The Evolution of the Japanese Developmental State 978-0-415-50346-4

Table of contents :
Cover
......Page 1
The Evolution of the Japanese Developmental State......Page 8
Copyright
......Page 9
Contents......Page 10
List of Illustrations......Page 12
I Introduction......Page 14
II Core institutions of the postwar Japanese economy......Page 15
1 Pilot agencies......Page 16
2 Industrial associations (Gyo-kai dantai)......Page 17
1 The collective action theory......Page 19
2 A power-based rationalist theory......Page 21
1 Critical juncture......Page 22
2 Path dependency......Page 23
3 Ideas in politics......Page 24
V The evolution of the Japanese developmental state system and the legacy of a wartime idea – “to- sei keizai ron”......Page 25
VI Points of contention......Page 30
VII Existing literature on the Japanese economy......Page 31
VIII Outline of the book......Page 33
2. The early stages of Japan’s industrialization......Page 35
I Industrialization in the Meiji period (1868–1912)......Page 36
II Liberal market economy in the 1920s......Page 38
III Zaibatsu dominance and party politicians......Page 42
IV Conclusions......Page 50
3. Institution-building in Manchuria (1932–45)......Page 52
I Historical background......Page 53
1 Pilot agency: the Planning Bureau......Page 54
2 Special corporation (tokushu geisha)......Page 58
III Explaining the establishment of the Manchurian developmental state system......Page 60
IV Conclusions......Page 88
4. The rise of a wartime economy in Japan (1937–45)......Page 90
1 Pilot agency: the Cabinet Planning Board......Page 91
2 Control associations (to-sei kai)......Page 96
II Explaining the rise of the wartime Japanese developmental state system......Page 98
III Conclusions......Page 130
5. Institutional evolution in postwar Japan (1946–65)......Page 133
1 Pilot agencies: the ESB and MITI......Page 134
2 Industrial associations (gyo-kai dantai)......Page 143
II Explaining the evolution of the postwar Japanese developmental state system......Page 147
III Conclusions......Page 176
I Evolution of developmental state systems in Manchuria, wartime Japan, and postwar Japan......Page 178
1 Pilot agencies......Page 179
2 Industrial associations......Page 185
1 The significance of historical factors in institutional evolution......Page 187
2 State control......Page 189
III Perspectives for future study......Page 190
Notes......Page 193
Bibliography......Page 208
Index......Page 217

Citation preview

The Evolution of the Japanese Developmental State

The Japanese economy underwent a fundamental transition from a liberal economy to a developmental state system during World War II, and despite efforts by the American occupation forces to dismantle them after 1945, these elements of the wartime economic system remained in place. Through an historical institutionalist lens, this book examines the reasons why the key features of the Japanese developmental state, such as pilot agencies and industrial associations, continued to play key roles in the post-war Japanese economy. Further, it locates the fundamental roots of the developmental state system in wartime Manchuria and thus highlights how decisions made in the context of war continued to influence the direction of the Japanese economy over the following decades. Analysing the institutional origin and evolutionary path of developmental state system, The Evolution of the Japanese Developmental State extends existing scholarship on the institutions that were at the heart of the developmental state system by focusing on not just why they were important, but also how and why they were originally built. Based on extensive archival research in both Japan and the USA, including Japanese-language collections not widely known in the West, it will be of great interest to students and scholars of political science, economic history, economics and Asian studies. Hironori Sasada is Associate Professor at Ritsumeikan University in Kyoto, Japan.

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56 Colonialism, Violence and Muslims in Southeast Asia The Maria Hertogh controversy and its aftermath Syed Muhd Khairudin Aljunied 57 Japanese and Hong Kong Film Industries Understanding the origins of East Asian film networks Kinnia Shuk-ting 58 Provincial Life and the Military in Imperial Japan The phantom samurai Stewart Lone 59 Southeast Asia and the Vietnam War Ang Cheng Guan 60 Southeast Asia and the Great Powers Nicholas Tarling 61 The Cold War and National Assertion in Southeast Asia Britain, the United States and Burma, 1948–62 Matthew Foley 62 The International History of East Asia, 1900–1968 Trade, ideology and the quest for order Edited by Antony Best 63 Journalism and Politics in Indonesia A critical biography of Mochtar Lubis (1922–2004) as editor and author David T. Hill 64 Atrocity and American Military Justice in Southeast Asia Trial by army Louise Barnett 65 The Japanese Occupation of Borneo, 1941–1945 Ooi Keat Gin 66 National Pasts in Europe and East Asia P.W. Preston

67 Modern China’s Ethnic Frontiers A Journey to the West Hsiao-ting Lin

72 Russo-Japanese Relations, 1905–17 From enemies to allies Peter Berton

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75 The Evolution of the Japanese Developmental State Institutions locked in by ideas Hironori Sasada

The Evolution of the Japanese Developmental State Institutions locked in by ideas

