The Headquarters Nation

The Headquarters Nation

Mini Teaser: Japan may soon dominate the world economy--but not as a result of a conspiracy.

by Author(s): Leon Hollerman

Japan may soon dominate the world economy--but not as a result of a conspiracy.  Its strategy is not written down in any of its official planning documents or in the "Visions" published from time to time by the Ministry of International Trade and Industry (MITI).  Rather, it is implicit in Japan's national interests, national goals, and institutional arrangements for achieving those goals. 

Japan is a centralized society that pursues the goal of comprehensive security by making the country a "headquarters nation" in the world economy.  As I shall use the term, a headquarters nation is one that has a global economic and political strategy based on its authentic national interests, that mobilizes and integrates its public and private sectors on behalf of those interests, and that implements its strategy by the establishment and coordination of global institutional arrangements.  Japan's headquarters strategy is not a policy of world domination; no nation has been coerced into accepting its leadership.  The nations that accept Japan's guidance, trade, finance, and direct investment do so willingly out of self-interest.  In serving their own aspirations, they serve those of Japan.

This view conflicts with that advanced by Karl van Wolferen in his influential book, The Enigma of Japanese Power, which sees Japan as a paralyzed entity incapable of generating a global strategy.  Van Wolferen's important work sheds light on the dark side of Japan's postwar "miracle."  However, his analysis of the sources and uses of power in Japan is preponderantly political rather than economic.  The imbalance needs to be redressed.

According to van Wolferen, the Japanese "system" is a "truncated pyramid" composed of semiautonomous groups that share power in a mutually offsetting way.  He asserts that the contending power centers can only stalemate each other; none is able or allowed to upset the balance by superseding others, none bears responsibility for national decision-making, and the power centers cannot be mobilized collectively.  They not only "lack a mechanism to set new priorities" but they cannot even set a common direction at the outset because "no one is ultimately in charge."  Externally, Japan seeks turf in a mere "politically motivated drive for ever greater international market shares."  In short, Japan's foreign policy is a reflection of its domestic turf battles.

Van Wolferen's thesis is inconsistent with both his own views and recent history.  For example, while insisting on the absence of a central policy-making machinery in Japan and thus on its inability to change course, he simultaneously subscribes to Chalmers Johnson's concept of Japan as a "developmental state" that undertakes responsibility for economic modernization.  But such a state must have both central direction and the capacity for coordinated policy change.  Profound and deliberate changes in Japan's national policy of the kind implied by the term "developmental state" have indeed occurred during the postwar period.  Until the OPEC oil embargo of October 1973, for example, it was consistent with Japan's strategy to maintain the "separation of economics from politics."  As a result of the embargo, however, it hastily combined the two, announcing its pro-Arab, anti-Israel policy on November 22, 1973.  Since then, Japan's international economic relations have become increasingly politicized as it has adopted a "high posture" and assumed geopolitical initiatives in accordance with its emergence as a headquarters nation.  Other examples of central policy changes include Japan's partial shift from export promotion to import promotion in foreign trade,(1) and the dramatic liberalization of the Foreign Exchange and Foreign Trade Control Law in December 1980.  Changes like these demonstrate conclusively that Japan does have a national strategy and the instruments with which to pursue it.

The Domestic Base

The "enigma" of Japan's power, as described by van Wolferen, can be dispelled by recourse to the economic concept of oligopoly, defined as a market dominated by a few large suppliers.  Economic concentration in Japan has produced enormously powerful firms and a society controlled by oligopolies.  Japan's government is itself an oligopoly, dominated by a few major players, and this small group of political power centers interacts with the power centers of big business.  The Japanese pyramid is not truncated: its summit consists of this collusive oligopoly.

Japan's institutional arrangements reflect the structure of its national interests.  In contrast with some other countries, Japan takes its national survival and independence pretty much for granted.  But it is obsessively concerned with achieving economic stability and security.  As expressed in a phrase attributed to the late Prime Minister Masayoshi Ohira, it seeks "comprehensive economic security."  That concept includes security in national defense (provided by its treaty with the United States); stability in its foreign markets and sources of supply; suppression of financial, technological, and political risk; and a position of acknowledged leadership in both a regional and a global context.  Japan's passion for security arises from its extreme dependence on the world economy.  After World War II, the slogan "Export or Die" explicitly affirmed that no domestic policy could be formulated without reference to its international implications.

