Japanese Industrial Governance: Protectionism and the Licensing State (Routledgecurzon Studies in Asia's Transformations)

Japanese Industrial Governance Japanese Industrial Governance uses a wide range of original Japanese sources to explore the evolution of Japanese developmental debates, arguing that the core of the industrial governance system was in fact the result of infant industry protection and high barriers to foreign entry. In response to international pressures, in particular penetration by Anglo-American multinational corporations, the “licensing system,” as Sohn refers to it, was not purely an internal, domestic decision, as it is commonly regarded. Using primarily the cases of prewar petroleum and automobiles industries, the focus of this book lies mainly in the late nineteenth century when the Meiji leaders (1868–1912) established non-tariff protective mechanisms, which were strengthened by the massive entry of foreign multinationals during the 1920s. Combined with other industrial policy tools such as subsidies and other financial incentives, the licensing system helped to establish regulated markets. Key content includes: • Constructing a national economy • Confronting a globalizing economy • Politics for protection: oil and automobiles • Theoretical and present-day implications Yul Sohn is Associate Professor of International Studies at Chung-Ang University, Seoul, Korea. His research and teaching interests include Japanese and East Asian political economies.

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Japanese Industrial Governance Protectionism and the licensing state

Yul Sohn

LONDON AND NEW YORK

First published 2005 by RoutledgeCurzon 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by RoutledgeCurzon 270 Madison Ave, New York, NY 10016 RoutledgeCurzon is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge's collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2005 Yul Sohn All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN 0-203-41739-9 Master e-book ISBN

ISBN 0-203-68034-0 (Adobe eReader Format) ISBN 0-415-33477-2 (Print Edition)

Contents

List of tables

x

Acknowledgments

xi

1 Introduction

1

2 Constructing a national economy

13

3 Confronting a globalizing economy

25

4 Politics for protection: petroleum

39

5 Politics for protection: automobiles

69

6 Industry governing Japanese style

100

7 Conclusion: theoretical and present-day implications

124

Notes

130

Bibliography

156

Index

167

Tables

3.1 Manufacturing output and its composition

27

3.2 Major foreign-affiliated manufacturing corporations in Japan, 1931

28

4.1 Refined oil supply in Japan, 1919–1940

42

4.2 The price of US oil in Japan, 1929–1933

53

4.3 Average cost at wells in USA, 1931–1934

57

4.4 Petroleum exports from Socal and Stanvac to Japan

59

4.5 US oil exports to Japan, 1932–1936

65

4.6 Exports of gasoline to Japan, 1935–1940

67

5.1 Auto production by major firms, 1919–1930

73

5.2 Projected production for Toyota and Nissan, 1936–1940

94

5.3 Actual production of Toyota and Nissan, 1935–1944

96

6.1 Foreign investment in Japan, 1941

104

Acknowledgments

This book is a project that began long ago in graduate school. There are, then, many persons and institutions to thank. Throughout this project, I am especially grateful to Professor Bernie Silberman of the University of Chicago, who first welcomed me into the world of modern Japan and showed me the rigor with which he pursued his scholarship on Japan. I also wish to express very special gratitude to Professor Bruce Cumings, who provided me with the stimulus and proper tools to pursue this study. This book would probably not have been written without his continuing encouragement and attention to my ideas and research. For this study to be successful, it was crucial that I met a number of scholars in Japan. I express special gratitude to Professor Takeda Haruhito of University of Tokyo, who not only guided me through the economic history of interwar Japan, but also kindly shared his invaluable materials with me. Professors Hashimoto Juro and Kikkawa Takeo of University of Tokyo and Professor Udagawa Masaru of Hosei University also provided indispensable introductions and materials. I also wish to thank Professor Fujiwara Kiichi of University of Tokyo and Professor Amakawa Akira of Yokohama National University for hosting me as a visiting fellow to conduct field research. All these were made possible through generous financial support for the research and travel that came from several institutions: the MacArthur Foundation, the Japan Foundation, the University of Chicago’s East Asian Center, and the Sumitomo Foundation. Over the years, ongoing conversations with my teachers and colleagues were very valuable. I especially thank Professors Yong-Chool Ha, Young-Sun Ha, Miyajima Hideaki, and Mark Tilton. I have learned much from Abe Takeshi, John Campbell, Ronny Carlile, Alexis Dudden, Mark Elder, Tim George, Tetsuo Najita, Oyama Kosuke, T.J.Pempel, Kenneth Pyle, Richard Samuels, and Stephen Walt. They read all or part of different versions of this manuscript and provided insightful comments without which this book would have been quite different. In the later stage, Mark Seldon provided valuable suggestions for improving the volume. I am also grateful to Ann King, Sarah Wray and Laura Sacha for their editorial and instrumental services in the publication process. Special thanks to Yeun Kyung Yoo and Eun Chol Kim for research assistance. Finally, I must gratefully acknowledge many years of love, understanding, tolerance, and remarkably uncomplaining support from my wife, Sukyung. But this project began with my father, Jae-Souk Sohn, to whom I owe the greatest debt. I am privileged to have enjoyed his wisdom and spirit. He sowed early seeds of my interest in political science and history, and has sacrificed enormously to support my intellectual journey. For all this, and for much more, this book is dedicated to him.

1 Introduction

During the past twenty years, deregulation has been one of the central policy agendas in Japanese politics. Domestic big business complains that regulatory arrangements undercut the vitality of the private sector, while foreign governments and traders cite them as the primary source of informal trade barriers.1 Government agencies respond to these calls with a series of seemingly ambitious plans and programs that would ostensibly reduce market regulations and encourage imports. Here, government licensing (Kyoninka) represents the core of Japan’s regulatory system. It means that the government authority imposes prior prohibition from which it grants exceptions. Under a licensing regime, firms are prohibited from starting up operations in an industry prior to receiving a license from the government.2 But in Japan, licensing covers a wide range of forms of intervention that extend far beyond the question of entry. The licensing authority governs not only a firm’s entry and exit, but also specific investment decisions.3 Firms complain of the commonly noted bureaucratic practice of discouraging or refusing submissions for licenses. While there exist more than 10,000 kinds of licenses now, more than 30 percent of these were concentrated in two key economic agencies—the Ministry of International Trade and Industry (MITI) and the Ministry of Finance (MOF).4 This striking number draws our attention to the unique feature of Japan’s industrial policy, one that uses licensing extensively for development and control purposes. While it is well documented that the Japanese state targets industries and strategically alters resource allocation by granting subsidies, credit allocation, tax breaks, and relevant information,5 what is often overlooked is that these measures are combined with licensing that creates entry barriers in order to organize industries for strategic objectives. The state channels various forms of financial incentives and information to preferred firms that are licensed. By serving as the gatekeeper to entry into industry, licensing gives the state leverage over firms.6 In this sense, it should be understood as a means of regulating market competition and shaping industry structure. While there is a large body of literature on Japan’s industrial governance and policy, few have dealt closely with the use of licensing as an important policy tool. At the same time, most scholars in the field looked primarily at the contemporary period.7 I explore the origins and development of a distinctive Japanese approach to industrial governance that centered on the practice of licensing. I show that this approach has long aimed at protecting and nurturing key industries from foreign competition, especially penetration

Japanese industrial governance

2

by Anglo-American multinational corporations during the interwar years: that is, it was the challenge of foreign direct investment (FDI) that crucially constrained and shaped the course of constructing industrial governance institutions in Japan. The narrative of this book is summarized as the following: bereft of the ability to use tariff protection due to the West-imposed free trade regime (i.e., unequal treaties), the Meiji (1868–1912) leaders began to establish non-tariff barriers by adopting industrial restructuring policies such as promoting cartels and mergers in order to nurture key domestic industries. The key aspect of enforcement, preventing excessive entry by foreign and domestic firms, had to be better handled when Japan faced rapid investment penetration by foreign multinationals in key industries during the 1920s. The licensing institution was designed to tackle this problem by erecting entry barriers to targeted industries. Combined with industrial policy tools such as subsidies and other financial incentives, this institution helped to establish regulated markets based on cartel-like practices while constraining the activities of foreign multinationals. It was constructed as an outcome of the historical conjuncture of two forces: the need to stabilize the rapidly transnationalizing market driven by Japan’s full-fledged integration into the global system during the 1920s, and the need to establish a national autarky based on total war thinking. In telling this substantive story, the argument presented here departs from the standard accounts of Japan’s political economy in three ways. First, this analysis takes an “outside-in approach.” In general, the standard works in the field have overly focused on internal interactions among the bureaucracy, politicians, and the industry while treating external factors merely as an environment. These may be described as an “inside-out approach.”8 For example, a combination of domestic variables (i.e., social structure, ultranationalist movements, the rise of the military and reform bureaucrats) in Japan led to imperialist expansion in the first half of the twentieth century. Trade disputes involving Japan for the past two decades, many believe, were caused primarily by Japan’s peculiar internal structures that were shaped either by its putative cultural peculiarity or by endogenous rational political processes. By contrast, this book stresses the role of international pressures in shaping internal politics and hence policy institutions.9 Specifically, it focuses on the embeddedness of the state’s action and the firm’s action in the global system. It systematically contextualizes public-private interactions as a contingent form of relationship situated in the global system. Second, ideas and ideologies are incorporated importantly in narrating the story of institution building. Since a specific institutional form is understood to be a historically specific solution to political and economic problems relating to global competition, the task here is to find historically rooted ideas of what was desirable and possible as well as those contextually induced problems that state and firms sharing those ideas attempted to solve. My analysis brings in the role of state-centered ideology in the making of industrial policy institutions. Assuming a plural ideological space rather than a monolithic national ideology, it demonstrates the complexity of Japanese mercantilism, divided as it has been between trade-oriented and autarky-oriented variants.10 This work shows that changes in policy governing the economy involved corresponding changes in key state actors’ conception and articulation with the changing political and economic worlds of which

Introduction

3

they were part. We then examine the processes by which those armed with specific ideas and ideologies competed for primacy in decision making. Third, the narrative in this book begins with the Meiji period. The existing literature on the origins of Japanese industrial policy has focused heavily on the war years (1931– 1945). As seen in the term “economic general staff to which Chalmers Johnson refers as the central agency of the Japanese state in his classic, MITI and the Japanese Miracle, security was a powerful impetus to the developmental state in Japan. Bai Gao similarly combines security concerns with worsening economic conditions (caused by the Great Depression) in accounting for the rise of developmentalism. Earlier works treat the pre-1931 period (that is, Meiji and Taisho eras) merely as background. For Johnson, Gao and many Japanese scholars, the 1920s was an ancien régime with which to break. The 1920s system is given historical and theoretical significance only as antithesis to the 1930s system. This work, however, finds the roots of industrial policy that preceded the developments of the 1930s going back to early Meiji. Many of the changes had been evolutionary, with new (i.e., total war ideas) and old (i.e., Meiji policy tradition) blended together.11 In addition, this analysis rejects two widely held views of Japan’s state-firm relationship (one that depicts strong control over the Japanese economy by the state and the other arguing that the private sector is the dominant force in shaping the economy) in favor of the institutionalized “power-sharing” relationship between the state and firms in protecting and nurturing domestic industries from global competition. Here, the operation of the licensing system reveals the political process by which the state set agendas (i.e., shaping market preferences) using licensing powers while control over the detailed procedural and administrative decision making was given to licensed firms.12 In making these arguments, it should be noted that I do not claim that dealing with foreign economic pressure was the overriding factor in explaining the rise of Japan’s industrial governance institution centered around the use of licensing prior to the 1930s. Nor am I suggesting that institution building should be understood through the lens of ideas and ideologies that evolved from the early Meiji period. What I am proposing is that a better understanding of Japan’s industrial governance system can be reached by aligning it with self-consciously held political economic ideas responding to the changing international environments since Japan entered the modern world. My argument suggests that the shaping of industrial policy and its institutional contexts have to be seen as much in terms of the mix of domestic and external economic conflicts (i.e., protection with regard to the challenges of the global market) as in terms of interstate competition (i.e., late developer problems).13 This introductory chapter first reviews the prevailing accounts of the institutional development of the Japanese political economy and then finds the biases and gaps they cause. The following section presents the theoretical presuppositions required to shape the alternative perspective, and subsequent sections present case selection and outline the organization of the argument.

Japanese industrial governance

4

Problems with the Japan model: Gerschenkronian time and space It seems fair to say that many of the standard accounts of Japan’s political economy have been strongly influenced by the writings of Alexander Gerschenkron and his so-called late development thesis.14 The central claim of this thesis is that nations can improve their position in the international division of labor through political adjustments, especially the political creation of institutions adaptable to new situational conditions. Time is an extremely important constraint, but at the same time it becomes an advantage if politics is played out properly. In the field of Japanese political economy, the Gerschenkronian notion of time was first presented in E.H.Norman’s seminal work, Japan’s Emergence as a Modern State, a book that pre-dates Gerschenkron’s.15 Norman presented an excellent mix of the late development thesis and a Japanese Marxist tradition.16 Under Western imperialist threat, he argued, imperial absolutism arose in a Bonapartist way out of the pre-existing class structure where a “nice equilibrium” of class balance existed between feudal aristocrats, bourgeoisie, and peasants.17 And the new absolutist Meiji state played a crucial role in achieving political independence and economic development.18 It successfully created institutions to adapt itself to the changing international standards of efficiency. The state acquired the most advanced technologies then available on the world market and made use of Japan’s own backwardness to create modern large-scale firms. It created financial institutions subsidizing long-term investments in strategic industries where private leaders earnestly followed the directions set by the state. William Lockwood, whose influence has been pervasive in postwar English-language scholarship in Japanese political economy, followed this line, but from a slightly different angle (i.e., a non-Marxist institutional explanation).19 Lockwood argued that successful economic development requires certain political and institutional arrangements no less than the revolutionary development of production technology, particularly in a society that is faced with interstate competition and thereby needs “speed” and looks for “short cuts” to emerge as a modern industrial state from feudal backwardness.20 The Japanese case, he continues, illustrates this extremely well. Pre-modern Japan exhibited the familiar features of Asian agrarian economies: general poverty, intense stress on the land, no firms to organize production, feudalistic social and economic relationships, which checked entrepreneurial activities, and so on. But in Lockwood’s account, the rise of powerful political institutions in the Meiji state, coupled with the heritage of feudalism, the ambitions of putative leaders, and the “historical time” it now entered, all combined to endow the state with broad responsibilities for creating an institutional framework for rapid economic growth. What followed was a close-knit relationship between state and society, a “typical Japanese web of influences and pressures interweaving through government and business, rather than a streamlined pyramid of authoritarian control…a web it may be, but a web with no spider”21—a cornerstone metaphor in the standard explanation of the state-firm relationship and economic miracle in modern Japan. In accounting for how institutional innovations emerged in Japan, Lockwood and Norman diverge. Norman argued that the key to success lies in “the ablest, most selfsacrificing” Japanese leadership who “utilized to the full and with remarkable dexterity

Introduction

5

those autocratic powers.”22 The exceptional quality of a handful of Japanese leaders, men of “patience, good judgment, and the will to strike fast and hard,” enabled Japan to seize an advantage.23 Exogenous crises produced systemic disequilibrium in which men of special abilities (i.e., some samurai) arrived to displace their reckless peers at just the moment when special abilities seemed to be what were needed.24 On the other hand, Lockwood pointed to the uniqueness of Japanese human resources, aptitudes, and values: Industrial revolution [and its] tempo reflected the release of indigenous forces long latent in Japan. Similarly, its progress continued to be shaped by national characteristics deeply rooted in Japan’s ancient culture. It found cohesive strength in the amenability of the Japanese [culture] to disciplined organization under acknowledged leaders beyond the family.25 Here, the web is a reflection of a strong esprit de corps among the elite, who shared a common social and cultural background.26 Arguments that combine late development and indigenous cultural values— Lockwood’s story—have constituted an influential tradition shared by many scholars, including Ronald Dore and Murakami Yasusuke.27 A familiar story follows: a particular latent cultural tradition such as groupism (or an IE society) functioned positively to meet the situational imperatives that required late development, and the outcome was a closeknit state-society relationship that continuously and successfully coordinated the flow of resources to meet the changing standards of international efficiency. The locus classicus of the Gerschenkronian account remains MITI and the Japanese Miracle by Chalmers Johnson. This book provides a brilliant account of the rise of the unique institutions of the Japanese political economy without recourse to indigenous cultures.28 Johnson’s account is primarily historical: (1) situational imperatives (depression and geopolitical strain since the late 1920s) created a contingent power equilibrium that required the state to play a crucial role in overcoming the depression and war; (2) under subsequent quasi-revolutionary situations (including immediate postwar chaos), the state and the firm began to work closely to achieve an overarching objective (i.e., national survival and economic recovery); and (3) through a dialectical progression (i.e., private control→state control→ public-private cooperation), the contemporary form of Japan’s industrial policy has evolved, shepherded by “administrative guidance.” Johnson argues that the institutional arrangements developed in Japan were primarily shaped by wartime mobilization (1931–1945); that is, under a quasi-revolutionary situation. This view parallels the view held by Nakamura Takafusa and a group of Japanese scholars including Okazaki Tetsuji and Okuno Masahiro.29 For these analysts, the war was a “useful war” because it enabled the economic general staff to intervene efficiently in the market or because the war and wartime mobilization forced a systemwide transformation toward a new systemic equilibrium that is the contemporary form.30 For others, the war was a “harmful war.” Most notably, Noguchi Yukio criticizes Japan’s currently struggling system of political economy as the outcome of wartime mobilization. In his book entitled The 1940 System, the institutional structures of this system (production-oriented thinking, main bank system, lifetime employment, seniority system, cozy government-business relationship) that were once praised as the source of

Japanese industrial governance

6

Japan’s superior economic competitiveness, but now hailed as the source of the long recession of the 1990s, began to form in 1940 when Japan initiated a “total war system (soryokusen taisei).”31 “Total war” is the central concept in this literature. Because modern war required not only guns and soldiers but also industrial resources, the state had to build an efficient system of creating as well as mobilizing war-related materiel. This required a powerful political and ideological apparatus à la fascism. The total-war system pursued by the state, therefore, was beyond the economic realm. It was a social system that aimed to construct a new social identity conducive to war preparation.32 This system, combined with economic hardship triggered by the Depression, produced a developmentalist ideology that survived the Pacific War into the contemporary era.33 What all the aforementioned accounts share is that they invariably point to the role of crisis: institutional change was driven by war and depression. As Peter Gourevitch points out in a comparative framework of political economy, crisis (both political and economic) put the existing system under stress, leading to the collapse of old institutional relationships and flux in the political and economic situations, and thereby making a new systemic equilibrium possible.34 In the above accounts the (quasi-) revolutionary situation, engendered by geopolitical competition, worldwide depression, and war, generated situational ideologies (economic nationalism, developmentalism, technonationalism), which in turn became institutionalized in national policy making. There is no doubt that the Great Depression and the Fifteen Years’ War had a strong influence on Japan’s distinctive institutional system of political economy. What most Gerschenkronian and “wartime economy” proponents consistently underestimate, however, is that the spatial change caused governance problems in Japan’s political economy. This refers to the problem of how to make sense out of what was emerging as an extraordinarily fluctuating world and to find an immutable there. Specifically, it refers to the problem of finding an industrial order in the constantly changing market, which was generated by its global integration. The work of Karl Polanyi casts important light on this problem.35 His fascinating analysis of the rise and fall of nineteenth-century civilization demonstrates that the specific forms of modern capitalism in the West (i.e., fascism, New Deal, Stalinism) were the outcome of a sharp political reaction in the form of society’s demands on the state to counteract the deleterious effects of the market society. This spatial change—that is, increasingly marketizing social space—caused by the British-led trade and capital liberalization took the central position in Polanyi’s analysis of divergent reconstructions of the capitalist institutions. Here, the great transformation of the capitalist system has less to do with crisis management than with protection, which “society adopted in order not to be, in its turn, annihilated by the action of the self-regulating market.”36 Spatial considerations are important in understanding the Japanese case. Japan’s governance problem was precisely associated with the collapse of a long “breathing space.” By breathing space, I mean Japan’s limited participation in the world market, especially during the Bakumatsu and Meiji years. The door to the Japanese market was open (because of the unequal treaties), but the West’s lack of interest left Japan intact so that it was granted an opportunity to make some internal adjustments to survive the imperialist world.37

Introduction

7

This breathing space ended as Japan met the massive intrusion of foreign direct investment in the early 1920s. Entry by giant foreign multinational corporations (GE, Westinghouse, Siemens, GM, Ford, Chrysler, Babcock, Standard-Vacuum, Shell) meant Japan’s greater integration into the world markets. It was this spatial change, I argue, that led Japan to rethink its policy goals and tools with regard to industrial governance. Behind this was the increasing belief that markets went to excesses, that they could readily fail, and that the social costs and, more important, sovereign risks were too high. Nonetheless, in analyzing Japanese industrial policy, few works have been attentive to the surprisingly high level of Western investment in prewar Japan and its long-term consequences.38 In most existing works, public policy was a product of internal conflict while the international factors were treated merely as environment. For example, Richard Samuels’s conflict-resolution system, called “politics of reciprocal consent,” was established out of iterative domestic political conflict and bargaining (i.e., intrabureaucratic battles, interfirm competition, state-firm conflicts), while the role of powerful foreign players in the Japanese energy market was insufficiently treated.39

Approaching the problem Japan’s integration into the global system in the 1920s, and its incorporation of mercantilist ideology, contributed to the rise and development of the licensing system. A persuasive argument needs to meet a number of conditions. First, it needs an analysis that combines domestic political conflict with the challenges of the world market forces. Second, it requires an analytical sensitivity to system-structural alterations, such as the structural configurations of the world markets and their changes. Further, it needs to analyze the nature of the specific political and economic pressures that external forces applied to Japan’s existing industrial order and to examine how the Japanese responded to these challenges.40 Let us begin with some methodological points. Comparative studies in the politics of policy making postulate that distinctive institutional frameworks develop through an interplay of domestic and international forces. A useful account of the interactions of international and domestic actors on multiple analytic levels may be found in the classic work of Karl Polanyi and his concept of the opportunity structure. There is a global opportunity structure that shapes what is possible for particular governments. This set of limits, in turn, creates a national opportunity structure that shapes what social groups or class forces will be most effective in influencing state policy.41 For example, the structural peculiarities of the nineteenth- and early twentieth-century world system (or the East Asian regional system) had an especially important impact on Japan’s prewar institution building. Meiji Japan faced a dual structure, an interweaving of world-systemic constraints and opportunity: “no tariff autonomy” and “breathing space.” The loss of tariff autonomy due to unequal treaties with the Western powers forced Japan to rely on industrial policy—as a substitute for trade policy—for economic growth. At the same time, Japan was granted an opportunity to maneuver due to limited foreign

Japanese industrial governance

8

penetration into its domestic market. We will see that this set of systemic influences created Japan’s national opportunity structure, which privileged certain ideological programs and actors and produced a set of institutions supporting them. The interwar years accelerated the pace of institutional change. Rapid penetration by foreign investment immediately after World War I under a US-sponsored liberal East Asian regional regime called the Washington System caused the Japanese to revise their industrial policy. Under the new national opportunity structure, attempts were made to determine which industrial order would be most effective in dealing with the pressing political and economic problems. As political and economic actors confronted world market pressures and tried to solve the modernist problem, their interpretation of the Meiji mercantilist ideology diverged. Two competing ideologies emerged, stressing different valances to mercantilism. “Tradeoriented mercantilism” (TOM) sought national gains by expanding international trade and was based on a managed open-door policy. This answer to Japan’s problem was pushed by Yoshino Shinji and Takahashi Korekiyo.42 The other, by Ishiwara Kanji and Konoe Fumimaro, was “autarky-oriented mercantilism” (AOM). This was formal trade protectionism, economic autonomy, and the informal/formal construction of a selfsufficient empire under Japanese leadership.43 Despite notable differences, both were based on anti-liberal economic thought; that is, they were (1) externally mercantilist (i.e., relative-gain seekers), and (2) domestically interventionist (proindustrial policy). The political process of establishing a new industrial policy—that is, establishing a licensing system—was a zigzag affair, illuminating conflict between the two ideologybased programs. We need to better understand this fitful and conflictual process within the state. The state is a complex organization that always faces the problem of internal cohesion. The nature of decision making is significantly affected by hierarchical decentralization and horizontal disintegration. In particular, state organizations in Japan exhibit a high degree of hierarchical centralization but a low degree of horizontal integration,44 due to the ministerial specialization of the bureaucratic role.45 Bernard Silberman shows convincingly that in the “state bureaucracy of organizational orientation,” organizational training and contextual knowledge are the primary criteria for the allocation of the administrative role. Here, high value is placed on early commitment to a bureaucratic career, and incentives to early commitment take the form of career predictability (usually based on seniority). Incentive systems of this kind produce departmental/ministerial specialization; knowledge is acquired within one ministry and is not easily transferable across the ministerial line, and thus personnel movement across that line is rare. In this system, interministry coordination, popularly called “tatewari gyosei,” is weak and difficult. State agencies (or ministries) are pitted against one another. At the same time, the state is approached as relational. Its effective power relies on the conditions of its relationship with society. It rests not only on features of the state organization in itself but its relationships with societal conditions. Historically, conflict arose from the modern state’s political and institutional expansion outward to the economy, which became organized by the state’s administrative structures that provided new opportunities for private market actors as well as constraints on their lives.46 In this process, state agencies are pitted against private agents (firms). At the same time, private agents are pitted against one another.

Introduction

9

This book expects to find the sort of conflict and alliance the state produced in society. Coalition politics predictably emerged as a way to solve those conflicts because, in the horizontally diffused Japanese political system with no consistently effective central coordination mechanism, the most predictable strategy was entering coalitions.47 Multiple state agencies were involved in formulating industrial policy vis-à-vis the global system, such as ministries of Foreign Affairs, Commerce and Industry, Finance, Army, and Navy. Each would seek to advance its own interests by forming coalitions. To summarize, understanding the formation of the licensing system requires an analysis that combines transnational forces with the domestic political coalitions centered on state-generated ideologies. It also requires an analysis not only of interwar politics but also of Meiji economic policies and their legacies. We cannot understand why institutions were replaced without knowledge about the previous regime. Not all residues of the old regime were swept into the dustbin. Some earlier Meiji ideas were reworked to accommodate new challenges. The task of this book is to trace the process of change. In this regard, the analysis presented here subsumes the whole prewar period after 1868 under an interpretive framework that grasps the historical process by which Japan managed to adjust its economic and political institutions to the changing conditions brought on by the evolutions and transformations of both the domestic and the world markets. Rather than viewing the 1930s system as a dramatic break from the immediate past, I see it as a historical outcome of the Meiji-style mercantilist policy’s systematic response to the exogenous challenges during the 1920s and early 1930s.

Cases In accounting for the political process leading to the licensing system, we need to look for cases where the Japanese state applied a set of policies exercising a licensing power combined with other policy instruments to create a cartelized market. At the same time, those cases must not be significantly different from other industrial sectors. Ideally, each case must be different in its sectoral politics so that the policy-making processes that lead to the licensing system can be compared meaningfully. I have selected petroleum refining and automobile manufacturing as critical cases simply because these were two of the industries where the state first applied the licensing system. Following the Aluminum Industry Law (1933), the Petroleum Industry Law (1934) and the Automobile Industry Law (1936) was the earliest “industry-specific” legislation aimed at nurturing important domestic industries and protecting them from foreign competition.48 These were commercially and strategically important sectors. Petroleum was not only the main civilian energy source but also an indispensable means of powering battleships, trucks, and aircraft during wartime. The automobile industry, a symbol of a country’s industrial strength and technological progress, entails backward links to steel, machinery, electrical, rubber, glass, and chemicals. It also has some forward links in strategic industries such as aircraft manufacturing. The Japanese state’s appreciation of the industry’s strategic value was evident because trucks and tanks are crucial in waging a modern mechanized war. Petroleum refining and automobile manufacturing were transnational sectors like other heavy industries such as chemicals, light metallurgy, heavy electrical machinery,

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machine tools, and steel. These were dominated by giant US multinationals such as Ford, GM, Shell, and Standard-Vacuum, which were the four largest foreign firms investing and operating in prewar Japan.49 These are excellent cases for tracing Japan’s governance problem and the Japanese state’s attempt to solve it. At the same time, petroleum and automobiles have differing sector characteristics in prewar Japan: the former is part of the energy sector, and the latter is the manufacturing sector; relatively speaking, the former is raw material-dependent and the latter is technology-dependent; the former is vertically truncated (i.e., upstream-downstream) and the latter is vertically integrated (terminalparts). In sum, despite their resemblance, different sector characteristics will highlight different political processes leading to the licensing system and its operations. Investigating the formulation and implementation of the two laws in particular offers a good opportunity for analyzing bureaucratic politics in which multiple state agencies (e.g., ministries of Commerce and Industry, Finance, Army, and Navy) competed for control over the formulation of policy. These cases also involve a foreign policy question—thus involving the Ministry of Foreign Affairs—in the sense that industrial policies in such sectors inevitably affect the interests of foreign firms and their host states. Because the Japanese market faced enormous pressures from those foreign firms beginning in the early 1920s, our primary attention will focus on the 1920s and 1930s. Besides, the significance of analyzing the interwar period in modern Japanese history should figure importantly here because the traditional accounts of the Japanese political economy treat this period merely as an aberration for postwar successes. Modernization theory, particularly its earlier version, sees the entire history of modern Japan as an extraordinary overall success of modernization. In this process, “what went wrong” in the 1930s is explained as either a conspiracy theory or a “plot” among some of the ruling elites while the overall successful trend is stressed. The later version, devoted to “dilemmas of growth,” recognized the earlier version’s naive understanding of the 1930s and called attention to the “pathology of growth.”50 Growth became pathological when it upset the gradual change within the status quo. In the 1930s, Japanese leaders’ pathology of growth caused the wrong path to be taken in the construction of the national defense state (Kokubo kokka) leading to the Asia-Pacific War. As John Dower points out, however, this view is premised on the understanding of “why good beginnings had faltered, and not how flawed beginnings had come to an impasse.”51 The success or failure of Japan’s modernization project, or dilemmas of growth in the modernizing process, was a matter of “policy.”52 Wrong policies only reflected “the general sense of malaise” and “confusion of the period.”53 Some Marxists, including Yamada, Norman, and Ishii, reject this view by emphasizing the deep structural causes of the interwar anomaly. At the same time many of these thinkers attribute great significance to postwar reforms by the Supreme Commander for the Allied Powers (SCAP), including the dissolution of semi-feudal landownership, the imperial institution, and the zaibatsu structure, which transformed Japan from a semifeudal absolutism into a bourgeois monarchy.54 This sharp division between prewar and postwar Japan has been the dominant underlying view of Japanese history in postwar scholarship in Japan as well as in America. The view is shared among the prolific accounts that emphasize the revitalized decision-making power of the political party (the Liberal Democratic Party) and the

Introduction

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newly emerged “enterprise groups” (Kigyo shudan or keiretsu), a democratized (meaning “decentralized”) postwar descendant of the prewar zaibatsu, family-owned companies. This work is consistent with the recent claims of “transwar history” scholars who demonstrate that the presurrender (at least, since the late 1920s) and postwar history is a single evolutionary process.55 Accordingly, this analysis does not agree with the modernist, developmental view of history that much of the works cited above shares. The interwar period— especially the 1930s—should not be viewed as a historical disaster predetermined by the incomplete character of modernity in its earlier period (à la Norman, the kozaha group, and Maruyama).56 Nor should it be seen as a period of aberration for postwar growth. It was a time when a new set of institutional adaptations emerged, prefiguring the institutional character of the postwar political economy.

Organization of argument The theoretical remarks so far highlight the major conceptual considerations underlying my account. First, they allow me to create a theoretical space for examining powerful world systemic constraints in modern Japanese history (i.e., the Meiji’s unequal treaties and the intrusion of foreign firms in the Japanese market from the beginning of the 1920s). Second, they suggest a way to analyze how systemic impacts relate to the existence of a robust and resilient tradition of mercantilism that has persisted in Japan. My central claim, as mentioned above, is that Japan’s spatial change contributed to the creation of a Japanese-style industrial governance system, called the licensing system, within which the state and the firm engaged in power sharing to create a structure of “cartelized markets.” Here power sharing refers to the mechanism by which the state sets the agendas for market barriers to entry while leaving the control of processual and implementational decision making in private hands. The distinctive features of the cartelized market were (1) protective because the setting of barriers was aimed primarily at regulating foreign firms, but at the same time it was (2) developmental because, historically, they were formed mainly to protect infant industries and not declining industries. The narrative of the argument starts with the emergence of a mercantilist ideology in Meiji Japan. Chapter 2 discusses the intellectual foundations of the policy course that Meiji leaders took in constructing a modern, national economy. Chapter 3 traces the parallel development of Japanese policy ideas about economic development throughout the history of industrialization, i.e., trade-oriented mercantilism and autarkyoriented mercantilism. I show the processes by which these two ideas were embedded in government ministries and led to political coalitions competing for the optimal strategy for Japanese national development—which centered on issues of regulating foreign capital. In Japan, institution building was far from a monolithic response to the world market, but rather a fortuitous process of interaction among competing political forces. Within this historical context, Chapter 4 narrates the Japanese experience with the transnational industrial order in the petroleum industry. I show the evolving institutional features of domestic oil cartels with regard to the world oil regime and the competing programs of state intervention to protect domestic industry. Chapter 5 traces the development of the automobile industry and shows how and why the Japanese state was

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more effective in formulating and implementing protective policies in this sector than in the petroleum sector. Both chapters make an explicit effort to demonstrate how the two competing policy ideas interacted to yield the licensing system in each case and how these political processes were shaped by the characteristics of the industry in which foreign giants had predominant market power. Chapter 6 compares the two cases, highlighting the differences in each process of coalition politics. In short, policy outcomes were the consequence of ministerial autonomy, competition of ideas, the nature of industrial constituency, and the strength of multinational companies. The Conclusion suggests theoretical and present-day implications of this analysis.

2 Constructing a national economy

For late industrializers, the central concern was how to establish a national economy. This meant protecting strategic infant industries from foreign competition and nurturing them to be competitive. Regulation was required and protective tariffs were instrumental. Like the advanced Western countries, Japan entered the modern world by protecting and nurturing its own industries, but the new leadership, the so-called Meiji oligarchs, failed to regain rights over tariffs, which had been lost as a result of unequal treaties concluded with the West before their seizure of power. However, the loss did not lead to free trade. Mercantilism always prevailed as they experimented with various sorts of industrial policies that could meet the needs of development under the pressures from enforced free trade. This chapter explores how the Meiji oligarchs went about the policy course they took in dealing with the challenge of nurturing domestic industry. It first examines the formation of the mercantilist ideas in Japan by focusing on the processes through which Western economic ideas were imported and debated in the early Meiji years. It then moves on to discuss how those ideas were translated into actual policies. As we will see, the fact that Japan’s policies emerged as a unique twist of mercantilism/ developmentalism in the extent to which they relied on non-tariff measures reflected and was reflected by its unusual internal and external contexts.

The rise of Meiji mercantilism Since the Meiji Restoration of 1868, there had been strenuous debates among the Meiji oligarchs on how to solidify their leadership under threats from pressing political and economic problems at home and pressures from Western imperialism abroad. It is widely acknowledged that while centralization and maintenance of power were their main political goals in the 1870s, constructing a modern national economy and industrial power based on the development of industrial capitalism was their fundamental goal in the economic realm.1 This prompts us to ask why and how the oligarchs chose this goal and developed the means to achieve it. A standard explanation is the following: The imperialist threat motivated the putative leaders to pursue economic growth as the means to achieve international equality.2 Foreign pressure (gaiatsu) created the sonno joi idea (revere the emperor, expel the

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barbarian), which, in turn, made it necessary to adopt the fukoku kyohi idea (rich nation, strong army) leading to the basis of the promotion of industrial capitalism in Japan.3 This is a prototypical Gerschenkronian account: Exogenous crisis produces systemic disequilibrium, which, in turn, produces a set of institutional adjustments conducive to industrial development. What was hidden behind this objective condition in Japan, however, was that the leaders used the external threat as their rationale for overthrowing the old regime and also for solidifying their rule.4 Since the immediate goal of the Restoration leaders appears to have been the destruction of the Bakufu, an oppressive and disabled regime, the external threat (a response to it was the “expel the barbarian” movement) was deliberately exploited by those leaders who subtly associated it with the “revere the emperor” idea, thereby executing their end with vigor.5 If so, it would not be difficult to understand that, for the leaders, the pursuit of a rich nation and a strong army was driven not only by the external threat but also by domestic political considerations. In the immediate post-Restoration period, the oligarchs faced political challenges from within and without. They had to consider seriously how to meet the exigencies of the precarious domestic situation in which the established government had found itself for some years since 1868. They needed to discourage any serious opposition that might threaten from several sources. One of these was a series of peasant revolts against the new policy course—“civilization and enlightenment” (bunmei kaika). The other came from the discontented and dispossessed samurai, including the returned soldiers after the end of the civil war who might stand to lose by changes that were imperative if the leadership was ready to centralize authority and demolish every form of separatism. Together, as Ramseyer and Rosenbluth point out, within the ruling bloc, each oligarch had an incentive to fight for a better share of the political rents, leading to chronic fratricidal battles. In doing so, some solicited support from the outside (i.e., the political dispossessed) in a self-destructive game.6 In this regard, the leaders were compelled to demonstrate their ability to initiate a popular reform in order to mollify the increasing suspicion and threat from the opposition.7 Okubo Toshimichi, who held the most important place in the new government until he was assassinated in 1877,8 was keenly aware of the regime’s political weakness, and he argued that a secure foundation for the new regime depended on strengthening state control of the private economy.9 In contrast to Saigo Takamori, one of the most influential oligarchs and a popular hero who advocated the Korean expedition in the hope of taming the discontented samurai, Okubo gave priority to national economic development in order to accommodate them:10 that is, industries could absorb unemployed former warriors. Eventually, Okubo defeated the social imperialists (Salgo and Itagaki) and constitutionalists (so-called Minkenha) who sought the new leadership’s raison d‘être from popular participation. The pursuit of rapid industrial growth was seen as a means to secure their newly acquired leadership as well as national independence. If we grasp the political motive embedded in the economic policy, it is not difficult to understand the relationship between the pursuit of (political) power and the pursuit of wealth as coordinated objectives, each reinforcing the other. According to Fukuzawa Yukichi, a leading intellectual force in nineteenth-century Japan, a rich nation is nothing but a powerful nation and vice versa (fukoku wa sunawachi kyokoku ni shite kyokoku wa sunawachi fukoku nari).11 Fukoku kyohei was a double-edged ideological slogan for the oligarchy. Industrialization would provide the sinews of centralized political control as well as

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military defense and economic prosperity. In illuminating the combination of domestic political control and industrial growth, there is no better example than the powerful Ministry of Home Affairs (Naimusho) established by Okubo. This ministry was founded to execute two critical objectives: civil control by the Police Bureau (keihoryo) and the nurturing of industrial growth by the Industrial Promotion Bureau (kangyoryo). In short, it was industrial growth that the oligarchs advocated to their people and political rivals as the foremost means to achieve fukoku kyohei and thus avoid humiliation by the Western powers. For them, industrial growth was the path by which Japan could become a world power, but at the same time it was seen as a way to maintain the Meiji rule.12 In other words, they were compelled to pursue rapid industrialization not simply because they valued it for “welfare” and external power but equally because they were constrained to do so for domestic power. In ideologizing industrial growth, it followed that national wealth should be succeeded by individual wealth, producing a powerful nation over a prosperous people. The national right theory (kokken-ron) emerged within this context. Popular rights called minken (i.e., independence of the individual, civilian liberty) acquire meaning only when they function as a means to national rights (i.e., national independence and liberty in the international world).13 Here, industrial and commercial activities were valued chiefly for their ability to enhance Japan’s imperialist power. In this sense, growth may have contributed less to the welfare of the people than the evidence of its increased production might have led one to expect. The attempt to develop an industrial economy necessarily demanded knowledge of a modern economic theory of growth, and the knowledge should be the West’s. The oligarchs were given few alternatives because they were already committed to the maintenance of a capitalist economy. For example, returning from the Iwakura Mission (1871–1872), Okubo Toshimichi firmly believed that Japan had no choice but to Westernize quickly, and he argued that, because the material power of the West lay in the vigorousness of the private business sector, Japan should follow the route taken by the West.14 The oligarchs had two choices. One was economic liberalism, represented by the theory of laissez-faire and free trade based on individual self-interest and the profit motive for the economic betterment of society. The other was mercantilism, a pragmatic view of economics privileging the state’s leading role in managing trade and industry.15 Western economic ideas were introduced into Japan after the arrival of Commodore Perry. Most of the early translated works were liberal economic texts by T.R.Malthus, J.S.Mill, Walter Bagehot, H.D.Macleod, and Adam Smith. Liberal economics was also offered to the public by native writers, of whom the most conspicuous were Kanda Takahira, Fukuzawa Yukichi, Taguchi Ukichi, and Tsuda Mamichi. Economics was an unfamiliar subject to most Japanese at that time. Hence its principles had to be disseminated and popularized. Fukuzawa Yukichi was instrumental in this regard. For example, in his early bestseller Seiyo Jijo (Conditions in the West), along with the concept of equilibrium, he introduced the notion of laissez faire, that “in principle, the state should not interfere with trade.” The activities left to the state, highlighted in his later work, are limited to some public goods areas such as railways, the telegraph, or gas and water supplies. In Tsuda Mamichi’s words, imports and exports circulate according to the law of nature and never fail to bend toward equilibrium. The arts and industry grow in the meantime, so that there is nothing to fear at all.16

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In practice, economic liberalism was unpopular, however. In the eyes of Meiji leaders (such as Okubo, Kido, and Ito), the economics of laissez faire and free trade was the metaphor of advanced Western imperialism, one that was unsuitable to Japan’s backward situation. Equally important to those who attempted to construct a political system based not on a parliamentary form of decision making but on authoritarian leadership to determine and serve the public interest,17 liberal economic ideas that centered on the notion of liberty as a fundamental element were politically dangerous; that is, the introduction of the notion of individual liberty would inevitably encourage discussion of sensitive issues such as freedom of speech and expression, and eventually parliamentary democracy, which the leaders consistently tried to avoid. As a consequence, they opted for the latter course. Few systematic theories of mercantilism were available in the early Meiji period. Only the writings of Henry Charles Carey, an American economist, were introduced and translated by Wakayama Norikazu, a Ministry of Finance bureaucrat who was ordered to accompany the Iwakura Mission to study financial subjects in America, and provided the first systematic anti-liberal economist account in Japan.18 As early as 1871, Wakayama argued that free trade is good in theory but not in practice in such a poor country as Japan. It works only for England, not for others including France, Germany, Switzerland, America, and Japan.19 To him, no universal rule applies anywhere anytime. By listing numerous examples, quoting from Carey, of the successful use of protectionist policies by Western countries, he continued, a systematic creation of wealth could not be achieved through free trade. Foreign trade should be managed and balanced. Although Carey was influential in early Japanese writings, his protectionism was, according to Karl Marx, peculiarly an American brand.20 In Marx’s account, Carey thought that the bourgeois political economy of America was based on the harmonious cooperation of town and country, of industry and agriculture. But England—with the destructive power of its large-scale industry—was undermining it. Protectionism was thus defended as a means to safeguard America’s harmonious laws of bourgeois political economy from the disastrous effect of the English striving for industrial monopoly on the world market. In Marx’s interpretation, state interference (i.e., protective tariffs) here was to preserve the American modernity (and not feudal elements) from the English one. There is no doubt that Wakayama and other Japanese did not intend to endorse protectionism as a means to protect the Japanese type of modernity. Rather, their accounts reflected the version of protectionism that came later in the 1880s when Friedrich List’s National System of Political Economy was translated into Japanese: that is, a nation’s rule of the game changes according to its stage (i.e., its location in the world market); protectionism is the rule until a nation grows old enough to be independent. Oshima Sadamaru, translator of List, promoted this idea by writing that when a country is in its infant stages, free trade should be adopted, because without it feudal elements that survived the restoration would not have been removed. But when, as in the case of Japan, it has grown up to appreciate the benefit of foreign trade, the state should intervene until it reaches a stage of development sufficient to compete with others and thereby enjoy free trade. To the extent that economic policy should be framed and executed in national terms (that is, national advantage has more weight than individual advantage), and that the state has to assume leadership over the private sector, this set of ideas was clearly favored by

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the Meiji oligarchs. For they had made strenuous efforts in the political realm not only in effectively mobilizing national resources to build an independent nation, but also in constructing a bureaucratic state that could meet the demand of equality or the demand of decision making by resorting to utilitarian concepts of expertise and impartiality as a way to determine publicness and the state bureaucracy’s monopoly over them.21 In other words, there was an “elective affinity” between mercantilist thinking and Meiji political ideology.22 Meiji leaders elected some features of mercantilist ideas (i.e., the concentration of power and the monopolization of loyalty by the state in the economic realm) with which the Meiji ideology (i.e., public interest is best served by a limited number of people who possess expertise and work for the greatest good for the greatest number) had an “affinity.”23 We find a classical mercantilist statement in Okubo Toshimichi, who presented a proposal to the government to encourage industry, later called the “shokusan kogyo” policy (“promote industry, prosper business”). In general, national power depends on the prosperity of its people. The prosperity of the people in turn depends on their productive power. And the amount of production is determined largely by the industriousness of the people, but more fundamentally it is dependent upon the guidance and encouragement of the government officials.24 Okubo argued that in order to expand industrial production the state must intervene in the economy and encourage private industry. He referred to the Japanese situation as “the unenlightened attitudes of the people who were inattentive to the changing times and thus unable to do profitable business, and also the inability of government officials who had not offered them adequate guidance and encouragement in that direction.”25 In this condition, he proceeded, the state must “do research and set up laws” to encourage private business activities (minsan kokuyo), ones that “correspond to popular dispositions and to the degree of their knowledge.”26 What interests us most is Okubo’s keen awareness of the explicit link between domestic policy and international affairs. “Industrial protection” (kogyo hogo) meant “people’s protection” (jinmin hogo).27 Because the “prosperity of people” depends on national independence (from a Western threat) in the first place, the protection of domestic industries that guarantees people’s prosperity necessarily means the protection of people.28 In Okubo’s mercantilist ideology, protecting and nurturing domestic industries were explicitly related to national welfare and independence. Here, Okubo denied the possibility of free trade as the central policy. To him, free trade was a metaphor for Western hegemony; it was a device to perpetuate the domination of existing Western powers over newly industrializing countries. What he witnessed was not free trade but gunboat diplomacy. Under the system of free trade and laissez-faire, Japanese industry was too weak to compete with Western economic powers. In order to develop domestic industries, it was necessary to cut the flow of foreign imports.29 That Okubo rejected free trade did not mean he preferred economic autarky. His ultimate model was England, a prototype trading state. According to his own theory, a nation gains political power as it gains trade surplus (i.e., current account surplus) by exporting more and importing less—a classical mercantilist idea. What mattered to him

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was how the state should manage the flux of international trade. Okubo proposed his mercantilist policy by citing the case of England: he attributed her rise to world power to seventeenth-century mercantilist policies such as the Navigation Acts, which built up the English merchant marine to a predominant position in the world by preventing unlimited importation of foreign goods. Only after achieving a dominant position in the world did England turn to free trade.30 Okubo’s pro-trade argument was supported by Fukuzawa Yukichi. Fukuzawa’s theory of “nation building by export” (yushutsu rikkoku-ron) also used the example of England.31 Under the title of “a nation’s wealth and power lie in flourishing foreign trade” (kuni o fukyo suru wa boeki o seidai suru ni ari), he wrote the following: England is the greatest trader and the wealthiest nation in the world. It is not that she trades because she is wealthy, but that she is wealthy because she trades. Wealth comes from trade, but wealth does not create trade.32 What was distinctive about Fukuzawa was that the argument for trade was put forward within the context of international politics. According to him, war was no longer a soldiers’ war but a machines’ war (kikai no senso). Winning or losing depends on the possession of advanced-level machines and the skill to handle them. The amount of machines and skills a nation could possess, he proceeds, depends on the level of its aggregate wealth, which, in turn, is created by the growth of international trade.33 International trade is therefore the battle of war. Thus it is logical that a gain due to trade on one side is a loss on the other. From this perspective, “relative-gains-from-tradeism” (boeki sagakushugi) emerged in Fukuzawa. He wrote that “what we lose must necessarily amount to what they (the West) gain. Therefore in trade foreigners have attained their objective of competing in order to make a profit, and we have lost what they have gained.”34 Fukuzawa did not propose protectionism because Japan was a loser in international trade. Nor did he support free trade based on comparative advantage. Instead, using the relative-gain concept, he advocated “building the nation by commerce and industry” (shoko-rikkoku). It is of vital importance to decide that we build our nation through commerce and industry…. This means that we manufacture goods inside and sell them outside…. [In doing so] we should entirely give up our old thinking, such as nation building by agriculture (nogyo-rikkoku), and concentrate our energies exclusively on commerce and industry, We should even be ready to import all the necessities of life (ishokuju) from foreign countries.35 Fukuzawa’s main point was that Japan should promote and export manufactured goods because the country’s wealth and strength depended on them. Profits would double, he continued, if Japan manufactured and exported textiles instead of raw silk, then the top export item. Why did Fukuzawa vigorously advocate export promotion and keep silent about import restriction, especially in the late nineteenth-century world where protective tariffs

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were used as the primary mercantilist policy instrument? His contemporary, Ito Hirobumi, another architect of the modern Japanese state, emphasized the importance of protective tariffs by asserting that only after encouraging domestic production by protective tariffs like the USA should Japan follow England and adopt free trade.36 Fukuzawa also knew the value of protection. Between free trade and protectionism, he stated explicitly that: Regarding foreign trade, there is a theory that foreign commodities should be freely admitted into the country so that anything that is inexpensive might be bought and consumed…. There is another theory that claims that, by importing manufactured commodities from abroad, the nation cannot fail to lose the profit that would otherwise be gained by manufacturing the product by itself… I, for one, agree with this latter opinion but, because of the unequal treaties, there is no prospect yet of any restriction in trade being adopted.37 The reason Fukuzawa did not provide a protectionist account derived from Japan’s external context that was the “unequal treaty system,” or “enforced free trade regime,” or “free trade imperialism.” Japan lost the tariff right when it signed the unequal treaties with the West between 1859 and 1868 (opening up the ports and the Restoration). Until 1899, these treaties forced Japan to maintain a single non-discriminatory tariff barrier of up to 5 percent on all imported items.38 Only thereafter were tariffs raised selectively on numerous items. In fact, immediately after 1859, a flood of imports, unchecked by tariffs, soon devastated the domestic economy. Japan immediately faced a balance-of-payments problem because it depended heavily on imports of raw materials and capital goods indispensable for early industrialization. While the price of rice soared, the outflow of gold that followed was aggravated by the silver standard which Japan adopted, because the price of silver steadily fell vis-à-vis gold throughout the second half of the nineteenth century. Naturally, trade revision was a continuing issue in the early Meiji years. The immediate task for the Iwakura Mission was to inquire about the possibility of revising the treaties, but the request was denied bluntly.39 Thereafter the Japanese state made every effort to seek some alleviation of tariff controls (and also extraterritoriality), but it met with firm resistance from the treaty powers, led by Britain. In 1878 to 1879 the USA was persuaded to agree to tariff revision on condition that other powers did so. Britain refused. It was not until 1911 that Japan recovered full autonomy over tariff control.

