MITI and the Japanese miracle

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It all began with capital liberalization. After Japan had joined the OECD in 1964with more reservations to the OECD's capital liberalization code than any of the sixteen other members except Spain and Portugalthe country seemed to forget that reasonably free movement of capital among the signatory nations was one of the OECD's fundamental goals. However, there were many foreigners who were quick to remind the Japanese that they had agreed to end restrictions on direct foreign investment in the Japanese economy. Japan gained several advantages from membership in the OECD, including greater ease in floating its securities in overseas markets; and it was itself, of course, a major investor in Korea, Taiwan, and Southeast Asia. The slowness of Japanese compliance first came up in May 1965 at the Japanese-American Financial Leaders Conference. Demands that Japan liberalize were made again in July at the Japanese-American Joint Committee on Trade and the Economy, repeated in December at the Business International convention in Tokyo, and repeated again in February 1966 at the OECD itself.

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The very thought of capital liberalization struck terror in the hearts of MITI officials and Japanese industrial leaders. In their view trade liberalization had meant only meeting world competition in terms of products (quality, design, price, and so forth), a level at which Japan had worked out the successful strategy of importing technology from Europe and America, combining it with Japanese labor power, and then offering to the market products that were able to compete profitably with those of other countries. But capital liberalization meant competition at every level of an enterprisein technology, capital resources, managerial skills, and all the rest. The low levels of capitalization of Japanese firms, a consequence of the indirect financing system invented during the capital shortage of the Korean War period, made them easy targets for foreign acquisition. The issue, of course, was nationalistic rather than economicthe belief on the part of some Japanese that the United States had for all intents and purposes "bought" Western Europeand was about to buy Japan, as well.

MITI had long feared that some such catastrophe might easily occur, and during the recession of 1965 (particularly after the bankruptcy of Sanyo* Special Steel), it began to deride what it called Japan's "cherry-blossom-viewing and sake-drinking economy," by which it meant numerous low equity, over-invested firms wholly dependent upon government-guaranteed bank loans.

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If such firms could not even survive a domestic recession in a hothouse economy, how were they going to compete with the Fords, du Ponts, and IBMs of the world? The ministry argued that the solution to these problems was