan by 1960. In 1962,Fuji Photo Film developed a partnership withXerox UK to form what is now considered to beone of the most successful joint venture compa-nies in the history of business, Fuji Xerox. Thisjoint venture project helped Fuji Photo to solidifyits international presence and reform its imageover the next few years.

Future growth for Fuji Photo will depend onthe strength of their existing operations aroundthe world. It plans to expand its digital basedbusiness as part of a drive to dominate “imagingand information.” So far, success within thisgrowth industry has been mixed. Fuji Photohas 20 percent market share in digital camerasin the world, which, although high, places itthird compared to its Japanese rivals, Olympusand Sony. Fuji Photo’s goal for the future is tobe number one in the world in the digitalimaging business.

Further reading

Arai, T. (1995) The Real Ability of the Lion, Fuji Film, TheNikkan Kogyo Shinbun, Ltd.

Barron, D. (1997) “Integrated Strategy Trade Policyand Global Competition,” California Management Re-view 39(2): 145.

Fuji Photo Film Co., Ltd. (1984) 50 Years History of FujiPhoto Film, Tokyo Fuji Shoshun Fuirumu KabushikiKaisha.

OGIWARA TAKESHIMARGARET TAKEDA

Fukuzawa, Yukichi

Born in 1835 in southern Kyushu, YukichiFukuzawa was perhaps the most influential manof the Meiji era who did not serve in government.He was trained in “Dutch Learning,” the study

160 Fuji Photo Film

of Western society literature and science throughbooks and materials introduced into Japan viaDutch traders who had restricted trade with Ja-pan on a small island at Nagasaki. After teachingDutch in Edo (present-day Tokyo), he switchedover to a study of English in response to the in-flux of foreigners involved in trading atYokohama. In 1860 and 1862 he accompaniedembassies to the USA and Europe respectively

Upon his return he founded a school in Edowhich, in time, became Keio University, the lead-ing private university in Japan in terms of edu-cating top business leaders. He subsequentlypublished, in 1875, The Encouragement of Learning,which laid out his ideas on education. More than700,000 copies of the book were sold.

ALLAN BIRD

Fukuzawa, Yukichi 161

GAISHIKEI KIGYOU see foreign companiesin Japan

genba-shugi

Genba-shugi literally means “shop-floorism.” Thisis a management philosophy that dictates that,as far as possible, the process of production ofgoods and services must be controlled at the shop-floor level by shop people. The set of policiesand practices designed for implementing this ideais called the shop-floor approach, and is com-monly observed in Japanese factories. Genba-shugiincludes a variety of participative and bottom-upapproaches used for managing the process ofproduction based on empowerment of the shopworkers and delegation of decision-making au-thority to the shop-floor level. Genba indicates the“actual site” where all important processes takeplace, and people who run the genba are consid-ered to have full power and responsibilities forcontrolling what is going on there. Therefore, tosuccessfully implement this idea, systematic del-egation of authority from management and engi-neering sections to genba leaders and workers isindispensable. Also important is empowermentof the shop through extensive training of genbaworkers in the skills and knowledge of produc-tion management, and sharing day-to-day busi-ness and production-related information withthem. In other word, systematic human resourcedevelopment at the shop-floor level and exten-sive information sharing by managers and engi-neers with shop people constitute criticalconditions for practicing genba-shugi successfully.

The power exercised by production teams inJapanese shops is not derived from the institu-tionalized group autonomy embedded in thework group which seeks to maintain independ-ent authority relative to management, as is theScandinavian model of autonomous work groups.Rather, power is delegated by management to theshop-floor level on the basis of established ac-countability of the shop, and in terms of policiesand targets set by management. Thus, genba-shugiworks effectively when management deploys setpolicies with clear goals of production to whichgenba teams commit. In this sense, genba-shugi is amethod of shop management co-operation for theaccomplishment of goals of production.

In Japan, the tradition of corporate unionismhelped co-operation between management andthe shop develop very quickly after the SecondWorld War, based on the idea of genba-shugi. Theconcept also facilitated a “win-win” spirit withinthe firm between management and employees.Both parties recognized that responding to mar-ket needs quickly by providing reliable productswith relatively low costs was essential to winningand growing in competitive markets. Therefore,all parties concerned in the firm—managers, en-gineers, technicians, and operating workers—started to explore methods for responding tomarket needs by studying through quality con-trol circles and experimenting based on kaizenactivities at the shop-floor level. The fruits of theirco-operation were shared through the other com-ponents of the Japanese style of management,namely lifetime employment, seniority-basedwage increases and promotion, biannual bonuses,

G

welfare provisions and so forth. In Japan, the genbais recognized as the ultimate source of competi-tive strength and all efforts are placed on improv-ing production processes in order to perfect genba-shugi.Consequently the shop sometimes experiencesincreasing pressure, and stress increases. Whenthis happens, the weight of expectations associ-ated with genba-shugi will become excessive forteam members and work will become overwhelm-ing (see karoshi)

Organization for the practise of genba-shugi

Hanada and Yoshikawa (1991) characterize theorganization for genba-shugi practices in Japan asbeing soft, having flexible boundaries, sustainedby face-to-face communication networks andimplementing extensive on-the-job training, com-pared to the hard, hierarchical, manual-based andoccupational skill-based organizations of Westernsociety. In other words, in order to practicegenbashugi, the organization of factories must beconstructed by overlapping roles in which task-related skills, knowledge, information and respon-sibilities can be shared extensively so that allpeople concerned particularly managers, foremenand operators, can co-operate easily through ef-ficient interpersonal communication networks.Likewise, Wakabayashi and Graen (1991) dem-onstrated that a transplant organization devel-oped by a company in the Toyota group in theUSA was based on empowered teams with tech-nical and information support provided by su-pervisors, managers and staff engineers. Theypointed out that human resource developmentfor establishing effective team-based factory or-ganization in the cross-cultural context was a keyto successful transfer of the Toyota productionsystem (TPS) to the USA.

Commonly a team consists of one team leader,one or two sub-leaders and ten to fifteen operat-ing workers called associates. One supervisor orforeperson supervises several teams. Roughly 20–30 associates work under the supervisor. Since ateam leader and sub-leader(s) are synonymouswith hancho and kumicho of the home plant respec-tively in terms of position roles and functions,developing a genba organization with a Japanese-style team structure was considered to be thefoundation on which further technology trans-

fer would take place in order to practice genba-shugi production in the USA.

To effect a transfer of genba-shugi, this firm firstcategorized knowledge and skills considered man-datory for running the genba shop and then or-ganized them into a team structure as follows (seeTable 1)

The above arguments suggest that empower-ment of a team comprised of qualified team mem-bers is a key to this type of shop-floor approach.Particularly a powerful leader must possess ap-propriate qualifications of extensive quality con-trol skills and management knowledge,problem-identifying and solving skills, long-rangeplanning skills, all practical skills related to worksubordinates are conducting, skills of training sub-ordinates, writing manuals, conducting kaizen im-provement, handling emergencies and so forth.It is clear these skills overlap with those of engi-neers and managers. Therefore, engineers andmanagers must be able to work closely with shopsub-leaders and associates in order to run the shopsmoothly. Genba-shugi is impossible without teamsempowered with management authoritiesthrough delegation, competent team leaders andqualified team members organized into a soft andoverlapping work system. In particular, continu-ous development of team members through ex-tensive knowledge-sharing and skill is essentialfor successful implementation of a shop-floor ap-proach.

Practices associated with genba-shugi

Practices conducted at the shop-floor level areclosely associated with policies and goals set bymanagement. Houshin-kanri (policy deployment)is one of the methods by which management poli-cies and specific goals of production are deliv-ered to the shop, with the provision of necessaryresources and authority for achieving them. Man-agers, supervisors and engineers monitor the pro-duction process and assist the genba workers inrealizing policies and goals. Normally quality im-provement and cost reduction are the two majorareas where policies and goals are set.

First, genba-shugi must be initiated through em-powerment of team members. To build team ca-pabilities, members are developed through a

genba-shugi 163

multi-job-holding program where, theoreticallyspeaking, everybody becomes capable of han-dling everyone else’s job by going through aplanned job rotation and on-the-job training.Multiple job holding by multi-skilled workersmakes possible interchangeable job assignment.It also helps each person detect mistakes madeby others, and encourages fixing them before theprocess is completed. These practices also leadto members feeling a sense of belonging to aneffective team and further nurturing a team spirit.

Second, maintaining genba in a clean and or-derly manner becomes an important responsibil-ity for each team member. Typically the 5Ss arepracticed for this purpose: seiri (orderliness), seiton(aligning), seisou (sweeping), seiketsu (cleanliness)

and shitsuke (discipline). These 5Ss constitute pre-conditions for implementing further cost savingand quality production programs in genba-shugi(see 5S campaign).

Third, a variety of team-based small group ac-tivities can be practiced for quality improvementand cost reduction at the shop-floor level. QCC(quality control circle) and kaizen (incremental im-provement) activities are two common ones.These programs become engines and foundationsfor the more extensive TQM (total quality man-agement) or TQC program for the entire firm,which must be rooted within team activities atthe shopfloor level.

Fourth, entire production systems such asToyota’s TPS that incorporate just-in-time and

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

164 genba-shugi

kanban practices must depend on the genba-shugiphilosophy. Since the ultimate goal of TPS is de-ploying policies and empowering teams to enablethem to satisfy market needs in technical and cost-related issues by improving the quality and re-ducing muda (waste) of all kinds (materials, energydefects, efforts, time, transport, etc.), genbashugimust be pursued to its maximum benefit. Moreo-ver, what is known as jidouka (self-control) sys-tems in TPS involving FM S (flexiblemanufacturing systems), fail-proof devices, anandon (lantern) line-stop mechanism all dependon initiatives of empowered teams at the shop-floor level.

Finally in future, genba-shugi practices will in-crease in importance because employees are be-coming more and more empowered andorganizations are becoming flatter. Managementis talking more directly with employees at theshop-floor level. Moreover, information technol-ogy and the evolution of new organization sys-tems are changing the nature of the shop andgenba-shugi.

MITSURU WAKABAYASHI

general trading companies

General trading companies (sogo shosha) are tradi-tionally defined as integrated international trad-ing enterprises engaged in importing andexporting a wide range of merchandise. Sogo shoshathemselves like to claim that an increasing pro-portion of their profit comes from investment invarious projects around the world, undertakennot only to boost trading relationships but alsofor pure capital gain. This shift to investment isthe latest in a series of business transitions bysogo shosha, who have been declared obsolete inevery decade since the 1960s but have so farmanaged successfully to reinvent themselves, withonly a few casualties along the way.

Although sogo shosha are usually considered tobe unique to Japan because of the range and scaleof their business activities and their pivotal rolein each keiretsu, many Japanese business scholarsprefer to point out their similarity to Western trad-ing companies and multinationals in general, bothpast and present. It is important to remember thatsogo shosha are by origin trading, not manufactur-

ing conglomerates. They have close links to othermanufacturers in their keiretsu, however, and of-ten have joint venture manufacturing companieswith these manufacturers. Sogo shosha supply otherkeiretsu members with raw materials and sell theirfinished and semi-finished products on the do-mestic and international markets. Thus, as theyreact to the changing needs of their clients, theirpatterns of overseas expansion and business de-velopment have many parallels with other multi-nationals. There is some evidence that theirkeiretsu ties are weakening, however, due to post-bubble economy restructuring and mergers.

Partly as a result of their ties with keiretsu com-panies across a range of key industries, sogo shoshaare also heavily intertwined with the fate of theJapanese economy to the extent that JapaneseGNP growth is often the most statistically sig-nificant predictor of their trading transactionsgrowth rates. Sogo shosha still handle a major pro-portion of Japan’s international trade, coordinat-ing 30 percent of Japan’s exports and 50 percentof its imports. This sense of ‘representing Japan’permeates their business strategy and has pre-vented them from becoming truly global opera-tions, in the sense of having key clients and seniormanagers originating from outside Japan. Thisis illustrated by the surprisingly large proportionof turnover represented by domestic transactions.According to the Japan Foreign Trade Council,the combined sales of the eighteen sogo shosha arearound one trillion dollars a year, of which 12percent comes from exports, 15 percent from im-ports, 24 percent from offshore trading and 49percent from domestic trading. Although the scaleof their trading transactions has led to the topfive sogo shosha being named as some of the world’slargest companies, their market capitalizationwould not justify this claim. Furthermore theirnet profits are only a fraction of a percentage oftheir turnover and their employee totals world-wide are not much more than 10,000, even forthe largest companies.

There are around 8,000 import/export com-panies in Japan, but only eighteen are recognizedas sogo shosha by the Japan Foreign Trade Council(which represents Japanese trading companies).The more common interpretation includes onlythe nine largest companies: ITOCHU Corpora-tion, Kanematsu Corporation, Marubeni

general trading companies 165

Corporation, Mitsubishi Corporation, Mitsui& Co Ltd., Nichimen Corporation, Nissho IwaiCorporation, Sumitomo Corporation andTomen Corporation. Recently however,Kanematsu has been excluded from this group,following a restructuring which halved its staffand sold off its textiles and energy businesses.The remaining nine smaller companies are:Chori Co, Ltd., Iwatani International Corpora-tion, Kawasho Corporation, Kinsho-MataichiCorporation, Nagase & Co Ltd., Nissei SangyoCo. Ltd, Sumikin Bussan Corporation, ToshokuLtd. and Toyota Tsusho Corporation. The latteris the only trading company that is growing rap-idly and has ambitions to enter the ranks of thetop five trading companies by acquiring or tak-ing a stake in other failing trading companies.Okura and Co was also part of the official groupof sogo shosha until it filed for bankruptcy in 1998.

General trading companies are engaged in allindustrial sectors from resource development toadvanced technology including energy such asoil and gas; metals such as iron and steel andnonferrous metals; machinery including automo-biles, ships, airplanes and industrial machineryand equipment; chemicals including petrochemi-cal products; general merchandise, sporting andleisure goods, medical equipment, constructionand property development, and information andcommunications including satellites and mobilephones, software and services such as retailing.In addition to trading and business investments,general trading companies also offer services suchas financing, transportation and logistics, researchand consulting, marketing and project coordina-tion.

Employees

Due to their pivotal role in the Japanese economythe variety of work and possibility of internationalpostings that sogo shosha offer, they are a highlypopular employment choice for Japanese univer-sity graduates. Sogo shosha employees are there-fore well represented amongst the alumni ofJapan’s elite universities, and consequently havehigh level contacts ranging across governmentand business circles. These contacts further en-hance their usefulness as facilitators for entry intothe Japanese market for foreign companies.

Sogo shosha are also well-known for their be-nevolent, perhaps overwhelming care of their em-ployees, in excess even of Japanese high standards.As well as the usual fringe benefits of dormito-ries, subsidized accommodation and life-time em-ployment, many sogo shosha offer employeemarriage bureaux, higher than average salariesand retirement packages and very generous ex-patriation benefits. With the latest restructuring,however, some of these benefits are being cut andthe complex hierarchies associated with lifetimeemployment are being de-layered. It is noticeabletoo that trading companies have been slippingdown the student employer popularity rankingsin the 1990s, largely due to being identified withthe “old” and failing Japanese economic struc-ture.

History

Most general trading companies started merchantbusinesses during the Tokugawa period (1623–1853) but formally established themselves in theMeiji era (1868–1912) as specialty trading com-panies: Mitsui as a silk and rice merchant,Sumitomo as a copper refining and sales com-pany Mitsubishi as a shipping and shipbuildingcompany and so on. In fact the use of the termsogo shosha to describe trading companies only be-came popular in the mid-1950s, when foreigntrade was resumed after the Second World Warand the Japanese economy began to revive. In-deed, many of the prewar specialty trading com-panies only became general trading companiesin the first two decades after the war.

The early specialties were a reflection of thestatus of some of the trading companies as seisho,or merchants who used their close contacts withpoliticians to take advantage of the Meiji govern-ment’s industrial promotion policy The tradingcompanies took up the challenge of wresting con-trol of Japan’s trade from the foreign merchantswho had a near monopoly on Japan’s foreigncommerce and shipping after the enforced open-ing of Japan, following two centuries of isolation.The earlier trading companies were given licensesto export the products in which Japan had a com-parative advantage, such as silk, rice and tea. Late-comers such as Mitsubishi concentrated first ofall on fighting off P&O for shipping lines out of

166 general trading companies

Japan and then on transferring technology fromBritain for shipbuilding, in order to reduce de-pendency on foreign ship purchases. The trad-ing companies quickly diversified into mining,manufacturing and transportation, evolving intozai batsu. These various divisions were spun outinto separate companies, with the sales divisionsbecoming the prewar predecessors of the post warsogo shosha.

The First World War proved a major boost tosome of the trading companies and a disaster forothers. Those who speculated heavily in metaland did not control their finances failed, such asMasuda, Shimada, Furukawa, Kuhara, Mogi,Yuasa, Takada and Suzuki Shoten. Mitsui Bussanby contrast avoided speculation and maintaineda steady and high profit level, profiting from theshortage of goods and ships in wartime.Mitsubishi Shoji’s period of growth and consoli-dation did not come until the 1930s, however,when its strengths in heavy industry drew it intothe rearmament and Asian expansion of Japan.These two companies were the nearest to a pre-war form of sogo shosha in terms of range of prod-ucts and international presence. By 1938, MitsuiBussan and Mitsubishi Shoji employed 7,000 peo-ple and had trading transactions of ¥2bn ($560m)each.

The trading companies were dissolved, alongwith their fellow zaibatsu member companies, bythe Supreme Command of the Allied Powers asholders of excessive economic power in 1947. His-torical ties were never completely severed, how-ever, and with the pressures of the Korean War,they were allowed to regroup in the 1950s.Mitsubishi Shoji was the first to become a truesogo shosha, opening offices around the world tocover a range of products in 1954–5. MitsuiBussan was slower to regroup, with its finalmerger taking place in 1959. Marubeni, Itochuand Sumitomo were specialty trading houses untilthe 1960s.

The 1960s were supposed to herald the “set-ting sun” for sogo shosha, as the liberalization ofJapan’s trade meant that specific categories oftrade were no longer allocated to them by thegovernment, so they would have to compete forbusiness. In fact, the 1960s were a time of vigor-ous expansion for sogo shosha, with their combinedannual sales growing over 900 percent between

1960 and 1973. This was partly due to mergers,inflation and yen reevaluations but also becauseof their ability to diversify into news industriesand to integrate their businesses upstream anddownstream.

In the 1970s sogo shosha facilitated the overseasinvestments of Japanese manufacturers, often tak-ing a stake in their foreign subsidiaries, or settingup joint ventures for distribution and warehous-ing. They also became conduits for Japan’s in-creasing Overseas Development Assistanceprojects in Africa and the Middle East.

Sogo shosha’s raison d’etre was questioned againin the 1980s, a decade which was supposed to bea “winter” for them. In the early 1980s, the sec-ond oil crisis and the Iran-Iraq war had a seriousimpact on their growth and profitability as didthe depressed state of the Japanese economy Thedevelopment of the bubble economy from themid-1980s revived their fortunes, however, andled them to direct their resources into zaitech andother financing functions.

The 1990s have largely been a decade of re-structuring and writing off of bad debts arisingfrom zaitech failures, although there have beensome new initiatives in information technologyretailing and Asian investment.

Function

Sogo shosha use their international networks to col-lect and analyze information, which they thenpass on to their headquarters or even to govern-ment agencies. This latter activity has sometimesled sogo shosha to be accused of espionage, par-ticularly by US politicians and journalists. Theimportance of the information gathering functionhas necessitated major investments in informa-tion and communication technology includingsatellite communication and dedicated electronicnetworks. Unsurprisingly sogo shosha have recentlycombined their knowledge of information andcommunication technology and trading to be-come involved in setting up e-commerce networksand business-to-business exchanges.

The traditional function of sogo shosha is theprocurement and distribution of goods. This func-tion has its roots in Japan’s status as a resourcepoor country and a major importer of raw mate-rials. The importation of fuel, iron ore, foods and

general trading companies 167

so on into Japan has led to the logical extensionof their business into actual investment and de-velopment of coal mining, oil fields, and agricul-ture overseas. Sogo shosha often act as thecoordinators of these highly complex projects, aswell as acting as financiers. Whereas in previousdecades investment had been undertaken as away of securing scarce resources or boosting trad-ing relationships with major customers, invest-ment activity is increasingly looked on by sogoshosha as a profit center in its own right, for purecapital gain. Sogo shosha are therefore starting tocompete more directly with Japan’s strugglingbanks and investment houses in areas such asmergers and acquisitions and investment funds.

Further reading

Arai, S. (1991) Shoshaman: A Tale of Corporate Japan, Ber-keley CA and Los Angeles: University of Califor-nia Press.

Yonekawa, S. (ed.) (1990) General Trading Companies: AComparative and Historical Study, Tokyo: United Na-tions University Press.

Yoshino, M.Y., and Lifson, T.B. (1986) The Invisible Link:Japan’s Sogo Shosha and the Organization of Trade, Cam-bridge, MA: MIT Press.

Young, A.K. (1979) The Sogo Shosha: Japan’s Multina-tional Trading Companies, Tokyo: Charles E. TuttleCompany.

PERNILLE RUDLIN

geography

Japan is made up of a chain of four mountainousislands: Honshu, the main island, Hokkaido inthe north, Kyushu to the south,and Shikoku thesmallest off the coast of southern Honshu, to-gether with several hundred lesser islands. Thetotal landmass of Japan is about 145,000 squaremiles; its elongated nature is revealed by the factthat although Japan stretches over 1,800 milesfrom northeast to southwest (from 25 to 45 de-grees latitude), no point in Japan is more thanseventy-five miles from the sea. Until the mod-ern era, Japan was relatively isolated physicallyfrom the Asian mainland, left free to develop itsown cultural system.

In considering geography and its relationshipto social and historical factors, Britain and Japanoffer some interesting similarities. Both are madeup of large islands and have between 100,000and 150,000 square miles of territory; both arelocated off the coast of continents, which arehome to long civilized traditions. Both have re-ceived influence from those traditions, but havebeen isolated enough to retain a distinct identity.They share basically similar climates and bothwere the first in their respective areas to industri-alize. The two nations have used the sea withunusual effectiveness for military and commer-cial pursuits. But the similarities only hold in avery general comparison.

Climate in Japan is more varied than the cli-mate of Britain, more reminiscent of the climatealong the US eastern seaboard. Hokkaido hasquite cold winters and mild summers. Theweather in the center of Japan near Tokyo is quitelike that of the Washington, DC area, cool tocold in winter, with muggy hot days in late sum-mer. Okinawa, the southernmost part of Japan,is Japan’s winter playground.

Japan is far more isolated from its continentthan Britain. By contrast, Japan lies approximatelyninety miles off the Korean Peninsula. For hu-mans to swim from England to France is a chal-lenging but completely possible undertaking.Japan is also very close to some Russian held is-lands in the north, but cultural influences havenever come from those places. From Japan to themain body of its nearest historical contact, Ko-rea, there is more than a hundred miles of ocean.In terrain, as well, the British Isles and the Japa-nese islands are quite dissimilar. Britain is rela-tively flat, while Japan is more like a larger versionof Switzerland, with dramatic stretches of moun-tainous terrain in many interior areas, withsmaller mountains and hills covering all areas withthe exception of a few interior valleys and rela-tively small coastal plains.

For several hundred years, Japan’s populationhas been about double that of Britain; early inthe twenty-first century it stands at a little over125,000,000. Japan has, on the other hand, lessthan half the arable land for farming that Britainhas, and although the Japanese employ intensivefarming techniques and some of Japan’s soil isquite fertile, Japan imports a high percentage of

168 geography

its food products, being self-sufficient only in afew products such as green vegetables and rice.

The Japanese islands are situated on the west-ern edge of what has been called the “Ring ofFire,” an area of seismic volatility stretching fromthe Philippines up along the Asian mainland,across the Aleutian Islands and down the westcoast of North and South America. There aremore than sixty active volcanoes in Japan, andmodest quakes of 2.5 or less on the Richter scaleoccur somewhere in Japan almost daily. Largequakes causing loss of life and great destructionhave been recorded throughout Japanese historyincluding the catastrophic Great Kanto Earth-quake of 1923 which brought enormous damageto Tokyo and environs and cost the lives of over100,000 people, and the more recent GreatHanshin Earthquake which struck the city ofKobe in 1995.

With only two navigable rivers (and both ofthose for less than one hundred miles), aside fromfresh water fishing, rivers have not played an im-portant role in Japanese life. The ocean, on theother hand, is deeply woven into Japanese cul-ture in many ways. It has served to protect it fromforeign military power, provided a considerablepercentage of the Japanese diet, and throughouthistory has been a chief medium for moving peo-ple and things. It is interesting to observe thatbecause of the mountainous terrain and proxim-ity of ocean waterways, the Japanese, uniqueamong sophisticated societies, never developedany practical system of animal-pulled carriages.

The human population of Japan is not asspread out over the land as is that of Britain. Afew areas are extremely densely populated, andothers, for example the long arm of northernHonshu called by the Japanese the Tohoku region,are considered to be underpopulated. A corridorabout 350 miles long, but only forty miles wide,running from northeast of Tokyo, down the Pa-cific coast through the city of Nagoya, and thenon southwest to and including the three cities ofthe Kansai area—Osaka, Kyoto, Kobe—is hometo almost half of the entire Japanese population,even though in land mass it represents just one-fiftieth of the nation.

As late as the end of the Second World War,less than half the population of Japan lived inurban areas, with very rapid urbanization occur-

ring since that time. Partly because of eventswhich occurred during the Tokugawa period,the capital city of Tokyo plays a role similar tothat of Paris or London in their respective socie-ties. It has the largest concentration of popula-tion in the industrialized world, and while Osaka,Sapporo, Kyoto, and Fukuoka together with afew other cities are important centers of cultureand commerce, Tokyo is the center of political,economic, entertainment and international activ-ity 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: TeikokuShoin.

Reischauer, E.O. (1981) The Japanese, Rutland, VT:Tuttle.

Trewartha, G. (1990) Japan, a Geogmphy, Madison, WI:University of Wisconsin Press.

JOHN A.McKINSTRY

giri

Ethics and morality in Japan are not as tied touniversal concepts of good and bad as in societ-ies which have been influenced by monotheisticreligions such as Christianity and Islam. For theJapanese, behaving properly relates less to abso-lute rules of conduct than in the West, and is moretied to how well people fulfill obligation withinrelationships. A highly developed sensitivity toduty and obligation owed to others has resultedin a specialized vocabulary of terms relating tosuch phenomena. Giri is one of those terms.

Introducing giri to people not familiar with Ja-pan carries with it the danger of exaggeration.Giri is real, and its effects on relations betweenpeople and institutions are real, but its imprinton contemporary Japanese society is quite sub-tle; in fact, hardly noticeable until one gets wellbeneath the surface of everyday life. The wordgiri is heard frequently. But used for its traditionalmeaning, to refer to a somewhat more consciousand formalized sense of obligation to people andorganizations, the term is not actually used often

giri 169

in Japan today. When it is used that way it isoften employed in a negative sense, such as re-ferring to someone who is judged not trustwor-thy as in giri shirazu no hito, literally a person whodoes not know giri. The reason for its frequentuse is simply because it has over the past seventyor eighty years come to be the most popular wordfor “in-law;” a wife’s mother is referred to as girino okaasan, and a husband’s older sister as giri nooneesan.

It is not exactly clear which came first: giri withthe samurai, later filtering down to influence moregeneral cultural themes, or in the reverse direc-tion, giri as a more general cultural theme whichthe samurai formalized. Whatever the answer tothat question is, we know that what giri came tomean in Japanese life was first articulated in thefourteenth century a time when the warrior elitebegan to eclipse the court nobility in Kyoto asthe dominant force in Japan. But it is quite possi-ble that the basic idea of giri, in a more diffuseand less formal sense, was an important part ofthe way people and communities establish orderand at all levels as far back as there has beenanything recognizable as Japanese society Anyhuman group, in order to function in a coopera-tive way over time, has to be tied together withsome kind of basic outline of ethics and morality.In societies which came to be dominated bymonotheism, the agents and interpretations ofGod serve much of this purpose. Societies suchas China and Japan that have not had significantexperience with a single, prescribed set of guidesfor behavior and relationships have to rely onsomething else. In China, bonds of kinship andextended clan ties have traditionally been the an-chors of ethics and morality For the Japanese, itseems that a conscious type of mutual obligation,both ascribed by formal social roles, and achievedthrough deeds of behavior, has served more typi-cally than elsewhere to underlay the rules of mo-rality.

The fifteenth and sixteenth centuries in Japanwere a time of desperate struggles for power anddominance in various regions throughout thecountry. Survival of any han, the autonomousmini-states of feudal Japan, depended on militaryprowess, and the virtues of loyalty devotion, faith-fulness, honor, sacrifice, together with skill inswordsmanship and other forms of combat, came,

by natural selection, to constitute the special cul-ture of bushido., the way of the warrior (see samu-rai, role of).

Four terms relating to the formal sense of dutyarose from bushido. Gimu, similar to giri, usuallyused in regard to an abstract entity such as thestate. On, a related concept, referred to formalobligation owed to persons and institutions in anascribed sense, for example to one’s feudal lord,and to parents. During the Meiji period, Japa-nese were taught that they owed obligation tothe nation, symbolized by on owed to the Em-peror. Giri was obligation owed because of someservice or help rendered. One owed giri to ateacher of calligraphy or swordsmanship, or tosomeone who rendered assistance in battle. Thefourth term, ninjo, was the feelings of affectionand longing pulling in the opposite direction, feel-ings which if acted on could cause a samurai toviolate the code of bushido by failing to carry outhis duty. Japanese drama through the centuriesinstitutionalized the pull of affection against thedemands of duty. The dilemma of the giri/ninjo,in which giri always wins, has been the subject ofJapanese drama through the ages, from kabukithrough to modern motion pictures.

Ethics and morality continue to be somewhatless tied to universal concepts of good and evil,and more directed toward connection to peopleand organizations. Words such as on and giri,which in the twentieth century came to be usedmore or less interchangeably sound old-fashionedto people in contemporary Japan, but their forcecan still be discerned in the sensitivity Japanesehave to what is owed to other people. In Japanthe lessons of reciprocity are given a special im-portance. Gifts must always be repaid with con-comitant worth. The first words uttered uponsubsequent meeting of someone who has hosteda person in any way are, Kono aida wa domo,“Thank you for the (nice) time.” For any adult toneglect to do so would be more than impolite, itwould represent for many Japanese, a breach ofdecency.

See also: business ethics

Further reading

Benedict, R. (1946) The Chrysanthemum and the Sword:Patterns of Japanese Culture, Boston: Houghton Mifflin.

170 giri

Keene, D. (1961) Major Plays of Chikamatsu, New York:Columbia Univesity Press.

Nakane, C. (1970) Japanese Society, Berkeley CA: Uni-versity of California Press.

JOHN A.McKINSTRY

guilds

The earliest Japanese guilds (za) were formed inthe eleventh century while trade associations(nakama) were established during the Tokugawaperiod (1603–1868). These farmers’ and mer-chants’ associations formulated and enforcedmarket rules for their industries in a growingeconomy to create trade in the absence of legalinstitutions and to safeguard market participantsfrom deception and fraud. Thus, guilds andnakama are predecessors of today’s trade associa-tions. Their early formation and sophisticatedorganizational structures reflect both the vigorand drive of the Tokugawa-period economy andthe merchants’ vital contributions to creating andmaintaining their own markets.

Early history: Za

The earliest groupings that can be considered co-operatives were the muyin, groups of farmers inthe Heian period who submitted dues so that afew group members could go on a pilgrimage tothe Ise Shrine every year (something no farmercould have afforded on his own). The first recordsof a merchants’ guild date from the year 1092,when a group of merchants in Kyoto establishedmarket hours and rules. As the economy beganto develop in various regions of the country theza grew stronger. They had exclusive member-ship, created barriers to entry and set productprices on their markets. During the continuingwars and territorial disputes of the fifteenth andsixteenth centuries, the za became increasinglypowerful by assuming control over regional taxbarriers and domain borders.

In 1603, Oda Nobunaga (the first of the threeunifiers) assumed military control over Japan. Heunderstood that one primary source of power andwealth of the local landlords were the guilds. Toweaken these landlords, Oda instituted a policyof rakuichi-rakuza (free the markets, open the za).

Under this policy all za were prohibited, exceptfor those with special permission, such as themints (the gold za or kinza, the silver za or ginza—located in what today is central Tokyo—and thecopper za or zeniza). The new Tokugawa govern-ment also introduced a division of society thatput merchants at the bottom of the hierarchy andcreated a new leadership class of administrativeofficials (the former samurai) who had money tospend and wanted products to buy. In the ab-sence of laws and courts, associations surrepti-tiously re-emerged to design mechanisms ofenforcing trade agreements. After 1670, theShogunate gave up on its attempts to outlaw thegroupings, and nakama (literally “among thosewho know each other”) flourished.

The earliest full-fledged nakama we know ofwere the wholesalers and shippers (tonya) alongthe 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 theywere considered to play important social roles(maintaining public hygiene, banking). From theentrepreneurs’ perspective, the licensing systemenabled them to control their markets. Outsid-ers were not allowed to practice in the profes-sion. This meant that all stationary and successfulentrepreneurs were members of a trade associa-tion.

Nakama organization

The organizational structure of the nakama wasremarkably similar to that of today’s trade asso-ciations. At the biennial general meeting (sokai),members elected directors. There was one stand-ing (long-term) director, resembling today’s se-nior administrative director, as well as annual andmonthly directors. The main tasks of a board ofdirectors were: (1) to collect taxes and donationsto the Shogunate and domain chiefs from mem-bers; (2) to evaluate and admit new members;(3) to punish transgressions of nakama rules (typi-cally by prohibiting the infringer from producingor trading for a certain period); (4) to maintaincontacts with other associations about the goodstanding of merchants; (5) to establish quality con-trols in the industry; (6) to set uniform prices forthe industry’s products or services; and (7) to

guilds 171

hold social functions such as arranging gifts toshrines and temples or end-of-the-year parties.

To engage in a certain business, an entrepre-neur had to become a member of the nakama.Once admitted, the member had to move intothe nakama’s quarter. Living in one area facilitatedthe monitoring of a member’s business behavior,creditworthiness, and pricing.

Economic functions

Nakama engaged in trade-enhancing activities,ranging from structuring market rules to guar-anteeing the creditworthiness of their members.Specifically by establishing fixed and regularmarket hours, nakama brought merchants of dif-ferent trades together. By limiting markets tomembers and monitoring their behavior, nakamakept markets clear from charlatans and swindlers.Because a member’s standing was guaranteed byits nakama, a credit economy could develop. InOsaka this even led to the establishment of a ricefutures exchange in 1730, where trading positionswere kept on the books and settled at the end ofa three-month trading period. Not only did thesesettlement systems make things easier, in manyinstances they made trade possible in the firstplace, thus leading to the creation of new mar-kets. By enforcing quality controls, the nakamafurther reduced the potential for fraud on themarketplace. In the event of deception, the nakamahad rules for settlements and punishment. Socialstigma was attached as well, as most nakama hadan elaborate code of honor. Finally nakama oftenadministered the widespread apprenticeship sys-tem and enforced rules against the poaching ofapprentices by competing merchants.

In addition to enhancing the trade mechanismsof the time, the nakama also ensured that theirmembers would be profitable by limiting compe-tition. In particular, most nakama enforced a “fairprofit” system, whereby the directors describedbinding product prices that enabled merchantsto earn a stable, but not exorbitant, profit mar-gin. By way of their organization, nakama alsoestablished barriers to entry In many cases, thenumber of outstanding kabu for nakama was lim-ited, and only after an incumbent member hadquit or died could a new merchant enter thegroup. Even groups that did not issue kabu were

very careful in selecting as new members onlymerchants who would not undermine the group’sstanding. Moreover, nakama imposed strict boy-cott rules: members were not allowed to tradewith merchants that were not a member of anakama. Occasionally an additional entry barrierwas employed in the form of minimum require-ments that were set so high that only incumbentfirms could fulfil them (e.g., a certain shippingvolume was required before a wholesaler couldenter a shipping nakama).

By inviting and enabling sophisticated tradepractices, creating markets, restricting access, andensuring stable profit margins, the nakama con-tributed greatly to the economic development ofJapan. Businesses grew steadily, and markets de-veloped around the country On the downside,precisely because the nakama were so protectiveand restrictive, they hindered technology trans-fer among industries and often served to slowtechnological progress and innovation. This be-came apparent when Japan opened up in the1860s: some basic artisan trades were world-class,but the country lagged behind in many indus-trial areas.

Shogunate policies towards nakama

In the course of the Tokugawa period, theShogunate changed its policies towards trade as-sociations several times. This was particularly vis-ible during the three major economic reforms of1720, the 1780s, and the 1830s.

In 1720, Shogun Tokugawa Yoshimune facedhuge budget deficits and inflation in most prod-ucts other than rice. To realign finances andprices, he embarked on major fiscal reforms andofficially licensed all nakama. By issuing kabu tothe associations, he could charge licensing feesand taxes to increase the goverment’s tax rev-enue. He also asked the nakama to set or main-tain certain prices, and in particular to increasethe price for rice while curbing inflation else-where. This was the first time that trade associa-tions were used as an instrument of public policyimplementation.

The effects of Yoshimune’s reforms were short-lived. Pro-business policies after his reformsgranted associations more freedom to regulatetheir own markets, and in turn the nakama were

172 guilds

charged ever higher taxes and fees. The nakamapassed these taxes on to their customers by wayof higher prices, which severely affected thesamurais’ standard of living. The Kansei Reformof the 1780s was also aimed at fiscal restructur-ing. To curb the increasing influence of businessand cut their monopolistic pricing powers, thelargest nakama were dissolved. However, sincesmall associations were allowed to continue andthe previous groups soon reassembled, these at-tempts at breaking up industry association onceagain proved futile.

The Tempo Reform of the 1830s broughtabout an interesting real-world experiment withmarket institutions, as it rested on the completeabolition of all trade associations, with the goalof curbing merchants’ influence and power. Whatthe reformers had overlooked was that this movehalted all the trade-creating and trade-support-ing mechanisms supplied by the nakama, and thustoppled the pillars of the market system. The poli-cies were revised in 1857 when nakama were al-lowed to operate again, albeit with openmembership and free market access.

Modern associations

This last policy move coincided with the open-ing of the country after 1853. The Meiji Restora-tion of 1868 led to a complete reorganization ofgovernment. All nakama were asked to dissolve.Again, because this significantly limited trade inan increasingly uncertain environment, many as-sociations continued to operate surreptitiously.The new Meiji government did not pass a newCommercial Code until 1893, but, understand-ing the merchants’ plight, it began to actively sup-port the formation of local Chambers ofCommerce and trade associations in the 1870s.As some of the modern industries grew at thebeginning of the twentieth century the large firmsbegan to found their own, large-firm trade asso-ciations, plus over-arching federations, such asthe predecessor of Keidanren in 1917. A distinctdifferentiation of trade associations into small-firmcooperatives and large-firm groups emerged dur-ing the Taisho years (1911–25).

As Japan moved towards a war economy inthe 1930s, trade associations and cooperatives

were increasingly called upon to gear their in-dustries towards the war effort. However, thegovernment’s attempts at complete economiccontrol and rationing were consistently under-mined by circumvention on the black market. Toenforce production and distribution controls,the Key Industries Association Ordinance of1941 established control associations (toseikai) inevery narrowly defined industry. The toseikaiwere headed by the leading businessmen in theirindustries, and their function was to implementinput and output plans and punish any deviationfrom these plans. In 1942, the Transfer and Ad-ministrative Authority Law even gave official le-gal authority to the toseikai to punish violations.

Interestingly while the toseikai were an attemptto increase government controls over industry inthe end they only increased industry’s controlsover itself. By receiving official enforcementrights, the toseikai leaders could structure their ownrules while upholding the appearance of coop-eration with the government.

Beginning in 1945, the US OccupationForces demanded that all toseikai be dissolved.Many of the existing groups simply adoptedslightly different names but maintained staff anddirectors. While a purge of business leaders bythe Occupation affected many executives in theleading firms, their proteges, who had also beenactive in the associations before, assumed leader-ship and continued many of the old policies. In1947, the USA helped Japan draft and pass anew Antimonopoly Law as well as a highly re-strictive Trade Association Law. This law was soprohibitive that business lobbied very heavily tohave it abolished as soon as the Occupationended in 1953. Some of the competition rulesfor trade associations were subsumed in the re-vised Antimonopoly Law of 1953, but in muchmore lenient form. This more lenient wordingand interpretation of anti-trust statutes allowedtrade associations to continue significant indus-try self-regulation throughout the postwar pe-riod.

Further reading

Miyamoto, M. (1958) Kabu nakama no kenkyu (Researchon Kabu Nakama), Tokyo: Yuhikaku.

guilds 173

Okazaki, T. (1999) Edo no shijo keizai (The MarketEconomy of Edo), Tokyo: Kodansha.

Schaede, U. (1989) “Forwards and Futures inTokugawa-Period Japan: A New Perspective on theDojima Rice Market,” Journal of Banking and Finance13:487–513.

——(2000) “The Historical Development of Self-Regu-lation by Japan’s Trade Associations,” in U.Schaede,Cooperative Capitalism: Self-Regulation, Trade Associations,

and the Antimonopoly Law in Japan, Oxford: OxfordUniversity Press, ch. 7.

Sheldon, C.D. (1958) The Rise of the Merchant Class inTokugawa Japan 1600–1868: An Introductory Survey,New York: Russell & Russell.

Yamamura, K. (1973) “The Development of Za in Me-dieval Japan,” Business History Review 47: 438–65.

ULRIKE SCHAEDE

174 guilds

habatsu

Habatsu, or “clique,” refers to a significant com-ponent of the social organization in Japanese com-panies. Japanese organizations are structuredprimarily around small groups for decision mak-ing, socialization, organizational learning andcareer development. These small groups reflectboth the cultural and historical roots of modernJapanese organization. For example, it is theorizedthat Japanese small group decision making is anindirect derivative of rice paddy culture, in whichall members of the community play a role withina system of small groups (Hayashi 1988). Othersargue that it is the historical significance of feu-dal governance which has influenced the strongadherence to group allegiance within organiza-tions (Whitehill 1991). In any case, it is clear thatthe small group as a unit of decision making is acornerstone of Japanese social organization.Habatsu represents one version of this small groupphenomenon.

Habatsu represent informal groups within or-ganizations to which membership is mandatoryand loyalty is paramount. Membership in thehabatsu means for employees that they must obeyhabatsu rules and seek to achieve habatsu goals,even in the case when habatsu-related goals arecontradictory to overall company goals. Thus,habatsu can be both a constructive and destruc-tive force in the organization. Habatsu member-ship influences employee and managementdecision making on such things as overall com-pany policy strategic goals, personnel policy andeven budgetary decisions. The habatsu influence

is often unspoken and implicit, yet it is felt veryclearly and strongly by management and employ-ees alike.

So, who becomes a member of a habatsu? InJapanese organizations most employees belongto one informal group or another. But, whereascliques in American companies are often basedupon common interests, sports or communityactivities, Japanese habatsu are based upon unal-terable criteria. Examples of habatsu membershipcriteria include graduating from the same uni-versity growing up in the same prefecture (state),or coming from the same hometown. Becausethese criteria are unchangeable for the employee,habatsu membership is considered to be involun-tary as well as permanent.

As mentioned, habatsu can be a powerful forcewithin the power structure of Japanese organiza-tions. Since they have their own internal, verticalhierarchy they can disrupt attempts at company-wide programs aimed at employee development,such as career planning, employee developmentand or promotion systems. They can influencecompany wide long-term planning, budgetarydecision making and even marketing strategies.Depending on the longevity of the habatsu in theorganization and the power with which membersexercise their desires, habatsu are sometimes con-sidered the invisible power structure (operatinglike an underground or parallel economy) withinthe Japanese organization (Whitehill 1991).

Habatsu can also have a direct impact on com-pany strategy. A powerful habatsu can influencethe outcome of major organizational decisions,through its implicit support or defeat. Since

H

members of habatsu can be fiercely loyal to theirleaders, it is in the highest interest of upper man-agement to gain the support of habatsu leadershipon any major decision facing the organization.

One of the most enduring forms of habatsu inJapanese organizations is the gaku-batsu or uni-versity clique. Gaku-batsu members are fiercelyloyal to the alumni of their university and offerpreferential treatment for their members. In someJapanese organizations, hiring, staffing, promo-tion and even compensation systems are heavilyinfluenced by gaku-batsu membership, making thisform of clique more than just an informal influ-ence on the organization. These systems can beso rigid that even in the cases of exceptional abil-ity talent or effort by a non-member of a power-ful gaku-batsu, rewards (promotion, extracompensation) are not forthcoming. Only thosewho are members of the powerful gaku-batsu canexpect to be treated favorably and provided ca-reer advancement.

Recently the increasing level of foreign com-petition in Japan has begun to erode the strongtradition of habatsu power in Japanese social or-ganization. Japanese companies are beginning toembrace human resource management practiceswhich are contradictory in nature to the habatsusystem. One example is performance manage-ment, which relies on the objective assessment ofemployee contribution to company goals in or-der to determine promotion and pay In this merit-based, professionally oriented system there is noroom for feudal like preference for special groupssolely based upon fixed membership criteria.

Habatsu may even impact globalization at-tempts by Japanese companies. According toRosalie Tung (1991), Japanese organizations can-not professionalize their operations while cling-ing to outdated social mechanisms like habatsu.Since professionalism is the foundation for glo-balization efforts (standardization of practices,performance management systems based uponfair, unbiased criteria), informal small group struc-tures such as habatsu may act as an impedimentto the long-term competitiveness of Japanese com-panies.

Still, habatsu continue to thrive in many of thelarger, established Japanese firms. As evidenceof this, the importance placed upon entry intotop universities in Japan is still largely a function

of the effect of gaku-batsu membership on careersuccess for Japanese employees. Acceptance to,graduation from and then membership in a topuniversity gakubatsu is still believed to be the keyingredient for success in Japan. Until these gaku-batsu lose some of their power and influence, itmay be difficult for Japanese companies toprofessionalize their management systems.

Further reading

Hayashi, S. (1988) Culture and Management in Japan, To-kyo: University of Tokyo Press.

Ouchi, W. (1981) Theory Z, New York: Addison-WesleyRohlen, 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.

MARGARET TAKEDA

Hayakawa, Tokuji

Hayakawa, the inventor of the snap belt buckleand the mechanical pencil, was an entrepreneurand founder of Sharp Corporation. Born in To-kyo in 1894, Hayakawa set up his first business,a metalwork business employing two other peoplethat produced a snap belt buckle, the “Tokubijo.”Hayakawa came up with the idea after being an-noyed in a theatre by a man sitting nearby whokept playing with his belt. Three years later, in1915, he invented the “Ever Ready Sharp” pen-cil. This was the original mechanical pencil andquickly acquired the nickname “Ever-Sharp” be-cause it did not requiring sharpening. At this timeHayakawa also founded the Hayakawa ElectricIndustry Co., Ltd, the predecessor of the currentSharp Corporation.

On September 1, 1923, Hayakawa’s entiremanufacturing facility was destroyed in the GreatKanto Earthquake. In December of that year herelocated to Osaka and set up Hayakawa MetalWorks and undertook research on radio technol-ogy Two years later, in 1925, he built his firstcrystal radio set. Mass production of radio setsbegan shortly thereafter. By 1930 the companyhad pioneered numerous product innovations

176 Hayakawa, Tokuji

and established itself as a leading electronicsmanufacturer.

Hayakawa carried his creative capabilities ontothe production floor. His mass production facili-ties developed a reputation for quality and effi-ciency. Masaru Ibuka and Akio Morita credittheir visit to his factory floor with helping themhone their own manufacturing skills when thefledgling Sony (then known as Totsuko) was firstgetting off the ground.

In 1970, Hayakawa stepped down as presidentand became chairman. In 1980, the company for-mally changed its name to Sharp Corporation inhonor of his “Ever-Sharp” pencil. Hayakawa diedin 1981 at the age of 86, after building the SharpCorporation into a world leader in electronicproducts. The company’s creativity and dedica-tion to quality reflect his core values as its founder.

ALLAN BIRD

Heisei boom

The Heisei boom refers to an expansion of theJapanese economy that began in November 1986and lasted until roughly July 1991. The economicexpansion was one of the longest in Japan’s post-war economic history It was marked by extraor-dinary growth, peaking at 5.6 percent in 1990.The high growth came to halt in 1991, and wasfollowed by three years of macroeconomic stag-nation and subsequently by economic recessionthrough the end of the decade. The Heisei boomsubsequently came to be called the “bubbleboom” or the bubble economy. The name“Heisei” derives from the name of the imperialera in the Japanese calendar during which themost dramatic rises in the economy occurred.

In Japan’s postwar history there have beenthree significant periods of economic expansion.The first took place from 1958–61 and wasknown as the Iwato boom. The second boomtook place between October 1965 and July 1970.The Izanagi boom (named after a mythical Japa-nese figure) saw fifty-seven months of uninter-rupted economic expansion, and came to an endshortly before the International Expositionopened in Osaka. The third significant period wasthe Heisei boom.

Although similar to the other two in several

respects, there were also significant differences.Property prices rose during and then slumpedafter all three booms. However, the drop in landvalues was extreme in the Heisei boom. So in-flated were land values during this period thatseveral economists noted, in theory one couldpurchase the entire state of California, includingall of its buildings, plants and equipment, in ex-change for the plot of land on which the imperialpalace was situated.

A second similarity is found in the high levelof investment in plant and equipment during eachof the three booms. However, again the Heiseiboom differed in that much of the financing forthis investment derived primarily from the issu-ance of stock, rather than by obtaining financingthrough banks and other lending institutions.Stock issues reached a peak of ¥8.848 trillion in1989, but dropped precipitously to ¥3.792 tril-lion in 1990. The decline continued on a down-ward trend hitting ¥807.7 billion in 1991 and¥419.9 billion in 1992. In short, there was a dras-tic decline in the rate of capital increase.

Finally the Heisei boom remains significantbecause of the length of the recession that fol-lowed it due to a snowballing effect of loss ofconfidence that rippled through the economy Thelongest postwar recession previously took placeover a thirty-six-month period from March 1980to February 1983, following the second oil shock.The Heisei boom broke that record, and the Japa-nese economy struggled through the remainderof the 1990s.

See also: economic crisis in Asia

ALLAN BIRD

history of the labor movement

The term “labor movement” can be generallyunderstood as a sustained and organized joiningtogether of employees, or wage earners, to ad-vance common interests. By joining together,employees increase their power and their abilityto bargain with employers over employee con-cerns such as wages, working hours, and work-ing conditions. Labor unions—identifiable,permanent associations of employees engagingin collective action—are often the result of labor

history of the labor movement 177

movements, but not always. Strikes and labordisturbances, for example, are much older thanunions.

In Europe, then the USA, and then Japan, thelabor movement was primarily sparked by theIndustrial Revolution, a time of great economicand social upheaval. Labor unions first startedwith small associations of craft employees threat-ened by new mass production methods. Crafts-men such as printmakers and metalworkers facedthe prospect of being undercut by lower cost pro-duction methods and of passing into permanentwage earning status. For these skilled employeesworking under the supervision of a master hop-ing to later become masters of a craft themselves,the new mass production methods representedan unpalatable loss of autonomy status, and crea-tivity and unions represented a way to counter-balance these losses.

Paralleling the spread of mass production, thelabor movement and the formation of unions oc-curred first in Europe, primarily Britain, wherelabor was plentiful and land and capital equip-ment were scarce. To increase their relativevalue, employees in Europe quickly learned thepower of acting collectively In the USA, withabundant land, there was ample opportunity forindividuals to seek self-employment when therewas dissatisfaction with wage employment. Thismeant that individual employees, with more al-ternatives, had more bargaining power thantheir European counterparts, and unionizationdid not arrive in the USA as soon or with asmuch intensity.

In both Europe and the USA, as mass pro-duction and markets continued to spread and tonationalize, unions began to nationalize as well,with industry-wide and national unions becom-ing commonplace by the mid-1800s in the USA.By the mid-1900s, the AFL-CIO was a huge na-tional union representing over 15 million employ-ees in a large constellation of industries includingauto and steel. The tendency to organize acrossemployers and industries in the USA and in Eu-rope continues to this day By the end of the twen-tieth century a common Western view was thatmeaningful unions are organized across employ-ers within an industry With anything less, thepower of collective action is diminished and un-

ions are more at the mercy of particular employ-ers. Because of this belief, many Western observ-ers have been critical of the Japanese propensityto unionize by employer in enterprise unions,and not by industry.

Japan’s labor movement has waxed and wanedlike other labor movements, and there are sev-eral distinct phases that are important. Interest-ingly the later phases are really when the labormovement and labor management relations tookon a cast commonly seen as “Japanese,” charac-terized by lifetime employment, seniority wages,and enterprise unions. Before 1900, early craftworkers in Japan—accustomed to autonomy andapplying their skills in different settings—were notinclined to appreciate the discipline of factorywork, similar to their Western counterparts. Theyalso had significant power because managementstill needed their skills and had not learned howto direct labor in an organized way Managementtherefore had to rely on these relatively skilledworkers to do a wide variety of jobs dependablyand well, even though many workers were notwilling to commit themselves to one organiza-tion. Furthermore, there was also little job secu-rity for them. Although there were attempts toorganize a union movement towards the end ofthis period, it was largely unsuccessful.

Around the beginning of the twentieth cen-tury coincident with increased specialization ofwork in Japanese large manufacturers, manage-ment began to try to impose a more coherent,authoritarian form of control on employees, cou-pling this with the rhetoric of “beautiful customs”such as paternal care and worker obedience. Typi-cal company strategies at this point includedgreater control over the work process, more effi-cient labor, and cultivation of foremen who wouldidentify with the long-term fate of the company.Initial paternal practice was largely rhetorical, butincreased in substance during periods of stronglabor challenges. Employers were still wrestlingwith problems of high turnover, and this, cou-pled with occasional union pressure, led to wagehikes, bonuses, and welfare programs such as re-tirement pay all designed to promote commitmentto the firm. From this point, through the FirstWorld War and up to the Second World War,the groundwork for more stable patterns of labor

178 history of the labor movement

management was laid. Employee expectations ofjob security wages based on seniority and em-ployer expectation of commitment from employ-ees emerged in this period. However, actualpractice differed from expectations, and it wasonly after the Second World War that this gapnarrowed.

There was significant labor strife in this pe-riod, particularly around the First World War.Like unions in other countries, Japanese unionsgained economic strength from the expandeddemand for labor as the economy boomed. Strikeactivity increased, and the growing economicstrength of unions helped lead to political con-cessions. However, union leaders were also rou-tinely incarcerated. By the early 1930s, unionmembership as a percentage of the industrialworkforce peaked at 8 percent. By the late 1930s,the Japanese government had imprisoned manyof the labor leaders with socialist leanings, andby 1940 independent labor unions were abolishedcompletely organizing unions into company bycompany political cells. These cells preemptedthe formation of autonomous labor unions inorder to suppress disputes and advance the wareffort.

After the Second World War, the SupremeCommander of Allied Powers (SCAP) imposedlabor laws that initially strengthened and led to amore democratic labor movement. The LaborUnion Law enacted in 1945 officially recognizedlabor unions and their right to strike. Two otherlaws, the Labor Relations Adjustment Law andthe Labor Standards Law, further elaborated therights of unions and employees and curtailed thepower of employers to break up independent un-ions. Unionization increased rapidly from this pe-riod, climbing to 55 percent of the workforce by1949. The union desire for consistent and fairtreatment by managers echoed concerns voicedbefore the war. These legal and newly powerfullabor unions helped to bring fundamental changeto the structure of labor relations in the first post-war decade, building on the past.

However, it was also during this period thatradical elements of the labor movement rose upand were forcefully put down, with the help ofSCAP. Ultimately, the labor movement was ef-fectively split by management, and the resultant

labor relations version that arose—now charac-terized as the three sacred treasures—was man-agement-led. At the same time, however, workersdid become a much greater part of the organiza-tion and were accorded a status that they did nothave before. With job security seniority wages,and enterprise unions, coupled with rapid eco-nomic growth, many blue-collar employees wereable to achieve their broader goals of stability andmiddle-class status, something that did not existfor 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 LaborMarket in Japan, New York: Columbia Univer-sity Press.

WILLIAM BARNES

Honda Motor

Established in 1946 by Soichiro Honda, HondaMotor is the leading manufacturer of motorcyclesin the world. It is also one of Japan’s top fiveautomobile manufacturers. Its reputation is builton excellence in engineering and design of en-gines. Along with Sony, Honda has been one ofthe fastest growing companies in the post-SecondWorld War era. It rose to prominence in Japan inthe 1950s when it grew from having a 20 percentshare of the domestic market to a 44 percentmarket share, surpassing the former leaderTohatsu.

The company’s major breakthrough in inter-national markets came in 1962, when Honda suc-cessfully penetrated and then captured the USmotorcycle market. With its innovative advertis-ing campaign and the slogan, “You meet the nic-est people on a Honda,” it transformed theperception of motorcycles from that of a wild ma-chine favored by rebels to that of an economical,mainstream mode of transportation. In the 1980sit moved aggressively into the three-wheel andall-terrain vehicle (ATV) markets. It is also a

Honda Motor 179

strong competitor in the small engine market oflawn mowers, portable generators, and other simi-lar products.

Honda is one of the most widely known Japa-nese companies in the world. In the early 1960sHonda committed to an overseas production strat-egy that it has consistently implemented, first withmotorcycles, later with automobiles and small en-gines. As a result, Honda has generally experi-enced less criticism from host countrygovernments than its Japanese automotive andmotorcycle counterparts, many of which set upproduction facilities only reluctantly Honda’sMarysville, Ohio plant for example, was estab-lished in 1982 as the first Japanese automotivefacility in the United States.

Honda is consistently rated among the top tencompanies preferred to work for in Japan. It alsohas a reputation for innovation in both its prod-ucts and its managerial policies. The foundationfor this reputation is the company’s commitmentto excellence in engineering through individualinitiative and experimentation. One example ofthis is the company’s annual inventor’s fair. Em-ployees working on their own time and with mod-est support from Honda, compete as individualsand teams to create new and unusual products.

In 1992 Honda became embroiled in a scan-dal in the United States involving illegal paymentsof cash and gifts totaling $ 50 million over a fif-teen-year period. At that time, Honda fired keyexecutives implicated in the scandal. Between1994 and 1997, eighteen former executives wereconvicted. The scandal grew out of the effects ofthe voluntary import restraints placed on Japa-nese automotive makers in 1981. The demandfor Honda’s cars rose precipitously creating a situ-ation in which dealers were coerced to make ille-gal payments in order to get shipments.

See also: automotive industry

Further reading

Lynch, S. (1997) Arrogance and Accords: The Inside Story ofthe Honda Scandal, Dallas, TX: Pecos Press.

Nelson, D., Moody P.E. and Mayo, R. (1998), Poweredby Honda: Developing Excellence in Global Enterprise, NewYork: John Wiley & Sons.

Otsuki, S., Tanaka, F. and Sakurai, Y. (1996) Good Mile-

age: The High-Performance Business Philosophy of SoichiroHonda, New York: Weatherhill.

ALLAN BIRD

Honda, Soichiro

Soichiro Honda (1906–91) was a Japanese inven-tor and automobile executive, and founder ofHonda Motor Company the world-famousmanufacturer of motorcycles and automobiles.Honda was born in 1906 in a small town nearHamamatsu in Shizuoka Prefecture, where hisfather was a blacksmith. As a child he was fasci-nated by machinery and when the first automo-bile appeared in his village during his primaryschool days, he decided that he would one daybuild cars himself. At the age of fifteen, Hondabecame an apprentice at an automobile repairshop in Tokyo. Pressed into intensive on-the-jobtraining when the 1923 Tokyo earthquake forcedmost of the shop’s employees to return to theirhomes, he became an accomplished mechanic,and in 1928 he opened his own auto repair shopin Hamamatsu.

Honda’s skills as an inventor became evidentwhen he began building racing cars in his sparetime. Through innovations such as tilting the en-gine to the left so that the car could more easilynegotiate left turns, improving engine cooling byadding an extra radiator, and fashioning the valveseats out of heat-conducting metal, his cars wonmany races. Although a crash at the finish of the1936 All-Japan Speed Rally ended his career be-hind the wheel, Honda’s interest in racing con-tinued, leading to the success of Hondamotorcycles and racecars in international racingcompetition in later decades.

In 1937, Honda decided to try his hand atmanufacturing piston rings. Studying metal cast-ing on his own, Honda developed a piston ringand tried to sell it to Toyota, but was turned down.He refused to give up, however, and after twohard years of trials and failure he was finally ableto produce piston rings that met Toyota’s qualitystandards. His company became a supplier toToyota in 1940.

When the Second World War ended, Hondasold his company to Toyota and used the pro-ceeds to buy a large drum of medical alcohol.

180 Honda, Soichiro

This he installed in his home, where he madewhiskey and spent a year partying with friendsand playing the shakuhachi (Japanese flute).

In 1946, refreshed, Honda established theHonda Technical Research Institute, the forerun-ner of Honda Motor Company in Hamamatsu.His new company began by modifying the smallengines that the Japanese military had used forradios and attaching them to bicycles. He thenbegan producing his own engines, and went intothe production of motorcycles. In 1949 he teamedup with Takeo Fujisawa, who became co-founderof Honda Motor Company. The two worked to-gether as equal partners until their retirement in1973, with Honda in charge of technological de-velopment and Fujisawa responsible for manage-ment of the company.

Further reading

Otsuki, S., Tanaka, F. and Sakurai, Y. (1996) Good Mile-age: The High Performance Business Philosophy of SoichiroHonda, New York: Weatherhill.

Sakiya, T. (1982) Honda Motor: The Men, The Manage-ment, The Machines, Tokyo: Kodansha International.

TIM CRAIG

human relations management

Human relations management refers to the typeof work system found in Japanese companies, inparticular, how Japanese companies manage theirpersonnel. The human relations approach relieson the assumption that an employee enters thecompany as a “clean slate.” Thus, human rela-tions management focuses upon interpersonalskill development, teamwork, flexibility and gen-eralist knowledge. The study of human relationsmanagement focuses upon the functional divi-sions of management, namely the work system,recruitment, training, compensation and laborrelations.

The work system in Japanese companies isstructured around small group activities and de-centralized decision making. The primary focusin this approach is upon the promotion of coop-eration among workers in order to sustain an in-ternal workforce over the long term. Small groupactivities serve as a tool to involve employees in

decision making while promoting interpersonalconflict resolution and close personal relations.Additionally small group activities promote grouplevel learning, which improves implicit commu-nication and company specific knowledge devel-opment. Therefore, the work system facilitatesthe building of a “company mindset” and strongcorporate culture (Nonaka and Takeuchi 1998).

Recruitment in the human relations system isbased upon long-term external relationships withthe company. The system of recruiting only newschool graduates is still the norm in Japan. Re-cruitment into a Japanese company most oftencenters on achieving a fit between the personal-ity of the individual and the company culture.This is because recruitment is designed to pro-vide stable human capital for the long term ver-sus short-term (strategic) skill or knowledge.Males and females are recruited for different rolesin the organization, as are white-collar (univer-sity graduates) and blue-collar (high school orjunior college graduates) employees, but the de-lineation among employees is confined mainlyto these categories.

Training and development in the Japanese sys-tem emphasizes an evolutionary process of edu-cation and training designed to mold anindividual into the ideal corporate employee. On-the-job training, or OJT, is the primary methodof training for the Japanese employee. OJT islearning by observing and doing, with little orno systematic measurement or evaluation. Thissystem of knowledge development is sometimessupplemented by education and training for em-ployees outside the company, as in study abroadscholarships or technical training assignments, butis largely confined to company-specific employeedevelopment.

Compensation and promotion are based upona seniority system. The seniority system assumesa slow, steady progression of employee develop-ment which occurs at roughly the same time forall employees. Thus, the length of employment de-termines the amount of change in pay and or sta-tus of the individual. This is in direct contrast toa performance-based system in which individualeffort and output determine the amount of com-pensation and the rate of advancement. Althoughthe seniority system has often been criticized aspromoting mediocrity and dampening innovation

human relations management 181

in the organization, its main purpose, to maintainharmonious relations among employees, has beensuccessful over time.

Labor relations in a human relations manage-ment system relies on the family structure of Japa-nese organizations to allow a unique “companyunion” system to persist. Whereas in the West-ern labor union tradition there is an adversarialrelationship between management and workers,Japanese managers and line staff are members ofthe same union. Again, the focus of Japanese un-ions is to promote quality or work-life issues muchmore than the traditional Western unions whichnegotiate mainly on issues of compensation andsafety.

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 Organi-zation.

Nonaka, I, and Takeuchi, H. (1998) The KnowledgeCreating Company: How Japanese Companies Create theDynamics of Innovation, Oxford: Oxford UniversityPress.

Whitehill, A.M. (1991) Japanese Management, London:Routledge.

MARGARET TAKEDA

182 human relations management

Ie

There is perhaps no more evocative word in theJapanese language than ie, most literally “family,”which encompasses a range of meanings fromsimply “kinsfolk” to “dwelling” to a value-ladensense of “household.” Historically shaped byConfucian familial rights and obligations, theword ie today still connotes the social basis ofone’s fundamental relationships: to parents andoffspring, to community and workplace. By pur-posefully extending the household collective be-yond relationships bound purely by blood, the iehas continued to serve from Japanese medievaltimes to the present as the basic unit of a cohe-sive social structure that eventually built the “Japa-nese economic miracle.”

The toyo kanji (ideograph) for family Ie, shownin Figure 1, illustrates its roots. The ideographconsists of two elements: a roof over a pig, a do-mesticated animal in a dwelling. This image suc-cinctly symbolizes the importance placed uponthe household’s economic role over the humanaspects of a conjugal nuclear family The conju-gal nuclear family is subordinate to the Ie. TheIe’s significance as an economic collective has, infact, brought added relevance to the word’s othermeanings.

The ie concept of the household unit may betraced back to ancient times and has its earliestroots in the cooperative nature of traditional ag-ricultural production. Later, in the seventh cen-tury Confucian concepts were imported fromChina and adapted by the elite classes, providingfundamental support for the ie ideology. The fo-

cus of Confucian doctrine was the cult of the fam-ily In general, it prescribed: the hierarchical rela-tions between members; personal loyaltyconsisting of reciprocal duties and obligations;ritual observances of these reciprocities; contrac-tual arrangements between groups patterned af-ter family relationships. Diffusion of Confucianideas to all social orders did not occur until muchlater, during the Tokugawa period. Until then,peasant family members were scattered as serfsamong the noble classes within the feudal order.

Buddhism also had a profound effect on Japa-nese culture. Its social impact, through an em-phasis on the cultivation of humility and thesubordination of individual ambition for a col-lective good, cannot be overestimated, particu-larly in regard to its implicit support for keyConfucian values. Confucianism and Buddhismwere complementary to the ujigami, patron dei-ties of the native Shinto local god system. To-gether the three evolved into a family religion,

I

Figure 1

commonly referred to as ancestor worship, whichwas virtually universal in Tokugawa Japan. Thebrief daily ceremony before the family shrine wasa constant reminder to household members oftheir obligations to the ie.

The ie was the most basic economic, political,and social collective unit of a society that wasitself governed by precepts of giri, obligations andduties to superiors, and on, benevolence to inferi-ors. Within the ie, the most important criterionby which to evaluate action and behavior washow well it served the group. In such a collec-tively oriented society the individual hardly ex-isted as a distinct entity and failure to fulfill one’sobligations was considered selfish, or even cow-ardly. This ie ideological system suited Japan’soligarchic feudal system quite well. The daimyo(feudal lord) was referred to as shushin (lordparent)and the followers as ienoko (children of the fam-ily). First adopted by the warrior class, the samu-rai, the ie house system later informed thebusiness and social practices of the merchant andthe artisan classes as these groups increased ineconomic importance.

The giri psychology of moral obligation andduty provided stability to the two and one-halfcenturies of peace and tranquillity of TokugawaJapan, following a hundred years of civil wars.After the Battle of Sekigahara in 1600, Tokugawahegemony was established and a class structureimposed that was to become largely immutable.Its rigid hierarchy popularly known as theshinokosho (warrior, farmer, artisan, merchantclasses), declared the peasants second only to thesamurai in the social pecking order, although theyranked last economically.

By the mid-1700s the whole of Japanese soci-ety was comprised of economic units based onhouseholds reinforced by a religious cult of thefamily. During this Pax Tokugawa, every effort wasmade to suppress change in order to maintainthe social structure. Tokugawa government policysought to settle peasants permanently in stablevillages and establish the ie as the basic unit ofsociety During the seventeenth and eighteenthcenturies, land and tenant rights were promul-gated among the peasantry making it possible forindividual farming households to establish them-selves. Family units could then remain intactthrough successive generations. Thus formalized

by law, the peasantry began to adopt the familyvalues of the samurai household codes.

The ie was seen first and foremost as an ongo-ing enterprise rather than as a sanguineous fam-ily unit. Once an ie was established, its continuitythrough successive generations was of major con-cern to its members. If there was no son, a daugh-ter’s husband would be adopted into thehousehold to assume the family name and even-tually inherit the household. If there were no chil-dren at all, a son or daughter would be adoptedand, with his or her spouse, carry on the house-hold. Kinship blood ties were not as importantas the suitability of the candidate to manage theaffairs of the household, particularly in a mer-chant family. Although a son would normally beconsidered first choice to inherit, if unsuited tothe task he might be sent to establish his ownbranch household while a longtime faithful em-ployee would be chosen as successor, married toa daughter, and adopted into the household.

Although the laws of inheritance allowed foronly one heir so as to preserve the property ofthe household, custom provided for the estab-lishment of branch households for additional off-spring and loyal apprentices who had become partof the ie. It is these last two attributes, the adop-tion of a non-blood member as heir and the indi-visibility of inherited property that distinguishesthe Japanese institution of the ie from other EastAsian family/ kinship enterprise systems, suchas in China and Korea.

The harsh living conditions of the Tokugawaperiod made the division of property among off-spring nearly impossible, so that only the wealthi-est families were able to bestow any assets on asecond or third son. However, high mortalityrates during the Tokugawa period and into themodern period meant that second or third sonscould be adopted into other households in thesame or neighboring villages.

It was most common that, in the formativestages of the household enterprise, the direct man-agement of the ie was in the hands of family mem-bers for the first two generations. As the businessgrew in stability and size, however, often by thethird generation, competent managers who hadgrown up in the ie from early childhood and hadbeen promoted from detchi (apprentice) to tedai(salesperson) and then banto (manager), were

184 Ie

ready to assume the management operations ofan expanded business. It was often at this stagein the development of the Ie that management ofthe mise (store) became physically separated fromthe oku (back living quarters), symbolically mark-ing the progression from a nuclear family busi-ness to an extended family business. For ie thathad grown to a very large scale, such as Mitsui,it was imperative that non-family member man-agers be given authority since there could notpossibly be a sufficiently large talent pool withinthe Mitsui family itself.

The banto was permitted to marry at agetwenty-five and was then provided by the masterwith a bekke (separate house). Those who contin-ued to work within the honke (main house) wereguaranteed their livelihood after retirement.Those bekke that operated a business were fi-nanced and given a share of the goodwill by thehonke, whether in the same or a different type ofbusiness. Apprentices for the main house wereselected from among the sons of the bekke, thusmaintaining the fictive kinship relationship.

The successful collectivist centered develop-ment of the Japanese firm differed sharply fromthe weakened role of the household firm in West-ern Europe, which was superseded by the crea-tion in early seventeenth century England andthe Netherlands of the joint stock company form(see joint stock corporation).

The Japanese family firm in the ie system wasable to develop many of the attributes of a West-ern-style corporation while retaining the motiva-tional aspects of a household business: (1)perpetuation of the firm by training of suitablesuccessors from within the ie; (2) securing theloyalty of management to the household by theuse of fictive kinship status; (3) the indivisibilityof the ie and its assets, which tended to constrainthe ability of any one individual stakeholder toact on his own against the overall interests of thehousehold.

The origins of the zaibatsu and its successorsthe keiretsu (vertically grouped companies) andkigyo shudan (horizontally grouped corporatefirms) are found in the establishment of the mer-chant family houses of the Tokugawa period. Theextended household enterprises or family asso-ciations, such as the Konoike, Sumitomo, andMitsui groups, were all engaged in different types

of businesses and strategies. They were active indeveloping the capital resources and a householdenterprise management system during the earlyTokugawa period that enabled them to continueto prosper during the industrialization era of theMeiji period.

The management style which enabled the de-velopment of the merchant household style busi-ness was based on a distinctive concept of kinship,namely of non-blood, fictive kinship-based eco-nomic units. In a household style business non-blood related individuals function together as asimulated kinship group. Even when the internalstructure of a modern industrial enterprise growsbeyond a small-sized business, traditional patternsof on and giri continue. Subsidiaries and sub-unitsassume the traditional obligations to their em-ployees. Similarly the traditional distinctions be-tween insider and outsider are in play in themodern notion of the “lifetime employee,” a mod-ern-day embodiment of the traditional appren-tice, an adoptive member of the ie (household).In the postwar period the most sought after jobsfor new university graduates are those not onlywith a prestigious company but also with a se-cure “family” culture. Although, only some 30percent of Japanese industrial workers were con-sidered to have “lifetime” status; an employeewould still be classified as “temporary” or “part-time” even after working twenty years for thefirm. The so-called temporary employee remainsoutside the network of reciprocities, without sharein the ie or job security.

The attributes of the postwar Japanese stylemanagement, such as the lifetime employmentsystem, seniority promotion. and a paternalis-tic policy towards employees, have their histori-cal basis in the annals of medieval seventeenthcentury merchant households. Ie household codesgoverning the management of family businessescontained specific regulations on the theory andpractice of long-term employment, seniority andthe good treatment of employees.

The process of modernization in Japan maybe viewed, in some very fundamental aspects, asthe continuous development of native institu-tions rather than as the result of the abrupt intro-duction of Western ideas in the Meiji period ofthe late nineteenth century The values and be-liefs associated with the ie household concept are

Ie 185

alive not only in family-operated businesses butare reflected in the relationships and practiceswithin firms and within industrial groups. Theconcepts that came to be inherent in ie providedfoundation for the transformation of Japanesehousehold enterprise across the centuries intothe present day forms as member firms of largecorporate enterprise groups (kigyo shudan) andkeiretsu. Ie prepared the way for the great tradinghouses and their commercial banks, known asthe zaibatsu in the prewar period. Finally ie“house” practices not only prefigured the rela-tionship for the kigyo shudan, of today but, moresignificantly the development of Japanese firmsas group entities, prototypic of the formation ofrelationships between industrial groups, bothbig and small, throughout Japanese society andits economy.

Further reading

Nakane, C. (1970) Japanese Society, Berkeley CA andLos Angeles: University of California Press.

Scher, M.J. (1997) Japanese Interfirm Networks and TheirMain Banks, London: Macmillan, and New York:St Martin’s Press.

MARK SCHER

Ikeda, Hayato

Hayato Ikeda was born in the Hiroshima prefec-ture in 1899. In March 1925, he graduated KyotoTeikoku University (presently Kyoto University)Department of Law, and entered the Ministryof Finance. He became the chief of NationalTaxation at the Ministry of Finance in 1941, andthe Vice-Minister of Finance in 1947. In 1952, hebecame Minister of International Trade and In-dustry.

In 1960 the First Ikeda Cabinet was formed,and the government set the Shotoku-Baizo-Keikaku(Double Income Policy). The success of this policyformed the basis of Japan’s phenomenal economicgrowth during the next few decades. Japan for-mally became a member of the Organization forEconomic Cooperation and Development(OECD) in April, 1964.

In September of that year (1964), Ikeda en-

tered the National Cancer Center. In October,he announced his resignation, and the entireIkeda Cabinet resigned in November. He passedaway on August 13, 1965. He was awarded theGrand Cordon of the Supreme Order of theChrysanthemum that same year.

Further reading

Ito, M. (1985) Hayato Ikeda and His Times, Tokyo: AsahiShinbun-sha.

Kobayashi, K. (1989) Hana mo Arashi mo: Prime MinisterHayato Ikeda’s Ambitions, Tokyo: Kodansha.

MARGARET TAKEDAAKI MATSUNAGA

Inamori, Kazuo

Born in 1932, Kazuo Inamori is the founder oftwo multibillion dollar companies: Kyocera Cor-poration, which is the world leader in manufac-turing ceramic casings for semiconductors, andDDI Corporation, the second-largest telephonecompany in Japan. He is viewed by many as oneof the greatest entrepreneurs of post-SecondWorld War Japan along with Akio Morita andSoichiro Honda.

As a student, Inamori failed to get into any ofthe prestigious high schools, colleges, or compa-nies. He later received a degree in chemical engi-neering from Kagoshima University and in 1955went to work for Shofu Industries, a Kyoto-basedmanufacturer of electronics. In 1959, at the ageof twenty-seven, he quit Shofu because the com-pany management would not pursue his visionof a ceramic business, and started Kyocera withseven colleagues.

Inamori’s business philosophy has strong reli-gious overtones. For example, Kyocera’s corpo-rate motto is “respect the divine and love people.”His teachings are a mixture of Zen, Zig Ziglarand motivational speaking. He has written twobooks that have been translated to English: APassion for Success and For People For Profit.

DAYO EAWIBE

186 Ikeda, Hayato

income doubling plan

The National Income Doubling Plan (KokuminShotoku Baizo Keikaku) decided by the Ikeda Cabi-net in 1960 has been called the “Income Dou-bling Plan” and is the most famous governmenteconomic plan in post-Second World War Japan.The then Prime Minister, Hayato Ikeda, taking ahint from Professor Ichiro Nakayama’s theory ofwage-doubling, announced that his governmentwould double national income within ten yearsfrom 1961 to 1970.

The political and economic background of theplan was the following. On the one hand, 1960was the year for renewal of the United States—Japan Security Treaty concluded in 1951, whichgave the United States the right to station troopsand maintain military bases in Japan. The treatyrenewal, which did little to change the basic situ-ation, gave rise to strong opposition and politicalturmoil. After Prime Minister Kishi Nobusuke’sresignation in 1960, he was succeeded by Ikeda,who tried to overcome the political crisis, whichhad also been triggered by the Mitsui-Miike CoalMine Strike, the postwar period’s largest labor-capital confrontation. In this context, the an-nouncement of the plan had an aspect of politicalappeasement.

On the other hand, the Japanese economythough reconstructed after the destruction of theSecond World War, was still weak and fragile do-mestically as well as internationally Althoughrapid growth had begun in 1955, achieving fullemployment and balancing international accountswere still the biggest challenges facing Japan. TheIkeda plan also had to address these challenges.

The plan stated its goal as follows: “the ulti-mate aim is to move toward a conspicuous in-crease in the national standard of living and theachievement of full employment. To that end, themaximal stable growth of the economy must becontrived.” The target set in order to maximizestable growth was to double national income andGNP within ten years. The target level for GNPin 1970 was set at ¥26 trillion (at 1958 values),double the GNP for 1960. Therefore, averageannual growth had to reach 7.2 percent over thedecade. In actuality the plan called for an aver-age annual rate of 9 percent for the first threeyears.

Five major problems had to be solved in or-der for the plan to reach this target. First, infra-structure bottlenecks that impeded furthergrowth had to be solved by increasing govern-ment investment. The expansion of the privatesector was creating bottlenecks due to lack ofroads, harbors, factory sites and so forth. Sec-ond, in order to achieve economic independ-ence, the modernization of national industrialstructure had to be promoted. This called for theAmericanization of Japanese industry, or inother words, the introduction of Fordism. Third,the promotion of international trade and coop-eration had to be increased. Fourth, the improve-ment of human capabilities and advancement ofscience and technology was emphasized andpromoted. For example, one approach was to setup a number of new colleges of science and engi-neering. Fifth, mitigating the negative side ef-fects of the dual structures of the economy (seedual structure theory) and securing social sta-bility was established as a major focus. This wasa response to problems that accompanied rapideconomic growth: the need to reduce wage dif-ferentials between large and small companies, toreduce income gaps between agricultural andmanufacturing sectors, and to diminish regionalincome disparities. The type of approach em-bodied in the income-doubling plan can beviewed as one element of Japanese-style welfarestate.

The plan’s policies can be broken down intotwo main thrusts: economic growth and ap-peasement. Although it is difficult to evaluatethe full effects of the plan itself, the Medium-Term Economic Plan introduced by the SatoCabinet in 1965 replaced the plan halfwaythrough its lifespan. The Japanese economy con-tinued to grow at the highest rate of any majoreconomy in the world and, as a result, exceededthe target of ¥26 trillion, reaching nearly ¥40trillion in 1970. The actual average annualgrowth rate in the period from 1961 to 1970 was11.6 percent.

Due to its high rate of growth, Japan attainedalmost full employment and economic inde-pendence in the middle of 1960s, mitigating tosome extent the dual structure economy and be-coming the second largest economy in the freeworld. However, the high rate of growth caused

income doubling plan 187

distortions in the economy such as price in-creases, overpopulation in urban areas and de-population in rural areas, pollution, and so forth.Indeed the main objective of the above-touchbehind introducing the Medium-Term Eco-nomic Plan was to correct these distortions.

Japan’s economic planning, as carried out of-ficially by the Cabinet, began with the five-yearplan for economic self-support put forward in1955. Since that time the government has intro-duced fourteen further plans. The most recentplan is called the Ideal Socioeconomy and Poli-cies for Economic Rebirth (1999–2010).

Japan’s economic plans possess three basiccharacteristics. First, they indicate the “desireddirection of economic and social development;”second, they indicate the policy direction the gov-ernment should take in order to achieve theseends; third, they indicate behavior guidelines forpeople and for business. On the whole, theplanned figures fall somewhere between predic-tions and guidelines. Few government or busi-ness leaders consider the national economic planas a rigid, binding plan that must be followed bythe government. Instead it is viewed as a long-term forecast, with some flavor of wishful think-ing by the plan-makers.

Especially in the case of the Income DoublingPlan, Komiya (1990) suggests that the “announce-ment effect” or “propaganda effect” on economicgrowth seems to have been quite substantial.Ikeda and the plan pulled together a nationalconsensus for economic growth and defined theera 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 TokyoPress.

Kosai, Y. (1986) The Era of High-Speed Growth: Notes onthe Postwar Japanese Economy, trans. J.Kaminski, To-kyo: University of Tokyo Press.

Nakamura, T. (1981) The Postwar Japanese Economy: ItsDevelopment 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.

HITOSHI HIGUGHI

industrial efficiency movement

The industrial efficiency movement (nouritsuundou) was a series of initiatives starting in theperiod 1910–20 that aimed to modernize laborand production management practices in Japa-nese industry. Inspired by American models, andespecially by Frederick Winslow Taylor’s theo-ries of scientific management, Japanese reform-ers sought to systematize and rationalizeinefficient, customary production methods.Adapting imported theories to Japanese condi-tions, the proponents of industrial efficiency pio-neered managerial ideologies and techniqueswhich would become the hallmarks of Japanese-style management (Nihon teki keiei) after theSecond World War.

The age of efficiency

Japan’s industrial efficiency movement paralleledsimilar drives to modernize factory managementpractices in the United States and Europe.Taylor’s work on the systematic rationalizationof production was a crucial catalyst in this inter-national effort and his classic book, The Principlesof Scientific Management, was published in Japaneseonly two years after its American release in 1911.Taylorite methods and the broader notion of ef-ficiency captured the imagination of many in in-dustrializing Japan, from engineers to academicsto the general public: new books and journalsdedicated to management issues proliferated,many universities introduced courses onTaylorism, and expositions featuring the latestmanagerial advances attracted thousands of in-terested spectators.

Although the Japanese mania for efficiencyseemed to some a passing fad of the 1910s, im-portant figures in private industry and the gov-ernment embraced the Taylorite message andactively promoted the adoption of techniquessuch as time-and-motion study standardizationand incentive wages. During the 1920s, thanks

188 industrial efficiency movement

in part to the work of Yoichi Ueno and otherearly management consultants, scientific manage-ment spread steadily through Japan’s modern in-dustries, especially textiles, electrical goods andthe national railways. Reformers encounteredopposition from some intellectuals and laborgroups that criticized Taylorism as dehumaniz-ing, exploitative and excessively materialistic.Nonetheless, Taylorite practices appear to haveengendered significantly less hostility from shop-floor workers in Japan than was the case in ei-ther the USA or Europe. An important reasonfor this was the fact that Japanese managementreformers, sensitive to their nation’s particulareconomic and cultural conditions, sought to adaptTaylorism ideologically and methodologically toJapanese realities. Tempering scientific manage-ment’s mechanistic rationality and managerialelitism with more concern for the well-being ofworkers, proponents of industrial efficiencyendeavored to develop a more humane Taylorismfor application in Japan.

Depression and war

After the onset of the Great Depression, Japan’smanagement reformers were increasingly inte-grated into the industrial rationalization move-ment (sangyou gourika undou), a majorgovernment-sponsored program to increase pro-ductivity limit competition and stabilize industryduring the global economic crisis. As part of thisbroader effort, the industrial efficiency movement,which during the 1920s had been a loosely orga-nized, uncoordinated and largely private sectorinitiative, became more centralized, streamlined,and professional. With official subsidization andencouragement, a series of new campaigns aimedat the modernization of factory management werelaunched during the 1930s.

Despite the early achievements of the indus-trial efficiency movement, proponents recognizedthat much improvement was still possible, espe-cially as labor productivity in Japan continued tolag behind US and European levels. Some ambi-tious reformers even looked toward the estab-lishment of Fordist mass production, a dramaticextension of the logic and methodologies ofTaylorism. Yet such a dream remained beyondthe reach of prewar Japanese industry which

lacked adequate markets, capital and technologyto make the leap to American-style assembly lines.Indeed, even incremental Taylorization provedimpossible for many Japanese employers: underthe straightened circumstances of the depression,mass layoffs and work intensification seemedeasier solutions than the scientific analysis of pro-duction.

The coming of the Second World War andthe realization that industrial power was as im-portant as military might in modern “total war”brought an unprecedented surge of interest in ef-ficiency and management reform. JapaneseTaylorites were readily mobilized and the appli-cation of scientific management was trumpetedas the patriotic duty of manufacturers. But de-spite heightened appreciation of Japan’s need formanagerial modernization, actual progress on theshop floor was slow in an environment of con-stant dislocation, endemic shortages and imper-fect central planning. Standardization andspecialization proved elusive through the war and,in the end only a few industries realized evenlimited assembly line production. Nonetheless,wartime developments did lay sound foundationsfor the sweeping reform of management practicesand the attainment of mass production in the post-war years: most importantly as the number oftrained, professional managers swelled during thewar, the vision of a humanized recasting ofTaylorism was widely embraced as a specificallyJapanese approach to modern production andlabor management.

Legacies

Although the industrial efficiency movement isusually taken to have ended with Japan’s defeatin 1945, its intellectual and methodological lega-cies suffused the major management reform ef-forts of the postwar period. For example, Tayloriteideologies—including the assumption that pros-perity would neutralize class conflict and the abid-ing faith in apolitical managerial expertism—cameto characterize the productivity movement, a US-sponsored drive to modernize Japanese industryand labor relations. Meanwhile, familiar Tayloritepractices such as time-and-motion study becamethe technical building blocks of the famed Toyotaproduction system and were widely embraced

industrial efficiency movement 189

as Japan made the postwar transition to a mod-ern, mass production economy.

Japan’s particular heritage of scientific man-agement may have had its greatest impact, how-ever, on the postwar quality control movement.Over a decades-long process of trial and error,quality advocates sought to realize the vision of ahumanized Taylorism, fusing the scientific remak-ing of the workshop (through statistical analysisand rigorous standardization) with new meansfor engaging and motivating labor such as qual-ity control circles. The distinctive patterns andconspicuous successes of Japanese quality man-agement—and, indeed, of contemporary Japaneseproduction and labor management as a whole—derived in large part from the formative influ-ence 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 JapaneseManagerial History), Tokyo: Manejimento-sha.

Sasaki, S. (1987) “Scientific Management Movementsin Pre-War Japan,” in S.Yasuoka and H. Morkiawa(eds), Japanese Yearbook on Business History: 1987, To-kyo: Japan Business History Institute.

Tsutsui, W.M. (1998) Manufacturing Ideology: ScientificManagement in Twentieth-Century Japan, Princeton, NJ:Princeton University Press.

WILLIAM M.TSUTSUI

industrial groups (keiretsu)

Keiretsu is a Japanese word that defies exact trans-lation. A literal rendering into English might be“succession,” in the sense of a sequence of enti-ties joined together, as links in a chain. The wordkeiretsu is used to refer to business groups includ-ing (1) the six groups centered around the largeJapanese banks (also called financial groups, fi-nancial keiretsu, or horizontal keiretsu), (2) thegroups of firms centered around the forty or solargest industrial companies of Japan (also calledenterprise groups or vertical keiretsu), (3) the sub-contracting groups that are an important compo-

nent of several of the groups centered aroundthe large industrial companies, and (4) directedmarketing channels (also called distributionkeiretsu). This entry is confined to the first two ofthese, which we will refer to respectively as thefinancial keiretsu and the enterprise groups. Bothare also called industrial groups.

Financial keiretsu

The financial keiretsu are the postwar reincarna-tions of the prewar zaibatsu. After the end of theSecond World War, the American occupationauthorities directed the dismantling of the zaibatsu.These measures included the divestiture of shareinterlocks, dissolution and abolition of holdingcompanies, and appropriation and disbursementof shares held by the zaibatsu families. Soon afterthe Occupation ended, and continuing until about1960, many of the firms previously affiliated withthe major zaibatsu or the successors of such firmsre-established their old shareholding interlocks.The large commercial banks among these firmsbecame major stockholders in most of the othermembers of their respective reconstituted groups.Besides the progeny of the big four zaibatsu—Mitsui, Mitsubishi, Sumitomo, and Fuyo (for-merly Yasuda)—the six financial keiretsu includethe Dai-Ichi Kangyo group, consisting mainly offormer members of the smaller Kawasaki andFurukawa zaibatsu, and the Sanwa group that hadno prewar antecedent.

There are different ways of ascertaining whichcompanies belong to which financial keiretsu. Theclearest evidence of affiliation is appearance onthe roster of monthly “presidents’ club” meet-ings of any one of the six respective groups. Theserosters are public, though the agendas of the meet-ings are not. A few companies belong to morethan one presidents’ club—Hitachi belongs tothree of them—but these are the rare exceptions.The rosters of the presidents’ clubs exhibit littlechange from one year to the next, and the changesthat do occur are mostly the result of mergers.Altogether, the members of the six presidents’clubs in 1995 numbered 185 companies, includ-ing most but not all of the largest companies inJapan. Some of the large companies not on therosters of presidents’ clubs include Honda Mo-tor, Matsushita, Sony and Fuji Film.

190 industrial groups

The presidents’ club companies span a wideselection of industries. In fact, the economistMiyazaki Yoshikazu famously characterized thefinancial keiretsu as organized on the basis of the“complete-set principle” (wan setto shugi); that is,each of them comprised of at least one companyin each major industry. In industry after indus-try the members of the differing financial keiretsucompete with one another. For instance, Toyota,Mitsubishi Motors, Nissan, Daihatsu and Isuzuare each affiliated with a different keiretsu. KirinBrewery belongs to the Mitsubishi presidents’club, but Sapporo Breweries belongs to the Fuyopresidents’ club. There are many other similarexamples. The financial keiretsu are not simplycartels, coalitions of suppliers of similar products.Rather, they represent suppliers of differing prod-ucts, and in many instances, fellow members ofthe same presidents’ club trade with one another.Japan’s Fair Trade Commission has periodicallysurveyed the extent of transactions between fel-low members of same presidents’ clubs. In 1980it reported that 20 percent of the sales of presi-dents’ club manufacturing firms were to fellowmembers of the same clubs, and 12 percent ofpurchases were from fellow club members. Theseare all very large companies, most of whose trans-actions are probably with smaller firms, outsidethe presidents’ clubs, so the Fair Trade Commis-sion data does suggest a disposition towards tradebetween fellow members of the same financialkeiretsu.

Presidents’ club members borrow principallybut not exclusively from fellow members. Thesingle largest lender to each of them is usuallythe city bank that belongs to the same presidents’club as the company itself. In the usual pattern,loans from the presidents’ club city bank accountfor 10 percent to 20 percent of any other fellowpresidents’ club member’s total outstanding debt.The presidents’ club trust bank holds another 5percent to 10 percent of each fellow member’sdebt and the life insurance company 1 percent to5 percent. The balance of a typical presidents’club company’s total borrowing is from outsidethe group, including borrowing from financialmembers of other presidents’ clubs than the oneof affiliation. Presidents’ club members also bor-row from the three long-term credit banks, thecity banks not affiliated with the six financial

keiretsu, and from the regional banks. Since 1980,large Japanese companies have been allowed ac-cess to international financial markets as a sourceof funds, but still rely quite heavily upon domes-tic loans.

Another visible linkage among fellow presi-dents’ club members is cross-shareholding. Theaverage fractions of outstanding shares heldwithin the respective presidents’ clubs in 1997were Sumitomo (22.2 percent), Mitsubishi (27.3percent), DaiIchi Kangyo (11.3 percent), Sanwa(15.8 percent), Mitsui (15.1 percent), and Fuyo(15.5 percent), but about half of these shares wereheld by financial institutions of the respectivegroups. The Antimonopoly Law of Japan limitsthe extent of shares that banks and insurance com-panies may hold in any one company Since 1987these limits have been set at 5 percent for banksand 7 percent for insurance companies. Few banksor insurance companies hold share interests ap-proaching these limits. The shareholding of banksin the companies to which they lend is an impor-tant aspect of Japan’s bank-centered system offinancial intermediation.

About one-third of the (non-ordered) pairs ofnonfinancial companies belonging to a samepresidents’ club are directly linked with one an-other by cross-shareholding, and in about half ofthese instances, the cross-shareholding is recip-rocal. Typically the share interest of any onepresidents’ club company in another lies around1 percent. In other words, the cross-shareholding ties are usually insufficient to con-fer a controlling interest. Cross-shareholdingbetween nonfinancial members of differingpresidents’ clubs is unusual.

The financial keiretsu occupy a sizeable nichein the Japanese economy. Together, the six presi-dents’ clubs in 1997 accounted for about one-eighth of the sales of nonfinancial businesses inJapan, one-seventh of the paid-in capital, and one-eighth of the net profit.

Enterprise groups

The groups of firms centered, respectively arounda number of the largest industrial companies arealso referred to as keiretsu and as industrial groups.There is no standard term of reference for thembut here let us refer to them as enterprise groups.

industrial groups 191

The prominent examples are listed in Table 2 be-low. Quite a few of the forty firms identified thereas leaders of enterprise groups are themselvesmembers of a keiretsu presidents’ club.

The enterprise groups generally includemyriad subsidiaries as well as independent sub-contractors and other suppliers, and some alsoinclude wholesalers and retailers of the group’sproducts. Trading ties within the respective en-terprise groups may be presumed to be muchmore extensive than is generally true in the fi-nancial keiretsu. Also the shareholding of the en-terprise group leader in the other members istypically strong enough to confer de facto control,not merely a silent financial interest. The enter-prise groups are more tightly knit than the finan-cial keiretsu.

The combined assets of the forty enterprisegroups listed in Table 2 approached 10 percentof the total assets of all industrial firms in Japan,in 1994. In other words, the scale of the fortylargest enterprise groups roughly corresponds tothat of all the industrial members of the presi-dents’ clubs of the six financial keiretsu.

Business scholars have offered various con-jectures regarding the fundamental rationale be-hind Japan’s industrial groups. The financialkeiretsu owe something to their zaibatsu anteced-ents. The companies’ long history of profitabletrade and cooperation with one another has en-gendered a mutual sense of trust within the re-spective financial keiretsu, and enhanced theirshared reputations in dealings with outsiders.These reputations represent a true business ad-vantage and one that the companies are loathe toabandon. If the companies’ early histories hadnot included the fact that each lay within the con-trol orbit of the same respective zaibatsu then theseadvantages of group affiliation might never havebeen realized and perpetuated. The Sanwa finan-cial keiretsu, unlike the others, has no prewar an-tecedent but from its origin it imitated the provensuccess of the others and so required their exam-ple.

Bank dominance of financial intermediationin Japan is another factor buttressing the finan-cial keiretsu. Regulations and other factors that in-hibited companies from raising external funds insecurities markets gave rise to the main bank sys-tem in Japan, in which banks supplied the greater

share of external funds and also therefore devel-oped close relationships with loan clients. Themain bank for any one member of a financialkeiretsu was naturally the main bank for all be-cause given the various group members’ activecommerce with one another, information abouteach one’s creditworthiness also bore on that ofthe others. This very fact further inclined the com-panies to perpetuate their special ties with oneanother; the implied information spillovers low-ered their costs of borrowing.

The enterprise groups represent a form of eco-nomic organization that is less vertically inte-grated than some conceivable alternatives. In themarket economy vertical integration will proceedfurther when the costs of transacting through theprice system are greater and the costs of admin-istering a directed system of production are lower.Factors bearing on transaction costs include theextent of the market, the weight of reputationeffects, the sophistication of contracts and the de-gree of government interference with private con-tracts. The large scale of the Japanese market,the durability of trading ties in Japan, and thelaxity of Japan’s anti-trust laws all contribute tothe organization of production into enterprisegroups rather than into fully vertically integratedenterprises.

Table 2 Companies that head the forty most signifi-cant enterprise groups. Presidents’ club mem-berships are stated in parent heses.

192 industrial groups

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)

Further reading

Flath, D. (1996) ‘The Keiretsu Puzzle,” Journal of theJapanese and International Economies 10:101–21.

Gerlach, M. (1993) Alliance Capitalism: The Social Orga-nization of Japanese Business, Berkeley CA: Univer-sity 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 ‘ExcessiveCompetition’ and the Formation of ‘Keiretsu,’” TheDeveloping Economies 5:329–50.

DAVID FLATH

industrial policy

Industrial policy consists of government actionsto influence the economic behavior of specificindustries, firms, and other economic actors, forthe achievement of broadly defined political goals.Industrial policy is designed to affect specific in-

dustries differentially and so is distinct from gen-eral economic policies that influence the economyas a whole, overall aggregate demand, economicwelfare, and the like. In general, industrial policyinvolves actions that anticipate or at times con-tradict market signals, with the goal of channel-ing resources to (or away from) selectedindustries, leading to developmental outcomesthat would not have occurred had market forcesbeen allowed to operate freely Industrial policygenerally operates on the supply-side, influenc-ing private investment decisions in directions con-sistent with broader political goals. A key conceptin industrial policy is the creation of comparativeadvantage: rather than maximizing efficient pro-duction while taking existing factor endowmentsas a given, a government can use industrial policyincentives to change a country’s factor endow-ments.

In the postwar period the Japanese governmenthas provided a range of policy incentives, bothpositive and negative, to influence private sectorbehavior. Industrial policy was designed first tohelp the Japanese economy recover, and then tofoster the development of industries with highgrowth potential, particularly those that embod-ied advanced technology. In general, Japan’s in-dustrial policy has focused on the promotion ofcapital and technology-intensive production, andhas sought to shift the country’s entire industrialstructure in these directions. Another focus ofJapan’s industrial policy has been on internationaltrade: many policies have sought to increase theexport competitiveness of Japanese products, andat times have shielded domestic industries frominternational competition.

Scholars do not agree on the nature of Japan’sindustrial policy goals, and the extent to whichthe state has been insulated from political andsocietal pressures. Many have argued that statebureaucrats have been able to define and pursuerelatively coherent national-level goals such asimproving Japan’s international power positionthrough rapid industrialization or achieving na-tional economic and technological autonomyOthers stress the economic motivations behindindustrial policy such as raising factor productiv-ity and national incomes, and overcoming so-called “market failures.” Still others argue thatindustrial policy has been more politicized,

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 ofKeiretsu Enterprises), Tokyo.

subject to the influence of political actors or af-fected industries. An academic consensus isemerging that describes Japan’s industrial policyas the product of a negotiated balance betweenthe goals of the state and the sometimes conflict-ing interests of the private sector.

Japan’s early industrial policy

Japan’s rapid industrialization in the Meiji era isoften associated with the industrial policies fol-lowed by the new government. The Meiji leader-ship recognized that Japan lagged behind theEuropean countries in terms of industrialstrength, technology and military capabilities.Unless Japan could rapidly increase its nationalstrength it would be unable to protect its nationalsovereignty or preserve its economic autonomyand thus would be vulnerable to the fate that wasbefalling many others in Asia: imperialism. TheMeiji leadership, under the slogan fukoku kyohei,or “rich nation, strong army” thus embarked ona sustained effort to upgrade Japan’s industrialcapabilities and to achieve economic and militaryparity with the West.

In addition to the government’s massive ef-fort to create a modern government administra-tive structure, the state also took the lead in usingindustrial policy to modernize the Japaneseeconomy The government realized that Japan wasan economic “latecomer,” and that the private sec-tor lacked adequate capital, technology and en-trepreneurial skills to create crucial large-scale andcapital-intensive industries. Rather than relyingon market forces, the Japanese government in-tervened in the market by creating a number ofstate-run “model firms” in such industries as tex-tiles, steel, and shipbuilding. These firms were inpart designed to induce private Japanese entre-preneurs to create firms of their own, and mostwere soon sold off to private sector entrepreneurs.Other government industrial policies included thepromotion and financing of the import of ad-vanced technology and the development of ex-ports, particularly in the textile industry.

In subsequent decades, the government’s in-dustrial policy role became more indirect. Statepolicy continued to promote exports and to en-courage investment in strategic industries, and

especially those deemed to be important for Ja-pan’s military capabilities. In the 1930s and thenduring the Second World War, the Japanese gov-ernment became increasingly involved in theeconomy especially in order to direct resourcesto war-related industries. During the war, the gov-ernment semi-nationalized a number of industriesthrough the so-called control boards (toseikai), inan effort to sustain the war effort.

Japanese industrial policy during the era ofrapid growth

The government’s direct involvement in theeconomy was drastically reduced followingJapan’s defeat in the war. In the postwar periodthe Japanese government has not relied heavilyon public or state-owned firms. Rather, indus-trial policy has relied on more indirect measures,including inducements, guidance, and threatenedpunishments, to influence private sector behav-ior.

In the postwar period industrial policy hasbeen the responsibility of the Ministry of Inter-national Trade and Industry (MITI), createdin 1949. (Prior to this, MITI was known as theMinistry of Commerce and Industry or MCI; inJanuary 2001 the ministry was renamed the Min-istry of Economics, Trade and Industry orMETI.) The creation of MITI ushered in a pe-riod of rapid industrial development and growth.Between 1950 and 1973, the country’s gross na-tional product grew by an average of more than10 percent per year, a record of sustained devel-opment that was unprecedented, in Japan or any-where. At the same time, Japan’s industrialstructure shifted from agriculture to manufactur-ing and services, and from light to heavy indus-try By the end of this period a growing numberof Japanese industries had reached the forefrontof international competitiveness, and Japan hadbecome a highly successful exporter. Theseachievements can be attributed at least in part toindustrial policy although analysts still disagreeon the extent.

The decades of fast economic growth upthrough the oil shocks of the 1970s, the period ofthe so-called “Japanese miracle,” can be consid-ered industrial policy’s “golden age.” During this

194 industrial policy

period the Japanese government enjoyed anumber of advantages, particularly the benefitof a national consensus on economic growth andcontrol over scarce resources and policy tools,that allowed it to design and implement a rela-tively coherent industrial policy.

The national consensus on the need for eco-nomic recovery permeated Japanese society dur-ing the first two decades following the war. Notonly government officials, but also the conserva-tive politicians, small and large businesses, andlabor, all generally agreed on the need to focusthe country’s energy on economic growth. Op-ponents of a focus on industrialization had beenweakened either during the war or in the periodof the US occupation.

Japan’s industrial policy was also more effec-tive in this period because the state controlledaccess to a number of scarce resources that theprivate sector desperately needed. Particularly inthe early postwar years, most Japanese industriesfaced acute shortages of critical resources, espe-cially capital and technology. It was the govern-ment’s ability to influence the availability of theseresources that gave it some early leverage overthe behavior of the private sector.

Most importantly the state was able to con-trol to an extent the flow of capital. The govern-ment at the time had control over foreignexchange, and was able to allocate this scarce re-source to favored industries. The government wasalso able to use a system of “industrial finance”to favor selected industries. MITI, working withthe Ministry of Finance, was able to use gov-ernment loans from the Japan DevelopmentBank (JDB) as a signal to the private sector. TheseJDB “policy loans” amounted to a governmentstamp of approval; industries that received theseloans could then usually borrow all that theyneeded from the private sector. MITI also wasable to offer low-interest loans to selected indus-tries through the annual Fiscal and InvestmentLoan Plan (FILP), which were drawn from Ja-pan’s huge national postal savings system. Thissystem of savings represented a pool of capitalthat the government could direct to the privatesector on relatively easy terms

The closed nature of the Japanese economyin this period also made industrial policy moreeffective. The government’s role has been referred

to as that of a “gatekeeper,” with some influenceover what was allowed to enter and leave Japan.The government was able to restrict the importof competitive manufactures through relativelyhigh industrial tariffs and quotas. These allowedJapan to protect its targeted industries and in par-ticular the so-called “infant industries” that wouldhave been overwhelmed if exposed to open com-petition with more established, more efficient for-eign competitors. The Japanese government wasalso able to influence to an extent access to for-eign technology. MITI in particular tried to en-courage the import of technologies deemedessential and to discourage those that were not.In addition, MITI played a critical early role inhelping to “untie” technology using its ability torestrict access to the Japanese market to allowJapanese firms to obtain foreign technology with-out permitting inward investment.

Japan’s industrial policy also focused on thepromotion of exports. In addition to early “in-fant industry” protection, export sectors were pro-vided with incentives such as tax exemptions anddirect and indirect subsidies. State support wasoften withdrawn once the industry was able tocompete on its own in international markets. TheJapanese government was also active in compel-ling, or allowing, key export industries to becomemore concentrated through mergers. Japan’s in-dustrial policy thus influenced the country’s in-dustrial structure in two ways: the shift to capital-and technology-intensive industries, and the shifttoward an oligopolistic structure within each in-dustry.

A final factor that made Japan’s industrialpolicy more coherent was the so-called “advan-tages of a follower:” Japan could use the exampleof the industrialized nations as a blueprint for itsown industrial development. Early on, it was clearto government officials, politicians, and the busi-ness community that Japan needed to rebuildsome basic infrastructure industries. One of theearliest postwar industrial policy efforts was the“priority production plan” in which the govern-ment helped rebuild four key industries: electricpower, coal mining, steel, and shipbuilding. Inensuing years it was also clear to most that Japanneeded to develop certain basic industries, nota-bly steel, chemicals and energy-related industries.It was also clear which would be the “industries

industrial policy 195

of the future,” not only in terms of high levels ofincome and value-added, but also in terms of their“strategic” importance to the industrial economy.In subsequent decades the state provided supportto a broad range of industries, including generaland precision machinery automobiles, and con-sumer electronics. Most of the chosen industrieswere those that enjoyed high growth potential orwere deemed to be potentially competitive in in-ternational markets.

Industrial policy after the oil shocks

Many of the factors that made industrial policyseemingly coherent in the high-growth era weregradually breaking down over time. By the timeof the oil shocks of the 1970s, which ushered in aperiod of stable growth, Japan’s industrial policyhad become less coherent and more politicized.

First, as Japan caught up with the industrial-ized nations, the consensus on growth graduallybroke down. By the 1960s many in Japan hadcome to recognize the costs of high-speed indus-trialization, most notably industrial pollution. Inaddition, the population increasingly demandedthat more attention be paid to general quality oflife issues such as improving housing and publicinfrastructure. At the same time, a growingnumber of industries clamored for industrialpolicy support from the state, including manysmall and medium-sized firms and depressed in-dustries that had lost their international competi-tiveness. Many of these less-favored firms reliedon support from politicians to press their demandson industrial policy bureaucrats.

As the result of these changes, Japan’s indus-trial policy after the oil shocks became less “stra-tegic” and more redistributive in nature. Industrialpolicy in this era continued to focus on high-growth industries and the promotion of exports,but now also was involved in improving hous-ing, welfare-related infrastructure, and regionaldevelopment. In addition, a growing portion ofindustrial policy efforts was now devoted to prop-ping up the less efficient sectors in the economy.

Japan’s industrial policy was also less effec-tive in this era because industries were no longeras dependent on the resources the state had tooffer. As the Japanese economy grew, many ofJapan’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 of-fered by the state’s industrial policy.

At the same time, the Japanese governmentwas in the process of losing many of its industrialpolicy tools, largely because of external factors.As the condition for joining the international eco-nomic organizations, Japan was forced to sub-stantially lower its tariffs on imported goods, andwas later compelled to liberalize its foreign ex-change laws. Another important change in thisperiod was the rising level of international scru-tiny of Japan’s industrial policy In the early post-war period Japan, as a “small economy” whoseactions did not have a great impact on its tradingpartners, was able to make its industrial policywithout much outside interference. But as theJapanese economy gained in export competitive-ness, its actions now clearly impinged on its trad-ing partners. Foreign governments now putgrowing pressures on Japan to refrain from usingits industrial policy to give unfair advantages toJapanese industries.

Japan’s industrial policy in this era also wasmade more complicated because many of its in-dustries had reached the forefront of technology.Without the advantages of a follower, it was lessclear which industries of the future were the mostpromising or strategic. One key shift in this pe-riod was the support of the “knowledge-inten-sive” industries. In particular, MITI becameinvolved in public-private research and develop-ment efforts, for instance the VLSI (Very LargeScale Integrated) Circuit project (see VLSI Re-search Cooperative). The Japanese state contin-ued to provide incentives for future technologies,but with a more mixed success rate. Althoughindustries such as semiconductors and comput-ers developed in part because of state support,industrial policy was less successful in industriessuch as aerospace and computer software.

Reassessing industrial policy after thebubble

The long period of stagnant growth in the 1990shas led many scholars to reassess the nature andeffectiveness of Japan’s industrial policy Manyhave noted that Japan’s earlier industrial policy

196 industrial policy

was not infallible, often citing MITI’s failure torecognize the future competitiveness of firms suchas Sony and Honda, and its failures in industriessuch as aerospace. Others have argued thatJapan’s industrial policy has led to a chronic prob-lem of excess capacity in that it has been moreeffective in inducing firms to invest, but less ef-fective in forcing firms to divest or exit the indus-try. Rather, industrial policy more recently hasoften been used to shield industries suffering fromexcess capacity from the costs of economic ad-justment, leading to a Japanese economy that isless efficient and competitive.

Most recently Japan’s industrial policy prac-tices have been at the center of the ongoing de-bate on deregulation. Many of Japan’sindustrial policy regulations, which at one timeserved to nurture and protect infant industriesor to stabilize competition in the domestic mar-ket, are now being blamed for stifling innovationand preventing the Japanese economy from re-gaining its competitiveness. Industries that ben-efit from these regulations—often the lesscompetitive, inward-oriented sectors—have beenvery powerful opponents of substantial deregu-lation. On the other hand, complaints about ex-cessive regulation have come not only fromJapan’s trading partners but also from many ofJapan’s more competitive, export-oriented in-dustries. Industrial policy bureaucrats thus findthemselves in a dilemma as to which side of Ja-pan’s dual economy to support.

The current emphasis on the problems andfailures of industrial policy is perhaps as exag-gerated as the earlier belief that industrial policywas a main reason for Japan’s economic success.Scholars still disagree in their assessment of theeffectiveness of Japan’s industrial policy. Manyhave argued that industrial policy was especiallyeffective in its earlier phases, as it helped Japanrecover from the devastation of the war and getback on the high-growth track relatively quickly;counterfactually we need to consider whether theeconomy would have grown as fast as it did with-out the industrial policy that Japan followed. Butas the Japanese economy matured and reachedthe frontiers of technology the coherence and ef-fectiveness of its industrial policy was alreadybeginning to decline even before the economystagnated in the 1990s. Japan’s more recent eco-

nomic problems have bolstered the position ofthose who stress the potential downside risks ofgovernment intervention in the market.

See also: administrative guidance; amakudari;cartels; competition; declining industries; FairTrade Commission; industry and trade associa-tions; industrial regions; Johnson, Chalmers;shingikai

Further reading

Calder, K. (1995) Strategic Capitalism: Private Business andPublic Purpose in Japanese Industrial Finance, Princeton,NJ: Princeton University Press.

Callon, S. (1995) Divided Sun: MITI and the Breakdownof Japanese High-Tech Industrial Policy, Stanford, CA:Stanford University Press.

Johnson, C. (1982) MITI and the Japanese Miracle: TheGrowth 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: CornellUniversity 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: NationalSecurity, Ideology, and the Transformation of Japan, Ithaca,NY: Cornell University Press.

Tilton, M. (1996) Restrained Trade: Cartels in Japan’s BasicMaterials Industries, Ithaca, NY: Cornell UniversityPress.

Uriu, R. (1996) Troubled Industries: Confronting EconomicChange in Japan, Ithaca, NY: Cornell UniversityPress.

ROBERT URIU

industrial regions

There are three primary industrial regions in Ja-pan. In order of size and importance they are theTokyo-Yokohama regions, the Osaka andgreater Kansai region, and Nagoya and theChubu region. These three regions stretch con-secutively along the eastern side of Honshu (the

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largest island in the Japanese archipelago) begin-ning in the north with Tokyo and extendingdown to Osaka. Taken as a whole their com-bined geographic area is also home to roughly30 percent of the Japanese population.

Tokyo is the largest city in Japan with a popu-lation in its twenty-three wards exceeding 8 mil-lion. The larger metropolitan area has apopulation of 11.9 million. It is the national capi-tal and ranks number one among all cities fornumber of corporate headquarters. Not surpris-ingly it is the hub of the Kanto region. Tokyoharbor is the third largest seaport in Japan, andNarita International Airport is the largest airportin terms of passenger and cargo. In addition tothe nearly thirty other towns that comprise theremainder of the Tokyo metropolitan region, thesix prefectures surrounding Tokyo—Chiba,Gumma, Ibaraki, Kanagawa, Saitama andGumma—are also considered part of this indus-trial region. They are home to thousands of large,medium and small manufacturers, assemblyplants and warehouses.

The other hub of this industrial region, inKanagawa prefecture, is Yokohama, situated onTokyo Bay 30 kilometers southwest of Tokyo.With a population approaching 4 million, it isJapan’s second largest city and possesses the larg-est seaport in Japan. It handles roughly 15 per-cent of Japan’s foreign trade. This is not surprisinggiven its historical importance. In 1859 it becamethe most influential seaport in all of Japan as aresult of its proximity to Tokyo, the national capi-tal. Yokohama soon attracted a large number offoreign residents, most of them connected withEuropean and American trading and shippingcompanies. For that reason, Yokohama has tendedto have a more international atmosphere than itsbig sister, Tokyo, nearby.

The Kanagawa region immediately surround-ing Yokohama became the site of major manu-facturing facilities, which used the nearby portfor exporting their products overseas and evendomestically within Japan. As a result, the areaaround Yokohama ranks near the top in terms ofmanufacturing output for general and electricalmachinery.

The second major industrial region is locatedin the Kansai region and has as its main hub thehistorical commercial capital of Japan, Osaka. The

two other large cities in this region are Kyoto,the imperial capital of Japan for more than a mil-lennium, and Kobe, a second major port city tothe region. The six prefectures surroundingOsaka—Hyogo, Kyoto, Mie, Nara, Shiga, andWakayama—encompass the second largest con-centration of industrial capacity after the Tokyo-Yokohama region.

Osaka is the third largest city in Japan and isthe site of the second largest stock market, againafter Tokyo. From the ninth century until wellinto the twentieth century Osaka was the com-mercial center of Japan. It was the birthplace offive of Japan’s general trading companies:ITOCHU, Marubeni, Mitsui. Nissho Iwai andSumitomo. It is also home to Matsushita Elec-tric Industrial, the largest electrical appliancemanufacturer in the world. The Osaka region’schemical and petroleum industries ranknumber one in terms of production capacityand the steel industry ranks second only to theTokyo region.

From the Meiji restoration (1858) onward,Osaka witnessed an erosion of its commercial im-portance as business activity shifted to Tokyo andthe munificent government contracts that markedthe era of Japan’s push toward rapid industriali-zation in the latter half of the nineteenth centuryMitsui typified this exodus from Osaka to Tokyowhen it moved its corporate headquarters in 1873.The trend of Osaka firms moving corporate head-quarters to Tokyo has continued for well over100 years. It was given additional impetus in theimmediate postwar era, as the American occu-pation had a tendency to further concentratepower and control of resources in Tokyo.

In the past decade, however, the region’s for-tunes have taken a turn for the better. For one,the Tokyo-Yokohama region simply ran out ofroom for further significant industrial expansion.Because of its well-developed infrastructure andhistorical position, the Osaka became the heirapparent for future growth. This shift has beenbuttressed by several aggressive developmentprojects. The first of these was the Kansai Inter-national Airport, built on a man-made island inOsaka Bay The project was the culmination of athirty-year project by government and businessleaders to significantly upgrade the commercialand cargo air facilities in the region. The airport

198 industrial regions

opened in 1994 and its impact on bringing moreforeign investment into the region appears sig-nificant. A second major project involved a jointbusiness-government effort to build a cluster oflarge high-tech research parks and governmentresearch centers in a completely new city. KansaiScience City can be considered a Kansai coun-terpart to Tsukuba, the Kanto city known for itsgovernment and corporate research facilities. Inmany respects, Kansai Science City represents aneffort by the central and local governments toreplicate the success of Tsukuba in the Kansairegion.

Nagoya and the Chubu region, locatingroughly midway between Tokyo and Osaka, arethe third major industrial region of Japan. Nagoyais Japan’s fourth largest city with a population ofapproaching 2.5 million. It is located in Aichi pre-fecture and is considered the main city of theChubu region, which includes the surroundingprefectures of Gifu, Mie, Nagano and Shizuoka.Because Toyota, Honda. Mitsubishi and Suzukiare headquartered in the region and have theirmajor manufacturing there, the Nagoya regionaccounts for over 50 percent of all vehicles manu-factured in Japan. Just as Toyota City is a keyautomotive producer, two other cities claim simi-lar honors in two other industries. Seto is an es-tablished center for ceramics, which explains whyNoritake and several lesser fine china manufac-turers are headquartered in the region.Ichinomiya, in nearby Gifu prefecture, is a majorcenter for textiles.

See also: Kansai culture

ALLAN BIRD

industry and trade associations

Trade associations (jigyosha dantai) have played animportant role in Japan’s early economic devel-opment (see guilds). In the control economyduring the Second World War, existing industrygroups were transformed into “control associa-tions” (toseikai). In every industry a control asso-ciation was in charge of designing andimplementing the rationing of input materials andoutput quotas. After the war, a large number ofassociations continue to be importantly involved

in industrial policy and regulation (interactingwith bureaucrats), lobbying and policy planning(interacting with politicians), as well as intra-in-dustry and inter-industry negotiations on jointproduct development, production curtailment,and self-regulation.

Over time, the pendulum of government in-volvement in trade association activities hasswung back and forth. During the Edo period,the Shogunate at times ignored the guilds and atother times used them for its policy purposes.The Meiji period saw more active governmentinterest in business affairs, and the Taisho periodless. The immediate postwar years were a periodof particularly high government involvement, somuch so that it often looked as if the ministriesunilaterally imposed policies onto industries.Because in those years the interests of the bu-reaucrats and those of industry were often inter-twined, it was difficult to determine whetherbureaucrats were bending to industry pressurein designing certain policies, or industry wasshaped to the interests of government. This mayhave led to an exaggeration of the role of minis-tries in industrial policy design and implementa-tion. When the ministerial leverage over industryby way of administrative guidance and indus-trial policy began to decline in the 1980s, thependulum of government involvement in indus-try also began to swing back, and trade associa-tion activities of self-regulation becameincreasingly important and visible.

Data

The wartime control associations were based onvery narrowly defined industries, often by prod-uct category. Although these control groups wereforced to dissolve under the Occupation, manyof them simply changed their names and contin-ued to exist to support the recovery of their mem-ber firms. As a result, there are more tradeassociations in Japan than in many other coun-tries. For instance, even in the 1990s, there wereseparate associations for pens, pencils, ballpointpens, fountain pens, highlighting pens, and white-out ink.

As of 1997, a total of 15,437 trade associationswere registered with Japan’s Fair Trade Com-mission (FTC). Of these, roughly 2,100 were

industry and trade associations 199

“incorporated” (zaidan hojin), i.e., they held a li-cense from their cognizant ministry and had tosubmit annual reports. In contrast, 9,700 were“voluntary”, with no immediate ties to a regula-tor, while 3,500 were cooperatives based on spe-cial small-firm legislation that exempted theseassociations from certain anti-trust rules.

In a sample of 1,200 trade associations in 1990,the median (representative) association had eightymember firms, four staff, twenty directors, and abudget of 70 million yen; these numbers weresimilar to US associations except for budget,which was, on average, more than five timeslarger in Japan (Schaede 2000). Given that budg-ets are financed through membership dues andJapanese firms are typically members of severalassociations, Japanese companies incur significantexpenses from association membership.

Organization

The governing body of every trade association isthe “general meeting” (sokai). Typically once ayear all members meet to vote on general issuessuch as changes in the by-laws. Very large asso-ciations also hold annual conventions (taikai)which are high-profile events and often featureas speakers representatives from the cognizantministries and politicians. Substantial policy de-cisions are delegated to the board of directors(rijikai), which meets monthly. The directors (riji),as well as the association’s president, are mem-ber company presidents who are officially electedat the general meeting and are usually the presi-dents of the largest firms in the industry.

Directly under the president, the staff of theassociation is headed by one senior administra-tive director (senmu riji) who is a member of theboard of directors but as a long-term employeeprovides institutional memory among the rotat-ing directors. This person also acts as a liaisonbetween the member firms, the association, andthe outside world. In those associations that hireretired government officials or “old boys” forcloser contacts with their regulators, this persontypically assumes the position of senior adminis-trative director.

Below the senior administrator, a number ofstaff people are in charge of administrative func-tions, including: organizing committee and sub-

committee meetings (which occur in large num-bers at frequent intervals); publishing a newslet-ter; collecting industry statistics; conductingresearch on foreign market access; collecting opin-ions on policy issues and contacting related asso-ciations; organizing educational programs andseminars; organizing trade shows and other indus-try promotion; and processing information fromthe cognizant ministry for distribution to mem-ber firms. In large associations, several of the staffare shukko, employees from member firms on a two-year secondment. During the stints at the asso-ciation, shukko learn about their industries and meeta large number of people with whom to maintainnetworks as their careers develop.

Functions

Trade associations fulfil a wide range of functionswhich require different organization. For instance,for influential lobbying, associations must belarge, but for effective cooperation they shouldbe small. Japanese industries have addressed thistradeoff between size and effectiveness by creat-ing a pyramid with focused, small associations atthe bottom, industry umbrella associations in themiddle, and large, over-arching federations, suchas Keidanren, at the top. Thus, different types ofassociations specialize in different functions withinthe political economy In general, there are threecategories of functions: (1) administrative (infor-mation exchange), (2) economic (self-regulationand ministry/business relations), and (3) political(lobbying and politicians/business relations).While all associations engage in information ex-change, large federations typically engage morein lobbying, whereas the focused industry-basedassociations are more concerned with economicfunctions.

Studies in corporate management attest to theimportance of information and knowledge forbusinesses to reduce uncertainty in strategy de-cisions, avoid duplication, and cooperate on newtechnologies. In particular, if firms want to coop-erate, the most important condition for a sus-tainable agreement is the frequent exchange ofinformation, because it facilitates monitoring.Understanding this, Japan’s trade associationshave crafted systems of institutionalized infor-mation exchange through committee meetings

200 industry and trade associations

at various junior and executive levels. These fre-quent meetings provide formal and informal op-portunities to interpret complicated signals fromcompetitors and related markets, and to respondto them. Japanese anti-trust law does not requirethat a lawyer be present at these meetings, andbecause the antitrust authority has never inter-fered with the extensive and multi-layered com-mittee structure, the exchange of critical data,including prices and costs, appears to be quitecustomary in some industries.

Trade associations and regulation

The fundamental economic function of trade as-sociations is to ensure a constant flow of discus-sion between officials at the ministries and theassociations they regulate. Activities that formal-ize these contacts include long-standing delibera-tion councils (shingikai), holding joint seminarson special policy issues, or a ministry paying theassociation to undertake a feasibility study fortheir industry.

As for what ministries do for associations, atthe most basic level the bureaucrats structure abargaining situation and assume the role of ref-eree for the negotiation. A well-known exampleof an outcome of this process are research coop-eratives. Upon discussion with all affected in-dustries and companies through theirassociations, MITI may formulate the basic planand offer subsidies as incentives for a group offirms to engage in joint research (importantlyJapanese ministries rarely offer subsidies to indi-vidual firms). Since firms do not typically like todisclose technology-related information, withouta referee they may be unable to agree on a project.Another example can be found in maturing, orstructurally depressed, industries. By creating ne-gotiations among firms regarding capacity reduc-tions, a ministry can fulfil its own goals of phasingin unemployment in the industry.

From the perspective of the regulating minis-tries, trade associations are important and help-ful both in formulating and implementingregulation. First, the understaffed ministries needassociations to provide them with aggregate in-formation on industry such as sales, investments,or inventory as well as industry-specific knowl-edge of products, standards, etc. Because many

trade associations collect data on foreign markets,ministries often use them as informants in inter-national trade negotiations. Second, rather thancontacting individual firms, the regulators typi-cally negotiate policy issues with the association.This is particularly useful when the ministry isdrafting administrative guidance, which doesnot need cabinet approval but is negotiated justbetween the regulator and the industry Third,trade associations are instrumental in monitor-ing compliance with informal regulation. As Ja-pan does not have specific supervisory agencies(except for the financial industries since 1998),the ministries are at the same time responsiblefor policy formulation and enforcement. In mostindustries, understaffed ministries rely on thetrade associations for administering industry self-enforcement.

Finally trade associations also engage in au-tonomous self-regulation, without the involve-ment of ministries. “Self-regulation” refers to aprocess by which a trade association designs therules of trade for that industry and enforces theserules through self-designed sanctions. What typesof rules associations create depends on the spe-cific circumstances and competitive environmentof their industries. Fundamentally these rules canbe either “administrative” and trade-enhancing(for example, through standard or quality require-ments, or rules on advertisement and ethicalbehavior), or they can be “protective” and trade-restricting (through price agreements, restrictingmarkets or customers, restricting market access,or an exclusive distribution system). Althoughindustries differ in the extent and types of theirself-regulation, the practice is widespread. Onereason is that the boundaries between adminis-trative and protective self-regulation are difficultto define, and even protective self-regulation isnot necessarily always found to be in violation ofthe anti-trust statutes.

Lobbying

Trade associations participate in the policy-mak-ing process in various ways. At the formal level,association representatives often participate in thegovernment’s deliberation councils. More infor-mally business tries to influence political decisionsthrough informal meetings and small gifts. For

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instance, large associations typically procure thebest tickets to sumo wrestling bouts or kabuki andno performances, to give them to politicians whohold influence over their industry.

Above all, trade associations play a major rolein party donations. To the extent that compara-tive data are available, the ranking of sources forpolitical donations in Japan are almost the oppo-site from the USA. Whereas in the mid-1990s,donations to US parties came primarily from in-dividuals with corporations only contributing 6percent of the total, in Japan individuals ac-counted for 10 percent of all party financingwhereas corporations provided more than 30percent. Importantly Japanese companies chan-nel their contributions through their trade asso-ciations. The associations in turn give directly tothe party up to the legal limit of 100 million yenper year, and also channel funds to the ultimateumbrella organization, Keidanren. Under theLDP one-party rule between 1955 and 1993, allindustries were most interested in lobbying theLDP, and Keidanren was continuously one of itsstrongest supporters. The system was interruptedwhen the LDP briefly lost its majority in theLower House in 1993.

Outlook

The decline in ministerial leverage over industrydue to deregulation and market liberalization isfurther increasing the importance of trade asso-ciations in Japan’s political economy. Whereasassociations have always self-regulated to a signifi-cant degree, their activities are becoming moreimportant as antitrust authorities allow significantexchange of information and rule-making by as-sociations, while many ministries do not strictlysupervise or monitor their industries. Some indus-tries self-regulate to open their markets and ex-pose their member firms to full competition,whereas others create entry barriers to protect in-cumbent firms. Many of these firms have been ableto weather the extended recession of the 1990sthanks 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 inJapan, Oxford: Oxford University Press.

Young, M. (1991) “Structural Adjustment of MatureIndustries in Japan: Legal Institutions, Industry As-sociations and Bargaining,” in S. Wilks andM.Wright (eds). The Promotion and Regulation of In-dustry in Japan, New York: St. Martin’s Press, 135–66.

ULRIKE SCHAEDE

internal labour markets

A central premise behind the idea of “internal labourmarkets” (ILMs) is that many of the rules determiningeconomic outcomes for employees are written insidethe firm rather than outside in an external labor mar-ket. When employees work for long time periods inone firm, understanding internal firm rules becomescritical if one wants to understand the organization ofwork, wages, how and why employees change jobs,and other labor outcomes. Of course, the internalrules may vary substantially across individual firms,industries, national boundaries, and time periods.

Early literature on internal labor markets wasUS based. Clark Kerr—who focused on US labormarket institutions in the 1950s—first made thepoint that there was a central boundary betweenwhat was happening in the firm and the activityin “external” labor markets. His distinction wasimportant because prevailing neoclassical eco-nomic theory implied that the boundary was notsignificant: the laws of supply and demand in thelabor market affect everyone in the same wayKerr and others began to argue that this is notnecessarily the case; the internal, firm-specificrules affect internal employees in ways that areindependent of an external labor market. JohnDunlop, who originally coined the term “inter-nal labor markets” in the 1960s, first focused onthe job ladders that he saw within US firms. Muchof this early research was narrowly focused ondetailing ILMs within blue-collar, union-domi-nated manufacturing industries in the USA. Morerecent work has focused on the differences be-tween ILMs in different manufacturing workmodels, between manufacturing models and serv-ices, and across national boundaries. This is par-ticularly true in the last two decades as US,

202 internal labour markets

Japanese, and European firms set up transplantsand joint ventures. In the USA in Freemont, Cali-fornia, the NUMMI joint venture betweenToyota and General Motors generated extremeinterest because of its early success with a signifi-cantly different model of work using US employ-ees.

Because of the longer documented job tenurefor Japanese employees relative to their Westerncounterparts, analyzing and understanding in-ternal labor markets has been a primary concernof those studying Japanese labor markets. JamesAbegglen and Ronald Dore were among thefirst non-Japanese scholars to document Japa-nese style employment practices that character-ize ILMs, including the “three pillars” oflifetime employment, seniority promotionand wages, and enterprise unions. The stylizedfacts on Japanese and US ILMs are now veryfamiliar. Kazuo Koike and many others havebeen careful to point out that comparisons canoften be misleading, and the differences revolvearound degree. Some of the more common styl-ized differences are: (1) executive and managerpay vs. average employee pay is more com-pressed in Japan; (2) job security for core em-ployees at large Japanese firms is greater than intheir US counterparts; (3) job rotation, em-ployee participation, and training is emphasizedmuch more strongly; and (4) the delineation be-tween blue-collar and white-collar work tends tobe more ambiguous, with movement from blue-collar ranks to white-collar work.

The study of Japanese internal labor marketshas recently become much more fine-grained,with scholars increasingly concerned about whatwe can learn from different ILM systems. Earlycomparative work was often static and describedJapanese ILMs as uniquely Japanese. Even if seenas efficient and effective in the Japanese context,many argued that particular ILM practices couldnot be transferred across national culture. How-ever, the weight of opinion now sees ILM prac-tices as dynamic and in a constant state ofevolution within particular countries. Also, cross-national diffusion of differences can and oftendoes occur.

At the same time, there is growing agreementthat the rules making up a particular internal labor

market “model” do tend to have a self-reinforc-ing logic and should be evaluated and understoodas a whole. For example, narrow job classifica-tions, wage attachment to a specific job, and fewrestrictions on the ability of the firm to lay offworkers are practices that tend to be mutuallyreinforcing. Broader job classifications, wages at-tached to individuals rather than a job, andgreater job security are also practices that are self-reinforcing. The former model is essentially a tra-ditional American model, while the latter iscommonly associated with Japanese firms andparticular US and other non-Japanese firms modi-fying their traditional work systems (now com-monly labeled as “high-performance worksystems”).

In the post-Second World War period, manyobservers saw the character and smooth func-tioning of internal labor markets within Japanesefirms as a source of relative economic strength.To encourage cooperation and commitment fromemployees, flexibility in job assignments in thefirm, and effective employee participation inonline problem solving, Japanese firms providedfirm-specific training, relatively high job securityand compressed wages based largely on senior-ity. More effective on-line problem solving and acommitment to the firm ensured rising produc-tivity and product market success for Japanesefirms.

Japan’s internal labor markets worked well inthe context of a high and stable growth environ-ment with tight labor markets, and few cyclicaldisturbances. With high growth and scarce labor,it makes good sense to build an internal labormarket system that attracts, trains and keeps goodworkers. Rapidly growing firms also allow quickpromotion internally for qualified employees com-mitted to firm success. With no large, unexpecteddeclines in demand, the relative expense of guar-anteeing employment and training employees islow. This is especially the case with a corporatelandscape dominated by firms utilizing the samestrategies.

Sustained lower growth in Japan during the1990s has increased pressure to de-regulate“rigid” internal labor markets and to increase theefficiency of external labor markets. With lowgrowth, Japanese firms with relatively permanent

internal labour markets 203

employment guarantees can quickly become top-heavy. The temptation to cut expenses by reduc-ing employees has increased as traditional optionssuch as farming out core employees to subsidiar-ies (shukko) are exhausted. Meanwhile, those em-ployees who are let go are finding it harder tofind work in a weak external labor market.

How, then, will Japan’s labor markets change?Many Japanese firms are still reluctant to give upthe benefits of an internal labor market that ef-fectively encourages firm specific skill acquisitionand meaningful employee participation. Even asnon-Japanese firms continue to appreciate Japa-nese ILM practices, Japanese firms continue tosearch for ways to adapt to a persistently difficulteconomic environment. This search includes ex-perimentation with more “Western” practices likeperformance-based pay less overall security foremployees, and a firm decision matrix that givesshareholders more power. However, to what ex-tent practices like these should be and will beadopted remains unclear.

Further reading

Abegglen, J.C. (1958) The Japanese Factory: Aspects of itsSocial Organization, Glencoe, IL: The Free Press.

Dore, R. (1973) British Factory, Japanese Factory, Berke-ley 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.

WILLIAM BARNES

Ishikawa, Kaoru

Kaoru Ishikawa (1915–89) was a pioneer in thedevelopment of quality management in Japan,with a particular impact on the spread of qualitycontrol circles. He emphasized company-wideparticipation in quality and worked to develop aset of simple statistical tools, usable by workersat all levels of the organization. Making invalu-able contributions to the implementation of con-cepts introduced by Deming and Juran, Ishikawapromoted the careful collection of process-related

data, and its presentation using charts and dia-grams. He developed the widely-employed cause-and-effect (fishbone) diagram for understandingrelationships in processes; it is often called the“Ishikawa diagram.” Ishikawa espoused an ho-listic view of quality arguing that it is muchbroader than simple product quality but ratheran all-encompassing way of managing people andprocesses.

Further reading

Ishikawa, K. (1976) Guide to Quality Control, Tokyo: AsianProductivity Organization.

ELIZABETH L.ROSE

ISO issues

ISO is a group of five standards set by the Inter-national Organization for Standardization that aregeneric guidelines and models for ensuring thequality of a company’s goods and services. Somecompanies see ISO as a management tool, whileothers see it as a trade barrier.

ISO 9000 and total quality are not the samething. However, ISO 9000 can be part of a largertotal quality management (TQM) environment.Organizations that have achieved a high level ofquality may already have the criteria for ISO9000 in place. This is the case in Japan. It is amajor reason why Japanese firms have notadopted ISO 9000 to the extent that businessesin other countries have. Many Japanese firms donot see the need for ISO 9000 certification sincethe Japanese are known for quality and alreadyhave many of their own quality processes inplace. The Japanese also have their own awardsfor quality such as the Deming Award. Some re-searchers believe firms such as Toyota wouldhave little to gain from ISO certification sincetheir products are recognized as world class interms of quality. Many Japanese firms set theirsights on one of the best-known quality awards,the Deming Prize. Deming Prizes are almost ex-clusively won by Japanese firms, with three ex-ceptions (Florida Light & Power, Taiwan Tube,and Lucent Technology). In Japan, five years af-

204 Ishikawa, Kaoru

ter a company has received the Deming Prize, itis eligible to compete for the Japan Quality Con-trol Prize. Only a few organizations, includingToyota, have won this award, thereby showingtheir commitment to continuous quality im-provement.

Today the new versions of ISO 9000 includeprinciples of total quality management and con-tinuous improvement from Japan. Quality Im-provement and therefore ISO 9000 is importantfrom organizations’ and suppliers’, as well as cus-tomers’ perspective. At a time of increasing glo-balization, ISO 9000 provided an internationalstandard for quality For example, European Un-ion (EU) members made ISO 9000 compliancepart of their safety laws and many EU compa-nies require suppliers to be ISO certified. How-ever, there are no laws requiring I SOcertification to export or sell to Europe. Never-theless, it is a competitive advantage. The stand-ards do not apply to products or servicesthemselves, but rather to the process. They arean assurance that the certified firm has in place aquality system enabling it to meet its stated qual-ity As Japanese companies continue to movemanufacturing facilities to developing countries,they have become more interested in havingtheir subsidiaries as well as their suppliers ISO9000 certified.

In the summer of 2000, ISO standard officialsfrom 46 countries met in Kyoto, Japan to sign offon revisions to the year 2000 version of the ISOseries. However, Japan as well as France voicedobjections to these new standards. The new stand-ards are streamlined and focus more on trackingprocesses, on continuous improvement, and oncustomer satisfaction.

In addition to global recognition of the impor-tance of high-quality products and services is thegrowing worldwide concern for the environment.ISO 14000 is a newly established certification sys-tem of environmental standards. The ISO Com-mittee developed an environmental managementsystem that could be applied to firms around theworld. It provides companies with a structure foran environmental management system that willensure that all operational processes are consist-

ent and effective and that will achieve the statedenvironmental objectives of a given organization.It attempts to balance socio-economic and busi-ness needs with environmental protection andpollution prevention.

In Japan, with environmental issues becom-ing a public issue and with growing governmen-tal regulations around environmental issues, firmsare looking into ISO 14000 certification as a wayof demonstrating their commitment to the envi-ronment, to be “good corporate citizens” and asa competitive advantage. Firms such as Toyotaand Denso have sought ISO 14000 certificationin their plants in Japan and abroad.

It is important to note that Japanese compa-nies are not trying to modify existing operationsto implement ISO 14000. Instead, they are creat-ing new operations that meet the ISO 14000 cri-teria. As of 1999, more than 2100 Japanesecompanies have already been certified. Accord-ing to one report, about 1000 Japanese compa-nies per year are applying for certification.Overseas, Japanese firms such as Sony andToyota in the United States have made publiccommitments to ISO 14000 standards.

Japanese companies are also starting to recog-nize suppliers who are more environmentallyfriendly For example, Witt (1999) states thatMatsushita Electric has a program of “greensourcing.” It gives priority to companies with ISO14000 certification. These suppliers do over $2billion in business with Matsushita.

In the United States, Sony and Toyota, as wellas Ford, have made public commitments to ISO14000 standards. Additionally numerous Japa-nese firms have stated that they plan to have allof their overseas operations both ISO 9000 andISO 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 ISO9000 Standards,” Metal Center News 40 (11): 5–6.

TERRI R.LITUCHY

ISO issues 205

Ito-Yokado

Ito-Yokado Company Ltd was established byMasatoshi Itou, currently Ito-Yokado group’shonorary chairman in Tokyo in April 1958.Masatoshi successfully developed the companyinto a retail conglomerate over the next forty-two years. Ito-Yokado is characterized by its profit-oriented policy and scientific management. InFebruary 2000, the company directly operated176 stores, employing 16,514 staff. In 1999, thecompany was capitalized at ¥46,674 million andsales totaled ¥1,490,709 million.

