Forget the Third Arrow and Behold the Old World Order (a journey into the depths of Japan Inc.)
This book’s commentary demonstrates: i) the consequences of historic protectionist trade policies and isolationism on Japan’s current economy; ii) the factors which contribute to the self-perpetuating nature of a system which frustrates reform; iii) the resurgence of a strong nationalism; iv) the enduring relationship between government and business and v) an understanding of the similarities with other non-market driven economies where government and business links are intertwined. The book also allows readers to draw parallels between the experience of Japan following the 1990 Financial Crisis and events in the West since 2008.
Prior to entering Japan Inc. at the height of the asset-inflated bubble in 1988, I had lived in Japan during two significant periods; the Vietnam War, directly after the abolition of the gold standard and during the first oil crisis when the Ministry of International Trade and Industry (MITI) restructured its industrial policy to focus on high-tech industries and nuclear energy. Readers will first journey with me and the Japanese through Japan’s post-war political economic development as I adapt to the socio-political society. These experiences enabled me to enter the innards of the political economy.
My employment in the private sector and government agencies allowed an intimate view of corporate Japan and government agencies during the two “lost decades.” By 1996 I was convinced that Japan Inc. was suffering from systemic failure and that, contrary to assurances from the Japanese government, Japan’s economy would not recover from the impacts of the bursting of the asset-inflated bubble in 1990. I predicted a prolonged recession and that, owing to continuous political turmoil and the ministries’ tight control over industrial production and domestic markets, the government would not succeed in implementing structural reforms. Structural reforms and the deregulation of markets would be more image than substance. In other words, there would be little change and, as importantly, the political environment would move backwards towards a version of the pre- World War II model.
During my employment in Japanese corporations and government agencies in the late 1980s and 1990s I was frequently asked by Japanese how I was able to be in positions deemed appropriate for Japanese. My rote answer was that my skills met the specific requirements of the positions. When western journalists and business owners asked how I was treated as a female staff I replied that their question would best be posed to Japanese female staff because I was trying to emphasize that my experiences were substantially similar to Japanese employees. However, the same questions still persist.
Surprisingly, I was never asked the most important questions; what did I see and what was I exposed to while I was working in Japanese private and public sector corporations. What I was exposed to was the consequence of years of concentrated effort to expand my responsibilities and build interpersonal networks in the corporations.
Until recently, the overwhelming consensus among the international business community, the IMF and the OECD was that the Japan Inc. model had propelled Japan’s post-war success in the global marketplace and that after the bursting of the asset-inflated bubble in 1989 the government would take measures to deregulate markets and initiate fiscal reforms in order to stimulate a floundering economy.
However, what I WAS experiencing from 1990 onward was the steady deterioration of the world’s second largest economy because of the insularity and the rigidity of the Japan Inc system. No one inside or outside Japan seemed to recognize the seriousness of Japan’s postponement of structural reforms and the failed attempts by government to correct its recessive economy. Furthermore, the United States was actively involved in the support of the post-war system because Japan was its key ally in the Pacific and the location for its numerous military bases.
Nevertheless, the image of success breeds success and the Japanese elite government officials and business owners, basking in these images, remained over-confident and complacent despite the financial crisis and the politicians’ inability to reach a consensus on policies that would bring about fiscal consolidation. Japan was locked in a system which was rigid and inward and nothing significant in the political economic system would change because the very rigidity of the system prevented the accommodation to rapidly changing needs on the home front and weakened the country’s ability to withstand both internal and external crises.
My work in big business and government agencies made me privy to a Japan Inc. which was very different to what I had experienced while living in Japan for seven years before entering a Japanese company. I was fluent in Japanese and comfortably integrated in the Japanese political society as a foreigner, or at least, I thought so.