Formulating industrial policy Under the treaty system, the principal problem for Japan centered on how to protect and nurture the nascent manufacturing sectors that could export and thereby earn national power, and how to do so without recourse to tariff controls. Some desperate strategy in the form of industrial policy had to be formulated as a substitute for trade policy. First, Okubo initiated institutional change within the state. He created a new organ, the Industrial Promotion Bureau within the powerful Home Ministry, which would play an

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entrepreneurial role in energizing the private sector. On the one hand this organ participated directly in the sectors where the initial risks were too great for private firms to enter, or where private capital investments could not be anticipated (e.g., railways, telegraph). On the other hand, it undertook a long-term development program for improving the quality of exportable craft goods as well as raw silk and tea.40 Second, Okubo set up model factories in export sectors, which imported advanced foreign equipment to mechanize silk reeling and cotton spinning. Third, he attempted to encourage direct exports by Japanese merchants and helped to establish a direct export firm (choku-yushutsu kaishd). Along with direct government promotion of exports, top bureaucratic leaders renovated regulatory arrangements that aimed to protect infant industries from foreign competition. Some developmental strategies that we now call “industrial policy” emerged. Under the leadership of Okubo and his political ally, Okuma Shigenobu, indirect taxation was introduced. Given the existing Japanese tax system that had been heavily skewed toward direct taxes (principally a land tax), Okuma proposed a sales tax (eigyozei) to compensate for the absence of tariff duties, which were the primary source of indirect tax in the West. In particular, he aimed to tax imported items that escaped tariffs.41 Public lending for private-sector projects began in 1873 and rapidly increased. From 1873 to 1886, this accounted for 57 percent of total government revenue related to shokusan kogyo.42 To a lesser degree, subsidies began to be granted. More interesting was the fact that the Japanese state began to consider industrial restructuring (sangyo saihensei) as an important policy instrument in enhancing the international competitiveness of domestic industries. This came from the belief that a particular form of market structure would help Japan to export more and import less. One of the earliest attempts was Okubo’s shipping industry protection and nurturing policy. He was dissatisfied with the cutthroat competition between two indigenous companies— the Postal Steamship Company (Yubin Jokisen Kaisha) and Mitsubishi Trading Company (Mitsubishi Shokai)—that led to a loss. He believed that they should compete not with each other but with foreigners. In order to do so, he claimed, the existing industry had to be restructured into a monopoly (i.e., one large-scale firm), and he proposed a merger of the two: Mitsubishi, a private firm with an autonomous spirit but with limited capital, and the Postal Steamship Company, a public firm lacking the spirit of autonomy because it relied excessively on state support.43 The two eventually merged as Okubo directed. Subsequently, the state granted subsidies to the restructured industry through two industry-specific laws. One was the Shipping Promotion Law (Kokai shorei-ho), which provided a subsidy of 0.25 yen per mile for ships over 1,000 gross tons and with a speed of more than 10 nautical miles per hour. The other was the Shipbuilding Promotion Law (Zosen shorei-ho), which subsidized construction of steel ships over 700 gross tons and the engines to power them. As subsidies rose, taxes were reduced.44 Cartelization began to be used as another key restructuring strategy. Maeda Masana, under the patronage of Okubo and Okuma, developed this idea in his famous report called “kogyo iken” (1884). As Sydney Crawcour points out, Maeda’s task as a Ministry of Agriculture and Commerce (later, Ministry of International Trade and Industry) bureaucrat was to expand the productive base to a level that would provide the needed revenue for pursuing fukoku kyohei.45 Maeda charged that the existing policy (that is,

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Finance Minister Matsukata Masayoshi’s retrenchment policy during the 1880s) was narrowly focused on recovery from the current recession. To counter this short-term perspective, he prepared two proposals that would foster the productive capacity of the private sector in the long term.46 The first proposal was to establish an industrial (or development) bank (kogyo ginko), which, under the auspices of the Ministry of Agriculture and Commerce (MAC), would lend to the private sector.47 This proposal did not receive government approval, however. The Ministry of Finance (MOF) immediately opposed it. Although it was preparing its own proposal for an industrial bank of the same name, MOF did not want a bank under MAC’s control. Besides, MOF disagreed with Maeda’s vision of the bank’s function. Whereas Maeda’s proposal was to lend money for the promotion of business productivity, the MOF-proposed bank was to relieve rural distress and promote rural economic activity by financing local public works.48 Matsukata Masayoshi, the leading economic decision maker at that time, refused Maeda’s proposal to proceed without considerable changes. This oligarch opposed Maeda’s gradualist, productionoriented strategy in favor of fiscal and monetary stability.49 Maeda’s second proposal was approved and implemented. Maeda proposed the establishment of government-sponsored trade associations in certain important export sectors such as raw silk and tea. Indigenous producers and merchants of the same industry would be associated through the Trade Association Ordinance on a national, district, town, or village basis. The Association’s functions and articles of agreement would be specified or approved by the government authority (MAC). The range of this ordinance’s application would begin with important goods and then be extended to a wider range. Restructuring industries into trade associations was not an entirely new idea. As early as 1879, trade associations, broadly similar to the pre-Meiji guilds (nakama), began to form in the Osaka area. Provisions for registering members, electing officials, and maintaining product quality and commercial ethics were prepared under the general supervision of the Osaka Chamber of Commerce.50 What Maeda significantly added was the suggestion that the operation of these associations be strengthened by state intervention. Cartels would gain official status. What was the goal for state intervention? Why would the state help to strengthen private cartel activities? In Maeda’s proposal for the Trade Association Ordinance for the Silk Industry (sangyo kumiai junsoku), the objective of organizing a cartel in this largest exporting sector was to prevent overproduction and improve product quality.51 To Maeda, cartels were not a device for dealing with fluctuations in the business cycle but a developmental policy tool. The government-sponsored cartels were a means to the national goal, shokusan kogyo. This idea was implemented immediately, upon the approval of Matsukata. MAC helped to form trade associations such as the Japan Spinners Association (Dai-nihon boseki rengokai), which was established under the leadership of Okada Reiko, an economic bureaucrat who had directed a governmentowned mill. It aimed to build a competitive industry by sharing information and cooperating in production among indigenous producers.52 Nonetheless, it was the promulgation of the Trade Association Ordinance (dogyo kumiai junsoku) in 1884 that ultimately realized Maeda’s proposal. MAC urged producers and traders to organize in order to control “excess competition” (i.e., curb

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dumping prices) and to inspect the quality of export goods. The ordinance was followed in 1900 by the MAC-supported Important Goods Trade Association (juyo bussan dogyo kumiai), which had the same function. Finally, Japanese businesspeople began to consider forming a peak association. The Japan Trade Council (Nihon boeki kyokai) was founded by major importers and exporters who wanted to trade more effectively by exchanging information and conducting research on foreign markets with each other.

Between enforced free trade and the breathing space Under the treaty system, Meiji Japan was wide open. This, however, does not mean that Japan was deeply penetrated by the West. Two factors deserve mention. The fact that the unequal treaties dealt with the flow of tradable goods and not with the flow of capital (that is, foreign direct investment) gave the Meiji leaders leeway to free Japan from domination by foreign capital. In fact, a sizable amount of foreign capital came in as Japan opened up. For example, in the late Tokugawa years, the Bakufu borrowed US$500,000 from France, mortgaging the Yokosuka steel mill, and thirty-seven Han governments took out foreign loans totaling 4 million yen to purchase weaponry, battleships, and steamships. Immediately after the Meiji Restoration, a British trading company gained controlling ownership of the Takashima coal-mine. In danger from foreign investment penetration and at the same time suffering a dearth of capital, the Meiji oligarchs decided to take an independent course, however.53 They looked critically at the unhappy experiences of Egypt and Turkey, which had both mismanaged foreign loans and so invited foreign intervention.54 Okubo expressed his opinion by writing, “if we borrow money, it must be England. In case we do not repay, she will definitely intervene in our internal affairs and we will lose our political independence.”55 Foreign debt, stated Matsukata, will inevitably lead Japan to “a disastrous scene that was presented by Turkey, Egypt, and India.”56 Japanese fear of foreign direct investment (FDI) was institutionalized in some of the legal stipulations. A notable example was the “Orders on Mining” (Kyozan kokoroe-sho) in 1873. By stipulating nativism, it prevented foreigners from investing in and developing local mines.57 Another example was Japan’s commercial treaties with the West. The treaties allowed Western signatories’ businesspeople to establish commercial enterprises only within designated port areas commonly referred to as “Treaty Settlements.”58 Although the Japanese authorities began to open up their capital market in 1899 by granting the West the right to invest directly in the Japanese market (signing new bilateral accords with the USA and subsequently revising the Japanese Civil and Commercial Codes), their deep fear of outside influence continued to place significant restrictions on foreign investment. Cautiously watching some of the foreign multinationals setting up subsidiaries on Japanese soil (e.g., Western Electric, Standard, Royal Dutch-Shell), the Japanese state responded by re-regulating foreign investment, creating laws and regulations that were aimed at out-right restrictions on FDI in certain industries (finance, communications, railroads), and also taking steps to channel foreign investment funds into a portfolio rather than directly.59

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Together with Japan’s anti-FDI policy, the West’s lack of significant commercial interest in Japan played a critical role in shaping Japan’s policy course. Let us begin with Britain, the world’s greatest colonial power at that time. Traditionally, nineteenth-century Britain’s East Asian policy had focused on China. From the end of the Napoleonic wars, Britain’s commercial expansion was concentrated on the East Indian and Chinese trade.60 The British government had no firm policy on opening trade relations with Japan, and the rebuff of the Bakufu was accepted without protest. Not until the opening of the port in Japan did the British govern-ment become commercially interested in Japan.61 There was little sign of strong interest from the British merchants in the possibilities of a valuable trade with Japan, whereas the China trade was regarded as important.62 American pressure brought about the opening of Japan, as Frances Moulder pointed out, but the USA treated nineteenth-century Japan not as an object of serious commerce but as a way station to China.63 For Western businessmen, Japan, being a poor country, would have little to sell and thus could not afford to buy their manufactured goods. Because Japan was not economically incorporated to any significant degree, political encroachment, in the form of the unequal treaties, preceded the development of Western economic interests. After the initial encroachments, Japan had some “breathing space”; no significant Western economic interests developed for twenty or thirty years.64

Conclusion After the Meiji Restoration, Japan’s quest for modernity meant Westernization, as much for national survival as for the enjoyment of the material fruits of Western civilization. That is, the elevation of economic growth to the status of primary public policy coincided with Japan’s keen conceptual responses to the physical gap between the rich West and the poor East. In enacting this policy, the Meiji leadership was driven by power objectives. Okubo and other young oligarchs were realistic enough to foresee the danger inherent in maintaining the post-revolutionary status quo. They had to implement drastic changes in the existing economic system if the threats of domestic rivals as well as foreign imperialists were to be met successfully. A mercantilist ideology emerged which promoted the belief that the decision making for industrial growth was too important to be left to the general public, and that it could be best realized by a body of state bureaucrats who represented science and worked for the greatest good for the greatest number. The external environment restricted the range of policy choices which the bureaucratic elites could make. In the absence of tariff control, mercantilist elites searched for nontariff-based solutions and came up with industrial restructuring policies. Promoting mergers and cartels was the means to develop domestic industries. The shaping of the Meiji institutions of political economy was far from a systematic application of a far-sighted idea or a ready-made set of Western institutions. The experiences of the Meiji elites after the surrender of the Bakufu demonstrate that they had no grand design for reconstruction. It was not possible for them to look ahead. They had to proceed step by step, making a series of ad hoc adjustments that dealt with domestic political challenges as well as external pressures and opportunities. Western ideas were

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introduced. But they were selectively introduced and combined to fit the political conditions faced by the ruling elites.

3 Confronting a globalizing economy

As we have seen in the previous chapter, Japan was put under dual opportunity structures. The global system pressed Japan to open its ports, at the same time providing it with a breathing space due to the West’s lack of commercial interest in Japan. Facing trade liberalization (and not capital liberalization), Japan created a non-tariff-based regulatory system that used public lending, preferential taxation, and industrial restructuring to promote mergers and cartels. Fortunately, the protectionist efforts proceeded without strong protest from the West. As we will see in this chapter, Japan had to reform its Meiji system of political economy to cope with the drastically altered external and internal environment of the 1920s. After World War I, Japan encountered a completely different market—capital was liberalized. Foreign multinationals invested in Japan and the market was becoming global. The breathing space disappeared. The interwar Japanese state followed a mercantilist policy to deal with the challenge of global forces. As the domestic market was globalized during the 1920s, earlier (that is, Meiji) institutional arrangements reacted to it. Because penetration by giant multinational corporations was swift and large scale, Japanese policy makers needed to devise institutional arrangements that would enable Japan to stabilize the fluctuating market. Not surprisingly, the course of institutional development involved considerable conflict of visions and strategies concerning what would best deal with economic growth problems. For example, conceptual attempts to rationalize export trade policy originated as the best alternative to Japanese industrial growth, to be achieved by inviting foreign investment and regulating it under national economic development goals. In contrast, though they emerged late, doubts arose over the policy of trade orientation and external interdependence as an adequate course of action. In this alternative discourse there was a strong quest for an autonomous basis for action, which was expressed by the harsh criticism of some of the prevailing ideas of the political economy (i.e., proWestern/prointerdependence), propagated in a radical form of nationalist autarky based on anti-West sentiment.

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The coming of foreign investment in Japan Over the course of Meiji economic development, industrialization was not so great a cause of economic growth as was generally thought.1 Growth had occurred in traditional industries such as silk reeling, match manufacturing, textiles, food, and so forth, but the only modern industries that grew substantially were mining and munitions. In this sense, the pre-World War I years (1868–1914) were what Nakamura Takafusa terms the period of “balanced growth.”2 The traditional industries consolidated their own position in the national division of labor, and their interdependence with modern industries was functionally maintained. For example, until the end of the war, the largest customers of financial institutions were local traditional industries.3 World War I changed the structure of the Japanese economy dramatically. It caused structural alterations in world trade patterns. The unprecedented boom of the US economy due to its massive exports of war-related products to wartime Europe led to a corresponding rise in import demand. Japan, together with Canada and others, became a primary exporter (especially of textiles) to the rapidly growing US market. In addition, as a result of the war in Europe, Japan was able to take control of the Asian market that had been occupied previously by the European powers. Thanks to virtually unlimited expansion of foreign markets, exports soared and production could not keep pace. Japan’s trade balance figured a large surplus, credits extended to foreign countries increased, and specie reserves climbed to 2.2 billion yen. More important, the war facilitated Japan’s import substitution in heavy industries, one that was naturally induced by the wartime difficulties Japan had faced in importing heavy and chemical goods from Europe.4 Financial conditions supported this move. With rising prices thanks to the war boom and increasing consumption demand, corporate profits swelled dramatically but wages did not rise proportionally. Firms needed to find an outlet for investment, and their target was the heavy industries. The result was phenomenal. Heavy and chemical industries, along with the spread of electric power, boomed. As may be seen in Table 3.1, the share of heavy industry in manufacturing, which had reached about 20 percent by the end of the Meiji era, grew rapidly during World War I. Industrial production increased by 9.3 percent per year during the war (this rate was indeed higher than the US and European powers), but heavy industrial sectors such as machinery and tools soared (28.1 percent).5 Employment in these industries rose correspondingly. During the war the rate of increase was greatest, with an absolute rise of about 300,000. On the other hand, 72 percent of the workforce that had been in the primary sector at the beginning of the Meiji era was reduced to 55.3 percent after the war.6 Increased employment meant the rise of urban population. Urbanization, high price levels, export earnings, expansion of the domestic market, and the corresponding rise of Japanese purchasing power all created the context in which foreigners began to take a fresh look at the Japanese market: Japan would be a promising place for trade and investments. Together, the postwar international circumstances strongly affected the context in which Japan’s breathing space was about to disappear.

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Table 3.1 Manufacturing output and its composition (million yen) Year

Heavy industry

Food product

Textiles

Total

1905 309.9 (21.8) 494.3 (34.8) 458.8 (32.3) 1,420.7 1910 434.4 (21.0) 707.6 (34.1) 700.3 (33.8) 2,072.9 1915 840.5 (29.2) 784.4 (27.2) 955.1 (33.2) 2,880.3 1920 3,202.7 (33.4) 2,285.9 (23.9) 3,286.9 (34.3) 9,579.2 1925 2,390.5 (23.7) 2,582.8 (25.6) 3,974.7 (39.3) 10,100.0 1930 2,896.0 (32.8) 2,206.0 (25.0) 2,709.0 (30.6) 8,838.0 1935 6,516.0 (43.5) 2,461.0 (16.4) 4,356.0 (29.1) 14,968.0 Source: Takafusa Nakamura, Economic Growth in Prewar Japan (Yale, 1971, p. 23).

In East Asian international relations, a radical transformation took place during and after World War I. The Washington Conference (1921–1922), a postwar settlement, replaced the old order in East Asia—the unequal treaty system, or the framework of “the diplomacy of imperialism.”7 The latter was the regime in which multiple powers created and maintained a subtle equilibrium by means of a series of secretive bilateral alliances, ententes, and agreements aiming at particularistic objectives and harmonizing the interests of as many imperialists as possible. As an alternative to this regime, the Washington Conference system was an attempt to re-establish order and stability in postwar East Asia by emphasizing multilateral consultation and cooperation. It aimed at multilateral institutions. The principal architect of this new regime was the USA, because of the central role it played during the war and the increasing share of American trade and investment in the Chinese and Japanese economies. During the war, both the USA and Japan, two principal actors in East Asian international relations, reaped enormous benefits from trade. USJapan trade ties were also strengthened. During the war, for example, Japanese exports to the USA almost tripled, and US exports to Japan soared by more than 500 percent. When the war ended, Americans found Japan an attractive place for trade and investment, and at the same time Japanese officials realized that their economic prosperity depended to a large extent on further expanding trade with the USA.8 In this sense, economic considerations did much to encourage the establishment of a new regime. The Washington Conference provided a framework that would bring about a new era of “the primacy of economic policy” as the basis for reconciling and promoting signatories’ interests, such as increases in trade and investment, nondiscrimination, and economic stability in China.9 In so doing, this regime promoted economic multilateralism based on the gold standard, in which commercial activities of all the signatories would be carried out smoothly for mutual benefit.10 Under these circumstances, massive foreign investment followed. [As Table 3.2 shows], as of 1931, fifty major firms owned either exclusively or partially by foreigners were established in Japan. Many of them were giant multinationals that had developed worldwide business networks with advanced technology and information. They include Standard Oil (1893), Rising Sun (Japanese subsidiary of Royal Dutch-Shell, 1900), Armstrong, Victors (1907), Dunlop (1909), General Electric (1909), B.F.Goodrich (1918), Siemens-Schukertwerke (1923), Westinghouse Electric (1923), Ford (1925),

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General Motors (1927), Victor Talking Machine (1927), Associated Oil (1931), Otis Elevator (1932), and International Standard Electric (1932), among others. Multinationals began to invest in the Japanese market at the turn of the century, but many of them came to Japan after the outbreak of World War I and abruptly increased their investment activities during the 1920s. Although the size of their investment was not especially big, their impact on the Japanese economy was substantial.11 In particular, they were concentrated in the heavy and chemical industries in which import substitutions had already begun during the war. Newly rising sectors such as automobiles, machine tools, specialty steels, chemicals, petroleum, heavy electric machinery, and tires were threatened by these firms.

Table 3.2 Major foreign-affiliated manufacturing corporations in Japan, 1931 By nationality

By product

1 Corporations owned exclusively by foreigners: 13 companies U.S.A. 6 Electric machinery, automobiles, rubber products, U.K. 5 machinery, records, food, paper Others 2 2 Corporations majority owned by foreigners: 10 companies U.S.A. 6 Machinery, automobiles, rubber products U.K. 2 Others 2 3 Corporations jointly owned, operated by Japanese: 36 companies U.S.A. 9 Electric apparatus, cotton yarn, rayon, steel, wool products, U.K. 9 machinery, gas, glass, ice, celluloid, matches Germany 8 Others 10 Source: Gaimusho, Tokubetsu Shiryofu, Nihon ni okeru gaikoku shihon (Kasumigaseki, 1948), quoted from Masaru Udagawa, ‘Business Management and Foreign-affiliated Companies in Japan Before World War II,’ p. 4.

Struggles for protection Tariff protection did not become an immediate policy tool until after the end of the war, despite Japan’s much-desired recovery of tariff control in 1911. The 1911 tariff revision increased the overall tariff rate only minimally. Several reasons can be offered. First, just as the Japanese economy had moved from the initial stage of light industrialization into heavy industrialization, it required advanced foreign technologies and capital investments that could not be attracted under a tight tariff protection system. Second, especially after winning two imperialist wars (the Sino-Japanese War of 1895 and the Russo-Japanese War of 1905), Japan did not want to revert to a system hostile to the West, thereby hurting its much-needed international prestige which it had earned at great cost. Third,

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only three years after its recovery of tariff autonomy Japan faced the outbreak of World War I, which created natural trade barriers. Because of the difficulty of importing foreign manufactured goods, Japan needed no formal tariff barriers. Finally, industrial policy as a substitute for trade policy was firmly entrenched in the national decision-making structure and process—an institutional inertia. By the early 1920s, however, the arrival of foreign firms, coupled with the bursting of the wartime bubble, precipitated the state’s immediate measures for protecting domestic industries. Domestic plants planned during the bubble period were completed only after the end of the war or later. Imports, especially the Europeans’ under the devalued currency (“currency dumping”), came in before investment plans could be realized. Further, the wartime and postwar bubble collapsed, prices and demand fell, and the new capacity became excessive.12 Japan was experiencing an overcapacity/overproduction crisis. Domestic heavy industries were particular victims of excessive competition, leading to a deep recession. Protection of nascent heavy industries was imperative. What is noteworthy here is that this agenda had already been prepared during the war. In preparation for the postwar economic management in 1917, the Japanese state launched the Economic Investigative Council (Keizai chosakai), which consisted of government bureaucrats, Diet members, private businessmen, and university professors. Ministry of Agriculture and Commerce (MAC) set up the Temporary Industrial Investigation Bureau (Rinji sangyo chosa kyoku) to study the same agenda. The public-private council made a comprehensive review of the current status and future prospects of heavy industries such as steel, chemicals, and machinery that had been established during the war. Although it stressed that heavy industries should be protected and nurtured, the council made no conclusive decision about whether tariffs should be used as a principal policy tool. Given the wartime situation, with domestic price levels soaring and productive activities largely isolated from the world market, it was technically difficult for the council to calculate the expected advantages/disadvantages of heavy tariff protection if it were to be applied.13 The postwar cabinet led by Hara Kei came to consider protective tariffs as an important policy tool. While undertaking ad hoc relief measures (i.e., spending money to bail out failing firms) on the one hand, the cabinet struggled to find a systematic set of trade policies to revise existing tariff schedules upward on the other. In doing so, it encountered a serious obstacle: discord between the MAC and MOF (Ministry of Finance). The former maintained an aggressive protectionist policy including tariffs and subsidies, while the latter was passive toward price stability and budget balance. Domestic producers (pro-tariff group) were pitted against domestic consumers (anti-tariff group). This was especially true in the intermediate goods (or basic materials) sectors such as steel products, soda, and dyestuffs. For example, shipbuilders protested heavy protective tariffs on foreign steel products. They demanded an import-tax exemption on steel for shipbuilding and a government subsidy.14 As a result, tariff rates were determined ad hoc. No consistent rules were applied.15 Despite the erection of tariff barriers, foreigners increasingly penetrated the Japanese market and pressed domestic firms hard. They made great strides when they also adopted much higher tariffs than Japan’s. Despite futile efforts at joint Anglo-American international economic leadership in the 1920s, protectionism prevailed in Europe. Part of the reason was that Americans themselves turned inward. Following the 1922

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Fordney-McCamber Tariff Act, the average duty on imports was over 50 percent, and it was even higher on items such as iron, steel, and cotton textiles. It was not until 1934 that US protectionism, culminating in the Smoot-Hawley Tariff of 1930, reverted to free trade.16 For Japan, a more comprehensive and systematic revision of the tariff system was required. To this end, in 1920, the Japanese state sought an advisory report from the Temporary Investigative Council of Finance and Economy (Rinji zaisei keizai chosakai) which succeeded the Economic Investigative Council. In order to systematically reform the tariff system, the initial task of this council was to gather information on the market and firms. MOF prepared an original plan and the council reviewed it. During this process, MOF consulted two major business associations, the Japan Industrial Club (Nihon kogyo kurabu) and the Tokyo Chamber of Commerce (Tokyo shogo kaigisho); each presented its own reports. Due to the interruption by the Kan to Earthquake (1923), MOF’s review process was protracted until the tariff revision became a central political issue in 1926.17 In the 1926 tariff revision, tariff levels were increased selectively. A uniform increase of the tariff rate across industries was avoided because tariff policy aimed to protect infant industries rather than to correct the chronic balance-of-payment problem.18 In sectors where ad hoc increases in tariff rates had been made in the immediate postwar years (steel products, low- and middle-quality dyestuffs, machineries), higher tariff barriers were erected. No revisions were made in sectors where firms faced severe competition from foreign products during the 1920s (high-quality dyestuffs, pig-iron, automobiles, aluminum). MOF believed that tariffs would only help to protect industries that would be able to compete with foreign firms (specifically, the sectors in which domestic supply capacity surpassed domestic consumption).19 In line with MOF’s protrade policy, MAC preferred subsidies to tariffs. Subsidies were provided for industries such as aluminum and automobiles in which there was no realistic expectation of strong domestic supply in the near future. By 1926 protective tariffs clearly became a means to industrial policy. Vigorous and consistent study of tariff revision had been made in a series of councils and committees during the first half of the 1920s. Nonetheless, the cases in which tariffs were the main policy tool of import substitution were relatively limited. The Japanese state was conscious of gains from international trade. Under the framework of the Washington Conference, Japan pursued an economic policy that promoted trade and international cooperation (so-called Shidehara diplomacy).20 Equally important was the behavior of foreign firms in Japan, which tried to kick Japanese infant industries out of the market through drastic price-cutting (or dumping).21 In the face of foreign denial of domestic entry into markets, tariffs policy alone was not an effective tool for protection and nurturing. Let us look at several examples. In some industrial sectors, combined use of tariffs and subsidies helped the domestic industry. The dyestuffs industry is the best example. Facing one of the tightest international regimes in the interwar years, the international dyestuffs cartel, the Japanese state could use tariff barriers and subsidies to strengthen the competitive power of domestic firms.22 The same policy supported the domestic soda firms’ successful effort to compete with the international soda cartel led by International

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Chemical Industries (ICI).23 Tariffs and subsidies were not effective in the sectors with heavy foreign investment, however. Beginning in the mid-1920s, under the liberal international regime, private cartels proliferated, initiated by private firms but often with state support. They included pigiron, steel materials, petroleum, cement, superphosphate, and electric machinery. All were established in sectors with substantial foreign investment.24 Relatively successful were those sectors that had a relatively low rate of foreign investment. One example was the pig-iron cartel, which, helped by government subsidies and protective tariffs, maintained price levels and regulated pig-iron imports. However, the combination of cartelization, subsidies, and tariffs was not enough to shore up domestic firms in sectors with strong foreign investment. When powerful foreign players were excluded, cartels invariably failed. Domestic firms often allied themselves with powerful foreign firms and opportunistically refused to join cartels. Although in a few instances domestic and foreign firms joined in setting up cartels to divide market share, limit production, and stabilize prices, all the agreements were short-lived. Because of the full-scale integration of domestic and global markets, fluctuating market conditions undermined the stability of domestic collusive arrangements. The state had to respond to industry pleas to strengthen cartels or even set them up. Yoshino Shinji, often called the architect of Japanese industrial policy, was the most effective agent in this regard.25 He believed that in a recession, cartelization as a means to creating monopoly could be justified from the viewpoint of the “national economy.” Yoshino wrote: Nowadays, (economic) liberalism was no longer the driving force of industrial progress that it used to be in the West…men of the same industry could not overcome the current crisis through self-governance. It is not unreasonable for the state to enforce laws in order to construct and facilitate a cooperative institution. Matsuoka Kinpei offered a new cartel theory to justify Yoshino’s idea. As an adviser to the Temporary Industrial Rationalization Bureau (Rinji sangyo gorika kyoku) of Ministry of Commerce and Industry (MCI) and as an official of the Mitsubishi Holding Company, Matsuoka introduced a German cartel theory: Cartels were a means not simply to guarantee profits to marginalized firms, but to induce competition among associated firms to supply cheap goods to consumers. Specifically, he continued, cartels contributed to the stability of the national economy, to industrial rationalization through simplification and the division of labor, and to mutual solidarity in industry. In short, cartels meant organizing competition (kyoso no soshikika) and not monopoly.26 Supported by this theory, Yoshino systematically pursued cartelization strategies. He prepared the Important Export Industries Association Law (Juyo yushutsuhin kogyo kuimiai-ho) in 1925. Under this law, the government-sponsored industrial unions were supposed to construct an industrial order and not advance private profits.27 They attempted to end excessive competition and thereby enhance the quality of export goods. Added to this law was the Export Union Law (Yushutsu kumiai-ho), which aimed to regulate trading companies. In doing so, the key issue was whether the state or cartel administration could force non-participants in the cartel agreement to abide by its terms.

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No compulsory clause was included in these laws. Not until the enactment of the Important Industry Control Law (Juyo sangyo tosei ho) in 1931 was private entry and exit of cartels controlled. Yoshino’s quintessential ideas were behind this historic law. Cartels were not intended to provide monopolistic rents for big business but were for “public purposes.”28 State guidance of cartels (karuteru shido) was intended to “rationalize” the national economy (kokumin keizai no gorika) with an eye toward facilitating a smooth supply of commodities, fair pricing, and fair profits.29 That is, the state must intervene in the economy to restore an industrial order corresponding to the interest of the national economy. The distinguishing feature of the 1931 law lies in two points. Whereas the previous laws dealt mainly with small- and medium-scale firms, objects of this law were large-scale, zaibatsu firms. Second, it contained a compulsory clause. The state would support the operation of cartels by restricting to a considerable degree the freedom of business, regulating business activities in and outside the cartel.30 The law had some success but was hindered by the difficulty of regulating major foreign market players inside and outside the cartels. As with the gasoline case which we will discuss in Chapter 4, the law did not work because it could not regulate the entry and exit of foreign players in the market, which could easily disrupt the workings of the preexisting cartel. In an extreme case, without drastic state measures to restrict domestic manufacturing and imports of powerful foreign firms, building up a Japanese-owned industry seemed impossible. “Restoring the industrial order” and “rationalizing the national economy” in the face of foreign competition required the state’s strict control. Yoshino intimated that “in order to exert a thorough regulation, it might be necessary for the state to grant license to the industry to be regulated.”31 In this radical measure, a firm would need a license to operate and the state would adopt licensing criteria that would limit market players to a few selected firms, upon which it would then focus its development efforts. In Japan, licensing had already been used for social regulation. Social regulation refers to government intervention which aims to minimize the social by-products of unlimited private economic and social activities, and thereby to protect the life and property of the public and promote social welfare.32 For example, prostitution has been a licensed industry since the late Tokugawa period. Pharmaceutical companies were licensed from the early Meiji. Licensing was also applied in public goods sectors, such as electricity, in 1929. Using it for developmental purposes (i.e., economic regulation for infant-industry protection), however, was a new and innovative idea.33 Although licensing was applied in importing dyestuffs from Germany in the immediate postwar years, this was an exceptional case. No commercial treaty with Germany existed at that time. MAC ordered that firms must have a license to import dyestuffs from countries that had no commercial treaty with Japan. In doing so, Yoshino recollected that MAC had found and followed the US example, in which the US used import licensing temporarily in the same case.34 Interestingly enough, as we will see in the next section, the licensing idea did not originate with Yoshino and his fellow bureaucrats. By the mid-1920s, it was introduced and discussed as a means to national autonomy in strategic industries. The military was instrumental in this effort, and by the early 1930s, economic bureaucracies such as the MCI began to accept the military-endorsed idea. Nevertheless, the military’s policy stance toward foreign investment differed from the economic bureaucracy’s. For the two,

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licensing served quite different purposes. Although both wanted infant-industry protection, each put a different value on stabilizing domestic industrial conditions versus developing autonomous domestic industry.

Accommodation versus prevention While a pro-trade mercantilist idea continued to serve the national goal of economic growth, a new discourse emerged that stressed an autonomous basis for action under the new international circumstances of modern, total war. It claimed that national integrity and economic prosperity depend on a powerful system of political economy that retains autonomous political power and a self-sufficient economic base. By the early 1920s, a number of international events (World War I, international naval conferences, the emergence of a mechanized Soviet military on the Asian continent) brought about Japan’s concerns over an impending confrontation with the West, which, some segments of the Japanese society thought, would be a war of attrition requiring not only guns and soldiers but all national resources. The efficient generation and mobilization of industrial power would be crucial in waging a future war. The burgeoning of such political economic ideas in Japan dates back to the mid-1910s, when a group of military officers and civilian bureaucrats began to study the German mobilization efforts of 1914 to 1918.35 The Army Colonel Koiso Kuniaki was sent to Germany to study its wartime mobilization. Koiso realized that the ultimate victory in a future war would go to those with strong industrial power and efficient mobilization plans. In his report, he made two policy recommendations: (1) Japan’s “economic policy should be formulated in accordance with the establishment of a self-sufficient economy by limiting the freedom of profit-seeking from the international division of labor,” and (2) because of its limited reservoir of strategic resources, Japan must develop productive facilities in Manchuria and Mongolia, and must also bring in necessary resources from China.36 At the forefront of this view were young military strategists, including Nagata Tetsuzan, Ishiwara Kanji, and Koiso himself, as well as a civilian group of the so-called reform bureaucrats who populated the Cabinet Investigative Bureau (later, Cabinet Planning Board) in the mid-1980s. They gained political power when their political guardian, Konoe Fumimaro, became Prime Minister in 1937.37 This circle believed that Japan’s national integrity and economic prosperity depended on its preparedness for total war, and that in order to survive, Japan must establish an autonomous political and economic base through drastic national reorganization. Kita Ikki and his radical proposal, An Outline Plan for the Reorganization of Japan, provided the strategists with a much-needed theoretical foundation.38 Kita’s Outline Plan was born in the immediate post-World War I conditions. He wrote in the first line of the plan, “At present, the Japanese empire is faced with an unparalleled national crisis both at home and abroad.”39 The country’s dilemmas were associated not so much with the Western imperialist threat as with a crumbling Japanese empire suffering from the impact of the Russian Revolution, an intensifying class struggle (the Rice Riot), and the rise of national liberation movements within its imperial sphere (Korea’s March 1 Movement and China’s May 4 Movement). In response to these problems, Kita proposed a national

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socialist program in which he advocated sweeping changes in all sectors of Japanese society via strict state control. He proposed the creation of seven new ministries to supplement the existing economic agencies aimed at coherent economic planning to enhance productivity. These institutions would bring coherence to the management of big businesses (confiscated for exceeding private wealth limitations) and encourage the formation of mergers and cartels among firms, thereby achieving the rationalization of production. The military circle’s strategic belief (i.e., inevitability of total war, autarkic empire) was combined with Kita’s radical ideas for domestic reorganization. The culmination of the autarkic idea came from two proposals prepared by the Army Ministry during 1934: “The Essence of Modern National Defense and Economic Strategy and Others” (Kindai kokubo no honshitsu to keizai senryaku kita) and “The True Meaning of National Defense and the Proposal of its Strengthening” (Kokubo no hongi to sorekyoka no teisho) or the so-called “Army Pamphlet” (Rikugun pampuretto). By criticizing the current economic organization, which allowed too much freedom to individuals who sought only the unlimited accumulation of personal profit and caused class conflict, these proposals advocated a “total economic concept” based on “morality” (zentaiteki keizaikan/dogiteki keizaikan), one that emphasized national rather than individual profit. On the basis of this concept, Japan was to establish “as soon as possible a new economic organization to realize the ideal of the imperial nation”; that is, “the national-defense state” (kokubo kokka).40 A state of this kind requires a powerful system of political economy that in times of war can tightly regulate industry and mobilize all economic resources efficiently. Moreover, because war would make international trade difficult, the state would need a self-sufficient economic empire comprising productive facilities and reservoirs of natural resources to protect against wartime embargoes.41 Here, economic autarky meant the selfsufficient production of goods in vital industries which, from a military perspective, included automobiles, petroleum, aircraft, iron and steel, machine tools, and some chemicals. These were invariably multinational-dominated sectors, so predictably the military’s attitude toward foreign investment was hostile. The military believed that preventing the adversary’s influence in the domestic market was indispensable for national autonomy. From the early 1930s, as we will see in Chapters 4 and 5, a strategic belief, combined with the desperate need to stabilize the fluctuating domestic market, produced a radical policy idea: the licensing system. Unlike Kita’s plan for sweeping nationalization, the new scheme focused on market-conforming control over the private sector. Licensing should be used as the principal instrument to restrain foreign firms. Inevitably this would strain diplomatic relations. By contrast, the pro-trade groups, outward mercantilists, asserted their own view on the use of licensing, one that argued for the accommodation and control of foreign investment. Their alternative was a joint venture. The central figure of this group was Takahashi Korekiyo, one of the most celebrated economic policy makers in prewar Japan, who between 1920 and 1936 served as a seven-time finance minister, an agriculture and industry minister, and a premier. Consistent with early Meiji tradition, he proclaimed in 1917 that “as long as Japan has entered into the world’s great power class,

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international trade is its lifeline.”42 He argued that the conception of international relations had changed: Armed competition has become obsolete, but economic competition is growing in intensity. The Japanese people must redouble their effort to produce and sell superior merchandise at competitive prices. By doing so, they would be contributing to the common welfare of mankind as well as happiness and development at home.43 The fundamental nature of interstate struggle is economic competition among states. A nation’s security is maintained by its economic power and not vice versa. Takahashi was not a free trader, however. He believed that in order to reach an export-import balance it is necessary to use protective tariffs, but cautiously. As early as 1912 (when Japan had fully recovered its tariff autonomy), he warned that although domestic producers’ competitiveness in commodity prices could be achieved through tariffs, it would not guarantee their future competitiveness that would be based on the higher quality of Japanese commodities. Tariff barriers tend to make protected domestic producers complacent, so he advocated that tariff policies should be formulated not only to replace imported goods by indigenous goods in the domestic market, but also to encourage domestic producers to export and compete in the world market.44 Takahashi was a stringent critic of the idea of economic self-sufficiency. Since the days of the First World War, which spawned the total war theory, he had openly opposed the military’s promotion of a national defense economy, asserting that: If our country needs economic independence (keizai tokuritsu), this gains meaning only when our economic power enters into and plays an active part in the economic sphere where the world’s great powers interact, and occupies certain status. By no means do economic relations mean selfsufficiency (jikyu jisoku). This is not the same meaning as the independence of arms.45 Faced with increasingly strong political challenges by those who advocated economic autarky and also by strong worldwide protectionist currents (especially after the beginning of the Great Depression) from the early 1930s, Takahashi admitted that under the increasingly unstable global economic regime, the state’s control of foreign trade was an inevitable solution to the problem of global protectionism in general and Japan’s trade deficit in particular. But he endorsed bilateral negotiation as opposed to radical trade control (i.e., unilateral protectionist action for autarky): Japan should make every effort to hold the foreign trade-oriented national strategy by bilateral negotiation (i.e., coordination of tariff levels, quotas, exchange rate), co-optation, and cooperation (i.e., joint ventures).46 From an economistic point of view, Takahashi judged that Japan’s trade surplus during the 1930s came only from within the Yen bloc, and thus the autarkic strategy could not improve the unfavorable balance-of-payment situation, which resulted mainly from imports of such essential commodities as petroleum, iron and steel, machine tools, and cotton from the West. From a strategic point of view, he wrote that armaments should be kept in accordance with the diplomatic objectives and national economic

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conditions.47 He argued that because the USA had been the greatest customer of Japanese export goods and at the same time the largest exporter to Japan, friendly relations with the USA were crucial to the country’s national interest. The mainstream Ministry of Foreign Affairs (MFA) bureaucrats, such as Kurusu Saburo, shared Takahashi’s view.48 For example, in the mid-1930s, they became fully aware that because a Japan-centered empire would never be truly self-sufficient, the costs of acquiring an autarkic empire would exceed the expected advantages. A paper presented by the Research Bureau of MFA in 1936 addressed this dilemma: The practical advantages of an expansionist policy are slim. Ever since the Sino-Japanese War (1894–95), there has been a national deficit, and this deficit could not be paid off by ten or twenty years of colonial dominance in the future.49 Instead, they argued, Japan should pursue the ideal of “universal harmony.” To reestablish the international cooperative system, they wrote that “although Japan would go along with the present global trends, it would not hesitate to return to the pre-1929 system of more liberal transactions among capitalist countries, if that system were reestablished.”50 Of course, Yoshino and the Ministry of Commerce and Industry (MCI, a descendant of MAI) bureaucrats formed this group. They were strong pro-ponents of domestic industrial protection from international competition. They shared the mercantilist belief that a nation could raise income by targeting particular industrial sectors and protecting them from international competition. This policy could change the conditions of international oligopoly and thus shift monopolistic rents from foreign to domestic firms. Nonetheless, what they pursued was infant-industry protection through the establishment of market stability and not economic autarky. As we will see in later chapters, their attention focused on technology transfers. Complete delinking from the world market made no sense. On this score, a domestic-foreign joint venture could be a second-best protective mechanism. It was an incremental development project that would take time but could reconcile import substitution with the maintenance of foreign trade flows. It was also a developmental one, because the primary frame of reference in policy making was always the position of domestic industry vis-à-vis competitive foreign firms. International competitiveness of domestic industries could not be realized if foreign technology and investment were prevented from entering the country.51

Conclusion The rise of the mercantilist state and its association with the powerful constraints of the enforced free trade regime in the late nineteenth century (the unequal treaty system) produced the idea of industrial restructuring (cartel/merger) as a means to mercantilist growth. But, faced with foreign investment penetration during the 1920s, such a restructuring entailed having a stronger interventionist program, which eventually led to the licensing system. In this process, two rival groups emerged. Each had different goals

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and pushed the new system for different purposes. They competed with each other and generated controversy over how to operate the licensing system. Trade-oriented mercantilism • Metaphor: a regulated open door. • Organizing principle: relative gains are sought through international trade, limited obstacles to the flow of goods, pro-trade, prointerdependence; gradualism, hegemony through gradual economic encroachment. • Role of state: intervention for economic growth and market stability; limited use of protective tariffs, licensing to be used for regulating foreign capital investment; encouragement of foreign-domestic joint ventures; emphasis on the role of economic diplomacy. • State-industry relations: encouragement of private cartels, state intervention at the level of cartel or industrial sector, as in the case of the Important Industry Control Law (1931). • Political constituency: ministries of Foreign Affairs, Finance, Commerce and Industry, Saionji Kimochi. • Economic constituency: tradable goods industries (especially export industries such as textiles), bankers, trading firms. Autarky-oriented mercantilism • Metaphor: an autarkic empire. • Organizing principle: autonomy and self-sufficiency, delinked from the world market; economic activity subordinate to geopolitical goals, national security; radicalism, hegemony through controlling the sphere of influence and exclusive control of key raw materials. • Role of state: state intervention for economic security; all-out protectionism and importsubstitution, licensing to be used for preventing foreign encroachment; the use of forceful measures if necessary. • State-industry relations: economic planning; direct control over individual firms as in the case of the National Mobilization Law (1937). • Political constituency: the Army, the Navy, the Economic Planning Board (former CPB), reform bureaucrats, Konoe Fumimaro. • Economic constituency: defense industries, new zaibatsu invested substantially in colonial areas. The controversy over trade versus autarky continued into the mid-1930s. The point at issue was how to use licensing. Was it to prevent foreign investment? Or was it to stabilize the domestic market? The political process of the mercantilists competing for primacy in decision making will be illuminated in the following chapters. Before moving on, it is useful to note one implication. In retrospect, it is vastly misleading to think that Japan has pursued consistently and successfully an outwardlooking, comparative advantage-sensitive strategy, with the partial exception of the 1930s and 1940s as an aberration for postwar growth. During those aberration years, in fact, the highest growth rates in modern Japanese history were recorded. Instead, what has to be

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recognized from history is the dual nature of the Japanese mercantile state. Free trade and protectionism were used selectively for the systematic accumulation of relative gains from trade.

4 Politics for protection

Petroleum This chapter explores how Japanese policy makers protected and nurtured the nascent indigenous petroleum industry from foreign competition. From the late nineteenth century, especially form the early 1920s, two multinational oil firms, Standard-Vacuum (an East Asian joint subsidiary of Standard Oil of New Jersey and Standard Oil of New York) and Rising Sun (a Japanese subsidiary of Royal Dutch-Shell), had a control of the Japanese oil market by consistently holding more than half the market share of refined oil in prewar Japan. Since penetration by the two giant multinationals was swift and large in scale under an open East Asian trade regime, the Japanese policy makers had to devise institutional arrangements that would enable her to stabilize the domestic market and nurture indigenous firms to be competitive. In narrating the Japanese efforts to establish a stable industrial order in oil, it is necessary to focus on the state’s decision-making process which eventually led to the enactment of the Petroleum Industry Law (sekiyugyo-ho, PIL) and its operation over the running of the cartel. This law was a comprehensive set of protectionist measures, which gave the state the right to license the business of crude oil imports and refinery construction, and to set production quotas and subsidies as well as enforce a six-month oil stockpiling requirement.1 We will see that the Japanese state eventually found an industrial order (i.e., control of market players, price, production, and sales) at the cost of the consumer, but that it could neither regulate foreign oil firms satisfactorily nor achieve the much desired autonomy in the oil-refining sector that it targeted.2 Two contrasting explanations account for such a policy result. First, Irvine Anderson, in The Standard-Vacuum Oil Company and United State East Asian Policy, argues that the international oil regime’s power frustrated Japan’s quest for oil autonomy.3 This is seen in the effective coordination between Standard-Vacuum and Royal Dutch-Shell in bargaining with the Japanese state. Anderson’s work relied entirely on US State Department records, but completely failed to examine the Japanese politics within which the intrastate actors and domestic forms interacted to influence the bargaining process toward particular institutional arrangements called licensing. On the other hand, in The Business of the Japanese State, Richard Samuels stresses domestic factors as accounting for the inconsistency of state intervention, and he argues that while the state aimed repeatedly for a vertically integrated, horizontally unified oil

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industry, what emerged instead was a vertically truncated, horizontally fragmented domestic industry constrained by state intervention.4 What is less recognized in this account is the extent to which the globalizing market helped to shape specific policy ideas of various actors, and the way in which public and private actors sharing their own ideas were organized to respond to that evolving market. This analysis instead focuses on the conflict both within the Japanese state and within the vertically disintegrated industry which includes oil-producing, refining, and trading firms. It explores how different ideas were formulated around the issue of oil industry protection within the state, and how they affected the formation of political coalitions including state actors and firms (domestic/foreign) under the context of the international oil industry’s structure. We will then find an institutional framework where political, business, and bureaucratic actors made political exchange to produce a “licensing system,” the idea of which, as we will see, was borrowed from the French experience, but whose actual application diverged considerably.

Historical background As shown in the case of Standard Oil’s domination of the US oil industry prior to its dissolution in 1911, and of the Seven Sisters’ control of world oil since the late 1940s, the oil industry is regarded as one of the most concentrated industrial sectors among modern industries. Shaffer argues that in the oil industry’s early phase, its monopolistic character was shaped by: (1) the presence of scale economies in refining, (2) the geographical distance between major markets and the producing center, and (3) the limited supplies of crude oil available.5 Indeed, Standard’s initial control over both transportation (the reduction in unit costs through lower transportation charges) and major refineries led it to hold over 90 percent of domestic production and 90 to 95 percent of total refining capacity in 1880.6 From the beginning, Standard Oil’s export of refined oil products exceeded domestic sales. In 1866, for example, it exported more than two-thirds of its refinery output,7 and it also established sixty-seven foreign affiliates engaged in the oil trade. Nonetheless, it failed to achieve a hegemonic position in the international oil market. It never reached one-third of the market share prior to World War I, whereas European firms such as Shell, Royal Dutch, Nobel, and Rothschild occupied the remainder of the non-US markets.8 Meanwhile, Standard dominated the East Asian market by establishing a distribution network that in 1893 was assigned to the Standard Oil Company of New York (Socony). Market success here replaced the losses suffered in Europe following the rise of Russian oil. It was, in fact, the fastest growing market for US oil.9 Standard’s dominant position, however, had been challenged at the turn of the century, first by the Shell Transport and Trading Company, which began selling refined Russian products to East Asia via Rothschild, and later by Royal Dutch, which was organized to produce, refine, and distribute Dutch Indies oil. Predicting that the Dutch Indies would become a major force in the East Asian market because of its rich oilfields, geographic proximity to China and Japan, and cheap local labor force, Standard made two aborted attempts to buy out Royal Dutch in 1895 and 1897, respectively. Due to the Dutch government’s intervention,

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Standard failed to obtain concessions in southern Sumatra. Later, it initiated a fierce price war in East Asia.10 In 1903, Shell, Royal Dutch, and Rothschild responded by creating a joint trading firm, “Asiatic Petroleum Company,” which controlled all their oil transactions “east of Suez.” Four years later, Royal Dutch-Shell was set up to emerge as the Standard’s biggest rival in the world oil market. For the next twenty years, the East Asian market became the world’s hottest battlefield for market share between Standard (after the breakup in 1911, Standard-New Jersey and Standard-New York) and Royal Dutch-Shell. This international situation shaped the modern history of the Japanese oil industry beginning with the establishment of Nippon Oil, the largest domestic producer and refiner up until now. Nippon Oil was followed by numerous small-scale producers which in 1891 totaled 403 firms, but two foreign trading firms soon dominated the field. In 1893 both Socony and Rising Sun opened offices in Yokohama. Both aggressively penetrated the Japanese market by selling refined products (mostly kerosene), and later they participated directly in production and refining, i.e., Socony’s International Oil Company. In 1907, due to high production costs and a limited reservoir in Japan, it abandoned the upstream business and sold its facilities to Nippon Oil. In 1909, Rising Sun constructed a refinery in Fukuoka, but abandoned it during World War I. Throughout the rest of the century, the two major companies continued to dominate the Japanese oil market by marketing foreign refined products while domestic firms struggled to survive.

Private control for protection As we see in Table 4.1, domestic oil had been dominated by the imports of foreign oil products, most of which were controlled by the two major oil companies. In this circumstance, the development of the domestic oil industry meant its protection from foreign oil. Without the right to impose tariffs, mergers and cartels became the primary means of protecting Japanese oil firms. As early as 1901, Okuma Shigenobu, together with Shibusawa Eiichi, addressed to domestic oilmen the necessity of a “grand merger” (daigodo) by which to “multiply [Japanese] power and compete with [Standard].”11 Initially, the plea for a merger centered on Nippon Oil was stimulated by Socony’s establishment of the International Oil Company on Japanese soil, and continued throughout the entire prewar oil history.12 On the other hand, the first private joint action appeared in 1904. Two leading domestic firms, Nippon and Hoden, realized that the competition between them caused prices to fall, which weakened their competitiveness vis-à-vis foreign firms. They organized the “National Oil Sales Union” (kokuyu kyodo hambaisho) to improve the quality of production and strengthen the marketing network. It collapsed within two years. Subsequent attempts at protection invariably failed. In fact, it was ineffective for domestic firms to organize themselves for collective action while excluding two dominant foreign players. They had to be dealt with.

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Table 4.1 Refined oil supply in Japan, 1919–1940 Year

Production from domestic crude

Production from foreign crude

Subtotal

Import of refined oil

Total

1919 – – 257,792 177,768 431,560 1923 222,229 97,410 319,639 272,384 592,026 1926 227,304 281,772 509,076 411,178 920,251 1927 246,204 289,224 535,428 436,479 971,907 1928 249,876 307,764 620,640 888,137 1,508,777 1929 293,760 416,484 710,244 1,164,506 1,874,750 1930 289,007 459,092 738,384 1,515,271 2,253,307 1931 301,731 489,653 791,384 1,601,972 2,393,356 1932 – – 913,354 1,847,444 2,760,798 1933 – – 1,074,440 1,854,777 2,928,217 1934 – – 1,297,135 2,298,764 3,495,899 1935 – – 1,516,344 2,911,056 4,427,400 1936 – – 1,730,837 2,677,049 4,407,886 1937 – – 2,091,071 3,281,129 5,372,200 1938 – – 2,005,162 3,401,337 5,406,499 1939 – – 1,939,795 1,706,763 3,645,558 1940 – – 1,652,384 1,921,636 3,574,020 Source: Calculated from Inoguchi Tosuke, Gendai Nihon sangyo hattatsushi II: sekiyu, pp. 212, 259.