In the 1960s, Ito-Yokado aggressively ex-panded its supermarket chains. In contrast withDaiei’s nationwide expansion, Ito-Yokado choseto build its new stores in the Tokyo area to main-tain the company’s domination there. It becamethe second largest retailer in Japan in terms oftotal sales in 1981.

Ito-Yokado also operated its own departmentstores (for example, York Matsuzakaya), discountstores (Daikuma), specialty shops (Merian), su-permarkets (York Benimaru), and conveniencestores (7–11 Japan). 7–11 Japan in particular hasbeen very successful. It was named York SevenInc. when Ito-Yokado reached a licensing agree-ment with the Southland Corporation to run theconvenience store business in Japan in 1973, andwas renamed 7–11 Japan in 1978. In 1996, 7–11Japan became the first company to record profitsof ¥100,000 million in Japan.

Ito-Yokado also branched out into restaurants(Denny’s Japan), mail order (Shop America Ja-pan), food production (Aiwai Foods), real estate(Urawa Building), and finance (Union Lease).However, the company is still less diverse thanDaiei.

In the 1980s, Ito-Yokado could no longer in-crease its profit simply by building new storesbecause of the introduction of the Large StoreLaw. The company unlike Daiei with its diversi-fication strategy decided to fundamentally reformits management system. In 1982, Ito-Yokadoformed an operation reform committee to carryout a five-stage reform to improve its profitabil-ity. The first and second stage aimed at improv-ing the inventory, increasing the stock turnover,and reducing the opportunity losses. In the thirdstage, Ito-Yokado introduced the POS (point of

sale) system to implement “item-by-item inven-tory control,” which enabled the company to de-tect sales trends for each item of merchandise andsubsequently develop a selling strategy whichwould then be tested again using sales data. Thefourth stage was to develop new products. Ito-Yokado adopted the concept of “team merchan-dising,” whereby the company based on the salesdata, came up with product ideas and thenworked with manufacturers, wholesalers, andother collaborators as a team to develop newproducts.

The company started to expand again in thefinal stage. First, Ito-Yokado started to extend itsstore network to western Japan, building storesrapidly in the Kansai area from 1995. The sec-ond expansion took place overseas. In 1996, Ito-Yokado established a joint venture with a Chineseretail company in China, aimed at building a na-tionwide store chain there. Simultaneously thecompany allied with Wal-Mart and Metro Groupto develop new merchandise.

See also: retail industry

Further reading

Mizoue, U. (1998) Daiei VS Ito-Yokado (Daiei, Inc andIto-Yokado Co., Ltd), Tokyo: Baru Shuppan.

Okamoto, H. (1998) Yokado guruupu: koushuueki noshisutemu kakushin (Yokado Group: System ReformFor High Profit), Tokyo: Baru Shuppan.

HEUNG-WAH WONG

ITOCHU

In 1858, at the age of fifteen, Chubei Ito beganwork as a linen trader. In 1872 he established“Benichu,” a fabric shop in Osaka. From thishumble beginning emerged one of Japan’s larg-est sogo shosha (general trading company). Build-ing upon its strengths in the burgeoning textileindustry in late nineteenth-century Japan, Itoexpanded the business into thread and yarn. In1914 he formally re-organized under the nameC.Itoh & Company and the firm came to insinu-ate itself into all aspects of the textile trade, fromthreads and yarns to finished goods, from arrang-ing for the purchase, shipment and delivery of

206 Ito-Yokadou

milling machines to the export of textiles world-wide. In 1918 Ito divided the company, forminga second trading company, Marubeni.

During the Second World War, C.Itoh & Co.merged with Marubeni and several manufactur-ers, including Kureha Cotton Spinning andAmagasaki Nail. However, as part of the Ameri-can occupation’s policy of breaking up zaibatsu,in 1949 C. Itoh, Marubeni, Kureha and severalrelated firms were separated.

In the postwar era, C.Itoh established itself asan aggressive sales company. It has consistentlyled its industry in sales. In 1992, to reflect a moreinternational identity it formally changed its nameto ITOCHU. As of 2000 the company was or-ganized into seven divisions: textiles; automobileindustrial machinery; aerospace, electronics andmultimedia; energy metals and minerals; chemi-cals, forest products and general merchandise;food; and finance, realty insurance and logisticsservices.

As with other general trading companies,ITOCHU has been involved in numerous large-scale projects around the world. It achieved par-ticular visibility in the early 1980s when, at theheight of Japan-US trade friction over automo-biles, it facilitated a joint venture between Gen-eral Motors and Toyota which became theNUMMI operation in Fremont, California.

See also: general trading companies

ALLAN BIRD

Iwasaki, Yataro

Born December 11, 1834 in Inokuchi Village,Shikoku island, in the Tosa clan domain (nowKochi Prefecture), Yataro Iwasaki was the founderof the Mitsubishi zaibatsu. Frustrated by dis-crimination because of the family’s status as low-ranking samurai and appalled by the way Japan’strade was subordinated to foreign concerns, heswiftly gained a reputation for being impetuousand aggressive but also possessing a shrewd busi-ness sense and excellent negotiating skills. Iwasakiwas imprisoned for six months in 1856–7 for li-beling the government, after his father had beenbeaten up by an Inokuchi village headman. Hisabilities were nonetheless recognized by a lead-

ing Tosa clan figure, Yoshida Toyo, who becamehis teacher in 1858 and recommended Iwasakifor a commercial post in Nagasaki, in 1859. InNagasaki Iwasaki first came into contact withscholars of Chinese classics, doctors of Westernmedicine and foreign technology. His lack of lan-guages frustrated him in his quest for knowledge,so he returned home before he was supposed to,and was discharged from his post by the Tosaclan as a punishment.

Despite this setback he was able to reacquirea higher ranking title for the family in 1861, andin the following year he married Kise, withwhom he had five children; Masaya, Yasuya,Masako, Hisaya and Haruji. Iwasaki reclaimedrice fields and managed forests in Inokuchi until1867, when he was reappointed as a clan officialand transferred to the Nagasaki branch. It was inNagasaki that he came to deal with later busi-ness partners such as Thomas Glover, buyingsteamships and munitions from them. Iwasakibecame head of the clan’s Osaka branch in1869, which was then separated from the Tosaclan management and set it up as a private firm,Tsukumo Shokai, in 1870. Some historians datethis as the beginning of the Mitsubishi zaibatsualthough Iwasaki was not officially the head ofthe company at that time. The company was re-named Mitsubishi Shokai in 1873, taking thename from the three water chestnut diamond-shaped leaves that formed the Iwasaki familycrest. This change in name probably marks thepoint at which Iwasaki gained full control overthe company.

Iwasaki saw the spirit of contributing to thecompany’s prosperity as the same as contribut-ing to the nation’s prosperity. This philosophyled to Iwasaki volunteering his ships for deliver-ing munitions for the Japanese government’sTaiwan Expedition in 1874. Until 1881 Iwasakicould be considered to be a seisho, a merchantwho made use of government contacts to build acommercial empire. Iwasaki’s particular govern-ment support was from Toshimichi Okubo andother progressive bureaucrats. In 1875 he peti-tioned the Japanese government for a loan to buythe Shanghai Line of the Pacific Mail, which wasgranted on Okubo’s recommendation, as part ofthe government’s shipping promotion policy. In1876, when another powerful rival appeared, the

Iwasaki, Yataro 207

Peninsular and Oriental Steam Navigation Com-pany of the United Kingdom, Iwasaki reducedhis own salary by half, made sixteen workers re-dundant and cut the salaries of his executives bya third, in order to engage in a rate cutting war.P&O eventually withdrew their Yokohama-Kobeline in August 1876, and Iwasaki celebrated hisvictory by inviting them and other foreign ship-ping companies to a lavish banquet, where heasked for their future cooperation.

Iwasaki also helped the government suppressthe Satsuma Rebellion in 1877 through provid-ing transport for troops and munitions, fromwhich he made a tidy profit and further consoli-dated his shipping monopoly. On July 8, 1878the government decorated Iwasaki with theFourth Order of Merit with the Grand Cordonof the Rising Sun, the first time a non-bureaucrathad received such an honor.

However, after the assassination of Okubo in1878, Iwasaki had only one protector left in thegovernment, Shigenobu Okuma. Okuma’s fac-tion fell from power after senior ministers decidednot to accept his radical democratic ideas for aconstitution. The new faction in power suspectedOkuma, Iwasaki and other allies of plotting tooverthrow them. Iwasaki found himself beingshadowed and his house watched by spies. Hebecame so incensed by what was happening thathe declared in 1881 that his staff should no longerbe involved in politics.

Nonetheless the attacks continued and the gov-ernment established a new steamship companyto compete against Mitsubishi in 1882. Iwasakistated his view that having two large companiescompeting with each other would only weakenJapan’s nascent maritime industry but decidednot to campaign publicly to stop the formationof the new company Instead he paid off the re-mainder of the loans from the government forship purchasing, cut costs and upgraded the ship-ping services, in order to ready the company fora price war. This war ended with the merger ofthe new company with Mitsubishi’s shipping ac-tivities in 1885, to form the Nippon Yusen Kaisha,several months after the death of Iwasaki, agedfifty.

Mitsubishi was able to continue throughoutIwasaki’s frequent illnesses in the 1880s thanksto the able staff whom Iwasaki had hired. Iwasaki

was encouraged in scholarly activities by his lit-erary family as a child and this respect for intel-lect undoubtedly made Iwasaki keen to hireeducated people for his company This habit ofhiring intelligent, independent-minded staff ratherconflicted with Iwasaki’s autocratic style. He out-lined his official position in his Rissha Teisai (TheStyle of Establishing the Company), where hestated that all key decisions were to be made bythe president. Nonetheless, Iwasaki sometimesfound himself overruled, as in the instance of hisclose friend and famous educationalist, YukichiFukuzawa, collaborating with Iwasaki’s youngerbrother Yanosuke and another Mitsubishi em-ployee, Shoda Heigoro, to persuade Iwasaki tobuy the failing Takashima Coal Mine in 1880. Itwas businesses such as this which Iwasaki’s heirswere to build up into the diverse conglomeratefor which the Mitsubishi name became famous.

See also: general trading companies

Further reading

Hensankai (ed). (1967) Iwasaki Yataro Den, Tokyo: Uni-versity of Tokyo Press.

PERNILLE RUDLIN

Izanagi boom

The Izanagi boom (October 1965-July 1970) re-fers to the postwar unprecedented prosperity thatlasted for fifty-seven consecutive months. Thisperiod saw the second-highest level of economicgrowth in Japanese history. Under the Eisaku SatoAdministration, the Japanese economy grew rap-idly mostly due to dependence on exportationand the power of Japanese financial standing inAsia and the world. Also, the Japanese economywas recovering from a period between 1956–65in which economic growth was restricted by thedeterioration of international income and expen-diture. The substantial growth rate reached 11.6percent (the average between 1966–70) and GNPgrew to third place among capitalist countries(behind only West Germany and the USA).

During this period, individual consumption,investment in private facilities, and exportingworked together toward a balanced expansion

208 Izanagi boom

for the economy. Consumer electrical productssuch as cars, air conditioners, and color televi-sions expanded into mainstream use, thus fuelinga boom in the consumer electronics industry inwhich Japanese companies were poised for suc-cess: the market expansion for autos was 17 per-cent per year, air conditioning equipment 5percent, and color televisions 25 percent. Thecolor television was at the height of popularityduring this period. And air conditioning systemswere fast becoming staple household and indus-try items, coming into wide use in departmentstores around 1970.

The profitability due to trade income increasedto its high point and then the tide shifted awayfrom high growth, mostly due to the maturing ofthe Japanese economy. By the time of the Inter-national Exposition hosted in Osaka in July 1970,the Izanagi boom was over. The peak price ofthe average Japanese stock was ¥2,534 in April1970, and it is said that the decline of the stockmarket during the three months prior to the Ex-position signaled the end of the Izanagi boom.

The Izanagi boom was a period during whichsteel production doubled along with the volumeof oil refined and the output of aluminum. Butthese increases took place without any change inthe methods of production, meaning a corre-sponding increase in the amount of waste cre-ated. Pollution became and still is a huge problem,with cases being brought to court one after an-other, spurring the creation of the first laws onenvironment pollution control. The Japanese gov-ernment understood the need for industry to in-vest in environmentally friendly technology anda new position, that of Director General of theEnvironment Agency was established.

Further reading

Hitomi, H. (1996) Nihonsi-B Yougosyu, Tokyo:Yamakawa-syuppan.

Ikeda, Y. (1997) Seiji EKeizai (Political Economy), To-kyo: Shimizushoin.

MARGARET TAKEDAIPPEI ICHIGE

Izanagi boom 209

Japan Airlines

Japan Airlines Company Ltd. (JAL) was foundedon August 1, 1951, as Japan’s national flag car-rier. Exactly two years later, on August 1, 1953,the so-called JAL Law was passed by the Japa-nese government and, on October 1 of the sameyear, it provided half of the new company’s capi-tal investment. Government support continueduntil November 18, 1987, at which time the gov-ernment sold its 34.5 percent stake and JAL be-came a fully privatized company.

During its initial start-up phase, JAL flights op-erated only on domestic routes. On February 2,1954, the first international route was inauguratedbetween Tokyo, Honolulu, and San Francisco.Six years later, on August 12, 1960, JAL enteredthe jet age when a DC8–32 made its inauguralnon-stop flight between Tokyo and San Francisco.JAL’s international route expansion continued thefollowing year with the introduction of a trans-polar route which linked Tokyo, Anchorage, Parisand London. Five years later, the Tokyo-San Fran-cisco flights were extended to New York.

From 1970 forward, JAL remained positionedwith the most technologically advanced aircraftto meet the challenges of both domestic and in-ternational competition. During the decade-longrecession of the 1990s in Japan, as well as in therest of Asia, its revenues steadily eroded. Moreo-ver, the deregulation of the aviation industry inJapan resulted in greater domestic competitionwith the creation of two new domestic airlines inJapan. Subsequently Japan’s aviation laws wererevised on February 1, 2000 and this resulted in

additional domestic competition as carriers wereallowed to set their own ticket prices.

The introduction of technologically advancedaircraft, the computerization of the flight man-agement systems in both air and ground envi-ronments, and the highly competitive deregulatedbusiness environment have required JAL to un-dertake a thorough review of its human resourcestraining and productivity By 1994, JAL had initi-ated massive cost-cutting measures by reducingits full-time workforce by nearly 4,300 and byhiring, on a limited contract basis, part-time non-Japanese flight attendants. Another strategy em-ployed by JAL to cope with the highly competitivebusiness environment was to use its low-cost sub-sidiaries: JAL Express (JEX) for domestic flightsand JAL-ways for international flights.

In June 1998, Isao Kaneko became the firstJAL president and chief executive officer to ad-vance from the labour management division, thussignifying a major change in the selection of JALleaders who have traditionally come from thesales 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 inMulti-Crew Flight Operations, Aldershot: Ashgate.

Ujimoto, K.V (1997) “Changes, Challenges, andChoices in the Japanese Aviation Industry: TheDevelopment of Crew Resource Management in

J

Japan Airlines,” in H.Millward and J.Morrison(eds), Japan at Century’s End, Halifax: Fernwood,150–60.

Yamamori, H. (1993) “Keeping CRM is Keeping theFlight Safe,” in E.L.Wiener, B.G.Kanki andR.L.Helmreich (eds), Cockpit Resources Management,New York: Academic Press, 399–420.

VICTOR K.UJIMOTO

Japan Association of CorporateExecutives

Founded in 1946 by eighty-three business lead-ers seeking to contribute to the reconstruction ofthe economy the Keizai Doyukai (Japan Associa-tion of Corporate Executives) is distinctive amongbusiness associations in Japan. Its membershipin 2000 included 1,500 senior executives fromover 900 large corporations. A distinguishingcharacteristic of Keizai Doyukai is that membersare expected to participate in association affairsas individuals, letting go of their corporate iden-tities. A second characteristic is that members areexpected to adopt a far-reaching and long-termperspective in addressing issues that span a rangeof political, economic and social matters. In striv-ing to maintain an independent position with thelarger business and social community KeizaiDoyukai conducts its own in-depth studies, re-search projects and discussions. It also activelypursues a dialogue with government officials, la-bor organizations, political parties and other busi-ness organizations. It is one of the most influentialbusiness organizations in Japan and, along withthe Japan Chamber of Commerce and Industry(Nihon Shoko Kaigisho), the Japan Federationof Employer’s Associations (Nikkeiren), and theFederation of Economic Organizations(Keidanren), is one of the four “voices of busi-ness” in Japanese society.

For purpose of research, discussion and coor-dination, the association is structured into threebasic areas. Policy committees address a host ofprimarily domestic matters. As of 2001, therewere fifteen standing committees. These were asfollows: Committee on Corporate Management;Committee on Employment Issues; Committeeon Financial Markets; Committee on Fiscal and

Tax Policy; Committee on Public Administration:Economy; Committee on Social Security Re-forms; Committee on Political Affairs; Commit-tee on Judiciary Reforms; Committee onEducation; Committee on Environment, Re-sources and Energy; Committee on Issues Con-cerning Metropolitan Areas; Committee onForeign Relations and National Security Issues;Committee on Socioeconomic Principles for theTwenty-First Century; Committee on E-Economy; and Committee on New TechnologyStrategies. As is evident from the committeenames, the interests of the association include butalso extend well beyond business and economicmatters and address a host of important politicaland social matters.

A second group of committees within the as-sociation fall under the title, International AffairsCommittees. The groups, of which there are five,focus on geographical regions and their relationto Japan. Finally a third grouping of activities fallsunder the title of Discussion and Study Programs.These include the following: Industrial Discus-sion Groups; Seminar on Current Topics; Glo-bal Forum; Committee for the Future; SeniorExecutives’ Discussion Group; and DiscussionGroup of New Members.

Keizai Doyukai has been criticized as beingelitist and exclusive. It has also been criticized asa “harmonizing voice” in support of Keidanren.There is no doubt that its membership, comprisedas it is of very senior executives from the largestcorporations, reads like a Who’s Who list. It isalso true that a comparison of the membershipof the two organizations has a high degree of over-lap. At the same time, the association has takenpositions at variance with Keidanren on a numberof matters. Perhaps more importantly KeizaiDoyukai, with its unique purpose and perspec-tive, provides a venue where individuals haveroom to speak their own minds. Whether thoseminds have become inextricably entangled withthe corporation mindset from whence they comewill, in all likelihood, remain a point of debate.What is not debatable is the large influence thatthe association wields within the Japanese busi-ness community.

ALLAN BIRD

Japan Association of Corporate Executives 211

Japan Automobile ManufacturersAssociation

The Japan Automobile Manufacturers Associa-tion, Inc. (JAMA) or Jikoukai was established onApril 3, 1967, with the objectives of encouragingthe development of the Japanese automotiveindustry and contributing to the progress of so-ciety (the first Japan-US automobile meeting washeld in the same year). The former AutomotiveIndustrial Association and Midget Motor Manu-facturers’ Association of Japan were merged intoone association, Jikoukai. Since then the organi-zation has been the leading association of theautomobile industry in Japan.

The purpose of founding JAMA was to en-able the industry to address a host of issues as aunified entity The impending liberalization ofcapital was a particularly pressing matter, and asJAMA’s activities would also include the promo-tion of exports, issues of traffic safety exhaustemissions and international trade were also pointswhich needed to be considered.

The new association’s membership did not in-clude all the members of the two previous or-ganizations. Many members of the Midget MotorManufacturers’ Association of Japan entered intoa new cooperative relationship with JAMA, whileother companies, especially chassis manufactur-ers actually merged into JAMA.

JAMA consisted of the fifteen founding mem-ber manufacturers: Aichi Kikai, Isuzu, Kawasaki,Suzuki, Daihatsu, Toyota, Toyo Kogyo, Nissan,Nissan Diesel, Hino, Fuji Heavy Industries,Bridgestone Cycle, Honda. Mitsubishi Heavy In-dustries, and Yamaha. The first chairman ofJAMA was Katsuji Kawamata, president of NissanMotor Co., who had also served as chairman ofthe Automotive Industrial Association, JAMA’spredecessor. Since then, either the chief execu-tives of Toyota or Nissan have been elected aschairman. Some elected executives of the thir-teen domestic motorcycle and automobile mem-ber manufactures have been installed in the boardof directors, which is comprised of a chairman,five vice-chairmen, a president, an executive vice-president and a secretary general.

JAMA has been the contact organization re-garding the export, overseas developments andthe internationalization of the automobile indus-

try in Japan since its inception. JAMA openedbranches abroad to deal with these matters: theParis office was opened in 1969; the New Yorkoffice was opened in 1970; the Washington of-fice was opened in 1976; Japan AutomobileManufacturers Association of Canada wasopened in 1986; and the European office wasopened in Brussels in 1990. A commerce mis-sion was dispatched to the Association of South-east Asian Nations (AS EAN) in 1995 inresponse to the advance of Japanese manufactur-ers into ASEAN. In 1996 a Singapore office wasopened.

JAMA has standing general committees andspecial vehicle committees. The general commit-tees consist of the technical administration com-mittee, the safety and environmental technologycommittee, environment committee, the trafficaffairs committee, the distribution committee, thetaxation committee, the international affairs com-mittee, the parts & materials committee and theelectronic information exchange committee, andthese committees deal with various issues in theautomobile industry. The special vehicle commit-tees consist of the mini-vehicle committee, the mo-torcycle committee, and the heavy vehiclecommittee. These committees deal with the mat-ters based on type of car, such as exhaust emis-sion standards.

JAMA has an administration under the super-vision of a vice-chairman and associates. The ad-ministration is divided into the administrationdepartment, the planning and coordination of-fice, the traffic affairs department, the businessaffairs department, the technical department, en-vironment department and the international de-partment. The administration regularly issuesseveral publications, provides information, helpsto adjust different opinions in the industry holdsinternational conferences, helps negotiations andcarries out industry research.

JAMA’s activities under the general commit-tees and the administration were: (1) researchprojects related to production, distribution, tradeand consumption of automobiles; (2) the ration-alization of automobile production, setting andpromoting policies concerning improvements inmanufacturing techniques; (3) setting and pro-moting policies concerning the automobile tradeand international exchanges; and (4) other

212 Japan Automobile Manufacturers Association

projects in order to achieve its objectives. Con-cretely, JAMA carries out the following:

• production of yearly quarterly monthly andother publications to provide informationabout the automobile industry and interna-tional trade;

• provision information about traffic safety fuelreduction, environmental preservation, andso on;

• participation in international conferences re-lated to automobiles;

• joint research and information exchangesabout automobiles, auto parts and auto ma-terials, as well as global environment issueswith various organizations in many coun-tries;

• cooperation in the attainment of internationalagreements regarding various automobilestandards such as those relating to safety andthe environment;

• research in order to set future roles in theautomobile industry and to set future direc-tions in international society;

• opinion adjustment concerning global envi-ronment problems in the broader industrialworld as a whole;

• issuance of position statements on behalf ofthe automobile industry in Japan;

• compiliation of statistical data related to theautomobile industry in Japan and the an-nouncement of the result of statistical analy-ses;

• research and investigations related to the au-tomobile industry in Japan, and the publica-tion of research results.

In addition to these activities, JAMA set up a meet-ing for the study of a reduction in working hoursin 1992 in order to deal with the problems offatigue caused by overwork and economic stag-nation. Consequently the application for employ-ment adjustment subsidies started in 1993. Sincethe early 1990s JAMA has dealt with environ-mental and safety matters, and has promoted ex-change and discussion of different opinions withAmerican and European makers about supply-ing materials to Japanese makers.

With the improvement of automobiles’ effi-ciency and reliability the progress of environmen-

tal measures concerning exhaust emission stand-ards, recycling, and waste disposal has receivedincreasing attention. In addition, taking steps tocope with safety problems has recently taken onincreased importance. JAMA seeks to shape thesedevelopments in ways that lead to automotiveinnovations being in harmony with society.

In response to increasing concerns about vari-ous environmental issues, Japanese automobilemanufacturers have sought to solve these issuesby introducing new technologies such as electron-ics. They also conduct research and develop newmaterials for automobile manufacture and alsodevelop alternative energy sources. For instance,Japanese manufacturers are experimenting withnew perspectives such as establishing internal or-ganizations to deal exclusively with specific is-sues and developing charters for comprehensiveenvironmental action. Their objective is to carryout decisive, effective measures across the spec-trum, from development and design, throughmanufacturing and sales, to the eventual scrap-ping and recycling of their products.

In this context, JAMA established forums inits organization to comprehensively assess andaddress these issues. Since the 1970s JAMA haspromoted collection and salvage of discarded au-tomobiles. Since the late 1980s it has dealt withglobal pollution of the environment, such asgreenhouse gas emissions. Moreover, in 1994 anenvironment department was established to ad-dress environmental problems on behalf of theautomobile industry. The organization also con-siders traffic safety owing to an increase in thenumber of traffic accidents. While various meas-ures to promote traffic safety have been intro-duced by the government, requiring thecooperation of vehicle users with respect to, forexample, the mandatory use of seatbelts and hel-mets, Japanese manufacturers have also been ac-tively pursuing programs to ensure traffic safety.

The JAMA action plan which is now beingcarried out demands further improvements in au-tomobile safety features, new traffic safety cam-paigns and educational activities, improvementof driving conditions such as road infrastructuredevelopment, and close government-industry co-operation on traffic accident analysis through theInstitute for Traffic Accident Research and DataAnalysis, founded jointly by the government and

Japan Automobile Manufacturers Association 213

public sectors in 1992. JAMA has carried out itsactivities broadly: it sets up various kinds of newcommittees and meetings regarding traffic safetyimplements various traffic safety campaigns, stud-ies the actual nature of vehicle uses, prepares andpublishes statistical data, and conducts public re-lations to deepen understanding of the automo-bile industry.

While economic internationalization is pro-gressing, Japanese automobile companies have de-veloped export activities to various countries aswell as improving their local production in thosecountries. Since the 1960s, Japanese automobilemanufacturers have been asked for assistance inthe import of materials and the development ofself-subsistence capabilities in several countries.To cope with these requests, JAMA assists Japa-nese makers and foreign makers in mutual un-derstanding at the private sector level by offeringa venue for the exchange of opinions and afford-ing opportunities to negotiate with one another.

At the government level in Japan and theUnited States, the Japan-US automobile meetingwas held in 1967; two Japan-US summit meet-ings took place in 1992; and the Japan-US autoparts meeting was held in 1993. From 1981 to1994 voluntary export restraints (VER) for theUS market were carried out. At the private sec-tor level, however, significant efforts have alsobeen made to resolve automobile trade issuesbetween Japan and the United States. JAMA alsoserves as a mediator between Japan and theUnited States at the private sector level.

In terms of local parts procurement, Japanesemakers are actively promoting industry-level co-operation. In 1977, and also in 1980, JAMA dis-patched a mission to the United States to promotethe purchase of auto parts. In 1987, the first JAMA-MEMA Liaison Committee Meeting was held inTokyo to exchange opinions concerning the pur-chase of US-made auto parts. Fifteen meetings hadbeen held as of 1995. A series of generalconferences and discussion meetings organized bythe Japan Automobile Manufacturers Association(JAMA), the US Motor and EquipmentManufacturers Association (MEMA) were firstheld in 1987 for the purpose of promoting USauto parts to Japanese manufacturers.

In 1990 the first One-on-One Auto Parts Busi-ness Development Meeting, co-sponsored by

JAMA and MEMA, was held in Las Vegas forthe purpose of promoting negotiations betweenUS parts makers and Japanese automakers. Fivemeetings had been held as of 1995. In 1991 areport on “Replacement Parts for Japanese Vehi-cles in the US“was released, and in 1993 a meet-ing was held in Tokyo for the purpose ofpromoting closer cooperation between the USand Japanese auto industries. In the meeting,eleven Japanese automakers announced volun-tary plans to purchase US-made parts. Thesemeetings have led to the implementation of spe-cific initiatives aimed at establishing closer busi-ness ties between Japanese manufacturers and USparts suppliers, including joint committees, thepublication of materials explaining the “design-in” process of Japanese manufacturers, the com-pilation of industry contact lists, and theorganization of special events designed to enhancecooperation and mutual awareness.

In Europe, JAMA-mediated negotiations haveled to adjustments between Japan and Europe.JAMA held Japan-UK automobile meetings ontwenty-three occasions from 1975 to 1992, andheld a meeting with European automobile manu-facturers in Paris in 1985. In the late 1980s, therapid advance of Japanese manufacturers into theEuropean market brought about problems con-cerning the rate of self-subsistence in the field.For these kinds of situations, JAMA has promotedadjustments and negotiations between Japan andEurope at the private sector level.

Japanese manufacturers are actively promot-ing industry-level cooperation to obtain localparts. In 1995 JAMA held a joint conference withthe European Automotive Components andEquipment Industries Association (CLEPA) inParis, where decision makers from eighty selectedEuropean suppliers met with representatives ofJapanese manufacturers to explore potential busi-ness opportunities. Japanese manufacturers arealso working hard to expand business ties withautomotive parts firms in Canada, Europe, Asiaand Australia with JAMA’s assistance. Some oftheir initiatives have been outlined in the JAMAAction Plan for International Cooperation re-leased by the Japan Automobile ManufacturersAssociation in June 1995.

MASANORI YASUMOTO

214 Japan Automobile Manufacturers Association

Japan Chamber of Commerce andIndustry

The Japan Chamber of Commerce and Industry(JCCI) or Nihon Shoko Kaigisho is theoverarching association to which all local andregional chambers belong. Its membership con-sists of the 523 (as of 1999) local chambers ofcommerce, whose collective member firms total1.64 million. It operates as the primary represen-tative of the concerns of small and medium-sizeenterprises throughout the country. It is, in manyrespects, the counterpart of Keidanren, whichrepresents primarily the interests of large corpo-rations. JCCI coordinates discussion among lo-cal chambers and formulates concerns andrecommendations that it then proposes to gov-ernment ministries and agencies. It also assists inthe implementation of initiatives growing out ofthose recommendations. Other functions of JCCIinclude the dissemination of information on gov-ernment policies and programs affecting cham-ber members, human resource training anddevelopment programs, and information sharingand coordination of joint efforts with businessorganizations outside of Japan with similar inter-ests and concerns. It is one of the most influen-tial business organizations in Japan and, alongwith the Japan Association of Corporate Ex-ecutives (Keizai Doyukai), the Japan Federationof Employers’ Associations (Nikkeiren), and theFederation of Economic Organizations(Keidanren), is one of the four “voices of busi-ness” in Japanese society.

The first local chambers of commerce and in-dustry in Japan were established in Tokyo, Osakaand Kobe in 1878. In the next few years, enter-prises in other cities followed suit. Fourteen yearsafter the first local chambers were established,fifteen of them met in Tokyo to establish the Ja-pan Chamber of Commerce and Industry.

Local chambers in Japan are designated as“corporations with special status” and operateunder the Chambers of Commerce Act. Underthis special status, local chamber membership isopen to companies both large and small. How-ever, the bulk of active chamber membership isamong small and medium-size firms. Chambersare also required to maintain political neutrality

and are prohibited from engaging in political ac-tivities. They are also prohibited from for-profitactivities. The local chambers are independentand self-governing; they do not operate underthe direction of the JCCI.

JCCI supports about 5,500 business consult-ants who are located in the local chambers toprovide counsel and guidance to small and me-dium-sized businesses on a host of matters in-cluding advances and innovation in managementpractices, financial issues, and tax matters. In sup-port of these consultants, JCCI carries out vari-ous research projects and field studies which itdisseminates to the local chapters.

JCCI also works to assist business membersof the local chambers in recruiting and trainingskilled employees. It offers standardized certifi-cation tests in English, bookkeeping and account-ing, word processing, salesmanship andabacus-based calculation. Annually JCCI testsroughly two million people.

Beginning in the 1980s and expanding rap-idly in the 1990s, JCCI has worked with the lo-cal chambers to enhance its services in helpingJapanese firms find foreign partners and viceversa. In 2000, JCCI handled over 15,000 inquir-ies from abroad regarding potential trade oppor-tunities with business outside Japan. In supportof its international activities, it published the quar-terly JCCI Business Guide. It also provides assist-ance by helping local chambers in the issuanceof certificates of origin, of which over 1 millionare issued each year. As small and medium-sizeJapanese firms have expanded their activities intoforeign markets, the role of JCCI within the largerJapanese business and economic community hasgrown, as has its influence.

ALLAN BIRD

Japan Development Bank

The Japan Development Bank (JDB) was char-tered in 1951 and is the modern incarnation ofthe many specialized public policy-based bankswhich were created at the end of the nineteenthand beginning of the twentieth century to pro-mote economic development and implement thepolicies of the Ministry of Finance under the long

Japan Development Bank 215

tenure of the autocratic Meiji Finance Minister,Matsukata Masayoshi.

The JDB’s most immediate predecessor wasthe Reconstruction Finance Bank (RFB) (1947–9) which was the only financial institution in theimmediate postwar period capable of helping torevive key industries such as the coal, iron andsteel, electric power, and chemical industries. Thechief failing of the FRB was that, because its fund-ing came directly from the Bank of Japan, repay-ments of loans to the FRB were at interest ratesfar below the hyperinflation rate of the postwarperiod. In effect, the loans made by the FRB be-came a form of government grants to private in-dustry outside the scrutiny of the Alliedoccupation forces, or, for that matter, parliamen-tary authorities.

The problems of the FRB reflected the factthat postwar reconstruction had to be placed ona more sound financial footing which would pro-vide long-term credits to industry. The creationof JDB, as well as the chartering of long-termcredit banks in 1952 (see banking industry),were designed to address this need through theirauthority to provide intermediate long-term fundsby the issuance of five-year debentures. In JDB’scase, most of their debentures in the early yearswere purchased by the Ministry of Finance’s Fis-cal Investment Loan Program (FILP) whose mainsource of funds was from deposits from the postalsavings system, as well as postal pension schemesand government pension plans.

The chief mechanism in directing funding fortargeted industries was by the so-called “cow-bell effect” in which JDB led the private sectorbanks to join in lending to the targeted industryand/or specific firms. Although it was rarely themajority supplier of funds within any given syn-dicate of loans for a particular enterprise, JDBwas able to organize support as a result not onlyof its diligent project appraisal and credit analy-sis of the enterprise, but also because of an im-plicit government guarantee of JDB’spolicy-based initiatives and the ability of theMinistry of Finance (MOF) to bestow upon co-operative banks favorable consideration in regu-latory matters. Of equal, if not greater,importance to the participation of private sectorbanks in the lending syndicate was the opportu-

nity for these institutions to reap considerablemain bank rewards with a lesser commitment oftheir own funds to the client firm (see mainbank system). JDB as a government-owned in-stitution is prohibited from taking deposits orserving as a main bank.

Over the years the national policy mission ofJDB, as determined in an inter-ministerial gov-ernment agency committee, changed with the de-velopment of Japan’s economy Initially in theearly 1950s JDB provided funding for reconstruc-tion of the electric power, coal mining, ocean ship-ping, and iron and steel industries. In the late1950s to the early 1960s the emphasis shifted tocatching up with advanced countries in the syn-thetic fiber, oil refinery nuclear power generation,machinery and electronics industries. By the late1960s and into the early 1970s policy emphasiswas directed towards social welfare and environ-mental considerations in urban and residentialland development, pollution prevention, welfarefacilities, private railroads, and further develop-ment of new technology. In the late 1970s andearly 1980s energy policy received priority withlending directed towards energy conservation andthe development of alternative energy sources.In the late 1980s and early 1990s JDB’s key mis-sion was directed towards promoting the struc-tural adjustment of industry and industrialresearch and development.

Lending policy in the present period is tar-geted towards livelihood and lifestyle, the im-provement of living standards, socialwelfare-related facilities, regional revitalization,urban transportation, information and telecom-munications, and the fostering of new businesses.The name of the bank has also been changed tothe Development Bank of Japan (DBJ). Thischange in part reflects the bank’s assumption ofremnants of the Hokkaido Takushoku Bank, afailed city bank with a strong regional base innorthern Japan. This bank’s demise was due toits extensive exposure in non-performing real es-tate loans, dating back to the bubble period ofthe late 1980s. It is a testament to the due dili-gence of JDB that it suffered only one-tenth therate of non-performing loans that still continueto plague the entire private commercial bankingsector.

216 Japan Development Bank

Further reading

Scher, M.J. (1996) Japanese Interfirm Networks and TheirMain Banks, London: Macmillan and New York:St. Martin’s Press.

MARK J.SCHER

Japan External Trade Organization

Japan External Trade Organization (JETRO) orNihon Boeki Shinkokai, is comprised of JETROheadquarters in Tokyo, JETRO Osaka, thirty-six local offices throughout Japan, and eighty of-fices in fifty-eight countries. JETRO is Japan’sofficial trade promotion organization. Originallyestablished in 1951 as the Japan Export ResearchTrade Organization, its original purpose was tocollect and distribute information on foreignmarkets to Japanese manufacturers and export-ers. In 1954, the institution was restructured intothe Japan External Trade Recovery Organizationwith capabilities to display Japanese products attrade exhibitions, providing overseas market re-search and providing a trade inquiry service. Atthis time the Ministry of International Tradeand Industry (MITI) began to oversee JETRO’sactivities. JETRO attained its current status as apublic corporation in 1958 when a law was passedthat officially outlined its functions and its opera-tional framework. As a result of this legal transi-tion, 25 July 1958 is said to be the year JETROwas established.

JETRO’s role changed as Japan’s global com-petitiveness increased. In the early 1980s, JETRObegan to implement a variety of programstoencourage imports and expand foreign invest-ment in Japan. In 1985, the Made in USA Fairwas organized in Nagoya along with other exhi-bitions in Tokyo, Yokohama, and Kitakyushu. In1993, JETRO’s first Business Support Center wasestablished in Tokyo to be followed by centers inYokohama, Nagoya, Osaka, Kobe, and Fukuoka.These facilities function as temporary offices forforeign companies needing support while doingmarket research and establishing contacts in Ja-pan.

JETRO publishes extensive English periodi-cals, marketing reports, fact books, business

guides, and numerous other materials to assistforeign business executives in doing business inand exporting to Japan. JETRO organizes largetrade exhibitions on behalf of foreign companiesin such areas as healthcare and environmentalequipment in Japan. Product import specialistsin the information technology and consumerproducts sectors are sent to overseas markets forindividual consultations with companies regard-ing export potential for the Japanese market.JETRO also organizes seminars on Japan’seconomy business trends and assists foreign busi-ness development missions. In addition, JETROmaintains extensive business libraries in Tokyo,and in overseas offices, which are open to busi-ness executives. JETRO’s presence on theinternet includes regularly updated market re-ports, background information, current articlesfrom periodicals, and instructions for participa-tion in JETRO programs.

In the United States, JETRO staffs regionaloffices in New York, Chicago, Los Angeles, SanFrancisco, Houston, Denver and Atlanta. Addi-tionally “Senior Trade Advisors” are assigned towork directly with state trade officials in a numberof states, and with individual companies to facili-tate local efforts to trade with Japan.

JETRO merged with the Institute of Devel-oping Economies (IDE) in July 1998. IDE’s fo-cus on economic research on the developingeconomies of Asia complements JETRO’s exten-sive global business development activities.

RALPH INFORZATO

Japan Federation of EconomicOrganizations

The Japan Federation of Economic Organizationsor Keidanren (an abbreviation of its name in Japa-nese, Keizai Dantai Rengokai) was established onAugust 16, 1946. Its membership as of 2001stands at 1,007 firms (sixty-five of these firms arenon-Japanese) and 118 industry and trade groupsrepresenting all of Japan’s key industrial sectors.Keidanen’s primary purpose is to coordinate thediscussion and subsequent resolution of majorproblems confronting the Japanese business com-munity whether domestically or abroad. Given

Japan Federation of Economic Organizations 217

its large size and broad scope of purpose, its workis structured around committees that focus onspecific industry sectors as well as particular top-ics. It is one of the most influential business orga-nizations in Japan and, along with the JapanAssociation of Corporate Executives (KeizaiDoyukai), the Japan Federation of Employers’Associations (Nikkeiren), and the Japan Cham-ber of Commerce and Industry (Nihon ShokoKaigisho), is one of the four “voices of business”in Japanese society.

Keidanren was established as part of the ef-fort to reorganize the business sector of Japanesesociety in the postwar era. As its influence grew,in 1952 it absorbed the Japanese Industrial Coun-cil, in a move that increased its membership andexpanded its influence. In addition to its closeinteraction with Japanese government bureauc-racy it was also active in the political realm and iscredited with playing an important role in thecreation of the Liberal Democratic Party, whichwas established in 1955. Its participation in thepolitical arena was significant until 1975, whenpolitical contributions became more tightly regu-lated. Its influence has also waned as Japanesecompanies have become global players and theinfluence of non-Japanese firms within Japan hasgrown.

Leadership of the organization is drawn fromamong the largest and most influential compa-nies in Japan. Among its past chairmen are suchbusiness leaders as Toshio Dokoh (CEO of bothToshiba and Ishikawajima-Harima Heavy Indus-tries) and Akio Morita (CEO of Sony). In addi-tion to position papers and policy statements,Keidanren also develops charters which it encour-ages member firms and organizations to sign. Arecent example is the Keidanren Global Environ-ment Charter, which sets forth guidelines andstandards for environmentally responsible eco-nomic activity. The organization is involved inan array of public relations efforts, including semi-nars and conferences. It also publishes positionpapers and several periodical and occasional pub-lications. This range of activities is directed atboth gathering and shaping public opinion onmatters pertaining to business and the economyin Japan.

As Japanese companies have become more ac-tive within the world economy and as the Japa-

nese economy became increasingly influentialwithin the world economy especially during the1980s, Keidanren has sought to develop ties withinfluential business and economic organizationsoutside of Japan. At the same time, it has increasedits efforts to build closer relationships with vari-ous groups including labor, consumer and spe-cial interest non-profit organizations domestically.

ALLAN BIRD

Japan Federation of Employers’Associations

The Japan Federation of Employers’ Associationsor Nihon Keieisha Dantai Renmei, more com-monly known as Nikkeiren, was established onApril 12, 1948. Founded in a context of frequentlabor disputes, Nikkeiren was launched to pro-mote solidarity among employers and better re-lationships between labor and management. Oneof Japan’s four key economic organizations andidentified as part of the zaikai, Nikkeiren has his-torically wielded considerable clout with the gov-ernment over the postwar period. Theorganization’s membership is comprised of sixtyindustry associations and forty-seven prefecturalemployers’ associations. Member associationsrepresent the whole range of industries.

Activities

Nikkeiren’s activities include the articulation ofpolicy proposals, requests to the government, andposition statements based on the conclusionsreached at regular meetings and on findings fromsurvey research. The organization presents theseto member organizations and corporate employ-ers, the government, political parties, and relatedministries and agencies and works to have thesepolicies implemented. Nikkeiren also sends rep-resentatives to government deliberation councilsto ensure that managerial views are reflected inthe development of government policy The or-ganization furthermore publishes a number of pe-riod icals, including a weekly newsletter, theNikkeiren Times, and a monthly journal, MonthlyKeieisha.

Nikkeiren has been well represented on the

218 Japan Federation of Employers’ Associations

government’s Labor Legislation Council. The or-ganization also maintains close ties with the Min-istry of Labor and the Ministry of Health andWelfare, and has had an influential voice in theselection of the Labor Minister. Nikkeiren fur-thermore maintains close ties to the Labor Sub-committee of the LDP’s Policy Committee andto the Social Welfare Committees of both housesin the Diet. The association holds frequent infor-mal meetings with government officials and poli-ticians as well.

Since 1951, Nikkeiren has served as the offi-cial voice of Japanese employers in the Interna-tional Labor Organization (ILO) and one ofNikkeiren’s Policy Board members serves simul-taneously as a member of the ILO GoverningBody. Nikkeiren has also actively participated inthe activities of the International Organizationof Employers (IOE) and taken part in the workof the Organization for Economic Co-operationand Development (OECD) through the activi-ties of the OECD’s Business and Industry Advi-sory Committee (BIAC). In addition, Nikkeiren’sInternational Cooperation Center furthers hu-man resource development abroad by bringingmanagers from overseas for training in Japan.

Evolution of role

In its early years, Nikkeiren was regarded as themost powerful and unified of Japan’s four mainbusiness organizations. This unity came aboutbecause of greater agreement in the business com-munity in the 1950s and 1960s over the need toconfront labor than on other aspects of economicactivities. Nikkeiren was highly sensitive to theactivities of those political parties supporting la-bor, and especially to the activities of the Com-munist Party The association was then knownas “fighting Nikkeiren” since it focused its effortson addressing labor offensives.

Leaders of Nikkeiren helped play a role in the1955 establishment of the Economic Reconstruc-tion Council, an organization that pooled politi-cal contributions from zaikai. This council wasintended to strengthen the zaikai’s position vis-à-vis the leftist movement while at the same timehelping to prevent the political scandals often aris-ing out of close relationships between individualcompanies and individual politicians. Nikkeiren

and the other business organizations—arguing thatnational economic viability was contingent on astable political situation—were furthermore veryinfluential in pushing for a merger between theLiberal and Democratic Parties to form the Lib-eral Democratic Party (LDP) in 1955.

Since the 1960s, Nikkeiren’s emphasis has fo-cused more on the promotion of cooperation be-tween labor and management. In 1974, whenJapan was confronted with economic difficultiesarising from the first oil crisis, for example,Nikkeiren established a task force to study reper-cussions in the area of labor relations. Nikkeiren’sefforts since have focused in particular on hu-man resource development, management ethics,orderly and harmonious relationships within cor-porations, and social and economic progressthrough corporate activities. The organization hasbeen particularly active as a voice in articulatingmanagement concerns in regard to changes inthe employment, personnel, social security andeducation systems.

Spring labor negotiations

Every year, Nikkeiren’s Committee for the Studyof Labor issues a report in January examiningthe current Japanese economy and labor issues.This report then serves as the basis for springwage negotiations, also known as the “spring la-bor offensive” or shunto. Major changes in theindustrial and employment structures, record highunemployment rates, and a widening of the gapbetween strong and weak firms within particularindustries have changed the character and needsof labor negotiations since the latter 1990s, how-ever.

Management and labor in individual compa-nies settle labor negotiations and wage agree-ments. Yet, in the past, unions demandedidentical wage increases and simultaneous re-plies from management. In a context of eco-nomic growth, long-term employment within asingle firm, and a seniority system of promo-tions, this strategy seemed to work well. Sincethe 1990s, however corporate earnings havecome to vary widely even within the same indus-try. As a result, it has become increasingly diffi-cult for industry unions to make unifieddemands. At the same time, employers are

Japan Federation of Employers’ Associations 219

switching to pay systems that emphasize meritover seniority. As a result of these developments,the traditional negotiating practice betweenNikkeiren and labor unions has become increas-ingly outdated and the need for annual labor ne-gotiations questioned. In twenty-first centuryJapan, it is no longer as desirable or feasible towork towards the adoption of uniform wage andworking conditions across companies or indus-tries.

Nikkeiren’s position in the 2001 spring labornegotiations reflected adjustment to this changedenvironment. Opposing uniform wage increases,Nikkeiren called instead for individual compa-nies to raise their labor expenses to appropriatelevels. The organization also proposed that worksharing should be introduced as an issue in thenegotiations and that priority should be placedon stable employment over wage increases.

Challenges to labor-management relations inrecent years

Other dramatic changes in the economic and busi-ness environment in the 1990s posed additionalchallenges to labor-management relations. Theprolonged economic downturn led companies torectify high cost structures through cuts in em-ployment. Growing labor mobility arising fromthe change in industrial structure, corporate re-structuring, diversification in the modes of em-ployment and changing employment expectationshave also been an outgrowth of the economicdownturn. Notably the number of temporaryemployees has grown steadily since the introduc-tion of the Manpower Dispatching Business Lawin 1999. These changes have spurred Nikkeirento work together with Rengo (the Japanese TradeUnion Confederation) to determine what kindsof labor-management relations might best serveJapan in this transitional period.

Nikkeiren’s activities have focused increasinglyon working to expand skill training to enhanceemployability The organization is engaged inbuilding an information network to enhance labormobility and enable companies to better meet em-ployment needs. In addition, Nikkeiren advocatesderegulation in the economic and labor fields andthe establishment of private sector leadership inthe economy as a means of creating jobs. A de-

clining birthrate and aging population will alsochange Japan’s labor force participation rate inthe future and thereby affect labor supply trends.In response to concerns over the tendency to-wards declining consumption that typically ac-companies a declining population, Nikkeiren hasspoken out in favor of relaxed immigration laws.

Finally a number of corporate and manage-ment scandals in the 1990s raised the profile ofbusiness ethics in Nikkeiren’s activities. The or-ganization has advocated the establishment ofhigher standards of behavior. At the same time,however, Nikkeiren has expressed alarm at rul-ings in 2000 concerning the responsibility of cor-porate directors for failure to carry out properrisk management, seeing the burden of responsi-bility placed on Japanese management as exces-sive.

Merger with Keidanren

For many years, Nikkeiren and the Japan Fed-eration of Economic Organizations, Keidanren,proved complementary Although there was con-siderable overlap in memberships, the divisionof labor was fairly clear: Nikkeiren was the lead-ing player in shaping corporate policies regard-ing labor and wages while Keidanren focused onother business issues. In the 1990s, however,Keidanren became increasingly concerned withsocial security and social welfare issues such aspension reform and medical insurance programs,areas that had traditionally been the domain ofNikkeiren. The increasing overlap in issue areafocus, combined with the declining role forNikkeiren in annual labor negotiations and callsfor restructuring and streamlining of business or-ganizations in line with similar trends in corpo-rate Japan, eventually resulted in pressure for thetwo organizations to merge. In September 2000,Nikkeiren and Keidanren announced their plansto create a more unified voice to articulate Japa-nese business interests. The merger, to be car-ried out in 2002, will result in a new organizationcalled the Japan Business Federation.

Some regional employers’ associations haveexpressed opposition to the merger betweenKeidanren and Nikkeiren. Nikkeiren member-ship at the local employers’ association level in-cludes some small and medium-sized firms

220 Japan Federation of Employers’ Associations

whose interests have not traditionally been rep-resented in Keidanren. Keidanren’s primarymembers tend to be large companies with head-quarters located in Tokyo. Local employers’ as-sociations are also wary of the trend towardscentralization of power in Tokyo and fear thatregion-specific concerns may become increas-ingly overshadowed by national or Tokyo-centered concerns.

The different legal status of the two businessorganizations also complicates the merger proc-ess. While Nikkeiren operated as a voluntarybody Keidanren operated as an incorporated as-sociation. To carry out the merger, Nikkeiren willbe dissolved and then absorbed by Keidanren, aprocess that to some symbolizes the likely over-shadowing of the Nikkeiren elements byKeidanren elements in the new organization. Themerger is expected to have some clear positivebenefits, however. In addition to bringing a po-tentially greater business influence over the for-mation of government policies and eliminatingredundancies in the respective activities of thetwo groups, the merger is expected to lead to anincreased volume of information available tomembers.

Further reading

Chitoshi, Y. (1968) Big Business in Japanese Politics, NewHaven, CT: Yale University Press.

The Current Labor Economy in Japan (annual), Tokyo: Ja-pan Federation of Employers’ Associations.

Nikkeiren Position Paper (annual), Tokyo: Japan Federa-tion of Employers’ Associations.

JENNIFER AMYX

Japan, Inc.

“Japan, Inc.” is a widely used phrase in referringto Japan’s industrial system, with a changingmeaning that reflects the changing views ofJapan’s economy over several decades. Appar-ently first used in an article in Fortune magazinein the mid-1930s, the term vanished from thebusiness vocabulary until the mid-1960s when itwas given currency in several speeches and ar-ticles. It served usefully as a brief description ofthe generally supportive interaction between gov-

ernment and business, with relations rather likethat in a conglomerate, Japan, Incorporated,whose businesses were free to compete withinthe broad limits of common overall goals andconsensus. Audiences still at that time had littleknowledge of Japan’s economy and still onlymarginal interest. “Japan, Inc.” was a useful wayof describing Japan’s economic management sys-tem to naive audiences.

As Japan’s industrial growth continued andas trade frictions with the United States intensi-fied, the phrase began to take on a more sinistertone, and became a way of encapsulating whatwas seen as a conspiratorial Japan in which busi-ness entities marched in unison to instructionsfrom an all-powerful central government. Thisview was very much reinforced as some US aca-demic studies provided legitimacy to the view thatthe Ministry of International Trade and Indus-try (MITI) was the entire determinant of Japan’sindustrial structure, competitive frameworks andtrade policy “Japan, Inc.” became the quick refer-ence to this unfair conspiracy which served toexplain Japan’s success. This was for business andgovernment in the United States at least a muchmore palatable explanation for Japan’s competi-tive success than different levels of competencein the market place, and appealed to widely heldparanoid feelings of being attacked by a sinisterenemy.

Much of the rapid and wide currency of thephrase no doubt derived from a US Departmentof Commerce publication, Japan, The Govern-ment-Business Relationship: A Guide for the AmericanBusinessman, issued in early 1972. The Japanesetranslation, Kabushiki Kaisha Nippon, appeared inTokyo only a few months after the US edition.The book provided a very good definition of theJapan, Inc. phrase, using the conglomerate ana-logue, and describes most positively govern-ment-business interaction in Japan. The threedetailed industry case studies in the book, ofcomputers, autos and steel, similarly give littlesupport for the more sinister and conspiratorialechoes.

Even now, after so long a time, “Japan, Inc.”remains a very much used, and misused, phrase.Perhaps it is distance that blurs complexity andmakes a simple (and misleading) phrase usefulto newsmen and others when speaking of Japan.

Japan, Inc. 221

Unfortunately, the negative nuances of the phraseare also long-lived, serving as one measure of howlittle we seem to have learned about the intrica-cies of Japan’s business systems.

Further reading

Kaplan, E.J. (1972) Japan, the Government-Business Rela-tionship. A Guide for the American Businessman, Wash-ington, DC: U.S. Government Printing Office.

Shomushohen, B. (1972). Kabushiki Kaisha Nippon, To-kyo: Simul Press.

JAMES C.ABEGGLEN

Japan National Railways

Japan has long placed great emphasis on its rail-way system, believing it to be an important meansof fostering economic development. As early as1872, an opening ceremony was held for a railline running between Shimbashi, near Tokyo, andYokohama. By 1874, service between Osaka andKobe began. Three years later, the service wasextended from Osaka to Kyoto. By 1880, rail-ways were running in the northern-most island,Hokkaido. In 1882, service opened betweenShimbashi and Nihombashi, and in 1889, theTokaido line between Shimbashi and Kobe be-gan. In the same year, the Kyushu Railway Com-pany began operations between Hakata andChitosegawa.

The 1890s saw continued expansion of Japan’srail system. Kyushu Railway Company openedanother line from Moji to Kumamoto in 1891,the same year that Nippon Railway Companybegan running trains between Ueno in Tokyoand Aomori. Japan’s first steam locomotive wasproduced in Kobe in 1893, with the Kyoto Elec-tric Railway opening in 1895. At the end of thedecade, the Kansei Railway Company line be-tween Nagoya and Osaka began. In the new cen-tury Japan continued to develop its rail system.The Sanyo Railway Company began to operatebetween Kobe and Shimonoseki in 1901, and theKobu Railway Company began running electricand steam locomotives between Iidamachi andNakano from 1904.

Up to then, the railways had been privatelyowned. To create more cooperation between thelines as well as put government backing behindthem, the National Railways Law was passed in1906, with private railways taken over by the gov-ernment in the following year. Throughout thenext several decades the national railways con-tinued to make progress in new trackage and intechnical developments. Some of the develop-ments during this time were electric locomotives,colored signal lamps, automatic couplers for pas-senger cars, ticket vending machines and auto-matic door openers. Japan’s first subway wasintroduced in Tokyo at this time, as well as anumber of tunnels being built.

In 1949, following the devastation of rail linesduring the Second World War, the rail systemwas reorganized with the creation of Japan Na-tional Railway (JNR). In the years that followed,JNR continued to develop the nation’s rail sys-tem. In 1956, the Tokaido line between Tokyoand Kobe was electrified. In 1964, at the time ofthe Tokyo Olympics, the Tokaido Shinkansen(high-speed service) line opened between Tokyoand Osaka. Other high-speed lines followed:Osaka to Okayama in 1972, Okayama to Hakatain 1975, Nigata to Omiya and Morioka in 1982,and Omiya to Ueno in 1985. By this time, therewere five types of railway operating organizationsin Japan: JNR, local government railways, pri-vate railway companies (mintetsu), joint local gov-ernment and private railways known as the thirdsector, and Teito Rapid Transit Authority for lo-cal commuters.

In 1987, Japan National Railways was priva-tized. At that time, there were about 27,600 kmof railway lines, and 345 billion passengers perkm. Freight transportation was about 21 billiontons per km. The reason for the privatization wasJNR’s tremendous operating and accumulateddeficits and labor problems. At the time of priva-tization, accumulated deficits were written off, andlabor cuts were made. As a result of the privati-zation, JNR was split into six passenger compa-nies, one freight company and otherorganizations. The passenger companies wereregionally based: Hokkaido, East, Central, West,Shikoku and Kyushu. Since they were no longergovernment-owned, National was not includedin their names. For instance, the northernmost

222 Japan National Railways

regional company was named Hokkaido JapanRailways.

Further reading

Noda, M., Harada, K., Aoki, E. and Oikawa, Y. Japa-nese Railway: The Establishment and Development, Rail-way History Series, Tokyo: Nihon KeizaiShinbunsha.

ROBERT BROWN

Japan Productivity Center forSocio-Economic Development

The Japan Productivity Center for Socio-Eco-nomic Development (JPC-SED) is a private, non-profit tripartite association of management,academics and labor circles. As its organizationalmission, JPC-SED seeks to further strengthen theproductivity movement in Japan and abroad. Itcame into being in 1994 when the Japan Produc-tivity Center (JPG) merged with its sister organi-zation, the Social and Economic Congress ofJapan (SECJ). Established in 1955, JPC was amajor channel for acquiring advanced manage-ment technology from the USA and Europe anddisseminating it throughout Japan. SECJ was es-tablished in 1973 to develop a national consen-sus by addressing social and economicmacro-issues. The new organization combinesSECJ’s expertise in research with the productiv-ity techniques that JPC has developed. Althoughthe Japanese government played a major role inthe initial establishment of the two organizations,it was not involved in their evolution beyond thatpoint.

JPC-SED’s major role is the study and for-mulation of policy proposals concerning threemajor issues: reform of various social systems,productivity enhancement and structural eco-nomic reform, and development of the interna-tional economy balanced with conservation of theglobal environment. Its most significant accom-plishment has been its promotion of the produc-tivity movement in Japan. A significant differencebetween JPG-SED and other similar organiza-tions abroad is that the former employs a human

resource-centered approach, while the latter of-ten advocate a technology-centered perspective.Additionally JPC-SED acts as a human resourcesdevelopment organization. Through variousseminars and outreach programs, it educates man-agers of Japanese companies about the latest tech-niques and trends of corporate management andeconomics. The fees from these seminars are themajor source of income for JPC-SED. Conse-quently JPC-SED is not dependent financiallyon other organizations.

In order to propose solutions to the problemsthat the Japanese society and economy face, theJPC-SED has formed committees consisting ofleaders and experts from various fields such asmanagement, economics, and sociology. Thereare fifteen committees that carry out studies andsurveys on issues such as social policy welfare,employment, management innovation, and soci-ety in the information age. Although typicallylong term, these committees are not permanent,but change according to the issues that emerge.The members of the committees disclose the re-sults of these studies to the public in the form ofpolicy proposals. These proposals are typicallypresented to the prime minister’s cabinet, appearin the leading mass media, and often are com-pared to the proposals made by Ministry of In-ternational Trade and Industry (MITI).

JPC-SED disseminates its knowledge and ex-periences to overseas countries. It is the nationalrepresentative to the Asian Productivity Organi-zation, an inter-governmental regional organiza-tion established in 1961 to increase productivityin the countries of Asia and the Pacificregion. Also, JPC-SED instituted the JapanQuality Award in 1995, an annual award thatrecognizes excellence of management quality incompanies.

See also: industrial efficiency movement

Further reading

Japan Productivity Center Staff (1989), New Paradigmof Productivity Movement in Japan,. Portland, OR: Pro-ductivity Press Inc.

GEORGIOS GIAKATIS

Japan Productivity Center for Socio-Economic Development 223

Japanese business in Africa

In contrast with other regions, Japanese businesshave only an insignificant presence in Africa. Thissituation can be attributed to both the lacklustereconomic performance of the region, and thephysical distance between Japan and the Africancontinent. However, two significant trends canbe noticed: the uneven presence of Japanese busi-nesses within the various African countries, andthe adoption of certain distinctive aspects of Japa-nese management practices.

Japanese businesses are concentrated in a fewAfrican countries, while a large number of coun-tries have a negligible presence, if not a total ab-sence, of Japanese enterprises. Within theSub-Saharan African countries, the largestnumber of Japanese businesses and investmentcan be found in South Africa. In northern Af-rica, Egypt has the largest number of Japanesebusinesses and investment. The other countriesthat have a relatively significant share of Japa-nese presence include Kenya, Tanzania and Ethio-pia in eastern Africa, Zambia, Namibia andSwaziland in southern Africa, and Senegal andthe Ivory Coast in West Africa. The Japanesebusinesses found in Africa are mostly found inthe natural resources, manufacturing and com-mercial services sectors. Investments in naturalresource extraction and processing are in suchproduct areas as agricultural products, copper,and other precious metals. Businesses in themanufacturing sector are mainly involved intransport equipment, electrical machinery andelectrical appliance assembly and manufacturing.The branches of some of the more establishedand larger Japanese trading companies domi-nantly represent commercial businesses.

Two clear issues emerge with regard to theuneven distribution and relatively insignificantpresence of Japanese businesses in Africa. First,the African region is still not a favorable recipi-ent of Japanese investment. Second, business be-tween the region and Japanese companies is stillconducted through international trade. The pres-ence of branch offices of major Japanese tradingcompanies in the capitals of many African coun-tries attests to the fact that Japanese business inAfrica is still by and large at an explorative orinformation collection stage. This is more so for

the countries having a negligible presence of Japa-nese corporations. It can also be noticed that someof the Japanese trading and manufacturing com-panies use their presence in one African countryas a strategic position for gauging the regionaleconomic trends. A case in point is that of com-panies based in South Africa, Kenya and Egypt,which use these strategic vantage points to gaugethe economic trends within the larger regions ofsouthern Africa, eastern Africa, and northern Af-rica, respectively.

In sharp contrast to the negligible presence ofJapanese business in Africa, it is quite commonto find certain elements of the Japanese manage-ment style practiced by both foreign affiliates andindigenous firms in various African countries.This is true for both the manufacturing and serv-ice industry The use of Japanese managementpractices can be largely attributed to the branchoffices of one international consulting company.This consulting firm had previously learned theJapanese system of management for use in theirEuropean division. While jointly working withtheir European counterparts, the firm’s Africandivision consultants became interested in the Japa-nese management system. This interest finallyculminated in the adoption of the Japanese man-agement system into the consulting firm’s prod-uct portfolio. This has resulted in the wide use ofcertain aspects of the Japanese management sys-tem in Africa, albeit with varying levels of suc-cess.

The most commonly found aspects of the Japa-nese management system are quality control sys-tems, kaizen activities to reduce waste, elementsof the just-in-time production system, factory lay-out changes, and multi-skill training for shopfloorworkers. Adoption of the Japanese quality con-trol system can be found in large manufacturingenterprises in a number of African nations.Clearly discernible are the quality task groupsand the new concept that quality starts at thebeginning of the production process with rawmaterial acquisition, rather than at the end of theproduction line. There are also a number ofmanufacturers that have changed their factorylayout by introducing cells and bringing machinescloser together. Even though the lack of a com-munity of parts and components suppliers hasprohibited the complete adoption of the

224 Japanese business in Africa

just-in-time system of production, many manu-facturers use the kanban system to organize pro-duction activities in their factories. Against thebackground of production inefficiency and ram-pant wastage, many factories have found kaizento be an appealing method for reducing wastageand effecting incremental small changes in theentire production process. Another aspect of theJapanese management style that many Africanfactories have found quite appealing, is the hu-man resource management system for factoryfloor workers, placing emphasis on multi-skilltraining. However, there has been mixed perform-ance in the adoption of the Japanese managementsystem, with the emphasis on failure; generallythe performance has been very dismal. This canbe attributed to management failure in severalareas: poor approach to quality issues, resistancefrom middle management and the workforce, un-reliable suppliers and poor quality of parts andcomponents, and short-term output maximizationat the cost of preventive maintenance.

In the future, an increase in the presence ofJapanese business will largely depend on posi-tive economic performance, political tranquilityand a generally favorable investment climate inAfrica. It is also an interesting fact that in the lasthalf of the 1990s there have been a number ofJapanese delegations visiting a few African coun-tries (South Africa, Kenya, Ethiopia and Zam-bia) on fact-finding missions on the generalinvestment climate in Africa. Such visits may sig-nal a relative increase in economic exchanges andpossibly be followed by direct investment fromJapanese companies. As such, any significant pres-ence of Japanese business in Africa will follow apattern in which certain favored first-in-line coun-tries will act as a window from which the strate-gic monitoring of both national and regionaleconomic conditions and opportunities will beundertaken. Nevertheless, it is quite difficult toproject as to when there will be any significantJapanese 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.

NATHANIEL O.AGOLA

Japanese business in Australia

Japan is Australia’s most important business part-ner in terms of both inward investment and over-all trade. Japanese business interests in Australiaare also substantial and represent 5 percent ofJapan’s total global investment (see Japanese in-vestment patterns), making Australia the thirdlargest recipient of Japanese foreign direct invest-ment (FDI) behind the USA and the UK. Japa-nese business in Australia has been concentratedin agriculture, mining, automobiles and financewith a recent growth of investment in real estateand tourism.

The development of offshore operations inAustralia has taken place in a series of waves. Inthe 1960s and early 1970s Japanese business in-vestment in Australia was mainly “resource seek-ing” and was focused around raw materialextraction, with Australia traditionally being Ja-pan’s largest supplier of iron ore and coking coal.In the 1970s “market-seeking” FDI intended tooffset trade barriers saw substantial Japan in-vestments in the Australian automobile and elec-tronics industries with the establishment of localmanufacturing operations by major Japanese com-panies including Toyota, Nissan, NEC, Sanyoand later Mitsubishi. These investments pre-ceded by almost a decade similar investments inthe USA and Europe. Japanese business invest-ment in Australia from the mid-1980s to the early1990s witnessed a new wave of investment inreal estate, tourism, and services, making Aus-tralia the largest recipient of Japanese investmentin these categories next to the USA. Australiaalso became one of the top 10 recipients of Japa-nese finance-related investment as Japanese banksestablished a succession of affiliates in Australia.

Over 700 Japanese business firms operate inAustralia and directly employ more than 45,000local workers or about 0.5 percent of theworkforce. In addition, some 180 Australian sub-contractors and major suppliers to Japanese busi-nesses employ an additional 263,000 workers,making a total of 308,000 people employed inJapanese or Japanese-related companies. This rep-resents 3.7 percent of Australia’s total full-timeworkforce. Japanese manufacturing firms, whilerepresenting only 15 percent of Japanese invest-ment in Australia employ 34 percent of all direct

Japanese business in Australia 225

employees, highlighting the contribution of Japa-nese firms to employment in the local manufac-turing sector. Japanese business operations inprimary industries such as mining, energy andagriculture involve a relatively small number ofJapanese companies handling a large volume ofexports. Conversely in secondary industries suchas manufactured goods and industrial productiona large number of Japanese companies handle arelatively small volume of exports.

Of Japan’s nine sogo shosha (see general trad-ing companies) in Australia, four rank in thetop ten list of Australia’s exporters. Combinedexport revenue in 1995–6 of the nine sogo shoshawas US$15.8 billion, representing 21 percent ofAustralia’s total merchandise exports in the sameyear.

Almost half of all Japanese manufacturingfirms in Australia were established before 1980,although the last decade has witnessed a rapidgrowth in the number of Japanese multinationalenterprises (MNEs) operating sales and produc-tion facilities. The establishment of financial serv-ices and tourism firms is much more recent andgenerally after 1988.

Japanese financial, trading and manufacturingfirms have a long history of involvement in theAustralian economy (Purcell 1981). Most Japa-nese firms have pre-FDI involvement in Australiathrough representative offices or joint venture.The beginnings of Japanese business in Australiago back almost 150 years to the late Tokugawaperiod when Akiyama Teiji, the first Japanesetrader to reside in Australia, arrived in Sydney in1850 to attend the International Exhibition andlater opened a store in Melbourne selling Japa-nese wares. The real beginnings of Japanese busi-ness in Australia, however, began in 1890 whenKanematsu Fusajiro established KanematsuShoten, the forerunner of the great KanematsuTrading Company based around the export ofAustralian wool to Japan. By the early 1920s morethan thirty Japanese companies operated somefifty branch offices in Australia. The group in-cluded Japan’s seven great sogo shosha includingMitsui Bussan and Mitsubishi Shoji plus a vari-ety of smaller, more specialized operators and anancillary group of banking, shipping and insur-ance firms including the Yokohama Specie Bank.

Nearly all of Japanese businesses in Australia

are wholly-owned subsidiaries. Since the mid-1980s more than 80 percent of new Japanese busi-nesses have been greenfield investments, of whichtwo-thirds are wholly owned subsidiaries. Japa-nese banks and tourism firms are overwhelmingly(92 percent) wholly-owned, greenfield operations.

Japanese manufacturing firms came to Aus-tralia principally to supply the Australian domes-tic market, while financial firms came to mainlyservice their parent’s Japanese clients or otherJapanese firms in Australia. Japanese tourismfirms came to service the burgeoning Japanesetourism market. Japanese manufacturing firmsrank the need to adapt to local customer require-ments, political stability tariff duties and energycosts as the most important reasons for selectingAustralia as an investment location (Nicholas etal. 1996).

Japanese businesses in Australia have alsoadopted many of the organizational practices ofJapanese firms in Japan, including the wide ap-plication of work practices related to productand process technology such as quality controlcircles, kaizen, just-in-time production systemsand formal on-the-job training practices (Purcelland Nicholas 1999). In the banking and tradingsectors, which contain the highest levels of Japa-nese ownership and where the density of Japa-nese expatriates and Japan-related business ishighest, Japanese management style in Australiatends to be most intense and subsidiaries more“clone-like” in appearance. Where the ratio oflocal employees is high, such as in manufactur-ing, firms tend to be much more hybrid in ap-pearance, characterized by the adoption ofJapanese organizational practices on the onehand but accompanied by more local labourmarket incentives on the other.

See also: Japanese investment patterns; Japanesemultinational enterprises; Japanese business in theUSA

Further reading

Australian Institute of International Affairs (ed.)(1999) Australia and Japan Beyond 2000, Proceedingsof the 20th Australia-Japan Relations Symposium,Canberrra: AIIA.

Nicholas S., Merrett, D., Whitwell, G. and Purcell, W.

226 Japanese business in Australia

(1996) “Japanese FDI in Australia in the 1990s:Manufacturing, Financial Services and Tourism,”Pacific Economic Papers 256:1–24.

Purcell, W. (1981) “The Development of Japan’s Trad-ing Company Network in Australia, 1890–1941,”Australian Economic History Review 22 (2): 114–32.

Purcell W. and Nicholas S. (1999) “The Transfer ofHuman Resource and Management Practice byJapanese Multinationals to Australia: Do IndustrySize and Experience Matter?” International Journal ofHuman Resource Management 10 (1): 72–88.

Toyama, Y. and Tisdell, C. (eds) (1991) Japan-AustraliaEconomic Relations in the 1990s., Osaka: Centre forAustralian Studies.

WILLIAM PURCELLSTEPHEN NICHOLAS

Japanese business in Canada

Canada has a small, open economy highly de-pendent on international trade and foreign directinvestment (FDI). International trade accountsfor over 40 percent of Canada’s gross nationalproduct. Inward foreign direct investment hasalways played a large role in Canadian economicdevelopment. More recently outward FDI hasgrown very rapidly to the point where it nowexceeds inward FDI. In 1998, the stock of in-ward FDI amounted to $217 billion Cdn andoutward FDI was 1240 billion Cdn. CanadianFDI in Japan is still relatively insignificant, but itis growing in importance. Japan ranks fourth interms of Canadian inward FDI, following theUnited States, the United Kingdom and the Neth-erlands. The Japanese share of the stock of Ca-nadian inward FDI was about 4 percent or $8.3billion Cdn. As a percentage of Japanese outwardFDI, it was under 2 percent.

Early post-Second World War Japanese FDIin Canada aimed at securing raw materials forthe resource-poor Japanese domestic economyThe first investments were in mining, both en-ergy and minerals. In 1983 these totaled $726million dollars Cdn. They peaked in the mid-1990s at over $1 billion Cdn and in 1998 fellback to $783 million Cdn. FDI in wood prod-ucts, including pulp and paper, was still relativelysmall in 1983 at less than $100 million Cdn, butit grew rapidly to a maximum in 1996 of $1 1,250

million Cdn and in 1998 stood at $972 millionCdn. Combined, these two industries (resources)accounted for over one-fifth of Japanese FDI inCanada.

Manufacturing became the largest compo-nent of FDI by the early 1980s. Unlike the FDIin raw materials, this sector’s FDI was aimed atserving the North American market. It beganwith a handful of consumer and industrial in-vestments such as Matsushita producing colortelevisions and NTN turning out ball bearings.In 1983 combined Japanese inward investmentin food processing, chemicals, electrical and elec-tronic production, construction and communi-cations stood at only $84 million Cdn rising to$1.511 billion Cdn in 1998 or about 18 percentof total Japanese FDI in Canada. (This isthe grouping according to Statistics Canada,which includes some non-manufacturing busi-nesses.)

However, the largest investments in manufac-turing are those in the automotive industry. Thisreflects the strong competitive advantage thatJapanese auto companies have had over their ri-vals from the early 1980s. Statistics Canada clas-sifies automotive investment in the machinery andtransportation equipment category. From a 1983level of $368 million Cdn, Japanese FDI in theindustry grouping rose to $3.148 billion in 1998Cdn and has increased considerably since. In1998, this sector accounted for nearly 38 percentof Japanese FDI in Canada, compared to onlyabout 14 percent of overall Canadian inward FDI.Hence, Japanese companies are much more con-centrated in this sector than are other foreign in-vestors.

The automotive investment began in the mid-1980s when the Japanese auto assemblers de-cided to build plants in North America to avoidboth import quotas resulting from the voluntaryrestraint agreement they were forced to accept,and also to avoid being subject to North Ameri-can import tariffs. As part of their North Ameri-can expansion, Honda and Toyota decided toselect Canadian sites in Ontario (in addition totheir United States operations. Suzuki, a smallerJapanese manufacturer, followed by forming ajoint venture with General Motors known asCAMI. Although these plants served the Cana-dian market, their output was primarily destined

Japanese business in Canada 227

for the United States. Canada was chosen forseveral reasons. These included the lure of dutyrebates offered by the Canadian government aswell as incentives provided both by the federaland provincial governments. There was also anavailable easily trainable labor force. Lowerwage rates in Canada and the payment of medi-cal insurance by the Canadian government wereother incentives. In addition, energy and landprices were attractive and, given that the UnitedStates market was quite close, transportationcosts were not high. Finally other things beingequal, firms like to produce in markets wherethey have substantial sales.

The Honda and Toyota operations wereoriginally small, even sub-optimal. However,they were expanded partly as a result of the dutyfree access to the United States market providedby the Canada-United States Free Trade Agree-ment in 1989 (and subsequently provided by theNorth American Free Trade Agreement of 1994that added Mexico to the free trade zone). Arapid descent of the Canadian dollar relative tothe United States currency in the 1990s furtherenhanced the attractiveness of expanding theCanadian plants. In 1997 Toyota opened a sec-ond plant at its site and Honda likewise in 1998.In 1998 Honda began to produce its new Odys-sey minivan and Toyota its Camry Solera coupein Canada. In 2000, Honda launched produc-tion of its new sports utility van (SUV), theAcura MDX. Soon a sister vehicle, a HondaSUV, will be added. Toyota is now gearing up toassemble the first Lexus produced outside of Ja-pan, the RX300 SUV The total investment inthe three operations is expected to be $5.1 billionCdn by 2003 (Honda 1.1, Toyota 2.1, andCAMI 1.0). Aside from these plants, there arealso in Canada forty Japanese auto parts, materi-als and machine shop operations associated withthe automotive industry. Over half of these arejoint ventures with Canadian partners. Total em-ployment in 2000 was over 9,000 in vehicle pro-duction and more than 10,000 in partsmanufacturing.

Japanese automotive companies recently in-creased their competiveness versus their US-based rivals by winning a case that Japan hadbrought before the World Trade Organization.

Effective February 2001, General Motors, Fordand DaimlerChrysler (the Big Three) can nolonger import vehicles from their factories out-side of North America duty-free. For example,Saabs produced in Sweden, Mercedes assembledin Germany by DaimlerChrysler, and Volvos andJaguars manufactured in Sweden and England,respectively will have to bear the same 6.1 per-cent tariff that is levied on motor vehicles im-ported into Canada from outside of NorthAmerica by other manufacturers. Canada will nolonger be able to discriminate in favor of the BigThree, who were party to the 1965 Canada-United States Auto Pact.

Turning to Japanese FDI in finance, includinginsurance, there is a rapid increase in the period1983 to 1998, from $150 million Cdn to $1.31billion Cdn. In the case of services including re-tailing, the trajectory is far less steep, climbingonly from $350 Cdn to $614 Cdn over the sameperiod. The small investment in services is in-dicative of Japan’s comparative disadvantage inthis sector. While Japanese auto assemblers, es-pecially Honda and Toyota, excel in manufac-turing vehicles, the service sector in Japan lagsits Western counterparts.

What is the likely future of Japanese FDI inCanada? Most probably the automotive invest-ments will continue to grow if Toyota and Hondaare able to gain market share in North Americaagainst the Big Three. There is also likely to bemore FDI in technologically advanced industries,as Canada becomes a more knowledge-focusedeconomy.

Further reading

Canadian Embassy Tokyo, DFAIT/Asia-Pacific & Co-ordination, Investment Section (2000) Japanese In-vestment Fact Sheet 2000.

Industry Canada (2000) The Trade and Investment Moni-tor, Fall/Winter 1999–2000.

Japanese Automotive Manufacturers Association ofCanada (JAMA) (2000) http://www.jama.ca.

Statistics Canada (2000) Canada’s International Invest-ment Position from 1926 to 1999, Ottawa: StatisticsCanada.

BERNARD WOLF

228 Japanese business in Canada

Japanese business in China

The People’s Republic of China has become animportant destination country for Japanese busi-ness in recent years. Over 50 percent of JapaneseFDI in emerging markets goes to China. Al-though Japan and China had a long history ofdiplomatic and trade relations, and althoughChina began opening up to the world in 1979,most of Japan’s FDI has taken place in the 1990s.Of almost 2,000 Japanese subsidiaries in Chinain 1996, only 4 percent were in China before 1987.As of 1997, there were almost 2,000 Japanesesubsidiaries in China; over 77 percent are jointventures, and 20 percent are wholly-owned sub-sidiaries. China is also the primary country intowhich Japanese SMEs are moving their produc-tion operations.

Reasons for locating in China include geo-graphic and cultural proximity. The main reasonfor choosing China, however, is the potential ofthe domestic market. Over 56 percent of compa-nies surveyed by the Japan External Trade Or-ganization in 1997 chose China for this reason.The country is a particularly attractive marketfor electronic firms as well as automotive compa-nies such as Toyota and Denso. At present, how-ever, most of the products manufactured byJapanese companies in China are for export. Ex-ports represent 91.3 percent of all Japanese pro-duction. In the case of audio component systems,China holds the number one position in terms ofreverse imports to Japan.

China has also been expanding its sales to Ja-pan of inexpensive mass-produced clothing madewith low-cost labor. In the 1990s, the Japanesetextile industry set up operations in China mostlythrough the establishment of joint ventures withChinese companies. Japan’s reverse imports oftextiles reached ¥2.8 trillion in 1996, a 52 per-cent increase over 1993, most of which originatedin China.

Japanese businesses in China are doing reason-ably well. Approximately 70 percent reported aprofit in 1992. However this number decreasedto 50 percent in 1997. Sales to Chinese consum-ers, however, have not taken off. Furthermore,exports to China in 1999 were a record high at16.5 percent. At the same time, imports from Chinaincreased to 16.2 percent, also a record high.

Local procurement is modest in China. Thenumber of firms that source over 50 percent oftheir raw materials and parts locally totaled only16.4 percent. Firms in China that source no morethan 20 percent of procurement locally reacheda level of 67.2 percent. Most firms also did nothave local boards of directors (86.8 percent).

The export of electronics and IT-related partsand materials from Japan to China has been in-creasing in recent years. There has also been anincrease in imports of consumer electronics fromChina to Japan as well.

See also: Japanese business in Southeast Asia;economic crisis in Asia

TERRI R.LITUCHY

Japanese business in Germany

A history of the Japanese presence inGermany

While the Japanese corporate presence can befound all over western and southern Europe, mostJapanese corporate operations are concentratedin the United Kingdom, Holland, and Germany(in that order). Within Germany corporate of-fices and personnel are primarily in theDusseldorf area. During the early 1990s Ger-many had the second highest concentration ofJapanese firms. Since then the Netherlands hasmoved ahead of Germany. When Japanese cor-porations began moving into Europe in largenumbers from the 1970s, the Dusseldorf area wasa favored location for several reasons. Dusseldorfis located in the Ruhr area of Germany in theländer (state) of Nordrhein-Westfalen, known sincethe 1800s as the industrial heartland of Germany.The nearby city of Duisburg also has one of thebiggest inland seaports in Europe, with easy ac-cess to the Atlantic through the Rhine River. Fur-thermore, the Dusseldorf area is centrally locatedin Western Europe, giving foreign corporationseasy access to all of the biggest industrial centersof Western Europe.

Before the Second World War, the Japanesepresence in Germany was concentrated in thenorthern port city of Hamburg. But from the mid-1950s the returning Japanese corporations were

Japanese business in Germany 229

moving mostly to Dusseldorf. There was oneJapanese person registered as living in Dusseldorfin 1950, but 300 by 1960, 2,000 by 1973, and7,443 by 1992. In 1966 the Japanese Chamber ofCommerce in Dusseldorf was founded, represent-ing sixty Japanese companies in the area. By 1968the number of Japanese companies had grown to100, then 200 by 1973, and 300 by 1980. Japa-nese companies first began production in the areain 1971. In 1990, Japan was behind only theUnited States and the Netherlands in levels ofdirect investment in Nordrhein-Westfalen, andNordrhein-Westfalen accounted for half of allJapanese investment in Germany In 1980 theJapanese direct investment in Nordrhein-Westfalen totaled slightly more than DM 1 bil-lion; by 1990 it had grown to over DM 5 billion.In 1990, however, the number of Japanese com-panies’ production facilities in the Dusseldorf areahad still only reached 30 and began to declinefrom this time forward.

From 1992 the number of Japanese corpora-tions of all industries in Dusseldorf began a slowdecline because of: (1) the economic slowdownin Japan; (2) slow movement to Berlin after Ber-lin was designated the new capital of united Ger-many; and (3) slow movement out of Germanyalong with more economic activity in nearbyHolland. As of late 1998 there were just over23,000 Japanese living in Germany and 1,110Japanese corporations with some kind of opera-tions in Germany Just over 4,500 Japanese livedin the Dusseldorf area in 1999, down from 7,443in 1992.

By the late 1990s there were also only 520Japanese companies in the Dusseldorf area. A1991 survey by the Japanese Chamber of Com-merce in Dusseldorf found about 75,000 Ger-mans employed by 1,099 Japanese corporationsin Germany with more than DM 100 billion inprofits in Germany These numbers have beencut almost in half since 1991, but as noted abovethere are still 1,110 Japanese companies with atleast some business in Germany But by the late1990s there were almost no Japanese productionfacilities in the Dusseldorf area, or anywhere elsein Germany Still, Dusseldorf remains the centerfor Japanese business activity in Germany. By thelate 1990s some Japanese firms that had movedout of the area (and especially to Berlin) began

moving back to Dusseldorf because of the infra-structure and support from a well-establishedJapanese community with a Buddhist center andgood Japanese schools. But there has continuedto be a reduction of Japanese corporate offices inthe Dusseldorf area due to movement out of Ger-many since the early 1990s, and especially toneighboring Holland. The movement out of Ger-many has been stimulated mostly by high laborcosts and labor laws. The European Single Mar-ket, realized in 1993, has eliminated barriers tocapital flow and trade, producing strong locationalcompetition for the whole EU market, making itmore and more difficult for Germany to hold onto such direct foreign investment.

German labor laws

Even at the high point of Japanese investment inGermany during the early 1990s, only 10.1 per-cent of the Japanese corporations in all of Ger-many were involved in manufacturing, while thevast majority were active in sales, service, andthe financial industry The Japanese corporationsinvolved in manufacturing were almost exclu-sively electronic firms. Interviews with the topexecutives of thirty-four randomly selected Japa-nese firms in the Dusseldorf area and officials ofthe Japanese Chamber of Commerce confirmedthat the primary reasons few Japanese corpora-tions have manufacturing plants in Germany arelabor costs, taxes, powerful German labor unions,and the strict German labor laws. These are alsoamong the reasons most often given for the move-ment of Japanese corporations out of Germanyand into other European countries such as theNetherlands. German workers continue to enjoythe highest wages and benefits in the world, andthe German Works Constitution Act, passed soonafter the Second World War (and expanded dur-ing the early 1970s, also referred to as “co-deter-mination laws”) gives German employeesextensive influence and rights in the work place.These German work laws apply to all corpora-tions hiring a significant number of Germanemployees while in Germany Most importantlythese German work laws require companies toallow for the election of employees to fill the“works council” which must be consulted on allmatters involving the interests of employees in

230 Japanese business in Germany

the company including the hiring and firing ofemployees at all levels, wages and other compen-sation, and even changes in work organizationand working hours. The larger the number ofemployees in the company the larger the workscouncil, whose members must be given paid re-lease time to take care of employee interests. Cor-porations can try to go against therecommendations of the works council in suchmatters as the hiring and firing of employees, butthey do so at their own peril. There is a systemof labor courts to back up the German work lawsand a company can be tied up in court, unable toimplement changes challenged by the works coun-cil, for months if not years. Powerful Germanlabor unions add to the influence of German em-ployees by focusing on industry-wide issues andpolitics while the works council members takecare of employee interests on every shop floorand office. The philosophy of the German gov-ernment after the Second World War in passingthe Works Constitution Act was that employeesof companies have just as much right to influ-ence major decisions of the company as stock-holders. This is why German laws also requirethat almost all major corporations reserve halfthe positions in the boards of directors for repre-sentatives elected by the employees of the com-pany.

Despite such rigid labor laws and powerfulunions, which Japanese managers find in extremecontrast to their working environment in Japan,research has found that respect for German laborappears to remain very high among Japanese ex-ecutives in Germany. There is little history of sig-nificant labor conflict in Japanese corporationsin Germany and German labor union officialshave confirmed that Japanese executives have atleast as much respect as executives of Germancorporations. Before the middle 1990s, Japaneseexecutives said they would remain in Germanydespite high labor costs, regulations, and taxesbecause German labor is the most skilled, pro-ductive, and quickest to train of any country. Thisratio of costs and benefits of doing business inGermany especially for those with productionfacilities apparently began to change by the endof the twentieth century. Japanese executives of-ten state they are in Germany now because theymust be there primarily for sales, service, and

finance. There are, however, signs of gradualchange in the influence of labor in the Germaneconomy Despite the election of GerhardSchroeder to head the German government in1998 with a “green-red” coalition government ofthe Social Democrats and Green Party (both tra-ditionally most supportive of labor), there hasbeen a slow erosion of labor influence, supportfor the welfare state, and high corporate taxes.This is also in spite of considerable evidence bysocial scientists and labor research institutes (suchas the Institut für Arbeit und Technik inGelsenkirchen) in Germany that the high pro-ductivity of German labor is related to their rightsand co-determination required under these Ger-man work laws.

Lack of trust of foreign employees and theposition of German middle managers

While labor conflict within Japanese corporationsin Germany has been comparatively low, thereis, however, a major employee-related problemfor Japanese corporations in Germany a prob-lem found in Japanese corporations with foreignoperations all over the world. There is a rigid“glass ceiling” for foreign employees in Japanesecorporations. A simple indicator of the situationis the Japanese Chamber of Commerce publica-tion in Germany listing all Japanese corporationsand their top managers in Germany: There isalmost a complete absence of non-Japanese namesamong these executives. Foreign managers inJapanese corporations know that they are seldomgiven the full trust of Japanese higher manage-ment or given authority on major company deci-sions. (And in this sense it can be said thatGerman employees on the shop floor have morelegal, and perhaps actual influence than do Ger-man middle managers of a Japanese company inGermany.) The lack of opportunities for careerpromotions within the company mean that theseJapanese corporations have difficulty hiring andkeeping talented German middle managers. Thisproblem is crucial because, given the rigid Ger-man work laws, the common practice is for Japa-nese executives to rely extensively on Germanmiddle managers. Japanese executives in Ger-many as elsewhere, are expected to spend only afew years away from Japan, often returning to

Japanese business in Germany 231

the home office in Japan after two years. TheseJapanese executives do not typically understandthe full meaning of German work laws, nor dothey speak fluent German. Thus the Germanmiddle manager is most often a “go-between,” arepresentative of German employees to Japanesemanagement and at the same time a representa-tive of Japanese management to the German em-ployees. Thus, especially in Germany with thecrucial role played by German middle managersunder German work laws, the mistrust and lackof promotions for foreign managers in a Japa-nese corporation proves to be especially harmfulto Japanese corporate interests.

Further reading

Kerbo, H.R. and Strasser, H. (2000) Modern Germany,New York: McGraw-Hill.

Kerbo, H.R., Wittenhagen, E. and Nakao, K. (1994a)Japanische Unternehmen in Deutschland: Unternehmens-struktur und Arbeitsverhaeltnis, Gelsenkirchen:Veroffentlichungsliste des Instituts Arbeit und

——(1994b) “Japanese Transplant Corporations, For-eign Employees, and the German Economy: AComparative Analysis of Germany and the UnitedStates,” Duisburger Beiträge zur Soziologischen Forschung,Duisburg.

Lincoln, J.R., Kerbo, H. and Wittenhagen, E. (1995)“Japanese Companies in Germany: A Case Studyin Cross-Cultural Management,” Journal of Indus-trial Relations 25:123–39.

Thelen, K.A. (1991) Union of Parts: Labor Politics in Post-war Germany, Ithaca, NY: Cornell University Press.

Turner, L. (1991) Democracy at Work: Changing WorldMarkets and the Future of Labour Unions, Ithaca, NY:Cornell University Press.

HAROLD KERBOPATRICK ZILTENER

Japanese business in Italy

At the close of the twentieth century Japanesedirect investments in Italy amounted to ¥5.2 bil-lion, less than 0.2 percent of the total Japaneseforeign direct investment (FDI) in Europe. Whencompared to Japanese FDI in the UK (45.4 per-cent), the Netherlands (40.1 percent), France (4.4percent), Germany (2.5 percent), this figure pointsout the marginal involvement of Japanese com-

panies in Italy Developments during the 1990sconfirm this situation. In fiscal year 1989, Japa-nese FDI in Italy accounted for ¥42.2 billion (2.1percent of total investments in Europe). In 1991it reached a peak of ¥44.2 billion (3.4 percent oftotal Europe). Between 1992 and 1998 they de-creased from ¥28.2 billion (3 percent) to ¥14 bil-lion (0.8 percent). The weakness of the Italianposition is confirmed by the fifteenth survey onJapanese-affiliated manufacturing companies inEurope conducted by the Japan External TradeOrganization (JETRO). According to JETROdata, even if the number of Japanese manufac-turing companies in Italy has steadily increasedfrom twenty-eight to fifty-seven in the ten-yearperiod between 1989 and 1998, the last figureaccounts for only 6.5 percent of the 883 Japa-nese companies operating in Europe (JETRO1999). As of 1998, nineteen Japanese enterprisesin Italy had design centers or R&D facilities, againaccounting for only a small percentage (5 per-cent) of the total number of such facilities in Eu-rope.

Japanese FDI in Italy has some peculiar fea-tures. First, the majority of Japanese companiesare mainly sales subsidiaries; they involve mostlytrade-related activities and manufacturing andonly in very few cases of finance and insuranceservices. Second, the manufacturing companiesare concentrated in traditional and specializedsupply industries, such as textile, clothing, ma-chinery and machine tools, where Italian compa-nies are highly competitive. With regard to thefifty-seven Japanese manufacturing companiesoperating at the end of 1998, thirteen were inchemical and petroleum products, nine in gen-eral machinery industry seven in transport ma-chinery parts, six in electrical machinery and fivein apparel and textile products, with the remain-der in various other industries (JETRO 1999).Third, with respect to mode of entry and capitalstructure, joint ventures are preferred overwholly-owned, green-field investments. This maybe due to several reasons. Italian subsidiaries ofJapanese firms are of relatively recent age. Thefirst cases of Japanese manufacturing companiesin Italy were YKK Italia, which began to operatein 1968; Honda, which was established as a jointventure (IAP Industriale) in 1971; Alcantara,which was originally a joint venture between ENI

232 Japanese business in Italy

and Toray Industries (1974); and TessituraTintoria Stamperia Achille Pinto, a joint venturebetween an entrepreneurial Italian company andToray Industries, established in 1974. Addition-ally the majority of Japanese companies were es-tablished in Italy during the 1980s and 1990s. Asecond reason may be the fact that in the firstphase of Japanese FDI Italian companies took onthe role of developers of the Italian market. Fi-nally in many joint ventures, there is the pres-ence of an Italian partner who often owns themajority of capital, and is an entrepreneurial firmhaving peculiar creative capabilities. For the Ital-ian partner, the joint venture represents a wayboth to gain access to competencies, technolo-gies and assets which could not be developed au-tonomously and rapidly and to enter newmarkets, especially in Asia, through cooperatingwith a strong competitor (Molteni et al. 2000).Conversely for the Japanese partner, the joint ven-ture provides an opportunity to obtain rapid ac-cess to the Italian market, to overcome legal ortrade barriers, to take advantage of fiscal incen-tives, and to gain access to the peculiar knowhowof the Italian partner, which complements theJapanese partners’ range of competencies. Themost striking cases of joint ventures between bigJapanese and Italian companies are, for example,those established by Fiat and Hitachi, Olivetti andCanon, Fiamm and Nippon Denchi, Eni andToray FAI and Komatsu, Piaggio and Daihatsu.

With regard to the transferability of Japanesemanagement and production systems to Italiansubsidiaries, it usually has taken place with ad-aptation of Japanese management principles tothe local context. In particular, according to astudy carried out in 1993 on Japanese manufac-turing companies in Italy local management styleseemed to predetermine Japanese managementprinciples. This result may be due to the fact thatthe research involved a significant number of jointventures with entrepreneurial Italian companies(Songini and Gnan 1995). A similar study car-ried out in 1997 pointed to a combination of Japa-nese and local goals, organizational mechanismsand management styles (Songini and Gnan 1998).This study identified a more significant role ofthe Italian subsidiaries than in 1993. In fact, Ital-ian subsidiaries seemed to have stronger R&Dand product policy autonomy and to be respon-

sible for a wider range of value-chain activities.They pursued long-term goals, both typical ofWestern companies (profitability) and peculiar toJapanese firms (growth and quality); adoptedboth formal, vertical and Western organizationalmechanisms and some peculiar Japanese ones,those devoted to developing human resourcescompetencies. The size, the shareholding struc-ture, the older age and a wider range of core ac-tivities influenced the degree of transferability ofJapanese management. As far as headquarterscontrol over foreign subsidiaries was concerned,Japanese multinationals coordinated and control-led Italian subsidiaries by both substantive con-trol systems, based on the centralization ofstrategic resources and decisions at the parentcompany and administrative control mechanisms,based on planning and control systems. Moreo-ver Japanese headquarters involved Italian sub-sidiaries in most strategic decisions concerninginnovation, pricing and production levels.

The transferability of Japanese management toItaly points out that Japanese management has tobe adapted to the local context to be effective. Inthe green-field, wholly-owned investments, oftenin depressed areas, such as for example Sony andHonda’s transplants, Japanese technology andmanagement were transferred more effectively dueto the fact that this choice favored the selection ofyoung workers more willing to create employmentrelationships similar to those used in Japan. As faras joint ventures are concerned, in some cases theyachieved satisfactory results in terms of produc-tion efficiency profitability and knowledge crea-tion, due to the fact that they stimulated thedevelopment of synergies between the partners.However, in other cases the transferability of Japa-nese management and production systems foundsignificant obstacles and resistance due to the Ital-ian system of labor market regulations, the resist-ance of labor unions and management, thelanguage and cultural barriers, the difficulties ofJapanese companies in attracting the first-class Ital-ian graduates and technicians.

Further reading

JETRO (1999) The 15th Survey on the Operations of Japa-nese-affiliated manufacturing Companies in Europe and Tur-key, Tokyo: JETRO.

Japanese business in Italy 233

Kidd, J.B. (1998) “Knowledge Creation in JapaneseManufacturing Companies in Italy,” ManagementLearning 29(2): 131–46.

Molteni, C. (1996) “Japanese Manufacturing in Italy”in J.Darby (ed.), Japan and the European Periphery,London: Macmillan, 132–48.

Molteni, C., Conca, M.G. and Zara, C. (2000) “Japa-nese Manufacturing Activities in Italy: Character-istics and Management Issues,” in L. Songini (ed.),Political and Economic Relations between Asia and Europe,Milano: EGEA, 121–36.

Songini, L. and Gnan L. (1995) “Management Stylesof Japanese Companies in Italy” Management Inter-national Review 2:9–26.

——(1998) “Japanese Management in the Nineties: NewFeatures and Their Transferability Abroad,” papergiven at the AIDEA 3rd International Conference,Lugano, Switzerland.

Songini, L., Gnan, L. and Kidd J. (2000) “A Compari-son of Management Styles of Japanese Manufac-turing Firms in the UK and in Italy” in L.Songini(ed.), Political and Economic Relations n Asia and Europe,Milano: EGEA, 147–81.

LUCREZIA SONGINI

Japanese business in Korea andTaiwan

The operations of Japanese-affiliated companiesin Korea and Taiwan are characterized by a rela-tively high degree of localization of top manag-ers at overseas subsidiaries, as well as by aconsiderable level of implantation of the Japanesemanagement system in terms of institutions andform. However, there are considerable differencesbetween these firms and manufacturing plants athome in Japan in more substantive aspects, suchas the degree of employee participation in man-agement and the development of a wide range ofskills among workers. In the future, Japanese-af-filiated companies in Korea and Taiwan will needto strive to narrow these gaps with Japaneseplants, and at the same time to learn from theadvantages of local companies accruing from theirlocal business climates.

The process of entry

The advances of Japanese companies into Koreaand Taiwan, which began in the 1960s, came

largely in response to the import-substitution in-dustrialization policies adopted by those govern-ments. Like other developing economies, Koreaand Taiwan imposed high tariffs on importedmanufactured products in order to protect andnurture their own industries. Japanese and otherforeign companies then began local productionin order to surmount the high tariff barriers andcapture markets. Most of the local productionprojects were launched in the form of joint ven-tures with local firms because of restrictions onforeign ownership. In particular, the Korean gov-ernment imposed severe restrictions on the en-try of foreign companies, and as a result, Japanesedirect investment in Korea took off later and ona more reduced scale than in Taiwan.

A major turning point in Japanese investmentsinto the two economies came from the late 1960sthrough the 1970s. Behind this change were both“pull” and “push” factors. The “pull” factor wasthe fact that both economies had switched to ex-port-oriented industrialization policies, underwhich they sought industrialization through thepromotion of exports by attracting foreign com-panies. Specifically they set up “export process-ing zones” where foreign companies were allowedto establish 100 percent-owned units and weregranted preferential tariff treatment for the im-portation of parts and production facilities, butwere required to export the products they madethere. The first of the “push” factors was thatafter going through its period of high economicgrowth, Japan had lost its suitability as a locationfor labor-intensive industries as wages rose tomatch those of European countries. As a result,Japanese companies headed toward Korea andTaiwan, which then had cheap and ample labor,as well as to Singapore and Hong Kong. Thisgrouping was called the newly industrializedcountries (NICs) (they are now referred to as thenewly industrializing economies (NIEs)). The sec-ond “push” factor was undoubtedly the growingtrade friction between Japan and other advancedeconomies, which prompted Japanese companiesto search for bases from which to “detour” theirexports. These factors combined to push Japa-nese companies to establish exclusively export-oriented wholly-owned factories, mainly inlabor-intensive industries or processes such astextiles, electrical and electronics, and leather.

234 Japanese business in Korea and Taiwan

At first, this mode of industrialization was criti-cized as degrading Korea and Taiwan into meresubcontractors for Japanese companies and forultimately subordinating them to the Japaneseeconomy In reality however, the advance of Japa-nese firms and transfers of technologies from Ja-pan contributed to lifting the levels of bothtechnologies and income in the two economies.This then made possible the transfer of higherlevels of technologies from Japan, and in turn en-couraged the development in Japan of highervalue-added products. In summary a virtuouscycle was created where the advance of Japanesefirms and the accompanying technological trans-fer made possible and promoted the transfer ofhigher levels of technologies.

The second turning point came in the latterhalf of the 1980s. The rapid industrializationraised income levels in both Korea and Taiwan,bringing about broad democratization rangingfrom politics to intra-company organizations(though there were differences in that demandsfor democracy were more radical in Korea thanin Taiwan). This far-reaching democratization re-sulted in sharp rises in wages. At the same time,the two economies faced trade frictions with theUnited States, and were criticized for the per-ceived undervaluation of their currencies againstthe US dollar. Eventually Korea’s won and Tai-wan’s new Taiwan dollar were substantially re-valued vis-à-vis the US dollar. The sharp rises inwages and the revaluation of the currency ex-change rates prompted Korean and Taiwanesecompanies to invest in ASEAN (the Associationof Southeast Asian Nations) states, while Japa-nese companies also shifted their main exportbases to ASEAN countries, centering on Thai-land and Malaysia, and then to China in the1990s. This is not to say however, that Japanesedirect investment into Korea and Taiwan com-pletely dried up. While the value of new invest-ment did decline, the flow continued inqualitatively higher sectors. Thus, Japanese firmsmolded a relationship of intra-company divisionsof labor: the mass production of products withhigh value-added was done in Japan, the outputof mass-produced goods with low value-addedin ASEAN and China, and the production ofmany varieties of products in small lots in Koreaand Taiwan.

The wave of digitalization that swept throughelectronics and other industries in the latter halfof the 1990s dramatically altered the intra-com-pany divisions of labor in a short period of time.Japanese firms gained the ability to almost simul-taneously begin turning out nearly equivalent fin-ished products in Japan, ASEAN and China, thuslessening the importance of Korea, and of Tai-wan to a greater extent, as production bases. How-ever, a new, functional relationship ofintracompany divisions of labor is already beingdeveloped. This new relationship calls for Japanto focus on R&D activities and the production ofproducts with frequent model changes or highvalue-added products for the domestic market,for ASEAN and China to export volume-prod-ucts, and for plants in Taiwan, Singapore andother NIEs to serve as mother plants, providingtechnical support for plants in ASEAN andChina.

Specific features of management

The management styles of Japanese companiesin Korea and Taiwan share common institutionaland organizational formulas with Japanese do-mestic plants. They include low barriers separat-ing job categories, wage systems in which ratesare not determined by job categories, and the factthat responsibility for quality control is given tothe workers at manufacturing plants. The intro-duction of these organizational characteristics isa prerequisite for the building of versatile skills,coordination between divisions, and high opera-tional efficiency in areas where Japanese firmsare strong, such as quality control, production ofmany varieties of products, and parts inventorymanagement. The first reason the Japanese sys-tem has taken root in Korea and Taiwan is be-cause, unlike the other advanced industrializedeconomies such as the United States and Euro-pean nations, they had no established systems tohamper the introduction of the Japanese formu-las. Secondly they had certain similarities withJapan in organizational features and in the waythey dealt with workers, as exemplified by lowinstitutional barriers between job categories, andin their wage systems.

Another feature of the management of Japa-nese-affiliated firms in Korea and Taiwan is the

Japanese business in Korea and Taiwan 235

relatively high degree of localization of manage-ment. In comparison with subsidiaries in indus-trialized countries, they have lower ratios ofJapanese expatriates to total payrolls. In compari-son with subsidiaries in ASEAN and other hostcountries with similar ratios of Japanese expatri-ates, those in Korea and Taiwan have morelocallyrecruited top executives. Many of the firmsare joint ventures with local firms that themselveshave relatively long years of operations. But asthe same can be said about subsidiaries inASEAN, these factors alone cannot explain thelarger number of locally-recruited chief execu-tives. The more fundamental reason for thegreater localization of top management lies in theexistence of local managers in Korea and Taiwanwho have a deep understanding of Japanese man-agement style. This can be traced to the institu-tional, social and cultural similarities betweenKorea and Taiwan and Japan, including educa-tion. Also many local managers have a fluent com-mand of the Japanese language.

However, there are differences, which cannotbe neglected, between Japanese domestic plantsand those in Korea and Taiwan. The extent ofemployee participation in management issmaller, as seen in the lack of enthusiasm forsmall group activities. Therefore, regardless ofwhether the top management is led by Japaneseor local executives, subsidiaries there have astronger tendency toward top-down manage-ment than those in Japan. It can be said there aregaps between the formal introduction of theJapanese management style and the conditionsof its actual implementation. These gaps stem inpart from the higher separation rates (tendencyfor workers to quit their jobs) than in Japan andlarge promotion gaps based on educationalbackgrounds.

The differences between Korea and Taiwanare also important. The strong point ofJapaneseaffiliated plants in Korea is management’sability to achieve high productivity and high qual-ity levels while precisely observing the stipulatedwork and quality standards within relatively largeoperational organizations. In Taiwan, which com-pares unfavorably to Korea in quality and othermanagement abilities, there are subsidiaries thatexcel in the intermediate fields between hardwareand software, or in creating a wide range of added

value for products. Meanwhile, subsidiaries inKorea have a higher dependence than their coun-terparts in Taiwan on the procurement of partsfrom Japanese firms or Japanese parts makers op-erating in Korea, reflecting the weakness of sup-porting parts industries in Korea. In thelocalization of top executives, however, Korea hasan upper hand over Taiwan. One reason for thisis that the joint venture partners there are allmanufacturers, while in Taiwan the partners arequite often nonmanufacturers, such as distribu-tion firms. Another reason that cannot be over-looked is the greater intensity of anti-Japanesesentiments in Korea, a fact that is traceable todifferences in Japan’s colonial rule in the twoeconomies.

In the future, Japanese-affiliated plants in Ko-rea and Taiwan will have to increase the stabilityof core personnel and strive to narrow their gapswith Japanese plants in such areas as the acquisi-tion of versatile skills and coordination betweendivisions. At the same time, they need to selec-tively learn the advantages of local companiesaccruing from the local business climate. In Tai-wan, for example, subsidiaries need to introducea sharp-witted management style to enable themto promptly discover business areas with highearnings potential and to assemble products bygathering parts and components with high costperformance.

See also: Japanese investment patterns; Japanesemultinational enterprises; overseas production

Further reading

Itagaki, H. (ed.) (1997) The Japanese Production System:Hybrid Factories in East Asia, London: Macmillan.

Suehiro, A. (2000) Kyacchi-appu-gata kogyoka-ron: Ajiakeizai no kiseki to tenbou (Catch-Up Style Industrial-ization: Tracks and Prospects of Asian Economy),Tokyo: Nagoya Daigaku Shuppannkai.

Tokunaga, S., Nomura, M. and Hiramoto, A. (1991)Nihon kigyo/sekai sennryaku to jissenn: dennshi sangyo nogurobaru-ka to nihonn-teki keiei (World Strategy andPractices of Japanese Companies: Globalization ofthe Electronics Industry and Japanese-Style Man-agement), Tokyo: Dobunnkann.

HIROSHI ITAGAKI

236 Japanese business in Korea and Taiwan

Japanese business in Latin America

Japan has had a long history of doing business inLatin America. Japan’s relation with LatinAmerica dates back to the 1600s when tradersbrought goods from Spanish colonies to Japan.More than any other country other than the USA,Japan exerts political and economic leverage inthis region of the world through its substantialamounts of development assistance and interna-tional business (trade, joint ventures, subsidiar-ies and affiliates). This may be because LatinAmerica is rich in the natural resources that Japa-nese industry needs. An additional motive forclose ties between Japan and Latin America isthe benefit of foreign direct investment (FDI) inthe regions. Historically Latin America has hadcomparatively inexpensive labor, low overall pro-ductions costs, and lax environmental standards,and has provided a geographically proximateexport platform for delivering goods to NorthAmerica and Europe.

Hundreds of Japanese firms have been at-tracted to Latin America, especially to Colombiaand to Mexico’s US border cities. In addition,FDI in Latin America is a logical way to accessUS market as a result of the North AmericanFree Trade Agreement (NAFTA). AlthoughNAFTA involves only one Latin Americancountry—Mexico—along with the USA andCanada, it is expected that future modificationsto the agreement will incorporate other coun-tries in the region, most likely Argentina, Braziland Chile.

Within the context of modern trade relations,there has been an imbalance between Japan andLatin America. Japan has been seen as more im-portant to Latin America than the other wayaround. Eight percent of all Latin American ex-ports go to Japan. Conversely Japanese exportsto Latin America are relatively small, and aremainly in industrial goods. The most signifi-cant level of activity is in Japanese FDI in theregion.

Although Japanese firms have maintained apresence in the region since the early 1900s, Japa-nese FDI in Latin American grew most signifi-cantly during the decade of the 1980s, and has

dropped since then. In Brazil, for example, 86percent of current Japanese subsidiaries were es-tablished prior to 1990. Comparable figures holdfor Argentina and Mexico, where the rates were74 percent and 64 percent respectively.

Direct investment grew in the 1990s due tothe formation of the NAFTA andMERCOSUR economic alliances. The South-ern Common Market (MERCOSUR) was es-tablished in 1988 as a customs union betweenArgentina and Brazil. It subsequently expandedto include Uruguay Paraguay Bolivia and Chile.After its formation, MERCOSUR countriessaw an almost immediate increase in JapaneseFDI, particularly in the automotive, electricalappliance, communications equipment and foodprocessing industries. Not including Mexico,Japanese FDI in Latin America grew fromUS$3.628 billion in 1990 to US$5.231 billion by1994. Between 1993 and 1994 alone there was a55.2 percent increase in Japanese FDI.

The economies of Latin America plungedinto recession in 1998 and 1999. Most of coun-tries in the region saw initial signs of economicrecovery by the first quarter of 2000, when GDPgrew by 0.9 percent in Argentina, 3.1 percent inBrazil, 2.2 percent in Colombia, 5.5 percent inChile, 7.9 percent in Mexico and 8.5 percent inPeru. Latin American exports of goods and serv-ices rose in 1999. Despite these positive eco-nomic signs, Japanese exports to Latin Americafell 8.1 percent in 1999 to US$17.79 billion,mostly in transport equipment, electrical ma-chinery and general machinery. At the sametime, however, Japan’s imports from the regionrose to US$ 9.25 billion, an increase of 3.6 per-cent from 1998.

As Latin American economies continue togrow, and with the expansion of MERCOSURto include more countries in the near future, ana-lysts expect Japanese FDI to grow. In a similarvein, trade between Japan and the region is alsoexpected to increase.

See also: Japanese business in Mexico; Japanesebusiness in the USA

TERRI R.LITUCHY

Japanese business in Latin America 237

Japanese business in Mexico

Beginning in the early 1980s and extending overthe next twenty years, Japanese corporations havemade significant foreign direct investment (FDI)in Mexico. Mexico has often been seen as a geo-graphically convenient platform for the manu-facture and assembly of products destined for thelarge market of Mexico’s northern neighbor, theUSA. With the emergence in the 1990s of a grow-ing middle class and the establishment of a stablepolitical climate, in the twenty-firstst centuryMexico is becoming an attractive market in itsown right.

The primary attraction for Japanese foreigndirect investment (FDI) has been the opportu-nity to establish maquiladoras. These are factoriessituated in the US border region which manu-facture products for export to the US using pri-marily US parts and components that areassembled by Mexican workers. Matsushita,Sanyo, Sony and Hitachi were the first majorJapanese MNCs to establish maquiladoras in thisregion. They are also Tijuana’s largest privateemployers. Sony has over 6,400 employees, Sanyohas 5,000 and Matsushita has 4,000. Hundredsof other Japanese manufacturers and suppliersfollowed these firms not only into Baja Califor-nia, but also located throughout Mexico. InTijuana alone, there are over 515 Japanesemaquiladoras.

With the signing of the North American FreeTrade Agreement (NAFTA), Mexico has becomean even more attractive site for Japanese FDI.NAFTA created a customs union among Canada,Mexico and the USA. It called for steps to abol-ish tariffs for goods made in North America. Forproducts to be classified as “Made in NorthAmerica,” they must meet one of the followingcriteria: (1) produced using materials producedin North America; (2) changed in tariff classifica-tion in the process of production in NorthAmerica when using materials not produced inNorth America; or (3) achieve a certain level oflocal content even when not meeting condition2. In general, the local content level is 60 percent(when using the transaction price), or 62.5 per-cent for automobiles. In addition color televisionsets and some electronics must have key compo-nents made in North America and textiles must

have North American fibers. As many JapaneseMNCs already had manufacturing and assem-bly facilities in the USA, the effect of NAFTAwas to encourage them to maintain existingmanufacturing operations in the USA but to shiftassembly to plants in Mexico.

The Japanese experience in Mexico has notbeen without its problems. In addition to the usualchallenges of adjusting to different business prac-tices and business related cultural values, Japa-nese firms have struggled with crime, includingkidnapping and extortion. In 1997, for example,the president of Sanyo Video was kidnapped andheld for a $ 2 million ransom. In 1999, anotherJapanese executive was killed in a botchedcarjacking. In response to the growing problem,Sony Sanyo and several other major Japaneseemployers met with Mexican President ErnestoZedillo in the spring of 2000 to express their con-cern over safety and security issues.

Japanese firms have also taken measures torespond to crime in Mexico. Many Japanese ex-ecutives working along the US border area ofTijuana—San Diego live on the US side and re-ceive armed escorts to and from work in Tijuana.Additionally firms have hired their own plant se-curity staffs and worked with organizations suchas the Latino Peace Officers Association to con-duct in-house training on personal protection andsafety. Finally, it is well known that Denso choseMonterrey in the interior of the country as thesite for its automotive parts manufacturing facil-ity because it felt the area was safer than the USborder region.

See also: Japanese business in Latin America;Japanese business in the USA

Further reading

JETRO (various years) JETRO White Paper on Interna-tional Trade, Tokyo: Japan External Trade Organi-zation.

TERRI R.LITUCHY

Japanese business in Southeast Asia

While Japanese investment has flowed into South-east Asia for decades since the post-Second

238 Japanese business in Mexico

World War recovery, this FDI (foreign directinvestment) picked up considerably from the mid-1980s. With Japanese economic power on the risearound the world from the early 1980s, and withNorth American and European nations growingmore critical of Japanese economic power andinvestment in their countries, FDI from Japan wasincreasingly directed closer to home. Some havecharged this investment flow to Southeast Asiahas been an attempt by Japan to build a self-sus-taining Asian centered economy with Japan inthe powerful center. The immediate stimulus forthe increased flow of FDI into Southeast Asia,however, was the rapid rise of the yen comparedto other world currencies after the Plaza Accordin 1985. Japanese goods quickly became moreexpensive around the world and to cut costs manyJapanese corporations began seeking cheaper la-bor in Southeast Asia. Some authors argue thatit was this influx of Japanese investment whichbegan the economic boom in many SoutheastAsian nations. But it must also be recognized thatmany countries in Southeast Asia had alreadyentered boom years from the early to middle1980s, leading Japanese firms to implement strat-egies to tap into the expanding consumer mar-kets of Southeast Asia. For example, the sale ofautomobiles in Thailand was increasing at a rateof 30 percent or more annually during the late1980s and early 1990s, leading all of the majorauto companies in Japan to set up plants to buildand then distribute automobiles in Thailand. Bythe mid-1990s Japanese auto firms accounted forsome 90 percent of all autos made or sold inThailand.

During the mid-1990s, Japan accounted formore FDI than any other country in each of theindustrializing countries of Southeast Asia exceptone, the Philippines, a former colony of theUnited States and still dominated by FDI fromthe USA. Japan accounted for just over 20 per-cent of FDI in Indonesia, 32 percent in Malaysia,23 percent in Singapore, 29 percent in Taiwan,and 34 percent in Thailand. With doi moi (eco-nomic liberalization) in Vietnam from the late1980s, Japan has been moving investments intoVietnam as well. In many of these countries theJapanese economic presence seems even greaterbecause of the concentration of Japanese plantsin huge industrial parks around the main cities.

Of the many large industrial parks around Thai-land, for example, more than half of the hun-dreds of factories display the corporate logo ofJapanese firms. As of 1999 the Japanese Cham-ber of Commerce in Thailand listed 1,166 Japa-nese firms with operations in Thailand. And whileVietnam is far behind other Southeast Asiancountries such as Thailand, Malaysia, and Indo-nesia in establishing such industrial parks, it hasalso begun to establish them. During 1995, FDIfrom Japan to Vietnam exceeded the $ 1 billionmark, with much going to facilities in new indus-trial parks around Hanoi and Ho Chi Minh CityJapan remains behind South Korea and Taiwanin terms of FDI in Vietnam, but is gaining onboth countries.

The most “troubled” countries of SoutheastAsia, particularly Cambodia, Laos, and Burma(Myanmar), have received very little FDI fromJapan, or any other country for that matter. Therehas been discussion of Japanese investment inLaos, but little action, especially since the Asianeconomic crisis of 1997 reduced costs in other,more attractive Southeast Asian countries andtook away economic incentives to move invest-ments to even lower cost countries in the region.The change in economic incentives can be easilyseen in the history of the Thai baht. Before July1997 the Thai baht was pegged at around 25 bahtto 1 US dollar, falling to 55 baht to 1 US dollarsix months after the Asian economic crisis hit(see economic crisis in Asia), then stabilizing atjust under 40 baht to the dollar through the fallof 2000.

The Asian economic crisis of 1997, as mightbe expected, slowed the movement of JapaneseFDI into Southeast Asia, and even led to steepdrops in investments. By the end of the twenti-eth century most nations in the region haveshown significant recovery from the crisis andJapanese FDI in the region has begun to pick up.However, concerns about the strength of theSoutheast Asian recovery remain, particularlybecause many of the needed reforms, especiallyin Southeast Asian financial institutions, and howlong it can be sustained. Southeast Asian nationshave lost export share to rich countries such asthe United States because countries such as Chinaand Mexico have increased their exports signifi-cantly since the Asian economic crisis of 1997.

Japanese business in Southeast Asia 239

Thus, FDI in Southeast Asian nations remainsbelow pre-1997 levels both in terms of actual dol-lar amounts (over $ 20 billion for 1997 but lessthat $14 billion for 1999) and in share of world-wide foreign direct investment.

Labor relations

Labor relations for Japanese corporations inSoutheast Asia are reported to be generally good,despite the negative view of the Japanese in manyof these countries because of the Second WorldWar. Studies report there is very little labor unionrepresentation in Japanese corporations aroundSoutheast Asia, but in none of these countrieshave labor unions been allowed to grow verystrong by governments in the region. While thereare reports in the mass media of exploitation ofSoutheast Asian workers by American and Japa-nese corporations, it is important to note that thelarger and well-known corporations from theUnited States and Japan generally provide higherwages and better benefits than do domestic cor-porations in each of the countries in SoutheastAsia. These wages and benefits are certainly lowcompared to standards in North America, Eu-rope, or Japan, but certainly not by SoutheastAsian standards. There are foreign corporationspaying poverty or below poverty wages in South-east Asia, but these tend to be small foreign firmsable to hide from negative attention or corpora-tions such as Nike that work mainly with smalllocal companies to out-source their production.One large study of major American and Japa-nese corporations in Thailand, for example,showed firms from both countries to have com-paratively high levels of work satisfaction amongThai employees, and these employees claimedthat wages and benefits were above those of Thaicorporations.

In most of the major Southeast Asian coun-tries where studies have been conducted, how-ever, there are some common complaints directedtoward Japanese corporations and their manag-ers, especially by the local white collar and man-agement employees. As in other countries aroundthe world, Japanese executives are known for theirlack of trust in foreign employees. Compared tocorporations from other nations, Japanese cor-porations send more executives to oversee op-

erations in Southeast Asian nations and hire fewerlocal employees for top positions in the local op-erations. Japanese transplant corporations inSoutheast Asia as elsewhere in the world, havebeen found to promote fewer local managers totop positions than transplants from other coun-tries, and in Southeast Asia the percentage of Japa-nese executives per corporation was actuallyincreasing through the 1990s. Studies documentcomplaints that Japanese managers, compared tomanagers from North America and Europe, donot allow their local managers to become involvedin decision making, and some Japanese execu-tives have even admitted to having secret meet-ings of Japanese only managers for decisionmaking. Not surprisingly studies of Japanese cor-porations in Southeast Asia have found local em-ployees stating they feel a lack of trust on thepart of the Japanese executives. Further, whileThai employees of Japanese corporations reportthat wages and benefits are above local levels,they also state they prefer working for Americanrather than Japanese corporations for the abovereasons.

Japanese management styles

One of the most interesting issues related to Japa-nese transplant corporations in Southeast Asia isthe extent to which famous Japanese managementtechniques such as quality control circles, rota-tion of workers, and kaizen are put into effect byJapanese corporations in the region. Studies ofJapanese transplants in North America and Eu-rope report that individualistic oriented Westernemployees require that Japanese transplants altertheir typical management styles and work orga-nization. The common assumption, however, isthat Japanese transplants in East and SoutheastAsia would be more likely to follow traditionalJapanese management styles and work organiza-tion given “common Asian values.” There is someresearch on this issue, but far more is needed toarrive at firm conclusions. The little research thatexists remains somewhat contradictory Some re-port success for Japanese corporations in usingtheir traditional management styles and work or-ganization. This seems to be the case more oftenin the auto industry The large Toyota plant inthe Bangkok area of Thailand, for example, is

240 Japanese business in Southeast Asia

the second most productive and efficiently runToyota plant in the world. Interviews in Toyotaplants in Thailand find both Japanese and Thaimanagement claiming to fully implement thework organization of the home factories in Ja-pan. But other studies indicate more mixed re-sults, with many Japanese firms admitting theyhave given up trying to implement Japanese workorganization with Southeast Asian employees.

It seems most likely the success of Japanesemanagement styles and work organization inSoutheast Asia is affected by type of industry andvaries by the nation where Japanese transplantcorporations are in operation. Contrary to popu-lar assumption, there is considerable cultural vari-ation within Southeast Asia, and most likely morecultural variation than can be found across NorthAmerica and Europe. Vietnam, for example, de-spite the years of communism, remains moreConfucian, with high respect for authority andgroup cooperation, while the Thais are noted fortheir greater individualism and independence inthe work place. The Thai corporation is usuallydescribed as authoritarian and dominated fromthe top much like an old feudal domain. How-ever, while Thai employees are expected to deferto superiors as would be expected in Asiancollectivist societies, Thai employees are notedfor their lack of loyalty jumping from employerto employer in a rather un-Japanese fashion. Withthe rich mixture of cultural variation throughoutSoutheast Asia, we find an interesting opportu-nity for research on the effects of culture and dif-ferences in social organization in the cross-culturalwork place.

Further reading

Dobson, W. and Yue, C.S. (eds) (1997) Multinationalsand East Asian Integration, Singapore: Institute ofSoutheast Asian Studies.

Elger, T. and Smith, C. (eds) (1994) Globalization Ja-pan: The Transnational Transformation of the Labour Pro-cess, London: Routledge.

Hatch, W. and Yamamura, K. (1996) Asia in Japan’sEmbrace: Building a Regional Production Alliance, Cam-bridge: Cambridge University Press.

Kerbo, H. and Slagter, R. (2000) “The Asian EconomicCrisis and Decline of Japanese Economic Leader-ship in Asia,” in F.-J.Richter (ed.), The Asian Eco-

nomic Catharsis: How Asian Firms Bounce Back FromCrisis., Westport, CT: Quorum Books, 33–54.

——(2000) “Thailand, Japan and the East Asian Devel-opment Model: The Asian Economic Crisis inWorld System Perspective,” in F.-J. Richter (ed.), TheEast Asian Development Model: Economic Growth, Insti-tutional Failure and the Aftermath of the Crisis, London:Macmillan, 119–40.

Slagter, R. and Kerbo, K. (2000) Modern Thailand, NewYork: McGraw-Hill.

HAROLD KERBO

Japanese business in the MiddleEast

Japan’s exports to the Middle East (includingNorth Africa) were $12.2 billion dollars in 1999,which accounted for 2.9 percent of Japan’s totalexports. About 80 percent of exports to theMiddle East were machinery. Transport machin-ery electric machinery and industrial machineryaccount for 46 percent, 13 percent and 19 per-cent, respectively Oil-exporting countries wereJapan’s main export markets in the Middle East,accounting for about 70 percent of total exports.Saudi Arabia was the largest market (27 percent)and UAE was the second (21 percent). Exportsto non-oil exporters (excluding Israel) are usu-ally affected by the oil producers’ economic situ-ations, which are influenced by oil prices.

Japan’s imports from the Middle East were$31,261 million in 1999, which accounted for 10.1percent of total imports. Most of the imports weremineral fuel, mainly crude oil.

Japan’s direct investments to the Middle Easthave been absolutely small and unstable com-pared with its economic size. The amount of Ja-pan’s direct investments to the Middle Eastaccounted for only 1.6 percent of the world totalin 1998. According to a research by the OrientalEconomist, only about seventy Japanese compa-nies were operating in the six Persian Gulf coun-tries (Saudi Arabia, Kuwait, United ArabEmirates, Bahrain, Iran and Oman) in 2000.About one-third of these firms are trading com-panies. The others are electric machine compa-nies, electronic parts companies, industrialmachine companies, construction and engineer-ing companies and so forth. For the most part,

Japanese business in the Middle East 241

these companies consist solely as sales or serv-ice/maintenance companies.

Saudi Arabia

Japan’s exports to Saudi Arabia amounted to$3.97 billion and imports $7.1 billion in 1998.Transport machinery accounted for 69 percentof total exports, and industrial machinery elec-tric machinery and steel products 11 percent to13 percent respectively. Mineral fuel such ascrude oil accounted for 96 percent of total im-ports. Saudi Arabia is the second largest mineralfuel supplier to Japan. Although it is also a mainsupplier of chemical products such as ethyleneglycol, styrene and methanol, its share of im-ports is only 3 percent of Japan’s total. Construc-tion and engineering companies represent thelargest number of Japanese firms in SaudiArabia. There are also local subsidiaries ofmanufacturing firms, but their activities aremainly in sales and service.

In the early 1980s, manufacturing companiessuch as National Pipe Co. (steel pipe), SaudiMethanol Co. (methanol), and Eastern Petro-chemical Co. (Petrochemical) were founded aslarge Japanese companies attempted to secure aSaudi market that appeared to be expanding in-definitely However, investment activities havebeen stagnant since the mid-1980s owing to along-lasting recession.

A chronic unemployment problem amongyoung people has continued to be a serious issuein Saudi Arabia since the latter half of the 1980s.In an effort to ameliorate this problem, Saudi gov-ernment and business circles have asked that Ja-pan increase investments in Saudi non-oil sectors.In turn, the Japanese government asked JapanExternal Trade Organization (JETRO) andother government affiliates to find potential in-vestment projects, which resulted in the founda-tion of several joint venture companies such asthe Saudi Arabian-Japanese Pharmaceutical Co.(medicine), the Red Sea Prawn (aquaculture) andseveral joint venture agreements in the fields offirebricks, printing ink and textile goods. Despiteall of these Japanese efforts, the Saudis have com-plained about the low level of investments by Japa-nese companies and this may have resulted in

the expiry of Arabian Oil’s oil concession in theSaudi part of the Neutral Zone.

United Arab Emirates

Japan’s exports to the United Arab Emiratesamounted to $ 1.9 billion and imports were $8.7billion in 1999. Transport machinery accountedfor 38 percent of total exports and machinery intotal was 74 percent. Mineral fuel such as crudeoil accounted for 98 percent of total imports. TheUAE is the largest supplier of crude oil and liq-uefied petroleum gas to Japan. More Japaneselocal affiliates are located in the UAE than in anyother country in the Persian Gulf region. Elec-tric/ electronic machinery manufacturers, indus-trial machinery manufacturers, automotivemanufacturers and transport/distribution compa-nies have UAE-based affiliates, which handlesales, transport, and distribution activitiesthroughout the Gulf area via Dubai.

Iran

Japan’s exports to Iran amounted to $576 mil-lion and imports $3.1 billion in 1999. Transportmachinery industrial machinery and metal prod-ucts accounted for 20 percent to 25 percent oftotal exports respectively Mineral fuel, mainlycrude oil, accounted for 97 percent of total im-ports. Iran is Japan’s third largest mineral crudeoil supplier. The Iran-Japan Petrochemical jointventure (IJPG) was founded in 1973. Shortlythereafter, Japanese companies (including me-dium-size companies) undertook investment inIran throughout the 1970s. After the IranianRevolution in 1979, the situation changed owingto widespread political and socio-economic con-fusion. Japanese participants withdrew from theIJPC and Japanese investments to Iran decreaseddrastically.

The Iranian government, in principle, did notapprove any new entry of foreign capital untilthe Rafsanjani administration adjusted foreignpolicies, increasing Iran’s openness toward newinvestment. As policies became more positiveIran also enacted the Free Zone Act, whichgranted special tax and investment breaks to for-eign companies in special processing zones. The

242 Japanese business in the Middle East

government subsequently introduced a bill oninward foreign direct invest ment but it stalled inthe face of strong resistance by religious con-servatives.

Rafsanjani and the current president,Mohammad Khatami, are positive about the ac-ceptance of official development aid (ODA). Inresponse to Iranian requests, the Japanese gov-ernment has granted yen loans to support hy-droelectric projects and other infrastructuredevelopment initiatives. Although the US gov-ernment has imposed sanctions on Iran, the Japa-nese government believes that aid will help easethe Iranian government’s entry back into theworld community During President Khatami’svisit to Japan in November 2000, both govern-ments agreed on economic cooperation plans inseveral areas, including oil development projectsand petrochemical projects.

Most Japanese local affiliates in Iran are trad-ing companies at present. Recent reports are thatKobe Steel has undertaken a feasibility study onthe building of a steel mill in a “free zone,” whichmay be a sign that Japanese firms have started toresume investment in Iran.

TETSUYA IWASAKI

Japanese business in the UK

Although most attention has been paid to therapid increase in Japanese manufacturing invest-ment in the UK since the 1980s, Japanese com-panies have had a presence in the UK since thelate nineteenth century. Furthermore, the bulkof investment activity both then and now,has been in the service sector (particularly finan-cial services), rather than the manufacturing sec-tor.

Undoubtedly much of the recent investmentin manufacturing was due to Japanese compa-nies wishing to gain a foothold inside the singleEuropean market in a way that would avoid fur-ther tariff impositions and anti-dumping actionsagainst them. The UK has attracted the majorportion of this kind of Japanese investment overthe past two decades, but it is debatable whetherthis trend will continue. Japanese companies havebeen expressing concern over the high sterlingexchange rate, following the UK’s refusal to join

the first wave of euro membership and uncertainprospects for its future membership.

Statistical overview

US firms are still the largest foreign employersof UK labor but Japanese foreign direct invest-ment in the UK since the 1980s showed fastestgrowth rate of any country increasing fivefoldfrom 1987 to 1996 and reaching an annual totalof $9.79 billion in 1998. Conversely investmentby British companies in Japan has rarely reachedeven 10 percent of this level.

Over 280 Japanese companies have investedin manufacturing in the UK, accounting for morethan 40 percent of Japanese total investment inthe European Union, with 65,000 associated jobs(Japan External Trade Organization in 1997claimed 100,000 jobs or 2.5 percent of the Brit-ish manufacturing labor force derive from Japa-nese affiliates in the UK). Individual investmentshave become more capital intensive over the1980s and 1990s, however, and the average em-ployment per firm has shrunk. Total real fixedassets reached just under £4 billion by 1996. Ofincreasing importance is the investment by Japa-nese companies in R&D in the UK; there are nowover 150 such operations by Japanese companies.

Reasons for investing in the UK

The reasons most cited for Japanese companiesfavoring a UK location over other countries inthe European Union are the English language,the size of the UK market, low direct labor costs,good employment relations, high-qualityworkforce, political and economic stability solidinfrastructure and legal system, well-establishedparts industries, stable local financing and lowcorporate taxes. There are also less openly cited,but influential factors such as the Japanese inter-est in British culture (including golf and whisky)and the long-standing historical ties between Ja-pan and the UK.

Many of these advantages were emphasizedby the Conservative government which came topower in 1979 and showed a very welcoming at-titude towards Japanese investment in the 1980s,which has continued with successive governmentsin the 1990s. The Conservative government’s

Japanese business in the UK 243

restructuring of the British economy led to highlylocalized pockets of skilled manual unemploy-ment and trades unions which were only ashadow of their former militant selves. Gener-ous regional grants, the above-mentioned Japa-nese strategy of setting up operations in the EUand other factors favorable to the UK led to thenice coincidence of Japanese plants being set upin areas of Britain with strong historical ties toJapan.

Nissan’s opening of a £350m greenfield carplant in Sunderland in 1986, near to where shipshad been built for Japan since the mid-nineteenthcentury was a catalyst for other Japanese manu-facturers to set up nearby. Another cluster devel-oped in Wales following Sony’s 1973 investmentin television manufacturing in Bridgend. Othermajor investments have included Toyota’s £700mcar plant in Derbyshire, which was opened in1992, Honda’s £300m car plant in Swindon andFujitsu’s £400m semiconductor facility in theNortheast.

Japanization of British industry

The establishment of these plants in areas of highunemployment partly explains the high degreeof attention paid to them by the British mediaand academia, relative to investments by otherforeign companies. The other noteworthy featurewas that they were concentrated in relatively fewsectors, either ones in which the UK had lostany preeminence, such as automobile manufac-ture, or sectors where Japan had become fa-mously strong, such as semiconductors andelectronics. Japanese companies brought theirmanufacturing and human resource managementtechniques with them to the UK, with resultantsuccesses such as Nissan’s plant in Sunderland,which is now widely seen as being the most effi-cient car manufacturing operation in Europe.

There was therefore a strong sense that Brit-ish management and manufacturing could learnfrom Japan, either to revive failing industries orto enter the new high technology sectors. Muchdebate amongst academia, the private sector andthe government ensued from the late 1980s intothe 1990s, about the degree and desirability of“Japanization” in British industry Concepts suchas just-in-time, kaizen, kanban, total quality con-

trol, flexible working, enterprise unions and soforth were introduced into British-owned facto-ries, with varying degrees of success and sincer-ity.

Service sector investment

Japanese service sector companies established op-erations in the UK a good century before Japa-nese manufacturers arrived. Japanese sailorsstarted settling in London and the Northeast, andJapanese marine engineers arrived on extendedstudy tours from the 1860s onwards, often set-ting up trading companies or boarding houses.The first major Japanese company to start opera-tions in the UK was probably Okura, a Japanesemerchant house, which established a London of-fice in the early 1870s. Over the next two de-cades other commercial companies such asMitsui, Takata, Tokio Marine Insurance Com-pany the Nippon Yusen shipping company andthe Yokohama Specie Bank all opened operationsin London to support Japan’s attempt to regaincommercial rights over its exports such as rice,silk, and tea.

These firms faced a struggle to survive, how-ever, until the First World War, when many moreJapanese companies arrived in London. Theywere aiming to take advantage of Japan’s limitedinvolvement in the war on the Allied side by mak-ing up the shortfall of European products avail-able worldwide. Trading companies such asSuzuki and Furukawa were also tempted by theshortages of wartime necessities such as steel, andbegan speculating in scrap. Few purely specula-tive ventures survived the end of the war, the1920 recession in Japan, the 1923 Kanto Earth-quake and the 1927 Japanese financial crisis. Con-sequently the number of Japanese companies inLondon began to decline in the 1920s.

Those London offices that survived, such asthose of the trading houses Mitsui andMitsubishi, began to evolve into regional head-quarters, using London’s status as a world com-modity trading center to coordinate the exportof raw materials to Japan, as well as importingitems into Europe such as canned fish and oilsfrom Japan’s colonies in Asia. This role contin-ued after the Second World War until the boomin Japanese manufacturing investment in Europe

244 Japanese business in the UK

and the consolidation of the City of London as aworld financial capital in the 1970s and 1980sbrought a second wave of Japanese financial com-panies to London.

Japanese banks and securities houses had adramatic impact on the City, buying prime Lon-don real estate at the height of the boom in thelate 1980s and paying extravagant salaries andbonuses to their locally hired staff. Japan’s eco-nomic problems in the 1990s, particularly thecollapse of several banks towards the end of thedecade, have brought about a withdrawal or con-traction of London operations. At the same time,many of the persistent issues surrounding themanagement of Japanese overseas operationswere once more uncovered, in a series of sex andracial discrimination cases and other incidentspointing to a lack of risk management and locali-zation.

The future of Japanese companies in the UK

Unless London loses its status as a world finan-cial centre, it is unlikely that there will be anyfurther significant decline in Japanese commer-cial and financial companies operating in Lon-don. Of more concern to the British governmentis the impact that the UK’s non-membership ofthe euro, the high sterling exchange rate relativeto the euro and uncertainty over the UK’s futureposition inside the European Union will have onJapanese manufacturers. Japanese manufacturersmay relocate British operations in Eastern Eu-rope or Asia, or choose such locations for anynew investments. The signs are mixed: Fujitsuclosed its semiconductor factory in Durham in1999, but this was as much due to the world-wide slump in semiconductor prices as any localdisadvantages. Mitsubishi Electric closed its tele-vision factory in Scotland in 1998, but is increas-ing European investment in mobile phones. TheUK government claims the number of JapaneseUK-based investment projects increased 15 per-cent from 1999 to 2000. The future of the NissanSunderland plant is in question now that Renaulthas a strong say in Nissan’s European produc-tion, following Renault’s purchase of a 36.8 per-cent stake in Nissan in 2000. Clearly factors suchas links to continental Europe (both transporta-tion and commercial/political) as well as the avail-

ability and cost of a highly educated and skilledworkforce to support new, higher value-addedproduction are going to be critical in maintainingthe UK’s position as main recipient of Japanesemanufacturing investment in the EU.

Further reading

Aaron, C. (1999) The Political Economy of Japanese ForeignDirect Investment in the UK and US: Multinationals,Subnational Regions and the Investment Location, Lon-don: Macmillan.

Conte Helm, M. (1989) Japan and the North East of En-gland from 1862 to the Present Day, London: TheAthlone Press.

Morris, J., Munday M. and Wilkinson, B. (1993) Work-ing for the Japanese: The Economic and Social Consequencesof Japanese Investment in Wales, London: The AthlonePress.

Newall, P. (1996) Japan and the City of London, London:The Athlone Press.

Oliver, N. and Wilkinson, B. (1992) The Japanization ofBritish Industry: New Developments in the 1990s., 2ndedn, Oxford: Blackwell.

Warner, F. (1991) Anglo-Japanese Financial Relations: AGolden Tide, Oxford: Blackwell.

PERNILLE RUDLIN

Japanese business in the USA

Japan and the United States have had a long anddifficult history of trade and foreign direct in-vestment. According to the Japanese ExternalTrade Organization (JETRO), economic andtrade relations between the USA and Japan havebeen calm since the auto trade agreementreached in 1995. However, the Asian financialcrisis in 1997 caused the US once again to beconcerned over the growing size of its trade defi-cit with Japan.

Beginning in the late 1980s and into the early1990s, a large number of Japanese firms set-upproduction facilities in the United States. These“transplants,” especially in the automotive in-dustry were sometimes seen as a way for Japanto work around the Voluntary’ import quotas onauto exports, while others see Japanese manu-facturing plants as jobs for Americans. By 1990,there were over 300,000 Americans working in

Japanese business in the USA 245

Japanese businesses in the USA. Japanese FDIexceeded $50 billion. Many of the largest, well-known Japanese firms have manufacturing facili-ties in the United States, including companiessuch as Sony, Epson, Mitsubishi, NEC, Toyota,Nissan, Isuzu, Mazda and Sanyo. There weremore than 600 Japanese businesses in Californiaalone in 1990.

