The Role of Competition in Industrial History of Japan

Japan has the most outstanding industrial development among Asian countries. It can be compared to the development in many big countries such as Germany, Britain, France and United States. However, the development of industry in Japan has its own uniqueness. Japan industrial development was mainly caused by its decision of not to be intruded by Western. In order to do that, Japan realized that they had to be more Western.

When speaking about the industrial history of Japan, one of the most important things to be considered is the role of competition. The competition has become aroused especially in the postwar era of Japan.

In a market economy, as commonly acknowledged, there should be individual freedom, and an acceptable economic performance could be reached by market mechanism which adjusts individual activities. Consequently, government should put into practice policies which encourage competition among companies to improve the benefit for consumers, in this case all the citizens.

However, in contrast to the above statement, the postwar Japan industrial policy tends to be in that of controlled economy, rather than to a more competitive market economy. This is where the Ministry of International Trade and Industry (MITI) had the key points on how the Japan industrial development become. The policy was that of catch-up type which was regarded to be important to become more competitive internationally against western countries. For most of the post-war era, the principal goal of Japan’s economic policy has been development and growth, and free competition has sometimes been seen as inconsistent with that goal.

The policies are based on the opinion that: (1) the production must be given first priority, and (2) the fruitless competition should be excluded. These postwar policies were carried out under the recognition; that is (1) the improvement of productivity in all industrial fields resulting in an improved standard of living; (2) for this purpose, collaboration of people is necessary and it is essential to equally deliver the obtained result to them2. Competition policy has been treated as a species of regulation, not an organizing principle for the economy. Even though there was Antimonopoly Act since 1947, it had not been enforced strictly. According to the above statements, the main type of postwar industrial policies is either competition-restrictive or cooperation-oriented.

According to Prof. Takako Ishihara of Hyogo University, the role of competition in the history of industrialization of Japan can be mainly divided into 3 phases, (1) the policies that attempt to protect and promote the key industries from the late 1940s to 1950s, (2) the industrial reorganization policies dealt with the trade and capital liberalization in 1960s, and (3) the industrial adjustment policies in 1970s.

The first phase is a phase where there was consideration on the protection and promotion of basic or strategic industries. From 1946 to 1948, the “priority production system” was carried out in order to promote steel and coal mining industries. The allocation of the limited government capital, foreign-currency holdings and imported raw materials for both industries was given top priority in those days to make a foothold of Japan’s postwar recovery in economy and industry. In the 1950s, the protection and promotion to key industries was effected with preferential measures on the tax system and the special financing by the Japan Development Bank aimed at key industries (the steel, coal mining, shipbuilding, electric power industries, and so on). The industries with potential growth (the synthetic fibers, plastic, petroleum refining, petrochemical and electronics industries, and so on) were also subjects for protection and promotion. Then, in 1956, the Law on Extraordinary Measures for the Promotion of Machine Industry was legislated.

This law was legislated as a temporary statute for 5 years but it was prolonged two times afterward. It has been enforced for 15 years. This implement was based on the idea that rationalization is required in the machine parts industry, mainly consisting of small businesses, in order to strengthen the industrial basis like the automobile and the machining tools industries. Furthermore, in those ages, the Antimonopoly Act was amended to relax. Especially, the amendment in 1953 permitted the two types of cartel: rationalization cartel and depression cartel. In this respect, it is also recognized that the government in those days intended to eliminate fruitless or excessive competition. The priority production system aimed at the entirety of steel and coal mining industries for protection and promotion, but in the industry rationalization policy and the protection and promotion measures in the 1950s, the superior enterprise in the said industries became the subject of preferential measures.

