Unbundling Japan Inc. William V. Rapp.

Everyone agrees that Japan's postwar econom,ic success has been truly spectacular. While the Japanese government's precise role and influence in this unprecedented development is sometimes debated, it is generally agreed that government policies at both the macro and micro level facilated the process. As other observes have pointed out, Japan at the end of World War Ii was a country with few resources except a well educated, hard working labor force. She had little arable land, 100 million people to feed, and few energy, or natural resources. Food, energy, and natural resources would all have to be imported and paid for with exports if Japan was to survive, much less prosper.

To accomplish this fundamental require,ment, Japan needed an internationally competitive manufacturing sector producing products for which there was worldwide demand. Japan had to export in order to import. From this logic, some basic policies evolved which underpinned Japan's spectacular postwar growth. However, since 1973, their effects have become less benign.

Competitive growth in manufacturing requires substantial investment. For this investment to be noninflationary, thereby maintaining international competitiveness, it must be supported by a high rate of savings. The government, therefore, instituted substantial incentives for promoting savings; itself running a budget surplus until the 1970's. These funds were in turn channeled to key business sectors through administrative guidance, budget incentives, lending policies by government banks, and Bank of Japan rediscount policies.

Government policies supported the promotion of light industry exports such as textiles, for which there was substantial worlwide demand and for which laow cost labor was a prime requirement. Fertilizer, ship building, steel, power, and coal were targeted as key industries to reduce transport and foreign exchange costs ans as necessary to successful

industria                     lization generally.

As imported oil became cheaper that n coal, Japan phased out coal and pushed to reduce the cost of imported oil. This led to larger oil tankers. more demand for steel, and large investments in oil refining, chemicals, and petrochemicals.

The heavy Industry Bureau of MITI had responsibility for the development of these basic industries and became the architect of Japan's postwar industrial policy. As the government of Japan, MITI, and the Japanese public all wished to raise their growth and standard of living, over time they raised their sights to industries with more value added and technical complexity: in succession, autos, consumer electronics, computers, semiconductors, bio-technology, and space.

The model for industrial development in each case has tended to be the same: First there is import of the product and development of the domestic market (including government subsidie technology imports, cooperative R&D, low cost loans, etc.). *as investment grows and costs fall, the industry begins to export first to less developed countries where competition is less and finally to the advanced countries. In time, as the economy grows in size and sophistication and as capital generation becomes substantial, the need for subsidies is reduced. Indeed, the value of the Japanese market itself along with low cost capital are the pillars supporting industrial evolution.

In this context, import substitution has led to rapid growth in demand supported by large scale investments funded by high debt levels. Large scale investment and the lower cost of debt capital (due to tax deductability) in turn resulted in lower costs, lower prices, more demand, more investment, and the search for other markets, including exports. This situation continued until domestic and export markets were saturated or politically limited.

This economic growth engine continued at accelerating rates until a series of events dramatically changed Japan's economic context. Domestically, many major industries such as steel, non-ferrous metals, chemicals, and pulp and paper matured. Further investments and lower prices did not expand demand domestically nor overseas.

In addition, the other developed countries, as well as the non-industrial nations were interested in limiting Japanese exports either to stem the erosion and employment effects of Japanese imports or to promote their own industrial development.

On top of this were layered two oil shocks that increased the price of oil 40 times, the floating of the yen with a net appreciation of 20 to 30 percent, and a disillusionment among Japanese with growth for growth's sake. The last in particular was fueled by some spectacular pollution cases, which, combined with the worldwide ecological movement, prompted the Japanese to adopt the world's strictest pollution legislation.

It was these events that prompted the government of Japan and MITI in particular to promulgate an acceleration in Japan's intent to move out of heavy industry into knowledge-intensive industries such as computers, biotechnology, fashion, management consulting, engineering, and so on. Within this development, of course, computers, semi-conductors, telecommunications, satellites, and software development were the key sectors just as steel, ship building, chemicals, and autos had been earlier.