As a result of this dramatic growth in the Japa-nese presence, many Americans were concernedwith Japanese takeovers of US companies, tech-nology and real estate. Sensitive to this concern,several Japanese companies formed joint ven-tures to break into the US market, such asspecialty steel manufacturers.

At the same time that one segment of the USpopulation was concerned about rising Japaneseinvestment, another segment was actively court-ing Japanese joint ventures and strategic alliances.In the high-technology area, many small US ven-ture firms struggling to attract US venture capi-tal were happy to get capital from Japanese firmsinstead. In return, Japanese firms obtained access,to and control of, cutting-edge technologies andprocesses. Japanese firms acquired four banks andseveral large pieces of California real estate. Intwo of the most visible acquisitions, Sony pur-chased Columbia and Matsushita bought Uni-versal Studios. Some people feared that Japan wastaking over the United States. The concern wasshort-lived, as the bursting of the bubbleeconomy forced many Japanese companies to selloff their US holdings.

Despite the economic recession in Japan, theUS trade deficit with Japan grew 14.7 percentfrom 1998 to 1999, reaching US$73.4 billion.Japan imports decreased due to the slow pace ofits economic recovery while exports increased dueto a booming economy in the USA. Japan’s FDI(foreign direct investment) in the USA has beendecreasing from 53.3 percent (126,128 million)in 1990 to 34.5 percent (| 17,331 million) in 1994.In other words, investment from Japan accountedfor 38.7 percent of all FDI received in 1990 anddropped to 12.9 percent in 1994.

Around this same time, in the automotive in-dustry Japanese firms developed relationshipswith American automotive manufacturers andsuppliers and related fields such as hardware andsoftware, thereby creating more jobs as well as

procurement of local (American) parts. In addi-tion to transferring manufacturing plants, theJapanese firms have transferred management andtechnological know-how. Joint research and de-velopment as well as cooperative sales programshave grown as a result of these relationships.

In the electronics industry, the USA has ledin innovation and entrepreneurship while Japa-nese firms have led in quality and overall com-petitiveness. These complementary competencieshave led to joint ventures in manufacturing aswell as research and development. Similar ar-rangements have been developed in the chemi-cal industry and pharmaceuticals industry.These relationships have been beneficial to firmson both sides of the Pacific. Banks and the USgovernment have both strengthened the relation-ship between Japanese companies located in theUS and local firms. In addition to the federal gov-ernment, particularly the Department of Com-merce, many US states have offices in Japan topromote trade, including California, Georgia, Il-linois, Kentucky North Carolina, Tennessee,Oregon and Washington

Japanese investment has not been without itscritics. While providing in excess of 300,000 jobs,observers note that there were no Americans intop management positions in these firms. Moreo-ver, at most of companies there were communi-cation problems, in some cases quite severe. MostJapanese managers have limited English skills,while only 10 percent of the American employ-ees speak Japanese at any level of fluency In re-cent years the number of local employees able tocommunicate in Japanese has been on the rise.

Japanese managers, although they usually onlyremained in the United States for from three tofive years, brought Japanese management tech-niques with them. Decision making by consen-sus, life-time employment, and other practiceswidely used in Japan appeared to work for theJapanese but often the Americans felt left out.For example, many American employees lackedany knowledge of their firm’s mission statement.Most Japanese firms in the United States try toduplicate the Japanese model of management, butthis is not always possible, due to differences inculture and values.

Japanese companies of all sizes and all indus-tries are doing business in the United States. In

246 Japanese business in the USA

1972, the Maruchan division of Toyo SuisanKaisha opened its first instant ramen productionfacility in the United States; by 1997 it had threefactories. In 1991 there were 1,563 Japanesemanufacturing plants in the USA employing over300, 600 employees. By 1996, the number ofplants had increased to 1,709.

See also: overseas education; overseas researchand development; trade barriers; trade negotia-tions

Further reading

Laurie, D. (1990) “Yankee Samurai and the Produc-tivity of Japanese Firms in the United States,” Na-tional Productivity Review 9:131–9.

TERRI R.LITUCHY

Japanese Industrial Standards

Japanese Industrial Standards (JIS) refer to tech-nical standards established for the purpose ofimproving the quality of industrial and mineralproducts and for facilitating their efficient pro-duction, distribution, and usage. Similar to ANSIin the USA or BS in the UK, JIS are voluntarynational standards that are established or revisedon the basis of a consensus between producers,consumers and related parties. JIS and other stan-dardization efforts at the national, industry andcompany level are credited with making signifi-cant contributions to Japan’s successes in qualityand productivity improvement. At the same time,some technical standards have been viewed asnon-tariff trade barriers by foreign companies.

At the end of 2000, there were 8,764 JapaneseIndustrial Standards in force, which reflected ac-tivity during the year of 621 newly establishedstandards, 464 revised standards, and 309 with-drawn standards. While JIS are classified intonineteen different technical areas ranging fromcivil engineering and architecture to managementsystems, they fall into three major types: (1) ba-sic standards which specify terminology symbols,units, etc. (roughly 30 percent of all JIS); (2)method standards which specify procedures fortesting, analysis, inspection, measurement, etc. (20percent); and (3) product standards which specify

the shape, dimension, function, and so forth, ofproducts (50 percent). Two JIS of particular noteare the JIS Q 9000 series and JIS Q, 14000 seris,which are the identical Japanese equivalents ofthe ISO 9000 and ISO 14000 international stand-ards for quality management and environmen-tal management systems.

Organizations with responsibilities for JIS in-clude the Japanese Industrial Standards Commit-tee (JISC; see www.jisc.org) and the JapaneseStandards Association (JSA; see www.jsa.or.jp).Based on the Industrial Standardization Law origi-nally passed in 1949, these two bodies work to-gether to establish and promote JIS. JISC isaffiliated with the Ministry of Economics, Tradeand Industry (formerly MITI) and serves as thenational standards body with membership in theInternational Organization for Standardization(ISO) and the International ElectrotechnicalCommission (IEC). Among other things, JISChas responsibility for deliberating and approvingdraft standards that have been submitted to it.Initial drafting of most standards is done by in-dustry and trade associations, with a smallnumber done by consumerist groups and gov-ernment entities. JSA’s responsibilities include fa-cilitating the creation of draft standards andpublishing and disseminating approved JIS, aswell as promoting standardization and qualitymanagement activities in Japanese industry

Certain designated products meeting the rel-evant JIS standards may be authorized to dis-play the mark, based upon an examination of theproduct prototype and the production facility in-volved. As of March 1999, the number of certifi-cations for JIS marks were 14,976 domesticallyand 354 in foreign countries. Other product cer-tification and marking schemes in Japan includethe JAS (Japanese Agricultural Standards) markfor agricultural and forestry products, as well asthe S mark and SG mark for product safety.

See also: standard setting

Further reading

Japanese Industrial Standards Committee (1991) In-dustrial Standardization in Japan, Tokyo: JISC.

Japanese Standards Association (2000) JIS Yearbook,Tokyo: JSA.

Japanese Industrial Standards 247

Krislov, S. (1997) How Nations Choose Product Standardsand Standards Change Nations, Pittsburgh, PA: Uni-versity of Pittsburgh Press.

McIntyre, J.R. (ed.) (1997) Japan’s Technical Standards:Implications for Global Trade and Competitiveness,Westport, CT: Quorum Books.

SHANE J.SCHVANEVELDT

Japanese investment patterns

For many years, Japanese foreign direct invest-ment (FDI) consisted mainly of investment thatwas related to Japan’s worldwide trading activi-ties, at manufacturing industries in Asia and atresource development. In the 1980s, however, amajor shift occurred in these investment patternsas the Japanese manufacturing industry changedits strategy from exports to local productionwithin the industrially advanced countries. Non-manufacturing industries such as finance andinsurance also began to energetically pursue FDI.In examining the stages and changes in invest-ment patterns of Japanese FDI, it is helpful toclassify this development into four periods: pre-war expansion, postwar economic recoverythrough the 1960s, strategic changes in the 1970sand 1980s, and finally globalized managementin the 1990s. Furthermore, since Japanese FDI isregulated by the Japanese Foreign Exchange andForeign Trade Control Law (FEFTCL), the FDIincludes the acquisition of foreign securities re-flecting 10 percent or more of stock or investedcapital, the establishments of branch offices orfactories and the period of investment exceedsone year.

Before the Second World War: investmentrelated to trade and colonies

There was a rapid surge in Japanese FDI in the1980s, in fact the roots of Japanese investmentoverseas date back to before the Second WorldWar. Most of this pre-war investment was relatedto trade and it was largely in the four areas oftrade, banking, insurance, and shipping. The sogoshosha acted as middlemen, facilitating exports andimports, as well as the transfer of technology (im-porting factories, creating licensing agreements,introducing investment opportunities in Japan)

and as collectors and providers of news and in-formation about foreign markets and societies.Banks provided the financial support necessaryfor Japan’s foreign trade. The insurance indus-try helped to absorb the risks associated withocean transport and of course, the marine ship-ping industry carried manufactured products andraw materials back and forth between Japan andits trading partners. The earliest of the sogo shoshato venture abroad was Mitsui & Co., Ltd. Itopened a branch office in Shanghai in 1877, fol-lowed by one in Paris in 1878 and then in NewYork in 1879.

In the period between the First and SecondWorld Wars, direct investment expanded in theJapanese colonies in Manchuria, China, on theKorean Peninsula, and in Taiwan as well as inthose regions under the general sphere of influ-ence of the Japanese Imperial Army In all of theseareas, investment was directed not only at thoseindustries specifically engaged in trade, but alsoat the railroad, mining, and manufacturing in-dustries. During and following the Second WorldWar, Japan lost its overseas foreign assets, themajority of which were located in Asia, after theywere either frozen or seized.

From the Second World War until the 1960s:resumption

The second period in the development of Japan’sFDI was from the end of the Second World Waruntil the 1960s. The Japanese government be-gan to regulate FDI when it enacted the ForeignExchange and Foreign Trade Control Law in1949. In the beginning, the Ministry of Financereviewed applications for FDI on an individualbasis, granting permission in those cases whereit felt that there was a positive impact on Japan’sbalance of payments as well as clear merit for theeconomic benefit of the Japanese people. Duringthis period, FDI patterns were essentially the sameas before the war. In other words, those indus-tries which contributed to the promotion of trade,namely sogo shosha and banks, became the majorrecipients of investment, which was applied toregions throughout the world including NorthAmerica, Asia, Central and South America, andEurope. Moreover, in the developing nations, par-ticularly in Asia, this investment was directed

248 Japanese investment patterns

mainly towards the extraction of natural resourcesas well as towards local production by the manu-facturing industry in response to foreign govern-ments’ policies for promoting their ownindustrialization through import substitution.However, in contrast to the prewar activities, therewere no longer any political or military objec-tives associated with this investment. This invest-ment was implemented by private sectorindustries and carried out not only in East Asiabut in Southeast Asia as well.

The 1970s and 1980s: strategic shift fromexport to overseas production

The third period in the development of JapaneseFDI was the two decades spanning the 1970s and1980s. Particularly in the latter decade, the levelof FDI increased and there was a fundamentalshift in the pattern of this investment. This waspartly the result of changes in strategies for inter-nationalization as well as a shift from the manu-facturing industry’s export-led initiatives towardsone that relied increasingly upon local overseasproduction. There was also diversification amongthe types of industries in the non-manufacturingsector that carried out FDI. No longer were par-ticipants limited to those involved in trade-relatedactivities; now these included the real estate in-dustry as well as non-trade-related businesses inthe financial and insurance industries. Further-more, while overseas investment had been tradi-tionally weighted in favor of the developingcountries, now investment in North America andEurope began to become more numerous.

The factors underlying these changes includedthe liberalization of FDI, trade friction betweenJapan and the other industrially advanced nations,and the dramatic appreciation of the yen. Between1969 and 1978, the Japanese government carriedout FDI liberalization in five stages. In the thirdstage, which was implemented in 1971, the limiton the amount of investment eligible for auto-matic approval was lifted. This is not to say how-ever, that the change in policy suddenly resultedin a massive increase in FDI. Since the end of theSecond World War, the Japanese manufacturingindustry had developed its overseas markets inaccordance with a fundamental export-orientedstrategy. Business leaders had little confidence

that distinctive management and production sys-tems, such as lifetime employment and theToyota production system which had developedin Japan, would take root in foreign countries,especially in North America or Europe. Althoughsome Japanese companies had ventured overseasin the 1950s and 1960s, these were the rare ex-ceptions. By far the majority of enterprises electedto stay at home and tread the path of “interna-tionalization” on the basis of exporting theirmanufactured products from Japan.

However, it was during this period that twocompelling reasons began to emerge for Japan’smanufacturing corporations to switch their strat-egies from export to FDI. The first of these wastrade friction with the industrially advanced coun-tries, and the second was the appreciation of theyen beginning 1985. Trade friction between Ja-pan and the USA first appeared in regard to tex-tile fibers, followed by iron and steel, colortelevisions, semiconductors, and automobiles, inthat order. Trade friction with the European coun-tries also occurred, although it lagged slightly be-hind that that developed with the United States.The policy for eliminating trade friction was oneof voluntary export restrictions on the part ofthe Japanese exporters. The manufacturing in-dustries offered their vigorous response to thepolicy for voluntary export restrictions throughlocal overseas production. In regard to yen ap-preciation, the rise in the export price of Japan’smanufactured products resulted in a decrease inexporters’ price competitiveness. To avoid thiseffect, exporters had no choice but to pursueoverseas production. As a result of these twofactors, the switch away from an export-led strat-egy became inevitable, as Japan’s manufacturingcorporations grudgingly began to tread the pathtowards local overseas production. In the case ofindustries in the non-manufacturing sector, theapplicability of Japanese-style management prac-tices in a foreign environment was also an issueof some concern; however, the obstacles were notas great as they were for manufacturers.

FDI by Japanese corporations increased stead-ily through the 1970s and 1980s, and particularlyfrom 1986 until 1989. In 1972, it reached $2.3billion, exceeding the $2 billion mark for the firsttime. In 1984 it surpassed $10 billion and in 1986$20 billion for the first time, reaching a level of

Japanese investment patterns 249

$47 billion in 1988. In the three years from 1986to 1988, cumulative Japanese FDI reached $102.7billion, exceeding the cumulative FDI for thetwenty-five-year period from 1951–85, of $83.6billion. Finally, in the year 1989 alone, JapaneseFDI posted an amazing $67.5 billion, an annualrecord that holds to this day.

Among the rest of the industrially advancednations, Japan’s FDI in the 1980s ranked at thevery top, reflecting the extent to which invest-ment patterns had changed. In addition to thedramatic surge in the amount of investment, twoother salient characteristics were, industriallyadvanced nations now outnumbered the devel-oping nations, among the nations which were thetarget of this FDI, and there was a notable diver-sification among the types of industries that werecarrying out the investment, spanning a varietyof industries from the manufacturing to the non-manufacturing sectors.

The 1990s to the present: global manage-ment

The fourth period in the development of Japa-nese FDI began in the 1990s. It was during thisdecade that the Japanese economy was burdenedwith the task of managing the non-performingloans that had accumulated as a result of the as-set-inflated bubble economy. Nevertheless, thehigh level of Japanese FDI persevered and Japanmaintained its position as the leading provider ofFDI in the world. In the latter half of the 1980s,the dawn of the age of globalized management,the patterns of Japanese FDI, in terms of regionsand industries, became more distinct. In otherwords, on a cumulative basis, the industrially ad-vanced countries of North America and Europereceived the highest proportion of investment,followed by Asia and then Central and SouthAmerica.

By industry and from a global perspective, themanufacturing industries carried out 30 percentof the total investment, and the non-manufactur-ing industries 70 percent. Among the non-manu-facturing industries, and again from a globalperspective, the finance and insurance industriescarried out the bulk of the investment, followedby real estate, services, and commerce, in thatorder.

The composition ratio of Japanese FDI inNorth America was very close to global trends.However, in Europe, the finance and insuranceindustries represented an even larger proportionof investment than the global average, followedby the manufacturing sector. In Asia, on the otherhand, nearly 50 percent of the investment comesfrom the manufacturing industries, reflecting theincreased investment in China that took place inthe 1990s. In Central and South America, financeand insurance were the largest targets of invest-ment, followed by shipping. In summary whereasthe North American pattern closely resembledthe average global pattern for Japanese FDI, Eu-rope received a higher proportion of investmentin the finance and insurance industries than inthe case of other countries, while FDI in Chinawas predominantly directed at the manufactur-ing industries.

See also: Japanese multinational enterprises

Further reading

Basu, D.R. and Miroshnik, V (2000) Japanese ForeignInvestments 1970–1998: Perspectives and Analyses,Armonk, NY: M.E.Sharp.

Encarnation, D.J. (ed.) (1999) Japanese Multinationals inAsia: Global Operations in Comparative Perspective, NewYork: Oxford University Press.

Hollerman, L. and Myers, R.H. (eds) (1996) The Effectof Japanese Investment on the World Economy: A Six-Coun-try Study, 1970–1991, Stanford, CA: Hoover Insti-tution Press.

Mason, M. (1997) Europe and the Japanese Challenge: TheRegulation of Multinationals in Comparative Perspective,New York: Oxford University Press.

Wilkins, M. (1994) “More than One Hundred Years:A Historical Overview of Japanese Direct Invest-ment in the United States,” in T.Abo (ed.), HybridFactory: The Japanese Production System in the UnitedStates, New York: Oxford University Press, 257–83.

HIROSHI KUMON

Japanese multinational enterprises

Theories that attempt to explain Japanese multi-national enterprises (MNEs) fall into two broad

250 Japanese multinational enterprises

categories: those that adhere to the DevelopmentStage Model and those that follow the JapaneseMNE Model. According to the former, JapaneseMNEs developed later than those in the West-ern economically advanced nations and werecharacteristically immature and backward. TheJapanese MNE model, however, contends thatJapanese MNEs incorporated Japanese-stylemanagement and organizational features intotheir overseas subsidiaries, giving rise to a newmodel of MNE that differed from its Westerncounterparts. To be sure, the characteristicallyhigh ratio of Japanese expatriates, which is evi-dence of a certain immaturity as well as the con-centration of authority in the home country arechanging as Japanese corporations gain experi-ence in international business. In this respect, theDevelopment Stage Model presents an undeni-ably persuasive argument. However, comparedwith their US counterparts, Japanese MNEs’conspicuously high ratio of expatriate employ-ees, as well as their tendency to leave much ofthe strategic and business decision-making in thehands of the parent companies, is fundamentallyunchanged despite their increased experience ininternational business. Consequently, the follow-ing explanation will emphasize the Japanese MNEModel.

The fundamental characteristic of JapaneseMNEs lies in the paradox between their high-performance operational efficiency as reflectedin quality control and inventory management, onthe one hand, and their low-performance profit-ability on the other. Why is it that Japanese MNEshave achieved a fairly decent operational effi-ciency but are unable to realize a level of profit-ability that is comparable with the overseassubsidiaries of Western MNEs? The key tounraveling this paradox lies in the organizationalfeatures of those Japanese corporations that em-phasize the accumulation and utilization of mana-gerial resources to increase operational efficiencysuch as technology and the human resources thatpossess skill and know-how. The paradox of si-multaneously high operational efficiency and lowprofitability and the type of business managementthat values the accumulation and utilization ofmanagerial resources are characteristics that Japa-nese corporations at home and abroad share.Moreover, those features that have come to be

considered characteristic of Japanese MNEs, suchas the high ratio of expatriates, a head office-ori-ented managerial style, and the importance ofinformal information networks, can also be ex-plained by this paradox, and by a style of man-agement that accumulates managerial resources.

High-performance operational efficiency

The competitive advantage of Japanese corpora-tions lies in their operational efficiency. Basic mul-tinational theory teaches that Japanese MNEsmust introduce their competitive advantage,namely their operational efficiency to the hostcountries in which they operate.

This operational efficiency is the result of aquality control capability that ensures a high levelof quality in finished products, a level of produc-tion control that allows a diverse range of prod-ucts to be manufactured in the same plant andon the same production line, inventory manage-ment that minimizes the stock of parts and mate-rials, and a maintenance system which assuresthat all of the manufacturing equipment is run-ning smoothly and kept in good condition. For-eign subsidiaries of Japanese companies haveachieved fairly good results in regard to this op-erational efficiency as documented by Takamiya(1979), Abo (1994), and Itagaki (1997). Theirresearch has provided evidence that foreign sub-sidiaries of Japanese firms in the UK or the USA,as well as their export factories in Asia, have suc-ceeded in achieving a level of product quality thatis almost on par with products manufactured inJapan. Furthermore, while most of the Japanesesubsidiaries operating in the US are less efficientthan their mother plants in Japan, they boast ahigher productivity than their local rivals. To re-alize this high operational efficiency Japanese cor-porations have introduced a variety of systemsand innovations. For example, they have adoptedquality control innovations that improve qualityduring the manufacturing process instead of sim-ply rejecting defectives at the final stage, and haveimplemented a just-in-time (or similar) inventorysystem that minimizes the stock of parts andmaterials. In terms of the Japanese manufactur-ing system, this is referred to as the internationaltransfer of its functional core. In other words,Japanese MNEs have succeeded to a remarkable

Japanese multinational enterprises 251

degree in achieving a high operational efficiencyas well as in transferring the functional core oftheir manufacturing system to their overseas sub-sidiaries.

Organizational features and low profitability

Specific organizational features of Japanese cor-porations as they exist in Japan, and which arenecessary to attain a high operational efficiencyinclude the following: First, the tendency to along-term commitment to the enterprise. Thismeans setting up various types of business andaccumulating core technologies within the cor-poration, as well as improving the ability of thecorporation to respond to the ever-changing andincreasingly challenging business environment.Second, a priority for management participationby and information sharing among all of the manydifferent classes of employees, as well as an inter-departmental capacity for coordination. This fea-ture supports a rapid and flexible response to avariety of unanticipated problems concerningmatters such as quality or equipment mainte-nance. Third, long-term training and methods forcultivating human resources that possess a widevariety of skills. The formation of these skillssupports a managerial approach that places em-phasis upon information sharing and coordina-tion between departments. Fourth, a personnelmanagement system with the type of wages andopportunities for promotion that can attract em-ployees to remain with the company for longer-term employment. Long-term employment is abasic premise for the cultivation of multi-skilledemployees. Fifth, harmonious labor relations arewidely seen throughout Japan and are a founda-tional characteristic that promotes managementparticipation and information sharing.

Although such organizational features are com-mon in Japan, are they common in overseas sub-sidiaries? There are two things that the overseassubsidiaries have in common with companies inJapan: their long-term commitment to the enter-prise and their unwillingness to easily resort tolayoffs. This was clearly revealed by the behaviorof Japanese firms in the face of the 1997 Asianeconomic crisis. According to a survey conductedby the Ministry of International Trade and In-dustry (MITI), as little as 3 percent of Japanese

companies with manufacturing operations in theNIEs or ASEAN countries withdrew their invest-ment and less than 10 percent of the companieswith plants in ASEAN countries laid off any oftheir regular employees. For example, neitherToyota’s subsidiaries in Thailand nor in Indone-sia laid off any regular employees despite pro-duction cutbacks. On days when plants were notoperating, they held training sessions or sent largegroups of employees to Japan for training.

Finally to encourage employees’ participationor sharing of information, a number of subsidi-aries have introduced small-group activities, vari-ous types of meetings, and cooperativelabor-management conferences. However, the in-troduction of such organizational features is to alarge extent influenced by the business environ-ment that obtains among the host countries andin general, their international transfer is more re-stricted than in the case of the functional core.Compared to the situation in Japan, overseas sub-sidiaries experience a lower degree of employeeparticipation in management, and for many sub-sidiaries employees have only a narrow range ofskills. Factors that obstruct the international trans-fer of organizational features include pre-exist-ing systems in the host countries (e.g. the wagesystem in the USA and in continental Europe),social inequality stemming from factors such aseducation (in Asia and Europe, including theUK), a management style that emphasizes jobspecialization (USA and Europe), and high em-ployee turnover ratios (common among manyhost countries).

A number of supplementary features have al-lowed overseas subsidiaries to achieve high op-erational efficiency despite their insufficienttransfer of organizational features. The first ofthese was the presence of Japanese expatriatesamong their personnel. At many subsidiaries,these personnel were used to fill gaps betweendifferent jobs or to assist with coordination be-tween departments. This is one of the reasonsthat the ratio of expatriate staff at Japanese sub-sidiaries was higher than at US or Europeancounterparts. It is also important to give credit tothe continual transfer of know-how from Japan,such as the results of kaizen. This represents thetransfer of the products of organizational fea-tures, rather than the transfer of those features

252 Japanese multinational enterprises

themselves. It also helps to explain one of thefactors behind the strict authority maintained bythe mother plants and head offices in Japan. Itshould be noted that the authority and influenceof the mother plants, which are at a similar rankin the managerial hierarchy as the overseas sub-sidiaries, were in some cases even stronger thanthat of the headquarters. This is because thesource of the technology and knowhow, which isrelated to operational efficiency exists at themother plants in Japan. This also helps to ex-plain characteristics of the Japanese MNEs suchas the importance of informal information net-works and the weak function of regional head-quarters. Finally the quality and inventorycontrol aspects of the subsidiaries’ operationalefficiency is due to the presence of Japaneseparts manufacturers who established their ownoperations in host countries in tandem withJapanese MNEs. This situation is frequently re-ferred to as the “mini-Japan” form.

According to data accumulated by the Japa-nese Ministry of Finance and by the US De-partment of Commerce, the ratio of return onforeign direct investment by Japanese MNEs isconspicuously lower than that of US MNEs.Similarly if the rates of return on investment fromEuropean and Japanese MNEs operating in theUSA are compared, those of Japanese MNEs arealso lower, as a rule. To be sure, these organiza-tional features, which protect and sustain diversemanagerial resources over the long term, are ex-tremely effective in coping with continuedchanges in an increasingly challenging businessenvironment and in raising operational efficiency.In contrast, however, this means that at any givenpoint in time there exist superfluous managerialresources that do not contribute to the return oninvestment. This is the fundamental factor be-hind the low profitability that characterizes Japa-nese plants at home and abroad. Especially wheneconomic conditions are poor, the excess of mana-gerial resources is magnified and there is astronger tendency to further aggravate decliningprofits. In the case of overseas subsidiaries, thereare also additional factors such as the high ratioof expatriates, the relatively short plant operat-ing experience, and employee education programsincluding the dispatch of a wide variety of per-sonnel to Japan for training, all of which drive

costs up further. Finally the reliance upon Japa-nese parts suppliers also puts upward pressureon costs.

Prospects

For Japanese overseas subsidiaries, achieving highoperational efficiency which gives them their com-petitive edge, is a prerequisite for success. Ne-glecting their operational efficiency in the pursuitof short-term profits may likely sacrifice the verybasis of their competitiveness. However, focus-ing on operational efficiency while the transferof organizational features remains incomplete ishazardous and entails not only increased costsbut a variety of other attendant risks as well. Japa-nese MNEs face the dilemma of having to choosebetween operational efficiency and higher costsand risks on the one hand, or undermining theircompetitive advantage by sacrificing efficiencyand reducing costs and risks, on the other. It isinteresting to consider how the Japanese MNEswill attempt to solve this dilemma in the particu-lar case of the Japanese expatriates.

A high ratio of Japanese expatriates and thelarge role they play not only increases costs forthe overseas subsidiaries, but also risks damag-ing the motivation of local employees and en-couraging the best employees to seek workelsewhere. This may create a vicious circlewhere it becomes even more difficult to reducethe degree of dependence on expatriates, and tal-ented local employees are further encouraged toleave. However, unreasonably decreasing thenumber of expatriates will reduce operational ef-ficiency and possibly obstruct the transfer oftechnology in the longer term. Even if the needfor Japanese MNEs to reduce their dependenceon expatriates is a given, it may be better to con-sider this a long-term objective. Perhaps the keyfor the success of Japanese MNEs is to discovera talented local manager who understands theimportance of accumulating and utilizing thecharacteristic Japanese managerial resources andthen to put the reins of management into thatperson’s hands. In fact, among successful Japa-nese MNEs, there are already examples wherethis has taken place.

To gradually reduce the degree of depend-ence upon Japanese expatriates, it is necessary to

Japanese multinational enterprises 253

systemize and standardize the skills and know-how required to increase operational efficiency.In many host countries where there is a high em-ployee turnover ratio, the proportion of “core”multi-skilled employees is smaller than it is in Ja-pan. To that extent the systemization and stand-ardization of these skills and know-how becomeseven more important. While some JapaneseMNEs are grappling with this task themselves,in most cases the process of systemizing andstandardizing these skills and know-how is lefteither to the mother plant or to personnel dis-patched from Japan. To make full use of thestandardized know-how that has accumulated atsubsidiaries in each host country it may be nec-essary to organize a horizontal information-shar-ing network among the various subsidiaries.Once that is accomplished, it will be possible toshare the authority that is currently over-concen-trated in the mother plants and headquarters.

Finally in the long term, it is possible that thestability of employees in Japan and their degreeof participation in management will both gradu-ally begin to decrease. At such time, it will be-come necessary to transfer to Japan the know-howaccumulated by overseas plant managementabout organizing a highly mobile workforce.When that happens we may see a Japanese MNE-style international, horizontal network that sup-ports the mutual learning and exchange ofinformation between mother plants and theiroverseas subsidiaries as well as among overseassubsidiaries themselves.

See also: Japanese investment patterns; overseasproduction

Further reading

Abo, T. (ed.) (1994) Hybrid Factory: The Japanese Produc-tion System in the United States, New York: OxfordUniversity Press.

Bartlett, C.A. and Ghoshal, S. (1989) Managing AcrossBorders: The Transnational Solution, Boston: HarvardBusiness School Press.

Beechler, S. and Bird, A. (eds) (1998) Japanese Multi-nationals Abroad, New York: Oxford UniversityPress.

Campbell, N. and Burton, F. (eds) (1994) Japanese Mul-tinationals: Strategies and Management in the GlobalKaisha, London: Routledge.

Itagaki, H. (ed.) (1997) The Japanese Production System:Hybrid Factories in East Asia, London: Macmillan.

Kenny M. and Florida, R. (1993) Beyond Mass Produc-tion: The Japanese System and its Transfer to the U.S.,New York: Oxford University Press.

Kojima, K. (1978) Direct Foreign Investment: A JapaneseModel of Multinational Business Operations, London:Croom Helm.

Takamiya, M. (1979) “Conclusions and PolicyImplicationsm,” in S.Takamiya and K.Thurley (eds),Japan’s Emerging Multinationals: An International Com-parison of Policies and Practices, Tokyo: University ofTokyo Press.

HIROSHI ITAGAKI

Johnson, Chalmers

Born 1931, in Phoenix, Arizona, Johnson taughtpolitical science at the University of California,Berkeley from 1962–88. In 1988 he moved toUniversity of California, San Diego. Since 1994he has served as president of the Japan PolicyResearch Institute.

Johnson is the most prominent non-Japanesetheorist of the politics of Japanese capitalism. Hiswork analyzes the Japanese bureaucracy’s use ofindustrial policy to promote economic develop-ment. Johnson explains how the industrial plan-ning bureaucracy operates internally how it workswith business to develop and implement plans,and how it has been supported politically.

See also: competition; industrial policy; Minis-try of International Trade and Industry

Further reading

Johnson, C. (1982) MITI and the Japanese Miracle: TheGrowth of Industrial Policy, 1925–1975, Stanford, CA:Stanford University Press.

——(1995) Japan: Who Governs? The Rise of the Develop-mental State, New York: W.W.Norton.

MARK TILTON

254 Johnson, Chalmers

joint stock corporation

The joint stock corporation is one of four typesof company form in Japan. These are: (1) thegomei kaisha (commercial partnership where part-ners have unlimited liability to creditors); (2) thegoshi kaisha (limited partnership that has limitedand unlimited liability partners, of which theunlimited partners represent the company); (3)the yugen kaisha (limited liability company wherethe total contribution is no less than ¥3 million,the number of members is no more than fiftyand the contribution per member is no less than¥50,000); and (4) the kabushiki kaisha (joint stockcorporation with a total contributed capital of noless than ¥10 million).

In 1998 there were a total of 27,000 gomei kaishaand goshi kaisha, 850,000 yugen kaisha, and 800,000kabushiki kaisha. Of these 800,000 joint stock cor-porations about 2,000 are listed on the first andsecond sections of the Tokyo Stock Exchange,and another 800 or so are traded on the over-the-counter (OTC) market. In 1995 there wereabout 1,200,000 joint stock corporations andfewer limited liability companies than in 1998.The minimum capital stock for kabushiki kaishawas raised to ¥10 million, in 1991. As there weremany joint stock companies that could not meetthis new requirement within the five years thatwere allowed as an adaptation period, in 1996many kabushiki kaisha were converted to yugenkaisha.

The majority of Japanese companies in gen-eral as well as the joint stock corporations in par-ticular, are small and medium-sized firms. Atthe beginning of the twenty-first century the twolargest Japanese joint stock corporations are NTTDocomo with a total capitalization of about ¥19trillion, and Toyota Motors with a capitalizationof about ¥16 trillion.

History

The modernization of the Japanese economystarting with the establishment of a modern fi-nancial system, was a major goal for the Meijigovernment from its establishment in 1868.Therefore in 1869 the government founded theMinistry of Finance. The Commercial Company(Tsuushou Gaisha) and the Exchange Company

(Kawase Gaisha), set up in the same year, couldarguably be called the first joint stock corpora-tions. Their fund suppliers received interest andshared in the profits, but did not enjoy limitedliability The first joint stock bank, and joint stockcorporation in the true sense of the word, wasthe First National Bank (Dai-ichi Ginkou), whichwas established in 1873. Finally in June 1878 theTokyo Stock Exchange was established in orderto enable companies to raise capital outside thebanking system. At that time, regulations for in-vestor protection were still virtually non-existent.

The Commercial Code as it was implementedin 1893 provided rules for the establishment ofcompanies, and offered some basis for creditorprotection and accountability towards stockhold-ers. The Securities and Exchange Law (SEL) of1948 was enacted to contribute to “the properoperation of the national economy and the pro-tection of investors.” In accordance with the Se-curities and Exchange Law, the stock exchangesthemselves provide detailed regulations for list-ing. The “Ministerial Ordinance regarding thedisclosure of corporate information” stipulates therules for disclosure of information towards share-holders. The Ordinance is part of the Laws per-taining to the SEL.

Establishing a joint stock corporation inJapan

Chapter 4, paragraph 1 of the Commercial Codestipulates the rules for establishing a joint stockcorporation. The articles of incorporation shouldinclude the company’s purpose, firm name, thenumber of authorized shares, par value of theshares (if applicable), a breakdown of par valueand non par-value shares issued, the company’saddress, the method of public announcement, andthe names and addresses of the sponsors. Parvalue of the shares shall be no less than ¥50. Atthe time of the establishment of the company thestock issued shall be no less than one fourth ofthe authorized capital. In case non par-value stockis issued at the time the corporation is established,the minimum value shall be ¥50,000. Total capi-tal stock shall be no less than ¥1 million. A direc-tor and a statutory auditor shall be appointed atthe inaugural meeting.

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See also: Commercial Code

GARIEN VAN MOURIK

joint ventures

Before the FDI liberalization in the mid-1970s,joint ventures were the typical mode of entry intoJapan. Even today when full control is the pre-ferred option, it is still used by many foreign en-terprises as a means to reduce cost of entryminimize risk, and gain quick access to marketknowledge and infrastructure. For Japanese firms,joint ventures offered a shortcut for accumulat-ing knowledge, or minimizing the risk of goingabroad. Outward joint ventures peaked in the1980s during the Japanese investment expansionto Southeast Asia, while in the US and Europethe preferred option was always 100 percentowned entity.

There are four types of joint ventures betweenJapanese and foreign enterprises, based on theirstrategic and knowledge-creation contexts: com-plementary learning, resource, and competitive.

A complementary joint venture is formed when part-ners with complementary strategic intent joinforces to exploit their existing resources or com-petencies—by linking different elements of thevalue chain, for instance. A typical complemen-tary joint venture in a Japanese market would bean alliance in which a Western firm contributedits technology and the local partner facilitatedentry into a local market. While most joint ven-tures are typically defined as complementary inopening public relations statements, a shift in part-nership orientation must be expected.

A learning joint venture can develop from a com-plementary alliance when both partners share aninterest in enhancing their individual competen-cies, whether through an exchange of existingknowledge, or the development of new knowl-edge where the partners jointly participate in thesame value chain activities. An example of learn-ing alliances is the former Fuji-Xerox joint ven-ture in Japan. Originally set up to facilitateXerox’s penetration of the Japanese market, itserved for many years as a critical source of com-petency development for the Xerox worldwide.Compared to complementary alliances, learning

alliances require more interaction, shared workand interface management.

Resource joint ventures have been the traditionalway to minimize risk or deal with closed mar-kets. This is changing as markets open up. Butthey are still a useful vehicle when competitivepressures such as resource constraints, politicaland business risks, or economies of scale leadcompetitors to join forces. It can help minimizethe risks in a particular aspect of the business bygetting others to participate. When Japanese carcompanies began to advance in the USA in themid-1980s, their suppliers did not have muchchoice but to follow suit. For most of them theinvestments required to enter the USA were toobig and too risky so many decided to join forceswith US companies in the same business.

Finally competitive joint ventures are formed be-tween companies who are otherwise competitors.One of the best-known examples is NUMMI, a50–50 joint venture between General Motors andToyota. This venture was nominally designed forthe joint production of small cars for the NorthAmerican market, but at the same time it wasintended to serve as a ‘learning laboratory’ forthe two competitors. General Motors gainedinsights into Toyota’s manufacturing system, andToyota learned how to operate a US-based manu-facturing facility In a competitive alliance, it isnot just fast learning that matters but also its speedand effectiveness relative to the partner; main-taining learning parity is the key to sustainingsuch a relationship.

None of four types of joint ventures is “bet-ter” than another. Joint ventures in all four quad-rants can enhance a firm’s competitive advantage.However, the management challenges associatedwith each type of a joint venture are different.Problems occur when the company does notknow what kind of alliance it has entered or—because joint ventures are by their nature dy-namic and transitory—when it does not respondappropriately to early signals that the nature ofthe alliance is changing. For example, in a com-plementary venture, a Western company can relyon the Japanese partner to recruit and train thealliance workforce since the loyalty factor maynot be an issue—at least in the short run. How-ever, in a competitive venture such an approach

256 joint ventures

could prove costly in the event of subsequent con-flict between the partners.

Contrary to a popular metaphor, a joint ven-ture is not like a marriage: longer alliances arenot necessarily better. Joint ventures are not for-ever; most either die early or evolve, just as anyother business enterprise. Joint venture stabilityis a contradiction in terms. Joint venture successcannot be measured by its longevity but the de-gree to which the alliance helps the firm to im-prove its ability to compete in the marketplace.In this respect, a good question to ask is, “howsuccessful were the joint ventures with the Japa-nese, in particular those in the Japanese marketcombining Western technology with the marketknow-how and distribution capabilities of theJapanese?”

The bottom line is that the track record ofmany joint ventures in Japan is poor. By the early1990s most were dissolved or taken over by theJapanese partner who rapidly absorbed new tech-nology without ceding much in market access.For the Japanese, the “market-for-technology”swap exchange created valuable opportunities toupgrade their competitive capability. The strate-gic intent of many of the Japanese partners wasto learn as much as possible about the technol-ogy contributed by the Western firm. A carefullyimplemented human resource strategy securedrapid diffusion and assimilation of the know-howto the Japanese parent.

Western firms did not pay sufficient attentionto the competitive aspects of the joint venture re-lationship and were not prepared for the possi-bility of changes in the relative power of theirJapanese partners. Western partners saw theirjoint ventures as “defensive,” established prima-rily to save resources, or simply to supplementthe competency they lacked. Because of a lack ofsystematic investment in learning, very little lo-cal knowledge filtered back to the Western par-ent. Without such local knowledge, the Westernfirm’s freedom of action in the Japanese marketwas greatly reduced.

Successful joint ventures were only those thatwere “offensive” in building a common competi-tive and learning culture. The partners embarkedjointly on a “race to learn,” using the joint ven-ture as a mutual tool for faster and broader gainsin competitive capability through investments in

competency development. In Japan, as in manyother markets, the rule for joint venture successis simple: “There is no free lunch.”

VLADIMIR PUCIK

Juran, Joseph M.

A US-based pioneer in quality management.Juran (1904-) was invited to Japan by the Unionof Japanese Scientists and Engineers (JUSE) in1954. Like Deming, he gave lectures to manag-ers on the need to promote quality in both pro-cesses and products.

Juran’s focus has been on management, stress-ing managerial responsibility for quality with qual-ity integral to managerial duties. He promotesplanning for quality with goal-driven agendas,and defines quality as “fitness for use,” rather thancompliance with specifications. Based on workby economist Vilfredo Pareto, Juran developedthe “Pareto principle,” which states that large pro-portions of problems are generated by only a fewcauses. Often cited as an “80/20” split, the Paretoprinciple emphasizes the separation of the “vitalfew” from the “useful many” when allocating re-sources to fixing problems.

Further reading

Juran, J.M. (1988) Juran on Planning for Quality, NewYork: The Free Press.

ELIZABETH L.ROSE

just-in-time

As articulated by its principal architect, TaiichiOno of Toyota Motor Corporation, a just-in-time(JIT) system produces only the necessary items,at the necessary time, and in the necessary quan-tity to meet customer demand. The underlyingphilosophy is to seek manufacturing excellencethrough the elimination of waste in all aspects ofthe production system, with particular attentionplaced on reducing excess levels of in-process andfinished goods inventories. Common usages ofthe term can be confusing, however, because invarying instances JIT is used to refer to the ge-neric philosophy of manufacturing management

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noted above, to a specific mechanism of produc-tion and inventory control called kanban, or tothe overall Toyota production system (Toyotaseisan hoshiki) which includes other aspects.

Though Toyota did not develop the methodsfor realizing just-in-time production until the1950s under Ohno, the term was used as earlyas the 1930s by Toyota founder, Kiichiro Toyoda,as an English phrase with Japanese pronuncia-tion (jasuto in taimu) (see Fujimoto 1999). WithinJapan, the terms “just-in-time” and “JIT” are stillused with a Japanese pronunciation rather thana native Japanese language equivalent. In an in-terview, one Toyota executive commented thatthe phrase “just-on-time” may have been moreappropriate, so as to emphasize the synchronized,clockwork nature that is intended, rather than a“barely in time” connotation. In the West, whileother terms such as stockless production and zeroinventory have been used, JIT remains the com-monly accepted, though imprecise, term.

Under Ohno’s leadership, Toyota developedits JIT system using kanban during the 1950s andgradually implemented it throughout Toyotaplants. By the late 1960s, Toyota was also extend-ing it to its suppliers, with the result that not onlyToyota, but also its first-tier suppliers, were ableto dramatically decrease their inventory levels.The cost and quality advantages that Toyotaachieved through JIT and its company-wide qual-ity control approach (see quality management)are credited with buoying Toyota through the eco-nomic turmoil following the 1973 “oil shock.”Toyota’s success prompted many other Japanesemanufacturers to learn from its JIT methods atthat time. By the late 1970s and early 1980s, JITwas the object of intense interest worldwide.

Concepts and support factors

A notable aspect of JIT is that it focuses on in-ventory reduction not only as an end, but also asa means to enable broader improvementsthroughout the production system. High inven-tory levels are viewed like deep water that hidesvarious problems and inefficiencies below thesurface. Reducing inventory levels, therefore,exposes problems so that they may be acted uponfor improvement. At the same time, it must be

recognized that reducing inventories without alsoimproving the production system can result in asystem stoppage as the buffering function of theinventory is eliminated.

For this reason, Toyota and other companiesemphasize kaizen and effective quality manage-ment to assure that parts are defect free, as thereis little or no buffer inventory to replace them.One approach that JIT uses to achieve defect-free production is the use of jidoka, sometimestranslated as autonomation. The original mean-ing of jidoka is to stop a machine automaticallywhen abnormal conditions are detected so as notto produce defective parts. Extensions of this ideaare the use of poka-yoke, or mistake-proofing de-vices, and visual control systems such as andonlight boards that indicates to workers when andwhere a problem has occurred so that correctiveaction can be taken. Along with this, failure-freeequipment is necessary so that a machine break-down in one area does not force a shut-down ofthe entire system. To improve equipment reliabil-ity approaches such as total productive mainte-nance are often used.

In order to effectively implement JIT, severalother supporting factors must be in place, includ-ing smoothed production schedules, rapid setupor changeover times, multiskilled workers, andhighly reliable processes. Heijunka, or smoothingof the production schedule to achieve uniformplant loading, is critical for JIT implementation.With heijunka, Toyota attempts to even out theproduction quantities of each item in the finalassembly schedule. This minimizes the variationin the quantities of parts needed and enables theupstream stages to produce each part at an effi-cient, constant rate. In addition, the productionschedule is smoothed in terms of product vari-ety. In other words, if several models are sched-uled for production then the quantities of eachmodel are divided up and evenly dispersedthroughout the day rather than producing largebatches of each model in succession. The ulti-mate goal is to have a production system so flex-ible and responsive that products can be made ina batch size of one and scheduled according tothe market’s demand rate. This is also called one-piece flow production.

To make such small batch sizes feasible, it isimportant that setup or changeover times be short

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for all processes, with a common goal being toreduce setup times of all processes to less thanten minutes. Toyota consultant Shigeo Shingo isknown for a number of techniques for achievingrapid setup. Also, in a one-piece flow productionenvironment, it is possible that each succeedingitem might require different operations to be per-formed. For this reason, the development of aflexible, multiskilled workforce is necessary.Cross-training also makes it possible for a workerto be responsible for several machine tools andto be flexibly reassigned to keep both worker andmachine utilization high.

Production and inventory control methods

Another typical aspect of JIT is the use of a pullmethod, such as the kanban system, for coordi-nating production and inventory throughout thesystem. In a pull system, production is initiatedonly to replenish what has been actually used atthe next stage of the production system. This is areversal of a push system in which parts are pro-duced in anticipation of future demand. A kanbansystem functions as a pull system due to the waythat it uses kanban (literally meaning card or sign)and returnable parts containers to control the pro-duction and movement of materials between twostages of the production system. The productionof additional parts is authorized only when aworker at the downstream stage begins to use anexisting full container of parts and takes the ap-propriate kanban card back up to the upstreamprocess as authorization to produce another fullcontainer as replenishment. The total amount ofinventory in the production system is determinedby the number of kanban cards and containers incirculation between any two stages of the system.Consequently inventory levels can be reducedby removing some of the kanban containers fromthe system. Sometimes this is done as a purpose-ful way of stressing the system in order to iden-tify the weak points that are exposed when theinventory buffer is removed.

Kanban systems are not appropriate for all situ-ations, however. Toyota itself uses several alter-nate methods for coordinating production andmaterial flows. For low consumption parts, Toyotauses a push method called chakko-hiki, or sched-ule-initiated production. In this method, the pro-duction and delivery of parts is determined inadvance based upon the final assembly scheduleand bill of materials. For large components andparts such as engines and seats, another methodcalled junjo-hiki, or sequence-synchronized produc-tion, is used. With this method, the productionand delivery of each part is synchronized withthe individual vehicles in the final assembly sched-ule, rather than waiting for a kanban card to sig-nal production of the part.

See also: supply chain management in Japan

Further reading

Enkawa, T. and Schvaneveldt, S.J. (2001) “Just-in-Time,Lean Production, and Complementary Paradigms,”in G.Salvendy (ed.), Handbook of Industrial Engineer-ing, 3rd edn, New York: Wiley 544–61.

Fujimoto, T. (1999) The Evolution of a Manufacturing Sys-tem at Toyota, New York: Oxford University Press.

Kuroiwa, S. (1999) “Jasutuo In Taimu to KanbanHoshiki” (Just-In-Time and Kanban System), inT.Enkawa, M.Kuroda, and Y.Fukuda (eds), SeisanKanri no Jiten (Handbook of Production Manage-ment), Tokyo: Asakura Shoten, 636–46.

Monden, Y. (1998) Toyota Production System: An IntegratedApproach to Just-In-Time, 3rd edn, Atlanta, GA: Insti-tute of Industrial Engineers.

Sugimori, Y., Kusunoki, K., Cho, F. and Uchikawa, S.(1977) “Toyota Production System and Kanban Sys-tem: Materialization of Just-In-Time and Respectfor Human System,” International Journal of Produc-tion Research 15 (6): 553–64.

SHANE J.SCHVANEVELDT

just-in-time 259

kaizen

Kaizen, continuous improvement, is one of a fullset of the Japanese-style production practices, but,in a sense, a word to reveal the most essentialaspect of the overall Japanese management andproduction systems. Kaizen in itself is simply bit-by-bit improvement in practices and day-to-dayaccumulation of the results which are imple-mented as participative activities at worksites ofJapanese companies. It is not a strictly definedconcept by academic people but a conventionalone that has been used in broad meanings byworksite people at companies, the leaders at prac-tice institutions such as the Japanese Union ofScience and Engineers (JUSE), and only by someresearchers. Kaizen has not clearly been definedin dictionaries, there is room for various kindsand levels of definitions.

Historically, the above characteristic featuresof kaizen practices by Japanese firms, small to large,in their technology and skill improvements havebroadly been seen in Japan, compared with thescience-led, breakthrough type innovations, of-ten seen in western, especially American, firms.The reasons are several. First Japanese people aregenerally stronger in practice-oriented inductiveways of doing research and development than intheory-oriented deductive ways. Second, the Japa-nese also have a distinct inclination for workingtogether in cooperative ways within a team, ratherthan as individuals in division of labor. Finally aworksite-oriented style of management has be-come popular at the company level, integratingthe above into kaizen innovation activities.

There are three different dimensions of kaizenactivities. Two types are seen at the shopfloorlevel. The first encompasses broader day-to-dayimprovement practices carried out on theshopfloor by all members. This would includepractices such as quality control circles focusedon maintaining better productivity, quality, andso forth as well as activities aimed at promotingworker motivation and improving work proce-dures, as reflected in practices incorporated inthe Toyota production system (TPS). The sec-ond type of kaizen covers activities that are bothnarrower and deeper, and more technology-ori-ented. These are carried out primarily throughactivities led by groups of engineering and main-tenance specialists. A third type of kaizen activityis found within management or at the overall com-pany level. At the company or factory level, kaizeninitiatives are led by top management and focusedon evolutionary changes through total qualitycontrol (TQC) and total production management(TPM).

Theoretically, at any levels, the essence of kaizenis an overarching philosophy of requiring all man-agement personnel to be responsible for motivat-ing all employees to improve steadily the existingstate of conditions. It is interesting to note theinternational diffusion of kaizen and its feedbackto Japan of kaizen activity Modifications and ad-aptations to local managerial environment are re-flected in the ISO 9000 and Six Sigma initiativesoriginated in Europe and North American respec-tively Both can be understood as modifiedand developed quality improvement modelsadopted from Japanese style worksite-oriented

K

organizational learning activities to more Ameri-can style top-down and specialist-led methodolo-gies.

Further reading

Cole, R.E. (1999) Managing Quality Fads, Oxford: Ox-ford University Press.

Fujimoto, T. (1999) The Evolution of a Manufacturing Sys-tem at Toyota, Oxford: Oxford University Press.

Toyota Motor Corporation (1996) The Toyota Produc-tion System, Nagoya.

TETSUO ABO

kanban

Made famous by the Toyota production system(TPS) and just-in-time (JIT), the term kanbansimply refers to a card or ticket used to controlproduction and inventory of a given item. Kanbancards typically indicate such information as therelevant part number, process name, and num-ber of parts per container. In a kanban system(kanban hoshiki), these cards are used in combina-tion with returnable containers that hold a desig-nated number of parts. Together they form ameans to authorize and coordinate the produc-tion and movement of materials between stagesof a manufacturing system so as to prevent ex-cess production and inventory.

Taiichi Ono of Toyota Motor Corporation iscredited with leading the development of thekanban system. He, in turn, credits American su-permarkets as being an inspiration in the sensethat they put additional items on the shelf onlyto replenish the number of items pulled off bycustomers. When Toyota originally developed thekanban system in the 1950s, Toyota called it the“supermarket system” and adopted the kanbanname some years later. Toyota first implementedkanban on a plantwide scale in 1959 and extendedit company-wide in 1962. In 1965, Toyota beganextending the kanban system to its suppliers.

There are various types of kanban cards andsystems. In the most basic form of kanban sys-tem, the production of more parts is authorizedonly when a worker begins to withdraw partsfrom an existing full container of the part, at

which time the worker takes the appropriatekanban card to the upstream process that makesthe part. In due time, the upstream process willuse that card as authorization to produce an-other standardized container full of the part tobe ready for the downstream process. Thenumber of kanban cards and containers in circu-lation between the upstream and downstreamprocesses can be adjusted to control the totalnumber of parts in the system. Since the produc-tion of more parts is initiated only when they arebeing used in the downstream process, a kanbansystem is considered to be a “pull system:” de-mand downstream pulls or triggers the produc-tion of more parts from the upstream processes.If the usage of a part slows or stops downstream,then its production upstream will correspond-ingly slow or stop. In this way kanban functionsas a sort of self-regulating, manual system forcontrolling the flow of materials from upstreamstages, including outside suppliers, through finalassembly.

Although the term kanban system is sometimesused synonymously with just-in-time or Toyotaproduction system, it should be recognized thatkanban is merely a mechanism to help achievethe goals of JIT and is only one aspect of TPS.Also, successful implementation of a kanban sys-tem requires that many supporting factors be inplace, including leveled production schedules,high-quality levels, rapid equipment set-up times,multiskilled workers, and so forth.

Further reading

Fujimoto, T. (1999) The Evolution of a Manufacturing Sys-tem at Toyota, New York: Oxford University Press.

Monden, Y. (1998) Toyota Production System: An IntegratedApproach to Just-In-Time, 3rd edn, Atlanta, CA: Insti-tute of Industrial Engineers.

Ohno, T. (1988) Toyota Production System, Portland, OR:Productivity Press.

SHANE J.SCHVANEVELDT

Kansai culture

In ancient Japan around the twelfth centuryKansai, which literally means “west of the bar-rier”, referred to the whole of western Japan, west

Kansai culture 261

of a major barrier station located in today’s MiePrefecture in the middle of Honshu Island. Kanto,“east of the barrier”, referred to eastern Japan.Today the areas of both Kansai and Kanto aremuch more limited. Kanto indicates Tokyo andits several surrounding prefectures, and Kansaicovers three major cities in the west, Osaka,Kyoto, and Kobe, and a few surrounding prefec-tures. Kansai and Kanto have been noted as twomajor central areas in the history of Japan, al-though in the postwar period, Kanto has beenincreasingly dominant politically economicallyand culturally.

Even though the term “Kansai” is widely usedin Japanese daily living, it is hard to say that thereis a common “Kansai culture,” as the area thatKansai covers consists of a wide variety of sub-cultures. Values, customs, communication styles,and so on are significantly different, even amongthe above-mentioned central three cities.

Kyoto has a long history of noble culture. Theimperial family had resided there for over 1,000years before moving to Tokyo in the late nine-teenth century Osaka has developed since thesixteenth century as a center of Japanese com-merce and industry In contrast, Kobe has a rela-tively short history It was founded in the latenineteenth century but its historical significance,parallel with that of Yokohama in Kanto, as amajor international trade port of Japan has beennotable. Therefore, Kobe has been known as acity with an international atmosphere becausemany Westerners and Asians have settled theresince the beginning of the city’s history In addi-tion to these three cities, the city of Nara, theancient capital of Japan before Kyoto, can be alsoincluded as part of Kansai, thus adding to thediversity of Kansai culture.

In terms of economic status, the three majorcity areas are absolutely dominant in Kansai.However, since Osaka has been outstanding eco-nomically and in terms of population, the focusis exclusively on that city Osaka began to play amajor economic and industrial role in the his-tory of Japan in the late sixteenth century Thecity of Sakai, in the southern part of Osaka,emerged as a major international center of com-merce and industry in the late sixteenth centurywhen Japan was torn by civil wars among daimyo,the samurai lords. The merchants in Sakai traded

internationally with Westerners and Chinese.They also provided major daimyos with guns,which were then new weapons. Guns were ini-tially brought to Japan from Portugal in the mid-sixteenth century but soon thereafter were beingmade by Japanese artisans. Sakai was a center ofthe gun industry at the time. Even today the spe-cific skill and expertise developed in making gunssurvives in the production of high-quality bicy-cle parts and cooking knives, which are exportedoverseas in addition to having a large domesticmarket share.

Toyotomi Hideyoshi, a peasant-born samurai,finally put an end to a half-century of civil wartoward the end of the sixteenth century He builta huge castle in Osaka to rule Japan and dramati-cally increased the commerce of Osaka.Tokugawa Ieyasu reigned in Japan after the deathof Hideyoshi and even after he settled hisshogunate government in Edo (now Tokyo) inthe early seventeenth century Osaka continuedto be the center of commerce for over two centu-ries during the Tokugawa period.

Japan’s modernization started after theTokugawa period ended in the late nineteenthcentury Even though modern Japan’s capital isTokyo, Osaka played a central role in moderniz-ing Japan. From the end of the nineteenth cen-tury until the 1930s, Osaka was the center of thespinning industry in Japan, the tractor of the in-dustrial revolution. Toyobo, one of the major spin-ning companies based in Osaka, was the largestsuch facility in the world in the early 1930s. Thus,Osaka was said to be the “Manchester of theOrient.”

The chemical industry and pharmaceuticalsindustry also developed in Osaka in moderniz-ing Japan, as Osaka merchants had dealt withChinese and even Western medicine in theTokugawa period. Many of Japan’s major phar-maceutical companies originated in Osaka andstill operate there.

Osaka also witnessed the founding of sevenout of nine sogo shoshas, large-scale trading com-panies in Japan, including Sumitomo, ITOCHUand Marubeni. Only two others, Mitsubishi andMitsui, started in Tokyo. Japan’s representativeelectric appliance makers, Matsushita andPanasonic, also originated in Osaka. The former’sfounder, Matsushita Konosuke, said to be the

262 Kansai culture

“God of Management” in Japan, was trained tobe a merchant in Senba, a small region in Osaka,historically known as the mecca of commerce.Sharp also started in Osaka, although thefounder came from Tokyo. In addition, majorsecurities houses such as Nomura Securities andDaiwa have roots in Osaka.

Since the Second World War, Tokyo has hadan increasingly greater presence economically aswell as politically whereas Osaka’s presence hasdeclined significantly. However, the tradition ofcenturies of commerce and industry can also beseen in the culture of the daily way of living andthe values of Osaka people.

If one were to characterize Osaka culture, itwould be as a culture of the people. This appearsin various aspects of Osaka people’s behavior.An individual is evaluated by his personality andability not by his birth, formal authority or po-litical power. This consciousness can be tracedto Toyotomi Hideyoshi, who ruled Japan in thesixteenth century. He is still a hero in Osaka be-cause he was a peasant-born man of great abilitywho made his way from the bottom to the top ofsociety. The Osaka anti-establishment attitude canalso be seen in the tradition of public entertain-ment. For example, unlike such Japanese tradi-tional performing arts as the no play and kabuki,whose performers are hereditary in the bunrakupuppet play which developed in Osaka in theTokugawa period, birth is not important. Recruitsare found in the general public and trained to beperformers.

The Osakan consciousness of anti-authorityand power sometimes manifests itself as an anti-Tokyo attitude. Unlike many other areas in Ja-pan, what is trendy in Tokyo is not necessarilyso in Osaka, where people tend to assert theirown taste.

Osaka’s tradition of commerce is also mani-fested in the people’s face-to-face communicationstyle. In negotiation, for example, a delicate tech-nique of communication is used by which oneexpresses his opinion and feeling quite honestlybut in a way that avoids hurting the opponent’sfeelings. Conversely even in cases where an op-ponent is too aggressive or offensive, an adroit,often humorous defensive response is given onan ad hoc basis.

One outcome of such a culture of communi-

cation is that Osaka is noted as a centre of com-edy. Many comedians who have come fromOsaka or been trained there have become famousnationwide.

NORIYA SUMIHARA

kansayaku

The kansayaku is equivalent to an auditor in West-ern companies, and a mandatory organ for anykabushiki kaisha (joint stock corporation). Thekansayaku monitors the management of thetorishimariyakukai and audits the accountingsof joint stock corporations with more than ¥100million of capitalization. The former function isnot assumed in case of joint stock corporationswith ¥100 million of capitalization or less. Thekansayaku is not mandatory for yugen gaisha (lim-ited liability corporations), and if there is one,assumes only an auditing function. In either case,the general assembly of stockholders or mem-bers of the corporation elect kansayaku. The Com-mercial Code stipulates that kansayaku are noteligible to serve as torishimariyaku, general manag-ers, or as employees of the corporation or its sub-sidiaries (article 276).

More than three kansayaku must be elected fora stock corporation with outstanding commonstock of ¥500 million or more or total liabilitiesof ¥20 trillion or more, and more than one isrequired to be chosen from outside the corpora-tion. The kansayaku must then set up akansayakukai, auditing board.

Kansayaku can request that anyone in the cor-poration at any time report to them about thecorporation’s operations, and are entitled to sur-vey the practices and properties of the corpora-tion (article 274 clause 2). Torishimariyaku mustpromptly report to kansayaku in cases where a dan-ger that might cause asubstantial damage to thecorporation has been identified (article 274–2).Kansayaku at a parent company if it is deemednecessary for them to carry out their duties, canexercise these same rights in regard to subsidiar-ies, and are required to mention in the auditorsreport the methods and results of their auditingin regard to subsidiaries (article 281).

Projects and papers drafted by torishimariyaku

kansayaku 263

for submission to shareholders at the generalmeeting of shareholders must be scrutinized bykansayaku prior to submission. If kansayaku findviolations of law or violations of the articles ofassociation of the corporation, or a matter of sub-stantial inadequacy they must declare this at thegeneral meeting (article 275).

Kansayaku are entitled to request thattorishimariyaku cease actions that are either beyondthe purpose of the corporation or that amount-ing to a violation of law or the articles of associa-tion that may lead to substantial damage to thecorporation (article 275). An extension of thisfunction of the kansayaku is that, in case of legaldisputes between the torishimariyaku and the cor-poration, the kansayaku represents the latter (arti-cle 267 clause 1). Prosecution of theresponsibilities of torishimariyaku is also broughtto trial by kansayaku (article 275–4).

See also: bubble economy; business ethics

Further reading

Kishida, M. (2000) Zeminaaru Kaishaho Nyuumon (Intro-ductory Seminar on Corporate Law), Tokyo: Nihonkeizai shinbunsha.

Maeda, H. (2000) Kaishaho Nyuumon (Introduction toCorporate Law), Tokyo: Yuuhikaku.

Oda, H. (1997) Basic Japanese Laws, Oxford: OxfordUniversity Press.

KAZUHARU NAGASE

Kao

Tomiro Nagase founded Kao in 1887, creatingthe first soap business in Tokyo. Throughout itshistory the company changed its name nine timesand made seven changes in its logo, indicatinghow the company has tried to adapt to the chang-ing tastes of society in Japan. The current presi-dent, Takuya Goto, has led the company throughmajor structural and cultural change in order tobecome the leading company in the householdproducts industry in Japan. Kao sells over 600consumer products, from household detergentsto floppy disks. In addition, the company is nowtrying to globalize and has so far established for-eign operations in Asia, North America, and

Europe. Consolidated sales for 1999 were ¥924.5billion with a net profit of ¥98 billion.

Kao has grown to 6,086 employees worldwide,excluding related subsidiaries and joint venturecompanies. Of that total, almost a quarter of theworkforce are involved in research and develop-ment. Even with this extraordinarily high per-centage of employees devoted to R&D, formerpresident Maruta Yoshiro said that half of the em-ployees in the future would be involved with re-search and development. By focusing oninnovation and new products, the company hasremained at the forefront of basic chemical re-search.

Kao has announced that its strategic goals areto invest in technological development, developmarketing through new distribution systems, andmaintain a state-of-the-art information system.Kao’s increasing sales and profit could not be ex-plained without discussing its marketing infor-mation system (MIS). The “free access toinformation” computer system introduced in theorganization allows anyone at Kao to access thesales system, marketing information system, pro-duction information system, and even the distri-bution information system. This unique systemprovides the user full access to real time com-pany data, giving all employees firsthand busi-ness knowledge regardless of their position in thecompany.

Another strength of the Kao management sys-tem is its distribution system, which has beenevaluated as the best of any Japanese corpora-tion. The Tokyo Distribution Center runs at sucha high capacity that deliveries of Kao productscan be made to as many as 6,000 retail storeslocated at metropolitan areas by the next day fol-lowing receipt of an order.

Kao has established its consumer products andchemical products as the pillars of its businessactivities, and is striving to expand its operationsin each business segment and in the global mar-ketplace by providing consumers throughout theworld with superior products and services.

Further reading

Nonaka, I. and Takeuchi, H. (1995) TheKnowledgeCreating Company, New York: Oxford Uni-versity Press.

264 Kao

Noriaki, O. (1985) Kao’s Astounding Strategy VAN, To-kyo: Chukei.

MARGARET TAKEDATETSU MORISHIMA

karoshi

At time of writing, there is a great deal of debatein Japan regarding sudden death among Japan’swhite-collar workers. This phenomenon is calledkaroshi, or sudden death syndrome. The Japaneseofficially recognized karoshi as a fatal illness in1989. Its symptoms include high blood pressureand asthma-like problems. Most of the victims,in their prime working years in white-collar oc-cupations, die from subarachonodial hemorrhage(stroke) or myocardial infarction (heart attack).

The cause of karoshi can be attributed to thefundamental nature of the Japanese-style workweek, which consists of twelve-hour days andworkfilled evenings. The Japanese work such longhours because in many organizations, workingovertime has become a ritual of obedience andsubservience. This is in spite of the fact that thereis rarely any work-related reason and there areno improvements in productivity for the com-pany. In addition to the long working hours, thereis social pressure which discourages employeesfrom taking vacations.

Consequently many Japanese workers feelmentally and physically fatigued every day andmany are afraid of dying from overwork. Thishigh level of work anxiety often results in poorwork performance for those employees, causingother employees to take up the slack. The result-ing redundancy means that the some employeesare doing the work of up to four people. Thoseoverworking employees cannot manage theheavy workload within normal time frames andso they work extra long hours in order to givethe appearance of efficiency. The result is aselffulfilling destructive cycle of anxietyoverwork, and death.

To illustrate the extent of the karoshi phenom-enon, a study conducted by the Fukoku Life In-surance Co. found that:

• 80 percent of Japanese workers want to sleepmore;

• 70 percent feel stressed;• 44 percent feel constant fatigue;• 42 percent fear death from overwork;• 28 percent lack creativity and motivation;• 23 percent feel a frequent desire to call in

sick.

Fundamental changes in the employment envi-ronment are taking place, however, which shouldhave a favorable impact and minimize karoshi. Therise of the shinjinrui (new workers), the new gen-eration of Japanese born into affluence, is chang-ing work habits and transforming Japan into aconsumption-driven economy Employees are nolonger willing to sacrifice their lives for the goodof the company or try to give the appearance tothat effect. Employees are resisting pressure tostay at work when there is no actual work to bedone. They are choosing to spend more time athome with their families, and are even takingvacations.

Although the Japanese government has finallyacknowledged that karoshi claims an estimated10,000 workers each year, it still does not offi-cially recognize its existence and does not main-tain comprehensive statistics. However, theJapanese Labor Ministry said it would introducea new medical insurance program meant to pre-vent karoshi or death from overwork. Workersbelieved to be at greatest risk—those who areobese, have high blood pressure, high blood sugarand high blood lipid levels—would get free medi-cal checkups under the plan.

Further reading

“A Kinder, Gentler Workplace” (2000) New York Times,January 30, 3 (4): 1.

Brown, W, Lubove, R. and Kwalwasser, E. (1994)Karoshi: Alternative Perspectives of Japanese ManagementStyles, Greenwich, CT: Business Horizons.

Palumbo, F. and Herbig, A. (1994) “Salaryman Sud-den Death Syndrome,” Employee Relations, 54–61.

Smith, P. (1998) “Tougher than the Rest,” Management,42–7.

MARGARET TAKEDA

karoshi 265

Keio University

Keio University (in Japanese, Keio GijukuDaigaku) was founded as Fukuzawa’s DutchStudies School in Edo (present-day Tokyo) in1858 by Yukichi Fukuzawa. It is the oldest insti-tution of higher learning in Japan and, withWaseda University one of Japan’s two leadingprivate universities. Historically it has been aprimary source of many of Japan’s top businessleaders, a position that it continues to hold to thepresent.

The name “Keio” was adopted in 1868 andcomes from the Japanese name for that era. In1871 the university moved to its present locationin Mita, a southern section of Tokyo. At presentit also maintains two large branch campuses:one in Hiyoshi, a suburban area roughly mid-way between Tokyo and Yokohama, and one inFujisawa, about forty minutes by train west ofTokyo on the coast.

Keio’s prominence as a university and its in-fluence within Japan is twofold. First, early onthe university established a reputation for edu-cating business leaders. As school-basedhabatsu—i.e. gakubatsu—became established inlarger firms, a powerful dynamic was created toenhance this reputation. Within a firm, the Keiogakubatsu helped advance the careers of its mem-bers who, in turn, encouraged the hiring of Keiograduates, who joined the company therebystrengthening the influence of the gakubatsu. Insome organizations, Keio graduates accountedfor an influential portion of the overall manage-rial cadre. For example, at Mitsukoshi, the topdepartment store chain, as late as 1990, approxi-mately one-fourth of the torishimariya kukai, orboard of directors, were Keio graduates.

Second, having been founded by one of Ja-pan’s most influential and revolutionary educa-tors, it has continued to pioneer many educationalinitiatives. As far back as 1898 it created whatamounted to a vertically integrated educationalcorporation by establishing elementary and sec-ondary schools. This meant that a student couldbegin the very first year of formal educationwithin the Keio system and continue all the waythrough to university graduation in that system.With the postwar establishment of a Keio pre-school, when combined with its graduate and

doctoral programs, an individual could pursuewhat might be called a “cradle to corporation”educational experience at Keio.

Keio University has maintained its positionas Japan’s leading educator of business manag-ers in several ways. In 1978, it became the firstuniversity in Japan to offer an American-styleMaster of Business Administration (MBA) de-gree. In a partnership with Harvard BusinessSchool, it introduced a full-time MBA programmodeled on Harvard’s curriculum and employ-ing the distinctive case method pedagogy It sub-sequently introduced Executive MBA courses.With the growth of executive education, lifelonglearning and distance education trends to Japan,Keio University’s role as a leading business edu-cator continues to expand.

ALLAN BIRD

Kirin Brewery

Kirin Brewery is Japan’s largest brewer. Kirin hasdominated the Japanese beer industry for mostof the postwar period on the strength of its flag-ship Kirin Lager brand and a strong supportingproduction and marketing strategy.

Kirin’s origins go back to Japan’s first brew-ery Spring Valley Brewery which was establishedby an American in Yokohama in 1870. In 1885,Spring Valley was reorganized into Japan Brew-ery Company Ltd, with financial backing fromseveral of Japan’s leading industrialists, includ-ing Yanosuke Iwasaki of the Mitsubishi businessgroup. Under the guidance of Germanbrewmasters, Japan Brewery offered a German-style lager beer named “Kirin,” after a dragon-like creature from Chinese legend. (A picture ofa kirin adorns the Kirin beer label.) In 1907, thecompany again changed hands, and was renamedKirin Brewery Company.

Japanese breweries proliferated and thrivedduring the early twentieth century but with the1929 stock market crash, the worldwide depres-sion of the 1930s, and the Second World War,demand plummeted and many breweries closedor consolidated. By 1948 only two beer makersremained in Japan: Kirin and Dai Nippon Brew-eries, which had been built over a forty-year

266 Keio University

period through the merging of numerous inde-pendent brewers. In 1949, Dai Nippon was de-clared in violation of Japan’s new anti-monopolylaw and split in half along geographical lines, withits operations in western Japan becoming today’sAsahi Breweries and those in eastern Japan be-coming today’s Sapporo Breweries. At the timeof Dai Nippon’s breakup, Sapporo held 38.6 per-cent of the market, Asahi 36.1 percent, and Kirin25.3 percent.

Over the next thirty years, Kirin surpassed itsrivals and came to dominate the industry. Kirin’ssuccess is attributed to several factors. First, thebreakup of Dai Nippon into Sapporo and Asahileft Kirin as the only brewer with a nationallyrecognized brand name and a nationwide salesnetwork, until the others could expand their op-erations. Second, Kirin anticipated growing de-mand for beer and aggressively built newproduction capacity at a rate of one new breweryevery two years. Third, Kirin targeted the homeconsumption market, which expanded rapidly inthe 1950s and 1960s as refrigerator use becamewidespread. Fourth, the strong, bitter taste ofKirin Lager was right for the times; the diet inpostwar Japan was poor and bland, leading con-sumers to crave strong taste where they couldget it. Finally the company effectively stressedKirin’s superior taste in its advertising, leadingthe public to equate Kirin with beer.

In 1979 Kirin’s market share reached 63 per-cent, prompting Japan’s Fair Trade Commis-sion to consider splitting the company into twoseparate entities. In the end, Kirin remained in-tact, though it suspended advertising for a timeto dampen sales growth and deflect charges thatit was a monopoly The company also began di-versifying into other product areas, includingwines, soft drinks, restaurants, and pharmaceuti-cals.

During the 1990s, Kirin lost ground in thebeer market to Asahi, whose Super Dry brandbecame Japan’s top selling beer. But with twostrong-selling brands in Kirin Lager and IchibanShibori, Kirin still held the industry’s largestmarket share at around 40 percent in 2000.Kirin is a member of the Mitsubishi businessgroup.

Further reading

Craig, T. (1996) “The Japanese Beer Wars: Initiatingand Responding to Hypercompetition in New Prod-uct Development,” Organization Science 7 (3):302–21.

TIM CRAIG

Koike, Kazuo

Koike (1932-) is the most influential labor econo-mist in postwar Japan. His contributions to thefield of labor research lie mainly in three areas:economic development, industrial relationstheory and the economics of skill formation.

Koike has bitterly criticized the popular theo-ries of Japan’s economic development, especiallythe unlimited supply of labor and the dualist ap-proach to Japanese industrial organization. Headvocates the latecomer theories of economic de-velopment proposed by Alexander Gerschenkronand Ronald Dore.

Japan began to industrialize one hundred yearsafter the UK. The lack of strong craft unionismas a result of late industrialization encouraged theinternalization of the labor market and fosteredthe development of enterprise unions. The dis-tinction between blue-collar and white-collar al-most disappeared in postwar Japan. Koikeconceptualized this development as “white-collarization of blue-collar.”

Koike’s most important contribution lies in theeconomic analysis of on-the-job-training (OJT)and career development. The recent progress ofinformation technology requires OJT-based, moreintelligent skills which can be formed throughintra-firm career development.

Further reading

Koike, K. (1977) The Economics of Work in Japan, Tokyo:LTCB International Library Foundation.

——(1988) Understanding Industrial Relations in Japan, Lon-don: Macmillan.

Koike, K. and Inoki, T (1991) Skill Formation in Japanand Southeast Asia, Tokyo: Tokyo University Press.

SUSUMU HAGIWARA

Koike, Kazuo 267

Komiya, Ryutaro

Ryutaro Komiya (1928–), professor at AoyamaGakuin University and emeritus professor atUniversity of Tokyo, is one of the leading Japa-nese international economists. He served as thedirector of MITI /Research Institute of Interna-tional Trade and Industry from 1987–97. He hasargued that the cause of the large trade surplusof Japan is not due to the exclusive nature of theJapanese markets toward imports but due to thefact that the amount of saving exceeds investment.He also argues that the situation of the UnitedStates is just the opposite, and if the United Statesdoes not adopt a policy of increasing the savingrate, managed trade measures to correct the im-balance are meaningless. Furthermore, he believesthat the Maekawa Report, which made a formalcommitment to the right of the Japanese to main-tain a trade surplus, was a mistake.

Further reading

Ryutaro, K. (1990) The Japanese Economy: Trade, Indus-try, and Government, Tokyo: University of TokyoPress.

SUMIHIRO TAKEDA

konbini

Konbini (convenience stores) constitute a dynamicsegment of the Japanese retail industry that hasa major impact on distribution channels for foodand daily necessities and, increasingly for prod-ucts and services based on information technol-ogy. They are a ubiquitous presence on the urbanJapanese landscape and an iconic trend in popu-lar sociology. Convenience stores were introducedto Japan from the United States in the 1970s, andthe term konbini, a contraction of “convenience,”first gained popularity around 1990.

Konbini are medium-sized, brightly-lighted,streamlined shops, usually open twenty-fourhours a day and generally located in high-trafficsites. The stores sell ready-to-eat and simple pack-aged foods, beverages, magazines, toiletries, andbasic household goods. Initially konbini were popu-lar primarily with young adults and commuters,but their appeal has spread widely and their num-bers have grown enormously.

There currently are estimated to be over40,000 konbini throughout Japan, many of themfranchised stores affiliated with large nationalchains. Several of these chains have thousandsof outlets, including the largest chain 7–11 (over8,000 stores), Lawson’s, Family Mart, Circle-K,and am-pm. Konbinis first carved out their nichesas purveyors of take-out food, snacks, beverages,and magazines, but their repertoire has expandedenormously. They have become general stores—touted as “lifestyle centers”—for young, mobile,free-spending Japanese consumers. Currentkonbini staples include computer software; copy-ing and fax services; music CDs; postage stampsand telephone cards; tokens for toll expressways;ordering flowers for delivery; and rail and air-line reservations.

Food remains their mainstay however. Konbinibenefit from long-established patterns in Japa-nese shopping behavior—frequent shopping tripsfor small quantities—which reflects some combi-nation of consumer preference for fresh foodproducts with practical limitations on domesticstorage space in densely populated Japanese cit-ies. Traditionally urban neighborhoods weredotted with small-scale shops that enabled resi-dents to shop quickly often, and close to home.Konbini are heir to this shopping and retailingpattern. Konbini derive one-third of their salesfrom the sale of box lunches (bento) and preparedfoods, according to statistics reported in October2000 by the Ministry of Economics, Trade andIndustry (METI, formerly Ministry of Interna-tional Trade and Industry MITI). Packagedfoods, beverages, and snacks account for an-other third. Magazines, media, and servicesmake up the final third of their sales. Electronicservices constitute only about 4 percent of totalsales, but this is the fastest growing segment, in-creasing approximately 10 per cent over the pre-vious year. Sales for top-of-the-line konbinilocations average approximately ¥600,000 perday

During the enduring Japanese economic slumpsince the late 1980s, konbini chains have increasedtheir market share vis-à-vis other categories oflarge-scale retailers such as supermarket chainsand department stores. In 2000, the konbini re-tail sector had an estimated sales volume of ¥6trillion, roughly 70 per cent of the total sales of

268 Komiya, Ryutaro

department stores and 40 per cent of supermar-ket sales. Profit margins for konbini tend to behigher than those for other large-scale retailers.

Some national konbini chains are subsidiariesof major retail corporations. 7–11, for example,is owned by Ito-Yokado, a major supermarketand discount chain which itself purchased theSouthland Corporation, the US founder anddisseminator of the franchise. Lawson’s, the sec-ond largest Japanese konbini chain, is owned byanother major supermarket and discount re-tailer, Daiei. An initial reason why large-scaleretailers actively developed konbini was as a strat-egy to work around the restrictions on the sizeand scale of retail stores (under the Large RetailStore Law) which effectively prevented the ex-pansion of supermarkets and department storesinto many commercial districts and most resi-dential neighborhoods. The small size of konbini(usually well under 100 square meters) set themoutside the scope of the restrictive law, and ma-jor retailing firms were able to engineer ultra-so-phisticated distribution and inventory systemsappropriate to dense networks of small-scale out-lets.

7–11, in particular, is noted for pioneering aretail “just-in-time” distribution and inventorysystem, which relies on deliveries daily or moreoften. Their system incorporates sophisticatedrealtime point-of-sale data collection for inven-tory control and ordering, as well as consumeranalysis and market forecasting. The aggressiveuse of information technology by konbini has alsoenabled the major chains to become major pro-viders of a wide (and increasingly wider) rangeof electronic services. Konbini provide automatedteller machines; process many kinds of routinebill payments for utilities and insurance compa-nies; make reservations and sell tickets for con-certs, sports events, and travel; operate asdrop-off and delivery points for express services(takkyubin); and download software updates forconsumers. Konbini have developed a pivotal rolein e-commerce, through links made with majorJapanese manufacturers and merchandisers.Konbini serve as a customer’s point for picking upand paying for products that consumers orderover the internet directly from other companies.The advantages for consumers are that they donot have to use a credit card over the internet

and that they can arrange for delivery at a timeand place convenient for their daily commute.

In response to government mandated socialwelfare programs, one major chain has developeda system for daily deliveries of meals to seniorcitizens. Government agencies are consideringpossibilities for distributing bureaucratic formsto the general public and accepting routine infor-mation, such as social services applications, viakonbini networks.

The extensive technological know-how and in-frastructure provided by large konbini chains hasbeen a critical factor in their successful market-ing of franchises to local business people, manyof whom have converted old-line specialized re-tail shops—corner grocers, rice shops, or liquorstores—into konbini. Small-scale family ownedshops have been a major feature of the urbanretail, wholesale, and service sectors for genera-tions. Many family-owned businesses occupyvaluable commercial locations, but in the pastgeneration this small-scale sector of the economyhas faced enormous labor difficulties, betweenthe aging of the population engaged in familyenterprises and the reluctance of children to fol-low in parental footsteps and take over the busi-nesses. Konbini therefore offer many small-scalefamily businesses a good opportunity to capital-ize on real estate assets and to retain ownershipof a local business, much of the management ofwhich is embedded in the technical know-howand efficiently engineered distribution systemsof the large franchise chains (see distribution sys-tem). These systems reduce the need for hands-on management by local proprietors and enablethe stores to be operated largely with relativelylow-cost, low-skilled labor. Many stores rely to agreat extent on part-time labor, for example fromcollege students and housewives.

Konbini have become a major social phenom-enon in their own right, and there is an enor-mous amount of pop sociological analysis of theirimpact and appeal. Some critics of konbini see themas garishly intrusive shops that destroy local re-tail competitors and push aside local productionand distribution networks in favor of highly cen-tralized major corporations. This economic trendhas the side effect of hollowing out the social in-frastructure of regional and community life.Other opponents see konbini as purveyors of a

konbini 269

highly impersonal popular culture of consump-tion that especially targets alienated teenagers andyoung adults. Still other detractors decry theimpact of konbini on nutrition and cuisine: thepejorative term “konbini housewives” labels youngwomen who lack culinary skills and depend onthe ready-made dishes of their local conveniencestores.

Regardless of the criticisms, konbini have clearlyestablished themselves as a major category ofJapanese retailing, with wide consumer appealand a significant impact on future developmentsin merchandising and services. They appear well-positioned to continue to expand their influence.

THEODORE BESTOR

Kyocera

Kyocera Corporation was originally founded asKyoto Ceramics Ltd. in April 1959 by Dr. KazuoInamori and seven colleagues as a company spe-cializing in fine ceramic components. Today it isthe world leader in the manufacture of fine ce-ramic components, semiconductor components(circuit boards), electronic components (liquidcrystal displays, LCD), information equipment(printers), telecommunication equipment (cellu-lar phones) and optical equipments (single-lensreflex).

Most of Kyocera’s growth is due to mergers andacquisitions. Some of its subsidiaries includeKyocera International Inc., which was establishedin the United States in 1969 as a sales companyFeldmuhle Kyocera Elektronische Bauelemente

GmbH, a joint venture with Feldmuhle AG of WestGermany to manufacture semiconductor pack-ages, and Kyocera Hong Kong, which supplies elec-tronic components and equipment to SoutheastAsia. In 1979, Kyocera acquired Cybernet Elec-tronics Corporation, a manufacturer of citizen-band radios and equipment, in order to expandthe company’s base outside of ceramic packaging.In 1988, as part of a major expansion to bolsteroverseas operations, Kyocera set up head officesin Asia, the United States, and Europe (based inGermany). Also in 1990, it spent $250 million toacquire Elco corporation, a maker of electricalconnectors, and $560 million in 1991 to acquireAVX Corporation, a manufacturer of multi-lay-ered ceramic and tantalum capacitors used in semi-conductors, based in South Carolina. In 1995, itexpanded into multimedia with the establishmentof Kyocera Multimedia Corporation. Later thesame year, it established Shanghai Kyocera Elec-tronics Co. Ltd to manufacture electrical compo-nents in China. In 1996, it merged with DongguanShilong Kyocera Optics Co. Ltd to manufactureand sell consumer optical instruments such as cam-eras, lenses, and stroboscopes.

As of March 2000, Kyocera had 13,746 em-ployees, capital of ¥115, 703, 320,000 and $7,779million in sales. Its largest sectors in terms of salesare electronic equipment (33.4 percent), telecom-munications equipment (20.7 percent) and semi-conductor parts (18.8 percent) respectively It istraded on the Tokyo, Osaka and New York stockexchanges.

DAYO FAWIBE

270 Kyocera

Large Retail Store Law, 1974

The Large Scale Retail Store Law (which was en-acted in 1973 and took effect in 1974, wasamended in 1978, and abolished in May 1998)was the latest in a succession of Japanese lawsover the last sixty years that imposed bureaucraticobstacles to the establishment of large stores. TheDepartment Store Act of 1937, which was sus-pended in 1947 and then reinstated in 1956, re-quired approval of the national government(Ministry of Commerce and Industry prewar/Ministry of International Trade and Industrypostwar) for the opening of new departmentstores anywhere in Japan. In 1974 the Large ScaleRetail Store Law replaced the Department StoreAct and made the extent of floor space of pro-posed stores, rather than the nature of the stores,the criterion for necessitating MITI approval. Thecutoffs were 3,000m2 in the largest cities and1500m2 everywhere else; in fact, almost all storeswith more floor space than these cutoff limits hadbeen department stores. In 1978 this law wascompletely revamped so as to broaden its cover-age to include all proposed new stores with floorspace above 500m2. In May 1998, the Diet re-placed the old law with a new one (actually withthree new laws) that place all details of the regu-lation of large stores under the control of the pre-fectural governments. Some prefectures mayenact more severe restraints on the opening oflarge stores, and others may remove the restraintsaltogether.

Prior to 1998, the process of securing MITIapproval to open a large store was tortuous, and,

if successful, typically required two years orlonger from the time approval was first sought.The process involved hearings before local pan-els that included owners of existing stores whosebusinesses would have suffered if the particularproposed large store was established. These pan-els tended either to recommend against MITIapproval or else propose restrictions on the hoursor days of the week that a new large store couldoperate. In many cases they proposed onerousrequirements such as the requirement that thelarge store offer classes in cultural activities likecalligraphy or floral arrangement, at prices thatfailed to cover costs. MITI tended to adopt theserecommendations and proposals. Consequentlyfollowing the adoption of the 1978 amendmentsto the Large Store Law, the number of applica-tions to open new stores dropped to a mere tricklein 1984, with less than 500 applications for per-mission to open stores with floor space in excessof 500m2 in all of Japan, a nation of 120 millionpersons (see Larke (1994) for the details of theprocess of gaining approval to open a new largestore).

In 1989, the US government identified theLarge Store Law as a “structural impediment” tothe sale of US-made consumer products in Ja-pan, arguing in trade negotiations with the gov-ernment of Japan for repeal or relaxation of thelaw. Whatever the merits of the claim that ex-pansion of the number of large stores in Japanwould expand commercial opportunities forAmerican businesses, the government of Japandid agree to expedite the process of approvingthe opening of large stores. But the law remained

L

in force and the actual numbers of large storesshowed little signs of increase. Then in 1998 theDiet repealed the Large Store Law, in effect shift-ing control of such regulations to the prefecturalgovernments (who may actually perpetuate simi-lar restrictions to those embodied in the old law).The Large Store Law is the essential reason whyJapan, at least for now, has far fewer departmentstores per person than the USA while at the sametime it has far more of most other kinds of storesper person (McCraw and O’Brien 1986). Never-theless, the Large Store Law and its antecedentsare almost certainly not the fundamental basisfor Japan’s multiplicity of small stores.

The proliferation of retail stores benefits house-holds but at the same time raises the logisticalcosts of the distribution sector itself. It is morecostly to restock numerous small stores than afew large stores. Put differently as stores prolifer-ate some of the burden of transporting goods frompoint of production to point of consumption areshifted away from households and on to the dis-tribution sector. Just how far such shifting will godepends upon the households’ and distributionsector’s relative efficiencies at storing and trans-porting goods. This is because new stores can beprofitable only if the added benefits their pres-ence confers are greater than their costs. Factorssuch as scarcity of living space, that raise all house-holds’ costs of storing goods lead households tooffer higher price premia to retailers who locatecloser to their dwellings. This makes a greaterprofusion of stores profitable. Similarly factorsthat lower retailers’ costs render it more profit-able for them to accommodate households’ pref-erences for shorter shopping trips and increasethe profitability of a profusion of stores. Sortingout the various influences on Japan’s density ofretail stores which include the Large Store Law,scarcity of household storage space, geographiccentricity cost of maintaining personal vehicles,and population density requires careful statisti-cal investigation. To this point there have beenonly a few such studies (Flath (1991), Potjes(1993), and Flath and Nariu (1996)), but theirfindings support the tentative conclusion thatregulation matters less than the other factors justmentioned.

Government policies that transfer income en-counter less strenuous political opposition if the

deadweight losses they impose are small in rela-tion to the net subsidy. Given that small storesare already ubiquitous in Japan for the reasonsmentioned in the previous paragraph, regulationsthat protect small stores from competition by largestores imply only small economic distortions andencounter little effective resistance. If small storesdid not already predominate, the Large Store Lawcould not have survived in Japan’s political mar-ketplace. Geographic factors in the USA havefavored large chain stores, and slanted the politi-cal marketplace in favor of regulations that ben-efit them instead. Government limitations on largestores can survive the give-and-take of politicalcompetition in Japan but not in the USA. Forlocal zoning that favors large stores over smallones the reverse is true. In each case, regulationends up exaggerating the inherent tendenciesrather than fundamentally influencing them.

The Large Store Law of Japan and its ante-cedents have protected small stores from compe-tition with larger ones. Government regulationsin the USA have tended to favor large stores.Local zoning in almost every city in America hashad the effect of separating residential and com-mercial activities, which promotes car ownershipand favors large stores over smaller ones. Manyscholars and others have correctly deplored Ja-pan’s Large Store Law as imposing unnecessaryconstraints on the marketing of goods in Japan,but have perhaps both exaggerated the extent towhich Japan’s marketing system reflects the heavyhand of government regulation, and overlookedthe extent to which America’s marketing systemand those of other nations are also influenced bygovernment regulations.

Japan’s fragmented and complex distributionsector is uniquely suited to its own particulargeography. The scarcity of living space in Japan,and the inconvenience of owning and operatinga car, enhance Japanese households’ willingnessto pay for the added convenience of next-doorshopping. And Japan’s geographic centricity andhighly developed transport system lower the costsof a distribution sector that accommodates thispreference, a distribution sector having a prolif-eration of retail outlets that must be continuallyrestocked through complex logistical arteries.These factors combine to make a proliferation ofstores in Japan not only inevitable, but desirable.

272 Large Retail Store Law, 1974

And given this, regulations like the Large StoreLaw that protect small stores from competitionby large ones imply only minor economic distor-tions and encounter little effective political resist-ance. The Large Store Law more reflected thanshaped the structure of Japan’s distributionsector.

References

Flath, D. (1991) “Why Are There So Many RetailStores in Japan?” Japan and the World Economy 2: 365–86.

Flath, D. and Nariu, T. (1996) “Is Japan’s Retail Sec-tor Truly Distinctive?” Journal of Comparative Eco-nomics 23:181–91.

Larke, R. (1994) Japanese Retailing, London: Routledge.McCraw, T.K. and O’Brien, P. (1986) “Production and

Distribution: Competition Policy and IndustrialStructure,” in T.K.McCraw (ed.), America Versus Ja-pan: A Comparative Study, Boston: Harvard BusinessSchool Press, 77–116.

Potjes, J.C.A. (1993) Empirical Studies in Japanese Retail-ing, Tinbergen Institute Research Series no. 41,Amsterdam: Thesis Publishers.

DAVID FLATH

Liberal Democratic Party

As the dominant political party of Japan, the LiberalDemocratic Party (LDP), known in Japanese as JiyuMinshu To or simply Jiminto, has been in powerthroughout the post-Second World War era except fortwo brief periods. It was established in 1955 as theresult of a merger between the Democratic Party (DP)led by Ichiro Hatoyama, the then prime minister, anda dissident group of the Liberal Party (LP) led byShigeru Yoshida, Hatoyama’s predecessor. The partywas largely meant to be an anti-socialist coalition, associalist candidates had won more and more seats ofthe House of Representatives in the successive elec-tions in 1952, 1953, and 1955. The establishment ofthe LDP was prompted by the reunification of the So-cial Democratic Party (SDP), the largest socialistparty which had split in 1951.

In the second half of the 1950s, the LDP con-sisted of two major groups. Most of the formerDP members had been in politics since the pre-

war period, and tended to be critical of the newconstitution drafted in 1947. As they outnum-bered the former LP members, the new party’splatform called for constitutional reforms, whichcontributed to the “reactionary” and “right-wing”character of the LDP. In contrast, the former LPmembers were generally more consenting to thenew constitution, under which they had startedtheir political careers.

The postwar political structure of Japan issometimes referred to as a two-party system con-trolled by the LDP and the SDP, or the “1955regime.” In fact, however, it was an exemplarymodel of the predominant-party system, consist-ent with the definition laid out by GiovanniSartori, a leading Italian political scientist. TheLDP secured the position of the first party in allgeneral elections for more than three decades(1958–90), and stayed in power throughout theperiod of Japan’s economic growth and bubbleeconomy. Its defeat in the general elections in1993 put the party for the second time in its his-tory in opposition. But the next year the LDPcame back to power in a coalition governmentwith its arch-rival the SDP, and has managed tostay as the central force of successive coalitiongovernments since then.

However, the end of the Cold War makes itextremely difficult for the LDP to retain its ini-tial, and essential, identity as an anti-socialist coa-lition. Being created as the central pivot againstthe danger of socialist revolution, and almostnothing else, the LDP has become a catch-allparty The party was split in 1993 precisely be-cause of different ideologies among members.

Leaders and achievements

Ichiro Hatoyama was elected the first president(Sosai) of the LDP in 1956. As the prime ministersince December 1954, he wished to reverse hisaristocratic predecessor Yoshida’s pro-US for-eign policies. One result was the termination ofthe belligerent status between the former USSR,with which diplomatic relations were normal-ized in 1956. On the other hand, Hatoyamatried, and failed, to revise the constitutionalclause, Article Nine, that calls for the abandon-ment of arms.

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After a brief interval, Nobusuke Kishi, whoas a leading official had been purged on suspi-cion of being a war criminal, took office in 1957.Kishi also was critical of Yoshida’s foreign poli-cies but, as his nickname Ryogishi (literally “both-sided”) indicated, he was a genuine realist. Heaimed at what he thought would be the real in-dependence of Japan, free from the US influencesin the sphere of international politics, and adoptedpro-US policies precisely for this reason. The Ja-pan-US security treaty concluded by Yoshida in1951, provided no duty on the part of the USmilitary forces based in Japan to protect it, which,from the prewar politician’s viewpoint, was anoffense to Japan’s sovereignty.

However, if Kishi wanted an equal partner-ship with the USA, Japan would be obliged toaccept a reciprocal obligation to assist the USAin case of war, but use of military means is ex-plicitly denied by the 1947 constitution. Kishi’sgoal then became to revise both the constitutionand the security treaty with the USA.

Not only the SDP and Sohyo, the largest labororganization at that time, but many ordinary citi-zens, still living with wartime memories, rejectedKishi’s idea. On May 19, 1960, Kishi suddenlyresorted to a forcible voting motion for ratifica-tion of the new security treaty with the USA.The news made headlines nationwide and vio-lent demonstrations took place demanding hisresignation and rejection of the treaty After a fewdays, during which the Diet was surrounded bytens of thousands of protestors, the new treatywas ratified, but Kishi was forced to resign.

His successor, Hayato Ikeda, was also a formerhigh-ranking official, but a faithful disciple of theso-called “Yoshida School”. Yoshida, his politicalteacher, had served as prime minister under theoccupation of Japan by the General Headquar-ters and the Supreme Commander of Allied Pow-ers (GHQ/SCAP), instituted the 1947constitution and concluded the peace treaty atSan Francisco, as well as the former security treatyalthough he rejected the idea of rearmament ofthe country Yoshida had put more emphasis onpostwar recovery. It was he who brought Ikedaand his aides, Masayoshi Ohira and KiichiMiyazawa, into political careers and advised themon various occasions. Ikeda launched the famousincome doubling plan, but at the same time in-

troduced a new style of premiership described as“taking a low profile” or “tolerance and patience.”His administration put aside the constitutionalrevision and honored the new security treaty withthe USA, but built up de facto military strength.Ikeda is generally regarded as the statesman whoestablished the postwar Japanese conservativepolitics. Japan enjoyed the economic growththroughout the 1960s, which consolidated LDP’sposition as the ruling party.

Ikeda’s successor, Eisaku Sato, was in officefor seven years and eight months, the longestpremiership in postwar Japan. Sato was also agraduate from the “Yoshida School,” but ayounger brother of Kishi by birth. The fact madehim a personification of the two founding par-ties’ ideologies (LP and DP). Sato’s premiershipwas described as the politics of waiting, as heusually did not wish to intervene with sensitivepolitical issues and preferred to wait until theopportunity ripened. But Sato was a shrewdmanipulator of appointments. He placed his con-fidential fellow politicians in cabinet posts andthe principal party posts, in order to have themcarry out what he wished.

One of the few issues on which Sato took aninitiative was the return of Okinawa from USgovernance, which he deemed as his most im-portant task. Already Yoshida, his teacher inpolitics, and his natural brother Kishi had pro-vided him with examples to follow: the principleof give and take. Yoshida extended help to theUSA in the first half of 1950s, when it badlyneeded behind the front-lines activities support-ing its war efforts in the Korean Peninsula. Kishialso supported the USA when it was challengedby the USSR with supremacy in rocket tech-nologies in the latter half of the 1950s. In the1960s, Sato firmly supported the US commit-ments to Vietnam, and Okinawa was returnedto Japan in 1972. However, some problems wereleft untouched, such as the suspected secretagreement with the USA that allows the bring-ing of nuclear weapons into Japanese territory incases of emergency.

In the 1972 presidential election held withinthe LDP, Kakuei Tanaka defeated TakeoFukuda. By then, many Japanese had grownweary of prime ministers who came from the elitecentral bureaucracy such as Kishi, Ikeda, and

274 Liberal Democratic Party

Sato. In this regard Fukuda, a graduate of theUniversity of Tokyo and a former Ministry ofFinance official, was not an attractive candidatein popular eyes. Tanaka, who had held a seat inthe House of Representatives since he was firstelected at the age of twenty-nine in 1947, was anexperienced politician. Such prominent statesmenof the “Yoshida School” as Yoshida himself, Ikeda,and Sato had trained him in politics. But the factthat he had graduated only from an elementaryschool and had been in business in civil workscontracting presented a sharp contrast to the pro-files of established political figures.

Tanaka’s premiership was heralded at first, asit symbolized postwar Japan where the prewarfeudalistic social restraints no longer applied anddemocratic values, as well as equality of economicopportunities regardless of one’s birth or origin,were a reality. Although a score of prime minis-ters after Tanaka were again from the centralbureaucratic circles (Fukuda, Ohira, andMiyazawa), the image of the Japanese prime min-ister changed irrevocably with Tanaka. Thankspartly to his talent for oratory Tanaka enjoyedpopularity for most of his term, but his politicswere always accompanied with an image of plu-tocracy His approach was, critics said, centeredon raising and distributing money in order tomake political gains such as winning elections andforming and maintaining his faction; in short, amoney politics. His greatest achievement was thenormalization of relations with the People’s Re-public of China in 1972. Despite this diplomaticsuccess, he is generally regarded as the one whocoined the legacy of money in Japanese politics.

Tanaka’s term was two years and five months.The oil shock shattered his ambitious policy ofeconomic expansion. In December 1974 he re-signed due to financial scandals. Two years later,suspected of accepting bribes from LockheedCorporation, he was charged with violation offoreign exchange regulations. Although foundguilty Tanaka retained a strong political influenceuntil he died in 1985.

During the 1970s and 1980s, the LDP contin-ued to remain in power under successive presi-dents. After Tanaka, Takeo Miki, Fukuda, ZenkoSuzuki, Yasuhiro Nakasone, and NoboruTakeshita held the post of prime minister, eachfor about two years. Exceptionally Nakasone was

in office for five years, from 1982–7. Until 1985Tanaka and his loyal members of parliament,called the “Army of Tanaka,” exerted decisiveinfluence in choosing LDP presidents, hence theprime ministers of Japan. The credo of the Tanakafaction was, as they themselves advocated, thatholding a majority meant holding power. TheLDP managed to rule Japan as the economyshifted from one of high growth to one of slowgrowth.

In hindsight, many Japanese tend to regardthe 1990s as a “lost” decade, filled with legaciesof money but devoid of agenda. Not only theLDP but its archrival the SDP and other newparties were suspected of being incapable of guid-ing the nation to overcome the social and eco-nomic challenges that have arisen since thecollapse of the bubble economy. A question, then,is why the LDP has lost its dominant role. Thisquestion, in turn, leads to another: why did theLDP succeed in riding out the economic ups anddowns and social changes throughout the post-war period? As an old adage goes, the cause ofLDP’s failure lies in its very success.

LDP power structure

There are four main reasons for the LDP’s longgovernance. Firstly the opposition, especially theSDP, was, and still probably is, weak and neverreally ready to be in power. Secondly the longhistory of the LDP as the ruling party provided astrong reason for the electorate to vote for itscandidates.

Thirdly the LDP was the only party fit to themedium constituency system. Under this system,the country was divided into 130 districts, whereon average four members of parliament wereelected. Since the House of Representatives con-sisted of 512 seats, it required a party aiming foran absolute majority to nominate more than twocandidates in all districts. Only the LDP was ableto gather that number of candidates.

On the other hand, however, more than twocandidates with the same party affiliation had tocontest with each other in the same constituencyOne difference between the LDP candidates layin affiliations to factions within the LDP, not theparty itself. The LDP was, and still is, composedof five or six factions. Election campaigns were

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run by factions and candidates’ local supportersorganizations, but not by the party itself. Anotherdifference lay in the candidates’ popularity amongthe voters, which it was critical to win. Typicallyeach potential candidate, regardless of whetherhe or she were actually seated in the parliament,would be present at every ceremonial occasionto “sell” their face with a gratuity (now illegal),called giri. When elected, members belonging toa faction asked their boss to approach the minis-tries and agencies on behalf of their local sup-porters, called nemawashi. The boss, in need ofthe party members’ votes when he would runfor the LDP presidency accordingly approachedbureaucrats and assisted his followers’ support-ers looking for subsidies to build bridges, roads,railways, and so on.

This method of systematically canvassing forvotes is said to have been developed by Tanaka.But this system required much money to be spentby politicians, not supporters. For example, mem-bers of parliament hired, at their own expenses,private secretaries to be in charge of handlingthe various requests of their local supporters, or“clients.” Since the late 1980s, LDP faction bossesone after another suffered from money scandals,which aroused indignation among the voters. Inthe face of demands for political and electoralreforms, the medium constituency system wasreplaced in 1994 with the single-member constitu-ency system for 300 seats and the proportionalrepresentation system for the remaining 200 seats.Subsequent general elections, taking place in 1996and in 2000, however, have not yet produced thetwo-party system that the reform had anticipated.

The fourth reason for the LDP’s long govern-ance was an “iron triangle” relationship betweenthe LDP, the central bureaucracy and business.At first, the LDP was an agrarian party Newlycreated independent, small-scale farms providedstrong support. The farmers’ interest group, theNational Federation of Agricultural CooperativeAssociations (Nokyo), functioned as the mostloyal election machine of the LDP, as well as anorgan to promote the policies laid down by theMinistry of Agriculture, Forestry and Fishery Inreturn, LDP leaders ensured that the Ministrywould extend various assistance to villages.

The same triangle can be found in every in-dustrial sector. For example, the LDP and the

Ministry of International Trade and Industryare closely connected with each other throughthe petrochemical industry and the party holds aclose relationship with the transportation indus-try which is under the auspices of the Ministryof Transport. Business makes financial contribu-tions to the party which is useful in having theministries and agencies grant licenses and pro-mote policies fit to their needs. LDP gives aspir-ant bureaucrats a chance of becoming astatesman. This system, however, often works toprotect vested interests that are in search of anexecutive’s help to be shielded from free compe-tition (referred to as “convoy guard practices”).In this regard, the LDP is neither liberal nordemocratic, but may be similar to a social demo-cratic party which stands by the weak.

Such a system will not survive as Japan entersthe age of global mega-competition, which re-quires openness and fairness. The LDP also faceschanges in the nation’s social and demographicstructure. If the LDP clings to its traditional old“customers” in local areas, it will run the risk ofbeing rejected by new potential clients, especiallythe urban electorate. If the LDP regards the lat-ter as important, the former will no longer re-gard the party as their representative. The partytoday faces an unprecedented dilemma.

Further reading

Curtis, G.L. (1971) Election Campaigning Japanese Style,New York: Columbia University Press; trans.S.Yamaoka as Daigishi no Tanjo (Birth of a Politician),Tokyo: Saimarushuppankai, 1971.

Hayasaka, S. (1993) Oyaji to Watashi (Reminiscences ofKakuei Tanaka), Tokyo: Shuueisha.

Ishikawa, M. (1995) Sengo Seijishi (Political History ofPost-War Japan), Tokyo: Iwanami Shoten.

Sato, S. and Matsuzaki T. (1986) Jiminto Seiken (LDPin Power), Tokyo: Chuuoukouronsha.

TSUTOMU TSUZUKI

liberalization of financialmarkets

The liberalization of financial markets involvesthe introduction of greater competition into thefinancial system. In general, therefore, the

276 liberalization of financial markets

liberalization process centers on abolishing or re-laxing regulations that stifle competition. In theearly stages of industrialization, a nation’s finan-cial system tends to be particularly vulnerableand countries typically place heavy regulation orcontrols on the movement and investment of capi-tal. As a nation’s financial system develops andthe national economy becomes increasingly inte-grated into the global economy however, the costsand benefits of heavy regulation change, andcontrols stifling competition tend to be dis-mantled. Politics and the structure of political andadministrative institutions play a critical role inthe timing and nature of the reform process.

Competition-suppressing characteristics ofJapan’s financial system

Japan had a relatively laissez-faire financial sys-tem in the 1930s. In the immediate postwar pe-riod, however, the Japanese financial market washeavily regulated as a means of promoting eco-nomic reconstruction and growth. Japanese au-thorities established a system intended to promotefinancial system stability and facilitate the alloca-tion of scarce capital from the private sector tothe corporate sector, and to critical industries inparticular. This system had a number of charac-teristics that suppressed free market-based com-petition.

One of the most prominent features of thissystem was the presence of numerous price con-trols. Artificially low interest rates on loans regu-lated the cost of capital for industry At the sametime, the Interest Rate Control Act of 1947 cappedinterest rates on deposits at below market rates,thereby guaranteeing banks significant profitmargins on making loans. Interest rate regula-tions also applied to the bond-issue markets.

Importantly these price controls took place ona backdrop of capital controls. Under the For-eign Exchange and Control Law, the governmentlimited cross-border financial transactions. In theirinternational financial dealings, Japanese banksfaced restrictions on their net foreign exchangepositions, on the banks’ issuance of certificatesof deposit abroad, on the amounts of foreign as-sets held by institutional investors, and on long-term Euroyen loans. Only a single bank—the

Bank of Tokyo—was permitted to engage in for-eign exchange transactions.

Segmentation of the financial system also sti-fled competition. Not only was the banking andsecurities business legally divided, but banks werealso subdivided into ordinary trust, long-termcredit, and foreign exchange banks. Crossing overinto other areas of business was strictly prohib-ited, as were financial holding companies. Otherregulations also served to offer support for bank-centered financing over the development of capi-tal markets.

Strict limits on market entry and exit further-more stifled competition. The Ministry of Fi-nance (MOF) rarely issued new licenses forbanks, brokerages, or insurance companies andkept a tight lid on the expansion of retailbranches. A so-called “convoy approach” toregulation at the same time ensured that no actormoved forward so fast as to leave another actorbehind. Financial institution failure was circum-vented by the government’s implicit guaranteeof all banks and its arrangement for “rescuemergers” in cases of dire financial institutiondistress.

These formal regulations were not the onlyimpediments to competition, however. In fact,much of financial system regulation was infor-mal in nature. Administrative guidance—that is,extra-legal directives given by government au-thorities to companies—was one of the mostprominent features of regulation of the financialsector. These directives also helped ensure thatcompetition never became “excessive.”

Pressures for liberalization

Many of the regulations that served to protectand stabilize the Japanese banking system in theearly postwar years became obstacles to efficiencyas time progressed. Pressures for the liberaliza-tion of Japanese financial markets began toemerge in the 1970s, and continued to rise in thedecades thereafter. These pressures arose prima-rily in response to changing opportunity struc-tures for domestic actors—both public andprivate—and to pressures from abroad.

As large Japanese firms became internation-ally active, they were able to circumvent high

liberalization of financial markets 277

bank fees by raising funds abroad. By the 1970s,many multinational corporations procured fundsin the Euromarkets rather than borrowing frombanks. Thus, at the wholesale end, banks hadincentives to support deregulation. In the area ofretail banking, however, deregulation was slowerbecause bank customers had fewer exit options.Nonetheless, with many more assets to invest andthe threat of a loss to purchasing power whichinflation in the 1970s had brought, Japanese firmsand households became increasingly more sensi-tive to interest rate levels. By the late 1980s, theMOF had begun to allow interest rates on de-posits to approach market levels.

Increased budget deficits in the 1970s alsoplaced pressure on authorities to liberalize finan-cial markets, as the financial system was hard-pressed to absorb increasing amounts of publicdebt in the absence of liberalized bond markets.The city (large commercial) banks played a largerole in underwriting government bond issues.When the volume of government bond issues wassmall, Japanese banks could absorb these issues.After the oil shocks, however, debt issues reachedsuch a level that banks could no longer absorbgovernment debt or tolerate the losses this en-tailed. Pressure on the government to changecontrols on Japan’s capital markets thus emergedfrom the banking sector. In 1978, financial insti-tutions were permitted to commence the sale ofgovernment bonds in the secondary market.Banks also pushed for the right to expand into awider range of services and products and theBanking Act of 1982 represented a move in thisdirection.

Through the US-Japan Yen-Dollar Commit-tee of 1983–4 and other pressures on Japan forreciprocity foreign pressure also played a role inpropelling reforms in the direction of a moreopen financial system. The overseas activities ofJapanese banks became increasingly prominentin the 1980s, while the virtual absence of foreignbanks in Japan was likewise conspicuous. Thisdisparity led the US government to complainthat the Japanese financial market was closedand push for deregulation that would enable for-eign banks to enter. The USA threatened to limitopportunities for Japanese banks in the USA ifJapan failed to open up its domestic financial sec-tor.

Impediments to financial liberalization

In these ways, fiscal deficits, profit pressures onbanks, and foreign pressure served as impetusfor the commencement of financial liberalizationin Japan. Interests were divided within Japan overthe pace of this liberalization, however. Politicswould control the pace of the transformation,helping to make the Japanese process of financialliberalization distinctively slow in comparison toliberalization in other advanced industrial coun-tries such as the USA or the UK. The Ministryof Finance was the primary arena for mediatingpressures for change and deliberating reforms butits own organizational interests had become en-trenched in this system. Thus, Japan’s path offinancial liberalization would reflect considerationof the ministry’s own preferences, as well as thepreferences of domestic industry and theindustry’s political advocates.

Because interest rate levels were integrally tiedinto profits of financial institutions, liberalizationof interest rates could be expected to squeeze fi-nancial institution profits. This anxiety for banks,however, might have been relieved by permittingbanks to engage in other areas of financial serv-ices and thereby shifting away from exclusivereliance on bank loan spreads as the primary basisfor profit-making. Yet, granting banks permissionto expand into new business areas—and into thesecurities business, in particular—drew strongprotests from brokerages. Rather than movingforward with financial system reform, therefore,the ministry followed a less conflictual route ofalleviating profit pressures through loose mon-etary policy In the process, financial liberaliza-tion was replaced in the latter half of the 1980sby the inflation of a speculative asset bubble.

Japan’s deposit insurance system was alsopoorly equipped to handle liberalization. Theintroduction of greater competition would inevi-tably mean the need to deal with some financialinstitution failures. Although a Deposit InsuranceCorporation (DIC) had been established in 1971,it lacked sufficient funds to pay off depositors ineven a second-tier regional bank. Yet, banks re-sisted the imposition of higher deposit insurancepremiums, preferring instead to rely on informalad hoc means of solving problems that they per-ceived to be less costly.

278 liberalization of financial markets

Big Bang financial reforms

As a result of the political impediments faced inthe 1980s, the final stages of Japan’s financial lib-eralization would be postponed until the 1990sand the first decade of the twenty-first century.The 1993 Financial System Reform Law allowedbanks to enter the securities business in a limitedway through subsidiaries but postponed theirentry into stock trading. Far-reaching reformswould not take place until the emergence of po-litical leadership and reform elements within theFinance Ministry.

In 1996, Prime Minister Ryutaro Hashimotoannounced a plan to push forward with liberali-zation of the Japanese financial market. The re-form program, nicknamed the “Japanese BigBang,” was touted to make Japan’s financial sys-tem “fair, free, and global.” The plan resembledin many respects the major reforms undertakenin the UK some years earlier. Commencing in1998 and scheduled for completion in 2001, thereforms were intended to revitalize the Japaneseeconomy by making the management of over1,200 trillion yen in household financial assetsmore efficient. In essence, the Big Bang reflectedthe completion of the liberalization process be-gun—but delayed—in the 1980s.

The Big Bang reforms include three majorcomponents: the promotion of competition be-tween the securities and banking markets, theimprovement of Japan’s capital market infrastruc-ture, and the promotion of investor confidencein Japanese capital markets. The first goal re-quired the liberalization of cross-border capitaltransactions—that is, the repeal of foreign ex-change controls—and was carried out in April1998. This goal also necessitated promotion ofcompetition among various financial intermedi-aries and the promotion of competition in thedomestic market.

Reforms taken to improve Japan’s capital mar-ket infrastructure included the elimination of le-gal obstacles to securitization, the promotion ofsmall business financing through the securitiesmarket, and the diversification of financial instru-ments used by corporations. Procedures for issu-ing securities have also been simplified andaccounting standards reformed as well. Otherintegral measures include improvement of the

settlement system and the implementation of taxreforms.

To promote greater investor confidence inJapanese capital markets, the Big Bang reformshave improved disclosure by financial institutionsand the quality of supervision by regulators. Earlywarning systems designed to detect serious prob-lems with asset quality before financial institu-tions reach the point of insolvency have also beenintroduced in the form of Prompt CorrectiveAction measures. Finally the reforms aim to im-prove the safety net for depositors, investors, andinsurance policyholders.

The heavy reliance on informal relations-basedregulation over most of the postwar period means,however, that true liberalization also involves aredefinition of the relationship between financialfirms and their regulator. Legislation imple-mented in April 2000 in the form of a new EthicsLaw for National Public Civil Servants has helpedeffect this needed shift.

Implications of financial liberalization

The liberalization of Japanese financial markets—and the Big Bang financial reforms, in particu-lar—have had a number of implications. Mostnotably the ongoing liberalization has led to asurge in foreign direct investment into the Japa-nese financial sector. Liberalization has also ef-fected changes in the relationships between banksand their borrowers, serving to further weakenthe main bank system and encourage firms todiversify their sources of fund procurement. Fi-nally while liberalization has meant the need toreduce or eliminate profit-padding regulation, ithas meant the need to establish new prudentialregulations to ensure that financial institutionsdo not act recklessly with their newfound free-dom.

Further reading

Hamada, K. and Horiuchi, A. (1987) “The PoliticalEconomy of the Financial Market,” in K. Yamamuraand Y.Yasuba (eds), The Political Economy of Japan:The Domestic Transformation, Stanford, CA: StanfordUniversity Press, 223–60.

liberalization of financial markets 279

Toya, T. (2000) “The Political Economy of the Japa-nese Financial Big Bang: Institutional Change inFinance and Public Policy Making,” Ph.D. disserta-tion, Stanford University.

Vogel, S. (1996) Freer Markets, More Rules: RegulatoryReform in Advanced Industrial Countries, Ithaca, NY:Cornell University Press.

JENNIFER AMYX

lifetime employment

The lifetime employment system, known asshushin koyo, is well known as one of the “threesacred treasures” of Japanese management, theother two being the seniority system and com-pany unions. Although lifetime employment isnot actually protected by law, it is an institution-alized practice which is engrained in the indus-trial structure of the country Lifetimeemployment refers to the widespread practice ofemploying salaried workers for the duration oftheir working life within the same company fam-ily In some cases an annual contract is continu-ously renewed, but in the majority of cases anemployment relationship is understood to be foran indefinite period, with nothing put into writ-ing. This long-term relationship between com-pany and employee is offered mainly to salaried,college-educated males who are recruited fromuniversity campuses each year in the spring-time.The lifetime employment system does not extenditself to part-time, female, or non-salaried work-ers (often called peripheral workers) except in afew cases. However, even without the implicitcontract of lifetime employment, most peopleexpect to work for the same company for theduration of their career, reflecting the importanceof group memberships and company affiliationin Japanese society.

For Japanese employers, the notion of lifetimeemployment is a practical way to solve labor short-age problems during economic expansions. ForJapanese employees, it provides the job securitythey had long demanded through their enterpriseunionization.

Studies of Japanese mobility suggest that im-plementing the lifetime employment system dif-fers by organizational type and size. Some studiesassume that lifetime employment is limited tolarge firms (at least 500 employees), suggesting

that under 20 percent of industrial workers takepart in the system.

The lifetime employment system is closelylinked to the seniority system in Japan, or nenko.In the seniority system, the length of service(years working for the company) heavily deter-mines both wage increases and promotions. With-out a long-term employment relationship betweenthe employee and company secured in some wayit would be impossible to maintain such a sys-tem. Thus, without lifetime employment, the sen-iority system would fail.

The lifetime employment system, as men-tioned previously is not offered to all workers inJapan. A dual structure of employment exists inwhich “core employees” are protected by the life-time employment practice, but all other employ-ees (often called “peripheral” or “non-regular”)are not. These core employees are predominantlymale university graduates who are expected tobe the future managers and leaders of the organi-zation. Education, training and employee devel-opment programs are most often designedexclusively for the “core employees.” Thus, com-pany investment is high for this “core” group ofemployees who will be retained for the extent oftheir working life.

The “peripheral” workforce includes all non-core employees, such as women, part-time, con-tract, junior college graduates, foreign employeesand other “non-regular” hires. The peripheralworkforce provides the labor flexibility the com-pany requires to maintain its lifetime employmentsystem for the core employees.

“Peripheral” employees do not have job orwage security and thus are a more flexible fea-ture of the Japanese employment system. Invest-ment in peripheral employees is low, and whenemployment restructuring is necessary the “pe-ripheral” workforce is more easily adjusted. How-ever, even with these “peripheral” workers theJapanese company maintains a level of long-termcommitment much higher than its Western coun-terpart. Firing is difficult given that the role ofthe company is that of “caretaker” for the em-ployee. Although peripheral workers are not en-dowed with the same rights and privileges as thecore group, they still have a relatively high de-gree of job security compared to their Westerncounterparts.

280 lifetime employment

The history of the lifetime employment system

In pre-First World War Japan, workers werehighly mobile. The labor market was structuredupon occupational skill and knowledge, not uponcompany affiliation. Differences in labor mobil-ity depended upon whether or not the occupa-tion was a traditional Japanese craft or based upona Western-style skill. The wage system was basedupon the classification of these occupations, andan individual worker would stay within the samewage classification as long as they stayed in thesame job, regardless of their years of service. Inthis system, the only way to increase status orpay was to move jobs. Thus, if there was dissatis-faction with either the pay or the company therewas little disadvantage to moving. This ability tomove around in order to increase one’s individualwealth helped to strengthen a worker’s self-re-spect and independence, making it difficult foremployers to control their workforce. Thus, thissystem was good for the individual worker, butnot necessarily the company.

In the post-First World War era, this systembegan to be replaced during a period of “ration-alization” which centered around creating largeenterprises capable of supporting the develop-ment of the Japanese economy and military. Thegovernment of Japan played an active role in theconfiguration of industry management of organi-zations and development of human capital (labor).Production processes in large companies weredivided into simplified jobs which made the oldsystem of skilled labor unnecessary. Companypersonnel policies were developed to reflect theincreasing focus on large enterprise developmentand workforce control, including the hiring andtraining of their own new labor force. The oldsystem of masters training unskilled students wasreplaced with companies training unskilled newrecruits, with the guarantee of lifetime job secu-rity in return for company loyalty. Companymanagement assumed the responsibility for skilldevelopment, which was usually exclusive to theneeds of the company. Therefore the laborers’skills became non-transferable. This system ofskill development, along with long-term compen-sation packages which reflected increasing wagesover time, effectively replaced the old system ofhighly mobile and independent labor.

After the Second World War, the zaibatsu (fam-ily group of companies) system was abolishedunder the new constitution and immediately re-placed by an almost identical keiretsu family sys-tem of companies and shareholders. This systemhas been characterized as the “industrial policymodel” in which government and business acttogether in order to meet societal economic goals(Abegglen and Stalk 1985). Within this system,Japanese companies began to operate at a muchbroader level to maintain their costly lifetimeemployment system by developing a two-tierwage system. In this system, higher wages wouldalways go to the “core employees” (white-collarcollege graduate males) at the expense of “pe-ripheral workers” (women, part-time, contractworkers, retirees). Japanese companies used thefoundation of commitment between employeeand organization to structure a complete systemof lifetime rewards (employment, security bonus,retirement).

Over the period between 1914 and 1945, Japa-nese companies created the now famous Japanesemanagement system, in which lifetime employ-ment is a key feature. Although the lifetime em-ployment system has never formally applied tomore than 30 percent of the working population,it nevertheless is prevalent in most large compa-nies today. Over the years, employees put in longhours and are loyal to their employers. In turn,their future is secure and income is adjusted totheir needs. Salaries grow progressively regard-less of individual performance. Younger employ-ees are underpaid, and older ones receive morethan their contribution to the company.

This system has worked well for the past fiftyyears, as long as companies maintained high prof-its, strong export growth, and were able to hire asufficient number of new university graduatesevery year. But this system is costly to maintainin a low-growth, highly competitive environment.Thus, the lifetime employment system has dis-tinct advantages and disadvantages in today’scompetitive global business environment.

Advantages and disadvantages of thelifetime employment system

The lifetime employment system has distinctadvantages for the company. First, it retains the

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services of employees in times of labor shortage.In this system, no matter what the market cir-cumstances may be, there is little chance of theemployee finding a better position outside of hiscurrent company. In addition, the company main-tains optimal control over the individual and theirtraining, career development and compensation.This reduces the high level of uncertainty andrisk that comes with more fluid labor markets.Finally the company is able to plan for the longterm and invest in its human resources accord-ingly allowing it to develop a strong futureworkforce.

For the employee, the system has the advan-tage of job security in times of labor surplus andcommitment from the organization toward thefuture development of the employee’s knowledgeand skills. More importantly from a cultural per-spective is the fact that the company provides thewhole social existence, or community from whichemployees derive their identity and their self-worth. As a community the company exercisesshared authority and control in a society basedupon group norms and social structure.

Thus, the lifetime employment system pro-vides many cushions both economically and so-cially. Layoffs are scarce, wages are steady on thewhole (but can rise and drop dramatically for theindividual who is either promoted, demoted ortransferred outside the headquarters), and a con-stant source of human capital is readily available.

Challenges to lifetime employment

The lifetime employment system worked best inan environment of steady economic growth, lim-ited imports and controlled competition. Recentlyseveral factors have arisen which have had animpact on the lifetime employment system in Ja-pan: the high yen, the collapse of Asian markets,the aging population, and increasing global com-petition.

During the 1990s, the strengthening yenforced Japanese companies to significantly in-crease the amount of their overseas investment,especially within Asia. Trade with other Asiannations now exceeds trade with Europe and theUnited States combined. Supported by the highyen, imports have risen significantly exceedingexport growth. This has eroded the local profit

margins which once helped Japanese companiesfinance their overseas expansion and fuel growthat home. Although Japanese companies were ableto remain competitive, it made many jobs in Ja-pan redundant. However, with an institutional-ized long term employment system, it has beenclose to impossible to reduce labor costs bydownsizing.

The second major factor to challenge the life-time employment system has been the farreachingeffects of the collapse of Asian markets. Both theJapanese government and Japanese companiesrelied heavily on the strong growth in SoutheastAsia during the 1980s and 1990s as a foundationto their global manufacturing systems. With thecollapse of currencies and even whole markets(Indonesia), Japanese investments turned intolosses. Japanese companies not only lost billionsof yen, but were forced to cancel longterm in-vestment projects, and in many cases, close downwhole operations. In the short term this forcedJapanese companies to repatriate thousands ofoverseas managers, and over the long term hasresulted in widespread economic turmoil in Ja-pan. Thus, an era of employment restructuringhad finally begun in Japan.

A third challenge to the lifetime employmentsystem is the aging workforce in Japan. There isnow only one future worker for every two em-ployees currently employed in Japan. This meansthat over time all institutions will be affected by ashortage of labor at one end, and a surplus ofwelfare recipients (retirees) at the other. Whencompanies experience such a shortage within thelifetime employment structure, it means that theycan no longer rely on the long term strategy ofhuman resource development. Fewer workers willhave to produce the higher output to remain com-petitive, which means increasing the skills andabilities of workers at a faster rate, and at thesame time trying to control spiraling labor costs.Thus, the lifetime employment may have a nega-tive effect on employee productivity and companyperformance.

Finally the effect of global competition on theJapanese employment system has been to chal-lenge the long-term nature of employee develop-ment. New technologies and the skills requiredto develop and manage them are all changing atincreasingly rapid rates. Companies no longer

282 lifetime employment

have the luxury of slow, internally focused andincremental skill development for their employ-ees. They will need to attract employees at alllevels of the organization and be able to recruitthe necessary knowledge, skills and abilities toremain competitive. The system of lifetime em-ployment, which includes annual university re-cruiting and long-term seniority wages, may betoo slow and inflexible to respond to the rapidchange of the global marketplace.

The future of lifetime employment

Job changes in the labor market are becomingpolarized, or in some cases, even more frag-mented. Companies are creating smaller “cores”and increasing their peripheral workforce (spe-cialists, irregular hires, and term hires). Jobs arediversifying and job change for peripheral work-ers is on the increase. Thus, some conclude thatthe lifetime employment system will slowly be-come a thing of the past.

Conclusion

The Japanese lifetime employment system has along tradition in Japan. This system of long termcommitment between employee and companyserves as both social and economic foundationfor the industrial system in Japan. However, thissystem may be changing in order for Japanesecompanies to adjust to contemporary market re-alities. There remains an open debate as towhether or not the positive aspects of this sys-tem will outweigh the negative when it comes tomaintaining a competitive labor market for Japa-nese companies competing in the globaleconomy.

Further reading

Abbeglen, J. and Stalk, G. (1985) Kaisha: The JapaneseCorporation, New York: Basic Books.

Cheng, M. and Kalleberg, A. (1997) “How PermanentWas Permanent Employment?” Thousand Oaks,CA: Work and Occupations.

Clark, R. (1979) The Japanese Company, New Haven,CT: Yale University Press.

Hayashi, S. (1988) Culture and Management in Japan,Tokyo: University of Tokyo Press.

Inohara, H. (1990) Human Resource Development in Japa-nese Companies, Tokyo, Japan: Asian ProductivityOrganization.

Ministry of Labor (1994) White Paper on Labor: Tasks forEnriching Working Life Based on Stable Employment, To-kyo, Japan: Japan Institute of Labor.

Okimoto, D. and Rohlen, T. (1988) Inside the JapaneseSystem, Stanford, CA: Stanford University Press.

Okuchi, K., Karsh, B. and Levine, S. (1988) The Japa-nese Employment Relations System, New York:Routledge.

MARGARET TAKEDA

localization

Localization is known as genchika in Japanese. Onemeaning of localization refers to the gathering ofas many production facilities at one geographicallocation as possible in order to increase efficiencyUsually however, genchika is used in the contextof the international management practices of Japa-nese multinational corporations that have over-seas sales and production subsidiaries. Often suchoverseas subsidiaries operate under the aegis anddirect control of their parent company in Japan.Genchika, on the other hand, refers to looseningthe control of the parent company so that thesubsidiary becomes more independent in orderto be regarded in the host country as a local ratherthan a foreign company. The genchika processconsists of the following three elements: an in-crease in the percentage of local capital, an in-crease in the supply of raw and industrialmaterials for production within the host countryand the appointment of native managers to topposts.

With the rapid postwar economic develop-ment, many big Japanese corporations becamemultinational and began to do business all overthe world. Much of their investment has been inAsia, North America and Western Europe. Ingeneral, genchika has been encouraged bypressure from the host countries, not by the in-ternal motivation of Japanese corporationsthemselves.

In Asia, many nations gained their independ-ence from Japan after the Second World War andhad to develop their own economies. At first,

localization 283

these nations had strong protectionist policies toprotect their natural resources and native busi-nesses from the inflow of products from advancednations. However, in order to modernize, theyopened their gates to foreign multinationals inan effort to utilize foreign capital and advancedtechnology for their own national economy. De-veloping nations in Asia invited multinationalcorporations of advanced nations, including Ja-pan, to set up local subsidiaries. Japanese multi-nationals established both sales and productionsubsidiaries because both cheap labor and devel-oping markets were available to them.

In terms of capital, developing nations in Asiahave demanded that foreign companies establishjoint ventures with native investors. They havealso demanded an increase in the local supply ofproduction materials. The same is true for hu-man resources. Asian nations expect foreign com-panies to develop native technicians and also toappoint native managers to high posts.

In general, genchika by Japanese multination-als has advanced significantly in terms of capitaland production materials in Asia. In these twoaspects, Japanese multinationals have met the lawsand expectations of the host nations. But when itcomes to personnel management, very few Japa-nese multinationals have opened their doors fornative employees to take top executive posts. Inthe vast majority of Japanese multinationals, Japa-nese men who are sent directly from the parentcompanies in Japan have occupied the highestposts. Japanese multinationals have been veryreluctant to have local people as top managers intheir subsidiaries, because the parent companiesfear that locals will not be as obedient as Japa-nese managers.

The fact that Japanese multinationals havebeen reluctant to appoint local people as topmanagers in Asia has nothing to do with Japa-nese prejudice against non-Japanese Asians. Thesame is true of Japanese multinationals in NorthAmerica and Europe, although the backgroundof genchika in those areas is somewhat different.

Japanese corporations’ multinationalization inNorth America, especially in the USA, and Eu-rope was largely driven by protectionist sentimentin those nations based on trade friction. Ever sincethe late 1960s, Japan has maintained a positivebalance of trade with the USA, and the gap has

increased enormously up to the present. There-fore, Japan has imposed restrictions on its exportsto the USA. In the 1970s, Japan restricted theexport of textiles and color televisions, and inthe 1980s of automobiles, semiconductors andmanufacturing machinery Thus, a major moti-vation for establishing local production and salessubsidiaries for most Japanese companies wasretaining market share in the USA.

Unlike their Asian subsidiaries, there werevery few Japanese factories in North Americabefore 1975, but since the late 1970s, the numberhas shot up like “bamboo shoots after rain.” ThePlaza Agreement in 1985 especially acceleratedthis tendency as the value of the yen rose drasti-cally after the agreement. In addition, the long-lasting recession of the US economy in the 1970sand 1980s, and the accompanying de-industriali-zation of the USA provided an atmosphere ofwelcome for Japanese companies. At the turn ofthe twenty-first century more than 600,000Americans are employees in Japanese subsidiar-ies in the USA.

Japanese corporations’ multinationalization inEurope was also driven by the same motivation,retaining market share in the face of a protec-tionist tendency However, this tendency is rein-forced by the historic unity of the EuropeanUnion among Western European countries.

The three aspects of genchika in the USA andEurope display a pattern that is slightly differentfrom that in Asia. In both the USA and Europe,there is little restriction on the percentage of capi-tal, so Japanese companies can own 100 percentof their subsidiaries. However, just as in Asia, acertain percentage of production materials mustbe sourced locally; in the USA, this is in order tocomply with what are known as “local contents”laws. As for the personnel issue, there is a strongexpectation from local employees in the USA andEurope that the top managers be native people.However, Japanese parent companies remain veryreluctant to hire non-Japanese local employees astop executives. The parent companies assumethat local people are hard to control and less obe-dient because they do not know the inner work-ing of the parent company. On the other hand,local employees who are not familiar with howJapanese management works, tend to assume thatthe subsidiary president and all top managers

284 localization

should be natives. This view fails to recognizehow drastically subsidiary management wouldbe affected by such a change.

Although genchika consists of such elements ascapital, supply of local materials and human re-sources, the concept can also include other as-pects such as the transfer of managementknow-how cross-nationally Host nations and thelocal employees do not necessarily expect foreigncorporations to operate just like a local company.If they sense that there is a “better” element inthe foreign approach to management, they natu-rally want it to be retained in the local subsidi-ary.

Research (Sumihara 1999) in a Japanese-owned subsidiary in North America suggests thatboth Japanese expatriates and American employ-ees refer to genchika or localization as a “goodmixture of Japanese and American management,”although they did not reach an agreement onwhat a “good mixture” is. As a reflection of thisthinking, some American employees were sentto the parent company in Japan for over a year inorder to become familiar with how the parentcompany operates. In other words, the conceptof genchika may even include socializing nativesinto the company’s Japanese way of doing things.

Further reading

Sumihara, N. (1999) “Roles of Knowledge and ‘Cross-Knowledge’ in Creating a Third Culture: An Ex-ample of Performance Appraisal in a JapaneseCorporation,” in S.Beechler and A. Bird (eds), Japa-nese Multinationals Abroad: Individual and OrganizationalLearning, New York: Oxford University Press, 92–106.

NORIYA SUMIHARA

Long-Term Credit Bank of Japan

The Long-Term Credit Bank of Japan (LTCB)was a government-run, long-term credit bank inJapan. LTCB was established in 1952 as a semi-governmental institution. It succeeded the long-term financial business of Nihon Kangyo Bank

and Hokkaido Takushoku Bank. After becom-ing a private financial institution in 1961, LTCBemphasized offering large amounts of capital forinvestment by the heavy chemical industry TheLTCB also contributed to the modernization ofmedium-sized and small businesses. LTCB raisedfunds by selling debentures.

During its high growth period of the 1970s,the LTCB expanded its business to include thefinancing of social development projects, such asresource and energy projects. The LTCB alsobegan expanding its activities to include interna-tional finance and the security business. Duringthis period, it opened overseas branches in Lon-don, New York, and Los Angeles. In the 1980s,the LTCB opened branches in Asian markets suchas Singapore and Hong Kong, while diversifyingeven more into mergers and acquisitions and evenaviation finance.

During the slowdown of the Japanese economyin the 1990s, the LTCB emphasized expansionof its business to security and derivatives tradingand infrastructure development. The LTCB sup-ported the overseas expansion of Japanese com-panies, but also encouraged foreign companiesto enter the Japanese and Asian markets. In 1997,the LTCB entered into an alliance with SwissBank, and began an investment bank business.But, in October 1998 LTCB failed due to badloans totaling ¥5 trillion ($46 billion) and wastemporarily nationalized by an emergency act ofparliament. The LTCB was then sold in Febru-ary 1999 for ¥121 billion to a consortium led bythe US-based Ripplewood Holdings and renamedand relaunched to become Shinsei (meaning “re-birth”) Bank in June 2000.

Further reading

“Finance and Economics: Serious Long-Term Prob-lems” (1998) The Economist, May 2, 69.

“Finance and Economics: Unforgiven” (2000) TheEconomist, July 1, 73.

Sender, H. (1999) “Old Habits Die Hard,” Far EasternEconomic Review 162(26): 42.

SUMIHIRO TAKEDA

Long-Term Credit Bank of Japan 285

madogiwa zoku

Literally “window-side tribe,” the term madogiwazoku refers to salarymen (see salaryman) whohave been shunted off the seniority promotioncareer track and who now have jobs of relativelylittle consequence and, therefore, sit by the win-dow rather than with a work group. Salarymenmoved to a window-side position have almost nohope of future promotion, but instead must re-sign themselves to handling matters of small im-port until they either choose to resign or reachthe age of retirement.

Japanese office layouts are often arrangedaround workgroups. A typical workgroup willhave the desks of all its members arranged to-gether in the middle of the room, with the groupleader’s desk at the head or located immediatelynearby Such an arrangement affords ease of com-munication among the group and encouragesincreased interaction. In this sense, madogiwa zokuemployees have been moved literally to the pe-riphery of the workplace and the organization. Amadogiwa zoku move is a polite, but clear signal byan organization about that employee’s future withthe organization. In some respects it also reflectsan organization’s recognition that the employ-ment agreement has not worked out as hoped,but that “permanent employment” compact mustbe honored nonetheless.

With the bursting of the bubble economy in1989, Japanese firms have found it increasinglydifficult to maintain the practice of madogiwa zokuassignments. The economic costs of retainingunproductive employees in essentially “make-

work” jobs is difficult to support in the economyof the 1990s. Firms have pared down theirmadogiwa zoku, moving in two directions. One di-rection has been to find ways to enhance the pro-ductive capabilities of unproductive workers. Theother has been to engage in shukko andoutplacement.

ALLAN BIRD

madoguchi shido

Madoguchi shido, or “window guidance,” was anextra-legal means of quantitative credit controlemployed by the Bank of Japan (BOJ) from the1950s through 1991. It involved indications bythe Bank of Japan to banks of the amount of lend-ing it deemed proper. As such, window guidancesupplemented more conventional methods ofcontrolling the monetary base. Although the BOJwas strongly influenced by the Ministry of Fi-nance in the setting of the discount rate and inother aspects of its operations, the central bankhad relative autonomy in giving window guid-ance.

The effectiveness of window guidance as atool of influence over banks was inextricablylinked to the practice of overborrowing andoverlending by the nation’s banks. Companiesborrowed from banks well beyond their capacityto repay or beyond their net worth. Large com-mercial banks without a deposit base largeenough to meet loan demands borrowed, inturn, from the central bank to meet this demand.Through the 1950s and 1960s, the city (large

M

commercial) banks borrowed over 10 percent oftheir total funds from the BOJ. The overloanphenomenon thus made the banks dependenton the guarantees of the BOJ. Importantly how-ever, overborrowing also profited the banks be-cause funds from the BOJ were a cheap andconvenient source of capital. The discount rateat which funds were borrowed from the BOJwas lower than private sector lending rates else-where. Thus, banks risked endangering theirprofitability if they ignored the BOJ’s guidance.

The dependence of Japanese industry on bank-centered financing and the underdevelopment ofJapanese capital markets heightened the effec-tiveness of window guidance as a tool of mon-etary policy The BOJ could employ windowguidance to expand or contract the tempo of eco-nomic activity in response to the internationalbalance of payments or other considerations.Scholars have debated the degree to which win-dow guidance served as a means for qualitativecredit allocation but recent studies suggest thatthe guidance focused on aggregate loan levelsrather than on the composition of loan portfo-lios.

It is clear, however, that window guidance wasanother aspect of the “convoy approach” to regu-lation, wherein no financial institution was per-mitted to move forward at a pace that would leaveanother financial institution behind. This wasbecause window guidance was carried out indi-vidually with each bank and not only served toregulate the monetary base but also served toensure that no bank grew appreciably faster thananother. Estimates of deposit base growth andexpected growth, and estimates of fund demandsserved as the basis for ceilings set on the quar-terly rate of increase in bank loans.