The first domestic-foreign (naigai) cartel in the Japanese oil industry was formed in 1910. Standard, Rising Sun, Nippon, and Hoden reached a four-way agreement. It set quotas between domestic producers (35 percent) and foreign importers/producers (65 percent). It also attempted to limit production, stabilize the price level and divide profits. This private agreement which lasted for less than a year was followed by a series of cartels subsequently formed during that decade. All were abortive because players, particularly domestic firms, could not control their distribution network efficiently (i.e., retailers), and, more importantly, world market conditions were extremely unstable (i.e., competition between majors, fluctuations in production).13 In addition, as Samuels points out, a successful collusion in the early Japanese oil industry was elusive because demand itself was transformed—the age of illumination (kerosene) gave way to the age of energy (gasoline/heavy oil).14

State intervention Oil became a strategic commodity when the British Admiralty converted its fleet from coal to fuel oil in the early 1900s. It was during World War I, however, that its strategic potential was fully recognized.15 Not only was oil used to power the fleet, but it was also used for tanks, trucks, and airplanes in a motorized war; as French President Clemenceau stated, oil was as necessary as blood. Now, all major powers recognized that oil was not

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only important economically, but also militarily, and each subsequently sought oil sources all over the world. The French consolidated their domestic industry and searched for concessions in Romania and Iraq. At the San Remo Conference, the British were awarded mandates for Iraq and gained concessions in Iran; the Dutch consolidated control over the Dutch East Indies oilfields; and in the USA, the world’s largest oil producer, where the wartime oil shortage gave rise to fears that domestic oil reserves would soon run out, firms also searched for new oilfields worldwide.16 As in the case of Britain, it was the Japanese Imperial Navy that first appreciated the strategic implications of oil and it subsequently played an important role in developing Japan’s domestic oil industry.17 Already in 1905, the Navy had built its first heavy oiltankers at Yokohama Yard, and in 1919 it built its first liquid fuel boiler for a battleship. Later, its steam boilers were replaced with oil-powered boilers. In 1917, due to insufficient supplies of domestic oil, the Navy began to purchase foreign oil from the Anglo-Saxon Petroleum Company, and two years later it signed a five-year contract with Rising Sun for one million barrels per year.18 In 1921, it decided to directly enter into the refining business by building the Tokuyama Fuel Depot, which became the largest Japanese refinery in the prewar period.19 The original impetus for direct state intervention in the oil industry also came from the Navy. In 1918, the Navy prepared a proposal entitled “Attention to Fundamental Measures Regarding Petroleum Supply for Military Use” (Gunyo sekiyu jukyu no konponsaku ni kansuru kaku) which included the nationalization of the oil industry, the grand merger of all domestic firms, and the construction of a Navy refinery.20 This initiative was followed three years later by the “Investigative Council for Petroleum Policy” (Sekiyu seisaku ni kansuru chosakai) with representatives from the ministries of Agriculture and Commerce (MAC),21 Finance (MOF), Foreign Affairs (MFA), the Army, Navy, and the National Census Board (Kokusein), which reviewed the national oil monopoly plan proposed by the Navy.22 After a detailed study of the feasibility of that plan, members accepted it as a “relatively appropriate” (hikakuteki tekito) policy, but the Navy ironically opposed it by asserting that the Navy use of fuel should not be subject to this policy.23 This committee came to an end without yielding concrete results. According to Takeda Hauhito, the Navy’s opposition resulted when it realized that the plan would give jurisdiction to MAC and MOF and would lessen the Navy’s influence on the national oil policy.24 While the state’s first attempt at controlling the domestic industry failed largely due to the division of interests among ministries, there is little evidence showing the private attempt to influence, whether directly or indirectly, the above decision-making process. In fact, the state was considering market intervention during the period when two leading firms, Nippon Oil and Hoden Oil, were doing highly profitable business—between 1919 and 1922 Nippon Oil paid the highest dividend of 25 percent up to 45 percent on the stocks, while Hoden paid 20 percent to 40 percent in their respective prewar business history.25 This may mean that each intrastate actor barely found its own private constituency in decision making. Equally important was the limited business opportunity for domestic traders since the domestic refiners used domestic crude. Nevertheless, the 1922 state attempt to intervene was important because the discussion of direct state control in the form of a national oil champion set the tone for later national oil policy.

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Fuel Investigation Committee Although the Navy had been consistently the largest consumer of oil in prewar Japan, private demand also grew with the proliferation of automobiles (gasoline) and commercial fleets (heavy oil). This reflects the steady growth of the overall Japanese economy. It was particularly during and after World War I that domestic oil firms enjoyed unprecedented profits as demand for oil increased drastically due to the wartime economic boom. New firms (i.e., Mitsui Mining, Mitsubishi Mining, Kuhara Mining, Murai Mining) subsequently entered the business and competed with the two existing powers, Nippon Oil and Hoden Oil, as well as with other foreign giants. Just as the crude production of domestic oil began to decline in the early 1920s, domestic firms shifted their business from “mining” to “processing.” Domestic refining began in 1921 when Asahi Oil bought out the Nishibezaki refinery, which Rising Sun had abandoned. Asahi started to refine the Dutch crude obtained from Rising Sun. In the same same year, Ogura Oil constructed the Tokyo refinery to refine Mexican crude imported through Asano Bussan. The Petroleum Sales Union (sekiyu kyodo hambaisho) was established to import Western Indies oil via Rising Sun. Imperial Oil (Teikoku sekiyu) established a modern refinery in Tokuyama.26 In 1924, Nippon Oil also constructed the Tsuumi refinery to refine California crude. By this time, the business of oil imports (particularly foreign crude) began to be profitable. Major trading firms (shosha) became active players in the market. From the early 1920s, they obtained master licenses for domestic distribution, mostly from Californian oil firms, i.e., Assano Bussan from Sinclair and Socal, Mitsui from General, Mitsubishi from Associated, Nisho from Union, Nidatsu from Sunset.27 Together with the change in the vertical structure of the oil industry, sales competition from the two majors intensified. Fierce price competition resulted, especially between the two majors. Oil became an important business sector. Large-scale firms recognized its business value not only because its market was rapidly expanding, but also because it played an increasingly important role in the overall economy as supplier of industrial and transportation fuel. It was precisely at this time that state intervention was again considered. In 1926, the Navy made another effort to urge the Ministry of Commerce and Industry (MCI) to organize an interministry committee, the Fuel Investigation Committee (FIC, Nenryo chosa iinkai) which included the MCI, the MOF, the MFA, the Army, and the Navy, and chaired by the MCI vice-minister. This time, it launched comprehensive research on national oil policy and formulated concrete agendas as to how to develop the domestic oil industry. Key agendas included the exploration of both domestic and foreign oilfields, domestic industrial restructuring, tariff controls, and the development of an alternative energy sector (i.e., synthetic oil). Attention focused on the measures dealing with the problem of how to protect domestic oil from foreign competitors. Two key issue areas were set for debate: tariff control and industrial restructuring. Under the unequal treaties that set customs duty up to 5 percent, tariff rates on imported crude and refined oil had been altered with a minimal increase in 1899, 1901, 1904, 1905, 1906, and 1908, respectively.28 Even after Japan’s regain of tariff control, protective tariffs were not used actively in the oil sector, since demand for oil was rapidly increasing while domestic oil production was stagnant. Rather, policies tended toward oil-consuming industries. For example, import duties on

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industry-use oil were exempt, subject to MAC’s permission. In fact, 70 to 80 percent of private applications were accepted and granted permits.29 Essentially, what the FIC intended was to change policy from consuming industry protection to producing industry protection. The point at issue was which part of the domestic oil industry should be protected. Positions were split between the Navy and the MCI. The Navy suggested imposing heavy import duties on foreign refined products, but only small duties on foreign crude.30 Since the Navy’s strategic focus was on reducing the de facto dependence on US oil, what it wanted was to import crude from diverse supply sources and to achieve self-sufficiency in refining. To do so, the promotion of the domestic refining industry was of the utmost significance. Then, discriminatory protective tariffs should be a means to attract non-US crude and help the domestic refining business. The MCI opposed the Navy’s policy position and argued that higher tariffs imposed on oil products would adversely affect oil consumers. Instead, the MCI wanted to subsidize the domestic upstream industry with tax credits earned from both imported foreign crude and refined products.31 In the end, no decision was reached due to the unresolved confrontation between the Navy and the MCI. While the former stressed refining, the latter emphasized mining. The existing low-level tariff system remained in place. However, more heated debates centered on the measures regarding how to rationalize the domestic industrial structure. Since all major domestic firms were increasingly dependent on imported oil and foreign firms were expanding their sales network, the point at issue was how to deal with foreign firms’ investment (i.e., foreign activities in the Japanese market). The FIC attempted to find appropriate measures to achieve a grand merger of firms (taigodo) in exploration, crude production, refining, and marketing while at the same time protecting consumers’ interests; to formulate incentives to induce firms to merge; and to study the advantages and disadvantages of the merger.32 As a result, three alternatives were prepared. Nippon Oil, which achieved a hegemonic position among domestic firms after merging with Hoden, the second largest domestic oil firm of that time, entered into the decision-making process.33 Just as it began to import foreign crude to refine in 1923, its integration into the world oil market became greater. By 1929, 52 percent of its products were refined from foreign crude. Profits declined steadily as oil prices dropped from 1926. The fall in prices was caused by the intensifying worldwide rivalry and competition between Standard and Shell which peaked in the mid-1920s. Domestic producers’ market share declined. Between 1919 and 1931, when the refined oil market was expanding fivefold, the volume of domestic products (refined from both domestic and foreign crude) only increased approximately three times.34 This meant that the rate of the amount of foreign supply outweighed that of domestic supply. To put it another way, domestic firms could not profit as much from the expanding oil market in which oil demand steadily increased. It was in this changing context that Nippon Oil considered state intervention. The company was actively involved in decision-making, which contrasted with the earlier scenario. It submitted its own plan (hereafter, Plan I) which proposed a merger between existing domestic refineries including Tokuyama refinery, the largest in the Navy. A joint public/private firm (kanmin godo kaisha) would refine crude and exclus-ively market all

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domestic products. Plan I unequivocally represented Nippon Oil’s interests. It would leave the structure of the domestic upstream sector intact—the company enjoyed a virtual monopoly in this sector (it accounted for 68 percent of domestic production at that time). But it would grant the would-be firm a monopoly on the domestic distribution sector which was the weakest side of Nippon Oil’s business. The Navy proposed two plans.35 The first (hereafter, Plan II) proposed that the state would monopolize foreign oil imports (both crude and refined products) and delegate its monopoly rights to a joint public/private refining firm which could freely import foreign crude. But the firm must obtain an import license from the state. All tariffs would be lifted, and a certain amount of the firm’s profits would go to the state treasury in order to subsidize the exploration of domestic oilfields. Under this system, the would-be firm would be granted exclusive rights to import crude and refined products, a major difference from Plan I. In return for a monopolistic import license, the private sector would allow the state to set prices and allocate profits. Here, private firms would be limited to produce and refine domestic crude. The Navy’s second plan (hereafter, Plan III) was the most radical alternative. It proposed a national oil champion, a vertically integrated and fully consolidated joint venture firm which would refine, import, and distribute oil. The new firm would also engage in upstream exploration and production which Plan I and II would leave entirely to the private sector. However, the plan did not specify concrete methods of how to deal with the existing business operations of firms. This vaguely worded plan proposed that there be no tariffs on crude imports. Refined products, however, would be subject to high tariffs. The subcommittee was organized to draft a concrete policy plan. After extensive negotiations among members (July 1927 through May 1928), it rejected Plan III and the Nippon Oil plan, and drafted a plan entitled the “Concrete Summary Plan for the Merger of Domestic Oil Firms” (Naikoku sekiyu kigyo no godo ni kansuru gutaian yoko) based on Plan II.36 This plan gave the state the licensing rights for foreign oil imports, and would delegate to a grand joint firm (Ittai godo kaishd) the right to import, refine, and market oil. The firm would buy out all existing domestic facilities relating to importation, refining, and distribution of products from both domestic and foreign firms, but would leave intact domestic crude and refining production.37 At the same time, the Committee proposed a plan for consolidating the domestic upstream industry, forming a private cartel which would receive government subsidies for exploration research and purchase of overseas oilfields.38 Government licensing was first introduced. Terms such as Kyoka, ninka, tokkyo, which refer to license, appeared in the text of the proposal and also in the context of industrial nurturing. Hereafter, the licensing idea was on a continuing theme until after the PIL was enacted in 1934. However, this idea was not exclusively of Japanese origin. The Committee took the French law of 1925 and of 1928 as a model. In France, import licensing was used chiefly for stockpiling—importers stockpiled a certain amount of imported oil, i.e., one-quarter of the quantity imported in the previous year. This law was unambiguously for military purposes. Interestingly, it was Ohashi, an Army General, who submitted to the Committee a lengthy report on the French oil policy of the 1920s, with particular emphasis on the necessity of merger and stockpiling.39 It is therefore not difficult to imagine that the French experience influenced the deliberation of the Fuel

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Investigation Committee. The key difference between Japan and France at this time was that Japan planned to use licensing as a means to restructure its industries, whereas France used it for stockpiling. This refers to the less military character of the 1928 concrete summary plan. The stockpiling requirement was not adopted anywhere by the Committee. Of central importance, at any rate, was the idea of using licensing as a chief regulatory instrument. Since 1918, the Navy had sought this type of plan: the establishment of a publicprivate joint foreign crude refining firm, which would control the leading domestic oil firms (Nippon Oil and Ogura Oil). Its central feature was to promote state intervention driven by the desire to protect the domestic industry, or to gain “autonomy” from overwhelming foreign competitors, and using mergers (and to a lesser extent cartels) as a protective measure while controlling imports mainly by the state’s use of licensing and not exclusively discriminatory tariffs. However, this proposal arranged by the subcommittee lost its concrete contents when it was reviewed by the main committee, and the three-year comprehensive report (Toshinan) was submitted to the MCI Minister. It revealed a disappointingly general statement: from the perspective of the national fuel policy, it is an urgent task to renovate the organization of the domestic oil industry and to manage its control by the state…it is necessary to organize a grand oil firm merging the importing, refining, and marketing facilities owned by domestic oilmen, reduce the costs for refining and marketing, and improve the refining facilities thereby efficiently reducing the production costs and consolidating the base of the domestic oil industry.40 Why could the Japanese state not translate its efforts into concrete form (i.e., legislation)? Or why was the originally proposed concrete plan (gutaian) substituted by a fundamental outline plan (kompon hosaku)? Certainly, there had been an interministry struggle. Up until the late 1920s, they consistently disagreed on what best serves Japan’s national interest in oil. From the very beginning, the Navy had been the sole actor seriously interested in the oil issue, and it took the initiative in formulating a national oil policy by proposing several plans on how to achieve relative autonomy from oil. In contrast, the MCI bureaucrats were not enthusiastic about protecting and consolidating the oil industry; they thought that, although formal jurisdiction was theirs, the Navy should play a major role in formulating oil policy simply because it was the largest consumer of oil.41 At this point I should mention the interfuel rivalry. Oil was not an important industrial fuel at that time. On the eve of the Pacific War, it made up less than 10 percent of Japan’s total industrial energy supply, while coal remained the most important source.42 Together, the oil industry was fragmented along upstream and downstream lines whereas coal had a highly concentrated industrial structure—in 1933 five highly profitable zaibatsu firms including Mitsui, Mitsubishi, and Sumitomo accounted for 40.5 percent of total domestic production. In this sense, MCI would have probably considered the concentrated interest of coal prior to the diffuse interest in oil.43 Thus, for the MCI, the oil policy was considered only as a long-term project, kokka hyaku-nen no taikei.44 The oil sector did

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not draw an immediate policy concern at the moment when domestic oil firms were not threatened seriously by global competition. Although Nippon Oil showed a decreasing rate of profits at the end of the 1920s, there seemed to be no reason why it should accept gutai-an based on Plan II which, if implemented, would detach the foreign crude refining business from Nippon Oil and incorporate it into the new firm controlled by the state and other interests. This meant that its newly invested Tsurumi refinery would be surrendered (30 percent of its current refining output) and its business would be limited to declining domestic crude production and refining.45 Similarly, the MOF was always passive about the Navy’s proposal for the public policy company because its financial conservatism opposed any plan requiring large amounts of revenue.46 Further, since it did not evaluate the economic significance of oil highly (as in the case of the MCI), it later opposed the exemption of mining tax to oil firms, maintaining that is was unfair to give preferential treatment to these firms but not to others, such as those in the coal industry. In contrast to the Navy, the Army was silent. Although it began to pay attention to aviation oil as its airforce expanded from 1925, the only visible activity was research and experiment with synthetic oil by the Army Automobile School.47 It was not until the Manchurian Incident that the Army’s interest in oil grew substantially as it appreciated the strategic significance of oil-powered trucks, tanks, and aircrafts.48 These attitudes, however, changed significantly when the rapidly expanding domestic oil industry was threatened by the international oil majors. This was a time when Japan experienced two of the most important events in the early Showa history: the Great Depression and the Manchurian Incident. Before moving on to the 1930s, let us briefly discuss the Commerce and Industry Deliberation Council (Shoko shingikai) where oil was a central issue. This committee was the primary organ for deliberating the implementation methods for the industrial rationalization movement, which was initiated by the MCI (in fact, Yoshino Shinji) in order to overcome the Showa’s persistent economic distress or financial depression (kinyu kyoko). That it dealt with oil issues meant the oil industry became an object of rationalization. In other words, oil attracted attention because it was regarded as one of the commodities causing Japan’s balance-of-payment problems. In 1928, having received the Fuel Investigation Committee’s report, MCI Minister Nakahashi Tokugoro sought advice from the Commerce and Industry Deliberation Council. The following year it established the Fuel Problem Special Committee (Nenryo mondai tokubetsu iinkai) to discuss oil issues raised in the 1928 report. It made a comprehensive study on the oil industry for two years. Although this committee did not make any further progress other than to reiterate the general statement of the previous report,49 two interesting points were discussed. While Nippon Oil basically recapitulated its original plan that was proposed before the FIC, it now explicitly claimed the oil industry’s strategic position by reporting that the primary enemy of the Japanese oil industry was foreign importers. Responding to Nippon Oil, the Special Committee stated that from the viewpoint of “balance of power vis-à-vis foreign firms,” it was necessary to establish a joint public/private firm which would monopolize the domestic refining and marketing business to achieve economies of scale and compete against foreigners.50 This meant that the foreign threat and the need for state intervention became intensified.

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However, what interests us most here was that committee members began to link the oil issue with industrial rationalization issues—mass production, standardization, and simplification in oil production.51 This meant that they narrowed their focus on “oil refining,” among other sections of the industry, as a manufacturing sector to be protected and developed: as Nakajima Kumakichi, Chair of the Committee, aptly pointed out, oil was in the end a question of industrial rationalization.52 The targeting of the refining industry was meaningful because civilian bureaucrats (MCI and MOF) began actively to take part in the whole discussion of oil which was now shaped under the framework of industrial rationalization: that is, the oil policy would not only secure oil autonomy but also promote the manufacturing industry in general.53

Toward the Petroleum Industry Law The immediate impetus for full-fledged state intervention in the oil industry this time came from the disruption of the domestic market, particularly when Japan was hit hard by the Great Depression. For economic recovery, the lifting of the gold standard and the depreciation of the yen might have placed domestic firms in a favorable position. But in the early 1930s, worldwide overproduction of crude oil due to the dramatic discovery of major oilfields in east Texas, the Soviet Union, Venezuela, and Sumatra drove down oil prices. The global price war that followed directly affected domestic oil prices. Between 1929 and 1931 the price dropped 11 percent for kerosene, 6 percent for gasoline, 16 percent for light oil, and 17 percent for machine oil.54 During the summer of 1932, the gasoline price dropped from 40 sen per gallon to 33 sen, even though, in June 1932, the tariff revision for oil imports was made to increase the tariff rate to 35 percent. Tariffs could not affect the downward trend in oil prices. After having revised the tariff rate, the MCI began to intervene directly in the market and urged firms to form a cartel. In August 1932 a cartel was formed—the six-firm agreement (Stanvac, Rising Sun, Nippon, Ogura, Mitsubishi, and Mitsui)—which increased gasoline prices by 10 sen per gallon. It also aimed to regulate the sales volume of its members: i.e., 55.5 percent for the foreign share (31.7 percent for Rising Sun, 23.8 for Stanvac) and 45.5 percent for domestic share (26.3 percent for Nippon, 11.4 percent for Ogura, 6.8 percent for Mitsubishi).55 Policy responses appeared successful for the moment. After two months, gasoline prices returned to 1929 levels. High prices, however, provoked strong protest from the oil consumers (mostly taxi-cab unions), leading to massive demonstrations. The MCI needed to stabilize the market by supporting domestic business while at the same time meeting the needs of oil consumers. The application of the Important Industry Control Law (IICL) to the gasoline market in November 1932 was a logical consequence. Market stability was not achieved, because rumors of the impending imports of cheap “red oil” delayed the drawing up of the law-supported cartel agreement. The news was shocking not only because it was “enemy oil” but also because it was put together by Matsugata Kojiro, son of Meiji genro Matsugata Masayoshi, who secretly went to Moscow and agreed to import 35,000 tons of Soviet refined products per year, and was about to establish Nisso Sekiyu (Japan-Soviet Oil).56 The new agreement finally reached under the IICL in June 1933 was immediately breached when Soviet oil arrived in

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September. Nisso entered the market and strategically set the price at 2 sen cheaper than the cartel price. Since Nisso’s sales were on a consignment basis with the Soviet Petroleum Export Union (whereby the latter, on paper, set the sale price for the former), Matsugata did not have to abide by the cartel price set under the IICL.57 Moreover, new entry into the industry was outside the jurisdiction of the law. A price war began between Nisso and the cartel members causing the price to drop from 40 sen to 26 sen. Domestic firms were pushed to the brink of bankruptcy.58 This motivated MCI bureaucrats to devise a more fundamental industrial policy that could deal with the vagaries of the world market. Unlike the earlier situation in which they thought domestic collective action (i.e., a merger and cartel among domestic firms) would stabilize the fragile market, they now felt a strong necessity to regulate foreign intervention. In order to facilitate an effective operation of the IICL, market entry had to be regulated. An obvious method was to strengthen entry barriers that would discriminate among players appropriate to stable industrial order. Further, the point was not only to stabilize the market but also to encourage indigenous industrial development while at the same time meeting oil consumer needs. Protective tariffs alone did not and would not work simply because of the diverse types and sources of oil, which would kill domestic as well as foreign players. Ever since the 1918 Committee, tariff control had been a secondary protective solution next to industrial restructuring. In fact, as industrialization grew rapidly in the early 1930s, the value of oil as an industrial fuel became acknowledged, and cheap oil was desirable as much for related industrial sectors as for transportation. In this connection, as we noted earlier, the MCI initiated a tariff exemption system on heavy oil which was used to produce a variety of industrial fuels for metal fabrication, ceramics, or metal heating. A selective use of protective tariffs had to be combined with industrial policy which would target the sector, discriminate players, and encourage independent growth. For the MCI bureaucrats who viewed the oil industry through the lens of industrial growth tan national autonomy and integrity, it was the refining sector, among others in this vertically long industry, that interested them most. For it was a manufacturing sector producing a variety of industrial fuels from crude oil, and thus, as we have seen earlier, it was the target of industrial rationalization. Since it had primary responsibility for controlling government subsidies, tax rebates, and the national balance of payments, the MOF approached the oil problem from the perspective of the balance of payments which had worsened since the mid-1920s, particularly during the Manchurian Incident.59 Plans for encouraging the domestic refining industry appealed initially to the MOF because it might reduce imports of refined products, the prices of which were higher than those of foreign crude. Since oil was one of the four biggest import items for Japan between 1930 and 1935,60 reducing imports by protecting and developing the domestic refining industry seemed to be a good target for correcting the balance of payment deficits. Foreign exchange could then be used for the betterment of the economy, i.e., building an industrial base instead of purchases. The military view of the oil industry also changed. The Manchurian Incident was key in this regard. The Navy’s consumption of heavy oil increased dramatically when the Incident broke out. Its consumption doubled in two years from 233,000 tons in 1931 to 475,000 tons in 1933.61 Moreover, the rising demand for aviation oil was linked to the

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strategic importance of the Airforce. The Navy constructed facilities which could produce 2,000 tons of aviation oil each year. Despite the lessons from World War I, the Army resisted a rapid technological change in arms and transportation. Only after the Manchurian Incident did the Army begin to seriously consider the strategic importance of oil as a transportation fuel for automobiles.62 Motor trucks, used for the first time in north China, enormously enhanced the mobility of the troops. The high mobility of the Ford motor trucks allowed the Japanese to swiftly defeat the Chinese troops in the Rehe battlefield.63 However, the Army’s primary interest in oil came from its recognition of the Airforce power and concerns about aviation oil reserve. It purchased aviation oil from Nippon, Ogura, and Rising Sun, and, for the first time, constructed an aviation oil reservation system in Manchuria in 1934.64 The extremely unstable conditions of the domestic oil market were particularly discouraging to both military agencies. From a strategic perspective, it was imperative that they find appropriate means to restore market stability from which to develop an autonomous source of oil supply. The quest for autonomy in oil was of particular importance since Japan relied on the imports from a potential enemy. In early 1933, the Interministerial Committee on Liquid Fuel Problems (Ekutai nenryo mondai ni kansuru kankei kakusho gyogikai) was organized. This committee was set up amid grave political circumstances. Japan’s foreign relations were aggravated by the Manchurian Incident and its subsequent defection from the League of Nations. In this process, there emerged among the military circle the argument of the 1936 crisis, that Japan would fight a total war with the West.65 At the same time, Japan was struggling to cope with the Great Depression. It was this coinciding of political and economic problems of the early 1930s that prompted the state to intervene in the oil industry and to consider it a strategically vital sector. Each ministry entered the decision-making stage with clearer interests and agendas. The assumption behind the repeated private and public market stabilization attempts was that the stabilization and development of the oil industry depended crucially on the regulation of foreign players’ activities. The key reason why repeated cartelization attempts failed even under the guidance of the Important Industry Control Law was the lack of control over foreign (or foreign-repeated) insiders and outsiders. Therefore, industrial policy should deal with the erection of the market barriers which would make the private collective action effective. Now, the question was how to devise concrete measures to implement these agendas. In order to establish entry barriers to the oil industry, the state had to target the primary areas of interest. Here, a convergence of interests was reached among economic ministries (i.e., the MCI and the MOF) and the Navy. For the latter, the refining sector was the only one where Japan could feasibly reduce foreign reliance. For it was impossible for Japan to achieve national autonomy in crude oil supply unless it controlled foreignonly fields by force. Civilian bureaucrats considered oil refining to be an importsubstituting industry, the fuel of which was used for industrial development, which at the same time helped correct the chronic balance-of-payments problem. Viewing oil as a manufacturing rather than a mining industry enabled the MCI to figure out problems and concrete measures to fix it under the framework of industrial rationalization that it had pursued since the late 1920s. Both targeted the oil refining sector. If firms wanted to be

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protected, they had to engage in oil refining and not importing and marketing foreign products. Second, a common agenda was set to value the “mass production” of refined oil as the top criterion of business activity. Insofar as private firms were equipped with the necessary refinery facilities to achieve scale economies and conduct mass production (regardless of levels of domestic demand and profits), the state would provide market protection, which would guarantee monopoly rents in the name of an adequate level of profit. Third, it was the state that controlled access to the refining sector. Government licensing was the primary means of selecting who would be favored. The state would discriminate for “controlled competition.” It would prop up a certain number of producers who could achieve scale economies. Large-scale zaibatsu firms would be favored due to their superior financial and organizational capacity to compete with foreign firms. Based on these common agendas, the Mining Bureau of the MCI, collaborating with the Navy, drafted two plans for review before the Committee: one based on the 1928 Fuel Investigation Committee’s Plan III and the other based on the 1928 Concrete Summary Plan. They were also modeled after the Spanish oil law of 1928 and the French oil law of 1928, respectively.66 The former was a plan for nationalization (Sekiyu kokka kanri-an), which would give the state a monopoly over all crude production, refining, trade, and sales. The state would then delegate these areas to a half-public half-private national oil champion. All profits after dividends and operating expenses would be deposited in the state treasury and used to explore domestic sources, and to experiment with synthetic fuels. All foreign facilities would be expropriated to state equity in the joint firm.67 The latter was the Licensing Control Plan (Kyokashugi tosei-an) which gave the state the right to license refiners and crude oil importers, and to enforce a six-month stockpiling requirement to all the licensees. The state would also provide subsidies to encourage domestic firms to explore overseas oilfields.68 Here, unlike the earlier cases promoting import licensing (yunyu kyoka), this plan would use business licensing (eigyo kyoka), thereby expanding the scope of licensing. Throughout the summer of 1933, in debating both plans, members formed two distinct coalitions (trade-oriented mercantilist versus autarky-oriented mercantilist) each having distinct agendas about the best route for developing the domestic oil industry and Japanese industrialization in general. The two coalitions weighed the significance of the following issues differently. The first issue centered around how important the oil industry was to national development. For the autarky-oriented mercantilists such as Navy officials, oil was regarded as a strategic commodity crucial to waging a modern mechanized war: gasoline for trucks and tanks; heavy oil for the fleet, and aviation oil for air fighters. In addition, although the oil industry involved little “backward and/or forward linkage,” oil was an important source for civilian transportation energy and industrial energy. Since the oil supply was vital to the national economy, control of oil should be understood not merely in terms of preparing for total war but in achieving national economic autonomy. They continued that the world oil regime was, however, controlled by “a few international oil firms like Standard and Royal-Dutch Shell behind which both the American and British Governments support and control,” and that “it is naive, in the future, to anticipate their

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goodwill [toward Japan].” It was therefore imperative to protect and encourage the autonomous development of the Japanese oil industry, which literally meant “national autonomy and independence” (jishu tokuritsu).69 Since the trade-oriented mercantilists like the MCI (and also the MOF) approached the oil problem from the viewpoint of industrial growth, their primary concern was related to the balance of interest between producers (here, refiners) and consumers. While the refining sector became important as an area of the industrial rationalization movement, their approach to its industrial value changed in accordance with world market conditions. For example, up until the late 1920s, they doubted whether domestic refining could be economical, and whether the costs for refining foreign crude by domestic refiners would be cheaper than importing refined products from the major producers who had the most efficient refineries in the world.70 This skepticism continued even after domestic refineries became equipped with efficient refining facilities during the second half of the 1920s, because the price of foreign refined products dropped faster than that of foreign crude. As Table 4.2 illustrates, while export prices of

Table 4.2 The price of US oil in Japan, 1929–1933 Year

Crude volume

Price

Gasoline volume

Price

1929 37,800 1.43 266,904 4.44 1930 32,153 1.40 250,647 3.96 1931 20,828 – 109,301 3.96 1932 27,639 1.00 79,081 – 1933 35,374 0.96 57,520 2.21 Net reduction, 1929– 32% 50% 1933 Source: American Petroleum Institute, Petroleum Facts and Figures (4th edn), pp. 23–25; (5th edn), pp. 154–155; (6th edn), p. 108.

US crude dropped by 32 percent between 1929 and 1933, during the same period US refined gasoline prices dropped by 50 percent.71 These phenomena were reflected in the Japanese market where the price of gasoline, 40 sen when the gold standard was lifted (December 1931), dropped to 32 sen in July 1932.72 For the trade-oriented mercantilists, the feasibility of infant-industry protection in the refining sector depended on price levels because they included the interests of both industrial oil and gasoline consumers as an important factor. Due to the availability of cheaper foreign oil, the MCI and other outward-looking officials were nor as interested in erecting an indigenous refining industry (which would inevitably require the sacrifice of industrial and commercial consumers) as developing a way to find an industrial order to stabilize the rapidly fluctuating market. Establishing stable market conditions was their primary concern. The second issue was whether foreign ownership should be taken for granted in the domestic industry. As with Plan III which was presented by the Fuel Investigation Committee (1928) and the national monopoly plan (1933), the autarky-oriented mercantilists asserted that the national oil policy, by excluding foreign ownership in such a key strategic sector, would threaten Japan’s autonomy.

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By contrast, trade-oriented mercantilists’ alternative was “Japanization,” the strategy that would require firms to be either majority Japanese-owned or equal with foreign capital. Mitsubishi Oil, a joint venture with California-based Associated Oil in 1931, was a showcase example. In addition, as we will see below, efforts by two key Japanese bureaucrats, Yoshino Shinji (MCI vice-minister) and Kurusu Saburo (Commercial Bureau Chief, MFA) fall into this category. They urged Stanvac, a joint subsidiary of SOCONY and Standard-New Jersey, to organize a joint venture with Mitsui Bussan.73 Here, the strategy of Japanization was a means to include foreign players in the cartelized market, thereby reducing high transaction costs by half-way indigenizing them. Moreover, this scheme should be pursued gradually and incrementally so as not to cause any serious trade disputes with the majors and their respective governments (the USA and Britain). They did not want to adversely affect the ongoing success of the export promotion strategy of the early 1930s.74 The following issue was how to restructure the domestic oil industry. The autarkyoriented mercantilists believed that since the private sector was underdeveloped, strong state involvement was seen as inevitable. Here, state intervention meant regulatory control over individual firms. State ownership was not their only option. In case they found unreliable private actors they would directly intervene as a market-displacing actor. What they preferred instead was a joint public/private enterprise with which they could maintain secure access to decision making while having the advantages of private entrepreneurship. This had been their first choice throughout the fifteen years of interministerial discussions on how to restructure the domestic oil industry. They actually established such an enterprise in north Sakhalin and have experimented on a full-scale basis in Manchukuo since 1931. On the other hand, private mergers and cartels were the key subjects for the outward mercantilists. Their primary concern was to make the Japanese industry stable and competitive in the world market, and since oligopoly was characteristic of the oil sector, it was necessary to achieve economies of scale by limiting the number of firms through mergers in the first place. A national oil champion did not fit because it would eliminate competition and sacrifice efficiency for control.75 Ever since the Meiji Ishin, Japan was oriented toward private sector entrepreneurship,76 preferring private initiative with the state’s assistance. Collective arrangements between a small number of players within a highly compartmentalized market (through merger and state license) would be effective, and thereby a stable industrial order would be achieved. Cheating might occur, but its negative effects could be checked so long as a number of insiders were fixed and protected. Decision making While the two plans were being discussed in the interministry committee, the two oil majors were never involved in the decision making. Only after the Petroleum Industry Law was issued in 1934 were they asked to bargain with the Japanese state over the terms of the decree. Organized labor was not included in the decision making either. In general, the Japanese political system’s primary objective was to maintain a stable, docile labor force conducive to rapid industrialization. To achieve this goal, labor was systematically

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excluded in the decision making through sanctions and co-optation.77 In particular, the oil-producing/ refining sector is characterized as “process-oriented” with “capitalintensive technology,” one that is made up almost entirely of machine-paced technical processes. That is, it involves chemical and mechanical processes which take place in a series of machine-controlled operations, and the small number of those key processes would limit the range of choices open to labor and management, and thus it is evident that the bargaining power of organized labor in this sector would be minimal.78 Private firms had also been included. Nippon Oil would have had the easiest access to the state not only because it was the largest domestic oil firm but also because its president, Hashimoto Kisaburo, was originally a prominent economic bureaucrat who served as MOF vice-minister and MAC vice-minister before entering the private sector. Throughout the history of institutional adjustments during the 1920s and early 1930s, Nippon Oil had been frequently called upon by committees like the Fuel Investigation Committee (1926–1928) and the Fuel Problem Special Committee (1929–1930) for consultations. At one time it prepared a plan on its own terms, only to be rejected. They were consulted only after state managers had developed a basic agenda. In the 1933 committee, the state initially determined who could participate in the decision making (i.e., like Nippon Oil which was Japanese-owned and had strong financial and organizational capacities), and at the same time, how they would operate within a restrictive choice situation (i.e., methods for the mass production of refined oil). For the autarky-oriented mercantilists, the new oil law could be used as a means to discriminate foreign firms from the Japanese market and to develop a pure Japanese industry that ensured national autonomy and integrity. Believing that private firms were fragmented and weak, they supported, as a first choice, the state monopoly plan which proposed a joint public/private national oil champion. But if this plan was deemed unfeasible, they could accept the license plan insofar as the stockpiling requirement (essential for security) and preferential quota-setting would be strictly observed by the use of licensing. If complete autonomy was not possible, insofar as Japan could maintain a secure supply of oil from non-US sources, the form of ownership (joint public/private versus private) could be compromised. Since the trade-oriented mercantilists understood the upcoming law as a means to stabilize the domestic market and, in time of war, ensure adequate supplies of foreign crude and refined products at a reasonable price, the radical market-displacing measure (the state monopoly plan) was not desirable. Nor did they support the institutional mechanism by which the state intervened at the individual-firm level (i.e., regulating private business activity). Kurusu Saburo, Chief of the International Trade Bureau, MFA, stated, “[the license plan] was a bad one all around and was bound to create trouble, either internally or internationally.” It would also allow too much state interference in the market, and also cause serious diplomatic disputes with the oil majors’ home countries, the United States and Great Britain, because the law would severely harm their business in Japan. In particular, he asserted, the mandatory stockpiling requirement would not only cause diplomatic trouble but also be economically unfeasible.79 Nonetheless, the license plan could be accepted not just because it was imperative to formulating a national policy to regulate the precarious domestic oil industry as soon as possible, but more importantly because this plan was less objectionable than the state monopoly plan which would entail huge costs in its implementation.80 This plan would be

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compatible with their agendas insofar as quotas were flexible for foreign firms and the stockpiling requirement would also be flexible when implemented. Government licensing toward cartel outsiders and foreign players could be cautiously utilized to regulate foreign investment in an attempt to stabilize the market without hurting the flow of international trade. The adoption of the license plan that the pro-trade coalition advocated was however contingent upon the private sector’s support. Here, their political asset in relation to the pro-autarky coalition was that they could enlist support from the private sector. Private firms undoubtedly opposed the national monopoly plan; nor did they show monolithic support for the license plan. While some welcomed protectionist measures such as tariff control, quota-setting, and measures limiting the number of firms, most industry members were dissatisfied with the measures that gave the state too much control over their business activities: for example, forcing compulsory purchases, monitoring business activities, requiring regular submission of business plans, fixing prices, and most importantly, making a six-month oil stockpiling policy mandatory.81 Nonetheless, for private firms, as in the case of trade-oriented outward mercantilists, the licensing plan was more acceptable than the state monopoly plan because the former was less objectionable. In August 1933, the state opted for the licensing control plan, and in April 1934 the Diet passed the Petroleum Industry Law (PIL) based on this plan. It was apparent that this law would protect domestic large-scale refiners while restricting the business of foreign oil majors. However, the law provided only a basic framework and key issues still remained: (1) the inclusion and exclusion of firms, (2) a six-month stockpiling requirement, and (3) setting quotas. Negotiations and bargaining followed.

The structure of the international oil industry It became apparent in the process of the Diet discussion early in 1934 that the PIL would adversely affect foreign oil firms, and those who would lose most were Standard-Vacuum (Stanvac) and Rising Sun. Stanvac was organized in 1933 as an East Asian subsidiary of Standard-New Jersey and Standard-New York.82 It was the merger between the former’s production facilities in the Dutch Indies and the latter’s marketing networks “east of Suez.” After a long struggle with Shell in the Dutch Indies, Standard-New Jersey organized Koloniale Petroleum in the 1920s, which later discovered prospective oilfields in south Sumatra and Talan Akar. Jersey then constructed refineries and pipelines and refined crude, which accounted for approximately 30 percent of the total Dutch Indies oil production.83 Now, its strategy in the East Asia had changed. The oil giant fully appreciated the strategic importance of Japan as a major marketing outlet.84 On the other hand, as the Japanese kerosene market was declining, Socony needed to change its commodity from kerosene to gasoline but was unable to supply gasoline at a competitive price in Japan. Note that, in comparison with other oil majors, Socony had been short of crude, and furthermore, since its refineries were located on the east coast of the USA, its price competitiveness was decreasing vis-à-vis California and Dutch Indies oil, due primarily to increases in transportation and production costs (Table 4.3).

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Table 4.3 Average cost at wells in USA, 1931–1934 (US$ per barrel) California 0.661 Texas/Oklahoma/Kansas 0.729 East/Midwest 1.426 Average 0.748 Source: Yokohama shokin ginko chosaka, Kashu Sekiyu 0 Chushin to seru beikoku sekiyu gaikan, 1938, p. 28.

While Socony needed gasoline, Standard-New Jersey needed a marketing network. The formation of a joint venture between the two companies complemented each other’s interests. The emergence of Stanvac meant that the Japanese market was becoming more important to Jersey. Its business became identical with Rising Sun’s, which had been the major distributor of gasoline supplied from the Dutch Indies. As with Rising Sun’s case, there was little reason for Stanvac to build a refinery in Japanese territory. PIL’s attempts to restrict market share for imported refined products and its Japanization strategy (i.e., building refineries in Japan by the majors) were in sharp conflict with the shared interests of Stanvac and Rising Sun. Now, let us explore how Stanvac and Rising Sun responded to the PIL. In examining their negotiations with the Japanese state we need to analyze their bargaining power, which reflected the strength of the international oil regime at that time. Implementation of the PIL would be ineffective if a strong international cartel led by the majors existed. The international oil industry controlled by the Seven Sisters of the oil majors has been known to be one of the tightest regimes in the world market. Majors include: Standard Oil-New Jersey (later Exxon), Royal-Dutch Shell, Standard Oil-New York (Socony or later Mobil), Standard Oil-California (Socal), Texaco, Gulf, and British Petroleum (BP). According to the Federal Trade Commission data, in 1949 the Seven Sisters held 65 percent of total world oil reserves and 82.1 percent of non-US reserves. Their crude production accounted for 54.6 percent of total world production and 70 percent of non-US production.85 The majors were able to control world oil because they controlled the Middle East. From the 1940s, just as crude production in that region surpassed production from the rest of the world, the oil majors correspondingly dominated the world market. John Blair points out that the primary instrument used by the Seven Sisters to form the international oil cartel was their joint ventures.86 The joint ownership of subsidiary and affiliated firms constituted partnerships in various areas of the world, particularly in the Middle East. Decision making was thus concentrated in the hands of a few powerful men, and joint action from them was easily enforced. The control by joint ownership was further tightened by the interlocking directorates among them—a considerable number of directors held multiple directorships in subsidiary firms.87 Joint ventures made their first appearance in 1928 with the establishment of the Iraq Petroleum Company initially by BP and Shell. Standard-New Jersey and Standard-New York later jointed this group. Another joint venture between Social and Texaco led to the formation of Aramco, while the Kuwait Oil Company added Gulf. This made up the

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Seven Sisters who by the end of the 1930s had sewn up the production and supply of Middle Eastern oil. Supplementing and reinforcing the joint ventures were supplier contracts which covered very large volumes of oil, extending over periods of many years. Their contracts contained highly restrictive provisions relating to the terms and conditions of sale.88 Beginning in 1928, a series of international agreements had been reached for control over marketing oil: (1) the Achnacarry Agreement (1928) accepted and maintained the status quo of each member’s market share; (2) the Memorandum for European Markets (1930) established quotas, which could be increased only at the expense of outsiders; (3) the Heads of Agreement for Distribution (1932) provided for the exchange of statistics and information among local representatives of the oil majors; and (4) the Draft Memorandum of Principles (1934) set forth detailed rules governing quotas revision, proscribing unilateral price determination, and restricting claims of product superiority. Although, from 1928 to the end of the 1930s the Seven Sisters had carved up oil supplies from the Middle East, Venezuela, and the Dutch East Indies, if we narrow our focus to the interwar years (particularly the early 1930s when Japan designed the PIL), the international oil regime was much looser than in the period that immediately followed. As mentioned earlier, the key sources where the majors gained monopoly power were the rich oilfields in the Middle East and Venezuela. But oil production in those regions during the 1930s was not as dominant as in later periods. From 1931 to 1939, crude productions in those areas constituted a mere 14 percent of world production. Further, worldwide competition among previous oil majors (i.e., Jersey, BP, Shell) and new oil majors (i.e., Socal, Texaco) during the 1930s and 1940s was another factor that caused the oil regime to be less tight. In an effort to achieve an “equitable” distribution among the majors to control world oil, power struggles between Socal and Jersey continued. As a late-comer in the world market, Socal started to participate in the Middle East oilfields in 1932 by obtaining concessions from Bahrain and Saudi Arabia. The concessions were outside the “red line,” the area where the individual activities of the members of the Achnacarry Agreement (Jersey, Shell, BP, and Socony) were restricted.89 During those years, the existing majors regarded Socal as a distinct threat to their de facto interests. Their initial reaction was to prevent Socal from obtaining those concessions, and after they failed they attempted to devise other means of prevention and again failed. A fundamental reason for the failure was the provisions of the Achnacarry Agreement which did not restrict individual activities of members outside the red line. When one member’s interest conflicted with the others as in the case of Socal, members were shackled by the provisions. It was not until 1946 when Socal brought Jersey and Socony into its Aramco partnership, that Socal and Texaco were fully incorporated into the international cartel led by Jersey and Shell. Behind the aforementioned competition between Jersey and Socal there existed contrasting characteristics in their business activities: while Jersey historically had been crude short, Socal has been crude long.90 The interests of the latter, as the world leading crude exporter, inevitably clashed with the former, the world leading refiner. With the enormous output of oil from Saudi and Bahrain as well as from California, Socal now needed to develop worldwide distribution networks. In 1936 it reached an agreement with Texaco to establish a jointly owned trading subsidiary, Caltex, under which it received a

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one-half interest in Texaco’s marketing position “east of Suez,” while Texaco gained a one-half interest in the Bahrain concession and facilities.91 Now, Socal had established a position as a serious competitor to Stanvac and Asiatic (Rising Sun) in the East Asian markets. What made Socal distinct from the other oil majors (Jersey/Socony/ Shell) in the Japanese market was that it had been the largest crude supplier. It accounted for 26 to 36 percent of Japan’s total crude imports between 1935 and 1939, plus crude from Bahrain ranged from 5 to 7 percent of the total crude imports during the same period.92 Ever since the dissolution of Standard, with its plentiful Californian crude (in 1919 California provided 26 percent of total US production), Socal was forced to go abroad to find markets while Standard-New Jersey and Standard-New York, in contrast, had to find oilfields.93 Socal found its outlet in Japan and supplied crude through Asano Bussan, and later through the powerful Mitsui Bussan. It became a leading crude exporter throughout the prewar years. In fact, Socal was the chief beneficiary of the PIL not only because it had been the largest crude supplier to Japan, but also because, since the enactment of the PIL, it became one of the leading sellers of gasoline whose market share came close to Stanvac’s.94 The rise of Socal in Japan meant reduced market shares for Stanvac and Rising Sun, particularly after the PIL which increased the market share for domestic refiners and Socal (Table 4.4). In short, the effective international coordination among the majors had not been attained during the 1930s because Socal, the world’s largest crude exporter, was not incorporated into the scheme which other majors tried to forge. Besides, there were still substantial oil sources not controlled by the oil majors such as Soviet Russia and Romania, which ranked second and fourth in world crude production in 1933, respectively. For example, as mentioned above, Stanvac and Rising Sun’s predominant

Table 4.4 Petroleum exports from Socal and Stanvac to Japan (1,000 barrels) Year Company Socal Exporting place USA

Stanvac Dutch Indies

Gasoline 1935 697 (17) 810 (20) 1936 1,003 (23) 597 (13) 1937 644 (13) 925 (19) 1938 185 (4) 1,003 (24) 1939 57(2) 705 (25) Crude 1935 5,059 (36) 0(0) 1936 3,334 (25) 0(0) 1937 5,770 (28) 0(0) 1938 7,106 (28) 0(0) 1939 4,884 (26) 0(0) Source: Calculated from Kikkawa (1989b, pp. 70–71).

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position in the Japanese market was disrupted by the imports of Soviet oil—Nisso Oil accounted for 9 percent of Japanese gasoline imports in 1934.95 However, the most important constraint preventing the formation of a strong international oil cartel was the existence of American independents which controlled more than half of the US crude production at that time. Decentralization was inherent in the crude production sector. Production was scattered among a large number of small and medium-sized fields each of which had its own independent producers. Although the subsequent stages of refining and transportation offered the potential for centralized control,96 crude exports by independents could hardly be controlled by the oil majors. In response to this problem, the oil majors lobbied the US government to control crude exports. The result was the passing of the 1928 Webb-Pomerene Export Trade Act, which formed two export trade organizations: the Standard Oil Export Corporation and the Export Petroleum Association. The former was designed to centralize control over the export activities of oil firms under the influence of Standard-New Jersey, whereas the latter was designed to control members with regard to export prices and quotas. Such arrangements, however, were ineffective. For example, in 1929, only 45 percent of US exports were made by members of the two organizations. Moreover, its unanimousconsent rule for decision making led to its collapse.97 As Raymond Vernon notes, “the strength of the independents, then as now, rested in part on the fact that they were well distributed over the face of the US and could rally formidable Congressional support for any position they work.”98 For Japan, Californian firms were the major crude supplier. Until 1928, California had been the largest crude-producing state in the USA. Although the state’s market share declined to 25.4 percent in the 1930s due to massive production in east Texas, California’s crude production during the 1930s was much greater than that of the world’s second largest producer, the Soviet Union.99 A distinctive feature of California oil was the predominance of non-major oil firms. For example, in 1940, the oil majors’ (except Socal) crude production in California was less than 10 percent.100 During the 1930s, approximately 10 to 15 percent of California crude was exported, and its major outlets were Japan via Japanese trading firms. For instance, the majors could not control independents such as Tidewater, which had ties with Mitsubishi Oil. Kikkawa Takeo’s study of Rising Sun demonstrates that the two majors (Stanvac and Rising Sun) failed to prevent Mitsubishi Oil from expanding its market share in the naigai cartel.101 As Irvine Anderson says, these independents had nothing to lose from the PIL, because the expansion of Japan’s domestic refining industry would inevitably need more foreign crude.102 In summary, during the 1920s and 1930s rivalry for new markets led to international competition among the oil majors and between majors and independents. This international structure led to the sharp division of interests among foreign firms in relation to the Japanese oil market. There were regional competitions between Stanvac and Socal, between Stanvac/Rising Sun and Californian independents, and between the majors and Soviet oil. Now, as these international conditions generated opportunities for the Japanese state, its potential bargaining power vis-à-vis the majors would grow, as long as, either side, the major (i.e., Socal) or US independents (i.e., Californian oilmen) were competing to supply crude oil.

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In fact, Japanese state managers recognized this point. In 1934, in the hearings before the special Diet committee on the PIL, MCI Minister Nakajima Kumakichi stated: In the United States of America, there are some sources of supply not connected with Standard Oil; also it appears that there are good sources of supply in the South Sea Islands not under the control of those two companies [Stanvac/Rising Sun].103 Similar statements were made by another MCI official, Sakai: At present, crude oil is coming mainly from American sources not connected with Standard Oil…there is a reasonable chance of our being able to obtain future suppliers from such sources…Dutch Borneo, Venezuela, Romania etc.104 However, even though Japan is able to import crude from sources other than the oil majors, this by itself does not mean that it has achieved autonomy in oil. Japan would be self-sufficient only if the domestic refining capacity is able to replace the amount of refined products imported from the majors. Kobayashi Hisahira estimated Japan’s 1934 refining output level at 65,042 kiloliters, which was only 52 percent of its domestic refining capacity. US refineries were producing at 84 percent capacity. He argued that the low output level was due to insufficient crude supplies, and that the output level reflects the size of refineries. This means that the smaller the refinery, the more difficult it is to acquire crude oil.105 Sakai argued that Japanese refineries were obliged to leave about half their capacity idle due to price wars in the refined oil market.106 In this sense, insofar as enough crude could be supplied and the prices of refined products were high enough, domestic refiners could have mathematically doubled their output of refined products in that year, and therefore could have taken the oil majors’ market share, which accounted for about half of the domestic consumption.107 However, the problem of how to cover the projected yearly increases in consumption by the existing refineries remained. MCI minister Nakajima stated that “because consumption is increasing greatly, it will not be easy for refiners in Japan to meet the increased demand and therefore foreign refined oil must be imported.”108 In retrospect, the productive capacity of domestic refiners was limited. From 1934 to 1936, while oil majors complained that discriminatory quotas always filled 100 percent, domestic refiners could not meet the set quota amount. For example, in the case of gasoline, domestic production fell 5 to 7 percent below the target set by the MCI. Other categories fared worse. Domestic refiners produced 87 percent of the government-targeted goal in kerosene, 68 percent of targeted goal in light oil, and 80 percent of machine oil.109 Domestic refiners were given an increasing market share set by the MCI, which remained to be met. Preferential quotas could reduce Japan’s dependence on the two oil majors, but it did not automatically guarantee independent development. In order to have some sense of what accounts for this phenomenon, let us briefly examine the

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configuration of the domestic oil industry at the time of the enactment of the PIL and move on to the implementation process.