Not surprisingly, techniques similar to those used earlier were employed: investment by foreign firms was limited until 1976, and tariffs were held at high levels. Also, administrative guidance was used to encourage sales by domestic companies. In addition, R&D cooperatives were formed, government funding was provided, and loans to key firms were ffacilitated.

The industry's growth and progress prospered, particularly in semi-conductors, including large scale DRAMS. Japanese computer companies, NEC, Fujitsu, and Hitachi emerged as the only serious global competitors to U.S. firms. More recently, Japan annoyched its Fifth Generation artificial intelligence and Supercomputer projects ad has served notice of Japan's intention to capture the lead in information processing from the United States. Indeed, the pressure on Japan and MITI to acoomplish this objective has grown substantially since the first oil shock.

As a result of dramatic increases in energy costs in Japan, some 24 industries--in which over 50 percent of operating cost is accounted for by energy and raw material--are classified as structurally depressed. Though these industries were built with export sales in mind, exports usually lose money even on a cash basis. Most of these industries, including chemicals, petrochemicals, pulp and paper, fertilizer, lumber, and plywood are thus operating at 50 to 60 percent of capacity. But some, like aluminum, are operating at as low as 20 percent of capacity. Since domestic sales amount to more than $100 billion, the threat of increasing imports is apparent. The government also has a major program underway to scrap capacity and rationalize these industries.

A combination of maturing demand, depressed industries, and a continued high savings rate have slowed economic growth considerably in the last few years from around 6 percent in the 1970's to 3 to 4 percent currently. This in turn has decreased demand and investment opportunities, further slowing growth.

High budget deficits have stimulated fiscal conservatism, curtailing budget expenditures, while investment and pressures to keep the yen strong have limited expansionary monetary policy. Thus macro growth policies have been restrained.

Pressures from the non-industrial countries in Japan's traditional industries is growing not only in export markets but in Japan itself. Korean and Taiwanese textiles, steel, ships, and consumer electronics are all factors in the marketplace.

Given the above factors, the pressure on Japan to find a major, even leadership, role for itself in the information age is very severe. Yet, there is no clear government agency with the mandate to achieve this result.

Though MItI's general industrial policy vision, for the 1970's and again the 1980's clearly sets forth Japan's reasons and objectives in moving toward a post-industrial economy, legal responsibility for several key post-industrial sectors lies with other ministries.

The Machinery and information Industries Bureau of MITI does not have the same mandate for the 1980's and 90's that the Heavy Industries Bureau had for the 1950's and 60's. The responsibility appears more disperesed: The Ministry of Education (MOE) has responsibility for University based R&D, copyrights, and education; The Ministry of Health and Welfare (MHW), for biotechnology, medical equipment, and pharmaceuticals; The Ministry of Finance (MOF), for information based financial services, electronic banking, and automatic funds transfer; The Science and Technology Agency (STA), for space and satellites; The Ministry of Post and Telecommunications (MPT), for telecommunications including enchanced services; MITI, for information processing industries, semi-conductors, space hardware, and patents.

While MITI has tried to extend its mandate through organizations in areas such as bio-technology, software, and teelecommunications (often administratively populated with ex-MITI bureau-crats), their administrative responsibility is weak.

The other ministries appear jealous of their turf and want their turn at being responsible for part of Japan's future. In this sense, Japa remains very different from the United States in that the big bureaucratic question is not whether government should manage Japan's entry into knowledge intensive industries as in the traditional model but which ministry should manage it. However, it is also apparent that business interests would like to see a greater degree of freedom, at least from control over certain industries.

Some recent U.S./Japan trade policy situations involving VANs (Value Added Networks), software registration, and communications satellites are instructive in illustrating some of these divisions and shifting interests, as well as the economic stakes. There also appear to be some new developments in the wings.

