By Mark J. Ravina, University of Texas
From 1949 to 1971, the Japanese economy boomed. They adopted what has been described as ‘market conforming state interventions’. The goal was to use government protection so that Japanese companies could be ready to compete internationally. The key agency setting those goals was Japan’s Ministry of International Trade and Industry or MITI, which worked with the ministry of Finance, and later with the Economic Planning Agency.
Ministry of International Trade and Industry
MITI’s heyday was in the 1950s and early 1960s when it intervened overtly in the Japanese industry. Its focus during that early stage was on rebuilding Japanese heavy industry. It emphasized shipbuilding, and the production of coal, steel, and electricity.
In that early stage, Japan’s capital markets were extremely underdeveloped. That is to say, if one wanted to grow their business one could go public and sell stock but only to a small number of very cautious, local, institutional investors.
Dependent on Bank Loans
One could also try to float corporate bonds, but with the same challenge. So, Japanese business was highly dependent on bank loans. And that gave the government leverage through government banks, such as the Japan Development Bank.
That leverage was both direct and indirect. First, industries received direct government loans, but government support also worked in the form of tacit loan guarantees. If one of Japan’s development banks supported a project, then private bankers assumed—correctly—the project had government support and that the project wouldn’t go bust. So, they could safely offer private loans, too.
This article comes directly from content in the video series The Rise of Modern Japan. Watch it now, on Wondrium.
Government Loans
This strategy was evident in the case of steel. In 1952, the Ministry of International Trade and Industry calculated how much steel it thought Japanese industry would need, and how much capital that would require.
The estimated cost was ¥42 billion, of which private sector banking could provide about ¥31 billion. So, the government’s newly established Japan Development Bank—which was created to extend flexible, low-interest loans to domestic businesses—pledged to cover the remaining ¥11 billion.
Once it did so, and as it became clear that the government was backing the domestic steel sector, private banks were also eager to lend. So, the net government investment ended up being much smaller than the projected ¥11 billion.
That established a precedent for government loans opening the door for private loans.
Licensing and Import of Foreign Technologies
The Ministry of International Trade and Industry wanted that new money be spent on state-of-the-art technology; specifically, something called the basic oxygen converter.
This steel-production process vastly reduced time and labor requirements. It was first deployed commercially in Austria in 1952, and MITI encouraged Japanese companies to license the technology.
MITI offered special loans for the construction of new steel plants that employed the technology. MITI also had enormous control over the licensing and import of foreign technologies. If the ministry wanted a Japanese company to obtain a foreign technology, it would pressure the foreign patent owner for favorable terms.
It is noteworthy that, had Japanese steel companies been dependent on the stock market—instead of the government—for capital, that investment in imported technology might not have been possible.
Tariff and Regulatory Protection
This would be so because those expensive new plants with expensive foreign technology might have taken years to yield profits. But all that the Japanese banks wanted was a sense that the steel makers wouldn’t default. And since the Japan Development Bank was in on the deal, it was clear the plan had tacit government approval.
In addition, the Japanese government added layers of tariff and regulatory protection to insulate the domestic steel industry from international competition. This made the Japanese steel industry become exceptionally internationally competitive.
Simple Protectionism
Ironically, many Japanese industries that once had been nurtured by the government stopped needing Japanese support, and even began to resent MITI’s meddling.
There are many governments, not just the Japanese, which intervene to nurture or protect domestic industries. Yet, if all it took was simple protectionism, then the US National Wool Act of 1954 would have turned the US mohair industry into a global powerhouse; and French intervention to protect its electronics industry would have led to French dominance of the color television market. But, that did not happen.
In fact, critics argue that policies to protect ‘infant industries’ have the unintended effect of keeping those industries from ever growing up. Fortunately, however, in Japan, the steel industry—and then auto industry, and then the electronics industry—grew up just fine.
Common Questions about Japan’s Ministry of International Trade and Industry
Japan’s Ministry of International Trade and Industry or MITI’s focus during that early stage was on rebuilding Japanese heavy industry. It emphasized shipbuilding, and the production of coal, steel, and electricity.
The Ministry of International Trade and Industry wanted that new money be spent on state-of-the-art technology; specifically, something called the basic oxygen converter.
All that the Japanese banks wanted was a sense that the steel makers wouldn’t default. And since the Japan Development Bank was in on the deal, it was clear the plan had tacit government approval.