Diffused domestic industry An industry comprising Nippon Oil, Ogura Oil, and Mitsubishi Oil would make an ideal combination for the PIL—three large-scale organizations, all majority-owned Japanese firms. The three welcomed the PIL’s objective of limiting the number of firms, which could be realized by the state’s licensing right, because fewer firms meant larger market shares for survivors. Here, all firms under a minimum size were targets for consolidation. When the PIL was promulgated, there existed fifty-three refiners, seventeen importers, and twenty producers, all domestic. Those firms opposed the enactment. The three were convinced that they would be given licensing, but, as discussed above, their reaction to the PIL was complex. While they were pleased with the licensing idea, they did not like some of the PIL’s clauses, which permitted strong state control over their business activities, and forcing mandatory submissions of business plans on a regular basis. Moreover, the six-month stockpiling requirement was particularly onerous because it would require an enormous amount of revenue to construct and maintain additional tankers. Once it was announced that the state would not give any financial benefits (e.g., subsidies, price increases, tax breaks) for observing the requirement, they argued that the stockpiling clause was not feasible.110 Nonetheless, the three firms supported the PIL because it would generally protect their interests from foreign capital. Trading firms were an essential part of the Japanese oil industry because they imported most of the foreign crude and some refined products. In general, trading firms such as Asano Bussan imported crude from Union and Socal, Mitsubishi Shoji imported crude from Associated and Tidewater, Nisho got crude from Union, Nidatsu obtained crude from Sunset, and Seru was supplied from Texaco. These firms were better off because more demand for foreign crude would be expected after the PIL. In contrast, those who were importing refined products or crude/heavy oil from the two oil majors would be hurt by the PIL. Asahi Oil which had been closely tied to Rising Sun was an example. Asahi Oil was a pioneer because it was the first domestic firm to refine imported crude on the Nishibezaki refinery, which was abandoned by Rising Sun. The most salient case was the powerful Mitsui Bussan which handled almost one-fifth of Japan’s total imports and exports in the 1920s. It entered the oil industry by importing crude/heavy oil from General. When General was absorbed by Socony, Mitsui then made a contract with Socony and later Stanvac to import refined products and heavy oil into Japan. It imported as much as 10 to 12 percent of the heavy oil market in Japan between 1930 and 1933. It also imported gasoline (2 percent), and other products such as grease, wax, and asphalt (7 percent).111 In this regard, Mitsui represented Stanvac’s interests. Moreover, as the leading trader controlling one-third of Japanese silk exports, 18 percent of cotton textile exports to the USA, and one-third of raw cotton imports, any economic and diplomatic dispute with the USA incurred by the PIL would threaten its major businesses.112 Its strong interest in maintaining good relations with the USA were apparently incompatible with a radical protectionist policy like the PIL. In diversifying oil sources it would be wel-corned by

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Japanese leaders, but at the same time it was the enemy’s oil (i.e., the Army regarded Soviet Russia as its biggest enemy, and was already preparing for total war).113 In addition, gasoline imports were not consistent with the interests of domestic refiners. In sum, its business was likely to be threatened rather than supported. Just as the interests of foreign firms were divided with regard to the PIL, those of domestic firms were also diffuse. While major domestic refiners and traders, if not enthusiastically, welcomed the PIL, Mitsui Bussan, the largest trader in Japan, and Asahi Oil, opposed it. Implementing the protectionist policy was not easy because the Japanese state faced a divided social constituency in the oil industry.

Implementation After the PIL, negotiations continued as two foreign oil majors sought changes in state policy on two issues: the six-month stockpiling requirement and preferential quotas. An Imperial Ordinance on 26 June 1934 ordered all firms operating in Japan to fulfill a requirement of building and marinating at the expense of a stockpile worth six months of sales. Stanvac estimated US$375,000 for additional tankage construction plus US$1,900,000 for stocks unnecessarily tied up for maintenance. This adds up to a total of US$2,275,000, which would account for 18 percent of Stanvac’s total investment up until 1934. The cost for Rising Sun would surpass Stanvac’s because it had less tankage in place.114 To make matters worse, when Japan announced quotas for July through December 1934, the combined market share for Stanvac and Rising Sun was reduced from 53.6 percent to 50.1 percent. While they were allowed approximately the same actual volume as before, they were not allocated any of the predicted increase in demand for the new period—note that between 1929 and 1934 the Japanese oil market expanded 14 percent annually.115 Strong protests by Stanvac and Rising Sun led initially to the idea of an oil embargo against Japan.116 Walter Teagle of Standard-New Jersey and Henri Deterding of Royal Dutch-Shell proposed to the US government that she “frighten” the Japanese into moderation by hinting at an embargo on crude shipments to Japan. They sought to mobilize the US government because its explicit backing of the idea would affect not only the Japanese oil industry but also US-Japan commercial relations. Given Japan’s dependency on US oil, an embargo backed by the US government would be a deadly blow to Japan. Initially, the British Foreign Office supported the idea and was willing to take action on condition that overt action would have to come from the US government. The US government’s reaction, however, was negative. Stanley Hornbeck, the Far Eastern Division Chief of the State Department, maintained that since Shell, the British company, had a larger stake in Japan, any initiative toward an embargo should come from London. After lengthy discussions with Shell, the British Foreign Office obtained approval from the Cabinet for this course of action, provided American support could be ensured. However, Washington still refused even though they initially suggested that they would offer support. Hornbeck said:

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We do not believe that…[without] definite restrictive action on the part of the American Government effective restriction of petroleum exports from the United States to Japan and Manchuria could be achieved. This Government does not for the present feel moved to proceed in the direction of such action and it does not look as though the oil companies adversely affected are in a position to make or cause the oil industry to take such cooperative action as might be effective.117 The above statement reveals the difference of opinion between the oil majors and the US government on how to deal with the Japanese oil problem. The two majors failed to enlist the US government’s support which would undoubtedly have been their biggest asset in bargaining with Japan. There could be several reasons why the US government refused to intervene. Basically, the USA rejected decisive action toward Japanese protectionism because of the way they perceived the world trends at that time (i.e., economic nationalism, regional economic blocs, and the New Deal). In a conversation with Parker, President of Standard, Hornbeck warned that: More and more, governments are going to be confronted with the question of employment for their own people; that in countries circumstances as are Japan and China…there will presumably be more and more a tendency to try to substitute domestic labor and employment for foreign labor and imported services; that, to limit the thought to Japan, the Japanese would import raw materials but as far as possible do their own processing and their own merchandising; hence, foreign countries doing business in Japan would need to think seriously.118 This view implies that the US government would recognize the PIL as a trend that is inevitable for aggressive nations such as Japan. Behind this statement was a dilemma for the USA; it was not in a position to strongly protest Japanese protectionism of its oil market because it was itself one of the leading protectionist countries at the time. Most notable was the signing of the Smoot-Hawley tariff in 1930 which raised the effective tariff rates in the USA by almost 50 percent between 1929 and 1932 and triggered retaliatory tariffs. In addition, in 1935, it negotiated the first voluntary export quota on Japanese textile exports, despite the fact that the US textile industry was already highly protected by tariffs of 40 to 60 percent.119 Moreover, it would have been extremely difficult for the US government to control the oil industry’s independents. This was also a time when US crude exports were increasing, accounting for 5 percent in 1932 and 9.7 percent in 1938 [see Table 4.5].120 Japan had been the second largest importer of US oil (both crude and gasoline) during the 1930s, and California oil was the nation’s leading exporter, most of which was headed for Japan. In this sense, restricting exports of independents would not only have been difficult for the US government, it would have been going against America’s commercial interests. After the episode of the abortive embargo idea, both parties entered into negotiations. The Japanese state directed the oil majors to submit plans for constructing a three-month reserve stockpile in addition to the existing stocks by April 1, 1935. By October 1, 1935,

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they were to increase the reserves to a six-month level. But the oil majors refused to submit the 1935 business plans by the September 30 deadline, protesting that their future in Japan remained uncertain.121 After repeated demands for compliance with the PIL by the state and repeated refusals by the oil majors, the state finally yielded to a “five-point memorandum” on April 13, 1935. The document stated that the three-month level stockpiling requirement, which had been effective on April 1, 1935, would include the working stocks already in hand, and the six-month requirement would be postponed until October 1. As Anderson points out, since the oil majors already carried roughly a two-month reserve in existing stocks, this arrangement effectively permitted them to continue operating in Japan with minimal additional expenses and inconvenience.122 This was a major setback for Japan. The problem with enforcing the stockpiling requirement also occurred on the domestic side. Although domestic refiners were ready to comply with the PIL, they continued to complain about the heavy burden of the requirement. They found that they would need 40 million yen to build tankers and to purchase the oil to fill them, and that under the present

Table 4.5 US oil exports to Japan, 1932–1936 (1,000 yen per 1,000 kiloliters) Year Exports in Growth (%) Exports in Growth (%) value quantity 1932 37,055 – 1,364 – 1933 59,309 60 1,508 10 1934 71,689 21 2,106 40 1935 86,842 21 2,459 17 1936 118,581 37 3,087 26 Source: Calculated from Table 13 in Abe (1981, p. 194).

situation they could not hope to make the additional investment profitable.123 Hashimoto of Nippon Oil agreed with other firms (Mitsubishi and foreign firms) on taking joint steps in an attempt to either end or lessen the burden of stockpiling. He wanted either a subsidy or to raise gasoline prices in order to cover the cost incurred by stockpiling.124 They petitioned the MCI for a subsidy but the MOF refused.125 In response, in May 1935, the state decided to increase oil prices to help them to construct additional tanks, an increase of 2.5 sen per gallon of gasoline. The state was forced to withdraw this plan due to strong protests from oil consumers. The state also postponed implementing the requirement until it could provide subsidies to cover the extra cost.126 Finally, by the Imperial Ordinance of July 13, 1936, subsidies were provided to domestic firms for stockpiling expenses. Subsidies were given in the form of a 6 percent return on capital invested in extra tankage and stocks. Meanwhile, those firms having fulfilled the requirement were compensated with most of the quota for the projected 1936 increases in the market.127 While domestic firms soon complied with the deadline and received subsidies, the oil majors, which were ineligible for the government subsidy, again disregarded the deadline set by the “five-point memorandum.” This time, the state urged Stanvac to arrange with Mitsui Bussan a joint venture as a means of complying with the PIL. Mitsui would construct tankage and store oil for Stanvac and it would receive compensation partly

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from state subsidies and partly from commissions on an additional allocation of Stanvac products.128 Negotiation, particularly over the issue of which side would assume the management, came to an end with no settlement. Eventually the oil majors entered 1937 in technical violation of the PIL but with no penalties from the state. They continued to refuse to stockpile at their own expense. The state took no further action until 1940. Another key issue leading to the confrontation was the preferential quota. As mentioned above, the quotas set for the second half of 1934 clearly favored domestic refiners whose share increased from 46.4 percent to 49.9 percent. In response, the oil majors defected from the gasoline cartel that was formed in June 1934, and they also refused to participate in other cartels that were subsequently formed. They would comply only if they were guaranteed a market share of over 45 percent for the next ten years.129 The Japanese state yielded again, offering the oil majors a share of the projected increase in domestic consumption for 1935 instead of restricting their actual volume. Now, although their market share would drop to 43.7 percent, they were allocated 30 percent of the projected increase. The increase of actual volume would be 943,500 barrels,130 which was close to what the majors demanded. In April 1935, Stanvac and Rising Sun’s marketing network controlled approximately 46 percent of gasoline sold in Japan.131 Finally, the Japan-ese state guaranteed that the oil majors would receive the previous year’s actual volume of sale as a minimum, plus at least one-third of future increases, and a price structure that would not force foreign firms to sell at a loss.132 Ultimately, the Japanese state’s attempt to restrict the oil majors’ business by discriminative quotas turned out to be ineffective. Since domestic firms could not singlehandedly cope with the expanding market, the de jure status of the oil majors was inviolated after all. As Anderson puts it, “the limited statistical data available do not reveal any drastic curtailment of Stanvac sales in Japan despite all the rhetorical thunder of the mid-1930s.”133 Table 4.6 confirms this statement by illustrating that gasoline exports to Japan, which constituted virtually the entire business of Stanvac and Rising Sun in Japan, were increasing until Pearl Harbor. In sum, foreign firms were not controlled in view of the original purpose of the PIL. Quotas were consistently allotted to the minimum requests of the majors and the sixmonth oil reserve was never implemented. Some domestic firms obtained state subsidies for the fulfillment of the latter requirement while profiting from the highly protected market. After setting the basic agendas, what the state had done was to relegate licensed firms to implement them. As an ex-MCI bureaucrat recollects, the state’s business was not to inspect and permit the licensee’s business plans, as formally stated in the PIL, but to allocate quotas and subsidies in response to the latter’s request.134 In the end, what Japan achieved through the implementation of the PIL was a stabilized oil market that protected the interests of all major market players (both domestic and foreign). It was able to regulate foreign players to the extent that monopolistic rents coincided with consumer sacrifice.

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Conclusion For the first time in the modern history of Japan’s political economy, a full-fledged state intervention, or a comprehensive set of industrial policies was applied to the oil industry. The state was fully equipped with the power to grant subsidies, tax breaks, preferential government procurement, quotas, and most importantly, licensing. However, it is too simplistic to say that the state intervened this much because this strategically

Table 4.6 Exports of gasoline to Japan, 1935–1940 (thousand barrels) Export

1935

1936

1937

1938

1939

1940

USA 699 1,081 1,042 1,422 1,379 3,188 British 1,236 388 754 882 929 n.a. Malaya Dutch Indies 4,692 6,694 6,192 8,015 7,475 6,798 Source: ‘Gasoline Exports to Japan,’ Stanley Hornbeck Paper, 183 Grew file, Hoover Institution.

important sector attracted the attention of the Japanese military whose political power bypassed civilian control during the 1930s. For example, the six-month stockpiling requirement, an important precaution established by the military, needed almost three years to be implemented after it was substantially modified to accommodate domestic oil interests. The requirement was never observed by the oil majors. This happened between 1935 and 1941 when it is said the military dominated civilian affairs. Without the support of the civilian economic bureaucrats and the domestic oil industry, this law would never have been realized. Throughout the history of the Japanese oil industry, together with mergers, cartelization was a salient strategy that the state used to protect and maintain the country’s industrial order by controlling foreign players. Cartels were formed initially among fledgling domestic oil companies to protect their interests vis-à-vis foreign firms. Later they realized that it was impossible for them to perform effective collective action without the two giant foreign firms accessing their distribution networks. A series of abortive naigai cartels proliferated. It was then that the state intervened to strengthen cartels. Controlling both domestic and foreign firms was difficult, due to the changing conditions in the world system. Even the application of the formidable Important Industry Control Law to the gasoline market was unsuccessful because it could not control foreign entrants. The PIL which followed was basically an attempt to limit the activities of foreign players through the state’s licensing powers. It purported to fix players (a small number of domestic and foreign firms) by setting up high entry barriers and thereby reducing transaction costs between stabilized actors. In short, the Japanese state targeted the sector where world-systemic factors prevailed. Industrial policy was used for foreign investment control (i.e., an institutional attempt to protect the domestic industry from global competition). Through protection, it sought basically to achieve a stable industrial order and to gain oil autonomy. Although the

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autarky-oriented mercantilists wanted to use the licensing system to prevent foreign encroachment into the Japanese market, and the trade-oriented mercantilists wanted to use it as a device to regain market stability by accommodating foreign capital, both agreed that introducing radical state intervention was needed. Foreign players were not immediately kicked out as the military maintained. What the military contributed in this story was giving the state a situational urgency and thereby the means to a tremendous power to intervene (i.e., licensing rights vis-à-vis the private sector). An archetypal protectionist law such as the PIL was therefore the outcome of a historical conjuncture of security and general economic interests.

5 Politics for protection

Automobiles In 1928, a year after General Motors landed in Japan and three years after Ford Motor Company entered the market, a dozen Japanese auto firms accounted for 1.1 percent of total new car registration in Japan. By 1938, 56.7 percent of vehicles sold in Japan were produced by two government-licensed firms—Nissan and Toyota.1 In this dramatic transformation of the Japanese auto industry, we will focus on the historical process through which institutional adjustments were made to open up industrial growth. Japanese efforts to control Ford and General Motors are important because the history of auto production in Japan was shaped by the dominance of these two multinationals. As in the case of oil, the issue in the making of a developmental strategy for Japan was how to deal with foreign investment; the answer was protectionist interventionism. Few English-language works discuss Japanese prewar industrial policy toward the automobile sector. Michael Cusumano’s book, The Japanese Automobile Industry, deals primarily with technological development, labor management, and corporate strategies, but tells us little about the formation of public policy.2 Adachi, Ono, and Odaka provide a good account of the state’s role and the institutional factors (e.g., market structure, managerial capacity) in the technological development of the parts industry, which they pinpoint as most important for growth.3 However, they pay little attention to how the Japanese state dealt with foreign auto makers in formulating industrial policy and thereby restructuring the domestic industry. C.S.Chang’s The Japanese Auto Industry and the U.S. Market, William Duncan’s U.S.-Japan Automobile Diplomacy, and other Japanese-language works discuss the conditions and evolution of the Japanese state’s policy toward US multinationals, but they provide no analytical framework to explain how the state arrived at policy decisions.4 Phyllis Genther looks at the interactions between the state and firms, and attempts to present the circumstances that generated and developed the interactive statefirm relationship. Her account is wanting because it ignores the international constraints on the making of Japanese industrial policy: that is, the confrontation and bargaining between MNCs and local states and the role played by local capital.5 In short, this chapter explores (1) the opportunities that existed for Japanese decision makers under particular historical circumstances of the world economy (i.e., constraints

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created by multinationals), (2) whether opportunities for domestic capital were open within national politics, (3) what kinds of institutional arrangements emerged, who pushed for them, and whose interests they represented, and (4) how successfully they dealt with problems relating to industrial growth.

Historical background The origins of the auto industry trace back to the 1880s, when two German engineers, Daimler and Benz, produced the first cars to sell on the market. Initiated by the Germans, the experimental period saw an auto industry of small-scale production involving a large number of firms that were essentially assemblers of parts and components. As a result, capital requirements were low and thus the industry was easy to enter and exit. The Model T, produced by Ford in 1908, revolutionized the industry. The introduction of mass production techniques enabled Ford to increase production enormously while substantially decreasing costs. The Model T’s price dropped from $900 in 1909 to less than $300 in the early 1920s.6 This cost reduction was achieved through the rapid increase in labor productivity that resulted not only from the moving assembly-line but also from the application of Taylorist methods of work study and control over the pace of work. Tasks were fragmented, labor de-skilled, and management made hierarchical.7 Ford’s production techniques led to its expanding share in the rapidly growing American market, soaring from under 10 percent in 1909 to 55.6 percent in 1921.8 But Ford’s dominance was soon challenged by GM and later by Chrysler, GM (and Chrysler) excelled by pushing a new decentralized organizational structure, innovation in marketing, and product differentiation by offering a variety of makes and models to respond to changing market demand. By 1927, competition forced Ford to abandon the Model T and to shut down for months before introducing the Model A. In short, while Ford was building the River Rouge plant (an example of a fully integrated giant auto plant), GM was turning to outside suppliers, and while Ford continued to concentrate on one model, GM began to produce the largest array of products in the industry.9 GM overtook Ford in 1927 and has retained its dominant position ever since. Mass production techniques and product differentiation strategies made it more difficult for the non-Big Three firms to remain price competitive. Accordingly, there was substantial concentration of capital in the US industry under the domination of the Big Three, which accounted for about 90 percent of US production. In the early years of the twentieth century, nearly 200 firms were manufacturing and marketing automobiles in the USA. By 1927, three-quarters of them had disappeared.10 The early introduction of mass production techniques by the Big Three gave them a huge competitive advantage over European firms in the world market and consequently led to the worldwide expansion of US auto capital, particularly from the early 1920s. Because of the trade barriers set by foreign states to protect their own industry at that time, US competitors expanded through direct investment, by establishing foreign subsidiaries to assemble a “completely knocked down (CKD) kit.” For example, Ford established an assembly plant in Britain in 1911, in France in 1913, in Italy in 1922, and in Germany in 1926. Likewise, GM expanded to Britain in 1924, Brazil and Spain in 1925, and Germany in 1929.

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Although European firms began to introduce mass production techniques in the 1920s and 1930s, a larger scale of production by US firms meant much lower costs, and European firms remained uncompetitive.11 By 1929, the Big Three and their Canadian subsidiaries accounted for 80 percent of world auto exports, and it has been estimated that as much as 60 percent of world production capacity was controlled by the US firms. The late 1930s saw an interesting turn of events: Ford and GM produced more in their foreign subsidiaries than they exported.12 During the mid-1920s the Big Three began to extend their business into Japan. This meant that Japan was incorporated into the global automobile regime they led. Here the pioneer was Ford. During the halcyon days of the Model T, the company set up its first assembly plant in Yoko-hama in 1925. Two years later, GM landed in Osaka, and Chrysler followed suit. In Japan, the use of automobiles began in 1897 when an American living in Yokohama imported from the USA a steam-powered passenger car called “Orient.” Two years later, another American introduced an electric-powered car called “Progress.” But the first automobile owned by a Japanese was an electric-powered car. Japanese residents in San Francisco presented the car to the Crown Prince (later Taisho tenno) on his wedding anniversary in 1900.13 A few ambitious Japanese tried to manufacture cars in small family shops. Many of these shops, as in the USA, originally produced and repaired bicycles.14 Yoshida Shintaro, a bicycle shop owner, and his employee Uchiyama Komanosuke, first assembled a car by mounting a body on a chassis using an engine that Yoshida brought back from a trip to the USA in 1902. In 1907 they built the first Japanese gasolinepowered car, and they eventually produced seventeen cars called “Takuri.” Out of this experience emerged Tokyo Motor Works in 1911, which turned out fewer than thirty cars before it was dissolved a decade later. In 1904, Okayama district officers who considered operating a bus line asked Yamaba Torao, an engineer who owned a small electrical repair shop, to experiment with building a bus. After seeking technical advice from an Italian engineer, Torao completed Japan’s first steam-powered vehicle. Unfortunately, the experiment was a failure due to numerous technical problems, especially poor tire quality. In 1911, Hashimoto Matsujiro established Kaishinsha Motor Works, the first Japanese auto firm that turned trial production into a continuing business. Well aware that the time was not quite ripe for the domestic production of automobiles due to the technological gap and limited market size, he opted for a gradual localization strategy, and began by assembling CKD kits and doing repair jobs.15 He first assembled CKD packages imported from Britain’s Swift Company, and began independently to manufacture DAT cars between 1913 and 1914. But he completed six units before converting Kaishinsha into an auto repair shop. In summary, Japan began its trial production of motor vehicles quite early if we consider that the first gasoline-powered car was produced in 1886. A few Japanese who possessed a strong inventive spirit showed impressive technological progress, but they could not create a profitable business due to the limited domestic market, insufficient funds, and, most important, the low technological level of supporting industries such as metalworking and machine building. Invention and imitation in the early period of the Japanese auto industry had little effect on later development.16

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State intervention The Military Vehicle Subsidy Law After a series of trials ending in failure, several larger firms joined the auto industry, mainly divisions of shipbuilders and arms manufacturers. Around World War I, the shipbuilding sector was Japan’s most advanced heavy industry, leading the development of mechanical industries.17 Ship-builders collected huge earnings during the war and tried to diversify their business activities. They considered the automobile industry one of the most desirable, because their accumulated knowledge of engines and machine-tool technology could easily be applied to auto making.18 The Kobe Shipyard of Mitsubishi Shipbuilding, the Kawasaki Shipyard, and the Tokyo Ishikawajima Shipyard subsequently began to produce cars and trucks.19 Their motivation for entering the field was in part directed by the Army, which wanted a stable supply of automobiles for military use.20 After the Russo-Japanese War (1904– 1905), the Japanese Army first appreciated the strategic significance of automobiles.21 It imported foreign trucks to investigate their utility as an effective weapon in the Japanese context. By 1910, the Army had manufactured two experimental trucks and concluded that domestic manufacture of automobiles would be invaluable.22 Accordingly, in 1912, it organized the Military Motor Vehicle Investigation Committee (Gunyo jidosha chosa iinkai) to investigate the military vehicle policies implemented in European countries and to create appropriate policies in the development of a domestic auto industry. The committee concluded that it would be too difficult for the Army to manufacture and maintain a large number of trucks. Instead it recommended that Japan adopt the European model. The government would subsidize private producers, and during a war it could claim the right to use the vehicles for military purposes. The activities of this committee led to the promulgation of the Military Vehicle Subsidy Law (Gunyo jidosha hojo-ho) in 1918. This provided government subsidies to producers who could turn out 100 or more trucks and buses weighing 1.5 metric tons or more, and who owned over 50 percent of the capital and voting rights of their firm. In return, the Army could requisition the subsidized vehicles in times of war. Low profitability caused Mitsubishi and Kawasaki to discontinue their businesses within several years. Ishikawajima survived by cooperating with foreign producers. It entered into an agreement with Wolseley to import British vehicles, and later, locally manufactured Wolseley trucks were subsidized by the Army. Tokyo Gas and Electric (TGE) was the first fully subsidized auto firm. While the Military Vehicle Subsidy Law was still under preparation, the Army, specifically the Osaka Arsenal, recommended that TGE begin trial manufacture of trucks, and it provided the firm with basic materials, forging dies, and cased items, as well as detailed blueprints and technical advice.23 TGE was a major truck producer until 1936, when it merged with Jidosha Industries and produced “Isuzu.” When the Army offered a new opportunity for domestic truck makers, Hashimoto of Kaishinsha decided to convert the DAT’s passenger car line into a truck. Kaishinsha improved the casting of its engine by subcontracting production to Komatsu Ironworks, a manufacturer of machine tools and mining equipment for which Hashimoto had worked

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briefly during the mid-1910s.24 He perfected a truck design that met the military standards and received subsidies in 1924. In 1926, low production and low efficiency forced Kaishinsha (renamed DAT Motors in 1925) to merge with another struggling firm, Jitsuyo Motors, which Kubota Ironworks founded in 1919 to produce automobiles designed by an American, William Gorham. Because Jitsuyo produced only 450 units and was losing money, the Kubota family gave in. DAT Motors managed to stay alive by concentrating on manufacturing trucks sold to the Army (see Table 5.1). Entry of Ford and GM The epochal turning point in the history of the Japanese auto industry was a surge in public demand for automobiles created by the Great Kanto

Table 5.1 Auto production by major firms, 1919– 1930 Year

TGE

Ishikawajima

DAT

Total

1919 1 – 12 13 1920 49 – 49 98 1921 28 – 28 56 1922 – – 0 0 1923 2 3 5 10 1924 9 125 136 270 1925 6 103 127 236 1926 – 202 245 447 1927 25 243 302 570 1928 70 246 433 749 1929 58 205 376 639 1930 57 177 371 605 Source: Sakurai Kiyoshi, Nichibei jidosha masatsu, p. 217.

Earthquake of 1923. Recovery from destruction led to great improvements in roads and highways in the Kanto area. This was followed by the rapid market expansion of buses and trucks. Popularity of passenger cars also rose. But personal use was limited, and most of the cars were fitted out as taxi-cabs. Trucks were used particularly for inter-urban and country-urban hauling of produce, and buses were used extensively in metropolitan areas. The rapid growth of the Japanese auto market in the 1920s, especially after 1923, did not work to the advantage of domestic producers, who lacked mass production techniques and were dependent on subsidies. These firms found it difficult to adapt to the new market conditions, which required efficiency and price competitiveness. Unfortunately, the rapid growth of the market invited foreign giants—Ford and GM. After the earthquake, the City of Tokyo decided to buy buses as the main mode of mass transit and ordered 1,000 Model T chassis from Ford to be refitted as buses.25 This large order drew Ford’s immediate attention. Dearborn sent officers to Japan to assess the market and Ford’s place within it. They felt that the market was developing rapidly and

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was potentially attractive. Robert Roberge, head of the traveling group, advised that Ford go beyond mere export and sales to direct investment in local assembly. Ford, he pointed out, would save on import duties by shipping CKD (completely knocked-down) kits (at a 25 percent tax rate) rather than shipping CBU (completely built-up) cars (at a 35 percent tax rate). And, he added, shipping parts would save on ocean freight charges.26 Dearbon approved the plan and established its own subsidiary in Yokohama. Although Japanese officials (the National Police and the military) were deeply suspicious of Ford’s intention to invest in Japan,27 they did not interfere with the company’s activities. In 1925, Ford Japan was estab-lished in Yokohama with a capitalization of 4 million yen, which increased to 8 million within five years. As in the case of Ford, the sudden surge in exports to Japan after the earthquake grabbed the minds of GM people. Ford’s decision to make a FDI in Japan and the possibility that GM might lose the market to its rival convinced them to establish an assembly plant in Japan.28 Compared to Ford’s experience, GM found it relatively easy to find a location for the new plant. Osaka officials were eager to invite GM’s investment. They offered GM special incentives: an exemption from all city taxes for four years and official assistance in providing facilities for GM’s new plant.29 GM headquarters accepted Osaka’s offer and started an assembly operation in 1927. No impediments were placed in GM’s way. This plant was followed by Chrysler, whose assembly firm, Kyoritsu Automobile Works, was established in Yokohama in the following year with a capitalization of 200,000 yen. The Impact of the Big Three’s entry on the existing auto makers was devastating. They immediately controlled over 90 percent of the Japanese auto market. Domestic production dropped suddenly from 376 units in 1925 to 245 in 1926. Hakuyosha Motors was closed. DAT and Jieuyo, both on the verge of bankruptcy, had to merge to survive. Only three firms (TGE, Ishikawajima, and DAT) remained to produce vehicles for the small market ensured by the Army.30 The Standard Model project Strictly speaking, the Army’s subsidy strategy was in fact a military procurement policy rather than industrial policy. Civilian bureaucrats judged that it was premature and unnecessary for Japan to make cars, and that it was better to import cheap foreign cars by opening up the market and making foreign producers compete with each other.31 But this view toward the auto industry slowly changed. As the prolonged recession in the 1920s and the subsequent financial crisis (i.e., Kinyu kyoko in 1927) deepened, the balance-of-payments problem became a central concern for economic bureaucrats. The widening trade deficits in the auto industry due to the dominance of Ford and GM alarmed MCI and MOF officials, who now felt the need for import substitution. They also noticed that the existing domestic industry subsidized by the Army could not keep up with the mass production required by the rapidly expanding market. In their view, the Army’s policy was problematic because military-use vehicles were unsuitable for private use (because of their size and the ban on remodeling). More important, the subsidy program permitted firms to be inefficient and uncompetitive. In the rapidly expanding market, only firms that achieved economies of scale could survive.

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They concluded that the Army’s policy was to rescue only a small number of troubled firms.32 On the basis of their evaluation, the MCI consulted the Committee for Promotion of Domestic Industry (Kokusan shinko iinkai) regarding concrete measures to reduce trade deficits in the auto industry. In response, the committee submitted its recommendations in May 1930: 1 Priority should be given to the production of trucks and buses. 2 Production capacity should be 5,000 vehicles a year. 3 Subcontracting practices should be encouraged to use the excess capacity in the existing auto industry and other related industries. 4 Existing facilities and experiences should be utilized. 5 Protective measures should be applied.33 In retrospect, these recommendations were extremely important because the basic conceptual agendas directing the subsequent protective attempts were set there: the pursuit of mass production in the state-targeted areas, efficient subcontracting, and protective tariffs. In 1931, to carry out further research, the committee organized the Special Committee on the Feasibility Investigation of the Automobile Industry (Jidosha kogyo kakuritsu chosa iinkai). After one year of study, it submitted the following recommendations: 1 Priority should be given to the production of mid-size trucks (1.5–2.0 tons) and buses called the Standard Model Vehicle (Hyojunshiki-sha). 2 Production of the Standard Model Vehicle should be promoted and protected by granting preferential government procurements, tax breaks, subsidies, and protective tariffs. 3 The industry should be rationalized by urging domestic firms to merge, or to form cartels and strengthen the production base of the Standard Model Vehicle.34 The report made two central points. First, it recommended that the target sector be midsize trucks and buses because, in the first place, it was impossible to compete “head to head” with Ford/GM vehicles (1 ton) in small-size trucks and buses as well as passenger cars.35 It implicitly aimed to solidify fundamental technological know-how by first specializing in mid-size standard vehicles and later gaining entry to the smaller size vehicle market, thereby directly challenging Ford and GM. Second, this incrementalist strategy should be implemented with the state-led rationalization of the production regime.36 Mergers among the existing and would-be producers was the primary method of protection. If it was unfeasible, however, the state would select producers appropriate to the project and promote a cartel based on each producer’s strong point. What the state needed to do was (1) target the areas of interest, and (2) help domestic producers organize a one-set system under control (tosei aru ittaikei).37 The study also recommended that rationalization of the market-ing organization (a sales cartel) would be helpful because it could control unnecessary competition among producers and act as a check on the quality of products. Rationalization could also be a means to the future union and improvement of the production organization.38

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In September 1931, the committee announced specifications for five models and asked TGE, Ishikawajima, and DAT Motors to produce test vehicles. These vehicles were tested and one was selected as the Standard Model that eventually became known as “Isuzu.” The goal set for producing it was 3,000 vehicles annually. Tariffs on auto parts were raised from 30 percent to 42 percent ad valorem. Those for engines increased from 28.1 percent to 35 percent.39 At the same time, the MCI urged the three firms to establish an efficient coordination system to execute the project, and subsequently they formed the Domestic Automobile Union (Kokusan jidosha kumiai) to manufacture the designated model by division of labor. Ishikawajima produced engines, TGE produced front and rear axles and brakes, and DAT produced clutches and propeller shafts. The union served as an administrative organ in charge of supervising sales and distributing government subsidies related to the Standard Model project. To support this project, the Ministry of Railroads (Tetsudosho), which had used imported buses for the Ministry-operated bus service (Shoei jidosha), promised to place an order with the union and to provide every possible technical assistance. Because the firms were small scale, uncompetitive, and suffering from internal conflicts, it soon became apparent that the cartel could not produce the required quantity of vehicles.40 MCI then tried to persuade them to merge. As a result, in March 1933, Ishikawajima and DAT Motors merged to establish Jidosha Industries, capitalized with 3.2 million yen. TGE joined four years later. This merger scheme did not work either. Simply, it could not produce the projected number of the Standard Model. The firms could not concentrate on the Standard Model project, in part because 80 percent of total auto production by Jidosha Industries were military-use vehicles supported under the Military Vehicle Subsidy Law. The latter granted more subsidies than did the former: the Army subsidized 1,250 to 2,200 yen, whereas MCI provided only 500 yen for manufacturing a vehicle.41 To make matters worse for MCI, international circumstances of the early 1930s negatively affected the project. After the Manchurian Incident broke out, the Army increasingly needed more military vehicles to wage war on the Continent. The immediate need for more military-use vehicles delayed MCI’s project.42 The fundamental problem with the Standard Model project was that the model itself was unpopular and less useful for the public than the one-ton vehicles that Ford and GM produced. Because of limited market demand, mass production was not feasible for the firms (Jidosha Industries and TGE) undertaking the MCI project. They were also too weak and small to compete in a modern sector that required huge capital investment. The emergence of Nissan and Toyota Shortly after graduation from Tokyo Imperial University, Ayukawa Yoshisuke, the central figure behind the emergence of the Nissan zaibatsu, went to the USA to study manufacturing and management techniques. During his second visit to the USA in 1909, he purchased machinery to open a factory, and in 1910 he organized the Tobata Casting Company to produce steel pipes and cast-iron. Tobata turned out to be a great success. Centering on this firm, Ayukawa rapidly expanded into chemicals, construction, insurance, lumber, and foundry products. The most notable addition to his empire was Kuhara Mining, which had prospered during the First World War and spawned Hitachi Electric Works, but was acquired by Ayukawa when it was on the verge of bankruptcy.

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He completed a zaibatsu structure by organizing a holding company, Nihon Sangyo (shortened to Nissan) in 1930, which established Nissan Motors four years later. Ayukawa’s interest in automobile production dates back to the early 1900s, when during his stay in the USA, he was impressed with the popularity of the Model T and mass production skills.43 After returning to Tokyo, he met William Gorham, an American engineer who participated in Kaishinsha’s auto production, to discuss the feasibility of entering the auto business. The initial response was positive, but his plan was discarded because he failed to convince other shareholders in Tobata Casting.44 Instead, he entered the parts industry and manufactured parts for Ford Japan, GM Japan, and domestic firms. In May 1931, Ayukawa finally entered the automotive industry by taking over the Osaka factory of DAT Motors, where passenger cars called “Datsun” were manufactured. DAT Motors approved the sale because the newly created Jidosha Industries (a merger between Ishikawajima and DAT Motors) intended to produce only trucks and buses.45 Then Ayukawa separated the auto parts division of Tobata Casting to merge with the DAT line and incorporated it as a new subsidiary named Nissan Motors in 1934 with a paid-in capitalization of 10 million yen. His goal for Nissan Motors was truly ambitious—to produce 10,000 to 15,000 automobiles a year. Believing that the acquisition of advanced technology was essential to auto manufacturing, he chose two strategies: (1) subcontracting, and (2) entering into a joint venture with one of the major foreign firms.46 Nissan focused on parts manufacturing, producing, for example, 521,000-yen-worth of components for Ford Japan and GM Japan between 1933 and 1935. At the same time it entered into an arrangement with GM to jointly manufacture passenger cars.47 The Toyota Motor Company was established in August 1937 as a separate entity from the Toyoda Automatic Loom Works, which Toyoda Sakichi founded. Sakichi, automatic loom inventor and entrepreneur in the machine-building industry, intended to enter the auto manufacturing sector in 1929. He secured seed money by transferring several patents to Platt Brothers, a British machine builder, in return for a million yen in royalties. Before his death in the following year, Sakichi told his eldest son, Kiichiro, that it would be Kiichiro’s duty to serve the country with automobiles. Kiichiro used the money to begin research on building passenger cars secretly for the next three years and then formally established the automobile section within Toyoda Automatic Loom in 1933. After extensive studies of foreign cars, its first passenger car, codenamed “A1,” and truck, codenamed “Gl,” were finally introduced to the public in 1935.

Toward the Automobile Industry Law Agenda setting MCI’s full-scale efforts to promote the domestic auto industry turned out to be another failure. All the subsidies, tax breaks, tariffs, and preferential government procurement only guaranteed that existing firms would survive. The effect of state-initiated cartels and mergers among domestic producers was no different. Stabilizing and encouraging the domestic industry meant regulating dominant foreign players. Industrial nurturing could

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not be effective if foreign businesses were left intact. In other words, industrial policy or industrial rationalization should regulate global forces. After the Manchurian Incident, the Army thought it imperative to reformulate the existing auto policy in order to control foreign firms more effectively. Aware of the numerous practical problems of subsidized domestic trucks, Army officials realized that foreign trucks were superior Ford trucks were effective in land operations over rough surfaces and under severe weather conditions in Manchuria and north China.48 In addition to the mechanical problems, the Standard Model (not to mention the Army-subsidized vehicles) proved too heavy and bulky to be effective on the battlefield. After an extensive investigation of the problems caused by the domestic vehicles used in Manchuria, the Army determined that, from the strategic point of view, Japan should develop one-ton vehicles equivalent to Ford’s and GM’s. The Manchurian market for domestic vehicles would be secured in order to avoid the anticipated difficulties in auto repairs and parts supplies over there. But it was imperative to develop the indigenous industry by driving Ford and GM out of the Japanese market.49 To the Army, the strategy of autarkic growth was the logical conclusion. To this end, it organized the Committee to Decide on a Domestic Vehicle Model (Kokusan jidosha kenshiki kettei iinkai) in March 1934 with twenty-three representatives from the Army and the MCI, chaired by the Chief of the Equipment Bureau of the Army, Lieutenant General Hayashi. The committee decided to develop two types of vehicle: a four-cylinder vehicle equivalent to Ford’s and a six-cylinder vehicle equivalent to Chevrolet’s as the new economic car (Shin keizaisha) or people’s car (Taishusha), the Japanese equivalent of Volkswagen. It then ordered Kyodo Kokusan Motors (a joint sales firm established by Jidosha Kogyo and TGE) in Tokyo and Kawasaki Vehicles in Kobe to produce them jointly. Tests of the vehicles proved successful. What mattered now was how to organize and expand domestic production capacity to manufacture the people’s car. In June 1934, for the autonomous development of the domestic industry, the Army prepared a proposal that included the construction of a “new” large-scale auto firm to manufacture the people’s car on a mass production base and a licensing system that would reduce unnecessary competition. It was implicit in this proposal that foreign auto makers would be discriminated against, because setting up a single national auto company licensed by the state would displace foreign giants as well as the existing small-scale firms.50 MCI did not agree with the Army’s approach. Although it concurred with the Army’s main point, MCI sought less direct measures. One month later, it provided a moderate plan: the state would grant a license to new auto firm(s) in which any existing firms would be allowed to invest. Foreign firms would be licensed as long as they conformed to the spirit and rules set by MCI.51 To debate the two rival plans, the Interministerial Committee Regarding the Promotion of the Automobile Industry (Jidosha kogyo kakuritsu ni kansuru kakushocho kyogikai) was organized with representatives from ministries of the Army, Navy, Finance, Commerce and Industry, Foreign Affairs, Home Affairs, and Railroad. The committee met twelve times between August 10 and October 9, 1934. The previous agendas set by the 1931 to 1932 interministerial committee were discussed.52 The initial point was the development of a mass production system—both the Army’s and MCI’s plans considered mass production to be the key to business

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activity. The state would discriminate among producers by selecting those which adopted mass production strategies. The state would reward them by ensuring an adequate level of profit, using tax breaks, import tax exemptions, and subsidies.53 Second, policy tools were needed to realize “controlled competition” or, to put it differently, to rationalize the industry. The state helped reduce the number of firms by supporting only those which achieved the economies of scale essential for mass production.54 Third, the state determined what types of vehicles would be produced. One-ton-size trucks and buses were designated as the “people’s car,” whereas passenger cars were excluded from state protection. Private producers who wanted state protection had to produce trucks and buses that were targeted at the main public as well as military transportation vehicles. The state believed not only that trucks and buses should meet Japanese conditions (that is, that the Japanese were not wealthy enough to buy passenger cars), but also that they were easy to build, whereas passenger cars needed more complex skills and materials.55 Fourth, the state believed that the participation of large-scale (zaibatsu) firms would be necessary to establish a domestic auto industry. Believing that the superior financial and managerial capability of zaibatsu firms along with relevant state support would make it possible to compete with Ford and GM, MCI and the Army tried to persuade the “Big Three” zaibatsu (Mitsui, Mitsubishi, and Sumitomo) to enter the auto industry around March 1932 and again in the spring of 1934. They failed to persuade them on both occasions, however.56 Finally and most important, the state tried to introduce a licensing system to implement these goals. Where did this idea come from? One answer is that it arose out of Japan’s experience in the oil industry. Introduction of this system had already been debated in the late 1920s in the course of policy discussions on protecting the domestic oil industry from foreign competition. We may assume that the progress made in this sector influenced how the very same policy makers (MCI, Army, Navy, MOF, MFA) attempted to solve with great difficulty the political and economic problems relating to the auto industry. The auto committee was launched at exactly the same time as the Imperial Diet passed the Petroleum Industry Law. As with oil, two coalitions were formed, representing different views on implementing the agendas and on choosing the best route for the growth of the domestic auto industry and national industry in general: a tradeoriented mercantilist coalition and an autarkyoriented mercantilist coalition. Each placed different emphases on the pace of industrial restructuring and the significance of domestic ownership. The coalitions viewed the importance of the auto industry for national development from different perspectives. The pro-autarky coalition believed that automobiles were a strategic commodity crucial to waging a modern mechanized war, as well as a sign of Japan’s advanced industrial power. Not only did Japan need to acquire a large number of automobiles, mostly trucks, either immediately or at the earliest possible date to prepare for war against the West, it also needed vehicles of higher quality than domestically produced ones.57 They promulgated a radical approach: rapid and autonomous development of the domestic auto industry by driving out the world’s leading producers from the domestic market.58

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The pro-trade coalition, on the other hand, valued the auto industry for different reasons. It viewed the industry as the symbol of industrial growth.59 Since the demand for automobiles had increased dramatically and supply depended heavily on imports, Japan chafed under balance-of-payment problems. This group also noted the important role of the auto industry in the development of general mechanical industries: its exceptionally long backward and forward linkages attracted them most.60 These were primary reasons why, as early as 1926, the MCI officials targeted automobiles as “important industry goods” to be developed. Countries like Japan, with low technological levels in general mechanical industries, could gain national industrial power by promoting the domestic auto industry.61 While agreeing with the Army on the necessity for import substitution, this group emphasized finding an appropriate method by which to ensure the transfer of advanced technology from foreign capital, which they believed was the key factor in the growth of the domestic auto industry. The strategy must be gradual and incremental. The difference of policy orientation between these two groups inevitably evoked a central issue: whether or not to permit foreign ownership. For the autarky-oriented mercantilists, excluding foreign capital from the domestic market was a matter of utmost concern. In particular, they disliked joint ventures between domestic and foreign firms because they would only perpetuate foreign domination.62 They argued that even if Ford and GM stopped their operations, “Japanese people could endure the deficiency, and that such a situation would rather be utilized as a decisive momentum for the Japanese autonomous development of the Japanese auto industry,” thereby “achieving more import substitution” and greater industrialization “without sacrificing efficiency.”63 Because the transfer of advanced technology from foreign capital was the central concern for the trade-oriented mercantilists, their best strategy was to use the power of government licensing to accommodate foreign capital and incrementally indigenize them through joint ventures or simple capital tie-ups.64 This strategy was less concerned with strengthening Japanese ownership than the one proffered by inward mercantilists. The plan would also leave the foreign-dominated market structure more or less intact, but would incrementally alter the structure of the foreign firms to favor the Japanese by gradually enlarging Japan’s share and increasing the automobiles’ local content. This plan could best deal with the balance-of-payment problems to which the trade-oriented mercantilists were invariably sensitive. For example, Takahashi Korekiyo, a powerful finance minister, pushed this idea when he was visited by GM Japan’s Managing Director Richard May in 1932. The minister advised that GM take in Japanese capital and establish a joint venture company by electing Japanese directors on to the company board. In return, he continued, goods produced by such a joint venture ought to be considered domestic goods, thereby escaping the “buy Japanese” campaigns that were growing in the early 1930s.65 At the same time, Takahashi suggested a “vertical” industrial restructuring that would link domestic parts-producing firms systematically with main firms in the terminal industry. This had been suggested by the 1930s Committee for Promotion of Domestic Industry. A debate followed on the issue of restructuring the “horizontal” dimension of the industry. As in the case of oil, inward mercantilists preferred a single half-public/halfprivate joint venture firm where the state would secure control while accommodating private entrepreneurship. Although their proposal did not call explicitly for a single-firm

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monopoly, it is implicit in the text that a single national policy firm (Kokusaku kaisha) was necessary to displace foreign capital and small-scale domestic capital. On the other hand, the trade-oriented mercantilists asserted that unless private firms merged voluntarily to establish a grand joint venture firm, the license would be given to more than one firm while the rest of the firms would be permitted to continue their own business without interruption. For example, the MCI desired to divide the Japanese market between two firms: one pure Japanese firm constructed by a grand merger among domestic firms, and a joint venture between foreign and domestic capital with minority Japanese ownership. This scheme was supported by two key MCI bureaucrats: viceminister Yoshino Shinji and chief of the Industrial Affairs Bureau Kishi Nobusuke.66 Decision making On August 10, the committee began to discuss these issues.67 On industrial restructuring, Saka Kaoru of the MCI opposed the Army’s anti-foreign monopoly plan and argued that it would cause the US government and the Big Three to protest and retaliate, whereas Asakura of the Ministry of Railways (MOR) argued that a single monopoly firm in sales could be accepted, but that a monopoly in production would cause serious inefficiency. The Navy’s autarkists also doubted the plan and instead suggested a compromise, saying that “it is better to give the license to one assembly firm but to allow free competition in other areas.”68 Because of these diverse opinions, the committee failed to agree on this matter. The outcome was stated in the subcommittee’s proposal: “The production of the people’s car designated by the state would go to one or several firms, and the method of selection depends on the applied firm’s business plan and the projected market demand for automobiles.”69 Above all, the central issue in the debates was whether joint venture firms (foreign/domestic) should be granted a license. MCI believed that the gradual Japanization of foreign firms was the best strategy and proposed that foreign firms should be licensed as long as they satisfied the requirements specified by MCI, such: (1) firms should substantially increase their share of Japanese ownership in management and capital; (2) businesses should operate within their current capacities; and (3) firms should adjust their current facilities to accommodate Japan’s “people’s car” project.70 The MOR and MOF both warned that a radical push by the state (i.e., the Army’s proposal) against natural progress would not succeed.71 In this regard, the outward mercantilists enthusiastically supported the ongoing negotiations between Nissan and GM for a capital tie-up.72 Ayukawa Yoshisuke of Nissan was called to speak before the committee. He argued that the key to a mass production system was the ability to supply quality parts. Extending the assembly-line was only a matter of more capital, but he believed that supplying good-quality parts was a matter of having the right technology. If they could be produced domestically, he thought competition would be possible. He also felt that the extension of the capacity to assemble vehicles comparable to Ford’s and GM’s would take only two months to build on the same scale. He concluded that overcoming technological backwardness in the production of parts would be possible only through joint ventures and the transfer of advanced technologies from companies such as GM.73

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In summary, for Ayukawa and Toyoda Kiichiro (who expressed essentially the same view as Ayukawa at the same session), the fundamental problem for Japanese firms lay not in the lack of the state’s financial and administrative support (e.g., subsidies, tax breaks, tariffs) but in the lack of advanced technology for making and supplying parts.74 Kawanami, Chairman of Mitsubishi Heavy Industries, similarly warned that strong state protection might have negative consequences for the development of the auto industry because protected firms could survive without advancing technological progress, which he believed was essential for successful growth.75 The private sector (zaibatsu firms) argued that the state should focus more on encouraging technological progress as a basis for the industry’s growth than on achieving scale economies through industrial restructuring and protection. Ayukawa opted for the incremental approach, suggesting a “twenty-year plan” that would begin with a capital tie-up with GM in order to benefit from technology transfer and in twenty years to completely Japanize the Chevrolet cars.76 Kishi Nobusuke and other MCI officials were impressed with this grandiose plan and supported it enthusiastically.77 They tried to persuade the Army on the grounds that Nissan’s joint venture scheme would not only upgrade the domestic technological level but also eventually force Ford, Japan’s biggest competitor, out of the market.78 The Army, however, strongly opposed the plan because officials there thought it would take too much time to accomplish. Ito Hisao of the Army stated: As far as I am concerned, it is irrelevant to discuss matters that will occur in 20 years. Japan has already withdrawn from the League of Nations and has become an orphan in international society. Under threats from great powers like the Soviet Union and the United States, it is inconceivable that international peace would continue for the next 20 years. What if Japan waged war with the United States? [The twenty-year plan for domesticating Chevrolet] is not the national policy (kokusaku). I will stick with the plan for the establishment of a pure Japanese auto industry to the end.79 In summary, the principal difference between the trade-oriented mercantilists and the autarky-oriented mercantilists centered on the administra-tion of the licensing system: whereas the former wanted to use the system to reduce the number of firms so that economies of scale and technological transfer would occur, the latter regarded it as the primary way to exclude foreign capital.80 The confrontation between the two coalitions on this issue continued even after the interministerial committee was dissolved in October 1934.81 Meanwhile, in April 1934, Nissan and GM reached a tentative agreement to form a capital tie-up. GM would yield 49 percent of its capital to Nissan, which in return would yield to GM 49 percent of Jidosha Seizo (later Nissan Motors).82 Immediately after the agreement was reached, Nissan secured the MCI’s support. It further obtained the MOF’s unofficial permission to forward a remittance to GM (in the USA) for the purchase of Japan GM’s shares.