The BOJ’s window guidance also affected therelationship between banks and their borrowers.When the BOJ reduced available funds, therebytightening monetary policy banks necessarily cutlending. Banks tended to pass this tightening ofcredit on to those borrowers for which it did notserve as a main bank (see main bank system).Thus, the practice provided incentives for firmsto establish relationships with a main bank.

Window guidance was used most frequentlyin the late 1960s and applied almost exclusivelyto city (large commercial) and long-term credit

banks until the 1970s. Its was heightened by thesegmented nature of the loan market but, as timeprogressed, lending through agent banks beganto erode the barriers in the loan market. Thus,from the 1970s, the BOJ began applying guid-ance to a wider range of financial institutions,and to regional banks in particular. Foreign banksremained outside the scope, however.

As the financial system became more market-oriented, window guidance declined in impor-tance. Its effectiveness relied on the need or desireof private banks to rely on supplemental borrow-ing from the central bank to fund overloans. Witha change in industrial structure, however, came ashift in demand for credit from the private sec-tor.

Window guidance also led to perverse incen-tives for banks. Increases in lending were typi-cally calculated as percentages of the existinglending base. Thus, to maximize the lending basein future quarters, banks had to lend to their maxi-mum quota in each quarter, regardless of theworthiness of projects. The imprudent behaviorthis policy fueled became evident in the “bub-ble” period of the latter 1980s. From mid-1991,the BOJ abolished the window guidance systemand focused instead on exercising influence overcredit flows via market interest rates.

Further reading

Calder, K. (1993) Strategic Capitalism, Princeton, NJ:Princeton University Press.

Hamada, K. and Horiuchi, A. (1987) “The PoliticalEconomy of the Financial Market,” in K.Yamamuraand Y.Yasuba (eds), The Political Economy of Japan,Volume 1: The Domestic Transformation, Stanford, CA:Stanford University Press, 223–60.

Horiuchi, A. (1980) Nihon no Kinyu Seisaku (MonetaryPolicy in Japan), Tokyo: Toyo Keizai Shimposha.

Patrick, H. (1962) Monetary Policy and Central Banking inContemporary Japan, Bombay: Bombay UniversityPress.

Teranishi, J. (1994) “Japan: Development and Struc-tural Change of the Financial System,” in H.Patrickand Y.Park (eds), The Financial Development of Japan,Korea, and Taiwan., New York: Oxford UniversityPress, 27–80.

JENNIFER AMYX

madoguchi shido 287

main bank system

The term “main bank” generally describes therelationship of a primary lender among a lend-ing hierarchy of several banks to a single firm.The main bank system, as it later came to becalled in the 1980s, is said to have its origins inthe 1930s when Japan’s wartime economic plan-ners sought to insure that companies deemedessential to the military economy received ad-equate funding for the uninterrupted productionof munitions. The system was later adapted toand reshaped by the requirements of postwarreconstruction as part of a diversification strat-egy of loan syndication to industry in the post-war credit crunch period. Historically the specialattributes which are an inherent part of the mainbank relationship were a cornerstone of bank—firm relationships among members of the zaibatsugroup (see banking industry). Before the mod-ern period, main bank-style relationships can betraced back to the exchange houses and lendingpractices of the great merchant households (seeie) of the Tokugawa period.

In the early 1990s the main bank system washailed as a governance model to be emulated bydeveloping economies. Based on a highly styl-ized theoretical model, the main bank was seenas a significant corporate governor and monitor-ing agent over the activities of the client firm, notonly on behalf of other creditors, but also for theshareholders of the firm, as the main bank typi-cally held shares in the firm (see cross-shareholdings). This view of the role of the mainbank was an expansion upon Nakatani’s thesis,which held that one of the functions of Japaneseindustrial groups is risk-sharing among theirmembers. In the case of the main bank, the long-term implicit contractual role of the group bankas risk-insurer for the other group members wasinterpreted as the chief mechanism enabling risk-sharing. Building on principal-agency theory theirmodel of the main bank emphasized the role ofthe bank as the governance and monitoring agentof the firm for its fellow creditors and sharehold-ers. According to economists adopting this model,it purportedly achieved benefits in the followingthree areas: (1) efficiencies of capital derived fromthe delegated cost of monitoring by affirming thecontinued creditworthiness and financial viabil-

ity of its client firm to other creditors and share-holders, the so-called signal function; (2) mainbank assistance to firms in financial distress, theso-called rescue function; and (3) the main bankrole in corporate governance. The credibility ofthese hypothesized functions of the main bankwas questioned by scholars, mainly in Japan butalso elsewhere, who had been studying the mainbank system.

Among the criticisms leveled against theagency interpretation of the role of the main bankwas the absence of supporting evidence basedon bank practices. Often treating the bank as a“black box,” the agency literature emphasized themain bank’s hypothetical agency role to the ex-clusion of considering what the role of the “mainbank” meant in fact to the main bank and thefirm. The main bank relationship is the bank’sgreatest source of profits. The liberalization ofinterest rates in recent years has made large cor-porate lending the least profitable aspect of thebanking business. Similarly the competition be-tween bank securities subsidiaries in underwrit-ing corporate bonds has proven to be a low profitarea, and likewise is considered by bankers as a“loss leader” necessary for maintaining client re-lationships. By contrast, the main bank will ordi-narily receive many lucrative benefits from itsstatus as lead main bank to a company. The mainbank expects to be given the main deposit ac-counts of its client, and it will require, as well,that the client firm hold a standing low or non-interest compensating balance account. The cli-ent may also be expected to maintain lowinterest-bearing time deposits at the bank for someoff-balance sheet favor such as a business intro-duction. In addition, the main bank receives adisproportionately larger share of fee-based trans-actions such as transfers, foreign exchange, andderivative products, an important area of bankprofits, than the other banks in the client firm’slending hierarchy. Finally whether the client islarge or small, the bank also expects to receivethe advantage of the company’s employee poolas its customers and with it the opportunity tosupply a host of lucrative retail services to thiscaptive client base.

The personal accounts of employees ofclient firms represent one of the greatest rewardsto the main bank in the relationship and are an

288 main bank system

important source of low-cost depository funds.The extent of the main bank’s efforts to main-tain its relationship with the client firm is oftendirectly proportional to the size of the captiveemployee base. Companies will “request” all oftheir personnel to open accounts at the main bankfor the direct deposit of their salary. A large baseof employee accounts means a significant amountof business for the bank in the retail sector, a highprofit-margin area which includes consumertransactions, in the form of electronic transfers,consumer lending, personal lending, credit cards,mortgages, and so on. The commercial bankingsector’s large share of personal accounts has stead-ily eroded throughout the 1990s banking crisisas depositors seeking greater safety have shiftedtheir personal savings into Japan’s postal savingsystem (see postal savings).

Although the main bank system is no longerdriven by large corporate bank borrowing, it hasfound new fuel in a host of bank products andservices, thus maintaining profitability for themain bank and for the second, third, fourth, andeven fifth bank in the lending hierarchy as well.On the other hand, firms expect to be able torely on the bank’s offices to supply business in-formation, consulting services, and, especially forthe medium-size firms, the ever-important bankintroductions to prospective clients or suppliers.The client corporation thus has its own reasonsto protect the hierarchical standing of its lead mainbank. Such relationship banking practices are notrestricted nor exclusive to the lead main bank,however. The second and third lending banks ofthat company will attempt to provide similar serv-ices, as will even the fourth and fifth banks in thelending hierarchy which may be composed ofupwards of 20–30 banks if the corporation islarge. Preservation of that hierarchy in a highlycompetitive environment is of paramount impor-tance to the lead main bank, particularly since itreceives a disproportionately larger share of prof-its from the client than the other institutions inthe hierarchy In fact, when the top five lendingbanks typically supply only 50 percent of thefirm’s borrowed funds, they can still expect toreceive almost 100 percent of the firm’s fee-basedtransactions, such as foreign exchange, letters ofcredit and other trade or business related creditguarantees, leasing and underwriting to their non-

bank financial subsidiaries. The opportunity forbanks below the top five to acquire profitablebusiness with the client outside of lending hasbecome quite remote, principally because corpo-rations themselves are attempting to rationalizetheir relations.

The overriding characteristic that distinguishesthe main bank from the second and third banksis that it is by custom the creditor of last resortfor the firm in financial distress and is expectedto initiate any rescue plan among the other banks.The degree to which the rescue function exists ismore a matter of perception on the part of theclient than contractual. Bankers report that theyare loath to make even an implicit commitment.

A key agency assumption of corporate gov-ernance by the bank is based on the so-called bankrescue function. However, evidence reveals thatsuch rescues generally have been effected onlywhen the bank determined that a client’s difficul-ties were a result of a liquidity problem ratherthan a solvency crisis. The bank then acted outof its own interest, if not just for its own profit.Bank officers often report they were the last toknow of an imminent financial crisis when theclient firm was intent on evading bank oversight.If the main bank rescue function really did exist,such calculated evasion by failing client firmswould have been pointless at the very least, ifnot counter-productive. In cases of insolvency“rescue” most often means overseeing the disso-lution of the firm’s assets and the distribution ofcollateral to its chief creditors, namely the banks.Typically for a small or medium-sized firm thismeans that the bank will ask some member com-pany of their corporate group to take over thecompany or find some other enterprise to mergewith the troubled company. Only in those lim-ited cases deemed by governmental authoritiesto be in the interest of the nation’s welfare, suchas a large failing firm with many employees, doesthe Ministry of Finance (MOF) “request” a mainbank to deliver a rescue package. Implicit in thebank’s willingness to provide funds to a sunsetindustry is the understanding that MOF will re-ward the bank by granting it some concession inanother area.

Bankers report that the main bank was oftenthe lender of “last resort” to a firm only becausethe other creditors had been able to accomplish

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a rapid retreat, thereby increasing the burden ofthe main bank. According to agency theorists,other creditors take their cues by observing the“signals” of the main bank’s actions, as the firm’slargest creditor. The question is whether the sig-nal “sent” is necessarily an accurate representa-tion of the client firm’s actual internal affairs.Often the signal is distorted by the main bank’sown strategic considerations and needs in main-taining a particular client relationship. Any hintof trouble, signaled by a decrease in lending bythe firm’s main bank, would be noted by the othercreditors, typically setting off a chain reaction ofretreat by those banks which benefit least fromtheir relationship with the ailing firm. Main banksare, therefore, very keen on not sending any sig-nal which would lead to the collapse of the firm’slending syndicate. That is why competing banksprudently make their own independent creditassessments.

The primary vehicle for carrying out the mainbank relationship is the bank team assigned tolarge client firms. Monitoring of the client firmby the bank team is often cited as one evidenceof the existence of such an external governancefunction. In the case of a large corporation, a bankteam, typically headed by a relationship manager,is intimately involved in the affairs of the client,visiting the firm’s offices and other facilities on adaily basis. However, the nature of the team’smission is essentially sales-oriented. The team’spurpose is to try and obtain information aboutthe firm’s future plans in order to promote thebank’s services. The second and even the thirdbanks of a major corporation will also assignteams to service a larger client.

A bank’s ability to exercise any form of out-side governance arises exclusively from its posi-tion as a major creditor and only when there areno other options for the client firm to access otherbanks, outside money markets, or internalsources of funds. However, given the competi-tive nature of the banking industry other bankscompeting with the firm’s main bank are usuallyonly too eager to grant a new loan in an effort toimprove their position in the relationship hierar-chy and the increased access that it affords. Dur-ing the “bubble period” of the 1980s, the missionof the bank teams was primarily to boost bankassets by issuing new loans, which were often used

for speculative purposes by the client. This lend-ing/ sales function was in obvious conflict withagency theory notions of monitoring a clientfirm’s creditworthiness, which the bank could doonly to a very limited extent in any case.

The main bank’s leverage is therefore quitelow over firms listed in the First Section of theTokyo Stock Exchange (generally large capital-ized firms) and even for Second Section firms(generally large to medium capitalized firms),because firms in both categories have direct ac-cess to money markets and thus can circumventthe need for bank finance. Indeed, it is difficultfor banks to monitor the activities of many suchfirms due to these firms’ large scope of opera-tions, business locations, and the multitude ofother banks a firm may deal with. Furthermore,only the largest corporations merit their own bankteams. Medium and small-sized firms receive onlythe occasional attention of already overburdenedjunior officers whose ability to monitor their cli-ent firms is often limited to tracking the cash flowinto the client’s main deposit account.

Agency economists’ assumption of firm moni-toring by former bankers, the retirement orshukko (transfer of employees) process, is simi-larly flawed. Shukko serves as an outplacementmechanism under Japan’s lifetime employmentsystem and reflects the primarily fiscal necessityof the bank to find early retirement positions forhigh-salaried senior bank executives. Bankersreadily acknowledge that their continued influ-ence over their former employees was extremelylimited, especially when a conflict of interest arosebetween the bank and its client firm. The neces-sity to retire senior bank employees has acceler-ated in pace since the over-hiring of juniorpersonnel during the “bubble period.” However,as Japanese firms also continue to downsize thereare fewer and fewer positions available in clientfirms for retirement shukko from the banks.

In considering the role of banks in corporategovernance, banks are not acting as monitors inthe agency sense, that is, as agents for fellow share-holders, since the bank’s own credit exposure tothe client far exceeds its own equity position inthe client firm. Even from a creditor’s standpoint,the bank’s ability to monitor is limited. The pro-longed banking crisis in Japan has also painfullyrevealed the banks’ lack of ability to evaluate the

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creditworthiness of clients when money was lentto pursue land and stock speculations in the 1980s“bubble economy.” In the ever-rising economywhich had been characteristic of Japan in thepostwar era, the validity of agency assumptionsof bank governance, and the main bank’s “res-cue function,” implicit or otherwise, had not beenseriously tested until the 1990s. The elements ofthe agency theory approach have been largelydemythologized since then by the ongoing bank-ing crisis. As Japan still continues to suffer its firstprofound postwar recession, questions of corpo-rate financial efficiency are being starkly con-fronted. The prolonged recession has beencharacterized with increasing frequency as a gov-ernance recession.

The main bank relationship is rooted in thehistory of the postwar reconstruction of the Japa-nese economy and prior to that in the role of thebank within the prewar zaibatsu groups. Indeed,many of its present-day practices stem from thathistory and also bear within them a strong com-ponent of traditional group relationships endog-enous to Japanese society. Nonetheless, we cannotescape the fact that the functionalist practices ofthe main bank relationship are to seek competi-tive advantages in a system in which the rela-tionship itself is a key source of bank profits.

Further reading

Aoki, M. and Patrick, H. (eds) (1994) The Japanese MainBank System: Its Relevance for Developing Economies,Oxford: Oxford University Press.

Scher, M.J. (1996) Japanese Interfirm Networks and TheirMain Banks. London: Macmillan and New York:St. Martins Press.

——(1998) Mainbank shinwa no hokai (Collapse of theMain Bank Myth), Tokyo: Toyo Keizai Shimposha.

——(1999) “Japanese Financial Institutions as Informa-tion Intermediaries,” in H.Albach, U. Goertzen andR.Zobel (eds), Information Processing as a CompetitiveAdvantage of Japanese Firms, Berlin: Sigma Publishing.

MARK SCHER

marketing in Japan

For the majority of Japan’s post-war history mar-keting in Japan traditionally focused on the fight

for market share rather than on meeting con-sumer needs. In Japan’s rapidly developingeconomy consumer demand was so strong thatquality products sold as soon as they hit theshelves. This led to the prevailing belief that theJapanese were homogeneous, and that individualtastes and concerns were not that important. Thetheory was that since any member of the firmproducing a product was a representative of thetarget consumer, focus group interviews and con-sumer surveys were unnecessary.

At best, Japanese firms considered marketingas a function of everyone in the organization,rather than a specialized pursuit. Thus the Japa-nese corporate custom of hiring entry-level col-lege graduates en masse, and subsequentlyrotating them through various positions, accountsfor the fact that many individuals assigned tomarketing departments have little or no formaltraining.

From the beginning of Japan’s economic re-surgence during the postwar era until the late1980s, Japanese consumer demand for productsoutpaced supply A good product from a reputa-ble corporation was almost guaranteed success.During this producer-driven economy the moreproducts a firm could produce to fill retailers’shelves, the higher the chance for success. Thekeys to a product’s success were considered toconsist of a good corporate image, technologicalexpertise, and a strong distribution channel. Thisled to a style of advertising that focused on build-ing the corporate brand, rather than espousingproduct merits, or building product brands. Notsurprisingly in this atmosphere, the discipline ofmarketing was not considered an instrumentalfunction to a product’s success.

This product-driven approach worked welluntil the bursting of Japan’s bubble economy inthe early 1990s, and the subsequent recession.As consumer purse strings tightened, productmanufacturers found themselves vying for con-sumer attention. Consumers began exercisingpersonal choice, forcing companies to concentratetheir attention on consumer needs.

Forced by the shift in the market to accept theimportance of marketing in Japan, many majorcorporations looked for guidance from across theseas, resulting in a proliferation of Westernmarketing books translated into Japanese. More

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telling is the heavy investment Japanese corpora-tions are making in marketing, by sending up-and-coming staff to overseas universities to pursuemarketing degrees or MBAs.

Recognizing the importance of marketing,more Japanese companies are now tracking con-sumer preferences through point-of-sale data andconsumer research, and tailoring their productsto those findings. Many companies have alsobegun segmenting their markets by values andlifestyles, rather than relying on demographicsalone. Furthermore, the importance of the prod-uct brand has come to be recognized, with theresult that more emphasis is put on building thebrand through advertising. As Japanese firmsrealize that their success depends increasingly ontheir marketing strategy marketing staffs andbudgets are being increased.

SEAN MOONEY

Marubeni

The company that later became Marubeni Cor-poration was founded in 1858, the year in whichthe company’s founder, Chubei Itoh, began tosell Omi linen. In 1872, Chubei opened Benichu,a drapery shop, in Osaka, and in 1883 beganusing the Beni mark as the store’s logo. The Benimark is the origin of the name Marubeni. Thecompany expanded into Osaka, Kobe, and Kyotothrough the nineteenth century.

In 1914, the company was reorganized froma proprietorship into C.Itoh & Co. (seeITOCHU). In 1918 the limited partnership wasdivided into Itochu Shoten, with the main storeand Kyoto store as its core, and C.Itoh & Co.,with the yarn store and the Kobe Branch at itscenter. These two companies were the forerun-ners to Marubeni Corporation and ITOCHUCorporation, respectively.

As a result of the post-First World War slow-down in commodity markets, Itochu Shotenmerged with Ito-chobei Shoten, which had re-mained under sound management, to formMarubeni Shoten in March 1921. At that timethe company which had only one branch inKyoto, was a textiles wholesaler handing silk andwool fabrics. In 1931, the Osaka branch was es-tablished. This branch began to concentrate on

trading, eventually opening branches and officesthroughout China and in India. It also expandedthe goods it handled to include constructionmaterials, machinery sundries, food products, andso on, in addition to textiles. The Osaka branch’ssales grew rapidly and in 1937 exceeded those ofthe main store, accounting for 62 percent of over-all sales.

As the business performance of MarubeniShoten, C.Itoh & Co. and others recovered, themove to reunify all of the Ito family businessstrengthened. In September 1941, three compa-nies (Kishimoto Shoten, a steel trading company;Marubeni Shoten and C.Itoh & Co.), merged toform Sanko Kabusiki Kaisya. Soon after, how-ever, the Second World War erupted and this lim-ited the company’s trading to China andSoutheast Asia.

In September 1944, Sanko Kabusiki Kaisyamerged with Daido Boeki Kaisha and KurehaCotton Spinning Co. (also established by ChubeiItoh) to form Daiken Co. The combined entitynow had 103 affiliated companies inside and out-side of Japan and interests in shipping and deliv-ery of textiles, heavy industry and chemicalindustry products, grains, fertilizer, etc., and alsoprovided materials to the military. With the end-ing of the war, however, the company lost all ofits overseas assets.

In February 1948, Daiken Co. was designatedas being one of those subject to the Law for Elimi-nation of Excessive Concentrations of EconomicPower, a measure designed to break up the zaibatsuwhich dominated Japan’s economy at that time.Daiken was divided into four companies:Marubeni Co., C.Itoh & Co., Kureha CottonSpinning Co., and Amagasaki Nail Works.

On December 1, 1949, Marubeni Co. wasformally established with headquarters in Osaka,was capitalized at ¥150 million, and had 1,232employees. When established, the company didnot have a single overseas office, but new regula-tions allowing imports and exports were just start-ing. The first financial results after establishment(December 1949-March 1950) showed sales of¥5 billion, 80 percent of which were from tex-tiles.

Although its commodities businesses collapsedafter the Korean War, the company opened itsfirst overseas office in New York in April 1951.

292 Marubeni

By the end of 1954 the company had twenty-twooverseas subsidiaries. The government decidedthat the trading companies needed to be strength-ened to expand the country’s trade and so estab-lished a policy to do so. Because the tradingcompany Iida & Co., the forerunner ofTakashimaya Department Store, had sustained alarge loss from the collapse of the soybean mar-ket, that company’s main bank, Fuji Bank, de-cided that a merger with another tradingcompany was the only way to restructure thatcompany and asked Marubeni to cooperate.Marubeni agreed to the merger, judging that itwas in accordance with the country’s policy tostrengthen the trading companies. On Septem-ber 1, 1955, Marubeni and Iida & Co. merged toform Marubeni-Iida Co., now a true general trad-ing company (sogo shosha).

In line with Japan’s accelerating growth at thetime, Marubeni-Iida established a chemicals de-partment in 1957, expanded into polyethyleneproduction, and in 1958 started automobile ex-ports to the United States on behalf of NissanMotor Co. In April 1966, Marubeni merged withTotsu Co., which was a trading company spe-cializing in metals and one of the sales agents ofNippon Kokan K.K. (now NKK). Sales of heavyand chemical industry products, such as metals,machinery and chemicals, now accounted formore than 50 percent of Marubeni-Iida’s sales.Tokyo effectively became the company’s head-quarters.

In 1966 the Fuyo Conference consisting of thepresidents of Fuyo group companies (all affiliatedwith Fuji Bank) was started, and a keiretsu wasformalized. On January 1, 1972, the companychanged its name from Marubeni-Iida Co. toMarubeni Corporation, and moved to the newlyconstructed Marubeni Building in the Takebashidistrict, which is still its headquarters today.

The Iranian Revolution in 1979 caused a tem-porary stoppage in crude oil production and oilprices rose. During this time the company’s en-ergy and chemicals division sales increasedgreatly and came to account for nearly 23 per-cent of sales, the same as the machinery andmetals division.

In the early 1980s, Japanese trading compa-nies faced criticism for their size and power inthe economy while manufacturers they had pre-

viously served moved to bypass them in favor ofdirect export. The company suffered high write-offs from the reorganization of affiliates, and re-lied heavily on asset sales to maintain profit levels.The businesses that did expand during this pe-riod were exports for power systems, energychemicals, etc., and exports of steel pipe for oilproducing companies. In particular, large ordersfor power systems were received from aroundthe world, and this proved to be a major profitsource for the company from the 1980s throughthe first half of the 1990s. By fiscal 1990, the com-pany had largely recovered, and reflected salesof ¥19.156 trillion and ordinary income of ¥54.8billion, both record figures.

Throughout the 1990s the company reorgan-ized and integrated some subsidiaries and affili-ates and liquidated others, while continuing toexpand in many areas, including information andelectronic businesses and high-cost projects suchas fiber optic submarine cables to Europe andthe USA. As a result of appraisal losses on itsbank and other stock portfolio, in fiscal 1997Marubeni posted a net loss of ¥30.8 billion, thecompany’s first loss since fiscal 1951. In the late1990s it actually sought to reduce employee head-count through early retirement, attrition, buyoutprograms, and selected layoffs. Restructuringcontinued in 2000 and 2001 and the company isnow focused on four business areas: retail, infor-mation and telecommunications business andelectric power infrastructure, high value-addedmaterials and materials processing and sales, andresource development and trading. Given theircommon roots, many observers believe Marubeniand ITOCHU Corporation will eventuallymerge again, as they have at previous times intheir history.

See also: general trading companies

JAY NELSON

Maruyu

Maruyu is a system of tax breaks for small saverswhich was introduced in 1963. Investors couldearn tax-exempt income on a total of ¥14 mil-lion ($US 140,000) in savings. Of that amount,up to 3 million yen could be deposited in tax-free

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bank accounts; 3 million yen in postal savings, 3million yen in government bonds; and 5 millionyen in special accounts for buying a house. Thesystem spawned tax evasion on a huge scale.

After April 1988, the law was changed to limitaccess to the maruyu system. Eligibility for maruyuwas limited to people sixty-five years or older;those who received a survivor’s annuity; peoplewho received a widow annuity or single motherannuity; mothers whose children receivechildcare support allowance; and those who re-ceived a handicap annuity

Further reading

Holloway N. (1988) “Conflicting Accounts—BanksScramble as Japan Ends the Small Saver’s TaxBreak,” Far Eastern Economic Review 99–100

SUMIHIRO TAKEDA

Matsushita Electric IndustrialCorporation

Matsushita Electric Industrial Co., Ltd (MEI) isa diversified manufacturer of industrial and con-sumer electronics/products, both assembledgoods and components. MEI’s predecessor firm,Matsushita Electric Appliance Factory (MEAF),was established in 1918 in Osaka, Japan byKonosuke Matsushita, and incorporated as MEIin 1935. MEI is the core firm in the MatsushitaGroup. In fiscal year 1999 its consolidated saleswere in excess of $ 63 billion, and its total world-wide employment was over 282,000. It sells un-der the National, Panasonic, Technics, andQuasar brand names. In the late 1990s, MEI andits subsidiaries had a very broad product line thatincluded components, home appliances, con-sumer electronics, and many industrial electron-ics products.

In 1918 MEAF brought out its first product,a double-ended electrical socket. Another impor-tant early product was a battery-powered bicyclelamp that was introduced in 1922. MEAF grewquickly in the 1920s and 1930s by selling house-hold electrical products such as irons and, later,radios, fans, light bulbs, and various electric ap-pliances. An early instance of the firm’s willing-ness to move beyond conventional business

practices occurred during the Japanese Depres-sion. In December 1929, to reduce inventory toavoid layoffs, MEAF put all workers on half-daywork with full salary eliminated holiday pay andasked all the workers to sell the excess inventoryBy February 1930 everyone was back to theirregular shifts. In 1930 MEAF began its first salesof radios, which were defective; in 1931 the ra-dios were redesigned and won first prize in aNippon Hoso Kyokai (Japan Broadcasting Cor-poration or NHK) contest. By 1942 Matsushitawas the largest radio producer in Japan.

In 1933 MEAF was one of the first firms inJapan to introduce a divisional structure basedon product families, the goal of which was todelegate more authority to the divisions. Al-though General Motors had adopted a divisionalstructure as early as 1921, Matsushita does notappear to have been influenced by General Mo-tors. The divisional structure created clear profitresponsibilities, with the divisions operating al-most like independent corporations. These divi-sions continue to be powerful and independent.At the end of the Second World War MEI hadforty-nine separate subsidiaries.

In the aftermath of the war, MEI was declareda zaibatsu and five factories were seized by theoccupation authorities. Initially MEI executiveswere scheduled to be purged; however, after aconsiderable lobbying effort this order was re-scinded. Only in 1950 was Matsushita relievedof zaibatsu-related controls. In the 1950s MEIexpanded rapidly broadening its product lines toinclude black-and-white televisions, transistorradios, stereos, tape recorders, air conditioners,washing machines, and other products. It intro-duced its first television in 1952. MEI acquiredmajority ownership in Japan Victor Corporation(JVC) in 1954, but JVC continues to operate in-dependently.

MEI was also an early entrant into globalmarkets. Matsushita Electric Trading Companywas established in 1935 and operated through-out Asia. During the Second World War MEIestablished production facilities throughout theexpanding Japanese Empire. In the immediateaftermath of the war, thirty-nine overseas facto-ries were confiscated. In 1948 the Dutch firmPhilips approached Matsushita to reestablish theirprewar business relationship. In 1951 Konosuke

294 Matsushita Electric Industrial Corporation

Matsushita visited firms in the USA and alsoPhilips in Holland. By 1952 the two firms hadcreated a joint venture for the Japanese market,and in 1954 they opened a plant in Osaka to pro-duce picture tubes, vacuum tubes, transistors,semiconductors, and other electric components.In 1953 MEI opened its first overseas liaison of-fice in New York City. In 1959 Matsushita Elec-tric Corporation of America was founded in NewYork, becoming its first overseas subsidiary. Thesame year MEI opened its first overseas produc-tion facility National Thai, in Thailand, and sincethen Matsushita has opened many subsidiariesaround the world. Global sales, marketing, andproduction continues to be a high priority. In 1974MEI purchased Motorola’s consumer electron-ics division, which retailed under the brand nameQuasar, but closed the last Motorola televisionfactory in 1995. In 1990, MEI purchased a USentertainment and movie firm, MCA, for $6 bil-lion, but then sold it in 1995 to Michael Bronfmanfor $5.7 billion. By 1999 MEI had 223 manufac-turing and sales subsidiaries globally and oper-ated in over 160 countries.

From its inception, MEI’s business strategyhas focused on being a fast follower: it has intro-duced improved versions at lower prices. In con-trast to many Japanese firms, MEI has oftenpurchased other companies as a method of en-tering a new business. An important strategy ithad developed already in the 1920s was to pro-mote brand names, particularly its Nationalbrand. MEI aggressively built a distribution andsales keiretsu before the Second World War, andas of 1999 it has the strongest retail distributionnetwork in Japan, consisting of approximately25,000 retail distribution outlets nationwide.These shops are the backbone of Matsushita’sleading market share in Japan.

MEI’s strength has been its emphasis on effi-ciency and quality mass production. In 1958 MEIreceived the Deming Award for quality In con-trast to the large general electric manufacturers,such as Hitachi and Toshiba, before the war MEIdid not invest in research and development, pre-ferring to improve upon existing products. How-ever, after the war the relative backwardness ofJapanese technology became clear to KonosukeMatsushita, as did the necessity of purchasingtechnology from foreign firms. To remedy these

shortcomings, in 1953 MEI created its CentralResearch Laboratory in Osaka, and MEI hascontinually increased investment both at the cen-tral laboratory and in divisional research anddevelopment laboratories.

See also: electronics industry; Sony

Further reading

Kotter, J.P. (1997) Matsushita Leadership: Lessons from the20th Century’s Most Remarkable Entrepreneur, New York:The Free Press.

Matsushita, K. (1988) Quest for Prosperity: The Life of aJapanese Industrialist, Tokyo: PHP Institute Inc.

MARTIN KENNEY

Matsushita, Konosuke

Konosuke Matsushita (1894–1989) was thefounder of Matsushita Electric Industrial Co.,Ltd. Japan’s largest consumer electronics manu-facturer. Known in Japan as the “god of manage-ment,” Matsushita is credited with pioneeringnumerous managerial innovations, including thedivision system and the five-day workweek, andhis books on management as well as broader so-cial and philosophical issues continue to sell welleven after his death.

The early years

Matsushita was born in 1894 in Wakayama Pre-fecture, south of Osaka, the youngest of eightchildren in a wealthy farming family. When hewas four, his father lost everything while specu-lating in the rice futures market and the familywas thrown into poverty. This was the beginningof a long series of trials that Matsushita wouldface, including poor health, the early deaths ofall his siblings and his only son due to illness,and numerous business setbacks. Overcomingsuch adversity was to be a recurrent themethroughout much of his life.

When Matsushita was nine, he was sent toOsaka where he worked for six years as an ap-prentice in a bicycle shop. When he was sixteen,he got a job at the Osaka Electric Light Com-pany and became an installation technician,

Matsushita, Konosuke 295

wiring homes and businesses for lighting. At agenineteen, he was put in charge of large projects,with dozens of employees under his supervision.He was further promoted to inspector, but wasunhappy in this position because it provided toomany idle hours and not enough “serious work.”In his spare time, Matsushita worked on design-ing a light socket that was better than the one hiscompany used. When he had devised a socketthat he had confidence in, he showed it to hisboss, but his boss was not interested. At this point,Matsushita decided to quit the company to manu-facture light sockets himself.

In 1917, at the age of twenty-two, he started abusiness with 100 yen, setting up operations in atwo-room tenement house with five workers, in-cluding himself and his wife. None had a highschool education, so they worked long hours toovercome their lack of technical expertise. Theirfirst product did not sell well, and soon the com-pany was down to just three employees.

Matsushita’s first successful product was adouble outlet adapter that screwed into light sock-ets. Since Japanese houses generally had just oneelectrical outlet, this enabled them to double theircapacity: the adapter could accommodate a lightbulb plus one other electrical appliance.Matsushita’s small company continued to intro-duce one or two new products per month. Heinitially designed the products himself, but gradu-ally came to rely on others. All of his productswere improved versions of existing products, soldat prices below the competition.

In 1922, Matsushita developed a bullet-shapedbicycle light that was more durable and burnedlonger than existing bicycle lights. When he hadtrouble persuading skeptical retailers to carry thelight, he came up with an innovative marketingstrategy: he had salesmen leave samples at bicy-cles shops with one lit lamp on display and askedto be paid only if the lamps sold. When retailerssaw that the demonstration lamp worked for fiftyhours on a single set of batteries, they were im-pressed, and began recommending the lights tocustomers. Sales took off. Matsushita continuedto expand his product line, and by 1931 his com-pany had 140 patents and was manufacturingover 200 products, including radios, lighting,batteries, and electric irons. In 1935, the com-pany was reorganized into a public corporation

and renamed Matsushita Electric Industrial Com-pany (MEI).

Innovation in management

By the 1930s, several of the distinctive character-istics of Matsushita-style management were be-coming evident. Matsushita rarely came out withan entirely new product category; instead thecompany improved existing products, makingthem better and/or cheaper than those offeredby competitors. Costs were kept low by hard workand relentless pursuit of manufacturing efficiencyNew and creative marketing methods were used,such as the promotion of the “National” brandname through aggressive nationwide advertising.Close and cooperative relationships were estab-lished with suppliers and retailers, in contrast tothe arm’s-length dealings that were then the normin Japan. Matsushita also set up its own distribu-tion channels, following a conflict with a salesagent for bicycle lamps. Many of these practicesare now taken for granted in Japanese business,but at the time Konosuke Matsushita first intro-duced them they were rare.

Matsushita was also a pioneer in company—employee relations. When the stock market crashof 1929 sent the Japanese economy into depres-sion, Matsushita’s sales were cut in half.Matsushita responded by cutting production byhalf, but did not lay workers off. Instead, un-needed production workers were shifted intosales, to help reduce excess inventories. Thus,during the 1930s when other companies werelaying off employees and bringing out few newproducts, Matsushita did the opposite. This pre-dated by three decades the lifetime employmentsystem and the practice of moving workers intoother jobs to avoid lay-offs, policies for whichJapanese companies became well known butwhich were not widely adopted until after 1960.Matsushita was also the first Japanese companyto introduce the five-day work week, in 1960. Asfounder and “hands-on” president of MatsushitaElectric, Konosuke Matsushita was the man re-sponsible for all of these management innova-tions.

Matsushita was also willing to take the risk ofmoving quickly into mass production, even whenthe market for a product was still small. Inspired

296 Matsushita, Konosuke

by the pricing strategy used by Henry Ford withthe Model T, Matsushita understood the conceptof expanding the market for a new product bymass producing it at an early stage, thereby re-ducing per-unit production costs through econo-mies of scale, and then translating the reducedcosts into lower prices, making the product af-fordable to more consumers. In 1931, Matsushitamade the unusual move of purchasing a criticalpatent and making it available free of charge toall radio manufacturers, to help stimulate growthof the radio market. Matsushita applied this mar-ket expansion model repeatedly. One of the bestexamples was with videocassette recorders(VCRs) in the 1970s and 1980s. WhenMatsushita adopted the VHS format (which hadbeen developed by JVC, a Matsushita subsidi-ary), he aggressively built up production capac-ity in anticipation of growing worldwide demand,and licensed the VHS technology to other manu-facturers. The result was falling production costs,falling prices, rapid expansion of the VCR mar-ket, and the establishment of the VHS system asthe industry standard over the competing SonyBetamax format. By the mid-1980s, VCRs ac-counted for almost 30 percent of Matsushita’stotal sales and around 45 percent of its profits.

The division system

In the Japanese business world, Matsushita Elec-tric is especially well known for its division sys-tem. In a division system, the different units of acompany are organized primarily by product orproduct group, with each product division oper-ating more or less autonomously much like anindependent company. Matsushita first adopteda division system in 1933, about the same timethat Pierre du Pont was pioneering a similardivisionalized organization in the United States.His goals in devising this organizational struc-ture were to delegate authority and train busi-ness managers (particularly as Matsushita himselfsuffered from chronically poor health); to giveproduct units the customer closeness and flex-ibility of small companies; and to prevent em-ployees from becoming too specialized and losingsight of the goals of satisfying customers and earn-ing profits.

Matsushita initially divided his company into

four divisions: radios, lamps and batteries, wir-ing and electrical fixtures, and electrical heatingappliances. The company then continued to addnew divisions as it expanded into new productareas. Each of Matsushita’s product divisions isin charge of its own R&D, engineering, produc-tion, and sales; at the same time, the accounting,recruitment, and basic employee training func-tions are centralized to maintain a degree of con-sistency and corporate control. The head of adivision is held responsible for performance; di-visional profitability is made public within thecompany and when a division fails to meet itsprofit target for two consecutive years, the divi-sion head is replaced. Over the years, Matsushitaalternatively tightened and loosened corporatecontrol over the divisions, in response to marketconditions and to maintain a balance betweendivisional autonomy and cooperation among di-visions.

During and after the Second World War

During the Second World War Matsushita Elec-tric, like all Japanese industrial companies, manu-factured products for the Japanese military. Afterthe war, the Occupation authorities designatedMatsushita a zaibatsu, ordered it to cease pro-duction, and announced that its top management,including Konosuke Matsushita, would no longerbe allowed to work for the company. Arguingthat Matsushita was not a zaibatsu but a young,founder-led company which had been pulled intothe war by the military Matsushita fought hardto have the Occupation rulings reversed, makingover fifty trips to Allied Headquarters in Tokyoto plead his case. The company’s labor unionhelped too; at a time when many labor groupswere petitioning to have their business leadersremoved from office, Matsushita’s union gath-ered over 15,000 signatures from union membersand their families asking that Konosuke be al-lowed to remain as president. These efforts weresuccessful; Allied Headquarters announced in1947 that Konosuke Matsushita and all his ex-ecutives could continue to work for the companyalthough it was not until 1950 that all of the post-war restrictions on the company’s business ac-tivities were removed.

In the 1950s, Matsushita put his company on

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the road to “internationalization.” In 1951 he vis-ited the United States, where he was impressedby the sophistication and dynamism of Ameri-can business, and in 1952 he signed a licensingand technology exchange agreement with theEuropean electronics giant Philips. Matsushita’sfirst overseas company Matsushita Electric Cor-poration of America, was set up in New York in1959, and this was followed over the next fourdecades by the establishment of dozens of salesoffices, manufacturing plants, research facilities,and training centers in countries all over theworld.

Spiritual values

Konosuke Matsushita is also revered in Japan forthe philosophical side of his management philoso-phy. Throughout his career, Matsushita empha-sized the importance of establishing and sharingwith his employees clear management objectivesand slogans to guide business decisions and ac-tions. In 1929, he laid down his company’s “ba-sic management objective” (koryo), which states:“Recognizing our responsibilities as industrialists,we will devote ourselves to the progress and de-velopment of society and the well-being of peoplethrough our business activities, thereby enhanc-ing the quality of life throughout the world.” Histhinking was further influenced through an en-counter with a popular religious movement in1932 which led him to feel strongly that peopleneed a way to connect their work lives with soci-ety. This idea, along with his own business expe-riences, shaped the continuing development ofhis management philosophy. Concerning the re-lation between business, society and profit, hesaid: “A business should quickly stand on its own,based on the service it provides to society. Profitsshould not be a reflection of corporate greed buta vote of confidence from society that what isoffered by the firm is valued. When a businessfails to make profits it should die—it is a waste ofresources to society” (Pascale and Athos 1981).

Another famous part of the Matsushita man-agement philosophy is the “water philosophy:”Konosuke’s declaration that manufacturersshould strive to make all products as “inexhaust-ible and as cheap as tap water.” Matsushita wasthe first company to have its own song and code

of values, which were sung and recited by allcompany employees every morning before start-ing work. Included in the code of values and in-grained in every employee are Matsushita’s“Seven Principles:” national service through in-dustry fairness, harmony and cooperation, strug-gle for betterment, courtesy and humilityadjustment and assimilation, and gratitude.Matsushita’s philosophy shaped his company’sapproach to human resource development as well.Unlike many large Japanese companies,Matsushita does not rely heavily on recruitmentof graduates from elite universities to fill man-agement-track positions; instead, the companyfocuses on getting “extraordinary results fromordinary men.” All employees receive thoroughand continuous training, both in business skillsand in Matsushita values. As one often-heardcompany slogan goes, “Matsushita makes peo-ple before it makes products.”

Konosuke Matsushita served as president ofMatsushita Electric until 1961, when he was madechairman. In 1963 he moved into a more “handsoff” executive advisory position as he sought todevelop the next generation of company leader-ship. Even as advisor, however, he was quick tobecome involved when a crisis arose. Matsushitawas also a prolific author, writing forty-six booksbetween 1953 and 1990.

Further reading

Kotter, J. (1997) Matsushita Leadership, New York: TheFree Press.

Matsushita, K. (1988) Quest for Prosperity: The Life of aJapanese Industrialist, Kyoto: PHP Institute.

Pascale, R.T. and Athos, A.G. (1981) The Art of Japa-nese Management. New York: Simon and Schuster.

TIM CRAIG

Meiji restoration

The Tokugawa period was followed by the firstera of modern Japan, the Meiji period (1868–1912). It was established by a rebellion againstthe Tokugawa regime led by low-ranking samuraifrom feudal estates far from the capital at Edo. Intheory it was not actually a revolution, but a “res-toration of Imperial rule.” With a breathtakingseries of fundamental changes, leaders of the Meiji

298 Meiji restoration

restoration quite literally designed a new Japan.It stands as one of the most comprehensive andrapid transformations of any society in worldhistory. Within the space of thirty years, Japanwas transformed from an agriculture-based feu-dal economy and social system into a modernworld power.

The Tokugawa regime was the supreme au-thority in Japan for more than two and one-halfcenturies, finally coming to an end in 1868.There were signs that the end was near even be-fore events occurred which forcefully broughtthe regime down. Physical isolation of the coun-try one of its main ideological pillars, was undermounting attack from Britain, Russia and theUnited States. The warrior elite from feudal es-tates outside those favored by the regime werebecoming more openly restive, and the questionof why the Emperor was not the actual head ofgovernment, rather than a mere ornament of his-tory had become a common focus of discussionamong groups of samurai, even including somewithin the ruling Tokugawa clan itself. When asmall American fleet steamed into Edo Bay inJune of 1853, under the very walls of the Sho-gun’s castle, with orders demanding that Japanopen ports to allow foreign ships to take on coaland provisions, the beginning of the end was athand. A year later the Shogun’s representativeswere forced to open ports to several nations, andto suffer the humiliation of tariffs dictated to itby foreigners, and even to surrender a measureof sovereignty over areas where foreigners livedand worked.

It took another fourteen years for the regimeto finally be replaced, a period called bakumatsuin Japanese, “last years of the military govern-ment,” during which endless debate about whatto do was carried out both inside and outsidegovernmental circles. As the foreigners came inincreasing numbers, their technological and mili-tary superiority was undeniable, and althoughmany Japanese hated their presence, fearing thecountry would be reduced to semi-colonial sta-tus as had China, they came to realize that theywere in no position to deal with the foreigners onan equal footing. Fortunately for Japan, this cri-sis brought to the fore a cadre of remarkable menwho were eventually able to put aside han rival-ries, suppress individual egos, learn from that very

West that they feared so much, and establish anew regime which, although imperfect and re-quiring many adjustments as time went on, suc-cessfully brought Japan into the modern worldto an extent no non-Western nation has ever beenable to do.

The young men who did all this (the oldestwas a mere forty-one), were mainly lower rank-ing samurai from what the Tokugawa regime hadalways considered “outsider” han, those keptphysically distant from Edo, and never allowedto participate in the deliberations of running thenation. They were joined by a progressive fac-tion of young court nobles in Kyoto. Especiallyprominent in what finally culminated in the MeijiRestoration were samurai of Choshu in extremesouthern Honshu and of Satsuma in southernKyushu, who championed the idea of removing,by force if necessary the entire Shogunate sys-tem of government and replacing it with a gov-ernment established on western lines with theEmperor as a kind of spiritual rallying point. Theyoung samurai from Choshu and Satsuma rallieda few thousand other samurai to their cause, con-fronting the forces of the Shogun for the first timein three centuries. The rebels were victorious ina short military struggle which produced surpris-ingly few casualties. The Shogun abdicated, wasnever harmed, and in fact was later granted alifetime pension. The old regime was thus sweptaway and now a group of idealistic young menfaced the daunting task of building a modernnation on the ruins of an agriculture-based feu-dal autocracy.

The first task at hand for the new leaders wasto establish trust and the image of authority overa confused population, and the way these youngmen used the imperial institution to do that re-flected their cleverness and farsightedness. Theydecided to keep the seat of political power in Edo,but in a calculated move to symbolize the revolu-tionary nature of the new order, the Shogun’senormous castle was transformed into the homeof the Keio Emperor, a lad recently turned four-teen, and the city itself was renamed Tokyo, “east-ern capital.” To further enhance the sense ofnewness of the regime, the Emperor’s reign namewas changed to Meiji, “enlightened rule.” 1868,the start of a new modernizing Japan, thus be-came the first year of the Meiji period.

Meiji restoration 299

Building a new Japan: the firstquarter-century

No emperor for a thousand years of history tothat date had actually been a ruler in Japan, andthe young Meiji Emperor certainly was not madeone. In theory on the other hand, getting rid ofShogunate rule was for the purpose of “restor-ing” the emperor—the sacred emperor—to hisrightful place as head of the Japanese polity. Inalmost all respects, the young emperor had noreal idea of what was going on, but the Meiji lead-ers controlled his seal. All edicts in a whirlwindof fundamental changes across society were pro-claimed in his name. Ordinary people had nodifficulty accepting the explanation the new gov-ernment put forth that the Shoguns had beenusurpers, and that Japanese society was at longlast back on its original course with the Emperorat the helm. The Imperial institution was effec-tively used not only as a rallying point and asource of legitimacy but actually as a way to putbeyond criticism, even beyond serious review,many changes that were being made.

Designers of the new regime were themselvessamurai and court nobles, but they understoodthat the old order would have to be completelydismantled if Japan was to be able to protect her-self from domination by western powers throughmodernization. Meiji leaders adroitly placated theold elite by subsuming them into the new order.Important daimyo and central figures at the formerKyoto court were given titles in a new, European-style nobility. The classification of samurai wasofficially discontinued; samurai costume andsword-wearing were declared illegal. In compen-sation, former samurai were given cash paymentstogether with government bonds, valuable onlyif the Meiji government continued to exist. Fromnow on, except for the titled nobility and theImperial family itself, all Japanese were to be con-sidered part of a population of equals.

The new social order was not instituted with-out some resistance. An uprising of sorts, led bya charismatic man who had himself helped tooverthrow the Tokugawa regime, broke out inKyushu, pitting samurai against a new Western-style conscript army. The samurai fought val-iantly and became somewhat canonized inlegend, but more significantly soldiers of the

Meiji military achieved complete victory indicat-ing that without a doubt the new regime wasfirmly in place.

The West, especially Germany Britain, Franceand the United States, became in a real sense class-rooms for the young men of the new regime.Under conditions that must have been extremelytrying, dozens of those young men agreed to ac-tually go to Western countries and examine indetail “how things were done.” Industrial tech-niques, especially shipbuilding techniques wereexamined in Britain. Military organization andartifacts were studied in France. The railroadsystem of the United States, the most compre-hensive in the world at the time, was of specialinterest, and Meiji leaders turned to Germanyfor a model of modern government. Engineersand technicians were lured to Japan with two tothree times the salaries of their previous employ-ment, a great drain on the new regime’s modestresources.

The earmarks of industry appeared within afew short years in the form of electric power inTokyo, a railway line stretching from the centralpart of the capital some seventeen miles toYokohama harbor, and a silk-weaving factoryusing steam power. At first the government triedto build modern industries by itself, but as fundsran out, it was decided to sell offenterprises toprivate owners. With the exception of a fewwealthy merchants who had prospered during thelate Tokugawa period, the only people with avail-able cash were former samurai, who, if theypooled what money they had, could in some casesbuy entire industries from the government. Thisformed the beginning of the zaibatsu groupswhich were to dominate the economic life of thenation for the next seventy years.

Enormous progress in building a new societywas achieved during the first twenty-five years.A modern military system was established andthe seeds of an industrial economy had begun tobear fruit. A constitution was issued (as a giftfrom the Emperor) in 1889, and a year later anelected national legislature met for the first time.A great landmark was reached in 1894, whenfirst Britain and then the other Western powerssigned new treaties with Japan, ending the un-equal status Japan had been put under and hadendured for forty years.

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The later Meiji period

Late in the nineteenth century the original Meijileaders began to die off. Their passion had beento build a nation strong enough to ward off theWest. The second generation of Meiji leaders wasdetermined to go farther, to see Japan itself as afull-fledged member of the community of greatpowers. Nationalist ideology a blend of the sa-credness of the Emperor with a new version ofnational Shinto, became a part of the school cur-riculum in an education system as widespread asany in Europe at the time. Political partiesemerged, and eventually parliamentary govern-ment began to challenge the power of entrenched,non-elected bureaucracy.

In foreign relations, Japan looked more andmore like an aggressive military power. Aware ofthe way England and France exploited other peo-ple to their economic advantage, a plan washatched by a triad of political, economic and mili-tary leaders to expand Japan’s authority beyondher traditional boundaries. A war was provokedwith China in 1895 which the newly industrial-ized Japan easily won, giving it concessions andcontrol over parts of the Asian continent. Earlyin the new century expansionists in Japan turnedtheir attention to Korea, and eventually rivalryover control of the Korean peninsula resulted inthe Russo-Japanese war of 1904–5. At great sac-rifice Japan prevailed in the war, an outcome withrather profound significance. Since the beginningof the Industrial Revolution no society outsidethe orbit of European-based culture was able toconfront on equal footing the technology andmilitary power of the great European powers. Itwas assumed by most people in the West thatsuch a thing could never happen. Japan provedthem wrong, and the set of assumptions under-lying European superiority were fatally weak-ened.

Further reading

Akamatsu, P. (1972) Meiji 1868: Revolution and Counter-Revolution in Japan, New York: Harper & Row.

Fukuzawa, Y. (1966) Autobiography of Fukuzawa Yukichi,trans. E.Kiyoka, New York: Houghton Mifflin.

Kosaki, M. (1978) Japanese Thought in the Meiji Era,Princeton, NJ: Princeton University Press.

Pyle, K.B. (1969) The New Generation in Meiji Japan,Stanford, CA: Stanford University Press.

Reischauer, E.O. and Craig, A.M. (1988) Japan, Tradi-tion and Transformation, Boston: Houghton Mifflin.

JOHN A.McKINSTRY

Men in charge of MOF (mofutan)

Meaning literally “in charge of,” the tan is a spe-cial company employee responsible for relationswith the cognizant ministry in a system of infor-mal regulation. Mofutan is a specialized Japaneseexpression referring to those who work with theMinistry of Finance. Almost every large corpo-ration designates at least one employee to be inconstant contact with the bureaucrats in the regu-lating agencies (for example, the Ministry of Fi-nance (MOF) and Bank of Japan for banks, theMinistry of Health and Welfare for pharmaceuti-cals, etc.). The more regulatory discretion thecognizant ministry exercises over a firm, the morerelevant the company’s ability to affect the regu-latory outcome through individual lobbying. Inthis respect, the tan are the junior-level equiva-lents of the “’old boys,” senior-level companyemployees often hired upon retirement from civilservice to facilitate the flow of information withthe ministry.

Objectives

The most important goal for a company in des-ignating a tan is to ensure a regular, immediateflow of information between the company andthe cognizant ministry While trade associationsfacilitate access to information on generic, indus-try-wide concerns, companies aim to ensure com-pany-specific lobbying with the cognizantregulator. Even companies not necessarily closeto their regulator often designate a tan in whatcan be called “regulatory competition:” if onecompetitor continuously lobbies its interests, allother firms in the industry will also dispatch atan in order not to lose out.

Men in charge of MOF 301

The need to designate a tan increases with theministry’s leverage over a single company. Oneexample is the voluntary export restraints (VER)demanded by the USA in the automobile tradenegotiations of the mid-1980s. The VER meantthat each company had to limit its exports ac-cording to a quota, which was officially set byMITI. While in practice the quota agreement wasreached among the firms based on their existingmarket shares, MITI had the power to changethese quotas. To represent their interests, eventhe most independent auto makers sent out theirtan.

Implications

The overall effects of the tan system are twofold.On the positive side, the tan serve to increase theflow of information between government andbusiness in a very direct, cost-effective manner.Since individuals interact repeatedly and openlythe civil servant is supposedly informed of allevents in the industry under his jurisdiction andcan identify low-cost solutions to any problems.The tan system also reduces the actual costs ofregulation, since it replaces on-site inspectors andother monitoring by the ministry Moreover, thetan system helps overcome one potential regula-tory problem inherent in the rotation-on-the-jobsystem, which also applies to ministries. As civilservants are moved to new positions every otheryear, they have to learn from scratch about thenew industry’s opportunities and challenges. Thecompany and trade association tan provide freetraining to the incoming regulator. Of course, thisalso means that the industry lobbies the regula-tor from the beginning.

On the negative side, the tan system increasesthe opacity of Japanese regulation. In industriesthat are predominantly regulated through ad-ministrative guidance and where direct lobby-ing is therefore particularly effective, theinstitutionalized tan representation of large firmsis a disadvantage to both smaller and foreignfirms. The system also obfuscates the process ofpolicy making and can lead to regulatorydisinformation of outsiders. Moreover, the sys-tem helps to cloak accountability In cases ofmanagement mistakes, a ministry may choose towithhold negative information, possibly to the

detriment of the affected shareholders and trad-ing partners.

The finance industry

One industry where the tan system has been ofparticular importance is banking. Until 1998, theMOF held a wide scope of regulatory responsi-bilities and relied heavily on situational, infor-mal regulation. Regulating banks is subject tospecial requirements in all countries. For instance,to avoid a bank run that could destabilize an en-tire financial system, governments sometimes optto withhold critical information in the hope oflimiting the damaging ripple effects of a bank fail-ure. In Japan, however, bank regulation based noton objective inspections but instead on an exces-sive reliance on behind-the-door problem-solvingmay have largely contributed to the banking cri-sis of the 1990s. The full extent of bad loans heldby the country’s banks remained undisclosed, andeven after a new agency had conducted thoroughinspections beginning in 1998, the scope of thebad loan problem remained unclear.

Another instance highlighting the negativeeffects of the system was the August 1995 case ofDaiwa Bank. The bank’s New York branch in-curred enormous losses which allegedly wereduly reported to Japan’s MOE Because severaldefaulting Japanese banks were threatening thefinancial stability of Japan at the same time, theMOF decided not to inform US officials and didnot make a public statement. US regulators werelivid and demanded termination of all of DaiwaBank’s international business.

In response to these crises, the MOF was re-organized by transferring banking regulation tothe new Financial Supervisory Agency and anabolition of the tan system was demanded. Banksand other companies had to abolish the desig-nated positions and terminate individual lobby-ing. In banking, this was strictly enforcedbeginning in 1995.

Outlook

Problems with this abolition soon became pain-fully obvious because the informal mechanismsof regulation were not replaced with formal ones.

302 Men in charge of MOF

The positive effects of smooth and efficient regu-lation were lost, and regulators had less access toinformation about their industries. In particular,formulating regulation became impossible with-out inside knowledge of new banking products.Quietly, some of the old relationships were re-established, especially through trade associationtan. Whether the tan system will continue in thefuture depends on whether supervisory agencieswill be established in industries other than bank-ing, as these would obviate extensive personalcommunication with the ministry.

ULRIKE SCHAEDE

Ministry of Construction

The Ministry of Construction (Kensetsusho orMOC) is one of twelve ministries in Japan’s cen-tral government bureaucracy The ministry ischarged with developing, operating, and main-taining roads, highways, sewerage, water re-sources, parks, and other public facilities;implementing river improvement, erosion con-trol, and coastal preservation projects; planningfor cities; promoting the construction and realestate industries; establishing building standards;and constructing and maintaining governmentbuildings.

The Ministry of Construction was establishedon 10 July 1948. Even though it was a creation ofthe early post-Second World War period, the min-istry inherited certain elements of its mission, struc-ture, and personnel from other ministries. Mostimportantly MOC absorbed the Civil Engineer-ing Bureau of the once powerful Home Ministry(Naimusho), which was dissolved as part of theOccupation’s efforts to demilitarize and democ-ratize Japan. From the War Recovery Bureau(Sensai Fukko In), MOC incorporated the tasksof reconstructing and maintaining public sectorfacilities, supervising infrastructure development,and overseeing public works projects. MOC’simmediate organizational predecessor was theshort-lived Construction Institute (Kensetsu In),which was created in January of 1948.

The Ministry of Construction is organizedaround a headquarters office, several institutes,and a network of regional bureaux. Located inTokyo’s Kasumigaseki district, MOC’s headquar-

ters office is subdivided into a Minister’s secre-tariat and five bureaux that administer function-ally specific policies for cities, rivers, roads,housing, and economic affairs. The ministry over-sees the Public Works Research Institute, Build-ing Research Institute, Geographical SurveyInstitute, and the Construction College. Muchof MOC’s work is carried out through eight con-struction bureaux located in the Tohoku, Kanto,Hokuriku, Chubu, Kinki, Chugoku, Shikoku,and Kyushu regions. Only Hokkaido andOkinawa, which are overseen by agencies underthe auspices of the Office of the Prime Minister,are excluded from the ministry’s administrativeembrace. In addition, MOC and its regional bu-reaux carry out their functions through hundredsof work offices and branch work offices locatedacross the country.

The Ministry of Construction is charged withspending a sizable share of Japan’s general ac-counts budget and a major portion of allocationsfrom the Fiscal Investment and Loan Program(Zaisei Toyushi Keikaku), the so-called “secondbudget.” MOC’s spending power is reflected inthe fact that Japan’s ratio of public works expendi-ture to gross domestic product tends to be two tofour times greater than that of other advancedindustrial countries such as France, the UnitedStates, Germany and the United Kingdom. In-creased spending on public works—largely fi-nanced by the issuance of construction bonds(kensetsu kokusai)—is a popular artifice whereby theJapanese government seeks to stimulate economicgrowth. For these reasons, MOC is consideredone of Japan’s most powerful spending agencies.Nevertheless, some observers contend that MOCis among the most politicized of Japan’s centralgovernmental ministries, allegedly manipulatedby the Liberal Democratic Party. However,some observers believe that the ConstructionMinistry wields relatively more power over Ja-pan’s enormous construction industry than theMinistry of International Trade and Industrydoes over client industries in its administrativebailiwick.

Construction bureaucrats

The human element of the Ministry of Construc-tion consists of a trio of political appointees who

Ministry of Construction 303

head up a vast corps of meritocratically selectedcivil servants. At the apex of MOC’s formal or-ganizational hierarchy are the Minister of Con-struction (kensetsu daijin) and two ParliamentaryVice-Ministers of Construction (kensetsu seimujikan). As with all of the ministries and agenciesof Japan’s central government bureaucracy theseare MOC’s only political appointees. The pau-city of political appointees in Japan’s governmentbureaucracy contrasts starkly with the dozens,sometimes hundreds, of politically selected func-tionaries in each of the various agencies of thefederal government in the United States. Mostof those appointed to the top political posts atMOC spend only a brief time in the position. Infact, from 1948 to 2000 the average length of ten-ure in the Construction Minister post was onlyabout nine months. Among other things, thismeans that the political appointees must dependheavily upon the good will and expertise of thecareer bureaucrats in carrying out their duties ofoverseeing the ministry While a few individuals,such as Ichiro Kono (Construction Minister,1962–4), come to be known for strong-handedcontrol, there is little evidence to suggest thatministers exert any appreciable long-term influ-ence over major policy and personnel decisionsat the Ministry.

At the time of its creation, slightly less thansix thousand civil servants were employed in theConstruction Ministry’s internal sections, affili-ated organs, and local branches. The total roseprecipitously until the mid-1960s when the Min-istry employed more than 35,000 individuals. Butthe number has declined steadily ever since, withthe 1998 figure standing at 23,674 employed of-ficials. As with all central state ministries in Ja-pan, MOC’s officials fall into two distinctcategories, depending upon whether they enteredthe Ministry after passing the Class A or the muchless demanding Class B segment of the Higher-level Public Officials Examination. The formerare referred to as “career” officials, while thevastly more numerous latter group is known asthe “non-careers,” a distinction akin to that be-tween commissioned and non-commissionedmilitary officers. The non-career officials tend tolack the educational pedigree of their career coun-terparts, and their promotional prospects are se-verely limited.

MOC’s career bureaucrats may be dividedinto two groups, each with its own peculiar ca-reer path leading to the post of administrativevice-minister (jimu jikan), the foremost post forcareer civil servants. As with other ministries, themajority of MOC’s “generalists” (jimuya) aregraduates of the law and economics faculties, withprestigious universities such as the University ofTokyo supplying a disproportionate share. ButMOC is unique among Japan’s central govern-ment ministries in that “technical specialists”(gijutsuya)—individuals trained in civil engineer-ing, architecture, and other technical fields—arepermitted to hold the post of administrative vice-minister. Aside from wielding considerable ad-ministrative power within the Ministry thesetechnical specialists perform a larger sharer of thedesign services involved in public works projectsthan do their counterparts in commissioningagencies in countries such as the United States.

The balance of power between generalists andtechnical specialists is a postwar phenomenon.Indeed, technical specialists in the prewar HomeMinistry’s Civil Engineering Bureau were notpromoted above the rank of section chief in theMinistry’s headquarters or head of the civil engi-neering department in the regional branches.Owing to the combination of several forces, in-cluding the faith of Occupation planners in “sci-entific administration” (for which, presumablytechnical specialists would be ideally suited),Tadayasu Iwasawa, a civil engineer, became theMOC’s first administrative vice-minister and thefirst technical specialist to ascend to the post.Despite the triumph of the technical specialists,Masami Nakata, a generalist, became adminis-trative vice-minister upon Iwasawa’s resignationin March of 1950. This initiated what has be-come an unwritten, and nearly inviolable, law atthe Ministry of Construction: that the top ad-ministrative post will alternate between technicalspecialists and generalists.

While the dual-track personnel system hasbecome institutionalized at the administer/vice-minister level, there is no alternation with regardto the penultimate posts in the respective careerladders, deputy vice-minister for administration(daijin kanbo cho) and vice-minister for engineer-ing affairs (kensetsu gikan). Generalists invariablyserve as directors of the minister’s secretariat,

304 Ministry of Construction

economic affairs, and city bureaux, while techni-cal specialists hold the director posts at the riverand road bureaux. The only exception is the di-rectorship of the housing bureau, wheregeneralists and administrative specialists alternatein the director’s post. For the most part, the topposts in the Ministry’s eight regional construc-tion bureaux, auxiliary organs, and local branchoffices are held by technical specialists.

MOC exerts influence over the constructionbureaucracy at the local levels through shukko,the practice of temporarily “loaning out” mid-career officials. These loaned-out officials typi-cally spend from two to fours years in positionsattached to prefectural or municipal bureaucra-cies. In addition, MOC “loans” a number of mid-career officials to public corporations, particularlythose entities under the ministry’s jurisdiction,such as the Hanshin Highway Public Corpora-tion.

Descent from heaven

Upon retirement from the government service,usually between the ages of fifty and fifty-five,most upper bureaucrats “descend from heaven”into a “second career.” This re-employment ofex-officials, known as amakudari (descent fromheaven), takes several distinct forms. The mostwidespread and controversial form of amakudariis the re-employment of retired MOC officials inprivate-sector construction firms. The ostensiblereason that firms hire ex-bureaucrats is to obtainthe administrative and technical expertise thatthese individuals possess. Yet many observersbelieve that the most important reason behindthe practice of re-employing retired MOC bureau-crats in construction firms involves their personalconnections to the government bureaucracy Spe-cifically some observers believe that firms em-ploying ex-bureaucrats are rewarded with accessto confidential information concerning bidderdesignation and secret leakages of informationconcerning the government’s confidential antici-pated ceiling price (yotei kakaku) for public worksprojects. In this way amakudari is said to be en-twined with dango, the institutionalized, albeitillegal, system of price-fixing on public worksprojects.

A second form of amakudari is termed “side-

slip style descent from heaven” (yokosuberi gataamakudari). This denotes the re-employment ofex-bureaucrats in upper administrative positionsin quasi-governmental corporations, foundations,financial banks, and similar organizations. It issaid that a large share of the top positions in thesepublic entities are “hereditary” in that their occu-pants tend to be drawn almost exclusively fromthe ranks of retired government officials, particu-larly those from the agency which oversees thecorporation. In some cases, these positions in-volve relatively high salaries, few duties other thanceremonial functions, and various other perqui-sites. MOC is in the enviable position of control-ling a number of “progenitor posts” in a dozenor so public corporations, such as the Japan Hous-ing Public Corporation. Some former MOC bu-reaucrats have been known to “migrate” throughas many as five side-slip posts.

Finally the Construction Ministry is well rep-resented among members of parliament. The firstconstruction bureaucrat to descend into parlia-mentary politics was Tadayasu Iwasawa, MOC’sfirst administrative vice-minister, who won elec-tion to the Upper House in 1950. Over the yearsa number of former MOC officials have troddenup the fabled red carpet of the National DietBuilding. The vast majority have claimed mem-bership in the Liberal Democratic Party It is be-lieved that much of the electoral success enjoyedby former MOC bureaucrats derives from thepotent campaign support provided by the “con-struction machine” (kensetsu mashiin), a somewhatshadowy apparatus designed to turn out the votefor candidates favored by the ministry.

In this way amakudari is the glue that bindstogether MOC, the construction and real estateindustries, and influential allies in the parliamen-tary world. Most importantly amakudari facilitatesmutually beneficial interactions and the exchangeof information.

“Construction friction” and beyond

In the mid-1980s the Ministry of Constructionbecame engulfed in heated trade friction with theUnited States and other countries concerning theclosed nature of Japan’s construction market. Thefirst salvo in this trade dispute involved demandsto include American firms in bidding for projects

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connected with the construction of the newKansai International Airport. Eventually the dis-pute widened to include demands for reform ofthe designated competitive bidder system—whereby the contracting agency designates whichfirms will be permitted to submit bids on publicworks projects—and strengthening of Japaneseantimonopoly law. A particularly contentiousepisode in this dispute followed the revelation thatfrom 1984 to 1987 Japanese contractors riggedbids on construction projects at the US NavalBase at Yokosuka. Issues relating to US-Japanese“construction friction” were incorporated into theBush administration’s Structural ImpedimentsInitiative and the Clinton administration’s Frame-work Talks. Given the enormous size of the Japa-nese construction market and the difficulties facedby foreign firms attempting to gain access to it,construction friction likely will be a nagging irri-tant in Japan’s foreign economic relations.

Further reading

Brooks, R.A. (ed.) (1990) Opening Japan: The Construc-tion Market, Washington, DC: The Heritage Foun-dation.

Cutts, R.A. (1988) “The Construction Issue: JapanSlams the Door,” California Management Review 30:46–63.

Kensetsusho (annual) Kensetsu hakusho (ConstructionWhite Paper), Tokyo: Okurasho Insatsu Kyoku.

Ministry of Construction Home Page, http://www.moc.go.jp/eng/eng/index.htm.

Woodall, B. (1996) Japan Under Construction: Corruption,Politics, and Public Works, Berkeley CA: University ofCalifornia Press.

BRIAN WOODALL

Ministry of Finance

The Ministry of Finance (MOF) was establishedin 1869, a year after the Meiji restoration, asone of Japan’s central government organs. Theministry’s roles and functions have undergonenumerous changes in the years since. For mostof the postwar period, the MOF’s operations werebased on the Ministry of Finance EstablishmentLaw, promulgated in May 1949. After the Sec-ond World War, Allied Occupation officials dis-

mantled other powerful government agencies,such as the Home Affairs Ministry but kept theMOF intact as a means of facilitating financialsystem stability and the development of a strongbanking system. As a result, the ministry emergedfrom the Second World War largely unscathedand clearly at the top of the bureaucratic hierar-chy.

The ministry has a long history of recruitingthe best and the brightest in Japan to join its ranks.In the initial postwar decades, many of the eco-nomics departments in top universities were domi-nated by socialist thinking. As a result, the majorityof officials on the elite career track within the min-istry held law rather than economics degrees. Inmore recent years, the number of officials hold-ing economics degrees has risen substantially al-though law graduates remain the majority.

Implications of a wide scope of authority

Until 1998, the ministry’s tasks spanned fromthe compilation of the national budget, tax col-lection, and oversight of monetary policy to theregulation and supervision of private sector fi-nance, the management of national assets, andthe regulation of the liquor and tobacco indus-tries. This enormous breadth of authority madeJapan’s Finance Ministry distinctive when com-pared to its counterpart finance ministries andtreasuries in other countries. The ministry’s si-multaneous responsibility for fiscal and monetarypolicy as well as financial regulation and supervi-sion also gave rise to particularly strong linksbetween the ministry and the governing partyprivate sector corporations (financial institutions,in particular), and other government and quasi-government agencies.

More specifically the number of former MOFofficials occupying seats in the Diet has typicallyexceeded numbers of ex-bureaucrats from otherministries. At the same time, former MOF offi-cials have assumed larger numbers and more lu-crative private sector positions upon retiring fromthe public service than have former officials fromany other ministry Furthermore, MOF officialson secondment have staffed a distinctively largenumber of positions within other ministries andagencies.

306 Ministry of Finance

Even while the ministry has been noted for itsstrength, however, it has been infamous for itscompartmentalization and lack of organizationalcoherence. It has long been described within Ja-pan as a “bureaucracy within a bureaucracy”(kancho no naka no kancho) and as “a collection ofbureaux rather than a ministry” (kyoku atte, shonashi). Although MOF officials in the fiscal policybureaux of Budget and Tax engage in constantinteraction with officials in the governing partyas part of the annual budget process and reviewof tax legislation, officials in the financial bureauxof Banking, Securities, and International Financelong enjoyed relative decision-making autonomyThis different pattern of interaction with the Dietacross bureaux reflected the relative electoral sa-lience of the respective issue areas.

Fiscal functions

The ministry’s fiscal functions involve the admin-istration of public finance. More specifically theministry formulates the national budget, overseesthe execution of this budget and the collection oftax revenue, manages funds so as to coordinatespending and revenue generation, and managesnational property.

The budget formulation process begins in Junewhen government ministries and agencies beginto draw up estimated budgets. These are thentypically submitted to the MOF in August andthe ministry compiles a national budget proposal.Following Cabinet and Diet deliberations and anyamendments (extremely rare), this proposal be-comes law and the ministry then moves to spendor allocate money in accordance with the provi-sions.

Finance ministries or national treasuries inmost countries exhibit conservative tendencies,but in Japan, the MOF’s persistent articulationof a “balanced budget” principle has been a par-ticularly prominent feature of ministry rhetoric.This principle was first breached in 1965 withthe issuance of government bonds to financepublic works projects and was encroached uponmore severely in the late 1970s and early 1980swhen government bonds were also issued to coverrevenue shortfalls. As Japan’s massive levels ofpublic debt today suggest, the ministry was alsounable to adhere to the principle in the 1990s.

Nonetheless, the balanced budget principle hasremained a strong undercurrent in all of theMOF’s policy discussions.

Efforts to suppress excessive public spendinghave been evidenced in the guidelines for budgetrequests issued by the MOF each year as part ofthe annual budget process. Although any minis-try or agency may in theory request budget ap-propriations in any amount, the BudgetBureau—with the Cabinet’s consent—normally set“ceilings” that indicated the highest levels per-missible. These ceilings have ranged from a 10percent increase on the previous year to a 10 per-cent decrease on the previous year.

Monetary functions

The MOF is also responsible for the managementof Japan’s monetary affairs, both domestically andabroad. Carrying out the government’s financ-ing operations involves the administration offunds in the ministry’s Trust Fund Bureau. Ofparticular importance is the ministry’s manage-ment of the Fiscal Investment and Loan Program(FILP). The FILP is a kind of “second budget”that funnels money from postal savings, postallife insurance, welfare, and national pension fundsinto the government’s special accounts, variousgovernment organs, quasi-governmental corpo-rations, and local public authorities, in order toimplement policy objectives. In April 2001, ma-jor reform of the FILP will significantly alter thistraditional flow of funds, however, and requiretraditional fund recipients to turn to other meansto procure resources, including the bond mar-ket.

The MOF’s monetary functions also includethe regulation and supervision of private sectorfinancial institutions including banks, insurancecompanies and brokerages. A so-called “convoyapproach” (goso sendan hoshiki) to financial regula-tion characterized the ministry’s supervision ofprivate sector finance over the postwar period.This approach ensured that no financial sectoractor was left behind and that no actor moved for-ward so fast as to endanger the viability of oth-ers.

The convoy approach also served a multiplic-ity of interests. The stability it facilitated in thefinancial sector ensured constant flows of credit

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to industry as the nation focused on economicreconstruction in the immediate postwar period.Through its support of the banks in this way thegovernment also cushioned the impact of eco-nomic shocks on borrowers. Importantly the con-voy approach also served the interests of banks,for it gave rise to a cartel-like arrangement thatbenefited all members. Furthermore, the practiceof amakudari meant that this principle was a re-flection of self-interested ministry behavior aswell. Any bank that went under would be onefewer potential depository for officials retiringfrom the ministry. Until the mid-1990s, the min-istry successfully upheld this principle.

Finally the ministry’s monetary functions havean international dimension. The ministry formu-lates, executes and coordinates exchange ratepolicies, while also supervising the government’sexternal loans and investments. In the wake ofthe 1997–8 Asian financial crisis, the ministry wasparticularly active in coordinating and providingaid to countries hit by crisis.

Organizational adjustments to changing needs

Organizational changes have been carried out inthe MOF over the postwar period to accommo-date changes in the policymaking environment.In response to the growth in Japan’s external tradeand the liberalization of foreign exchange trans-actions, for example, a Customs and Tariff Bu-reau was established in 1961. By 1964, as Japan’seconomic system became more liberal and thenation became a member of the Organization forEconomic Cooperation and Development(OECD), the need to place greater priority onthe development of the capital markets and for-eign exchange transactions was evident. In thisyear, therefore, a Securities Bureau and an Inter-national Finance Bureau were established withinthe ministry Then, in 1992, in response to thegrowing inter-relationship between financial ser-vices and the emergence of financial scandals, theministry established the Financial InspectionsDepartment within the Minister’s Secretariat.

Policy breakdown and reorganization of theministry

The ministry however, did not always adjustadeptly to changing policy needs. In the 1990s,

the ministry’s failure to aggressively tackle thenon-performing loan problem in the nation’sbanking sector led to an unprecedented level ofcriticism of the ministry as well as to dire conse-quences for the economy as a whole.

Public criticism of the MOF in the 1990s wasin itself nothing new. The ministry became thetarget of public criticism on a number of occa-sions over the postwar period. Prior to the 1990s,however, this criticism bore little connection topolicy breakdown per se. Occasional scandalsemerged over such things as ministry officials inthe Budget Bureau being wined and dined byrepresentatives of quasi-government agenciesseeking subsidies from the budget. The introduc-tion of the consumption tax in 1989 led to somepublic anger directed at the ministry Criticism ofthe MOF in the 1990s was distinct, however, inthat it depicted the ministry’s lax financial super-vision and influence on monetary policy in thebubble period as a central reason behind the baddebt that plagued the financial system after thebubble’s collapse. The bad debt problem, in turn,was perceived as also contributing to the eco-nomic downturn.

The political context of MOF criticism in the1990s also differed from the past, occurringagainst the backdrop of unprecedented upheavalin the political party system. Criticism intensi-fied from 1995–6 in particular, after the ministryrequested public funds to dispose of failed hous-ing and loan corporations called jusen. In the wakeof this development, the Liberal DemocraticParty’s coalition partners—and some membersof the LDP itself—began calling for the ministryto be “dismantled.”

In 1997, legislation was passed in the Diet toreorganize the MOF. In April 1998, responsibil-ity for monetary policy was devolved from theministry to the Bank of Japan with the imple-mentation of the new Bank of Japan Law. Then,in June 1998, responsibility for the regulation andsupervision of private financial institutions wastransferred from the MOF to a new and inde-pendent Financial Supervisory Agency In July2000, responsibility for financial system planningwas also transferred to the Financial ServicesAgency (the successor to the Financial Supervi-sory Agency). As a result of these changes, thescope of authority enjoyed by Japan’s Finance

308 Ministry of Finance

Ministry today more closely resembles that of itscounterpart agencies elsewhere in the world.

As Japan enters the twenty-first century theMOF must play a critical role in addressing someof the most difficult challenges faced by Japan inthe postwar period. These include restarting theeconomy after a decade of prolonged economicstagnation and addressing the dire state of publicfinance. As of 2001, Japan’s ratio of governmentdeficit to GDP ranked as the worst among theadvanced industrial nations.

With the reorganization of Japan’s central gov-ernment ministries and agencies in January 2001,the Japanese name of the MOF was changed fromOkurasho to Zaimusho (literally “Treasury Min-istry”). The official English translation, however,remains “Ministry of Finance.”

Further reading

Brown, J.R. (1999) The Ministry of Finance: BureaucraticPractices and the Transformation of the Japanese Economy,Westport, CT: Quorum Books.

Hartcher, P. (1998) The Ministry: How Japan’s Most Pow-erful Institution Endangers World Markets, Boston:Harvard Business School Press.

Kato, J. (1994) The Problem of Bureaucratic Rationality: TaxPolitics in Japan, Princeton, NJ: Princeton Univer-sity Press.

Mabuchi, M. (1994) Okurasho Tosei no Seiji Keizaigaku(The Political Economy of the Finance Ministry’sControl), Tokyo: Chuo Koron-sha.

Rosenbluth, F.M. (1989) Financial Politics in Contempo-rary Japan, Ithaca, NY: Cornell University Press.

Vogel, S.K. (1994) “The Bureaucratic Approach to theFinancial Revolution: Japan’s Ministry of Financeand Financial System Reform,” Governance: An Inter-national Journal of Policy and Administration 7 (3): 219–43.

JENNIFER AMYX

Ministry of International Trade andIndustry

The Ministry of International Trade and Indus-try (MITI) is in charge of administering Japan’spolicies covering international trade and indus-

tries other than agriculture. It was established in1949, taking over from the Ministry of Com-merce and Industry As of 2000, MITI had astaff of 12,346 and annual budget of ¥2.03 tril-lion. It was restructured as the Ministry ofTrade, Economy and Industry (METI) in thecontext of the complete revision of national ad-ministration organization of Japan in January2001.

The administrative area and organization ofMITI

The administrative area of MITI covers most ofthe private sector (most manufacturing industries,wholesale, retail and service industries) other thanagriculture, the transportation business, construc-tion industries, and telecommunication business.MITI is responsible for government policy to-ward industry and trade covering such mattersas the healthy development of industrial sectors,which it supports through advisory and techni-cal support of private sector initiatives; environ-mental protection as it relates to industrial activity;and the management and resolution of trade con-flicts and disputes involving Japanese firms andindustry both domestic and international. Whilemuch of MITI’s activities seem directed at largecompanies, it is also responsible for industrialpolicies affecting small and medium enterprises,as well as patent policy.

The extensive administrative area of MITI isbetter understood by considering the ministry’sorganization. The organization of MITI haschanged corresponding to the challenges con-fronting the Japanese economy In 1973, follow-ing a major organizational reform, the ministryconsisted of genkyoku (original bureaux) whichare in charge of policies for each industry andyokowamkyoku (inter-industry bureaux) which arein charge of the policies for specialized issue ar-eas such as environmental policy trade policyand so forth. There are three genkyoku: the Ma-chinery and Information Industries Bureau,which is in charge of policy for the machine andinformation industries; the Basic Industries Bu-reau, which develops policies for the chemicalindustry the steel industry and so forth; and theConsumer Goods and Service Industries Bu-reau, which oversees policy for the textile and

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apparel industries, miscellaneous goods, the pot-tery industry and so forth.

There are four yokowamkyoku. The IndustrialPolicy Bureau is in charge of industrial policyoverall, such as the policy for industrial structureconversion, industrial finance and industrial tech-nology. The International Trade Policy Bureauis in charge of multilateral and bilateral tradenegotiation. This bureau is also in charge of policyfor the promotion of international trade, such astrade insurance policy. The Industrial Locationand Environmental Protection Bureau is in chargeof policy for industrial location, preserving theenvironment and safety. Also, there are threegaikyoku (agencies). The Small and Medium En-terprise Agency develops and coordinates smalland medium enterprise policy The Japan PatentOffice is responsible for patent administration.The Agency for Natural Resources and Energyis in charge of policies to ensure stability and se-curity of energy and natural resources as well aspolicies that relate to the energy and mining in-dustry The Minister’s Secretariat has the role ofadjusting and coordinating the opinions on in-dustrial policy from the related bureaux and toform the budget and draft laws submitted to theDiet.

The history of MITI

MITI was formally established in 1951. Fromthat date to the present, it has held the primaryresponsibility for the development of policies af-fecting the Japan’s economy and industrial de-velopment. In the 1950s, MITI’s primary chargewas to strengthen the independent base of theJapanese economy which had been devastatedby the war. In 1951, the Japan DevelopmentBank was established as a policy financing bank.The Enterprise Rationalization Promotion Lawwas promulgated in 1952 to give favorable treat-ment such as tax credits to encourage enterpriserationalization. Thereafter many other laws wereintroduced to promote targeted industries suchas electronics and various machinery industries.The ultimate objective of these policies and theirsupporting legislation was the achievement ofeconomic equality with other developed coun-tries. As Japan must rely on the importation ofraw materials and food, the acquisition of for-

eign currency was a subject of special concernand, in order to address this concern, an exportpromotion policy was adopted. As a consequence,an export insurance system was carried out be-ginning in 1950 and from 1953 favorable taxtreatment extended to export activities. Also, theJapan External Trade Organization (JETRO)was established in 1958 to accumulate and dis-seminate information on foreign economies. In1956 Japan joined the General Agreement onTariffs and Trade (GATT).

In the 1960s Japan became a vital member ofthe world economy through the liberalization oftrade and capital. In 1960, the Japanese govern-ment adopted a plan to liberalize trade and cur-rency that raised the rate of trade liberalizationfrom 40 percent to 80 percent within three years.Further, in 1964 Japan accepted the Article 8obligation of the International Monetary Fund,and carried out its first capital liberalization in1968. The primary focus of MITI in the 1960swas to cultivate new industries such as automo-biles, petrochemical products and syntheticfibers under the difficult circumstance of tradeand capital liberalization. MITI put forward apolicy of “heavy and chemical industrialization,”which it outlined in a document entitlted Vision ofMITI Policy in the 1960s. At the time, the ministrybelieved that key industries were suffering froma lack of funds, excessive competition and inabil-ity to achieve scale economies. MITI dealt withthis problem by means of market-interveningmeasures such as the use of administrative guid-ance to carry out advance adjustment of enter-prise investment plans, based on its own surveyof these plans. (Such measures were discontin-ued in the 1970s.) A typical example of MITI’sefforts to advance improvements in industrialstructure through government leadership wasthe submission to the Diet in 1963 of the DraftLaw on Temporary Measures for Promotion ofSpecified Manufacturing Industries. This DraftLaw designated the specialty steel, automobileand petrochemical industries as “specified indus-tries.” It ruled that representatives of the indus-try in question, along with representatives fromfinancial circles and competent ministers shoulddeliberate on “promotion standards” for thesetarget industries in order to cultivate their devel-opment in a coordinated fashion. MITI argued

310 Ministry of International Trade and Industry

that the government needed to carry out a policyof favorable treatment in taxation and fundingtoward these industries, and also to give them anexclusion from the Anti-Monopoly Law (theLaw Concerning the Prohibition of Private Mo-nopoly and the Preservation Fair Trade) ifnecessary However the Draft Law was tabledtwice and finally abandoned without a vote be-ing taken. Reports at that time indicate that, withthe exception of MITI, members of financialand industrial circles and other ministries wereopposed to the Draft Law because the bill wasseen as strengthening the power of MITI. As aresult, MITI’s policy gradually shifted to onethat was more informational in nature, provid-ing information and advice to complement,rather than control, market mechanisms.

The distortions of high economic growth be-gan to appear in the Japanese economy in thelatter half of the 1960s. The first was serious en-vironmental destruction, as reflected in severalhighly visible water and air pollution disasters.In response, the government promulgated theBasic Law for Environmental Pollution Controlin 1967, and MITI formulated new initiatives insupport of the measure, such as the developmentof technology for pollution prevention, promo-tion of pollution prevention investment, and pro-motion of positioning technical experts inmanufacturing facilities.

The second distortion was the appearance ofdepopulated areas and the concentration of popu-lation in cities. The government tried hard toconstruct industrial infrastructures of rural dis-tricts in response to this problem, and MITI ad-vanced policies to address the adjustment ofindustrial location by means of the IndustrialRelocation Promotion Law (1973).

Trade friction also emerged as a significantissue during this period, as Japan’s economic riseled to it becoming a competitive force within theworld economy The US-Japan textile negotia-tions begun in 1969 became a major politicalproblem for the first time. The negotiations con-tinued until the US-Japan Textile Agreement of1972, which contained provisions to restrain tex-tile exports from Japan to the USA. Correspond-ing to this, MITI implemented a policy topromote the abandonment of excessive looms,in order to reduce production capacity and

lessen the shock to the domestic textile industryof export reductions.

In 1970 MITI announced its Vision of MITIPolicy in the 1970s. It identified the knowledge in-tensification of the industrial structure as the pri-mary focus of its efforts. It specifically targetedthe computer and numerically controlled (NC)machine tool industries as well as the fashion in-dustry as representative examples of knowledge-intensive industries. In response to thesocio-economic problems that emanated fromrapid economic development, it also proclaimedthe importance of industry’s role in, and respon-sibility to, society This represented an importantshift in the ministry’s orientation. It was at thispoint that industrial policy at MITI graduallyshifted its emphasis toward achieving a soundeconomic development while taking values otherthan growth into account.

In 1973 MITI restructured itself and estab-lished the Agency for Natural Resources andEnergy. Shortly thereafter, the worldwide oil cri-sis occurred and the Japanese economy experi-enced a sharp jolt. Quickly the newly formedagency found itself at the center of attention as itworked to develop a plan for enhancing energyefficiency and reducing petroleum consumption.MITI followed through with regulations andpolicies based on the Petroleum Supply and De-mand Optimization Law on Emergency Meas-ures for National Life Stabilization.

As a result of the oil crisis and the end higheconomic growth, the 1970s was a time whenseveral major industries fell into a serious chronicbusiness slump. In 1978 the Law on TemporaryMeasures for Stabilizing Specified Depressed In-dustries was promulgated, and MITI targeted therestructuring of these industries with an aim ofreducing excessive capacity and improving oper-ating efficiency thereby enhancing competitive-ness.

In the 1980s, trade friction intensified as thetrade imbalance between Japan and the USAcontinued to grow. The areas of trade frictionexpanded to include automobiles, semiconduc-tors and NC machine tools. As for automobiles,after intense negotiations, Japan agreed to restrainthe export beginning in 1981. In the area of NCmachine tools, self-restraint was also accepted.In semiconductor negotiations, Japan agreed to

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introduce an export monitoring system and makeefforts to assist US makers’ entry into the Japa-nese market. There was concern within MITIthat this series of bilateral negotiations wouldthreaten the world free trade system, with itsemphasis on broader, multilateral agreements. Inthe 1990s much of the trade friction problem wasresolved through the development of new inter-national trade rules such as the Marrakesh Agree-ment establishing the World Trade Organization.In 1985, the rapid appreciation of the yen follow-ing the Plaza Accord brought about a difficultsituation for export-led small and medium-sizedfirms. MITI took measures to lessen the shockby promulgating the Law on Temporary Meas-ures for Small and Medium Enterprises in Speci-fied Regions.

In the 1990s, the situation surrounding MITIchanged drastically. First, deregulation becamean urgent issue and was seen as critical to furthereconomic development in Japan. MITI aban-doned its regulation in many fields. The aboli-tion of the Large Retail Stores Law and theliberalization of electric power prices are two ex-amples of MITI’s shift. Second, both at homeand abroad, the preservation of the environmentcame to take on greater importance. In this area,MITI began promoting recycling of electricalequipment and other energy and resource con-servation activities. Furthermore, MITI pushedpolicies that sought to reduce industry and con-sumer demand for energy through research anddevelopment on energy efficient and energy con-serving technologies. The 1990s was also thedecade in which MITI actively worked towardthe further construction of international rules oftrade, investment, and the protection of intellec-tual property In each of these areas, MITI wasput in the position of coordinating Japan’s do-mestic system with the larger international sys-tem.

Summary

Within the government administration, MITI hasbeen responsible for the oversight of a large por-tion of the Japanese of economy MITI carriesout its wide and varied duties through a struc-ture of bureaux that have either industry or topic-

specific responsibilities. At the ministry level, itcoordinates and adjusts policies put forward byindividual bureaux. MITI’s objectives and themeans by which it accomplishes those objectiveshave evolved over time in concert with the de-velopment and evolution of the Japaneseeconomy The fundamental thrust of that evolu-tion has been in the direction of increasing reli-ance on approaches that complement marketmechanisms. In recognition of further changesin the Japanese economy MITI has evolved onceagain. It restructured itself and was reborn as theMinistry of Trade, Economy and Industry(METI) in January 2001 with the complete revi-sion of the national administration organizationin Japan.

Further reading

Sumiya, M. (2001) A History of Japanese Trade and Indus-try Policy, Oxford: Oxford University Press.

TAKEHIKO YASUDA

Ministry of Labor

Recently combined in 2001 with the Ministry ofHealth and Welfare to become the Ministry ofHealth, Labor and Welfare, the Ministry of La-bor (MOL) was originally established in Sep-tember of 1947. Its charge, according to theMinistry of Labor itself, is to secure stable em-ployment, promote worker welfare, and contrib-ute to economic expansion and stability ofnational life. Similar to the Department of Laborin the USA with its Bureau of Labor Statistics,the Ministry and affiliated institutions such asthe Japan Institute of Labor collect extensivedata on the workplace constantly throughoutthe year, and act as a central clearinghouse forlabor-related information. The Ministry is alsodeeply engaged in labor policy and is involved inmany decisions that bear directly on the eco-nomic welfare of employees. The Ministry en-forces the nation’s labor laws and is also partlyresponsible for legal revision. Known for itsstrong support of job security and other charac-teristics of the stylized view of Japanese labormarkets (see internal labor markets; lifetime

312 Ministry of Labor

employment; seniority wages; enterpriseunions), the Ministry has struggled in recentyears to adapt labor policy to rapidly changinglabor conditions. This includes rising unemploy-ment and a rapidly aging population.

More than twenty statistical surveys per yearare performed by the MOL and affiliated institu-tions. Two well-known surveys are the MonthlyLabor Survey and the Basic Survey of WageStructure. The general purpose of surveying isto identify trends and problems in the labor sta-tistics. Possible problems might revolve aroundwages, working hours, employment, and person-nel and labor management. Additional qualita-tive data is gleaned through managementconferences in each industry and Ministry ofLabor research meetings on topics such as per-sonnel and labor management. The level of de-tail the ministry is able to gather on separateindustries and businesses is extensive. Each year,a White Paper on Labor is published by the Min-istry based on data collection. The White Papertends to focus on the issues identified over thecourse of the year and proposes medium andlong-term solutions to these problems. For ex-ample, in the midst of continued stagnation inthe Japanese economy rising structural unemploy-ment, and an aging workforce, the 1997 WhitePaper focused on employment and wages in struc-tural transformation, as well as possible solutionsto the inevitable problems that will arise from anaging workforce.

The Ministry remains a large institution bro-ken into many different bureaux and divisionscovering the areas of labor administration. Ma-jor bureaus include the Labor Relations Bureau,the Labor Standards Bureau, The Women’s Bu-reau, the Employment Security Bureau, and theHuman Resources Development Bureau. Thesebureaux in turn are broken up into divisions.Typical divisions include the Labor LegislationDivision within the Labor Relations Bureau, theworking hours and working compensation divi-sions within the Labor Standards Bureau, andthe Employment Insurance Division within theEmployment Security Bureau. Important affili-ated organizations include the Japan Institute ofLabor, founded in 1958, which disseminates in-formation to the public through the EmploymentInformation Center within the Institute.

History and description of selected policies

The MOL was founded in the context of a pro-found period of change for labor policy in Japan.Just after the Second World War, three very im-portant laws—sometimes known as “the threefundamental labor laws”—were passed that wereto frame policy for the postwar period. The La-bor Union Law (1945) established the right ofworkers to organize and bargain collectively anddefined unfair labor practices. The Labor Rela-tions Adjustment Law (1946) defined the limitsof strike behavior and established procedures forsettlement of labor disputes. The Labor StandardsLaw (1947) legislated, among other things, bet-ter working conditions, minimum wage stan-dards, an eight-hour working day compensationfor work related injuries, and lastly restrictionson female and minor employment. The mainthrust of these three laws lasted through the post-war period to the present. Perhaps the most im-portant law for Ministry of Labor jurisdiction wasthe Labor Standards Law, which was only fun-damentally overhauled after fifty years. The termsof the law covered all employees in Japan, union-ized and non-unionized alike.

Although many of these terms remain in ef-fect, there have been some changes recently Re-strictions on female employment originallyintended as protection—including restrictions onovertime, nighttime, and early morning work—were eventually seen as hindering the move forgreater egalitarianism in Japan. These restrictionswere recently relaxed, and the Ministry beganenforcing more egalitarian work standards. Cou-pled with the Equal Opportunity EmploymentAct, women in Japan now have more opportuni-ties and choice than they did before. On this andother issues relating to discrimination, the MOLis combining carrot and stick; companies thatconform to new standards tend to get rewardedwith penalties levied on firms that violate discrimi-nation legislation. Other recent significantchanges to the Labor Standard Law have aimedat making the labor market more flexible by steer-ing workers toward newer industries such as in-formation technology.

Although there are many examples, the mini-mum wage policy in Japan is a good illustrationof the MOL’s degree of involvement in everyday

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labor issues. The Ministry of Labor is in chargeof the overall administration of the minimumwage system, and it ensures that minimum wagesare revised every year in accordance with changesin overall wages and prices. In sharp contrast tothe USA and to many European countries, Ja-pan does not have a uniform national minimumwage. A Minimum Wage Law enacted in 1959stipulates that individual industries and regionsplay a major role in determining the level of thewage. On the recommendation of the Ministerof Labor or the Chief of the Prefectural LaborStandards Office, a Minimum Wage Council ineach prefecture then adjusts the minimum wageaccordingly Contemporary data provided by theMinistry of Labor has the highest minimum wageby prefecture at 5,465 yen per day (in Tokyo,Kanagawa, and Osaka), while the lowest is 4,712yen (in Miyazaki). Across industries, the highestminimum wage paid in a particular industry perday is 7,280 yen (in general trucking), while thelowest is 4,928 yen (in ceramic ware manufac-turing).

Enforcement of the minimum wage law, likeenforcement of many of the other labor laws inJapan, is quite difficult. Constrained by a rela-tively low number of trained monitors and fairlyweak punishment, the MOL essentially educatesthe public with the resources available. Having amany-tiered minimum wage system injects a largedegree of complexity into the system, and it iscommon for employees to be unaware of the levelof minimum wage that their employers are le-gally obligated to pay As such, the temptationfor employers to cheat is high. Every November,the Ministry runs a ten day campaign to educatethe public about the year’s minimum wage in-creases and to try to ensure payment of mini-mum wages.

Despite the inherent complexity of labor mar-kets, the MOL has been strategically involved inshaping their evolution. Throughout the postwarperiod, for example, the MOL generally hassought to soften the effects of downturns andpreserve long term employment—sometimes di-rectly subsidizing firms to ensure that employeeswill be hired back after a period of layoff. At otherpoints the MOL has brought direct pressure onfirms to not fire employees in times of stress. In1993, when Pioneer Electric officially laid off a

group of employees, the MOL objected stronglyand brought about a change of heart. However,in the face of continued stagnation and growingrecognition of the need for change in labor mar-kets, the stance on preserving employment secu-rity has softened.

The private sector plays a major role in shap-ing change as well. Typical of most diffusion ofnew organizational forms in Japanese business,private sector companies and bureaucrats worktogether to legitimate new practices. An exampleof collaboration between the Ministry of Laborand the private sector was in a 1994 report pub-lished by the Employment Information Center.Based on Ministry research on “best practice”already beginning to occur, it urged companiesto create three new promotion tracks for a newwage system: true managers leading subordi-nates, researchers and planners, and skilled work-ers and technicians. Within categories, therecommendation was to promote according toability. Hitachi, Matsushita, NTT, Sanyo andother leading companies had all implementedsystems like this by the mid-1990s.

The latter half of the 1990s and early 2000s ispresenting unique challenges for the MOL, andthe situation has remained troublesome for sev-eral years running. Unemployment overall is ata postwar peak of around 4.9 percent, with in-voluntary unemployment surging from 320,00in 1992 to 1 million by 2001. An increasing per-centage of this unemployment may be structural,rather than cyclical. Discouraged workers—thosewho are not even searching for a job—have risenfrom 1 percent of the workforce to around 2.2percent. Temporary part-time, and contract em-ployees have risen from 4.7 percent of the laborforce to 27.5 percent of the labor force. A slowshift to the service sector remains underway withthe latter rising from 50 percent of the workforceto 55 percent; according to most theory on eco-nomic development, this last trend is a good thing.In short, change in labor markets alreadyunderway has accelerated dramatically and iscausing dislocation of a sort not seen in Japansince the Second World War.

Faced with these realities, the MOL has be-gun to shift away from employment preservationtowards a focus on new job creation, especiallyin small and medium sized businesses. In 1999

314 Ministry of Labor

and 2000, subsidies were being granted to em-ployers who hired workers laid off from otherfirms; this is a practice many Japanese firms stillfind difficult to do. Extra unemployment meas-ures were built in to automatically kick in shouldunemployment go above 4.9 percent. Growthsectors of the economy—such as information tech-nology and health services—were provided otheremployment subsidies. Despite measures such asthese, unemployment has persisted. Generallythese and other policies have favored older work-ers and former “insiders” (those employees whoworked inside the firm for a long duration), ratherthan younger workers. Thus, the high unemploy-ment rate for young workers will remain an is-sue. This also preserves high costs to employers,as older workers are more expensive. In responseto this problem, the MOL has begun to focus ontraining unemployed young employees in hopesof maintaining and improving their skills for atime when employment conditions improve. Onething is clear from recent activity: Japan’s laborpolicy is evolving, but the Ministry of Labor isstill very much engaged in the current problemsof the day.

Further reading

Lincoln, J. and Nakata, Y. (1997) “The Transforma-tion of the Japanese Employment System: Nature,Depth, and Origins,” Work and Occupations 33–55.

OECD Economic Surveys (2000) Structural Policies toEnhance Growth and Secure Recovery: A Review of Progress.

WILLIAM BARNES

Minomura, Rizaemon

Born in Edo (now Tokyo) on November 25, 1821,Minomura Rizaemon was orphaned early in life.After the death of his ronin father, he traveled fromKyushu up to Kyoto at fourteen years of age, thentraveled the country eventually settling back inEdo. At nineteen he took a position as amerchant’s apprentice. In the markets of Edo heworked hard, and eventually found his way intothe merchant house of Mitsui. During his ten-ure Mitsui grew into a financial giant, one of the

few to evolve during the Tokugawa period(1603–1857) and make a successful transition inthe modern industrialized era, and became thedominant zaibatsu of the late nineteenth and earlytwentieth centuries.

After joining Mitsui, Minomura quickly roseto the top. Through his skill and the develop-ment of close ties to the government he was ableto steer it through a difficult period. At one point,when Mitsui’s financial position was extremelyweak, the government imposed a forced loan onMitsui and other wealthy merchant houses. Be-cause of his government connections, he was ableto arrange a remittance, thereby alleviatingMitsui’s difficulties. Shortly thereafter he waspromoted to the position of head clerk, a posi-tion of nearly unassailable power within the firm.Though the Mitsui clan controlled the firm, com-pany custom dictated that a non-family memberoccupy the position of head clerk and hold op-erational power.

Through his close ties with the governmentof the Meiji restoration, Minomura was able toreceive special privileges for Mitsui. Only twoother merchant houses, Shimada and Ono, wereable to acquire similar arrangements. It was thisaccess to government contracts, subsidies andmonopoly privileges that enabled Minomura tosteer Mitsui into the most profitable areas of thenewly industrializing economy. For example,roughly two-thirds of the Japanese army’s provi-sions were managed through Mitsui contracts.Recognizing the importance of being physicallyclose to government, Minomura waged a deter-mined campaign with the Mitsui family to movethe headquarters from Kyoto, where it had beenbased for several centuries, to Tokyo. Thoughthe campaign even stirred up the population ofKyoto against him, he eventually succeeded, andmoved the headquarters in 1873.

However, in addition to understanding thebenefit of close ties to the central government,Minomura also introduced modern bankingmethods to Japan. He became the first presidentof Mitsui Bank, the first modern private bank inJapan. Moreover, he was aggressive in steeringthe Mitsui conglomerate into other key sectors,such as mining, thereby securing a stable foun-dation for the future.

Minomura, Rizaemon 315

Minomura was equally capable of divestingMitsui of unprofitable ventures. When Echigo-ya, one of the oldest and most famous retailstores in Tokyo, suffered sustained losses, hesevered its long-standing connection to otherMitsui enterprises. The move proved beneficialto Mitsui and to Echigoya, as the latter recov-ered and went on to establish itself asMitsukoshi, the most prestigious departmentstore in Japan. Although he died in Tokyo onFebruary 21, 1877 at the relatively young age offifty-six, by the time of his death Mitsui’s foun-dation and future developmental path had be-come firmly established.

Further reading

Amakawa, J. (1968) “The Spirit of Capitalism in MeijiJapan,” Kwansei Gakuin University Annual Studies.

Hirschmeier, J. and Yui, T. (1975) The Development ofJapanese Business, London: George Allen.

Lockwood, W.W. (1954) The Economic Development ofJapan, Growth and Structural Change 1868–1938,Princeton, NJ: Princeton University Press.

ALLAN BIRD

Mitsubishi

Mitsubishi Corporation is the general tradingcompany of the Mitsubishi keiretsu founded byIwasaki Yataro in the 1870s. It imports and ex-ports a wide variety of products, as well as fi-nancing and investing in various projects aroundthe world. Its 12,000 employees are spread arounda network of forty-two offices in Japan and 118offices and subsidiaries in seventy-three locationsoverseas.

Mitsubishi Shoji, as it is known in Japanese,first became a separate entity in 1918, formedfrom the sales division of Mitsubishi Goshi.Mitsubishi Goshi’s president, Iwasaki Koyata, hada policy of spinning off parts of Mitsubishi Goshiinto separate businesses, including the predeces-sors of Mitsubishi Corporation’s present day sis-ter companies (and major customers) such asMitsubishi Electric Corporation and MitsubishiHeavy Industries.

Iwasaki Koyata had a strong liberal and inter-

national outlook and his values shaped theMitsubishi Corporation culture. This is encap-sulated by his address to the general managers ofMitsubishi Shoji in 1920, where he outlined thethree fundamental principles of Mitsubishi’s busi-ness ethos as being: corporate responsibility tosociety integrity and fairness and internationalunderstanding through trade. To this dayMitsubishi Corporation retains a reputation forbeing “gentlemanly” cautious and having a strongorganizational structure.

Up until the mid-1930s Mitsubishi Shoji hadlimited operations and low profitability comparedto its main rival, Mitsui Bussan. In the 1930s itbecame more profitable through focusing onmetals, machinery and exporting from Asia. Al-though these businesses bolstered the militaristgovernment’s ambitions, Mitsubishi was regularlyattacked throughout the decade for lacking pa-triotism.

Mitsubishi Shoji was dissolved by the AlliedOccupation into 139 separate companies and for-bidden to re-form or use the Mitsubishi name orlogo. Due to the pressures of the Korean War,zaibatsu were allowed to regroup in the 1950sand eventually Mitsubishi Shoji was re-establishedin 1954, immediately opening offices in majortrading centers around the world.

In the 1960s it became heavily involved in therebuilding of Japan’s industries and a substantialpart of its business was purely domestic. Even in1999 over 40 percent of its trading transactionstook place within Japan only This is despite thefact that throughout the 1970s Mitsubishi Cor-poration became a major participant in JapaneseOverseas Development Assistance projects, open-ing offices in Africa, the Middle East and LatinAmerica.

More recently Mitsubishi Corporation hasdeveloped various “merchant banking style” func-tions, including investment funds and mergersand acquisitions, although, like other trading com-panies, it had to write off substantial bad debtsfrom its zaiteku activities in the 1980s.

In the 1980s and early 1990s Mitsubishi Cor-poration was regularly listed by Fortune as thelargest company in the world, in terms of trad-ing transactions ($116bn in 1999) but is cur-rently undergoing a period of retrenchment andrestructuring, due to the strong impact of the

316 Mitsubishi

depressed Japanese economy on its perform-ance.

Further reading

Kankokai (ed.) (1981) Mitsubishi Shashi, Tokyo: Uni-versity of Tokyo Press.

Mishima, Y. (1989) The Mitsubishi: Its Challenge and Strat-egy, Greenwich: JAI Press.

Rudlin, P. (2000) The History of Mitsubishi Corporation inLondon: 1915 to Present Day, London: Routledge.

PERNILLE RUDLIN

Mitsui

Mitsui was established in the Meiji era, a periodof extraordinary development of Japanese soci-ety especially toward the outside world. As ageneral trading company Mitsui established it-self as a main source for trading goods, bothoverseas and domestic. In addition to trading,Mitsui offered a wide range of business supportservices including: information support for busi-nesses, networking, personnel recruiting, fi-nance and support for new enterprisedevelopment.

The modern Mitsui & Co., Ltd. was estab-lished on July 25, 1947, forming the nucleus ofthe so-called Mitsui keiretsu. The former Mitsui &Co., Ltd. was officially dissolved after the Sec-ond World War because of its zaibatsu, a disso-lution commanded by the United States in 1947.After the reconstruction, an amalgamation withDaiichi Co. in 1959 shaped today’s Mitsui.

Mitsui has a reputation for hiring bright andpromising students. In fact, the company at-tributes its long-term success directly to its tal-ented personnel. Including Tokyo Head Office,Mitsui has thirty-four offices in Japan and eighty-nine offices overseas. Globally it has forty-twooverseas subsidiaries with ninety-one offices, ina total of ninety-three countries. Mitsui holds alarge market share in many fields and is one ofthe largest general trading companies in Japan.

During the high-growth period from the 1960sthrough the 1980s, Mitsui contributed to thegrowth of the Japanese economy by diversifyingits range of business activities, exploiting foreignresources, and opening up new domestic and for-

eign markets. Although its core business is incommercial transactions—mainly trading by mak-ing good use of substantial information, peopleand their long experiences. Mitsui has developedmany business fields, including: Iron and Steel,Non-Ferrous Metals, Property Service, Construc-tion & Housing Business Development, Machin-ery Chemicals, Energy Food, Textiles, GeneralMerchandise, Transportation and Distribution,and the Information Industry.

Currently Mitsui is emphasizing its informa-tion technology (IT) business. On February 1,2000 a company called 7dream.com was estab-lished. It is a joint venture with eight companiesincluding Mitsui, 7–11 Japan Co., Sony andNEC. This company was established to providetotal e-commerce services. Using multimediaterminals that are set up at every 7–11 store thefollowing services are available: hotel reserva-tion, purchases of airline tickets and books,online distribution of music and so on. It is an-ticipated that success or failure in informationtechnology business ventures will significantlyaffect the long-term prospects of the Mitsui com-pany.

Further reading

Fukuyama, F. (1995) Trust: The Social Virtues and theCreation of Prosperity, New York: Free Press.

Miyashita, K. and Russel, D. (1994) Keiretsu Inside TheHidden Japanese Conglomerates, New York: McGraw-Hill.

Okimoto, I.D. (1989) Between MITI and the Market:Japanese Industrial Policy for High Technology, Stanford,CA: Stanford University Press.

MARGARET TAKEDAMEGUMI KATSUTA

Mitsukoshi

Mitsukoshi was Japan’s first department store.Founded in the seventeenth century Mitsukoshiinitiated a number of innovative sales methodsthrough its long history and the company remainsone of the leading retail operators in present-dayJapan.

Mitsukoshi’s foundation was laid by Takatoshi

Mitsubishi 317

Mitsui, who opened a kimono store namedEchigoya in the Honmachi quarter of Edo (nowTokyo) in 1673. Ten years later, the store movedto Surugacho where Mitsui introduced, for thefirst time in the modern world, the sale by priceticket and cash-and-carry. He also established amoney exchange alongside his garment retailbusiness, which would later become Mitsui Bank(now Sakura Bank).

At the beginning of the twentieth century thehouse of Mitsui launched a project to establishthe first Western-style department store in Japan.The famous six-story building in Renaissancestyle in Nihonbashi, in central Tokyo, was com-pleted in 1914. Its underground floor, escalator(the first in Japan), a roof garden, and annex thea-tre (added in 1927) set the precedent for Japa-nese department store designs. After openingbranch stores in Osaka, Seoul (Korea) and Dairen(China), the company changed its registered namefrom Mitsui-Echigoya to Mitsukoshi in 1928.Mitsukoshi embarked on an ambitious chain-store strategy and built stores in such retail centersas Shinjuku, Ginza, Kobe, Takamatsu, Kanazawa,Sapporo, and Sendai.

After the Second World War, the growth ofconsumer needs further enlarged its scope ofbusiness. The company sought to be a providerof affluent and cultured lifestyle, and diversifiedinto areas of cultural fairs, sale of artworks, thehousing business and travel agency In 1971, itopened its first European branch store in Paris,aiming primarily at Japanese tourists looking forlocal products. The Paris store was followed bystore openings in Rome, London, New York,Dusseldorf, Hong Kong, Frankfurt, Munich,Madrid, and Hawaii. In Japan, Mitsukoshi haseighteen stores as of 2000.

One stronghold of the present Mitsukoshi isits outward sales division, which sells gift itemsin bulk to corporate clients and high-income cus-tomers. Another important division is the build-ing service division, which is specialized in interiordesigning and furnishing. For example, the To-kyo Dome Hotel, opened in 2000, was providedwith banquet rooms and room interiors designedand furnished by this division.

Mitsukoshi’s unconsolidated sales in fiscal1999 was ¥676 billion, with operating profit of¥9 billion, and recurring profit of ¥6 billion. The

company has slightly more than 8,000 employ-ees, and the surface of its retail floors, includingtenant shops, is 361,000 square meters.

See also: industrial groups; retail industry

Further reading

Hirschmeier, J. and Yui, T. (1975) The Development ofJapanese Business, 1600–1973, New York: Allen &Unwin.

——(1977) Nnihonno Keiei Hatten: Kindaika to Kigyou Keiei(The Development of Japanese Business: Modern-ization and Management), Tokyo: Toyokei-zaishinposha.

SHINTARO MOGI

mochiai

Many Japanese companies hold equity shares intrading partners that pass some threshold of pub-lic awareness but that are insufficient to confereffective control. The Japanese terms used to de-scribe this practice vary but one of the most com-mon is mochiai. Mochiai literally means to balanceor remain steady. This meaning provides insightinto the practice of cross-shareholding. That is, thecross-shareholdings represents a silent financialinterest only Often, but not always, theshareholding is reciprocal. Common examples ofcross-shareholding are the share interests thatbanks in Japan typically hold in their loan clients.The banks hold these share interests to improvetheir incentives in monitoring the real investmentsof the loan clients, and to gain access to privilegedinformation. Antimonopoly law limitsshareholding by banks and insurance companiesto 5 percent and 7 percent of outstanding sharesrespectively but the shareholding seldom ap-proaches these limits. Cross-shareholding is mostprominent within the financial keiretsu. About halfof the cross-held shares within keiretsu presidents’clubs are held by financial institutions. One-thirdof the non-ordered pairs of non-financial membersof same presidents’ clubs are linked by cross-heldshares and in about half of these instances the cross-shareholding is reciprocal. Cross-shareholding bynon-financial firms has a different rationale fromthe cross-shareholding of banks. By holding stock

318 mochiai

in a trading partner a firm weakens its own bar-gaining position, for its own gain from trade thenincludes a share interest in the other party’s gainfrom trade. Precisely for this reason the crediblethreat of divesting cross-held shares bonds theother party to attend to the shareholder’s wishes.Cross-shareholding in Japan is often erroneouslyidentified as a takeover defense. The threat ofhostile takeover has never been a serious one inJapan, and cross-shareholding is not the most ef-fective defense against a takeover. The other ex-planations for cross-shareholding are thereforemore convincing.

Further reading

Flath, D. (1993) “Shareholding in the Keiretsu, Japan’sFinancial Groups,” Review of Economics and Statistics75:249–57.

——(1996) “The Keiretsu Puzzle,” Journal of the Japaneseand International Economies 10:101–21.

DAVID FLATH

Morita, Akio

Morita is a post-Second World War entrepreneurand innovative business leader, a founding mem-ber of Sony Corporation who helped turn it intoa leading technology company. Ultimately hebecame chairman of Sony. Long recognized as amaverick in Japanese business circles, he finallygained acceptability in Japan with his selectionas chairman-elect of the Keidanren, the associa-tion of Japanese businesses. Unfortunately astroke prevented him from taking over the chair-manship.

Morita came from a very successful businessfamily that owned a sake brewing company andhad created a baking company now called Pasco.He had attended business meetings with his fa-ther from an early age in anticipation of his tak-ing over the family business. One of the first signsof Morita’s independence was when he declinedto do so. As a first son, he broke a tradition thathad existed in the family for fifteen generations.

On May 7, 1946, approximately twenty peo-ple gathered on the third floor of a burned-outdepartment store building in downtown Tokyo.At the meeting, they agreed to establish a new

company Tokyo Telecommunications Engineer-ing Corporation. That company later becameSony Corporation. The founders were MasaruIbuka, a thirty-eight-year-old engineer, and AkioMorita, a twenty-five-year physicist. They startedwith initial capital of $500.

From the beginning, the company’s philoso-phy was based on its being an innovator, inMorita’s words, a clever company that wouldmake new high technology products in ingeniousways. Initially Ibuka and Morita assumed thatall they had to do was make good products. Whenorders did not come in, Morita shifted to focuson merchandising, while Ibuka remained focusedon engineering.

By 1953 the company was struggling to makea profit, surviving in part from family contribu-tions and deferred salaries for seven years. Rec-ognizing the limitations of the Japanese market,Morita made his first trip overseas to developopportunities there. His first trip was to the USA,a market that would remain a primary focus forSony.

From the beginning, another focus of Sonywas miniaturization and compactness, a focus thatalso continues today. Unlike many other Japa-nese companies following the war, Sony was notdependent on assistance from the Ministry ofInternational Trade and Industry (MITI). Formost of this period, Sony had to battle the bu-reaucrats at MITI, many of whom did not recog-nize the potential of Sony’s intended technologymarkets. For instance, it had great difficulty inobtaining a foreign exchange license from MITIto pay $25,000 to Western Electric for the rightto use its transistor technology.

Over the next forty years, through persever-ance and hundreds of trans-Pacific trips, Moritahelped expand a company that is recognizedaround the world not only as a high-tech com-pany but the company which usually leads oth-ers in developing new technology. His reputationfor innovation among his competitors was suchthat initially Sony could produce a particularmodel for a year or two before competitors en-tered the market. Eventually competitors beganto follow Sony’s innovations in just six months,and often sooner.

Morita not only led his competitors, butalso led consumers. Sony’s goal was to lead the

Morita, Akio 319

public with new products rather than ask themwhat kind of product they wanted. Since it wasso far ahead of the rest of the market, Morita feltthe public did not necessarily know what waspossible. Some of the products created and intro-duced by Sony were transistor radios, tape re-corders, Betamax video recorders (which wassupplanted by the later-introduced VHS ofMatsushita), and Walkman.

Personally Morita never stopped his search forchange and development. During his first trip tothe United States, he made certain he rode theroller coaster at Coney Island. Later in his ca-reer, he rode with a stunt pilot as he flew upsidedown fifty feet above ground level. At the age offifty-five, he took up the game of tennis; at sixtyhe learned to ski, and at sixty-four he learnedwater-skiing.

Morita’s business management policies be-came famous around the world. He believed thatinvestors and employees are in equal positions,but that sometimes employees are more impor-tant because they will be there a long timewhereas investors will often get in and out on awhim in order to make a profit. Throughout Sonymanagement has been dedicated to the principleof upgrading workers. Morita believed that peo-ple need money but that they also want to behappy in their work and proud of it. He meas-ured managers by how well they organized a largenumber of people, and how effectively they gotthe best performance from their employees andblended them into a coordinated group. He alsobelieved that when Japanese talk about coopera-tion or consensus building, it usually means theelimination of individualism. At Sony his chal-lenge was to bring ideas out into the open.

Morita also felt that an enemy of innovation,which was a key element of Sony’s operatingpolicy could be its own sales organization. If thesales force had too much power, it often discour-aged innovation. Morita, on the other hand, wascommitted to three creativities: creativity in tech-nology product planning and marketing. His so-lution to the problem of unleashing this creativitywas to set targets instead of giving undefinedgoals.

Morita’s wife, Yoshiko, also had an importantimpact on Japanese business. She came from aprominent business family Originally her samu-

rai family went into the bookselling and publish-ing business at the end of the Tokugawa periodand expanded the business into a large chain ofbookstores. Sanseido, her family’s company pub-lishes the popular Concise line of foreign languagedictionaries, an idea that originated with her fa-ther. Although she grew up without any real in-terest in foreign countries and when she wasyoung had no great desire to travel, she becameprominent in international business circles and asymbol for Japanese women. She became veryinvolved in helping to educate Japanese womengoing abroad and wrote a book to help themunderstand living in foreign countries. It is stillused today as a guide. She also did a televisionshow in Japan for ten years, traveling to new fash-ion centers, bringing back interviews and intro-ducing new ideas to Japan, which was then behindthe times in fashion awareness. Her influence mayhave helped turn Tokyo into an international fash-ion center.

ROBERT BROWN

motorcycle industry

The motorcycle industry in Japan is a significantindustry in that, for several reasons, its impactextends far beyond its current economic size for.First, it gives us an indication of the nature ofcompetition in Japan when there is little govern-ment intervention in an industry. Second, theworld first discovered here that scale alone is notthe key to competitiveness, but that experiencealso matters. Third, this industry experiencedsome of the earliest areas of successful Japaneseforeign investment as trade barriers increased.

Japanese firms remain major players in theworld motorcycle market. Honda, Yamaha,Suzuki and Kawasaki are the four players. Whileeach firm initially had a large commitment tomotorcycles, none of these firms currently hasgreater than half of its sales in this product seg-ment. Only Yamaha, at 42 percent of sales, hasmore than 10 percent of its sales in this industrysegment. Yet Honda builds more motorcycles,even with only 10 percent of its sales volume inthis sector. For Kawasaki, a large, diversifiedheavy equipment manufacturer, its business inmotorcycles never was a major share in its total

320 motorcycle industry

sales. Yet even as the firms have built on theirbase of motorcycle technology to enter autos(Honda), minicars (Suzuki) and recreational ve-hicles (Yamaha), the legacy of their motorcyclebusiness is still important.

The nature of competition

When government does not dictate the rules ofcompetition in Japan, new players can enter, andthere are frequent pressures for both productimprovement and price reduction. The motor-cycle industry is a good example of both thesephenomena. The motorcycle was never seen bythe government as a strategic industry and thushad little industry-specific government support.

In the early postwar period, we can observethe entry phenomenon. Tohatsu, a reliable, well-run company had the major share of the indus-try. Soichiro Honda was an inventor whose onlyearlier experience was in supplying parts toToyota. Yet he was able to identify new marketsand utilize new technology in engines to redefinethe industry dethrone the existing leader Tohatsu,and send it into bankruptcy. Thinking unconven-tionally, Honda realized that people in the imme-diate postwar economy needed inexpensive waysto get products into the devastated cities fromthe countryside. He mounted an engine built torun on a noxious mixture based on coal tar to abike, and sold this to the many people who wereprofiting from the trade in food. Later, havingupgraded engine and machine, he observed apotential market for the motorcycle in the vari-ous delivery services that were common in Japanat that time. Designing a carrier that could staylevel while a cycle careened through the narrowstreets of Japanese cities, he enabled firms andeven the neighborhood noodle shop to delivertheir wares efficiently. Again, the market ex-panded.

Pricing was also an important strategy forHonda. The company calculated that it couldincrease sales and reduce cost by identifying alarge market and then designing a new productfor that wider market. An easy-to-shift motorcy-cle, he observed, would enable many more peo-ple to be comfortable on a motorcycle, and wouldincrease the market substantially His design of

the Super Cub provided that expanded marketand the associated cost reduction.

Experience curve

The Super Cub was a transition to the secondarea where the motorcycle industry is importantfor Japanese business, the experience curve. Mostanalyses of competition had emphasized the im-portance of the size of the production facility so-called economies of scale. With this approach,there was no easy way for a new competitor toenter the market because the size of the existingcompetitors would block the newcomer fromprofitable operation. The newcomer could notcompete on production cost. The successful en-try of Honda and the other Japanese firms intothe world market demanded an explanation, sincetheir initial size was much less than that of theestablished players in the UK and the USA. Theusual explanation of government subsidies didnot provide a convenient explanation for the Japa-nese success, since the government provided nospecial support to this industry Studies by theBoston Consulting Group showed that the com-panies could indeed succeed even if their initialcosts were much higher than that of the foreignplayers. Given the strategies mentioned above toexpand the markets, Japanese firms could increasethe volume of production rapidly As they did so,they learned to produce motorcycles less expen-sively A large domestic market provided the op-portunity to expand volume quickly for thesmaller bikes that were not at that time on offerfrom foreign manufacturers. As the cumulativevolume built up, the firms were able to pass alongthe savings to their new customers. This led to avirtuous cycle that in turn led to substantialchanges in competitive position. Instead of a strat-egy of simply basing decisions on high volumealone, this approach showed that the growth strat-egy of Japanese firms could be profitable. Fastgrowth, if based on these learning efficiencies,could be the basis for sustainable, profitable com-petition. Pricing based on the experience curveeconomies gave Honda and the other Japanesecompanies a sustainable advantage both in do-mestic and international markets.

When Japanese motorcycle companies triedto compete only on price, however, and hoped

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that the increased volume would lead to profits,the industry found itself in an unsustainable con-dition often found in Japanese markets. This iswhat Japanese call “excess competition.” We canuse this industry to learn about the dangers ofthis type of price competition in Japanese mar-kets. The obsession with share so often found inJapanese markets led the motorcycle industry intoa period of chaos in the 1970s. Concerned withits perpetual “number two” status in the indus-try the president of Yamaha threw down thegauntlet to Honda, saying that it would take overthe top position within a short period of time.Unfortunately the desire for increased volumewas not based on any significant cost advantageat Yamaha. Nor was it based on any ability todesign new products at a faster pace than Honda.At that point, Honda was moving into the auto-mobile market, and Yamaha thought it might bedistracted, and that Honda would not respond.Honda’s response provides an important lessonon the nature of competition in the Japanesemarket: no firm lets a new player into the marketwithout a significant fight. Images of shared mar-kets and cartelized industries give foreigners theimpression that Japanese generally agree to sharemarkets. But if the government is not involvedin coordinating the market, this is far from thenorm. In this case, Honda responded by reallo-cating a large number of engineers from the au-tomotive division. It designed a significantnumber of new models, and matched the de-creases in price that Yamaha had initiated. Withno significant production advantages and an en-gineering staff that was not equal to that ofHonda, Yamaha had to beat an ignominious re-treat. Honda’s dominant position in the industrywas maintained due to its cost and product de-sign capabilities.

The industry gives one additional example ofthe importance of experience curve effects,though this example comes from a US companyHarley Davidson, rather than the Japanese firms.Harley Davidson had understood the importanceof experience curve economies and had begunto digest many of the lessons of Japanese manu-facturing process efficiencies. It also knew that itcould be competitive with the Japanese firms atthe high end of the market if only it could gener-ate enough sales to internalize that experience in

a reasonable period of time. In the HarleyDavidson case, the company chose to appeal tothe US government to give it a period of protec-tion to achieve that experience level. The gov-ernment and the firm agreed to an unusualstructure for the period of protection that reflectedthe economies to be expected from the experi-ence curve. An initial high tariff on large Japa-nese bikes was decreased each year, disappearingin seven years. If Harley Davidson could not re-duce its costs and expand the market for its bikes,the reduced tariff protection would doom theirstrategy. This incentive to improve productivityand develop new products worked well for thecompany and it is now competitive in the highend of the market. The company needed less thanthe seven years to complete its program to in-crease competitiveness, and the tariffs were abol-ished ahead of schedule. Harley Davidson, in amove that Honda surely would have grudginglyrespected, took out advertisements saying thatthe firm was now competitive, and no longerneeded protection.

Entering international markets

The strategy of new market segments, mentionedearlier, also helped Honda develop new marketsoverseas. At the time that Honda started to de-velop the US market, the image of the motor-cycle user was not of a mass market of typicalpeople, rather the image was of someone whowas rebellious and slightly “off color.” To get morepeople to use the motorcycle, Honda had to cre-ate a respectable image. Using an innovative ad-vertising campaign, “You meet the nicest peopleon a Honda,” the company persuaded Americansto accept the fact that everyday people could usethis means of transportation. The most memo-rable ad was of a nun riding over a pristine moun-tain path.

The challenge of the Japanese motorcycle firmssoon generated calls from both Europe and theUnited States for restrictions on imports. Thisled both Kawasaki and Honda to set up manu-facturing plants abroad. Both firms located inrural US communities where they felt their team-based manufacturing techniques would be moreconsistent with the culture. These very visiblemanufacturing operations brought home to

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Americans many of the Japanese managementtechniques. The plants arguably stimulatedchanges in the wider transportation equipmentindustry as American suppliers learned that theycould utilize the techniques to improve produc-tivity within the US environment.

In Honda’s case, the investment in motorcy-cle plants had another benefit. Since the companyalso competed in the automotive industry, itknew that it would soon face similar restrictionson autos. Its early investment in motorcycles, firstin Europe and then in Columbus, Ohio, allowedit to generate experience in managing foreignoperations and in developing local parts suppli-ers. This was invaluable in the more complexautomobile plant investments that were to follow.Honda’s plants in the USA generally have ahigher reputation for good management and sup-plier relations than some other Japanese firms.This is in no small part due to this early experi-mentation in motorcycles. Just as in the earlier

case of experience curve benefits in production,Honda sought out early experience and learningin overseas operations.

The Japanese motorcycle industry is nowcompeting globally. In the late 1990s, there havebeen increases in production facilities by all fourJapanese manufacturers in China. While the in-dustry is no longer the important contributor tothe Japanese economy that it was at one time, itremains important for its contribution to thefirms. Honda used its engine technology to en-ter the auto industry. The company used its cus-tomer base in the United States, built from itsmotorcycle bridgehead, to generate the scaleneeded to compensate for its weakness in distri-bution in the Japanese market. The industry hasalso contributed to the understanding by non-Japanese of the Japanese production system andcompetition.

THOMAS ROEHL

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Nakauchi, Isao

Isao Nakauchi was born in Osaka prefecture inAugust 1922. He graduated from Kobe Commer-cial High School (now Kobe Commercial Uni-versity) in 1941, then entered and dropped outof Kobe Economic University (now Kobe Uni-versity Faculty of Economics) in 1950, and startedto work for Nichimen Corporation. In 1943 hewas drafted into the military and was assigned toservice in Manchuria. After the war, he returnedto Japan in 1945 and joined his family’s business,Daiei Yakuhin Kogyo (Daiei Medicinal Manufac-turing).

Nakauchi opened the first supermarket in Ja-pan, Shufu-no-Mise (A Store for Housewives) inthe city of Osaka in 1957. In 1963, he openedanother store in Fukuoka Prefecture, thus begin-ning expansion of a chain of stores nationwide.He became the chairman of the Japan Chain StoreAssociation in 1967. In 1970, the name of thestores was changed to Daiei, and Isao Nakauchibecame president (he also held the post of chair-man starting from 1982). Since then, Daiei hasexpanded all over Japan using the chain storemethod and has become a market leader in thesupermarket industry with 300 affiliated compa-nies. In 1977, Nakauchi received the Medal withBlue Ribbon (a national award designated forphilanthropy and inventions).

Nakauchi received the Sixth Keizai-kai Taisho(the Sixth Economic World Grand Prize) in 1980,and the Pegasus-Club Diamond Award and theBusiness Excellence International Award in 1987.In 1989, he became the owner of the professionalbaseball team the Daiei Hawks.

In 1990, Nakauchi became vice-chairman ofthe Federation of Economic Organizations. Heacquired the Recruit Company Ltd. (a recruit-ment, publishing and services giant) in 1992. In1993, he received the Grand Cordon of the Or-der of the Sacred Treasure. Daiei acquired rivalsupermarkets, Chujitu-ya, Yunid Daiei, andDaihana, in 1994, and launched the first “nationalchain store” in Japan, with stores covering all ofJapan from Hokkaido to Okinawa. Daiei alsoreceived the Tenth Corporate PR Award (Spe-cial Award) that year. In 1995, Nakauchi resignedas vice-chairman of the Federation of EconomicOrganizations. In 1996, he received theComandoll Badge of Leopard Medal.

At present, Isao Nakauchi serves on the boardof directors and as a top-advisor of Daiei Incor-porated, chairman of the board of directors ofRecruit Company Limited, owner of the profes-sional baseball team Fukuoka Daiei Hawks, andon the board of directors and as president ofNakauchi Educational Institution. He was themodel used in the national best-selling novelKakaku Hakai (Price Destruction), written bySaburo Jyoyama. His own book, Waga Yasu-UriTetsugaku (My Philosophy of Bargaining), is abouthis commercial philosophy and strategy.

Further reading

Nakauchi, I. (1969) Waga Yasu-Uri Tetsugaku (My Phi-losophy of Bargaining), Tokyo: Nihon KeizaiShinbun-sha.

AKI MATSUNAGAMARGARET TAKEDA

N

Naniwa bushi

Literally “Naniwa melodies,” the term refers to abusiness negotiation or management style thatappeals to intuition, emotion and “gut instinct”rather than reason or fact-based business sense.Naniwa is the former name for Osaka, and theterm refers to songs from that area that recountromantic tales of love and daring, often involv-ing Robin Hood-type heroes who lived on thefringes of respectable society and treated thosearound them with generosity and flair.

In a business context, naniwa bushi is used todescribe two types of related, but somewhat dif-ferent behaviors. In negotiating and managerialcontexts, it is used to refer to appeals to one’sromantic nature (in the sense of chivalry andgrand gesture) or to one’s emotional side. It canalso refer to blatant attempts to appeal to one’ssympathy rather than business judgment.

A second type of behavior characterized asnaniwa bushi involves acts of hospitality and gen-erosity that exceed what one might normallyexpect. Showering guests with gifts, extravagantmeals and gestures of largesse can serve as ameans for achieving cooperation by weakeningresolve and lowering defenses so that objectiveconsiderations are overwhelmed by good feelingsand a sense of indebtedness.

ALLAN BIRD

NEC

NEC, formally registered as NEC Corporation,is a company offering service-related computerand Internet solutions. NEC corporate headquar-ters is located in Tokyo, Japan. It boasts six pro-duction facilities near Tokyo, as well as fifty-sixsubsidiaries and twenty affiliate firms through-out Japan. NEC’s marketing network consists ofnearly 400 sales offices and 150 marketing andservice subsidiaries and affiliates in thirty-fourcountries. In addition, as of 2000 NEC has sevenR&D facilities in Japan, two in the United Statesand one in Germany.

NEC was established on July 17, 1899 andhas had a long and varied history which can bedivided into distinct stages. From 1899 to 1923,NEC was founded as the result of a joint ven-ture with Western Electronic Company of the

United States, now Lucent Technologies. Dur-ing stage two, from 1924–45, NEC expanded intothe radio market with both production and re-search and development facilities. From 1946–64, NEC expanded into computers and electronicswitching systems. Its research into transistortechnology led the company to apply for numer-ous patents in Japan and the USA, plunging itinto the US market for the first time in 1964.The period from 1964–78 focused on worldwideexpansion and diversification for NEC. The com-pany began producing advanced satellite systems,at the same time ushering in their well known“C&C” strategy combining computer and com-munications technologies. Also during this pe-riod, NEC listed stocks on the London StockExchange, the Swiss Exchange, and the Nether-lands Exchange.

In 1979, NEC announced the introduction oftheir first computers, including thesupercomputer. By 1986, NEC had developedthe dynamic random access memory (DRAM)and by 1986 had developed information-process-ing systems application architecture. NEC en-tered the semi-conductor market in the early1990s.

Currently, NEC is divided into three distinctoperating divisions, broadly known as NEC So-lutions, NEC Networks, and NEC ElectronicDevices. NEC Solutions provides Internet-relatedsolutions through the development of applicationsderived from supercomputers, computers, PCs,printers, and Internet-related services, includingInternet access services such as Biglobe. NECwas the first Japanese computer manufacturer toprovide integrated Internet services.

NEC Networks is responsible for supplyingand supporting network systems. Network sys-tems are best described as equipment which sup-ports photonic IP solutions, ATM solutions,mobile communications, and digital broadcast-ing. NEC Electronic Devices focuses on advancedelectronic equipment such as semiconductors,modules, and ion rechargeable batteries.

Known for charting its own course, NEC pio-neered the concept of the “value chain” manage-ment in Japan, which seeks to connect andoptimize the products and services offered amongthe three NEC divisions. NEC continues toexperience strong worldwide growth and

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technological diversification largely due to itsrelentless focus on R&D and customer service.

Further reading

MacLellan, A. (2000) “NEC’s Divestiture Talk SetsWheels in Motion,” Manhasset: Electronic Buyers’ News.

Miyashita, K. and Russell, D. (1994) Keiretsu: Inside theHidden Japanese Conglomerates, New York: McGraw-Hill.

Okimoto, D. (1989) Between MITI and the Market: Japa-nese Industrial Policy for High Technology, Stanford, CA:Stanford University Press.

Robertson, J. (1999) “NEC Sets Massive Restructur-ing Plan,” Manhasset: Electronic Buyers’ News.

MARGARET TAKEDASOYEON PARK

negotiations

The way in which Japanese negotiations unfoldis distinctly different from negotiations that takeplace within other cultures. These differences canhamper the success of both sides in cross-culturalnegotiations. It has been shown for example, thatthe joint outcomes of Japanese-US negotiationsare worse than if the negotiations had been con-ducted within the same culture (Brett andOkumura 1998). With negotiating experienceand increased cultural understanding, the out-comes of cross-cultural negotiations generallyimprove.

Conflict resolution

Negotiations can be used both in resolving con-flicts and in negotiating more general businessrelationships (for example, buyer/seller agree-ments, joint ventures or partnerships). Some ofthe concepts that are most relevant to conflictresolution in Japan are: (1) harmony as a societalgoal; (2) the importance of face-saving and; (3)the use of third parties to assist in resolving con-flicts.

Maintaining harmony is an important part ofJapanese society. Respected Confucian proverbsemphasize that disharmony is the fault of and anembarrassment to all of the participants. Eachindividual bears some responsibility for having

interpersonal tolerance of others to prevent dis-putes from arising. A well-known Japanese prov-erb states: “In a quarrel, both parties are toblame.” At least partially because of this, the courtsystem in Japan is typically not used to litigatedisagreements. Litigation is viewed as a methodof resolving disputes between immoral individu-als when the moral manner of settling disputesby tolerance and mediation have failed.

Another important concept in Japanese soci-ety and in dispute resolution is the concept offace. Face refers to the self-image one projects toothers. Respect is the way in which face is main-tained. Maintaining face confirms a person’s ac-ceptance in a society and that person’s status.When tensions in a dispute escalate with eitherparty becoming emotional, the display of thesenegative emotions is disrespectful and result inthe loss of face.

When disputes arise in Japan, which is a hier-archical culture with harmony as a strong valueand a preference for indirect confrontation, thereis a tendency toward early involvement of thirdparties. Involving a third party is viewed as a face-saving, harmony-preserving way to resolve a dis-pute. Having the assistance of a third party whoacts as a go-between or mediator can prevent theloss of face that would occur if one of the partiesexpressed their negative emotions in front of theother party The Confucian philosophy embed-ded in Japanese culture holds that it is a society’scommunal responsibility to maintain harmony.Therefore, people feel personal responsibility toassist with conflicts. The most effective third partyis someone with equal or higher status relative toeach of the parties involved and someone whoknows each party well enough that they can re-main a neutral and unbiased mediator. The me-diator will then typically listen to each sideseparately gathering information and clarifyingtheir positions. The mediator then conveys in-formation to the other party often removing anyemotional or negative statements from the infor-mation passed to the other side. The mediatormay also suggest some possible courses of actionand may if the conflict is close to reconciliation,try to bring the two sides together to speak di-rectly to each other. It is not without personalrisk that a third party undertakes mediation.Should the situation worsen following the

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mediator’s intervention, the mediator may benegatively viewed by one or both parties asaossekai (nosey or meddlesome).

General business

Business negotiations are conducted with thehope of mutually beneficial outcomes and areoften viewed as having several distinct phases:relationship building; exchanging information;persuasion and compromise; and concessions andagreement. These stages are approached differ-ently by Japanese negotiators and those fromother cultures.

Relationship building

In comparison to those in the USA and the UK,Japanese negotiators spend longer periods of timein developing relationships prior to negotiatingthe specifics of a business deal. The Japanese putsignificant effort into establishing a harmoniousand trusting relationship. It appears that this strat-egy may help the Japanese to avoid litigation later.USA and UK negotiators appear much moreconscious of time pressures and deadlines andoften become uncomfortable and impatient withthe amount of time the Japanese spend entertain-ing and socializing in order to evaluate and builda potential long-term relationship.

Japanese negotiators pay close attention to thepower of the parties involved. The most impor-tant aspect of power is the social status of thenegotiators. Exchanging business cards is an im-portant initial ritual to help all involved deter-mine the social status of each person in thenegotiations. Often the highest status member ofa Japanese negotiating team will be the most quietduring the negotiation, observing closely what isbeing said by both parties. In the USA and UK,the relative power of the negotiators is more likelyto be assessed by determining which side has thebest alternative, if the negotiation fails. The Japa-nese are much less likely to view alternatives as asource of power (Brett and Okumura 1998).

In Japan the buyer is accorded much morestatus than the seller. In Japan the adage “thebuyer is king” is a realistic description of the rela-tionship. Buyers would typically expect deferenceand respect from sellers. In return the buyers of-ten exhibit a type of paternalistic or fatherly pro-

tection toward the seller. It has been difficult forother cultures to penetrate the Japanese marketpartially because outsiders trying to sell productsor services often have difficulty showing suffi-cient deference to buyers and developing an ad-equate level of trust with their Japanesecounterparts. Normally in intra-cultural negotia-tions, Japanese sellers would begin first by ex-plaining characteristics of the product andbackground factors, but not initially discussingprice. Then the Japanese buyer would ask clari-fying questions. One study found that when priceis eventually discussed, Japanese sellers oftensuggest a more extreme initial price than woulda US negotiator (Graham 1993).

Exchanging information

In Japanese negotiations the exchange of infor-mation is a primary part of the negotiation. Ne-gotiators may ask many questions so that theyare confident of their understanding. It is com-mon for the Japanese to want more written docu-mentation than is typical in the USA or UK.Published information is viewed as more cred-ible and valuable than oral assurances. When anopponent makes an offer, the Japanese are likelyto respond initially with silence or by asking morequestions. They are less likely than most oppo-nents to respond to an offer with a counteroffer.During the information exchange, Japanese viewUS and UK negotiators as honest to the point ofdiscomfort as they communicate even negativeinformation very directly Japanese negotiatorsmay share less information and are more likelyto communicate information subtly and indirectlyThis can result in information being lost becausenegotiators from the US and UK may not real-ize or fully understand that information is beingcommunicated by Japanese negotiators. The Japa-nese try to be truthful, but also polite. As a re-sult, they do not share much negativeinformation, and when they do share negativeinformation, it is shared indirectly so as to beless offensive. In comparison to other culturesincluding the UK, Taiwan, Korea, France, China,Russia, Germany Brazil and the USA, Japanesenegotiators are much less likely to use the word“no” (Graham 1993). For example, “That willbe very difficult” is a common, more indirect and

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polite way for the Japanese to communicate “No,we can’t do that.”

