Text/Bai Yimin

The Socialist Characteristics of the Japanese Economy

Examining the essence of the Japanese economic model solely from a macroeconomic perspective is somewhat one-sided; the true strengths and characteristics of the Japanese economic model lie in the microeconomic realm, where Japan can be described as the “king of microeconomics.” Japan’s economic system retains characteristics of a wartime command economy and bears distinct traits of a planned economy. Some Western scholars have described Japan’s economic system as “capitalist on the outside, socialist on the inside.”

After the war, Japan implemented economic controls and a national policy of blurring the lines between government and business. In August 1946, the business community established the Federation of Economic Organizations (commonly known as “Keidanren,” with functions equivalent to China’s State-owned Assets Supervision and Administration Commission), which was a continuation of the prewar Japan Economic Federation and the wartime Important Industries Council, and included all large industrial enterprises, financial institutions, and high-tech companies. In February 1948, building upon existing industry associations and regional business associations, the Japan Federation of Employers“ Organizations (abbreviated as ”Nikkeiren”) was established, bringing together the vast majority of small and medium-sized enterprises as well.

In May 2002, the Keidanren, representing large enterprises, merged with the Nikkei, representing small and medium-sized enterprises, to form the new Keidanren, with a total of 1,623 members. Of these, 1,306 were major Japanese companies, 129 were national organizations of an industry association nature (such as the Japan Iron and Steel Federation and the Japan Automobile Manufacturers Association), and 47 were regional economic organizations.

The first president of the newly formed Keidanren was Hiroshi Okuda, then president of Toyota, and the vice presidents were the presidents of major Japanese companies such as Nippon Steel, Mitsubishi Heavy Industries, Sumitomo Corporation, Toshiba, and Sony. The second and third presidents were Fujio Mitarai, president of Canon, and Hiromasa Yonekura, president of Sumitomo Chemical, respectively; On June 3, 2014, Sadayuki Sakakibara, Chairman of Toray Industries, was appointed as the new Keidanren Chairman.

In addition to national-level economic policy-making bodies, Japanese companies have established various types of corporate groups, which we classify into two categories: “horizontal corporate groups” and “vertical corporate groups.” “Horizontal corporate groups” are large clusters of corporate groups formed by major conglomerates to strengthen their mutual relationships, such as the six major financial groups: Mitsui, Mitsubishi, Sumitomo, Fuji (Fuyo), Sanwa, and Dai-Ichi Kangyo. “Vertical conglomerates” are organic business entities that operate under the unified, vertical leadership of a parent company, such as large manufacturing conglomerates like Toyota and Toshiba.

During its period of rapid development, Japan’s economic model adopted an approach similar to that of socialist countries, building a complete industrial chain in which the financial sector provided low-interest financing to key industries. Japanese companies had very little equity capital; most of their capital came from banks. Japan is resource-poor and relies on exports to secure resources. Imports were strictly restricted, import substitution was enforced, and technology was actively introduced. Across the entire industrial sector, large conglomerates operated in concert—that is, they coordinated and unified their development efforts—focusing on key industries such as heavy and chemical industries, equipment manufacturing, and electrical and electronics.

Decentralization internally, cooperation externally

Why did Japan’s adoption of a planned economy—now considered rigid—after the war not result in low efficiency and productivity? This was the result of full competition and external pressures.

Facing economic competition and pressure, Japan adopted a capitalist-style planned economy to enhance corporate competitiveness, which, to some extent, shares similarities with China’s approach of adopting a socialist planned economy to build an independent industrial system. The difference lies in the fact that China was once effectively a single “giant conglomerate”—an absolutely centralized system that led to rigidity—while Japan had six major conglomerates that, through market forces, engaged in both competition and cooperation, forming a “Bakufu-Han system” that achieved a dialectical unity of centralization and decentralization.

As a country with scarce resources and a small domestic market, Japan would undoubtedly face certain ruin if it could not enter the international market. Although Japan’s economic competitiveness was very limited at the time, joining the General Agreement on Tariffs and Trade (GATT, the predecessor to the WTO) was the only path to national economic development. After joining the GATT, in order to meet the enormous challenges posed by international monopoly capital, the Japanese government and organizations such as the Japan Business Federation (Keidanren) actively promoted numerous plans and measures to protect domestic industries and foster the development of Japanese companies. In the years following Japan’s accession to the GATT in 1955, the country’s six major conglomerates gradually reemerged and took shape.

In driving the extraordinary development of the manufacturing sector, the role of general trading companies cannot be overstated. As the vanguard of Japanese conglomerates in capturing international markets, these companies staged one inspiring, unstoppable chapter after another throughout the 1960s and 1970s. When Japanese electronics, electrical products, and automobiles swept across the U.S. and European markets, the general trading companies played a decisive role.