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Not surprisingly, the Army opposed this plan because it was preparing and pressing for its own autarkic plan. Under pressure from the Army to break up the deal, Nissan persuaded GM by explaining that the terms of agreement between them would not be accepted by the Army, and that the government would not approve the deal without the Army’s consent. Consequently, GM allowed Nissan to have majority ownership of GM Japan. The American firm would surrender 51 percent of its stock immediately to Nissan and further agreed that 51 percent of Nissan’s stock would be bought not by GM Headquarters but by GM Japan, which would be under Nissan’s control and thus be independent of the GM Headquarters in New York.83 The final agreement was reached in September. Minister of Finance Takahashi Korekiyo approved GM’s application for the remittance of funds. A signed contract for the purchase of Nissan’s share by GM Japan was executed. A portion of the purchase price was deposited in the bank. And yet the Army did not accept the conditions and forced them to postpone the deal. Because it hoped for a pure Japanese auto industry it rejected any kind of joint venture scheme, even one that assured majority Japanese ownership as in the case of the Nissan-GM deal. Ayukawa had to consider the implications of Nissan zaibatsu’s increasingly close business relationship with the Army. Nissan zaibatsu was initially favored by the Army not just because it was made up of firms concentrated in the sectors on which the Army placed strategic importance (i.e., heavy and chemical industries), but because the Army highly valued Nissan’s modern rational firm structure, which differed from “old zaibatsu” based on family ties. As a result, Nissan thrived as the military expanded in the 1930s. In this regard, the company could hardly ignore the threat that the Army’s opposition in the auto sector might jeopardize its overall business interests, particularly an extremely profitable business in Manchuria based on the Kwantung Army’s favorable terms. Opposition came also from within the Nissan organization. Yamamoto Shoji, a top representative of Nissan, wanted to manufacture Datsun and trucks independently. Ayukawa finally surrendered, and the Nissan-GM negotiations ended in December.84 Thereafter, the Army aggressively pursued its own project and suggested a more concrete proposal to restrict the business activities of Ford and GM, primarily by quantitatively restricting their sales in the Japanese market. In response, both the MCI and the MFA, after having consulted each other, warned that such a non-tariff trade barrier would violate the 1911 US-Japan Commercial Treaty, and that the foreign activities of Japanese firms would in turn be restricted. They also asserted that since the Petroleum Industry Law had already hurt Japan’s relationship with the West, another piece of wrong-headed legislation would cause much more serious diplomatic problems. They reiterated the conclusion that a capital tie-up or merger scheme would be the best possible alternative.85 Frustrated by the lack of MCI’s support, the Army resorted to establishing a public auto firm, which, as in the case of oil, required enormous political effort. The Army’s dilemma was soon resolved by its encounter with Toyota—a new firm that had not yet attracted much attention. Toyoda Kiichiro saw the opportunity to gain the Army’s support and presented his well-articulated plan to establish a pure Japanese mass production system. After an interview with Toyota, Ito reported that: (1) Toyota’s target class was the same as Ford’s and Chevy’s (i.e., one-ton trucks and passenger cars); (2) the company was acquiring a large tract of land for a factory whose projected monthly

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output would be over 3,000 units; (3) it had already pursued an autonomous plan to mass produce the types of cars mentioned above irrespective of the state’s protection policy; and (4) the company was determined to shoulder the costs of venturing into this new business, some one million yen a year for the next five years.86 The Army was impressed with Toyota’s determination and readiness to create an independent mass production auto company, and thus willingly discarded the public ownership idea.87 While the circumstances for the private sector now favored the Army, personnel changes within MCI helped create a positive atmosphere supportive of a national policy in the auto industry. In April 1935, Kishi Nobusuke, newly appointed chief of the Industrial Affairs Bureau, the bureau in charge of the automobile policy, ordered Kogane Yoshiteru, also newly appointed chief of the Industrial Policy Section, to settle as quickly as possible pending issues such as the auto policy.88 Together, the MCI secretly sent Nagasaka (Saka Kaoru’s successor, chief of Industrial Affairs Section) to Nazi Germany to search for an appropriate method to undermine US dominance in the auto sector. The Volkswagen project was extensively studied.89 Despite the newly created cooperative atmosphere between the MCI and the Army (over the necessity of formulating a national auto policy at the earliest possible moment), the MCI still refused to agree with the Army’s discriminatory policy. In June, it drafted its own proposal, which was basically identical with the Army’s except for a clause granting equal opportunity to pure domestic firms and foreign-domestic joint venture firms.90 After a series of negotiations with the Army, the MCI finally surrendered that clause and reached an agreement with the Army on July 21, 1935. The final proposal was drafted. Key terms included: (1) to place the auto industry on a license basis, (2) to issue licenses only to manufacturers of automobiles that had a majority Japanese ownership, and (3) to permit foreign firms already in the industry to continue production at their current scale. Why did the MCI give up? What altered the balance of bargaining power between the MCI and the Army (or OM and IM) in the latter’s favor? Some observers point to the personnel changes within the MCI in April and the emergence of reform bureaucrats (kakushin kanryo or shinkanryo) like Kishi in the decision-making process because they were pro-military and thus sympathetic to the Army’s autarkic policy.91 Let us look briefly at who the reform bureaucrats were, and what role they played. In general, they are described as pragmatic nationalist, reformist, pro-military pro-fascist, and anti-democratic.92 But reform bureaucrats as a powerful political entity emerged only after 1937 when Konoe Fumimaro, their enthusiastic supporter, became Premier and gave them a power base—the Cabinet Planning Board (or the so-called Economic General Staff). A secret paper prepared by the Showa Kenkyukai, which populated key reform bureaucrats, stated in December 1936 that “the shinkanryo were much less powerful than the public supposed… hereafter the shinkanryo will gradually become powerful, and together with military services, they will be influential in opening new era.”93 This statement implies that the political alliance between the reform bureaucrats and the military may have gained power after 1937 or 1938. Robert Spaulding further questions their reformist ideological foundations: “Even the growing emphasis on economic planning and control appears to have been due less to a qualitative change in revisionist thought than to an obvious change in circumstances and

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opportunities for action.”94 That is, the surge of the reform bureaucrats in economic ministries like the MCI and the MOF coincided with the dramatically changed political milieu after the 1936 February Incident and the 1937 Sino-Japanese War. This suggests that reform bureaucrats were not born reformist. The case of the famous “Manchurian clique,” which included Kishi Nobusuke, Shiina Etsusaburo, and Minobe Yoji, whose political fortunes profiled enormously from their temporary service in the Manchukuo government and their personal ties with powerful Kwantung Army generals like Tojo Hideki, suggests that their new economic ideas (radical restructuring of industry, tight state control, economic autarky) were shaped by their free-wheeling experience in Manchukuo between 1936 and 1938 (and thus after the AIL). Kishi’s recollection of the AIL confirms this point. In an interview with NHK, he confessed that he was forced to withdraw his own alternative (the MCI’s plan) before the Army’s stubborn stance asserting the autarkic auto policy.95 This testimony is consistent with his policy position, which favored a joint venture. The personnel change (or reform bureaucrat) argument is less plausible. Then where did the Army’s power in shaping the auto policy come from? Some argue that MCI was under pressure to surrender because Ford’s land-purchasing scandal occurred at a critical negotiating point, autumn 1934, and the Army effectively used the Ford case in its favor.96 The Army’s propaganda was that if Ford were to construct a giant factory to produce a larger quantity of automobiles at lower prices, it would be a long time before the Japanese would have a chance to succeed. Foreign investment therefore should be restricted at all costs. The following is the story in brief. Ford Japan predicted that the Japanese state would enforce restrictive measures of various kinds against foreign auto production. It decided that the only way to retain this important market was to take timely steps to expand local manufacturing before it was subjected to trade discrimination. A “pre-emptive” strategy was set, which would build a vertically integrated large-scale auto plant capable of making as many components and parts as possible. Ambitiously, the proposed investment decision targeted the rapidly growing East Asian market, and the Japanese site would become a regional center for exports. Ford proceeded to negotiate with the City of Yokohama to purchase about 90 acres of land for the extension of the plant. The city treated Ford’s request favorably, for several reasons. Ford was a lucrative Yokohama company, and a huge taxpayer. Second, it was a local favorite of employees because of its exceptionally high salary level, more than double what average domestic firms would pay. The company also had a five-day work week and nine-to-six work hours. Third, the profit earned from selling the land itself helped the city’s budget. The military police informed the Army of the deal. The Army then used threats to prevent the city from selling to the American auto maker. It predicted that Ford’s extension of investment on such a large scale would undermine the protectionist legislation. The Army began to argue publicly that if Ford built a giant plant to manufacture a much larger quantity of vehicles at lower cost, Japanese manufacturers could not catch up in the near future. This story may be true. But it would, at best, make a certain government measure more imperative and thus cause the MCI to act quickly. Further, this incident cannot negate the legitimacy of joint ventures.

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What changed policy during the winter of 1934 to 1935 was critically related to the emergence of Toyota as a major domestic auto manufacturer and the dissolution of the joint venture between Nissan and GM. Remember that after the breakup of the GM deal, Nissan quickly shifted its business strategy into making small-size passenger cars and independently manufacturing trucks. That is, it switched its position from an outward to an inward orientation. This gave inward mercantilists a stronger bargaining position visà-vis the MCI over how to deal with foreigners. The Army had two large-scale firms able to carry out its objectives, though they were not the firms the Army initially asked to join (Mitsui, Mitsubishi, Sumitomo). Nissan and Toyota, however, had a sufficient level of capital, managerial and technical ability, and determination to undertake such a largescale project. Besides Nissan and Toyota, about eight firms engaged in the auto business existed in the mid-1980s: Jidosha Industries, TGE, Nippon Vehicles, Nippon Motors, Kokusan Industries, Kawasaki Vehicles, Kosokukikan Industries (under the umbrella of Mitsui zaibatsu), and Mitsubishi Heavy Industries. Because the latter two were large-scale zaibatsu firms, they could have influenced the national decision making. Let us look at Mitsubishi’s case. Lack of profits forced the zaibatsu to halt its automating business in 1921, but it re-entered the industry in 1930. In order to deal with the depression in the shipbuilding industry, the Kobe Shipyard’s internal combustion engine section began to develop a large bus manufacturing project (a 7.7-ton bus, called “Fuso”) with an eye to the Ministry of Railway’s bus line project (shoei basu).97 Although Mitsubishi had once projected a plan for the mass production of Fuso, it stopped due to the Army’s increasing demand for tanks.98 In addition, because its (and also Kawasaki’s) major concern was the manufacture of airplanes, heavy trucks, and buses, the public car project was ignored.99 On this score, its business would have been virtually unaffected by any policy intended to encourage the one-ton vehicles. Compared to Mitsubishi, Mitsui had been much less active in the manufacture of automobiles. Mitsui Bank helped finance Ishikawajima in 1919 when it tried to develop its own model with Wolseley’s help, but the loan was soon called in. Thereafter, Mitsui made no further move until it established the High-Speed Engine Industries (Kosokukikan) and experimented with manufacturing trial cars named “Yashima” and “Ota.” Both the Army and the MCI strongly urged Mitsui officials to join the mass production project in 1932 and 1934, only to be rejected. Mitsui was not sure whether the state could fully support such a backward industry as automobiles. Its leaders were also wary of the military’s excessive intervention in its business activity. Finally, there remained medium-size firms such as TGE and Jidosha Industries that had neither the capacity for investment in the big project nor the political power to influence state policy. They would be excluded from the financial benefits provided by the upcoming policy because they could not meet the basic requirements for a license: firms were required to make more than 3,000 units per year. In summary, three firms—Nissan, Toyota, and Mitsubishi—were initially included in the national decision-making process. They were called upon by the interministerial committee, as we have seen earlier. They were all zaibatsu-related firms with concentrated interests in favor of a strong protectionist, discriminatory state policy. Therefore, the inward mercantilists could mobilize support from private agents who were included in decision making.

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The structure of the international auto industry If a strong international regime had existed in the auto industry, the Japanese state might have been forced to follow its dictates because Japan had no firms capable of manufacturing automobiles entirely on their own. The international auto regime seemed strong, given Ford and GM’s dominant position internationally. The output of both firms accounted for 67.8 percent of world auto production in 1935, when the Japanese state pursued a protectionist policy. A more striking figure was their share of the non-US markets, which was 52 percent in the same year. In other words, more than half of the vehicles sold in non-US markets came from Ford and GM.100 Despite Ford and GM’s dominant world market share, the basis of their power against local states and firms did not necessarily correspond to their market share. Dominance would be rendered meaningless if those states could import technology and raw materials from firms other than Ford and GM, or if these two could not effectively coordinate with each other to control the local market. As in other countries, there had been no coordinated effort between Ford and GM to protect their interest from the proposed legislation in Japan.101 Instead they employed different corporate strategies before and after the Automobile Industry Law. GM used a “local adaptation production” strategy for its overseas operations. That is, the primary concern was to respond to local tastes and demands, employ local managers, and merge with local firms.102 The purchase of, or joint ventures with, firms was the appropriate way to meet local demand because it enabled GM to infuse its technology and experience into local firms. GM’s purchase of Opel best illustrates this strategy. GM purchased Opel and exerted great effort to adapt itself to Hitler’s demand. The company knew that Hitler was interested in the mass production of a “people’s car.” GM met this demand by employing local personnel as the representatives of the firm and produced a compact car called “Olympic,” which had a 1,300cc engine and sold at RM 2,500.103 GM Japan believed that it faced one of the most difficult business environments, and decided to follow the German route. The company thought it would be wise to associate itself with certain Japanese interests in order to secure its position in Japan. As early as 1932, when the merger between DAT Motors and Ishikawajima took place under the auspices of MCI, R.A.May, the executive director of GM Japan, unofficially expressed his willingness to join the merger scheme.104 This move was followed by the abortive attempt to merge with Nissan during 1933 to 1934. While GM was attempting to localize its business through increasing levels of both local capital and local content through a joint venture, Ford’s strategy in contrast was to “directly” localize its production line with a wholly owned subsidiary operation.105 This policy is well illustrated in Benjamin Kopf’s (the general manager of Ford Japan) reports to Ford Headquarters on March 28, 1935. He judged that it seemed natural for a country like Japan, which would soon be embroiled in a war with Western powers, to make every effort to develop an automobile industry that was self-sufficient and under Japanese control. In the near future, he argued, “restrictive measures of diverse kinds will be enforced against foreign vehicles, and the only way for us to retain this important market is to take timely steps to manufacture locally before we are shut out of the market.”106 It would be a strategic move to build a large factory before any discriminatory law could be promulgated, insuring de facto favorable conditions in the future.

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This “pre-emptive” strategy was accepted by Dearborn. Ford Japan initiated an ambitious plan to change its assembly plant in Yokohama into a vertically integrated manufacturing plant that would produce as many components and parts as possible. As we have seen, this policy caused the Yokohama land-purchase incident in which the Army was involved. Although the Army’s intervention did not block Ford’s plan entirely, it caused Ford to hesitate before investing further in Japan. How would Ford respond to this circumstance? An article from the Asahi Newspaper stated four options that were open to Ford. Option 1: Ford would abandon the idea of erecting the new plant and adhere to its present vested rights: that is, it could concentrate on assembling cars. Option 2: Ford would intimidate the Japanese by showing an indication to withdraw entirely from Japan and shift its headquarters to China or another country. Option 3: Ford, in accordance with the terms of the proposed law, would cede 51 percent of the stock to Japanese interests and hand over control of the auto industry to Japan. Option 4: Ford, considering that the proposed law would be enforced in about two years, would hasten to establish an auto parts manufacturing plant, make as much profit as possible during the ensuing two years, and then withdraw from Japan.107 From Kopf’s viewpoint, the prospect of the Japanese plan for autonomous buildup of the domestic auto industry was gloomy. Kopf did not believe that the upcoming Japanese auto policy would be any more successful than the existing Petroleum Industry Law.108 On the basis of these judgments, he chose Option 4. Kopf believed that “the proposed legislation would not come into force (if it ever passes the Diet) for at least one or two years, and wished to present the Japanese Government with a fait accompli in the shape of a complete factory at that time, in the belief that the Government could not refuse to permit the Company to use a factory already completed.”109 Longley, counselor for Ford Japan, took a similar view. In a discussion with Dooman (charge d’affaires in the American Embassy), he was optimistic that vested interests “could be protected,” and that even if the Japanese state would not permit the factory to be used to its full capacity, Ford would have a larger and more efficient plant than the existing one, and would thus profit more.110 Thereafter, Ford looked at another site, a suitable one belonging to Asano zaibatsu. After lengthy negotiations Asano seems to have secured the acquiescence of the Army and sold the property to Ford in July 1935. On August 15, Ford announced its future policy position: We have not yet had an opportunity of making a thorough study of the proposed automobile control law and therefore are not in a position to make any comments on same. We can state positively, however, an irrevocable decision not to relinquish full control of our company under any circumstances whatever.111

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Ford was expanding its market share without surrendering its entire ownership, while GM was considering either a joint venture or selling out to Japanese interests. For this reason, the latter’s determination to resist and protest the discriminatory legislation realized later was weak, whereas the former repeatedly requested the embassy to protest on behalf of the US government. There were no coordinated attempts between Ford and GM in dealing with Japanese protectionism. Despite the presence of Ford and GM’s hegemony, and a seemingly insurmountable regime in the international auto industry, the Japanese state always found areas to exploit. The competitive nature of the relationship between Ford and GM virtually everywhere in the world generated an open opportunity structure where the individual state could pursue autonomy, but it was only an opportunity. What was important was how effectively domestic capital and the state could react to exploit it in their favor. Before discussing the domestic conditions we must mention the diplomatic factor, because foreign capital would gain enormous bargaining power over the Japanese state if it could elicit overt support from its home government. Now let us review how the US Embassy in Japan and the US State Department dealt with the auto issue. The US Embassy in Japan and Amer-ican firms (particularly Ford) held different perspectives on the Japanese auto industry. When Ford was optimistic about its future with regard to the enactment of the protectionist law, the embassy was worried about the Japanese quest for autonomy. Joseph Grew, the ambassador, stated: Experience in other industries (e.g., the oil industry) indicates that the Japanese when they are determined can produce practically anything at competitive prices to do so, and their fanatical nationalism and tremendous power of organization may carry even a project such as [automobiles].112 Embassy officials warned Ford that if a discriminatory law were enacted, the protection of the US interests involved would never be an easy matter because the Japanese usually rejected protests by falling back on the argument that national interests were paramount to private interests.113 Further, they warned that “there is little doubt that Japanese manufacturers will be able to rise to the occasion and be able to supply the market before the proposed legislation comes into effect, which may be one or two years from now.”114 The embassy’s realistic evaluation was particularly accurate when the joint venture attempt between GM and Nissan became a prominent issue in 1933. Embassy officials argued that “if either Ford or GM does sell a controlling interest to the Japanese, and thereby acquires the right to expand and compete with the infant Japanese industry, other legislation will be introduced to hold the American firm in check.”115 This was exactly correct. Despite yielding majority ownership of its joint venture to Nissan, GM failed to reach an agreement. In sum, the embassy suggested that American firms should not swim against the current. The State Department adopted a similar view when it decided that it would, if required, resort to legal protest only by invoking Article I of the 1911 Treaty with Japan. When Ford protested, the State Department reviewed the legal aspects of the dispute and tentatively concluded that the discriminatory law violated the Treaty of 1911 on the

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grounds that Article I should be interpreted so that Americans and Japanese were placed on an equal footing in all matters. But State Department officials soon realized that such a protest was not based on indisputably clear legal grounds. The argument might be tenable in the case of American individuals residing in Japan, but “if, however, the Japanese should admit this but contend that American corporations in the United States (as distinct from American individuals residing in Japan) have no right to set up corporate entities in Japan… [we are] not sure that we would have any sound legal basis to answer such an argument.”116 In fact this was exactly what the Japanese state later argued. Shigemitsu, vice-minister of the MFA, asserted that: the proposed automobile law would not be inconsistent with the term of the Treaty inasmuch as Article I applied to individuals and not to companies or individuals as such will be corporations. Because it is unlikely that any individuals as such will be permitted to manufacture automobiles, there would be no discrimination so far as individuals are concerned.117 The embassy suggested to the State Department that “it would be the part of discretion for this Government to accept the situation with the best grace possible, and not attempt to interfere diplomatically with the plans of the Japanese military.”118 Stanley Hornbook fully concurred and recommended to the under-secretary that “we held the proposed instruction (diplomatic protest) on a legal basis” because of the questionable legal basis.119 Thereafter, facing repeated complaints by Ford and GM of Japan’s discriminatory practices, the embassy refused to exert any diplomatic protest. Its only response was: [We] cannot see that any good can be accomplished either for the automobile interests or for the prestige of the American Government by endeavoring to fight against the present nationalistic trends in Japan.120

Implementation There was a substantial change in content between the original draft of August 1935 and the Automobile Industry Law of 1936. Most conspicuous was the inclusion of Article 5, which empowered the state to restrict importation (i.e., to set quotas) and impose higher tariffs when the prices of imported autos and parts were considered sufficiently low to harm the growth of domestic auto makers. This clause resulted from the perception that quantitatively restricting foreign autos (quotas) could not establish the domestic industry quickly enough. If domestic firms obtained little more than the natural increase in market they would be in trouble. In this sense, the clause gave the state more power to restrict foreign firms at will.121 Further, while the PIL empowered the state to ask for the submission of annual business plans by foreign and domestic firms, the AIL gave the state the power to inspect not only the offices and business records of firms, including unlicensed ones, but also factories, warehouses, and other sites owned by auto firms.122

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Despite such radical legislation, the AIL itself provided only the legal framework for state policy. The practical effect of the law depended on the regulations for implementation, which would determine the ultimate fate of US auto interests. Three imperial ordinances followed on June 10, 1936, and the AIL went into effect the following day. The law applied to manufacturers which produced automobiles with engines of more than 750cc and which produced more than 3,000 vehicles a year.123 Unlicensed firms such as Ford and GM (disqualified as foreign-owned) were allowed to continue business activity insofar as they operated within the current capacity (as of August 9, 1935). The Japanese state would apply an additional 50 percent tariff on imports over the quota.124 How did Ford and GM respond to these protectionist policies? Around 1935, GM again approached Nissan on the subject of a joint venture. Nissan now insisted on much better terms than those offered by the previous negotiations. Ayukawa stated: If GM wants the same terms as last year, the deal will have to be dropped. It was necessary for Nissan Automobile to accept the terms last year, as the company had to sell its parts. Now we have a year’s experience in making parts and finished cars. We don’t have to be afraid to stick up for our own interests. The automobile industry law seems likely to be adopted by the Diet, and we must work out a deal for cooperation based on the new conditions.125 He then proposed a complete joint venture, creating a new firm rather than the simple capital tie-up that both companies had previously pursued.126 GM Japan supported this scheme, but at the final stage of negotiations it expressed discontent over several conditions, including (1) evaluation of Nissan’s assets at the time, (2) its management of inventory, (3) Nissan’s past financial policy, (4) the selection of Board members for the new firm, and (5) the new firm’s investment plan. At the same time, the New York office suspended its local agent’s contact with Nissan. The negotiations reached a deadlock when GM, again uncomfortable with the Army’s increasing control over auto policy, was unwilling to make a risky investment.127 Instead, it took a “wait and see” approach until the AIL was promulgated. Thereafter, its abortive efforts for a joint venture continued. It turned to Toyota, but Toyota rejected GM’s insistence on using its own components and its refusal to export the vehicles jointly produced.128 Then Sumitomo was approached, in vain. GM after all followed the way the wind was blowing: it maintained auto assembly within the quota limit until it decided to withdraw completely from Japan in 1939. In contrast, Ford Japan announced its direct localization policy in November 1935: (1) Ford Japan would double its capital stock, the increased amount filled by Japanese stockholders who, however, were restricted to local Ford dealers in Japan; (2) it would construct a manufacturing plant on its newly acquired site to produce a purely Japanese car; and (3) it would maintain management rights until purely domestic Ford cars were produced. At that moment, Ford had not decided whether to construct an integrated factory (from a steel foundry to assembly) or to build a much bigger assembly plant.129 Owing to the hostile environment it opted for the latter, constructing a new factory three times larger than the existing one, which still violated Japan’s new auto policy.130

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Ford was confident of executing its plan because it believed that Japanese auto makers would not be able to produce automobiles in sufficient quantities to meet the increasing demand. They felt that the Japanese state would fall back on American firms, and in the end the newly erected plants would be permitted to produce automobiles more cheaply. Thus even if Ford was limited to its present output, profits would still increase.131 Benjamin Kopf, the local Ford manager, was optimistic. He predicted that: The army, which sponsored the recently announced auto policy, [would] soon find that it (could) not obtain an adequate supply of good cars and trucks from a native Japanese automobile industry; that the Japanese people [would] object to the higher cost of cars which [would] inevitably follow restrictive legislation against the American automobile manufacturers: that the automobile legislation [was] being advocated by the more radical group in the army, which [was] now losing power; and that the Diet itself, with the lessons of the unworkable petroleum control law before it, [was] likely to balk at passing further legislation of the kind.132 In reality, Kopf’s assessment of the situation was entirely misleading. Contrary to his naive evaluation (particularly his miscalculation of the power of the Japanese state in relation to society), Ford faced even greater discrimination than it expected from the law. For example, in June the company applied for a factory license and a building license to construct the planned assembly plant. Once the application was filed, MCI asked innumerable questions, requested data, and ordered modifications. It protracted the whole procedure as long as possible to wear down the applicant. Ford also applied to construct additional manufacturing facilities. Although it would be impossible for Ford to increase production beyond the quota, the AIL did not specify any limit to increasing production efficiency by renovating established plants. Ford wished to make a number of changes in plant structure to increase efficiency, but after nine months it was told that the application would not be accepted.133 No reasons were provided. Ford repeatedly requested diplomatic protests, but to no avail, because the US Embassy’s stance suggested that it would be best for all American firms to accept the conditions as they stood and not to struggle and “swim against the current.”134 Kopf eventually realized that nothing could be accomplished through government channels, and that in order to survive, Ford had to explore some tie-up with local firms.135 He approached zaibatsu firms such as Mitsubishi, Furukawa, Toyota, and Nissan. Belated attempts to cooperate with Japanese firms resulted in a sales contract between Nissan and Ford Japan in 1937 whereby Ford could use the parts imported by Nissan in its assembly plants. A further move was naturally anticipated, but the whole business situation changed. When Ford offered a joint venture with Nissan, it instead heard a buyout offer. Next, Nissan’s Ayukawa suggested a joint venture between Ford and Nissan in Manchuria. Kopf advised Dearborn to invest in Manchuria, and pointed out that it was getting extremely difficult for Ford Japan to remit any profits to Dearborn due to the difficulty in obtaining foreign exchange permits or permits for the exportation of funds to

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pay for imported parts and chassis. In February 1938, however, Dearborn vetoed that idea for public relations reasons. Coupled with discriminatory use of licensing, further regulations with regard to unlicensed (that is, foreign) firms were introduced that limited dividend payments and restricted the remittance of profit abroad. At the start of 1938, Ford and GM’s efforts to overcome the trends proved abortive. They were squeezed out, and they abandoned Japan in 1939, leaving only skeleton organizations. Blocking foreign business interests through the use of licensing was not the ultimate goal of the Japanese state. Although the market share for domestic firms increased dramatically, this did not lead to the achievement of autarkic development. The vacuum created by prevention was not filled by Nissan and Toyota. Let us examine how domestic firms responded to the enactment of the Automobile Industry Law and how the licensing system was used to implement the ambitious goals. The new system under the licensing law was launched with a highly concentrated domestic industrial structure: Toyota and Nissan. After frustrated bargaining with GM, Nissan quickly turned to the independent production strategy and invested in plant extension for mass production of passenger cars and trucks. As the Nissan zaibatsu grew rapidly and became the third largest zaibatsu in 1937, below only Mitsui and Mitsubishi, Nissan Motors became the centerpiece of the corporate network. What is noteworthy is that its auto business had maintained close ties with Mitsubishi interests.136 It had been the largest customer of Mitsubishi Trading during the 1930s outside of Mitsubishi territory. In manufacturing parts and autos, Nissan needed to import large quantities of machine tools from the USA. Mitsubishi Trading became the Japanese sales agent for many American machine tool manufacturers, and purchased and shipped $3 million-worth of machine tools between 1933 and 1938, and received a commission of 1.5 percent.137 On the other hand, Toyota had much stronger ties to Mitsui. Their ties began in 1907 when Mitsui Bank provided some of the financing for the establishment of the Toyoda Automatic Loom Works, which produced and exported automatic looms invented by Toyoda Sakichi. In return the latter used the services of the former. The ties continued, and eventually Mitsui directly made a sizable investment in Toyota’s auto division in 1936. As discussed earlier, Mitsui rejected the state’s proposal for its participation in the people’s car project. Nevertheless, it had planned to manufacture mid-size passenger cars by improving the small “Ota” cars manufactured by Kosokukikan, a subsidiary of Mitsui Bussan. Mitsui Gomei (the holding company) had decided to wait before investing in the plan, but when it realized that the proposed bill would provide sufficient support for auto manufacturing, it told the Army that it had decided to enter the industry.138 Unfortunately, circumstances changed adversely to the Mitsui interest. This time, the Army rejected its application on the grounds that, because Ford and GM were allocated 10,000 vehicles each and the remaining 10,000 were allocated to Nissan and Toyota (5,000 each), the Japanese market (30,000 vehicles) would be fully saturated if more firms were to enter; the market would be overcrowded.139 Ito Hisao of the Army suggested that Mitsui would be better off investing in Toyota, which had an excellent development plan. As a consequence, Mitsui invested 20 million yen in Toyota and became a major shareholder.140

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Many medium-size firms such as TGE, Nippon Motors, Nippon Vehicles, Kokusan Industries, and Jidosha Industries had diffuse interests that would be adversely affected by the AIL. Another group with diverse interests was undoubtedly the auto consumers who would generally be in the opposition camp. For the average family in Japan, which earned about 100 yen per month, passenger cars were entirely out of reach: Ford and GM cars cost over 3,000 yen and even a Datsun midget car cost over 1,500 yen. Thus consumers were limited to the Army, Navy, and other governmental offices, business houses, bus services, and taxi-cab companies.141 Private consumer groups protested that obstructing foreign capital might have a boomerang effect, as in the case with the PIL, but they were not effective in promoting their own interests.142 With the concentrated industrial structure and the heavy protection the law entailed, the Japanese state projected a rapid increase of domestic production. Its estimation, calculated from the reports submitted by Nissan and Toyota, projected a fivefold increase in productive capacity between 1936 and 1940 (see Table 5.2). This was an extremely optimistic figure, and looked virtually impossible to achieve. Ayukawa’s Nissan opted for a strategy of buying in more technology and foreign assistance rather than going independent. After a long search for partners overseas, Ayukawa found the Graham-Paige Company, a firm in the USA that was ready to make an attractive offer because of its financial problems. Graham-Paige offered to sell all its equipment to Nissan, along with some machine tools for parts production. Designs for a 1.5-ton truck and a six-cylinder engine were included in the package.143 The contract was

Table 5.2 Projected production for Toyota and Nissan, 1936–1940 Year

Toyota Nissan Combined Cars Trucks/buses Total Cars Trucks/buses Total total

1936 150 850 5,000 – – 10,000 15,000 1937 2,500 3,500 8,500 2,500 3,500 20,000 28,500 1938 5,000 7,000 20,000 6,000 6,000 24,000 44,000 1939 8,000 10,000 24,000 10,000 10,000 30,000 54,000 1940 8,000 10,000 24,000 15,000 15,000 50,000 74,000 Source: ‘Jidosha seizo jigyo iinkai shorui,’ Kogane bunsho XXV (1936–1939).

signed and Nissan imported blueprints, machines and tools, and technology. But the learning process was painful. Nissan had difficulty operating the specialized American machine tools. The existing casting factories were not suitable for the imported project, so a new factory had to be built. Reliable parts subcontractors were particularly wanting—this was precisely the problem Ayukawa had warned about four years ago when he was asked to deliver a report before the interministerial committee. Under the autarkic circumstances, he had no choice but to try to organize a domestic production regime to overcome the technological backwardness. Meanwhile, Toyota’s progress was slower than Nissan’s because it was a latecomer. Another reason was its indigenization strategy: everything from car designs to machine tools to parts would be Japanese. Initially Toyota used sketches of the 1933 Chevy to make its first engine. A copying strategy was again used to draw body design, this time a 1934 Chrysler Desoto, subject to some deliberate changes in order to escape patent-

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violation claims.144 Toyota either produced or ordered from Japanese firms imitations of American components. For trucks, Ford vehicles were copied. Michael Cusumano has described this strategy as “eclectic borrowing and in-house R&D.”145 Individual efforts by Nissan and Toyota were strongly supported by the AIL. As licensed firms they were exempt from income tax, local and business revenue taxes, and import duties for certain items. As members of the governmental committee that supervised the implementation of the law, they were virtually given a free hand over quota setting, distribution of basic materials, and import licenses. In 1938, the Japanese Automobile Industry Cartel (Nihon jidosha seizo kogyo kumiai) was established as the primary administrative organ for the implementation of the AIL. It was headed by Toyoda Kiichiro, housed in a Nissan building, and staffed by members of the Nissan and Toyota organizations. To the extent that these two firms met the state-set agenda (mass production of trucks), they got their way. For example, they were always given top priority in cases of the purchase/import of machines, foreign currency use, and basic materials allocation.146 Whereas quotas for unlicensed firms such as Ford (12,360 units) and GM (9,470) were fixed, the industry’s natural increase was assigned to the licensed firms. On the surface, the policy outcome was impressive. Nissan’s production grew rapidly, quadrupling in four years from 3,800 units in 1935 to 17,781 units in 1939. But after peaking in that year, production stagnated. More important, the actual production records were considerably under its projected amount (that is, the state’s order), and Nissan achieved only about 60 percent of the production plan between 1931 and 1939. Thanks to protection by the AIL and entrepreneurial superiority and determination, Toyota’s belated push also yielded a phenomenal growth, from three units in 1935 to 14,519 units in 1940. But like Nissan’s, its impressive 1940 record represented less than 60 percent of the target. The autarkic plan was a practical failure. Two licensed firms could not meet the goals of the ambitious development project. They produced barely as many vehicles as Ford and GM in 1935. Because foreign capacity was frozen as of 1935 and domestic capacity was limited, a projected market increase was suppressed, which was supposed to be met by domestic producers. Therefore the much needed growth meant only the domestic replacement of foreign share. Furthermore, domestic vehicles, once built, were riddled with technical problems. It is ironic that the military motivation for intervention was driven by the technical failure of domestic vehicles that were unable to match the superior Ford trucks used during the Manchurian Incident. The very same thing occurred five years later. After the SinoJapanese war broke out in 1937, domestic trucks were mobilized. Their poor performance was obvious on rough dirt roads in Manchuria and north China. Despite the sturdy engines, serious defects were found in the design of the frame and some parts such as the air filter. More problematic was the supply of quality parts across the continent. The mass production of parts and their supply were the biggest problems the Japanese Army and firms faced. The number of vehicles did not grow alongside the developments in technology. The joint venture idea was evoked again. Faced with the need for a large number of vehicles (mostly trucks), the Japanese state realized that domestic capacity was not large enough to meet the demand. It had no choice but to import higher capacity trucks from

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Ford and GM. Because the American firms were restrained businesses under the quota limits, the state chose a painful, compromising subterfuge: Chevy components were imported under the name of Toyota and consigned to be assembled at the Osaka plant of GM Japan; and Ford components were imported under the name of Nissan and consigned to be assembled at the Yokohama plant of Ford Japan. As we see from Table 5.3, this project accounts for a dramatic increase in the 1938 to 1939 production at both Toyota and Nissan. Not surprisingly, cooperative joint action from both sides led to a more progressive idea. As we have seen earlier, Ayukawa proposed to Ford a

Table 5.3 Actual production of Toyota and Nissan, 1935–1944 Year Toyota Cars

Trucks/buses

Nissan Total Cars

Trucks/buses

Combined Total total

1935 0 20 20 2,631 1,169 3,800 3,820 1936 100 1,042 1,142 2,562 3,601 6,163 7,305 1937 577 3,436 4,013 4,068 6,159 10,227 10,172 1938 539 4,076 4,615 4,151 12,440 16,591 17,055 1939 107 11,874 11,981 1,370 16,411 17,781 29,862 1940 268 14,519 14,787 1,162 14,763 15,925 30,712 1941 208 14,403 14,611 1,587 18,103 19,688 34,299 1942 41 16,261 16,302 871 16,563 17,434 33,736 1943 53 9,774 9,827 566 10,187 10,753 20,580 1944 19 12,701 12,720 9 7,074 7,083 19,803 Sources: For Toyota’s statistics, Sozo kagirinaku: Toyora jidosha gojunen-shi shiryoshu (1977); for Nissan’s statistics, Nissan jidosha sanjunen-shi (1964).

capital tie-up in Manchuria because he expected greater business opportunities there. Another tie-up scheme developed between Toyota and GM. While the bilateral negotiations were protracted, a grand tie-up idea emerged when Toyota and Ford sat down together during 1938–1939 and reached an agreement on major points. The Army intervened again, but this time it urged Toyota to include Nissan in the tie-up. The three firms came close to a deal, including (1) granting licensed company status (Kyoka kaisha) to Ford; (2) granting a license for Ford’s construction of plant in Tsurumi, Yokohama, which had been bought out from Asano zaibatsu three years previously; (3) the establishment of a new joint firm by Ford Japan (40 percent of ownership), Toyota (30 percent), and Nissan (30 percent). The dream deal was not realized. US-Japan diplomatic relations worsened as the China war ensued.

Conclusion Government licensing emerged as a critical method for the regulation of entry into the automobile industry. Whereas in the petroleum case the licensing idea was initially introduced to stabilize and fortify the existing cartel, whose stability had been disrupted

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by the frequent entry and exit of foreign players, the automobile industry demonstrates that licensing pointed directly to the restriction of foreign businesses. Because Ford and GM controlled more than 90 percent of the market in Japan, cartels were almost nonexistent. The power of these American firms was so insurmountable that no amount of collective bargaining would have any consequence. Without drastic state measures to restrict their business activities as well as imports in the first place, nurturing domestic industry seemed impossible. The Japanese state intervened to deal with precisely this task—to institutionalize and run the licensing system so as to curtail the business operations of Ford and GM. Because the requirements for a license application could be set arbitrarily by the government, central policy debates always centered on specifying the conditions under which licenses would be granted. A trade-oriented mercantilist coalition was formed within the Japanese state to assert that, although the plan for establishing a purely Japanese industry by ousting foreign firms would be desirable in principle, it might not work out in practice because (1) unless foreign firms agreed to allow Japanese capital to control their local facilities, the Japanese would not have the benefit of the experience and technology essential to the growth of the Japanese auto industry, and (2) the demand for automobiles was not sufficient to establish a factory on a Ford-like mass production basis. In this sense, they maintained that the foreign-domestic joint venture scheme, the second best alternative, would be a realistic policy in promoting the domestic auto industry. On the other hand, a counter-coalition centering on the autarky-oriented mercantilists argued that because existing international circumstances would not allow Japan to become a great power quickly, strategic industries such as automobiles should be established independently at the earliest possible moment, and that policies of strong protection and discrimination were inevitable to kick out the enemy’s capital. It is misleading to claim that the autarkic plan was chosen because it was superior or more rational. The dramatic increase in domestic auto production between 1937 and 1939, due to the preferential quota system, was followed by a sudden decline. The choice between the two plans came down to which could draw the more powerful private constituency. The Army and its coalition’s policy agendas could enlist support from Toyota, and later Nissan, both of which were closely tied to the two largest zaibatsu, Mitsui and Mitsubishi. In contrast, the MCI-supported joint venture plan lost because of Nissan’s defection and GM’s bleak judgment of the business climate in Japan. Furthermore, the concentrated domestic industrial configurations centering on Nissan and Toyota made possible the Japanese state’s strong bargaining position vis-à-vis Ford and GM. The role of licensing in the development of Japanese industry produced a mixed record. The market did not function well in manufacturing quality trucks much desired by the military. Nor did it respond to the demand of general consumers, as it was truckoriented rather than passenger car-oriented. Protectionism did not rectify the balance-ofpayments deficit in this market. On the other hand, this institution was effectively used to prevent foreign investment. Two giants, Ford and GM, surrendered. A pure Japanese industrial structure was set up, ready to flourish long after the disastrous war. To conclude, the licensing system emerged from the convergence of interests between the economic bureaucrats and the military bureaucrats over the necessity to regulate

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foreign economic influence in the automobile industry as well as the petroleum industry. By the mid-1930s, this strategic belief was combined with a desperate need to stabilize the fluctuating domestic market, leading to the rise of a radical policy idea: the licensing system. The Navy Ministry played a significant role in introducing the licensing system into the petroleum industry, and the Army Ministry was instrumental in establishing the very same system in the automobile sector. After oil and autos, other strategic industries such as iron and steel, machine tools, synthetic oil, aircraft, and shipbuilding were subsequently targeted in the same way. “Industry-specific” licensing laws passed during the late 1930s include the Artificial Petroleum Law (1937), the Steel Industry Law (1931), the Machine Tool Industry Law (1938), the Aircraft Industry Law (1938), the Shipbuilding Industry Law (1939), the Light Metals Manufacturing Industry Law (1939), and the Important Machinery Manufacturing Law (1941). Each law invariably expressed its strategic importance, using terms such as “preparation for the national security” and “development of industry,” thereby justifying the application of the licensing system under the authority of the state. In these industries, government licenses were required when firms wanted either to enter or to extend their business activities (such as factory expansion or, in fact, any major investment activity), and were granted if they met specific criteria. For example, in the case of petroleum, licenses were in principle given to Japanese-owned firms that could mass produce refined products. To be qualified and protected, the refineries were required to process an annual quantity of 50,000 kiloliters of crude oil, equipped with more than one cracking distiller. In automobiles, licenses were given to the Japanese producers who could manufacture more than 3,000 vehicles a year with engines in excess of 750cc. Truck manufacturing by the Japanese was favored. Licensing action did not ban the business of unlicensed firms, however; that is, foreign MNCs, small-scale domestic firms, and domestic firms under foreign control. Insofar as they stayed within their current scale of business, they were allowed to operate. The point at issue was that because the licensing system was applied and administered typically in rapidly expanding and prospering infant industries, it was indispensable for firms that wanted to keep up with the expanding market. In this sense, the licensing policy was used as leverage to get firms to do what the state wanted. Firms were induced to undertake truck manufacturing and petroleum refining, both of which the state targeted. Licensing policy was also an effective means of pushing unfavored firms out of an industry, as in the case of Ford’s denied investment applications. To serve the protectionist goal (infant-industry protection), foreign business needed to be constrained by the discriminatory use of licensing, but domestic industry had to be nurtured simultaneously. The introduction of the licensing system was combined with financial benefits such as preferential lending, tax exemption, tariff protection, and subsidies. With financial incentives provided, some domestic firms fortified themselves through mergers and were qualified to apply for licenses, and cartels were established among preferentially licensed firms. A long list of cartels followed. In the case of the Domestic Gasoline Union, the Petroleum Union, the Kerosene Union, and the Oil Committee, all their cartel activities came after the promulgation of the Petroleum Industry Law. The auto industry also saw a cartelized market emerge. The level of production was set on a longer term basis, as were types of products. Nissan and Toyota

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cooperated to implement “national” goals. They did so not because they were patriots, but because they expected enormous profits from a monopolistic cartel.

6 Industry governing Japanese style

The central puzzle of the past four chapters has been how Japan responded to the market instability that disrupted its overall economic growth in general and the business of domestic firms in particular. We have concentrated on the extent and nature of state intervention in the oil and auto industries as the critical case of Japanese capitalism, and found that industrial policies (especially licensing) dealt mainly with the problem of regulating foreign capital. We have seen also that state agents and firms interacted closely with one another in implementing as well as formulating licensing policies. What does this story contribute to our general understanding of the Japanese political economy, and specifically the internal organization of “Japan, Inc.”? Does this study provide a different picture from the ones presented by Chalmers Johnson and his critics? In order to answer this question, I will compare and contrast the two cases (petroleum refining and automobiles) as a way of testing the various explanations. Why did the Japanese state, even in the 1930s when it is often said that the state bureaucracy had the fewest checks on its capacity to intervene, deal with the two sectors in different ways? Why did Japan erect an effective industrial strategy to pursue autonomy against the power of foreign capital in the automobile sector (Ford and GM), and not in the petroleum sector against Shell and Standard-Vacuum, despite the central strategic importance of both sectors and the relative ease with which oil might have been protected? I have tested systemic, sectoral, and domestic theories, found them wanting, and developed an alternative, multi-causal explanation based on the analysis in previous chapters. If we also compare the experiences of three European countries—Germany, France, and Italy—we will be able to make better theoretical claims about Japan. We will see that (1) under the licensing system, the Japanese state was powerful because it shaped markets according to its policy objectives while delegating to licensed firms the operation of cartels; (2) the power of the state—specifically the licensing power—derived from the pressure of the world system, which forced the state to take the initiative in deciding what kinds of market structure were desirable when dealing with pressing political and economic problems; (3) firms were granted a relatively free hand in the market, but they were initially screened by criteria that did not necessarily benefit the largest or the most powerful firms, but rather the firms that fitted the state’s agendas.

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Systemic explanations Systemic theorists argue that the international system exerts enduring pressures on states and domestic societies, and consequently on policy outcomes. Neo-realist theory argues that, in an anarchic world, states design policies to meet their own needs at the expense of other states, needs that are primarily geopolitical.1 With regard to state intervention in the economy, the central idea of this tradition is that economic activities are subordinate to the goal of modern state building and survival of the state. In this sense, despite the virtue of free trade, a bid for security through protectionism may be rational if the international milieu makes states vulnerable to their competitors. But their power to pursue protectionism is either circumscribed or enhanced depending on the international conditions they face. For instance, a hegemon’s decline in the international system provides an opportunity for nonhegemonic states to exert their interests more freely than in a system where a hegemonic power reigns.2 A good example is the 1930s, when the hegemonic decline of Great Britain produced an open international structure and provided an opportunity for individual states such as Japan and Germany to break with the existing liberal orthodoxy.3 Another prominent systemic explanation is Immanuel Wallerstein’s world-system theory, which disagrees with neo-realism on the identity of the totality and its governing structures in the international system. According to Wallerstein, the social whole is not the anarchic interstate system, but the modern world capitalist system. A capitalist world economy with a social division of labor and integrated global production leads to intercapitalist competition and unequal market exchanges. Wallerstein describes a threetiered world system (core, semiperiphery, and periphery) where nation states are positioned in accordance with the economic roles taken by the individual state’s ownerproducers. The position of a nation state in the system determines its structure, preferences, and power. At the core, states seek free trade, but the extent to which they pursue it varies depending on how extensively the socially dominant class achieves cohesiveness and gains hegemony over civil society. On the semiperiphery, states tend to favor protection because private capital’s relative weakness leads to a greater degree of state intervention to enforce protectionism, and the extent to which the state protects the domestic market depends on how effectively the state consolidates its power in the face of dominant class resistance. Now, suspending our disbelief on the theoretical issues of preference and capacity of the state in the two systemic theories, let us empirically examine the impacts of the systemic factors on the shaping of the oil and auto protection policies in Japan. Clearly, one would predict that the variation in the Japanese state’s capacity to intervene depends on the strength of the international regime, which differs across industrial sectors. Systemic constraints in two sectors may be gauged in the relative bargaining power of foreign multinational firms vis-à-vis the Japanese state. Multinationals can constrain the activities of the host state simply because the former’s principal assets and policy making center lie outside the boundaries of the latter. The most important variable determining the bargaining power of multinationals relative to the state is the strength of the international regime. There is a set of variables to determine strength: market share and the degree of competition.

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Along with regime strength, foreign multinationals’ bargaining power with the host state also depends on the firm-specific capability in the international setting. If a particular firm has high capital mobility in international markets (i.e., it exerts authority across national boundaries, makes investment decisions on a global scale, and shifts funds from one country to another), or if it enlists support from its home government, then its relative bargaining power increases. Let us review four variables—market share, competition, capital mobility, and the ability to enlist home country support—in Japan. If the systemic approach is valid, in the interwar period, the bargaining power of foreign multinationals vis-à-vis the Japanese state should have been stronger in the oil industry than in the auto industry because the activities of foreign multinationals were more constrained in the auto market than in the oil market. Market share The tremendous market power of Ford and GM in Japan was present in their combined market share, which was over 90 percent in 1935. More notable was their share of the world market, which in the same year was 67.8 percent of the total world auto production. More than half the vehicles sold in non-US markets (52 percent) were products which Ford and GM either exported, manufactured locally, or assembled.4 In market share, foreign oil firms (Stanvac and Rising Sun) were less dominant in the Japanese market (both refined and crude) than foreign auto makers. While the latter accounted for over 90 percent of the total auto production until 1935, the former equaled approximately half of the Japanese gasoline market. Because Japan in the mid-1930s had achieved enough refining capacity to counter a possible boycott by the two majors, what mattered most was the supply of crude on which Japan heavily depended. In this sense, the predominant market share of the two majors in the Japanese refined oil market was not automatically translated into a strong bargaining position vis-à-vis the Japanese state.5 Competition The overall power of an international regime depends on the degree to which its constituents cooperate. It critically affects the ability of the host state to turn to alternative supply sources. Worldwide competition among foreign firms within both the oil and auto industries was fierce—although competition arose from different sources. In the international oil industry, the rapidly expanding production of crude oil in the early 1930s (in East Texas, Venezuela, and the Middle East) was the primary source of competition. New oil sources and the subsequent oversupply led to competition on a worldwide scale, which in turn shaped the competitive nature of Japan’s oil market, within which there were struggles for market share between the majors (Stanvac/Shell vs. Socal), between the majors and the independents (Stanvac/Shell vs. Californian independents), and among domestic firms (refiners vs. importers). On the other hand, the stagnation of the US auto market was the main source of competition in foreign markets among the Big Three. The maturation of the domestic market coupled with the depression caused declining sales at home. Rather than develop entirely new products to sell or engage in fierce price competition, they preferred to use

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their accumulated technological and managerial advantages to expand their sales in foreign markets.6 The conventional wisdom that product-differentiation strategies— strategies that differentiate products from one another and establish consumer loyalty— made the auto firms avoid price competition cannot be applied to the nascent Japanese market, in which truck sales prevailed. The Japanese market valued efficiency and price much more than style. Instead, as we have seen in the previous chapter, Ford and GM’s contrasting business strategies in the foreign market made it difficult for them to cooperate in the face of Japanese protectionism. Capital mobility The international mobility of capital shapes the relative strength of MNCs vis-à-vis the host state. This point was taken up by Albert Hirschman, who developed the notion of “movable wealth” when the state has incentives to form alliances to foster capital accumulation.7 His core idea is that the power of MNCs owes much to the division of the world into many states, because it makes it easier for MNCs to play one against another in search of concessions.8 As Hirschman explains: “[T]he threat of nationalisation is less crushing to a transnational company, since it is likely that only a small portion of its assets would be expropriated by a single country.”9 The key to power is the degree of capital mobility when threatened by a host state. When an investment can be reallocated to a more favorable part of the world and, more important, when the investment is “uncommitted,” capital mobility increases.10 For both foreign oil and auto firms, there were no substitutes for Japan in the Asian market. They had already sewn up the Chinese market in both sectors.11 Because the Japanese market was expanding and irreplaceable, foreign firms made substantial investments in Japan. As Table 6.1 illustrates, all the leading investors in Japan were oil and auto firms. Rising Sun (Shell) was the largest foreign investor in prewar Japan, constituting 18 percent of the entire Anglo-American investment in Japan. Stanvac was the single largest US investor in East and Southeast Asia in 1941, ranked second in asset size among foreign firms in Japan, whose market equaled 43.4 percent of its total sales in that region. Its assets represented 51.9 percent of all US firms operating in Japan, and its sales accounted for 65.7 percent.12 The two oil majors’ investment in Japan was 2.7 times greater than Ford and GM’s. Further, the strategic importance of the Japanese market to foreign capital depended not only on the actual volume of sales but also on its future prospects. Both oil and auto MNCs viewed Japan as a rapidly growing market in which future sales were of the utmost significance—note that the Japanese oil market had grown by 15 percent annually between 1932 and 1935 (it became the third largest export market for the USA in 1935, accounting for 10 percent of total US petroleum products) and that the Japanese auto market had grown by 7.2 times between 1925 and 1935 (it became the sixth largest importer of US passenger cars and the third largest importer of US trucks and buses in 1935, accounting for 5.5 percent and 4.8 percent of total US exports, respectively).13

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Ability to enlist home country support There is no doubt that the bargaining power of foreign capital increases if it can gain support from its home state. In particular, if foreign capital in

Table 6.1 Foreign investment in Japan, 1941 Firm

Asset (thousand yen)

Rising Sun 59,130 Standard-Vacuum 28,196 Ford Japan 19,795 GMJapan 13,045 Toyo Bobcock 12,598 Nippon Dunlop 10,392 Total assets of Anglo American firms 326,870 Source: Udagawa Masaru, ‘Senzen Nihon no kigyo keiei to gaijikei kigyo (1),’ Keiei shirin 24–1 (1987), p. 17.

the Japanese market had been able to muster a formidable ally like the US government, its bargaining power would have increased enormously. The US was hegemonic because it was the third largest market for Japanese export goods (after yen-bloc countries, China and Korea) and was thereby the primary source for foreign currency, accounting for 16.3 percent of Japanese exports in 1935. More important, Japan was heavily dependent on imports of essential raw materials and machines from the USA, the largest exporter in the Japanese market (accounting for 24.7 percent).14 Given Japan’s economic dependence on the USA, pressure by the US government, if exerted, would have significantly enhanced the bargaining power of foreign capital relative to the Japanese state. But, as we have seen in previous chapters, Japan was able to avoid economic sanctions because both the oil majors and the auto MNCs failed to elicit support from their government. Although the US government made several protests against Japan’s discriminatory policy in the oil and auto sectors, it never seriously considered the formal sanctions insisted upon by US firms. In summary, these propositions tell us that four variables do not account for the variation in the Japanese policy responses. Rather, other things being equal (i.e., competition, and the ability to enlist home country support), just because the oil majors seemed less dominant in market share and less mobile than auto MNCs, the relative bargaining power of the former might have been weaker. In reality, however, the business activities of the oil majors were less constrained than those of US auto firms. Systemic theory is useful in understanding the Japanese experience because foreign multinationals mattered greatly in the making of industrial policy. Modified forms of it help more, as they can account for the variations in state preference. Nevertheless, the principal weakness of this tradition lies in its structural explanations, which miss the political dynamic in which domestic actors respond to changing internal and external constraints.15 State actors do not merely reflect, express, or manifest the underlying structural conditions, but rather they respond to them.