Persuasion and compromise

US and UK negotiators are most likely to viewthe persuasion portion of the negotiation as theactual negotiation because they are finally “get-ting down to the real meat of the issues.” Theywill plan to spend the majority of their time try-ing to persuade. As a result, they try to movequickly to this phase and try to start bargainingbefore they have gathered information from theother side. If English is used to conduct the ne-gotiation, then language difficulties may lead theJapanese negotiators to spend more time focusedon the numbers and the carefully constructedarguments and persuasions commonly used byUS and UK negotiators are likely to be lost.

In contrast, the Japanese believe that if a trust-ing relationship has been built and they have care-fully gathered information and gained anunderstanding of each side, then little persuasionis necessary Once the Japanese feel confident thata beneficial long-term relationship can be estab-lished and all of their questions have been an-swered satisfactorily an agreement can cometogether fairly quickly Japanese negotiators maysuggest an agreement that addresses the negotia-tion as one overall package and may view thisstage as just working out minor details. This isdifferent from the tendency in the USA and UKto break a negotiation into smaller pieces and tryto use persuasive tactics to come to an agreementon each point before proceeding.

The Japanese tend to be less aggressive andmore polite negotiators when compared to nego-tiators from other cultures. They are unlikely tothreaten, command or warn and more likely tomake recommendations and positive promises.They are therefore, likely to be uncomfortablewith aggressive tactics and displays of negativeemotions. The Japanese have a proverb, Tanki wasonki which translates, “if you lose your temper,you will lose your case.” In negotiating with Japa-nese, it is best not to show negative emotions oreven impatience, the result may be loss of respect.The Japanese are unlikely to enter into argu-ments. If they think they are right they may justremain silent. Entering into an argument might

risk displaying anger or impatience creating a lossof face.

Concessions and agreement

Japanese companies prefer to conduct businessnegotiations with a team of people. In such ascase, concessions are unlikely to be made by theJapanese until they have a chance to confer pri-vately and reach a consensus on their response.They also typically need to consult with theirhome office. Once a decision has been made, Japa-nese negotiators tend to make all concessions atthe end of the negotiation and expect that thesewill immediately lead to a final agreement. Incontrast, US and UK negotiators tend to makeconcessions throughout the process and expecttheir opponents to reciprocate with concessionsas well. US and UK negotiators are also likely tocharacterize the decision-making style of the Japa-nese team as very slow and unhurried and ex-press discomfort at the lack of decision-makingauthority a Japanese team typically has. Negotia-tions are sometimes terminated prematurely be-cause of the occasionally mistaken belief that thenegotiations are not progressing.

Japanese are more likely than those from othercultures to respond to an offer or concession witha period of silence. While this silence is usually acommon part of Japanese communication style,occasionally this silence is an intentional strategyto communication displeasure with the offer(Graham 1993). The resulting silence can creatediscomfort and result in concessions from oppo-nents.

Other differences between Japanese and othernegotiators include the Japanese preference forformality for written agreements that are brief andcover basic principles, and their longer term per-spectives. This contrasts with the informality de-tailed legalistic contracts and generally shorter termperspectives of US and UK negotiators. In con-clusion, while negotiations can easily break downbecause of a lack of understanding of cultural dif-ferences, continuing efforts to understand the cul-tural differences can be beneficial to both sides.

Further reading

Brett, J.M. (in press) Negotiating Globally: How to Negoti-ate Deals, Resolve Disputes and Make Decisions

328 negotiations

Across Cultural Boundaries, San Francisco: Jossey-Bass.

Brett, J.M. and Okumura, T. (1998) “Inter- and Intra-Cultural Negotiations: U.S. and Japanese Negotia-tors,” Academy of Management Journal 41: 495–510.

Callister, R.R. and Wall, J.A. (1997) “Japanese Com-munity and Organizational Mediation,” The Jour-nal of Conflict Resolution 41:311–28.

Graham, J.L. (1993) “The Japanese Negotiation Style:Characteristics of a Distinct Approach,” NegotiationJournal 9:123–40.

Martin, D., Herbig, P., Howard, C. and Borstoff, P.(1999) “At the Table: Observations on JapaneseNegotiation Style,” American Business Review 17 (1):65–71.

RHONDA ROBERTS GALLISTER

nemawashi

The original meaning of nemawashi refers to themethod by which a tree, especially an old tree, istransplanted from one place to another. Accord-ing to the method, the root of an uprooted tree iscovered with a straw mat and left alone formonths; then it is transplanted, so that the treemay not die.

The term is used metaphorically in modernJapanese society to mean laying the groundworkfor achieving one’s goal, especially agreement indecision making. The nature of nemawashi is itsinformality and off-the-record, if not necessarilysecret, communication. Before 1970, very fewJapanese language dictionaries listed the meta-phorical use of the term, but after 1970 all majordictionaries did. It is also true, however, that inthe late 1960s newspapers were already using theterm in its later meaning.

The term has been used in all kinds of Japa-nese organizations besides business. The reasonit has had such wide use is because the action ofnemawashi is closely associated with the traditionalJapanese decision-making process, known as ringiseido, or the referral and clearance system. Ac-cording to this system, a plan is initiated by mid-dle management in an organization throughexamination of its feasibility. Then it is proposedupward for official agreement. The term ringi,means offering a proposal from below to above.One critical characteristic of the system is that a

unanimous decision at the top level meeting ispreferred over a decision by majority. The unani-mous decision symbolizes that the plan has beenexamined from all possible perspectives and thateveryone shares responsibility for the executionof it.

Thus, nemawashi is an institution, integral tothe ringi-seido. There are two aspects of nemawashiin action, both of which are characterized by in-formal person-to-person, off-the-record commu-nication. First, when a plan is in the making, theinitiator of the plan needs to modify or polish itby contacting all the people the plan would in-volve after it is officially approved. Those whoare contacted are expected to give advice fromtheir own standpoint. In the process, the originalplan may be more refined, and, what isequally important, the plan becomes a creationof everyone involved, who all become its sup-porters.

The second aspect is that in order for the planto be approved unanimously all the major deci-sion makers have to be fully informed informallyof it. Among these important people, there maybe influential people that are only partially af-fected by the plan. Nemawashi is likely to be usedwith them to smooth the discussion in the meet-ing.

Thus, nemawashi includes explanation, persua-sion, request, and asking a favor on a personalbasis. Nemawashi can be done anywhere, evenoutside as well as inside the organization.Nemawashi is sometimes used in secretive, behind-the-scenes manoeuvering, but its positive aspecthas also been pointed out. Compared with a planthat has not been examined thoroughly a planthat has been screened through examination byway of nemawashi in many sections of the organi-zation will usually be a better plan. Additionallysince all possible hurdles have already beencleared before the plan is officially approved, itcan be put smoothly into practice. In the samevein, as all the relevant members of the organiza-tion are fully aware of the plan, they are quick tocooperate when the plan is executed. Moreover,a unique plan which might be disapproved if itwere a directly proposed in a meeting has a bet-ter chance to be approved if nemawashi is prop-erly done.

Some shortcomings of nemawashi have also

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been pointed out. Since nemawashi is done infor-mally on a person-to-person basis, it is hard for aperson to respond in the negative. It is alsoargued that in rapidly changing times, nemawashitakes so much time that the organization maylose an opportunity to move in a new direction.Also, a unique, potentially good plan may beturned down in the complex nemawashi process ifonly the negative aspects are examined. Thestrengths of nemawashi contain its weaknesses aswell.

Finally nemawashi has been widely practicedin Japan because it is rooted in Japanese culture.Japanese want to avoid harsh face-to-face argu-ment and conflict in meetings, where they knowone another well. Nemawashi provides a means toavoid the possibility of such conflict.

As Japanese multinationals have introducednemawashi in their overseas operations, it has notbeen well received. In North America, wherenemawashi was widely practiced, it was one of theleast favored aspects of Japanese managementamong American employees. Although manyAmerican employees, especially middle manag-ers and above, learned how to conductnemawashi, only a few thought the practice hadmerit.

Despite complaints from American workers,Japanese managers have not tried to change theirdecision-making style. Due to their close connec-tions with parent companies in Japan, most sub-sidiaries cannot be that independent. Nemawashiremains deeply rooted in the Japanese decision-making process.

Further readings

Sullivan, J.J. (1992) Invasion of the Salarymen: The Japa-nese Business Presence in America, London: Praeger.

Sumihara, N. (1993) “A Case Study of Cross-CulturalInteraction in a Japanese Multinational Corpora-tion Operating in the United States: Decision-Mak-ing Processes and Practices,” in R.R.Sims andR.F.Dennehy Diversity and Differences in Organizations,Westport, CT: Quorum Books, 135–48.

NORIYA SUMIHARA

New United Motor ManufacturingIncorporated

In 1984, Toyota and General Motors (GM)formed the New United Motor ManufacturingInc. (NUMMI) joint venture to produce subcom-pact cars in California. Toyota’s objectives in-cluded beginning production in the United Statesand gaining experience in working with Ameri-can unionized labor. GM’s objectives were tolearn about the efficient Toyota production sys-tem and to produce high-quality cars.

The production facility used for NUMMI wasa former General Motors plant that had beenclosed due to labor problems, quality problems,and low productivity Under the new Toyotamanagement, the plant quickly became the mostproductive of all GM facilities and the automo-biles produced received very high-quality ratings.Grievance rates and absenteeism were exception-ally low, and remain so. Quality and productiv-ity have continued to improve.

Before operations began, Toyota managementworked with the United Automobile Workersunion to establish a cooperative relationship. Theresulting labor agreement provided the strongestjob security clause in the industry included a “nostrike” provision with respect to production andsafety standards, and emphasized non-confron-tational problem resolution. A great deal of timeand care were taken in the selection of workers,including interviews to determine the applicant’spotential for teamwork. Extensive training wasprovided for new employees, with more than 11percent of the workforce being sent to Japan forthree weeks of training. The company continuesto regularly send employees to Japan for addi-tional training.

The production workforce was organized inteams with team responsibility for quality pro-ductivity and continuous improvement. Alongwith the responsibility each worker had the au-thority to stop the production line for safety orquality reasons. Team members were giventraining in problem-solving techniques, were re-quired by the union contract to participate inquality/productivity improvement programs,and were cross-trained to do every job in the

330 New United Motor Manufacturing Incorporated

team. In addition to the features of the systemdescribed above, NUMMI developed relation-ships with suppliers to support a just-in-time in-ventory system.

Both Toyota and General Motors met theirobjectives in forming NUMMI. Toyota sent agroup of its managers from NUMMI to applywhat they had learned in their new, wholly-owned plant in Kentucky. Executives with expe-rience at NUMMI were subsequently assignedto key positions at Toyota headquarters. GMsent a number of managers to NUMMI fortraining, and thousands of others on visits. Itapplied what it learned in NUMMI in the devel-opment of its Saturn plant, and is now in a long-term effort to make its other plants more likeSaturn. NUMMI continues to produce highquality vehicles, cars for GM and both cars andlight trucks for Toyota.

See also: automotive industry; kaizen

Further reading

Adler, P., Goldoftas, B. and Levin, D. (1999) “Flexibil-ity Versus Efficiency? A Case Study of ModelChangeovers in the Toyota Production System,”Organization Science 10 (1): 43–68.

Duerr, M. (1992) “New United Motor ManufacturingInc. at Midlife: Experience of the Joint Venture,” inA.Negandhi and M.Serapio (eds), Research in Inter-national Business and International Relations, Volume 5,Japanese Direct Investment in the United States:Trends, Developments, and Issues, Greenwood, CT:JAI Press.

EDWIN C.DUERRMITSUKO S.DUERR

Nihon Keizai Shimbun

Founded in 1876 as the Chugai Bukka Shimpo (Do-mestic and Foreign Price News), the newspaperadopted the name Chugai Shogyo Shimpo (Domes-tic and Foreign Commercial News) in 1889, andthen changed to its current name Nihon KeizaiShimbun (meaning Japanese Economic Newspa-per) in 1946. It is widely respected in Japan andthroughout the world as Japan’s foremost busi-

ness-oriented newspaper, on a par with the WallStreet Journal in the USA and the Financial Timesin the UK. It is the world’s largest selling dailybusiness newspaper and, like the Wall Street Jour-nal and the Financial Times, it includes articles onsocial trends, culture and the arts, sports and somegeneral news. In the latter part of the twentiethcentury the newspaper has expanded into otherbusiness information-related and business dataservices. In both English and Japanese, thenewspaper’s name is often abbreviated to Nikkei,a combination of the first syllables of the firsttwo words in its name.

Nihon Keizai Shimbun, Inc. (Nikkei) actuallypublishes four newspapers as well as thirty-fourother magazines. In addition, it also publishesbusiness and economic books, averaging about300 new volumes annually in the 1990s. In addi-tion to the daily Nihon Keizai Shimbun, two of thepapers cover specialized areas of business, andthe fourth is an English-language publication. TheNikkei Sangyo Shimbun (Nikkei Industrial Newspa-per) covers economic and business developmentsin Japan’s manufacturing sector. The NikkeiRyuutsuu Shimbun (Nikkei Marketing Newspaper)focuses on developments in the marketing anddistribution sectors. Finally the Nikkei Weekly isan English-language newspaper that is a combi-nation of news stories translated from the threeJapanese-language papers as well as some featuresprepared specifically for its English-speaking read-ership. Also in English, its Japan Economic Alma-nac is a standard reference volume.

Nihon Keizai Shimbun is published daily in bothmorning and evening editions. Its four main pub-lication sites are Osaka, Sapporo, Seibu and To-kyo. Daily circulation in 2001 exceeded2,800,000. Outside of Japan, it has news officesin major national capitals and world financialcenters.

Nikkei’s electronic data services include theEnglish-language News Telecom/Japan News andRetrieval, a counterpart to its Japanese-languageNikkei Needs database. Both services have expe-rienced rapid growth in recent years. Nikkei alsosupports and produces a wide variety of broad-casting initiatives, and industrial and culturalevents.

ALLAN BIRD

Nihon Keizai Shimbun 331

NIHON SHOKO KAIGISHO see JapanChamber of Commerce and Industry

Nihonteki keiei

Nihonteki keiei, “Japanese-style management,” re-fers to a set of management systems and prac-tices that are unique to or characteristic ofJapanese companies and which differ from thosetypically found in non-Japanese, and particularlyWestern, companies. Nihonteki keiei includes life-time employment. seniority promotion. enter-prise unions. bottom-up decision-makingprocesses, and other related management prac-tices. Together, these form a unified approach tomanagement that provides benefits such as richintra-company information flows, low rates ofabsenteeism and employee turnover, and a highlevel of employee training and commitment. Inthe hard economic times following the collapseof Japan’s bubble economy, the costs of nihontekikeiei became more difficult for companies to bear,causing some of its features to be re-examined,modified, or eliminated.

In Japan, as in any country there is consider-able variation in management practice from firmto firm; consequently the description that followsis a generalization. It should also be noted thatnihonteki keiei management practices are foundmore prominently in Japan’s large companiesthan in its small and medium-sized firms.

The “three pillars” of Japanese-stylemanagement

The so-called “three pillars” of nihonteki keiei arelifetime employment, seniority-based wages andpromotion, and the enterprise union. Under life-time employment (shushin koyo), employees join acompany upon graduation from high school oruniversity with the expectation, on the part ofboth employee and company that the employeewill remain with the company for his or her en-tire working career. Employees tend to be hiredmore for their general characteristics and abili-ties than for specific skills. The best companieshire from the best schools, so the competition toenter a good university is intense, producing theinfamous “examination hell” that Japanese stu-dents experience as they prepare to take univer-

sity entrance examinations during their final yearof high school. The first years of work are aninitiation process during which new employeesreceive general training, learn their firm’s historyand culture, and experience work in several dif-ferent departments. They are then given longerterm assignments, but will continue to be trans-ferred to other jobs and departments until theyreach retirement age, usually 55–60. Only in ex-treme circumstances, such as near bankruptcy onthe part of the firm or criminal behavior on thepart of an individual, are lifetime employees laidoff or fired.

The commitment to lifetime employment pro-duces a strong bond between company and em-ployee. Employees know that their earnings andbenefits depend on the performance of the com-pany so they work hard to help make their com-pany successful. Companies know that it isunlikely that their employees will move to an-other firm, so they can invest in employee educa-tion and training with little fear of losing thebenefits of that investment. Another benefit ofthe system is efficient information flow withinthe company. The combination of lifetime em-ployment, frequent transfer, and the after-hourssocializing that is a part of Japanese business lifemeans that employees develop extensive peoplenetworks throughout the organization. Theseenable them to keep up to date on what is hap-pening in other parts of the company and to getneeded information, answers to questions, andintroductions to people whose assistance or co-operation they may need. Lifetime employmentalso has an important strategic implication: theimperative of providing continued employmentfor all their regular workers causes Japanese firmsto aggressively pursue growth and market share,often at the expense of profitability.

The lifetime employment system applies toonly around 30 percent of the Japanese workforce,mostly the regular male employees of larger firms.The majority of Japan’s workers, including daylaborers, part-time employees, and most femaleworkers (who typically work for a few years af-ter graduation and then get married and “retire”to raise a family), do not enjoy lifetime employ-ment and the benefits associated with it.

In nearly all companies, wage increasesand promotion are based on a combination of

332 Nihonteki keiei

seniority and merit, but under nihonteki keiei, sen-iority typically carries greater weight (nenko joretsu).This is especially true with wages, which start atlow levels and increase as employees reach theage where they need greater income to supporttheir families and pay for their children’s educa-tion. Promotion is slow, and increasingly merit-based as a person advances to higher ranks; themore-talented employees are promoted more fre-quently and to higher positions than those withless talent. The average wage gap between topmanagement and ordinary worker is significantlysmaller in Japanese companies than in Westernones.

Japanese unions differ from Western unionsin that they are organized by enterprise (com-pany) rather than by trade. Each company hasjust one union and each union negotiates withonly one company. All company employees (ex-cept for parttime workers and management atthe rank of section chief and above) are mem-bers, regardless of their job category Labor-man-agement relations are more cooperative thanadversarial, with unions exerting moderate pres-sure for wage and benefit increases but rarelystriking or making demands that would hurt thecompany’s economic health. Unlike trade unionsin other countries, Japanese enterprise unions donot present a barrier to employee movementamong jobs.

Bottom-up decision making

Decision-making in nihonteki keiei is generally de-scribed as bottom-up or consensus-based, in con-trast to the top-down style that is morecharacteristic of Western companies. Problemsmay be identified at any level of the organiza-tion, but lower-level managers or task forces areusually given the job of generating solutions inthe form of proposals which are then circulatedupward to successively higher levels of manage-ment through what is known as the ringi seido,or memo circulation system. During this process,proposals may be modified and refined. Once aproposal has been approved by all levels in theoriginating unit, it is circulated laterally to otherconcerned managers and departments for theirreview and routine approval. The implementa-tion stage comes only after a proposal has been

approved at all levels. Parallel to the formal ringiseido is another form of consensus-building knownas nemawa shi, informally consulting with oth-ers and sharing information about a proposal ordecision before a formal decision is made.

While this decision-making process is time-consuming, implementation can be carried outsmoothly and quickly as all concerned parties areinformed and on board. This is in contrast totopdown decision making, where decisions aremade quickly but implementation takes longerbecause the broader organization has had lessinput and been given little chance to become fa-miliar with a proposal and convinced of its ben-efits.

Quality control circles, just-in-time produc-tion, and kaizen are other elements of nihontekikeiei that empower and tap the ideas and knowl-edge of employees in the lower levels of the or-ganization. Quality control circles are groups ofworkers that meet outside work hours to developways to improve product quality or the efficiencyor safety of operations. With just-in-time produc-tion systems, line workers are responsible for arange of tasks, including stopping the assemblyline when there is a problem and taking the ini-tiative to find ways to improve quality and effi-ciency Kaizen, continuous improvement, enliststhe entire workforce in a systematic effort to findbetter ways of doing things, large and small.

The origins and overseas application ofnihonteki keiei

Although many of the roots of Japanese-stylemanagement are cultural, social, or historical,the lifetime employment system and other keyelements of nihonteki keiei are in fact of relativelyrecent origin. Japan’s union movement, whichhad been weak prior to the Second World War,grew into a powerful force following the war,supported by the Occupation authorities andspurred by high unemployment in the earlypostwar years. Conflict between labor unionsand company management became common,and even as economic growth took off in the1950s, the nation’s factories continued to be thescene of frequent and sometimes violent strikes,employment and wage insecurity and fierce

Nihonteki keiei 333

battles for worker loyalty between militant leftistlabor unions and more moderate, company-sponsored unions. Management-friendly enter-prise unions gradually won out over the moremilitant ones and finally realizing that continuedstrife would threaten the nation’s economic fu-ture, labor and management came to an agree-ment: companies would ensure rising wages andemployment security for all union members byproviding seniority-based pay and lifetime em-ployment, while unions and workers wouldadopt more cooperative and supportive policiestoward their companies. This happened around1960, the same time that Prime Minister HayatoIkeda announced the income doubling plan.and the nation turned its attention more fully tothe achievement and enjoyment of economicprosperity.

As Japanese companies expanded overseas inthe 1970s and 1980s, they took nihonteki keiei withthem, experimenting to find out which of its ele-ments would work with and be accepted by non-Japanese workers. In general, Japanese-stylemanagement was successful with blue-collar em-ployees. Product quality and production efficiencyat Japanese-run foreign plants approached levelsachieved in Japan, and blue-collar workers tendedto feel more appreciated and empowered underJapanese management, with its greater relianceon initiative and input from line workers, thanthey had under Western management. Foreignwhite-collar employees tended to be less happycomplaining that management decisions weremade in Tokyo and that a “glass ceiling” limitedpromotion opportunities for non-Japanese. Japa-nese companies were able to build relatively co-operative relationships with overseas laborunions, or avoid unionization of the workforcealtogether, but lifetime employment was not of-fered to foreign employees to the extent that itwas to regular employees in Japan.

Post-bubble developments

Nihonteki keiei has continued to evolve and adjustto changing external conditions. Change wasparticularly noticeable during the 1990s, whenthe economic downturn following the collapse ofthe bubble economy put heavy pressure onfirms to cut costs and increase efficiency. This

made certain costs of nihonteki keiei, such as theinability to downsize or shed inefficient workersunder lifetime employment and the high salariespaid to older workers under the seniority-basedwage schemes, more difficult to bear than theyhad been in more prosperous, higher growthperiods. Risutora, or restructuring, became oneof the strongest, and most feared, trends in Japa-nese business in the 1990s, as major companiesbegan moving more of their operations overseasand slimming down their Japanese workforcesthrough plant closures and layoffs. For as long aspossible, companies avoided outright layoffs, in-stead downsizing through attrition and by lettingpart-time workers go. But as recessionary condi-tions continued, companies’ commitment to life-time employment weakened, and more andmore regular lifetime employees, particularlyolder employees, were pressured to retire orwere discharged. The seniority system weak-ened as well, with wages and promotion becom-ing increasingly based on merit rather than yearsof employment.

Social trends also contributed to change. Thegeneration of young people who joined compa-nies in the 1980s and 1990s differed from earliergenerations. Dubbed shiryinrui, or “new humanspecies,” these people seemed to lack the workethic and company loyalty of their seniors, whosevalues had been shaped by growing up in lessaffluent times. Older managers complained thatthe new generation preferred to go home at fiveo’clock to enjoy their private lives and interestsrather than work overtime or go drinking withwork colleagues after hours. There were also anincreasing number of young people who felt lit-tle attraction to the idea of lifetime employmentand slow, seniority-based promotion, preferringinstead a chance to prove themselves and be re-warded for their achievements at an early age.

Further reading

Abegglen, J.C. (1958) The Japanese Factory: Aspects of itsSocial Organization, Glencoe, IL: The Free Press.

Abegglen, J.C. and Stalk, G. (1985) Kaisha: The Japa-nese Corporation, New York: HarperCollins.

Clark, R. (1979) The Japanese Company, New Haven,CT: Yale University Press.

Marsland, S.E. (1980) Note on Japanese Management and

334 Nihonteki keiei

Employment Systems, Boston: Harvard BusinessSchool.

TIM CRAIG

Nikkei jin

Nikkei jin literally means people of Japanese de-scent. The term generally refers to those whoare Japanese or of Japanese descent that live out-side Japan and possess the nationality of the coun-try where they reside.

Japanese emigration was noted as early as thesixteenth century However, it was not until afterthe Meiji restoration that large-scale emigrationbegan. Emigrants worked primarily as agricul-tural and mining laborers; their destinations wereSouth Asia, East Asia, Hawaii, California, thewest coast of Canada, and Latin American coun-tries including Brazil, Peru, Argentina, and Bo-livia. São Paulo, Brazil has more people ofJapanese descent than anywhere else in the worldoutside Japan.

Beginning in the late 1980s, a significantnumber of Japanese descendants from LatinAmerican countries, primarily from Brazil, havebeen returning to Japan to work as foreignlaborers. Recent usage of the term Nikkei jin bythe media in Japan generally refers to these for-eign workers from South America. Japanese of-ficials maintain a position of not allowing in anyunskilled foreign laborers. However, faced withthe nation’s acute labor shortage in the late 1980sand 1990s, the Japanese government revised theirimmigration policies and allowed these descend-ants of Japanese immigrants to South Americancountries to work and live in Japan for up to threeyears with a domicile visa. The Japanese authori-ties hoped that foreigners of Japanese descentwould be more likely to blend in with Japanesesociety thereby minimizing the effect on the na-tion’s ethnic and cultural homogeneity

Further reading

Clucas, M. (1995) “Race, Ethnicity and Life Satisfac-tion: A Study of Nikkei Workers in Japan,” Ph.D.dissertation, Department of Sociology Universityof Southern California.

Kitano, H.H.L. (1969) Japanese Americans, EngelwoodCliffs, NJ: Prentice-Hall.

Takahashi, Y. (1993) Nikkei Brajiru Imin Shi (The His-tory of Japanese Brazilian Immigration), Tokyo: SanIchi Shobo.

MEIKA CLUCAS

NIKKEIREN see Japan Federation ofEmployers’ Associations

Nintendo

Founded by Fusajiro Yamauchi in Kyoto, Japan,Nintendo is the oldest company to be involvedin the manufacture of video games. Founded in1889 as the Marufuku Company it producedelaborately decorated Hanafuda playing cards.The name was changed to Nintendo Koppai in1907. In the 1970s, Gunpei Yokoi, a Nintendodesigner, began creating toys such as the UltraHand and the Beam Gun. These toys led to sub-stantial profits for Nintendo and moved it intothe first tier of the Osaka Stock Exchange.

In 1975 Nintendo obtained the rights to sellthe Magnavox Odyssey game system in Japanand in 1977, working together with Mitsubishi,Nintendo developed the TV-Game 6, with 6 vari-ations of Pong; this was later followed by the TV-Game 15. By the end of the 1970s Nintendo haddeveloped a department devoted solely to pro-ducing arcade games.

In the early 1980s Nintendo began marketingand distributing its arcade games in the UnitedStates, and after some unsuccessful attempts atdesigning new products, introduced DonkeyKong in 1981. Americans initially mocked thiscoin-operated arcade game, but then quickly be-came fascinated by the hero, a carpenter namedMario, who rescued a kidnapped girl from a go-rilla. So strong was the demand expressed forDonkey Kong that numerous bootleg copies wereproduced.

After Donkey Kong’s success became appar-ent, Nintendo was threatened with a lawsuit fromUniversal for infringing on the 1929 film KingKong. Nintendo refused to settle and countersuedinstead, claiming that Universal had no rights toKing Kong and that the company was well aware

Nintendo 335

of that fact when suing Nintendo. A judgment of$1.8 million was made in favor of Nintendo.

In 1983 the Famicom was introduced in Ja-pan, an 8-bit game system which was introducedto the US market two years later as the NintendoEntertainment System (NES.) By this timeNintendo controlled 90 percent of the Japanesegame market and in the following year outsoldits competitors in the US by a margin of 10:1. Inthe early 1990s Nintendo introduced the GameBoy a portable game system which used inter-changeable game cartridges. With more than 500game titles available at the end of 1999, the GameBoy is the best-selling game system to date.

Nintendo faced serious competition in the1990s. In 1991 the Sega Genesis, a faster systemthan the improved Super NES, was launched.Although Nintendo had made plans to work to-gether with Sony on a CD-ROM project, namedthe PlayStation, the plans fell through and Sonycontinued on its own, creating yet another com-petitor in the video-game market. In 1995Nintendo showed further signs of distress whenSquare and Enix, two of Nintendo’s main devel-opers, went over to Sony. However, whenNintendo’s system was improved again in 1996and the Nintendo 64 became available in theUnited States, it outsold both the Saturn and thePlayStation.

In September 1998 Nintendo introduced thePokémon game. The Pokémon franchise has be-come a worldwide phenomenon, and ironicallyhas returned Nintendo to the sale of playing cardsand toys, which had been responsible for the com-pany’s initial success.

Further reading

Sheff, D. (1993) Game Over, New York: Random House.

ALEXANDRA COHEN

Nippon Telegraph andTelephone

The telephone company Nippon Telegraph andTelephone Corporation (NTT) was establishedon April 1, 1885. It currently has 195,000 em-ployees, and a capital of ¥796 billion.

Since 1885, NTT has operated as a public tel-

ephone monopoly under the authority of theMinistry of Post and Telecommunications andone of the few public corporations with substan-tial demand-generating power for informationindustries. All foreign carriers connect to NTTto do business in Japan. In early 1997, restructur-ing into three affiliated companies and severalsubsidiaries combined with market deregulationthrust change upon NTT. In 1997, BritishTelecom (BT) officials publicly declared that theywould seek a preferred partnership with NTT.These overtures had begun in late 1996 whenJapan’s Ministry of Posts and Telecommunica-tions said it would break up NTT and do awaywith the regulations that segregated Japan’s car-riers by international and domestic markets. TheMinistry also began easing laws on foreign par-ticipation in Japan’s market.

The biggest turning point for NTT started inearly 1999 when market deregulation pushedNTT into the international telecommunicationsstage for the first time in its history Due to Ja-pan’s market segregation, NTT’s revenues cur-rently come solely from its home market. Despiteits size, the company remains uncommitted tothe kind of global telecommunications allianceor major merger that the world’s other big carri-ers including AT&T, BT, Sprint, and MCI havesought.

Though less concerned with global markets,NTT has developed new domestic services. In1999, I-mode services were introduced by NTTDoCoMo and IC public card telephones havealso been introduced. Some international tel-ephone services have been established by NTTCommunications and ADSL trial services havebeen initiated by NTT East and NTT West.NTT is currently investing in the next-genera-tion of network operators. NTT said it will com-mit as much as 1100 million to Denver-basedVerio, an ISP that has grown rapidly mergingsmall US ISPs. Recently NTT sought and re-ceived telecommunications licenses in majormarkets including the United States, and it is aninvestor in a project to connect the United Statesand China with 30,000 kilometers of fiber-opticcable.

The future goal of NTT is to work towardcreating new opportunities for its “informationdistribution” business in a variety of forms, not

336 Nippon Telegraph and Telephone

limited to the traditional telecommunicationsfield but also including such efforts as construc-tion of platforms to safely and efficiently distrib-ute videos and other types of content. Toaccomplish this, NTT will seek to apply theR&D capabilities of the NTT Group, whosehigh standards are recognized on a global scale,and mobilize the group’s full range of manage-ment resources to provide cutting-edge servicesat lower prices.

MARGARET TAKEDA

Nissan

Nissan Motor Co. began in a series of mergersand acquisitions during the period 1925–34. Lateralliances included producing British Austin carsunder license in the 1950s, and the purchase ofPrince Motors in Japan in 1966. Nissan likewiseinvested in a range of specialty assemblers in the1950s and early 1960s, such as Nissan Auto Body(light trucks), Nissan Diesel (heavy trucks), andparts firms such as Tokyo Radiator. Finally itcame to control a number of its large dealers,often unwillingly when the latter ran into man-agement problems. The largest domestic autoproducer from 1937 through 1962, it was thensurpassed by Toyota, and while it did very wellduring 1970–6, both domestically and as Japan’sleading exporter, it lost market share almost con-tinuously thereafter.

Some of Nissan’s long-term problems date toa five-month labor dispute in 1953, resolvedonly through the formation of a new union.That maneuver was supported by KawamataKatsuji, who later dominated the firm as presi-dent (1957–73) and chairman (1973–85). Theconflict produced factions, with the union sup-porting Kawamata but undermining his succes-sors, such as Ishihara Takashi, who pioneeredNissan’s sales in the USA as well as the develop-ment of the highly successful Datsun Sunnylaunched in 1966. The end result was poor coor-dination among departments—development andengineering did not work with marketing—and asales force that once refused to work Saturdaysas a way to stress union prerogatives. Nissan’sdomestic output peaked in 1980, and it enteredthe 1990s with a weak dealership network and a

poor presence in the newly developed, more car-oriented suburbs of major cities.

Marketing ineptitude also played a role. Theoriginal Datsun logo was dropped in overseasmarkets in the mid-1980s, and a quirky advertis-ing campaign hurt the launch of the luxury Infinitiin the crucial US market. The firm had long beeninvolved in overseas production, in Mexico from1960, in the US (Smyrna, Tennessee) from 1984and in Sunderland, England from 1986. How-ever, its cars were often out of touch with localmarkets; it reacted slowly to the collapse of theUS subcompact car market after 1985. Its Smyrnafactory ranked number one in several US pro-duction efficiency surveys, and a major new pro-duction center in Kyushu, Japan, leaves it withrelatively new plants. Such strengths have beenoffset by poor sales and overcapacity in all majormarkets since 1992. Large losses led it to closeits Zama plant outside of Tokyo in 1995, the firstJapanese producer to take such a step, and with-draw from assembly in Australia. Even though itlost money in every year but one during 1992–2000, it delayed restructuring. Renault’s takeo-ver in 1999 and the installation of theBrazilian-born Carlos Ghosn as presidentchanged that: revamped marketing, additionalplant closures, and the sale of stakes in affiliatecompanies followed. With 2.5 million units world-wide output, Nissan remains a major producer,but restructuring will likely drive it from its cur-rent second place in the Japanese domestic mar-ket.

MICHAEL SMITKA

Nomura Securities

Nomura Securities is one of Japan’s “Big Three”domestic financial securities companies, whichalso includes Nikko Securities and Daiwa Secu-rities. It was established in 1925 as a spin-off fromthe Securities Department of Osaka NomuraBank Co., Ltd, which was founded by TokushichiNomura. Since the 1960s, Nomura has been thelargest of all Japanese financial securities compa-nies, and is the leader in almost all domestic se-curities business fields, including stock trading,bond sales, corporate bond underwriting, andinitial public offerings.

Nomura Securities 337

For the fiscal year ending March 2000,Nomura’s revenues were over a trillion yen,nearly double that of Nikko Securities (approxi-mately 650 billion yen) and Daiwa Securities (ap-proximately 530 billion yen). Because of itsoverwhelming size and power in Japan, Nomurais occasionally nicknamed “Gulliver Nomura”,after the “giant” in Swift’s satirical novel. In ad-dition to 124 branch offices in Japan, it also has105 group companies engaged in activities relatedto the securities business, such as banking, trusts,information services, consulting, real estate, leaseand rental. Group member companies of particu-lar note include Nomura Research Institute (theworld’s largest commercially-owned think tank),Nomura Asset Management Co., Ltd. (Japan’slargest asset management firm), and NomuraSecurities International (NSI).

Born in 1878, Tokushichi Nomura was theson of an Osaka moneychanger. In 1908, he lefton a five-month trip to the United States andEurope to understand the Western dealing sys-tem. After this visit, he established his ownclique of financial companies called Nomurazaibatsu. In 1925, Nomura Securities was spunoff from the Osaka Nomura bank, which wasthe main bank of the Nomura zaibatsu (see mainbank system). By the early 1960s, Nomura hadoutstripped Yamaichi Securities, the leadingcompany at that time, to reach the top of theJapanese financial securities industry (YamaichiSecurities would later file for bankruptcy in1997). Nomura employees were put underheavy pressures to achieve sales targets. Moreo-ver, performance appraisals for promotions andpay raises were carried out on the basis of anextensive merit system. In those days, the workenvironment in a Nomura office was often ex-pressed as suuji wa jinkaku, meaning that a personwas known by his numbers or results. Due totheir long work hours, Nomura’s employeeswere described as “Seven-Eleven”. In those days,it was often said that a stock pushed by Nomurawas sure to go up. By these means, Nomuragradually established itself as a giant amongJapanese financial securities companies. At theheight of the 1980s bubble economy, thenumber of Nomura customers reached upwardsof five million.

After the Tokyo market passed its unsustain-

able peak in the late 1980s, Nomura was in-volved in several major scandals. In 1991,Nomura was implicated in illegal loss compensa-tion of over ¥26 billion to favored large custom-ers but not to small individual customers. Also,at that time, financial loans to yakuza, or Japaneseorganized crime gangs, came to light. In particu-lar, the scandal in 1997 had a huge impact onNomura and other major Japanese securitiescompanies. In that year, illegal payoffs tosokaiya, or corporate racketeers, were uncov-ered. The Securities and Exchange SurveillanceCommission of Japan indicted Nomura Securi-ties and its executives. Former managing direc-tors, as well as people at banks who providedfinancing to the sokaiya for the purchase ofNomura Securities shares, were arrested on sus-picion of violating the Securities and ExchangeLaw for illegal compensation of losses and theCommercial Law for illegal payoffs to sokaiya.Afterwards, executives of several major securi-ties companies and banks, including the formerNomura president Hideo Sakamaki, were ar-rested. This series of events developed into thescandal that shook the financial and securitiesindustry in Japan, with payoff amounts reaching¥700 million in total. A different sort of chal-lenge faced by Nomura in 1998 was the enor-mous business loss incurred by its US subsidiaryNSI. A sudden fall in the market prices of realestate bonds along with holdings of problematicRussian national loan bonds led to staggeringlosses of ¥160 billion by the subsidiary.

Following Nomura Securities International’s(NSI) registration as a member of the BostonStock Exchange in 1969, Nomura has been ac-tively expanding abroad. By 2000, the numberof Nomura group companies located in Northand South America was twenty-six, with thirty-seven group companies in Europe, and twenty-three group companies in Asia/Oceania. Withinthe Japanese securities industry Nomura is therecognized leader in international business. Asan example of its international activity it is knownin Vietnam for helping to establish a securitiesmarket as well as commercial corporations. Be-cause of its size and extensive overseas presence,Nomura has become one of the more well knownJapanese business names to people of other coun-tries.

338 Nomura Securities

More recently, according to a business planannounced in October 1998, Nomura has beentrying to establish its identity as the top invest-ment bank in Japan. The plan identified the fol-lowing four areas as cores of its business: globalbonds, global stocks, global investment banking,and domestic retail financial services. Nomurahas intensively invested its management resourcesin these fields. Building on its domestic base andaiming at becoming an important global player,Nomura also has been working to reorganize itsinternational business and to improve the effi-ciency of all its business operations.

Further reading

Alletzhauser, A.J. (1990) The House of Nomura: The In-side Story of the Legendary Japanese Financial Dynasty,New York: Arcade/Little, Brown & Co.

Arora, D. (1995) Japanese Financial Institutions in Europe:International Competitiveness of Japanese Banks and Secu-rities Companies, Amsterdam: Elsevier.

Fitzgibbon, J.E., Jr. (1991) Deceitful Practices: Nomura Se-curities and the Japanese Invasion of Wall Street, NewYork: Carol Publishing Group.

Kimura, Y. and Pugel, T.A. (1993) “The Structure andPerformance of the Japanese Securities Industry”in I.Walter and T.Hiraki (eds), Restructuring Japan’sFinancial Markets, Homewood, IL: Irwin.

Nomura Securities Company (1986) Beyond the IviedMountain, Tokyo: Nomura Securities.

HIROTAKA AOKI

Nonaka, Ikujiro

A leading scholar in the field of knowledge cre-ation within organizations, Nonaka obtained aB.A. in political science from Waseda Universityin 1958 and a Ph.D. in business administrationfrom the University of California, Berkeley in1972. On the Faculty of Social Science at theNational Defense Academy from 1977–9, he thenjoined the Institute of Business Research,Hitotsubashi in 1979, serving as director of theinstitute from 1982 to 1995. In 1997 he becamethe first Xerox Distinguished Professor of Knowl-edge at the Haas School of Business, Universityof California, Berkeley In the same year he

founded and became dean of the Graduate Schoolof Knowledge Science. His book with HirotakaTakeuchi, The Knowledge-Creating Company: HowJapanese Companies Create the Dynamics of Innovation,won numerous book-of-the-year awards in 1997and 1998.

Nonaka’s theoretical and empirical work onhow knowledge is created within organization hada profound effect on theories of organizationallearning. In major departure from the dominantview, first propounded by Nobel laureate HerbertSimon, of organizations as “information proces-sors,” Nonaka argued the organizations didn’tsimply process knowledge, but rather they cre-ated knowledge. Moreover, it was the knowledgecreating activities of organizations that gave thema competitive edge in the market. Though heargues for the universality of his theories ofknowledge creation and management, Nonaka’sthinking is firmly rooted in an understanding ofthe product development processes common toJapanese organizations.

See also: firm strategies for technology

Further reading

Nonaka, I. and Takeuchi, H. (1997) The Knowledge-Cre-ating Company: How Japanese Companies Create the Dy-namics of Innovation, New York: Oxford UniversityPress.

ALLAN BIRD

Norin Chukin Bank

Japanese cooperatives, after the enactment of theIndustrial Cooperative Society Law in 1900, de-veloped mainly in rural areas as societies under-taking credit, marketing, purchasing andutilization activities in parallel. In 1923, the Cen-tral bank for Industrial Cooperatives, the prede-cessor of the Norin Chukin Bank, was foundedfor the purpose of expanding credit operations.Its name was officially changed to the NorinChukin Bank in 1943 when forestry cooperativesjoined the Bank.

After the end of the the Second World War,

Norin Chukin Bank 339

functional associations such as agricultural coop-eratives (nokyo), fishery cooperatives (gyokyo), for-estry cooperatives (shinrinkumiai), consumercooperatives (seikyo) and credit unions replacedcooperative societies. Nokyo, gyokyo andshinrinkumiai, which support the primary indus-try and their respective federations at the prefec-tural level, engaging in credit-extensionbusiness, made capital contributions to theNorin Chukin Bank, and the Bank made a freshstart as the financial institution for the coopera-tive organizations that operate credit-extensionbusiness.

The core of the Bank’s business consists offinancial services to nokyo, gyokyo, shinrinkumiai andtheir respective federations. The Bank’s primarysources of funds are deposits, the majority ofwhich come from the cooperative system, or de-posits obtained from members of Nokyo andother cooperatives. The Bank is also authorizedto issue bank debentures under the Law of Cen-tral Cooperative Bank for Agriculture, Forestryand Fisheries, and raise funds by selling thosebank debentures to individuals and institutionalinvestors.

Loans relating to agriculture, fisheries and for-estry constitute an important part of the Bank’sbusiness which, consist mainly of loans for pro-

curing fertilizers, feedstuff, agricultural chemicalsand machinery as well as for the food processingindustry. Other operations include inland ex-change, international business, and securitiestransaction. For international operations, theBank engages mainly in loan extension andmoney market transactions from its branches inNew York, London, and Singapore. Its locallyestablished subsidiaries engaging in securitiesbusiness in London and Switzerland operate withcentral focus on bond issuance and debt securi-ties flotation.

The Bank has fourteen subsidiaries and twoaffiliated companies, which together form theNorin Chukin Group, and provide securitiesbusiness, trust services, lease operations and otherfinancial services.

Finding ways to wage competition against largeprivate-sector city banks in the likelihood of fur-ther progress in financial liberalization representsthe major challenge that lies ahead in the futurefor the Bank. Elimination of high cost structureassociated with the nature of cooperative bank’sactivities centering on retail business character-ized by time deposits and long-term loans is an-other challenge for the future.

KENJI ISHIHARA

340 Norin Chukin Bank

office ladies

“Office ladies” (OL) refers to young unmarriedwomen who work full time in assistant clericaloccupations. The term emerged during the rapidexpansion of a tertiary sector (service and trade)in the 1960s and connotes glamour and freedomfor unmarried young women whose life courseis in a transition from youth (school graduation)to adulthood (marriage). Working as an OLmeans a time of “waiting” and preparation forthe “real life” that comes after marriage. It is atime to see the world, and to earn and save moneyfor marriage. For this reason, the position is de-scribed as koshikake, temporary bench. The pri-mary goal of working as an OL is to meetprospective husbands who can bring a comfort-able middle-class lifestyle, or alternatively to re-turn to their home towns to make a bettermarriage match.

The contribution of office ladies to Japan’sGNP is small, especially when compared to thatof married women. Young unmarried womenconstitute less than one-third of the total femaleworkforce, but they make up nearly 50 percentof female clerical workers. Women’s representa-tion in clerical occupations declines sharply withage and marriage. Married women, whose jobsare more intermittent, are likely to work in pro-duction, both skilled and unskilled, and sales jobs.They provide a vital supply of substantial butcheap labor and act as a buffer in the overalleconomy.

In contrast to the type of work performed bymarried women, the position of OL provides a

social veneer, embodying the traditional feminineroles. Jobs are more ornamental than substan-tial. They remain “ladies” and have decorativevalue as receptionists or office assistants. Theyanswer telephones, operate photocopy machines,serve tea, and clean the office desks. Office la-dies are recruited immediately after high schoolor junior college. They typically resign from workeither upon marriage or the birth of the first child.Pressure for resignation comes from strong so-cial expectations that women are supposed to puttheir family first. Such pressure is sometimesmade through employer suggestions that theyretire, a practice known as kata-tataki (tap on theshoulder). With the passage of the Equal Em-ployment Opportunity Law (EEOL) in April1986, however, the suggestion that women retireat marriage is no longer legal.

There is no career mobility but the lack of ajob ladder is for the most part irrelevant. Theclearer understanding of the significance of OLrequires a larger structural and historical picture.During the rapid economic development of the1960s, the (new) middle class expanded, andalong with it an image of the ideal housewife whois fully committed to the family. Marriage wasseen as a ticket out of labor-intensive agriculturalor textile mill work or unrewarding office work,as well as an entry into the security of a middle-class lifestyle. The new ideology situated womenas nurturers of children, supporters of husband’scareer (or the family business), and caregivers ofaging parents.

Currently Japan faces an uncertain trend. Thestrong normative and behavioral consensus that

O

existed about women’s roles is crumbling. Thereis greater awareness among women that employ-ers continue to discriminate against women whodo not intend to leave work upon marriage andthose with career ambitions. During the 1980sand 1990s, women began to postpone marriage.As the economy opened up more job opportuni-ties, women’s life options widened, and the needfor rushing into marriage for economic securitydecreased. Marriage that only increases their fam-ily responsibilities and puts an end to their free-dom is no longer attractive. The average age ofmarriage for women rose from twenty-five in 1975to twenty-eight in 1995, and in the Tokyo area, itis thirty-one. Women on average are having 1.6children, one of the lowest birth rates in the world.The celebration of single lifestyle among officeladies gave rise to a popular phrase, “office ladysyndrome.” It describes the orientation of officeladies geared to dining out, fashion, leisure, andtravel.

Studies are divided in the interpretation of the“office lady syndrome.” Some observers considerit a product of the bubble economy of the 1980s.According to this view, women who were pam-pered by their parents during the bubble era de-veloped a strong sense of money andconsumption orientation without long-range lifeplans or a career orientation. This position sug-gests the pursuit of conspicuous consumption ismore consistent with existing patterns of genderdifferentiation than it is with the advancement ofnew roles for women. Alternatively some sug-gest that a “quiet revolution” is taking place inthis group of women involving the postponementof marriage. According to this view, youngwomen are disillusioned with Japanese men andmarriage, question the wisdom of “traditional”women’s roles, and are more selective in theirlife course options. This perspective views womenas quiet initiators of social change, including there-negotiation of gender roles.

See also: salaryman

Further reading

Awaya, N. and Phillips, D. (1996) “Popular Reading:The Literary World of the Japanese WorkingWomen,” in A.Iwamura (ed.), Re-imaging Japanese

Women, Berkeley CA: University of California Press,244–70.

Carter, R. and Dilatusb, L. (1976) “Office Ladies,” inJ.Lebra, J.Paulson and E.Powers (eds), Women inChanging Japan, Stanford, CA: Stanford UniversityPress, 75–88.

Clammer, J. (1997) Contemporary Urban Japan, Oxford:Blackwell.

Fujimoto, T. (1994) “Office Lady Syndrome: A Gen-der Comparison of Job Attitudes Among JapaneseClerical Workers,” in Best Papers Proceedings, Asso-ciation of Japanese Business Studies, 7th AnnualMeeting, Vancouver, British Columbia, Canada,183–207.

Inoue, T. and Ehara, Y. (eds) (1995) Women’s Data Book,Tokyo: Yuhikaku.

Lo, J. (1990) Office Ladies/Factory Women: Life and Work ata Japanese Company, New York: M.E. Sharpe.

Ogasawara, Y (1998) Office Ladies and Salaried Men: Power,Gender, and Work in Japanese Companies, Berkeley CA:University of California Press.

Saso, M. (1990) Women in the Japanese Workplace, Lon-don: Hilary Shipman.

Usui, C. (1994) “Do American Models of Female Ca-reer Attainment Apply to Japanese?” OccasionalPaper Series No. 9408, Center for InternationalStudies, University of Missouri-St. Louis.

White, M.I. and Barnet, S. (1995) Comparing Cultures,Boston: Bedford Books of St. Martin’s Press.

GHIKAKO USUI

Ohmae, Kenichi

Kenichi Ohmae was born in the Fukuoka prefec-ture in 1943. He received his bachelor’s degreeat Waseda University, his master’s degree at To-kyo Institute of Technology and his doctoratedegree at Massachusetts Institute of Technology.After working for Hitachi Limited for two years(1970–2) as an engineer on nuclear development,Ohmae joined McKinsey & Company Incorpo-rated in 1972. He received the Twelfth Keizai-kaiTaisho Tokubetsu-sho (Special Prize at the Eco-nomic-World Grand Prize) in 1986, and becamethe chairman of McKinsey & Company Incorpo-rated Japan in 1989. He resigned from the com-pany in 1994.

Ohmae is well known as a theorist of the open-

342 Ohmae, Kenichi

ing of the Japanese market. His books includeThe Evolving Global Economy: Making Sense of the NewWorld Order, The Invisible Continent: Four StrategicImperatives of the New Economy, and The BorderlessWorld: Power and Strategy in the Interlinked Economy.

MARGARET TAKEDAAKI MATSUNAGA

one-to-one marketing

One-to-one marketing relates to the pinpointingof specific needs of individual customers, and itis best understood as the opposite of mass mar-keting. The concept of marketing was first intro-duced in Japan in the 1950s, at the initial stage ofeconomic growth, and deemed particularly rel-evant to the buoyant consumer goods industrywhich applied methods of mass merchandisingduring the 1960s. In the 1970s, however, eco-nomic growth came to an end, especially afterthe oil shock. In the face of a slowdown of theJapanese economy the traditional policy ofswamping the market with a uniform product,which was based on the notion that the marketwas composed of unspeciflc customers with ho-mogenous needs, no longer applied. It wasthought, instead, that the market had becomeheterogeneous, requiring differentiated productscorresponding to the needs and characteristicsof customers forming sub-sets of the entire mar-ket (segment marketing).

Segment marketing had three variations.Firstly, target marketing related to methods forapproaching and exploiting a particular segment.Secondly differentiation marketing aimed at sev-eral segments simultaneously which Japaneseautomotive producers and leading publishingcompanies typically adopted for their productlineups. Thirdly focus marketing was specificallyemployed in regard to a narrowly defined seg-ment.

As the consumer market in Japan was thoughtto have matured, segment marketing became ir-relevant, as it was believed that the entire marketwas composed of segments within which cus-tomer needs were still homogeneous. It was sub-sequently argued that sorting out the specificneeds of individual customers and responding to

them could expand sales. In parallel, the growthof the service industry prompted a wide range ofbusiness activities to become ever more customer-oriented. In the late 1980s, the notion of customersatisfaction (CS) gained popularity and a numberof CS surveys were conducted so as to gauge acompany’s overall performance from a broaderpoint of view.

In 1995, the translation of Peppers and Rogers’book The One to One Future (1993), was published.The new term “one-to-one marketing” was theninterpreted as a long-awaited solution to theabove-noted agendas. Peppers and Rogers fore-see the possibility of maximizing each custom-er’s satisfaction through the use of computers,from which the sales force can retrieve a largeamount of past and new information, previouslyunavailable and not possible to accumulate, suchas requests from various customers, data on pastpurchases, inclinations, etc. With a continuousrenewal of the database on a customer-by-cus-tomer basis, companies will, argue the authors,be able to increase their opportunities for con-tact with the customers over a lifetime than wouldcompetitors. Companies would thus retain cus-tomers for a long period, which, in turn, wouldcontribute to higher market shares. One-to-onemarketing, therefore, is made possible by com-puter technologies that provide databases, atlower cost than before, for developing new meth-ods to contribute to the customer satisfaction. Itsaim is to maximize the time and opportunity shareof individual customers.

However, database marketing with the use ofcomputer has been developed in the direct mailindustry and the retail industry through the is-suance of point cards and credit cards, which canbe regarded as one-to-one marketing tools. Withthe advent of the information society however,the Internet has become a powerful transactionchannel of business to consumer (B to C) mar-keting, as exemplified by the popularity ofAmazon.com.

The term “one-to-one marketing” in Japantends to be used in a broader context, and alsoapplied to approaching specific customers for arelatively long period of time. For example, ahousing company that approaches its customerson the occasions of periodic maintenance and

one-to-one marketing 343

then proposes rebuilding or additions is some-times referred to as using one-to-one marketing.The term is also used within the automotive re-tail industry to designate sales efforts to inducecurrent users to choose the same manufacturer’scar for replacement.

Sales promotions (SP) with a view to captur-ing high yield customers are commonly used bydoor-to-door sales and the department store in-dustry (see department stores), and they are alsoviewed as a form of one-to-one marketing. Auniquely Japanese example of one-to-one mar-keting are Buddhist temples that apply the no-tion to the management of their relations withfamilies and persons affiliated with the sect.

See also: marketing in Japan

Further readings

Peppers, D. and Rogers, M. (1993) The One to One Fu-ture, New York: Doubleday; trans. T.Iseki, ONE toONE Maaketingu: Kokyaku Rireishon Senryaku. Tokyo:Daiyamondosha, 1995.

SHINTARO MOGI

Ono, Taiichi

Taiichi Ono (Ohno) is an engineer and execu-tive who guided the development of the Toyotaproduction system. A graduate of NagoyaHigher Industrial School, Ono worked forToyoda Spinning before joining Toyota Motorsin 1943. Influenced strongly by Fordist mass pro-duction and Frederick Winslow Taylor’s theoriesof scientific management, Ono was dedicated toeliminating waste, increasing labor productivityand cutting costs on Toyota’s production lines.Through a process of constant analysis and ex-perimentation on the shop floor, Ono adaptedAmerican manufacturing models to Japanese re-alities, introducing a series of production man-agement innovations between the late 1940s andthe mid-1960s. These highly successful methods,including multi-machine handling, small-lot pro-duction, the just-in-time concept, and the kanbansystem, revolutionized traditional manufacturingpractices and were widely emulated both in Ja-pan and abroad.

Further reading

Cusumano, M.A. (1985) The Japanese Automobile Indus-try: Technology and Management at Nissan and Toyota,Cambridge, MA: Council on East Asian Studies,Harvard University.

WILLIAM M.TSUTSUI

organizational learning

When organizations and its members acquirenew knowledge and new insights, organizationallearning occurs. To sustain competitive advan-tage in the global market, organizations shouldmaintain effective organizational learning andcontinuously overcome any obstacles to learning.Although the processes of the organizationallearning cycle itself do not differ much, the learn-ing methods of Japanese firms differs from thoseof US firms in a few essential points, and this inturn leads to other differences.

Historically theories of organizational learn-ing appeared around the early 1960s. These earlytheories were based on studies of organizationaladaptation. Organizational adaptation simplymeans defensive adjustment to gaps, for exam-ple, the gap between the aspiration level and thereal performance of an organization. On the otherhand, the more recent definition of organizationallearning includes new understanding of causalchains and changing shared beliefs and values oforganizational members. Firms that want to suc-ceed in their business need continuous change inexisting and obsolescing values. In other words,they need organizational learning. As a result ofthis change in perspective, the study of organiza-tional learning has become more popular.

It was around the year 1990 that the term“organizational learning” became a subject ofgreat interest among both academic people andbusinesspeople. The prominent work of PeterSenge’s The Fifth Discipline played an importantrole in popularization of this term. He focusedon a “learning organization” and the applied theo-ries of organizational learning. Because his dis-cussion on it attached importance toimplementation and was perceived as useful, theconcept was welcomed by businesspeople. An-other reason for the rapid diffusion of this termwas that executives of US firms noticed the strong

344 Ono, Taiichi

power of effective organizational learning forgaining competitive advantage. They regardedthe overwhelming victory of many Japanesemanufacturing firms in the 1980s as due to alearning-oriented corporate culture and to dailylearning activities on the shop floor.

Many Japanese manufacturing firms had longmade efforts towards quality management andthe development of education systems for theiremployees. A typical example can be found inthe activities of quality control circles formedby blue-collar workers, which became very popu-lar from the late 1960s to the mid-1970s. Mem-bers of QC circles decided upon a common themeby themselves. Themes aimed at the improve-ment of the performance of both the team andthe corporation. Because QC circles were notactivities maintained by compulsion of manag-ers but by means of individual pursuit of self-fulfillment, motivation for learning through circleactivities was high. The learning-supportive at-mosphere of Japanese firms also helped employ-ees to participate in the activities positively. Forexample, executives and managers were readyand quick to adopt many new ideas proposed bycircle members. Their attitude was useful in en-hancing employees’ perceptions that each was anactive member of the firm and that members’ideas could directly improve corporate perform-ance. As whole, these activities enabled Japanesefirms to have continuous and effective organiza-tional learning.

It is difficult, however, for any firm to main-tain effective organizational learning practices.The capability that firms need is always chang-ing in concert with changes in a firm’s environ-ment. Some Japanese firms that were successfulin the 1980s now confront many difficulties,which hinder desirable organizational learning.Some of these obstacles are common to all firms,and some are specific to Japanese firms.

The process of organizational learning

The cycle of organizational learning generallyconsists of four phases. The first phase is “plan-ning,” in which people clarify what they learn ormust learn in the organization. At the secondphase “action,” people attempt to carry out the

plan developed in the previous phase. The thirdphase is “reflection.” People conduct feedback,examining their action and inquiring as towhether or not it is consistent with organizationalvalues and vision, and if it has been carried outcorrectly The forth is “memory,” during whichthe learning acquired from the three previousphases is shared with other organizational mem-bers. Memory is also the starting point of thenext learning cycle. Effective organizational learn-ing can be maintained when this learning cyclecontinues in iterative fashion without interrup-tion. The so-called PDCA (Plan-Do-Check-Ac-tion) cycle is another way of understanding thelearning cycle.

Argyris and Schön (1978) note that there aretwo levels of organizational learning. The firstlevel is single-loop learning, which occurs whenorganizational members do not question organi-zational values or approaches, but simply detectand correct errors. Kaizen is an example of sin-gle-loop learning. The second level of organiza-tional learning is double-loop learning. Membersengage in double-loop learning when they ques-tion or explore organization values and perspec-tives, replacing obsolete value with new, moreappropriate ones. The difference between the twoways of learning is in the method of reflectionthat occurs during the third phase of the organi-zational learning cycle. When members regardthe cause of a problem as not embedded in or-ganizational values, but rather as a behavioralerror, they engage in single-loop learning. Whenreflection leads to a replacement of existing or-ganizational values with a new one, then double-loop learning occurs. Both types of learning areimportant for organizations. Effective single-looplearning is useful to improve the daily task per-formance, while effective double-loop learningenables organizations to adopt innovative ideasthereby transforming themselves.

Though the same learning cycle can be ap-plied to both, there are several intrinsic differ-ences between Japanese and US firms. The firstdifference is found in the main entity of organi-zational learning. In US firms, top managementtends to engage in double-loop learning muchmore than other layers of the organization be-cause of a top-down management style. Con-versely middle and lower level personnel tend to

organizational learning 345

be more involved in single-loop learning. Themerit of this style is rapid execution and diffu-sion of the learning results acquired by top man-agement. The downside is that the firm’s fortunesare directly affected by the top level’s ability orinability to realize double-loop learning.

In contrast to US firms, most Japanese firmshave bottom-up decision-making processes.Based on their daily experiences, employees atthe front-line make proposals to those abovethem. When proposals are good, managers areready to receive them as the result of organiza-tional learning and diffuse the new knowledgethroughout the organization. In addition, the roleof middle management in learning is quite im-portant for Japanese firms. They pull critical in-formation out of lower employees and translatethis information into a form accessible to the topmanagement of the organization. They also com-municate upper management’s requests to lowerlevels, again after transforming such requests intoan accessible form. In this sense, the middle man-ager’s function is to act as a catalyst of effectiveorganizational learning. If middle managers func-tion well, both single-loop and double-loop learn-ing will effectively appear at any place within theorganization. The merit of this style of organiza-tional learning is that the organization is stronglysupported by every employee who is highly learn-ing-oriented. The demerit is that an organizationcan be severely damaged by the failure of middlemanagement to adequately carry out this func-tion.

The second difference between Japanese firmsand US firms is the way they transfer new val-ues and knowledge. In US firms, employeesrecord most of their new knowledge in a formaldocument, which is so-called explicit knowledge.Because of this, anybody who reads the docu-ment can imitate and utilize it at once. In the casethat organizational members transfer their knowl-edge and values as explicit knowledge, it is alsodifficult to realize double-loop learning becausethere is less chance to add new values to existingvalues. At the same time, the possibility of effec-tive single-loop learning is high because the lossof knowledge through transfer is a minimized.

In contrast, the really important knowledge—values and orientations—for Japanese firms tendnot to be explicit. Just like the relationship be-

tween an apprentice and a master craftsman,employees must carefully observe their bosses orother skilled persons and develop through ob-servation and “intuition” the ability to do theirwork. In other words, most of the importantknowledge is reserved and transferred as tacitknowledge in Japanese firms. The success oftransferring tacit knowledge greatly depends onthe capability of the receiver, that is, the user oforganizational shared knowledge. If the receiveracquires as much learning through accessing thetacit knowledge of their boss and organizationand adds new insights of their own, the receivercan experience both single-loop and double-looplearning. However, in the case of a poor or inef-fective receiver, even single-loop learning can bedifficult to achieve, resulting in significant loss inpotential organizational knowledge, and at a highcost in resource investment.

Obstacles to effective organizationallearning

There are several obstacles to effective organiza-tional learning. Some are common to every or-ganization, while others are unique to US firmsor Japanese firms. The types of obstacles firmsconfront depend on differences in their approachto learning, as noted above. An example of a com-mon obstacle is that, as a result of organizationalculture, most organizational members are reluc-tant to change present conditions or to accept newways of doing things. In such a culture, mem-bers lose opportunities to learn, because peopleonly notice a problem in existing practices orvalues when confronted with a different perspec-tive or way of doing things. In addition, organi-zations which have such a culture producemembers who dislike change or non-routineevents, thereby limiting the effectiveness of em-ployee training and socialization systems. Becausethey take existing values and practices forgranted, new approaches and proposals are of-ten rejected and the person proposing the changeis gradually discouraged by repeated refusal.When people hesitate about doing challengingthings, there are fewer and fewer chances to learnnew things. Under this condition, the organiza-tional learning cycle does not function, so

346 organizational learning

neither single-loop nor double-loop learning canoccur. When there is a communication blockbetween departments of the firm, each depart-ment tends to develop a defensive mindset, lead-ing departmental members to reject ideas fromoutside their own department. In order to solvethis problem, firms need to change organizationalculture through the development and use of cross-functional teams.

The absence of a clear corporate vision canalso be a critical factor in obstructing organiza-tional learning for both Japanese and US firms.However, the reasons are different for the twotypes of firms. In the case of US firms, the ab-sence of vision prevents executives from attract-ing employee acceptance and enthusiasm,thereby reducing employee contributions to theorganization. Because they lack the power tomotivate organizational members, they cannotachieve effective organizational learning. On theother hand, the absence of vision in Japanesefirms exerts a bad influence mainly on middlemanagers in Japanese firms, because it makes itdifficult for them to understand the future orien-tation of the organization or what they shoulddo to convey a motivating vision to lower levelemployees. When middle managers do not func-tion well as catalysts of organizational learning,neither the top management nor the lower levelachieves adequate learning. Generally Japaneseexecutives, in comparison with US executives,do not explicitly express corporate vision andbeliefs. This lack of explicitness needs to changeif Japanese firms are to promote enhanced learn-ing activities.

One of the obstacles specific to Japanese firmsis the possible deterioration of employees’ learn-ing capabilities. Recently it has become impor-tant for Japanese firms to try to improve thequality of white-collar workers. If their capabil-ity of receiving tacit knowledge or of translatingfrontline employees’ requests into adequate in-formation is low, most of the tacit knowledge willbe gradually lost and the organization will loseits competitive edge in international markets. Toavoid this, Japanese firms must upgrade the qual-ity of their employee training activities. At thesame time, they need to transform tacit knowl-edge into explicit knowledge that all memberscan use.

Further reading

Ando, F. (2001) Soshiki gakusyu to soshiki-nai tizu (Orga-nizational Learning and Navigation Maps in theOrganization), Tokyo: Hakuto Shobo.

Argyris, C. and Schön, D.A. (1978) Organizational Learn-ing: A Theory of Action Perspective, Reading, MA:Addison-Wesley

Hisamoto, N. (1998) Kigyo-nai roshi kankei to jinzai keisei(The Labor-Management Relations in the Organi-zation and Human Development), Tokyo:Yohikaku.

Nonaka, I. and Takeuchi, H. (1995) The Knowledge-Cre-ating Company, Oxford: Oxford University Press.

Senge, P. (1990) The Fifth Discipline, New York:Doubleday.

FUMIE ANDO

outplacement

Outplacement is a way to adjust a company’shuman resources by encouraging employees totransfer their jobs through use of outside place-ment corporations. It has been firmly establishedin Japanese economy and society from the 1990s.Outplacement requires employees to find andtransfer to jobs beyond those that might be pos-sible in subsidiaries and affiliated firms. It is verydifferent from the manner in which large Japa-nese companies had traditionally managed hu-man resource adjustments. The primarydifference is that outside personnel service com-panies mainly help employees find a job.

The conventional approach to humanresource adjustments

The conventional characteristics of the Japaneseemployment system are permanent employmentand the seniority system. Although large enter-prises adopted these systems, the adjustment ofhuman resources was still carried out for middle-aged and older employees. Older employees notcritical to the firm were required to permanentlyleave their positions and work for subsidiary oraffiliated companies (tenseki) or to temporarilytransfer to subsidiary or affiliated companies(syukkou). Tenseki means employees resign theirposition, and work for the subsidiary or affili-ated companies, so it is essentially a job change.Syukkou refers to when employees work for

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subsidiary or affiliated companies, and receive asalary from them, but employees continue to be-long to the original company. Middle-aged andolder employees tend to be transferred to subsid-iary or affiliated companies for syukkou. However,after a few years of syukkou, this usually turns intotenseki. In these situations, the Japanese companysecures employees’ positions without the aid ofpersonnel service companies.

The influence of economic and social change

The employment system in Japanese companiesbegan to change in the 1990s because of changesin the economic structure and the aging of soci-ety. With the collapse of the bubble economy,the Japanese economy entered a period of matu-rity Under economic stagnation, the need forcompanies to achieve enhanced efficiencies in-creased, which made it difficult for companies tomaintain the long-term employment and senior-ity system. Though some sectors of the economysuch as computer manufacture and informationservices, were experiencing labor shortages, mostother industries had a labor surplus. Conse-quently there was a severe need to redistributehuman resources out of some firms and indus-tries and into others. At the same time, with theaging of society it was difficult for older workersto secure employment opportunities. In responsepersonnel service companies began to emerge tohelp struggling firms find positions for redundantemployees.

Legal issues and obstacles

Historically labor restructuring and mobility hasbeen handled mainly buy public agencies underthe jurisdiction of the Minister of Labor. This wascodified in the Syokugyou Antei Hou (Occupa-tional Security Law). These agencies focus on blue-collar workers, so that when labor restructuringand redistribution began to occur among white-collar workers, they lacked sufficient knowledgeor skill to adequately respond. They had difficultyaddressing the variety of industries involved andthe overall volume of white-collar workers in needof new positions. As a consequence, private per-sonnel services began to appear. Personnel serv-ices had initially been granted permission to work

with white-collar workers after a revision to thelaw in 1967. However, at that time, such firms pro-vided services primarily for temporary or part-timeworkers such as housewives returning to work.Until 1997, when the law was again revised, whitecollar placements totaled less than 5 percent of allplacements. In the aftermath of the 1997 revisionsthere was immediate and rapid growth in thenumber of personnel services companies operat-ing in Japan.

With structural changes in the Japaneseeconomy and society demand for outplacementservices has increased significantly. Becauseoutplacement is often part of a company’s largerhuman resources management strategy it is some-times described as restructuring (jinin sakugen).The emergence of out-placement as a more widelyaccepted practice and the emergence of person-nel services companies signify an important shiftin the human resource practices of Japanese firms.The extent and permanence of this shift and itsultimate impact on traditional personnel practicesremains to be seen.

Further reading

Abegglen, J.C. and Stalk, G. (1985) Kaisha: The Japa-nese Corporation: The New Competition in World Business,New York: Basic Books.

Cole, R.E. (1979) Work, Mobility and Participation: A Com-parative Study of American and Japanese Industry, Ber-keley CA: University of California Press.

Dore, R.P. (1973) British Factory Japanese Factory: TheOrigins of National Diversity in Industrial Relations, Ber-keley CA: University of California Press.

Takanashi, A. (ed.) (1994) Kawaru Nihongata koyou (TheChange of the Japanese Employment Style), Tokyo:Nihon Keizai Shinbunsya.

Yashiro, N. (1997) Nihonteki Koyou-Kankou noKeizaigaku:Roudou-Shijou no Ryudouka to Nihon-Keizai(Economics of Japanese Employment Custom: La-bor Market Mobilization and Japanese Economy),Tokyo: Nihon Keizai Shinbunsya.

MASANORI YASUMOTO

overseas business of small and me-dium-sized enterprises

Japanese small and medium-sized enterprises(SMEs), especially manufacturing firms, have

348 overseas business of small and medium-sized enterprises

been moving production offshore due to thestrength of the yen, low-priced imports, and theabundance of inexpensive labor overseas, espe-cially in Asia. Among manufacturers with fewerthan fifty employees, only a small number wereoperating abroad in the 1970s. However, the num-bers of SMEs operating overseas has been climb-ing steadily since the 1980s.

Pressure from large businesses for SMEs tolower prices has also caused medium and smallsized companies that supply the electronics in-dustry and automotive industry in Japan to lookoverseas for sourcing parts and manufacturing.The need for these SMEs to find foreign part-ners is greater than ever. SMEs, however, facehurdles of language barriers and concern aboutred tape when expanding their businesses over-seas. Private and public-sector organization pro-grams are helping Japanese SMEs stake a moreglobal approach to their businesses. For exam-ple, since 1994, JETRO (Japan External TradeOrganization) has an advisory program to helpSMEs in Japan find import and export partners.The purpose is to encourage grass-roots leveloperations.

The major destinations for Japanese SMEshave been China and the United States. In 1995SME foreign direct investment (FDI) was 783projects. FDI by region included 434 projects inChina, 109 in ASEAN (Association of SoutheastNations), 55 in Asian NIEs (Newly Industrial-ized Economies), 15 in other Asian countries, 30in Europe, 103 in North America and 37 in othercountries. Most of the FDI has been in manufac-turing (573 projects in 1995), followed by com-merce (59) and service (31). Sixty percent of theseoverseas manufacturing operations have beenjoint ventures. In China most ventures have beenproduction operations, while in ASEAN coun-tries Japanese SMEs are involved primarily inprocessing and assembly. To assist SMEs withoverseas business, JETRO has established Localto Local Initiatives for Mutual Industrial Devel-opment. This program brings together regionallevel groups and SMEs in Japan and overseas.Since 1993, JASMEC (Japan Small and MediumEnterprise Corporation) has been expandingways it can assist SMEs in internationalization.International advisors who have extensive inter-national business experience provide advice to

SMEs interested in business tie-ups with foreignfirms. JASMEC also provides guidance and sup-port for overseas expansion and procurement ofparts and materials in the international market.They conduct overseas training services for per-sonnel and management as well as provide loansto SMEs.

A 1997 JETRO survey found 57 percent ofSME respondents already had, or were planning,overseas operations. Of those planning to go over-seas, 57 percent said they are looking to enter anASEAN country because of political and socialstability In contrast, the potential domestic mar-ket attracted Japanese SMEs to China (56 per-cent) and India (59 percent), while in Hong Kongit was the infrastructure that was most attractive(40 percent). As mentioned earlier, one reasonSMEs go overseas is for the inexpensive labor.Japanese SMEs in Asians countries have foundthat China and India have lower wages thanASEAN countries, while Hong Kong and Singa-pore have the highest wages. One of the difficul-ties SMEs face overseas is procuring enoughmaterials and supplies. One-third of JapaneseSMEs in ASEAN countries report that 50 per-cent of raw materials and supplies are sourcedlocally. This compares with only 16.4 percent inChina, but is below the 67.9 percent reported byfirms in India. Overseas business was seen as agood investment strategy in ASEAN (50.4 per-cent), Hong Kong (65.8 percent), and Singapore(61.6 percent). Only 19.9 percent of the respond-ents planned to increase research and develop-ment overseas, but they were planning to increaseproduction in the Philippines (76.2 percent), In-dia (75 percent), and Indonesia (71.6 percent).Many of these firms are also exporting in ASEAN(94.1 percent). Thirty-one percent of respondentsstated that at least 50 percent of their exports wentto other ASEAN countries. The findings of thissurvey found that 62.7 percent of the respond-ents were profitable in 1997, down from 68 per-cent in 1995.

The major problems cited by these firms wererising local wages and labor relations. Country-specific problems include a complicated tax sys-tem in China, and difficulties in accessing capitalin India.

Compared to large firms, it is more difficultfor SMEs to expand into foreign markets. To

overseas business of small and medium-sized enterprises 349

offset these difficulties, groups such as the OsakaGlobal Business Opportunities Convention (G-BOC) assist Japanese and foreign firms in find-ing partners. The G-BOC, held under theauspices of JETRO, MITI (Ministry of Inter-national Trade and Industry) and the OsakaChamber of Commerce and Industry has beenheld in Osaka every year since 1990. Its purposeis twofold: to help foreign SMEs to gain a foot-hold in the Japanese market and to help connectJapanese SMEs with foreign partners.

Japanese SMEs have used a variety of ap-proaches in their businesses. These include over-seas expansion and offshore operations such asforeign direct investment project, wholly-ownedsubsidiaries and joint ventures; import and ex-port partnerships, exploring the world market fornew ideas and new customers, and other coop-eration with foreign counterparts.

The high yen and the growing overseas pres-ence of large Japanese firms continue to providestrong incentives for SMEs to pursue overseasexpansion. However, with overseas expansion,many SMEs now confront important challengesin developing overseas research and developmentcapabilities, establishing extensive after-sales serv-ice capabilities in overseas locations and respond-ing to calls for greater environmental protectionin their Asian and Southeast Asian manufactur-ing operations. In short, Japanese SMEs nowconfront all of the major issues encountered bythe large Japanese multinational corporations.

See also: economic crisis in Asia; Japanese busi-ness in China; Japanese business in SoutheastAsia; overseas research and development; smalland medium-sized firms

Further reading

JASMEC (Japan Small and Medium Enterprise Cor-poration) Home Page, http:// www.jsbc.go.jp/english.

TERRI R.LITUCHY

overseas education

Many Japanese students spend a high school orcollege semester or a year abroad to learn about

another country. The Japanese usually look onthis experience favorably as long as the studentis able to fit back into the Japanese education sys-tem upon return to Japan, something that can bedifficult given strong social pressures for confor-mity to peer norms in areas of speech, appear-ance and behavior.

More and more Japanese are being sent towork overseas, and many of them bring theirfamilies with them. A real concern is whether ornot their children will fall behind their peers inschools back in Japan. Consequently there hasbeen a demand for Japanese schools overseas.Keio University and several other educationalinstitutions in Japan have opened “branch” cam-puses in the USA and elsewhere in the world toaddress this need. Where Japanese children areunable to attend a Japanese school, they will at-tend local American schools, and then attendJapanese schools in the evenings or weekends tokeep up in Japanese language and mathematics,the latter of which is more advanced in Japanthan in the United States.

One of the major concerns for most Japaneseexpatriates is what will happen to their childrenupon return to Japan. Beginning in the early1980s, Japanese educators identified a problemwith ijime (bullying) of returning Japanese chil-dren. Known as kikokushijo (literally “returninghome children”), these children were often sin-gled out by classmates because they dressed dif-ferently spoke differently or had different interestand hobbies. In response, the Ministry of Educa-tion established “magnet” schools where kikoushijocould be grouped and received special educationalsupport and counseling.

There are several other types of Japanese over-seas education. The National Association of Ja-pan-America Societies is a private, nonprofitnetwork of thirty-five Japan-America societiesacross the United States. Its mission is educationabout Japan and US-Japan relations. Most socie-ties have speakers that address business, politicaland cultural issues. They also offer Japanese lan-guage classes. The society has over 30,000 mem-bers (mostly in the 25–50 age group) across theUnited States including over 30 percent of Japa-nese who are residents in the United States.

The Japan Business Information Center(JBIC) is a privately funded non-profit business

350 overseas education

association. Its mission is to improve bilateralunderstanding between Japan and the USA.The JBIC established its first overseas office ofthe Keizai Koho Center in 1992. The Center’smission is to promote understanding throughcommunication, dialogue and cooperation ofJapanese and American business leaders andeducators. The JBIC sponsors seminars and lec-tures, social studies programs, and businessschool programs.

TERRI R.LITUCHY

overseas production

Overseas production on the part of the Japanesemanufacturing industry entered a period of rapidexpansion in the latter part of the 1980s. Whilethe ratio of overseas production, as measured interms of sales by overseas manufacturing subsid-iaries compared with sales by all manufacturingcorporations in Japan, stood at only 3 percent in1985, it had jumped to 13.1 percent by 1998. Thesame ratio for only those corporations that hadundertaken some overseas production was 32.2percent in 1998.

The Japanese manufacturing industry firstventured overseas in the beginning of the twenti-eth century when Japanese companies in the cot-ton spinning industry first established overseasproduction operations in China. Later, as Japan’ssphere of influence gradually expanded, moresuch overseas manufacturing facilities sprang upin China, as well as on the Korean peninsula andTaiwan. However, when the Second World Warended in defeat for Japan, such holdings wereseized, and Japan lost all of its overseas assets.

In 1950, a few years after the end of the war,overseas production resumed on a very limitedbasis. Most of these efforts targeted locationswithin Asia, although a certain number also in-cluded the industrially advanced nations. In 1970,the Japanese government promoted the liberali-zation of foreign direct investment (FDI), and inaccordance with the third phase of this liberaliza-tion, which was implemented in 1971, the gov-ernment removed restrictions on the value ofinvestment that would qualify for automatic ap-proval. Nevertheless, at this time the Japanesemanufacturing industry continued to pursue its

fundamental post-war strategy of developingoverseas markets through exports from Japan. Asfar as manufacturing industries were concerned,“internationalization” remained primarily a mat-ter of promoting exports.

Eventually there occurred changes in the in-ternational business environment that began toexert pressure on this export-driven strategy forinternationalization. These changes were the de-velopment of trade friction and the appreciat-ing yen that followed in the wake of the PlazaAccord. The Japanese manufacturing industrywhich needed to find some way of responding totrade friction and yen appreciation, had no alter-native but to begin to undertake overseas pro-duction in the industrially advanced nations, firstin the United States, and then later in Europe.By the 1990s, Japanese manufacturing industrieshad achieved a truly globalized stage of develop-ment with production footholds in Asia, Europe,and North America.

It is worthwhile to consider the differences inamount of FDI as well as in the volume of salesposted by overseas subsidiaries according to thetype of industry. In terms of FDI, the electronicsindustry accounted for the largest proportion ofsuch investment at 27 percent, followed by vehi-cle and chemical manufacturing industries at 13percent each. These three industries taken to-gether thus comprised approximately one-half ofall investment by Japanese manufacturing indus-tries in overseas production. Metals manufactur-ing (ferrous and non-ferrous), foods, generalequipment, and precision tools manufacturingindustries followed, in that order. The stronglyexport-competitive electronics, automobiles andchemical manufacturing industries were, not sur-prisingly the top three industries to engage in FDI.Furthermore, electronics and automotive manu-facturing showed the highest ratios of overseasto domestic production within their own indus-tries.

In 1998, the ratio of overseas sales registeredby each industry against the total overseas salesby all overseas production operations revealedthat the electronics, auto, and chemical manufac-turing industries accounted for more than 70percent of all overseas production sales, at 32.5percent, 31.9 percent and 8.2 percent respec-tively In terms of the regions in which these sales

overseas production 351

occurred for each of these industries, it is clearthat the electronics industry achieved most of itssales in Asia, followed by North America andthen Europe. The vehicle manufacturing indus-try had its largest volume of sales in NorthAmerica, followed by Europe and then Asia; thechemicals industry was biggest in NorthAmerica, then Asia and finally Europe.

Next, let us examine the amount of FDI, thevolume of sales, and the number of employees atthese overseas production operations on a region-by-region basis. North America ranks numberone in terms of amount of FDI as well as volumeof sales, while Asia is first in terms of number ofemployees. The cumulative figure for amount ofFDI in the years 1951 to 1999 is approximately$288.7 billion. As much as 85 percent of this ac-tivity is concentrated in the three regions of NorthAmerica, Europe and Asia. Of this, $125.8 bil-lion (43.6 percent) is invested in North America,($116.6 billion or 40.4 percent of the total in theUnited States), $76.3 billion (26.4 percent) is spentin Asia, and $52.8 billion (18.3 percent) in Eu-rope. Other regions include Central and SouthAmerica where FDI amounted to $20.3 billion(7.0 percent), Oceania with $8.5 billion (2.9 per-cent), the Middle East with $3.8 billion (1.3 per-cent), and Africa with $1.2 billion (0.4 percent).

Turning to the volume of sales by overseasproduction operations, North America is the high-est with Asia and then Europe following in thatorder. Finally persons employed at Japanese over-seas manufacturing facilities in 1998 numberapproximately 2.2 million in total, of which 1.4million (61.1 percent) are in Asia, 473,000 (21.3percent) are in the North America, and 241,000(10.9 percent) are in Europe.

The reason that Japanese manufacturing in-dustries chose to pursue an export-led strategyfor such a long period after the Second WorldWar and that they eschewed a policy of ventur-ing abroad with production operations lay in thecharacteristics of the Japanese-style managementsystem. The leaders of Japanese manufacturingindustries had no confidence that their manage-ment system, created and cultivated in Japan, wascapable of being applied in the midst of a differ-ent managerial environment, particularly as ob-tained among the industrially advanced nations.The export strategy therefore, came to be viewed

as the best means for promoting the internation-alization of Japanese business vis-à-vis those na-tions. However, after the Second World War, theAsian countries adopted policies to promote theirown industrialization through import substitution.Manufacturing corporations from the industri-ally advanced nations expected Asian countriesto pursue a policy of local production of goodsthat they would otherwise have had to import.Therefore, in order to promote industrializationand to nurture and protect their own fledglingmanufacturing industries, these developing na-tions applied high tariff rates on the import offinished products. These policies also facilitatedefforts by the Japanese manufacturing industriesto locate production facilities in those countries.

Local overseas production on the part of Japa-nese manufacturing industries in the industriallyadvanced nations raised the question of whetherit would be possible to successfully transfer theJapanese-style management and production sys-tem overseas. Broadly speaking, this concernedthe problems of the transferability of work or-ganization and of technology. The Japanese-stylemanagement and production system, otherwiseknown as the Toyota production system, wascharacterized by features such as a highly skilledworkforce, a wage system identical to that forwhite collar personnel, quality management onthe production line, a parts procurement systemthat minimized parts inventory (just-in-time),kaizen, consensus-style decision making, andparticipatory labor relations.

The problem was whether Japanese manufac-turers would be able to maintain its large com-petitive advantage and apply its homegrownmanagement and production system in its over-seas manufacturing operations. Among the in-dustrially advanced nations, the managerialenvironment differed significantly from that ofJapan and there was also a well-established pro-duction system already in existence. If the Japa-nese manufacturers were going to hire localmanagers and local production workers, and ifthey were going to procure products from localmaterials and parts manufacturers, then it wasclear that they were going to be influenced bythe existing local manufacturing system. Ulti-mately the overseas manufacturing operationswere able to succeed in transferring the Japanese

352 overseas production

system. However, although it was difficult totransfer the system in its purest form, it was pos-sible to implement a management and produc-tion system that combined elements from the localand the Japanese systems. The answer lay in thehybridization or transformation of the Japanesesystem. As a result, overseas production by Japa-nese manufacturing industries promoted the in-ternational spread and acceptance of the Japanesemanufacturing system.

The transfer of Japanese manufacturing op-erations to North America, and particularly tothe United States, began to accelerate in the 1970s,and was especially pronounced through the1980s. This was largely the result of measures tocope with trade friction as well as the yen appre-ciation that followed in the wake of the PlazaAccord. Most Japanese FDI in the United Stateswas in the electronics, vehicle, chemicals, andgeneral equipment manufacturing industries. Theregions that benefited from this investment werefirstly the western United States followed by otherparts of the country. By industry although manyelectronics manufacturing plants were in Califor-nia, these plants also spread to other parts of thecountry. In contrast, a characteristic of the autoparts makers and assemblers was that their plantswere concentrated in the region extending fromMichigan to a region just south of the Midwest-ern United States. Since the manufacturing in-dustry in North America achieves about 90percent of its sales within North America, thereis a strong tendency for most of its activities tobe confined within a given region.

Although the expansion by Japanese industryto Europe also began to increase in the 1970s,the same as in North America, it was concen-trated mainly in the period leading up to the in-tegration of the European markets in 1992. Thetrends for FDI by industry were the same as inNorth America, favoring the electronics, vehicleand chemicals manufacturing industries, respec-tively. The United Kingdom received the largestproportion of Japanese FDI, or approximately 30percent, followed by France and then Germany.Together, these three countries accounted formore than half of all Japanese manufacturing FDIin Europe. Spain, the Netherlands and Italy fol-lowed, in that order. The European manufactur-ing industry was also similar to the North

American industry in that most of its sales werefrom within its own region, and exports outsideof the region were very limited.

The roots of the expansion of Japanese indus-try into Asian countries can be found in Japa-nese direct investment in China in the beginningof the twentieth century. Asia was also the firstregion to receive Japanese FDI after the SecondWorld War. In the 1960s, investment targetedthe Asian NIEs such as Taiwan and Korea. Inthe 1980s, ASEAN countries and in the 1990sChina, India and Vietnam became the focus ofinvestment. Additional investment ground to ahalt with the 1997 Asian currency crisis.

By industry while the cotton spinning indus-try was historically the most important focus forinvestment, in modern times the electronics andthen the chemicals industries carry out most ofthe investment. Two characteristic features ofJapanese investment in the Asian countries is theoverwhelming prevalence of joint ventures as aform of investment, and the large number ofemployees. Manufacturing in the Asian countriesserves not only to produce goods for sale in thosecountries but also to produce goods for export toJapan and the other industrially advanced nations.Approximately 60 percent of the products are soldin Asia and the rest is exported, mainly to Japan,the United States, and Europe.

Further reading

Abo, T. (ed.) (1994) Hybrid Factory: The Japanese Produc-tion System in the United States, New York: OxfordUniversity Press.

Itagaki, H. (ed.) (1997) The Japanese Production System:Hybrid Factories in East Asia, London: Macmillan.

Liker, J.K., Fruin, W.M. and Adler, P.S. (eds) (1999)Remade in America: Transplanting and Transforming Japa-nese Management Systems, New York: Oxford Univer-sity Press.

MITI (2000) Dai 29-kai, 1999-nen Kaigai Jigyo KatsudoKihon-Chosa Gaiyo (Research Outline on the OveaseasBusiness Activities of the Japanese Companies in1999, No. 29), Tokyo: MITI.

MOF (2000) Zaisei-Kinyo Tokei-Geppo: Tai Nai-Gai MinkanToshi-Tokushu (Ministry of Finance Statistics Monthly:Special Issue for the Foreign Direct Investment andInward Investment), No. 584, December, Tokyo:MOE

overseas production 353

Oliver, N. and Wilkinson, B. (1992) The Japanization ofBritish Industry: New Developments in the 1990s., Ox-ford: Blackwell.

HIROSHI KUMON

overseas research and development

In its narrowest sense, “overseas research anddevelopment” refers to the off-shore research anddevelopment activities of Japanese corporations.However, the term can also be applied morebroadly to encompass the acquisition in Japan ofresearch and development capabilities, as well asjoint activities involving Japanese and non-Japa-nese researchers, either in Japan or overseas.

Japanese are not known for the type of “break-through” creative or innovation that is reveredin the west. Among Nobel laureates in the physi-cal sciences, only one is Japanese. The reasonsfor Japan’s shortcomings in this area have beenwidely debated within the Japanese business com-munity and the wider society at large. Someblame the educational system, which emphasizesrote memorization over creative problem solving.Others blame the nature of Japanese society withits tight strictures on roles and responsibilities andits avoidance of risk-taking or failure. Whateverthe reasons, real or imagined, many Japanesecompanies have opened or moved their researchand development operations overseas to coun-tries perceived as having more creativeworkforces. Japanese firms and government agen-cies are also hiring foreigners to work in Japan ormoving their R&D operations overseas to over-come these difficulties.

Overseas research and development takesplace through the formation of research agree-ments between Japanese companies and Ameri-can universities. Such agreements may cover theestablishment and operation of R&D facilities aswell as licensing agreements. In 1990, for exam-ple, Hitachi Chemicals and the University ofCalifornia at Irvine signed a $16.5 million agree-ment in biotechnology. In exchange for a newuniversity building, Hitachi employees have un-restricted access to the university researchers’laboratories and research notes. Also in 1990,Shiseido, the cosmetics company pledged $ 85million over ten years to develop a research center

at a hospital affiliated with Harvard Universityin exchange for licensing rights to all technologydeveloped there.

Hiring foreigners for research and develop-ment positions in their Japan operations is an-other strategy that Japanese firms adoptedbeginning in the early 1980s. Prior to that time,labor laws and restrictions on immigration madeit extremely difficult to bring in foreign workers,even in research positions, for anything other thanshort-term stays. By the late 1990s changes inlabor and immigration laws have effectively re-moved most obstacles. The result has been a sig-nificant increase in foreign hires. For instance, atthe Advanced Telecommunications Research In-stitute, more than 25 percent of the 230 research-ers are foreigners. There appears to be littleresistance to this recent development. Researchchiefs are allowed to hire foreign researchers attheir own discretion.

Japanese firms are not only hiring foreign re-searchers for their R&D efforts in Japan, they arealso hiring scientists, many of whom teach at USuniversities. These scientists now work for pri-vate Japanese firms with R&D operations in theUnited States. Another approach to enhancingR&D capabilities is the acquisition of “boutiques,”small start-up firms often headed by scientists witha marketable specialized technology patentableprocess or product. Much of this activity beganin the late 1980s when many firms were flushwith money At the same time that Japanese firmswere looking to acquire R&D capabilities over-seas, many high-tech and biotech firms in the USwere looking for infusions of capital to cover theirstart up costs. In return for their financial invest-ments, Japanese firms got innovative technolo-gies that they could not develop at home in acost effective manner.

The Japanese government also provides sub-stantial assistance in research and development.Government organizations such as MITI fundresearch in a variety of fields. They currentlysupport fifteen research laboratories in Japan,some of which involve US companies or US re-searchers. The Japanese government is also fund-ing a multimillion dollar semiconductor researchproject. MITI has committed $160 million on aR&D project with a super-clean room facility tobegin in 2002. As a result of opposition to the

354 overseas research and development

project voiced by US semiconductor firms theJapanese have decided to open up this project toforeign firms such as Motorola, Texan Instru-ments, and IBM.

Smaller overseas R&D activities are sponsoredby prefectural and city governments. The Osakagovernment, for example, encourages R&D athome and overseas by organizing events for Japa-nese firms to find overseas partners. For exam-ple, the Global Venture Forum brings companiesin new, high-tech and emerging fields of businesstogether with potential Japanese partners.

The Japan Society for the Promotion of Sci-ence (JSPS) brings Japanese and foreign research-ers together. JSPS provides funding for researchcollaboration. In 1996, 315 foreign fellowships(from over eleven countries) and seventy-nine

foreign postdoctoral fellowships (from overtwenty-five countries) were funded. The Societyalso sends Japanese researchers overseas throughbilateral exchanges (129 Japanese to twenty-sixcountries), fellowships to visit Southeast Asia(fifty-one Japanese fellows to five countries), andpostdoctoral fellowships (fifty-five in 1996). Fi-nally the JSPS funds and hosts joint research andseminars in Japan as well as bilateral programsin France, Germany the UK and the USA. JSPShas offices in the USA, Egypt, Germany Brazil,Thailand, and Kenya.

See also: Japanese business in the USA; smalland medium-sized firms

TERRI R.LITUCHY

overseas research and development 355

patent system

Copyright

Copyright protection arises automatically on cre-ation of an object in the literary, scientific, artisticor musical field. It is not dependent on applica-tion and registration; nor is it dependent on pub-lication. Based on the European principle of droitmoral, authors have moral rights to their worksto protect from unauthorized use even if not re-leased to the public. Such moral rights also in-clude the right to be identified as the author andthe right to prevent unauthorized alteration.

Protection is available for architectural works,choreography compilations and database works,computer programs, maps, motion pictures, pan-tomimes, and photographs. Excluded are mate-rials whose republication is in the public interest,such as statutes, orders, ordinances, court deci-sions, and official government publications.

Authors have the right to adapt, broadcast,copy exhibit, lease, perform, recite, screen, andtranslate their work, as well as request paymentfor private use—including digital audio or visualdisplay Transfers of copyrights are permitted, butmust be registered with the Ministry of Educa-tion to be enforceable. Neighboring rights existfor performers, phonograph record producersand broadcasters. Performers’ rights include theexclusive right to audio and video recording,broadcasting, leasing, and request payment forlease to public. Phonograph record producers’rights include rights to reproduce, leases to pub-lic commercial records, and to request payment.

Broadcasters’ rights include rights to reproduce,rebroadcast, transmit, communicate and enlargeimages.

The term of copyrights is lifetime of authorplus fifty years. The fifty-year period is fromdeath, publication if published under an assumedname, or from publication for works of an or-ganization. Moral rights, however, can only beexercised by an author—meaning they are validonly during the author’s lifetime. In some cases,immediate family members of a deceased authormay seek an injunction or damages to the au-thor’s honor. Neighboring rights are valid for fiftyyears from the first performance, recording orbroadcast. All duration periods are counted fromJanuary 1 following death, creation or publica-tion.

Copyright holders may grant exclusive publi-cation rights to third parties. To be effectiveagainst third parties, the grant must be registeredwith the Agency for Cultural Affairs. Unless oth-erwise agreed, the recipient must publish withinsix months after receipt of the manuscript andkeep it in print (if normal in the publishing busi-ness). If the recipient breaches these requirements,the holder can cancel the publication rights. Un-less otherwise agreed, publication rights expirethree years from first publication. Limited assign-ments of copyrights are possible. For instance,authors can split translation, publication and per-formance rights among different parties. Infring-ers are subject to injunction, civil damages andcriminal liabilities. Infringers of moral rights canalso be forced to take appropriate measures torestore the author’s lost honor.

P

Japan is a party to many international copy-right agreements, including the Berne Conven-tion, UNESCO Treaty Convention forProtection of Producers of Phonograms againstUnauthorized Duplication of Their Phonograms,and International Convention for the Protectionof Performers, Producers of Phonograms andBroadcasting Organizations.

Patents

Patent rights are created by application and reg-istration with the Patent Office. The same rulesapply to Japanese registrants and foreigners re-siding or doing business in Japan. The patentrights of foreigners living abroad and not doingbusiness in Japan, however, are governed by anyapplicable treaty between Japan and theforeigner’s nation, and by the one year rule ofthe International Convention. The Conventiongives parties one year to apply for a patent in anycountry that has signed the convention, with theyear measured from first filing in another signa-tory country. Non-resident foreigners must ap-ply for patent rights through a local attorney orpatent agent.

Applications must be in Japanese. Since July1, 1995, applicants may file specifications, draw-ings and abstracts in English as long as a Japa-nese translation is submitted within two months.If requested by the applicant or an interested thirdparty examiners of the Patent Office will reviewthe patent application. The request must be madewithin seven years of the date that the patentapplication is filed. Examiners must review thepatent based on patentability.

On January 1, 1996, the post-grant oppositionsystem was introduced, under which third par-ties can object to patents after issuance but withinsix months of public notice of patent issuance.For patents filed before January 1, 1996, thirdparties must object within three months afterpublication of the examined application.

Patent applications are made public in the Pat-ent Gazette 18 months after patent application ismade. From public disclosure, applicants canclaim infringement and seek compensationagainst infringers. Compensation is based onnormal royalty rates. Collection under the claim,

however, cannot be made until publication fol-lowing examination.

To receive a patent, an article or process mustbe patentable. Patentability is only available tohigh-grade inventions of articles or industrialprocesses. Patentability is not available to itemsthat could potentially injure public order, moralsor health. Patentability also requires the articleor process be new. This means it could not havebeen described in written publications distributedin Japan or any foreign country or in any otherprior patent application. The scope of the patentis based on the description of scope in the patentapplication. Third parties can apply to the PatentOffice for a non-binding, advisory opinion onscope.

Japan is a first-to-file nation. This means apatent will be issued to the first to file, not thefirst to invent. If several applications covering thesame article or process are filed on the same dayno patent will be issued until the applicants re-solve who has priority. In addition to examiningapplications, the Patent Office has jurisdictionover invalidity of patents, appeals from decisionsof examiners refusing to issue patents, and amend-ments to issued patents. Appeals from the PatentOffice are taken to the Tokyo High Court.

Since July 1, 1995, a patent term is twentyyears from date of application. On application,the term may be extended for a maximum of fiveyears if the invention could not have been usedfor two years or more due to data accumulationrequired under the Agricultural Chemicals Con-trol Law or Pharmaceutical Affairs Law. Patentscease on expiration of the term, abandonment orinvalidation by the Patent Office.

Patents are property rights and can be trans-ferred voluntarily (license, pledge) or involuntar-ily (on death or by claim of creditors). To beeffective, such transfers (other than inheritance)must be registered with the Patent Office. In caseof co-owned patents, the approval of all ownersis required. Applications are also transferable.

There are two types of patent licenses. Exclu-sive licenses giving another party exclusive rightsto a patent must be in writing and registered withthe Patent Office. Such licenses grant the licen-see exclusivity even against the original owner.As such, the exclusive licensee can seek injunc-tive relief and civil damages for its injuries.

patent system 357

Under ordinary licenses, the licensee has theright to use a patent, but not exclusively Theowners (and possibly third parties) have the rightto use the patented article or process. Such li-censes arise by contract, compulsory order of thePatent Office or the Ministry of Economics, Tradeand Industry (formerly MITI), or under law(such as an employer’s right to use its employ-ees’ inventions, as discussed below). The rem-edies of ordinary licensees are limited. Theyusually cannot obtain an injunction, althoughthey can seek damages. Although not requiredby law, registration with the Patent Office hasthe advantage of confirming licensee’s rightsagainst third parties.

Patent owners can be required to grant a li-cense in three instances. First, the Director Gen-eral of the Patent Office may grant suchcompulsory licenses if the patented invention hasnot been worked in Japan for more than threeconsecutive years. Second, the Minister of Eco-nomics, Trade and Industry may also grant themif in the public interest. Third, the owner of animprovement patent can request a license fromthe owner of the underlying patent.

Employees have rights to inventions not in thescope of their work. In Japan, such inventionsare called not in service. In such cases, any ex-clusive license from the employee to its employerprior to invention is unenforceable. Employeesare entitled to reasonable compensation for not-in-service inventions.

Utility models

Although related to patents, a separate statute,the Utility Model Law, covers utility model rights.Inventions entitled to protection as utility mod-els do not need to be as high grade as those seek-ing patent protection. They must, however, havea practical utility in terms of form, compositionor assembly. Covered models are entitled to thesame protection as patents. The term of protec-tion is six years from application date. The PatentOffice does not examine utility model applica-tions. Instead, an applicant applies to the PatentOffice for a search report on prior applications.If none exists, it can give a warning to the allegedinfringer along with a copy of the search report.A third party can challenge a utility model by an

interested third party filing an invalidation actionwith the Patent Office. Infringement actions in-volving the same parties will be stayed pendingthe result of any invalidation action.

Designs

Designs can be protected under a process similarto that for patents. There are three requirementsfor protection: the designs must be of a new vari-ety have an industrial nature, and relate to form,pattern, coloring or a combination. Designs aredifferent from patents and utility models in thatthey need not have a practical use, they can sim-ply relate to ornamentation.

To register a design, an application is filed withthe Patent Office. The application is checked forcompliance with statutory requirements and ex-amined on the merits. No publication, however,is made. If the application is approved, the de-sign is registered. After registration, a design canbe challenged for noncompliance with statutoryrequirements. The term of protection is fifteenyears from registration.

Plant species and semiconductor integratedcircuits

Some protection exists in Japan for improvementsin plant species and circuitry of semiconductorintegrated circuits. Japan is a party to the PatentCooperation Treaty and the Agreement on Trade-Related Aspects of Intellectual Property Rights.

Trademarks

A trademark is any written character, sign, de-sign, solid body or combination, whether or notwith a color, which is used to distinguish a prod-uct or service as coming from a particular source.The source may be a manufacturer, producer,wholesaler, or retailer.

Only trademarks registered with the PatentOffice are entitled to protection. To register, anapplication covering the trademark must be filedwith the office. The proposed trademark mustbe distinctive. Additionally it must not resemblemarks of international organizations, govern-ments, and registered or widely-known trade-marks for the same or similar goods or services;nor may it be a red cross, or injurious to public

358 patent system

morals. Since April 1, 1992, service marks canbe registered. The term of trademark rights isten years from date of registration. Additionalten-year renewals are possible.

Foreign trademarks can be registered in Japan.Japan is a party to the Trademark Law Treaty.Trademarks are transferable. They can be trans-ferred separate from the underlying business. Incase of a trademark covering two or more prod-ucts, the trademark may be split. Trademark li-censes are also permitted. To be effective, transfersmust be registered with the Patent Office. In caseof co-ownership, all owners must consent to thetransfer or license.

Trademarks can infringe previously registeredpatents, utility rights, designs or copyrights. Insuch case, they cannot be used without the con-sent of the prior, conflicting owner. An infringeris subject to an injunction, civil damages or crimi-nal action. Any interested party can seek to in-validate a registered trademark. The grounds canbe failure to satisfy registration requirements,improper use, or non-use for more than threeyears.

Trade Names

Trade names can be registered. Once registered,a third party in the same municipal area cannotuse the same or similar name for the same typeof business. Infringers are subject to injunctionand civil damages. Company trade names mustindicate the type of company (e.g, partnership orcorporation). Personal trade names can be trans-ferred or inherited, but to be enforceable mustbe recorded. Trade names are valid until cancelledby the holder, or by petition of a third party show-ing that it has not been used for two years.

ROBERT BROWN

permanent employee

Also known as regular employees (seishain orhirashain), workers in this category occupy a posi-tion roughly equivalent to exempt employees inthe USA. Permanent employees accept ove-timework, flexible job assignments, job rotations, jobtransfers, job retraining, temporary or permanentassignment to affiliated firms in exchange foremployment security; that is, they will not be laid

off except under extreme economic conditions.Permanent employees are also known assalarymen (see salaryman), however, that deno-tation applies only to white-collar workers. Per-manent employees may also occupy blue-collaror production floor positions. Contract employ-ees or temporary employees represent the alter-native to permanent employees, having lessexpected of them by the enterprise and receivingless in return.

Permanent employees are found primarily inlarger enterprises, although medium-size enter-prises may also offer some employees permanentstatus. Historically the percentage of permanentemployees has probably never exceeded 30 per-cent of the labor force. One study of companieslisted on the first rank of the Tokyo Stock Exchangecalculated the percentage of permanent employ-ees in those companies at 25 percent in 1974. By1993, just 17 percent of the employees were soclassed. However, observers disagree on both thedefinition and the proper calculation of what con-stitutes a permanent, or regular, employee. In 1997,Brown et al. (1997), using a different method ofcalculation, concluded that the number of perma-nent employees was significantly higher, upwardsof 75 percent in some sectors.

Differences in definitions of what constitutesa permanent or regular work address a more fun-damental issue: the widespread disparity in workhours and conditions, and in compensation andbenefits across employees designated as perma-nent. The prolonged recession of the 1990s hasfurther clouded the situation by eroding the im-plicit agreement underpinning the permanentemployment agreement. Even very large compa-nies are no longer able to make implicit, but firmguarantees that permanent employees will not belet go.

See also: lifetime employment; outplacement

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

permanent employee 359

pharmaceuticals industry

The Japanese pharmaceuticals industry is com-prised of firms that primarily serve the Japaneseinternal market. Japan has a universal coveragehealth care system. Therefore, a discussion of theindustry must include an explanation of thoseaspects of the health care system that impact thestrategies of the pharmaceutical firms in Japan.The domestic market focus of the firms in theJapanese pharmaceuticals industry has put thesefirms at a competitive disadvantage as the indus-try evolves worldwide. Japanese firms are increas-ing their research and development efforts andexpanding their international activities, but theyremain behind the competitive levels of theirAmerican and European counterparts.

The Japanese demand for pharmaceuticals isthe second largest, after the United States. Japa-nese consume about 13 percent of the developedworld’s pharmaceuticals, compared to 42 percentfor the United States. Sales in the industry havebeen flat over the period from 1995–2000. TakedaChemical Industries and Sankyo are the largestJapanese firms, but their pharmaceuticals salesare much less than half of the sales of the largeNorth American firms. No Japanese firm ranksin the top ten of the pharmaceutical industryworldwide, in contrast to many other Japaneseindustries where Japanese firms are more likelyto appear as world leaders. The other top do-mestic firms are as follows, in order of sales in1999, Yamanouchi, Daiichi, Eisai, Shionogi,Taisho, Fujisawa, and Banyu. Only at the tenthranking do we observe any firm with foreign con-trol, with Merck having substantial ownership inBanyu. New entrants in the industry have comefrom increased foreign firm activity and fromfirms that diversify out of related technologies.Kirin (beer fermentation technology) and KyowaHakko (fermentation) and Asahi Kasei (chemi-cals) are examples of some of the new players.

The Japanese government, via the Ministryof Health and Welfare, shielded the industryduring the immediate postwar period. The gov-ernment set high prices for drugs. The firms wereallowed, under Japanese laws, to copy drugs de-veloped overseas merely by altering the processin making the pharmaceuticals. This obviouslyreduced the requirement for R&D for the local

firms. To make this environment even more com-fortable, foreign firms were encouraged to licensetheir pharmaceuticals to local firms, filling outthe portfolio of the local pharmaceutical. Moreo-ver, foreign firms were restricted from register-ing drugs in their own name in Japan. Restrictionson foreign firms generally applied to pharmaceu-ticals firms as well. Thus, most foreign firms de-cided to let Japanese firms market their productsunder contract.

The Japanese pharmaceutical firms wereobliged to share this wealth in the protected mar-ket, however. In the West, the prescribing of drugsis kept separate from the actual sale of these prod-ucts. In Japan, however, the doctor who prescribesthe drug also profits from the sale of these prod-ucts. Since the doctor can choose the drugs toprescribe, the system has evolved into a bilateralmonopoly that requires the pharmaceutical firmsto bid for the business of the doctors. The doc-tors, having received the drugs at a discount fromthe pharmaceutical firms, can sell the drugs topatients at the government-regulated fixed price,pocketing the difference. This revenue was amajor part of the income of many doctors in pri-vate practice. To keep the business of the doc-tors, the firms not only provide discounts, butalso provide services and information to the doc-tors. To keep the business of the doctors, the firmsfeel pressure to have a full line of pharmaceuti-cals products. This has led to a licensing of drugsfrom abroad, but it also has led to a desire tocopy any drug developed by another domesticrival. This excessive variety of drugs has becomemost significant in the antibiotics area, where theprofusion of “me-too” drugs has led to increas-ingly resistant strains of bacteria in Japan.

The Japanese health care system thus intro-duced substantially different incentives for Japa-nese pharmaceutical firms. These health caresystem elements led the Japanese firms to developdifferently from those in other markets, and madeit hard to transplant any strategy to other mar-kets.

Starting in 1975, three changes impacted theindustry putting pressure on the industry tochange its ways of doing business. First, Japaneselaws on intellectual property changed. Second,Japanese health care cost increases forced thegovernment to become more concerned about

360 pharmaceuticals industry

cost controls. Third, Japanese government ruleson foreign firm participation in the market wereloosened, allowing foreign firms to more easilyset up their own operations in Japan. More detailon the impact of each of these changes follows.

Changing laws on intellectual property

In 1975, Japan adjusted its laws on intellectualproperty to be consistent with those of developedcountries. Japan by that time had developed suf-ficient technology of its own that required simi-lar protection. Thus the combination of domesticand foreign pressure for change increased. Japa-nese pharmaceutical firms could no longer use adifferent production process to produce the samedrug. For the Japanese pharmaceuticals firms, thischange required them to increase their expendi-tures on technology either via licensing of theforeign drugs, or via an increase in the domesticR&D that they performed.

Pricing pressures

As the costs of medical care continued to increase,Japan in the 1970s was faced with major budgetpressures as the rate of growth in the economyslowed. This put increased pressure on a systemthat had allowed the firms in the industry to earnhigh profits. Around a third of Japanese healthcare costs came from expenditure on pharmaceu-ticals. The government made several changes thatforced the firms to become more innovative. Theprices for new products were set at a lower levelunless the drug was a significant improvement inefficacy compared to existing drugs on the mar-ket. A “me-too” drug to match the portfolio ofanother firm would not be very profitable underthese rules. In addition, the prices allowed for adrug were decreased each year. Thus, even ablockbuster drug would gradually lose its profit-ability as the government lowered the prices ofthe drug over time. Note the difference in pric-ing strategy that this implies compared to thesystem in the United States. The US pattern ofhigh prices until the patent expires is not foundin Japan. The gradual reduction in prices makesthe price of a drug at the end of its patent liferelatively low. Thus, there is much less activityin the generic drug market. If the brand name

drug is relatively inexpensive by that time in itseconomic life, then it is hard to market a genericalternative. Note also that the price of the drug isno longer based on the cost of development, buton its efficacy Unless the firm can spend its re-search and development resources effectively andgenerate products that have significant medicalvalue, it is unlikely to be handsomely rewardedfor its innovative activity

The investment climate for foreign firms

The change in the environment for foreign firmscame somewhat later, but by the middle of the1980s, foreign firms could develop their ownoperations in Japan rather freely They could takeadvantage of the change in the patent laws toprotect their position in the Japanese market.They could register their own products in Japan.Restrictions on investment had been generallyliberalized starting in the early 1970s. The newForeign Exchange Control Law in 1980 allowedthem to move funds freely across the border. Theresult was an increase in marketing by the for-eign firms and a gradual development of theirR&D facilities in the Japanese market as well. Bythe late 1990s, this resulted in a market share fordirectly marketed foreign pharmaceuticals ofabout a quarter of the Japanese market. With theoption to operate in Japan now open to them,foreign firms were much less likely to license theirattractive products to Japanese competitors.

The changing nature of competition in thepharmaceuticals industry

The result of these changes is an industry that istrying to change to become more focused on theresearch and development function. This has ledto a substantial increase in R&D effort on the partof Japanese firms, both internally and via alli-ances. The strongest firms in the older systemwere those firms with the widest network of doc-tors, and the best system of marketing. Underthe changed environment, firms that had devel-oped a less conventional, domestically focusedprogram of research could be successful as wellin the industry. This was the approach used bymany of the “outsider” firms such as KyowaHakko and Asahi Kasei. In their other industries,

pharmaceuticals industry 361

these firms had faced more competition. Theyhad seen less incremental innovation and moreradical changes in technology and competitiveposition. Market shares became less stable in thisperiod, and strategies of firms tended to changemore over time as the innovative results allowedfor changes in the path of pharmaceuticals devel-opment.

The firms in the industry also changed theirattitude toward international cooperation. Previ-ously firms were content to contract for avail-able drugs with the established firms. After thechanges in the 1980s, we observe a variety ofalliances with overseas firms, both to develop andtake advantage of domestically produced drugs.It should be noted that we have not yet observedanother type of cooperation, mergers of Japanesefirms. Except in the case of Green Cross, a com-pany tainted by scandal, no major firm has beeninvolved in merger, in sharp contrast to the situ-ation in Europe and North America.

This move toward more research and devel-opment has introduced much more variety intothe strategies of the firms in the industry Somefirms have deepened their established relation-ships with domestic research institutes and indi-vidual doctors. If that network was strong, like itwas with the largest firms, then international ac-tivities can mainly focus on getting the greatestand fastest return on the increasingly capabledomestic innovative organization. The role ofoverseas labs in this type of company is to assurefast approval, and to assure that the appropriateuses of the drugs are identified in the variousmarkets.

If a firm is not as confident in its domesticnetwork of research, it is possible to use the in-ternational markets to develop the truly innova-tive products that will allow these firms tocompete more effectively in the domestic mar-ket. For this type of firm, the organizational re-quirements for a strong internationalcommitment are much higher. They must iden-tify a good source of innovation, either at a uni-versity or via a researcher who can lead theirown laboratory They must then be sure thattheir organization can work with these outsidersto take full advantage of the innovation. Notethat this type of firm is more likely to be smaller,and needs to find a way to get the attention of

marketers and doctors in the domestic market.The foreign-bred innovation can provide thatentry.

New players in the industry often find thatthey do not have within their own organizationthe full complement of skills necessary to be com-petitive in the industry For these firms, foreignpartners allow them to acquire access to the mixof skills they need to be competitive in the mar-ket. These Japanese firms often have skills in thebulk processing of drugs, a result of the fermen-tation technology that bought them access to theindustry Foreign biotech firms are natural alliesof these players, as scaling up the volume of prod-uct for clinical testing and later for actual com-mercial sales is essential for a biotech firm’ssuccess in the marketplace.

The changes faced by the Japanese pharma-ceuticals industry have led to substantially greatervariety in the strategies within this industry. Inthe less regulated industry firms have chosen avariety of paths to deal with the changed envi-ronment. The Japanese industry continues tostruggle against the major players in the worldmarketplace and in Japan. Individual productsare successfully sold internationally such asYamanouchi’s Pepcid. Yet even here, Yamanouchifelt that it did not have the worldwide marketingto take advantage of the discovery. Merck thuscould share in the profits for this revolutionarydiscovery. The limited scale of the domesticallyfocused industry limits competitiveness, even asthe R&D expenditures of companies as a percent-age of sales approach Western company levels.While foreign firms have continued to increasetheir presence in Japan, there is evidence that theabove changes in strategy have allowed Japanesefirms to maintain their competitive position inthe Japanese marketplace and at times to be com-petitive in world markets as well. This type offast-changing environment is going to be facedby an increasing number of domestically orientedindustries in the Japan of the twenty-first century.Thus, the behavior of firms in the pharmaceuti-cals industry and the experience of the industryas a whole, provide possible insights into howsimilarly domestic-oriented industries may evolvein the future.

THOMAS W.ROEHL

362 pharmaceuticals industry

post-Second World Warrecovery

Japan’s recovery from the Second World Warduring the first decade of the postwar period laythe foundation for the nation’s “economicmiracle,” the period of rapid economic growth(kodo seicho) that would continue until 1973. Whilemany of the factors that underlay Japan’s post-war economic success existed prior to the war,occupation-period social and economic reforms,the taming of inflation under the “Dodge Plan,”and the demand for Japanese goods created bythe Korean War were critical in getting theeconomy back on its feet and setting the stagefor sustained economic expansion in the decadesto follow.

The situation at the end of the war

When the Second World War ended with Japan’sofficial surrender aboard the US battleship Mis-souri on September 2, 1945, the Japanese economyhad been shattered. The war had destroyed afourth of Japan’s national wealth and assets, afourth of its buildings, and 82 percent of its ship-ping. The nation’s economic output had droppedto pre-First World War levels. Tokyo and otherlarge cites had been reduced to rubble by theAllied bombing campaign. Inflation was high,unemployment was widespread, and there weresevere food shortages. Over 6 million Japanesecivilians and soldiers returned home from over-seas to find a country that could not support them.On top of this, a generation of Japanese businessleaders were being purged by the Allied Occupa-tion force in an effort to break up the zaibatsu,Japan’s large corporate groups, which had coop-erated closely with the military in building upthe country’s war capabilities.

Not all was bleak, however, as Japan also pos-sessed some important economic assets. From theTokugawa period (1603–1867), Japan had in-herited a relatively well-educated population, highlevels of savings for investment, advanced agri-cultural technology and a strong infrastructureof roads and irrigation. From the beginning ofthe Meiji period (1868–1912) through the 1930s,the foundations of economic strength had con-tinued to be built: compulsory education was

introduced, Western technology was imported,the Bank of Japan was established, the trans-portation and communications infrastructure wasenhanced, and there was high labor mobilityacross regions and economic classes. These con-ditions produced levels of prewar economicgrowth that compared favorably with those ofother countries and helped transform the Japa-nese economy from a primarily agricultural stateto an industrial state capable of creating a formi-dable war machine. Nevertheless, few observersin the early postwar period foresaw a particularlybright economic future for Japan. The country’schief competitive advantage was seen to be itscheap labor. When asked in 1950 about futuretrade possibilities with the United States, JohnFoster Dulles, a key US policy maker on Japan,suggested that Japan might focus on shirts,pajamas, or cocktail napkins.

Occupation-era economic reforms

Allied military occupation of Japan began in Au-gust 1945 and lasted until April 28, 1952, whenthe San Francisco Peace Treaty signed by Japanand forty-eight other nations in September 1951went into effect. Nominally it was the Allies whooccupied Japan, but in reality the occupationforces were overwhelmingly American. Theywere headed by General Douglas MacArthur,who was appointed Supreme Commander of theAllied Powers (SCAP) and whose ideas and per-sonality dominated the occupation era.

A primary goal of the occupation was to ridJapan of militarism, and the Americans believedthat the best way to do this was to create a demo-cratic society. In 1946, MacArthur and his advi-sors drafted a new Japanese Constitution, whichwent into effect on May 3, 1947. The new Con-stitution made the Emperor a “symbol” of thenation rather than its political head, abolishedthe army and navy gave women the right to vote,and renounced war as a sovereign right of thenation. The occupation also sought to democra-tize the economy in order to achieve a broaderand more even distribution of wealth and of own-ership of the means of production. To achievethis, occupation leaders introduced anti-trustmeasures, land reform, and labor reform.

In 1946–47, occupation authorities technically

post-Second World War recovery 363

dissolved the zaibatsu, which had cooperatedclosely with the military before and during thewar, by requiring them to auction off shares heldby their family-owned holding companies. Tenholding companies, Japan’s two largest tradingcompanies, and twenty-six of the nation’s largestindustrial corporations were dissolved. Over atwo-year period, 1.4 million company shares weresold to the public. In 1947, the occupation au-thorities introduced a new Antimonopoly Lawand other legislation, modeled after Americananti-trust laws, designed to break up existingmonopolistic companies and prevent the forma-tion of new ones. A Fair Trade Commissionwas also established to watch over business andprevent monopolistic practices.

The occupation program with perhaps themost wide-reaching consequences for Japanesesociety was land reform. The goal of this was toredistribute the land of absentee landowners tothe tenant farmers who had been farming it.Landowners were allowed to keep up to 7.5 acresof land to farm themselves, plus an additional2.5 acres of tenanted land. (Larger plots were al-lowed in Hokkaido.) The rest was purchased bythe government and resold to existing tenants atbargain prices. The result was a drastic redistri-bution of wealth that contributed to a conver-gence in the standard of living and helped createa new middle class. It also brought income eq-uity and stability to the agricultural sector, con-tributing to a rapid increase in agriculturalproduction and ensuring a stable food supply Increating many small plots of farmland, however,the land reform program prevented farmers fromattaining economies of scale. As a result, Japa-nese agriculture remained inefficient and latercame to be heavily subsidized.

Prior to and during the war, wages and unionactivity were suppressed by the military and thezaibatsu. Occupation authorities reversed this byencouraging the formation of labor unions andsetting standards for working conditions andcompensation. The Japanese government waspushed into enacting the Labor Union Law of1946, the Labor Relations Adjustment Act of1946, and the Labor Standards Law of 1947.Unions were quickly formed in every sector ofthe economy Four and a half million Japaneseworkers joined labor unions in the first year of

the occupation, and the percentage of unionizedworkers rose from 3.2 percent in 1945 to 53 per-cent by 1948.

With unemployment high—13 million Japaneseworkers were without jobs in 1946—and inflationrunning out of control, many union leaderspushed for radical action. There were widespreadstrikes. On May Day in 1946, in the largest dem-onstration in the nation’s history more than 2million people took to the streets to demand wageincreases, political power, and worker control offactories. A turning point came when a generalstrike, which all of Japan’s unions planned toparticipate in and which threatened to shut downthe country was called for February 1, 1947.MacArthur, uncomfortable with the socialist di-rection in which Japan’s labor movement wasmoving, banned the strike and began a purge ofradical union leaders, including many commu-nists. However, even with occupation authoritieswithdrawing their active support of labor unions,strikes and labor-management conflict continuedto increase. (It was not until the 1960s that labor-management cooperation emerged in Japan.)

The change in attitude toward labor unionswas part of a more general shift in occupationpolicy that resulted from the onset of the ColdWar. This shift later became known as “the re-verse course.” By 1948, tensions between theUnited States and the Soviet Union were risingover the spread of communism, causing Ameri-can policy makers to revise their thinking aboutJapan’s place in the postwar world. The new viewwas that the USA could not afford to have a weakJapan; rather, Japan was to be a strong Pacifically in the fight against communism. GeorgeKennan, a major architect of early Cold War USforeign policy recommended after a visit to Ja-pan that “no more reform legislation should bepressed. The emphasis should shift from reformto economic recovery” (Kennan 1967). Thispolicy shift became more pronounced with thevictory of communists in China in 1949 and theoutbreak of the Korean War the following year.One change it brought about was a suspensionof the policy of breaking up large companies;emphasis was instead shifted to encouraging in-creased production by existing companies tostrengthen Japan’s productive capacity. Anothereffect was that the US began to pressure Japan to

364 post-Second World War recovery

rearm and side with America in the Cold War.Although a police reserve force—the forerunnerof Japan’s Self-Defence Force—was established in1950, pressure to rearm further was resisted byPrime Minister Shigeru Yoshida, who feared thatthe military expenditures rearming would entailwould damage Japan’s fragile economic recov-ery. In the San Francisco Peace Treaty a deal wasstruck: Japan would regain its independence inexchange for allowing the US to keep its militarybases on Japan soil.

Taming inflation

One of the most difficult postwar problems Ja-pan faced was inflation. In the first three yearsafter the war, as the Japanese government printedmoney at a high rate to pay off war bonds andfinance government spending, inflation ran ram-pant: prices rose by 364.5 percent in 1946, 195.9percent in 1947, and 165.6 percent in 1948. Thegovernment attempted to control inflationthrough price controls and by freezing assets, butthese policies were not effective. Finally in Feb-ruary 1949, the USA sent Joseph Dodge to Ja-pan as economic and financial advisor. Dodgewas a Detroit banker who had been credited withstopping runaway inflation in postwar Germanyand his policies in Japan, which became knownas the “Dodge Plan,” consisted basically of bal-ancing the budget, so that the government wouldnot need to print money to finance its spending.An official exchange rate was also established, at360 yen to the US dollar.

The Dodge Plan was successful in controllinginflation; as the fiscal budget was tightened, pricesstabilized, enabling price controls to be lifted.However, the tight fiscal policy also pushed theeconomy toward recession. A major user of gov-ernment funds had been the ReconstructionBank, which was established in January of 1947for the purpose of accelerating the recovery ofJapanese industry The Reconstruction Bankmade loans to public corporations and issuedbonds, using the proceeds to subsidize key in-dustries such as coal, fertilizers, electric power,iron, and machinery Most of these bonds werepurchased by the Bank of Japan. Forced to bal-ance the budget, the government had no choice

but to cut subsidies. Without government funds,thousands of firms went bankrupt. Public andprivate companies laid off over 2 million work-ers in 1949, and national production, which hadbeen on the rise, stalled. At this point, Japan’seconomy was rescued from what might have beena severe recession by an event that some called a“divine gift:” an unexpected demand for Japa-nese goods brought about by the Korean War.

The Korean War and the beginning ofsustained rapid growth

In June 1950, war broke out on the Korean Pen-insula between North Korea, backed by the So-viet Union, and South Korea, backed by theUnited States. Japan was used as a supply basefor American and United Nations forces, creat-ing a sudden and large demand for Japanese-madegoods. The result was a “procurement boom:”between 1950 and 1954, the US spent almost $3billion in Japan for military supplies, and the Japa-nese economy grew quickly Although inflationresumed for a time during this period, the eco-nomic benefits were far greater: production ex-panded, jobs were created, and the exportsbrought in much-needed foreign reserves, whichcould be used to import technology.

By the mid-1950s, Japan’s economic miraclewas underway and postwar pessimists were aboutto be proven wrong. In 1955, the Japaneseeconomy surpassed its former peak size, and overthe next two decades a remarkable record of eco-nomic expansion was achieved, with annual GNPgrowth averaging 9.1 percent in 1955–60, 9.8percent in 1960–5, and 12.1 percent in 1965–70.Equally important, the economy evolved from areliance on cheap labor—textile firms were Japan’slargest companies in the 1950s—to a focus onprogressively more capital and technology-inten-sive industries such as steel, automobiles, andelectronics.

See also: American occupation; economic growth

Further reading

Dower, J. (1999) Embracing Defeat: Japan in the Wake ofWorld War II, New York: W.W.Norton

post-Second World War recovery 365

Ito, T. (1992) The Japanese Economy, Cambridge, MA:MIT Press.

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

Kennan, G.E (1967) Memoirs: 1925–1950, Boston:Little, Brown.

Kosai, Y. (1997) “The Postwar Japanese Economy:1945–1973,” in K.Yamamura, The Economic Emergenceof Japan, New York: Cambridge University Press.

TIM CRAIG

postal savings

Japan’s postal savings system was introduced inthe nineteenth century when, according to theprevalent moral attitudes of the late Edo period,saving was not socially condoned. A popular say-ing admonished that “trying to get one sen (cent)to last from one day to the next was shameful.”At that time there were no banks or other privateinstitutions in Japan interested in personal sav-ings, either in the cities or the rural areas. De-spite such conditions Maejima Hisoka, founderof Japan’s national postal system (1871), intro-duced, a Japanese postal savings system whichhe based upon first-hand observations of the Brit-ish postal savings system. Maejima had beengreatly impressed with the positive role he per-ceived the postal saving system to be playing inEnglish society. Through his relentless efforts, inMay 1875 post office branches for the first timebegan accepting deposits at eighteen locations indowntown Tokyo and at one office in Yokohama.The number of post offices rapidly expanded torural regions soon thereafter. Japan was the fourthcountry to establish postal savings and the firstin a developing economy.

The Japanese postal savings system was insti-tuted at a time when Japan had just left behindcenturies of feudalism and isolation. Its leadershad taken note of the foreign indebtedness of theOttoman and Chinese empires. After its ownpostal savings system was set up, the Japanesestate was able to forswear all foreign borrowingsfor the next thirty years (until the advent of theRusso-Japanese War). It can be said that the es-tablishment of a postal savings system at such acritical juncture in its history provided Japan

with a significant resource in its future economicand social development.

Indeed, the postal savings forms and postersof the late Meiji and Taisho eras (1900–25) docu-ment the appeals used by the post office to en-courage individuals to save, both for theirpersonal future prosperity and for the prosperityand development of the nation. One of the postalsavings system’s unique attributes, and the prob-able basis for its early mass appeal, was the factthat at one time it accepted deposits as small asone-half a sen (¥1= 100 sen).

In the mid-1880s, Finance Minister Matsukatabrought postal savings funds under the controlof the Ministry of Finance and directed theiruse towards national goals. The success of thesystem grew and postal savings deposit campaignswere initiated at various times to remedy specificproblems. For example, during the inflation fol-lowing the First World War, a campaign waslaunched to encourage savings to stem spendingand absorb the excess liquidity that had resultedfrom the war.

As the Japanese economy developed, the postalsavings system was able to respond to the chang-ing circumstances. Some of the issues besidesinflation that the postal savings system helpedthe government confront included providingpump-priming for private sector support to newand developing industries, development andmodernization of infrastructure, non-inflationaryfunding of government deficits, pumping up theeconomy during recessions, and at times stabiliz-ing capital markets. Historically however, itsforemost goal has been economic development.

Starting in the postwar period and until theend of 2000, postal savings funds were lent tothe Fiscal Investment Loan Program (FILP) (zaiseitoyushi—the so-called “zaito system”), managed bythe Ministry of Finance. Major recipients of FILPfunding included the Japan Development Bank(JDB), which allocated funds for industrial de-velopment to meet national and regional devel-opment goals. Other public policy-basedinstitutions which received FILP funds duringthis period included the Export-Import Bankof Japan; regional development finance institu-tions, such as the Hokkaido-Tohoku Develop-ment Corporation and the OkinawaDevelopment Finance Corporation; the Japan

366 postal savings

Finance Corporation for Small Businesses andthe People’s Finance Corporation, which provideloans for small and medium-sized firms; andthe Housing Loan Corporation for housing fi-nance.

Whatever the policy intention, political trade-offs were involved in the FILP system. Duringthe 1990s a majority of funds for developmentalpurposes were not channeled through the JDBor other government-owned banks and policy-based financial institutions, but instead weredirectly parceled out to designated quasi-govern-mental companies such as the Japan HighwayCompany and other politically well-connectedrecipients of infrastructure development fundstied to construction and real estate industries in-terests. Political considerations were never farfrom such an investment/disbursement systemfavoring rural provincial areas rather than urbanindustrial centers.

Critics have questioned the continued needfor and the efficiency of these types of develop-ment-lending practices in the presence of a de-veloped capital market. Others have pointed tothe separation between the collection function bythe postal savings system and the disbursementfunction by FILP as an underlying cause of inef-ficiency. Indeed, for the past several years, thePostal Savings Bureau lobbied to invest the fundsit collects in the financial markets on its own,thereby bypassing the policy-based designated-finance FILP system. Beginning April 2001, thereorganized Postal Savings Agency was givendiscretion over the investment of collected fundsthereby opening it to market risk.

Critics from the banking industry have alsocomplained of the unfair advantages given thepostal savings system by its numerous exemp-tions, including from national and local taxes ofall types and payments to the Deposit InsuranceCorporation. It is also exempt from Bank of Ja-pan reserve requirements and the payment ofdividends that private banks make to their share-holders. On the other hand, banks have been al-lowed for many years to offer the same productsthat postal savings offer their clients, but havenot done so. Postal savings officials counter criti-cisms of its supposed competitive advantage bypointing to the costs they must bear in providing

postal, savings and life insurance services in ru-ral areas to fulfill their mandate. A good case canalso be made that the postal savings system helpskeep the private sector “honest,” and that, in theabsence of competitive pressures from the postalsavings system, the private sector banking hasshown little innovation on its own, and in thepast made few efforts to provide competitivelypriced retail banking services and products forthe general public.

The success of the postal savings system, how-ever, can be chiefly attributed to the fact that Ja-pan’s 24,537 post offices function as collectionpoints for its savings system, far outstripping the16,000 branches of all 110 banks, savings andloans, and other financial institutions in Japan.In fact, Japanese people are on average within1.1 kilometers from a post office, while bankbranches are typically found clustered in busi-ness districts. Of the 3,235 cities and municipali-ties that have post offices, some 567 are withoutbanks. This widely based infrastructure of postoffices offers tremendous economies of scale, es-pecially in reaching out to rural areas where therewould be little profit margin for a stand-aloneinstitution such as a bank.

For many years now, Japan’s private bankingsector has called for the break-up and privatiza-tion of the postal savings system, envying thehuge amount of individuals’ deposit the postalsavings system continues to garner. At the endof March 2000, there was ¥260 trillion in per-sonal savings on deposit in the system, repre-senting 36 percent of all personal savings ondeposit in Japan, and nearly equal to the com-bined personal savings deposited among all pri-vate sector commercial institutions—that is, allcity regional, and second-tier regional banks—making Japan’s postal savings system the largestfinancial institution in the world. Since 1990,there has been a steady flight to safety withbanking deposits contracting and with markedincreases annually in the size and number of de-positors in postal savings accounts as public con-fidence in Japan’s banking system increasinglyerodes.

When Maejima first established the Japanesepostal service, he appointed prominent individu-als in rural areas as local postmasters who, in

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turn, provided postal station facilities at little orno cost. Even today, some 80 per cent of Japan’spost office buildings are privately owned by theirpostmasters, most having inherited their positionsfor many generations. Needless to say these post-masters are a powerful force in regional and na-tional politics. Together with the postal workersunion, they have been able to foil banking indus-try efforts to marginalize or abolish Japan’s postalsavings system.

The postal service has materially improvedthe quality of financial services available to thegeneral public, offering products such as life in-surance and pension plans (both managed sepa-rately from postal savings), as well as anationwide network of 21,796 automatic tellermachines that can be used to make deposits,withdrawals, credit card payments, or to payutility bills or transfer payments to anywhere inJapan without the fees exacted by banks. Banksare just now beginning to compete in response toconsumer pressures.

Although some critics have argued that theentire infrastructure of the postal savings systemis subsidized by revenues from postal operations,cost analysis shows there is no such subsidy. Infact, without the multiple use of the existing in-frastructure, the postal system would find it diffi-cult to sustain mail delivery operations in manyrural areas on its own.

Further reading

Scher, M.J. and Yoshino N. (2002) Postal Savings Systemsin Asia, Tokyo: United Nations University Press.

MARK J.SCHER

pricing practices

The Japanese wholesale and distribution systemis characterized by three predominant pricingpractices that serve to (a) link wholesalers andretailers exclusively to one producer, or suppli-ers to one assembler; (b) to maintain productprices at desired levels; and possibly (c) to createentry barriers by tying up retailers or suppliers.Pricing practices are directly linked to other “cus-tomary trade practices” (shokanko) such as rebates(discounts to the retailer depending on sales vol-

ume etc.) and returns of unsold goods (wherebyproducers promise to accept returns of goods onthe condition that the retailer follow its guidanceon price or other matters). These shokanko prac-tices reinforce the bargaining power of the pro-ducer/assembler over the retailer/supplier.

After-sales price adjustment

After-sales price adjustment (ato-gime) has longbeen the dominant practice in intermediate prod-ucts, such as steel, lumber, auto parts, and glass.The producer indicates a “standard price” (tatene)to a general wholesaler, who then indicates a stan-dard price to a regional wholesaler, etc., but thefinal transaction price is determined only afterthe product has been sold to the end user andthe actual market price been established. Basedon this market price, the producer determinesthe margins of its wholesalers that are often spe-cialized and exclusive. Combined with an intri-cate rebate structure, this creates a system underwhich the profit structure within the entire chainof wholesalers and retailers can become depen-dent on the producer. Yet, the producer’s powersto squeeze the suppliers’ or distributors’ profitsare counterbalanced by the producers’ depen-dency on the specialized wholesalers: if all pro-ducers have exclusive wholesalers, switching isimpossible.

Through the ato-gime system, most intermedi-ate product prices are negotiated post hoc. Thesystem is extremely opaque, and it is unclear towhat extent intermediate product prices may befixed, since the actual end prices are unknown.Yet, no anti-trust case has been brought againstafter-sales price adjustment, mostly because es-tablishing evidence of coercion is impossible.While some industries moved away from ato-gimein the 1990s, it remains the predominant pricingmechanism in many intermediate product mar-kets.

Suggested retail price

The dominant pricing practice for consumerproducts is that of suggesting a retail price (kibokakaku), especially for end-products in industriesdominated by specialized retail outlets (such as

368 pricing practices

cars, electric appliances, or cosmetics). In theorythe manufacturer indicates a retail price but theretailer is free to determine the eventual price.While widely practiced in the USA and Europe,suggesting a retail price is even more common inJapan. According to a poll in the early 1990s, 85.5percent of all manufacturers indicated a resaleprice for their product. A problem with anti-trustlegislation occurs when the producer entices orcoerces the retailer to stick to the suggested price.

One example of effective price suggestions isthe stationery industry Pens and pencils typicallyhave a price printed on the product and sell forthis price at most stores. Yet, while this is de factoprice maintenance, Japan’s Fair Trade Commis-sion (JFTC) has allowed the practice to continue,maintaining that it is unaware that retailers areforced to follow the recommendation.

Retail price maintenance

A stronger version of “suggested retail prices,”retail price maintenance (saihanbai kakaku iji koi)is an anti-trust violation, except in a few speci-fied industries. Under this system, the producerdetermines the final retail price (sometimesprinted on the container) and enforces this priceby monitoring the retail system and punishingviolators through measures such as penalty pay-ments or interruption of shipments. Producersmay pursue pro-competitive goals with this prac-tice, such as ensuring good after-service or re-gional product availability However, maintainingretail prices can also be used to prevent discountsand competition, or to enforce price cartels amongproducers (because any price deviation is attrib-utable to the producer). In the USA, retail pricemaintenance is considered per se illegal; it is ille-gal even without proof of restricted prices or com-petition. In Japan, it is in principle illegal for amanufacturer to restrict the sales price.

Yet retail price maintenance remains wide-spread in Japan for two primary reasons. First, itis rarely used such that the anti-trust authoritycould easily prove a violation, because suggest-ing a retail price is permitted. Even if the JFTCcan prove that retailers were coerced, the lawdoes not prescribe more stringent measures thana cease-and-desist order without penalties. Sec-

ond, in the past the law has allowed for exemp-tions from the general rule of (a) daily use con-sumer products, allegedly so that the price canindicate quality (until the 1970s); (b) pharmaceu-ticals and cosmetics; and (c) copyrighted materi-als such as books and records. In the 1950s, thefirst of these three categories was used not onlyfor toothpaste, soap, men’s white shirts, or cara-mel candy but also in designated strategic exportproducts such as cameras. In several subsequentreviews of the system, the list of exempted prod-ucts was progressively shortened: by the 1970s,only consumer products under ¥1000 could beexempted, and by the 1990s, only pharmaceuti-cals and copyrighted works (such as books) werelegally allowed to uphold retail price mainte-nance.

Further reading

Flath, D. (1989) “Vertical Restraints in Japan,” Japanand the World Economy 1:187–203.

Kawagoe, K. (1997) Dokusen kinshi-ho—kyoso shakai nofeanesu (The Antimonopoly Law—The Fairness of aCompetitive Society), Tokyo: Kinzai.

Ramseyer, M. (1985) “The Costs of the ConsensualMyth: Antitrust Enforcement and Institutional Bar-riers to Litigation in Japan,” Yale Law Journal 94 (3):604–45.

Schaede, U. (2000) Cooperative Capitalism: Self-Regula-tion, Trade Associations, and the Antimonopoly Law inJapan, Oxford: Oxford University Press.