In the summer of 2001 I was conducting a programme for Japanese small and medium-size business owners at Hofstra University located in Long Island, New York. One of the participants was a Japanese woman who had been sent by an affiliate of Nippon Telephone and Telegraph (NTT), a huge corporation managed by the former Ministry of Post and Telecommunications. Although NTT was in the process of privatization, the government owned one-third of equity in the holding company. Several years earlier after graduating from a university in Tokyo, the woman entered the company’s Strategy Division. She confided to me that she had never really known her own society until she had entered a Japanese corporation.
I presumed that as a Japanese who had been raised and educated in Japan she would have adapted quickly to Japanese corporate culture. I had also presumed that having resided in Japan for seven years in circumstances comparable to middle-class Japanese prior to entering a Japanese firm and that having reasonable fluency in the Japanese language would help me to avoid a significant degree of corporate culture shock. However, it was not until I began working for Japanese corporations that I saw Japan Inc. unmasked.
An essential criteria was that I would be the first foreign employee in a conservative Japanese company because I was recognized that foreigners who worked in Japanese firms left because they had experienced what they considered to be discriminatory practices and harassment due to misunderstandings arising from poor communication and ignorance of the Japanese corporate system. On the other hand, Japanese management was reluctant to hire foreigners because they were unable to adapt to regulations thus disrupting the workplace. Mutual misunderstanding was also prompted by cultural differences. Japan was an ultra-conservative and insular society and Japanese corporations operated very differently from western corporations.
Foreigners saw Japan as a ‘westernized’ country and a democracy and anticipated that management would accept them as equal to Japanese staff. What they did not understand was that Japanese corporations were hierarchical and that they would be considered new staff and expected to adhere to instructions from their superiors and abide by corporate etiquette. Many foreigners were frustrated that they were not accepted for their skills and many experienced what they considered to be demeaning treatment.
I hoped to enter a corporation where the staff had no previous exposure to foreign staff and, therefore, few preconceptions. Entering a conservative Japanese company as the first and only western staff would enable me to adapt smoothly to the corporate system without promoting misunderstanding. I did not presume that the Japanese staff would relate to me as a foreigner but I did assume that I could make them comfortable with my presence and integrate in the workplace over a period of time. However, I failed to consider that fluency in the written language could pose other problems which are detailed in the book.
In the Beginning
I lived in circumstance similar to the Japanese middle class. The small Japanese-style homes lacked storage space and freezers were out of the question. Refrigerators were half the size of the American brands and without freezer compartments. Refrigerators with freezer space for ice cream and ice cubes were considered luxury items. There was no central heating or ovens because of high energy costs.
Frugality dominated our budgets with the quality of food taking precedence over the amount on the plate. Imported produce such as oranges, which I had consumed daily in the US and took for granted, were sold at three-times the price and domestic produce could often be as expensive. Shoppers habitually examined domestic products, comparing one piece of fruit or vegetable with another for several minutes before making a purchase. In the 1970s this practice extended to packaged meats and fish. And the import duties made foreign foods too expensive for daily consumption. Although beef imports from Australia and lamb from New Zealand could be sourced, US beef was almost non-existent. I became obsessed with going to markets, not to shop, but to observe consumer buying patterns.
It was difficult to fathom why Japan, having achieved by 1975 the world’s third largest GDP (after the US and the Soviet Union) would continue its mercantile policies and protect domestic markets from foreign competition and why we consumers had to pay premium prices for imported goods. But I gradually began to recognize that in order to stabilize Japan’s economy and to promote rapid economic growth, the US opened its markets to Japanese imports, which the Japanese government took full advantage of while keeping tight control over domestic markets. The government’s policies not only shielded industry from foreign competition but, also, our choice of products which were limited to goods primarily produced in Japan.
The government proselytized that the Japanese language was so difficult that foreigners would be unable to fully understand the intricacies of the Japanese social political system let alone the issues regarding the protection of domestic industry from foreign competition.
It was not until I began working in Japan Inc. that I realized that what was perceived outside Japan as a maze-like distribution system which frustrated entry was not nearly as complex as presented by the Japanese government.