At the outset of the American occupation under General Douglas MacArthur, rules placing the Japanese economy "off limits" to foreigners were established.  During Japan's recovery and rehabilitation, foreigners were not allowed to acquire real estate or engage in domestic business; they were not even allowed to engage in foreign trade with Japan without the intervention of occupation authorities.  These central controls were elaborated and augmented by the Japanese bureaucracy to which they were bequeathed following the occupation.  Reinforced by prewar and wartime precedents, the comprehensive control assumed by Japan's ministerial bureaucracy set the tone for its postwar economic policies.  Foremost among these was an industrial policy that was implemented on both the domestic and international planes.  This represents the operational core of Japan's strategy as a headquarters nation.

Japan's industrial policy was not designed to identify "winners and losers"--as defined in American terms--among individual firms and industries.  Rather it was meant to identify and develop "key industries" that were important not only in terms of their own products but because of their active or potential control of "downstream" industries for which those products are essential.  In the early postwar period, these industries were primarily "materials" industries that were highly dependent on imported raw materials--particularly steel, nonferrous metals, chemicals, ceramics, paper and pulp, gravel, and textiles.  Later, under the impact of the oil crises and rising energy costs, the materials industries were superseded in Japan's industrial structure by the "fabricating and assembling" industries--including transportation equipment and general, electrical, and precision machinery.  Facilities of the materials industries were scrapped, with legislation being passed to facilitate the process.

In 1960, MITI decided that computers were essential to the centralization and control of Japan's communication networks.  Accordingly, the government took the risk of investing heavily in research and development and in plants and equipment.  Without such support, the infant companies would surely have collapsed on several occasions.  In creating the computer industry, MITI demonstrated the role of government in a headquarters nation in an even more essential respect: it compelled the assistance of IBM.  As a condition for allowing IBM to manufacture computers in Japan and to repatriate its profits, not only was the number of machines it could sell severely limited, but IBM was obliged to release its patents to Japanese companies.  Shigeru Sahashi, MITI vice minister, is reported to have advised IBM that "We will take every measure possible to obstruct the success of your business unless you license IBM patents to Japanese firms and charge them no more than a 5 percent royalty."(2)  This was "Japan, Incorporated" in action with a vengeance.

By 1980, Japan's high technology priorities included nuclear power, aircraft and space technology, ocean development, life science, computer software, systems engineering, and new data processing systems.  These involved great technical risks and huge investments over a long period of time.  Keidanren--the Federation of Economic Organizations, Japan's foremost organization of business interests--requested that the government expand its science and technology budget to provide greater support to the private sector.(3)

Economic concentration and cartels in the domestic economy--including their associated networks of privileged information, contacts and channels--provide the underpinnings for transposition of Japan's industrial policy to the international arena.  From the early days of the post-occupation period, the Japanese government took steps to promote economic concentration both in its own interest and in the interest of the private sector.  For efficiency and convenience, the government prefers to coordinate its policies with large rather than small units in the private sector (large firms being more useful in conveying the government's policies downward in the industrial hierarchy).  Similarly, the government favors cartelization of markets, because cartels facilitate the maintenance of covert government control.

Within Japan, most market sectors are rigidly controlled by distribution cartels organized by manufacturers.  These are known as "Fair Trade Councils" and are authorized by the Japanese government to establish marketing practices that preclude entry by domestic outsiders as well as foreign rivals.  The cartels are comprised of loyal distributors, as for example in the wholesale and retail networks controlled by the Suntory Company or the Matsushita Electrical Industrial Company.  They are adept at maintaining control by the manipulation of bottlenecks, such as warehousing and transportation facilities.  Well-established relations among importers, warehousers, and truckers often make it impossible for foreign firms to store or transport their products within Japan.  This is a clear example of adversarial trade on the import side, arranged by collusion between government and business.

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