ULRIKE SCHAEDE

Prince Shotoku’s Seventeen-ArticleConstitution

Issued by Prince Shotoku (Shototku Taishi, 573–621) in 604, the seventeen articles were Japan’sfirst constitution. The articles present a code ofmorals by which the ruling class should live,rather than a set of rules by which a governmentcould be maintained. The articles are firmlyrooted in Buddhist and Confucian ideals. Thecentral thesis of the articles is the divine natureof authority and the responsibility of both supe-rior and subordinate to respect one another.

The first article lays out the basic notions of

Prince Shotoku’s Seventeen-Article Constitution 369

superior and subordinate responsibilities andemphasizes the importance of respect, temperanceand harmony:

Harmony is to be valued, and an avoid-ance of wanton opposition to be honoured.All persons are influenced by class-feelings,and there are few who are intelligent. Hencethere are some who disobey their lords andfathers or who maintain feuds with theneighbouring villages. But when thoseabove are harmonious and those below arefriendly and there is concord in the discus-sion of business, right views of things gainspontaneous acceptance. Then what is therethat cannot be accomplished?

The ideals of the Seventeen-Article Constitutionexerted a profound influence within Japaneseculture and society. While directed toward theruling class, the ideals can easily be applied toother relationships where there are superiors andsubordinates. For this reason, they were oftenespoused in business organizations in the pre-Meiji era. The Meiji restoration brought abouta renewed interest in, and respect for, the impe-rial family and of imperial guidance. Under thesecircumstances, it was only natural the Seventeen-Article Constitution would again be brought for-ward as foundation for moral leadership.

In the second half of the twentieth centuryJapanese business leaders still invoke the articlesand promote their acceptance as a foundation formanagement philosophy. Yoshio Maruta, aformer president of Kao. was typical of such lead-ers, actively circulating copies of the articles toemployees and colleagues as well as developinghis own management philosophy based on thearticles.

ALLAN BIRD

product development

Product development is the process by which,through a combination of technological knowl-edge (“seeds”) and information about market-place opportunities (“needs”), an idea is embodiedin a usable product and is sold to customers. Prod-uct development refers both to the development

of new products and to changes in existing prod-ucts. It involves interactions across functions, suchas research, product engineering, process engi-neering, manufacturing, and marketing, usually(though not necessarily) within a single companySince the early 1980s, product development hasbeen a focus of research not only in the field oftechnology management but also in strategy (asa critical element of competitive advantage) andthe study of organizations (as a venue of interac-tions across groups with different professionalspecializations). From the mid-1980s to the mid-1990s, Japanese “best practice” in product devel-opment had a significant impact both on academicparadigms and on companies around the world.However, like so many other features of Japan’sbusiness system, the potential weaknesses of Japa-nese product development became increasinglyevident after the collapse of the bubble economyin the early 1990s.

Research on product development processesin Japanese firms began in the mid-1980s, pio-neered by a group of researchers at HitotsubashiUniversity in Tokyo (Imai et al. 1985; Takeuchiand Nonaka 1986). Interest among Westernscholars and managers grew quickly driven bythe widespread recognition that Japan’s leadingcompanies excelled not only in manufacturingbut also in developing products that were well-received by customers around the world. In arange of industries, including consumer electron-ics, autos, cameras, copiers, and computers, prod-uct development exhibited several strengths:

• speed (relatively short development cyclesfrom initial product concept to productlaunch);

• high productivity (fewer engineering hours re-quired for product development);

• design for manufacturability (product designs thatfacilitated a smooth transfer into production,with few quality problems);

• rapid incremental improvement (each new prod-uct quickly followed by sequences of newand improved generations);

• effective use of external technology (a willingnessamong engineers to draw on technologiesand componentry generated outside theirfirm, a trait envied by many American R&Dmanagers, who complained of their

370 product development

engineers’ NIH— “Not-Invented-Here”—re-sistance to technology that their organiza-tions did not generate themselves).

Understanding how Japanese companies gener-ated and sustained these features of product de-velopment involved research at three interrelatedlevels of analysis: the product developmentproject, the firm itself, and the firm’s externalnetworks, with the greatest attention focused onthe first level, the project. Some of the most de-tailed research at all three levels has been carriedout in the context of the automobile industry(Clark and Fujimoto 1991; Cusumano andNobeoka 1996). Fundamental patterns seemedto hold, however, across industries, especially atthe project level. The key feature of project-levelprocesses in Japanese firms has been dense andrapid cross-functional communications, based onthe following practices:

• overlapping phases, where the next phase ofa project begins while the preceding one isstill in progress, with dense interactionsacross the team members involved in eachphase, and at least some members are in-volved in multiple phases;

• cross-functional project membership, withproject team members from production andfrom marketing involved from the beginningstages of the project;

• “heavyweight project manager,” meaning asingle project leader with authority and re-sponsibility for the entire product develop-ment process, from concept creation and theinterface with marketing through processengineering.

Takeuchi and Nonaka (1986) compared thesepractices to the US standard practice in the mid-1980s with a sports metaphor: the US model re-sembled a relay race, in which the “baton” of theproduct design was passed from one specializedgroup to another, whereas the Japanese modelresembled a rugby game, in which team mem-bers interacted intensively to move the ball downthe field. US firms tended to use another meta-phor to describe the interaction between engi-neering and manufacturing: “throwing it over thewall.” Although Japanese project-level practices

differed significantly from US practices in themid-1980s, they were picked up and emulatedby US companies over the succeeding decade,particularly in the auto industry.

Practices at the organizational level, however,were more deeply rooted in the Japanese busi-ness system, and proved less easy for foreign com-petitors to emulate. These centered on humanresource management practices and on the or-ganization of R&D. Japan’s human resource man-agement practices included the systematic transferof engineers across functions, to carry techno-logical and organizational knowledge and to fa-cilitate effective and rapid communication inproduct development (Kusunoki and Numagami1997). Even within the R&D function, engineerswere often transferred within a product familyeither to work on subsequent generations of aparticular product, or to participate in new prod-uct development in a closely related area. Cross-functional transfers were eased by the sharedsocialization of personnel in standardized entry-level training programs, in which all new employ-ees who had graduated from university includingengineers, went through a common orientationto the company including some first-hand expo-sure to production and sales. The locus of re-sponsibility for the engineers’ careers was clearlyassigned to the company not the individual engi-neer. This also enabled companies to send theirengineers on assignments to outside sources oftechnology (universities, government laborato-ries, other companies) to bring new technologiesback to the company.

The organizational structure of Japanese com-panies also played a role in product developmentprocesses: companies tended to co-locate proc-ess engineering and incremental product devel-opment with manufacturing, in engineeringcenters or divisional laboratories built in or closeto factories (see Fruin 1997). This facilitated thespeedy transfer of technology from developmentinto manufacturing and also encouraged rapidincremental product and process improvement,since design improvements rarely needed to besent back to the central facility for technical in-puts. Especially in electronics, the divisional labo-ratories in the development factories wereentrusted with incremental improvement of prod-ucts and variations on product platforms, while

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corporate laboratories focused on fundamentaltechnology development and the development ofsignificantly new products.

Finally, product development in Japanese com-panies involved close cooperation with an exter-nal network of key suppliers. Clark and Fujimoto(1991) identified the importance of “black box”suppliers in the Japanese auto industry where theauto firm provides suppliers with general specifi-cations and entrusts them with the completionof the designs. These key suppliers were involvedin the product development process at an earlystage, resulting in “parallel engineering” wheresuppliers were designing components in parallelwith (and in close cooperation with) the productdesign process. This shortened the developmentprocess, especially since Japanese firms have tra-ditionally relied on their suppliers for significantlymore of the final value added of the product.

As the strengthening yen eroded Japan’s manu-facturing competitiveness and as both US andAsian competitors learned from the Japanese pro-duction system, many Japanese companies re-sorted increasingly to their product developmentcapabilities to maintain their competitive advan-tage. Steady streams of new products and newmodels of existing products came out of theirR&D organizations, encouraged during the bub-ble economy of the late 1980s and early 1990sby the seemingly insatiable appetite of Japaneseconsumers for novelty and by the flow of re-sources into R&D. The collapse of the bubbleeconomy left many Japanese firms with a prolif-eration of closely related and marginally differ-entiated products. As Fujimoto (1997) put it,Japanese firms may have developed lean produc-tion, but they had fallen into “fat design,” or ex-cessive product complexity and proliferation. Inthe 1990s, many firms engaged in pruning andrationalizing their product lines, trying to re-fo-cus their product development by applyingstricter business-based criteria for R&D invest-ments.

See also: electronics industry; export and importof technology; firm strategies for technology; in-dustrial policy; Nonaka Ikujiro; overseas researchand development; patent system; research coop-eratives; science and technology policy; softwareindustry; VLSI Research Cooperative

Further reading

Clark, K.B. and Fujimoto, T. (1991) Product Develop-ment Performance: Strategy, Organization., and Manage-ment in the World Auto Industry, Boston: HarvardBusiness School Press.

Cusumano, M.A. and Nobeoka, K. (1996) “StrategyStructure, and Performance in Product Develop-ment: Observations from the Auto Industry” inT.Nishiguchi (ed.), Managing Product Development,New York: Oxford University Press, 75–120.

Fruin, W.M. (1997) Knowledge Works: Managing Intellec-tual Capital at Toshiba, New York: Oxford Univer-sity Press.

Fujimoto, T. (1997) “The Dynamic Aspect of ProductDevelopment Capabilities: An International Com-parison in the Automobile Industry” in A.Goto andH.Odagiri (eds), Innovation in Japan, New York:Oxford University Press, 56–99.

Imai, K., Nonaka, I. and Takeuchi, H. (1985) “Man-aging the Product Development Process: How Japa-nese Companies Learn and Unlearn,” in K.Clark,R.Hayes, and C.Lorenz (eds), The Uneasy Alliance:Managing the Productivity-Technology Dilemma, Boston:Harvard Business School Press, 330–81.

Kusunoki, K. and Numagami, T. (1997) “IntrafirmTransfers of Engineers in Japan,” in A.Goto andH.Odagiri (eds), Innovation in Japan, New York:Oxford University Press, 173–203.

Liker, J.K., Ettlie, J. and Campbell, J.C. (eds) (1995)Engineered in Japan: Japanese Technology ManagementPractices, New York: Oxford University Press.

Nonaka, I. and Takeuchi, H. (1995) The Knowledge-Cre-ating Company: How Japanese Companies Create the Dy-namics of Innovation, New York: Oxford UniversityPress.

Takeuchi, H. and Nonaka, I. (1986) ‘The New Prod-uct Development Game,” Harvard Business Review64 (1): 137–46.

ELEANOR D.WESTNEY

promissory notes

A promissory note is a legal paper by which themaker promises to pay a sum certain to the payeeor due holder (holder in due course) at a definitetime, that is the date of maturity. By issuing apromissory note, therefore, the maker is obligedto pay to payee or due holder. Apart from exer-cising the right, the payee may endorse the note

372 promissory notes

and negotiate it with others. The issue of a prom-issory note is subject to a stamp tax.

Promissory notes have been extensively usedas a means of payment (item) and of extendingcredit. At present in Japan, most promissory notestake the form of a uniform instrument definedby the Japanese Bankers Association (ZenkokuGinko Kyokai, or Zenginkyo) and delivered byfinancial institutions to their current account hold-ers. Financial institutions do not clear promissorynotes using any other form, and can refuse todeal with the issuer in cases where they elect notto honor the bill, which may often lead to bank-ruptcy of the issuer.

The payment of promissory notes is madepossible by a clearing system, in which all finan-cial institutions in a designated area gather in theclearing house every business day and presentnotes to be collected from each other. Clearinghouses are designated by the Minister of Justice,and currently number 185 throughout Japan. Butmost clearing takes place in that of Tokyo. Thetotal value cleared in 1997 was ¥1,516 trillion,of which the Tokyo Clearing House handled

¥1,112 trillion. The use of promissory notes,however, is in decline due to tax evasion and di-versification in the means of payment. In 1997the Tokyo Clearing House cleared 100 millionitems including checks, bills, and others, com-pared with 141 million items for ¥4,033 trillionin 1990.

Further reading

Maeda, H. (1999) Tegata Kogitte Ho (Bills and NotesLaw), Tokyo: Yuuhikaku.

Oda, H. (1997) Basic Japanese Laws, Oxford: OxfordUniversity Press.

Seki, T. (1996) Kin-yu Tegata Kogitte Ho (Financial Billsand Notes Law), Tokyo: Shadanhojin Shoji HoumuKenkyukai.

Yoshihara, S., Kaizuka, K., Rouyama, S. and Kanda,H. (2000) Kin-yu Jitsumu Daijiten (Dictionary of Pro-fessional Financing), Tokyo: Kabushiki GaishaKinzai.

KAZUHARU NAGASE

promissory notes 373

quality control circles

Quality control circles (usually referred to in Ja-pan as QC circles or QCC) are small groups con-sisting of front-line employees who control andimprove the quality of their work processes, prod-ucts and services on an ongoing basis. These smallgroups operate autonomously utilize quality con-trol concepts and techniques, draw upon theirmembers’ creativity and promote self- and mu-tual-development. Their aim is to develop mem-bers’ capabilities, make the workplace more vitaland satisfying, improve customer satisfaction andcontribute to their company and society.

QC circles originated in post-Second WorldWar Japan as one of the important elements ofcompany-wide quality control, along with theutilization of statistical techniques by engineersand technical staff, and the implementation bytop and middle management of systematic or-ganizational improvement activities such as policymanagement. With the increasing recognition ofthe importance of quality control in theworkplace, the magazine Genba to QC: Quality Con-trol for the Foreman was first published in April 1962with a targeted readership of supervisors andworkers. (The magazine was later to be retitledFQC in 1973 and QC Circles in 1988). In its firstissue, the magazine called for the formation ofQC circles in the workplace. Also at that time,the QC Circle Headquarters was founded withinthe Japanese Union of Scientists and Engineers.The first circle to be registered with the QCCHeadquarters was from Nippon Telegraph andTelephone. By March 1963, there were thirty-

six registered QCC representing many differentcompanies. The first QC circle conference washeld in 1963, and regional chapters of QC cir-cles were organized in 1964. The number of reg-istered circles increased to 10,000 by 1970 andexperienced another period of rapid increase inthe early 1980s, reaching an all-time high of nearly30,000 circles in 1984. As of 2000, the numberof registered circles was 4,594. It should be noted,however, that QCCs have evolved into variousforms within individual Japanese companies, andmost of these small groups do not formally regis-ter with the QCC headquarters.

Worldwide attention to Japan’s QC circle phe-nomenon was initiated by J.M.Juran’s presenta-tion on the subject at the European Organizationfor Quality Control conference held in Stockholmin 1966. Lockheed Missiles and Space Companyis generally recognized as being the first Westerncompany to introduce QCCs, which it did aftera study mission to Japan in 1973. By the late1970s, countries in Asia, America, and Europehad introduced QCCs or similar small groupactivities, with the first international QC circleconvention held in 1978. By the mid-1980s, thequality circle boom in many Western countrieswas beginning to pass, though many companiescontinued to involve employees in quality im-provement activities under different formats andnames such as process action teams. Today QCcircle activities are found in more than seventycountries or regions, with Japan and other Asiancountries being the most active practitioners.

A QC circle is usually comprised of from fiveto seven members who work together in a single

Q

unit work area. Typically the foreman directlyoverseeing QC activities or one of the memberswith seniority serves as the leader of the circle.In some cases, front-line employees with the sameduties at different workplaces also join togetherto form a circle. Most circles hold meetings onceor twice a month, though frequency varies de-pending on the theme or subject a particular cir-cle is working on. The themes taken up by QCCsare diverse, including quality cost, or safety is-sues at the workplace, operational efficiency andimprovement, problems related to internal orexternal customers, or how to create a bright andsatisfying workplace.

QC circle activities have several distinguish-ing features. They provide a mechanism whichmutually supports employees in: (1) learning arational way of thinking and scientific/problemsolving methods through the study of qualitycontrol principles and techniques, (2) buildingteamwork and fostering discussion among em-ployees with shared work knowledge and expe-rience, and (3) contributing to the company bysolving problems in the workplace. In carryingout these activities, QC circles typically employa common set of improvement tools, such as theseven tools of QC. Other distinguishing featuresinclude the use of the eight-step QC story as aguide for problem solving, as well as the charac-teristic way in which QCCs are organized andoperate.

Benefits typically enjoyed by companies withQC circle activities include: (1) the developmentof employees that are highly motivated and havethe capability necessary to tackle problems whichthe company faces; (2) improvement in qualityand productivity that, in turn leads to an increasein customer satisfaction; and (3) the achievementof broader company goals including contribut-ing to the improvement of society

Some challenges faced by companies whencarrying out QC circle activities include sustain-ing enthusiasm and activity levels of QCCs aswell as adapting to changing values regarding life-time employment, work and private life. Largerorganizations usually establish a position or de-partment with responsibilities for administrationand promotion of QCC activities.

Though originating in manufacturing depart-ments, QC circles are now found in sales, engi-

neering, and other departments and have spreadto service industries such as hospitals, banks,hotels and retailing. Accompanying thesechanges, variant forms of QC circle activities haveemerged, including “joint QC circles” which un-dertake problems that cross workplace bounda-ries, “theme-oriented QC circles” which involvepeople facing similar problems within differentworkplaces, and “sub-circles” and “theme leader”structures. The range of techniques and meth-ods used by QCCs also has expanded, and QCCsoften have become involved in other companyinitiatives such as occupational safety manage-ment, value analysis/engineering, and total pro-ductive maintenance (TPM).

See also: quality management; total productivemanagement

Further reading

Cole, R. (1989) Strategies for Learning: Small Group Ac-tivities in American, Japanese, and Swedish Industry, Ber-keley CA: University of California Press

Ishikawa, K. (ed.) (1984) Quality Control Circles at Work:Cases from Japan’s Manufacturing and Service Sectors,Portland OR: Productivity Press.

Lillrank, P. and Kano, N. (1989) Continuous Improve-ment: Quality Control Circles in Japanese Industry, AnnArbor, MI: Center for Japanese Studies, Univer-sity of Michigan.

QC Circle Headquarters, JUSE (1996) QC Circle Koryo:General Principles of the QC Circle, Tokyo: JUSE Press.

——(1997) How to Operate QC Circle Activities, Tokyo: JUSEPress.

TAKESHI NAKAJO

quality management

Quality management is defined as a system ofmeans for economically producing goods or ser-vices to satisfy the needs of the customer. Lead-ing Japanese companies have come to be knownfor a variety of best practices in quality manage-ment that have greatly influenced the develop-ment of quality management worldwide,particularly during the 1980s. The cheap andshoddy image held by “Made in Japan” goodsafter the Second World War was replaced by a

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reputation for high quality and reliability. Thehistory and major players behind this transfor-mation will be outlined first, followed by a dis-cussion of the conceptual, methodological andorganizational features of Japanese quality man-agement.

History and development

Though there was a very limited awareness andpractice of quality control methods before theSecond World War, the major origins of Japa-nese quality management can be traced to thepost-Second World War occupation era. Troubledby frequent problems with the telephone system,the occupation’s General Headquarters hadAmerican experts give extended seminars onmanagement, including quality control, to man-agers in the telecommunications industry in 1949.Also, during the early postwar years, two non-profit organizations were established that wereto become influential leaders in the developmentand promotion of Japan’s quality movement: theUnion of Japanese Scientists and Engineers(JUSE) and the Japanese Standards Association(JSA). These organizations also began to offereducational programs on quality control in 1949,and in that same year JUSE established its firstQuality Control Research Group.

It was to this receptive environment that JUSEinvited W.Edwards Deming, an American ex-pert, to lecture on statistical quality control inJapan in 1950 and again in 1951. The lecturenotes were published and Deming donated theroyalties to JUSE. Using these funds, in 1951JUSE established the Deming Prize to honorindividuals and to recognize companies excellingin the implementation of quality management.Over time, the Deming Prize was to prove itselfas a powerful vehicle for advancing the Japanesequality movement. In 1954, another Americanquality expert, J.M.Juran, was invited by JUSEto lecture in Japan. In that and later visits, Juranpresented a more managerial approach to qual-ity. It should be noted that senior executivesformed the audience for several of Deming’s andJuran’s lecture series, symbolic of the high de-gree of awareness and support that Japanese topmanagers were to give to their companies’ qual-ity efforts.

During the 1950s, quality management gainedincreasing acceptance among Japanese manufac-turers, though the emphasis originally was onapplying statistical methods in manufacturingactivities. By the late 1950s to early 1960s, lead-ing companies were extending quality manage-ment to include marketing, design,manufacturing, sales and other functional areas.At the same time, employees at all levels of theorganization were becoming involved in qualitycontrol and improvement. A major vehicle forthe involvement of frontline employees wasthrough quality control circles beginning in theearly 1960s. In this way Japanese quality man-agement was broadening to become a truly com-pany-wide activity unlike in the USA and othercountries where quality typically was in the handsof quality specialists and was not a managementpriority.

From the 1960s through the 1980s, Japan ex-perienced a quality management boom. Duringthis time, quality management matured as a com-pany-wide activity and was extended to a corpo-rate group-wide level. Also, beginning in the1970s, some Japanese service industries beganformal quality management efforts. By the mid-1970s, J.M. Juran estimates that Japanese indus-try had caught up with and begun to surpassWestern industry in its ability to create qualityproducts. Evidence from a number of industriesemerged to substantiate the Japanese quality ad-vantage. One particularly detailed study on theroom air conditioner manufacturing industryshowed startlingly large gaps in quality perform-ance in the early 1980s (see Garvin 1988). Forexample, while Japanese manufacturers had de-fective rates of 0.0 to 0.3 percent for incomingparts and materials, American manufacturersexperienced defective rates of 0.8 to 16.0 percent.In other words, even the worst performing Japa-nese manufacturer was still nearly three timesbetter than the best performing American manu-facturer. Similarly large gaps were found for as-sembly-line defect rates and service call rates.Other studies on televisions, memory chips, andautomobiles, likewise showed higher quality lev-els for Japanese-made products.

Spurred by these dramatic quality differences,Western companies showed an immense interestthroughout the 1980s in learning and adopting

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Japanese-style quality management. Other turn-ing points included the 1980 broadcast in theUSA of the NBC television documentary If Ja-pan Can…-Why Can’t We?, which introducedDeming’s past activity in Japan to a wide audi-ence. Also attracting attention was the awardingof the Deming Prize in 1981 to YokogawaHewlett-Packard, which in the process had trans-formed itself from H-P’s worst to best-perform-ing division. Though a great number and varietyof organizations and individuals contributed tothe dissemination of Japanese quality manage-ment abroad, the role of Japanese joint ventureand affiliated companies merits special note. Sev-eral such companies, including YokogawaHewlett-Packard, Fuji Xerox, Texas InstrumentsJapan, IBM Japan, Aisin Warner, and Mazda,served as models and information conduits forinterpreting and transferring Japanese best prac-tices to overseas counterparts. The profound ef-fect of Japanese quality management onworld-wide practice was readily seen in manyquality-related articles and training manuals ofthe early 1980s which often contained directtranslations of the original Japanese concepts andapproaches. Also during this time, the DemingApplication Prize was opened up to overseas ap-plicants, with Florida Power and Light becomingthe first overseas recipient in 1989 followed byTaiwan Phillips (1991) and AT&T Power Systems(1994).

Since the 1990s, quality management has re-ceived less prominence in Japan. In part, this isdue to the fact that its major concepts and prac-tices have become ingrained into corporate rou-tine. At the same time, some criticism has emergedregarding the tendency for certain practices tobecome ritualistic or bureaucratic, and othershave pointed out the need for fresh, new ideasand approaches. A spate of quality and safetyproblems in 1999 and 2000 also raised questionsabout a seeming quality malaise in segments ofJapanese industry. Companies whose qualityreputations were tarnished include a Sumitomosubsidiary that used unsafe processes leading tothe Tokaimura nuclear accident, Snow Brandwhose contaminated milk products caused illnessin 15,000 people and Mitsubishi Motors whichwas implicated in the long-term cover-up of de-fects to avoid product recalls.

Some areas of notable activity in the 1990s,however, included the push by Japanese compa-nies for certification to ISO 9000, the interna-tional standard for quality management systems.At first, Japanese firms showed little interest inthe standard due to the perception that their ownquality performance levels were high and wouldnot benefit from ISO 9000’s rudimentary con-formance-based approach. When it became clearthat ISO 9000 was becoming a market require-ment, however, Japanese firms earnestly begancertification efforts on a wide scale. Other devel-opments included the introduction of alternativeawards to the Deming Prize. Affiliated with theJapan Productivity Center for Socio-EconomicDevelopment, the Japan Quality Award waslaunched with an award system and criteria simi-lar to the Baldridge Award in the USA. Also, in2000 JUSE established a new category of awards,Japan Quality Recognition Awards, to comple-ment the Deming Prize. One award recognizesachievement in TQM and is positioned as a step-ping-stone to the Deming Prize, while anotheraward recognizes the development of innovativequality methods or systems.

Concepts and methods

Over the course of its development, Japanesequality management has come to be character-ized by a number of concepts, tools, and meth-ods. In some cases, these are new contributionsto the practice of quality management, while inother cases they are conventional ideas cast in adifferent light or with a new emphasis.

Kaizen, or the continual pursuit of improve-ment, forms the philosophical basis for qualitymanagement and other Japanese approaches suchas just-in-time and total productive maintenance.Japanese quality leaders speak of quality man-agement as being a “revolution in thought”wherein one attains a problem-consciousness andseeks to prevent rather than fix problems afterthey have occurred. Through the repeated cycleof Plan-Do-Check-Act (PDCA), all aspects ofbusiness activity are to be evaluated and actedupon for improvement. To carry out kaizen, Japa-nese companies emphasize the need for the par-ticipation of all employees, at all levels, and inall departments. This is accomplished through

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quality control circles, quality audits by top man-agement, hoshin kanri and other activities describedbelow. Also essential is a customer-orientation.An axiom of Japanese quality management is“market-in—not product-out”. In another saying,“the next process(es) is your customer,” Japantaught the important concept of recognizing in-ternal customers as well as external customers.Japan was also the origin of the well-known clas-sification of customer expectations for productquality into delighters, satisfiers, and must-be/dissatisfiers.

Japanese quality management also has empha-sized the scientific method through the use of datato make decisions, analyze problems and imple-ment improvements. This notion is symbolizedby sayings such as “speak with data” and “man-age by the facts.” Along with this, Japanese com-panies stress the 3-gen principle of observing theactual object in question (genbutsu) and actual situ-ation (genjitsu) at the actual location (genba) (seegenba shugi). To support this emphasis on dataand the involvement of all employees, Japaneseindustry promoted the widespread use of a prob-lem-solving toolkit called the seven tools of QC:Pareto diagram, cause-and-effect diagram, strati-fication, checksheet, histogram, graphs and con-trol charts, and scatter diagram. Made famous inJapan and abroad through Kaoru Ishikawa’sbook, Guide to Quality Control, this package of ba-sic tools became an important feature of Japa-nese quality management as employees at alllevels in the organization are able to learn andapply these tools. Ishikawa contended that themajority of quality problems could be solved withtheir use alone. Prompted by the popularity ofthe seven tools, JUSE later coordinated the de-velopment of another set of tools called the “newseven tools,” or seven management tools, whichare used for planning and for organizing andunderstanding complex information.

Another important aspect of Japanese qualitymanagement has been its emphasis on systemdesign and the upstream activities of process andproduct design. Shigeo Shingo and others em-phasized the use of poka-yoke, or error-proofingtechniques, to design out the possibility of mis-takes in work processes. A widely used techniquefor product development called quality functiondevelopment (QFD) was also developed in Ja-

pan. Through a series of matrices, QFD trans-lates customer requirements into technical re-quirements and product specifications. Inaddition, the Japanese practice of concurrent en-gineering, wherein the product is designed in par-allel with its related production processes, hasbecome an accepted best practice. Also receivingworldwide attention have been the ideas andmethods of Genichi Taguchi. He advocates aquality engineering approach that emphasizes thereduction of variation, the importance of mak-ing products and processes robust to variabilityin operating and usage conditions, and the use ofdesigned experiments.

Organizational framework

The organizational implementation of Japanesestyle quality management can be conceptualizedas a framework of top-down, lateral, and bottom-up activities (see Akiba et al. 1992). Just as a clothis made strong by its cross-woven threads, qual-ity management requires a coordinated combi-nation of vertical and horizontal activities.

Top-down activities include hoshin kanri andinternal quality audits by top management. Vari-ously translated as policy deployment or man-agement by policy hoshin kanri refers to amanagement process for identifying goals (usu-ally annual) and deploying them throughout alllevels of business planning and activity The aimis to focus effort and resources on a few priorityissues for breakthrough improvement. Essentialto hoshin kanri is a back-and-forth dialogue (called“catch ball”) between all levels and departmentsof the organization about not only the goals, butalso the concrete means for their achievement.Another way that top management is involvedin quality management is through regular re-views of the quality system called quality audits(QC shindan). Their purpose is not inspection,but rather to evaluate management processesand provide and opportunity for discussion.Typical items covered include the progress ofhoshin kanri activities, the implementation statusof routine control and improvement activities,and the status of QC circle activities. Qualityaudits are usually conducted at multiple levels inan organization. In a presidential audit, the com-pany president reviews quality activities

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company-wide. Division and section managersmay also conduct audits within their own areas.

Lateral activities include cross-functional man-agement and management of daily work.Crossfunctional management (kinoubetsu kanri) isthe organizational tool for interdepartmental co-ordination. To implement cross-functional man-agement, permanent steering committees aretypically formed to coordinate and reviewprogress with regard to quality cost, and deliv-ery performance. For each committee, the seniormanaging director of the relevant functional area,such as quality is installed as committee chair anddirectors of other functional areas are includedas committee members. Management of dailywork (nichijo kanri) refers to the application of theplan-do-check-act (PDCA) cycle in each individu-al’s routine work activities. The idea is to evalu-ate, define, and standardize all work activities andwhere possible to extend best practices to otherworkers and departments.

The principal means of bottom-up involve-ment in quality management activities is throughquality control circles (QCC). Typically QCcircles are small groups of front-line employeesfrom the same workplace who meet regularly ona voluntary basis to carry out quality control andimprovement activities. Education and trainingare important aspects of QCC activity and allcircle members are expected to master and applythe seven tools of QC. Many companies and otherorganizations sponsor QC circle conferenceswhere employees present their improvementprojects and often compete for awards.

Terminology

Several different Japanese terms, as well as En-glish acronyms, are commonly used when refer-ring to quality management in Japan. The mostbasic term is hinshitsu kanri, which can be narrowlytranslated as “quality control,” though the Japa-nese use the term in a broader sense that may beequated with “quality management.” The acro-nym “QC” also is commonly used in Japan withthis same generic meaning. Beginning in the1960s and 1970s, as Japanese companies broad-ened the scope of quality management activitiesto include more functional areas and organiza-tional levels, the term zenshateki hinshitsu kanri came

into common usage to emphasize the “company-wide” nature of quality management. Also, theacronym “TQC” (from Total Quality Control)was borrowed from the US and used interchange-ably with zenshateki hinshitsu kanri. However, todistinguish the progressive Japanesestyle TQCfrom the Western-style TQC which had reliedmore heavily on quality specialists, Japanese com-panies and authors coined the English term Com-pany-Wide Quality Control (CWQC) to usewhen explaining Japanese-style quality manage-ment to overseas audiences. Thus, the termCWQC is found in many English languagesources, while the equivalent term “TQC” isfound throughout Japanese language sources. Toconfuse matters further, the term “total qualitymanagement” (TQM) came into popular usagein Western companies during the 1980s and1990s to denote their newly adopted approachto quality management which was largely mod-eled after Japanese practices. Despite this changein terminology overseas, Japanese companiescontinued to use the English acronym TQC do-mestically up until 1996 when the Union of Japa-nese Scientists and Engineers (JUSE) made anofficial change to TQM (sogoteki hinshitsu kanri).

Further reading

Akiba, M., Schvaneveldt, S.J. and Enkawa, T. (1992)“Service Quality and Japanese Perspectives,” inG.Salvendy (ed.), Handbook of Industrial Engineering,2nd edn, New York: Wiley 2349–71.

Garvin, D. (1988) Managing Quality, New York: TheFree Press.

Ishikawa, K. (1985) What Is Total Quality Control? TheJapanese Way, trans. D.Lu, Englewood Cliffs NJ:Prentice-Hall.

Nemoto, M. (1987) Total Quality Control for Management:Strategies and Techniques from Toyota and Toyota Gosei,trans. D.Lu, Englewood Cliffs NJ: PrenticeHall.

Nonaka, I. (1995) “The Recent History of Managingfor Quality in Japan,” in J.M.Juran (ed.), A History ofManaging for Quality, Milwaukee, WI: ASQC Qual-ity Press, 517–52.

Shiba, S., Graham, A. and Walden, D. (1993) A NewAmerican TQM: Four Practical Revolutions in Manage-ment, Portland, OR: Productivity Press.

SHANE J.SCHVANEVELDT

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Rengo

Rengo is the acronym for Nihon Rodo KumiaiSorengokai, translated as the Japanese TradeUnion Confederation. Comprising unions in boththe private sector and in the public sector, withtotal membership of approximately 8,000,000(about 68 percent of organized labor), it is by farthe largest, the most representative, and the po-litically most significant national center of labororganizations in Japan. However, Rengo’s author-ity over its constituent organizations (industrialunions), let alone over the enterprise unions, thebasic and most powerful level of union organiza-tion, is limited. Likewise, in the labor market, itis a junior partner of the government and ofNikkeiren, the Japan Federation of Employers’Associations.

History

From the mid-1950s until Rengo’s establishmentin 1989, Japanese unions lacked one, overarchingnational center. Throughout most of this period,unions were affiliated either with one of severalrival national centers (Sohyo, Domei, ChuritsuRoren, and Shinsanbetsu), or with none. Divi-sions were largely along Cold War-related ideo-logical lines reinforced by sectoral interests (publicvs. private), and partly along diverging percep-tions of the role of unions in the place of employ-ment, society and the polity.

The main driving force for unification camefrom pragmatic, non-doctrinaire leaders of un-ions in the private sector. Major milestones were

the formation in 1982 of Zenmin Rokyo (All-Ja-pan Council of Trade Unions in Private Indus-tries); and the reorganization in 1987 of ZenminRokyo as Rengo, following the dissolution ofDomei, Churitsu Roren, and Shinsanbetsu. In1989, Sohyo, formerly the largest and ideologi-cally most “militant” national center, consistingprimarily of public sector unions, dissolved, andmost of its affiliates joined Rengo.

Unification was enhanced by union leaders’sense of vulnerability in view of domestic socio-economic and demographic changes, especiallyfollowing the oil crisis, and of mounting externalpressures to open the Japanese economy to for-eign competitors. Considerable gains previouslyachieved through labor-management consultationand cooperation at the enterprise became insuffi-cient, and had to be supplemented by state inter-vention. To become credible partners in publicpolicy making, unions at all levels had not onlyto close ranks, but also soften their ideologicaltone and adopt a more cooperative posture to-ward the then ruling Liberal Democratic Party(LDP) and the national bureaucracy The LDPand the bureaucracy reciprocated by incorporat-ing increasing numbers of leaders of industrialunions and national centers into policy processes.This opening toward labor was facilitated by thephase out of the Cold War and its rendering long-standing ideological rifts largely irrelevant.

Under the assertive leadership of YamaghishiAkira, its first president, Rengo played a notablerole in exacerbating fission within the LDP, form-ing the anti-LDP coalition in 1993, and institut-ing political reforms in 1994. Moreover, in

R

addition to fielding its own candidates in elec-tions, it sought to reunify the socialist parties intoa new moderate, social democratic party thatwould play a major role in a realigning multi-party system, but without success.

Structure and functions

Among Rengo constituents, the legacy of pastaffiliation with rival national centers, especiallySohyo and Domei, persists, albeit in differentorganizational forms and on a more moderatescale and intensity. The unification of formerlyrival unions at the level of respective industries isprogressing, but at a snail’s pace.

Rengo’s top leaders hail from its affiliate un-ions; and upon completing their term, they re-turn to their firm/government ministry enterpolitics, or land a managerial or advisory posi-tion in union-related organizations in such areasas education and welfare. The administrative of-ficials at headquarters are largely from affiliatedunions; a few “professionals” (propa in Japanese)have been recruited directly mostly after gradua-tion from university.

For its rather limited finances, Rengo dependson its affiliates, which in turn are financed by theiraffiliate enterprise unions. The latter retain thelion’s share of individual members’ dues. Vis-à-vis its affiliates, Rengo is largely supportive, advi-sory and coordinating, rather than authoritative;it is not a “peak association” in the terminologyof the literature on “neo-corporatism.” It dissemi-nates information and research results from gov-ernment and other sources, including its ownResearch Institute for the Advancement of Liv-ing Standards (Rengo Sogo Seikatsu KaihatsuKenkyu jo; Rengo Soken, in short). It adoptsguidelines for the annual spring labor offensiveand for union support of parties in elections. Itencourages unification of affiliates in the sameindustry It seeks to adjust divergent interests ofunions in different sectors and in industries dif-ferently affected by globalization and deregula-tion. And, in view of declining union organizationrates, it urges reluctant affiliates and their enter-prise unions to organize irregular employees andthe unemployed, and launches organizationdrives on its own.

More widely Rengo leaders make statementson public issues directly and indirectly relatingto employees. They meet Nikkeiren leaders toiron out differences, launch joint research projects,and jointly issue policy demands and proposalsregarding such issues as employment security andtaxation. They also participate in government-appointed formal shingikai, semi-formal shitekishimon kikan, and informal forums of policy con-sultation, as well as in private-sector policy studyand advocacy forums.

Internationally Rengo offers aid through itsJapan International Labor Foundation (JILAF);cooperates with international NGOs; plays a lead-ing role in the Asian branch of the ICFTU; rep-resents labor in the Japanese tripartite delegationto the International Labor Organization; andparticipates, together with the Ministry of Laborand Nikkeiren, in periodic dialogues on labor is-sues with counterparts in other countries, nota-bly Germany.

Rengo has achieved only part of its initial goals.But though ideologically conservative, it has notpresided over the demise of labor unionism inJapan, as some observers had predicted. Rather,it is considering new roles, defining new missions,and launching new programs to invigorate allthree levels of union organization.

See also: history of the labour movement; life-time employment

Further reading

Koshiro, K. (ed.) (1998) Sengo gojunen: sangyo, koyo, rodoshi (Postwar 50 Years: Industry Employmentand Labor History), Tokyo: Nihon Rodo KenkyuKiko.

Kume, I. (1998) Disparaged Success: Labor Politics in Ja-pan, Ithaca, NY: Cornell University Press.

——(2000) “Rodo seisaku kettei katei no seijuku tohenyo” (Maturity and Transformation of LaborPolicymaking Processes), Nihon rodo kenkyu zasshii(Japan Institute of Labor Journal) 475:2–13.

Rengo (annual) Seisaku seido shu: seisak seido yokyu to teigen(Policy and Institutional Demands and Proposals),Tokyo: Rengo Headquarters.

Shinoda, T. (1997) “Rengo and Policy Participation:Japanese-Style Neo-Corporatism?” in M. Sako and

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H.Sato (eds), Japanese Labour and Management in Tran-sition, London: Routledge, 187–214.

EHUD HARARI

research cooperatives

Research cooperatives, also known as researchconsortia, are temporary alliances of potentialcompetitors in the same industry for the purposeof joint research and development. Research co-operatives in Japan come in private and publicforms. They first appeared in 1956 and soonbecame part of the government industrial policytool set. While the early cooperatives aimed atcatching up with the West, projects after 1980have focused on basic research. Throughout, therole of public funding has remained small as com-pared to the United States. While organizing re-search in cooperatives has numerous theoreticaladvantages, empirical evidence has shown noclear link between the presence of cooperativesand industry competitiveness.

Forms and actors

There are private and public research coopera-tives in Japan. In a private cooperative, the par-ticipant firms often found a jointly-heldcorporation (kabushiki kaisha) to coordinate re-search activities. An example of this type is theSemiconductor Leading Edge Technologies(SELETE) cooperative, Japan’s counterpart to theSemiconductor Manufacturing Technology(SEMATECH) cooperative in the United States.

Public cooperatives involve not only firms, butalso sponsoring government bureaucracies, in-dustry and trade associations, public researchlaboratories, and universities. Prominent exam-ples include the VLSI, Supercomputer, and FifthGeneration research cooperatives. Since publiccooperatives are at least in part publicly funded,the sponsoring government bureaucracy such asthe Ministry of International Trade and Indus-try (MITI) for manufacturing industries, playsan important role in creating them. After an ini-tial proposal to undertake a public researchproject, often from firms or academics, the min-istry in charge of the project industry has a delib-eration council (shin gikai) evaluate the proposal.

Once the council decides in favor of a project,the ministry proceeds in several directions. First,it secures funding for the project, either from theMinistry of Finance or from other sources ofincome such as the proceeds from publicly li-censed betting at bicycle races. Second, it selectsfirms and public research laboratories to partici-pate in the project. Central criterion for firm se-lection is the likelihood of becoming a leader inthe new technology and in most cases, thenumber of participant firms is less than 20. Third,if the project creates a new industry for which noindustry association exists that could coordinateresearch activities, the ministry founds a new in-dustry association together with the participantfirms.

The implementation of the project is in thehands of the respective industry association. Itserves as a coordinator for, and forum for infor-mation exchange between, the participant firmsand laboratories, which often split up into groupsto work on a small number of smaller projects. Itacts as a conduit to government by disbursinggovernment research funds to cooperative mem-bers and reporting to the government on behalfof the cooperative. Finally association councilsprovide a forum for feedback from universityresearchers, who seldom participate directly inpublic cooperatives.

Historical development and governmentfunding

Research cooperatives are roughly modeled onthe British Research Associations of the FirstWorld War. The first research cooperative in Ja-pan dates to 1956, when a number of automo-tive air filter manufacturers formed a collaborativeventure. The first government-sponsored coop-erative appeared in 1959, and in 1961, the Engi-neering Research Association Act officiallyrecognized research cooperatives and bestoweda number of tax benefits on them. A total of about150 cooperatives have since been registered un-der the Act; however, the actual number of re-search cooperatives is considerably higher andnot precisely known, as not all cooperatives areregistered.

The characteristics of public cooperatives

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changed fundamentally around 1980. Projectsbefore then focused on catching up technologi-cally with Western competitors. They aimed toproduce commercializable products and lasted onaverage about five years. Public funding coveredonly part of the total research expenses and camein the form of conditional loans (hojokin), whichfirms were to pay back if the cooperative wassuccessful (which they did for about half of allloans). Cooperatives financed through hojokin re-tained the patent rights to all technologies devel-oped.

As Japan caught up with the technology fron-tier around 1980, the focus shifted toward basicresearch. Cooperative lifetimes lengthened to anaverage of about ten years, as basic research re-quires more time, and public funding began tocover all research expenses to make the risk as-sociated with basic research more palatable tofirms. The funding scheme changed to reimburse-ments for commissioned research (itakuhi), whichfirms need not repay; however, all patents remainwith the government, which licenses out the tech-nology on a non-discriminatory basis. Most gov-ernment funding for research cooperatives hasgone to three areas: semiconductors and com-puters, petroleum and chemicals, and power gen-eration and distribution.

Overall, the role of public funding in Japaneseresearch cooperatives has been modest. Between1960 and 1991, such funding amounted to about0.47 percent of GDP in Japan, compared withabout 1.32 percent over the same period in theUnited States. The average government budgetper project has been about ¥8.4 billion ($76 mil-lion), while SEMATECH alone had receivedUS$850 million from the US government by1996 (Sakakibara 1997).

A success?

Whether research cooperatives have been a suc-cessful vehicle for promoting research is subjectto debate. Theoretically cooperatives should beadvantageous for participating firms in a num-ber of ways. Among others, the literature sug-gests that the pooling of research resources helpsavoid wasteful duplication of research efforts andspeeds the diffusion of technology; the contribu-tion of public funds to cooperatives alleviates the

financial risk for firms of undertaking basic re-search with unclear benefits; and the public com-mitment of government money to a given projectafter extensive expert consultations signals tofirms that the target technology may be viable.However, empirical research has unearthed noclear link between the presence of research coop-eratives and industry competitiveness, and wherecooperatives have been successful, it is not ap-parent that firms would not have developed thetechnology on theirown.

Further reading

Aldrich, H.E. and Sasaki, T. (1995) “R&D Coopera-tives in the United States and Japan,” Research Policy24:301–16.

Callon, S. (1995) Divided Sun: MITI and the Breakdownof Japanese High-Tech Industrial Policy, 1975–1993,Stanford, CA: Stanford University Press.

Okimoto, D.I. (1989) Between MITI and the Market:Japanese Industrial Policy for High Technology, Stanford,CA: Stanford University Press.

Sakakibara, M. (1997) “Evaluating Government-Spon-sored R&D Cooperatives in Japan: Who Benefitsand How?” Research Policy 26:447–73.

MICHAEL A.WITT

restructuring

The term, restructuring, or risutora, began to ap-pear in the Japanese vocabulary in the late 1980s,as exporting firms took measures to respond tothe endaka, or abrupt increase in the yen after thePlaza Accord in 1985. Restructuring gained mo-mentum in the 1990s, after the bursting of thebubble economy. Mentions of risutora in theNihon Keizai Shimbun, Japan’s leading businessdaily, increased from 505 in 1990 to 5,324 in1994, and it was difficult to find a firm not talk-ing of restructuring. By the end of the 1990s,however, “restructuring” appeared less frequentlyin the Japanese business press, in part because ithad become associated with downsizing. Whilethere were very few outright layoffs during therestructuring movement, firms used other meth-ods to reduce their workforces, and employeesand the general public correctly associated risutorawith job losses.

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Even during the restructuring movement inthe 1990s, Japanese firms were extremely hesi-tant to lay off employees. Several factors madeoutright layoffs difficult. First, courts tended tofavor employees in lawsuits over severance. Em-ployers had to demonstrate pressing economichardship (such as looming bankrucpty) to con-duct layoffs without legal repercussions. Enter-prise unions also opposed layoffs, preferringinstead to negotiate gradual programs of laborforce reduction. Layoffs and other forms ofdownsizing also invited bad publicity. Pioneerdiscovered this in 1993, when it gave thirty-fivesenior employees a choice between retirement anddismissal. This announcement was featuredprominently in the mass media as a harbinger ofthe end of permanent employment. Several weekslater, Pioneer retracted its decision, allegedly dueto concern about unfavorable publicity and pres-sure from its labor union.

In restructuring, Japanese firms tended toadopt several measures that stopped short ofoutright layoffs. The first was shukko, or dispatchof employees either temporarily or permanentlyto related companies. When firms exhausted theiroptions for shukko, as receiving firms became lesswilling and able to accept redundant employees,they turned to other methods of downsizing.Many women in secretarial or clerical positionswere encouraged to retire and were subsequentlyreplaced by soft-drink machines and temporaryemployees. Firms also offered early retirementpackages to increasingly younger cohorts of maleemployees. The mass media reported cases of“bullying,” in which firms harassed employeesinto resigning, though this kind of activity hasbeen difficult to verify Many firms also eliminatedor reduced hiring of new cohorts of graduatesfor one or more years. Though this reduced head-count without layoffs, it also had implications forthe nenko joretsu system, in which successive co-horts of employees moved up a fixed promotionhierarchy Hiring reductions left gaps in this hier-archy and increased the average age of a compa-ny’s labor force.

The magnitude of restructuring among Japa-nese companies during the 1990s did not reachthe levels of US companies during a similar pe-riod. Sweeping and immediate reductions of 10percent of a firm’s labor force—not uncommon

in the USA—remained rare. Nevertheless, restruc-turing had a real impact. According to Ministryof Labor statistics, the percentage of job separa-tions among firms with over 1,000 employees dueto management circumstances (as opposed to re-tirement and other individual circumstances) in-creased from 2.3 percent in 1980 to 9.3 percentin 1998. The unemployment rate grew to his-torically high levels (though still relatively lowby US standards).

Changes in organization structure often ac-companied workforce reductions. Many firmsattempted to move towards flatter hierarchiesand reduction of job titles. There was also amove in many large companies to reorganizealong business units rather than functionalgroups or factories. These reorganizations oc-curred under the rubric of the “company sys-tem,” a term that reflected the objective ofencouraging business units to act as independ-ent companies, with profit and loss responsibil-ity. It is not clear how deep these changes were,and how much they went beyond newspaperheadlines and organizational charts. They did,however, suggest a change in managerial think-ing from a company as a cohesive community tocompany as a set of discrete, though related, op-erating units.

Another aspect of restructuring involved re-negotiation of long-term relationships with busi-ness partners, in particular with parts suppliersand distribution channels. Though accounts oflarge manufacturers cutting ties to small suppli-ers attracted media attention, more common werecases in which buyers reduced purchases overseveral years, and provided encouragement andactive assistance for its suppliers to diversify theirbusiness opportunities.

Foreign investors, who after the bursting ofthe bubble were increasingly active and vocalinvestors in the Japanese stock market, welcomedrestructuring. Stock analysts at foreign firmstouted companies that had announced restruc-turing programs as good investments. The Japa-nese public saw restructuring in a less positivelight. The unwillingness of the Japanese consumerto spend money a tendency that prolonged thepost-bubble recession, was in part due to uncer-tainty over future employment prospects undercontinued restructuring.

Perhaps the best-known case of restructuringduring this period occurred after Renault took acontrolling stake in Nissan in 1999. Renault dis-patched Carlos Ghosn to serve as COO and laterpresident. Ghosn embarked on an intense restruc-turing program, featuring deep cuts in employ-ment and severance of long-term supplierrelationships. Even so, employment reductionswere carried out through early retirement, re-duced hiring, and attrition rather than outrightcuts. Ghosn at first attracted heavy criticism forunfeeling and un-Japanese behavior towards em-ployees and long-term stakeholders, though asNissan’s operating performance improved, thiscriticism became increasingly subdued.

See also: lifetime employment

Further reading

Lincoln, J.R. and Nakata, Y. (1997) “The Transforma-tion of the Japanese Employment System: Nature,Depth, and Origins,” Work and Occupations 24:33–55.

Mroczkowski, T. and Hanaoka, M. (1997) “EffectiveRightsizing Strategies in Japan and America: IsThere a Convergence of Employment Practices?”Academy of Management Executive 11: 57–67.

Usui, C. and Colignon, R. (1996) “Corporate Restruc-turing: Converging World Pattern or SocietallySpecific Embeddedness?” Sociological Quarterly 4:551–78.

CHRISTINE L.AHMADJIAN

retail industry

The huge retail industry in Japan embodies avery complex scheme of cultural categories.Japanese retail analysts have classified the indus-try into two sections: one selling without storesand the other selling through stores. The formerconsists of mail-order houses, telephone sales,television shopping services and so on; the latterincludes shopping centers, middle- to small-scaleretailers (discount stores, convenience stores,and specialty stores), and large-scale retailers(primarily department stores and supermar-kets; see superstores).

Brief history of the modern retail industry

The development of the modern retail industryin Japan was marked by the opening ofMitsukoshi in 1904. The establishment ofMitsukoshi also symbolized a retailing “revolu-tion” at that time. The company introduced a setof new retail techniques and management, includ-ing “cash payments and no haggling” policy di-rect sourcing of merchandise from manufacturers,selling by display rather than za-uri sales, and soon. Other traditional drapery stores followedMitsukoshi, developing their stores into moderndepartment stores between the end of the Taishoperiod and the beginning of Showa. At that time,the major clienteles for department stores wasconfined to members of high society.

In 1929, Ichizou Kobayashi of Hankyuu Rail-ways founded the world’s first railway store inits Osaka Umeda station. Many railway compa-nies followed Kobayashi’s lead after the war. Themajor reason for the prosperity of railway depart-ment stores was the rapid growth of populationin major cities. The emergence of railway depart-ment stores also widened the clienteles of depart-ment stores to include the lower-middle classurban masses.

Department stores expanded rapidly to exploitthe high-speed economic growth of Japan in the1960s. At the same time, supermarkets, a newretail format, emerged. In 1953, Kinokuniya builtJapan’s first self-service supermarket. The rapidgrowth of the supermarket business coincidedwith the emergence of a standardized consumermarket in which everyone with the wherewithalsought the same material goods. Supermarketssuccessfully capitalized on this market becausethey could offer the high-volume and low-profitsales for a limited range of products that bestmatched this market. Another reason for the rapidgrowth of the supermarket business in the 1960swas that the expansion of supermarket compa-nies was not limited by the Department Store Law.Daiei outperformed Mitsukoshi and became thesales leader of all individual retailing companiesin 1972.

Threats also came from another new retailformat: specialty shops. From the mid-1960s, agroup of customers seeking fashionable mer-chandise emerged. Companies specializing in

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different merchandise started to build theirspecialty shop chains all over Japan to exploitthis market.

Department stores responded to these threatsin two ways. Firstly large city department storesstarted developing shopping malls in suburbanareas to cater to the ever-expanding market there,which further facilitated the growth of specialtyshops. Secondly some local department storesjoined the merchandise network of large-scalestores and even merged with them.

In the 1970s, large-scale retailers suffered adouble blow. The first was the economic down-turn after the oil shock. The second was the in-troduction of the new Large Retail Store Lawthat was extended to also cover general merchan-dise stores (GMS). Large department stores re-sponded by slowing down new investment andlaying off staff. In contrast, the large GMSadopted a diversification strategy.

After the Plaza Accord in 1985, the Japaneseyen appreciated rapidly resulting in thestabilization of the price of consumer goods. Atthe same time, interest rates were very low butstock prices and property prices were high. Theaverage salary increased rapidly because of a gen-eral manpower shortage. These forces allowedthe retail market to prosper. The sales of depart-ment stores, especially the sales of luxury goodssuch as jewelry rebounded very quickly Depart-ment stores invested substantially in buildinglarge new stores and creating elegant sales floorsfor luxury goods. Daiei also continued its diver-sification strategy in the 1980s, aggressivelybranching into other non-retail businesses, whileIto-Yokado was determined to reform its retailbusiness by building a scientific retail manage-ment system to improve its profitability.

However, the sales of department stores in the1990s declined rapidly following the collapse ofthe bubble economy, while the cost, includingnew land tax, salary and so forth increased sub-stantially. Consequently the profits of most de-partment stores continuously decreased from1992. Some retail analysts even argued that de-partment stores were going to disappear. LargeGMS experienced difficult times as well. EvenIto-Yokado, the most profitable, started record-ing a negative profit growth in 1994. Some com-panies like Daiei chose to reform the organization

of its business. Ito-Yokado did not change its or-ganization, but enhanced the autonomy of eachindividual store manager.

Large-scale stores

Department stores can be classified according totheir origins: those originating from the “kimonotradition” and those from the “railroad tradition.”The former have a longer history and have thusgenerally more prestige than those from the lat-ter. Major kimono stores included Mitsukoshi,Matsuzakaya, Isetan, Takashimaya, Sogou, andDaimaru. The railroad tradition started withIchizo Kobayashi of Hankyuu Railways in 1929.The idea was simple: railroad companies builttheir stores in terminals instead of in central busi-ness locations, designing them as full-blown de-partment stores from the beginning. Theirrailroad connections enabled them to go to thecustomers and to create their own markets.Odakyuu, Keiou, and Tobu were major railwaystores in Tokyo. In addition, there was Sotetsu inYokohama, Meitetsu in Nagoya, and Kintetsu,Hanshin, Hankyuu and Sanyo in the Kansai area.

Suupaa is a truncated loanword and is referredto three forms of supermarkets. The first is calledshokuhin suupaa (food supermarkets), itself modeledon the supermarkets in the USA. Shokuhin suupaa,by definition, must generate no less than 70 per-cent of their income from food alone. The secondis referred to specialty suupaa including apparel andhousehold goods suupaa. A specialty suupaa musthave a sales floor of no smaller than 500 squaremeters and generate no less than 70 percent of itssales from the merchandise it specializes in. Thefinal form is the sougou suupaa (general supermar-kets) that devote themselves not only to food salesbut also to the sale of a wide range of merchan-dise including textiles, household goods, furnitureand electrical appliances. Therefore, the termsougou suupaa refers to a sort of combined super-market and mini-department store which is simi-lar to a department store in form and should bethought of as a GMS.

Sougou suupaas are different from departmentstores in three major ways: the organization ofoperations, the number of outlets, and thesocial prestige attached to them. Generally mostdepartment stores are located in a city’s earliest

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established central business district to emphasizehigh quality goods, comprehensive customerservice, and target high-income customers. Sougousuupaas are located close to residential areas, inorder to be more easily accessible, focus mainlyon daily necessities, and target ordinary house-wives.

Shopping centers

Shopping centers in Japan can be classified intotwo types: general and specialty shopping cen-ters. The general shopping center is a multi-func-tional retail format that usually includes one ortwo large-scale retailers as its core stores, supple-mented by various retail formats such as specialtyshops and local retailers. It also houses restau-rants, sport and leisure centers, cinemas,churches, and other public facilities. All theseestablishments are integrated into a single retailspace, catering to different needs of the commu-nity in which the shopping center is located. Gen-eral shopping centers are not just a shoppingcomplex but also a community center.

General shopping centers require large landareas. They are usually located in suburban ar-eas where land is much cheaper than city centersbut less accessible by trains. General shoppingcenters are also located at the nodes of highwaynetworks and provide extensive car parking fa-cilities so that customers can go there by car. Thisis why general shopping centers did not emergeuntil cars had became popular and the popula-tion of suburban area had grown rapidly in the1960s. The first shopping center in Japan wasthe Tamagawa Takashimaya Shopping Centerdeveloped by Takashimaya in Tokyo in 1969.Since then, developers have gradually establishedlarge general shopping centers all over Japan.Famous large general shopping centers includeMYCAL Honmoku, Hikarigaoka, Rarapouto,and Harborland.

Specialty shopping centers do not have corestores. They can be further divided into twotypes: extensive underground shopping centersand multistory shopping buildings. The formerusually connect with public transport stations andlarge department stores within city centers. Cen-tral Park of Nagoya is one of the most famousunderground shopping malls in Japan. Most of

the latter are “fashion buildings,” which usuallyhave at least four floors, with food stores at thefirst floor, followed by fashion and variety shops,and finally restaurants at the top floor. These fash-ion buildings are always located in city centers,close to department stores or main railway sta-tions. Parco of the Saison Group, 109 of ToukyuuGroup, and Forus of the Jusco Group are famousfashion buildings in Japan.

Mid-sized and small retailers

Specialty shops refer to any store that generatesmore than 90 percent of its sales from a singletype of merchandise. The strength of specialtyshops lies in its expertise in their merchandise,back-up service, and flexible customer service.Specialty shops started to establish chain storesin fashion buildings, underground shoppingmalls, and shopping centers from the 1960s ratherthan operating solely through their freestandingoutlets because the former was much cheaperthan the latter. The development of shoppingcenters accelerated the expansion of chains ofspecialty shops. Additionally during this periodnewly established families became individualizedin taste and fashion conscious, and the merchan-dise displayed in department stores no longerappealed to them. This explains why many chainstores specializing in electrical appliances, shoes,men’s suits, books, furniture, cameras, and so onemerged and prospered after the 1960s. Famousspecialty chain stores include Best Denki (electri-cal), Chiyoda (shoes), Aoyama (men’s),Kinokuniya (books), Bic Camera (cameras), andShimashi (furniture).

Konbini (convenience stores) are defined inJapan as a self-service store, having a sales areaof less than 200 square meters, operating no lessthan sixteen hours a day with no more than twoclosing days a month, and generating less than30 percent of total sales from fresh foods. Themajor merchandise offered by convenience storesare processed food, daily foods, fast foods, andnon-food items. It is very obvious that the strengthof convenience stores lies in the “convenience”demanded by the urban consumer lifestyle inJapan. 7–11 Japan, a subsidiary of Ito-Yokado,started Japan’s first convenience store in 1973.Other large GMS subsequently established their

retail industry 387

own convenience stores such as Daiei’s Lawsonand Seiyu’s Family Mart.

The key issues of operating a conveniencestore are efficient use of space and rapid stockturnover, which are further dependent on accu-rate estimation of customers’ needs thereby avoid-ing stock-outs or excess inventory. Running aconvenience store successfully thus requires ad-vanced information technology and efficientphysical distribution systems. Most conveniencestores had already equipped themselves with elec-tronic ordering and point-of-sale systems by the1980s.

Discount stores have no clear definition butgenerally refer to stores which sell merchandiseat 20 to 30 percent discount of the price recom-mended by manufacturers. Discount stores dateback to the 1970s when large GMS branched intoother retail businesses including discount stores.These large GMS originally were discount storesat the beginning and they later developed them-selves into large GMS, no longer appealing tothe customers with low price but through offer-ing a wide range of merchandise. In the 1970s,the large GMS started to develop new discountstores that reduced price by strictly controllingoperation costs, rather than by selling low-qual-ity goods. These new discount stores successfullyovercame of the image of selling cheap but low-quality goods. Discount stores grew rapidly inthe 1980s and reached their peak in the early1990s when Japan’s economic bubble burst. Eco-nomic recession led Japanese consumers to seekvalue for money. Discount stores have been par-ticularly successful in the field of cosmetics, liq-uor, and imported foreign goods.

Further reading

Larke, R. (1994) Japanese Retailing, London: Routledge.Niikei Ryuutsuu Shinbun (ed.) (1993) Ryuutsuu gendaishi

(The Modern History of Distribution), Tokyo:Nihon Keizai Shinbun, Inc.

HEUNG-WAH WONG

ringi seido

Ringi seido is a distinguishing characteristic of Japa-nese management and refers to the proposal dis-

cussion system that relies on horizontal and ver-tical employee participation in reaching a consen-sus on important organizational decisions. Twokey features of this system are the bottom-upnature of employee participation and the circula-tion of the ringi-sho, a proposal document, through-out the sectional, divisional, and corporate levelsof the organization to build consensus and com-mitment to company goals. However, at eachlevel, the formal circulation of a proposal is usu-ally preceded by a thorough discussion of thedetails and alternative solutions. This processcaptured the attention of Western managers, re-searchers, and consultants during the mid andlate 1980s when interest in Japanese managementpeaked.

The ringi system can have a significant impacton the effectiveness of organizational structure,strategic planning, negotiations. participation,commitment, and organizational learning. Thisis because ringi seido is more than just employeessigning off on proposals, it is also a significantorganizational process driven by informationgathering and consensus building objectives.Some of the key activities in this process include:

• problem identification• information gathering/analysis• informal discussion/consensus building• formal meetings and deliberations• proposals circulated/revised• final decision and implementation

The range of these activities indicate that ringiseido is a multi-step procedure that involves alllevels of the organization in the attempt to de-cide an appropriate course of action. In givingstructure to the decision-making environment ofJapanese firms, this system impacts manykey organizational functions and business strate-gies.

Japanese organizational structure places greatemphasis on intra-firm communication. Ringi seidotherefore plays a key role in company-wide com-munication and business strategies. From theopen layout of offices to the active rotation ofemployees throughout the Japanese firm, the fo-cus is on building intra-firm relationships andavenues of communication. Once these are inplace, it is then possible to more easily manage

388 ringi seido

firm-specific information, skills, and knowledge.Moreover, the group orientation of Japanese cor-porate culture provides the mutual monitoringand information sharing that gives direction tomany organizational activities. The ringi systemis clearly an important aspect of the communica-tions network that helps to structure organiza-tional activity in Japanese firms.

Ringi also has an impact on the strategic plan-ning process in Japanese firms. The literature onringi generally highlights the bottom-up aspect ofthe process. However, it is often the executives atthe top that identify a particular problem andindirectly challenge lower and middle managersand their staff to find a solution. By carefullyidentifying a set of key problems which the or-ganization faces, management lays the ground-work for long-term strategic plans. Lower-levelemployees’ generation of alternative solutionssets the stage for the effective implementation ofconsensus driven strategies. Many scholars thuspoint out that Japanese management cleverlycombines the decentralization of employee par-ticipation with a high concentration of formalauthority

Formal and informal negotiations are key ele-ments of the ringi system. The informal processof nemawashi (root binding or sounding out)helps to build consensus. This process is ex-tremely important in generating alternative solu-tions to problems as well as in resolvinginter-group or interdivision differences. The lit-erature on intrafirm negotiations point out thatJapanese employees and managers often employinformal meetings on the job and after work tosuggest solutions and arrive at compromises. Itis due to this type of extensive preparation andthese behind-the-scenes informal negotiations thatthe formal circulation of the ringi-sho generallybecomes a simple process of signing off on ac-cepted proposals.

Since the bottom-up approach of the ringi sys-tem involves employees in problem solving, itrequires the delegation of responsibility and ac-tive participation to be successful. In Japaneseorganizations, the ringi seido helps to create a highparticipation environment. By spreading marketinformation and organizational problemsthroughout the firm, a sense of crisis can oftenbe created. The goal of management is clearly to

mobilize employees to find alternative solutionsand share responsibility for the execution of newstrategies. In continually sharing information anddelegating responsibility Japanese firms are ableto foster a sense of community and enhance or-ganizational commitment. This approach mayexplain the extensive use of company-wide cam-paigns in Japanese firms.

Finally some researchers have linked high par-ticipation systems such as ringi seido to the organi-zational learning capabilities of Japanese firms (seeCole; Nonaka). Organizational learning relies ona firm’s ability to harness the information-gath-ering and problem-solving abilities of individu-als and groups, with the goal of converting thisknowledge into sustainable company adaptationroutines. The development of problem-solvingroutines and procedural knowledge has beenshown to be crucial for effective quality man-agement. product development and processinnovation (see kaizen). The ringi system can thusbe considered as one of the reliable problem-solv-ing and implementation processes that aid organi-zational learning.

As a group-oriented and consensus-drivendecision-making system, ringi seido can help tocreate a sense of community. Although Japanesemanagers use the system to share responsibilityand mobilize employee efforts, it also means thatlower ranking employees can have a significantimpact on company strategy. Aside from the in-tra-firm factors mentioned above, the ringi sys-tem can impact inter-firm dynamics. Contractnegotiations, alliances, affiliate management andnew business establishments can all be influencedby ringi seido. The process sometimes appears tobe slow and frustrating for foreigners doing busi-ness with Japanese firms. Moreover, the slowerpace and less drastic decisions which result fromringi seido can be a disadvantage in rapidly chang-ing environments. However, since there is gener-ally less dissension once a decision is reached,there tends to be faster implementation of theobjectives. As with other aspects of Japanesemanagement, this approach to decision makingis embedded in complex social relations that de-pend on trust and a commitment to organizationalobjectives.

ROBLYN SIMEON

ringi seido 389

salaryman

“Salaryman” is both an image and an occupa-tional category that has come to represent theJapanese middle class. Salaryman refers to white-collar male workers employed by large modernprivate sector corporations. The term embodiesall the stereotypical images associated with Japa-nese corporate employees: loyalty commitmentand obedience to the firm in exchange for secu-rity protection and rewards from the firm. Al-though white-collar male employees constituteabout a third of the labor force, those working inlarge private corporations account for less than15 percent of the labor force. Thus, the class ofsalaryman is small numerically but serves as an“ideological reference group” for the workingpopulation.

The meaning or image of a salaryman and hisrelation to his firm can be compared to the samu-rai warrior’s relation to his lord. During theTokugawa period (1603–1867), samurai devotedthemselves to feudal lords and to the expansionof the privilege and prestige of the lord’s houseand fief. Notions of loyalty and personal sacri-fice have clear parallels with the symbolic con-ception of the salaryman. Thus, the salaryman issometimes called the modern samurai or corpo-rate warrior.

The metaphorical comparison is powerful, butlocating the job category of salaryman within thelarger social structure may draw a clearer under-standing. The Japanese word salari man (salaryman) can be traced back to the 1930s. It becamepopular with the rise of the (new) middle class

after 1955. After the Second World War, the farm-ing population declined drastically and the work-ing class (skilled and unskilled workers) and themiddle class (white-collar workers) expanded.Today the working class and the middle class eachconstitute slightly over one-third of the workingpopulation. Independent small proprietors andtheir family workers make up about a quarter ofthe labor force. (Remaining percentages are pub-lic sector workers and those unemployed.)

Precarious working conditions that character-ize small business sectors are in sharp contrast toworking conditions of white-collar employees oflarge firms. The salaryman’s life is more stableand less affected by economic cycles. It providessecure employment and a lifestyle that is brightand glamorous. The stability of the income, jobsecurity career outlook, and the lifestyle consti-tute the essence of the salaryman and salarymanfamily

The salaryman class is generally well-edu-cated. Salarymen are recruited right after gradu-ation from a university accorded with apparentlifetime employment and pursue careers throughthe firm-based internal labor market. Large cor-porations provide the salaryman with housingbenefits, family allowances, pensions, housingloans, and recreational benefits. In return for jobstability economic security and corporate ben-efits, a salaryman pledges his allegiance to thefirm. He is expected to devote himself to the needsand commands of the company at the expense ofhis personal rights and choices.

The salaryman’s career path, which centerson the same company for his entire life, is not a

S

typical career path for Japanese. Given the heavyconcentration of small and medium-sized firmsin the Japanese economy job changes are higherthan might be expected, especially from medium-sized firms to small firms or from one small firmto another. Overall job mobility rates in Japanare quite comparable to those in Europe. Thus,the concept of salaryman may overlook the highdegree of labor mobility among workers in thelarge number of small enterprises.

The bright image of salaryman as a high-sta-tus career changed in the 1980s and 1990s. Life-time employment, seniority-based promotion,and in-house training have locked salarymen intoa rigid system of career attainment. A salaryman’scareer is shaped and re-shaped depending on thecompany’s goals, allowing little autonomy overhis career development. For example, rotationsof jobs are a standard part of corporate careerdevelopment and salarymen are dispatched fromone geographical location to another. These com-pany assignments increased the number of tanshinfunin, temporary family separation. In 1985 therewere 200,000 married men who were classifiedas tanshin funin and more than half of these menwere in their forties. Tanshin funin is often trig-gered by children’s education or family’s needsto care for elderly parents. At the age of fifteen,Japanese children take the single most importantexamination of their lives: high school entranceexams that may well determine their future. Oncechildren enter a good high school, they will havebetter chances of getting into good universities.Parents attempt to avoid any disruption at thispoint in their children’s education. And so,salarymen take tanshin funin.

Salaryman’s dedication to a company limitshis position in family life to not much more thana bread winner role. Long hours of daily com-muting, overtime work, and evening socializingwith co-workers leave very little time for personalor family leisure. Young women have begun toexpect more family participation from the men.Divorce rates are rising among middle-aged cou-ples, with women claiming it difficult to live withmen who have such a single-minded pursuit ofwork and little usefulness around the home.Karoshi, death from overwork, is also rising anda number of lawsuits have been brought againstcompanies. The courts have upheld a number of

wives’ claims that their husbands’ deaths werecaused by the overwork demanded by their com-panies, ordering the companies to pay compen-sation.

The celebration of Japan’s labor managementpractices ended abruptly in the 1990s with thesteepest slump in Japan’s postwar economy. Sud-denly companies rushed into restructuring anddownsizing, threatening a social contract that hasstood at the core of Japan’s success. Corporatelife that was rigid but secure suddenly becameinsecure. Employee expectation that loyalty to thecompany would be returned has been broken.

Further reading

Powell, B., Takayama, H. and McCormick, J. (1995)“Who’s Better Off?” in M.I.White and S.Barnet(eds), Comparing Cultures, Boston: Bedford Books ofSt. Martin’s Press, 274–83.

Rosen, D. and Usui, C. (1994) “The Social Structureof Japanese Intellectual Property Law,” UCLA Pa-cific Basin Law Journal 13 (1): 32–69.

Sugimoto, Y. (1997) An Introduction to Japanese Society,Cambridge: Cambridge University Press.

Vogel, E.F. (1963) Japan’s New Middle Class, BerkeleyCA: University of California Press.

GHIKAKO USUI

samurai, role of

Originally a kind of warrior-bodyguard, the roleof the samurai was completely transformed dur-ing the Tokugawa period to constitute a por-tion of a hereditary elite which stood above andruled over the bulk of the population. Samuraiwere distinguished by their appearance, by thefact that only they could carry weapons, and bylanguage usage. That segment of Japanese soci-ety developed its own style of religion, lifestyleand entertainment, and exerted a strong influ-ence on the values of modern Japan.

The word samurai brings to mind dramaticimages of bravery dedication to duty extremelydeveloped fighting skill, a highly idealized visionof masculinity Originally part of Japanese folk-lore, those images are now shared by people allover the world. Hollywood has in several in-stances chosen to use themes and artifacts from

samurai, role of 391

the samurai tradition in making movies designedto reach the imaginations of young people, evenwhen the setting has nothing to do with Japan.In Japan itself the samurai image is introduced toeach new generation through relatively accuratehistorical documentation, and through liberalamounts of entertainment fantasy. When a Japa-nese boy is born, he is typically provided with adecorative samurai helmet and sword for displayon Children’s Day a symbol of the new mascu-line unit of the home. When thought of in a posi-tive light (which is definitely not always the casetoday), the self-sacrificing salaried employee of alarge corporation is sometimes referred to as amodern-day samurai.

The word samurai, closely associated and of-ten used interchangeably with another word,bushi, both denoting warrior, had its initial wide-spread application in the thirteenth century andcontinued to be used to refer to a specific andofficial category of Japanese men until the end ofthe nineteenth century However, glamour asso-ciated with the samurai image is actually drawnfrom only a part of that time, roughly from theearly thirteenth to the beginning of the seven-teenth centuries. For the final two and three-quar-ter centuries of its existence during the Tokugawaperiod and its immediate aftermath, the role ofsamurai was fundamentally altered.

The Tokugawa regime transformed Japan intoa system of fiefs or feudal estates tightly control-led and carefully watched over by a central gov-ernment. The crowning accomplishment of theTokugawa rulers was the peace the regime wasable to enforce for a very long time. Ironically ina society ruled by warriors, all military activitydisappeared under the Tokugawa, and was notto appear anywhere in the land again for morethan ten generations.

During Japan’s long period of civil wars, warsfought until the mid-1500s almost exclusively bysamurai, a great many of those warriors did notlive past the age of twenty-five. Most samurai weresons of samurai, but a promising peasant lad couldbe trained as a samurai if he caught the attentionof the rulers of his estate, and stories of farm boyswho became famous samurai are not uncommon.All that changed under the Tokugawa. Samuraiwere made an hereditary caste; for most of theperiod of Tokugawa rule, the samurai, the war-

rior caste, were not warriors at all, but rather acategory at the bottom rung of a ruling aristoc-racy.

Samurai was a term used in some cases to referto all of the ruling aristocracy outside the courtnobility surrounding the Emperor in Kyoto.However there were other more specific titleswhich applied to those of the highest status infeudal Japan, and samurai, then and now, mostoften identified the men at the large bottom levelof the Japanese ruling caste. In the eyes of ordi-nary people, they were a kind of elite police. It isonly a slight exaggeration to state that samurailived lives almost completely shut off from ordi-nary Japanese society.

The samurai caste was not a single status; somesamurai had retainers of their own, and the amountof pay in the form of rice made to each samuraifamily varied considerably Most were at the bot-tom of the caste however, and although we cancall samurai aristocrats due to their elevated sta-tus and power over commoners, ordinary samu-rai themselves were not usually wealthy people.Until the very end of the regime, it was shamefulfor those with real power if samurai under theircommand did not dress well and have the bestequipment. However, these things were issuedto most samurai in the same way that slaves orprisoners are provided for.

During the civil war period, most samurai spentmost of their waking hours preparing for the in-evitable battles. They never constituted a largesegment of the people as a whole, probably nomore than 1 percent. Soon after 1600, as an offi-cial caste in the Tokugawa social system, and withno more fighting to do, samurai men began to liveas long as other men; together with their fami-lies, they came in time to constitute from 7 to 8percent of the total Japanese population. Samuraiwere normally quartered on the castle groundsof their master, either the daimyo of a feudal es-tate or the head of one of the several branches ofthe Tokugawa clan. Young samurai continued tobe trained in the martial arts, but after 1600 therewas plenty of time for other pursuits, and overtime samurai became a highly educated cadre,universally not only literate but well schooled inhistory and philosophy Only samurai were allowedto carry weapons, and although they swaggeredthrough the streets of Tokugawa Japan with their

392 samurai, role of

two swords in evidence, the real job for most samu-rai was as bureaucrats.

See also: giri

Further reading

Shinoda, M. (1960) The Founding of the KamakuraShogunate, New York: Columbia University Press.

Totman, C.D. (1967) Politics in the Tokugawa Bakufu,Cambridge, MA: Harvard University Press.

Varley P.H. (1970) The Samurai, London: The TrinityPress.

JOHN A.McKINSTRY

sarakin

A contraction of the Japanese term “salarymanfinancing,” the term sarakin refers to finance com-panies with notoriously high interest rates or in-volved in loan sharking operations, often withclose ties to yakuza, the Japanese mafia. Sarakinemerged in the 1970s in response to an unmetdemand for consumer credit. Major legislativereforms in the early 1980s served to rein in sarakinpractices. Legislation, however, has not helpedsarakin overcome the historically negative imageof moneylenders. This stands in contrast to theirUS counterparts who were able to make the tran-sition to becoming financial firms offering a widerarray of services. Instead, the gap for consumercredit once filled by sarakin has been taken overby banks and shinpan (sales finance corporations).

Historical development

In the early 1970s, individuals seeking loans forpurposes other than to buy a house confrontedsocial stigma and practical challenges. Socialstigma generally attached to people who foundthemselves in circumstances necessitating theborrowing of funds. In addition to social disap-probation, the market for consumer lendingthrough established banks and other lending in-stitutions was not well developed. There werenumerous regulatory barriers besides which in-dustrial demand for investment funds was swal-lowing up most of the available capital. Sarakinstepped in to fill the niche.

Located near virtually every train station and

neighborhood, most sarakin were small opera-tions, usually with only a single office. The at-tractiveness of sarakin was obvious: theyprovided small, for the most part unsecured,loans and required little more than a signature.Annual interest rates, however, were exorbitant,often exceeding 100 percent. Indeed, the legallimit at that time was 109.5 percent. For delin-quent payers, collection methods were aggres-sive, and included such things as personal visitsto one’s residence, intimidating calls to one’semployer and threats of physical violence. Oneestimate of sarakin with yakuza ties placed thenumber at over 3,000. Despite their overallunsavory image, by 1975 sarakin held 4 percentof Japan’s total consumer credit.

The second half of the 1970s and early 1980ssaw explosive growth among the sarakin. Theirshare of consumer credit grew to nearly 14 per-cent in 1982 from its 4 percent level in 1975. Thenumber of sarakin also grew dramatically withsome estimates placing the number of sarakin atroughly 220,000. Though most of these were stillof the one-office variety four of the largest oper-ated nationwide, with hundreds of offices, andholding individuals’ accounts numbering in thehundreds of thousands.

In 1983, the Diet passed the Loan Shark Con-trol Bill, reining in the growth of sarakin and sig-nificantly reducing the maximum annual interestrate allowed. The top rate was lowered in phasesfrom 109.5 percent to 73 percent in 1983, then to54.75 percent in 1986, and then to a final posi-tion of 40 percent in 1991. The legislation cameabout in response to widespread social concernover samkin-related suicides and disappearances.A study by the National Police Academy identi-fied over 1,000 suicides which it classified as sarakin-related. It also classified 10,000 disappearances assamkin-related, suspecting these people of fleeingcreditors. In a separate analysis, fifteen murdersin the first four months of 1984 were also classedas sarakin-related.

Despite the 1983 legislation, numeroussarakin continued to operate as usual. In one in-stance, the Saitama police arrested three loansharks for charging ¥40,000 interest on a three-day loan of ¥60,000, fifteen times the allowablerate of ¥3,700. Such incidents prompted an in-vestigation by the National Tax Agency, which

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concluded that 80 percent of sarakin were evad-ing taxes and generating incomes three times thereported average.

Over time the Loan Shark Act took its toll.The phased-in interest rates, coupled with thegrowth of consumer lending practices amongbanks and shinpan led to a shakeout. From a peakof 220,000 in 1980, sarakin numbers dropped to37,000 by the early 1990s. Some observers specu-late that bad practices winnowed out many ofthe small sarakin. Poor screening processes, unso-phisticated collection methods and high levels ofunrecovered loans drove out many. Those whoremained pursued cooperative efforts in termsof sharing credit information and sought scaleeconomies in transaction processing.

Large sarakin who survived the shakeout ofthe early 1990s are thriving at the turn of thecentury Takeufuji reported 1999 earnings atnearly ¥53 billion, a 27.8 percent improvementover 1998. Acom and Promise, two others, re-ported similar earnings levels. At the same time,leading sarakin have dropped their top annual ratesdown to a range of 25.55 to 29.2 percent. Finallyconsumer behavior suggests that the position ofsarakin will remain prominent. The average levelof consumer debt (using the ratio ofdebt:disposable income) for Japanese now ex-ceeds that of the USA.

ALLAN BIRD

science and technology policy

Japan’s science and technology policy historicallyemphasized the importation and adaptation offoreign technology. This was considered essen-tial to Japan’s military and economic security.After the Second World War, the focus on for-eign technology continued, though the emphasisshifted almost exclusively to commercially im-portant technologies. As Japan moved to a lead-ership position economically and closed itstechnological gaps with the West in the 1960sand 1970s, new concerns emerged. These in-cluded the development of a stronger ability toperform basic research and to contribute to theworld stock of technology. Although Japanesepolicy makers have tended to craft more coher-ent statements of national science and technol-

ogy policy than their US counterparts over theyears, the Japanese government has always spentfar less as a percentage of overall national R&Dspending than the US government.

Through the Second World War

Although the Tokugawa government (1603–1868) severely restricted Japan’s contacts with theoutside world from the early seventeenth centuryuntil the mid-nineteenth century it did allow theimport of foreign books on science and technol-ogy and supported the translation of many ofthem. After Japan was opened to contact withthe Western world, its government hoped to com-bine Western technology with Japanese values,thereby building a strong nation able to maintainits independence. In the late nineteenth centuryforeign engineers were hired to help build a tech-nological infrastructure and to teach technologyto the Japanese. Young Japanese were also sentabroad to learn about technology. By 1873, morethan 500 foreigners were working for the Japa-nese government and some 250 Japanese werestudying abroad at government expense.

The Japanese government also began struc-turing itself to import and adapt foreign technol-ogy. The Ministry of Engineering (also calledMinistry of Industry) was established in 1870 withthe major mission of bringing in mining andmanufacturing technology. In 1886 the PatentOffice was established. Government involvementin technology accelerated during the First WorldWar. Around this time the Ministry of Educa-tion began offering research grants for naturalscience research. National Research Institutes insuch fields as electrical engineering and metal-lurgy were also set up. The military establishedR&D centers: the Naval Research Institute, inparticular, became quite strong in the electronicsarea, and wartime researchers at the institute,including Morita Akio (a co-founder of Sony),went on to become leaders in the consumer elec-tronics industry.

As international tensions escalated in the1930s, the Japanese government sought to mobi-lize its technological resources. In general, theseefforts were unsuccessful. Rivalries between themilitary services, shortages of materials, and theinduction of many researchers into the military

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all weakened the development of Japanese tech-nology. The severance of ties with foreign sourcesof technology in the United States and Europealso hurt.

Postwar period

With the end of the Second World War, US oc-cupation authorities dismantled the Japanesewartime technology policy apparatus and prohib-ited research in areas such as aviation and radar.Many aviation researchers moved to the auto-mobile industry and many of the radar research-ers moved to the consumer electronics (and laterthe semiconductor) industry.

In the early postwar era, Japan desperatelyneeded to import new technologies. At the timeJapan was chronically short of foreign exchange,which was rigidly rationed by the government.A major challenge was to establish mechanismsfor Japanese firms to pay foreigners for technol-ogy. A framework for doing this was establishedwith the passage of the Foreign Exchange andForeign Trade Control Law (1949) and the For-eign Investment Law (1950). Under these laws,Japanese firms applied to the government, mostoften the Ministry of International Trade andIndustry (MITI), for approval of technologyimport agreements. If approval was granted thefirm was allowed the foreign currency to pay forthe technology. In the 1950s and 1960s some13,000 agreements were screened and approvedby the government. While government involve-ment may have slowed the flow of technologyinto Japan, it apparently also resulted in Japanesefirms getting better terms than they might haveotherwise. MITI could refuse to approve agree-ments if the terms seemed too generous to for-eigners. It could also keep Japanese firms frombidding against each other to raise the price of atechnology.

The emergence of modern science andtechnology policy

While MITI, the Ministry of Finance, and otherministries concerned themselves with Japan’s tech-nology import policies, other initiatives in the areaof science and technology and policy were begunin the 1950s. In 1956 the Science and Technol-ogy Agency (STA) was established as a cabinet-

level body reporting to the prime minister. Thissignified that science and technology policy wasformally recognized as having an important rolewithin the national government. In 1959 the Coun-cil for Science and Technology (CST) was estab-lished with STA staff to make recommendationsto the prime minister on the overall directions ofJapanese science and technology policy.

In 1960 the CST proposed a comprehensiveplan for the development of science and technol-ogy in Japan over the coming decade. This waspart of the government’s income doubling plan.The comprehensive plan called for the elimina-tion of the technological gaps between Japan andthe West. It recommended increasing the numberof science and engineering universities and in-creasing spending on R&D to 2 percent of GDP,double the 1959 level. This would have beencomparable to the percentage in the UK, thoughstill below the 2.7 percent being spent at the timeby the USA.

While the STA concentrated on general poli-cies and on certain national projects, such as thoserelated to nuclear energy and space exploration,MITI shifted its interest from technology importcontrols (which were being phased out as Japanjoined the OECD) to policies that would promotethe development and use of industrial technol-ogy. In its “vision” for the 1960s, MITI proposeda variety of policies for the promotion of indus-trial technology including the use of subsidies andtax relief. At this time the decision was also madeto build Tsukuba Science City.

In 1966, the CST issued new recommenda-tions on science and technology policy designedto help Japan cope with the opening of itseconomy. Now the target was for R&D spendingto reach 2.5 percent of GDP, near the US level.The CST wanted to see a new emphasis on long-term planning. CST’s proposed Basic Law forScience and Technology however, was not passed.

Changes in the 1970s

As Japan entered the 1970s it was no longer apoor country and policy concerns shifted fromeconomic growth to environmental protection.The energy crises of the 1970s brought newinterest in energy conservation and finding alter-native sources of energy. Japanese policy makers

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also believed Japan had to become competitivein emergent new industries. In its recommenda-tions for the 1970s, the CST gave new attentionto technology assessment and soft science. It seta long-term goal of increasing Japan’s investmentin R&D to 3 percent of GDP. As Japan becameembroiled in conflicts with its trade partners, andthe Japanese became concerned about their im-age as a nation of copiers, there was new interestin international cooperation in the developmentof technology.

MITI also issued a new vision for the 1970sthat called for the development of pollution con-trol technology energy-saving technology andalternative sources of energy. In a 1975 interimreport, MITI called for research on nuclear fu-sion and computers. One MITI policy device wasthe use of research cooperatives, made up ofindustrial firms and government laboratories sup-ported by government subsidies and tax benefits.Perhaps the most publicized of these was theVLSI Research Cooperative which targeted thedevelopment of semiconductor technologies foruse in computers. Although the VLSI consortiumis generally portrayed as having been successfulin accelerating Japan’s technology progress, therecord of the research cooperatives in general iscontroversial. In the 1980s MITI established newR&D programs to promote “future” industries,including new materials and biotechnology. An-other new area of policy was the creation of re-gional technology centers.

CST believed Japan’s major priorities for the1980s should include a strengthening of its abil-ity in basic research. Throughout the 1980s theCST worked on the development of basic guide-lines for a new science and technology policy forJapan. In a report approved by the cabinet in 1986two main pillars of science and technology policywere identified, basic research and internation-alization. Now the goal was to increase R&Dspending to 3.5 percent of GDP.

After the bubble

After the bursting of the bubble economy of the1980s, new problems emerged for Japan’s scienceand technology policymakers. Corporate spend-ing on R&D declined for the first time since theSecond World War in 1992 and again in 1993.

Enrollments in science and engineering depart-ments started declining in 1988. Younger Japa-nese seemed to be turning away from an interestin science and technology.

The CST revised the general guidelines forscience and technology policy A new Science andTechnology Basic Law, based on the revisions,was passed by the Japanese Diet in 1995. Thenew law called for government to prepare andimplement two successive five-year basic plans.The goals of the plans were to make the Japa-nese science and technology system more inno-vative and cost efficient by addressing suchproblems as the decline in private R&D spend-ing, the generally poor Japanese R&D infrastruc-ture, and the obsolescence of facilities at nationaluniversities and national laboratories.

The guidelines pointed to other problems andsuggested remedies. It noted, for example, the rela-tive lack of mobility of Japanese researchers be-tween the government, private and universitysectors. Under the new law, professors at nationaluniversities would be freer to work as consultantsor in joint research with the private firms. The newlaw also introduced more competition amongstthose applying for government research supportand sought to standardize the review process. Itincreased the number of postdoctoral fellowshipsand sought to encourage more foreign research-ers to work in Japan. New tax deductions and sub-sidies were offered to encourage small and mediumsized firms to spend more on research. The newlaw also supported the development of regionalscience and technology centers.

Major changes in Japan’s administrative struc-ture are scheduled for 2001. The STA is to bemerged with the Ministry of Education, Scienceand Culture. STA’s Atomic Energy and NuclearSafety Bureaus are to be moved to MITI. MITI’sresearch institutes are to be merged into a newIndustrial Science and Technology Institute. TheInstitute will be an independent administrativeagency partially funded by the government, butnot considered to be part of the government.

Distinctive features of Japan’s science andtechnology policy

Japan’s science and technology policies havediffered somewhat from those of the USA and

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Western Europe. There was a much greater em-phasis on the acquisition of foreign technologyparticularly in the first few decades after the Sec-ond World War. There was little emphasis ondefense spending and, partly as a consequenceof that, the share of R&D spending supported bythe government was typically lower (20 percentin the late 1990s, compared to more than 30 per-cent for the USA). Another consequence of thelack of emphasis on defense spending was thatthe Japanese government was far less able to of-fer the lure of government procurements to en-courage the development of specific technologies.

Further reading

Callon, S. (1995) Divided Sun: MITI and the Breakdownof Japanese High-Tech Industrial Policy, 1975–1993,Stanford, CA: Stanford University Press.

Goto, A. and Odagiri, H. (eds) (1997) Innovation in Ja-pan, New York: Oxford University Press.

Lynn, L. (1982) How Japan Innovates: A Comparison withthe U.S. in the Case of Oxygen Steelmaking, Boulder, CO:Westview.

Morris-Suzuki, T. (1994) The Technological Transforma-tion of Japan, New York: Cambridge UniversityPress.

Science and Technology Agency Japan (annual) Indi-cators of Science and Technology. Tokyo: Ministry of Fi-nance Printing.

——(annual) Kagaku gijutsu hakusho (Science and Tech-nology White Paper), Tokyo: Ministry of FinancePrinting.

LEONARD H.LYNN

seniority promotion

Known as nenko joretsu in Japanese, along with life-time employment and enterprise unions, se-niority promotion is considered one of the threesacred treasures of the Japanese managementsystem. It refers to the practice of promotingemployees on the basis of seniority in the firmrather on the basis of merit. This type of promo-tion system is sometimes described as an “esca-lator,” suggesting that one steps on at the bottomand then automatically rises within the organiza-tion. It is often portrayed as reflecting the collec-tive, egalitarian nature of Japanese organizations

and as being rooted in the deeper values of Japa-nese society However, it applies only to perma-nent, or regular, employees of the firm, whosenumbers comprise a minority within the totallabor force and even within the company. More-over, the evidence for seniority promotion sug-gests that the practice is more textured than iscommonly thought. In the face of a prolongedrecession, heightened competition with non-Japa-nese firms both at home and abroad and a tightlabor market for college graduates, firms aremoving away from their emphasis on seniorityas a key criterion in promotion decisions.

Cultural foundations

Harking back to pre-Meiji era ie, Japanese workorganizations have had a long history of respectfor seniority. At a more fundamental level, thefoundation for seniority promotion is sociocul-tural norms rooted in the Confucian-based val-ues of respect and deference toward seniors. Theassumption embedded in this value is that as aconsequence of age and experience, seniors havemore knowledge and wisdom. Within a work-place context, this same assumption is held.Longer tenure implies a greater knowledge of thefirm and its competitive environment that trans-lates into better judgment. Within the merchanthouses and guilds of the pre-Meiji era, there wasgood reason to accept this assumption, as indi-viduals worked their way up through apprentic-ing to someone more skilled and moreknowledgeable. The correlation between age,experience and knowledge/skill was more clearlydiscernible.

A related rationale for the logic of senioritypromotion is that given the norms in the largersocial context, employees of an organizationwould feel uncomfortable working for someoneyounger than themselves or supervising some-one older than themselves. In short, senioritypromotion was deemed necessary to maintenanceof good company morale and harmony.

Seniority promotion is also predicated on thenotion of rewarding loyalty Advancement in rankis recompense for working hard on the compa-ny’s behalf. A refinement of this argument is thatpromotion is a form of “serial equity” in which

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the employee works hard in the early years inexchange for the promise of greater reward andpromotion later in the career.

The reality of seniority promotion

Western discussion of seniority promotion hasoften been simplistic. A superficial case for se-niority promotion is easily found in the behaviorof torishimaryakukai (board of directors) at thetime that a new president is selected. The tradi-tional practice, still common, is for members ofthe torishimariyakukai (board of directors) who areyounger than the incoming president to resigntheir positions, either immediately or at the endof their two-year appointment. Though this phe-nomenon appears to support the notion of se-niority promotion, it does not withstand closescrutiny. Under a pure seniority system, therewould be no one older than the incoming presi-dent (though there might be some who were thesame age). There are other equally compellingexplanations for what transpires with the succes-sion of presidents. As the new president will havea tenure of six to eight years, directors who areolder have little prospect of further advancement.New presidents also prefer to have their ownpeople in place, so it is natural to leave and makeroom for them. Elements of the values underly-ing seniority promotion may contribute to exitphenomena surrounding CEO succession, butalone do not provide a compelling explanation.

The evidence for seniority promotion at lowerlevels of the organization is equally complex, dueto the length of time between promotions andthe nature of cohort recruitment. In large firms,employees enter directly from university in largecohorts. Japanese firms tend to hire annually inlarge cohorts and employ an internal labor mar-ket system (see internal labor markets) in whichjob vacancies are filled from below rather thanfrom an external labor pool. Large, particularlytraditional, firms tend to prolong the period be-fore one’s initial promotion as compared to West-ern firms, where promotions can occur early inone’s career. As a result, these cohorts tend tomove up and through the organization as a group.However, over time they will begin to separatebased on performance. For high performers, thefirst promotion to a managerial position (most

likely kakaricho, sub-section head) will come asearly as the fifth year. For average performers,promotion to kakaricho may not come until yearseven or eight. If subsequent promotion oppor-tunities present themselves on a four-year basis,and differences in rates of promotion persist, thenover a sixteen-year period high-performing andaverage-performing members of the same cohortwill find themselves several levels apart. Whenone factors in the presence of new cohorts enter-ing annually and the recognition that firms havea pyramidal structure, it is difficult to countenancea pure seniority promotion system.

The metaphor of promotion as an “escalator”requires some modification. First, access to theescalator is highly restricted, applying only topermanent employees. Second, there are multi-ple escalators—at least one for each cohort. Third,based on performance, managers end up on es-calators that move at different rates. Finallythrough shukko and related practices, voluntaryexit and outplacement, workers are moved offthe escalator in order to make room for thosebelow them.

Age versus ability

The conception of seniority promotion derivesfrom a much larger distinction between Japaneseand Western firms, the relative importance of ageand ability as criteria on which to base not onlypromotion decisions, but also decisions on com-pensation. The traditional Japanese system hastended to place a greater emphasis on age as acriterion for both pay and promotion than isfound in Western firms. Japanese have tended togive age more importance. It is important to notethat even in Western countries, seniority carriesweight and contributes both to pay and promo-tion decisions. However, its relative weight hasbeen much greater in Japan.

There is evidence that the relative weight ofage has been shifting, particularly from the 1980sonward. A tightening labor market has left newrecruits with more options, to which they haveresponded with higher levels of mobility In or-der to retain them, firms have been moving uppromotion timetables and increasing the weightof performance criteria in making promotiondecisions. The presence of Western firms, which

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no longer suffer a stigma as unstable employers,has served to amplify the different options opento new recruits: fast versus slow promotion, per-formance versus tenure.

The internationalization of Japanese firms hasalso forced many to confront conflicting pay andpromotion policies between Japan-based opera-tions and overseas subsidiaries. The pressure tostandardize, or at least bring into greater conform-ity human resource management policies andpractices has led many to opt for increasing theweight of performance over age. Internationali-zation has also created a competitive environmentin which seniority promotion policies placed Japa-nese firms at a competitive labor disadvantage.

Finally many of the most dynamic industriesin twenty-first century Japan—high tech, e-com-merce, financial services, telecommunications,biotech—are industries without strong ties to thetraditional Japanese management system and ledby younger business leaders, often operating onthe periphery of the established, conservativebusiness community Consequently firms in theseindustries have demonstrated a greater willing-ness to break with business norms and sociocul-tural values.

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.

Clark, R. (1979) The Japanese Company, Berkeley CA:University of California Press.

Tachibanaki, T. (1996) Wage Determination and Distribu-tion in Japan, New York: Oxford University Press.

Rohlen, T. (1974) For Harmony and Strength, BerkeleyCA: University of California Press.

ALLAN BIRD

7–11 Japan

7–11 Japan is Japan’s largest chain of conveniencestores, with 8,200 outlets nationwide. The com-pany helped revolutionize retailing in Japan inthe 1970s and 1980s, pioneering the developmentof the convenience store industry and introduc-ing computerized point-of-sale (POS) systems to

improve inventory and shelf space managementand enhance profitability.

Prior to the 1970s, Japanese retailing wasdominated by small mom-and-pop stores and afew large department stores. During the 1960sand 1970s, the retail chain Ito-Yokado built agrowing chain of superstores—multi-story storescontaining several types of retail outlets—in sub-urban areas of Japan. The success of Ito-Yokadoand other superstores hurt the business of mom-and-pop operations, prompting the Japanesegovernment to establish the Large Retail StoreLaw to protect small shop owners. Enacted in1974 and strengthened in 1979, the Large RetailStore Law restricted the opening of new storeswith sales floors above a certain size and limitedthe operating hours of new and existing largestores.

In 1974, Ito-Yokado secured a license fromDallas-based Southland Corporation to operate7–11 stores in Japan. Fifteen 7–11s were openedin Japan in that year, and over the next twenty-five years the chain expanded at a rate of over300 new outlets per year. With an average floorspace of only 1,000 square feet, the storesavoided regulation under the Large Retail StoreLaw and competed successfully with the mom-and-pop stores on basis of long operating hoursand lower prices. 7–11 Japan followed a policy offranchising stores rather than owning them, andmany small retailers became 7–11 franchises. In1991, Ito-Yokado bought out Southland, theowner and operator of the 7–11 chain in NorthAmerica. In the 1990s, 7–11 was Japan’s mostprofitable retailer. Total sales in 2000 were $20billion.

7–11 Japan owes much of its success to inno-vative management, particularly the introductionand development of point-of-sale (POS) systemsthat monitor the flow of every item of merchan-dise through purchase, inventory sale, and re-stocking. First introduced in 1982, 7–11 Japan’sPOS systems allowed two-way information flowbetween individual stores and company head-quarters, and revealed clearly and immediatelywhich products sold well and which did not. Theprofit performance of individual items replacedsupplier power as the determinant of which prod-ucts were given shelf space. Centralized order-ing also gave 7–11 increased bargaining power

7–11 Japan 399

with distributors, resulting in more frequent andsmaller deliveries.

7–11 Japan has also steadily increased thenumber of products and services offered in itsstores; consumers can purchase an astoundingvariety of items, as well as make color copies,send faxes, order tickets, and pay electric, gas,water, telephone, insurance, and NHK televisionbills. In 2000, with further land-based growthbecoming difficult and online shopping taking offin Japan, 7–11 Japan joined with NEC, Sony,Mitsui & Co, Japan Travel Bureau and other lead-ing Japanese firms to set up an e-commerce mar-ket which integrated the convenience of onlineshopping with in-store payments and merchan-dise pick-up capabilities.

TIM CRAIG

shareholder weakness

Japanese managers have not had much pressurefrom shareholders. One of the main reasons forthis is that the majority of shares in Japanese firmshave been held by so-called stable shareholderssuch as affiliated or keiretsu firms, banks, and in-surance companies. These shareholders, who arecalled antei kabunushi or seisaku toshika’ in Japanese(“stable shareholders” or “strategic investors”)often have other relationships, such as lending,insurance sales and other commercial trades withthe firm in which they own shares. In many cases,these equity holdings are reciprocated among af-filiated firms through cross-shareholding arrange-ments (see cross-shareholdings). It is suggestedthat 70–75 percent of listed shares of Japanesefirms are owned by stable shareholders and 15–20 percent of listed shares are cross-held, althoughthese numbers have been declining in recentyears.

It is commonly argued that stable sharehold-ers own shares primarily to cement and grow sta-ble business relationships rather than to earnreturns on their equity investments and thus,shares held by stable shareholders are rarely ifever sold. Because of these motives inshareholdings, stable shareholders’ main concernhas not been stock price appreciation or dividendincomes. Thus, stable shareholders have not beenexerting much pressure on management of the

company in which they hold shares to improveinvestment return to shareholders. Also, becauseof cross-shareholding relationships, some stableshareholders have a strong incentive not to med-dle with other companies’ management becausesuch action may be reciprocated. These arrange-ments, therefore, allow management to maintainstrong control over the company.

In addition to large shareholdings by stableshareholders, the role of the board of directorsof Japanese firms functions to allow managers topay only minimum attention to the sharehold-ers’ interests. Although the directors of the boardare assumed to represent shareholders, they arenot motivated to do so because they are usuallychosen by the president and are thus in effectjunior officers of the company. Further, very fewdirectors own stock in the company or are com-pensated through stock price-linked packages,although such compensation plans are increas-ing in recent years. Thus, there is no internalmechanism that can promote the interests ofshareholders who seek investment returns.

While shareholders of Japanese firms have hadonly limited influence over management, this situ-ation shows some sign of change due primarilyto the changing ownership structure. In recentyears, Japanese firms and banks have been gradu-ally selling their shareholdings in other compa-nies and unwinding part of theircross-shareholdings, and share-ownership by for-eign institutional investors has been increasing.Although it is far from the situation in the USA,the number of investors who are sensitive to in-vestment returns is increasing.

See also: corporate governance; torishima-riyakukai

Further reading

Abegglen, J. and Stalk, G. (1985) Kaisha: The JapaneseCorporation, New York: Basic Books.

Charkham, J. (1994) Keeping Good Companies: A Study ofCorporate Governance in Five Countries, Oxford:Clarendon Press.

Gerlach, M.L. (1992) Alliance Capitalism: The Social Or-ganization of Japanese Business, Berkeley, CA: Univer-sity of California Press.

400 shareholder weakness

Kester, W.C. (1991) Japanese Takeovers: The Global Con-test for Corporate Control, Boston: Harvard BusinessSchool Press.

TORU YOSHIKAWA

Sharp

Sharp Corporation is a major Japanese electron-ics company known as a pioneer in developingand introducing new products, including Japan’sfirst commercial radio and television sets, andthe world’s first electronic calculator and liquidcrystal display (LCD). Sharp was founded in 1912by Tokuji Hayakawa, an inventor whose firstpatent was for a snap buckle called the Tokubijo.In 1915, Hayakawa invented the Ever-Sharpmechanical pencil, from which his young com-pany later took its name. In the 1920s Sharpmoved into the field of electronics, starting withthe assembly of crystal radio sets in 1925 andthe development of Japan’s first AC vacuum tuberadio (the Sharp Dyne) in 1929. The companydeveloped and began mass producing televisionsin 1953 and microwave ovens in 1962, and elec-tronic desktop calculators in 1966.

Since the 1970s, Sharp has become especiallywell-known as a leader in LCD and optoelectronictechnology. In 1973, Sharp introduced the world’sfirst practical liquid crystal display in the form ofthe EL-805 LCD pocket calculator. Until thattime, calculators had used fluorescent characterdisplay tubes or light-emitting diodes for thenumber display These consumed a large amountof energy severely limiting the length of time acalculator could operate on batteries. Using anLCD for the number display meant that muchless power was required; the EL-805 could runfor 100 hours on a single AA battery about 1percent of the energy consumption of previouscalculators. Although priced higher than othercalculators, the EL-805 sold well, starting a trendtoward smaller and thinner machines. By 1979,Sharp was producing a calculator that was only1.6 mm thick.

Sharp has continued to push LCD andoptoelectronics technologies forward, and to ap-ply these to a broad range of products, includingelectronic translators, video cameras and projec-tors, wall-mounted televisions, fax machines,

copiers, and notebook PCs (personal comput-ers).

In 2000, Sharp had 60,000 employees world-wide. Almost half were working in its sixty-sixoverseas operations, which included representa-tive offices, sales subsidiaries, manufacturingplants, and research and development centers inthirty different countries.

See also: electronics industry

TIM CRAIG

Shibusawa, Eiichi

Eiichi Shibusawa (1840–1931) was a prominentbusinessman who lived during the most extraor-dinary changes in Japanese history Often calledthe father of modern Japanese capitalism, he wasone of the most crucial agents of change duringthe Meiji and Taisho periods. His contributionmay be categorized into four areas. First,Shibusawa is known as a banker-entrepreneurwho helped build more than 500 companies, cov-ering the entire spectrum of the new economySecond, he is known as the founder of zaikai. Headvocated a new style of business policy leader-ship through the organization of business andcommerce associations that stand as a counter-balance to the government. Third, Shibusawapursued active roles for business associations andleaders in international economic diplomacy es-pecially in improving US-Japan relations. Fourth,he advocated the moral obligations of businessleaders to the community and stood at the fore-front of philanthropy in education and social re-form.

Shibusawa was born in 1840 to a wealthyfarmer-merchant family in Chiaraijima, Saitamaprefecture, a village some fifty miles northwestof Tokyo. The family had substantial land hold-ings, where rice, barley indigo, and silkwormswere cultivated. At the age of fourteen, the youngShibusawa was brought into the family business.Under the stratified class system of the Tokugawaera, business and commerce were looked downupon and merchants were kept in the lowest class.Wealthy merchant families did not escape fromthe arbitrary use of power by the ruling samuraiclass. Shibusawa’s family’s experience was no

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exception. The family was often obliged to makesubstantial donations to their local daimyo. In rec-ognition of family “services” Shibusawa’s fatherwas given official permission to use a surnameand wear a pair of samurai swords. Though thiswas a standard means for rewarding rich farm-ers and merchants who contributed to daimyo’sfinances, it did not mean the family received re-spect from the authority.

In 1861, at the age of twenty-two, Shibusawawent to Tokyo. This was a time when Japan wasswept with violent confrontations between theTokugawa Bakufu and several powerful do-mains (Satsuma, Choshu, Tosa). A struggle, trig-gered by the Bakufu’s signing of a Treaty ofCommerce with the USA in 1858, ensued be-tween these groups. Shibusawa himself at-tempted to organize a local uprising against theBakufu. However, by an ironic twist of fate, in-stead of carrying out his original intention ofoverthrowing the Bakufu, he became a Bakufuretainer at Hitotsubashi House in Kyoto, a high-ranking branch of the ruling Tokugawa family.Starting as a doorkeeper, Shibusawa moved upthe ranks quickly as he successfully carried outtax reform for the Hitotsubashi domain. Whenthe Tokugawa Shogun decided to send hisyounger brother to the World’s Fair in Paris,Shibusawa was given the opportunity to accom-pany the young lord. The delegation departed inFebruary 1867 but was abruptly ordered to re-turn to Japan after the Tokugawa Bakufu col-lapsed and the Meiji Emperor was restored. Thegroup returned from a nearly two-year study ofParis in late 1868.

In 1870 Shibusawa was unexpectedly recruitedinto the Meiji government’s Ministry of Financeto modernize Japan’s tax and monetary systems.He helped create the Daiichi Kokuritsu Ginko,the first national, Western-style banking institu-tion in 1873. However, he resigned from the min-istry soon after and became chief executive officer(todori) of Daiichi. He was then thirty-four yearsof age. From his position at Daiichi until his re-tirement in 1916, Shibusawa built Western formsof organizations (kabushiki kaisha) ranging frompaper mills and cotton spinning to railroad andshipping, public utilities, life insurance, hotels andtheaters, and resort development. Some of the

high-profile companies he built include Oji Pa-per, Osaka Cotton Spinning, Tokyo ChemicalFertilizer, Shinagawa Glass, Ishikawajima Ship-yard, Tokyo Gas, Tokyo Electric Light, TokyoMarine Insurance, and Tokyo Imperial Hotel.

Shibusawa advocated a “group-oriented” capi-talism, with emphasis on business involvementin government policy There were two contrast-ing styles of thought on capitalist developmentat the beginning of Meiji. One style is representedby Shibusawa, and the other by Iwasaki, whofounded the Mitsubishi zaibatsu. Iwasaki’s ideaswere closer to a Western style of monopoly capi-talism with ownership control. In contrast,Shibusawa believed that a society prospers whenbusiness organizations pool resources and formgroups (zaikai). Top business managers would bezaikai jin, or the people who think about the fu-ture of the industry as a whole and lead the in-dustry In addition, Shibusawa wanted zaikai tostand as a counterbalance to the government,opposing the heavy-handed government controlof business and the stratified class system thatkept merchants in the lowest class. He empha-sized the importance of business leading the gov-ernment. To nurture talent in business and tofoster high status and respect for the businessworld, Shibusawa organized business associa-tions, beginning with the Tokyo Chamber ofCommerce (Tokyo Shoko Kaigisho) in 1891 andthe Japan Federation of the Chamber of Com-merce involving some fifteen local associationsin 1892.

Shibusawa’s vision was not limited to domes-tic economic development. He advocated thatUS-Japan relations be based on a multilateralframework that included China. Furthermore,he initiated business/economic diplomacy(minkan keizai gaiko) as a distinct non-governmenttrack of diplomacy operating at the level of busi-ness and industrial associations. Shibusawa em-phasized the importance of exchangingeconomic/business missions composed of corpo-rate leaders and representatives of business asso-ciations between countries. He believed thatthese activities are a part of corporate leaders’responsibilities and should not be limited to gov-ernment level diplomacy or individual business-men’s negotiations.

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From the early stage of his career, Shibusawainitiated philanthropic activities in education andsocial welfare (for example, Tokyo Yoikuin). Asa dedicated student of the Chu Tzu school ofConfucianism, he emphasized “Rongo toSoroban,” expressing through his business prin-ciples that the pursuit of profit must be guidedby moral obligations to the society and commu-nity. Inspired by his observations during his tourof Europe and the USA, he considered philan-thropic activities a necessity for good businessleadership and demonstration of corporate re-sponsibility to the local community

Further reading

Kimura, M. (1991) Shibusawa Eiichi, Tokyo: Chuokoronsha.

Obata, K. (1938) An Interpretation of the Life of ViscountShibusawa, Tokyo: Tokyo Printing Company

Sakaiya, T. (1997) Twelve People Who Made Japan, To-kyo: PHP.

Shibusawa Kenkyukai (ed.) (1999) Koeki no Tsuikyusha:Shibusawa Eiichi, Tokyo: Yamakawa Shuppansha.

GHIKAKO USUI

shingikai

Translated as “deliberation councils,” shingikai isthe general designation of more than 200 gov-ernment-appointed public advisory bodies, alsovariously named chousakai, shinsakai, kyougikai,kaigi, and iinkai. Established by legislation or gov-ernment ordinance, they form a highly salienttip of an iceberg of formal, semiformal, and in-formal networks of government-private sectorconsultation in practically all areas of publicpolicy.

Shingikai are appointed, assisted, and steeredmostly by government ministries. Several, includ-ing some of the most famous ones, have beenappointed by prime ministers. Their membershipis partly or wholly composed of persons fromoutside government, notably representatives ofspecial interest groups, scholars, and even seniormembers of the major mass media. They are for-mally requested to study and deliberate new poli-cies, to consider complaints, standards,qualifications, authorizations, and administrative

punishments, and, very rarely to mediate con-flicts of interests. Most government bills are be-ing considered in shingikai prior their submissionto the National Diet (parliament).

Historically the roots of Japanese public advi-sory bodies go back to the Meiji era. But it wasthe American occupation which, as part of aseries of democratic reforms, called for shingikai’sstatutory foundation and, for the first time, speci-fied guidelines regarding their structure and op-eration. Initially the occupation authoritiesintended all advisory bodies to be formed on anad hoc basis and to be of the formal, shingikaivariety. In fact, however, most of them have be-come “permanent,” and their members are ap-pointed for fixed, but renewable, terms. And indue course, alongside shingikai, numerous semi-formal bodies, misleadingly known as shiteki shimonkikan (“private” advisory bodies), have beenformed by government. Some of these bodieshave been similar to shingikai in salience, mem-bership composition, tasks, and functions.

The occupation, and ostensibly Japanese au-thorities, have three major goals for shingikai: in-jecting new ideas into government, promotingequitable public participation in policy proc-esses, and safeguarding fairness in administra-tion. In fact, it has widely been argued, shingikaihave failed to achieve these goals for lack of au-tonomy competence, and representativeness. Al-legedly they are controlled and/or manipulatedby bureaucrats who appoint their members and“service” them; they lack pertinent informationand data, other than that provided by bureau-crats; and their membership is skewed in favorof business and finance, such as zaikai and in-dustry and trade associations. While justifiedin some cases, this view is somewhat outdated,especially in the case of labor policy processes,and fails to fully grasp shingikai’s roles in thecomplex and subtle context of policy consulta-tion in Japan.

See also: industrial policy; nemawashi

Further reading

Harari, E. (1997) “The Government-Media Connec-tion in Japan: The Case of Public Advisory Bod-ies,” Japan Forum 9:17–38.

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Kume, I. (2000) “Roudou seisaku katei no seijuku tohenyou” (Maturity and Transfiguration ofLabor Policy Process), Nihon roudou kenkyuu kikou42:2–13.

Schwartz, F.J. (1998) Advice and Consent: The Politics ofConsultation in Japan, Cambridge: Cambridge Uni-versity Press.

Sone Kenkyuukai (1995) Rinchou gata shingikai (Tem-porary Investigative Council Type Shingikai), To-kyo: Keio Daigaku Hougakubu.

Sone, Y. (1998) “‘Zoku gakusha’ ga habiru shingikaiwa haishi yori kyousou wo” (Instead of AbolishingShingikai Strewn With “Tribal Scholars,” MakeThem Competitive), Ronza 43: 106–13.

EHUD HARARI

Shingo, Shigeo

An industrial engineer at Toyota, Shigeo Shingo(1909–90) developed Zero Quality Control(ZQC), which is based on preventing errors inmanufacturing processes, or detecting them sim-ply and immediately Key to ZQC are poka-yoke,mistake-proofing, devices. These are simplechecks built into the process, to prevent a faultycomponent from proceeding down the line (e.g.,physical blocking of an oversized piece) or to pro-vide immediate feedback to workers regarding aproblem (e.g., a buzzer). Noticed quickly thefaulty component can be repaired or removedbefore it creates more difficult and expensiveproblems later in the process. Shingo also devel-oped single-minute exchange of die (SMED) tech-niques for faster changing of tools on productionlines, providing efficiencies from the use of smallerlot sizes.

See also: quality management; Toyota produc-tion system

Further reading

Shingo, S. (1986) Zero Quality Control: Source Inspectionand the Poka-Yoke System, Cambridge: ProductivityPress.

ELIZABETH L.ROSE

shukko

Shukko refers to the practice of employee trans-fers between firms. There are two types of shukko.In the first, an employee retains his or her origi-nal company affiliation while transferred tempo-rarily to another firm (zaiseki shukko). In thesecond, the employee is transferred permanently(tenseki shukko). Shukko exists at all levels: fromjunior engineers transferred temporarily for on-the-job training, to redundant factory workersreassigned to new businesses, to retiring manag-ers dispatched to run affiliates, to bankers sent toreorganize a troubled firm. Shukko has three prin-cipal roles: to reduce labor costs by reallocatingredundant employees, to promote inter-organi-zational knowledge exchange, and as a monitor-ing and governance device wielded by externalstakeholders such as main banks or trading part-ners.

Firms frequently use shukko to reduce costs.Large Japanese industrial firms transfer redun-dant employees to businesses ranging from sup-pliers and sales organizations, to affiliates inbusinesses ranging from landscape maintenanceto real estate management. From a labor coststandpoint, shukko is not costless. Firms often paythe difference between an employee’s previouswages and those in the new job.

Shukko also occurs routinely when an employeereaches retirement age of 55–60. Those employ-ees who do not make it to the ultimate status ofboard member (torishimariyakukai) are com-monly transferred to smaller affiliates, often assenior managers. For the receiving firm, thesemanagers are often valuable repositories of man-agement skills. For the larger sending firm, shukkoallows it to provide opportunities for advance-ment for younger managers while assuring jobsto its retirees.

Shukko is also an important vehicle for thetransfer of knowledge between firms and theirbuyers and suppliers. Firms often transfer theirown engineers through temporary assignmentsto work side by side with employees of suppliersand buyers of their products. These employeesretain their loyalty to the dispatching firm, andact as a bridge between it and the receiving firm.

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In this way they are able to transfer informationand gain tacit knowledge. Through direct expo-sure to the work rhythms and social networks ofanother firm, employees develop a feel for howthe partner operates without having to put thatknowledge in explicit form (e.g., as a set of specsor memos). The easy exchange of employeesbetween manufacturers and suppliers has beenlinked to effective product development in manyJapanese automotive and electronics firms.

A third form of shukko exists at a company’supper echelons. The boards of Japanese compa-nies are heavily interlocked with those of banksand business partners. Manufacturers dispatchtheir own managers to top executive positions atsuppliers while banks place their own executiveson boards to monitor and oversee firms to whichthey have made loans. In this respect, shukko playsan important role in corporate governance.

While it is very difficult to obtain data onshukko at the firm level, the Japanese Ministryof Labor collects and reports aggregate data onshukko. Several patterns are apparent in shukko.First, large firms tend to dispatch employees tosmaller firms. Employees sent to shukko from largefirms to smaller ones rarely return to their origi-nal firm. Shukko rates tend to be higher in manu-facturing industries, and shukko is far morecommon for men than women. Shukko rates alsoincrease during recessionary times, and decreaseduring periods of growth. Nevertheless, becauseshukko is not only a means of cost reduction, buta means to share knowledge, solidify interfirmrelationships, and influence and control businesspartners, it continues even during good times.Finally shukko occurs between affiliated firms: itis very unlikely that a firm would dispatch em-ployees to a firm with which it has no businessrelationship, and shukko to a competitor is unheardof. More often than not, shukko occurs betweenfirms linked by an ownership tie.

Advantages

The institution of shukko has allowed large Japa-nese firms to maintain a considerable degree oflabor flexibility while maintaining the lifetimeemployment system. Firms use shukko both asan escape valve when faced with redundant work-ers, and as a regular step in the nenko joretsu pro-

motion hierarchy through which older employ-ees with no more promotion prospects at theirown firm are sent to smaller affiliates. Shukko isalso an important tool for the exchange of knowl-edge and transfer of organizational culture.Through shukko, a company gains access to theknowledge base of the transaction partner. Evenwhen the shukko is permanent, the relocated em-ployee still identifies with the dispatching com-pany and stays in regular contact with it. As amethod of coordinating goals and operations andexchanging knowledge and skill between affili-ated or transacting organizations, the shukkomechanism may be without peer. It plays a ma-jor role in forging the strong partnerships amongbanks, customers, suppliers, distributors, andeven government ministries that characterize theJapanese business system.

Disadvantages

A major disadvantage of shukko is that it is morecostly than layoffs. The originating firm usuallypays the difference between an employee’s wagesat his or her new job and the former one. Theneed to provide new opportunities for redundantworkers through shukko has encouraged firms tocontinue costly equity and business relationshipswith firms that receive shukko. Shukko may alsoplace an unnecessary burden on the receivingcompany since it often has little choice in whetherit will accept these employees.

See also: lifetime employment; restructuring

Further reading

Cole, R.E. (1979) Work, Mobility, and Participation: A Com-parative Study of American and Japanese Industry, Ber-keley CA: University of California Press.

Lincoln J.R. and Ahmadjian, C.L. (2000) “Shukko(Employee Transfers) and Tacit Knowledge Ex-change in Japanese Supply Networks: The Elec-tronics Industry Case,” in I.Nonaka and N.Nishiguchi (eds), Knowledge Emergence: Social, Techni-cal, and Evolutionary Dimensions of Knowledge Creation,New York: Oxford University Press.

Nishiguchi, T. (1994) Strategic Industrial Sourcing: TheJapanese Advantage, New York: Oxford UniversityPress.

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Nonaka, I. and Takeuchi, H. (1995) TheKnowledgeCreating Company: How Japanese CompaniesCreate the Dynamics of Innovation, New York: OxfordUniversity Press.

CHRISTINA L.AHMADJIANJAMES R.LINCOLN

small and medium-sized firms

There are over 6.5 million small and medium-sized enterprises (SMEs) in Japan. This figurereprents more than 95 percent of the businessorganizations in Japan. The definition of SMEsand small-scale enterprises was set by the Smalland Medium Enterprise Law. These definitionsvary by sector. An SME in manufacturing andmining is not more than 300 employees or 100million yen, while a wholesale firm is not more100 employees and 30 million yen, and for retailand services, it is not more than fifty employeesor 10 million yen. A small-scale enterprise inmanufacturing has not more than twenty employ-ees, while for commercial or service firms it isnot more than five employees. The largest con-centration of SMEs is in the Osaka area.

SMEs have always had a significant impacton the Japanese economy Out of 6.5 million pri-vate business enterprises (excluding primary in-dustry), SMEs accounted over 99 percent in1986. Of the 54 million people employed nation-wide, 78–80 percent were employed in SMEs.There are two main categories of SMEs in Ja-pan: subcontracting companies and independentcompanies. SMEs account for 52.9 percent ofmanufacturing, 61.9 percent of wholesale, and77 percent of retail. Since the passage of the Smalland Medium Enterprise Basic Law (1963), theseratios have remained constant for more thanthirty years.

The Basic Law recognizes that SMEs play animportant role in the Japanese economy Theobjectives of the Law is to promote the growthand development of SMEs and to enhance theeconomic and social well being of entrepreneursand employees of SMEs. The Law recognizes thespecial challenges that SMEs face and stipulatesthat the government must implement necessarymeasures in such areas as modernization of equip-ment, improvement of technology rationalization

of management, preventing excessive competi-tion, stimulating demand, and ensuring fair busi-ness opportunities. Prefectural governments,regional bureaux of the Ministry of Interna-tional Trade and Industry (MITI), Japan Ex-ternal Trade Organization (JETRO), and JapanSmall and Medium Enterprise Corporation(JSMEC) provide various kinds of assistance toSMEs including consulting and advising, financeand training programs, and financing assistance.For example, the Japan Small and Medium En-terprise Corporation (JASMEC) provides: guid-ance, advice and consulting; collection anddissemination of information; management ofmutual relief funds for small-scale enterprises andfor preventing chain-reaction bankruptcies ofsmall and medium-sized firms.

Other laws also protect SMEs such as theLarge Retail Store Law, which places restric-tions on the opening of large stores. However, asJapan is working on economic recovery and there-fore restructuring, some of these protections willbe lost. Some observers argue that SMEs willsurvive because of their maneuverability inno-vation, advances in information technology cor-porate downsizing and outsourcing of in-houseoperations.

Challenges remain for SMEs. In a commen-tary published in Japan Update (1995), TakashiKitaoka, President of Mitsubishi Electric, notedthat small businesses do not prosper in Japanbecause large companies have a monopoly ontalented people. Also, history culture and theeducation system encourage uniform attitudesand discourage differences of opinion or creativ-ity. Of small manufacturing organizations, 56percent are subcontractors, who are dependenton large parent organizations. Subcontractingcompanies, compared to independent SMEs, areless likely to have control over their productprices, and introduction of technologies and man-agement interventions. This in turn affects theorganizational culture of the SME and the atti-tudes and behaviors of employees.

SMEs are also not likely to offer the benefitsof lifetime employment to even a minority of theiremployees. They also experience more difficultyin implementing some management techniquessuch as quality control circles. SMEs, on theother hand. are more likely to hire women or to

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be owned and operated by women. Japanesewomen, finding discrimination in large firms,especially during the current recession, are start-ing their own businesses in increasing numbers.

There are several industries in which smallfirms dominate. SMEs control the multimediaand CD-ROM markets. Originally sparked bySMEs, large rivals have entered the market gen-erating some competition, but SMEs still domi-nate with over 6,500 titles available in 1996 (vs.2,500 in 1995).

The economic crisis in Asia has had a seri-ous impact on SMEs in Japan. Many have gonebankrupt, lost sales, or experienced heightenedcompetition from large firms with lower-cost,overseas operations or low-cost products. Thenumber of businesses subscribing to JASMEC’smutual relief funds has been increasing since themid-1980s. JASMEC has provided more fundsto small-scale firms: from 1.83 million accountsin 1984 to 3.86 million in 1996. A total of ¥6.1trillion has been provided to the following sec-tors: service (21.6 percent), retail (29.3 percent),manufacturing (22.1 percent), construction (13.4percent), wholesale (4.7 percent), real estate (3.5percent), transportation and communication (3.1percent) and other sectors (2.3 percent).

The failure of a client can trigger chain-reac-tion bankruptcies among SMEs. To prevent this,JASMEC operates the Mutual Relief System forPrevention of Bankruptcies. As of 1997, therewere over 740,000 accounts (150,000 loans) inwholesale and retail (39.8 percent), manufactur-ing (38.3 percent), construction (15 percent),transportation and communications (1.6 percent),mining (0.2 percent) and other (5.1 percent) withtotal loans of ¥301 billion.

With the bursting of the bubble economyand more large manufacturing firms moving off-shore for cheaper production, SMEs have be-come desperate. They cannot compete withlower-cost overseas SMEs and are receivingfewer subcontracting jobs. However, in somespecialized industries SMEs are finding ways tosurvive. In industries involving precision ma-chining and non-standard projects that requirehighly skilled labor rather than mass produc-tion, SMEs are stable. They are also doing wellin semi-conductors, unmanned production linesand non-contact inspection machinery for preci-

sion products. The economy has also encour-aged SMEs to become more independent and tobecome international. Finally because large cor-porations in the retail sector have developedlow-priced private brands, SMEs have also hadto introduce low-cost products and privatebrands in order to differentiate themselves fromthe larger companies.

An additional issue that affects SMEs is theincreasing concern about the environment. SMEsused to be exempt from recycling laws. Now,medium-sized manufacturers with sales exceed-ing ¥240 million and wholesalers, retailers andservices SMEs with sales over ¥70 million haveto pay their share of the recycling. Although noone can deny that environmental regulations arenecessary to protect the environment, they cutinto the profits of SMEs that are already strug-gling.

See also: overseas business of small and medium-sized enterprises

Further reading

Japan Small and Medium Enterprise Corporation(JASMEC) Home Page, http://www.jsbc.go.jp/english.

TERRI R.LITUCHY

social marketing

Social marketing is interpreted as applying to twoactivities. Firstly the term relates to the applica-tion of various concepts and tools of marketing,which have been developed in commercial ac-tivities, to the management of such non-profitorganizations as universities and hospitals, or tothe deployment of social reform activities suchas anti-AIDS campaigns.

Secondly social marketing is understood to callfor the recognition of responsibilities that com-panies bear in regard to their role within societyMarketing should be carried out, and then, inorder to check and offset unintentional anti-so-cial activities, such as pollution or the publica-tion of false financial statements, the marketingpolicy of each company should include someexplicit contributions to society. Typically it calls

social marketing 407

for building a good relationship between the com-pany and its surrounding communities.

The above notions of social marketing wereintroduced to Japan primarily through the worksof Kotler and Zaltman (1971) and Lazer and Kelly(1973). It is generally understood that their theo-ries were developed in the US in response to criti-cal views of big business and the establishmentin the late 1960s, when the US saw a series ofprotests against the Vietnam War, the civil rightsmovements, and growing consumerism.

In Japan, the term social marketing began tobe used among business people in the 1990s, butsome precursor movements can be found. By theend of the 1980s, it was generally recognized thatJapan, the second largest economic power afterthe USA and having deployed overseas networksof corporate activities, should upgrade its inter-national contributions and realize a society thatwould correspond to its wealth. As a result, suchterms as “philanthropy” and “mécénat” (theFrench word for patronage) gained popularity.The Association for Corporate Support of theArts (Kigyou Mesena Kyougikai) was foundedin 1990.

After the fall of the Berlin Wall in 1989, assist-ance to the former Socialist countries movingtoward the market economies required corporateparticipation. In 1992, the United Nations Con-ference on the Environment and Development(Earth Summit) in Rio de Janeiro, Brazil, urgedbusiness entities to take environmental concernsinto considerations. These international develop-ments also contributed to the dissemination ofthe term social marketing, in the broader mean-ing of society-oriented corporate activities. As aconsequence, social marketing is often used inJapan as synonymous with society-oriented ac-tivities provided by companies, although a dis-tinction is made when experts use this term.

See also: business ethics; environmental and eco-logical issues; marketing in Japan

Further reading

Kotler, P. and Roberto, E. (1989) Social Marketing: Strat-egies for Changing Public Behavior, New York: The FreePress; trans. T.Izeki, Soshal Maaketingu: Koudou

Henkaku no Tameno Senryaku, Tokyo: Daiyamon-dosha, 1995.

Kotler, P. and Zaltman, G. (1971) “Social Marketing:An Approach to Planned Social Change,” Journal ofMarketing 35 (7): 3–12.

Lazer, W. and Kelley E. (1973) Social Marketing: Perspec-tives and Viewpoints, Homewood, IL: RichardD.Irwin.

SHINTARO MOGI

software industry

Japan’s large, vertically integrated hardware/soft-ware firms were able to build up their softwareskills in a relatively protected environment dur-ing the 1960s and 1970s. They were able to cloneIBM machines and “borrow” IBM’s software,changing it enough to make it incompatible withother systems. This allowed the firms to avoidthe heavy costs of creating and maintaining theirown standards or paying the American giant hugeroyalty fees. This strategy backfired in the early1980s when they were caught stealing IBM’ssecrets and forced to pay for use of IBM’s soft-ware. During the 1980s they struggled to reducetheir dependence on the IBM standard by creat-ing proprietary versions of UNIX-based systemsand by developing a new Japanese operating sys-tem called TRON. In the early 1990s, softwarefirms and the state realized that clinging to theirclosed standards was creating a serious lag be-tween Japanese and US software. Thus theystarted embracing international operating systemstandards such as Windows and UNIX, thoughthey continue to be interested in free-of-charge,open systems standards such as TRON andLINUX. They still continue to lag significantlybehind their US counterparts, but are second onlyto the USA as a world power in the field of soft-ware.

The 1960s and 1970s

Japan’s software industry grew out of the state’sefforts to promote the computer industry start-ing in the early 1960s. When IBM announcedits new advanced 360 series of computers in1964, the Ministry of International Trade andIndustry (MITI) promptly set up its first major

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computer project involving software, the SuperHigh-performance Computer Project (1966–71).To develop the project’s software, MITI helpedcreate the Japan Software Company a joint ven-ture among the three strongest hardware mak-ers—NEC, Fujitsu, and Hitachi—and theIndustrial Bank of Japan, a bank supportive ofstate policies. The company was to develop anoperating system (OS) that could run on allthree makers’ machines. But the vertically inte-grated, hardware/software firms had no incen-tive to follow MITI’s plan for a commonsoftware standard. They were all losing heavilyin their hardware divisions even though theywere locking-in users with closed standards. Thesoftware budget for the project was only 25 per-cent of the project’s total cost, reflecting thestate’s lower priority for software than hardwareas well as the Ministry of Finance’s (MOF) re-luctance to fund what it saw as intangible prod-ucts.

The Japan Software Co. did not meet its am-bitious objectives. State and corporate lack ofknowledge about software technology minimalfinancial support, and contradictory incentivesfor the firms led to its bankruptcy in 1972. Exter-nal events also made the company obsolete. In1969, IBM, under pressure from the US Depart-ment of Justice’s anti-trust investigations, decidedto unbundle (price and sell as separate products)its hardware and software. This opened up aworld of opportunity for Japanese hardware mak-ers. IBM’s unbundling allowed Fujitsu andHitachi, two of Japan’s top three hardware mak-ers, to take an IBM-compatible route. Most im-portantly while tied up with anti-trust concerns,IBM was not in a position to complain aboutsmall, foreign competitors essentially copying itsOS and applications software. This allowed MITIand the makers to focus on hardware, which theycould legally reverse engineer, and enabled thebroader strategy of competing through scaleeconomies and manufacturing expertise.

Fujitsu and Hitachi modified IBM’s OS stand-ard enough so that it would not be compatiblewith other IBM-based machines. And they con-tinued to bundle their hardware and software.By doing so, they locked in users, preventingthem from combining different brands of hard-ware and software without costly adjustments.

NEC had technological ties with Honeywell, butcreated its own closed standard too.

Though the state primarily promoted hard-ware throughout the 1970s, it did not completelyignore software. MITI was particularly con-cerned about alleviating the shortage of softwareengineers. In 1970 it created the InformationProcessing Promotion Association (IPA) to helpsmall, independent software houses developstandardized, general purpose applications soft-ware packages with the goal of increasing thenumber and productivity of programmers. Aspart of this effort, the IPA organized severalMITI-funded research projects. But the IPA andits projects have not been very effective. Poorlyfunding and the lack of a strong intellectualproperty regime to protect software inventionscontributed to the IPA’s inability to nurture newsoftware programs and firms. Also, since thefirms sold their software and hardware as apackage incompatible with other systems, therewas virtually no demand for IPA-supported soft-ware packages.

Even had there been greater funding and bet-ter legal protection, it is unlikely the IPA and itsprojects would have been very effective becausethey worked at cross-purposes with key pillarsof Japan’s catch-up system of capitalism. Thebank-centered financial system meant capitalmarkets were underdeveloped, which discour-aged the emergence of a venture capital marketand new firms. The lifetime employment andseniority wage systems obstructed labor mobil-ity. The keiretsu industrial groups and otherloose alliances that permeate Japan’s economyalso served to create an environment in whichusers, loyal to their allied computer maker andlocked into their closed standards, could not andwould not easily switch computer systems orsoftware. In this context, closed standards andcustomized software thrived. This was not aproblem as long as the firms could quickly copyIBM’s software and thereby provide theirlocked-in users with software that met theirneeds. But as IBM made it more difficult forclone makers to quickly respond to new IBMmachines, it meant that users were increasinglystuck with software significantly inferior to soft-ware packages based on international standardssold on the open market.

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The state and the makers simply did not graspthe long-term negative impact of closed stand-ards. Moreover, a focus on increasing the numberand productivity of software engineers was inef-fective in an industry where concept, individualcreativity and proprietary but quasi-open stand-ards, not merely productivity of software engi-neers and manufacturing expertise, were key

The 1980s

The turning point in the industry was in the sum-mer of 1982 when Japanese computer firms, des-perate to get information on IBM machinesbefore they hit the market, were caught stealingIBM software technology. This FBI sting casesent shock waves through the industry The freeride on IBM was no longer free. The firms nowhad to pay huge annual licensing fees to IBM.From then on, the firms tried to diversify the stan-dards they relied on, especially their dependenceon the IBM mainframe standard. In the 1980s,there was a strong move toward UNIX-basedsystems through the government-sponsoredSigma Project (1985–90) and a private sector-ini-tiated attempt to create a unique Japanese oper-ating system standard called TRON.

The Sigma Project selected UNIX, an openstandard, as its focus. The goal was to encouragemakers to unbundle by providing them with anopen standard as an alternative to IBM. But thefirms, desperate to lock in their customer base inorder to maximize profits, made their own closedversion of UNIX-based software and bundled itwith their hardware. This meant independentsoftware makers still had little incentive to de-velop new software.

In the Sigma Project, as in earlier IPA projects,the state made the same mistake of seeing effi-cient production as the software industry’s keyproblem. Again they focused funds and research-ers on increasing the productivity of softwareengineers rather than software concepts and func-tions that users desired. Some analysts argue thatthe project pushed the industry toward the UNIXstandard much quicker than would have other-wise occurred. But even MITI and IPA officialsagree that the move would have happened any-way and that the jump-start was probably not

worth the project’s cost (¥22.3 billion yen, or$131.2 million).

The TRON project was aimed at having auniquely Japanese OS. Announced with greatfanfare and media coverage in 1984, the projectstill continues today. Most agree that TRON wasnot a great standard, but the fact that the worldwas largely locked into IBM mainframe and PC(MS-DOS) standards at the time meant that evenif TRON was superior, it would have had greatdifficulty succeeding internationally.

The 1990s

In the early 1990s Japan’s computer softwareindustry was at a crossroads: it could continueoffering closed, modified versions of foreign stan-dards or unbundle and embrace open, interna-tionally accepted standards such as the Wintel(Windows Intel) standard. It became increasinglyclear to the government, users, and makers thatthe costs of closed standards were mounting andthat to become internationally competitive, com-puter producers needed to unbundle, move to-ward open standards, and shift their focus fromquantity to quality.

The problems were obvious. But the solutionswere less clear. The government, viewing soft-ware as an industry with critical spillovers ontothe rest of the economy strongly favored conver-gence with international standards even thoughit would hurt the hardware/software makers tem-porarily. MITI was acutely aware that the target-ing policies that had worked so well in otherindustries were not working in software. Thefirms were afraid to unbundle without assurancethat all would do so. But the market was notwaiting for Japanese firms to make up their minds.By the early 1990s, Windows, Intel microproc-essors and the Internet swept the globe.

The quickest and most politically acceptableway to get the industry to unbundle and movetoward open, internationally accepted standardswas to have foreign firms force the conversion.Starting in late 1992 MITI started publishingreports openly welcoming foreign software intoJapan. MITI did not simply want imports; itwanted foreign firms to participate in the mar-ket. This move was not so much an embracingof internationalization. Rather MITI was

410 software industry

desperate and felt that even if the firms were for-eign, they needed to have cutting-edge softwarefirms in the domestic market to promote the do-mestic industry and provide all Japanese firmswith the software they needed to become moreefficient.

As a result, in the 1990s we saw a sharp risein the market share of foreign software compa-nies. Microsoft currently dominates Japan’s pack-aged software market. US hardware makers, suchas Dell, Compaq, and Gateway have gained onlysmall (1–3 percent) shares of the market. But thesudden entry of foreign hardware and softwaremakers in the early 1990s pressured Japanesemakers to converge with internationally acceptedstandards such as DOS, and more recently theWintel and NT standards.

While Japanese software/hardware firms havestarted offering new machines based on interna-tional standards, the economy as a whole has beenslow to downsize. Lock-in to proprietary stand-ards means that shifting to a new standard makesa company’s current software obsolete, inevita-bly slowing their conversion.

The government’s role in the 1990s and 2000sclearly declined in significance but remains im-portant. There are numerous ongoing nationalR&D projects related to software, such as formassive parallel processing machines and theInternet. Moreover, the state has tried to revisethe copyright law to make it legal to decompileforeign software. And it has tried to institute avoluntary quality certification scheme for soft-ware, which foreign makers say would requirethem to divulge proprietary information to gainapproval. These tactics have been unsuccessful,but only due to close vigilance by foreign compa-nies operating in Japan as well as heavy pressurefrom the US government.

The 2000s

The lag of Japanese firms in software and Internet-related technologies is still growing in the 2000s.They have caught up in most hardware technolo-gies but their industrial system needs to changeits emphasis from manufacturing to promotinginvention and entrepreneurship. Such changewould help industries such as software and bio-technology where technological change is rapid

and unpredictable and where the idea, not supe-rior manufacturing techniques, is key to competi-tive success. Unfortunately the long, deeprecession in the 1990s, which started primarilyas a bad debt banking crisis, is affecting Japan’sindustrial base and is slowing efforts to dealquickly with their software problems.

See also: computer industry

Further reading

Anchordoguy M. (1989) Computers, Inc.: Japan’s Chal-lenge to IBM, Cambridge, MA: Harvard UniversityPress.

——(1997) “Japan at a Technological Crossroads: DoesChange Support Convergence Theory?” Journal ofJapanese Studies 23 (2): 363–97.