This xenophobic firewall prevented Japanese corporations from accessing foreign corporate strategies and corporate governance, promoting domestic consumption and stimulating competition among domestic producers. Indeed, opening up markets was the key to encouraging structural reforms of a lopsided economy.
I never intended to publish articles or books in order to set the record straight but the data I collected during my employment provided sterling examples of how the 1990 financial crisis impacted the Japanese corporate sector and why the Japanese government would be unable to implement structural reforms. However, I was in a quandary as to release the information without compromising myself or my colleagues.
I concluded that the most effective way to bust the myths about the infallibility of the Japan Inc model that had been perpetuated over the years was to publish books in an academic context to stimulate a realistic understanding of Japan Inc. Nevertheless, I was exceedingly reluctant to embark on an academic career because the process to publishing would require at least four to five years of intense labor. As it turned out, it took fifteen years.
The Academic Route
I succeeded in publishing four academic books after receiving a doctorate at the University of Edinburgh. However, to publish books that were acceptable to the academic community the work had to be placed in the context of existing academic literature. My problem was that relevant academic literature in English or in Japanese simply did not exist. In other words, I was entering virgin territory.
Each book gave a comprehensive analysis of Japan’s political economic landscape at the time of publishing. After publishing the first book Special Corporations and the Bureaucracy: Why Japan Can’t Reform (2003) in which the section “Forecast for Japan: too little too late?” stated: “At the time of writing the forecast for Japan’s future as a global economic power is bleak…”
I sent a copy to the late Chalmers Johnson, a Professor of Political Science at the University of California who was considered the guru of Japanese industrial policy and a China specialist. He wrote the best-sellers MITI and the Japanese Miracle (1979) and Japan Who Governs? (1995). I was immensely grateful when Johnson congratulated me for getting out a book in English about a subject of which there was little writing in English and which was at the “very heart of Japanese government.”
His message made me determined to forge ahead with Why Japan Can’t Reform: Inside the System (2008) which argued again in the conclusion “Too Little Too late: what ministerial policies have wrought” that: “… even if the Japanese initiated structural reform of the administrative system, the reforms would come too late to bring the economy back on track. That prediction still stands.”
The book argued that the Japan Inc. model defied structural reform and frustrated the implementation of economic and social policies that could resolve the problems that had challenged the Japanese for years.
Japan’s Nuclear Crisis: The Routes to Responsibility (2012) assessed the impact of Japan’s 2011 nuclear crisis on the Japanese political economy and defined pertinent political and economic elements intrinsic to the political economy to reveal why the Fukushima nuclear plant was still operating despite numerous problems that had been plaguing the reactors since the 1980s. The book exposed the Ministry of Economy, Trade and Industry-affiliated agencies which have been at the core of the nuclear and electric power industries since the 1950s.
Japan Inc on the Brink: Institutional Corruption and Agency Failure (2015) contended that due to entrenched vested interests in Japan’s political economy and the rigidity of the Japan Inc. model structural reforms and the essential “third arrow” in Abe’s Abenomics would not happen. And as a result, Abenomics was merely a combination of reckless monetary policy and ambiguous fiscal policies which would fail to regenerate Japan’s fragile economy and cut sovereign debt.
My forecasts have proven substantially correct and I now feel that the time is right to share with readers the same information regarding what was transpiring during Japan’s first and second “lost decades” but in a different context. Although the contents in my academic texts may be regarded as exposés of corruption in government and industry, this book is empathetic to the behaviour of the majority of ministry officials and to the views of the Japanese regarding their political society.
The book is tightly drawn with events stated at the beginning referred to in subsequent chapters. Although the book is by no means a personal story, I hope that by incorporating anecdotal materials readers will be able to engage in what was transpiring at the time and to understand that post war Japan’s economic development forged a rigid government and corporate system that was supported by mercantile policies, a system which became Japan’s Achilles Heel by the 1980s.