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Sectoral explanations The sectoral approach proposes that different attributes of industrial sectors shape different modes of interaction between state and capital, and thus produce different policy outcomes. State action is shaped not by the international system, but by the characteristics of industrial sectors.16 Perhaps the sectoral approach’s most persuasive presentation is Peter Katzenstein’s, which takes sectoral differences as the important variable to account for divergent objectives and instruments of foreign economic policy across industrial democracies.17 Katzenstein divides industries into three categories: investment (e.g., machine tools/mechanical engineering), intermediary (e.g., iron/steel/energy), and consumer goods (e.g., automobiles/consumer electronics), each of which yields different rates of change, financial conditions, politico-economic logic, state-capital relationship, and conditions of class conflict. This approach has certain merits in accounting for variations in state intervention across industrial sectors, because oil and autos have obviously different sectoral characteristics: energy and manufactured goods, respectively. Accordingly, we should expect different sectoral politics. Let us analyze this theme empirically. The relative bargaining power of the state vis-à-vis foreign capital varies across industrial sectors, and it does so according to three variables that shape sectoral characteristics: publicness, the intensity of technology, and the effects of global integration. Publicness The more public in character an industry is, the more susceptible it is to state intervention. In Japan, the origins of government licensing go back to sectors associated with public health or public security: drugs, prostitution, explosives. It is also found in sectors that are public in consumption: transportation, electricity, oil. In Europe, state ownership prevailed in this kind of sector, especially in the energy industry.18 By contrast, the automobile sector saw very few examples of state ownership although it was a strategically important industry, militarily as well as commercially. It expects less state intervention. Intensity of technology Because the host state generally seeks technology transfers from foreign capital, technological complexity, intensity, and rate of change all positively correlate with the bargaining power of foreign capital.19 Basic technology has been surprisingly stable in the auto sector. The Wankel engine has been the only major innovation since the 1920s, but there have been rapid design changes.20 In the 1930s, however, the auto sector was the “high-tech” industry. Mass production required not only huge amounts of capital investment but, more important, advanced metalworking and machine-building technologies. Because its “related and supporting industries” were underdeveloped, Japan had to import virtually all special steels used in automobiles and parts like wheels and rear axles.21 On the other hand, the oil industry (particularly the refining industry) is a “processoriented industry” or “equipment industry,” where the management of technology is

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relatively easy because almost all the processes (from crude to gasoline) are machine processed and paced. There has been technological progress in refining, but it has not been intensive. Effects of global integration Global integration shows the complex interactions of flows among raw materials, components, and final products as well as technological and managerial transfer. Greater global integration in an industry further constrains the host state’s ability to restrict the activities of foreign capital in that industry.22 Both the oil and auto industries were globally integrated in the 1930s, although the nature and mechanism of integration differed between the two sectors. In the oil industry global integration was caused by the geographic separation of oil reserves, refining facilities, and markets, whereas in the auto industry the optimal scale of production and technological intensity forced auto makers to go abroad. Most national markets were too small to support efficient manufacturing, and a transnational division of labor within the industry was required; that is, global expansion and integration was “an inherent requisite of efficient production.”23 At any rate, the Japanese oil and auto industries were tightly integrated into the international market. Japanese refiners were totally dependent on foreign crude, and the majors’ marketing networks controlled approxi-mately half of the total refined oil market in Japan during the 1930s. Almost all the essential equipment required for building efficient refiner-ies was imported from the USA, and it was no different in the auto industry. For Ford and GM’s CKD (complete knock-down) manufacturers, the major components and parts were imported from the USA, and domestic producers (both final and parts firms) also needed to import raw mater-ials like iron and rubber, specialty steels, and machine tools. In sum, empirical findings for a sectoral approach are mixed. Different sectoral characteristics in the two industries do not give rise to different sectoral politics that would lead us to expect the state to pursue protection more coherently in autos than in oil. The application of this approach to prewar Japan should be made cautiously because the cross-sector corpor-ate linkage structure (zaibatsu) and the subsequent intersector rivalry and alliance would make sector characteristics complex or incomplete. Although a recent study of the prewar zaibatsu organizations highlights the autonomous management of zaibatsu firms away from the central control of the zaibatsu headquarters (zaibatsu honsha or komei kaisha),24 we cannot deny that important business decisions (such as entry into new businesses) were made exclusively at the top, in the zaibatsu headquarters, by businessmen who formulated corporate policy on more than a sectorspecific or firmspecific basis. For example, Iwasaki Koyata, owner and chairman of Mitsubishi Zaibatsu, decided to enter the oil-refining industry by establishing the Mitsubishi Oil Company;25 Ayukawa Yoshisuke, chair-man of Nissan Zaibatsu, decided Nissan’s entry into the automobile indus-try;26 and the Mitsui Komei (the headquarters of Mitsui Zaibatsu) led Mitsui’s attempt to participate in auto manufacturing.27

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Domestic explanations In contrast to systemic and sectoral approaches, the statist approach assumes the primacy of state power in the formation of public policy.28 The state, in this view, has an autonomous interest that is not reducible to societal interests, and the state’s ability to pursue the national interest is a function of its “strength,” which is determined by its institutional political structures. Strong states have a centralized state structure, whereas weak states have fragmented decision-making structures. Although the initiatives of state policy may come from the private sector, the state can refract those initiatives as its organizational structure transforms them into policy.29 The state has the power to transform those private influences by processing them in certain ways as the private sector contributes to the realization of the national interest.30 The prototypical example of this view in the Japanese case is Chalmers Johnson’s classic, MITI and the Japanese Miracle, the Japanese economic success was achieved by the effective operation of the “developmental state.” In order to be developmental, the state must satisfy two requirements: (1) it has to be protected from interest group pressure so that it can autonomously set its own “long-term developmental” goals; and (2) it has to be effective in pursuing these goals. By using the Gerschenkronian argument, Johnson explained that situational imperatives that Japan faced, such as a Western imperialist threat, the Great Depression, and threat of war, all contributed to the creation of a quasi-revolutionary political condition, which in turn gave the state broad administrative powers to intervene in the market for the pursuit of an overriding national (or societal) goal. “The very idea of the developmental state originated in the situational nationalism of the late industrializes.”31 Then the developmental MITI men or other economic bureaucrats emerged and intervened selectively in the market by picking the neglected winners and propping up the losers, and they based their choices on rational calculations regarding the potential costs of market distortion. The private agents who appreciate MITI officials’ superior capability are always the primary beneficiary of industrial policy. As Johnson puts it: those businesses that listened to the signals coming from the government and then responded were favored with easy access to capital, tax breaks, and approval of their plans to import foreign technology or establish joint ventures. But a firm did not have to respond to the government. The business literature of Japan is filled with descriptions of the very interesting cases of business firms that succeeded without strong governmental ties…but there are not many to describe.32 Japan succeeded because the state set developmental goals and also because private firms responded positively to the state leadership. What makes the administrative guidance effective is a close cooperative relationship between state and firm. On this score, that the Japanese state does it all—the argument frequently made by critics of Johnson—is far from what perfects the developmental state. Nonetheless, the utilitarian superiority of state bureaucrats matters most. The source of state power (or the power to induce private

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support) rests not only on the quasi-revolutionary geopolitical situations but also on the expertise and impartiality of the state bureaucracy: the expertness of neutral state bureaucrats which enables the state to set goals that represent what is good for the whole. If so, state power is undermined: when it is suspected that a ministry is not neutral in an issue it is supposed to be arbitrary, or when it has been captured by the people it is supposed to be regulating, or when its administrative guidance is really only a governmental loak (kakuremino) hiding an otherwise illegal cartel, or when the deliberation councils in which administrative guidance is carried out have been packed with people leaning in a certain direction.33 If one accepts this view, incoherent pursuit of industrial policy results from arbitrary (or irrational) policy making, which would not successfully mobilize private cooperation. Let us think about the evidence of the previous chapters. Was the oil policy arbitrary, but not the auto policy? If the state could not mobilize private resources effectively in the oil sector, was it because the policy was arbitrarily pursued? Or was it because it was penetrated by private interests? The evidence tells us otherwise. What was noteworthy in both oil and auto cases was the constant presence of politics between two coalition camps (outward versus inward mercantilists), which were invariably influenced by situational circumstances, both domestic and international. Such politics and policies were often ad hoc responses to the changing world market. The evidence does not suggest that the oil policy was pursued more arbitrarily than was the auto policy. If, as Johnson argues, the source of incoherence and inefficiency of state policy is penetration by the narrow interests of the private sector, sectors with a concentrated structure should cause state power to be weaker than those with dispersed ones, because the former are expected to be more effective in penetrating state policy. Again, the evidence does not support this claim. The Japanese oil industry was fragmented both horizontally and vertically, so the private sector penetration of the state should be less effective than in the case of the auto industry, which consisted of two large-scale firms with common business interests while many small/medium-scale firms were eliminated politically. There is considerable criticism focusing on Japan’s smart state.34 At the heart of the difficulty inherent in Johnson’s account is the argument that public policy is initially set by a rational state pursuing long-term develop-mental goals, and the private sector follows. But as we have seen in previous chapters, in order to foster economic development, the state needed to mobilize resources from private forces, and thus needed to form alliances with some of the private sector. State power (the ability of the state to extract resources) needs some sort of voluntary consent from society, the source of which may be more than its monopolistic claim of smartness.35 John Hall and G.John Ikenberry make the point that the effectiveness of the state requires the organized support it receives from important societal agents. They argue that “a deeper dimension of state power has more to do with the state’s ability to work through and with other centers of power—[State power] is furthered and not curtailed when the state coordinates other autonomous power sources.”36 Peter Gourevitch identifies the strongest state as “one with the political support to be strong, a state with

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the compliance or enthusiasm of at least some societal actors that support the actions of strength.”37 A more nuanced explanation of the Japanese state is found in Richard Samuels’ work, The Business of the Japanese State, which points out precisely the theoretical problem of dealing with the view of state power as the ability of the state to ignore or dominate societal interests.38 Its central question is: Why has state intervention always conformed to and reconfirmed evolving energy markets? The answer Samuels offers is that “the pervasive Japanese state has nearly always been congenial to private interests, in large measure because private firms have learned how to surrender jurisdiction while retaining control of markets.”39 The institutional mechanism by which private objectives are realized through the state is called “the politics of reciprocal consent.” Samuels criticizes most descriptions of the Japanese political economy because they exaggerate state power at the expense of private power. Instead he attempts to find a stable institutional relationship between the state and private agents that is produced by an iterative process of reassurance between them, where the former can create and manipulate its own interests, at the same time as the latter are invited into the internal process of decision making. In contrast to the pluralist theory, which presupposes a fluid, spontaneous, voluntary articulation and representation of interests, Samuels demonstrates that a fairly consistent and relatively fixed institutional relationship of decision making exists in which the state and the private sector work with each other to maximize each one’s interests.40 Private interests matter. They always have an effect on policy, but not necessarily in the way they intend. Private power depends on its ability to penetrate the state through the iterative process of reciprocal consent in policy making. Therefore the state is real here—separating Samuels himself from the standard societal explanations in which the state has no fundamental reality in itself. The pluralist state is a neutral political ground providing an arena for conflict among societal actors.41 The Marxist (neo-Marxist) state functions to preserve and expand the capitalist mode of production.42 Here, the ability of the Japanese private energy sector explains why the Japanese state has been a market-conforming agent in the energy sector (coal, oil, electricity), even though “direct state intervention (state ownership) has always mattered…. Regulation has often been the planners’ second choice in Japanese industrial history.”43 Nonetheless, the Japanese state’s market-conforming activities do not prove state weakness, as opposed to the market-displacing European industrial democracies that indicate state strength. Evidence shows that the state wanted to have (and actually had) licensing power that was used to regulate the market, while state ownership was conceived of as the last resort. Even radical state managers within the autarky-oriented mercantilists had searched for private agents who would have the competence and determination to undertake an ambitious project. Sometimes they turned to state ownership, not least because, as in the case of the Army, they thought that there were no alternatives. After its abortive attempts to invite major zaibatsu firms (Mitsui, Mitsubishi, Sumitomo) into auto manufacturing to take up the “people’s car” project, the Army began to consider establishing a public firm, but that scheme was abandoned immediately after it found Toyota. In the case of all, a market-displacing policy (here, the public-private joint utility firm) was pursued incessantly by the Navy from 1918 to 1934. Was it abortive because the private sector opposed it? We saw that the outward mercantilists

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within the state were powerful in pushing their own program, and the private sector supported them. Intrastate struggles aside, once in a while, Nippon Oil propagated its own policy alternative based on the creation of a public utility firm jointly owned and operated by both state and private firms. This evidence tells us that state ownership does not always signal the power of the state vis-à-vis the private sector, Samuels himself introduced a European case illustrating that the establishment of a public policy firm (CFP) was hardly testimony to the state’s strength, but rather witness to the powerful influence of the private sector.44 Second, the state’s market-conforming activities do not indicate the power of the private agents. Samuels says: “The Japanese state, when it intervenes, usually attempts to reproduce shifting market structures, and it does so by fortifying the position of existing firms.”45 That is, the Japanese state has always responded to market conditions by supporting the interests of the existing core firms. The critical question, however, is: Was the state market-conforming because of the private demand? Or was it because its own interests happened to be consistent with private ones? In the first case, the private actors should have the power and willingness to penetrate the state. Further, this line of reasoning predicts that state protection would be more extensive in autos than in oil because the protective interests of domestic auto firms were more coherent than those of their oil counter-parts. It is too simplistic to argue that the level of state protection correlates positively with that of private cohesiveness. Were the existing core firms strong enough to shape state policies given the domestic market configuration? How could such a newly entered firm as Toyota have established its position so quickly as to have access to the internal decisionmaking process leading to the AIL, and thereby engage in the politics of reciprocal consent with the state? Note that at the time when the basic framework of the AIL was finally settled between the MCI and the Army (July 1935), Toyota had yet to introduce its own product to the public. Auto politics show that the state was instrumental in creating the private industry by selecting and nurturing Toyota and Nissan, but the oil case was more complicated. The major existing firm, Nippon Oil, was involved in the state’s policy-making process. In the 1926 interministerial committee (Fuel Investigation Committee), it could present its own policy plan. Although its plan was not accepted, it had participated in decision making from 1926 onward. For example, it was again called on to join the Commerce and Industry Deliberation Council in 1929. After the licensing law of 1934, the state-firm dynamic changed. State intervention strengthened the position of firms that fitted into a particular framework set by the state. Nippon Oil, Ogura Oil, and Mitsubishi Oil benefited from the PIL not because they were the existing large-scale firms capable of influencing the state, but because they were major refiners that the state wanted to protect (note that the PIL adversely affected Mitsui Bussan, the largest oil importer). Newly emerging Toyota and Nissan, rather than the existing auto firms (TGE, Jidosha Industries, Mitsubishi Industries, Kawasaki Vehicles), benefited from state intervention. They were protected because they were willing to undertake the ambitious “people’s car” project. In accounting for the decision-making process in the prewar Japanese state, some argue that the locus of power lay not in the state bureaucracy, nor exclusively in the private sector businessmen, but in the political principals. Using principal-agent theory, J.Mark Ramseyer and Frances Rosenbluth make a bold claim that prewar bureaucrats

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were agents who always answered to the principals: during the early decades of prewar Japan, they answered to the oligarchs; during the middle years, they answered to party politicians; and during the last decade, they answered to the military officials.46 According to this theory, an institutional choice such as the licensing system was to be understood through the political mechanism by which the principals monitored active bureaucrats. In the 1920s, politicians could veto what bureaucrats did. Their power stemmed from their control over bureaucratic careers (i.e., career promotion) and budgets.47 By the mid-1930s, the military had gained the ascendancy.48 Ramseyer and Rosenbluth are certainly correct that the locus of power within the internal organization of policy making changed over time. Problematic, however, is their claim that the dynamic itself (principal-agent relationship) was/is unchanging.49 Bureaucrats behaved consistently and coherently as an agent, rationally reacting to varying principals. My evidence also confirms that state bureaucrats were not always independent; nor were they so powerful that they could do whatever they pleased. We saw that they had to share power. Each competing state bureaucrat needed apolitical constituency to claim the supremacy of his own policy program. They all had to share power with politicians or private sector businessmen or generals or admirals. From the 1920s Nippon Oil engaged in the process, sometimes by presenting its own policy program. It had achieved access to the subsequent governmental committees, but it did not obtain what it proposed. Nor was it deeply involved in the making of the PIL, as in the case of the 1926 to 1928 committee. It did not do well without the help of non-private agents. Faced with the increasing power of foreign multinationals, the private sector had to work with the state, and not dominate it. The consequence was the rise of the licensing system. In this setting, the state could exercise agenda-setting powers by constraining the action of private agents who were now forced to deal with the state within a narrow range of choices. Discussing processual or administrative issues (i.e., how to protect, methods of protection) rather than political issues (i.e., whether and what to protect) was the point. Private firms mattered in decision making, but only to decide—or help decide—exactly how the goals that the state set should be implemented, as in the operation of cartels. Firms were willing to trade off some autonomy in return for the certainty of limited access to decision making, or, to put it differently, a share in decision making. Within a very narrow choice range, they were allowed to compete for a share of power and not for control of power. This power-sharing relationship was far from a mechanism in which bureaucrats were agents reacting rationally to the signals coming from the changing principals. For the same reason, the military, often regarded as the most powerful political force in the 1930s, had to rely on the support of the civilian bureaucracy. The Navy ministry worked closely with the MCI in drafting the oil licensing law, negotiating and compromising with it. In order to persuade the MCI, the Army as an inward mercantilist had to mobilize a private auto constituency, its endless search for private agents for its own strategic protect confirming the power-sharing story.

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Structural narrowness, confining power, and power sharing We have seen that a proper understanding of the state’s exercise of power in the market is important in explaining the nature of the public-private interaction and policy outcomes. The central problem derives from the behaviorist concept of power—power as the ability of A to ignore interests and to get B to do something that B would not otherwise do.50 If we focus on observable behavior (that is, final outcomes) indecision making, who pushes whom? Whose alternatives are finally adopted? As Steven Lukes aptly points out, this view overlooks the important dimension of power that can be exercised outside the agenda or in the absence of actual, observable political conflict (thus, latent conflict).51 Against the behaviorist assumptions about power, Lukes proposes the causal-power argument: A’s power is exercised over B by influencing, shaping, or determining B’s very wants. He explains it thus: the supreme and most insidious exercise of power [is] to prevent people, to whatever degree, from having grievances by shaping their perceptions, cognitions, and preferences in such a way that they accept their role in the existing order of things, either because they can see or imagine no alternatives to existing order of things, either because it, or because they see it as natural and unchangeable, or because they value it as divinely ordained and beneficial.52 The most effective use of power is to prevent conflict from arising in the first place. To a lesser extent, power is exercised by confining the scope of decision making to limited (or relatively safe) issues.53 Here, agenda setting is an important aspect of exercising power. By setting agendas, one can discriminate and/or transform others’ preferences. According to this view, the seeming conformity, congruence, or consensus in the Japanese decisionmaking process may come from the ruler’s exercise of power to prevent conflict from arising in the first place by altering and shaping others’ interests and to do so by setting agendas. If the agents’ interests converge and thus bargaining becomes unnecessary, this outcome does not necessarily stem from the harmonious, consensual character of Japanese political and social life, but from the effective use of power to engineer divergent interests into convergence. This concept is helpful because it leads us to the point that firms seemed to enjoy free rein in the market, but their incentives were coopted by the state to achieve its own goals. In both oil and auto cases, the state enforced a narrow structure of market barriers to confine private agents. Market barriers were established under the state-set agendas that firms were required to satisfy: an objective requirement (financial and managerial capacity) and a subjective requirement (accepting the areas of interest pre-set by the state). Firms that met the first condition were, in general, zaibatsu firms such as Mitsubishi Oil, Nippon Oil, Ogura Oil, Nissan Motors, and Toyota Motors, but not all zaibatsu firms were automatically invited into the decision making: only those which met the second criterion were invited. For example, those that were not committed to mass

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production of refined oil products and trucks (Mitsui Bussan, Mitsubishi Heavy Industries, Kawasaki Vehicles) were excluded. Nonetheless, the state did not always get what it wanted. The private sector did not always respond to state signals. In fact, firms could control the issues of administrative and processual decision making within the agendas. In other words, the state relegated the detailed decision making to firms, for instance, setting the level of tariffs, subsidies, or quotas. In the case of oil, what the state mainly did after the enactment of the PIL was to accommodate the licensees’ requests for quotas. Licensed domestic oil firms also managed to obtain subsidies that could be used for the construction of oil-tanks for the mandatory stockpiling, subsidies that the state initially refused to provide. In practice, Nissan and Toyota ran the administrative system of the AIL. Firms were given free rein within the limited range of choices permitted by the state-set agendas. Aside from the area of implementation, the private power was also exercised in the area of agenda setting in a limited manner, we have seen that bureaucratic politics in Japan led to two different strategies relating to the setting of market barriers. To the extent that competing intrastate coalitions required a private constituency, firms that were on agendas shared by competing intrastate agencies could choose which program would better serve their own interests. They were given two alternatives represented by the inward and outward mercantilist coalitions: the oil monopoly plan versus the license plan, the autonomous auto development plan versus the domestic-foreign joint venture plan. Private preferences were important here because the state needed private support in resolving intercoalitional competition. Toyota played an important role in the making of the Automobile Industry Law by presenting itself as the much needed implementing agent. Because of private opposition (from Nippon Oil and its domestic followers) to the nationalization scheme, the licensing idea gained currency in the coalitional conflict within the state. In short, the availability of private support or the cohesiveness of the private sector was an important factor accounting for the variations in state power. If we see power sharing of the state with firms by which the former determined/confined the agendas (that is, shaped market preferences) and in return relegated the implementation to private firms that accepted the agendas, then the question is: How and why did the state acquire its agenda-setting power? In what historical and political contexts did new institutional relationships emerge to give the state that kind of power? We have seen that, following a long period of “breathing space” after World War I (in the 1920s and early 1930s), Japan faced the challenges of the world market. For Japan, this caused the modernist problem in the realm of political economy—the problem of finding a stable order in an increasingly fluctuating market as it became tightly integrated into the world system. The massive influx and immediate domination of foreign firms in the Japanese market created an unprecedently high level of market uncertainty (i.e., information problems, or transaction cost problems) because now the market decisions of domestic firms would be based on the exigencies of the world market. This situation pressed domestic firms to invite much stronger state intervention, although, in retrospect, the firms’ logic behind the invitation was to reduce transaction costs, whereas the state agencies reasoned from bureaucratic and security-oriented interests.

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In sum, the central point here is that Japan’s response to the challenges of the world market required a systematic creation of institutional mechanisms by which the state provided protection from the world system to the hard-pressed domestic firms. Those situational constraints produced, in fact, not only the private need for state leadership but also two different reactions from the state: (1) an increasing intensification of geopolitical concern for some segments of the state, i.e., autarkic system, and (2) a growing awareness of the necessity of industrial policy based on the “national” framework, i.e., the national industrial order. The rise of new institutional arrangements incorporating power sharing was therefore an outcome of a historical conjuncture between Japan’s full integration into the world system and each national agent’s protective thinking—protection stemming either from a strategic concern or from an economic stability concern. The history of Japanese prewar industrial policy reveals plenty of evidence that the regulation of foreign capital was of central importance in formulating state policies, which centered around the fortifying of cartels, that is, the erecting of discriminatory market barriers. In brief, the central feature of the Japanese interwar industrial policy was to set market barriers, which meant that the state helped fortify cartels. To put it differently, the state structured—actually restructured—the industry, and the firms within that industry were granted a relatively free hand. Historically, these special institutional practices were shaped in response to the internationalization of the market during the 1920s and early 1930s, which invigorated the power of the state, leading to the licensing system.

Reconceptualizing state power The foregoing discussion of the state-firm relationship in Japan suggests a reconceptualization of state power. As Ikenberry correctly points out, state power cannot be gauged and compared by measuring the degree of state intervention in the economy or the expansion of state controls or activities.54 State power is not reflected in “both action and inaction, intervention and nonintervention.”55 Samuels also shows that pervasive state intervention in the economy does not automatically indicate a state’s strength. If intervention indicates state strength, an instrumental state may be a strong state. A state that is completely permeated by economically dominant interests may be highly effective in intervening to transform the market on their behalf.56 According to Ikenberry, strong states respond with regulatory control to the reimposition of market pricing or to withdraw protection for infant industries and allow noncompetitive firms to decline. State power, he argues, stems from flexibility (i.e., strategic abstention, withdrawal, and the reshaping of previous interventions). I do not dispute the usefulness of flexibility as the core of state power, but the question of what is structurally necessary for the state to be able to act flexibly is crucial. Although Ikenberry argues that a state is flexible when it has “the broadest array of options as they anticipate the next socioeconomic crisis,” he fails to account for how a state acquires the widest range of policy instruments for flexible response.57 We have seen that the availability to the state of “a wide range of policy instruments” or “the broadest array of options” does not automatically produce power. Both the PIL and the AIL gave the Japanese state a broad array of policy instruments to exert power

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and control over the industry. If we compare policy instruments and organizational resources, we find little difference in the degree to which the two laws delegated intervention power to the state. Policy results differed, however. Here what matters is how “formal” power is translated into “actual” power. Even if the state can establish the widest range of options to ensure a flexible response and at the same time has relevant knowledge (science and technology) to know what best serves its objectives, it may be unable to realize its objectives. Then the question becomes: What is the source of translative power (or flexibility)? We know theoretically that since its monopoly on the legitimate use of violence does not constitute power, the state inevitably has had to bargain with the private sector.58 This argument is at least consistent with my empirical findings. Competing state agencies or coalition groups such as the OM and the IM needed a politically strong economic constituency to determine the priorities in decision making, and conversely, certain private firms were able to find some political ground to influence decision making. The problem with this argument centers on state autonomy. If we argue that “power can be increased when it is shared,” does this subvert some of the state’s autonomy? If working through or with societal actors can increase state power, does this refer to the state’s trade-off of some autonomy in return for gaining resources from societal actors? If so, should the state’s autonomy and power be conceived of in a negative (or zero-sum) manner? Scholars including Tilly, Mann, Gourevitch, Hall, and Ikenberry are not explicit on this point due to their inability to specify the mechanisms by which the state shares its power with society. I have attempted to answer this question by specifying, in the Japanese context, what constrains state and societal agents and the way in which it constrains them. A new understanding of the Japanese state-firm relationship starts by specifying the nature of the constraints those agents face. I have used Polanyi’s implied concept of the “opportunity structure,” which generates the set of con-straints under which state and societal agents interact. It works to provide certain constraints that are not structurally deterministic but that offer a range of choices under which power relations operate among the agents.59 The constraints it sets are “internal” and “situational.” The evidence indicates that the Japanese state could set internal constraints that “exclude options which are unacceptable to, beyond the capacity of or even inconceivable by the agents.”60 For example, Nissan and Toyota changed their market preferences by willingly accepting the AIL: they agreed to mass produce one-ton trucks and buses and not other types of vehicles (passenger cars). This choice does not suggest that all the domestic producers changed their internal positions. State constraints could not change the market preferences of Mitsui, Mitsubishi, and Sumitomo, which consistently refused to enter the industry regardless of the state’s invitation. Second, the constraints that the opportunity structure sets are always “situational.” What is structurally constraining for some may not be for others. Or what is structurally constraining at the systemic level may not be at the national level. For example, although the competitive structure of both the international oil and auto industries generated a relatively broad set of choices in which the Japanese state could operate, the exigencies of the intrastate struggle provided a different set of choices available to private firms.

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Further, constraints vary according to a given time period as well as to different agents. What was structurally constraining for the Japanese state in the 1920s as a result of the gold standard and the Washington System ceased to be constraining in the 1930s when the state was allowed a wide range of choices for voluntary action.61 Equally, the very extent to which the state constrained the framework within which firms were able to make decisions varied according to the availability of private agents who could implement the agendas.62 To conclude, the interim state-firm relationship in the oil and auto industries may be characterized by specifying the set of constraints that were situational and external. In this framework, the Japanese state, constrained in a certain way by the international opportunity structure open to it, in turn created a national opportunity structure that constrained the actions of the pre-existing firms, and thereby limited their range of choice, degree of freedom, and rules of the game. Constraints worked in two ways: first, the state decided whom to include in decision making, and second, it chose what to discuss. Consequently, the state created opportunity structures available to some private agents who would work under these agendas. Within such a framework, private agents competed for a share of power by trading off some autonomy in return for the certainties of limited access to decision making.

Is Japan unique? In states that were slow to establish domestic industry, it was imperative to find a stable industrial order by which domestic producers would be protected from the vagaries of the marketplace. This meant, in effect, the regulation of foreign investment, made largely by advanced foreign capital. Because a stable industrial order was not the ultimate goal but a means to industrial growth, protective tariffs alone did not help. Imposition of heavy tariffs would have killed off both foreign and domestic producers because, in the case of the automobile industry, both needed to import the very same parts, not to mention basic raw materials. For that matter, neither did a selective use of tariff barriers work. In general, tariffs were effective in regulating the flow of goods but not investment. Only a set of clever discriminatory measures made it possible to realize a dual goal of discouraging foreigners and encouraging domestic producers. The Japanese tried to achieve the goal by combining a licensing system with other conventional protectionist methods. This practice was seen not only in autos and oil. From the mid-1930s, it proliferated in the industries of steel, machine tools, synthetic oil, aluminum, and so on. Is the Japanese case unique? Or does the pattern of the Japanese institutional responses resemble that of other latecomers? The German institutional experience in facilitating industrial growth is of central importance in any interpretation of the modern Japanese political economy.63 The reason for comparison is evident: the philosophy of the Prussian state directly influenced the Meiji oligarchs’ attempts to establish a modern national state during the nineteenth century, from constitutional law to the Imperial Army. When Meiji Japan sent missions to the West to inquire into modern state building, leaders such as Ito Hirobumi were impressed with the lessons that Germany could teach, and chose it as a model. As we have seen in Chapter 2, Listian mercantilism profoundly affected the shaping of the Meiji

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economic policy. Likewise, as Kenneth Pyle clearly showed, German social political thought was transferred to the Japanese leadership.64 Many of the elite young Japanese went to Germany to study. Germany attracted overall two-thirds of the man-years of foreign study during the period 1868 to 1914.65 Lessons continued. The Japanese total war thinking was German in origin. As we saw earlier, Japanese military officials went to Germany to study its wartime mobilization plans, which nurtured the total war thinking that was gaining wide adherence in the military and in some of the civilian bureaucracy toward the end of the 1920s. The 1920s German rationalization movement, which was also studied extensively by Japanese economic bureaucrats such as Yoshino and Kishi, was a model for Japan’s industrial rationalization movement, a cornerstone of modern Japanese industrial policy. These lessons aside, the economic dimension of German history is worthy of comparison because of its close similarity to that of Imperial Japan. In modern Germany, as Gerschenkron succinctly pointed out, the economy was treated primarily as an instrument of power, one that was to be developed by institutional adjustments to take the advantages of backwardness. For German leaders, the economy was not simply an arena for generating wealth systematically. It was a means for achieving national power and international prestige. Their equation of a strong economy with national power (or national revival) implied that economic policy should be judged by the criterion of strategic necessity as well as political utility. It became obvious that a “short cut” could be found in the creation and effective use of institutions that privileged the leadership role of the state in facilitating industrial growth. Japan was another prototype illustrating the politics of late development. Entering the modern world, the Meiji oligarchs shaped a mercantilist thinking, created a national ideology emphasizing industrial growth as a means to enhancing national power, set up goals based on that ideology, and pursued them through the flexible application of institutional instruments adaptable to changing circumstances. In this sense, Japan was generally regarded as a Gerschenkronian variant although its developmental strategy was not always identical with that of other latecomers, because of different contextual mixes. As an exemplary case of late development, Germany’s managed economy, frequently a sort of “organized capitalism,” shows a unique combination of “the increasing concentration and centralization of cartel in large corporations, the formation of cartels and trusts, and the role of banks.”66 It was a bureaucratic order, organized into private cartel associations, assured by various governmental measures. Because cartels played a central role in ensuring market stability and business profits, HansUlrich Wehler called it “cartel capitalism.”67 Cartels were used initially as a temporary protective measure to deal with the instability of the business cycle, especially to counteract the destructive effects of the depression of the late nineteenth century. Cartels proliferated as a standard institutional feature in the capitalism of the Bismarckian and Wilhelmine eras. These were in essence a private self-regulating system, assisted by the state. The 1923 Cartel Law granted firms voluntary membership in a cartel, which was binding until nullified by competent authority. It did not last long because the new Nazi regime arose with a strong interventionist power in the economy. It exerted greater control over the workings of the cartel to be used for its own purposes, political and economic.

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The existing law was amended, and a new decree emerged as a means to augment state power by authorizing compulsory cartels to replace the previous voluntary ones, if the industry in question was critical to the welfare of the general economy. Withdrawal from cartel contracts was practically nullified. Cartels were transformed into agents of state control as the state exerted price controls and ran the quota system. The terms of the German automobile industry were instructive: Ford and Opel were treated as outsiders and were effectively discriminated against in the making of cartel agreements. The quota system in raw materials was progressively skewed toward a few firms of German origin. During this period, the state had strong discretionary power to constrain the freedom of private business. With its coercive power, the Nazi state not only controlled both insiders and outsiders of the cartel, but also their business plans by setting up national economic plans. As with Germany, Japan saw widespread use of cartels and trusts as ways of dealing with market uncertainty. A critical difference lay in Japan’s lack of tariff autonomy. It led Japan to use cartels and monopolies as a means to protect domestic industry from foreign competition rather than to deal with recessions (or periodic market instability) as the Germans did—the central protective measure in Listian mercantilism was protective tariffs. In Meiji Japan, cartels and monopolies were used as substitutes for protective tariffs. This institutional legacy endured even after the tariff right was regained. The private cartels that proliferated in the 1920s were aimed at regulating the activities of foreign firms. To an extent, these were more protectionist than their German counterparts. In Japan, almost every may or cartel found substantial foreign investment. In contrast, the German automobile industry was one of the rare sectors in which the Germans lagged significantly behind the leading technological edge of the time. The Japanese counterpart to the Nazi cartel was perhaps the control association (toseikai) which was instituted under the Important Industry Association Decree (Chuyo sangyo dantai rei) in 1941, when Japan was getting bogged down in the war with Asia. It formed a compulsory cartel that dealt not only with price setting, quota allocation, and subsidy allocation, but also with production planning. In order to make plans, the cartel association collected relevant information from member firms and submitted it to the government. On the basis of the information given, the government drafted concrete production plans, which, in return, were implemented under the initiative of and monitoring by the cartel. This association was a wartime creation, although the claim is often made that its operative structure continued in postwar Japan.68 Licensing regulated a firm’s choice among exit, voice, and loyalty. It was found not only in Nazi Germany, but also in other European countries, the most conspicuous of which was the French oil industry. The Italian automobile policy was another example. Let us briefly review three European licensing experiences in oil and autos.69 Germany Japanese study of Hitler’s motorisierung policy is well documented. The first direct encounter was made by the Army in 1934. The following year, the MCI also sent an official to review the Volkswagen project. The Japanese name of a new auto project, “taishusha” was a translation of the German “Volkswagen” although no evidence proves that the Japanese named it after the German precedent.70

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As in the Japanese case, the initial conditions in which the German state strove for intervention were a typical late industrialized. Opel (GM’s local subsidiary) and Fordwerke dominated the 1930s market by tallying about 60 percent of the total auto sales. The remainder of the industry was divided among small German makers such as Audiwerke, who were trying to establish mass production facilities, and specialist producers such as Daimler-Benz and BMW, which made large sedans and munitions. Because the German automobile industry was an infant industry having numerous domestic producers and powerful foreign multinationals, it lacked a strong cartel, unlike other heavy industries that could negotiate to achieve a stable market environment and thereby protect indigenous producers.71 The new Nazi state took a keen interest in nurturing the automobile industry. One of its first measures was to provide tax exemptions to stimulate auto demand. The state announced that the auto sector should be transformed into a powerful industrial system through which it would produce as many cheap cars as possible, thereby raising the people’s standard of living.72 From this policy emerged the idea of the “people’s car”— the Volkswagen project. No existing models fitted what Hitler had in mind. No single maker could mass produce a cheap car to serve the needs of the populace. As in Japan’s taishusha project, the state’s initiative was crucial. It wrote the specifications for car design, outlined the operating principles, and promised various financial benefits in return for launching a costly business. Then the question was: Who would take up this project? Tension and conflict prevailed in the private sector. All the producers wanted to please the Nazi elite, but no one was ready to take on such a vast project. What they did was to bluff Opel’s participation, which they protested would eventually hurt the national interest. Each company wanted the project revised to be commercially tenable.73 The state was frustrated because it could not find an agent from the existing group of producers, with some prospects initially excluded—Opel and Fordwerke. Opel made every effort to maintain cordial relations with the new leadership, declaring its loyalty to the project because it realized that the key to maintaining business activity was to avoid being the target of nationalist, discriminatory policy, Fordwerke was also aware of the increasingly hostile business circumstances and pursued strategies to secure the government’s recognition as a German company, even though in other cases it tried to remain a wholly American-owned firm.74 The state faced a dilemma: (1) it needed an industrial restructuring to find an agent; (2) it should provide not only protection but also a set of financial benefits to the selected player; and (3) those benefits should not be available to non-selected players—foreign multinationals. Realizing that it could not leave the project to private producers, the state designated the Deutsche Arbeitsfront (DAF), an arm of the German state, to manage it. Behind this move, two core German firms, Daimler-Benz and BMW, supported a state ownership scheme because they worried about the possibility of Opel’s involvement. They persuaded the Nazi bureaucrats that the project should be done by German hands (therefore, not Opel’s) and by the public sector. The Volkswagen project was funded and carried out by DAF, staffed in part by members of Daimler-Benz and Porsche. The Nazi state opted for the creation of a public utility company rather than a private sector merger. The next step was to provide a variety of financial benefits. Along with a selective use of tariffs on auto parts, export subsidies were granted. The Nazis’

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discriminatory practices included preferential government procurement: foreign subsidiaries were generally excluded from government contracts. Ford and Opel were awarded military contracts only after 1937, but contracts were rapidly skewed toward domestic firms such as BMW, Daimler-Benz, and Volkswagen. More important was the introduction of an import licensing system. From 1935, all imported items relating to auto production required government licenses. Predictably, licensing was used to favor domestic producers. It was another method to support Volkswagen and other firms of German origin and hinder foreigners at the same time. In 1937, the state imposed a new quota system for the allocation of raw materials. This system again favored German producers. In sum, the events in fascist Germany were similar to the Japanese experience. State policies concerning foreign investment altered the structure of the automobile industry in a dramatic fashion. A public project called “the people’s car” was implemented, with countless benefits given to the implementing agents. Foreign companies made every effort to share in those benefits, only to be rebuffed. Import licenses and government procurement were effectively used for discrimination. A crucial difference in the two countries, however, was the way in which the domestic industrial structure was altered. The Germans preferred state ownership while the Japanese opted for private ownership. Licensing made the difference. In Japan, it was used not only to certify imports—as both states did—but also to pick implementing agents. In Nazi Germany, this institution was not used explicitly for regulating entry to the industry. Nonetheless, that public ownership was adopted in Germany does not suggest that the German state was stronger than the Japanese state. Japanese state actors preferred an oligarchic system in which a small number of large-scale firms cooperated to pursue the state-set goals coherently. The state chose that path, not because it was forced to do so by the private sector, but because it valued the market-conducive system. In contrast, the big German firms, not exclusively the state, propagated the public ownership idea. It is worth mentioning that the primary motivation for state intervention in both cases was not strictly military. The two “people’s car” projects were not developed merely as part of a military strategy for an armaments buildup. The Nazi state also considered the automobile industry an economically important sector. The central objective of its auto policy was to legitimate its seizure of power by raising the people’s standard of living.75 The Volkswagenwerk was completely unprepared for war demand in 1939.76 In the case of Japan, the enactment of the Automobile Industry Law depended on a coinciding of visions and interests at a particular historical moment between the inward mercantilists and the outward mercantilists. Highly valued was the auto sector’s exceptionally long list of backward linkages, which was the centerpiece of the country’s mechanical industry and symbolized industrial power. Italy As in Germany, the Italian automobile industry was dominated by foreign multinationals. What made the difference was the dominant position of Citroën, a French firm. Ford was the second largest firm, and GM followed. One of the main policy objectives for the Italian state was to restrain the business of foreign multinationals. It began with heavy use of prohibitive tariffs, ranging between 122 percent and 142 percent, during the 1920s.

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After the rise of Mussolini, a quota system was installed, which aimed to control the importers who were willing to pay the tariff. Of course, the quota favored domestic producers. This system of combining import quotas with tariffs was extremely protectionist, but it was not enough to control foreign investment. In order to protect domestic industry, more policy measures had to be designed to regulate foreign direct investment. As with the Japanese case, a licensing system was instituted which gave licenses only to domestic producers, Fiat and Alfa Romeo. An industry-specific law implementing the licensing system (like the Japanese AIL) was not necessary. An emergency decree concerning military-related manufacturing exchange was effected in 1929. Automobiles were subject to this decree, of course. Thereafter, discriminatory interventions proliferated. Investment extensions were denied to unlicensed firms (e.g., Citroën, Ford, GM). Facing Mussolini’s calls for autarky, foreign producers made great efforts to survive. In order to gain a political ally, a foreign-domestic joint venture was quite an effective way to denationalize its origin. A Ford-Fiat deal began, only to be split later. Imports became difficult; so were investments. Ford and others surrendered to government pressure and abandoned the Italian market. Although the aforementioned measures were aimed at driving foreign producers out of the domestic market, these alone did not guarantee the growth of a competitive domestic industry. Government licensing was used to control domestic competition and thereby promote economies of scale. A virtual monopoly was granted to Fiat and financial assistance was provided. As In Japan, where Toyota and Nissan were selected and nurtured, Fiat benefited not because it was politically powerful enough to influence the fascist state, but because it was targeted as a large-scale indigenous agent capable of mass production. In effect, both Japan and Italy were successful in that foreign firms were eliminated and replaced by licensed producers. Both failed, however, to nurture a competitive industry. Their wartime productivity was almost a disaster. They could not produce as many trucks as planned, nor did they achieve the technological sophistication that Ford vehicles had shown effectively in the battlefield (on the Asian continent and in Africa). Losing access to advanced technology proved critical. This situation was in contrast with Nazi Germany who retained Ford and Opel and used their resources effectively. France Like most of the European countries, France was heavily dependent on imports of crude oil and refined oil products, mostly from Standard Oil. The early French oil industry was organized by ten domestic firms, known as the Cartel des Dix. Because the cartel firms depended on foreign multinationals for their crude supplies, mainly lamp oil, the stability of the cartel was vulnerable to changes in the world market. In fact, changes in the industrial structure by merger and cartel as well as in the production and supply of oil at the level of the world market immediately affected the operation of the cartel. Reactions followed in two directions. One was looking abroad and finding foreign oilfields; foreign direct investments began in Russia, Romania, Poland, and other countries. The other was seeking vertical integration as a defense against increasing foreign competition.77 Both

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moves were not sufficient. State intervention was needed to consolidate the downstream industry. In 1914, a plan to create a state monopoly was introduced. The legislation proposed was selection of a national champion, which would hold a monopoly on sales in France. The state would own 20 percent of the company and the private sector would own 80 percent. Firms that would not join the project would be expropriated with compensation. This project was initially conceived in conjunction with the development of the very promising Mesopotamian oilfields, which would be controlled by Royal Dutch-Shell, Deutsche Bank, and the French Rothschilds. The French monopoly would allow the state to buy oil produced in Romania and the Transcaucasus by the French Cartel des Dix, and more in Mesopotamia if it started to flow.78 This scheme was discouraged. Not only did Standard oppose it, but so did domestic oil importers. The 1920s saw a dramatic change in the structure of the French industry as illumination fuel (lamp oil) was giving way to transportation and industrial fuels. The existing domestic oil firms needed new capital investments. Increased competition, new technology, and insufficient capital to meet the requirements of a changing market adversely affected domestic firms, which had to sell their shareholdings to foreign multinationals. As a result, the market was consolidated around the multinationals, finally establishing vertical integration in France. The domestic firms that survived were hard pressed to compete. Intense competition resulted. Prices fell. This situation, as in other countries, inevitably led to the idea of collaboration by both major French players and the majors. After negotiations, cartel agreements were signed: French firms were given 44.5 percent of the market share while the rest went to the majors. The former agreed because they had no secure sources of crude. But the arrangement did not last long. Unstable market conditions continued, with frequent cheating and entry of new players. State intervention was again considered. This time, French Premier Raymond Poincarf authorized the creation of a state oil company in 1923 to bolster national security. The following year, the Compagnie Française des Petroles (CFP), a public-private joint venture, was established as a principal agent implementing the state-set agenda. The establishment of this firm was not driven purely by the state’s quest for autonomy. As Gregory Nowell argues, it was also desired by the majors, who wanted unification of the various French interests. They wanted an assured French player to participate in international cartel agreements.79 By 1924 it became apparent that French interests would acquire 23.75 percent of production rights in the Turkish Petroleum Company. The CFP emerged as a government-designated firm to represent French interests there. In 1925, the Office National des Combustibles Liquides was established as the top administrative organ governing fuel policy in France. It enforced the import quota system and the licensing system created by the 1928 law. Oil importers would have to be licensed for specific quantities. Quotas would be used to encourage crude oil to be imported and refined. In practice, by increasing capital requirements for license, this law restrained the business of independent importers who bought oil from independents in the USA, Romania, and elsewhere. A stockpiling requirement was instituted. First introduced was the 1931 legislation, which required the importer to stockpile as much as 25 percent of the previous year’s imports. An amendment was implemented in 1932. Now there was

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a six-month stockpiling requirement for importers in return for licenses and subsidies that were to be used to build oil storage tanks.80 Germany, France, and Italy were all late industrializers, subject to the challenges of both world market and interstate competition. All were mercantilist, pursuing their developmental goals—often political—ruthlessly through the application of strong interventionist methods. All were discriminatory, directing all the benefits from government intervention to a limited number of domestic producers. All used the licensing system, although France and Italy used it more often as a means to bar entry into the targeted industry, and Nazi Germany preferred import licensing. Compared with France and Italy, prewar Japan put more emphasis on licensing as a means to protect an infant industry for industrial growth. The French licensing system was inclined toward stockpiling, whereas fascist Italy used this system to eliminate the adversary’s capital. Although some Japanese state agents put a priority on the improvement of Japan’s international position and war preparation (as with Hitler), there was certainly a consensus between inward and outward mercantilists about the necessity for economic growth. To that extent, both were basically developmental. But their methods for realizing it differed: one focused on the pace and nature of promoting growth and the other on who should implement the strategy and who should not. In short, the Japanese system was different and unique. But it borrowed basic ideas, and imported specific institutional instruments from Europe, particularly Germany, France, Italy, and Spain. If Japan were unique, it would be in the way in which the Japanese combined a variety of Western ideas and practices in its own changing political and economic contexts. Licensing was obviously borrowed from European countries, but it was (and still is) used differently and creatively.81

7 Conclusion

Theoretical and present-day implications What can we learn from Japan’s industrial policy toward the petroleum and automobile industries during the interwar years? What would constitute a model Japanese industrial policy system? Can we find some practical implications for understanding Japan’s economic relationship with the rest of the world? Four points can contribute to our better understanding of the Japanese state, its institutional relationships with the private sector, and how to deal with it.

Internal organization of the Japanese system Ever since Johnson’s MITI and the Japanese Miracle, most of the existing literature on Japanese public policy has focused on the debate of who governs: state bureaucrats, politicians, or the private sector? Based on the theoretical assumption that state and society are sharply divided, each having separate interests, the point at issue is where the locus of power lies in the spectrum in which those actors are located. Preoccupied with the political configuration of the balance of power between them, the function of which is the Japanese miracle, the writers tend to see variations in policy outcomes (economic success or failure) across industrial sectors as a reflection of the relative power configurations. At the same time, they invariably assume that the Japanese state-firm relationship is close and cooperative on the one hand, and informal and covert on the other. The Japanese elites are tightly connected in an organizational web where a spider (the locus of power) moves, or gets lost. What is lacking, however, is an inquiry into the exact nature and terms of the organizational interactions within such a relationship. In response, I have proposed a picture of the public-private interaction as varying. In the early years of prewar Japan, the state encouraged the creation of cartels and mergers as means to protection trade; during the middle years, private cartels, supported by the state, prevailed in strategic industries as the central regulatory institution for dealing with foreign investment; state intervention strengthened those cartels under the powerful influence of the private business leaders and party politicians toward the late 1920s; from the early 1930s, power sharing was institutionalized under a licensing system in which

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the state controlled private entry into the market while relegating processual and implementational decisions to private hands. Private actors seemed to have free rein in the market, but only those that were initially screened by the state, which had the power to control new entrants. On the other hand, the state did not get whatever it wanted in the market even in the 1930s when it is customarily said that the state bureaucracy had the fewest checks. It only discriminated among players at the initial stages and strengthened the working of their market institutions by setting entry barriers. These findings will help us to move beyond the polar extreme debate (strong state-weak state debate), because the dynamics of the state-society relationship were power sharing, and the locus of power varied.

International impacts on the shaping of Japanese industrial policy What drove the dynamics I have described above? Let us begin with the Meiji Restoration. One of the main reasons for the Iwakura Mission (1872–1873) was to restore the right of tariff autonomy lost when Japan opened its doors to the West (kaikoku). For the Meiji mercantilist leadership, tariff control was conceived to be a vital policy instrument for national development from both political and economic perspectives. The systemic constraint—the lack of tariff autonomy—inevitably caused them to put a lot of effort into devising industrial policy as a substitute for trade tariff policy. Cartelization combined with mergers turned out to be the central policy used for developmental purposes (infant-industry protection), as opposed to the conventional understanding of it as a recession/depression policy. In turn, what was characteristic in the 1930s (laws such as the Petroleum Industry Law and the Automobile Industry Law) was the state’s comprehensive use of tariff and nontariff barriers combined with the use of licensing to strengthen the cartel policy. In other words, those laws were an attempt at industrial restructuring by restricting the disruptive activities of foreign capital, ones that aimed not only at reducing market instability, but at industrial growth. In general terms, the fact that industrial policy has been shaped considerably in the course of regulating foreign goods and investment leads us to the theoretical importance of protectionism in understanding the nature of the modern state. Concerning this point, the classic treatment remains Karl Polanyi’s The Great Transformation. His powerful analysis of the political origins of the 1930s economic system demonstrated that the primary role of the modern state is to protect its society and to do so by controlling “time.” The state as a gatekeeper alters the rate of social and political changes by either speeding up or slowing down the flow of global capital, using protectionist methods. This work rekindles our renewed interest in the study of Japan’s interwar years, specifically from the end of World War I to the Great Depression, when states in advanced industrial countries launched a counter-movement to the encroachment of the market economy. In the case of Japan, attention should be paid to the massive influx of foreign, particularly American, investment during the 1920s and early 1930s. The surprisingly high level of penetration and dominance of American capital during this period, which tends to have been overlooked in the existing works (perhaps because of the conventional wisdom that the prewar Japanese market was highly “isolated” and thus

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“national”), was one crucial factor in the shaping of the new industrial policy. Institutions and policies were formulated to deal with the problems of an increasingly contingent and fluctuating market. Students of comparative politics and history as well as Japanese political economy need to pay more attention to protectionism, which has been traditionally the area of economists, and to the role of the modern state. As Polanyi powerfully demonstrates, in the 1930s, Japanese protectionism led to the first confrontation in the history of US-Japan economic relations, beginning, as we now know, with petroleum and automobiles.

The battle of ideologies in interministry politics Bureaucratic politics are ubiquitous. What is interesting in the Japanese case is that bureaucratic competition and conflict appeared across the ministerial line, based on the unit of individual ministries, and that subsequent interministry coalitions were established according to the economic ideologies of trade-oriented mercantilism and autarky-oriented mercantilism. We have seen that ideologies were embedded in the institutional practices of each ministry, and thus worked as a coalitional glue.1 This was particularly so because rival economic ideologies were mostly developed by important political and bureaucratic figures. The modern Japanese mercantilism came out of the heads of Okubo Toshimichi, Okuma Shigenobu, Ito Hirobumi, Takahashi Korekiyo, Yoshino Shinji, Ishiwara Kanji, and Konoe Fumimaro, all bureaucrats and politicians. The possible exceptions include Fukuzawa Yukichi and Kita Ikki, both of whom were not pure private ideologues (minkan ideorogu)—note their political connections and activities. In these unique conditions, the battles between the two ideologies were pervasive in the shaping of industrial policy when Japan faced world-systemic pressures. To the extent that each ideological program was competing for supremacy in decision making, it is grossly misleading to assert that Japan has consistently and successfully pursued an outward-looking, comparative advantage-sensitive strategy for postwar growth, with the partial exception of the wartime years, as an aberration.2 Japanese industrial history tells us that the Meiji pioneers of the new economic policy, when setting the goal of economic development, had to struggle for a strategy under powerful world-systemic constraints that prevented Japan from resorting to standard protectionist means (tariff control). The outward, export-oriented industrialization strategy was forced as a result of the situational context. It was not driven by an elegant growth theory. It was soon subject to harsh criticism by those who assumed an inward mercantilist strategy based on import substitution, an idea that increasingly gained currency from the 1920s. The call for greater attention to economic autarky, in turn, evoked defensive responses by some of the outward mercantilists who spoke of strategic trade based on skillful diplomacy. Predictably, the postwar settlement under the Cold War system led to a renewed belief that trade could best serve as an engine of growth. In this conflictual historical process, we can see a synchronous history of competing perceptions about both the meaning and the goals of economic development, which accordingly led to shifting emphases on the strategies to achieve it. What we should recognize is the dual nature of the modern Japanese state: it pursued systematic accumulation of wealth through both autarky and trade.

