When, in the mid-1980s, a small Japanese gasoline company called Lion Petroleum decided to import cheap gasoline from Singapore, Japan's Ministry of Trade and Industry (MITI) `advised' Lion to drop its plans because they threatened the domestic refining industry, which enjoyed a de facto monopoly of refined-oil products. Lion duly refrained and, a decade later, Japanese motorists are still lumbered with some of the highest petrol prices in the developed world.
Similar tales of MITI's intractably protectionist and determinedly interventionist policies abound in the West. That reputation, protests MITI, is out of date - but it's going to be a hard tag to lose.
MITI's vice-like grip on trade is, after all, often accorded a starring role in Japan's rise to prominence as the world's most competitive industrial nation. In MITI and the Japanese Miracle, American Japanologist Chalmers Johnson argues that Japan was a `developmental' society in which purposeful planning achieved results that would always elude the `regulatory' societies of the West. Bureaucratic interventionism was the name of the game, according to Johnson.
The unpalatable truth was that more government rather than less was what western economies needed - so long as that meant having more intervention in the private sec-tor by a limited number of elite bureaucrats, not more interference from a greater number of rather dim officials.
Today, however, the wheel has come full circle. Now MITI gets blamed for many of the ills that have dogged Japan's economy during a recession that started in 1991 and still shows few signs of abating. The critics include American economists crowing about the recent resurgence of US industries such as cars and computer chips, and Japanese businessmen who want more freedom to set their own investment strategies and who blame bureaucrats for picking losers rather than winners.
In response, MITI is set on change. The ministry's new-look mission to liberalise the economy looks every bit as challenging as its former role as head of Japan Inc. `It's crucial for Japan's welfare to engage in drastic deregulation over the rest of this decade,' says Sadanobu Taguchi, an official at MITI's price-monitoring division who thinks bureaucratic controls (including those imposed by MITI) are among the reasons why Japan's living costs are an estimated 1.79 times the Organisation for Economic Co-operation and Development average. `For the foreseeable future our job in MITI will be to try not to pre-vent change,' says Shigehiko Tanaka, a middle-ranking bureaucrat in the ministry's retail division whose job used to be preventing small, owner-operated stores from being driven out of business by supermarkets. A senior official at the ministry puts it even more strongly. `Japan is a second-class country and we may be downgraded to a third-class country if we don't change our policies,' he said. `Unless we loosen the government's grip on industry we will slowly lose our competitiveness.'
If MITI is sincere about championing the cause of deregulation that is good news - though not all that surprising - to Tokyo-based western businessmen and diplomats. For some years the British business community has regarded MITI as the good guy among the main Japanese ministries. Western diplomats often use MITI to help them pressure less friendly organisations such as the Ministry of Finance (which oversees Japan's distinctly unhelpful alcohol tax laws), or the Health and Welfare Ministry (known for its foot-dragging over pharmaceutical testing). MITI has proved helpful in other ways, too. When Britain asked Japan in the early 1980s to accept a gentleman's agreement that would cap car exports at a fixed share of the UK market the request went through MITI. A year or two later the ministry was instrumental in helping to persuade Nissan Motor Company to build the first Japanese assembly car plant in Britain.
MITI can do things like that, say insiders, because of the leverage it enjoys as one of Japan's most political ministries - the lower house of parliament includes a number of ex-MITI men turned politicians - and because of an array of laws and ministerial regulations which can be used to put pressure on companies that fail to accept its `guidance'. But can the ministry shift from benevolent paternalism to a genuinely hands-off posture that would allow the Nissans and Toyotas of this world to make investment decisions without looking over their shoulders at the government? And if it does, will Japan's economy function as dynamically as it did in the heyday of the `developmental' economy?
The answer seems to be that it's going to be difficult. As its name implies, MITI is in reality two ministries (plus at least another three specialised agencies dealing with small businesses, natural resources and energy and industrial science and technology).
The high-profile portion of the ministry, consisting of the International Trade Policy and International Trade Administration bureaux, has been committed for years to opening up Japan's economy to outside influences, by boosting imports of manufactured goods and encouraging direct foreign investment - even in highly sensitive sectors such as retailing where several owner-operated stores maintain a precarious high-cost existence in the face of modern supermarkets. The other face is turned inwards towards the industries - ranging from steel to textiles and petrochemicals to electronics - that form MITI's all-important domestic constituency. MITI's two faces - domestic and external - have often found themselves at odds.
MITI's textiles bureau, for example, has fought battles in the past with the ministry's two trade divisions over whether to abandon Japan's much-prized attachment to a free import market for textiles, in order to protect high-cost natural-fibre spinners in the Osaka area. More violent still have been battles over the deregulation of retailing - a key sector because of the prohibitive costs incurred by Japan's multi-layered distribution system.