Hironori Sasada

First published 2013 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2013 Hironori Sasada The right of Hironori Sasada to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Sasada, Hironori. The evolution of the Japanese developmental state : institutions locked in by ideas / Hironori Sasada. p. cm. – (Routledge studies in the modern history of Asia) Includes bibliographical references and index. 1. Economic development–Japan–History–20th century. 2. Bureaucracy–Japan–History–20th century. 3. Business and politics–Japan– History–20th century. 4. Industrial policy–Japan–History–20th century. 5. Japan–Economic policy–1945- 6. Japan–Politics and government–1945- I. Title. HC462.9.S2548 2012 338.952–dc23 2011050174 ISBN: 978-0-415-50346-4 (hbk) ISBN: 978-0-203-11437-7 (ebk) Typeset in Times New Roman by Taylor & Francis Books

Contents

1

List of illustrations

xi

Introduction I Introduction 1 II Core institutions of the postwar Japanese economy

1 2

1 Pilot agencies 3 2 Industrial associations (Gyo-kai dantai) 4

III Alternative arguments

6

1 The collective action theory 6 2 A power-based rationalist theory

IV Historical institutionalism

8

9

1 Critical juncture 9 2 Path dependency 10 3 Ideas in politics 11

V The evolution of the Japanese developmental state system and the legacy of a wartime idea – “to-sei keizai ron” 13 VI Points of contention 17 VII Existing literature on the Japanese economy 18 VIII Outline of the book 20 2

3

The early stages of Japan’s industrialization I Industrialization in the Meiji period (1868–1912) II Liberal market economy in the 1920s 25 III Zaibatsu dominance and party politicians 29 IV Conclusions 37

22 23

Institution-building in Manchuria (1932–45) I Historical background 40 II Institutions of the Manchurian developmental state system 1 Pilot agency: the Planning Bureau 41 2 Special corporation (tokushu geisha) 45

39 41

x

Contents III Explaining the establishment of the Manchurian developmental state system 47 IV Conclusions 75

4

The rise of a wartime economy in Japan (1937–45) I Institutions of the Japanese wartime developmental state system 78

77

1 Pilot agency: the Cabinet Planning Board 78 2 Control associations (to-sei kai) 83

II Explaining the rise of the wartime Japanese developmental state system 85 III Conclusions 117 5

Institutional evolution in postwar Japan (1946–65) I Core institutions of the postwar Japanese developmental state system 121

120

1 Pilot agencies: the ESB and MITI 121 2 Industrial associations (gyo-kai dantai) 130

II Explaining the evolution of the postwar Japanese developmental state system 134 III Conclusions 163 6

The evolution of the Japanese developmental state I Evolution of developmental state systems in Manchuria, wartime Japan, and postwar Japan 165

165

1 Pilot agencies 166 2 Industrial associations 172

II Implications

174

1 The significance of historical factors in institutional evolution 2 State control 176

III Perspectives for future study Notes Bibliography Index

174

177 180 195 204

List of Illustrations

Figures 1.1 2.1 2.2 4.1 4.2 4.3 4.4 5.1 5.2 5.3 5.4

Positive feedback effect of ideas Labor disputes, 1910–45 Household savings and consumption rates, 1930–64 Steel production, 1938–41 Japan’s national income, 1927–32 Unemployment rates in Japan, 1929–34 Government spending increases, 1929–41 The Consumer Price Index in Japan 1946–64 Profit-capital ratio of Japanese firms, 1950–64 Corporate bankruptcies, 1952–61 Positive feedback effect in the Japanese developmental state system

12 26 27 81 86 87 92 135 137 137 163

Tables 2.1 3.1 4.1 4.2 4.3 5.1 5.2 6.1

Corporate finance sources (%) Industrial growth in Manchuria, 1925–35 Production expansion four-year plan, 1938–41 Production goals and actual results of important industrial commodities, 1938–45 Control associations established, 1941–42 Economic planning policies in postwar Japan Growth of steel and coal production, 1946–48 Pilot agencies of Manchuria, wartime Japan, and postwar Japan

27 50 80 81 84 125 126 166

1

Introduction

I Introduction In the latter half of the 20th century, most East Asian countries developed successful economic systems that are, in many ways, different from those of other industrial countries. Many studies have analyzed the secrets behind the “economic miracles” of those nations, and it is now widely believed that their unique economic and political institutional settings, often referred to collectively as the “East Asian developmental state system”, were critical to their rapid economic development.1 Such studies persuasively explain the causal link between economic growth and the economic system. However, their theoretical domain is limited because studies of political economy and economic development often overlook the issue of institutional origin and evolution, taking institutions as an exogenous factor and focusing primarily on the causal link between institutional settings and economic performance.2 Waldner (1999: 5) explains the lack of attention paid to institutional origins in this type of study by saying, “Institutionalist scholars have identified neoliberal economists, who ignore the role of institutions, as their primary theoretical rivals; thus, their most pressing goal has been to demonstrate that institutions matter, a task that obviously precedes exploring the etiology of institutional formation.” Just as neoliberal economists ignored the role of institutions, studies into East Asian economies have neglected the issues of institutional origin and evolution. An understanding of a country’s political economy and economic development cannot be complete if we cannot account for how its economic institutions were built and later developed into their particular form. Without such knowledge, we do not know who built the institutions and for what purpose; what factors affected the institutions’ evolution; and whether the institution’s causal effects were intentional. The Japanese economy went through a fundamental transition from a liberal economy to a developmental state system during the wartime era, and the elements of the wartime economic system remained in place as central features of the postwar Japanese economy, despite efforts by the American occupation forces to dismantle them after World War II.