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Present-day implications Two points follow. First, licensing is not strictly a prewar phenomenon. It is ubiquitous in contemporary Japan. In 1994, 10,965 licenses existed.3 The widespread use of licensing in postwar Japan raises an interesting issue. Licensing originated in the 1930s in the foreign-dominated strategic sectors. How do we account for the puzzling fact that the limited range of applications in the 1930s expanded and proliferated in the postwar years? And how do we explain the prewar-postwar continuity? This is another theme that is interesting in itself, and has been studied recently.4 In the recent Japanese-language literature, the wartime economic system argument has been popular.5 According to this view, the core of the postwar Japanese-style economic system was the wartime system that came into being around 1940, introduced to replace the market with a national mobilization system that gave top priority to production.6 This system, once firmly established, proved effective in overcoming the immediate postwar crisis and generated high-speed growth. I would argue, however, that the licensing state was not purely a product of the wartime mobilization system, but pre-dated it. Primarily, it responded as much to investment by foreigners as to war preparation. In other words, it dealt with the internationalization problem (or the modernist problem)—i.e., how states can effectively stabilize and protect domestic markets that are buffeted by global economic forces. We can extend this line of reasoning to postwar Japan. There are interesting parallels between the pre- and postwar periods. Japan’s first market internationalization was brought about by the unequal treaties that forced Japan to open its markets to imports. Unable to use tariffs, the Japanese state protected domestic industries with non-tariff measures in the form of cartels and mergers, combined with subsidies and preferential loans. The state’s response to increased inflows of foreign investment in the 1920s led to the licensing system. The first wave of internationalization led to the institutionalization of the licensing system. A second, postwar wave of internationalization led to the spread of the system into broader areas. Following the postwar recovery, the USA pressed Japan to carry out trade and capital liberalization in the 1960s.7 Capital liberalization was especially feared—so much so that it was called the second coming of the black ships, a reference to US Admiral Matthew Perry’s fleet, which arrived in 1853 to force Japan to open its ports. Liberalization itself eliminated two important tools of protective policy for the postwar state. First, the state’s ability to protect domestic industry was reduced by the dramatic relaxation of the Foreign Exchange and Foreign Trade Control Law (1949), which gave the state power to concentrate all foreign exchange earned from exports and thereby control imports through the allocation of foreign exchange from a foreign exchange budget. Second, the Foreign Capital Law (1950), which required that inward FDI should obtain the approval of the state, had to be replaced. Further, tariff rates were lowered. As in the prewar period, market liberalization led to proposals for industrial restructuring. Like Yoshino Shinji, postwar policy makers saw domestic firms as small and unproductive, and prone to excessive competition (kato kyoso) that left them too weak to compete with foreigners. As in the 1930s, the state and the private sector broadly agreed on the need to enhance Japan’s international competitiveness. Because of this consensus, for example, the Petrochemicals Cooperation Roundtable (Sekiyukagaku

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kyocho), composed of representatives of the government and industry, was established to set standards for the licensing of business in order to compete with large-scale foreign firms. Licenses were granted to firms that could achieve economies of scale, i.e., firms retaining an annual manufacturing capacity of 300,000 tons of ethylene. When the postwar petroleum industry faced liberalization, the low level of capitalization of domestic oil firms made them easy targets for foreign buyout. A nationalistic mood (based on fears that the Japanese oil industry would be at risk and national security would be compromised) arose, and the MITI and the Energy Roundtable (Enerugi kondankai) searched for a way to prevent foreign investment and excessive competition among Japanese firms. The same licensing and regulatory powers that had been granted in 1934 and repealed in December 1945 were given to the state in 1962. In the shipbuilding industry, government licensing was introduced to regulate new entry into industry as the tariff rate dropped from 15 percent in 1964 to zero in ten years. In sum, armed with licensing powers, the state promoted industrial restructuring in those sectors subject to market instability, perceived excessive domestic competition, and competitive pressure from foreign firms, as well as sectors considered especially vital to the nation’s economic security. The absence of tariff controls was always used to justify the use of invasive and extensive regulation based on licensing powers. In fact, in the age of globalization, the number of licenses is increasing, from 10,054 cases in 1985 to 10,945 cases in 1994—a net increase of 891 cases, despite harsh criticism from some private and foreign sectors. Licensing practices are likely to continue unless technological innovation ceases and infant industries mature.8 The second point is that if the licensing system is one of the core Japanese-style regulatory institutions, is it uniquely Japanese? If so, was it the consequence of putative Japanese peculiarities? These questions are warranted, since they have been associated with the present US-Japan trade conflicts and how we should deal with them. By the late 1980s a popular claim emerged that Japan was running large trade surpluses not simply because of its tremendous export-promoting power but more because of its importresisting power. The Japanese market is protected because it is not competitive in the same way as those of Western countries.9 Japan’s “unfair trade practices” (contrasted with Western “rational” practices) emanate from its protectionist structural artifacts, which reflect either its cultural peculiarities or institutionalized political collusion among a small group of elites that has produced an opaque, irresponsible, undemocratic, dangerous “System.”10 These charges are followed by another contention: that since Japan’s unfairness comes from its unchanged structures, Japan will remain an international outlier, maintaining opaque protection of its markets.11 My findings argue that the Japanese system was a historical outcome of the country’s response to the changing political and economic contextual mixes, and that it is not so different from Western economic concepts and behavior as to be incomprehensible. For example, the Meiji economic policy was a combination of Listian mercantilism (a Western ideology) with Japan’s unique place in the world system at the time: a janusfaced nature comprising both the lack of tariff autonomy and the breathing space. Later policies, under pressing international circumstances, evolved by selectively copying advanced Western practices that a latecomer was able to exploit (borrowing methods from France and Germany). In short, Japan’s industrial policy system was the

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consequence not of immutable Japanese peculiarities but of specific decisions in response to global structural forces. For that reason, the Japanese system can and should be changed to fit Japan’s new role in the world economy. Many of Japan’s informal trade barriers are not the consequence of its local customs that, as some Japanese claim, inadvertently discriminate against foreign goods and investment. They are the outcome of intentional public policy. What is to be done? A long time ago, Albert Hirschman made an interesting claim that hegemony stems from a nation’s importing power.12 To be a global power and contribute to the global community, what Japan can and should do now is to open its regulated markets through structural reform.13 The relaxation or destruction of the licensing system alone cannot create open, free markets. The purpose of formal regulation through licensing has been to establish informally regulated markets based on monopolistic, cartel-like practices. In order to create open markets, the Japanese state needs to work more actively to reform its legacy of licensing policies rather than simply to withdraw from formal regulation. As Murakami Yasusuke stated clearly, if Japan fails to end illiberal licensing practices, its postwar developmentalism may be judged as a failure.

Notes

1 Introduction 1 For a good historical overview of Japan’s deregulation/administrative reform politics from 1981 to 1998, see Lonny Carlile, ‘The Politics of Administrative Reform,’ in L.Carlile and M.Tilton (eds), Is Japan Really Changing Its Ways?: Regulatory Reform and the Japanese Economy, New York: Brookings Institution Press, 1998. 2 By government licensing I mean a special exemption from a general ban on an economic activity. In Japan, licensing is used in: (1) industries related to public health (e.g., prostitution, pharmaceuticals); (2) industries related to public safety (e.g., explosives, oil pipelines, high-pressure gas); (3) infrastructural industries (e.g., telecommunications, electricity); and (4) infant industries that are strategically important to national security and economic well-being. 3 Licensing agencies also discourage or refuse to accept submissions of licensing applications in order to control corporate behavior, as we will see later in the Ford case in Yokohama. 4 The numbers of licenses have steadily increased in the past decade. See Somucho (ed.), Kisei kanwa suishin no genkyo, Tokyo: Somucho, 1996, p. 14. 5 The most illustrative is C.Johnson, MITI and the Japanese Miracle, Stanford: Stanford University Press, 1982. 6 That is to say, once an industry is designated as a license business (kyo/ninka jigyo), firms are required to get a license for not just entry but also importation, factory expansion, and other major investment decisions. 7 Notable exceptions include Johnson, ibid.; R.Samuels, The Business of the Japanese State, Ithaca: Cornell University Press, 1987 and idem, Rich Nation, Strong Army, Ithaca: Cornell University Press, 1994; M.Mason, American Multinationals and Japan, Cambridge: Harvard University Press, 1992; and B.Gao, Economic Ideology and Japanese Industrial Policy, Cambridge: Cambridge University Press, 1998. 8 I am indebted to Kenneth Pyle for suggesting this term. 9 It is, in this sense, consistent with the “second-image reversed” tradition in comparative politics promoted by scholars including Peter Gourevitch, Peter Katzenstein, Ronald Rogowski, Robert Keohane, and Helen Milner. 10 Gao’s work shows that a monolithic “developmentalist” ideology shared by the policy circle shaped Japan’s particular trajectory of industrial development that began in the early 1930s. Ibid. 11 Here, I do not intend to claim that Japan’s industrial policy should be understood as a function of Meiji politics. This book rather aims to complement earlier treatments by adding the Meiji period that others barely touched upon. 12 Here, firms competed for a share of power and not for a control of power.

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13 In this sense, my argument is consistent with the so-called “second-image reversed” approach pursued mainly by Peter Gourevitch and Peter Katzenstein. See, e.g., P.Gourevitch, Politics in Hard Times, Ithaca: Cornell University Press, 1986, and P.Katzenstein, Small States in World Market, Ithaca: Cornell University Press, 1985. 14 A.Gerschenkron, ‘Economic Backwardness in Historical Perspective,’ in idem, Economic Backwardness in Historical Perspective, New York: Belknap, 1962. 15 E.H.Norman, Japan’s Emergence as a Modern State, New York: Institute of Pacific Relations, 1940. 16 In Japan, there were two competing Marxist traditions, termed the Lecture School (koza-ha) and the Worker-Farmer School (Rono-ha). From the former view, prewar Japanese capitalism was a particular mix of feudalistic landownership and capitalism, called “the militaristic semi-slavery finance Capital (gunjiteki han-rodoseiteki kinyu shihon),” Or “Unique Japanese-Style (tojushu nippon-kata)” capitalism. See Yamada Moritaro, Nihon shihonshugi bunseki, Tokyo: Iwanami shoten, 1977, pp. 219–23. Some peculiar aspects of Japanese political economy are characterized by the persistence of imperial absolutism entrenched in the semi-feudal land relationship in agriculture and its peculiar mix with finance capital (zaibatsu). In this sense, Japanese political economy as backward capitalism is unique but only relative to the advanced capitalist form such as England’s. See Ouchi Tsutomu’s discussion of the kozaha in his Nihon Keizairon sho, Tokyo: Iwanami shoten, 1962, p. 64. For the kozaha view, see also Nihon shihonshugi hattatsushi koza, 7 vols (reissued 1982); and O.Tanin and E. Yohan, Militarism and Fascism in Japan, New York: International Publishers, 1934. In opposition to this view, the rono-ha tradition including Tsuchiya Takao and Sakisaka Itsuro seems to argue that some unique characteristics found in Japan reflect its backwardness or premodernity which would be overcome as its capitalism develops. Here, the characteristic difference in the (political economic) system is the function of the difference in time on the unilinear process of the capitalist development. Sakisaka Itsuro, ‘Nihon shihonshugi bunsekini okeru hohoron,’ Kaizo, October 1935; and Ouchi, op. cit., pp. 66–69. 17 Norman, op. cit., p. 6. 18 He approved the Meiji state’s enlightened character by arguing that absolutism was necessary and beneficial in the situation where “speed” was such an important constraint, while he, as with other Japanese Marxists, never failed to point out that prewar Japan’s autocratic character eventually outweighed enlightenness, thereby leading to fascism and war. 19 W.Lockwood, Economic Development of Japan, Princeton: Princeton University Press, 1954; and idem (ed.), The State and Economic Enterprise in Japan, Princeton: Princeton University Press, 1965. 20 Lockwood, ibid., 1954, p. 500. 21 ‘Japan’s New Capitalism,’ in Lockwood, ibid., 1965, p. 503. 22 Norman, op. cit., p. 102. 23 Ibid., p. 5. 24 In this sense, Norman’s fascinating structural analysis of modern Japanese capitalism exposes a surprisingly high level of exceptionalism. 25 Lockwood, op. cit., 1954, p. 11. 26 In this sense, he paralleled what the traditional modernization school accounted for Japan’s successful pursuit of modernity. Viewing Japan as the most remarkable example of successful adaptation and utilization of Western concepts of the state and political economy, this school attempted to find out what aspects of Japanese society made possible Japan’s success. In this view, particular indigenous characteristics such as group values (i.e., Bellah) played the same functional role that Protestant ethics played in the political and economic development of Western Europe (i.e., Weber), and due to the functionality of premodern

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values, Japan has progressed with extraordinary success apart from the period between 1931 and 1945 when “something went wrong.” Here, the Japanese commitment group values provided the means to overcoming the potentially disastrous thrust toward self-interest and to creating modern institutions of public and private decision making in an integrated and relatively frictionless manner, which is the central premise of modernization theory. 27 For example, R.Dore, British-Japanese Factory, Berkeley: University of California Press, 1973; idem, Flexible Rigidities, Stanford: Stanford University Press, 1987; and Murakami Yasusuke, Shin-chukan taisu no jidai, Tokyo: Chuo koronsha, 1982. See also E.Kaplan, Japan: The Government-Business Relationship, Washington: US Department of Commerce, 1971. 28 While the crucial role of the Japanese state in economic development has been acknowledged ever since E.H.Norman, no postwar Japanese studies rival the influence of Johnson’s book which generated the heated controversy over the nature of modern capitalism and also over the locus of power between the state bureaucracy and firms and politicians. Although I believe that this book dealt primarily with historically specific institutional structures in which the Japanese state’s and firms’ actions are embedded rather than the question of whether the state is strong or others are strong, the post-MITI debates invariably focus their central attention on the latter question. The anti-Johnson group either criticizes (1) the industrial policy’s publicness and smartness; or emphasizes (2) the superiority of the private firms/political party in their relative bargaining power with the state. For the former view, see e.g., B.Hindley, ‘Empty Economics in the Case for Industrial Policy,’ World Economy 7, September 1984; P. Krugman, Targeted Industrial Policies: Theory and Practice,’ in idem, Industrial Change and Public Policy, New York: NorthHolland, 1984; H. Odagiri, Growth Through Competition, Competition Through Growth: Strategic Management and the Economy in Japan, New York: Clarendon Press, 1992, and K.Calder, Strategic Capitalism, Princeton: Princeton University Press, 1993. For the latter view, see Inoguchi Takashi, Gendai Nihon seiji keizai no kozu, Tokyo: Tokyo daigaku shuppankai, 1983; Murakami Yasusuke, op. cit.; Samuels, op. cit., 1987; K.Yamamura and Y.Yasuba (eds), The Political Economy of Japan I, Stanford: Stanford University Press, 1987; D.Friedman, Misunderstood Miracle, Ithaca: Cornell University Press, 1988; K.Calder, Crisis and Compensation, Princeton: Princeton University Press, 1988; D.Okimoto, Between MITI and the Market, Stanford: Stanford University Press, 1989; G.Allinson and Y.Sone (eds), Political Dynamics in Contemporary Japan, Ithaca: Cornell University Press, 1993; and J.Ramseyer and F.Rosenbluth, Japan’s Political Marketplace, Cambridge: Harvard University Press, 1993, and idem, The Politics of Oligarchy, Cambridge: Cambridge University Press, 1995. Most of these works are invariably preoccupied with the balance of power between state and firm (or relative power configuration between state and firm), the function of which, they believe, is the Japanese miracle. Here, variations in outcome (success or failure) across the industrial sectors occur only as a reflection of the relative balance between state and firm. This view understandably ignores the way and manner in which policy is mediated to produce outcome, i.e., the structure in which firms are organized and related with the state. 29 For example, Nakamura, op. cit., 1982; and Okazaki Tetsuji and Okuno Masahiko, Gendai Nihon keizai sisutemu no genryu, Tokyo: Toyokeizai shimbunsha, 1994. 30 For the term “useful war,” see J.Dower, The Useful War,’ in idem, Japan in War and Peace, New York: The New Press, 1993. So far the most comprehensive English account of Japan’s total war system is M.Barnhart, Japan Prepares for Total War, Ithaca: Cornell University Press, 1987. 31 Nogushi Yukio, Senkyuhyuhyahu Yonju-nen taisei, Tokyo: Toyo keizai shimbunsha, 1995. 32 For example, Yamanouchi and his edited volume treat the total war system as a new national unification system that could overcome class divisions and struggles inherent in an industrial society. See Yamanouchi Yasushi, Soryokusen to gendaika, Tokyo: Hyaku shobo, 1995.

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33 See also Gao, op. cit., 1998. 34 Gourevitch, op. cit. For an analysis of Japan in similar vein, see Calder, op. cit., 1988. 35 Polanyi, op. cit. 36 Ibid., p. 249. 37 E.H.Norman exactly pointed out this “dual” character of the world opportunity structure that Japan faced in the Meiji period. Norman, ibid., 1940. For a discussion of postwar Japan’s breathing space, see B.Cumings, ‘Origins and Development of the Northeast Asian Political Economy,’ in F.Deyo (ed.), The Political Economy of the New Asian Industrialism, Ithaca: Cornell University Press, 1981, pp. 34–63; and Japan’s Position in the World System,’ in A.Gordon (ed.), Postwar Japan as History, Berkeley: University of California Press, 1993. 38 This is why, in the existing literature, the 1920s—Japan’s “transnationalized” and “Americanized” period—were ignored in the discussion of the rise of industrial policy. This tendency is not surprising because we all know retrospectively about Japan’s closed market and its pervasive predilections of national security, and its perennial—and successful— attempts to find autonomy. But the flipside tells us the enormous magnitude of Western FDIs that the Japanese faced. 39 Samuels, op. cit., 1987. 40 In this sense, this work casts industrial policy in the context of Japanese protectionism (the twentieth-century search for a new political and economic order at home and abroad) which was driven by the modern state situated in the capitalist world economy. The state is understood as the gatekeeper to the world market, determining a country’s level of protection which leads to drastic changes in economic structure and political coalition. For an understanding of the role of the state in this way, see K.Polanyi, The Great Transformation, New York: Beacon, 1947. For the term “the state as a gate-keeper,” see B.Cumings, ‘The Abortive Avertura,’ The New Left Review, January 1989, p. 23. 41 F.Block and M.Somers, ‘Beyond the Economistic Fallacy: Karl Polanyi,’ in T. Skocpol (ed.), Vision and Method in Historical Sociology, Princeton: Princeton University Press, 1985, p. 74. This framework is useful because it grasps the interrelations among three levels (international-state-domestic) without collapsing any one into another. Opportunity structures do not determine the preference and action of the agent. Although the agents (state agencies and private firms) may operate within a limited space (i.e., the range of choice given by structures), they nonetheless have a certain relative autonomy and could have acted differently. Conversely, opportunities for action are provided and need not necessarily be seized upon by the agents. What really matters is how effectively the agents respond to the opportunities. In order for an effective response, it is crucial to account for the agents’ ability to extract their mobilizable resources. In this regard, this framework nicely manages both the historical contingencies and structural opportunities that lay in power relations among state agencies and private firms, thereby avoiding structural determinism. 42 Yoshino Shinii, a prototype MCI (later MITI) bureaucrat serving as vice-minister of MCI between 1932 and 1936, is regarded as the leading proponent and engineer of industrial policy in interwar Japan. Takahashi Korekiyo, an influential political figure in the interwar period, served as finance minister five times in Tanaka, Inukai. Saito, and Okada cabinets, masterfully pursued a Keynesian fiscal policy, the reimposition of the gold embargo, interest rate manipulation, and attempted to promote political harmony between the military and financial world. 43 Ishiwara Kanji was a prominent military strategist and central figure representing the Army’s control faction (Toseiha) which asserted the establishment of the total war system which required rapid growth in industrial production in key areas and an efficient mobilization system. He was a main proponent of the Asian League or East Asian solidarity that would provide Japan with strategic raw materials and thus enable Japan to achieve self-sufficiency. Konoe Fumimaro, a three-times prime minister (1931, 1940, 1941), represented the reformist political segments of the Showa period, pursued an expansionist foreign policy with strong

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state control over the economy, and a radical reform of the political system (i.e., the movement to do away with political parties). 44 Works on strong sectionalism and conflict intrinsic in the Japanese state bureaucracy include Tsuii Kiyoaki, Nihon kanryosei no kenkyu, Tokyo: Tokyo daigaku shuppansha, 1969, pp. 59–72 and 206–241, respectively; Ide Yoshinori, Nihon kanryosei to gyosei bunka, Tokyo: Tokyo daigaku shuppansha 1982, pp. 61–140; Hata Ikuhiko, Kanryo no kenkyu, Tokyo: Keishodo, 1983, pp. 107–146; and B.Silberman, Cages of Reason, Chicago: University of Chicago Press, 1992, pp. 10–12, 119–222, respectively. 45 In contrast, what Silberman terms the bureaucratic pattern of professional orientation is characterized by the rule that the acquisition of a body of professional knowledge outside the organization is the primary criterion for holding higher administrative position. It secures the privilege of self-regulation by the individual since the professionally oriented bureaucratic role is governed by norms derived from extra-organizational sources. While the organization defines the administrative role in the organizationally oriented bureaucracy, the role here is characterized by the individual acquisition and control of a task. Therefore, the latter organization is likely to be more permeable than is the former case. See his neat summary of these two modes in ibid., pp. 10–15. 46 It was Max Weber who first called our attention to the organizational roles and impact of the state bureaucracy in the modern society’s capacity for producing material resources and implicitly argued that the latter requires a rational bureaucratic structure defined by objective role characteristics. See his Economy and Society, vol. 1, Berkeley: University of California Press, 1978, pp. 211–223. On the other hand, Karl Polanyi argued that state’s organizational expansion and intervention in the economic space was politically driven. Polanyi, The Great Transformation, New York: Beacon, 1947, esp. ch. 5. 47 The Meiji constitutional system generated a fragmented decision-making structure: (1) each minister was responsible not to the Premier but only to the Emperor, thus the Cabinet had little coordination power: and (2) the ministries of Army and Navy were legally exempt from civilian control. 48 The aluminum case was excluded intentionally because the state itself initiated experimentation successfully and thus held a patent for domestic aluminum manufacture. 49 See Okurasho, Dainiji taisen ni okeru renaikoku zaisan shori, Tokyo: Okurasho, 1966, pp. 317–319; also Gaimusho Tohbetsushiryo-fu, Nihon ni okeru gaikoku shihon, Tokyo, 1948, pp. 103–140. 50 J.Morley (ed.), Dilemmas of Growth in Prewar Japan, Princeton: Princeton University Press, 1971. 51 Dower, op. cit., 1975, p. 80. 52 Morley, op. cit., p. 29. 53 E.Reischauer, ‘What Went Wrong?,’ in Morley, ibid., p. 495. 54 For example, Yamada Moritaro, ‘Nochi kaikaku no rekishi-teki igi,’ in Tokyo daigaku keizaigaku-bu shoritsu sanju kinen ronbun-shu 2: Sengo Nihon Keizai no Sho mondai, Tokyo: Tokyo daigaku shuppansha, 1949. 55 See fn. 3 and fn. 19 (above). 56 For both kozaha Marxists and non-Marxists, the darkness and irrationality of the 1930s stemmed from the very same premodern legacy. In Maruyama Masao, feudal values like the “family-system tendency” served to promote the rise of fascism. See Masao Maruyama, Thought and Behaviour in Modern Japanese Politics, London: Oxford University Press, 1963.

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2 Constructing a national economy 1 See Ishii Kanji, Nihon Keizai-shi, Tokyo: Tokyo daigaku shuppankai, 1991, ch. 3; and Nakamura Masanori and Ishii Kanji, ‘Meiji senki ni okeru shihonshugi taisei no koso,’ in Nihon kindai shiso-shi 8: Keizai Koso, Tokyo: Iwanami, 1988, p. 427. 2 In David Landes’ words: “to match strength with the great Western power, (Japan) would have to accomplish a metamorphosis. Modern armed forces could be equipped and sustained only by a modern economy.” D. Landes, Unbound Prometheus, Cambridge: Cambridge University Press, 1969, p. 93. 3 The earliest powerful account in this vein is E.H.Norman’s Japan’s Emergence as a Modern State, New York: Institute for Pacific Relations, 1940. 4 This Gerschenkronian argument is incomplete because there was no fundamental reason why new leaders facing foreign threat should react rationally to commit themselves firmly to pursue industrial growth. For example, Hattori Shiso questioned the excessive emphasis placed on the role of external causation in explaining the Meiji industrialization. In his view, the Western impact may have accelerated changes that were already occurring. In addition, some like Ishii Takashi criticized the “nationalistic” account by comparing the Chinese case which was much more seriously threatened externally. Ramseyer and Rosenbluth also criticized the nationalistic account. Hattori Shiso, ‘Meijiishin no kakumei oyobi hankakumei,’ in Nihon Shihonshugi hattatsushi koza, Tokyo: Iwanami, 1982; Ishii Takashi, Meiji ishin to gaiatsu, Tokyo: Iwanami, 1993; J.Ramseyer and F.Rosenbluth, The Politics of Oligarchy, Cambridge: Cambridge University Press, 1996. 5 For example, Horie Yasuzo, ‘Economic Significance of Meiji Restoration,’ Kyoto University Economic Review 10 (11) (n.d.), pp. 69–70. 6 At the same time, there existed constant tensions and conflicts among the oligarchs over various political and economic issues. Ramseyer and Rosenbluth (op. cit.) grasp this point precisely as the central dynamic of institutional adjustment leading to the distinguishing prewar Japanese political system that eventually collapsed catastrophically. 7 M.Iwata, Okubo Toshimichi: The Bismarck of Japan, New York: Columbia University Press, p. 125. While Okubo asserted domestic political economic reform, in contrast, Saigo Takamori advocated a social imperialist strategy: namely, the Korean expedition (seikanron), in the hope of diverting the discontented samurai from their own problems. Saigo was defeated. 8 The years 1871 to 1873—from the time when he was back from the Iwakura Mission to the time when he was shot to death—is called the “Okubo dictatorship.” 9 Okubo Toshimichi monjo V, Tokyo: Nihon shiteki kyokai sosho, reprinted 1968, p. 55. 10 Tanaka Sogoro, Okubo Toshimichi, Tokyo: Iwanami, 1938, pp. 305–306. 11 Quoted from Nihon kindai shiso taikei 8: Keizai koso, Tokyo: Iwanami, 1988, p. 258. 12 On the domestic problems centering around the issues of equality, legitimacy, and authority during the Meiji period, see B.Silberman, The Bureaucratic State in Japan: The Problem of Authority and Legitimacy,’ in T.Najita and J.V. Koschmann (eds), Conflict in Modern Japanese History, Princeton: Princeton University Press, 1982, pp. 226–257. 13 For Fukuzawa’s kokken-ron based on political realism and economic nationalism, see ‘Bummeiron no kairaku,’ Fukuzawa Yukichi senshu IV, Tokyo: Iwanami, 1969. A more straightforward endorsement of the kokken-ron is found in Kato Hiroyuki’s social Darwinian and organic theory of state and society. For example, Kato Hiroyuki, Jinken shinsetsu, reprinted 1982. 14 Also, a few years earlier in Seiyo Jijo Gaihen (1867), Fukuzawa Yukichi, an influential writer and educator in the Meiji period, strongly advocated the capitalist society of the West as the model of civilization, by emphasizing the right of private property.

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15 Mercantilism has been variously manifested as some doctrines of money and balance of trade (Adam Smith), as the process of state building (Gustav Schmoller), as economic selfsufficiency (E.Lipset), or as industrial policy (Peter Gourevitch). I define and characterize mercantilism as follows. First, externally, mercantilists seek relative gains. Based on the belief that the quantity of money is constant in the world, they treat an increase of money or wealth of any country, brought about by foreign trade, as necessarily a loss of money or wealth for other countries. What really matters to one country is to seek not absolute gains but relative gains compared to others. Second, the very objective of mercantilists is industrialization because industry is the basis of military power, and also because the possession of industry is associated with economic self-sufficiency and political autonomy. Here, since industrial production is the foremost goal for mercantilists, productivist thinking follows: production over profit. Third, mercantilism sets forth state interventionism. It is the state that regulates private economic activities in accordance with political objectives because the state is a formative agent, giving existence to organized society, which is more effective in pushing long-term economic development than unhampered activities of private market agents. See L.Magnusson, Mercantilism, London: Routledge, 1994. 16 Quoted in C.Sugiyama, Origins of Economic Thought in Modern Japan, London: Routledge, 1994, p. 7. 17 Okubo Toshimichi monjo, 1968, pp. 183–187. See also Silberman, op. cit., 1992, ch. 6; and Ramseyer and Rosenbluth, op. cit., 1995, chs 2 and 3. 18 Carey was an associate of Friedrich List and was regarded as an inferior scholar. But he was more popular in Japan than List in the early Meiji years, because his disciple, E.Peshine Smith, spent nine years as a legal adviser for the Meiji government beginning in 1811. His job was to help the Japanese government regain tariff autonomy. 19 However, Wakayama never failed to mention that even Britain has achieved its present wealth and strength because it strived hard to protect its industries for two or three hundred years. See Sugiyama, op. cit., pp. 8–9, 98–99. 20 Karl Marx, ‘Bastiat and Carey,’ Collected Works, vol. 12. 21 Ibid. 22 For this term, see H.Gerth and C.Mills (eds), From Max Weber, New York: Galaxy, 1958, p. 62. 23 For the Meiji ideology, see C.Gluck, Japan’s Modern Myth, Princeton: Princeton University Press, 1985; and Silberman, op. cit., 1982. 24 Okubo Toshimichi monjo V, p. 561. 25 Ibid., pp. 562–563. 26 Ibid., p. 565. 27 Ibid., pp. 563–564. 28 See also Okubo Toshimichi monjo VI (1968), p. 354. 29 Okubo Toshimichi monjo V, p. 564. 30 Ibid., pp. 563–564. 31 Sugihara Shiro (ed.), Nihon no keizai shiso yonkyakunen, Tokyo: Nihon keizai shimbunsha, 1990, p. 245. 32 Here, trade means foreign trade (boeki). Quoted from ‘Fukuzawa Yukichi no boeki ritikokuron,’ Nihon kindai shiso taikei 8: Keizai koso, Tokyo: Iwanami, 1988, pp. 257–258. 33 Ibid., pp. 258–259. 34 Quoted from Sugiyama, op. cit., pp. 56–57. 35 Fukuzawa Yukichi senshu 16, 1971, pp. 257–258. 36 Ito Hirobumi’s kengisho of 1871 reprinted in Tsusho sangyosho, Shoko seisakushi V: Boeki (1), Tokyo: Tsusho sangyosho, p. 201. 37 Quoted from Sugiyama, op. cit., p. 58. 38 W.Lockwood, Economic Development of Japan, Princeton: Princeton University Press, 1954, p. 326.

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39 Originally, the Meiji leaders sought the revision of the treaties as a way out of the financial stress that the post-revolutionary state faced as it helped to subsidize the dispossessed daimyos and samurai. G.B.Sansom, The Western World and Japan, New York: Free Press, 1973, p. 328. 40 See S.Brown, ‘Okubo Toshimichi: His Political and Economic Policies in Early Meiji Japan,’ Journal of Asian Studies 21, February 1962, pp. 194–196. 41 ‘Okuma Shigenobu no zaiseishushi antei no konponsaku ni kansuru kengi,’ Nihon kindai shiso taikei 8, Tokyo: Iwanami, 1988, pp. 22–23. 42 Numbers are calculated from Table 17 in Ishii Kanji, Nihon keizaishi (2nd edn), Tokyo: Tokyo daigaku shuppankai, 1991, p. 129. 43 Okubo Toshimichi VI, pp. 414–423. For more in detail, see ‘Okubo Toshimichi no kaiun hogo ikuseisaku,’ in Nihon kindai shiso taikei 8: Keizai Koso, 1988, pp. 34–37. 44 Silberman, op. cit. 45 S. Crawcour, ‘Maeda Masana and His View of Meiji Economic Development,’ Journal of Japanese Studies 23 (1), 1997. 46 Ibid., p. 93. 47 Loans consist of two types: short-term loans of six months to two years for commodity production, and long-term loans of five to fifteen years for development projects. Ibid., p. 92. 48 Ibid., p. 93. 49 Ibid. 50 A brief discussion of this development is found in S.Crawcour, ‘Industrialization and Technological Change, 1885–1920,’ in P.Duus (ed.), The Cambridge History of Japan, Volume 6, Cambridge: Cambridge University Press, 1988. 51 Maeda Masana, ‘Kogyo Iken,’ in Nihon kindai shiso taikei 8: keizai koso, 1988, p. 128. A similar ordinance was implemented in the silk industry by MAC in 1884. 52 The cotton-spinning industry was not only cartelized but also organized as an interest group to influence the making of industrial policy, fostering the growth of the cotton-spinning industry. See W.Miles Fletcher, The Japanese Spinners Association: Creating Industrial Policy in Meiji Japan,’ Journal of Japanese Studies 22 (1), 1996, pp. 49–75. See also idem, The Japanese Business Community and National Trade Policy, 1920–1942, Chapel Hill: University of North Carolina Press, 1989. 53 For the danger of dependency on Western capital, see Shibahara Takushi, ‘Meiji Ishin no sekaishiteki ichi,’ in Rekishigaku kenkyukai (ed.), Sekaishi to kindai nihon, Tokyo: Yamakawa shuppansha, 1985. 54 Norman, Japan’s Emergence as a Modern State, p. 116. 55 Okubo Toshimochi, ‘Seikanron ni kansuru ikensho,’ in Kindai nihon shiso taikeii 8, 1989. 56 Matsukata Masayoshi, ‘Zaiseigi,’ in ibid. 57 For the original text, see ‘kyozan kokoroe-sho,’ in ibid. 58 Mark Mason, American Multinational and Japan, Cambridge: Harvard University Press, 1992, p. 17. 59 Ibid., pp. 24–26. 60 By the mid-nineteenth century, however, Britain (ministries of Foreign Affairs and Commerce) began to downgrade the value of the China government. The costs of overseas expansion such as the Opium War and Sepoi Rebellion loomed large on the scene of domestic politics. In order to deal with the huge fiscal expenditure incurred, a retrenchment policy led by Gladstone was introduced which, in turn, restrained Britain’s active engagement in East Asian affairs. See Sugiyama Nobuo, ‘Higashi ajia ni okeru gaiatsu no kozo,’ Rekishigaku kenkyu 560, October 1986. 61 Sansom, op. cit., pp. 275–276; and W.G.Beasley, Great Britain and the Opening of Japan, New York: Japan Library, 1995 (reprinted), pp. 54, 85. 62 It is important in this connection that the agreement concluded by Britain with Japan in 1834 did not even mention trade. See Sansom, op. cit., p. 276.

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63 Frances Moulder, Japan, China and the Modern World Economy, Cambridge: Cambridge University Press, 1979. 64 See op. cit., pp. 43–44.

3 Confronting a globalizing economy 1 Takafusa Nakamura, Economic Growth in Prewar Japan, New Haven: Yale University Press, 1983, pp. 77–81. 2 Ibid., p. 87. 3 Ibid., p. 97. 4 Hashimoto Juro, Daikyokoki no nihon shihonshugi, Tokyo: Tokyo daigaku shuppankai, 1984, ch. 1. 5 Statistics are provided in Table 5.4 from Nakamura, op. cit., p. 145. 6 Ibid., pp. 21, 147. 7 The best account of the rise and fall of the Washington Conference system remains A.Iriye, After Imperialism, Cambridge: Harvard University Press, 1965 (reprinted 1990). For the term, the diplomacy of imperialism, ibid., p. 5. 8 Ibid., p. 9. 9 Ibid., p. 278. 10 Akira Iriye, The Origins of the Second World War in Asia and the Pacific, London: Longman, 1987, p. 3. 11 Masaru Udagawa, ‘Business Management and Foreign-Affiliated Companies in Japan Before World War II,’ in Takeshi Yuzawa and Masaru Udagawa (eds), Foreign Business in Japan Before World War II, Tokyo: University of Tokyo Press, 1990, p. 5. 12 The war boom continued in 1919, but ended abruptly in the Panic of 1920. The collapse of the bubble generated by wholesale prices fell by 4 percent while silk and cotton yarn prices fell by 63 percent and 13 percent, respectively. Corporate bankruptcies were widespread, leading to the Ishii Panic of 1922. For a detailed account of the 1920s Japanese economy see Takahashi Kamekichi, Taisho-showa zaikai hndoshi (3 vols), Tokyo: Toyokeizai, 1954. 13 Hasegawa Minoru and Miyajima Hideaki, ‘1920 nendai no jukagaku kogyoka to kanzei seisaku,’ in Oishi Kaiichiro (ed.), Senkanki nihon no taikai keizai kankei, Tokyo: Nihonkeizai shimbunsha, 1992, p. 35. 14 Tominaga Yuji, ‘Honpo teltkogyo to kanzei,’ Osaka shogaku daigahu kenkyujo, Osaka, 1932, p. 207. 15 Ibid., pp. 37–38. 16 David Lake, Power, Protection, and Free Trade, Ithaca: Cornell University Press, 1988. 17 Miwa Ryoichi, ‘1926-nen Kanzei kaisei no rekishiteki ichi,’ in Sakasai Takahito (ed.), Nihon Shihonshugi-Tenkai to ronri, Tokyo: Yamakawa, 1978, p. 174. 18 Ibid., pp. 37–38. 19 Hasegawa and Miyajima, op. cit., p. 56. 20 The best account of the Shidehara diplomacy remains A.Iriye, 1965, op. cit. 21 Ibid., p. 78. 22 Harm Schroter, The International Dyestuffs Cartel, 1921–1939, with Special Response to the Developing Areas of Europe and Japan,’ in A.Kudo and T. Hara (eds), International Cartels in Business History, Tokyo: University of Tokyo Press, 1990, p. 33. 23 See Miyajima Hideaki, ‘Senkanki nihon ni okeru kokusai kyoso to senryakuteki kainyu,’ Waseda Shogaku 362 (1995), pp. 609–640. 24 Most informative on this score is Hashimoto Juro and Takeda Haruhito (eds), Ryodaisenkanki nihon no karuteru, Tokyo: Ochanomizu shuppansha, 1985.

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25 For Yoshino’s industrial policy ideas, see Yoshino Shinji, Shoko gyosei no omoide, Tokyo: Yuhikaku, 1971. See also Chalmers Johnson, MITI and the Japanese Miracle, Stanford: Stanford University Press, 1982, ch. 3. 26 Matsuoka Kinpei, Juyo sangyo no tosei ni tsuite,’ Nihon shoko kaigisho, Sangyo korika, vol. 3, 1931, pp. 20–22. 27 Yoshino, op. cit., p. 128. 28 Ibid., pp. 202, 205–206. 29 See Miyajima Hideaki, ‘Sangyo korika to chuyo sangyo tosei-ho,’ in Kindai Nihon kenkyukai (ed), Seido naikaku no seiritsu to hokai, Tokyo: yamakawa shuppansha, 1984, pp. 101–142. 30 Yoshino, op. cit., p. 189. 31 Yoshino Shinji, Nihon kogyo seisaku, Tokyo: Nihon hyoronsha, p. 318. 32 Somucho, Kisei kanwa suishin no genkyo, Tokyo: Kyosei, 1998, p. 73. 33 The official definition of economic regulation is that regulation serves the public interest when an appropriate supply of goods and services is not secured under the unrestricted operation of the free market (ibid., p. 7). 34 Yoshino, Shoko gyosei no omoide, p. 63. 35 Michael Barnhart, Japan Prepares for Total War, Ithaca: Cornell University Press, 1987, p. 22; Chalmers Johnson, op. cit., p. 117. 36 Boeicho, Rikugun Gunjudoin I (1967), pp. 40–42. 37 “Reform bureaucrats” or “new bureaucrats” characterized as pro-military, antidemocratic, ultranationalist, or radical interventionist, formed during the early 1930s as a political force having a common background. Members of private associations or study groups such as Kokuikai and Asameshikai, including Home Ministry bureaucrats like Goto Fumio, Yoshida Shigeru, and Karasawa Toshiki. But it was not until 1931 that reform bureaucrats arose as a powerful political group within the state. Before then, they were only a minority in every major ministry and consequently they flocked together in such newly established supraministerial organs as the Cabinet Investigative Bureau or the Manchurian Affairs Bureau, thus having little influence on the national policy (i.e., oil and auto policies). It is safe to say that it was only after Konoe Fumimaro became Premier and Japan was on a war footing that they counted as a significant political participant in the national decision-making process. See Robert Spaulding, ‘Bureaucracy as a Political Power,’ in James Morley (ed.), Dilemmas of Growth in Prewar Japan, Princeton: Princeton University Press, 1971; Hata Ikuhiko, Kanryo no kenkyu, Tokyo: Tokyo daigaku shuppankai, 1983, pp. 112–113. 38 For the influence of Kita’s idea on the shaping of the military circle’s strategic thinking, the most comprehensive has been Ito Takashi, Showa shoki seijishi kenkyu, Tokyo: Tokyo daigaku shuppansha, 1969. 39 Kita Ikki chosakyshu III, p. 291. 40 ‘Kokubo no hongi,’ p. 281. 41 ‘Kindai kokubo no honshitsu,’ p. 30. 42 ‘Boeki to kinyukikan no yakuwari,’ in Takahashi Korekiyo, Takahashi Korekiyo keizai-ron (1936), p. 320. 43 Quoted in Akira Iriye, ‘Failure of Economic Expansionism,’ in Silberman and Harootunian (eds), Japan in Crisis (1971), pp. 244–245. 44 ‘Yushutsu boeki no shintensaku,’ in ibid., pp. 300–301. 45 ‘Kaigai boeki ni chuisubeki yoten,’ in ibid., p. 328. 46 ‘Zaisei to keizai no kommyonichi,’ in ibid., pp. 57–68. 47 ‘Kokubo to gaiko,’ in ibid., p. 659. 48 For Kurusu Saburo’s thinking on trade and industry, see Kurusu Saburo, Homatsu no sanjugonen (1979). 49 Gaimusho Chosabu, ‘Nihon koku no galko shido genri koryo’ (1936), Gaiko shiryokan, File A. 1.0.0.6.

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50 Akira Iriye, Power and Culture: The Japanese-American War, 1941–1945 (1981), p. 75. 51 Note that since its establishment in 1925, the MCI had directed a series of export-promotion policies such as the Export Cartel Law (1926), the Important Export Industries Cartel Law (1926), the Exporting Artificial Textile Inspection Law (1921), the Export Compensation Law (1930), the International Trade Protection Law (1933), the New Export Cartel Law (1934), and the Temporary Measures Law Relating to Exports, Imports, and Other Matters (1937).

4 Politics for protection: petroleum 1 For the full text of the PIL, see Tsusho sangyo-sho, Shoko seisakushi 23: Kyogyo, Tokyo, 1980, pp. 159–162. 2 Most Japanese-language literature on the Japanese oil industry regarded the PIL as a symbolic monument of a successful protectionist policy, but they tend to accept the PIL at face value while ignoring its incoherent, ineffective implementation. For example, Takeda Haruhito, ‘Shiryo kenkyu: nenryokyoku sekiyu gyosei senshi,’ in Sangyo seisakushi kenkyujo (ed.), Sangyo seisakushi kenkyu shiryo, Tokyo: Tsusho sangyosho, 1979, pp. 171–240; Abe Sei, ‘Dainisha taisenzen ni okeru nihon sekiyusangyo to beiei sekiyujihon,’ Shogaku ronsan 23– 4, 1981, pp. 169–209; Udagawa Masaru, ‘Senzen Nihon no kigyo keiei to gaijitei kigyo (1),’ Keiei shirin 24–1, 1987a; idem, ‘Senzen nihon no kigyo keiei to gaijikei kigyo (2),’ Keiei shirin 24–2, 1987b; Kikkawa Takeo, ‘1934-nen no Nihon no sekiyugyo-ho to StandardVacuum Company, (1)’ Aoyama keiei ronshu 23–4, 1989a, pp. 21–43; idem, ‘1934-nen no nihon no sekiyugyo-ho to Standard Vacuum Company (2),’ Aoyama keiei ronshu 24–3, 1989b, pp. 39–68; idem, ‘1934-nen no Nihon no sekiyugyo-ho to Standard-Vacuum Company (4),’ Aoyama keiei ronshu 24–4, 1990b, pp. 55–67; idem, ‘1934-nen no seikiyugyo-ho to gaikoku sekiyu kaisha to no kosho,’ in Oishi Kaichiro (ed.), Senkanki Nihon no taigai keizai kankei, Tokyo daigaku shuppankai, 1992, pp. 173–205. 3 I.Anderson, The Standard-Vacuum Oil Company and United States East Asian Policy, 1933– 1941, Princeton: Princeton University Press, 1975. 4 R.Samuels, The Business of the Japanese State, Ithaca: Cornell University Press, 1987, p. 225; see also Inoguchi Tosuke, Gendai nihon sangyo hattatsushi II: sekiyu, Tokyo: Gendai nihon sangyo hattatsushi kenkyukai, 1963, pp. 310–312. 5 E.Shaffer, The United States and the Control of World Oil, New York: St. Martin’s Press, 1983, p. 20. 6 S.Bromley, American Hegemony and World Oil, University Park: Penn State University Press, 1991, p. 90. 7 Shaffer, op. cit., p. 30. 8 Ibid., p. 35. 9 Ibid., p. 32. 10 A.A.Fursenko, The Battle for Oil: The Economics and Politics of International Corporate Conflict Over Petroleum, 1860–1930, Greenwich: JAI Press, 1990, p. 82. 11 Quoted in Inoguchi, op. cit., p. 110. 12 For example, a Meiji genro, Matsugata Masayoshi, urged Nippon Oil and Hoden Oil to merge in 1902. Goto Shimpei did it too in 1911. Samuels, op. cit., 1987, p. 171. 13 Inoguchi, op. cit., pp. 146–147. 14 Samuels, op. cit., p. 170. 15 Shaffer, op. cit., p. 43. 16 Bromley, op. cit., p. 94. 17 Abe, op. cit., p. 180; and Kikkawa, op. cit., 1989a, p. 29.

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18 Abe, ibid., p. 173. 19 Ibid., p. 174. 20 Boeicho boeikenkyusho senshishitsu, Kaigun Gunsenbi, Tokyo: Asaguma Shimbunsha, 1969, p. 692. 21 MAC’s commerce division was detached to become the Ministry of Commerce and Industry (MCI) in 1925. Later in 1949 the Ministry of International Trade and Industry (MITI) replaced it. 22 The Kokusein was established in 1920 to (1) conduct a unified, cabinetlevel statistical survey, and (2) conduct research to prepare for the national mobilization plan relating to the implementation of the Munitions Industry Mobilization Law. It lasted for only two years and its function was delegated to the Ministry of Agriculture and Industry and the Cabinet’s Statistics Bureau. 23 ‘Nenryo chosa iinkai setchi ni kansuru shorui,’ Kogane Bunsho I. 24 Takeda, op. cit., p. 172. 25 For Nisseki’s data, see Inoguchi, op. cit., pp. 159 and 211; also Nippon Sekiyu Kabushiki Kaisha, Nippon Sekiyu, Tokyo: Nippon sekiyu kabushiki kaisha, 1972, pp. 221–222. For Hoden’s data, see ibid., p. 220. 26 It has nothing to do with today’s Teikoku sekiyu. 27 Abe, op. cit., p. 174; Kitazawa Shinjiro and Ui Ushinosuke, Sekiyu keizairon, Tokyo: Senso shobo, 1941, pp. 315–316. 28 ‘Sekiyu kanzei no enkaku,’ in Kogane Bunsho II. 29 Takeda, op. cit., p. 185. 30 ‘Wagakuni nenryo no shorai ni taisuru konpon hosaku,’ Kogane Bunsho III. 31 Ibid. 32 Ibid. 33 After merging in 1922, Nippon Oil immediately occupied 87 percent of the domestic crude production share and 96 percent of the domestic product share. Nippon Sekiyu, op. cit., p. 233. 34 See Table 3.1, p. 30. 35 For the full text of the three plans see Kogane Bunsho III; see also Takeda, op. cit., pp. 187– 188. 36 Takeda, ibid., p. 190. 37 ‘Waga kuni nenryo no shorai ni taisuru hosaku,’ Kogane Bunsho III. 38 Ibid. 39 Ibid. 40 ‘Nenryo chosa iinkai toshinsho.’ Ibid. 41 Yanagihara Hiromitsu, Sekiyu Zuiso, Tokyo: Hara shobo, 1952, pp. 9–10. 42 Samuels, op. cit., p. 170. 43 Compared to the fragmented nature of the oil industry, coal had a highly concentrated industrial structure where in 1933 five highly profitable zaibatsu firms including Mitsui, Mitsubishi, and Sumitomo accounted for 40.5 percent of total domestic production. See Samuels, op. cit., p. 30. In 1933 Mitsui accounted for 14.9 percent and Mitsubishi 11.0 percent of total national coal output. See Yasuoka Shigeaki (ed.), Mitsui zaibatsu, 1982, p. 308; and Mishima Yasuo (ed.), Mitsubishi Zaibatsu, Tokyo: Nihon keizai shimbunsha, 1981, p. 282. 44 ‘Nenryo chosakai setchi ni kansuru ken,’ Kogane Bunsho I. 45 Takeda, op. cit., pp. 191–192. 46 Kitazawa and Ui, op. cit., p. 494. 47 Inoguchi, op. cit., p. 198. 48 Yoshino Shinji, Shoko gyosei no omoide, Tokyo: Nihon keizai shimbunsha, 1971, p. 151. 49 Takeda, op. cit., pp. 210–213.

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50 Shokosho, ‘Shoko shingikai daiyon tokubetsu iinkai (nenryo mondai) gijroku (1),’ 1929, pp. 125–126. 51 Ibid., p. 123. 52 Ibid., p. 129. 53 Ibid., p. 125. 54 Nippon Sekiyu, op. cit., p. 295. 55 Mitsui’s share was allotted from Stanvac’s share. 56 Inoguchi, op. cit., pp. 246–250; and Kitazawa and Ui, op. cit., pp. 381–382. 57 Nippon Sekiyu, op. cit., p. 301. 58 Takeda, op. cit., p. 214. 59 Hashimoto Juro, Taikyokoki no nihon shihonshugi, Tokyo: Tokyo daigaku shuppankai, 1984, p. 206. 60 Mizuda Seikichi, Sekiyu, Tokyo: Daiamondo shobo, 1938. 61 Abe, op. cit., p. 191. 62 Boeicho boeikenkusho senshishitsu, Rikugun gunju doin I, Tokyo: Asaguma shimbunsha, 1967, p. 378; and Yoshino, op. cit., p. 151. 63 Nihon jidosha kogyokai, Nihon jidosha kogyo shiko 3, pp. 24–25. 64 Rikugun nenryo, p. 198. 65 J.Growley, Japan’s Quest for Autonomy, Princeton: Princeton University Press, 1966, ch. 4. 66 See Tsusho sangyosho, Shoko seisaku-shi 4, Tokyo: Shoko seisakushi kankokai, 1961, pp. 477–480. 67 Samuels, op. cit., p. 177. 68 Samuels, ibid., p. 177. For discussion of the French oil law (1928), see L. Grayson, National Oil Companies, New York: Wiley, 1981; and Shoko seisaky-sho 4, pp. 477–480. 69 ‘Waga kuni no shorai ni taisuru hosaku,’ Kogane Bunsho III. 70 Kikkawa, op. cit., 1989a, p. 40. 71 Some argued that the drastic fall in the price of refined products during the early 1930s was due to excessive competition and the lack of cooperation within the US industry. V.R.Garfias and R.V.Whetsel, “World Oil Consumption Next Year to Rival 1929," quoted in RG59.894.6363/174A. 72 Inoguchi, op. cit., p. 245. 73 See Anderson, op. cit., p. 100. 74 For this idea, see Memorandum of Conversation between Mr. Dickover and Mr. Kurusu, 18 October, 1934, RG.59.894.6363/107; and ex-MCI bureaucrat Yanagihara, op. cit., pp. 59– 60. 75 Yanagihara, ibid., p. 24. 76 Refer to Meiji oligarch’s economic ideas (particularly Okubo and Okuma) in ch. 2. 77 Note Silberman’s argument on labor; the state bureaucracy excluded the interests of labor because they thought the “labor’s claims to equity” were based on “notions of justice as fairness rather than as social utility.” Thus, the state either suppressed the labor movement by force or tried to “declass” labor by “forcing it to be absorbed into the organizational structure of large-scale enterprise.” Silberman, op. cit., 1982, pp. 244–246. 78 A.Hirschman, Theory of Economic Development, Boulder: Westview Press, 1958, ch. 8. See also M.Alam, ‘Hirschman’s Taxonomy of Industries: Some Hypotheses and Evidence,’ Economic Development and Cultural Change 32–2 (January 1984), pp. 367–372. 79 Memorandum of Conversation between Dickover and kurusu, October 18, 1934, RG59.894.6363/107. 80 Kitazawa and Ui, op. cit., p. 494. 81 RG59.894.6363/143, December 4, 1934; and Conversation between Mr. Neville and Mr. Kurusu, November 30, 1934, RG59.894.6363/153. 82 For the emergence of Stanvac, see Anderson, op. cit., pp. 32 and 35–38; and Kikkawa, 1989b, pp. 89–91.