It was precisely at this time that Japan began implementing measures to “stabilize shareholder relations,” reorganizing the zaibatsu system—centered on lead banks and general trading companies, comprising large corporations, and characterized by cross-shareholdings and internal directors. At the same time, the nation’s economic lifeline was truly in the hands of highly loyal, responsible, and hands-on professional managers who had been groomed within these zaibatsu enterprises. This “Japanese model”—or the “East Asian model” that emerged from it—became a successful paradigm for developing countries to rapidly rise to the ranks of economic powers in the short term and build the capacity for sustainable development.

At its core, any corporate merger is essentially a merger of personnel. The long-standing military-style organizational structure and shared cultural heritage of Japanese conglomerates have significantly reduced the costs of integration between companies. While this consolidation of strength has taken place, it has not led to a situation where the resulting entity becomes unwieldy. Chinese economists have long held the view that Chinese companies often fail as soon as they grow large. This is partly because, as they expand, they fail to achieve true integration and generate synergistic power, and partly because China lacks the external environment necessary for inter-company integration.

In Japan, when companies merge to form new conglomerates, there is a convergence point where finance, industry, and commerce intersect—the general trading company—which serves as the link between these enterprises. The essence of Japanese conglomerates lies in the two characters “財” and “團”: “財” represents “finance,” and “團” represents “merchant guild.” In the financial sector, cross-shareholding among companies is referred to as the “fleet escort system” of Japanese conglomerates, and the conglomerate itself is the embodiment of the modern merchant guild.

“It’s more than just a narrow strip of water separating us”

Following the Southeast Asian economic crisis, Japan’s business community put forward concepts such as “Full Utilization of China,” “Super-Manufacturing,” and “International Vertical Division of Labor.” “Maximizing the Use of China” refers to achieving industrial complementarity between China and Japan. “Super-Manufacturing” refers to Japan shifting away from the manufacturing sector to focus on research and development and component manufacturing, while outsourcing assembly to China. The “International Vertical Division of Labor” refers to the vertical allocation of the multiple production processes required to manufacture a single product across the globe. Today, all of these concepts have been fully realized.

China’s economic development is inextricably linked to Japan’s, primarily for three reasons: First, Japan possesses outstanding technological capabilities and makes massive investments in research and development to maintain its technological edge; second, Japanese companies are able to supply China with high-quality products that are indispensable for economic development; and third, Japan is able to provide China with large-scale production equipment that is essential for industrial manufacturing.

China’s economic development has led to strong demand from the manufacturing sector for materials and components from Japan. Although China ranks first in the world in steel production, it produces very little high-grade steel. Japan holds a monopoly on high-grade and specialty steels—such as high-strength steel, electromagnetic steel, and surface-treated steel—which command high profit margins and added value. Machine tools used to produce automotive parts in China operate an average of 3,500 hours per year, yet only Japanese-made machine tools can guarantee consistent performance for five consecutive years. In terms of heavy industry production data, China relies heavily on large-scale equipment supplied by Japan.

China’s high-speed rail construction incorporated technology from Kawasaki Heavy Industries, with the locomotive prototype based on Japan’s Shinkansen E2-1000. Of the 60 trains China ordered from Japan, three were completed in Japan and delivered to China fully assembled; another six sets were shipped in kit form for assembly by the Chinese side; and finally, the intellectual property rights for the equipment and other components needed to manufacture the remaining 51 trains domestically in China were provided, though some high-tech components were still imported.

China’s excessive reliance on foreign sources, as a rising major power, will result in an unstable foundation for modernization, as well as instability in economic and national defense security. Opening up to the outside world and self-reliance can coexist without contradiction. According to data from the Ministry of Science and Technology, two-thirds of equipment investment—a component of China’s total fixed-asset investment—relies on imports. If we divide the manufacturing sector into product manufacturing and equipment manufacturing, China’s equipment manufacturing accounts for less than 30% of the total manufacturing sector—far lower than that of the United States (42%), Japan (44%), and Germany (46%).

The Shift from “Macroeconomic Management” to “Microeconomic Management”

It is widely recognized that China is an emerging global manufacturing powerhouse, and its future trajectory and status are expected to rival those of 19th-century Britain, 20th-century Japan, and the United States. However, it must be noted that being a manufacturing powerhouse does not equate to being an economic powerhouse; indeed, there is room for debate as to whether China is currently a fully-fledged manufacturing powerhouse.