——(2000) “Japan’s Software Industry: A Failure of In-stitutions?” Research Policy 29:391–408.

Baba, Y., Takai, S. and Mizuta, Y. (1996) “The User-Driven Evolution of the Japanese Software Indus-try: The Case of Customized Software forMainframes,” in D.C.Mowery (ed.), The InternationalComputer Software Industry, Oxford: Oxford Univer-sity Press, 104–30.

Cusumano, M. (1991) Japan’s Software Factories, Oxford:Oxford University Press.

MARIE ANGHORDOGUY

Sohyo

The General Council of Trade Unions, or Sohyoin Japanese, was the largest trade union confed-eration in Japan from 1950 to 1989 and was astronghold of radical unionism mainly supportedby public-sector unions. It laid the foundation forthe coordinated wage determination systemknown as spring labor offensive or shunto, whichattempted to overcome the limits of enterpriseunions in Japan. Sohyo’s presence, however wasmore striking in the realm of politics than in eco-nomics. It had a huge influence over the direc-tion of the Japan Socialist Party (JSP) by assistingit financially and supplying candidates for publicoffice. It was politically opposed to moderate,private-sector unions affiliated with other laborconfederations, Domei (Japanese Confederationof Labor), and its political representative, the

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Democratic Socialist Party (DSP). Sohyo’s lead-ership and influence began to erode after the oilcrisis, when unions in the big, export-orientedcorporations began to ally which undercut therivalry between Sohyo and Domei. The coop-eration of these unions eventually led to the de-mise of Sohyo and the birth of a newconfederation, Rengo (Japanese Trade UnionsConfederation, JTUC in 1989.

The origin of Sohyo

Sohyo was created by anti-communist tradeunionists in July 1950, and its foundation wasfacilitated by the Supreme Commander of AlliedPowers (SCAP). At its inauguration, Sohyo de-clared that it would seek membership in the In-ternational Confederation of Free Trade Unions(ICFTU), which had been created in 1949 inopposition to the communist-dominated WorldFederation of Trade Unions (WFT). However,by 1951, Sohyo had swung left. Minoru Takanotook leadership in March 1951 at Sohyo’s sec-ond congress, which rejected Japan’s rearmament.Takano likened Sohyo’s transformation to“SCAP’s hatching a chicken which turned out tobe an ugly duckling.” Sohyo’s political activitiesirked moderate unions, which abhorred extra-parliamentary political actions. In 1953 moder-ate unions dropped out of Sohyo and eventuallyformed the second largest trade union confed-eration, Domei.

By 1958, Takano’s leadership was contestedand he was replaced by Kaoru Ohta and AkiraIwai. The new leaders pushed economic ratherthan political struggles and pursued a strategy ofjoint actions for wage increases, which laid thefoundation for the spring labor offensive. Eventhough the new leaders emphasized the impor-tance of economic issues, Sohyo kept its pacifismand antimonopoly stance, which crystallized inthe mass movement against the revision of theU S-Japan Security Treaty and the Miikecoalminers’ strike in 1960. The defeat of Sohyoin both incidents marked a watershed. WhileMarxist-Leninism had drawn support amongyoung rank-and-file unionists throughout thestruggles, demands for cooperative unionismgrew among union leaders and employers.

Political radicalism continued to characterizeSohyo because the largely politically radical pub-lic sector unions constituted more than 60 per-cent of Sohyo’s membership. In contrast, Domeiprincipally consisted of private sector unions.When it was formed in 1964, it embraced1,360,000 members as opposed to Sohyo’s4,200,000. Sohyo comprised 2,510,000 membersin the public sector and 1,670,000 in the privatesector, whereas Domei consisted of 80,000 un-ionists in the public sector and 1,600,000 in theprivate sector unions.

From its birth, Sohyo officially supported theJapan Socialist Party especially its left wing. Thetight relationship between Sohyo and the JSP wascalled the “JSP-Sohyo bloc” which rivaled the“DSP-Domei bloc.” Sohyo provided indispensa-ble financial support to the JSP and also suppliedcandidates. By the mid-1970s 50 percent of theJSP parliament in the lower house and 70 per-cent of those in the upper house were unionistsendorsed and supported by Sohyo. Among theSohyo-affiliated industrial union federations, theJapan Teachers’ Union, National Railways Work-ers’ Union, and Postal Workers’ Union sent thelargest numbers of representatives to the Diet.

The demise of Sohyo

Sohyo, once a mighty political actor, disappearedin 1989 as a result of the growing antagonismbetween the public sector unions and unions inthe export-oriented big corporations. This newconflict of interest cut across the political and ideo-logical rivalry between Sohyo and Domei, andled to the total reorganization of the labor move-ment.

In 1975, the Spring Offensive, InternationalMetal Workers Union-Japan Council (IMW-JG)and Domei agreed on wage restraint in ex-change for employment security While IMF-JCcame to be a wage setter and dilute the role ofSohyo, Sohyo did not support employment andindustrial policies demanded by the private sec-tor, which further widened the gap between thepublic and private sector unions. Moreover, af-filiates of the Public Employees’ Union and thePublic Enterprise Union Council embarked on astrike to recover the right to strike that they lostin 1948. Sohyo’s political activism accelerated

412 Sohyo

the unification process of the private-sector un-ions and the defeat of the “strike for the right tostrike” made Sohyo leaders take a more realisticapproach.

A unification process led by big corporationunions became explicit by the mid-1970s. In 1979,Sohyo leaders accepted unification led by thoseprivate-sector unions and allowed each memberindustrial union to decide whether or not to joina unified confederation. Moreover, Sohyo lead-ers agreed that a new confederation would seekmembership in the ICFTU, although the ICFTUaffiliation issued remained controversial, separat-ing Domei-affiliated unions and Sohyo’s left-wingunionist, until the dissolution of Sohyo. In 1980,five Sohyo-affiliated private-sector unions joinedZenminrokyo (Japanese Private Sector TradeUnion Council) which developed into a unified,private sector labor confederation called MinkanRengo, Domei and the other two confederationswere disbanded. By that time, most Sohyo-affili-ated private sector unions had joined the newconfederation, and so the inclusion of public sec-tor unions in Minkan Rengo came onto theagenda. Acrimonious disputes erupted in all pub-lic sector unions. The left-wing unionists, whowanted to defend the traditional tenets of Sohyoradicalism, were eventually left out of the unifi-cation negotiations and formed marginal left So-cialist or Communist confederations. A newunified labor confederation, Rengo was thenformed in 1989 under moderate leadership, andSohyo ended its thirty-nine year history.

Further reading

Hiwatari, N. (1999) “Employment Practices and En-terprise Unionism in Japan,” in M.Blair and M.Roe(eds), Employees and Corporate Governance, Washing-ton, DC: The Brooking Institution, 275–313.

Kume, I. (1998) Disparaged Success: Labor Politics in Post-war Japan, Ithaca, NY: Cornell University Press.

Miura, M. (2000) “Did the Japan Social Party’s Activ-ists Commit Political Suicide: Typology of Activ-ism and Party Strategy” Shakai Kagaku Kenkyu (TheJournal of Social Science) 51:5–6, 221–51.

Price, J. (1997) Japan Works: Power and Paradox in Post-war Industrial Relations, Ithaca, NY: Cornell Univer-sity Press.

Shinoda, T. (1997) “Rengo and Policy Participation:Japanese-Style Neo-Corporatism?” in M. Sako andH.Sato (eds), Japanese Labor and Management in Tran-sition, London: Routledge, 187–214.

MARI MIURA

sokaiya

A sokaiya is a corporate extortionist who pur-chases a small number of shares in order to gainaccess to a company’s annual stockholders’ gen-eral assembly meeting (sokai) and then attemptsto extract money or other benefits from the com-pany in exchange for ensuring that the meetingis short and tranquil. While the distinction is notalways clear-cut, there are two main roles playedby sokaiya. Yato sokaiya (opposition party sokaiya)threaten that unless they are paid off, they willdisrupt the assembly and embarrass top execu-tives by loudly and persistently asking boardmembers questions about real or alleged prob-lems relating to the quality of management (poorinvestments, low profits and the like) or the per-sonal and family lives of executives (extra-mari-tal affairs, questionable finances, etc.). Yotosokaiya undertake, for a fee, to ensure a smoothmeeting by suppressing dissent by other share-holders, including other sokaiya. This may bedone by shouting them down, buying them off,or using physical intimidation. Sokaiya groupstypically try to portray themselves as corporateactivists acting as watchdogs to protect the smallinvestor. Some groups operate quite openly withplainly marked offices and even web sites. Acommon euphemism for sokaiya is tokushukabunushi (special shareholder). Similar activitiesare undertaken in South Korea by hecklersknown as chongheoggun and in Italy by gadfliesknown as disturbatori.

The emergence of sokaiya can be traced backto the early Meiji period, when influential fixersbegan to assist managers, who were unaccus-tomed to the intervention of outside investors dueto the late introduction of the joint stock corpo-ration. Their numbers exploded during the 1970safter shareholder activism protesting the VietnamWar and the Minamata mercury pollution inci-dent revealed top executives’ vulnerability toembarrassment at the shareholders’ meeting.

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They peaked in 1982 when the National PoliceAgency (NPA) estimated that there were over6,783 active sokaiya, 2,012 of whom were believedto be yakuza.

To combat this problem, more and more com-panies began to hold their annual stockholders’assemblies on the same day in late June to makeit difficult for sokaiya to attend more than onemeeting. By the 1990s, over 2,000 companieswere holding their meetings simultaneously. TheNPA dispatched over 10,000 officers to guard themeetings held that day and companies supple-mented this with large numbers of private secu-rity staff and employee volunteers. TheCommercial Code of Japan was also revised in1982 to make it illegal to pay off sokaiya. Theoffense, known as rieki kyoyo (conferring a ben-efit), prohibited the provision of any benefit to ashareholder in connection with the exercise ofthat shareholder’s rights, such as the right to askquestions or vote. Penalties could include up tosix months imprisonment or a fine of 300,000yen. The revisions also raised the number ofshares necessary to vote to a par value of 50,000yen. Since most Japanese shares have a par valueof 50 yen, this amounts to 1,000 shares in mostcases.

While the number of sokaiya officially reportedby the NPA declined to just a few hundred bythe late 1990s, many of those who fell off theofficial list because they no longer owned enoughshares to meet the higher ownership thresholddid remain active and simply changed their tech-niques. Instead of demanding cash payments,they used a variety of other mechanisms, includ-ing the sale of proprietary publications at exorbi-tant prices (the most common method), paymentsfor services not used (such as rent for trainingfacilities or beach houses), or inflated paymentsfor miscellaneous services ranging from adver-tising to the leasing of potted plants. Involvementwith yakuza (organized crime) groups also in-creased. Such underworld ties resulted in an im-plicit threat of physical injury or death in cases ofnon-payment which is an additional factor moti-vating executives to cooperate with sokaiya.

A series of scandals in 1997–8 which resultedin the resignation of over 100 executive and doz-ens of arrests prompted further countermeasures.The penalties under the Commercial Code were

increased to three years and a fine of up to 3million yen, and it was made illegal for sokaiyaeven to request a payoff (prior to this it had onlybeen illegal to accept one). Those who madethreats (as opposed to requests) could receive upto five years and a 5 million yen fine. The NPApushed both general business associations suchas Keidanren (the Federation of Economic Or-ganizations of Japan) and sectoral industry asso-ciations to issue declarations that they would notdeal with sokaiya and to establish task forces toensure compliance. Some firms opened up theirshareholders’ meetings or broadcast them live onthe Internet to show they had nothing to hideand posted signs indicating they would refuse todeal with sokaiya. Nevertheless, repeated surveysin the late 1990s showed many firms still dealingwith sokaiya.

Traditionally analysts have attributed the long-evity of the sokaiya phenomenon in Japan to acultural aversion to embarrassment and loss offace that makes Japanese executives particularlyvulnerable to blackmail. It has also been suggestedthat structural factors such as the lower level ofcorporate disclosure in Japan may create a de-mand for secrecy Sokaiya exploit this throughblackmail due to the unavailability or inconven-ience in Japan of other methods of profiting fromnegative information, such as short-selling. Botharguments are compatible with the difficulty Ja-pan has experienced in eradicating sokaiya activ-ity

See also: corporate governance; stockholders’general assembly

Further reading

Szymkowiak, K. (1994) “Sokaiya: An Examination ofthe Social and Legal Development of Japan’s Cor-porate Extortionists,” International Journal of the Soci-ology of Law 22:123–43.

Ursacki, T.J. (2000) “Restoring the Legitimacy of Japa-nese Business in the Post-Bubble Era: Can GoodEconomics Make Good Ethics Easier?” in P.Bowles,and L.T.Woods (eds), Japan After the Economic Miracle:In Search of New Directions, London: Kluwer Aca-demic, 37–57.

West, M.D. (1999) “Information, Institutions and Ex-tortion in Japan and the United States: Making

414 sokaiya

.

Sense of Sokaiya Racketeers,” Northwestern Univer-sity Law Review 93:767–817.

TERRI URSACKI

Sony

Sony Corporation is a diversified consumer elec-tronics manufacturer headquartered in Tokyo. In1999 its fiscal year sales totaled over $56 billionand it employed 177,000 workers. As of 1999Sony Group was comprised of over 1,000 con-solidated subsidiary companies, some of whichare located abroad. The predecessor company toSony was Tokyo Tsushin Kogyo K.K. (TokyoTelecommunications Engineering Corporation,also known as Totsuka), founded by MasaruIbuka in 1945. Masaru Ibuka and Akio Moritaincorporated Totsuka on May 7, 1946; the firmhad approximately twenty employees and an ini-tial capitalization of 190,000 yen. Its major com-petitors have been Philips and Matsushita ElectricIndustrial Corporation.

Totsuka’s first product was an adapter to con-vert medium-wave radios into superheterodyne,or all-wave, receivers. Soon, however, the com-pany branched out to make a variety of otherelectronic goods. Due to the difficult conditionsfollowing the Second World War, most of its saleswere to the government and Nippon Hoso Kyokai(Japan Broadcasting Corporation). The compa-ny’s business connections with the OccupationForces led to knowledge of magnetic sound re-corders and the development of a tape recorder.Totsuka introduced the first Japanese magnetictape recorder and recording tape in August of1949. This was the first expression of Sony’sengineering-oriented culture and philosophy ofinnovation.

The invention of the transistor at Bell Labo-ratories in the United States was known to Ibukain the late 1940s, but it was not until March 1952that Ibuka visited the United States for a three-month inspection tour to learn about tape re-corder manufacturing by American companies.While in the USA he recognized the potential ofthe newly invented transistors, and upon return-ing to Japan Totsuka decided to pay $25,000 tolicense the transistor technology from WesternElectric. Totsuka had to get a permit from the

Ministry of International Trade and Industry(MITI) to remit foreign currency abroad, butMITI initially rejected the application because thecompany was too small. Eventually Totsuka re-ceived permission, and in August 1953 Moritasigned a licensing agreement with Western Elec-tric. In May 1954 Totsuka introduced the firsttransistors made in Japan, and in August 1955the company produced the first Japanese transis-tor radio. The firm rapidly transistorized vari-ous other consumer electronics products, andexperienced great success domestically and inexport markets.

Wanting to export its products and believingthe company’s name was too difficult for foreign-ers to pronounce, in 1955 Totsuka began sellingproducts under the Sony name. “Sony” was anamalgamation of two words: the Latin word sonus,which is the root of the such words as “sound”and “sonic,” and “sonny” meaning little son. InJanuary 1958 Totsuka’s name was officiallychanged to Sony Corporation.

Sony’s most famous product is the trinitrontube, developed in April 1968. Many believe thetrinitron has superior picture quality to conven-tional picture tubes, and it continues to be thesignature Sony product. In 1975 Sony introducedthe Betamax videocassette recording system;however, it lost the VCR market to the VHSsystem invented by the Japan Victor Corpora-tion. This was Sony’s most serious marketingfailure. In 1979 Sony introduced a small portablestereo tape player, the Walkman, which provedto be an enormous success. In October 1982 Sonyintroduced the first music CD players for the Japa-nese consumer market. In the late 1990s Sonysuccessfully brought out the Sony Playstation,which challenged Nintendo, the market leaderin video games.

By the dawn of the twenty-first century Sonyhad become a globalized firm that operated ma-jor production facilities in Japan, North America,and Asia. It was the first Japanese firm to under-take television manufacturing in the developedcountries. In 1960, Sony Corporation of Americawas established in the United States. Sony brokeground in January 1971 on its San Diego colortelevision factory its first overseas factory In 1974it opened its first European television factory inBridgend, Wales. In 1988 Sony acquired CBS

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Records Inc., and in 1989 Sony acquired themovie company Columbia Pictures Entertain-ment. It was the first major Japanese company tohave non-Japanese members on its board of di-rectors. Sony was also the first Japanese electron-ics firm to globalize and has continued to be aJapanese leader in this endeavor.

Sony has a reputation for being more West-ernized than its Japanese competitors. It pridesitself on its ability to innovate and to create at-tractively designed products. For example, in abreak with tradition Sony announced in 1997 thatit would no longer consider a graduate’s univer-sity as a major factor in the hiring process in itssubsidiaries in Japan. More than any other Japa-nese electronics manufacturer, it has earned areputation for product development and engineer-ing prowess combined with a sophisticated senseof design.

See also: electronics industry; Matsushita Elec-tric Industrial Corporation; Morita, Akio

Further reading

Lyons, N. (1976) The Sony Vision, New York: CrownPublishers.

Morita, A. (1986) Made in Japan: Akio Morita and Sony,New York: E.P.Dutton.

Nathan, J. (1999) Sony: The Private Life, New York:Houghton Mifflin.

Sony Corporation (1999) http://www.world.sony.-com/CorporateInfo/huhou-e.html.

MARTIN KENNEY

standard setting

Japan’s semi-statist approach to standards hasaccelerated broad adoption of new technologybut also provoked trade friction. In other ad-vanced countries, the national standards organi-zation receives only a minority of its fundingfrom the state, as in Europe, or is entirely mem-ber supported, as is ANSI in the USA. Japan’snational standards organization, the Japan In-dustrial Standards Committee (JISC, NihonKougyou Hyoujunka Chousakai), is a section ofthe Standards Department within the Agencyfor Industrial Science and Technology (AIST) ofthe Ministry of Economy Trade, and Industry(METI, formerly Ministry of International

Trade and Industry, MITI). METI shares su-pervision of one-eighth of the 9,000 Japan Indus-trial Standards (JIS) with another ministryusually telecommunications or health. The 1949Industrial Standardization Law (KougyouHyoujunka Hou) requires that all environment,health, and safety regulations must conformwith JIS. Quite separately the Ministry of Agri-culture supervises several hundred Japan Agri-cultural Standards (JAS) for medicines,agricultural chemicals, silk yarn, foodstuffs, andforest products. Any JIS or JAS requires finalapproval from the relevant minister; one-tenthof JIS also require companies to have their facto-ries inspected and earn the right to display a “JISmark” on their products. JIS certification andother government testing have increased the po-tential for JIS to serve as trade barriers. Non-Japanese firms have also complained aboutlanguage barriers: 75 percent of JIS lacked anofficial English translation in 1980, 57 percent in1986, and 29 percent in 1998.

JISC is less a regulatory office than a small“think tank” that coordinates—partly via a “long-range plan for the promotion of industrial stand-ardization” issued every five years since1961—work by outside organizations, most nota-bly the somewhat larger Japan Standards Asso-ciation (JSA, Zaidan Houjin Nihon KikakuKyoukai). Top JISC officials have sometimesserved simultaneously at JSA, which functionsas publishing house, lead coordinator for someprominent JIS standards, accreditor for the JISmark, and general “change agent” for standardi-zation and quality management. JSA has 11,000regular members (up dramatically from only 811members in 1972), a staff of 160, and an annualbudget of ¥6 billion. JSA claims that half of allfirms take part in its conferences, courses, semi-nars, and other activities. The agriculture minis-try established an analogous “helper”organization, JAS Kyoukai, in 1962.

JISC and JSA work with over 200 industryassociations, most of which are ministerially “ap-proved” associations (shadan houjin). Early retireesfrom the ministries preponderate as associationexecutives (senmu riji, joumu riji) and retain well-institutionalized ties back to their former minis-try (see amakudari; industry and tradeassociations); by 1991, industry associations had

416 standard setting

promulgated over 4,800 non-JIS standards. Dur-ing the 1990s, a reaction against overly special-ized standards from the bubble economy led tobroader standards foundations (zaidan houjin) be-ing established (e.g., Chemical StandardizationCenter) or strengthened (e.g, Japan InformationProcessing Development Center). Even appar-ently independent standards organizations tendto align with METI: the Kyoyohin Foundation,whose E&C Project has sought standards sup-porting “simple use for everyone” since 1991,became a METI-approved organization in 1999.JSA has increasingly led multi-sector standardsprojects (e.g., information processing, ISO 9000/JIS 9900 management standards). AIST researchlabs such as the Electrotechnical Laboratory spe-cially designated private or quasi-governmentalinstitutes and, more rarely academic societies allhost industrial standards research. The JIS Center(Kurashi to JIS sentaa) established at Tsukuba in1995 with an annual budget of $1 million, inves-tigates precompetitive standards.

History

Although the establishment of a Japan Engineer-ing Standards Committee (JESC, KougyouhinTouitsu Chousakai) in 1920 emulated many othercountries at that time, Japanese firms devotedmore attention to standardizing company-levelworkplace practices (hyoujun-ka) than to develop-ing formal, national standards (kikaku-ka). From1930–7, an “external” bureau of the ministry ofcommerce and industry the Temporary Indus-trial Rationalization Bureau (TIRB, RinjiSangyou Gouri Kyoku), worked closely withzaibatsu groups, journalists, and academics toplan for simplification, rationalization, modernmanagement, and formal standards. To promotethese objectives more widely TIRB established ahelper organization (Nihon Kougyou Kyoukai)in 1931 that merged with the Japan ManagementAssociation (JMA) in 1942. Only 520 JES stan-dards existed in April 1941, but during the heightof the war, JMA oversaw the diffusion of 931temporary standards (T-JES) based on simplifiedprocedures. The Aircraft Technology Association(Dai Nippon Koukuu Gijutsu Kyoukai) estab-lished by the technology agency (gijutsuin) thenunder the prime minister’s office issued 666 air-

craft standards (Dai Nippon Koukuuki Kikaku).After the war, with ministerial approval on 6

December 1945, the Japan Standards Associationwas detached from JMA and, along with the tech-nology agency given offices inside the patent andstandards office of the ministry of commerce andindustry. JESC was re-established as JISC in Feb-ruary 1946, which issued its first postwar stand-ard in September 1946. In May 1948, GHQordered the adoption of 766 US standards and288 Australian standards; Japan undertook rela-tively intensive exchanges with, and study of,standards organizations from twenty-one coun-tries including Holland, Switzerland, Finland,China, and Chile. The Industrial StandardizationLaw (Kougyou Hyoujunka Hou), which followedin July 1949 (law no. 185; with relatively minorrevisions in 1966, 1980, and 1997), regulatesJISC, the issuance of JIS and the “JIS mark,” andmost other aspects of Japan’s formal standards.The first factory to receive the “JIS mark” wasTokyo Steel’s Adachi factory in August 1950.

Japan’s signal achievement in the first post-war decades was an unusually tight integrationof prewar workplace mobilization with a rapidlyexpanding national system of formal standards.In 1952, there were 2,509 JIS, increasing 82 per-cent by 1957 and 166 percent by 1967. Manycompanies and supplier associations based theirin-house standards and operation manuals on JISor related industry association standards.Shopfloor workers—prepared by an education andemployee training system that produced broad,rather than specialized, human capital—learnedto incrementally revise the standards governingtheir own work. JSA disseminated these devel-opments to small and medium-sized firms,which also helped large firms rationalize theirsupply chains. Even the broader society partici-pated: thousands of homemakers, for example,for decades regularly reported on consumer prod-ucts awarded the JIS mark.

Formal standards reduced industry-wide pricelevels while the involvement of shopfloor workersin standardization encouraged firms to addproduct features and improve quality (see kaizen).Standardization aimed at price and qualityfacilitated massive export drives, for example, infacsimile machines, computer displays, and datastorage technology. Occasionally as with facsimile

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machines, Japanese firms coordinated not onlyin the early development of a national standardbut also on a shared strategy for internationalstandardization.

Japan signed the GATT Standards CodeAgreement on Technical Barriers to Trade(TBT) in 1980. Access slowly broadened; JIStechnical committees first permitted non-Japa-nese firms to attend drafting committees in1983, to propose drafts and attend technicalcommittees and Division of Council meetings in1985, and to become registered members in1987. Yet the locus of standardization alsoshifted—sometimes aided by ministerial fundsand policies—to less conspicuous settings such asindustry associations, quality control commis-sions, company president meetings, researchcooperatives, ad hoc commissions, and special-purpose foundations (zaidan houjin).

Firms on the technological frontier oftenfavored less binding forms of cooperation thanthe JIS framework; moreover, as products becamemore networked, control of networking interfacesby a single firm was becoming a more importantstrategic asset. The number of JIS rose only 8percent between 1975 and 1989 and declinedabsolutely during most of the 1990s. The numberof companies subscribing to JIS declined 23 per-cent between 1979 and 1994.

As the JIS framework weakened, ministry in-tervention tended to reduce the number of com-peting alternatives without preventing standardsraces from spilling over into the marketplace.Vigorous last-minute MITI intervention into con-sumer video standardization in 1976, for exam-ple, winnowed the four contending standardsdown to two but was unable to forestall a dec-ade-long market contest between Betamax andVHS. Similarly bounded competitions broke outin analog camcorders, videodisks, game ma-chines, and cellular telephones. Even collabora-tive standards research increasingly let companiespursue alternative (rather than complementary)standards; for example, in the Real Internet Con-sortium’s next-generation router project, Hitachipursued a supercomputer approach, while NECtried parallel processing. Standards competitionswere least likely in industries facing organizeddemands for a single standard from foreign user

firms (for example, in DVD) or dominated do-mestically by a single firm such as Nippon Tel-egraph and Telephone or NHK (such as satellitebroadcasting and cable).

Transnational standards

Moreover, nation-based standard setting wasunder challenge everywhere. Japanese firmssought to deepen the presence of Japan-centeredproduction networks in other countries, but theyfaced new approaches to standard setting fromthe USA and Europe. Anti-trust policy in the USfacilitated contests for winner-take-all control ofglobal de facto standards anywhere in the IBM orAT&T supply chain (e.g. Microsoft, Intel, Cisco);Japan’s keiretsu rivalries often hindered similarstrategies from developing in Japan. Meanwhile,Europeans invested heavily in the developmentof European standards that were often seamlesslyadopted by international organizations, often re-jecting alternative proposals by Japanese firms(e.g., condoms, medical imaging, cellular phones).Japan held relatively few secretariats at ISO andIEC—despite sending large delegations to almostevery technical committee and being the leadingsource of overall financial contributions—and wasoften confined to the testing and refinement ofproposals put forward by others.

JIS influence in Asia (e.g. steel JIS in China)—cultivated by the Japan International Coopera-tion Agency (JICA)—has the potential to offersome international leverage. Thus, JISC haslong played a leading role in the Pacific AreaStandards Congress (PASC) and sought to in-crease the influence of PASC members withinISO and IEC.

With hesitations, Japanese firms have soughtto integrate externally generated internationalstandards. Japanese firms initially criticized ISO9000 standards as a redundant expense, for ex-ample, but by the late 1990s Japanese firms hadbecome the leading holders of ISO certificationsworldwide: companies such as NEC andMitsutoyo offered their own ISO certificationservices, creating new tie-ins and opportunitiesfor their core businesses, especially in Europe.Similarly NTT resisted international standardsin second-generation mobile telephony but in

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the third generation allied quite closely with Eu-rope-based international standards; in 1998, anofficial from the telecommunications ministrybecame the first Japanese head of the Interna-tional Telecommunications Union.

After Japan signed the WTO Agreement onTrade-Related Aspects of Intellectual PropertyRights, JIS underwent a “zero base” review dur-ing 1997–2000: of 8,253 standards, 10 percentwere withdrawn (including 15 percent of JISmarks) while 36 percent were already equivalentto international standards. According to changesin the JIS Law made in 1997, standards projectscan begin without JISC preliminary assessment,and private and foreign organizations can offerJIS mark certification. Agriculture standards fol-lowed: the JAS Law was revised in December1998, and a five-year review of JAS, omittingpharmaceuticals and alcohol, began in 1999.

Ministerial influence, although trimmed inroutine matters, has also gained new strategicoutlets. In 1998, MITI began approving stand-ards projects on a five-year provisional basis ifconflicts among firms temporarily block creationof a JIS standard. In 2001, METI reorganizedJISC to target international standards morefavorable to Japan. JISC staffing nominally dou-bled to 225, and the number of JIS began risingfor the first time in two decades.

Further reading

JETRO (1995) Kokunai dantai kikaku mokuroku (List ofDomestic Industrial Group Standards), Tokyo:JETRO.

Johnson, C. (1982) “The Rise of Industrial Policy”MITI and the Japanese Miracle: The Growth of Indus-trial Policy, 1925–1975, Tokyo: Charles E. Tuttle.

JSA (1995) Nihon Kikaku Kyoukai 50 nen no ayumi (JapanStandards Association’s Fifty-Year Walk), Tokyo:Nihon Kikaku Kyoukai.

McIntyre, J.R. (ed.) (1997) Japan’s Technical Standards:Implications for Global Trade and Competitiveness,Westport, CT: Quorum.

Nakamura, S. (1993) The New Standardization: Keystoneof Continuous Improvement in Manufacturing, trans. B.Talbot, Portland, OR: Productivity Press.

Noble, G.W. (1998) “Standard Setting and R&D Con-sortia in Japan’s Video Industry” in Collective Action

in East Asia: How Ruling Parties Shape Industrial Policy,Ithaca, NY: Cornell University Press, 93–122.

JAY TATE

stockholders’ general assembly

Japan, like most other countries, requires publiccompanies to hold an annual stockholders’ gen-eral assembly or shareholders’ meeting (kabunushisokai), at which the investors in the firm gather tohear reports about the company’s progress andto vote on various proposals for the future. Un-der the Commercial Code the assembly is em-powered to make decisions such as theappointment of directors. However, Japaneseshareholders’ meetings are distinguished by twonotable characteristics: most are very short andthe vast majority are held on the same day at thesame time. As a result, in practice the role of theshareholders’ meeting in making decisions aboutthe company’s future is quite minor. Such deci-sions are made elsewhere, with approval at themeeting a mere formality.

In 1997 the average length of a shareholders’meeting for a publicly listed company in Japanwas twenty-nine minutes, with less than 5 per-cent taking more than an hour. Many lasted lessthan fifteen minutes, and at more than three-quar-ters of the meetings no questions at all were askedfrom the floor. This is in sharp contrast to NorthAmerican practice, where social activists, gadfliesand disgruntled ordinary shareholders often dragout meetings for several hours, and some com-panies purposely hold long meetings to showcasetheir plans. It is also a marked contrast to thedrama which sometimes attends shareholders’meetings in North America, where proposalsfrom the floor and even fights for control of thefirm are not uncommon, and where large institu-tional investors have been known to join togetherto vote to dismiss managers they felt wereunderperforming.

There are several reasons for these differ-ences in the length of the shareholders’ meeting.Most Japanese stock market-listed companieshave several major shareholders such as banks,trust banks, insurance companies and fellowkeiretsu members, who together own a control-ling stake in the company (40–70 percent).

stockholders’ general assembly 419

These shareholders deal with the company regu-larly on a long-term basis, and hence are regu-larly kept up to date on its activities. They holdtheir shares to solidify long-term business rela-tionships and will have worked out any differ-ences well before the meeting. Thus,management almost always has the votes itneeds to ensure passage of its proposals. Thereare also no outside directors on most Japaneseboards, so the directors seldom engage in publicpower struggles.

Under a revision to the Criminal Code whichcame into effect in 1982, in order to attend themeeting investors must hold shares with a parvalue of at least 50,000 yen, which usually means1,000 shares. This prevents small shareholdersfrom attending. Moreover, managers often packthe meeting with supportive employee sharehold-ers to ensure swift and discussion-free passage ofmanagement proposals, and many have also re-sorted to the use of sokaiya, corporate extortion-ists, who will, for a fee, ensure that no embarrassingmatters are raised by verbally or physically intimi-dating any troublesome attendees.

Only shareholders who have held at least 1percent of the company’s shares for six monthsprior to the meeting can make proposals, and 3percent is necessary to see the company’s booksbeyond the published financial statements. Thus,smaller shareholders are precluded from usingthe meeting as a forum to investigate or attackmanagement.

While the traditional explanation for manag-ers’ preference for short, quiet meetings was theaversion to embarrassment and loss of face inJapanese culture, some research has shown thatcompanies which usually have a short sharehold-ers’ meeting suffer declines in stock price when along meeting (over one hour) is reported in thepress. Thus, there may be a rational economicelement to this preference as well.

Annual general meeting day is a major eventwith front-page coverage in all the major nationaldaily newspapers in Japan. Companies whosemeetings have lasted more than one hour areprominently named. Over 90 percent of Japanesecompanies listed on the First Section of the To-kyo Stock Exchange hold their annual meetingon the same day in late June. Most Japanese com-panies have been encouraged to adopt a year end

of March 31, which coincides with the end of thegovernment’s fiscal year. These companies thenhold their meetings three months later, in June.Over time they have tended to coalesce on thesame day in late June as a measure to counteracthostile sokaiya, who threatened to drag out anddisrupt the meetings if not paid off. By holdingall meetings at the same time on the same dayunder heavy police protection, managers couldensure sokaiya were unable to attend more thanone company’s meeting each. This had the sideeffect of preventing ordinary shareholders fromattending more than one meeting as well. Whileless than ideal from a corporate governance stand-point, this effect was welcomed by most Japaneseexecutives since it further ensured that the meet-ing would not raise any embarrassing issues.

A series of scandals during 1997–8 revealedthat many companies had been paying off sokaiyafor years, some even after earlier convictions fordoing so. Pressure from the authorities and pub-lic opinion pushed these companies to reformtheir approach to the shareholders’ meeting. Be-ginning in 1999, several started to broadcast theirmeetings on the Internet or make other arrange-ments to be more open in order to reassure in-vestors and others that they had indeed cut theirties to the sokaiya. These companies have beenjoined by a number of others that have adopteda more open approach out of a desire to attractinternational investors, who have often been dis-mayed by a perceived lack of transparency in Japa-nese management.

See also: corporate governance; cross-shareholdings

Further reading

Nakane, F. (1995) “The Commercial Code and TheAudit Special Exceptions Law of Japan,” EHS LawBulletin Series, EHS Vol. II, Tokyo: Eibun HoreishaInc.

West, M.D. (1999) “Information, Institutions and Ex-tortion in Japan and the United States: MakingSense of Sokaiya Racketeers,” Northwestern Univer-sity Law Review 93. An excerpt, “Making Sense ofJapan’s Sokaiya Racketeers,” appeared in 42.2 LawQuadrangle Notes 72 (summer 1999).

TERRI URSACKI

420 stockholders’ general assembly

strategic partnering

“Strategic partnerships”—also commonly knownas “strategic alliances”—are usually formed to cre-ate competitive advantage on a worldwide basis.The term “partnership” is commonly used whentwo firms are involved, whereas “alliance” maybe used when there are two or more firms. Theintention of partnerships is a long-term contrac-tual relationship where firms share control overtheir firms’ resources. Firms may selectively sharecontrol, costs, capital, access to markets, and in-formation and technology. Partnerships may takemany forms. Some more common activities in-clude: joint research projects, technology shar-ing, use of product facilities, joining forces tomanufacture components, assembling finishedproducts together, and marketing the partner’sproducts.

Historically export-minded firms in industri-alized nations sought partnerships with firms inless developed countries to export and marketproducts in that less developed country Such ar-rangements were often required to win local gov-ernment approval for economic activity andmarketing in the less developed country. Morerecently companies from different parts of theworld form strategic partnerships and alliancesto strengthen their mutual ability to serve wholecontinents. Particularly when companies lackparticular resources essential for competition onthe international stage, they may seek out a part-ner holding the keys to further expansion. Ofcourse, any help must be reciprocated.

Although the rewards are enticing, maintain-ing partnerships is not easy Forming partner-ships initially is usually a challenge, butmaintaining the partnership for the long run isextremely difficult. Time and money costs ofcoordination are usually expensive in the shortrun and can even increase in the long run. Part-nerships often break down when one or both ofthe partners feel that they are not benefiting asplanned, and partnerships become especiallyvulnerable when one partner begins feeling ex-ploited by the other. Collaboration between in-dependent companies can be very difficultbecause of language and cultural barriers. Fi-nally depending on another for essential exper-tise and capabilities is threatening and requires

trust. Over the long run, this trust frequentlybreaks down.

In partnerships and alliances out of Japan, Japa-nese companies often form strategic alliances withEuropean companies to strengthen their abilityto compete in the European Union. They havealso been actively forming alliances with Asianfirms to capitalize on the opening up of Asianmarkets. In the USA, Japanese companies haveconsistently had relatively poor performing alli-ances, with the exception of the auto and con-sumer electronic industry The high costs ofserving the highly competitive US market hasled to disappointing operating returns for manyJapanese firms. Strategic alliances, however, re-main an attractive way for Japanese firms to en-ter US markets due to the fact that Japanesecompanies have only had about a 30 percent suc-cess rate with cross-border acquisition. Cross-border acquisitions have been unsuccessfulbecause they have primarily been done on a“hands off” basis, which prevents the collabora-tion necessary to two-way learning and minimizesthe opportunity to capture value through con-solidation.

An example of a company active in formingstrategic partnerships is Toshiba. Japan’s oldestand third-largest electronics company Toshibahas used strategic alliances as the cornerstone ofits corporate strategy. Some of its most promi-nent strategic alliances are with IBM (to makeflat-panel liquid crystal displays in color for port-able computers), Motorola (to design and makedynamic random access memory chips) and Ap-ple Computers (to develop CD-ROM basedmultimedia players that plug into televisionsets). The company—like many other globalizingcorporations—believes that these alliances arenecessary because technology has become soadvanced and the markets are so complex thatno one corporation can be the best at an entireprocess any longer.

In Japan, more than half of all foreign entrieshave been accomplished through strategic alli-ances. Relatively few acquisitions of attractiveJapanese companies take place. Alliances in Ja-pan tend to last at least 15–20 years, twice aslong as anywhere else. Even if both partners arenot satisfied with the alliance, the costs of break-ing up are high; it is often difficult to find

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replacement partners. The alliances usually in-volve the sharing of personnel, quality control,product development and just-in-time inventorysystems. Historically Western companies have of-fered innovative products and technology in re-turn for access to Japanese markets. Over time,Japanese firms typically learn the technologythemselves and are more likely to terminate thealliance if their partner is no longer contributingwhat they perceive as a fair share. In these casesJapanese companies often buy out their partners;Japanese partners have been the acquirers in ap-proximately 70 percent of the terminating ven-tures in Japan. Because Japanese markets can beso different and difficult to penetrate, US com-panies are still reliant on alliances with Japanesecompetitors to learn production and marketingprocesses. Furthermore, Japan’s government regu-lation and policies can make access to Japanesemarkets very difficult for foreign firms, therebygiving Japanese companies a valuable bargain-ing chip when forming strategic alliances.

Further reading

Bleeke, J, and Ernst, D. (ed.) (1993) Collaborating to Com-pete: Using Strategic Alliances and Acquisitions in the Glo-bal Marketplace, New York: John Wiley and Sons.

WILLIAM BARNES

subcontracting system

The Japanese system of subcontracting, charac-terized by continuity and stability in supplier-as-sembler relationships between core firms andtiered medium and small-scale parts providers, isa distinctive feature of the Japanese business sys-tem. This unique system of external architectureevolved in response to wartime government man-dates, immediate postwar labour surpluses andthe high growth and labour short economy ofthe 1960s.

Shitauke, as subcontracting is known in Japa-nese, is symbolized by firms such as Toyota andNEC which are surrounded by their respectivekeiretsu or supplier groups. Relationship contract-ing as compared to spot trading is the hallmarkof the Japanese subcontracting system. In theWest, customized components are generally

manufactured in-house or by wholly-owned sub-sidiaries of the assembler. In Japan, such itemsare produced by independent members of thekeiretsu who are willing to take the risk of estab-lishing dedicated production facilities and install-ing transaction-specific assets.

Japan’s subcontracting system comprises long-term relational contracts for parts and compo-nents, with first, second and third-tier suppliersstratified according to each supplier’s range andlevel of technical expertise, attitudes to risk andrelative bargaining power (Aoki 1988). However,supplier-assembler relations in Japan are notmonolithic, with practices differing between twoplants in the same industry and between differ-ent industries. This distinctive system of continu-ous trading between manufacturers and suppliersrests on relational contracting that facilitates thesharing of product knowledge and encouragessystem flexibility One element in the wider ar-chitecture of the Japanese firm, which includesinterrelated work and industrial organizationpractices, the subcontracting system providesJapanese firms with competitive advantagesthrough acquisition of organizational knowledge,establishment of organizational routines and thedevelopment of a cooperative ethic.

How buyers set specifications for suppliers,and how suppliers meet those specifications, de-fines the Japanese subcontracting system(Asanuma 1989). Subcontracting in Japan in-volves the transfer of codified and tacit know-how, embodied in product specifications, pricingregimes, shipment scheduling, and quality con-trol mechanisms. Such decision making and prob-lem solving facilitates learning, while attenuatinginformational asymmetries between partners.Suppliers learn to achieve reliability in quality anddelivery and meet targeted percentage price re-ductions, over a specified time through rationali-zation or productivity improvement (Asanuma1985b). Buyers learn to commit to suppliers byassessing suppliers’ performance and rankingsuppliers into tiers. Buyer commitment and sup-plier reputation allow both parties to invest inspecific human capital (design engineers) andphysical capital (machines). For both parties, thesenetwork specific assets act as an additional in-centive device to ensure contract compliance, at-tenuate opportunistic behaviour and preserve the

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long-term supply relationship, given low second-best uses and high switching costs when special-ized assets are present. Repeat contractingbetween buyer and supplier furthers learning andcreates trust and cooperation, which also acts asan incentive for maintaining the subcontractingsystem over time.

The term “subcontractor” in Japanese hasbeen sometimes associated with the exploitativeuse of small businesses as a buffer against busi-ness fluctuations by large firms, especially byMarxist scholars. Lower profit rates and wagerates in small firms are often cited as evidence tosupport this position. According to the Marxistview, large firms are able to protect their ownprofits by transferring the impact of cyclicaldownturns to small contractors over whom theyhold monopolistic advantage, by either reducingthe orders to suppliers by a larger amount thanthe decrease in demand for the end product orby forcing suppliers to accept less favourableterms through lower prices. The evidence tosupport such exploitation is mixed. Studies ofprofit rates in manufacturing in Japan suggestthat whilst profit rates are lower in the smallfirms normally associated with subcontractingthan in large firms, they are higher than the aver-age for manufacturing as a whole. This view ofsubcontracting is essentially similar to any com-petitive spot transaction, which might take placein any market.

Essential to an understanding of subcontract-ing in Japan is its quasi-vertical integration, moreakin to intra-firm transacting than to spot trans-acting. Component suppliers also play a majorrole in the kanban or just-in-time productionsystem that originated in Toyota and is an exam-ple of a structure possible only under relation-ship contracting. Subcontracting relationships inJapan overlap to some extent with Japan’s keiretsubusiness groupings. Many automobile suppliersare organised in this way. Toyota for examplehas a stable organisation of supplier firmsknown as kyohokai. However, members ofToyota’s kyohokai generally include only thelarger first tier suppliers and represent only afraction of the many thousands of suppliers.However, in other industries such as electronics,relationships between core firms and suppliersare less well defined and similar associations that

include major plant suppliers have not been or-ganized.

Subcontracting relations in Japan are wide-spread and pervasive. For example, Asanuma(1985a) found that the cost of purchased partswas as much as 70 percent of the unit productioncost for any of the representative carmakers inJapan. According to a survey by the Agency forSmall and Medium-Sized Enterprises, an un-named manufacturer of automobiles had directrelations with 122 first-tier suppliers and indirectrelations with 5437 second-tier suppliers and41,703 third-tier suppliers. After adjusting fordouble counting this manufacturer was the corefirm of a hierarchy of 35,768 suppliers.

Three different types of vendor supplier rela-tionships are clearly discernible within Japan’ssubcontracting system. The first distinction tobe made is between catalogue goods (CG) andordered goods, that is between those goodswhich are standardized and ready-made and canbe purchased in open markets, and those com-ponents that are supplied in accordance with thepurchaser’s specification. While some supplierssupply both marketed and ordered goods, firmstend to supply either one type or the other.

Ordered goods can be further divided intotwo types of suppliers: design approved (DA)vendors and design supplied (DS) vendors. DAsuppliers manufacture parts from designs madeby the suppliers themselves and approved by theassembler. DA suppliers have a relatively uniquestock of production knowledge and directly sup-ply essential components to the prime manufac-turer. This type of supplier may providecomponents such as advanced electronic equip-ment, bearings, brakes and carburettors, whichmay be patented products or products in whichthe prime manufacturer (assembler) does nothave comparable technological expertise. DSsuppliers, on the other hand, manufacture com-ponents according to designs and specificationssupplied by the assembler. These suppliers gen-erally have less specialized technological exper-tise and supply less crucial components (such aslamps or plastic mouldings) to the primarymanufacturer.

DS suppliers fit most closely with the popularimage of the subcontractor referred to asshitauke in Japanese. They are considered to have

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relatively weaker bargaining power vis-à-vis thecontracting firm because they lack specializedtechnological expertise (Aoki 1988). As a result,this type of subcontractor in Japan has long beenunder the protection of Japanese law. The shitaukefirm is a legal concept defined in Japanese law asa firm with 300 or fewer employees or with apaid-up capital of ¥100 million or less. Notwith-standing the legal and conventionally acceptedusage of the term shitauke, the subcontracting sys-tem in fact involves a continuum of contractualrelationships between a prime manufacturer andits subcontracting members, stratified accordingto the technological capacities of individual sup-plying firm. The balance between these catego-ries varies between industries according to theextent of standardization of the component be-ing supplied. The more standardized the compo-nent, the more likely it will be supplied as a CGwhile the more customized the component, themore likely it will be supplied as a DS or DAcomponent.

Virtually all automobile components, for ex-ample, are either DS or DA, while electric ma-chinery components, which are much morestandardized, have a higher proportion of CGcomponents (Asanuma 1989). DA and DS sup-pliers, because of the high level of customizationand asset specificity or their components, arelikely to be much more dependent on the primemanufacturer (assembler). Large suppliers andsuppliers with technical expertise tend to supplymore catalogue goods than ordered goods, andof the ordered goods more DA than DS compo-nents. This is partly because greater technologi-cal know-how and human resources enable thesefirms to have substantial design and drawing ca-pabilities and partly because they are in a betterposition to absorb the economies of scale thatcome from producing a large quantity of stand-ardized products. Some CG suppliers, as a re-sult, are often large independent firms and includemany large corporations such as NEC,Matsushita and Hitachi who themselves aremajor manufacturers of finished goods.

Perhaps the two main features of Japan’s sub-contracting system which contrasts with assem-bler-supplier relations in the West are thelong-term cooperative relationships between as-semblers and suppliers based on repeated inter-

actions and suppliers’ willingness to make cus-tomized investments. Namely Japanese manu-facturers purchase intermediate products(component parts) repeatedly from a limitednumber of suppliers, who are willing to makeinvestments specific to their purchaser in orderto produce customised investments. For exam-ple Dyer and Ouchi (1993) found, based ontheir study of the Japanese automobile industrythat Japanese suppliers were willing to invest incustomized equipment and customer specific hu-man capital and locate their plants close to themanufacturer. This allows Japanese assemblersto reduce the level of capital tied up in invento-ries. Strong technical interaction between assem-blers and suppliers in the Japanesesubcontracting system, involving routine ex-change in personnel and information, also al-lows greater efficiency and faster productdevelopment. Toyota, for example is able to de-velop a new model in just fifty months, almost40 percent faster than automobile US automo-bile manufacturers (Dyer 1994). Finally the will-ingness of Japanese suppliers to invest incustomised assets due to the long-term relation-ship characteristic of the Japanese subcontract-ing system, also plays an important role in theimprovement of both productivity and qualityimprovement. This factor is often singled out asa major reason for the strong performance of Ja-pan’s tightly integrated production system.

From the suppliers’ viewpoint, there is astrong incentive to acquire sufficiently high tech-nology to make their own drawings and be pro-moted from a DS to DA supplier and hopefullyto a CG supplier so that they can reduce theirdependence on a single purchaser, differentiatethemselves from rival suppliers and also increasetheir profit margins. They are therefore moti-vated to invest in technological acquisition andengineering capabilities.

The nature of the contract between primemanufacturer and the first-tier supplier has beenarticulated by Asanuma (1989). Normally thecontract period between the prime contractingfirm and its subcontractor corresponds to theduration of a particular model. The prime con-tracting firm guarantees not to switch suppliersor manufacture in-house the contracted part forthe life of the model. In Japan, it is quite unusual

424 subcontracting system

for the subcontracting relationship between anassembler and a supplier, once begun, to be ter-minated. Relationships between assemblers andsuppliers continue on a semi-permanent basiseven through model changes, although a suppli-er’s rank and bargaining position may changeover time.

The Japanese subcontracting system pro-vides competitive advantages that include pro-duction and contract flexibility economies ofscope and specialization, and productivity im-provement. Contracts between the prime manu-facturer and suppliers set both the price andquantity which are determined on the estimatedunit cost plus an agreed markup and on produc-tion forecasts, but are subject to change depend-ing on fluctuations in demand and changes ininput costs. Minor changes in supplier outputare driven through daily kanban orders from theassembler which, as noted earlier, helps to keepinventory suppliers to a minimum in accordancewith the just-in-time system. More significantchanges to production schedules occur on amonthly basis, and suppliers are notified in ad-vance of changes in production schedules. Priceadjustments also occur when production costschange. Usually changes in production volumescausing increases in the fixed cost per unit of thesupplier are met by the assembler. Changes invariable costs occasioned by increases in mate-rial costs are also usually met by the primemanufacturer (assembler). However, increase inlabor costs are usually expected to be met by thesupplier through productivity improvements.Productivity improvements are generally sharedbetween the assembler and supplier, dependingon whether the cost reduction is due to the initia-tive and investment of the supplier or the assem-bler.

Strong incentives and competition also existbetween suppliers. Suppliers who are evaluatedpositively in terms of performance may well bepromoted to a higher category and allowed higherprofit margins, while those who are poorly evalu-ated may be demoted in rank and have lowermark-ups imposed. Poor performance may resultin a refusal by the assembler to place further or-ders, but this is rare, and suppliers are usuallygiven the opportunity to redeem their position(Asanuma 1989). In this way both competition

and quality improvement are characteristic of theJapanese subcontracting system.

It has been suggested that the rapid advancein information technology may change the basicnature of the Japanese subcontracting system andmanufacturer-supplier relations, with manufactur-ers moving increasingly to the procurement ofstandardized rather than customized parts whichcould be sourced through the Internet rather thanfrom a limited number of suppliers within theirown corporate groups.

Further reading

Aoki, M. (1988) Information, Incentives and Bargaining inthe Japanese Economy, Cambridge: Cambridge Uni-versity Press.

Asanuma, B. (1985a) “The Contractual Frameworkfor Parts Supply in the Japanese Automobile In-dustry” Japanese Economic Studies, Summer: 54–78.

——(1985b) “The Organization of Parts Purchases inthe Japanese Automobile Industry” Japanese EconomicStudies, Summer: 32–53.

——(1989) “Manufacturer Supplier Relationships in Ja-pan and the Concept of Relationshipspecific Skill,”Journal of the Japanese and International Economies 3:1–30.

Dyer, J. (1994) “Dedicated Assets: Japan’s Manufac-turing Edge,” Harvard Business Review (November–December): 174–8.

Dyer, J. and Ouchi W.G. (1993) “Japanese Style Part-nerships: Giving Companies a Competitive Edge,”Sloan Management Review 35:51–63.

Odagiri, H. (1992) Growth Through Competition, Competi-tion Through Growth: Strategic Management and the Japa-nese Economy, Oxford, Clarendon Press.

WILLIAM PURCELLSTEPHEN NICHOLAS

suggestion systems

Japan’s first suggestion program was started byKanebo Company in 1905. Kanebo modeled itsprogram after executives saw similar ones at workin the United States. However, it was not untilthe 1950s that suggestion systems became com-monplace in Japanese companies. To anunforthcoming workforce accustomed to follow-ing top-down dictums in a vertically integrated

suggestion systems 425

hierarchical society the idea of offering sugges-tions to superiors was not quickly accepted. How-ever, in the 1960s companies began to integratesuggestion plans with a variety of small-groupactivities such as quality control circles and jishukanri (autonomous control) teams. This combi-nation proved more successful in generating sug-gestions.

For example, in 1976, Matsushita Electric re-ported an average of fifty suggestions per pro-duction worker in its Ibaraki television plant. Inrecent years, the company as a whole has beenaveraging over ten suggestions per worker (fac-tory and office workers combined). The accept-ance rate at Matsushita averages about 10 percent.This figure was the norm for most successfulcompanies that depended on such input fromemployees for idea generation.

By 1982, a survey of 512 organizations con-ducted by the Japan Human Relations Associa-tion and the Japan Suggestion System Associationshowed an increase in suggestions per employeeto 14.74. At Hitachi Ltd. alone, 5.8 million sug-gestions (102.59 per person) were received. Otherfirms experienced levels as high as 400 sugges-tions per employee. According to the 1982 sur-vey the largest percentage of suggestions (35percent) address work process improvement.Other types of suggestions (10 percent) addressedmachine tools, work environment, and ways tosave energy resources and materials.

There have been continuous improvements inthe suggestion system as it has been applied andexperienced in the Japanese culture over time.One significant adaptation was going from a pas-sive to active strategy of suggestion accumula-tion. The former involved providing suggestionboxes for employees and waiting. The latter in-volved active campaigns educating and reward-ing personnel in regards to fulfilling suggestionquotas. These innovations in the system are con-gruent with the commitment of Japanese man-agement to developing employees skills fully andunderstanding that employees can make real con-tributions to organizational effectiveness.

By the 1990s suggestion systems have perme-ated through organizational structures into theschool system. As early as first grade at school,children are encouraged to make suggestions.Indicators include the ever-present suggestion

boxes, in the classrooms, hallways, and outsideof the principal’s office, suggestion campaign slo-gans on banners, and audio reminders via thepublic announcement system.

Further reading

Cole, R.E. (1979) “Made in Japan: A Spur to US Pro-ductivity” Asia (May–June): 6.

Hattori, I. (1985) “Product Diversification,” in Thurow(ed.), The Management Challenge: Japanese Views, Cam-bridge, MA: MIT Press.

JETRO (1982) “Gauging and Comparing EconomicProductivity” Focus Japan, September: JS-A.

Keizai Koho Center (1990) An International Compari-son, Tokyo.

Lillrank, P. and Kano, N. (1989) Continuous Improve-ment, Ann Arbor, MI: Center for Japanese Studies,University of Michigan.

MARY YOKO BRANNEN

Sumitomo

Sumitomo Corporation, one of Japan’s largest andmost successful trading companies, was estab-lished on 24 December, 1919. Currently it has192 offices worldwide, including 158 offices in88 countries and thirty-four offices in Japan. Inaddition to Sumitomo company offices, there area vast number of consolidated subsidiaries, 553,of which 346 are overseas and 207 are domestic.The total number of associated companies is 214,of which 132 are overseas and 82 are domestic.Sumitomo is an increasingly global company withstock market listings in Tokyo and Frankfurt. Thenumber of employees in the Sumitomo Corpo-ration is 8,192, and the total number of employ-ees working for consolidated subsidiaries is33,057. The Sumitomo product lines includemetals, machines, media, chemicals, fuel, food,fiber and construction.

The commercial history of the Sumitomo fam-ily began when Masatomo Sumitomo, thefounder of the Sumitomo family opened a medi-cine shop and bookstore in Kyoto in the begin-ning of the seventeenth century Later, his heir,Tomomochi Sumitomo, created the first coppertrading com pany in Japan, which was to becomethe foundation of the future Sumitomo enterprise.

426 Sumitomo

At the same time, the company entered into thebusiness of running copper mines, with the BesshiCopper Mine established in 1690. Besshi contin-ued to produce copper and contribute toSumitomo for more than 280 years until its endin 1973. A new Western technique was introducedto the Besshi Copper Mine in the beginning ofthe Meiji Era (1868), and copper production in-creased rapidly. The increase in copper produc-tion allowed the company to diversify into avariety of business ventures.

The Sumitomo zaibatsu (a monopolistic groupof companies run by one family) grew out of thisJapanese merchant house to become one of thelargest zaibatsu in Japan, controlling some 135companies by 1945. Sumitomo was so successfuland influential that it is widely credited with turn-ing the country into a modern, capitalist societyas Japan gradually opened up to the rest of theworld during the latter part of the nineteenth andfirst half of the twentieth centuries.

When the Second World War ended in 1945,all zaibatsu in Japan were dissolved and holdingcompanies were banned. As a result, affiliatedcompanies had to begin independent business op-erations. Sumitomo was likewise dissolved, andeach company of Sumitomo started out on itsown as an independent company. But very soonthereafter, as with all former zaibatsu, the compa-nies regrouped into modern day “keiretsu” andwere back in business as a powerhouse group ofcompanies.

The Sumitomo Corporation has maintainedits high status in Japan, being regarded as the“Big 3 and Best 1,” indicating that they rank inthird place in terms of sales and in first place interms of employment. Generally, Sumitomo’sbusiness management ability has a respected repu-tation. The Sumitomo Group has a hard-and-fastrule that the sales staff must not manage. Somanagement staff are highly trained and, in turn,are responsible for the training of their sales staff.With the help of their management system,Sumitomo Corporation has reaped vast profitsand is a major success story in Japan.

Further reading

Kearns, R.L. (1992) Zaibatsu America. New York: TheFree Press.

Uchida, Y. (1995) Shosya, Tokyo, Japan: KyouikusyaPublishing.

MARGARET TAKEDAIPPEI ICHIGE

superstores

The superstore is not a native Japanese retail cat-egory. The closest category is suupaa, a truncatedloanword used to refer to three forms of super-markets. The first is called shokuhin suupaa (foodsupermarkets), itself modeled on supermarketsin the USA. Shokuhin suupaa, by definition, mustgenerate not less than 70 percent of their incomefrom food alone. The second refer to specialtysuupaa including apparel and household goodssuupaa. A specialty suupaa must have a sales floorof no smaller than 500 square meters and gener-ate no less than 70 percent of its sales from themerchandise it specializes in. The final form issougou suupaa (general supermarkets) that devotethemselves not only to food sales but also to thesale of a wide range of merchandise, includingtextiles, household goods, furniture and electri-cal appliances. Therefore, the term sougou suupaarefers to a sort of combined supermarket andmini-department store which is similar to a de-partment store in form and should be thought ofas a general merchandise store (GMS).

The category of suupaa can be seen as the re-sult of a historical process in which Japanese bor-rowed the concept of supermarket chains fromthe USA in the 1950s and domesticated the con-cept into things Japanese. At that time, some re-tailers adopted most elements of supermarketoperations such as self-service techniques, massmerchandising, and pricing, but widened therange of merchandise to include textile, varietyfurniture, electrical appliances, and so forth ratherthan confine themselves solely to food sales. Theyalso built large stores from the outset to housethe wide range of merchandise. In the 1960s,these retailers established chain stores all overJapan. This is how sougou suupaa were developed.At the same time, some small grocery shops choseto stick to the American format of supermarketsand became shokuhin suupaa. Other retailers ap-plied the concept of supermarkets to sell non-foodmerchandise such as apparel and householdgoods. This is the origin of specialty suupaa.

superstores 427

Among the above three forms of supermar-kets, sougou suupaa is closest to the concept ofsuperstores. Sougou suupaa can be classified intonational, regional, and local. A national sougousuupaa must, by definition, operate outlets acrossmore than four prefectures. Secondly it must alsohave a network of outlets in two or more of thefollowing cities: Tokyo, Osaka, and Nagoya. TheDaiei group, Seiyu group, and Ito-Yokada groupare several well-known examples. A regionalsougou suupaa must run stores across four prefec-tures. The former Yaohan Japan is a good exam-ple. The differences between national andregional sougou suupaa in corporate strength andreputation have been significant. Finally a localsougou suupaa is defined as a supermarket thatoperates outlets across three prefectures such asMarunaka.

Large department stores are sometimes calledsuperstores because of their operation scale.However, department stores and sougou suupaadiffer in three major ways: the organization ofoperations, the number of outlets, and the socialprestige attached to them. Sougou suupaas are self-service operations, with chain-style organization—in other words, with separate merchandising andstore operations—while department stores are notdifferentiated according to these functions. Thesecond characteristic of supermarkets is their largenumber of outlets. Daiei, for instance, directlyoperated 317 stores all over Japan in 2000. Incontrast, Isetan operates only seven outlets. De-partment stores and sougou suupaa are also differ-ent in terms of social prestige: their respectivestatuses are rooted in their histories and are re-lated to the physical locations of their stores.Department stores, especially those such asMitsukoshi of the so-called “kimono tradition,”can boast longer histories than supermarkets—and, in Japanese business generally a long corpo-rate history tends to be related positively inconsumers’ minds, to quality and prestige. The“goodwill” created and sustained by stores overa long period of time thus leads to a good corpo-rate image.

Looking at differences in their business strat-egies suggests some meaningful connections be-tween the categorical distinctions of prestige andsuch elements as merchandising policies, cus-tomer services, price, location strategies, clien-

tele, and staffing. Japanese retail experts classifymerchandise into two categories according tocustomers’ purchasing behavior. The first is calledluxury merchandise (kaimawari hin) which refersto such items as high fashion, jewelry and so on.The purchasing frequency of luxury merchan-dise is low and customers tend to be choosy Thesecond category consists of daily necessities(moyori hin) such as food, daily items, and house-hold utensils. Unlike luxury merchandise, thepurchasing frequency of daily necessities is high.Customers tend to shop in stores convenient tothem such as those close to their places of resi-dence.

In order to maintain their high status, mostdepartment stores have adopted a merchandis-ing policy that centers on luxury merchandisesupplemented by daily necessities. In contrast,sougou suupaa focus mainly on daily necessities.Moreover, department stores stress textiles, whilesougou suupaa focus on food and daily necessities.Generally sales of textile merchandise alone haveconstituted 40 to 60 percent of the total sales ofdepartment stores.

High-quality goods and comprehensive cus-tomer services result in high prices, which them-selves contribute to prestige. Sougou suupaa, dueto their emphasis on daily necessities, are lessexpensive. In fact, low prices were the raison d’êtreof supermarkets when they started to flourish inthe 1960s.

Moreover, in order to be consistent with theirhigh status, most department stores, especiallythose from the “kimono tradition,” have locatedtheir stores in the earliest established central busi-ness districts, such as the Ginza in Tokyo. Suchlocations can give department stores an atmos-phere of tradition and exclusiveness that attractrich customers. Sougou suupaa, on the other hand,have located their stores close to residential areas,in order to be more easily accessible. The key con-sideration here is convenience, as wealthy custom-ers have never constituted their core clientele.

See also: Daiei; Ito-Yokado; retail industry

Further reading

Larke, R. (1994) Japanese Retailing, London: Routledge.

HEUNG-WAH WONG

428 superstores

supply chain management in Japan

In Japan as in other countries, supply chain man-agement (SCM) refers to the integration andmanagement of the business processes that linkoriginal suppliers with producers, distributors,and ultimately consumers. The objective is tooptimize the responsiveness and cost performanceof the entire supply chain, rather than focus nar-rowly on business activities within any one com-pany. Since the 1990s, SCM has receivedconsiderable attention worldwide. Certain Japa-nese business practices, most notably those ofToyota and its keiretsu group members, have beenrecognized by many as providing an early proto-type of supply chain management (see Toyotaproduction system). Subsequently Japanese in-dustry has looked to the USA as a leader in in-novating SCM, particularly for utilizinginformation technology and the Internet.

In its development, supply chain managementhas drawn upon many aspects of Toyota’s busi-ness practices. In fact, many top managers in Ja-pan use the terms supply chain and “demandchain” interchangeably borrowing terminologyfrom Toyota’s pull-system of production whichinitiates the production of parts only as they areactually used, or demanded, by downstreamstages of the production system or supply chain.The aspect of the Toyota production system mostrelevant to SCM is its extensive degree of infor-mation sharing between supply chain members.For example, Toyota provides information on newcar models to first-tier suppliers who then worktogether with Toyota to design the parts. Toyotaalso provides a rough production schedule to partssuppliers one-month in advance, and then placesthe actual purchase order ten days in advance.Consequently suppliers have adequate time toprepare materials without maintaining perpetualinventories. Toyota’s dealer network also providesdemand forecasts to Toyota one month in ad-vance, and finalizes purchase orders ten days inadvance based on a mix of actual customer or-ders and forecasted demand. Toyota then se-quences its final assembly of automobilesaccording to the dealer delivery schedule. Aim-ing to increase the responsiveness of its supplychain, Toyota has set a goal to build 70 percentof cars to customer order by 2010, up from 30

percent in 2000. This will require increased useof information technology and customer relation-ship management (CRM) systems, together withsignificant reductions in total manufacturing lead-time.

Many supply chains in Japan are still formedlargely along keiretsu lines, but are moving increas-ingly towards an open network model. The burst-ing of the bubble economy and variouscompetitive factors have pushed companies tolook for suppliers outside their own keiretsu affili-ation. The increasing numbers of Internet-basedtransactions and the emergence of e-markets forthe purchase of supplies have also accelerated themove towards network supply chains. At the sametime, it should be noted that many companiesnever had keiretsu affiliations or have always beena supplier to more than one keiretsu group. Otherindustries, such as fashion apparel, had neverdeveloped close relationships among members intheir supply chains. Textile manufacturers, ap-parel manufacturers, and retailers independentlydetermined their own production and orderingschedules based on their own individual salesforecasts. Due to this lack of information sharingand coordination, retailers routinely experienced20 percent opportunity costs and apparel manu-facturers had 30 percent obsolescence of inven-tories. To address these problems in the fashionapparel supply chain, the former Ministry ofInternational Trade and Industry or MITI(now the Ministry of Economy Trade and Indus-try METI) launched the Quick Response Archi-tecture Initiative (QRAI) in 1998. Through a oneand a half year project involving multiple enti-ties, several improved business approaches wereproposed including the introduction of quantityflexibility contracts, information sharing, synchro-nized schedules with small lot sizes for produc-tion and delivery, continuous optimization ofproduction and delivery schedules, and otheroperational techniques of SCM.

Information sharing is widely recognized asthe most important issue for supply chain man-agement, whereas the obstacles to efficient SCMare generally recognized to be (1) long lead times,(2) too many stages in the supply chain, and (3)demand uncertainty and independent decisionmaking. Many excellent examples of reducingproduction lead-time exist in Japanese industry

supply chain management in Japan 429

including Toyota. For eliminating redundantstages in the supply chain, the retailer, Ito-Yokado, provides a good example with its intro-duction of a vendor managed inventory programfor daily necessity items. To deal with demanduncertainty some manufacturers have begunimplementing Internet-based design and order-ing systems, such as Sharp’s system for micro-wave ovens. To coordinate decision making, somecompanies have introduced continuous replen-ishment planning (CRP) systems. For example,Japan’s multitude of small stationery shopslaunched a cooperative logistics system in 1998and then extended it into an “efficient supplychain management system” in which continuousreplenishment planning is the core. Using thissystem, member companies, including manufac-turers such as Pentel, as well as distributors andretailers have targeted to reduce average inven-tories by up to 50 percent, average shortages tozero, and average delivery cost by 50 percent.

While the term “supply chain” typically re-fers to inter-firm linkages, many large Japanesecompanies also speak of managing their own “in-ternal supply chains” (kigyounai sapurai chien). Aspart of efforts to improve their internal supplychains, Sony and National/Panasonic(Matsushita), for example, have integrated theirvarious manufacturing resources in order to sim-plify and enhance the efficiency of procurementand manufacturing. Many Japanese companieshave eliminated their logistics activities and in-

stead have outsourced the logistics function tothird-party logistics providers. Another area ofactivity for many companies has been to bettersynchronize their logistics planning with manu-facturing planning.

Since the late 1990s, most large Japanese firmshave established departments with responsibili-ties for supply chain management. Furthermore,almost all consulting companies, as well as in-dustry and trade associations, have SCM divi-sions. Organizations that have actively organizedconferences and promoted SCM in Japan includethe Japan Institute of Logistic Systems and a Japa-nese branch of the US-based Supply Chain Coun-cil.

See also: distribution system

Further reading

(1998) “Tokushu 1: Sapurai chien senryaku/ Tokusyu2: Baryu chien saikouchiku” ((Special Issue on Sup-ply Chain Strategy and Value Chain Restructur-ing), Diamond Harvard Bijinesu 23(6).

(1999) “Tokushu: Sapurai chien manejimento” (Spe-cial Issue on Supply Chain Management) OpereshonzuRisaachi, Keiei no Kagaku 44(6).

(1999) “Kaigishiryou No.1, No.2” (Proceedings ofLogistics Software Conference, Vols 1–2), RojisuteikuSofuto-uea Zenkoku Kaigi, Tokyo: Nihon RojisuteikusuSisutemu Kyoukai.

DE-BI TSAO

430 supply chain management in Japan

Taguchi, Genichi

Taguchi (1924) has made important contributionsto technical aspects of quality management. Hedeveloped the quality loss function, based on thenotion that any deviation from a target value cre-ates user dissatisfaction (loss to society). Lossesassociated with being very close to the target aresmall, but increase quickly (parabolically) withdistance from the goal. This approach is verydifferent from the traditional view of an accept-able range (specification limits), focusing insteadon a specific target. Taguchi aims toward unifor-mity rather than compliance with specifications.Emphasizing robustness in both design and pro-cess, Taguchi also popularized a simplified ver-sion of statistical design of experiments. Whilehis approach displeases statisticians by not fullyspecifying interactions between variables, manyengineers find it to be more accessible than tradi-tional experimental design.

Further reading

Phadke, M.S. (1989) Quality Engineering using RobustDesign, Englewood Cliffs, NJ: Prentice Hall.

ELIZABETH L.ROSE

takeovers

A takeover occurs when one company (indi-vidual, or institution) acquires control rights of atarget company. Control rights are usually ob-tained through the buying of more than 51 per-cent of a firm’s shares. In the typical

principal-agent view of the corporation developedin US and British economics, the “principal,” orowner, then has the right to control the “agents,”or managers, who run an organization. It is themanager’s duty to maximize profit; by maximiz-ing profit, the manager maximizes share pricesfor shareholders. Managers who do not do thissuffer falling share prices and the eventual threatof unwanted (or hostile) takeovers. Because ofthis constant pressure, managers fall in line andmaximize profits for shareholders. All of this en-sures rapid and efficient resource allocation inthe economy This view of corporate governanceis common in the USA, but has only recentlygained ground in Japan and Germany.

The belief in the ultimate efficiency of takeo-vers may be one reason why they occur in theUSA. Another reason is related to the relativeease with which a determined acquirer of sharescan obtain a majority stake in the US context.Although many deterrents to takeovers have beeninvented over the course of the past two decades,US and British capital markets tend to be muchmore fluid than their Japanese counterparts. Yeta third possible reason, although usually notmentioned by economists, is that the underlyingwork culture in the USA is permissive of takeo-vers. US employees may not identify themselveswith the fate of one company to the degree thatJapanese employees might. With well-developedexternal labor markets, US employees may alsohave more opportunity to change jobs if dissatis-fied with a current employer.

In contrast to the US corporate governanceenvironment, many observers in the 1980s and

T

1990s argued that the managers of large Japa-nese firms traditionally see themselves not asagents for shareholders, but as agents for thefirm’s core employees and for other firmstakeholders. Instead of maximizing short-termprofit (hence share price), managers focused onother goals such as firm growth and the long-runmaximization of employee well being. At leastpartly because of this, managers and employeesmay have not been disposed to wanting to growthe firm through external takeovers or mergers.Instead, Japanese firms were inclined to growinternally including through the creation of sub-sidies. In contrast to the US model, this view offirm control was also theorized to be efficient.Employees with job security good pay and firmspecific training are productive employees con-cerned with quality; higher productivity and qual-ity for the firm translates to greater long-termefficiency and growth.

Takeovers were said to be rare for several rea-sons. First, the form of ownership was said to beimportant as a deterrent. The stylized facts forthe postwar Japanese financial system are thatarm’s length, speculative shareholders have tra-ditionally played very little role in corporate de-cision making. Because a significant percentage(often a majority) of the Japanese firm’s capitalproviders are “patient” and not willing to sellshares, this was said to block out unwanted takeo-vers and shield the firm from speculation in thecapital markets (see main bank system; cross-shareholdings). As some researchers have alsopointed out, firms that do not have shares heldby large patient investors were also not taken overin Japan, so the relevant deterrent may be not berelated to ownership. Hiroyuki Odagiri and oth-ers stressed the importance of firm culture, andlabor practices in deterring takeovers. If employ-ees view the firm as a community they are likelyto view an offer of a takeover (whether friendlyor hostile) as an intrusion. Also because of thespecificity of Japan’s internal labor markets, itis quite difficult to mesh one firm’s labor prac-tices with another’s.

Although takeovers are slowly increasing inJapan and the corporate governance model is influx, the evidence that US-style takeovers willtake hold in Japan is not conclusive. Althoughcross-shareholdings are unraveling and the main

bank system is under extreme stress, there arestill relatively few takeovers in Japan. Japan justrecently witnessed its very first domestic hostiletakeover attempt in 2000, when a former top Japa-nese bureaucrat made headlines with a hostiletakeover bid of Shoei, a raw silk maker whichnow makes batteries. The bid failed, but the bid-der went on to reinvent himself as an “activist”shareholder interested in exercising shareholdervoice to affect change. Activist shareholders buy-ing large stakes in a company and attempting topersuade recalcitrant managers to change mayachieve some influence. However, there are manyreasons why employees and managers may re-sist, including their belief that these shareholdersmay damage, rather than help, the long-run vi-ability of their firm.

Further reading

Kester, W.C. (1991) Japanese Takeovers: The Global Questfor Corporate Control, Boston: Harvard BusinessSchool Press.

Odagiri, H. (1992) Growth through Competition, Competi-tion through Growth, Oxford: Oxford UniversityPress.

WILLIAM BARNES

Tanaka, Kakuei

Kakuei Tanaka was Prime Minister of Japan fromJuly 6, 1972 to November 26, 1974. Tanaka isbest known for creating big money politics andhis involvement in the Lockheed scandal. Tanaka,however, represents a transition in the politicaleconomy of Japan. He rose to power as one ofthe first in a long line of “professional politicians,”as the Yoshida School of ex-bureaucrat politiciansdeclined. In the heady days of economic expan-sion, when the flows of money and votes involvedenormous public works projects, Tanaka createdthe “dual power structure” of Japanese politics inwhich unofficial power brokers, like Tanaka, con-trolled major political offices.

In April 1947, Tanaka won election as Pro-gressive Party representative from Niigata. Fromhere he began his involvement in massive gov-ernment spending on infrastructure (roads,

432 Tanaka, Kakuei

bridges, tunnels) to remodel the archipelago.Tanaka’s talents were in raising money and or-ganizing people. His money pipeline was rootedin numerous ghost corporations that speculatedin stocks and real estate. Tanaka’s nationalpower base was a group of conservative Dietmembers called gundan (army unit). He built hisgundan on patron-client relations, providingmoney for loyalty and votes.

From 1976 to 1983, the years between his ar-rest and the trial verdict, he used his gundan toconvert the Liberal Democratic Party (LDP),the bureaucracy and business into an intercon-nected system of money and power. He becameknown as “Shadow Shogun of Mejiro” (the primeminister’s residence). For example, by 1980Tanaka’s gundan was the largest faction in theLDP. All three prime ministers during Tanaka’strial (Ohira in 1978, Suzuki in 1980, andNakasone in 1982) owed their positions toTanaka. In response, Ohira gave the gundan fourof twenty-one cabinet positions; Suzuki gave sixand Nakasone gave eight positions.

Tanaka worked the bureaucracy with flatteryservices and payoffs. He raised the salary of ex-ecutives of public corporations, pleasing bureau-crats intent on retirement to these corporations.Tanaka was so well received by bureaucrats thathe was called upon to adjudicate jurisdictionalboundaries among the ministries and agencies.Yet his most characteristic form of influence washis flagrant attempts to buy allies among the bu-reaucrats, particularly in the Ministry of Con-struction. Tanaka paid their travel expenses andproviding expensive gifts along with statementsof sympathy for their low salaries.

Tanaka’s connection with business was basi-cally a pork-barrel relationship. Tanaka advo-cated for and protected business, for example,by passing pro-business tax cuts. He lobbied forindividual businesses and negotiated mergers.By the 1960s, construction spending was a mainpillar of the economy equaling 20 percent ofGDP and 10 percent of employment. Tanakaoften controlled dango bid rigging, because ofthe opaque process of awarding governmentcontracts, which comprised 30–40 percent of allconstruction. In return, Tanaka received be-tween a 1–3 percent kickback on the contracts.

In addition, Tanaka systematically used the re-gional branches of the benefited constructioncompanies as bases for the political campaigns oflocal gundan politicians.

Tanaka’s lieutenants (Kanamaru, Takeshitaand Ozawa) continued Tanaka-style politics andbroadened their base into foreign aid and thefinance sectors. However, by the mid-1980s scan-dals rocking the legitimacy of the LDP, a bal-looning budget deficit, a 3 percent sales tax,changing US—Japanese relations, and world criti-cism of Japan during the Gulf War all led to thedestablization of the politics of the gundan.

Further reading

Junnosuke, M. (1995) Contemporary Politics in Japan, Ber-keley CA: University of California Press.

Schlesinger, J. (1997) Shadow Shoguns, New York: Simon& Schuster.

RICHARD A.COLIGNON

telecommunications industry

Japan’s telecommunications industry is secondin size and technological advancement to that ofthe United States. Government control of theindustry in the form of the monopoly firm, theNippon Telegraph and Telephone Company(NTT), was of critical importance up throughthe 1970s. State control allowed for heavy invest-ment in the industry and protected it from for-eign inroads, leading to a high quality reliablesystem by the late 1970s. When NTT was par-tially privatized in 1985 (the government stillowns the majority of the shares), the Ministry ofPost and Telecommunications (MPT) gained in-creased regulatory authority over the industry.MPT’s policies, the deep recession in Japan inthe 1990s, the politicized environment withinwhich NTT operates, and NTT’s sluggishnessin moving into new technologies such as thoserelated to the Internet, have weakened NTT andits family of firms. While Japan leads the worldin cell phone technology in the early 2000s, itlags in most other telecom technologies.

telecommunications industry 433

The 1950s, 1960s, and 1970s

NTT was created as a public corporation in 1952just as the US Occupation of Japan was ending.Three key factors contributed to NTT’s auspi-cious beginning. First, NTT set sail at a time whenthe international environment was very favorableand the technological trajectory was clear. Closerelations with Bell Laboratories of the USA pro-vided NTT with significant technological assis-tance during this period, when Japanesecompanies essentially reverse-engineered AT&Tproducts.

Second, NTT was established at a time whenJapan was pouring its efforts into building up theentire economy No longer interested or able un-der Article 9 of the constitution to defend itselfmilitarily Japan turned to a strategy of defensethrough a strong economy and technological base.The telecom industry and NTT were a key partof this strategy. Indeed, NTT became Japan’sPentagon, a protected safe haven for research tostrengthen the nation’s technological base.

Third, an innovative system of financing al-lowed for heavier investment in NTT than oth-erwise would have been possible. Up until theearly 1980s, a system of telephone subscriberbonds, used only in Japan, required that phoneusers purchase a ¥100,000 government bond($300-$400 depending on the exchange rate) toget a phone. This money was returned to thesubscriber after ten years. This system funneleda huge amount of up-front money into the indus-try much more than the government alone couldhave provided. Phone users also supported NTTthrough high installation fees (still ¥72,000 or$720 in 2000). NTT did not profit heavily fromthese large fees. Rather, the money was used topay high prices to the firms that made equipmentfor NTT. These firms, members of the so-calledNTT family include NEC, Fujitsu, Oki, andHitachi. NTT bought equipment from familyfirms on a cost-plus basis, much like the Penta-gon in the USA. In short, money from phoneusers was used to build up a strong telecom in-dustry and a strong set of telecom firms.

When NTT needed equipment, it met withits family of firms to discuss the product and setspecifications based on NTT’s proprietary stand-ards. Orders for sophisticated switching equip-

ment went to the big four makers: Fujitsu, NEC,Oki, and Hitachi. The R&D was done collabora-tively amongst the firms and NTT’s advancedlabs. Ties between NTT and the firms were ce-mented by the practice of amakudari, the retire-ment of NTT officials onto the boards of NTTfamily firms. NTT nurtured the firms and in re-turn the firms took care of retiring NTT officials.The NTT family system worked well throughthe 1970s. By the late 1970s NTT had met itstwo key goals of providing direct dial servicethroughout the country and eliminating the back-log of phone orders.

Because of its large budgets and impact ongrowth rates and employment, politicians did tryto influence NTT’s investment decisions. To pro-tect its autonomy as well as to assure the politicalstability and pro-business policies required for itsobjectives, NTT made indirect campaign contri-butions to politicians. More specifically by pay-ing high prices for equipment, NTT providedfamily firms with the extra funds they needed tomake significant campaign contributions. Politi-cal interference in NTT’s affairs was kept in bal-ance up until the late 1970s. In the 1980stechnological change, a shift in the internationalenvironment, the nation’s deteriorating nationaldebt problem, and the erosion of the consensusamong state actors on how to use NTT for thenational purpose led to increased politicizationof NTT and the erosion of an effective state-guided strategy toward the industry.

The 1980s and 1990s

By the late 1970s NTT had met its key goals.But now that it had caught up with the west inbasic phone infrastructure, it needed a new mis-sion in an era when the technological path wasno longer clear. Political, economic and techno-logical conditions were changing, leading to adiscussion over privatizing and breaking up NTT.This discussion was stimulated in part by the USgovernment’s break-up of AT&T and the Britishgovernment’s privatization of British Telecom(BT).

At this same time, various scandals raisedquestions about NTT’s inefficient managementand its overall legitimacy as a protected nationalmonopoly Corporate users started complaining

434 telecommunications industry

about NTT’s low-quality data communicationsservices and its high prices. The USA, facinggrowing deficits with Japan, started pressuringNTT to procure foreign telecom equipment.Once doubts were raised about NTT’s future,state and corporate actors with strong stakes inthe outcome realized that NTT would be priva-tized and possibly divested and decided it mayas well be changed to their benefit.

The key actors had different motivations forprivatizing and breaking up NTT. The Ministryof Finance (MOF) wanted NTT to be privatizedso it could sell NTT shares to reduce the nation’srising debt. Big business wanted the debt prob-lem to be solved without tax hikes and thusfavored privatization. The Ministry of Interna-tional Trade and Industry (MITI), which over-saw the computer, semiconductor, and othermanufacturing industries, wanted to wrestle con-trol over the telecommunications industry whichwas in MPT’s jurisdiction. MPT bureaucratsbelieved that if NTT was privatized and brokenup, MPT would gain regulatory powers thatwould make it a powerful policy agency like MITIand MOE Non-NTT family firms were pressingfor the giant’s privatization because they wanteda piece of NTT’s pie.

In short, the motivation for privatizing andbreaking-up NTT was primarily political. Whilecouched in terms of economic efficiency userbenefits, and long-term competitiveness, the de-bate was really driven by a power struggle. Thus,what had been an effective industrial policy to-ward NTT and the industry up through the 1970sdisintegrated into political squabbling. Variousactors tried to manipulate NTT for their ownpurposes with little attention given to the long-term competitiveness of the industry and userbenefits. There was no longer a strong state con-sensus on how to use NTT for the national in-terest and the result was serious politicization ofNTT and an over twenty-year debate overwhether to privatize and break up the telecom-munications giant.

NTT was partially privatized in 1985 (thegovernment stated it would hold 30 percent ofthe stock indefinitely and held two-thirds of thestock until the late 1990s). MOF and MPT werethe big winners in the partial privatization. MOFcould sell NTT stock to help shore up national

coffers. and MPT gained vast regulatory powersthat had formerly been held by NTT.

While MPT professes to be increasing userbenefits and nurturing new firms, Japan’s telecomcharges remain quite high by international stand-ards, and competition is weak. Competition onlyexists in cell phones and long-distance markets,but even then MPT keeps prices relatively highand tightly controls entrants. NTT’s dominanceof local calls and the fact that all long-distancecarriers have to pay NTT high connection feesto connect to its local lines has become a majortrade issue between the US and Japan in the early2000s. Growing domestic constituencies are alsocomplaining about NTT’s dominance. As longas NTT is largely a government-owned firm en-meshed in a political environment in which it is amajor provider of public works and cannot fireworkers, it is destined to lag in cutting edge tech-nologies and communications services.

The decision to divest NTT was delayed from1985 to 1990, 1990 to 1995 and again to 1996.The delay was largely due to MOF’s concern thatdivestiture would hurt NTT’s stock price as wellas NTT’s strong opposition to the proposal. In1996 a compromise was reached to break NTTinto three firms: one local company covering east-ern Japan, one local company covering westernJapan, and a long-distance firm. But these threefirms, together with other NTT spin-offs such asthe mobile phone giant, NTT DoCoMo, havebeen put under an umbrella holding company.There is consensus that this “break-up” is hav-ing little impact on competition. The “break-up”compromise allows the Japanese government totell the USA that it has broken up NTT and savesthe face of MPT, which has long been pushingfor a break-up. It also allows NTT to say it wasnot broken up but instead strengthened throughintegration under a holding company.

The 2000s

Japan lags the west in Internet use, high fees andother advanced telecommunications services withthe exception of the cellular phone. While mo-bile phones meet the needs of Japanese citizens,who spend long hours commuting, the high rateof cell phone usage is also the result of the high

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cost of installing a regular phone line. Indeed,there are now more cell phone subscribers thanthose for installed lines.

There is a sense of crisis in the industry in the2000s just as there is in many high tech sectors.Japan has succeeded in manufacturing high qual-ity goods and now it needs to become a moreinventor and entrepreneur-friendly nation. Ja-pan’s success in mobile phones has only been inJapan because of its closed standards. But NTTDoCoMo is planning to offer an internationallycompatible standard in its next generation cellphones. As for the Internet, while use is grow-ing, there are many barriers to its full-fledged useother than high local phone rates. These includeclose interfirm keiretsu ties, lifetime employmentand seniority wage practices that make it diffi-cult to restructure firms to gain efficiencies fromthe Internet, traditional reliance on personal con-tacts, and the like.

There is a growing debate over whether thestate should sell all its NTT shares to allow thegiant to restructure itself to compete internation-ally But even if the government does sell its shares,the politics of the situation, especially given thedeep recession, will most likely work against anydramatic change in NTT in the foreseeable fu-ture.

See also: computer industry; software industry

Further reading

Anchordoguy M. (1989) Computers, Inc.: Japan’s Chal-lenge to IBM, Cambridge, MA: Harvard UniversityPress.

——(2000) “Building a Telecommunications Industry:The Developmental State and the Nippon Tele-graph and Telephone Company” and “ThePoliticization and Erosion of the DevelopmentalState: Japan’s Telecommunications Industry 1980–2000,” working papers.

Fransman, M. (1995) Japan’s Computer and Communica-tions Industry: The Evolution of Industrial Giants and Glo-bal Competitiveness, Oxford: Oxford University Press.

Ian, G. (1991) “Re-regulation, Competition and NewIndustries in Japanese Telecommunications,” inS.Wilks and M.Wright (eds), The Promotion and Regu-lation of Industry in Japan, New York: St. Martin’sPress.

Johnson, C. (1989) “MITI, MPT, and the TelecomWars,” in C.Johnson, L.Tyson, and J.Zysman (eds),Politics and Productivity, Cambridge, MA: Ballinger.

Vogel, S. (1996) Freer Markets, More Rules, Ithaca, NY:Cornell University Press.

MARIE ANGHORDOGUY

three sacred treasures

The “three treasures” is a culturally-tinged eu-phemism for the most commonly cited elementsof the Japanese management system: enterpriseunions, lifetime employment and senioritypromotion. These distinctive aspects of the tra-ditional post-Second World War Japanese firmwere first identified in James Abegglen’s pioneer-ing work, The Japanese Factory. Proponents of Japa-nese-style management argue that these threeelements are the key to Japanese success in hu-man resource management.

The “sacred treasures” is a reference to themirror, sword and jewel, three objects accordedgreat reverence in Japanese mythological historywhich are viewed as tokens of the emperor’s le-gitimate authority The actual mirror, sword andjewel are located, one each, at Japan’s three mostimportant Shinto shrines: Izumo, Atsuta, andIse.

Further reading

Abegglen, J.C. (1958) The Japanese Factory: Aspects of itsSocial Organization, Glencoe, IL: The Free Press.

ALLAN BIRD

Tokugawa period

The period of formal rule by the fifteen Tokugawashoguns (1600–1868), often called the Edo Pe-riod, was a time of tight control of a central gov-ernment over more than 250 feudal estates. Japanwas cut off from the outside world during mostof the Tokugawa period. Social ranking wasstrictly enforced with the warrior and noble casteon top and everyone else beneath. It was a timeof peace and relatively strong commercial devel-opment in Japan’s cities, with the political capitalat Edo experiencing spectacular growth in powerand size. The Tokugawa period began with the

436 three sacred treasures

victory of the Tokugawa forces and their allies atthe battle of Sekigahara in 1600, enduring until1868, the year of abdication of the last TokugawaShogun and the official start of the Meiji period.The regime was the ultimate power in the landfor almost all of that time. What happened dur-ing the Tokugawa period both in direct and indi-rect reaction to policies of the regime, is ofoverwhelming importance in understanding thecharacter of modern Japan.

In comparison with other regimes over the pastfew centuries, the central authority establishedby the Tokugawa clan shortly after 1600 was re-markable in many ways. It lasted for two andone-half centuries, ruling over one of the mostpopulous nations of the world, wielding togetherand controlling a political system extending morethan a thousand miles from northeast to south-west, with areas cut off from each other by moun-tain ranges difficult to cross even now. The degreeof rearrangement of a large society and the tech-niques used for tightly controlling such a societyare impressive even by contemporary standards.The regime brought lasting peace to a societywhich had institutionalized nearly continual civilwar for more than a hundred years. Effectivecentral authority was instituted over a nation thathad not had more than brief periods of centralgovernment for nearly a thousand years. It ruledto a surprising degree by written decree, at a timewhen mass-production of written materials waslimited and difficult to disseminate. Following itsinitial hundred years or so, the Tokugawa regimewas the government of one of the most literateand orderly societies prior to the twentieth cen-tury.

Tokugawa Ieyasu, founder of the Tokugawaregime, the first of fifteen men to serve as Sho-gun, or secular ruler of Japan, during theTokugawa period, did not simply spring up andput an end to the period of civil wars by himselfor with his own military forces. The unificationof Japan under a single military leader, bringingan end at least temporarily to the struggle forpower among the larger feudal estates, had beenaccomplished more than thirty years before thebeginning of the Tokugawa period by the greatwarlord Oda Nobunaga. Unification did notmean the disappearance of feudal estates, but theestates and the daimyo who headed them were

forced to give up a degree of autonomy especiallymilitary autonomy and acquiesce to a centralpolitical power. Following the assassination ofNobunaga in 1582, the mantel of centralized au-thority over the feudal estates fell to the flamboy-ant former peasant, Hideyoshi, who helped pavethe way for the Tokugawa regime by moving yetmore authority in the direction of central power.

Tokugawa Ieyasu was a man born to a timeand to a station in life characterized by armedstruggle, intrigue, military alliances both overtand secret, subversion of authority and other as-pects of extreme individual and societal insecu-rity Perhaps it was natural that his passion in lifewas to create stability and establish power overthe land that would pass on to his heirs indefi-nitely He was clever enough to understand thatthis could not be accomplished merely throughmilitary domination. Several radical policieswere instigated during the first decade of rulewhich literally changed the face of Japan. Thosedaimyo whom the regime did not trust becausethey had opposed Tokugawa’s bid for controlwere relocated, literally ordered to move estatesto areas far from the capital, construct new cas-tles, and make a home for themselveswhere more reliable daimyo could keep an eye onthem.

The new regime decided not to rule from theKansai area, around Kyoto and Osaka, which hadbeen the political and commercial center of Ja-pan for most of its history up to then. An enor-mous castle project was begun by Ieyasu,continued by his son Hidetada, and finally com-pleted by his grandson Iyemitsu in the area closeto the mouth of the Edo River. There was a smallcastle already there, but nothing else. As had hap-pened once before in Japanese history in the latethirteenth century a military government set upfor business before permanent structures werebuilt for it, with officials living and working intents. As before it was called bakufu, tent govern-ment. The name stuck and the Tokugawa regimewas always referred to by people who lived un-der it as bakufu, which came to mean simply “thegovernment.”

If any of the people who saw the area aroundconstruction of the castle could have been trans-posed ahead 150 years they would surely havebeen astounded at what lay around them. They

Tokugawa period 437

would have found themselves in the middle ofone of the largest cities on earth. The castle at itscenter was actually a walled city within a cityCovering more than twice the area of the present-day Imperial palace, home and work place to abureaucracy of hundreds of samurai who keptdetailed records of activities throughout the land.Outside, a city spread beyond the castle for miles,with more than a hundred temples, more thantwo hundred large estates for the elite, and homesfor close to a million Japanese of lesser ranking.

Sankin kotai

What spawned the rapid and extensive urbandevelopment was something called in Japanesesankin kotai, usually rendered in English as “alter-native residence.” It was an elaborate hostagesystem whereby all daimyo were forced to con-struct a residence compound on grounds closeto the Tokugawa castle in Edo, and to physicallyreside in that residence for one-half of each year.During the other six months when a daimyo wasallowed to return and attend to affairs of his do-main (within limits of the may rules and regula-tions constantly being issued and revised fromthe bakufu), his parents if they were alive, his wife,and his children had to take his place in the Edomansion. The program did not run on the honorsystem. Personnel assigned to be at the mansionwere verified at intervals by bakufu samurai, andcheckpoints were established along roads lead-ing to Edo at which every person in a daimyo pro-cession going either toward or away from thecapital was checked against a list prepared in ad-vance and forwarded to Tokugawa officials man-ning the checkpoints.

During the first few decades of the seven-teenth century there were more than 250wealthy aristocrats living in the general area ofEdo castle. They all needed many things: hous-ing, clothing, artifacts for preparing food, fooditself, and they had needs beyond these, thingssuch as domestic help, entertainment, readingmaterial, and all sorts of personal items. Anenormous consumer market had been made tospring up out of nowhere. Most peasants weretied to the land and under the control of thedaimyo. Merchants and craftsmen, on the otherhand, were free to locate wherever they liked,

and it was clear to large numbers of them thatEdo was the place to be. Secular power hadshifted firmly to the new capital of Edo, and by1700 it passed both Kyoto and Osaka becomingthe largest city of Japan, and indeed, as statedabove, one of the largest in the world.

Sakoku-rei

During the rule of Oda Nobunaga and Hideyoshi,and for the last thirty years or so of the civil warspreceding unification of Japan under Oda, Euro-peans had begun to have a hand in Japanesepower politics. They introduced firearms, whichcompletely changed the character of warfare inJapan, and Christianity was embraced by somedaimyo, a result of close relations some warlordshad with specific groups of Dutch, Portugueseor Spanish. Oda had actually encouragedChristianity in Japan as a way of offsetting thepower of large Buddhist groups, some with pri-vate military units, headquartered near the capi-tal at Kyoto. Tokugawa Ieyasu apparentlyconsidered this incursion of foreigners and a for-eign religion to be a threat to the Tokugawaregime’s absolute power. Christianity wasbanned, and all foreigners ordered to leave Ja-pan. The regime then took the radical step ofclosing Japan off from the outside world. Japa-nese living abroad were given a few years to re-turn, and then when sakoku-rei, literally “lockedcountry rule,” went fully into effect in 1639(twenty-three years after the death of Ieyasu), noone could leave or enter the country There werea few exceptions such as Deshima island inNagasaki harbor which Dutch and Chinese shipswere allowed to visit on occasion, and one branchfamily of the Tokugawa clan was allowed to tradewith the Ryukyu islands, then under Chinesecontrol. But for the most part, Japan was sealedoff from the world, officially for more than twohundred years.

Edo culture

Although for the bulk of the Japanese popula-tion, the peasants, life remained austere and dif-ficult, the Tokugawa period ushered in a highlydeveloped and relatively prosperous urban

438 Tokugawa period

culture in Edo and other large cities. It is some-what ironic how this came about, because thedriving force behind the explosion of urban cul-ture was the lowest ranked category of Japanese.The regime based its economic policy on con-trolling land and the products of the land. Theentire population was officially frozen into occu-pation castes based on a type of Japanese inter-pretation of the theories of Sung Dynastynew-Confucianism. At the top, representing alittle less than 10 percent of the population werethe warrior elite and court nobility with the Im-perial family at the top of this category and thesamurai at the bottom. According to theory thepeasants were ranked next in line, but in realitythey were the most exploited and abused of allcategories. Craftsmen were ranked next in thefour-part system, and the bottom of the list weremerchants, people seen by the ruling warrior classas parasites who served no real national purpose.

The warrior/noble class held all political power,but a new kind of power was emerging in Japan,the power of money By bringing lasting peace tothe land, the Tokugawa regime created conditionsof stability and predictability which were veryfavorable to the one rank they held in greatestcontempt: merchants. Business thrived in urbanJapan, with some members of the merchant classbecoming very wealthy creating markets forelaborate material and non-material products.The industrial revolution had passed them by andin the realm of technology Edo Japan fell behindEurope. However Tokugawa Japan was run withgreat administrative skill, and (often in spite ofthe heavy hand of the samurai officials) the cul-tural life of its cities was as vibrant and intricateas any city of its time.

See also: guilds; Meiji restoration

Further reading

Dore, R. (1984) Education in Tokugawa Japan, London:Athlone Press.

Lehmann, J.-P. (1982) The Roots of Modern Japan, Lon-don: Macmillan.

Murayama, M. (1974) Studies in the Intellectual History ofTokugawa Japan, Tokyo: University of Tokyo Press.

Totman, C.D. (1967) Politics in the Tokugawa Bakufu,Cambridge, MA: Harvard University Press.

Tsukahira, T.G. (1970) Feudal Control in Tokugawa Ja-pan: The Sankin-Kotai System, Cambridge, MA:Harvard University Press.

JOHN A.McKINSTRY

Tokyo University

Standing at the top the hierarchy of the Japaneseuniversity system is the government-financed andoperated Tokyo University It is more central tothe selection of leadership in the governmentaland economic life of the nation than that of anyuniversity in any other country. Tokyo Univer-sity graduates dominate top government andbusiness leadership positions. Only the brighteststudents (or at least, the best test takers) in Japansit for entrance examinations to Tokyo Univer-sity and entrance is a virtual guarantee of careersuccess.

There are more than 500 universities in Ja-pan, second only to the United States in numberand per capita. About twenty Japanese universi-ties are particularly respected as places wherequality graduates are produced and which arerecruiting grounds for leadership for importantprivate and government employers. It is widelyagreed that within that group of twenty or so,five universities stand out above the rest as eliteschools: Tokyo University the two private uni-versities, Keio University and Waseda Univer-sity (both also in Tokyo), Kyoto University andHitotsubashi, also located in Tokyo. Entry intothese elite schools is sought after by the brightestof Japan’s youth, and to be a graduate of one ofthese top five universities is an advantage in anycareer.

Around the world, other famous universitieshave played a prominent role in providing lead-ership in countries around the world: Oxford,Harvard, Moscow University the University ofParis, Chulalongkorn University are examples.It is no exaggeration to state that none of theseinstitutions even comes close to Tokyo Univer-sity as a place where future leaders are providedfor a nation. It is a large institution with aboutseven thousand undergraduate, and about seventhousand graduate students. The student bodyof Tokyo University is highly selected; it is ex-tremely difficult to pass the examination for

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entrance. The faculty is, as one would imagine,quite distinguished. However, some observershave concluded that the quality of scholarshipand academic programs is not commensuratewith its position in such an advanced society.

Japan is often depicted as a society dominatedby three significant power sources, what somehave called the “iron triangle:” the elected gov-ernment, the bureaucracy and the large corpora-tions. The proportion of people at the top of eachof these power sources who have graduated fromthat one institution provides evidence of the over-whelming importance of Tokyo University in theleadership of Japanese society More than twentypeople have held the office of prime minister sincethe end of the Second World War; ten of themhave been graduates of Tokyo University Thatsame kind of concentration of graduates can befound in top bureaucratic posts and among topleaders in banking and industry.

To underscore the narrowness of condition-ing of Japanese life at the top, all ten of the post-war prime ministers mentioned above graduatedfrom a single department of the university theFaculty of Law (which, as is the case in all Japa-nese universities, does not grant law degrees, butadministers a rather general undergraduate pro-gram). For the various ministries of the nationalbureaucracy a more strategic center of power thanfor similar agencies in the United States or Brit-ain, graduates of the Faculty of Law of TokyoUniversity are even more in evidence. For im-portant ministries such as the Ministry of Fi-nance, Ministry of International Trade andIndustry, and the Foreign Ministry graduates ofTokyo University have always made up morethan 70 percent of top-level personnel.

While such a narrowly concentratedchanneling of leadership identification and con-ditioning may seem extraordinary clearly unprec-edented in contemporary advanced societies,history reveals a rather simple answer for it: To-kyo University was founded precisely to playsuch a role, and it has to date never relinquishedthat role. Leadership in the Tokugawa periodhad been rooted largely in heredity. Young menwho conceived of and brought to realization theMeiji restoration were quick to grasp that if thenew society could hope to compete with West-ern powers, it was essential to have a new kind

of leadership, based not on heredity but uponspecific skills and training, upon understandingof modern systems of administration, uponknowledge of a wider world.

During the final half-century of theTokugawa regime, a growing fear of the price ofisolation and ignorance of the outside world wasopenly expressed by people within the govern-ment. Several small institutes were established tofamiliarize a cadre of samurai with whatever in-formation was available about foreign societies.A few studied the Dutch language, and therewas more knowledge of the outside world circu-lated within that small group than is generallybelieved. Meiji leaders consolidated these insti-tutes immediately after taking the reigns of con-trol, and by 1877, nine years into the newregime, they were all merged into an institutioncopied from European and American modelswith faculties of agriculture, economics, engi-neering, law, letters, medicine and science. In1886 the institution was officially titled TokyoImperial University. After the Second WorldWar the name was shortened to the present To-kyo University.

This government institution was not the onlycenter of learning during the early Meiji period.In fact the private school which later came to beknown as Keio University actually predated thebeginning of Tokyo University having its begin-nings the very first year of Meiji in 1858. Wasedacame into existence a little later, in 1882. How-ever, Tokyo University was then, and remainstoday the primary training institute for top Japa-nese leadership.

See also: Men in charge of MOF

Further reading

Cutts, R.L. (1997) An Empire of Schools: Japan’s Universi-ties and the Molding of a National Power Elite, Armonk,NY: M.E.Sharpe.

Kerbo, H.R. and McKinstry, J.A. (1995) Who RulesJapan: The Inner Circles of Economic and Political Power,Westport, CT: Praeger.

Koh, B.C. (1989) Japan’s Administrative Elite, BerkeleyCA: University of California Press.

JOHN A.McKINSTRY

440 Tokyo University

tonya

In a modern society where the social division oflabor prevails, consumer products (commodities)reach the consumers through a successive pro-cess of transactions, which is called a distribu-tion system. The last stage of transaction thatinvolves consumers, is designated as retail or re-tail distribution, and relates to the function ofdistribution vis-à-vis consumers, which is assumedby those called “retailers” (kouri gyousha or kouri).All the other transactions in the distribution pro-cess, including purchases by retailers, are knownas intermediary distribution, but the term is rathernotional and often replaced by the term “whole-saling” (oroshiuri gyousha or oroshi).

In Japan, the term tonya has traditionally beenused to designate the wholesalers (individual andcollective) that specialize in the intermediary func-tions in distribution. The term derives from toior toi maru, the section of medieval seigniorialdomain in charge of storage and transport ofimpost. As commercial activities grew, this sec-tion became independent from landowners andexpanded to transport and warehouse businesses.During the Muromachi period (1336–1573), theywidened the scope of operations into such areasas transactions of commodities and provision ofaccommodation and other services for peddlers,the then retailers. These business entities werecalled toiya, and the appellation was transformedto tonya after the Meiji restoration.

Until the mid-twentieth century, when thecapitalistic economy in Japan reached the pointof mass consumer society the tonya’s role in re-gard to producers and retailers was significant.Producers that lacked sales know-how or finan-cial strength to run their business often accordedto a strong tonya the exclusive license to sell par-ticular or all items that they produced. In return,producers received some money before the pur-chase of their product by consumers took place,which was a critical arrangement in the formers’cash flow management. Tonya with abundant fi-nancial resources thus functioned as de facto lend-ers to producers.

Tonya also assumed the marketing function forproducers that relied on the tonya to sell their prod-ucts, by proposing modifications or additions ofitems. In the pre-Second World War period, Meiji-

Ya, a leading food products wholesaler foundedin 1885, expanded its business through the ac-quisition of a sole distributor license from JapanBrewery (presently Kirin Brewery Co., Ltd.), andfrom the Tsuneyoshi Okura Brewery a sakemaker, for preservative-free sake that Meiji-Ya it-self had proposed.

On the other hand, tonya also held the posi-tion of allocating merchandize of high demandto individual retailers under its networks. As thetonya also sold merchandize to retailers on creditspanning a certain period, it acted as a credit in-stitution for both ends of the distribution chan-nel. This financial role provided the tonya with anoverwhelming power to control the whole distri-bution process. The tonya generally retained thispower throughout the periods when producersand retailers were fragmentary and small inscale.

A Japanese saying, still in use, Souwa ton-ya gaorosanai (tonya does not wholesale), relates to thepractical lesson that life never proceeds as onehopes, and derives from the historical fact thatthe tonya exerted very strong influence on theeveryday life of the ordinary people and some-times abused it for profit. The hegemony of tonyastill persists today in areas where production anddistribution structures are fragmentary Exem-plary commodities are the fresh vegetables andfish, and publishing.

After the Second World War, the consumergoods industry grew rapidly throughout the pe-riods of economic growth. In the 1960s so-calledmass production and mass consumption was her-alded. Mass production led to the birth of na-tionwide producers in a variety of commodities,while mass consumption was spurred and accel-erated by mushrooming superstore (supermar-ket) chains (see superstores). As large-scalenationwide operators increasingly dominatedboth ends of the distribution channel in Japan,the intricate traditional intermediary distributionindustry the tonya system, was put under ques-tion along with the practices of tonya to often im-pose arbitrary and unilateral terms oftransactions.

In the early 1960s, Shuji Hayashi, a professorat the University of Tokyo, called for moderniza-tion of the distribution system in line with that ofthe country’s industrial development under the

tonya 441

slogan of Ryuutsuu Kakumei (revolution in distri-bution). His proposal was that leading producersand large retailers should deal directly with eachother, or that the intermediary distribution shouldbe eliminated altogether in order to have an effi-cient distribution system.

Contrary to these arguments, however, thenumber of wholesalers continued to increase untilinto the 1980s. Three factors were influential.Firstly the considerable expansion of the con-sumer market in Japan also made room for thetraditional small retailers to increase (but oftenwith new business formats), to which the tradi-tional wholesalers responded by slimming downand diversification in the commodities and serv-ice that they provided.

Secondly organized retail firms such assuperstores, needing to control the inventory andtimely purchase of an ever-increasing array ofitems on their shelves, regarded the tonya as ameans of outsourcing to bear this function. Thetonya did not only eagerly assume it but also par-ticipated in the marketing activities of superstoreswith suggestions and proposals under the self-designation of “retail support” partners.

Thirdly the importance of tonya for the lead-ing producers of consumer goods did not dimin-ish either. Since the tonya controlled a wide rangeof distribution channels and outlets, a stable rela-tionship with a large tonya gave producers anumber of advantages in the exchange of rebatesand sales promotion fees paid to the former.Firstly the producers could readily make use ofthe existing retail networks under the control ofthe tonya. Secondly they could expect that the tonyawould purchase the minimum lot of productionnecessary to cover the initial investment. Andthirdly the tonya could, to a certain extent, func-tion as a shield against fluctuations of demand,which allowed producers to dispatch their prod-ucts in an orderly fashion.

Due to these factors, the tonya system retainedimportance through the 1960s and 1970s, even ifnot so powerful as in the prewar period whentheir hegemony was almost absolute. By the endof the 1980s, however, traditional forms of retailbusiness had lost ground within the Japanese re-tail industry. The main arena of competitionshifted, from the one between the traditional re-tailers and the chain operators, to competition

among the latter. The application of informationand telecommunications technologies made itpossible for chain store headquarters to collectsales and inventory data of individual stores onan item-by-item basis using point-of-sale (POS)technology. These data were useful to avoid ex-cessive inventory or opportunity loss, and increas-ingly were transmitted to producers in order tostreamline logistics.

In the late 1980s, the bubble economy in Ja-pan, coupled with endaka, brought about a seriesof speculative purchases of foreign real estate.This prompted Japan’s trade partners, especiallythe USA, to demand that Japan open its domes-tic market to foreign operators. The complex andinefficient structure of the country’s intermedi-ary distribution system became one of the heatedissues in trade negotiations. It was then that theterm tonya acquired international recognition, andthe tonya system was thought, not only by for-eigners but also at home, to be a major barrieragainst free entry and one of the principal fac-tors contributing to high retail prices in the coun-try.

In 1991, Toys R Us, an American toy retailer,began deploying a chain network in Japan. Thecompany’s strategy was to skip tonya or the inter-mediary distribution stages as extensively as pos-sible, and to make direct purchases in bulk fromproducers in order to lower the costs. After ToysR Us, a number of foreign retailers began to makeinroads with identical strategies.

These changes reactivated the once-rejectedargument that the tonya system should be elimi-nated. The fact that the number of wholesalerswas in decline and that chain operators control-led a considerable share within each regionalmarket, seems to have further strengthened theviews that direct transactions between produc-ers and retailers will dominate.

Around the turn of the twenty-first centurythe world’s leading retailers have established vari-ous systems of procurement and purchasethrough the Internet. Wal-Mart pioneered thisapproach with Retailers Market Xchange.com,which prompted its competitors to launch simi-lar B2B (Business to Business) or “marketplace”networks such as WorldWide Retail Exchangeand GlobalNetX-change. In line with foreign com-panies, several leading Japanese retailers have

442 tonya

announced their intention to participate in oneof these networks, and the purchase volume isgradually increasing.

Surrounded with a rapidly changing environ-ment, many tonya are struggling to rediscoversome new and proper function in relation to pro-ducers and retailers. The additional functionssought include logistical support, assistance to thelineup of merchandises, information managementand its maintenance, and finance. However, asthe whole economy of Japan tends to be defla-tionary after the collapse of the bubble economythe retail industry itself has been experiencing astructural slump. The situation, in turn, makes itinevitable that the tonya system will undergo aperiod of restructuring and consolidation.

See also: after-sales pricing; Daiei; deregulation;guilds; Ito-Yokado; marketing in Japan; pricingpractices; promissory notes

Further reading

Hayashi, S. (1963) Ryuutsuu Kakumei (Revolution inDistribution), Tokyo: Chuuoukouronsha.

SHINTARO MOGI

torishimariyakukai

The official title for executives at the highest levelof a Japanese firm is torishimariyaku, translated as“director.” As a group, these torishimariyaku com-prise the Japanese firm’s formal board of direc-tors, torishimariyakukai. The activities of thetorishimariyakukai differ substantially from its USor Western European counterparts.

Historically torishimariyakukai were based on aWestern model of organization in which respon-sibility at the top was divided into two generalcategories: shareholder trusteeship and generalmanagement. Shareholder trusteeship refers tothe responsibility of members of the board ofdirectors to protect the interests of shareholdersthrough oversight of the firm’s professional man-agers. Duties pertaining to the administration ofcompany policies and day-to-day operational ac-tivities of the firm fall under the category of “gen-eral management” and fall under the purview ofthe professional managerial cadre, usually a set

of senior managers at the top of the organiza-tion.

In most US and UK companies, these tworesponsibilities are differentiated more clearlythan in Japan. In US firms, for example, the boardof directors meets and reviews the performanceof the company and ratifies policy decisions thatare likely to have a major influence on the com-pany’s performance. Once the board ratifies suchpolicies, professional managers, led by the shacho(equivalent to a chief executive officer in West-ern firms), take responsibility for the generalmanagement of the company. It is common inUS and Western European firms for the ChiefExecutive Officer (CEO) and several senior ex-ecutives to simultaneously hold general managerposts as well as positions on the board in orderto accurately represent management’s position onvarious decisions made at the board level. Be-cause of this arrangement, the distinction betweenthe board’s responsibility to shareholders andgeneral managers’ responsibility for policy devel-opment and implementation is clearly demar-cated, though some overlap does exist.

In Japan, the distinction between shareholdertrusteeship and general management duties ismore ambiguous. On average only one directorin thirty is an outside director, i.e., one who doesnot have some area of operational responsibilitywithin the company. In fact, most directors arepromoted from posts as department heads, and,though they are promoted to the torishimariyakukai,continue to carry out their responsibilities as de-partment heads. Nevertheless, directors with de-partment head duties have a different relationshipto the firm than their non-director counterparts.When elected to the board and appointed as di-rectors, the new executive formally retires fromthe company and collects a retirement bonus. Heis then immediately re-hired as a director of thecompany with a two-year appointment to theboard.

Further comparisons of torishimariyakukai withboards in the USA and UK reveal thattorishimariyakukai appear to be 25 to 30 percentlarger. However, such a comparison is mislead-ing. The double duty that a Japanese executiveperforms implies that, to make a proper compari-son with Western firms, both directors and gen-eral managers should be included. When general

torishimariyakukai 443

managers are included in the calculation, the sizeof torishimariyakukai is actually smaller.

Torishimariyakukai structure and function

The torishimariyakukai includes all directors as wellas kansayaku, the firm’s internal auditors. Theformal torishimariyakukai is not a sovereign body.No legal powers are granted it under Japanesecommercial law, although the law requires thatthere be one. Generally the torishimariyakukai meetsless than once a month. Under a Western modelof the firm, boards of directors make final deci-sions on whether or not to approve long-rangeplans. For example, 35 per cent of boards in theUS authorize long-range plans. In the UK thatfigure approaches 65 per cent. In Japan, by con-trast, only 13 per cent of boards surveyed areinvolved in the authorization of long-range plans.

Though the torishimariyakukai is assumed torepresent shareholders, this is largely a fiction.Directors are selected by the CEO, summarilyapproved by the formal board, and then votedon at the general shareholders’ meetings once ayear. Even at the general shareholders’ meetingit is unlikely that shareholders will have muchpower to influence the choice of directors as votesare usually vested by proxy in the formal boarditself and companies may enlist the aid of sokaiya,strong arms with ties to the yakuza, who intimi-date vocal shareholders from asking embarrass-ing questions. Though legislation in 1983outlawed sokaiya, they are still widely influential.The average annual shareholder’s meeting laststwenty-five minutes.

At the same time that shareholders appearpowerless to influence the torishimariyakukai, Japa-nese commercial law grants them broad powerto call it to accountability A shareholder with asfew as 3 per cent of a company’s stock can re-quest that the civil courts remove a director. Simi-larly such a shareholder can demand that a boardmeeting be held within two weeks of a requestfor such a meeting. Comparable power does notexist for shareholders with equally small stockpositions in US firms. Finally shareholders inpossession of 10 per cent or more of a compa-ny’s stock can claim access to confidential finan-cial statements relating to a company’sperformance.

There are a number of reasons why sharehold-ers hold little sway over the torishimariyakukai. Inprewar days there were numerous outside direc-tors. These outside directors viewed themselvesas independents who were charged mainly withcarrying out the duties of shareholder trustee-ship. With only one in thirty directors originat-ing from outside in Japanese boardrooms todaytorishimariyakukai are in a position to resist attemptsto change their nearly unassailable control overthe company Additionally as noted above, fromthe immediate postwar years up to the early 1980smany companies employed sokaiya to silenceshareholders who might raise uncomfortablequestions or challenge the board during the gen-eral shareholders’ meeting. The final reasonshareholders have little influence on directors andthe torishimariyakukai has to do with the composi-tion of shareholders. In most large corporations,small shareholders account for just over 30 percent of outstanding shares. Institutional investorsare responsible for the lion’s share of companystocks. But unlike the USA or UK, where insti-tutional investors consist mainly of pension fundsand insurance companies, Japanese institutionalinvestors consist mainly of a company’s mainbank and affiliated companies. This group of in-stitutional investors does not seek control of thecompany even though it has ownership.

Members within the torishimariyakukai can bedivided in two ways, by legal authority and byhierarchical rank. Under Japanese commerciallaw at least one director must be granted author-ity to represent the company to third parties andto sign documents for it. This representative au-thority daihyoken, is usually reserved for CEOsand selected senior officers. The number of ex-ecutives possessing representative authority var-ies by company size and by industry Banks havethe largest number of executives vested with suchpower per torishimariyakukai of any industry inJapan.

Torishimariyakukai have a pronounced hierar-chy which can range from as few as three differ-ent levels to as many as seven. The averagenumber of levels is six. These are, in descendingorder of rank: chairman, vice-chairman, presi-dent, vice-president, senior managing director,managing director, and director. The level mostfrequently omitted in companies is that of

444 torishimariyakukai

vice-chairman. Additionally the authority associ-ated with each level is relatively clear for all posi-tions from vice-president on down. However, therelationship between chairman and president isambiguous and varies by company and by spe-cific occupants of those positions. In some com-panies the chairman is the supreme authoritywithin the torishimariyakukai, while in others thechairman is a figurehead and the president is thetrue powerholder. Differences in power arrange-ments at the top of torishimariyakukai appear to bebased solely on the preferences of the individu-als involved and not on any formal or informalpolicy within companies.

The structure of the torishimariyakukai and themanner in which it carries out the dual responsi-bility of general management and shareholdertrusteeship lead to some advantages for the com-pany First, the combining of top management’sresponsibilities into one body leads to a smalleroperating unit at the top and contributes to apotential for greater flexibility than is usuallypossible in US and Western European compa-nies where the responsibilities are divided andthe number of executives and directors compris-ing the top echelon of the company is larger. Thesecond advantage is the freedom from pressurefor short-term returns that the torishimariyakukaihas by virtue of both the weak position of theshareholder and the fact that institutional share-holders do not seek to exercise their right to con-trol the firm. This freedom gives it greater latitudein developing long-range policy and strategy forthe firm.

There are, a number of disadvantages andweaknesses with the torishimariyakukai. First, thesmaller size of the operating unit increases thelikelihood that power within the group can beseized by just one or two executives in key posi-tions. A second weakness is that the freedom fromshareholder pressure can also constitute freedomfrom accountability. This weakness is furtherexacerbated by the fact that only directors withmanagerial assignments within the company haveextensive knowledge about the company In mostinstances, shareholders do not have access tosufficient information so as to make informedchoices at shareholder meeting elections.

Torishimariyakukai do not usually function ef-fectively as decision making bodies. Conse-

quently there are likely to be other organs oper-ating within it which fulfill the policy formula-tion role more effectively. Two types of organswhich firms have developed to do so are thejomukai, executive committee, and kaigitai, ad hoccommittees. Related to its decision-making weak-ness is the changing nature of organizational struc-ture in Japanese companies, which is alteringdecision systems and increasing pressure for linemanagement responsibility to be vested in oneindividual.

The presence of habatsu. factions based onschool ties or common background, can createschisms within a torishimariyakukai if not kept incheck. Traditionally factions are kept in checkthrough the use of crisis management approaches.The large number of baby-boom managers whohave reached the age of promotability to direc-tor, is increasing the likelihood of greater politi-cal behavior within torishimariyakukai in the future.

Because torishimariyakukai carry out generalmanagerial duties as well as directoral duties,there is no clear distinction between policy mak-ers and policy-implementers. Consequently thegroup making policy may tend to become entan-gled in operational decisions. This can lead to atendency to focus on departmental problemswithin the firm rather than on comprehensive,whole-firm issues.

Weaknesses in the ability of torishimariyakukairegarding policy and strategy formulation havenot gone unnoticed. In response, many compa-nies have established executive committees to takeover responsibility for decision making in thisarea. Executive committees are usually comprisedof a CEO and four to six senior officers, usuallyof managing director rank or higher. In 1984 over90 per cent of companies listed on the TokyoStock Exchange had operating jomukai. In mostlarge companies, jomukai meet once a week ormore often if required, with the planning depart-ment acting as its clerical office and support staff.

Further reading

Bird, A. (1988) Nihon kigyo executive no kenkyu (Researchon Japanese Executives), Tokyo: Sangyo NoritsuDaigaku Shuppansha.

Clark, R. (1979) The Japanese Company, New Haven,CT: Yale University Press.

torishimariyakukai 445

Kono, T. (1984) Strategy and Structure of Japanese Enter-prise, London: Macmillan.

Mills, G. (1981) On the Board, Aldershot: Gower.Okumura, A. (1982) Nihon no toppu manejimento (Japa-

nese Top Management), Tokyo: Daiyamondosha.Shimizu, R. (1986) Top Management in Japanese Firms,

Tokyo: Chikura Shobo.

ALLAN BIRD

Toshiba

Toshiba Corporation, along with Hitachi andMitsubishi, is one of the three big “integrated”electric and electronics companies in Japan. Asthe world’s eighth largest integrated company inthe industry it has over 198,000 employees andannual sales of over US$40 billion worldwide asof 1999. With its long history since 1875 (1939as Tokyo Shibaura Electric Co. and 1978 ToshibaCorporation), it developed from a heavy electriccompany to a “one set” electrical and electronicmanufacturer. It is one of the most innovativecompanies in Japan, manufacturing a large num-ber of Japan’s first products such as telegraphs,incandescent lamps, radio receivers, laptop PCsand the world’s first 16-megabit NAND typeEEPROM.

Toshiba has been a typical conservative andreluctant Japanese multinational enterprise(MNE) in terms of overseas production activi-ties, in comparison with active MNE-type con-sumer electric and electronics companies such asMatsushita, Sanyo and Sony. Globalization isnow its most important initiative, expanding over-seas production facilities and extending interna-tional strategic alliance with GE, IBM, Siemens,Time-Warner, and so forth. Its manufacturing anddevelopment range from medical electronicsequipment to highly integrated DRAM, to tur-bine generators to multi-media systems composedof information and communication systems, in-cluding audio-visual, which are led by DVD andmedia entertainment such as movies, music andpublication businesses.

The major reasons for the “conservative” na-ture of Toshiba’s overseas business activities areas follows. Historically its domestic market, rely-ing on its traditional brand name and based on areputation of innovative products were more prof-

itable than its overseas markets. It is also a “re-luctant” MNE because of its heavy reliance onhuman-relations, Japanese-style management, anda production system that is deeply influenced bythe socio-cultural environment in Japan. Addi-tionally Japanese-type engineering and manufac-turing technologies at most domestic Toshibaplants have been so typical in their worksite-ori-ented methods such as “all member participation-style” that it is not easy to effectively transfer suchmethods into different social backgrounds. There-fore, the company has preferred to implementthe main part of its strategic R&D and manufac-turing activities at its home facilities and to ex-port its products to foreign markets. A goodexample of this is its semiconductor business.Semiconductor production depends largely oneconomies of scale, the huge size of plant andequipment and high level of maintenance skillsfor such machines are carried out at Toshiba’sdomestic laboratories and plants while its majorJapanese competitors such as NEC and Fujitsuhave been more active in setting up and organiz-ing worldwide networks of semiconductor plants.It was not until the mid-1990s when the “ruleless”appreciation of the yen finally dissuaded the com-pany from relying on a domestic productionmanagement approach (see appreciating yen).Since then, Toshiba has begun deploying veryactively international alliance initiatives in its semi-conductor business with western companies.

On the other hand, Toshiba has pursued amerger and acquisition (M&A) strategy to startmany of its foreign operations, a distinctive fea-ture of Toshiba relative to other Japanese MNEs.Of the six major production plants for televisionand semiconductors in developed countries, three(in the USA and UK) were joint ventures oracquisitions, though all were bought out and be-came wholly owned subsidiaries. Toshiba is oneof the most innovative electric companies in Ja-pan in the sense that international strategic alli-ances were employed from the beginning of itsfounding, and continue to play a major role indeveloping new products. This may reflectToshiba’s historical experience, especially the longalliance relationship between Toshiba (and itsantecedents) and GE through licensing and jointventure agreements since the late 1880s.

It appears that this experience has provided a

446 Toshiba

strong foundation for recent strategic alliances inits global business activities. One evidence of thisis the joint-venture semiconductor productioncontract with IBM in 1995. At its newest largescale plant in the US, Toshiba appears to at lasthave been able to overcome the limit of scale atToshiba America Electronic components, whichwas a reorganization of a small American inte-grated circuit plant acquired by Toshiba. The al-liance relationship with IBM, which will bechanged to a wholly owned Toshiba operationfrom 2001, was one of the critical factors for thesuccess in terms of the scale of investment moneyand market, and the cooperation for developingprocess technologies. It is also interesting to notethat Toshiba also has joint-venture productioncontracts with Motorola in Japan and a close jointR&D with Siemens and IBM. The first one willbe converted to a wholly owned operation byMotorola with which Toshiba will continue acontract of processing on commission. The out-come of these strategic alliance activities is therationalization of Toshiba’s world-wide R&D andproduction activities

With this effort complete, Toshiba will initiatea globalization strategy focused in “Six Sigma”methodology a Westernized TQM (total qualitymanagement) system for promoting the transfor-mation of Toshiba’s overall management that isexpected to advance the “creative destruction.”Toshiba is striving to create a new corporate cul-ture worldwide. This is a notable challenge forsuch a traditional large Japanese company.

Further reading

Abo, T. (ed.) (1994) Hybrid Factory, Oxford: OxfordUniversity Press.

——(1998) “Toshiba’s Overseas Production Activities:Seven Large Plants in the USA, Mexico, the UK,Germany and France,” in H.Mirza (ed.), (1998)Global Competitive Strategies in the New World Economy,Cheltenham: Edward Elgar.

TETSUO ABO

total productive maintenance

Total productive maintenance (zen-in sanka no seisanhozen), or TPM, was developed in Japan as a

means to support manufacturing firms in seek-ing superior equipment effectiveness, an essen-tial condition to accomplishing the goals of qualitycost, delivery performance, safety and employeemorale. In its narrowest sense, TPM involves thetransfer of various maintenance-related duties tothe machine operators themselves. TPM hasevolved, however, into a broad managerial ap-proach that involves multiple business functionswith the aim of strengthening production capa-bilities and corporate competitiveness. Along withjust-in-time (JIT) and TQM (see quality man-agement), TPM forms the third leg of a triad ofapproaches adopted by many companies to at-tain world-class manufacturing excellence.

The initial development of TPM took placein the late 1960s from a productive maintenanceprogram conceived by Denso, a member of theToyota Group. Denso’s purpose was to enablesustainable implementation of the Toyota pro-duction system/JIT, which depends on highlyreliable equipment. However, credit for the fur-ther development and diffusion of TPM is givento the Japan Institute of Plant Maintenance(JIPM), a private non-profit organization thatoffers an array of services concerning plantmaintenance management and technology. Aformer officer of JIPM, Seiichi Nakajima, con-tributed to the dissemination of the early defini-tion and propositions of TPM. The diffusion ofTPM outside Japan gained momentum in 1988with the English translation of one ofNakajima’s books, Introduction to TPM. Also dur-ing the 1980s, TPM spread from its originalbase in fabrication and assembly industries, suchas automobiles, auto parts and machinery intoprocess industries, such as chemicals, food, pa-per and pulp. Today TPM has been adopted bya myriad of companies in many industriesworld-wide.

The definition of TPM, as well as its purposeand scope, have undergone numerous refine-ments over the years, building upon its originalbase in the production and maintenance func-tions. Driving these changes was the perceptionthat to improve the efficiency of the productionsystem to the fullest extent, activities confined tothe production system were not enough. Overtime, TPM came to be implemented with a com-pany-wide scope, prompting JIPM in 1989 to

total productive maintenance 447

formulate a broader definition of TPM, statingthat it means to:

1 build a corporate constitution that maximisesthe effectiveness of the production system;

2 organize a practical shop-floor system for pre-venting all types of losses throughout theentire life cycle of the production system (en-suring zero accidents, zero defects, and zerofailures);

3 involve all departments, including produc-tion, development, sales and administration;

4 ensure participation of every member, rang-ing from top management to frontline op-erators;

5 accomplish zero losses through the activitiesof overlapping small groups.

TPM is more than a methodology or package oftools. It has become a philosophy and system-atized approach for manufacturing management.By emphasizing employee participation, team-work, development of maintenance skills, andcontinuous improvement (see kaizen), TPM nur-tures a culture where operators develop owner-ship of their equipment and work side by sidewith managers and engineers to strengthen theeffectiveness of operations. One means of em-ployee participation is through TPM overlappingsmall groups. While these groups share somesimilarity to quality control circles in the sensethat groups of employees carry out improvementactivities and further develop their skills, someimportant points of difference are that TPM’sgroups are built into the permanent, formal or-ganization and involve employees at each levelof the organization from top management downto frontline level.

Another major feature of TPM is the produc-tive maintenance (seisan hozen) approach whichincorporates such disciplines as maintenance pre-vention design, reliability engineering, andmaintainability engineering so as to enhance theeconomic efficiency of equipment investment overthe equipments’ life cycle.

The primary equipment evaluation metricadopted by TPM is “overall equipment effective-ness (OEE),” which considers the up-time avail-ability of equipment, actual output compared tostandard, and conformance quality of outputs.

Typically OEE in ordinary manufacturers rangesfrom 40 percent to 60 percent. The goal of TPMis to elevate OEE to 85 percent or more, imply-ing that production output can be doubledthrough better use of existing resources. Progresstoward this goal is made by systematically identi-fying and then minimizing or eliminating the di-verse kinds of losses that hamper productionsystem effectiveness. These losses are typicallyclassified into sixteen major loss categories includ-ing failures, set-ups and adjustments, cutting bladechanges, start-up, minor stoppages and idling,reduced speed, and defects or rework, as well asother factors related to workers and the produc-tion system.

Originally TPM focused on the immediateproduction system with the establishment of thefollowing “five pillars”: (1) equipment efficiencyimprovement through project teams (kobetsukaizen); (2) autonomous maintenance (jishu hozen);(3) planned maintenance; (4) education and train-ing; and (5) initial phase equipment management.With the enlargement of TPM’s Scope and pur-pose over time, the fifth pillar evolved into initialphase management for new products and equip-ment, and additional guidelines were added inthe form of three more pillars: (6) quality main-tenance system; (7) effective administrative sys-tem; and (8) safety and environmentalmanagement system.

While the approaches used to implement JITor TQM vary by company JIPM advocates astandard, twelve-step program for implementingTPM. The first five steps are of a preparatorynature: (1) announcing TPM implementation; (2)beginning introductory TPM education; (3) es-tablishing an organization to promote TPM; (4)defining basic TPM policies and goals; and (5)formulating a master plan for TPM implementa-tion. Following these, step (6) is the kickoff ofactual TPM implementation. Next, step (7) in-volves installing the first four pillars of TPM,while steps (8) to (11) involve the implementa-tion of the last four pillars of TPM, respectively.Finally step (12) is for completing TPM imple-mentation, evaluating its outcomes and settingfuture goals.

Since 1971, JIPM has conferred TPM Awardsto plants excelling in the implementation of TPM.Separate categories are established for small and

448 total productive maintenance

large applicants. The highest level of recognitionis the Award for World Class TPM Achievement,with several other award levels for TPM Achieve-ment, Consistent TPM Commitment, and TPMExcellence. In recent years, there has been asteady increase in the number of applicants fromoutside Japan.

Sometimes confused with TPM, 5S cam-paigns aim to establish good housekeeping prac-tices for clean and orderly facilities and havebecome popular in manufacturing and service in-dustries. 5S activities can be implemented inde-pendently of TPM, but manufacturers oftenincorporate them as a foundation for the autono-mous maintenance pillar of TPM.

Further reading

Japan Institute of Plant Maintenance Web Site, http://www.jipm.or.jp.

Nakajima, S. (1988) Introduction to TPM: Total ProductiveMaintenance, Cambridge, MA: Productivity Press.

Nakajima, S. et al. (eds) (1996) TPM—Total ProductiveMaintenance—Encyclopedia, Tokyo: JIPM.

Shirose, K. (ed.) (1996) TPM New Implementation Pro-gram in Fabrication and Assembly Industries, Tokyo:JIPM.

Suzuki, T. (ed.) (1994) TPM in Process Industries, Port-land, OR: Productivity Press.

DARIO IKUO MIYAKE

Toyota

Toyota is the largest firm in the Japanese autoindustry with about 40 percent of the domesticmarket, and consolidated revenue (fiscal year2000) of $120 billion and worldwide sales of 5.4million units. Production began in 1937, drivenby the fascination of Toyoda Kiichiro with autos,and drawing upon his family’s textile machineryfortune. As late as 1966, however, trucks were itslargest product, and virtually all sales were do-mestic. Today 60 percent of revenue comes fromoverseas sales, dominated by North America, andforeign production accounts for one-third of out-put. However, the rise in the foreign share is notall positive: in part it reflects a drop in domesticproduction of 1 million units since 1990.

Toyota is a participant in the global consolida-tion of the auto industry. Domestically it has ab-

sorbed its sales subsidiary Toyota Motor Sales,and the producers Daihatsu (minicars) and Hino(heavy trucks), adding them to the existing set ofsix affiliated assemblers (Toyota Auto Body KantoAuto Works and others). The firm also has largestakes in parts suppliers, including Denso andAishin Seiki. However, it has not been active inacquisitions overseas, and in most markets oper-ates through “greenfield” manufacturing facilities.It remains heavily committed to the auto indus-try; its ventures in housing construction, tradeand finance (and more recently telecommunica-tions and the Internet) account for only 14 per-cent of revenue.

The defining event in Toyota’s history was abrush with bankruptcy in 1949, avoided only bya bank bailout. At that time its sales operationswere spun off into a separate company as wereseveral parts operations (including a steel mill andthe forerunner of Denso, currently the world’sfourth largest automotive parts manufacturer with$12 billion in sales). This meant that while Toyotaproper remained focused on core engineering andmanufacturing operations, it could not force out-put onto dealers. In turn Toyota Motor Sales con-centrated on developing dealers, but as the solepurchaser of output, it could interject marketingconcerns into vehicle design and corporate strat-egy. Furthermore, the bailout made it clear thatit needed to work with parts makers. It respondedby bringing in consultants in 1952–3 to help setup guidelines, including a program of ongoingtechnical and management consulting for its sup-pliers.

Toyota is known for innovative management.Drawing heavily upon Japan’s postwar produc-tivity movement, and with the executive suitedominated by engineers and factory managers,it emphasized a “flow” approach to manufactur-ing, epitomized in what only later came to beknown as JIT (just-in-time) production. Imple-mented on the shop floor by kanban tags thatauthorized the “pull” of parts from upstreamoperations, it required the ability to change diesrapidly calling for careful attention to machinemaintenance and maintaining a “level” produc-tion schedule that minimized the variation in dailyoutput. In addition, this drew upon a labor rela-tions environment and a no-layoff policy that fa-cilitated developing a skilled workforce amenable

Toyota 449

to operating and maintaining multiple machines,while bearing responsibility for quality controland participating in systematic productivity im-provement activities (quality control circles,TQC and so on). JIT was only systematicallyimplemented within the firm in the late 1960s,and among suppliers from 1970, with a particu-lar boost from the sales downturn in 1974 fol-lowing the first oil crisis.

Toyota also is an early adopter of “platformteams” for product development, which keptengineers from becoming compartmentalizedwithin the vehicle design and engineering proc-ess. Improved feedback allows otherwise discretestages of this process to be overlapped—bodyengineering and die design are initiated beforeall the details of styling are locked into place—allowing a new vehicle to be developed morequickly. This generates both cost savings andpotentially a better fit to the market with theshorter lag between styling choices and the com-mencement of sales. In addition, coordinationbetween different functional specialties—for ex-ample, manufacturing engineers and stylists—fa-cilitates developing cars that are easier to makeand have higher intrinsic quality With many high-volume models, however, Toyota has been con-servative in implementing new technology andstyling trends, generally waiting until after otherfirms have proven their acceptance in the mar-ketplace.

Despite its reputation for manufacturing prow-ess, Toyota was not always successful domesti-cally It lagged at home in the late 1960s, and againin parts of the 1980s and the latter 1990s. In gen-eral, however, it suffered fewer downturns thanits rivals, and was able to maintain a strongerand more profitable dealer network; indeed,Toyota’s marketing strengths are probably thebiggest element in its overall success. One ele-ment was a full-line product strategy made possi-ble by affiliate firms specializing initially inlow-volume cars. These firms now make Toyota’slight and heavy trucks and its minicars—over 40percent of Toyota-badged vehicles—while Toyotafocuses on regular passenger cars.

Toyota did particularly well as an exporter inthe late 1970s and early 1980s, earning the nick-name “Toyota Bank” for the profits it accumu-lated. Nevertheless, it was the last of the major

Japanese producers to enter into overseas pro-duction (its Georgetown, Kentucky plant beganoperations in 1988, following the success of the1984 NUMMI joint venture with General Mo-tors in Fremont, California). It now has ten manu-facturing sites in NAFTA, assembling over 1million units, including full-sized pickups andsport utility vehicles aimed at the domesticNAFTA market. Likewise, within the EU it nowhas plants in the UK and France, as well as op-erations in Mercosur and in Southeast and EastAsia, with its most recent venture in Tianjin,China. Despite its success in the USA and itsstrong share in many export markets, the firmstill must deal with significant overcapacity withinJapan. Its profitability in export markets has alsobeen hurt in recent years by the strong yen and(in the EU) the strong British pound. Finally givenits parochial roots in rural Aichi Prefecture, thefirm must develop the long-run ability to man-age operations around the world.

MICHAEL SMITKA

Toyota production system

Also known as “lean production,” the Toyota pro-duction system (TPS) is an integrated approachto achieving the efficiencies of mass productionwith small production volumes. Developed byToyota Motor Corporation in the 1950s, TPS isbased on the elimination of waste throughout theprocess of design and manufacturing, and reliesheavily on just-in-time (JIT) production, thebuilding of quality and productivity into produc-tion processes, and the continuous and incremen-tal improvement of quality (kaizen). Thisapproach to quality management is creditedwith Toyota’s remarkable global success in theautomotive industry during the second half ofthe twentieth century.

TPS was developed by Taiichi Ono, who wasToyota Motor Corporation’s chief productionengineer in the post-Second World War period,with the support of Eiji Toyoda, the company’smanaging director. This alternative to mass pro-duction was born of necessity Immediately fol-lowing the war, Toyota faced considerable capitalconstraints. Unlike the large Western automobilemanufacturers, Toyota’s production volumes

450 Toyota production system

were small, a few thousand vehicles per year,compared with 7,000 per day at Ford Motor Com-pany’s River Rouge plant in Detroit. Toyota hadneither the financial backing nor the scale of pro-duction to implement the western mass produc-tion approaches. Ono recognized the need todevelop flexible production processes that werenot dependent on huge production volumes ofindividual vehicle models to be economical. TPSinvolves great flexibility in terms of both produc-tion equipment and workers. The system focuseson designing processes that create cost reductionsthrough the elimination of waste. This extendsfar beyond the machines on the factory floor, andincludes the management of employees, inven-tory control, and supply chain management. Bothsuppliers and customers are expected to cooper-ate in the common quest for ever-better qualityand productivity Very much in line with the teach-ings of Deming, TPS is an integrated system thathas three key aspects: jidoka (literally “self-work-change”), JIT (see kanban), and standardizedwork with kaizen.