At the end of 1990, and again in late 1993, MITI trade officials supported the US and other foreign lobbyists who were demanding the scrapping of the `Big Stores' law - a measure which, in its original form, left it up to the discre-tion of small shopkeepers in any given town or city to decide whether a bigger retailer could set up on their territory. The Small Business Agency - an organisation staffed by MITI men whose last job might have been in one of the trade bureaux - fought back just as strongly. Keeping owner-operated stores in existence was essential to the social and political stability in Japan, the agency argued, and the Big Stores law even served to ensure some order in urban development in the absence of proper town-planning laws.
The battle was a draw - the Big Stores law has had some of its teeth pulled in the past few years. But in a recent interview with officials in MITI's retail trade division a foreign journalist had the odd experience of being told that MITI was wholly committed to `not impeding change' and then hearing a detailed explanation of why it was best to keep the Big Stores law on the ministry's books `at least for the time being'. (One reason for caution, the official suggested, was that if MITI didn't regulate big stores, local authorities probably would and that would be worse for everyone concerned).
MITI's problems with deregulation are not just to do with the survival of the industries it protects, notes a diplomat from one of the western nations that has problems with the ministry. They are also to do with MITI itself, because of the notorious amakudari (descent from heaven) system, under which retiring MITI bureaucrats often get jobs as senior executives with companies or trade associations to which they supplied `guidance' while they were in the ministry. Amakudari is a system that suits nearly everyone. It means that MITI can find new jobs for younger bureaucrats fast enough to make their career paths exciting, while retired officials get to earn the fat salary packages in the private sector they couldn't have hoped for as officials. Companies that have ex-MITI officials on their boards can expect more consideration than those that don't when the ministry starts handing out directives and, finally, MITI maintains an unrivalled intelligence network by having its old boys scattered through the ranks of private companies. The group that probably doesn't benefit from this are the consumers - and that won't change unless MITI starts telling its old boys that they must cut prices and abandon some of the collusive practices that still prevent outsiders from gaining access to Japan's markets.
If MITI's new commitment to deregulation seems to run counter to practically everything the ministry has stood for in the four decades since it was born out of the ashes of the wartime munitions ministry, there are, nevertheless, reasons why the ministry might make a go of the change. To start with - restrictive though it may be in its attitude to the industries under its control - MITI is by no means the most interventionist of major Japanese ministries. Compared with the 1,769 laws and administrative regulations that MITI has accumulated over the years as part of its armoury for dealing with major manufacturing industries, the Ministry of Transport (in charge of railways, aviation, shipping and every conceivable form of road transport) presides over an even more impressive 1,893 laws and regulations. The Ministry of Posts and Telecommunications is also more highly regulation-minded than MITI, say insiders. That is despite an urgent need to break down barriers between sectors such as TV broadcasting and telecommunications so as to facilitate the application of new information technology.
MITI's interest in deregulation arises at least partly out of its belief that information is destined to be one of the economy's big growth sectors in the next two decades, says an industry analyst in a western securities company. If the ministry can loosen Post and Telecom's grip in that area and establish itself as a leading source on how to develop the sector, it will have won a prize that will be much richer than administering sectors such as textiles, or even consumer electronics. That may explain why recent MITI `vision' documents (papers written by MITI officials or by think tanks under MITI's control that offer ideas on future directions for the economy) have tended to paint glowing pictures for developing an information superhighway - but only if the various industries concerned are deregulated.
Finance is another area in which MITI has tried to leap jealously guarded inter-ministerial barriers. In the mid-1980s the ministry tried to engineer a liberalisation of the small Tokyo over-the-counter (OTC) market so as to spur the growth of a venture capital industry in Japan that might encourage small businessmen to be more entrepreneurial. Its efforts were largely frustrated by jealous bureaucrats at the Ministry of Finance who thought the OTC sector was their territory and managed to persuade the big security companies not to co-operate. `That was then, though, and this is now,' says a foreign securities company employee. A recent MITI policy paper suggests the ministry is going to have another try at liberalising the OTC, this time by introducing selective easy-listing criteria for companies in industries such as housing, which it regards as especially promising.
If MITI officials think they can ride the wave of deregulation better than their rivals in Kasumigaseki (Japan's Whitehall), another reason may be that MITI bureaucrats have a collective memory of having done something of the kind before. In its original incarnation as Japan's wartime Ministry of Munitions the ministry had something approaching absolute power over a broad swathe of Japanese industry, according to Naohiro Amaya, a late and great MITI official who wrote some of the ministry's more celebrated vision documents in the 1960s and 1970s. During the first decade or so after the war this was still true. As Amaya tells it MITI became intensely unpopular with business in the late 1950s when it exercised dictatorial control over prices and supply levels of many basic products.