China’s current reputation as the “global (manufacturing) powerhouse” is built on the massive consumption of raw materials and energy, the extensive use of unskilled labor, the large-scale import of intellectual property from developed countries, and the significant sacrifice of environmental protection and ecological resources; in recent years, the growth rate of energy consumption has far exceeded that of economic growth.

In the electronics and information technology industry, Chinese companies are engaged in fierce competition with foreign firms. Ren Zhengfei, CEO of Huawei, once famously said, “Western patents have now taken the mountaintop. We must use our patents to encircle the base of the mountain, so that when they come down, they cannot avoid our patents—and then use the patents at the base to trade for those at the mountaintop.”

Since the launch of China’s reform and opening-up, the country has accumulated enormous wealth. Now that this initial accumulation has been achieved, these resources should be invested in the sustainable development of the microeconomy. Projects such as the construction of large aircraft and aircraft carriers present an opportunity to rebuild and nurture China’s manufacturing sector. At the same time, private enterprises with technical expertise should be encouraged to participate in these large-scale construction projects as much as possible, thereby fostering cross-industry collaboration among Chinese companies.

When examining China’s microeconomic landscape, a profound sense of crisis naturally arises. In recent years, state-owned monopolies in sectors such as electricity, energy, telecommunications, banking, and insurance have accounted for the vast majority of the “Top 100 Chinese Enterprises” (ranked by sales revenue), while purely private enterprises that have grown through organic development are few and far between. It is hard to imagine that relying on low-tech, low-end capital to drive the development of the national economy over the next 20 years is the path a major power steadily on the rise should take.

Who Holds the Reins: Where Are China’s Microeconomic Actors?

As China’s economic reforms have deepened, the government has gradually withdrawn from microeconomic management, lifted regulations on enterprises and banks, and significantly reduced the scope and extent of state-directed resource allocation. While macroeconomic regulation, the refinement of the market economy, and reforms in the capital and securities markets are important, the microeconomic sphere should not be overlooked, as it forms the foundation of the national economy. China now urgently needs to study the Japanese economic model to provide diverse perspectives for economic system reform.

In the 1950s and 1960s, Japan adopted various measures to fend off competition from foreign investors and protect the development of domestic industry, commerce, and capital. These measures provide extremely valuable insights for us in understanding the current economic situation and addressing the many issues that constrain economic development. China’s emerging private enterprises are increasingly assuming important microeconomic functions. The models of Japanese and South Korean conglomerates offer practical lessons for the consolidation and expansion of China’s private enterprises, while the microeconomic management model centered on general trading companies holds even greater significance as a reference.

In the 1990s, under the “Going Global” strategy, China followed the models of Japan and South Korea, and expanding and strengthening Chinese enterprises became a mainstream trend; during this period, there was a surge in research on general trading companies. During this period, a large number of monographs, such as *Japanese General Trading Companies*, were published. A search of the Chavip China Journal Database using the keyword “general trading companies” revealed 250 relevant articles from 1991 to 2000.

However, between 2001 and 2005, a search of the VIP China Journal Database using the same keyword “general trading company” yielded only 25 relevant articles. Dangdang, China’s largest online bookstore, surprisingly does not carry a single monograph on “general trading companies,” and there is only one book available on Mitsui & Co., Japan’s leading general trading company: *The Mitsui Empire: Insights into the King of Microeconomics* (published in August 2006).

Have China’s economists and economic leaders noticed that behind the scenes, Japan’s major conglomerates—led by general trading companies—are deploying their China strategy through a quasi-military organizational model and modus operandi, while playing a role in microeconomic management on a global scale? Now, while we are defending against U.S. financial capital (hedge funds) on the “front lines” (the macroeconomy), we have overlooked the fact that Japan’s commercial forces (general trading companies) are quietly infiltrating our “rear bases” (the microeconomy).

During the reform process, the banking system—which has been the focus of government reform and support—has shouldered the heavy responsibility of China’s macroeconomic management. So, who is responsible for China’s microeconomic management? Should this role be entrusted to Japan’s general trading companies? Where are China’s own general trading companies?

—Excerpted from *Conglomerates Are Power* (by Bai Yimin)

About the Author: Chinese industrial economist, Chinese strategic economist, economic advisor to the Research Center of the State-owned Assets Supervision and Administration Commission (SASAC), board member of the Japanese Economy Society at the Chinese Academy of Social Sciences, expert advisor to CCTV’s Economic Channel, editorial board member of *Global Finance* magazine, chief economist at China Huaxin (a Fortune Global 500 company), and chairman of Beijing Huaxin Shanglue Investment Consulting Co., Ltd.