Jidoka refers to self-regulation of the entireprocess, either automatically or through humanintervention. Preferably machines are designedto detect problems (such as malfunctions, qual-ity problems, or delays) and to stop the produc-tion line when problems are encountered. Manysuch poka-yoke (mistake-proofing) devices weredeveloped by Shingo during his tenure at Toyota.When such mechanical solutions are unavailable,workers have the authority and the responsibil-ity to stop the production line immediately ratherthan waiting for supervisory or managerial au-thorization. Jidoka permits the clear identificationof trouble spots and prevents poor quality out-put from being sent to the customer (internal orexternal), while reducing the need for inspectors.With jidoka, quality is constantly being built intoproduction processes.

Consistent application of J IT principlesthroughout the system permits each customerorder to be processed with speed and efficiencynot necessarily in large batches of similar mod-els. Because parts are delivered as needed allthrough the system, inventory is reduced, whichmeans that quality problems are obvious quicklyand less floor space is required to store work inprocess. In addition, J IT facilitates the

customization of finished product, providing in-creased customer satisfaction.

The purpose behind standardized work andcontinuous, incremental improvement of qualityis to permit the organization to respond quicklyto changing demand patterns, while eliminatingwaste throughout the system. Adhering to rig-idly defined standard operating procedures re-sults in less variation in outcomes, making processoutcomes and quality more predictable. This fa-cilitates the arrangement of production activitiesinto a single, continuous flow, which involvescareful balancing of production scheduling. Giventheir direct knowledge regarding the productionprocesses, employees are empowered to assist inmaking the processes progress more smoothlyand quickly.

People

People are crucial to TPS. Implementation of thesystem requires a workforce that is both highlyskilled and very motivated. Labor problems atToyota in the late 1940s created an environmentthat facilitated the development of such aworkforce, as unions negotiated for lifetimeemployment for their members, as well as paybased on seniority rather than specific job func-tion, with bonuses based on the company’s prof-itability. In return, workers agreed to acceptincreased flexibility in their work assignments.

These developments meant that Toyota andits workers had a strong, mutual commitment toeach other, which made TPS feasible. The long-term nature of the employment relationshipmade it logical for the company to expend re-sources on continuously enhancing workers’skills, as it would benefit from their Toyota-spe-cific knowledge and experience for many yearsto come. Workers perceived value in initiatingprocess improvements, given their emotionaland financial stakes in the company’s success.This mutual relationship became a cornerstoneof TPS.

Workers face rigid work rules in TPS. Pro-duction procedures are tightly choreographed,with workers participating in their development.While adhering strictly to the rules, workers areencouraged to develop ways to revise them, to

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generate improvements. Both quality controlcircles and suggestion systems are used exten-sively with workers offered the security that effi-ciency improvements will not result in job losses.Workers are also encouraged to request helpwhen necessary. The routing of the help requestis specific, with one person explicitly responsiblefor reacting quickly Production-related informa-tion is shared widely in the plant, with andonboards which detail daily production targets, carsproduced, equipment breakdowns, etc., visiblefrom every workstation. Cross-training is exten-sive, and managers are expected to be able to dothe jobs of all the people they supervise.

Reducing cost by eliminating waste

In TPS, eliminating waste in systems is the pri-mary approach to reducing costs. For example,mass production systems have typically beencharacterized by considerable worker redun-dancy due to narrow job descriptions, highworker absenteeism, and a hierarchical struc-ture. Ono viewed this redundancy as wasteful.In contrast, TPS employs a team structure, inwhich teams have latitude with respect to howthey accomplish their assigned operations. Thecross-training of the team members providesflexibility. The team leader performs assemblytasks and fills in for absent workers. Time is allo-cated for teams to work together to develop pro-cess improvements, for kaizen and wastereduction.

Another distinction between TPS and massproduction systems is the treatment of rework.Western mass production systems have long re-lied on rework to correct quality problems late inthe production process. While this approach isnow widely seen as inefficient and ineffective,Ono recognized the waste inherent in rework inthe early 1950s, noting that the system allows aprocess problem to go unnoticed for too long.Instead, he developed TPS such that each workerhas the authority to stop the production line im-mediately if a problem emerges that he or shecannot fix. As a plant becomes mature in its im-plementation of TPS, this approach results inminimal rework, few line stoppages, lower costs,and higher quality.

Supply chain management

The coordination of the engineering, manufac-turing, and delivery of the thousands of parts ina vehicle is a monumental task. Toyota’s approachto supply chain management, based on long-term,cooperative relationships, recognizes the interde-pendency of suppliers and customers and differssubstantially from those of most Western auto-motive firms.

Western firms have traditionally awardedfixed-term contracts to suppliers based on thelowest bid, creating short-term perspectives re-garding the customer-supplier relationship. In thissystem, suppliers are placed in competitive situa-tions against each other and the customer. West-ern automobile firms have also traditionally donetheir component design in-house, with minimalinput from suppliers regarding manufacturingfeasibility or the potential for improvements. Sup-pliers tend to work only on their own compo-nents, with little information regarding theinterface of their part with the larger system; suchinformation is considered proprietary to the au-tomotive firm. The competitive nature of thiscontract system provides incentives for suppliersto warehouse large inventories of product, mak-ing quality problems difficult to detect.

Toyota adopted a different approach, empha-sizing long-term relationships with their suppli-ers and cooperation, rather than competition.Suppliers are organized in functional tiers. First-tier suppliers have design responsibilities. Aspart of Toyota’s product development team,their engineering work is done in cooperationwith that for other vehicle systems being de-signed by other suppliers. Second-tier suppliersare responsible for manufacturing; their custom-ers are the first-tier suppliers. The suppliers tendto be quite specialized. Because they do not com-pete against each other, cooperation is facili-tated.

There are generally equity cross-holdings be-tween Toyota and the first-tier suppliers, andamong the first-tier suppliers. The result of thisrelationship is not complete vertical integration,as often practiced in the West, but partial inte-gration. Permanent and temporary personneltransfers among Toyota and the suppliersstrengthen the long-term relationships.

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These structured and long-term customer-supplier relationships serve to reduce variationin both process and product, and fit well with thesystems approach to product development thatcharacterizes TPS. Teamwork and coordinationat lower levels in the organizational hierarchypermit a faster design process, which leads to in-creased responsiveness and faster response tochanging market conditions.

Risks associated with TPS

The primary risk in TPS is that the unceasingelimination of waste reduces organizational slack.There is little redundancy in the system to pro-vide a safety net. JIT reduces inventory levels(or shifts them down the supply chain), makingthe system vulnerable to external shocks (e.g.,weather, accidents, and natural disasters). JITthus requires processes that are in control. Onobelieved that the lack of a safety net would serveto focus the attention of everyone in the systemtoward anticipating and addressing problemsbefore they became serious.

The lack of slack can be stressful for workers.The assumption is that the increased intellectualchallenge associated with working in a TPS en-vironment creates intrinsic rewards (seeDeming). Management has the responsibility ofensuring that workers have the training and skillsto undertake the additional responsibilities.

Knowledge creation and transferability

One of the most powerful aspects of TPS is itstacit nature, which makes it individual to an or-ganization and, therefore, very difficult for com-petitors to imitate. Workers are trained to seekthe root causes of problems, rather than grab-bing at quick solutions. The combination of stan-dardized work with kaizen leads workers to usethe scientific method to conduct repeated con-trolled experiments. This continuous experimen-tation makes possible the type of organizationallearning and knowledge creation described byNonaka, essentially creating kaizen of kaizen, con-tinuous improvement of both the process and theapproach to improving. This is extremely pow-erful, and creates solutions that are specific tothe organization.

While successful implementation of TPS iscontext-specific, the system is not unique toToyota, to Japan, to the automotive industry orto the manufacturing sector. TPS was used suc-cessfully in New United Motor ManufacturingIncorporated (NUMMI), the 1984 joint venturebetween Toyota and General Motors in Fremont,California that was Toyota’s first automotive as-sembly site in the USA. The other North Ameri-can Toyota plants (such as Georgetown, Kentuckyestablished in 1988) use TPS, with some veryminor modifications to accommodate culturaldifferences between US and Japanese workers.The Toyota Supplier Support Center (TSSC),established in Lexington, Kentucky in 1992, pro-vides assistance to companies interested in im-plementing TPS. This free help is provided tofirms in a variety of industries; no affiliation withToyota is necessary.

TPS is credited with allowing Toyota MotorCorporation to develop from a small, domesticmanufacturer in the 1950s to an internationalpower by the 1980s. The combination of jidoka,JIT, and kaizen, with emphases on people and onthe reduction of waste, has produced a flexiblesystem that enables considerable responsivenessto customers.

Further reading

Cusumano, M. (1985) The Japanese Automobile Industry:Technology and Management at Nissan and Toyota, Cam-bridge, MA: Harvard University Press.

Monden, Y (1983) The Toyota Production System, Atlanta,GA: Institute of Industrial Engineers.

Spear, S. and Bowen, H.K (1999) “Decoding the DNAof the Toyota Production System,” Harvard BusinessReview (September–October): 96–106.

Womack, J.P., Jones, D.T. and Roos, D. (1991) TheMachine that Changed the World: The Story of Lean Pro-duction, New York: HarperPerennial.

ELIZABETH L.ROSE

trade barriers

From the initial postwar period onward, Japanhas been embroiled in a series of trade conflicts.Though some of these have involved foreignmarket penetration by Japanese firms, the vastmajority have focused on the inability of foreign

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firms to access the Japanese market. Potentialexporters to Japan have confronted a host of ob-stacles. Foreign firms setting up operations in Ja-pan have found themselves equally hampered.Over time, the nature of these barriers to tradeand market entry has shifted from formal gov-ernment controls to a variety of non-governmen-tal and informal constraints and, eventually tothe removal of most barriers. Nonetheless, Japanis still viewed as one of the most difficult marketsin the world to penetrate.

Formal barriers to trade were put in place im-mediately following the Second World. Theseformal controls included foreign exchange con-trols, import quotas, high tariffs and restrictionson the type and nature of permissible foreign di-rect investment. The primary purpose was to al-low Japanese firms to rebuild unhindered byforeign competition as well as to allow the gov-ernment to strategically deploy its limited foreignreserves. Consequently Japan has developed areputation for not “playing fair” in trade ofinvward foreign direct investment. In fact, Japanwas kept out of the General Agreement on Tar-iffs and Trade (GATT) until 1955, eighteen yearsafter the agreement was initially reached, becauseof its unfair trade practices.

The strong recovery and subsequent rapidgrowth of the Japanese economy led to increas-ing liberalization in the late 1960s and early 1970s.This was, in part, a response to external tradefriction resulting from Japan’s aggressive exportof first textiles in the early 1960s followed by steelin the late 1960s. Threat of trade sanctions anddemands for reciprocity particularly by the USA,provided a powerful incentive for removing orreducing the formal barriers. Still, the pace of lib-eralization has been reluctant and remarkablyslow. Exchange controls were not removed until1980, and other financial controls remained inplace through the 1990s. Similarly import quo-tas tended to be dropped only in response to ex-ternal pressure—gaiatsu—and only for the specifiedindustry or market. At present, import quotasremain for only a few selected, primarily agricul-tural products.

In a similar vein, tariffs on Japanese goods havegradually lowered over time. Again, reductionstended to come only on the heels of external criti-cism or pressure. The current average tariff is

less than 3 per cent and the lowest of all OECDcountries. Nevertheless, the average can be mis-leading because there are still products, such asleather goods, for which the tariff remains quitehigh.

Another formal trade barrier can be found inthe technical standards that the government im-poses on all manner of products. It has not beenunusual for Japan to reject internationally ac-cepted product design and safety standards infavor of its own. Foreign laboratory test data orproduct certifications were, similarly not usuallyrecognized by Japan. This often meant that for-eign firms had to arrange for products previouslytested in their home country to be re-tested inJapanese laboratories. Further exacerbating frus-tration over inability to access the Japanese mar-ket was a routine custom of not informing foreignfirms as to why their products did not meet gov-ernment standards or what could be done to bringthem into compliance.

In the case of food, chemical or other sub-stances, the Japanese employed a policy of “posi-tive listing,” meaning only substances listed bythe government were permitted. Non-listed sub-stances were not permitted, and obtaining per-mission often involved an elaborate, costly andtime-consuming process. Moreover, various regu-lating agencies were known to share product datawith domestic Japanese competitors of import-ing firms.

As Japan entered the 1980s, there was a feel-ing that the increasing international profile of itsMNCs and concerns over reciprocity would leadto significant easing trade friction and removalof trade barriers. However, the conflict simplymoved from formal to informal, or what came tobe know as “non-tariffbarriers.” Non-tariff barri-ers include a host of government and industrypractices which effectively close out foreign com-petition. For example, during the 1980s the Japa-nese government lifted nearly all restrictions onforeign participation in government tenders, how-ever, the qualifying conditions, filing deadlinesand processing procedures effectively precludedmost foreign firms from bidding. The complex,multi-layer, multi-channel distribution systemwas seen as another type of non-tariff barrier.Wholesalers would often resist distributing for-eign products because they competed directly

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with domestic products they were already han-dling.

From 1980 forward there have been at leasteight packages of market opening measures aimedat removing informal barriers to trade. For in-stance, in 1980 foreign firms were finally allowedto use the Japan Industrial Standard (JIS) markon their products. This was significant—and alsoindicative of the type of non-tariff barriers thatforeign firms faced—because in numerous cases,industry associations had agreed to limit pur-chases of parts and materials to only productscarrying the JIS mark.

Despite these various packages, Japanese tradesurpluses with other countries have remainedhigh. Its surplus with the US was over $ 50 bil-lion in the early 1990s. In fact, 1993 Japan tradesurplus jumped 20 percent to about $60.5 bil-lion. Sixty percent of Japan’s trade surplus withthe United States was attributable to automobilesand car parts. Because Japan put artificial tradebarriers around its auto and the auto parts mar-kets, the US imposed sanctions on Japan. In 1995,Japan agreed to begin to open its automobile andparts markets to American companies.

The current generation of trade barriers con-stitutes a complex mix of government, industryand consumer group initiatives that often requireaggressive, creative and persistent means to over-come. The experience of California rice export-ers provides an instructive case study. In 1993, abad rice harvest in Japan led to a significant pricehike in domestic rice. The government tried toprevent rice imports and to encourage Japaneseconsumers to buy government-subsidized, expen-sive Japanese rice. However, the Rice Accordunder GATT prevented Japan from using importquotas and other previously identified non-tariffbarriers. So in 1994, the Japanese enacted a newlaw requiring that no specific foreign rice couldbe sold as such. Rather it had to be a mix, spe-cifically 30 percent Japanese, 50 percent Califor-nia, Chinese and Australian, and 20 percent Thai.The rice from these four sources differ signifi-cantly in appearance and taste. Not surprisinglyJapanese consumers found the mixture unappeal-ing. Japanese consumers particularly did not likethe Chinese or Thai rice. The Japanese govern-ment had hopes the taste and appearance of theforeign mix would lead consumers to buy the

more expensive Japanese rice, but it did not workout that way Many retailers did not mix the rice,but sold the California rice separately At the be-hest of Japanese farmers and agricultural coop-eratives, the Japanese government issued newregulations specifically requiring California ricefrom being sold in its pure form. The new regu-lations required it to be mixed with rice from otherregions of America. In addition, Japan imposeda 580 percent import tariff, thereby removing itsprice advantage over domestic rice. The Japanesegovernment then used the $2.7 billion rice im-port tariff revenues to subsidize Japanese ricefarmers. Under the GATT minimum-access rule,Japan has been forced to comply by importingmore foreign rice each year. The Japan govern-ment is currently stockpiling the surplus rice andusing the imported rice in processed foods, notin its pure form. In 2000, rice tariffs were a WorldTrade Organization (WTO) agenda item. Japa-nese farmers are concerned that more importedrice will mean more competition.

Because of its past history and the continuinglarge number of trade barriers, including non-tariff barriers and protective regulations that Ja-pan has erected, many developed countries,particularly the USA, do not believe that Japanis committed to the elimination of trade barriersor to the overall cause of free trade. The currentUS approach is to pressure Japan to set targets.Japan’s response is that targets would harm thefree trade system and any bilateral deal with theUSA would violate GATT.

For years, the United States tried to get Japanto decrease its trade barriers and open its mar-kets through voluntary export restraints, sector-specific talks, and structural adjustment measures.A textile agreement was signed in 1974 wheretextile exports from Japan were restricted. NTTgave foreign companies fair opportunities to com-pete in 1980, NTT’s procurement of foreign prod-ucts increased from 3.8 billion yen in 1980 to152 billion yen in 1995. There were agreementsin wood products, steel, telecommunications,transportation, semi-conductors, fish products,meat and citrus fruits, copyright protection onsound recordings, paper products, and comput-ers. Between the mid-1970s and mid-1990s, Ja-pan and the United States signed over twenty-twodifferent trade agreements. In 1994, Japan and

trade barriers 455

the US had the Economic Framework Talks. Themain sectors covered in these talks had to do with:government procurement, insurance, automobilesand auto parts, export promotion and competi-tiveness, intellectual property rights, flat glass,financial services, inward direct investment andbuyer-supplier relationships, deregulation andcompetition policy global challenges, bilateralcooperation on advancing science and technol-ogy and human resources development. For ex-ample, the main point of agreement inautomobiles and auto parts had to do with thepromotion of dealerships, and strengthening ofthe function of the Fair Trade Commission. As aresult, over 42,000 US cars were newly registeredin Japan in 1995, up 19 percent from 1994.

Even with many Japan—US agreementssigned, many people in the United States believethat little was accomplished. According to theEconomic Strategy Institute, US exports to Ja-pan would increase more than $55 billion if Ja-pan eliminated its trade barriers, $44 billion inservice exports. In 1995, Japan worldwide exportswere $443 billion up 12 percent from 1994. Im-ports also increased to $337 billion up 22.3 per-cent. Therefore, Japan’s trade surplus decreasedby 11.6 percent to a four-year low of $ 107 bil-lion. In trade with the US, Japan’s surplus seemsto peak in 1994 at $67.3 billion and has decreasedto $49.2 billion in 1996.

JETRO stated that three changes in Japan’strade structure helped to decrease the surplus.These include: imports and exports to develop-ing countries surpassed developed countries;growth in exports have been difficult because ofthe economy whereas imports are easier; andration of current account surplus to Japan’s nomi-nal GDP fell. Furthermore, changes in Japan’strade structure are due to moves by Japanese com-panies to adapt to changing conditions such asshifting manufacturing overseas, globalization,and concentration of production in SoutheastAsia.

While Japan has recently removed many im-port quotes and duties, non-tariff barriers stillprevent foreign firms from entering the Japanesemarkets. These include the Large Retail StoreLaw; the informal job-bidding systems which goeson behind closed doors; and the common prac-tice of below-cost bidding, all of which eliminate

foreign firms from competing. The Japanese gov-ernment is beginning to put pressure on firms tostop these practices. However, there is still fric-tion over trade imbalance between Japan and therest of the world. As deficits with Japan remainlarge, more and more countries are putting pres-sure on Japan to eliminate its trade barriers. Ifnot, other countries will expand trade barriersagainst Japanese companies. For example, theUnited States may put up trade barriers againstJapanese autos and car parts that would hurt theJapanese auto industry.

JETRO has also changed its focus. It is nowmore involved with promotion of imports to Ja-pan. JETRO has organized numerous trade mis-sions for foreign firms to Japan; it has hostedexhibits and fairs to assist foreign importers. Sincethe mid-1990s, the Japanese have had a workinggroup monitoring the progress of the Deregula-tion Action Plan. In 1995 the Japanese govern-ment drafted a deregulation program, with a firstreview in 1996. Measures to facilitate competi-tion and fair trade include increasing the person-nel working in The Japanese Fair TradeCommission to 200 employees in 1998; and areview was conducted for the sectors for whichthe application of the Antimonopoly Law hasbeen waived, so that the system was abolishedby the end of 1998.

See also: business ethics; economic crisis in Asia;Japanese business in the USA

Further reading

The Japan Times, Japan-US Economic Handbook

TERRI R.LITUCHY

trade negotiations

Japan in the postwar period has engaged in aseemingly constant series of negotiations with itsmajor foreign trading partners, usually led by theUnited States, that have been designed to curbits export competitiveness and to increase theopenness of the Japanese market. The AmericanChamber of Commerce in Japan counts someforty-five major agreements negotiated betweenJapan and the United States between 1980 and1996. Negotiations have covered the entire range

456 trade negotiations

of goods and services: agricultural products suchas rice, citrus, beef, and tobacco; materials in-dustries including steel, aluminum, chemicals,wood, and paper; manufactures such as footwear,textiles, and automobiles; high technology indus-tries including semiconductors, supercomputersand satellites; and services such as construction,telecommunications, aviation, insurance, and fi-nancial services.

Through the mid-1990s the Japanese govern-ment was relatively responsive to foreign tradedemands, although more reluctantly and moreslowly than its trading partners had desired. Sincethe mid-1990s, however, Japan has shown an in-creasing willingness to resist bilateral trade pres-sures, and now strongly prefers to deal with tradeproblems in a multilateral setting. (Trade nego-tiations are distinct from other efforts to reduceJapan’s trade surplus, such as alterations in thedollar-yen exchange rate, or pressures on the Japa-nese government to increase domestic demandthrough monetary or macroeconomic policies.)

Efforts to curb Japanese exports

Trade negotiations with Japan through the 1970swere mainly motivated by the desire to deal withthe social and economic costs of Japan’s risingexports. Although Japan ran overall trade defi-cits with the USA until 1965, its export competi-tiveness in certain industries led to rising socialand economic costs in many of its trading part-ners. Early trade negotiations with Japan weredesigned to deal with these costs by slowing Japa-nese exports, particularly in the textile industryIn the early 1950s, for instance, rapidly risingJapanese exports of cotton textiles led to grow-ing calls for protectionism in major markets inthe USA and Europe. In 1955 the US govern-ment negotiated a bilateral agreement with Ja-pan in which the industry agreed to curtail itsexports to the USA. American efforts to curbJapanese exports of synthetic fibers and textilesin the late 1960s also resulted in the Japanesegovernment agreeing to voluntarily reduce itsexports of this type of textile. When the Japa-nese industry refused to abide by these curtail-ments, the result was a period of intense andacrimonious negotiations with the USA, nowknown as the Textile Wrangle.

In the late 1970s protectionist pressures in theUSA continued to rise, in part due to the rapidincrease in Japan’s overall surplus as well as grow-ing exports in politically sensitive industries.During the Carter administration, the USA ne-gotiated a long series of bilateral agreements thatsought to slow Japanese exports. An oft-usedpolicy tool was the voluntary export restraint,used in industries such as televisions, footwear,steel, and automobiles. Japanese producers weregenerally not in the position to say no to thesedemands for export restraint, since failure to doso risked more protectionist measures by the USCongress. In most cases these industries weredependent on exports to the US market; whenfaced with the choice of having no access to thatmarket or abiding by the VER, most chose thelatter. (It also turns out that at least one industryautomobiles, indirectly ended up benefiting fromthe VER, as it encouraged Japanese firms toexport higher-value added automobiles to theUSA.)

Opening the Japanese market

In the early 1980s trade negotiations shifted to afocus on gaining greater access to the Japanesemarket. In the context of rapidly rising Japanesetrade surpluses, its foreign trade partners pointedto the closed nature of the economy as the mainaspect of Japan’s “unfair” or “adversarial” trad-ing practices.

Formal tariffs on imported goods were not themain problem. Although Japan had enjoyed rela-tively high tariffs in the immediate postwar pe-riod, as the Japanese economy recovered andexports began to grow, Japan was graduallyforced to lower these barriers to imports. As thecondition for joining the international economicorganizations, and then during successive roundsof international tariff negotiations, Japan agreedto reduce its formal tariff barriers. Although itfaced criticisms for its reluctance to remove tar-iffs until after the protected industry was com-petitive, by the 1970s Japan could argue that itmaintained the lowest level of tariffs on manu-factured goods in the industrialized world. (Ja-pan did maintain some tariffs and quotas inpolitically sensitive sectors such as rice and leatherproducts.)

trade negotiations 457

Despite the formal openness of the Japanesemarket, a growing list of foreign exporters com-plained that their access to the market was stillbeing impeded by hidden, or non-tariff, barriers.As the Japanese trade surplus continued to grow,Japan’s trading partners became convinced thatthe Japanese market was substantially closed. Apopular metaphor compared the Japanese mar-ket to an onion: even if one could identify andremove one layer of protection, one would thenfind another layer of protection underneath, andso on. Furthermore, critics charged that Japan’sclosed economy gave its firms an unfair advan-tage, providing them with a safe haven in whichthey could earn excess profits that could then beused to finance “export offenses” against foreignmarkets.

Foreign complaints centered on three aspectsof the Japanese political economy: governmentpolicy business practices, and economic structure.Foreign critics pointed to many of Japan’s indus-trial policies that served to nurture or protect itsdomestic industries. Key Japanese industries hadenjoyed government regulations that affordedthem implicit protection or the ability to “man-age competition”—for instance restrictions onentry into an industry the ability to engage incartel-like behavior, and implicit and explicit re-strictions that made it difficult for foreign firmsto invest in Japan. Foreign partners also com-plained about the collusive nature of businesspractices in Japan, in which many industries tookadvantage of a weak antitrust environment to“cooperate” in exclusionary business practices.Foreign governments thus called for the strength-ening of Japan’s anti-trust rules and enforcementprocedures. Finally foreign partners pointed to anumber of structural features of Japan’s economythat were seen as impediments to imports, includ-ing the keiretsu cross-shareholdings, and the dis-tribution system.

Trade negotiations in the 1980s focused onthe identification and removal of specific barri-ers to trade. In the first half of the decade, thesenegotiations were mostly carried out on an in-dustry-by-industry basis. The Reagan adminis-tration, for instance, initiated theMarket-Oriented Sector-Specific, or MOSS, talks,in four general areas: telecommunications, elec-tronics, medical equipment and pharmaceuticals,

and forest products. MOSS talks were later ex-tended to include autos and auto parts. Tradenegotiations were also carried out in other sec-tors, most notably civil aviation, citrus and beef.The US government identified the specific barri-ers that blocked imports in each particular in-dustry and applied pressures on the Japanesegovernment to remove them.

A key focus of US-Japan negotiations in thisperiod involved the semiconductor industry. In1986 the two countries completed the Semicon-ductor Agreement, in which the Japanese govern-ment agreed to stop its firms from “dumping”semiconductors in foreign markets, and (in a con-fidential side letter to the agreement) to increaseforeign sales of semiconductors in the Japanesemarket. The US government later imposed a to-tal of $300 million in retaliatory tariffs against Japa-nese exports to the USA when it decided that Japanhad not complied with either of these provisions.

The Bush administration continued to seekincreased access to the Japanese market througha combination of approaches. As before, the USApressed for lower tariffs and stronger trade rulesthrough multilateral trade negotiations. On a bi-lateral basis, the USA and Japan negotiated in anumber of sectors, including construction, autosand auto parts, paper, and other sectors. In addi-tion, the Bush administration initiated the Struc-tural Impediments Initiative (SII) in 1989. Ratherthan dealing with specific trade barriers on a case-by-case basis, the USA now tried to identify moregeneric barriers to imports in the Japaneseeconomy including the keiretsu system, distribu-tion, and weak anti-trust provisions.

A major shift in the US approach to tradenegotiations with Japan occurred early in theClinton administration: a “results-oriented” ap-proach that sought some form of market sharetarget. The US government stopped short of of-ficially asking for explicit numerical targets, how-ever, which were strongly opposed by theJapanese government. It asked instead for “quan-titative indicators” that would be used to meas-ure increases in foreign exports to Japan. Thisdistinction was lost on the Japanese government,which insisted that US demands amounted to“managed trade.” After intense negotiations from1993 through 1995, the USA backed down fromthese demands.

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Trade negotiations after the Framework

Prior to the Framework the Japanese governmenthad usually followed a predictable negotiatingstyle: after a long period of denying or resistingtrade demands, Japan would eventually and of-ten at the last minute, offer some sort of conces-sion that would be enough to placate foreign tradedemands. An agreement would invariably bereached, but only after acrimonious negotiationsand, quite often, the threat of sanctions by theUSA.

During the late 1980s, however, the Japanesegovernment gradually formed a harder line to-ward US trade demands. During a period inwhich Japan was growing in power relative tothe USA, it was becoming increasingly resentfulat what were seen as ever-escalating and “unfair”US trade demands. The 1986 SemiconductorAgreement, and the US sanctions that followed,convinced a number of Japanese government of-ficials, particularly in the Ministry of Interna-tional Trade and Industry (MITI), that Japanshould no longer give in to US demands. Japa-nese officials also resented the 1988 revision ofthe US Trade Act, which included the so-calledSuper 301 provision that required the US gov-ernment to identify and remove foreign “unfairtrade practices,” a provision that was seen asclearly aimed at Japan. In addition, the strength-ening of the multilateral trading system, includ-ing the creation of the World Trade Organization,gave Japan a viable alternative to dealing withthe USA on a bilateral basis.

The US demands during the Framework talks,which were deemed by Japan to be the equiva-lent of numerical targets, led to a galvanizing ofopinion in the Japanese government. To the sur-prise of many Japan stuck to its hard-line posi-tion all the way through the 1995 conclusion ofthe Framework negotiations. For the first time, itwas the USA rather than Japan that retreated atthe final moment.

Trade negotiations in the last half of the 1990shave been less politicized and controversial, atleast compared to the pre-Framework situation.The USA toned down its market access demandson Japan, for a variety of reasons: Japan’s grow-ing resistance to bilateral pressures, the recoveryin the USA economy as the Japanese economy

shifted into recession, and the need to cooperatewith Japan on regional security issues. The USAhas shifted away from a focus on sectoral tradebarriers, and instead has applied more generalpressure on deregulation in the hopes of increas-ing competition in the Japanese economy TheUSA also continues its efforts to strengthen anti-trust enforcement in Japan.

For its part, the Japanese government has re-lied more and more on a multilateral approachto trade negotiations with the USA. In 1996 atop MITI official went so far as to declare that“the era of bilateralism is over.” Although Japancontinued trade negotiations with the USA in thisperiod, it has refused to discuss anything resem-bling numbers or indicators, or even the removalof specific barriers to trade. Japan has insteaddemonstrated a clear preference to deal with UStrade demands in a multilateral setting. In par-ticular, Japan has sought to use the new disputesettlement mechanisms of the WTO rather thanengaging in direct trade negotiations with theUSA.

See also: foreign companies in Japan; trade bar-riers; US investment in Japan

Further reading

American Chamber of Commerce in Japan (1997)Making Trade Talks Work: Lessons From Recent History,Tokyo: American Chamber of Commerce in Japan.

Encarnation, D. (1992) Rivals Beyond Trade: America VersusJapan in Global Competition, Ithaca, NY: CornellUniversity Press.

Lincoln, E. (1999) Troubled Times: U.S.-Japan Trade Re-lations in the 1990s, Washington, DC: The BrookingsInstitution.

Schoppa, L. (1997) Bargaining With Japan: What Ameri-can Pressure Can and Cannot Do, New York: Colum-bia University Press.

Tyson, L. (1992) Who’s Bashing Whom?: Trade Conflict inHigh-Technology Industries, Washington, DC: Institutefor International Economics.

ROBERT URIU

Tsukiji market

The Tsukiji market is the largest single whole-sale market for seafood products in Japan,

Tsukiji market 459

probably in the world. The marketplace—offi-cially Tokyo Chuo Oroshiuri Shijo, Tsukiji Shijo(Tokyo Central Wholesale Market, Tsukiji Mar-ket)—is the flagship of Tokyo’s wholesale marketsystem, a network of fifteen main and branchmarkets for fresh and semi-processed seafood,fruits and vegetables, meat, and flowers. In1998, Tsukiji’s seafood auctions had a total an-nual sales volume of approximately ¥583 bil-lion. The auctions handled 623,000 metric tonsof seafood (approximately 2.3 million kilogramsper trading day), down about 20 percent fromthe market’s peak year, 1987. Tsukiji’s reach isglobal, and increasingly large percentages of theproducts sold at Tsukiji’s auctions are imported.

Tsukiji is a spot market organized around com-petitive auctions among licensed participants. Theregulated institutional structure carefully definesroles within the auction system in order to limitvertical integration “above” and “below” the auc-tions. Through informal trading alliances, how-ever, most traders maintain relationships withlong-term partners both upstream and down-stream. Currently Tsukiji’s auctions are suppliedand run by seven large brokerages (niuke gaisha,consignees, or oroshi gyosha, primary wholesalers)who accept seafood on consignment from pro-ducers, regional brokers, and importers, or pur-chase it directly on their own account. Several ofthese brokerages are affiliated with parallel auc-tion firms that supply other major urban mar-kets; these keiretsu were organized around someof the large fishing companies (for example, TaiyoGyogyo KK, now known as Maruha Corpora-tion) that dominated Japanese seafood produc-tion and distribution until the 1970s. Brokeragessell at auctions six days a week, charging regu-lated commissions on sales, on terms set by na-tional and municipal regulations. The licensedauctioneers (serinin) are employees of these sevenfirms.

Their customers are independent intermedi-ate wholesalers (nakaoroshi gyosha) whose licensespermit them to buy at auction and to operate stallswithin the marketplace to resell seafood to retail-ers, chefs, and processors. There are a total of1,677 licenses for intermediate wholesalers, cur-rently held by about 900 separate firms. Theseintermediate wholesalers are divided among adozen and a half trade specialties (for example,

tuna, octopus, shrimp, live fish, fish paté, etc.),each represented by a gyokai (trade association)that negotiates specific terms of trade with thewholesale auction houses. Each trading commu-nity forms a semi-autonomous institution withinthe market, affecting and affected by its economic,political, and social relationships with producers,auctioneers, market administrators, and the par-ticular subset of Tsukiji’s clientele that is attractedto the products this specialized group of tradershandles. Members of each gyokai are further dis-tinguished among themselves according to theirhighly specialized individual market niches (e.g.,suppliers to high-end vs. mass-market sushi chefs;suppliers to supermarkets vs. retail fishmongers).

Since the 1970s, the Japanese fishing industryhas undergone major structural changes, in parttriggered by the spread of 200-mile fishing limitsthroughout the world as well as domestic eco-nomic realignments and rising labor costs. Do-mestic production of seafood has declinedsharply; in 1975, the Japanese government calcu-lated the ratio of domestic production to con-sumption of seafood at 100 percentself-sufficiency; in 1997, the ratio was 60 percent.In 1980 gross domestic production of fish, shell-fish and seaweed totaled 10.6 million metric tonsand 1.7 million metric tons of imports; in 1997,domestic production was 6.9 million and importswere 6.0 million metric tons. Major Japanese fish-ing corporations have largely withdrawn fromdirect fishing operations and shifted into foodimporting, processing, and distribution. Majortrading firms have made direct investments inforeign seafood production and have establisheddirect distribution channels with supermarketsand restaurant chains, both sectors that have in-creased greatly during the last twenty years. As aresult of these and other changes in Japanesedomestic consumption patterns, the overall per-centage of fresh and frozen seafood that passesthrough Tsukiji and other wholesale seafoodmarkets has shrunk; increasingly large amountsof seafood go directly from producers to retailers(in a distribution pattern known as jogai ryutsu,meaning channels that do not pass through regu-lated wholesale markets). Since the early 1990s,Tsukiji’s sales have actually declined in both vol-ume and value; the market has become increas-ingly specialized on high-end products, a category

460 Tsukiji market

which has suffered during the prolonged stagna-tion of the 1990s.

Like many major urban marketplaces through-out the world, Tsukiji is a significant historicaland cultural landmark. Tokyo’s seafood markethas been located at Tsukiji, near the city centeralong the banks of the Sumida River just a fewblocks east of the Ginza, since 1923, when itmoved there from Nihonbashi, where the city’smajor fish market had been located just outsidethe gates of Edo castle since the early seventeenthcentury. Until the 1860s the Nihonbashi market-place operated as a system of feudal guild mo-nopolies; from the 1860s through the 1920s itfunctioned as a speculative cartel, which engagedin flagrant bribery of government officials. In the1920s, a new Central Wholesale Market Lawestablished uniform regulations for urban mar-kets for perishable foods. The Kanto earthquakeof 1923 destroyed most of central Tokyo andforced the market’s relocation to its present site.Tsukiji officially began operation under the termsof the Central Wholesale Market Law in 1935.During the Second World War, civilian food sup-plies were severely rationed and Tsukiji sus-pended ordinary commercial functions. Rationingended in 1950, and the marketplace was recon-stituted along much the same lines it continuesto follow at present.

Despite the major transformations in the in-stitutional structure of the marketplace, as wellas in conditions of supply and demand, Tsukiji’sbusinesses continue to include many small-scale,

family-run shops that can trace long histories ofinvolvement with the marketplace, in some casesstretching back generations to the Nihonbashimarketplace. The market as a whole is steepedin the lore of Japanese cuisine and traditions ofmercantile life. In particular, the so-called “outermarket” (jogai shijo), several square blocks of tinyshops that sell to both a wholesale clientele andordinary shoppers, located just north of the offi-cial market (referred to as the “inner market” (jonaishijo or simply jonai)), is a popular and colorful shop-ping area for gourmets and bargain hunters seek-ing both culinary and cultural tradition.

Tsukiji’s future is in doubt, however. Becauseof changing patterns of distribution, as well ascongested transportation and antiquated marketfacilities, plans are now being drawn up to relo-cate the official marketplace to another site, pos-sibly in Toyosu, across the mouth of the SumidaRiver. New facilities would probably not beready until around 2010. If this move takesplace, major changes in the structure of the mar-ketplace are also likely and the numbers of li-censed participants will probably bedramatically reduced.

See also: central wholesale markets

Further reading

Bestor, T.C. (2002) Tokyo’s Marketplace, Berkeley CA:University of California Press.

THEODORE BESTOR

Tsukiji market 461

Ueno, Yoichi

A management consultant, writer and educator,Yoichi Ueno (1883–1957) was a pioneer in theindustrial efficiency movement and the mostprominent advocate of American managementtechniques in Japan during the interwar period.As Japan’s foremost proponent of FrederickWinslow Taylor’s theories of scientific manage-ment, Ueno authored dozens of works on busi-ness administration, industrial psychology andpersonal development. In addressing the mate-rial and spiritual dilemmas of modern societyUeno sought to develop a holistic vision of eco-nomic life that fused Japanese cultural traditionsto Taylorite methods and ideals.

A graduate of Tokyo University in psychol-ogy Ueno became interested in industrial man-agement in the 1910s, when Taylor’srevolutionary ideas swept through Japanese busi-ness circles. Inspired by Taylor’s pursuit of theutmost efficiency in the production process, Uenobecame a self-taught expert in scientific manage-ment, lecturing and writing extensively on thelatest American advances. His reputation wasmade in the early 1920s after he attained remark-able results as one of Japan’s first managementconsultants. Applying the techniques of scientificmanagement—time-andmotion study job simpli-fication, standardization—Ueno significantlyboosted labor productivity in the factories of LionToothpowder, Fukusuke Tabi and other manu-facturers.

Through the 1920s, Ueno spearheaded effortsto modernize Japanese labor and production

management. In 1921, he founded the IndustrialEfficiency Institute, a research, consulting andeducational organization, and in 1927 establishedthe Japan Efficiency Federation, a national um-brella group of management associations. He alsochartered a Japanese branch of the Taylor Soci-ety During the 1930s and the Second World War,Ueno’s consulting practice declined and he turnedmore to writing and teaching: his encyclopedicNooritsu handobukku (Efficiency Handbook) waspublished in 1939 and he opened a managementacademy (now SANNO University) in 1942.During the American occupation. thanks to hisexperience with modern administrative tech-niques, Ueno was appointed one of the threeoriginal commissioners of the National Person-nel Authority. He continued to lecture on scien-tific management until his death.

As the premier interpreter of Taylorism inmid-twentieth-century Japan, Ueno had a pro-found influence on the evolution of Japanesemanagement practices. Although dedicated tothe rationalizing principles of scientific manage-ment, Ueno was no mere translator or mindlessimitator of American managerial trends. Ueno,for example, had deep respect for Confucianmorality and Zen doctrine, and he attempted toalign Japan’s cultural heritage with the demandsof modern management. Trained as a psycholo-gist rather than an engineer, Ueno focused onthe human element in industry rejecting themechanistic, dehumanizing elements of Ameri-can mass production. He also questionedTaylorism’s faith in self-interest (and its conse-quent emphasis on incentive wages), stressing

U

instead cooperation, mutual understanding andunity of purpose in managing a complex organi-zation. Ueno’s conviction that effective manage-ment had to combine a systematic, scientificquest for efficiency with a concern for the hu-manity and well-being of workers would cometo characterize Japanese managerial practices inthe high-growth years after the Second WorldWar.

Further reading

Tsutsui, W.M. (forthcoming) “The Way of Efficiency:Ueno Yooichi and Scientific Management in Twen-tieth-Century Japan,” Modern Asian Studies.

Ueno, Y. (1967) Ueno Yooichi den (The Life of UenoYoichi), Tokyo: Sangyoo Nooritsu Tanki Daigaku.

WILLIAM M.TSUTSUI

unemployment

Traditionally Japan is viewed as having a lowerunemployment rate than that prevailing in otherdeveloped and developing nations. Quoted un-employment in Japan can run from one-half toone-third of the stated rate of the US and Euro-pean nations. The declared unemployment rateof Japan does not, however, tell the entire fac-tors. employment story. It hides a number ofunrecorded factors.

As early as 1980, the Ministry of Labor ad-mitted that different criteria were used in the USand Japan, adding that the Japanese rate wouldrise if US criteria were applied. In 1987, the Min-istry of Labor also admitted that the Japaneserate counts military personnel as employed, whilethe US does not include them in its calculations.

More importantly in the USA laid-off work-ers are immediately classified as unemployed. InJapan, if they continue to receive any salary pay-ments (regardless of how small), they are notcounted as unemployed. Similarly in the USAunemployed workers are treated as unemployeduntil they start work. In Japan, they are consid-ered employed as soon as they accept a job offer,even if the work will not start for up to thirtydays. If a job applicant in the USA declines a joboffer, he or she is still considered unemployed.In Japan, if they are offered a job through a labor

exchange they are considered employed even ifthey decline the offer.

Another difference is the treatment of stay-at-home parents. In the USA, if a housewife regis-ters at a government employment office, she isconsidered unemployed. In Japan, she would notbe, since she did not previously have a job. Work-ers with jobs but seeking new jobs are also treateddifferently. In the USA, if they apply for a newjob, they are considered unemployed. In Japan,they are not.

For these reasons, many writers have arguedthat national employment statistics are only validfor comparisons within the same nation. Reflect-ing differences in calculations, they point out thatthey are misleading when compared from onecountry to another.

Writers who have nevertheless tried to adjustJapanese unemployment statistics to US stand-ards have increased Japanese numbers signifi-cantly For instance, Hachiro Koyama, formerchief executive officer of Smith-Kline BeckmanJapan, argued that Japan’s quoted 2.8 percentunemployment rate, if calculated in accordancewith US methods, would be 7.3 percent.

ROBERT BROWN

US investment in Japan

United States foreign direct investment (FDI) inJapan has been strikingly limited throughout themodern period. The first American firms estab-lished operations in Japan during the latter halfof the nineteenth century, yet these firms per-formed only limited trade and trade-related op-erations and were confined to a small number oftreaty ports such as Yokohama and Kobe.Roughly a dozen US manufacturing firms, to-gether with a handful of banking and insurancecompanies, had set up modest facilities in Japanby the early 1930s, yet Japan hosted far less USFDI throughout the pre-Second World War pe-riod than did major European economies suchas the United Kingdom, Germany and France.Indeed, official US data for the year 1936 sug-gest that the UK alone was host to more thanten times the quantity of accumulated US FDIin Japan in that year.

US investment in Japan 463

Nor did the relative amounts of US FDI inJapan increase substantially during the ensuingdecades. In wartime and occupation, of course,virtually no new US direct investment enteredthe country and much of the previous investmentwas literally destroyed. Yet even during Japan’shigh-growth postwar period the level of US FDIremained extraordinarily limited. By 1965, forexample, Mexico and Brazil each hosted greaterquantities of accumulated US FDI than did Ja-pan, and by 1980 Japan still lagged considerablybehind other major industrialized countries as ahost to US FDI.

The amount of US FDI in Japan increasedsignificantly during the latter half of the 1990s,yet in comparative terms still remains quite mod-est. The US government reported that betweenthe end of 1994 and the end of 1999, the totalvalue of accumulated US FDI in Japan on anhistorical cost basis grew from roughly $34 bil-lion to almost $48 billion, which represents anincrease of some 40 percent. Included in that lat-ter total are such large and high-profile invest-ments as the acquisition of the Long-Term CreditBank of Japan by a US consortium led byRipplewood and a number of major direct in-vestments by General Electric and other large USfirms. Yet even at the end of 1999, Japan—still theworld’s second largest economy—ranked just sixthamong host countries to US FDI, trailing theUnited Kingdom, Canada, the Netherlands, Swit-zerland and Germany. Indeed, as Japan enteredthe new millennium, its huge economy playedhost to just 4.2 percent of total US FDI abroad.

Why has there been so little US FDI in Ja-pan? Clearly part of the explanation stems fromhome (or source) country considerations. SomeUS firms, for example, lacked requisite knowl-edge of Japanese language, customs and businesspractices to successfully enter and expand in Ja-pan. Other American companies apparently didnot make adequate efforts to break into the mar-ket, or chose to limit or withdraw from ongoingoperations. And some US multinationals lackedthe patience necessary to succeed in a countrynotorious for the long lead times required beforeadequate returns are realized on direct invest-ments.

Yet the primary explanation for low levels ofUS FDI in Japan stems from a series of host (or

recipient) country factors. Often backed by do-mestic firms fearful of foreign competition andfor other reasons, the Japanese government pre-vented or deterred US direct investment in Ja-pan for well more than a century Host countrypolicies can be divided into a number of more orless distinct phases. The Japanese authoritiesfirst permitted US (and certain other foreign)companies to directly invest in Japan in 1859upon the conclusion of a series of bilateral com-mercial treaties, but such investments werestrictly limited to the treaty ports. Host govern-ment policy entered a second phase in 1899,when in exchange for revision of the so-calledunequal treaties, Japan permitted US firms todirectly invest throughout the nation with rela-tively few encumbrances.

This second phase came to an end in 1931when the Japanese government, under the increas-ing sway of the military began to institute increas-ingly strict controls over the operation of US andmost other foreign direct investors. The periodof war and occupation, during the decade of the1940s, constitutes yet a third distinct stage in hostgovernment treatment of US business. Virtuallyall US direct investment was expropriated andthen turned over to local business interests dur-ing the Second World War, but even during theAmerican-led occupation period local officials—often at the behest of the occupiers—preventedUS companies from entering or resuming theirbusinesses in Japan.

The Japanese authorities initiated a fourthstage of policy when they passed and then ap-plied a complex set of rules and regulations un-der the Foreign Investment Law of 1950. Thislaw, which effectively screened out most FDI formore than two decades, was part of Japan’s largerstrategy during this period to disocourage freshinflows of direct investment from abroad butencourage fresh inflows of foreign technology.Powerful domestic companies played key rolesin this screening process, and the few large USfirms that did manage to enter Japan in theseyears, such as Coca-Cola, IBM, and Texas In-struments, generally had to satisfy the demandsof their domestic competitors before gaining of-ficial government approval to invest.

In more recent years, however, the principalbarriers to greater US FDI in Japan have

464 US investment in Japan

originated in the Japanese private sector. Under-developed secondary labor markets, for exam-ple, have contributed to the host of challengesUS firms must confront in order to hire qualifiedJapanese employees often frightened of losingtheir jobs if their foreign employer downsizes ordeparts and they are left unemployed. The highcosts of living, real estate and other aspects ofdoing business in Japan similarly discouragegreater US investment. And, perhaps most im-portantly high levels of intracorporateshareholdings between allied members of thesame business groups make US acquisitions ofmany Japanese companies unusually difficult toaccomplish.

What are the prospects for US FDI in Japan?Although numerous factors will continue to de-ter many American companies from undertak-ing major new investments, some recentdevelopments point to modestly increasing lev-els in the foreseeable future.

First, the mobility of the Japanese labor forcehas been increasing in recent years, and thisshould stimulate renewed investment interestamong American firms as they discover new op-

portunities to hire quality local employees. Sec-ond, the declining cost of Japanese real estateand related cost factors have substantiallybrought down the cost of office space and resi-dential housing for foreign executives. Third,the gradual unwinding of intra-corporateshareholdings between keiretsu firms and otherchanging features of Japanese industrial organi-zation and practice spell new opportunities forUS firms to enter Japan via merger and acquisi-tion. Finally in recent years powerful sectors ofthe Japanese bureaucracy such as the Ministryof Economy Trade and Industry (or METI, theformer MITI) as well as prefectural and munici-pal government agencies have come to appreci-ate some of the many benefits foreign companiescan bring to Japan. This important change hasled to the adoption of new government policiesand programs which encourage rather thanhinder the entry of US direct investment in Ja-pan.

See also: American occupation; trade barriers

MARK MASON

US investment in Japan 465

venture capital industry

Estimates on the size of the Japanese venture capi-tal (VC) industry and the invested stock and flowof VC funds face similar problems of precise defi-nition and accurate recording as in other coun-tries. The most acknowledged sources forempirical data on the Japanese VC industry arethe semi-annual survey of the Venture EnterpriseCenter (VEC), a semi-public institution foundedby the Ministry of International Trade andIndustry (MITI) in 1974, and the joint annualsurvey by the Nihon Keizai Shimbun and theNikkei Research Institute of Industry and Mar-kets, the results of which are compiled in the an-nual Nikkei Venture Capital Yearbook. The VECsurvey distinguishes between direct capital invest-ments by VC firms and investments into part-nerships, and subdivides the invested funds intoequity-only equity plus near-equity and equityplus near-equity plus debt. As of September 1999it reports a total amount of ¥722 billion equityplus near-equity funds managed by eighty-threeVC firms. According to the Nikkei survey 108VC firms committed ¥268 billion for new invest-ment in venture firms during 1999. Thus, com-pared to the over $46 billion raised by 409 VCfunds in 1999 in the USA, the domestic JapaneseVC industry is still small.

History

The origins of the Japanese VC industry dateback to the enactment of the Small and Medium-Sized Business Investment Development Law in

1963. Following the model of the American SmallBusiness Investment Act of 1958, it intended tofoster VC investment into innovative small firmsand led to the establishment of three semi-publicVC firms called Small Business Investment Com-panies (SBICs) in Tokyo, Nagoya, and Osaka.In contrast to the US model, these firms are notallowed to provide loans, but are required to in-vest in equity or equity-linked securities of small,but profitable, dividend-paying enterprises witha nominal capital of less than ¥300 million inone of twenty-eight designated industrial fields.The investment guidelines determine that theSBICs assume substantial risk by taking a shareof no less than 15 percent and up to 50 percentof a portfolio company’s equity.

The history of Japan’s private VC industry iscomparatively short and marked by distinct pe-riods. The first wave of private VC investmentoccurred between 1970 and 1973 and was led byJapanese banks and security firms which wereinspired by the take-off of VC in the USA andbacked by ample cash reserves piled up duringthe high growth period. Altogether eight firmswere established, starting with the independentKyoto Enterprise Development (KED), and fol-lowed by Nippon Enterprise Development(NED), a joint venture between the Long-TermCredit Bank of Japan, the Daiichi KangyoBank and the ITOCHU general trading com-pany. The establishment of Japan’s largest VCfirm, the Japan Associated Finance Company(JAFCO), a listed affiliate of Nomura Securities,also dates back to this period. The first wave ofJapanese VC was short-lived and the majority of

V

the funds ended in high losses which was par-tially due to the oil shocks of the 1970s, but moreso due to inexperience and inflexibility in VCmanagement as well as the enforcement of stricterregulations by the Ministry of Finance (MoF)in regard to listing and accounting standards foryoung growth firms.

The second wave of private VC investmentoccurred between 1982 and 1986, triggered bythe emergence of Silicon Valley and liberaliza-tion of financial markets in Japan. Improve-ments in the regulatory environment such as therelaxation of listing requirements for the OTCmarket and the Tokyo Stock Exchange SecondSection, the liberalization in the use of warrants,or the introduction of a rating system created amore favorable environment for VC investmentin Japan. In addition to the six firms remainingfrom the first period, over fifty new VC firmswere established and investment grew to a size-able amount with a focus on high-tech firms inareas like electronics or new materials. Further-more, the first investment partnership (toshi jigyokumiai) was established by JAFCO in 1982,thereby providing venture capitalists with an op-tion for risk diversification. The rapidly appre-ciating yen after the Plaza Accord followed by aseries of large-scale bankruptcies of well-knownventure businesses led to a collapse of the sec-ond VC wave in 1986. However, despite the de-cline in domestic VC investment, Japaneseinvestment into USA and European venturefunds increased. Most notable are investmentsby Japanese corporations into high-tech venturefirms in the field of computer hardware and soft-ware or biotechnology in the California area withthe commercial objective to gain access to emerg-ing technologies and to initiate future businesspartnerships.

From the beginning of the 1990s the JapaneseVC industry experienced a significant, thoughunsteady increase in the level of equity-linked VCinvestment as second-tier financial institutions likeregional banks, mutual loan and savings banks,or cooperative associations, as well as more andmore firms independent from financial institu-tions were established. Since the late 1990s Ja-pan’s VC system is becoming more diversifiedand versatile due to market entry by large-scalefunds of well-known foreign VC firms and in-

vestment banks, and the rapid rise of internet-related VC firms led by Softbank Corporation.

Characteristics of Japan’s VC industry

The Japanese VC industry is highly concen-trated and dominated by affiliates of financial in-stitutions and semi-public funds. As of March31, 1999, the top ten Japanese VC firms man-aged about two-third of the reported venture in-vestment of ¥806 billion, withNomura-affiliated JAFCO, Daiwa-affiliatedNippon Investment & Finance Company and Ja-pan Asia Investment Company alone command-ing a 42 percent share. In regard to the stock ofmanaged funds, the semi-public SBICs accountfor significant investment shares, notably theTokyo Small and Medium Business Develop-ment Fund and the Osaka Small and MediumBusiness Development Fund. At the same time,smaller funds composed of individual venturecapitalists and partnerships as well as, more im-portantly pensions funds, are negligible as asource of VC in Japan mainly due to Japan’sregulatory framework. Until the passage of theLimited Partnership Act for Venture Capital In-vestment (toshi jigyo yugen sekinnin kumiaho) of No-vember 1998 liabilities of investor partnershipswere not limited, thereby increasing the risk forindividual venture capitalists. In regard to pen-sion funds investment that nowadays contrib-utes over half of the VC in the US regulatorydeficiencies are considered to be a significantbarrier to an increase of VC investment by insti-tutional investors in Japan. Japan lacks rules andregulations like the US Employee RetirementIncome Security Act (ERISA) that, by means ofan amendment to the “prudent man” rule in1979, permitted investment of pension moneyinto high-risk assets like VC funds and, therebycontributed largely to the surge in US VC in-vestment.

A second important obstacle for VC invest-ment in Japan relates to regulations for initialpublic offering (IPO) procedures. Although therelaxation of the listing standards for securitieson the OTC market in 1983 resulted in a surgeof new listings in the late 1980s and early 1990s,it still requires fifteen to twenty years on averagefor a company to obtain a listing on the Japanese

venture capital industry 467

OTC market, as compared to an average of fiveyears in the USA. These long time requirementsfor an IPO, combined with high cultural barri-ers to MBOs or mergers and acquisitions in Ja-pan constrain the options for a viable exit strategyby the venture capitalist. The establishment ofthe Mother’s Section at the Tokyo Stock Ex-change as well as the foundation of NASDAQJapan, a joint venture between NASDAQ,Softbank Corporation and the Osaka Stock Ex-change, in 1999 is a major step to stimulate fu-ture growth of VC investment in Japan, as bothexchanges explicitly target young growth firmsand thereby widen the options for a smooth andspeedy exit.

Compared to the USA, Japanese VC firmsusually are more risk averse and conservativereflecting their strong affiliation to financial insti-tutions. Investments usually concentrate on laterstage companies in their business expansion phaseand on bridge/mezzanine finance prior to an IPO,while high risk, early stage investments into seedor start-up firms are rather limited. These pat-terns reveal substantial differences between Ja-pan and the USA in regard to the underlyingphilosophy of the VC business. Seed and earlystage investment lie at the heart of the US-styleVC, because during these phases VC firms areprovided with ample opportunities to generatevalue added for venture firms, while at the sametime foundations for high financial returns arecreated. Japanese VC firms often pursue multi-ple objectives. Due to their affiliation with banksor security firms, they not only aim for high capi-tal gains, but also for access to profitable under-writing or future lending business.

A further contrast between US and Japanese-style venture capital is the nature of the relation-ship between the VC firm and the venturecompany. US VC firms usually maintain a closerelationship with their portfolio companies, en-gage in active monitoring, and provide variousvalue-adding services, management support andexpertise in respect to business planning, mar-keting, organization or personnel. They regu-larly exchange information and become activelyinvolved in company affairs through boardmembership. In Japan, VC investment is usuallynot associated with an active monitoring andgovernance role. Instead, the relationship be-

tween the VC firms and their portfolio compa-nies is, in general, distant and at arm’s length,exchange of information is limited, and boardmembership of the venture capitalist an excep-tion. In fact, until 1995, the anti-monopoly lawprohibited board membership of employees ofVC firms in their portfolio companies. In addi-tion, Japanese venture capitalists are said to lacksufficient industry experience and managementexpertise due to their finance-related careerbackground.

Many of the differences between VC in Japanand the USA or Europe can be explained bystructural and regulatory factors. Next to finan-cial regulations in regard to listing requirementsor pension management, insufficient incentiveschemes for venture capitalists such as stock op-tion plans or tax breaks for “business angels” areoften quoted as examples. Regulations are alsoheld responsible for insufficient exchange be-tween academic research and business causing alack of involvement by university professors andresearchers with the VC community Next to dif-ferences in the regulatory framework, it is ar-gued that the state of Japan’s VC industryreflects distinct features of Japan’s industrial cul-ture. One such feature is the predominant posi-tion of large Japanese corporations as a majorsource for new technologies and innovations. Bymeans of diversification, in-house company ven-tures, and corporate spin-offs, large companieshave repeatedly succeeded in establishing newgrowth areas, thereby replacing or crowding outVC investment. Furthermore, the predomi-nance of long-term employment practices andthe existence of internal labor markets are be-lieved to limit labor mobility to discourage entre-preneurship, and to make recruitment ofqualified employees by new enterprises moredifficult. Finally cultural impediments to entre-preneurship are cited as yet another reason forJapan’s underdeveloped VC business by point-ing to the high risks of entrepreneurial failurewithin the Japanese cultural context and to thestrong social concerns for stability However,these culture-based arguments are often dis-puted by referring to the large number of smalland medium-sized firms and independent,mid-sized companies (chusho kigyo), and their im-portant role for Japan’s economic development.

468 venture capital industry

Nevertheless, since the beginning of the 1990sthe Japanese government has expressed its con-cern with the faltering corporate start-up rate andhas enacted a series of policies and legal changesin order to foster a US-style VC business. Meas-ures include tax incentives, special funds for loansand loan guarantees for young technology firms,the permission of limited liability partnership, aswell as changes in the commercial and tax codein regard to stock options and “angel tax deduc-tions.” These measures reflect an important shiftin the policy towards small and medium-sizedenterprises from protection of existing small firmstowards fostering of an entrepreneurial culture.

Further reading

Borton, J.W. (ed.) (1992) Venture Japan: How GrowingCompanies Worldwide Can Tap Into the Japanese VentureCapital Markets, London/New York: Woodhead-Faulkner.

Clark, R. (1987) Venture Capital in Britain, America andJapan, London/Sydney: Croom Helm.

Hurwitz, S.L. (1999) The Japanese Venture Capital Indus-try, Cambridge, MA: MIT Japan Program 99–04,Center of International Studies, Massachusetts In-stitute of Technology.

Mizuno, H., Hayashi, A. and Miura, I. (eds) (1998)Bencha Handobukku (Venture Handbook), Tokyo:Nikkan Kogyo Shimbunsha.

Nihon Keizai Shimbunsha/Nikkei Sangyo ShohiKenkyujo (2000) Nikkei bencha bijinesu nenkan (NikkeiVenture Business Yearbook), Tokyo: Nihon KeizaiShimbunsha.

JÖRG RAUPACH-SUMIYA

VLSI Research Cooperative

The Very Large-Scale Integrated Circuit ResearchCooperative was a government sponsored re-search effort involving the Ministry of Interna-tional Trade and Industry (MITI) and fivemajor domestic computer companies: Fujitsu,NEC, Hitachi, Toshiba and Mitsubishi. Thecooperative held together for five years, from1975–9, and was touted as the vehicle by whichJapan would gain superiority in integrated cir-cuit (IC) manufacture, specifically 256k DRAMand higher. The project is generally considered a

success. In 1989, Dataquest estimated Japan’smarket share in 256k and 1Mb integrated cir-cuits at 92 percent and 96 percent respectivelySuccess is also reflected in the fact that when theUS government and a consortium of US firmsset up Sematech (the Semiconductor Manufac-turing Technology Initiative) in 1987, they usedthe VLSI Cooperative as both a justification andan example.

The cooperative was a clear attempt by MITIto shape the pace and direction of one of Japan’skey high-tech industries—integrated circuits—byincreasing funding and encouraging the sharingof information. The government provided ¥300million and the companies as a group contrib-uted another ¥400 million. While not a signifi-cant amount when spread over a five-year period,it sent a symbolic signal about the perceived im-portance of the industry Probably of more im-portance was the encouraging of informationsharing among the five firms. Fujitsu, Hitachi,Mitsubishi, NEC and Toshiba are fierce competi-tors across a range of markets. There was deepconcern as to whether or not the five would bewilling to work together. However, MITI had alsoconcluded that the increasing competitiveness ofthe US computer industry required Japanesefirms to cooperate.

It is unclear to what extent information shar-ing took place within the cooperative. Over itsfive-year lifespan, about 100 engineers were in-volved. They were divided into three projectteams: materials development, wafer size andproduction process equipment. Company repre-sentation was not equally distributed acrossteams, and some companies appear to have domi-nated particular projects. Whether this was aconscious attempt to control the project or, in-stead, represented the varying strengths of firmsin different technological areas is hard to con-clude. Given that the firms were fierce competi-tors and that the collectivist nature of Japaneseorganizations discourages horizontal communi-cation among firms, even modest informationsharing can be seen as an important accomplish-ment.

Another school of thought argues against theimportance of the VLSI Cooperative ResearchProject. They note that Oki Electric, the onemajor computer firm to not join the cooperative,

VLSI Research Cooperative 469

remained competitive in the IC industry (despitetaking twice as long as the other five to reachproduction). It also noteworthy that three new-comers to IC production—Matsushita, Sanyo andSharp—were able to enter the DRAM market atthis time. Finally critics of the cooperative pointout that the most significant firm in the IC indus-try did not participate in the project, but contrib-uted more to IC production technology between1974 and 1980 than the cooperative. NipponTelegraph and Telephone, at the time a quasi-public organization under the regulation of theMinistry of Posts and Telecommunications, main-tained several laboratories. Though not an equip-ment maker, it worked closely with supplier firms,often sending its own engineers to supplier firmresearch centers. The research centers and closerelationships with suppliers was justified on thegrounds that NTT set specifications for all tel-

ecommunications equipment in order to insurequality.

The VLSI Cooperative Research Project tookplace in a period in which Western concerns aboutJapan, Inc. was widespread. Western observersnoted the close relationship between MITI andthe private industrial sectors. The cooperativeproject reinforced the perception that Japanesegovernment and businesses were competing inglobal markets as a partnership.

See also: administrative guidance

Further reading

Methé, D. (1991) Technological Competition in Global In-dustries, New York: Quorum.

ALLAN BIRD

470 VLSI Research Cooperative

wartime legacy

One can only speculate what Japan would be liketoday had the military not come to dominate for-eign policy in the late 1920s. If that had not hap-pened, Japan would never have provoked war inChina, never taken over Manchuria, never de-signed and carried out an invasion in SoutheastAsia, and never drawn the United States into thePacific War. These things of course did happen,and they led to disastrous defeat for Japan in1945. Results of Japan’s wartime experience andbehavior continue to be debated, but some of theeffects are quite clear and can be interpreted inboth positive and negative ways.

For Americans, the Second World War lastedfor a little less than four years; for Europeans itwas six years or more in duration. For the Japa-nese it was over a much longer period; the coun-try had been involved in virtually non-stopmilitary struggle since early in 1931. It is truethat involvement in war in the early 1930s wasnot nearly of the intensity and scale that it grewto be from 1942 through 1945, but the outpour-ing of human and material resources over suchan extended area, and over such an extended pe-riod of time, was bound to leave its mark on Japa-nese society

The Purge

In addition to the international war crimes trialswhich resulted in a little over four hundred peoplebeing hanged and several thousand imprisoned(see American occupation), the United States

government directed the occupation authoritiesto remove from an active role in Japanese societyall “exponents of militant nationalism and aggres-sion.” In Japan, figuring out just who was an ex-ponent of militant nationalism and aggression wasnot so easy and there was great disagreementwithin the occupation government over whoshould be purged. All officers of the Imperialarmy and navy were officially purged. Top gov-ernment bureaucrats were also an easy target, andseveral thousand were duly removed from theirpositions. Members of patriotic societies, groupsof government, business and military personnelwho had conspired to further Japan’s interestson the mainland, and some teachers and pub-lishers were dismissed from their posts. The num-ber of people in the above categories was quitelarge. About 80,000 in all were purged, in addi-tion to 120,000 army officers.

When SCAP turned to the business commu-nity however, there was more controversy thanever. SCAP officials responsible for identifyingbusiness leaders to be purged had come to knowmany of the business leaders during the businessrestructuring negotiations immediately after theoccupation began. There was strong sentimentamong SCAP officials that removing the mostproven business minds from the scene would se-riously hamper Japan’s economic recovery mak-ing some sort of radical take-over of thegovernment more likely After much internalwrangling, about 1,500 business leaders wereadded to the purge list; deducting voluntary res-ignations from that number, only about 450 busi-ness leaders were actually purged by SCAP.

W

History will record that on the whole the purgedid not have a serious effect on Japanese recov-ery or any other aspect of the society. The greatmajority of those purged were “unpurged” in1951; three years later when Japan was again fullysovereign, all restrictions under the occupationpurges were nullified. Several of those purgedreturned to positions of leadership, includingHatoyama Ichiro who became prime minister in1954, and Kishi Nobusuke, who followed him in1956.

Anti-war ideology

Although a military government did not officiallyrun Japan during the war years, the military wasan extremely powerful and influential focus ofauthority For three years the minister of war, ageneral, served as prime minister, and a hugeamount of Japan’s wealth was subsumed byJapan’s army and navy forces, subsumed for theexpress purpose of preparing for and executingwar. The Japanese people knew where to placethe blame for the catastrophic destruction rainedupon their nation. War planners in military uni-form together with their clients in the industrialcartels had led them to ruin, a set of events whichplanted a deep core of fear and resentment in theminds of the great majority of the Japanese peopletoward war and toward anything associated withmilitary institutions.

Most people in Japan today were not alive tosee the pain of war when it was brought uponthe nation, but the memory is nourished throughthe media, by the substantial left-leaning factionof Japanese politics, and with the national observ-ance of the nuclear bombing of Hiroshima andNagasaki each August. When the war ended, theJapanese military was not only discredited, it wasvirtually removed as an active force in economicand political life. During the first few years of theAmerican occupation, six generals and one civil-ian were hanged as class A war criminals, and400 more as class C war criminals. Several hun-dred other individuals were sentenced to prisonfor terms ranging from a few years to life. Al-though these punishments were handed downby an international war crimes tribunal, there wasnot much expression of sympathy for the defend-ants from the Japanese population at large.

The Self Defense Force of today has not, andunder current conditions, cannot function witheven a shadow of the power and influence of theprewar and wartime Japanese military On aver-age, the Japanese are as anti-war in outlook asthe people of any large society and while Chinaand other nations fear a rebirth of aggressivemilitarism in Japan, one legacy of the war is thatJapan was transformed from a warlike and ag-gressor society into one which is not likely tocause trouble to anyone through military meansfor the foreseeable future.

Postwar reforms

The totality of defeat, together with the obviousbenign intentions of the conquerors, created inJapan an openness for change and a willingnessto discard the past to a degree quite rarely seenin any society at any time. Some of the enthusi-asm for American-inspired change and reformwore off over time; some aspects of the occupa-tion reforms were frankly not appropriate for Ja-pan. On the whole, however, the occupation freedJapan from some of its own confining themes; itwas said by many Japanese that defeat and occu-pation liberated Japan from itself: in land reform,labor relations, with a new and more open edu-cational system, with an economy less tied to afew wealthy families, in many ways. A liberatingwind blew through Japan with the occupation,bringing reforms which the Japanese themselvesprobably could not have instituted. Left to itself,any society has a difficult time wresting powerfrom vested interests in attempting reforms. De-feat in war and temporary authority vested in anobjective outside force offered a chance to rede-sign aspects of Japan’s institutional framework.Some of that redesign has had a lasting and posi-tive effect on the culture and society

End of aristocracy

For hundreds of years, hereditary feudal elite hadrun Japan. During the Meiji period, on the otherhand, education and economic performance cameto be more important than connection to an aris-tocratic past; indeed Japan seemed to make moreprogress in overcoming a traditional caste likeranking system than some European societies

472 wartime legacy

such as England or Italy. But in spite of the im-pressive degree to which Japan was able in a veryshort span of time to throw off the bonds of feu-dalism, even after modernization it remained ahighly stratified society The new middle class,dynamic as it was, was surrounded on three sidesby a large impoverished peasantry growing work-ing class, not much better off, and a very smallprivileged elite.

The “privileged elite” included people wholived lives hardly imaginable by ordinary peopledue to their great wealth, and other privileges aspart of the formal nobility A peerage was put intoplace during the Meiji period composed of fiveranks (see Meiji restoration), roughly equivalentto the peerage ranks traditionally used in Europe,with about 900 families making up the officialJapanese titled nobility Some of the families atthe center of the largest zaibatsu were incorpo-rated into the peerage, and several top industri-alists who remained outside the peerage werelisted among the wealthiest men in the world.Had Japan not been defeated in war, it is prob-able that the peerage system would have remainedintact, and those wealthy families of commonerswould still be in a privileged place, exerting in-fluence at the top of economic and political life.

Reforms discussed above included to a largemeasure ending hereditary privilege and powerin Japan. Indeed it can be argued that, at least forthe two and one-half decades following the war,Japan became a model of egalitarian society un-paralleled among capitalist nations, significantlymore so than its great teacher, the United States.The power of great wealth and advantages asso-ciated with social connections began to re-emergeas important factors in Japan during the 1970sand 1980s, and there is evidence that family tiesfunction today in some ways reminiscent of theold aristocracy. In spite of this, however, the topof power and influence in Japanese society willnot likely ever again be as closed to those notborn to it as it was in the years prior to and dur-ing the war.

Relations with Asian nations

One rather powerful wartime legacy has beenthe way events during the war have been keptalive in the collective memories of other Asians.

When Japanese reflect on the war, they are mostlikely to call to mind the people of Japan as vic-tims of the carpet bombing of their capital andseveral other cities, victims of the dropping ofnuclear bombs on Hiroshima and Nagasaki, vic-tims of the miserable conditions of ordinarypeople at war’s end. For Japan’s neighbors, it isquite another matter. People and governments inKorea, China, and several countries of SoutheastAsia are more likely to conjure up images of in-vasion, brutal treatment at the hands of Japanesemilitary personnel, forced labor, imposed foreigncurrency images which continue to influence theway Japan is seen and dealt with.

In 1998, South Korea finally lifted some of itsban on Japanese popular culture, but there re-mains virulent anti-Japanese sentiment in somequarters of the population, in some cases en-couraged by the government. A museum on theoutskirts of Seoul, isited by thousands of schoolchildren each year, exhibits in vivid fashionsome of the cruelty of Japanese against Koreansduring the colonial period. China has been criti-cal of Japan for not owning up to the brutalbehavior of the Japanese Army during its longoccupation of China. Chinese government offi-cials monitor political events in Japan, with aneye on right-wing groups, feared by many Chi-nese as potentially a rebirth of Japanese milita-rism.

Japan has to a significant degree repaired itsreputation in Southeast Asia through trade andeconomic investment, but there remain unpleas-ant memories for those who lived through Japa-nese incursion into their lands, and for some ofthe older generation, Japan is always looked uponwith suspicion.

Further reading

Baerwald, H.H. (1959) The Purge of Japanese Leadersunder the Occupation, Berkeley CA: University ofCalifornia Press.

Gibney F. (1992) The Pacific Century: America and Asia ina Changing World, New York: Scribner’s Sons.

Hachiya, M. (1965) Hiroshima Diary, ed. and trans.W.Wells, Chapel Hill, NC: University of NorthCarolina Press.

Jansen, M. (1975) Japan and China: From War to Peace,Chicago: Rand McNally.

wartime legacy 473

Kerbo, H.R. and McKinstry, J.A. (1995) Who RulesJapan: The Inner Circles of Economic and Political Power,Westport, CT: Praeger.

JOHN A.McKINSTRY

white-collar workers

The term “white-collar worker” refers to salariedmale workers in Japanese organizations. The term“salaryman” is synonymous in Japan for white-collar worker. “Salaryman” was used in Japan asfar back as the Meiji period (1868–1912) to referto salaried workers in desk jobs. Today it refersspecifically to white-collar male workers. Salariedfemale workers are referred to as “career women.”

The white-collar worker in Japan designs hislife on the expectation of a guarantee of lifetimeemployment, the promise of increasing wages forthe length of his working life (seniority pay), andrepresentation in decision-making within the com-pany (company union). He joins the companyupon graduation from college, is educated by it,and remains loyal to the company in spite of lowwages while he is young because the senioritysystem guarantees that his salary will eventuallygrow and his job will be secure.

However, recent data suggest that Japan’semployment system is in transition and perhapsis moving away from the lifetime employmentmodel and shrinking the number of white-collarworkers. Mid-career recruitment in large enter-prises, even for top executives, is growing. Withan aging workforce, less committed young work-ers, and pressing needs for skilled specialists,employers are adjusting their permanent employ-ment and seniority reward systems. Workers areseeking greater job mobility and not relying onthe company for their career development andjob security.

In addition, as employment restructuringmoves forward, white-collar workers will even-tually find themselves being downsized becausethey are a group having no special qualificationsthat are valued in the labor market. Most of theirskills come from on-the-job training and job rota-tions within their companies, making theirknowledge and skills non-transferable. Ad-vances in technology and computers made thejobs previously held by administrative staff re-

dundant. As more emphasis is placed on spe-cialization and individual skills, white-collarworkers are finding that they need to systemati-cally improve their abilities to survive in a com-petitive labor market.

The Ministry of Labor anticipates an increasein labor movement activity as a result or becauseof such changes in the working environment. Theministry’s goal is to encourage employment sta-bility for the white-collar worker while allowingthe labor market to become more dynamic. Train-ing schemes and re-employment programs willbe the focus of the Ministry of Labor in its ef-forts to stabilize the careers of the white-collarworker.

Further reading

Chinone, K. (1996) “Coping With Freedom: Can theSalaryman Change His Spots?” Tokyo Business Today64 (1): 28–32.

Hitoshi, C. (1997) “Salaryman Today and Into Tomor-row,” Compensation and Benefits Review 29 (5): 67–75.

Mantsun, M. (1997) “How Permanent Was PermanentEmployment?: Patterns of Organizational Mobil-ity in Japan,” Work and Occupations 24 (1).

Toshiaki, O. (1999) “Report on Labor Trends in Ja-pan,” Ministry of Labor White Paper, Tokyo.

White, O. (1996) “Japanese Seek Skilled Workers OverCheap Labor,” World Trade 9:66.

MARGARET TAKEDA

women’s roles

Women’s roles in the post-Second World Warera have centered on the dual roles of wife-motherand secondary worker. Women have participatedin the labor force at high levels, but the develop-ment of economic and social institutions haveshaped their roles to complement male breadwin-ners. Women are expected to support theirhusband’s careers. This usually involves completedevotion to their husband’s company nurturingof the children, and caring for aging parents. Therapid expansion of the new middle class sincethe mid-1950s gave rise to a new image of theideal of housewife: a woman that is free from thelabor intensive work the previous generation of

474 white-collar workers

women endured. The increasing level of educa-tional competition among children since the 1970sintensified women’s responsibilities in children’seducation. Thus, contrary to the popular imageof Japanese women who devote themselves tothe family the “traditional” women’s roles are notso traditional as one might think. More recenttrends show a growing ambivalence on the partof young women in their acceptance of women’sdual roles. The direction of change is not yet clear.

Historically high rates of female labor forceparticipation are due to the size of the traditionalsector (agriculture, fishing and forestry) and thestrong presence of small family-owned enter-prises. The traditional sector, absorbing the larg-est segment of the work force until about 1960,declined to account for less than 10 percent by1980. The decline in the traditional sector wasoffset by the expansion of the secondary (manu-facturing, construction, and mining) and tertiary(service and trade) sectors. The secondary sec-tor absorbed 20 percent of the work force in 1960and 27 percent in 1987. The service sector ac-counted for 37 percent in 1960 and 63 percent in1987. Continuing industrialization opened newemployment opportunities to young women inthe factories and modern corporations in urbancenters.

Women combined their economic and familyroles within the traditional industries that offeredflexibility in working schedules. Only thosewomen who could afford not to work stoppedworking upon marriage or having children. Thecontraction of traditional industries reduced fam-ily enterprise workers. The concomitant growthof the modern economy increased female employ-ment outside the home, accentuating the tempo-rary withdrawal from the labor force for manywomen. The withdrawal from the labor forceduring child-bearing years and the re-entry intothe work force in middle age was most pro-nounced in the 1970s and early 1980s, with 55percent of women aged 25–34 not working. Morerecent patterns are a reversal to the earlier trend.The dip during the childbearing years has gradu-ally decreased, and in 1990 the labor force par-ticipation rates among women aged 25–34returned to the 50 percent level, but is still lowerthan the rates among women of the same agegroup before 1960 (55 percent).

The ideology of the middle-class housewife,which accentuated the division of gender roleswas particularly strong in the 1970s and 1980s.For example, an overwhelming majority ofwomen, 76 percent, supported the gender divi-sion of work and family in 1982. This numberhad decreased to 56 percent in 1992. Similarlywomen’s support for withdrawal from the laborforce during middle-age years was 71 percent in1972, 74 percent in 1983, and 64 percent ofwomen in 1990. Women’s support for work ca-reers without disruptions was 12 percent in1972, 17 percent in 1983, and 14 percent in1990. Educated women, who are more likely tomarry educated men who can provide the eco-nomic security of the middle class, were lesslikely to return to work in their middle-age yearsthan those with only a high school education.The weak correlation between the level of wom-en’s education and their employment during theyears of middle age is still pronounced today.

The image of middle-class women may ob-scure the complexities of women’s dual rolesand the implications for society. Corporate poli-cies related to hiring, training and promotion, aswell as socialization at home and the educationsystems, all contribute to woman’s dual roles aswife-mother and secondary worker. Womensupply full-time labor when they are young, andthey support their husband’s career after theyare married. Women perform types of jobs thatare drastically different from those of men ofsimilar age. When young, women work full-timein auxiliary or dead end jobs, young men areplaced in more responsible positions and gothrough the firm-based internal labor market.Once leaving their jobs upon marriage or havingchildren, middle-aged women who need to sup-plement their family income re-enter the labormarket as part-time or temporary (non-regularfull-time) workers. In 1990, within a group ofworking women aged 34–55, 51 percent heldfull time positions, 43 percent held part-time ortemporary positions, and 6 percent were self-employed.

Until about 1980 men and women showed astriking normative and behavioral consensus onthe proper age of marriage. Incorporating thisnorm and expecting women to leave the com-pany to raise a family employers have been re-

women’s roles 475

luctant to invest heavily in training women. Forexample, large firms actively recruit male univer-sity graduates but seek women who have a highschool or two-year college degree. While maleworkers receive in-house training and are re-warded on the basis of seniority women are pre-cluded from such investment from the verybeginning. Such corporate practices perpetuate apattern whereby women perform less responsi-ble work until they marry or have children.

Most parents monitor their son’s educationmore carefully than their daughter’s educationbecause of the close relationship between educa-tion and future occupational success. Japanesewomen enter college in higher numbers than domen (46 percent vs. 41 percent in 1993), but halfof them go to junior colleges rather than four-year universities (whereas more than 90 percentof men go to four-year universities). A four-yearuniversity education for daughters is considereda barrier to finding employment and a hindranceto their chances for a good marriage. Thus, par-ents are hesitant to push their daughters throughthe “examination hell” demanded for entry intoelite universities. Higher education for daughtersis viewed more in terms of general educationaldevelopment in preparation for meeting a manwho will bring high social status and economicsecurity Such socialization leads to a lack of ca-reer aspiration and a more family-oriented careeramong young women.

Working women, especially those who arecommitted to their work careers, have been awareof the systematic inequalities imposed by the cor-porate system, and as early as the 1960s theysought legal redress. Clauses stipulating thatwomen must retire at marriage or pregnancy werelitigated first. In the 1960s and 1970s, the courtsawarded several female workers back wages andan injunction that barred large corporations fromusing mandatory retirement at marriage clausesin contracts (for example, the 1966 SumitomoCement case). Earlier successful litigation casesguaranteed women’s rights to work and promo-tions. However, discriminatory hiring and train-ing practices remained firmly in place, at leastuntil the passage of the Equal Employment Op-portunity Law (EEOL) of 1986.

Most observers maintain that the EEOL hasnot been a success. Even though large firms be-

gan to offer a two-track hiring system for women,the general clerical track (ippanshoku) and themanagement track (sogoshoku), the number ofwomen who took advantage of the new hiringsystem did not increase. The management trackpromises career advancement, but in exchange,women are expected to work like men, emulat-ing “corporate samurai” careers. The long com-mute and working hours, extensive overtime,attendance at social events after work, and trans-fers are all prerequisites to corporate career ad-vancement. Women are reluctant to seek themanagerial track out of concern that the trans-fers and long working hours will conflict withtheir family needs. In 1990, less than 15 percentof large private firms assigned relocation towomen as part of career development. Lack ofmaternity leave and child-care facilities are addi-tional barriers to women who are committed tocareer advancement. Employers do not groomwomen for future promotion, and women fail toaspire to and to apply for such positions. In 1990women held only 2.2 percent of managerial posi-tions in large firms.

In contrast to the “hostile” corporate environ-ment in which women hit a “concrete ceiling,”the public sector is much more hospitable towomen’s needs and career development. Genderequality is acknowledged and women are re-warded with equal pay for equal work and theirjobs are protected by maternity leave policies. Yet,even in the public sector, women in leadershippositions are few, accounting for less than 2 per-cent of the managerial class.

Women’s entry into managerial positions isinversely related to the size of the firm. Accord-ing to a study by the Women’s Bureau of theMinistry of Labor, the probability that a womanholds a kacho position (section manager) is tentimes greater in the small firms and a bucho posi-tion (division manager) is thirty times greater. Inaddition, there are a large number of female own-ers of small and medium-size firms. Retail wom-en’s or children’s clothing was the most commonbusiness headed by a female president in 1989.Studies show that these women are not necessar-ily highly educated. They are more likely to bemarried and have children than their counter-parts in large firms. These women appear to comefrom families that encourage work in small and

476 women’s roles

medium-sized businesses, with their parents (es-pecially fathers) providing the role model. In ad-dition, studies on career progression of femalemanagers suggest that women typically rose totheir position by working around the dominantmale career pattern, rather than by competingwithin it.

During the booming economy of the 1980s,Japan experienced a severe nationwide laborshortage and “women power” was one of the big-gest catch phrases in corporate job advertise-ments. The government recognized the need tosupport working women’s needs (child care, flexitime, elder care). Studies report that multinationalcorporations made a positive impact on workingwomen as they recruited diverse workers basedon ability. However, there are also reports thatJapanese multinational firms operating in the UShired more Japanese women in managerial posi-tions in their American offices than they did intheir home operations. More studies are neededto assess the impact of multinational corporationsin women’s employment.

Currently Japan faces an uncertain trend. Sincethe economic bubble burst in 1989, young womenare struggling with a very tight job market, andthey are postponing marriage. The average ageof marriage for women rose from twenty-five in1975 to twenty-eight in 1995, and in the Tokyoarea, it is thirty-one. Women on average are hav-ing 1.39 children, one of the lowest birth rates inthe world. Some observers interpret these changesas a “quiet revolution,” with women initiating are-negotiation of gender roles. According to thisview, young women are disillusioned with Japa-nese men and marriages that only constrain themand so have become more selective in their lifecourse options. Others, however, paint a morepessimistic picture by pointing to the absence of

concrete structural and institutional changes thatpromote long-range employment opportunitiesfor women and a new family division of labor.According to this view, the postponement ofmarriage and women’s reluctance to raise chil-dren are far from the advancement of women’snew roles.

Further reading

Adler, N.J. (1993) “Competitive Frontiers, WomenManagers in the Triad,” International Studies of Man-agement and Organization 23 (2): 3–23.

Awaya, N. and Phillips, D. (1996) “Popular Reading:The Literary World of the Japanese WorkingWomen,” in A.Iwamura (ed.), Re-imaging JapaneseWomen, Berkeley CA: University of California Press,244–70.

Brington, M.C. (1993) Women and the Economic Miracle,Berkeley CA: University of California Press.

Clammer, J. (1997) Contemporary Urban Japan, Oxford:Blackwell.

Department of Labor Women’s Bureau (1992)“Women Workers: Outlook to 2005,” Facts on Work-ing Women 92 (1): 1–7.

Inoue, T. and Ehara, Y (eds) (1995) Women’s Data Book,Tokyo: Yuhikaku.

Saso, M. (1990) Women in the Japanese Workplace, Lon-don: Hilary Shipman.

Steinhoff, P.G. and Tanaka, K. (1993) “Women Man-agers in Japan,” International Studies of Management andOrganization 23 (2): 25–48.

Usui, C. (1994) “Do American Models of Female Ca-reer Attainment Apply to Japanese?” Center forInternational Studies, Occasional paper No. 9408,University of Missouri-St. Louis.

GHIKAKO USUI

women’s roles 477

Yamato Transportation

Yamato is the pioneering company of truck haul-age in Japan and the leading firm in the over-night delivery service of small parcels, which itintroduced to the country in 1976. As of 1999,Yamato Transport handled 836 million parcels,which represented a 35.6 percent share of theindustry. At the end of June, 2000, the companypossessed 31,690 vehicles, linking its networksof 2,702 depots, storage points, and transship-ment centers throughout the country. It has87,658 employees nationwide. The total operat-ing revenue for fiscal 1999 was ¥744 billion, withoperating profit of ¥32 billion and recurring profitof ¥32 billion.

Yasuomi Ogura laid the company’s founda-tion when he began a charter truck haulage serv-ice with four lorries at Kyobashi, Tokyo, in 1919,at a time when there were only 204 lorries inJapan. In early times, Ogura struggled to findcustomers, since carriage by motor vehicles wasconsiderably more expensive than by horse-drawn ones. In 1923, he signed an exclusive con-tract of delivery with Mitsukoshi, the firstdepartment store in Japan, which made his busi-ness much more stable.

Four years later, Ogura attended an interna-tional conference of road cargo transport compa-nies in London, and visited Carter-Patterson, aBritish company which operated scheduled longhaul transport linking networks for collection anddelivery Inspired by this, he started, betweenTokyo and Yokohama, the first scheduled bulkroad transport in Japan two years later. This serv-ice was extended to the Kanto area by 1935.

After a disruption during the Second World

War, the company’s activities had resumed fullyby 1949, and the scope of operations was ex-tended to overland legs of air and sea cargo, roadhaulage between railway terminus and ports, andpackaging. In the 1950s, the principal mode ofcargo transport in Japan began to shift from rail-way (Japan National Railways) to trucking.Yamato was comparatively late in establishing thelong haul operation, and it was only in 1960 thatthe company started the Tokyo-Osaka service.Due to high competition, Yamato suffered fromlow profitability throughout the 1960s.

Masao Ogura, who succeeded his father in1971 as president, was inspired by visiting UPSand started, in 1976, overnight delivery serviceof parcels focusing on individual customers inthe Kanto area under the name of Takkyu-bin(home express). Contrary to the prevailing be-lief that the business was not feasible, Yamato’ssimple and innovative concept of uniform pric-ing and overnight delivery was a stunning suc-cess. In 1986, the company extended itsgeographical scope to overseas destinationsthrough a cooperative agreement with UPS. Thecoverage of its parcel collection and delivery serv-ice was extended to all of Japan by 1989. Mean-while, Yamato developed new services such astransporting skiing and golf equipment to sitefrom home, articles of perishable food by tem-perature-controlled vehicles, delivery at desig-nated times, book delivery and home moving. Inthe 1990s, this leader of the overnight deliveryservice industry began “cash on delivery” serv-ice of items marketed by direct mailing compa-nies and Internet retailers.

SHINTARO MOGI

Y

zaibatsu

Literally “financial clique(s),” zaibatsu refers to thebusiness groups that dominated the Japaneseeconomy throughout much of the prewar andwartime period. These are typically divided intotwo categories: the four groups centered aroundthe well-established names of Mitsui, Mitsubishi,Sumitomo, and Yasuda (Fuji), which were widelydiversified across finance, industry and com-merce; and a larger number of emerging groups(shinko, or new, zaibatsu) with substantial economicpower in a more limited range of industries. Post-war economic reforms initiated by the Occupa-tion forced out the families that had dominatedmany of the groups, as well as their top manage-ment, but the 1950s saw the reconstitution of thezaibatsu as keiretsu groupings based around thesame nucleus of prewar companies.

The zaibatsu is an organizational form of con-siderable substantive and theoretical significance.Japan’s private sector development in key indus-tries like banking, international trade, and newtechnologies was dominated by zaibatsu firms fromthe late 1800s until Japan’s defeat in the SecondWorld War. Even today zaibatsu descendents aredisproportionately represented among Japan’sfinancial, trading, and high-tech companies.Moreover, in their early years, the zaibatsu wereleaders in introducing new management and or-ganization systems into the Japanese economyincluding the employment guarantees that laterbecame institutionalized as “lifetime employ-ment.”

Earlier postwar research (Hadley 1970; Caves

and Uekusa 1976) emphasized the economicpower of the zaibatsu and their central role in ex-ecuting the industrial plans of Japan’s wartimegovernment. But the continued growth in Japan’seconomy after the war, with the reconstitutedzaibatsu clearly playing a major role, has led inthe past two decades to alternative, efficiency-oriented, explanations. Reinforcing this search foraffirmative explanations is evidence that family-based industrial networks have also been centralin other fast-growing economies (such as Koreaand Taiwan). It has become increasingly clear thatbusiness groups are not simply vestigial “cartels”of a pre-anti-trust world, but a fundamental fea-ture of many developing economies.

The emergence of zaibatsu in Japan is the prod-uct of several factors. One of these is the strongrole played by the state in early modern Japan.Modern industries like the railroads were ownedand managed by the government during the earlyyears of Meiji. Even when these industries werelater sold off to private investors, it was to entre-preneurs that maintained close relationships togovernment and who continued to benefit fromgovernment largesse. Political connections werescarce, and those who had them stood to benefitacross a range of industries. Meiji entrepreneurslike Yataro Iwasaki, founder of Mitsubishi, cul-tivated close ties to the finance minister, whichresulted in direct and indirect subsidies from thegovernment for his shipping line to help beat for-eign competition. He then used these ties to ex-pand into warehousing and insurance. SimilarlyEiichi Shibusawa (the founder of present-dayToshiba) used his political acquaintances to start

Z

many other companies, including those in thebanking, paper, textile, and brewing industries.

Another consideration was simultaneous de-velopments in the Japanese financial system.Unlike the USA and UK, where independentstock markets developed early as an importantsource of external capital, corporate financing inJapan came primarily through private, non-mar-ket mechanisms—wealthy entrepreneurs, zaibatsufamilies, and commercial banks. Japan’s bankingsystem developed rapidly in the 1870s and 1880s,and prior to most other Western industries inJapan. Several decades later, banks with close tiesto merchant houses and industrial clients werewell positioned to take advantage of a wave ofbanking consolidation forced by financial crises,creating the concentrated financial centers thatcontinue today Reinforcing these ties were laxsecurities regulation and opaque accounting sys-tems that made Japanese securities markets, un-til the postwar period, the locus of unsavoryspeculation rather than serious investment.

The primary explanation for zaibatsu develop-ment, however, must be traced back to the or-ganizational requirements of Japan’s catch-upeconomy and especially the way in which thezaibatsu managed the competing tensions it wasfacing in a world of rapid industrial change: theneed for strategic centralization, on the one hand,and the need for operational decentralization, onthe other. Forces pushing toward strategic cen-tralization were reflected in attempts by Japanesegroups to reallocate resources among enterprisesbased on some notion of collective interest. Catch-up required investments in technical, managerial,and organizational learning, as well as institutionbuilding along a chain of relations extending fromresearch and development through prototypingto final production and sales. Various stages alongthe chain were often underdeveloped: key up-stream materials or component supplies mightbe lacking; potential downstream customers hadto be convinced to commit to new products ofuncertain value and longevity; and basic know-how concerning how to link the various stageswas scarce. Making this even more challenging,all of the pieces in the chain had to be accom-plished simultaneously and rapidly to competesuccessfully with Western competitors.

Firms that developed internal capabilities at

critical stages in the development of a technol-ogy were able to reduce entrepreneurial risks,providing important advantages to large, well-organized producers. It was the leading zaibatsuthat had the financial wherewithal, the politicalconnections, and the overseas contacts to promotedevelopment of Japan’s frontier industries: buy-ing foreign technology and product licenses, fund-ing learning missions to and from Japan, investingin supply and distribution infrastructure, and in-vesting in plant and equipment. Three institu-tions were vital in this: the group bank helped toraise capital that was used in expansion projects;the group trading firm provided international andoverseas intelligence and resource support; andthe head office coordinated overall resource allo-cation through a small team of decision makers.

This is not a complete explanation, however,since hierarchical organizations have their ownlimitations. They may lack internal capital, tech-nical, or managerial resources necessary to con-trol all of the stages along the production process.Worse, they are frequently poorly adapted tohandling the process of industrial change itself.Head office employees often had little experiencein the technical and market requirements ofemerging industries, and were often more adeptat managing financial and strategic affairs (moni-toring subsidiary accounts, cultivating politicalrelationships, etc.) than they were at handlinglocal operations.

Therefore, while the centralized zaibatsu headoffice managed overall strategic decisions overresource allocation, it often allowed considerableautonomy to managers at the level of the enter-prise or line of business over just how those re-sources would be allocated, especially duringJapan’s rapid diversification in the 1920s and1930s. These forces toward operational decen-tralization were reflected in the process of spin-ning off new enterprises organizationallysegregated from the head office. Where therewas rapid expansion into promising new tech-nologies or markets, group executives found,this relative autonomy promoted a more entre-preneurial attitude in its local managers and alsoprovided an independent focus for strategic part-nerships.

By segregating activities, the head office wasable to accomplish two important objectives. First,

480 zaibatsu

it provided greater autonomy for localized deci-sions and incentives to operate and created a moreentrepreneurial environment in the satellite op-eration. Rather than applying the standardizedrules and procedures of the central organization,spin-off companies were granted a higher degreeof autonomy to develop new and locally appro-priate procedures to follow and were providedstrong managerial incentives toward venturegrowth. A degree of control was no doubt givenup by the head office, but the underlying logicwas that the agency costs produced by a weak-ened administrative control structure areoftentimes less important than the organizationalflexibility and entrepreneurial initiative that re-sults.

A second major advantage of zaibatsu-basedgrowth was its usefulness in building of relationsoutside of the group. By segregating operations,the zaibatsu were able to create a coherent organi-zational focus for localized strategic alliances withother companies. The partner firm’s investments,personnel, and other resource contributions couldbe directed toward a limited set of activities. Thishad the advantages of concentrating the partner’sefforts while at the same time protecting the corefirm from undue external influence by the part-ner over its own operations. In addition, the re-sulting operation was freer than the core firm topursue new markets and customers (especiallythose involving firms that might, due to strategicconflicts, be reluctant to deal directly with theparent firm).

These dual pressures—one toward integrationand the other toward disintegration—operatedthroughout the prewar period as centripetal andcentrifugal forces continually defining and rede-fining organizational boundaries as groups andtheir member firms evolve over time. Given thespecial needs of Japan’s enterprises, and the re-source limits they faced, it made sense to lever-age what resources were available across as broada set of business opportunities as possible. At thesame time, Japanese leaders found it useful tohave a stable “core” of enterprise groups thatcould be counted on to have both the broad ca-pabilities necessary to make complex expansionprojects work and to be reliable and trustworthyin carrying them out.

The basic zaibatsu model provided a significant

legacy on which Japan’s postwar economy wouldbuild. Important transformations in Japan’s cor-porate systems during the wartime period hadalready shifted the emphasis away from the tra-ditional capitalist notion of enterprise—as an in-strument of profit for shareholder owners—to onein which the company’s managers and workersbecame the dominant stakeholder. Much of whatwe now think of as central features of the Japa-nese economy took root then, as the planners inJapan’s wartime machine found that stabilizingindustrial relations and internalizing capital mar-kets made it easier to control strategic enterprisesthan was the case under a more market-like sys-tem.

This evolution continued after the war, as tenselabor-management relations gave way to accom-modation based around the idea of long-termemployment guarantees, internal promotion, andcompany-based unions. The internal labormarkets that developed in large enterprises re-quired careful management of the “core”workforce, leading to heavy reliance on externalsubcontractors to handle fluctuations in produc-tion output. It also required cultivation of stableshareholders willing to overlook short-term per-formance problems in favor of long-term busi-ness growth. While occupation reformsintroduced the “rationalization” of some of thesefinancial and corporate governance relations, theydid not eliminate the densely connected, inter-company hierarchy that had developed duringthe war. Indeed, despite the fact that the occupa-tion set out to eliminate the zaibatsu from the Japa-nese economy economic reforms initiated by theoccupation actually helped to institutionalize atighter, better organized, more zaibatsu-like net-work architecture throughout Japan’s businesssystem. Corporate financial policies across Japa-nese industry saw an increase in bank financingand a continued decline of dividend payouts ascompanies reinvested profits into plant expan-sions and new businesses. And a new generationof professional managers took over Japan’s larg-est companies, with managerial pay becoming lessand less tied to company performance, whilelabor markets became increasingly internalized,as they had already become in zaibatsu enterprises.

Interestingly after largely disappearing fromthe Japanese lexicon, the zaibatsu terminology has

zaibatsu 481

reappeared in recent years. One reason for this isthe revision of the Commercial Code in 1997which lifted the ban on holding companies thathad been originally imposed to dissolve thezaibatsu. While the primary intentions of the re-form were to facilitate the closing or selling offailing businesses, critics pointed to the irony ofreturning to a prewar form of organization torestructure Japanese industry. Some also worriedthat lifting the ban would revive conditions thathad led to the economic concentration and mili-tary expansion of the 1930s.

This terminology has also re-appeared in thecontext of Japan’s emerging information indus-tries. Masayoshi Son, founder of Softbank, isamong those who now refer to his emergingempire as a “zaibatsu” to tap into historical con-nections to Japan’s earlier era of entrepreneurialcapitalism. The key feature of this model is thatSoftbank seeks to gain implicit control in ven-

tures by taking minority stakes in ventures andthen building in synergies through a web of cross-investments in sales and technology much as thezaibatsu did before the war.

Further reading

Caves, R. and Uekusa, M. (1976) Industrial Organizationin Japan, Washington, DC: The Brookings Institu-tion.

Gerlach, M.L. (1992) Alliance Capitalism: The Social Or-ganization of Japanese Business, Berkeley CA: Univer-sity of California Press.

Gordon, A. (1985) The Evolution of Labor Relations inJapan: Heavy Industry, 1853–1955, Cambridge, MA:Council on East Asian Studies, Harvard Univer-sity.

Hadley E. (1970) Antitrust in Japan, Princeton, NJ:Princeton University Press.

MICHAEL GERLAGH

482 zaibatsu

5S campaign 153–4, 1647–11 Japan 399–400

7dream.com 317distribution system 118e-commerce 126Ito-Yokado 206konbini 268, 269

7dream.com 317

Abegglen, J.C. 1accounting 2–4acquisition of technology 152–3administrative guidance (gyosei shidd) 4–6, 40advertising 6–7

creative houses 94–6Dentsu 108motorcycle industry 322see also marketing

Africa 224–5after-sales pricing (ato-gime) 7–9, 368aging

domestic markets 131lifetime employment 282

agricultural cooperatives 9–10Central Union of 65–6

agricultural policy 10–12aid, foreign 154–5air pollution 142–3airline industry 12–15

see alsoindividual airlinesAjinomoto 15–16Akihabara 16–17All Nippon Airways (ANA) 12–14alliances

airline industry 13–14strategic 421–2, 446–7technology acquisition 153

allowances 17–20amakudari (descent from heaven) 20–3

bid-rigging (dango) 104Ministry of Construction 305Ministry of Finance 308

America see United States of AmericaAmerican occupation 23–6

Anti-monopoly Law 63dissolution of toseikai 173Dodge, J.M. 119enterprise unions 141post-Second World War recovery 363–5

amino acids 15–16ANA see All Nippon Airwaysancestor worship 183–4ancestry burakumin 56antei kabanushi (stable shareholders) 400Anti-monopoly law

cross-shareholdings 98Fair Trade Commission 150–1

anti-trust measuresDepressed Industries Law (1978) 113post-Second World War recovery 364

Apple Computers 421appraisal systems 26–9appreciating yen (AY) (high yen) 29–31Arabian Oil 31aristocracy 472–3Asahi Bank 70ASEAN countries 128Asia

economic crisis 127–8wartime legacy 473

assembly plants 423–4assets 2, 3, 52Association of Corporate Executives 211ato-gime see after-sales pricing

Index

484 Index

auction houses (primary wholesalers) 67–8,459–61

audits 4, 73Australia 225–7

just-in-time 226kaizen 226Mitsui 226quality control 226Toyota 225

Automobile Manufacturers Association(JAMA) 212–14

automotive industry 32–5, 212–14Canadian investments 227Honda Motor 179–80New United Motor ManufacturingIncorpo-rated 330–1Nissan 337Toyota 449–53United States of America 245–6

autonomous control (jishu kanri) 426AY see appreciating yen

bad debt 36–7, 46bakufu (tent governments) 437, 438balance sheets 4balanced budget principle 307Bank of Japan (BOJ) 37–9

bubble economy 52creation 43role in banking crises 42window guidance (madoguchi shido) 286–7

Bank of Tokyo 39banking

bad debt 36–7corporate finance 89–91corporate governance 92–3crises 41–3cross-shareholdings 99–100industry 43–6main bank system 288–91Nomura Securities 337–9Norin Chukin Bank 339–40postal savings 366–8regulation 53scandals 103tan system 302window guidance (madoguchi shido) 286–7

Banking Act of 1982 39–41bankruptcies 46–9

banto 49–50barriers to trade 453–6Basic Law of Food, Agriculture and Rural

Areas 11–12behavior, giri 169–71benefits see non-salary compensationbento 268bid-rigging (dango) 103–5Big Bang reforms 279Big Four Pollution Suits 57–8board of directors (torishimariyakukai) 443–6BOJ see Bank of Japanbonds

corporate finance 89, 90government 61Nomura Securities 337–9

books, history of imports 146booms, economic 177, 208–9bottom-up decision making 50–1

nihonteki keiei 333organizational learning 346

box lunches see bentobrand stores 117Britain see United Kingdombrokerages, Tsukiji market 460bubble economy 44, 51–4

Asian economic crisis 127capital markets 61–2corporate finance 91corporate governance 93cross-shareholdings 99Heisei boom 177United States of America 246

Buddhism 54–5, 183–4budget, national 307building see construction industryburakumin 55–7bureaucracy

amakudari 20–3shingikai 403

bushi (warriors) 392business ethics 57–9business negotiation, naniwa bushi 325buyers as stakeholders 93buying and selling 75

calculators 138Canada

automotive industry investment 227

Index 485

business 227–8Honda 228Toyota 228

Canon 60–1capital

liberalization 310Toyota 255

capital markets 61–2, 157capitalism

dual structure theory 122–3Japanese version 53, 131–2Shibusawa, E. 401–3

career paths of salarymen 390–1“carrot and stick” enforcement 5–6cars see automotive industrycartels 62–5

after-sales pricing (ato-gime) 8automotive industry 34Fair Trade Commission 151see also dango

castes 392, 436, 472–3category killer retailers 116, 118–19celebrities in advertising 7cell phones see mobile phonesCentral Union of Agricultural Cooperatives

(Zenchu) 65–6central wholesale markets 66–9centralization, strategic 480certification, ISO 9000 204–5chain stores

Daiei 101–2discounters 115–16Nakauchi, Isao 324

Chamber of Commerce 215chemical industry

Ajinomoto 15–16competition 75–6Marubeni 293

children 133–6China

Buddhist influence 54business 229relations 473Toyota 229see also Asia;Southeast Asia

Chubu region 199Chugen 69–70citizenship, corporate 59city banks 44–5, 70–2

civil code, contracts 88civil engineering see construction industrycivil servants 20–3, 304–5climate 168cliques see habatsucohort recruitment 398Cold War 154, 364–5Cole, R. 72–3collective bargaining 141Commercial Code 73–4

accounting 2, 3–4corporate governance 92daihyoken 102

common cause variation 107communication, negotiations 326–9companies, foreign 155–8compensation (remuneration)

allowances and non-salary benefits 17–20human relations management 181–2

compensation (restitution) 57–8competition 74–7

after-sales pricing (ato-gime) 7–8Akihabara electronic products 16appraisal systems 28deregulation 113–15Fair Trade Commission 150–1financial market liberalization 276–7foreign companies in Japan 156–7impact on lifetime employment 282–3motorcycle industry 321–2pharmaceuticals industry 361–2technology domain selection 152see also excessive competition

computer industry 77–80, 325–6concrete ceilings, women in corporate

environment 476conflict resolution, negotiations 326–7consolidated financial statements 4construction industry 80–3Construction, Ministry of 303–6consumer credit 393–4consumer movement 83–6consumption tax 86–7contract employees 87–8contracts 88–9control associations (toseikai) 173, 199control methods 259convenience stores (konbini) 268–70,

399–400convoy system 42, 47, 72, 276, 287, 307–8

486 Index

cooperativesagricultural 9–10research 382–3Very Large-Scale Integrated Circuit Re-search 469–70

copyright 356–7Corporate Executives Association 211corporate finance 89–91corporate governance 92–4

bank-centered system 53main bank system 288–91takeovers 431–2

Corporate Income Tax Law 2corporate warriors (salarymen) 390–1corporations, business ethics 57–9Council for Science and Technology (CST)

395creative houses 94–6credit activities, agricultural cooperatives 9–10Crew Resource Management (CRM) 14–15crime 414crises

Asian economic 127–8banking 41–3, 44

CRM see Crew Resource Managementcross-shareholdings 96–100

corporate finance 91mochiai 318–19

CST see Council for Science and Technologyculture, group 7currency appreciating yen 29–31customers, one-to-one marketing 343–4

DAC see Development Assistance CommitteeDaiei 101–2, 115daihyoken 102Daiichi Kangyo Bank (DKB) 102–3daimyo 437, 438Daiwa Bank 70dango 103–5DBJ see Development Bank of Japandeath from overwork (karoshi) 391debt

bad 36–7bankruptcies 46–9corporate finance 89–90equity ratios 105–6

decentralization 480decision making

bottom-up 50–1, 333

human relations management 181influence of W.E.Deming 106–7nemawashi 329–30ringi seido 388–9

decline, industrial 110deference 397deliberation councils (shingikai) 403–4Deming Prize 204–5Deming, W.E. 106–8democratization 24–5demographics

economic growth 130–1foreign workers 158–9

Dentsu 108department stores 109–10

Ito-Yokado 399Mitsukoshi 317–18retail industry 385–7

depressed industries 110–13deregulation 113–15

agriculture 11airline industry 12–13, 15Asian economic crisis 127banking 42consumer movement 84financial markets 277–8industrial policy 197Japanese economy 52–3see also regulation

descent from heaven see amakudaridesigns, patent system 358developing countries 456development

overseas 354–5product 370–2

Development Assistance Committee (DAC)154

Development Bank of Japan (DBJ) 216developmentalism 132differentials 18dioxin pollution 144, 145directors (daihyoken) 102directors (torishimariyaku) 443–6discounters 115–16discrimination 56, 407disputes 326–7distribution 116–19

automotive industry 33–4foodstuffs 66–9konbini 269

Index 487

Tsukiji market 459–61division system, Matsushita Electric 297DKB see Daiichi Kangyo BankDodge, J.M. 119Dokoh, T. 119–20dollar shock (Nixon) 120–1domains, technology 152Domei 412domestic market 129Dore, R. 121double-loop learning 345–6downsizing, white-collar workers 474Draft Law on Temporary Measures for

Promotion of Specified ManufacturingIndustries 310–11

dual structure economy 47, 122–3, 432Dutch Learning 146, 161duty, giri 169–71

e-commerce 124–7Earth Summit 1992 408earthquakes 169ecological issues see environmental and

ecological issueseconomic growth 51, 74–5, 128–31, 187–8Economic Organizations, Federation 217–18economic reforms 363–5economics

growth 51, 74–5, 128–31, 187–8ideology 131–2scale 129–30

Edo culture 438–9see also Tokugawa period

education 133–6American occupation reforms 26overseas 350–1women 475–6

EEOL see Equal Employment Opportunity Lawefficiency

industrial movement 188–90multinational enterprises 251–2production 462–3total productive maintenance 447–9

Electric Town see Akihabaraelectrical products 16–17electronic games 335–6electronics industry 136–9

Matsushita Electric Industrial Corporation294–5Sharp 401

Sony 415–16Toshiba 446–7United States of America 246

elementary schools 134employees

contract 87–8corporate governance 93nihonteki keiei 332–4office ladies (OL) 341–2outplacement 347–8see also employment; industrial relations;labor force

Employers’ Associations Federation 218–21employment

airline industry 13Asian economic crisis 127–8dual structure theory 122–3enterprise unions 139–42foreign workers 158–60general trading companies 166internal labor markets 202–4labor movement history 177–9lifetime 280–3, 332Ministry of Labor 312–15permanent employees 359white-collar workers 474women 341–2, 474–7see also employees; industrial relations; laborforce; unemployment

engineers: Ono, T. 344enterprise groups 191–3enterprise unions 139–42entrepreneurs 479–80environmental and ecological issues 142–5

ISO 14000 205Ministry of International Trade and Indus-try 311

Equal Employment Opportunity Law (EEOL)476

equity financing, corporate finance 90–1espionage 59, 167ethics 57–9, 169–71examinations 134–5excessive competition (kato kyoso)

concept 76industrial decline 111motorcycle industry 322

exchange of knowledge, shukko 404–6exchange rates

appreciating yen 29–31

488 Index

dollar (Nixon) shock 120–1experience curves, motorcycle industry 321–2experimental design 431Export-Import Bank of Japan 148–9exports

technology 147–8see also imports

failed banking institutions 41–2Fair Trade Commission (FTC) 150–1family allowance 18–19family separation (tanshin funin) 391farmers 9–10, 26FDI see foreign direct investmentFederation of Economic Organizations 217–18Federation of Employers’ Associations 218–21feedback, appraisal systems 27, 29fiefdoms 392film, photographic 160FILP see Fiscal Investment and Loan Programfinance

companies 393–4corporate 89–91market liberalization 276–80tan system 302see also banking

Finance, Ministry of 306–9financial cliques (zaibatsu) 479–82financial keiretsu 190–1, 318financial reporting 3–4financial services

Nomura Securities 337–9Norin Chukin Bank 339–40postal savings 366–8

firm strategies for technology 151–3Fiscal Investment and Loan Program (FILP)

307, 366–8floating exchange rate system, appreciating yen

30food

Ajinomoto 15–16consumer movement 83, 85self-sufficiency 11, 12wholesale markets 66–9

foreign aid 154–5foreign companies in Japan 155–8, 361foreign direct investment (FDI) 248, 351–3

American 463–5appreciating yen 30

foreign relations, Meiji restoration 300–1

foreign trade, banking 45foreign workers 158–60

Germany 231Nikkei jin 335research and development 354–5

franchises7–11 Japan 399–400automotive industry 33–4

FTC see Fair Trade CommissionFuji Photo Film 160Fukuzawa, Y. 160–1

gaku-batsu (university cliques) 176, 266games, Nintendo 335–6GATT see General Agreement on Tariffs and

Tradegenba-shugi (shop-floor approach) 162–5genchika see localizationGeneral Agreement on Tariffs and Trade

(GATT) 454, 455General Council of Trade Union (Sohyo) 411–13General Motors (GM) 330–1general trading companies (sogo shosha) 165–8

Australia 226ITOCHU 206–7Mitsubishi 316–17Mitsui 317

genkyoku (original bureaus) 309geography 168–9Germany

business 229–32foreign employees 231history 229–30labor laws 230–1middle managers 231

gifts 69–70, 88giri 169–71, 184global management 250globalization

Sony 415–16strategic partnering 421

GM see General Motorsgoal setting 151–2goso sendan/goso sendan hoshiki see convoy systemgovernance, corporate 92–4government

bubble-related changes 53see also civil servants; individual Ministries;Liberal Democratic Party

group culture

Index 489

advertising 7habatsu 175–6ie 183–6

group orientated capitalism 402growth, economic 51, 74–5, 128–31guilds (za) 171–4gundan (army units) 433gyokai (trade associations) 460gyosei shido see administrative guidance

habatsu 175–6, 266Hatoyama, I. 273Hayakawa, T. 176–7health care 10Heisei boom 177high yen see appreciating yenhigher education 135hirashain see permanent employeesHitachi 238Hokkaido Takushoku Bank 71, 72holidays 19–20Honda 179–80

Canada 228Italy 233motorcycle industry 320–3Honda, S. 180–1

Hosonomics 127household units, ie 183–6housewives 475housing 19, 82–3human relations management 181–2human resource adjustments 347–8

i-mode (Internet) 125IBJ see Industrial Bank of JapanIBM 77, 79

antitrust investigations 409software cloning 408strategic partnering 421

ideologyanti-war 472economic 131–2middle-class housewife 475

ie 183–6Ikeda, H. 186, 187, 274ILMs see internal labor marketsimage, advertising 6immigration 159imports

technology 145–7see also exports

Inamori, K. 186Income Doubling Plan 187–8, 274, 395indirect taxation 86–7Industrial Bank of Japan (IBJ) 45industrial efficiency movement (nouritsu undou)

188–90, 462–3industrial groups see keiretsuindustrial policy 254

administrative guidance 5–6cartels 62–5

industrial relations 139–42, 177–9, 220, 240Industrial Standards 247–8industrialization

economic ideology 132environmental and ecological issues 142–5

industries, depressed 110–12industry

airline 12–15associations 199–202, 247automotive 32–5, 449–53banking 43–6chemical 15–16, 293computer 77–80construction 80–3dual structure theory 122–3electronics 136–9, 294–5, 401, 415–16, 446–7finance 302, 393–4see also bankingfood 15–16manufacturing 351–4, 423Meiji restoration 300motorcycle 320–3petrochemical 75–6pharmaceutical 15–16, 360–2policy 193–7primary regions 197–9research and development 396retail 16–17, 385–8, 427–8, 441–3scale economics 129–30seafood 459–61small and medium-sized enterprises 406–7software 408–11steel 64–5subcontracting 422–5telecommunications 433–6textile 457transport 478

490 Index

venture capital 466–9inflation 365information exchange 327–8information gathering

bottom-up decision making 50general trading companies (sogo shosha) 167–8

information sharing 469information technology 124–7inheritance customs 184initial public offering (IPO) 467–8innovation 153, 296–7intangible assets 2intellectual property 58–9, 361intermediate wholesalers (nakaoroshi gyosha) 460internal labor markets (ILMs) 202–4internal supply chains (kigyouai sapurai chien)

430International Organization for Standardization

(ISO) 204–5international trade

barriers 453–6negotiations 456–9

International Trade and Industry, Ministry of309–12

internationalization 399Internet

e-commerce 124–7NEC 325–6slow uptake 435–6

inventories 2, 259see also kanban

investmentaccounting 2–3American 463–5appreciating yen 31Canadian automotive industry 227economic growth 129–30patterns 248–50shareholder weakness 400–1United Kingdom 243–4venture capital industry 466–9World War II 248–9

IPO see initial public offeringippanshoku (general clerical track) 476Iran 242–3iron triangle 440Ishikawa, K. 204

ISO see International Organization forStandardi-zation

Italy

business 232–4Honda 233Japan External Trade Organization 232Sony 233

Ito, D. 122Ito-Yokado 206, 399ITOCHU 206–7Iwasaki, Y. 207–8Iwato boom 177Izanagi boom 177, 208–9

JAFCO see Japan Associated Finance CompanyJAL see Japan AirlinesJAMA see Japan Automobile Manufacturers

AssociationJapan Air System (JAS) 12–14Japan Airlines (JAL) 12–14, 210–11Japan Associated Finance Company (JAFCO)

466–7Japan Automobile Manufacturers Association

(JAMA) 212–14Japan Bank for International Cooperation

(JBIC) 149Japan Chamber of Commerce (JCCI) 215Japan Development Bank (JDB) 215–17Japan Electronic Computer Company (JECC)

77–8Japan External Trade Organization (JETRO)

157, 217, 232Saudi Arabia 242United Kingdom 243United States of America 245

Japan Fair Trade Commission (JFTC) 63–5Japan, Inc. 221–2Japan Productivity Center for Socio-Economic

Development JPC-SED) 223Japan Socialist Party (JSP) 411–12Japan Software Company 409Japan Standards Association (JSA) 416–17Japanese Confederation of Labour (Domei) 412Japanese Industrial Standards (JIS) 247–8,

416–18, 455Japanese management system, banto 49–50Japanese-style management see nihonteki keieiJapanese Trade Union Confederation see RengoJapanization, British industry 244JAS see Japan Air SystemJBIC see Japan Bank for International

CooperationJDB see Japan Development Bank

Index 491

JECC see Japan Electronic Computer CompanyJETRO see Japan External Trade OrganizationJFTC see Japan Fair Trade Commissionjidoka (self-regulation) 451jigyosha dantai see trade associationsJiminto see Liberal Democratic PartyJIS see Japanese Industrial Standardsjishu kanri (autonomous control) 426JIT see just-in-time approachJiyu Minshu To see Liberal Democratic PartyJohnson, C. 132, 254joint stock corporation (kabushiki kaisha)

255–6, 263joint ventures 256–7

Latin America 237Taiwan 234Toyota 256United States of America 246

JSA see Japan Standards AssociationJSP see Japan Socialist Partyjuku 135Juran, J.M. 257just-in-time (JIT) approach 257–9

7–11 Japan 269Australia 226kaizen 258kanban 261multinational enterprises 251–2operational efficiency 251–2quality management 258Toyota production system 258see also supply chain management

kabushiki kaisha 255–6, 263kaizen 260–1

airline industry 14Australia 226just-in-time approach 258multinational enterprises 252–3quality management 377–8Southeast Asia 240TPS 453

kanban 258, 261Kanebo Company 425–6Kansai culture 261–3Kansai region 198–9kansayaku 263–4Kanto 262Kao 264

karoshi (death from overwork) 265, 391kato kyoso see excessive competitionKeidanren 220–1Keio University 266keiretsu (industrial groups) 190–3, 318, 427, 429kibo kakaku (suggested retail price) 368–9kigyouai sapurai chien (internal supply chains) 430kinship 184, 185Kirin Brewery 266–7Kishi, N. 273–4kizuki system 14knowledge 107Kobe earthquake 124Koike, K. 267Komiya, R. 268konbini 268–70Korea 234–7Korean War 365Kyocera 270kyosei 60–1

Labor, Ministry of 312–15labor force 314

contract employees 87–8dual structure theory 122–3economic growth 130–1foreign workers 158–60mobility 391white-collar workers 474women 474–7see also employees; employment; industrialrela-tions

labor laws, Germany 230–1labor markets

seniority promotion 397–9takeovers 431–2

labor movement 177–9labor negotiations 219–20labor reforms 364ladies, office 341land reform

agricultural cooperatives 9agricultural policy 10–11American occupation 26post-Second World War recovery 364

Large Retail Store Law 109–10, 271–3Latin America 237laws

accounting 2, 3–4

492 Index

agriculture 9, 11–12Banking Act of 1982 39–41bankruptcy 48–9Commercial Code 73–4environmental protection 142–3, 144–5Equal Employment Opportunity Law(1986) 476investment 466New Bank of Japan 38–9retail 406trade 395see also individual laws

LCA see life-cycle assessmentLDP see Liberal Democratic Partyleadership 440lean production 450–3learning, organizational 344–7leaves of absence 20

see also holidaysleverage, debt/equity ratios 105–6Liberal Democratic Party (LDP) 218, 219,

273–6leaders 273–5Tanaka 433

liberalizationconsumer movement 83, 84–5financial markets 276–80trade and capital 310

life-cycle assessment (LCA) 145lifetime employment (shushin koyo) 249, 280–3

nihonteki keiei 332United States 246white-collar workers 474

limited liability corporations see yugen gaishaloan sharks (sarakin) 393–4loans

bad debt 36–7corporate finance 89

lobbying 200, 201–2localization 283–5Long-Term Credit Bank of Japan (LTCB)

285long-term credit banks 45LTCB see Long-Term Credit Bank of Japan

MacArthur, Douglas 24–5madogiwa zoku 286madoguchi shido (window guidance) 286–7mafia (yakuza) 393main bank system 288–91

corporate finance 89–90cross-shareholdings 99financial keiretsu 192

managementairline industry 13–15appraisal systems 26–9automotive industry 32banto 49–50convenience stores 399Deming, W.E. 106–8Korea 235–6naniwa bushi 325nihonteki keiei 332–5openness 420quality 375–9sacred treasures 397Southeast Asia 240–1supply chain 429–30, 452–3Taiwan 235–6three pillars 332–3Ueno, Y. 462–3women 476–7

manufacturingautomotive industry 32–5overseas production 351–4subcontracting 423

market debt instruments see bondsMarket-Orientated Sector-Specific (MOSS)

talks 458market-oriented adjustments 111, 112marketing 291–2

one-to-one 343–4marketing information system (MIS) 264markets

capital 61–2central wholesale 66–9domestic 129internal labor 202–4

Marubeni 292–3maruyu 293–4mass media see mediaMatsushita

Mexico 238televisions 227

Matsushita Electric Industrial Corporation(MEI) 294–5

Matsushita, K. 295–8media

advertising 7creative houses 94–5

Index 493

Dentsu 108Nihon Keizai Shimbun 331

meetings, industry and trade associations 200MEI see Matsushita Electric Industrial

CorporationMeiji restoration 194, 298–301MEMA see Motor and Equipment

Manufacturers Associationmerchandising strategies 428MERCOSUR see Southern Common Marketmercury poisoning 57, 142mergers 220–1Mexico 238

see also Latin AmericaMiddle East 241–3middle managers, Germany 231militant nationalism 471mimaikin (sympathy payment) 57mimic strategies 152Minamata pollution case 57, 142minimum wage policy 313–14Ministry of Agriculture, Forestry and Fisheries

(MAFF) 67Ministry of Construction (MOC) 303–6Ministry of Education (MOE) 133–4Ministry of Finance (MOF) 306–9

administrative guidance 5, 6bad debt 37Bank of Japan 38–9, 43Banking Act of 1982 39–41city banks 71–2history 255mofutan 301–3multinational enterprises 253

Ministry of International Trade and Industry(MITI) 309–12cartels 63–4depressed industries 111–12industrial policy 194–5Japan External Trade Organization 217Japan, Inc. 221multinational enterprises 252

Ministry of Labor (MOL) 219, 312–15Minomura, R. 315–16MIS see marketing information systemMITI see Ministry of International Trade and

IndustryMitsubishi 316–17

origins 207–8Shoji, Australia 225, 226

United Kingdom 244United States of America 246

Mitsui 317Australia 226Bussan 226Minomura, R. 315–16United Kingdom 244

Mitsukoshi 317–18Mizuho Financial Group 70MNEs see multinational enterprisesmobile phones 435–6MOC see Ministry of Constructionmochiai 318–19modernization, Income Doubling Plan 187MOF see Ministry of Financemofutan 301–3MOL see Ministry of Labormonetary policy

Bank of Japan 37–8bubble economy 52

monopoliesAmerican occupation 63NTT 433, 434–5Sumimoto Corporation 426–7

morality giri 169–71Morita, A. 319–20Morita, Y. 320MOSS see Market-Orientated Sector-Specific

talksmotivation, Deming, W.E. 107–8Motor and Equipment Manufacturers

Association (MEMA) 214motorcycle industry 320–3

Honda Motor 179–80see also automotive industry

multinational enterprises (MNEs) 250–4features 252–3profitability 252–3

multinationalization 283–5mutual aid services 10mutual (sogo) banks 45

Nagoya 199nakama see trade associationsnakaoroshi gyosha (intermediate wholesalers)

460Nakauchi, Isao 324naniwa bushi 325naniwa melodies see naniwa bushiNASDAQ Japan 468

494 Index

National Income Doubling Plan see IncomeDoubling Plan

National Railways 222–3National Research Institutes 394National Tax Agency 394NEC 246, 325–6negotiations 325, 326–9nemawashi 276, 329–30nenko joretsu (seniority promotion) 280, 397–9neoclassical economic growth 129, 131New Bank of Japan Law 38–9New United Motor Manufacturing

Incorporated (NUMMI) 330–1, 450, 453newspapers, Nihon Keizai Shimbun 331Nihon Keizai Shimbun 331Nihon Rodo Kumiai Sorengokai see Rengonihonteki keiei 332–5Nikkei see Nihon Keizai ShimbunNikkei jin 335Nintendo 335–6Nippon Telegraph and Telephone (NTT)

336–7, 433–6Nissan 244, 246, 337Nixon shock see dollar shocknobility 473nokyo see agricultural cooperativesNomura Securities 337–9non-performing loans see bad debtnon-salary compensation 17–20non-tariff barriers 454–6Nonaka, Ikujiro 339Norin Chukin Bank 339–40nouritsu undou see industrial efficiency movementNTT see Nippon Telegraph and TelephoneNUMMI see New United Motor Manufactur-

ing Incorporated

obligation, giri 169–71Occupation of Japan see American occupationochugen (gifts) 69–70ODA see official development assistanceoffice ladies (OL) 341–2official development assistance (ODA) 154–5Ohmae, K. 342–3oil 31, 196

see also petrochemical industryOJT see on-the-job-trainingOL see office ladieson-the-job-training (OJT) 267

one-to-one marketing 343–4Ono, T. 257, 344operating systems (OS) 408–10operational efficiency 251–2oral administrative guidance 5organizations

bottom-up decision making 50–1Deming, W.E. 106–7habatsu 175–6hierarchical 480learning 344–7partnership 469–70quality management 378–9ringi seido 388–9seniority promotion 397–9Shibusawa E. 401–3shukko 404–6sokaiya 419–20suggestions 425–6torishimariyakukai 443–6TPM 447–9white-collar workers 474zaibatsu 479–82zaikai 402

organized crime (yakuza) 414OS see operating systemsOsaka 198–9, 262–3outplacement 347–8overseas

development 354–5education 350–1motorcycle manufacturing plants 322–3production 249, 322–3, 351–4research 354–5small and medium-sized enterprises348–50

part-time workers 88see also employees

partnerships, strategic 421–2, 453Patent Office 394patents 356–9, 357–8peer groups 27pensions 3performance appraisal see appraisal systemsperipheral employees 280, 281permanent employees (hirashain or sieshain) 359

see also salarymenpetrochemical industry

after-sales pricing (atogime) 8

Index 495

Arabian Oil 31competition 75–6

pharmaceutical industry 360–2Ajinomoto 15–16

plans, economic 187–8plant species, patent system 358platform teams 450poka-yoke (mistake-proofing) 451policy

agricultural 10–12aid 155banking 43–6industrial 5–6, 62–5, 130, 193–7minimum wage 313–14monetary 37–8, 52science and technology 394–7

political governance, bubble-related changes 53politicians, Tanaka 432–3politics, depressed industries 111–13pollution

business ethics 57environmental and ecological issues142–5

population 168, 169positive listing 454post-Second World War recovery 363–6postal savings 216, 366–8power structures 21prefabricated housing 82–3presidents’ clubs 190–1pressure groups 83–6price 368–9

after-sales (ato-gime) 7–9, 368competition 75, 152pharmaceuticals industry 361retail price maintenance (saihanbai kakaku ijikoi) 369suggested retail (kibo kakaku) 368–9

price-fixing (dango) 103–5Prince Shotoku’s Seventeen-Article

Constitution 369–70privatization, NTT 433, 435privileged elite 473product development 370–2production

control methods 259efficiency 447–9, 462genba-shugi (shop-floor approach) 162–5overseas 351–4

profitability 252–3

promissory notes 372–3promotion

nihonteki keiei 332–3seniority 397–9

protectionism 77pull system 261purging, post-war 471–2

quality control circles (QC circles) 374–5quality management 375–9

Deming, W.E. 106–7genba-shugi 164Industrial Standards 247Ishikawa, K. 204Juran 257just-in-time approach 258Southeast Asia 240see also kaizen

R & D see research and developmentradio 136, 137railways 16–17ratios, debt/equity 105–6recessions 127–8recruitment 181recycling 143, 145reforms

American occupation 25–6Big Bang 279economic 363–5education 26, 133–4labor, post-Second World War recovery364land 9, 10–11, 26, 364postwar 472tax 86

regional banks 45regular employees see permanent employeesregulation

administrative guidance 4–6banking 42, 53, 302–3e-commerce 125trade associations 201see also deregulation

regulationsaccounting 2–4environmental 144–5wholesale markets 67–8

relationship contracting 422relationships 183–6, 327

496 Index

religionBuddhism 54–5ie 183–4Shintoism 54–5

Rengo (Nihon Rodo Kumiai Sorengokai) 220,380–2

reparations, war 154reporting, financial 3–4research cooperatives 382–3research and development (R & D) 396

computer industry 78construction industry 81overseas 354–5pharmaceuticals industry 361–2product development processes 370–2

reserves, accounting 3responsibility

business ethics 57–8decision making 51

restructuring (risutora) 383–5retail industry 385–8

7–11 Japan 399–400Akihabara 16–17Chugen season 69Daiei 101–2department stores 109–10discounters 115–16konbini 268–70Large Retail Store Law 109–10, 271–3Mitsukoshi 317–18prices 368–9superstores 427–8tonya 441–3

retirement, amakudari 20–3rice 11Rincho (Second Provincial Commission on

Administrative Reform) 114ringi-seido (ringi-sho) 50, 388–9risk, debt/equity ratios 105–6risk-avoidance, appraisal systems 28risutora see restructuringrules see regulationsruling caste 392

sacred treasures 397, 436saihanbai kakaku iji koi (retail price maintenance)

369sakoku-rei 438Sakura Bank 70salaries see compensation; wages

salarymen 286, 390–1samurai 390, 391–3, 438sankin kotai 438Sanwa Bank 70–1sarakin 393–4Sato, E. 274Saudi Arabia

business 242JETRO 242unemployment 242

savingsbanking industry 45–6maruyu 293–4postal 366–8

SBICs see Small Business InvestmentCompanies

scale economics 129–30scandals

banking 103business ethics 57, 58dango 104

SCAP (Supreme Commander of the AlliedPowers) 24–6labor laws 179labor legislation 141purges 471–2

schools 134–5science and technology policy 394–7scientific management 462SCM see supply chain managementseafood industry 459–61Second Provincial Commission on

Administrative Reform (Rincho) 114secondary schools 134–5securities

accounting 2Nomura Securities 337–9

Securities and Exchange Law 2, 3–4securitization 40seisaku toshika (strategic investors) 400seishain see permanent employeesSelf Defense Force 472self-regulation 201, 451selling see buying and sellingsemiconductors

computer industry 78electronics industry 137, 138patent system 358

seniority promotion (nenko joretsu) 280, 397–9serial equity 398

Index 497

serinin (auctioneers) 460service sector investment, UK 244–5Seventeen-Article Constitution, Prince

Shotoku’s 369–70shareholder weakness 400–1shareholders

governance 97influence 443–5meetings 92sokaiya 413–14, 444stable 400trusteeship 443

sharescross-shareholdings 96–100equity financing 90–1

Sharp 176–7, 401Sherman Anti-trust Act 62Shibusawa, E. 401–3shingikai 403–4Shingo, S. 259, 404shinjinrui 265Shinohara, M. 122shinpan (sales finance corporations) 393–4Shintoism 54–5shipping 207–8shitauke (subcontracting system) 422–5shoguns, Tokugawa period 436–9shop-floor approach see genba-shugishopping centres 387

see also retail industryshort-term lending institutions 44–5Shotoku’s Seventeen-Article Constitution,

Prince 369–70shukko 384, 404–6shushin koyo see lifetime employmentSigma Project 410single-loop learning 345–6SM see supermarketsSmall Business Investment Companies (SBICs)

466small and medium-sized enterprises (SMEs)

127–8, 348–50, 406–7social contributions, business ethics 59social marketing 407–8social reform, Shibusawa, E. 401–3societal stratification 55–6Socio-Economic Development Productivity

Center 223software 78–9, 408–11sogo (mutual) banks 45

sogo shosha see general trading companiessogoshoku (management track) 476Sohyo 411–13sokaiya 413–14, 420, 444Sony 415–16

Italy 233Mexico 238origins 319–20United Kingdom 244

sougou suupaa 427–8Southeast Asia

business 238–41Japanese management styles 240–1kaizen 240labor relations 240management styles 240–1quality control 240Toyota 240–1post World War II recovery 239

Southern Common Market (MERCOSUR)237

special cause variation 107Spring labor negotiations 219–20stable shareholders 400stakeholders, governance 92–3, 97standards

accounting 1–3industry associations 247ISO issues 204–5setting 416–19technical 152trade associations 247

statistics, unemployment 463steel 64–5, 147–8stock exchanges 61stock market 97stockholders’ general assembly 413–14, 419–20stocks, Nomura Securities 337–9stores see retail industrystrategic centralization 480strategic management, airline industry 13strategic partnering 421–2strategies, technology development 151–3stratification of society 55–6strikes 179subcontracting system 422–5sudden death syndrome see karoshisuggested retail price (kibo kakaku) 368–9suggestion systems 425–6suicide 49

498 Index

Sumimoto Corporation 426–7Sumitomo Bank 71supermarkets (SM)

Daiei 101–2discounters 115Ito-Yokado 206see also kanban

superstores 427–8suppliers

automotive industry 32–3stakeholders 93subcontracting 422–5tiered 452

supply chain management (SCM) 429–30,452–3

supply and demand 7–8Supreme Commander of the Allied Powers see

SCAPsurveys, Ministry of Labor 313suupaa (superstores) 427–8sympathy payment see mimaikin

tacit knowledge 346Taguchi, G. 431Taiwan

business 234–7joint ventures 234management features 235–6

takeovers 431–2tan system 301–3Tanaka, K. 274–5, 432–3tangible assets 2tanshin funin (family separation) 391tariffs, international trade 453–6, 457–8tax, consumption 86–7tax evasion, sarakin 394taxation, accounting 3Taylorism 188–90teams, genba-shugi (shop-floor approach) 162–5technology

acquisition 394–7airline industry 14–15export and import 145–8firm strategies 151–3see also science and technology policy

telecommunications 433–6deregulation 114e-commerce 124–7electronics industry 136–9

Nippon Telegraph and TelephoneCorporation 336–7

televisionselectronics industry 136, 137–8Matsushita 227

temporary workers 88, 127, 128see also employees

tertiary wholesalers (tonya) 117–18textile industry 457Textile Wrangle 457“thirty day due” payment arrangements 118three fundamental labor laws 313three pillars (sacred treasures) 332–3, 397–9,

436see also enterprise unions; lifetimeemployment; seniority promotion

tiered suppliers 452Tokai Bank 71Tokuanho see depressed industriesTokugawa Bakufu collapse 402Tokugawa Ieyasu 436, 438Tokugawa period 226, 390, 391–3, 436–9

ending 298–9ie 184, 185Osaka 262policy 394stratification system 55–6trade associations (nakama) 171, 172–3

tokushu kabunushi 413Tokyo 198Tokyo, Bank of 39Tokyo-Mitsubishi Bank 39, 70Tokyo Stock Exchange 61Tokyo University 439–40Tokyo-Yokohama industrial region 197–8tonya (tertiary wholesalers) 117–18, 441–3torishimariyakukai 263–4, 266, 443–6toseikai (control associations) 173Toshiba 421, 446–7total productive maintenance (TPM) 447–9total quality management, ISO 9000 204–5Toyota 330–1, 449–50

Australia 225Canada 228capital 255China 229joint ventures 256just-in-time system 257–9Southeast Asia 240–1supply chain management 429

Index 499

United Kingdom 244United States of America 246

Toyota production system (TPS) 450–3Toys R Us 118–19TPM see total productive maintenanceTPS see Toyota production systemtrade

developing countries 456general trading companies (sogo shosha) 165–8international 453–9liberalization 310negotiations 456–9see also exports; imports

trade associationsgyokai 460jigyosha dantai 199–202nakama 171–3standards 247

trade barriers 82, 225, 453–6trade names 359Trade Organizations see Japan External Trade

OrganizationTrade Union Confederation see Rengotrade unions 26, 411–13

see also enterprise unions; industrialrelations; labor movement; unions

trademarks 358–9training 181transfers (shukko) 404–6transistors 137transnational standards 418–19transport industry Yamato 478transportation allowance 19TRON project 408, 410Tsukiji market 459–61Tsukuba Science City 395

Ueno, Y. 462–3UK see United Kingdomunemployment 463

Ministry of Labor 314–15Saudi Arabia 242see also employment

unfair trade policies 459unification, Rengo 380–1unions

enterprise 139–42

history of labor movement 177–9nihonteki keiei 333Sohyo 411–13

United Arab Emirates 242United Kingdom (UK)

business 243–5future 245geographical comparison 168–9investment 243–4Japan External Trade Organization 243Japanization of industry 244Mitsubishi 244Mitsui 244Nissan 244service sector investment 244–5Sony 244Toyota 244

United States of America (US)anti-trust legislation 62–3business 245–7construction industry competition 82investment in Japan 463–5Japanese automotive industry 33–5Japanese education reform 133Motor and Equipment ManufacturersAssociation 214Occupation of Japan 23–6trade friction 305–6, 311–12see also American occupation

university cliques (gaku-batsu) 176UNIX-based systems 408, 410US see United States of Americautility models, patent system 358

vacations see holidaysvalue-added tax see consumption taxVC see venture capital industryVCRs see videocassette recordersvendors, subcontracting 423–4venture capital (VC) industry 466–9VER see voluntary export restraintVery Large-Scale Integrated Circuit (VLSI)

Research Cooperative 469–70video games, Nintendo 335–6videocassette recorders (VCRs) 297VLSI see Very Large-Scale Integrated Circuit

Research Cooperative

500 Index

volcanoes 169voluntary export restraint (VER) 34, 302

wagesappraisal systems 27–8Asian economic crisis 128enterprise unions 140Ministry of Labor 313–14nihonteki keiei 332–3see also compensation (remuneration)

war crime punishments 25, 471, 472warrior caste (samurai) 391–3wartime legacy 471–4waste 452Western civilization 299, 300Western technology 145–7white-collar workers 474

see also salarymenwholesale markets 66–9, 459–61wholesalers 117–18, 441–3window guidance (madoguchi shido) 286–7women

employment 128, 313Internet usage 126office ladies 341–2roles 474–7small and medium-sized enterprises 407

workgroups 286World War II 239, 248

see also American occupationwritten administrative guidance 5

yakuza (organized crime) 393, 414Yamaha 320, 322Yamaichi Crisis (1964) 98Yamato Transportation 478yen

appreciating 29–31dollar (Nixon) shock 120impact on lifetime employment 282

yobiko 135Yokohama 198yokowamkyoku (inter-industry bureaus) 309, 310Yoshida, S. 273–4yugen gaisha 263

za see guildszaibatsu 479–82

American occupation reforms 25–6cross-shareholdings 98Matsushita ruling 297reincarnations as financial keiretsu 190, 192Sumitomo 427

zaikai 402Zenchu see Central Union of Agricultural

CooperativesZero Quality Control (ZQC) 404ZQC see Zero Quality Control