MITI's attempts to mastermind technology imports (through a foreign exchange control law which it administered) were not popular with industry either. On one occasion in the mid-'50s it told a small company called Tokyo Telecommunications Engineering Corporation (later Sony) that acquiring transistor technology from the US would be a bad idea because the company would not be able to exploit it properly and the technology was not likely to be of much use anyway.
In the 1960s, though, MITI discovered what Amaya pictured as the strategy of planned or `leveraged liberalisation'. The ministry realised early in the decade that Japan's entry into the General Agreement on Tariffs and Trade and the International Monetary Fund would force it to lift quotas on imports of manufactured goods and reduce tariffs to something approaching western levels. The timing of liberalisation, however, was at least partly up to the government to decide and that gave MITI its opportunity. It struck a series of deals with different industries under which `inevitable' steps towards the adoption of a free trade system were strategically delayed in return for industry accepting `guidance' from the government in such areas as mergers and acquisitions.
Mergers in the motor industry between big companies such as Toyota and Nissan and a handful of smaller groups before Japan opened its car-import market in 1965 were a trade-off between reluctant car-makers, who wanted to stay apart, and MITI bureaucrats, who had the last word on when the import barriers would come down. In the mid-1970s MITI again used its leverage derived from fixing liberalisation timetables to force co-operation between computer makers.
There was never any question of merging computer giants such as NEC, Hitachi or Fujitsu but these three and two others got together under one roof in a MITI-sponsored research laboratory in Yokohama in 1975 to do the basic research that later gave Japan a head start over the US in the mass production of 64K memory chips.
The liberalisation of computer imports (in 1974) and of foreign investment in the hi-tech end of the electronics industry were incentives that helped to get the Yokohama project started. Once it was going MITI's role was to `organise the drinks', says a project veteran. It was the experience of working - and playing - under one roof that broke down barriers between the five companies and helped them to work together.
MITI's skill at `making liberalisation work for it' may come in useful during the latest phase of deregulation, but the ministry still has to decide where it wants Japan to go and what kind of future it envisages. A MITI vision for the '90s, published just before the start of Japan's longest post-war recession was unhelpful on this point, talking vaguely of internationalisation and empowerment of the consumer. Since that time MITI has struck out in many directions - from plans to subsidise new leisure industries to proposals for exploring paranormal phenomena.
The ministry's choice of topics shows that young officials have lost none of their flair for coming up with unlikely ideas for getting research budgets. What they may need now is their own `paranormal' vision on where the Japanese economy is really headed.
MITI was born in 1949 when the postwar Ministry of Commerce and Industry (MCI), largely dedicated to regulating domestic industry, was merged with the Board of Trade, an organisation set up by the US occupying authorities to handle foreign trade. But the ministry's bureaucratic pedigree dates back to the Ministry of Agriculture and Commerce (MAC), established in 1881 by Japan's Meiji-era leaders to regulate all primary and secondary industry.
The MAC was split into its agricultural and industrial components in 1925. In 1939 the MCI, as it had then become, introduced a system of vertical bureaux controlling major industries. The MCI and the wartime Ministry of Munitions, which succeeded it in 1943 and lasted until 1945, were equipped with sweeping legislative powers allowing them to license specific companies to enter given industries. Most of these laws were scrapped in the postwar era.
Today MITI is the most powerful ministry dealing with the micro aspects of Japan's domestic economy, and sets Japan's international economic agenda.
HOW MITI SETS THE INDUSTRY AGENDA
For much of its history MITI has played the role of tour-guide for Japanese industry. Its 10-year `vision documents' have helped to keep companies moving purposefully in the same direction. Over time, however, MITI visions have become blurred. In the early postwar period visions tended to address the questions of what industries were needed to promote growth and increase exports, and how to nurture them with fiscal incentives. A vision published in 1972, just before the first oil shock, argued the case for upgrading the entire industrial structure from `materials consuming' to `knowledge-intensive' industries.
The most recent vision - the 1990 document, published just before the end of Japan's last big boom, took a very different and broader tack. It focused on wide policy issues such as removing underlying obstacles to growth, improving the quality of life and promoting Japan's `inter-national contributions' including foreign aid. Individual industries were scarcely mentioned and deregulation was recommended, if tentatively, as one way of reducing price differentials between Japan and the outside world and thus releasing pent-up domestic demand. The underlying message of the 1990 vision seemed to be that MITI itself was groping for a new role. Five years before the next vision is due in 2000 the groping continues. MITI officials, however, are certain they will never return to their old ways of picking winners and building protective walls around them.