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83 Abe, op. cit., p. 188. 84 Kikkawa, 1989b, p. 91. 85 Figures recalculated from charts 7 and 10, and tables 8, 9, and 10 in Federal Trade Commission, The International Petroleum Cartel, Washington: US Government Print, 1952, pp. 1–25. 86 John Blair, The Control of Oil, New York: Pantheon, 1975, pp. 29–47. 87 Federal Trade Commission, op. cit., pp. 29–47. 88 The following discussion heavily reflects Blair, op. cit., chs 2, 3, 4, and 5. 89 Blair, ibid., p. 35. 90 W.Greene, Strategies of the Major Oil Companies, Ann Arbor: UMI Research Press, 1985, p. 274. 91 Blair, op. cit., p. 36. 92 Calculated from Table 8 in Kikkawa, 1989b, pp. 70–71. 93 Blair, op. cit., pp. 36–37. 94 Kikkawa, 1989b, pp. 70–71. 95 Ingoguchi, op. cit., pp. 247–250. 96 As capital entrance requirement is high and rising in the refining industry, the number of refiners became low. Blair, op. cit., pp. 131–132. 97 Blair, ibid., pp. 218–225. 98 Quoted in G.Ikenberry, Reasons of State, Ithaca: Cornell University Press, 1988, p. 65. 99 American Petroleum Institute, Petroleum Facts and Figures (4th edn) (1931), p. 34. 100 Abe, op. cit., p. 186. 101 Kikkawa Takeo, ‘Gaishikei kigyo no Nihon shinshutsu ni kansuru kenkyu,’ Kokusei kankyo no hendo to kigyo no taiyo kodo, Tokyo: Aoyama gakuin daigaku sogo kenkyujo keiei kenkyu senta kenkyu sosho I, 1992. 102 Anderson, op. cit., p. 82. 103 A copy of the compilation of excerpts from the stenographic record of hearings before the special Diet committee appointed to examine PIL, RG59.894.6363/78 (Septembers, 1934). 104 RG59.894.6363/78. 105 Kobayashi Hisahira, Sekiyu kogyo, Tokyo: Nihon hyoronsha, 1939, pp. 91–93. 106 RG59.894.6363/78 (September 6, 1934). 107 Kobayashi, ibid., pp. 91–93. 108 RG.59.894.6363/78 (September 6, 1934). The annual increase in oil consumption between 1932 and 1936 was average 15 percent. It increased rapidly from 3,876 kiloliters in 1932 to 6,300 kiloliters in 1936. Calculated from Table 12 in Abe, op. cit., p. 193. 109 Calculated from Table 19 in Takeda, op. cit., p. 233. 110 RG59.894.6363/143 (December 4, 1934); RG59.894.6363/153 (November 30, 1934); and RG59.894.6363/189 (March 22, 1935). 111 Kikkawa, 1989b, pp. 70–71. 112 E.Schumpeter (ed.), The Industrialization of Japan and Manchukuo, New York: Macmillan, 1939, p. 633. 113 For the Army’s view of Soviet Russia, see J.Crowley, Japan’s Quest for Autonomy, Princeton: Princeton University Press, 1966; and M.Barnhart, Japan Prepares for Total War, Ithaca: Cornell University Press, 1987. 114 RG59.894.6363/84 (August 21, 1934). 115 For the market share for the majors in 1934, see Anderson, op. cit., p. 77. For the statistics of Japanese oil consumption, see Table 12 in Abe, op. cit., p. 193. 116 The following discussion of the embargo issue is based on Anderson, ibid., pp. 89–91. 117 Quoted in Anderson, ibid., p. 90. US Department of State, Foreign Relations of the United States (FRUS), 1934, III, pp. 774–776. 118 FRUS, 1934, III, pp. 757–758.

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119 For US protectionism in the 1930s, see the World Bank, ‘Threat of Protectionism,’ World Bank Report (1987). 120 H. Williamson, The American Petroleum Industry: The Age of Energy, 1899–1959, Evanston: Northwestern University Press, 1961, p. 720; also Petroleum Facts and Figures (6th edn) (1938), pp. 110–111. 121 Anderson, op. cit., pp. 79–80. 122 Ibid., p. 95. 123 Jiji Simpo (December 13, 1934). 124 Memorandum of Conversation between Mr. Neville and Mr. Kurusu, March 22, 1935. RG59.897.6363/189. See also RG59.897.6363/153 (November 30, 1934). However, at the time, it was unimaginable that government subsidies would be granted to foreign firms and that price increases would fully cover the huge amounts of capital to build tanks. Further, foreign importers were in no way certain of their future business opportunities. In this sense, although both domestic and foreign firms opposed stockpiling, they stood on entirely different ground. 125 Memorandum of Conversation between the Ambassador and Mr. Hirota, Minister of Foreign Affairs, July 25, 1935. RG59.894.6363/205. 126 Takeda, op. cit., p. 230. 127 Anderson, op. cit., p. 97. 128 Ibid., p. 100. 129 Letter, Grew to See State, January 10, 1935. RG59.894.6363/173. 130 Takeda, op. cit., p. 228. 131 Anderson, op. cit., p. 94. 132 Ibid., p. 95. 133 Ibid., p. 102. 134 ‘Sangyo seisakushi kenkyu shiryo: Nenryo kyoku sekiyu kyosei ni kansuru zadakai’ (1978), p. 58.

5 Politics for protection: automobiles 1 Figures from Michael Cusumano, The Japanese Automobile Industry, Cambridge: Harvard University Press, 1987, pp. 385–386. 2 Ibid. 3 F.Adachi, K.Ono, and K.Odaka, ‘Ancillary Firm Development in the Japanese Automobile Industry,’ in K.Odaka (ed.), The Motor Vehicle Industry in Asia, Singapore: Singapore University Press, 1983, pp. 325–396. 4 C.Chang, The Japanese Auto Industry and the U.S. Market, New York: Praeger, 1981; William Duncan, U.S.-Japan Automobile Diplomacy, Princeton: Princeton University Press, 1973. For the Japanese-language works on this category, Udagawa Masaru, “Nissan Baibatsu no jidosha sangyo shinshutsu ni tsuite (1),” Keiei shirin 13–4 (1977a), pp. 93–109; ‘Nissan zaibatsu no jidosha sangyo shinshutsu ni tsuite (2).’ Keiei shirin 14–1 (1977b); ‘Jidosha seizo jigyoho no seitei to gaijikei kaisha no taiyo,’ in Morikawa Hidemasa (ed.), Kigyosha ktto no shiteki kenkyu (1981); Nakamura Seiji, Gendai jidosha kogyo-ron, Tokyo: Yuhikaku, 1982; Ozaki Masahisa, Jidosha nihonshi (2 vols), Tokyo: Jikensha, 1955a, 1955b; Nihon jidosha kogyo shiko (3 vols), Tokyo: Nihon jidosha kogyokai, n.d.: Iwasaki Matsugi, Jidosha kogyo no kakuritsu, Tokyo: Ito shobo, 1941; Sakurai Kiyoshi, Senzen no nichibei jidosha masats, Tokyo: Hyakujo shobo, 1987. 5 Phyllis Genther, A History of Japan’s Government-Business Relationship: The Passenger Car Industry, Ann Arbor: University of Michigan Press, 1990.

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6 Rhys Jenkins, Transnational Corporations and the Latin American Automobile Industry, Pittsburgh: University of Pittsburgh Press, 1987, p. 13. 7 Emma Rothschild, Paradise Lost, New York: Random House, 1982, pp. 33–35. 8 Federal Trade Commission, Report on Motor Vehicle Industry, Washington: FTC, 1939, p. 27. 9 Alfred Chandler, Jr., Giant Enterprise, New York: Harcourt, 1964, p. 16. 10 Jenkins, op. cit., p. 14. 11 Ibid., p. 15. 12 Ibid., pp. 16–17. 13 For the earlier history of the Japanese auto industry, see Tsusho sangyo-sho, Shoko seisakushi 18, Tokyo: Tsusho sanggyosho, pp. 180–181; and Shiko I. 14 Genther, op. cit., p. 17. 15 Adachi, op. cit., p. 332. 16 Ibid. 17 Hosoya and Mukasa Masao, ‘Kikai kogyo no shiteki tenkai,’ in Arisawa Hiromi (ed.), Gendai nihon sangyo koza V, Tokyo: Iwanami, pp. 18, 35. 18 Sakurai, op. cit., p. 165; and Chang, op. cit., p. 11. 19 The manufacture of automobiles in the shipyard exposed some limitations on the growth of the auto industry in part due to the nature of the shipbuilding industry which may be characterized as small-scale machine manufacturing. Mass production of automobiles requires mass production of parts, but most machine tools needed for shipbuilding were made on a small scale within the shipyard. For this reason, shipbuilders tended to overlook the importance of the parallel development of the parts industry in the auto sector. 20 A notable exception was the Mitsubishi zaibatsu’s Kobe Shipyard which made a total of twenty-two cars between 1918 and 1922. Its historically close ties with the Navy caused its shift of business from autos to aircrafts and submarines at the Navy’s request. Later, it became a major producer in the areas of special purpose vehicles, military-use trucks and tanks, but not in small/medium-size vehicles. 21 Sakurai, op. cit., p. 164. 22 Boeicho, Rikugungunsembi, p. 69; and Miyada Ogi, ‘Shokosho shogo no jidosha gyosei,’ in Jidoshakogyo shinkokai (ed.), Nihon jidosha kogyoshi gyosei kirokushu, 1979, pp. 1–2. 23 Adachi, op. cit., p. 338. 24 Cusumano, op. cit., p. 33. 25 Chang, op. cit., p. 22. 26 Mark Mason, American Multinationals and Japan, Cambridge: Harvard University Press, 1992, p. 66. 27 For example, some Japanese businesspersons and bureaucrats expressed their grave concern: “Ford has tremendous financial power, and through this they oppress peoples elsewhere I believe that the devil hand of the United States is now reaching into our country, and I am in fact extremely angry.” Quoted in Mason, ibid., p. 68. 28 Ibid., p. 70. 29 Ibid., p. 10. 30 Sakurai, op. cit., p. 217. 31 Toyota jidosha sanjunen-shi, Tokyo: Toyoda, p. 31. 32 Sakurai, op. cit., pp. 211, 218. See also ibid., p. 31. 33 Shokosho komukyoku, ‘Jidosha kogyo kakuritsu chosa iinkai keika kayo,’ May 1932, pp. 2– 3. 34 Ibid., pp. 9–14. 35 Ibid., p. 17. 36 MCI’s incrementalism in the promotion of the auto industry is also found in its merger policy. Udagawa, p. 99. See also Iwasaki Matsugi, op. cit., p. 129. 37 ‘Jidosha kogyo kakuritsu chosa iinkai keika kayo,’ p. 34. 38 Ibid., p. 31.

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39 Shokosho komukyoku, ‘Honpo jidosha kogyo seisaku no rakushi,’ in Kogane Bunsho XIV. 40 Genther, op. cit., p. 27. 41 Sakurai, op. cit., pp. 224–225. 42 Miyada, op. cit., p. 6; and Udagawa, op. cit., 1977a, p. 97. 43 Since it was true that new zaibatsu such as Nissan grew rapidly due to close relationships with the military, particularly in the area of munitions industry, it is said that Nissan participated in the auto industry just because the military urged it to do. It was however almost more than ten yeas before when Ayukawa decided to enter the industry. Also, his plan had been run against the military interests, i.e., a tie-up plan with GM. 44 Udagawa, op. cit., 1977a, p. 100. 45 Cusumano, op. cit., p. 35. 46 Udagawa, op. cit., 1977a, p. 102. 47 Udagawa, op. cit., 1977b, p. 39. 48 Shiko 3, op. cit., p. 24. 49 Ibid., pp. 24–26. 50 Ito Hisao, ‘Jidosha kogyo kakuritsu ni kansuru keika,’ in Jidosha kogyo shinkokai (ed.), Nihon Jidosha gyosei kirokushu, op. cit., p. 18. 51 For the content of the two plans, see Ito, ibid., pp. 18–19. 52 Common agendas are explicitly revealed in Shokosho komukyoku, ‘Jidosha seizo jigyohoanshitsumon yoso jiko (May 1936),’ in Kogane Bunsho XII. 53 Ibid. 54 ‘Jidosha kogyo-hoan,’ and ‘Jidosha seizo Jigyohoan,’ in Kogane Bunsho XII. 55 Iwasaki Matsugi, op. cit., p. 143; and Kogane Bunsho XII. 56 Shiko 3, op. cit., pp. 32–34. 57 Ibid., pp. 23–24. 58 Ibid., p. 34. 59 ‘Jidosha seizo jigyoho no ikisatsu,’ in Nihon jidosha kogyoshi gyosei kirokushu, op. cit., p. 31. 60 Shoko seisaku-shi, op. cit., p. 338; and Toyota Jidosha sanjunen-shi, op. cit., p. 32. 61 Toyota jidosha sanjunen-shi, op. cit., p. 22. 62 Ito, op. cit., p. 15. 63 Shiko 3, op. cit., p. 34. 64 This view was presented by two prototype MCI figures, Yoshino Shinii and Kishi Nobusuke, in their conversation about foreign capital. See Udagawa, 1981, p. 243; for MCI Minister Machida Chiyujiand Kishi’s recollection on the joint venture scheme, see NHK, pp. 69 and 12; and for MFA (Kurusu)’s view, see Telegram, Neville to Secstate, August 22, 1935, RG59.894.797/11. 65 Mason, op. cit., p. 14. 66 For Yoshino and Kishi’s preference on this scheme, see Udagawa, op. cit., 1981, p. 243. 67 For detailed discussion among members in the Committee, see Shokosho Komukyoku, “Jidoshakogyo kakuritsu ni kansuru Kakusho Gyogikai gijikeika gaiyo.” 68 ‘The Fourth Session (August 23, 1934).’ 69 Ito, op. cit., p. 19. 70 ‘The Tenth Session (September 19, 1934).’ 71 ‘The Fifth Session (August 27, 1934).’ 72 The negotiations between GM and Nissan began in early 1933 and ended in December 1934. 73 ‘The Seventh Session (September 4, 1934).’ 74 Since both Nissan Motors and Toyota Motors were established by machine builders, it is not surprising that they emphasized acquiring advanced technology for the supply of parts and materials, and tried to internalize units manufacturing them: i.e., Nissan with Tobata Casting, Yasurai Steel, Toa Electric, and Toyota with Toyota Machine Tools, Aichi Steel. See Tomiyama Kazuo, Nihon no jidosha sangyo, Tokyo: Nihon keizaishimbunsha, 1973, p. 41.

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75 ‘The Sixth Session (August 29, 1934)’ and ‘the Seventh Session (September 4, 1934).’ 76 Shiko 3, p. 34. 77 Ibid. 78 Ito, op. cit., p. 15. 79 Shiko 3, p. 34. 80 ‘The Third Session (August 21, 1934).’ 81 There was an attempt by the MCI to reduce the gap between itself and the Army. Saka of the MCI devised a deliberate method to discriminate foreign capital: “it is not that licenses would be given only to domestic firms, but that licenses would be given to those who satisfy a certain standard of productive capacity which should be so deliberately set as to surpass those of foreign firms while at the same time the state would negate any anticipated effort on the foreign side to extend their existing productive facility to meet that standard.” ‘The Tenth Session (September 19, 1934).’ Still, the insurmountable problem with this scheme was how to find a domestic firm which could possibly satisfy such a high standard. It was soon discarded. 82 Udagawa, 1981, p. 79. 83 Ibid., p. 89. 84 Udagawa, 1981, pp. 91–92. 85 ‘Jidosha kogyo kakuritsu hosaku ni kansuru ken’ (November 5, 1934), E.450.43 Gaiko Shiryokan. 86 Toyota jidosha (ed.), Sozo kagiri naku: Toyato jidosha gojunen-shi, Tokyo: Toyota, 1981, p. 75. 87 Ozaki, 1955b, p. 119; and Shiko 3, pp. 34–35. 88 Both Kishi and Kogane were regarded in general as reform bureaucrats who were characterized as pragmatic nationalist, reformist, pro-military, profascist, etc. For this view, see Udagawa, op. cit., 1981. 89 Ozaki, op. cit., p. 377. 90 Ito, op. cit., p. 17; and Shiko 3, pp. 38–39. 91 For this view, see Udagawa Masaru, 1981, pp. 233–253; and Nihon hoso kyokai, Dokyumento Showa 3: Sekai e no tojo, Tokyo: NHK, 1986, p. 65. 92 Chalmers Johnson, MITI and the Japanese Miracle, Stanford: Stanford University Press, 1982, and Ito Takashi, Showa shoki seijishi kenkyu, Tokyo: Tokyo-daigaku shuppankai, 1969. 93 Spaulding, op. cit., p. 63. 94 Ibid., p. 60. 95 Nihon hoso kyokai, op. cit., pp. 68–78. 96 For example, Nakamura, op. cit., pp. 50–51. 97 Mitsubishi jidosha kogyo kabushiki kaisha, Mitsubishi jidosha kogyo kabushiki kaisha-shi, Tokyo: Mitsubishi, 1993, pp. 47–49. 98 Ibid., p. 70. 99 Shiko 3, p. 33. 100 Calculated from Abo Tetsuo, Senkanki amerika no taigaitoshi, Tokyo: Tokyo-daigaku shuppankai, pp. 219, 224, and 252–253. 101 For cases of other countries, see Simon Reich, The Fruits of Fascism, Ithaca: Cornell University Press, 1990. 102 GM, Annual Report: 1929, Detroit: GM, pp. 32–33. 103 Reich, op. cit. 104 Udagawa, op. cit., 1981, p. 241; Ozaki, Jidosha Nihonshi, Tokyo: Jikensha, 1955, p. 202; and Chang, op. cit., p. 23. 105 Udagawa, op. cit., p. 245. 106 Mira Wilkins, ‘The Role of the U.S. Business,’ in Dorothy Borg and Shumpei Okamoto (eds), Pearl Harbor as History, New York: Columbia University Press, 1973, p. 361.

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107 The Okuyama Service, August 10, 1935, RG59.894.797/8. Similarly, the embassy in Japan sorted out three alternatives. American auto firms could choose in response to the upcoming protectionist legislation: (1) to continue operations at their present rate without taking in Japanese capital and yielding control to Japanese interests; (2) to yield control to Japanese interests and expand with the market in the future; or (3) to withdraw from Japan, establish themselves elsewhere in the Far East, and compete with the Japan-made cars by importing complete cars into Japan. 108 Telegram, Grew to SeeState, November 28, 1934, RG59.894.791/4. 109 Telegram, Neville to SeeState, September 5, 1935, RG59.894.797/12. 110 Memorandum of Conversation between Longley and Dooman, August 9, 1935, RG59.894.797/7. 111 Telegram, Neville to SeeState, August 22, 1935, RG59.894.797/11. 112 Telegram, Grew to SeeState, November 28, 1934, RG59.894.797/4. 113 Memorandum Between Longley and Dooman, August 9, 1935, RG59.894.797/7. 114 Telegram, Neville to SeeState, August 22, 1935, RG59.894.797/11. 115 Ibid. 116 Letter, Ward to Hornbook, April 28, 1936, RG59.894.197/19. 117 Memorandum of Conversation Between Neville and Shigemitsu, February 5, 1935, RG59.894.791/20. 118 Ibid. 119 Division of Far Eastern Affairs Record, July 9, 1937, RG59.894.797/32. 120 Telegram, Grew to SeeState, April 30, 1937, RG59.894.797/32. 121 Telegram, Grew to SeeState, May 15, 1936, RG59.894.797/25. 122 Telegram, Grew to SeeState, June 11, 1936, RG59.894.797/26. 123 Telegram, Grew to SeeState, July 14, 1936, RG59.894.797/29. 124 Yearly quota for Ford was set at 12,360 vehicles and for GM at 9,470. 125 Telegram, Neville to SeeState, August 22, 1935, RG59.894.797/1; and Udagawa, 1981, p. 242. 126 Udagawa, op. cit., p. 242. 127 Ibid., p. 245. 128 S.Kamiya, My Life with Toyota, Tokyo: Toyota Motors Sales, 1967, p. 71. 129 Udagawa, op. cit., p. 247. 130 Ibid. 131 Telegram, Grew to SeeState, May 12, 1936, RG59.894.797/24. 132 Telegram, Neville to SeeState, September 5, 1935, RG59.894.797/12. 133 Telegram, Boyce to SeeState, August 25, 1936, RG59.894.797/31; and Udagawa, 1981, pp. 247–249. 134 Telegram, Grew to SeeState, April 30, 1937, RG59.894.791/32. 135 Japanese newspapers reported rumors that Ford negotiated a joint venture with Mitsubishi or Furukawa. RG59.894.797/11; for Mitsubishi’s interest in regard to Ford, see NHK, Dokyumento Showa 3: Sekai e no tojo, Tokyo: NHK, 1986, pp. 123–143. 136 Besides, there was an intermarriage relationship between the two. Ayukawa’s sister was married to Kimura, the Chairman of the Board of Mitsubishi zaibatsu who was regarded as the most influential non-Iwasaki person in the Mitsubishi organization. I am indebted to Haruo Iguchi who introduced this fact to me. 137 Cusumano, op. cit., pp. 43–44. 138 Japan Advertiser, November 3, 1935. 139 Tokyo Asahi (June 28, 1936) and Tokyo Nichinichi (June 28, 1936) filed from Kogane Bunsho XIV; and see also telegram, Grew to SeeState, June 14, 1936, RG59.894.791/29. Sumitomo also applied but was rejected. According to the report from Tokyo Asahi (June 28, 1936), Sumitomo submitted an application for auto production which essentially

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included the project arranging a capital tie-up with GM which had failed to reach an agreement with Nissan. 140 Sakurai, op. cit., p. 290. 141 Richard Boyce, ‘Japanese Automobile Industry,’ June 12, 1936, RG59.894.797/24. 142 For the weak power of consumer groups, see Nakamura, op. cit., pp. 152–153. 143 Cusumano, op. cit., p. 42. 144 Ibid., pp. 64–65. 145 Ibid., p. 70. 146 ‘Jidosha seizo jigyoho shikogo no tenkai,’ in Nihon jidosha kogyo-shi kyosei kirokushu, op. cit., p. 41.

6 Industry Governing Japanese style 1 The seminal work in this category is K.Waltz, Theory of International Politics, Reading: Addison-Wesley, 1979. 2 For the theory of hegemonic stability, see C.Kindleberger, The World in Depression, Berkeley: University of California Press, 1973; and Robert Gilpin, Political Economy of International Relations, Princeton: Princeton University Press, 1987. 3 See K.Polanyi, The Great Transformation, New York: Beacon, 1948, ch. 20. 4 See Abo Tetsuo, Senkanki amerika no taigai toshi, Tokyo: Tokyo daigaku shuppankai, 1988, pp. 219, 224, and 252–253. 5 Note that Stanvac and Rising Sun did not get involved in the crude oil market; some of their crude oil was exported not through their own marketing networks but through Mitsui Bussan and Asahi Oil. 6 D.Bennett and K.Sharpe, Transnational Corporations vs. the State, Princeton: Princeton University Press, 1985, p. 69. 7 A.Hirschman, ‘Exit, Voice, and the State,’ World Politics 31 (1987). 8 S.Gill and D.Law, The Global Political Economy, Baltimore: Johns Hopkins University Press, 1988, p. 92. 9 Ibid. 10 Alfred Stepan specifies the degree of capital mobility into “sunken” and “uncommitted” to measure the relative bargaining power of foreign capital vis-à-vis the host state. See his The State and Society, Princeton: Princeton University Press, 1978, pp. 242–245. 11 I.Anderson, The Standard-Vacuum Oil Company and United States East Asian Policy (1933– 1941), Princeton: Princeton University Press, 1975. 12 Udagawa, ‘Senzen nihon no kigyo keiei to kaijikei kigyo,’ Keiei Shirin 24–1 (1987), p. 23; and Anderson, op. cit., pp. 215, 220. 13 Petroleum Facts and Figures, vol. 5 (1931), p. 133; and Automotive Industries, February 22, 1936, p. 250. 14 Ito Hisao, ‘Jidosha kogyo kakuritsu ni kansuru keika,’ in Jidosha kogyo shinkokai (ed.), Nihon Jidosha kogyoshi gyosei kirokushu, Tokyo: Jidosha Kogyo shinkokai, 1979, pp. 54– 51, 60–61. 15 For the critic of structuralist accounts, see P.Gourevitch, ‘The Second Image Reversed: International Sources of Domestic Politics,’ International Organization 32(1978). 16 The body of literature which takes this view has been growing: for example, Raymond Vernon and Alfred Stepan pointed out sectoral differences between extractive and manufacturing investment in affecting the relative bargaining power of TNCs vis-à-vis states. R.Vernon, ‘The Obsolescing Bargain: A Key Factor in Political Risk,’ in M.Winchester (ed.), The International Essays for Business Decision Makers, vol. 5, Dallas:

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SMU Press, 1980, and Sovereignty at Bay: The Multinational Spread of US Enterprise, New York: Basic Books, 1971; Stepan, op. cit., esp. ch. 7. Within the manufacturing sector, Susan Strange applies a similar approach to argue that international conflict (e.g., protectionism) decreases in sectors where modes of production are by nature international but increases in sectors where production is national, and further increases when national production is laborintensive. See her ‘The Management of Surplus Capacity: Or How Does Theory Stand up to Protectionism 1970s Style?,’ International Organization 33 (1979), pp. 303–334. A more elaborate study incorporating virtually every variable regarded as important with regard to the relative bargaining power of TNCs vis-à-vis host state is found in Stephen Kobrin, who concludes that the relative bargaining power of the state versus TNCs increases in sectors where technology is mature and global integration is limited, whereas it decreases in sectors characterized by changing technologies and the spread of global integration. S.Kobrin, ‘Testing the Bargaining Hypothesis in the Manufacturing Sector in Developing Countries,’ International Organization 41 (autumn 1987); and Ellis Krauss and Simon Reich characterized divergent US trade policies by examining the relationship between types of sectors and their national competitiveness. E.Krauss and S.Reich, ‘Ideology, Interest, and the American Executive: Toward a Theory of Foreign Competition and Manufacturing Trade Policy,’ International Organization 46 (autumn 1992). A more recent account is provided by D.Michael Shaffer. He tried to explain four different types of economic activity (mining, industrial plantation crop production, peasant cash crop production, and light manufacturing) by a combination of four sectoral variables (capital intensity, economies of scale, production flexibility, and asset/factor flexibility). See D.M.Shaffer, Winners and Losers: How Sectors Shape the Developmental Prospects of States, Ithaca: Cornell University Press, 1994. 17 P.Katzenstein, ‘Research Design: Comparative Analysis of Economic and Foreign Economic Policies of Advanced Industrial States,’ unpublished manuscript (1977). 18 A good summary of state ownership in the energy sector in Europe is found in R.Samuels, The Business of the Japanese State: Energy Markets in Comparative and Historical Perspective, Ithaca: Cornell University Press, 1987, ch. 2. 19 Vernon, op. cit., 1971; and C.Bergsten, T.Horst, and T.Moran, American Multinationals and American Interests, Washington: The Brookings Institution Press, 1978. 20 Katzenstein, op. cit., 1977, p. 15. 21 See Boyce to SeeState, June 8, 1937, RG59.894.791/36; and Boyce to SeeState, December 13, 1937, RG59.894.797/38. Furthermore, for Japan, as in the case of oil refining, the supply of raw material (that is, iron and steel) had been the crucial constraints on auto manufacturing. Chang (1981, p. 33) points out that one of the biggest causes of the deterioration of auto production between 1939 and 1945 was the scarcity of raw materials— particularly the lack of steel was the most decisive factor. In this connection note that, in the mid-1930s, Japan became the world’s largest importer of pig- and scrap iron. See Ishii Kanji, ‘Kokusai kankei,’ in Oishi Kaichiro (ed.), Nihon teikoku shugi-shi II, Tokyo: Tokyo daigaku shuppankai, 1987, p. 63. 22 S.Kobrin, op. cit., autumn 1987. 23 Ibid., p. 614. 24 For example, Hashimoto Juro and Takeda Haruhito (eds), Nihonkeizai no hatten to kigyoshudan, Tokyo: Tokyo daigaku shuppankai, 1992. 25 See Kawabe Nobuo, Sogo shosha no kenkyu, Tokyo: Jitsugyo shobo, 1982, pp. 52–75. 26 See Udagawa Masaru, ‘Nissan zaibatsu no jidosha sangyo shinshutsu ni tsuite (1),’ Keiei shirin 13–4 (1977), pp. 93–109. 27 Japan Adviser (November 3, 1935), and Nihon jidosha kogyo shiko 3, p. 35. 28 J.P.Nettl, ‘The State as Conceptual Variable,’ World Politics 20 (July 1968); and P.Evans, D.Rueschmayer, and T.Skocpol (eds), Bringing the State Back In, Cambridge: Cambridge University Press, 1985. 29 T.Skocpol, States and Revolution, Cambridge: Cambridge University Press, 1979.

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30 The “institutional approach” claimed by G.John Ikenberry, David Lake, and Michael Mastanduno furthers this line of reasoning. Their research appreciates the role of the state’s institutional structures in mediating societal and international forces and focuses on particular institutional interactions which link state and society. G.Ikenberry et al. (eds), ‘The State and American Foreign Policy,’ International Organization 42 (winter 1988). See also J.March and J. Olsen, ‘The New Institutionalism: Organizational Factors in Political Life,’ American Political Science Review 78 (September 1984). 31 Johnson, op. cit., p. 24. 32 Ibid. 33 Ibid., p. 267. 34 M.Okuno-Fujiwara, ‘Industrial Policy in Japan: A Political Economy View,’ in P.Krugman (ed.), Trade with Japan: Has the Door Opened Wider? Chicago: University of Chicago Press, 1991, p. 272. See also B.Hindley, ‘Empty Economics in the Case for Industrial Policy,’ World Economy (September 1984), pp. 211–294; P.Krugman, ‘Is Free Trade Passé?,’ Journal of Economic Perspectives 1 (fall 1987), pp. 131–144; R. Baldwin, ‘The Political Economy of Trade Policy,’ Journal of Economic Perspectives 3 (fall 1989), pp. 119–135; R. McCulloch, The Optimality of Free Trade: Science or Religion?’ Paper Presented at the Annual Meeting of the American Economic Association, January 1992; H.Odagiri, Growth through Competition, Competition through Growth, New York: Clarendon Press, 1992; and M.Mussa, ‘Making the Practical Case for Freer Trade.’ Paper Presented at the Annual Meeting of the American Economic Association, January 1993. 35 As Michael Mann notes, “despotic” states relying on the threat of physical force (i.e., the absolutist French state) were weaker than “infrastructural” states (i.e., their British counterpart) which provide infrastructural services for society, such as skills, literacy, communicative facilities, and protection. The state derives power from the needs of society by performing certain tasks. State power is not separate from the private sector, nor does the state necessarily oppose the policy agendas set by the latter. M.Mann, Sources of Social Power (2 vols), Cambridge: Cambridge University Press, 1986/1993. 36 J.Hall and G.Ikenberry, The State, Minneapolis: University of Minneapolis Press, 1989, p. 95. 37 P.Gourevitch, Politics in Hard Times, Ithaca: Cornell University Press, 1986, p. 238. 38 R.Samuels, The Business of the Japanese State, Ithaca: Cornell University Press, 1987. 39 Ibid., p. 261. To Samuels, “surrender jurisdiction” and “retain control” mean that, understanding the imperfection inherent in the market, the private agents invite state intervention thereby letting the state set constrains on the territory where the private prerogative of resource allocation had been exercised (i.e., the market), but they exercise authority on determining those constraints by penetrating and negotiating with the state. 40 There are a variety of accounts that acknowledge the central role of the Japanese state in the policy-making process, but at the same time the private sector established a stable institutional link with the state decision-making structure. The consequence of which yields relatively predictable degrees of policy outcome. For example, Sone Yasunori, ‘Nihon no seisaku keiseiron no henka,’ in Nakano Minoru (ed.), Nihon-kara seisaku kettei no henyo, Tokyo: Tokyo daigaku shuppankai, 1981, pp. 301–319; Inoguchi Takashi, Gendai Nihon seiji keizai no kozu, Tokyo: Toyokeizai shimposha, 1983; Murakami Yasusuke, Shin chukan taishu no jidai, Tokyo: Chuokoronsha, 1983; Sato Seizaburo and Matsuzaki Tetsuhisa, Jiminto seiken, Tokyo: Chuokoronsha, 1985; M.Muramatsu and E.Krauss, ‘The Conservative Party Line and the Development of Patterned Pluralism,’ in K.Yamamura and Y.Yasuba (eds), The Political Economy in Japan /, Stanford: Stanford University Press, 1987, pp. 516–554; and David Friedman, The Misunderstood Miracle, Ithaca: Cornell University Press, 1988. 41 The pluralist theory of state follows this line of thought: the state is identified as neutral ground, providing an arena for the competition among societal groups and individuals; and

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public policy decisions are understood to be allocations of benefits among them. For the pluralist theory, see A.Bentley, The Process of Government, New York: Knopf, 1980; E.E.Schattschneider, The Semi-sovereign People, New York: Rinehart & Winston, 1960; Theodore Lowi, ‘American Business, Public Policy: Case Studies and Political Theory,’ World Politics 16 (1964). 42 Marxist theory claims that under capitalism the capitalist class has the causal power over the state, and thus the state must represent and protect the essential claims of the capitalist class. The power of capital structurally constrains the state’s effective power to realize its goals, because altering the nature of political forces is a characteristic of the capitalist system, not of the occupants of governmental positions or the winners of elections. Neo-Marxists, most prominently Poulantzas, assert that, although autonomy is given to the state, it is “relative” in that while the state may have its own goals distinct from societal ones, it remains constrained by interests of the capitalist class: since the level of economic activities is dependent on capitalists’ investment decisions, the state will not pursue policies that will severely discourage the rate of investment by undermining business confidence. In other words, capitalists have a veto power over state policies in that their failure to invest at adequate levels can create major political problems for state managers. For discussion of the capitalist state, see B.Jessop, State Theory: Putting Capitalist States in Their Place, University Park: Pennsylvania, State University Press, 1990; and Clyde Barrow, Critical Theories of the State, Madison: University of Wisconsin Press, 1993. 43 R.Samuels, The Business of the Japanese State, Ithaca: Cornell University Press, 1987, p. 2. 44 See Gregory Nowell, Mercantile States and the World Oil Cartel, 1900–1939, Ithaca: Cornell University Press, 1994. 45 Samuels, op. cit., p. 2. 46 J.Ramseyer and F.Rosenbluth, The Politics of Oligarchy: Institutional Choice in Imperial Japan, Cambridge: Cambridge University Press, 1995. 47 Ibid., p. 59. However, they do not clearly present evidence concerning whether politicians had an actual veto power over the promotion of bureaucratic career and how they exercised it. The only data provided is the statistical evidence that bureaucratic career change correlated with changes in the parties governing the cabinets. And yet, the two were correlated but not causally related. 48 Despite Ramseyer and Rosenbluth’s claim that the military substituted for politicians as a principal, no post-1932 account is provided to back up that claim. Their analysis of imperial Japan had stopped by 1932 when the parties were out of power. 49 Their post equivalent is Japan’s Political Marketplace, Cambridge: Cambridge University Press, 1993. 50 R.Dahl, ‘The Concept of Power,’ Behavioral Science 2 (1957), pp. 201–205; and also Who Governs?, New Haven: Yale University Press, 1961. 51 S.Lukes, Power: A Radical View, London: Macmillan, 1974. 52 Ibid., p. 24. 53 This is how Peter Bachrach and Melton Baratz conceptualized power. “Power is also exercised when A devotes his energies to creating or reinforcing social and political values and institutional practices that limit the scope of the political process to public consideration of only those issues which are comparatively innocuous to A.” P.Bachrach and M.Baratz, Power and Poverty, New York: Oxford University Press, 1970, p. 4. 54 G.Ikenberry, Reasons of State, Ithaca: Cornell University Press, 1988, p. 204. 55 Ikenberry, ‘State Structure and the Politics of Adjustment,’ Ph.D. Dissertation, Department of Political Science, The University of Chicago (1985), p. 424. 56 The strongest state may be the one that does not seem to exercise power (i.e., no intervention) while achieving whatever it wants. 57 Ikenberry, op. cit., p. 206.

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58 C.Tilly, ‘War Making and State Making Organized Crime,’ in P.Evans et al. (eds), Bringing the State Back In, Cambridge: Cambridge University Press, 1985, pp. 169–191; P.Gourevitch, Politics in Hard Times, Ithaca: Cornell University Press, 1986; M.Mann, Sources of Social Power, vols 1 & 2, Cambridge: Cambridge University Press, 1986, 1993; and J.Hall and G.Ikenberry, The State, New York: Taylor & Francis, 1989. 59 For example, the security dilemma (the emergence of Soviet Russia as Japan’s greatest enemy) and economic hardship (the Great Depression) at the systemic level may have provided a strong motivation for some states like Japan to pursue a radical course of action, but these international opportunity structures were not in themselves sufficient to make her act that way: they only provided the range of opportunity. 60 S.Lukes, ‘Power and Structure,’ in his Essays in Social Theory, New York: Columbia University Press, 1977, p. 11. 61 Although what was structurally constraining means that agents act within structurally determined (closed) limits, they nonetheless have a certain autonomy and could have acted differently. 62 Also, what was structurally constraining for some states was not so for others at the same period of time. For example, under the Great Depression, Britain’s Labor government was, despite opportunities open to it, unable to rise to the demands of that time (i.e., breaking with economic orthodoxy or de facto foreign policy), but at the same time, the alleged success of its German counterpart implies that, under similar constraints, the British could have acted differently. 63 One of the earliest illustrations is D.Landes, ‘Japan and Europe: Contrasts in Industrialization,’ in W.Lockwood (ed.), The State and Economic Enterprise in Japan, Princeton: Princeton University Press, 1965. See also some of the recent essays including Davis Williams, Japan: Beyond the End of History, London: Routledge, 1993, ch. 10; and P.Anderson, ‘The Prussia of the East?,’ in M.Miyoshi and H.D.Harootunian (eds), Japan in the World, Durham: Duke University Press, 1993, pp. 31–40. 64 K.Pyle, ‘Advantages of Followership: German Economics and Japanese Bureaucrats, 1890– 1925,’ Journal of Japanese Studies 1 (autumn 1914). 65 See J.Bartholomew, The Formation of Science in Japan, New Haven: Yale University Press, 1989, p. 71. 66 ‘Introduction,’ by T.Bottomore in R.Hilferding, in Finance Capital, London: Routledge, 1985, p. 5. 67 H.Wehler, The German Empire, Providence: Berg, 1985, p. 43. 68 For example, Okazaki Tetsuji and Okuno Masahiro, Gendai nihon keizai shisutemu no genryu, Tokyo: Nihonkeizai shimbunsha, 1993. 69 The case of the German oil industry was not included, since we see no significant institutional adjustments made to protect the industry there. What Germans focused on instead was the systematic encouragement of the development of alternative energy (i.e., synthetic oil). 70 It is slightly controversial to argue that the “taishusha” project was a copy of the “Volkswagen” project. The rise of the two projects was almost synchronous; that is, spring 1934. Some may claim that the “taishusha” project was basically a revision of the earlier “hyojunsha,” that is, the standard model project. 71 S.Reich, The Fruits of Fascism, Ithaca: Cornell University Press, 1990. 72 Ibid., pp. 151–152; see also R.Overy, The Nazi Economic Recovery, 1932–1938, Cambridge: Cambridge University Press, 1982. 73 Reich described this situation as follows: “The enormous costs involved in designing the car and constructing the plant; the potential loss involved, at least in the first few years of production; and the state of the world economy all made the project economically unattractive to the private sector. The impediments to success were so great that only state

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actors with a political motivation would have embarked on the project.” Reich, op. cit., p. 154. 74 Ibid., pp. 110–123. 75 Ibid., p. 151. 76 Overy, op. cit. 77 G.Nowell, Mercantile States and the World Oil Cartel (1900–1939), Ithaca: Cornell University Press, 1994, p. 48. 78 Ibid., p. 73. 79 Ibid., p. 218. 80 Nippon sekiyu kabushiki kaisha hishoka, Furansu no sekiyugyo-ho to sono koka (1934), pp. 22–23. 81 Reminder: the French used it to enforce the oil stockpiling requirement; Italian fascists used it to kick the Americans out; and cartels originally used for depression measures in Germany were introduced in Japan to protect domestic industry from encroachment by foreign goods and investment.

7 Conclusion 1 Judith Goldstein and Robert Keohane argue that ideas serve as “focal points that define cooperative solutions or as coalitional glue” to alleviate coordination problems. J.Goldstein and R.Keohane, ‘Ideas and Foreign Policy,’ in idem, Ideas and Foreign Policy: Beliefs, Institutions, and Political Change, Ithaca: Cornell University Press, 1993, p. 12. 2 Note that those aberration years, in fact, recorded the highest growth rate in modern Japanese history. 3 Somucho, Kisei kanwa sushin no genkyo, Tokyo: Kyosei, 1996, pp. 14–17. 4 For example, C.Johnson, MITI and the Japanese Miracle, Stanford: Stanford University Press, 1982; R.Samuels, The Business of the Japanese State, Ithaca: Cornell University Press, 1987, and idem, Rich Nation, Strong Army, Ithaca: Cornell University Press, 1994; J.Dower, ‘The Useful War,’ and idem, Japan in War and Peace, New York: New Press, 1994; B.Gao, Economic Ideology and Japanese Industrial Policy, Cambridge: Cambridge University Press, 1997. 5 For example, Okazaki Tetsuji and Okuno Masahiro, Gendai nihon keizai shisutemu no genryu, Tokyo: Nihonkeizai shimbunsha, 1993; and Noguchi Yukio, 1940-nen taisei, Tokyo: Toyozeizai shimposha, 1995. 6 This wartime system consists of (1) economic planning, (2) corporations made up by lifetime employment, a seniority-based wage system, corporate unionism, (3) indirect financing, and (4) a social policy-type land system. 7 See Johnson’s postwar account, especially on Sahashi Shigeru, in op. cit. 8 We know that technologies are constantly being born as well as constantly dying. Some think that Japan is making the only large surplus in the world, and maintaining domestic output and employment at the expense of other countries whose external deficits are growing. That is, the structural characteristics of the Japanese market are the pivotal factor in the US’s general decline in economic power. For example, E.Lincoln, Japan’s Unequal Trade, Washington: The Brookings Institution Press, 1990. 9 The former view is represented by L.Tyson, Who’s Bashing Whom?, Washington: Institute for International Economics, 1992. For the latter, see K.Wolferen, Enigma of Japanese Power, New York: Knopf, 1989. 10 Some argue that the differences were not critical and, in fact, they are already declining substantially, i.e., I.Destler, American Trade Politics, Washington: Institute for International

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Economics, 1992. From this view, the Japanese have supported many aspects of the US’s Structural Impediments Initiative (SII) by responding to amend its distribution system, strengthen its anti-trust capability, and relax the taxation of land. On the other hand, US firms have adopted Japanese management practices such as just-in-time inventory practices. Even some began to copy the much-maligned keiretsu system. See C.Fred Bergsten ten and Marcus Noland, Reconcilable Differences?, Washington: Institute for International Economics, 1993, p. 10. Regarding the policy prescription, mild pessimists propose a comprehensive effort to resolve the conflict by initiating major changes in macroeconomic, structural, trade, and international economic policies in both countries whereas hard-liners propose some form of “result-oriented” managed trade which, paradoxically, is likely to cause a market with more state control. See Tyson, op. cit. However, Lawrence warns that result-oriented approaches might increase US exports and the profits of some US firms, but they are unlikely to open up the Japanese market in the crucial sense of making it genuinely contestable by foreigners because it is likely to be under state and corporate control. See R.Lawrence, ‘How Open is Japan?,’ in P.Krugman (ed.), Trade With Japan, Chicago: University of Chicago Press, 1991, p. 35. 11 A.Hirschman, National Power and the Structure of Foreign Trade, Princeton: Princeton University Press, 1948. 12 This is exactly the demand that US and Asian countries have made recently for Japan in the context of Asian financial crisis. 13 Murakami Yasusuke, Hangoten no seijikeizaigaku (2 vols), Tokyo: Chuokoronsha, 1995.

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Index

Army Pamphlet 38 autarkic empire 42 autarky 20, 28, 38, 95 Automobile Industry Law (AIL) 11, 87, 102–8, 125, 128, 137, 142 Ayukawa, Yoshisuke 86, 92–4, 103–19 balance-of-payment problem 33, 58, 83 breathing space 7, 9, 27–8, 128 bureaucratic politics 11, 143 Cabinet Investigative Bureau 37 California oil 68, 73 Carey, Henry Charles 18–19 cartel: cartelization 24, 35, 76, 142; in general 25, 27, 76, 133–4; markets and 13; mergers and 2, 87, 141 class conflict 38 coalition politics 10 Commerce and Industry Deliberation Council 54 Committee for Promotion of Domestic Industry 84 Committee to Decide on a Domestic Vehicle Model 87 control association 134 controlled competition 88 currency dumping 32 Datsun 86 deregulation 1 developmental state 3, 121 developmentalism 15 domestic-foreign (naigai) cartel 46 Dore, Ronald 6 Dower, John 12 Economic Investigative Council 32

Index

168

economic liberalism 18 Economic Planning Board 42 economic regulation 36 elective affinity 19 embargo 73 Energy Roundtable 145 enterprise groups 12 esprit de corps 5 excess competition 25, 145 export-oriented industrialization 144 Ford 11; business in Japan 77–120 foreign direct investment (FDI) 2 foreign investment 26–9, 31, 110 Fuel Investigation Committee 48–9, 52, 54, 58, 61, 125 Fuel Problem Special Committee 54, 61 fukoku kyohei 16–17, 24 Fukuzawa, Yukichi 17–18, 21, 143 gaiatsu 16 Gerschenkron, Alexander 4 Gerschenkronian: approach 6–7, 121, 133 globalization 146 GM 11; business in Japan 77–120 gradualism 41 grand joint firm 51 grand merger 46 Great Depression 53–4, 57 harmful war 6 Hirschman, Albert 116, 147 Hornbeck, Stanley 71–2 Important Industry Association Decree 134 Important Industry Control Law (IICL) 35, 41, 55, 57, 76 industrial bank 24 industrial governance: Japan and 1–4, 8, 13 industrial policy: Japan and 1–4, 8–9, 23, 32, 76–7, 128, 141 industrial restructuring 2, 23, 90, 135, 145 infant-industry protection 36–7, 111 inside-out approach 2 Interministerial Committee on Liquid Fuel Problems 57 Interministerial Committee Regarding the Promotion of the Automobile Industry 88 Investigative Council for Petroleum Policy 47 Ishiwara, Kanji 9, 37, 143

Index

169

Ito, Hirobumi 22 Japan, Inc. 113 Japanese Automobile Industry Cartel 107 Japanization 60, 91 Johnson, Chalmers 3, 6, 113, 141 joint ventures 40, 41, 60; Nissan and GM 86–121 Kaishinsha 81 Katzenstein, Peter 118 Kishi, Nobusuke: autopolicy and 91–6; economic bureaucrat and 132 Kita, Ikki 37, 143 Kogane, Yoshiteru 94 kogyo iken 24 Koiso, Kuniaki 37 Konoe, Fumimaro 9, 37, 95, 143 Kopf, Benjamin 104, 105 Kurusu, Saburo 40, 60, 62 laissez faire 18, 20 late development 4 late-developer problem 4 liberalization 28, 145 licensing: automobile and 93, 104–5, 109–25; emergence 36–8; Europe and 140; in general 1–4, 9, 13, 41–2; Germany and 134; Italy and 137; petroleum and 44, 51, 58, 62, 75; present day and 144–5, 147 List, Friedrich 19 localization 80 Lockwood, William 5 Lukes, Steven 127 Maeda, Masana 24–5 Manchurian Clique 95 Manchurian Incident 53, 56, 87 Marx, Karl 19 mass production 58, 79, 88 Meiji oligarchs 15 Mercantilism: 3, 9, 13, 15, 18, 143; autarky-oriented mercantilism 9, 13, 42, 58–62, 76, 89–92, 143; ideas 15, 19–20; ideology 20, 27;

Index

170

Listian mercantilism 132, 134, 146; trade-oriented mercantilism 9, 13, 41, 58–62, 76, 89–92, 143 Military Motor Vehicle Investigation Committee 81 Military Vehicle Subsidy Law 81 MNCs 116 motorized war 47 movable wealth 116 multinationals 2, 28, 31, 115, 137, 139 Murakami, Yasusuke 6, 147 Nagata, Tetsuzan 37 nation building by export 21 national autonomy 59 national defense state 12, 38 National Mobilization Law 42 nationalization 39, 58 Navigation Acts 21 Nazi state 135–6 neo-realist theory 114 new economic car 87 Nippon Oil 45–74, 124–7 Nissan 77, 86–109, 125–38 Nissan-GM deal 93 Norman, E.H. 4, 5, 12–13 Okubo, Toshimichi 16–27, 143 opportunity structure 8, 28, 100, 130–31 outside-in approach 2 parts industry 77 people’s car 87–91, 124, 135 Petroleum Industry Law (PIL) 11, 43, 52–4, 61–76, 89, 100–42 Polanyi, Karl 7–8, 142 power-sharing 3, 13, 126–8, 142 principal-agent theory 125 protectionism 19, 22, 42, 72, 100, 110 protectionist policies 19 rationalization 54–9, 84–7, 132 reform bureaucrats 95 regulated open door 41 relative-gains 21, 41 Rising Sun 43–74, 115–16 Royal Dutch-Shell 26 Russian Revolution 38 Saigo, Takamori 16 sectoral approach 118 self-sufficiency 39 Seven Sisters 64–5

Index

171

Shell 11 Shidehara diplomacy 34 shokusan kogyo 23, 25 Silberman, Bernard 9 six-month stockpiling requirement 71–6 smart state 122 social regulation 36 sonno joi 16 spatial change 7 Standard 26 Standard Model 83–5 Standard-Vacuum (Stanvac) 11, 43, 63 Stanley, Hornbook 102 Stanvac (Standard-Vacuum) 55–74, 115–16 state monopoly 59 state-centered ideology 3 state-firm relationship 3 subcontracting 86 Takahashi, Korekiyo 9, 39–40, 90–3, 143 Takuri 79 Temporary Industrial Investigation Bureau 32 Temporary Industrial Rationalization Bureau 35 Temporary Investigative Council of Finance and Economy 33 Tokugawa period 36 total war 6, 37, 132 total war ideas 3 Toyoda, Kiichiro 94, 107 Toyoda, Sakichi 86, 92 Toyota 77–109, 124–38 translative power 130 transwar history 12 unequal treaties 13, 22, 25, 27 unfair trade 146 useful war 6 US-Japan Commercial Treaty 94 Vermon, Raymond 67 Volkswagen 135–6 Volkswagen protect 94 wartime economy 7 wartime mobilization 6 Washington Conference 30 Washington System 9, 131 web: with no spider 5 world-system theory 115

Index

172

Yoshino, Shinji 9, 35–6, 40, 54, 60, 91, 132, 143, 145 zaibatsu 53, 58, 86, 89, 93, 124