In the case of VANs, the issue has been who will control the delivery of information services by telephone cable, satellite, or radio wave, not whether it should be guided. While MITI has argued for complete liberalizatioin with respect to establishing VANs, it hope to exercise its authority via its mandate to promote firms developing/producing related hardware and certain software. Indeed, VAN liberalization in conjunction with its software registration package would enable MITI to exercise full authority over both VAN hardware and the services transmitted (software packages).

MPT, on the other hand, wishes to retain authority over the use of tele-communications facilities just as it did several years ago with respect to time sharing services. And in the end, the result appears similar: a partial compromise, but with MPT retaining authority. The foreign ownership, MPT inspection, adn licensing requirements have been dropped, but an MPT registration adn notification system are retained. In addition, hardware must meet common carrier interconnect requirements and standards.

The MOF may also want some guidance over VANs used for financial services. But some conflicts may soon arise with the major city banks who want to run their own nationwide VANs independent of Nippon Telegraph and Telephone and the MOF.

MITI's motivations in developing a new system for protecting software appear even more clear cut:

The U.S. lead in software seems substantial and does not appear to be narrowing. The U.S. has ten times as many programmers as Japan.

The period of protection under copyright law is so long that much of the basic existing computer programming languages and microcode used worldwide, including in Japan, will remain under U.S. control for the next several years (e.g. IBM 360-370 based software systems).

While copyright law permits the writing of new software to achieve the same results, it does not allow copying or odd-ons without the orginators' approval. In certain cases, MITI does not feel Japan has time to spend writing new software. Also this would force Japan's limited programming resources to reinvent the wheel. Given the rapid rate of change in this area, this could place Japan at a competitive disadvantage in software for some time.

From MITI's view, helping users, including hardware producers, gain access to important software is as critical as protecting software developers.

Copyright law applies automatically and on an international basis even if a program is not formally registered. This approach substantially reduces the ability for government to interfere in the process as well as to discover via an application process how the program was created.

For all these reasons, MITI has tried to replace copyright protection with their own version of software is so inextricably ties to a machine that it is an economic property. Therefore, a patent process, which MITI controls, is more appropriate.

In this position, they were opposed by the MOE and the U.S. government who pointed out that programs were works of authorship and that the rest of the world including Japan, was generally applying copyright law to program protection. The U.S. also noted that if the MITI bill were passed, Japan would be in violation of the Universal Copyright Code and the Berne Convention. In that case, the U.S. would probably take remedial action including not allowing the Japanese programs U.S. copyright protection adn embargoing imports containing U.S. pirated software. After much bureaucratic jockeying, both bills were withdrawn. But in effect, the Japanese courts are still applying copyright protection.

A similarly tangled set of interests surround the communications satellite industry in Japan.

VANs, software, and satellites, indicate an apparent lack of homogeneity in Japan's approach to high technology electronics. The objective of moving into the information age is generally agreed on. But the how and the role of the government, and more specifically each ministry or firm, have yet to be resolved. So far it appears that no one agency or roup of businesses will have such control. Japan Inc. seems to be unbundling, with each group representing its won interest and generating only moderate pressure for a consensus.

On the other hand, where MITIs influence is clear, as in the case of the Fifth Generation and Supercomputer projects, resources and research are being mobilized. This is an impressive effort involving several major firms, including NTT, to leap-frog current technology and U.S. market competition.

One interesting objective of this project is the automation of software production, substituting hardware and capital (Japan's strengths) for software expertise (the current advantage of the U.S.). Such factor reversal is, of course, a classic competitive response to a specific advantage. (In the 19th Century, the power loom was invented in response to a shortage of weavers that in turn resulted from the invention of automated spinning equipment.)

Given the importance of the information processing and data transmission business to the future of both Japan and the U.S., the ebb and flow of U.S. and Japanese policy and competitive response is important to everyone. To understand how this dynamic is evolving, however, requires a more detailed analysis of Japanese interest groups and the positions of concerned ministries. It is no longer sufficient to look only at MITI and its industrial visions, other groups are now playing major roles.