The second phase is the policies in 1960s. As the competition with foreign enterprises became the real issue, the opinion that “we must strengthen the international competitiveness by eliminating the domestic excessive competition and enlarging size of business” became more powerful, and then industrial reorganization was attempted by promoting mergers. Actually, big mergers occurred in the 1960s. There is no doubt that the merger supporting measures by the government really promoted mergers, but it is interesting that the private enterprises had reluctance in accepting the way of government leading style. This is nothing else but the appearance of this fact, which the Bill on Extraordinary Measures for the Promotion of Specific Industry was discarded. It is also a good example that the consolidation plan for automobile manufacturers by MITI failed after all. Moreover, for strategic industries such as the automobile industry and the computer related fields, the protective trade measure was taken in order to strengthen the international competitiveness. These industries show outstanding growth afterward, but one influential opinion is that the success owes not to the protective trade measures themselves but to their being “time-bound.” To sum up, the threat of facing the competition with foreign enterprises in the near future gave a strong incentive to domestic enterprises to improve efficiency; as a result, they could strengthen their competitiveness.

Finally, the third phase is the adjustment policies for the declining industries after the oil crisis. Entering 1970s, the period of low growth, it was the subject of policy to protect the industries, which had lead to excessive production capacity and fell into a structural recession where the reconstruction seemed extremely difficult. The Law on Extraordinary Measures for the Stabilization of Specific Industry enacted in 1978 had an intention to assist these structural recession industries in renovating old facilities and scrapping the excessive facilities. As the Law became a time limited, the Law on Extraordinary Measures for the Structural Improvement of Specific Industry was legislated in 1983 instead, which was continuously to progress the adjustment support policies for these industries.

Competition policy in Japan has been treated as a species of regulation, not an organizing principle for the economy. Competition policy was assigned to a separate agency, which was Fair Trade Commission, independent of the government but politically not strong enough to promote its policies effectively, while the ministries that regulate industry and investment, and that have historically encouraged non-competitive practices, were more powerful. Japan’s economic success now makes it possible, indeed imperative, to shift policy goals from “catch-up” development to consumer welfare. The competition agency is responding to this change by redirecting its own efforts, to concentrate on practices that impair efficient markets3.

Competition enforcement was on the rise again in the 1990s. This revival is mostly caused by pressure from abroad, just like the original competition law itself. This time, it was claimed, in trade disputes with the US, that lax competition law enforcement gave Japanese firms unfair trading advantages while tolerating restraints on competitive imports. Whatever the merit of those claims, the response from Japan was a number of explicit commitments to increase the resources and the visibility of competition enforcement. Many of these represented changes that the FTC had long been advocating. The FTC was an object and active participant in the negotiations. At their conclusion, the Japanese government committed to increasing enforcement against exclusionary cartels, to greater reliance on more formal, public methods of enforcement, and prosecutions, and to increasing attention to competition issues in the distribution system and in inter-corporate keiretsu groups. The FTC has increased its formal enforcement activity, strengthened its guidelines about horizontal and vertical issues, modernized its merger standards, added to its staff and budget, and raised its profile in advising about competition issues at other ministries.

Despite the recent successes, competition policy remains an awkward import into Japan’s business and government culture, and its long-term status remains uncertain. A recent analysis by Japanese and British scholars describes the FTC as “a unique and vulnerable agency administering deeply unpopular laws based on a widely rejected model of market competition,” playing an “ambiguous and difficult” role, with a “huge gap” between its theoretical powers and its actual practice. The gap is closing, but “the renaissance of competition policy in Japan is recent, partial, and far from fully secure.”

References:

1 Iyori, H. and Uesugi, A. (1994), The Antimonopoly Laws and Policies of Japan, New York, pp. 30-52.

2 Noguchi, Y. (1995) 1940 nen Taisei (The 1940’s System), Toyo Keizai Sinpo-sha, Tokyo,

Japan.

3 OECD Review, Regulatory Reform in Japan: The Role of Competition Policy in Regulatory Reform, July, 23, 1999

4 Sanekata, K. and Wilks, S. (1996), “The Fair Trade Commission and the Enforcement of Competition Policy in Japan,” in Comparative Competition Policy: National Institutions in a Global Market, G. B. Doern and S. Wilks, ed., pp. 102, Oxford.