2

Introduction

In spite of the intense scholarly attention paid to the Japanese political economy, existing studies have not fully accounted for why the Japanese developmental state system emerged during wartime and why it has persisted for such a long period. In this book, I attempt to unravel unsolved puzzles relating to the institutional origin and evolution of the Japanese developmental state system. To accomplish this, I examine the process through which economic institutions emerge and evolve from an historical institutionalist point of view,3 while focusing on the long-term impact of policy decisions made during a critical period of history on institutional evolution in subsequent periods. The puzzles analyzed in this book are the following: first, what is the origin of the postwar Japanese developmental state system? Second, why did wartime and postwar Japanese policymakers choose the developmental state system, a system that combines characteristics of both planned and market-based economies? Studies suggest that most of the core institutions governing the postwar Japanese economy did not exist before the mid-1930s.4 In the 1930s the Japanese government adopted a new system of political economy that was significantly different from the economic systems of the previous periods (i.e. the Meiji period and the 1920s). In the postwar period, Japanese policymakers facing the urgent need for a new economic system had several options available. These included Marxist, national-socialist, and liberal market-based economic systems. Yet, the policymakers repeatedly chose the developmental state system, rebuilding prewar institutions, despite strong pressure from American occupation forces to abolish them. What explains the Japanese policymakers’ decision to introduce a new system of political economy in the 1930s, and to rebuild that system in the postwar period?

II Core institutions of the postwar Japanese economy5 In my analysis of the Japanese developmental state system, I focus on the evolution of two types of institutions, namely pilot agencies and industrial associations. These two institutions were of particular importance to the Japanese economy because they were critical components of the system of state control and played important roles in Japan’s rapid economic growth during the postwar period. Pilot agencies took charge of drawing blueprints for the nation’s economic growth and provided guidance to domestic industry based on their plans (Johnson 1982, 1995; Anchordoguy 1988; Wade 1990; Gereffi and Wyman 1990; Woo 1991; Samuels 1994; Pekkanen 2003). Industrial associations assisted the pilot agencies in making and implementing their economic plans, and by promoting a cooperative relationship between the state and industry (Samuels 1983; Lynn and McKeown 1988; Yonekura 1993; Tilton 1996; Schaede 2000). Thanks largely to these two institutions, Japan’s developmental state system functioned effectively and achieved remarkable success in the postwar period. However, the creation and evolution of these

Introduction

3

core institutions has not been widely studied. Therefore, I will attempt to contribute to the understanding of Japanese political economy by exploring the institutional origin and evolution of these core institutions.6 1 Pilot agencies The most distinguishing feature of the so-called East Asian developmental state system is the role of bureaucratic leadership in economic development. Because of this, the remarkable successes of industrial policies championed by various bureaucracies have been the focus of numerous scholars in the field of East Asian political economy (Johnson 1982, 1995; Anchordoguy 1988; Okimoto 1989; Wade 1990; Gereffi and Wyman 1990; Woo 1991; Samuels 1994; Evans 1995; Waldner 1999; Pekkanen 2003). Even though the system generally allows the nation’s market to perform its primary functions unhindered and guarantees private property rights, the bureaucracy does intervene in various economic activities. In other words, in a developmental state system, the market system is fused with state control in a subtle balance. This fusion of market and state control differentiates the developmental state system from both Western free market and socialist economies in important ways. The postwar Japanese economy was based on the market system with government guarantees of private property rights. However, it differed from a liberal market-based economy in that state elites set economic goals designed specifically to promote productivity and economic growth. However, it remains distinct from a socialist economy because the government does not nationalize or manage private firms directly. Instead, it compels them to operate and compete within a framework of government regulations and industrial policies. Thus, the Japanese system combines features of both liberal market-based and socialist economies. In such systems, economic bureaucracies play a crucial role as “pilot agencies” that direct industrial development from strategic viewpoints. Pilot agencies are distinguished from other bureaucratic bodies by their functions in guiding industrialization and economic growth. The defining functions of pilot agencies include: composition of the long-term development plans for a specific industry or the national economy as a whole; carefully calculated allocation of scarce resources among industries; protection and nurturing of infant industries; manipulation of macroeconomic conditions in favor of domestic industries; and assistance in acquiring advanced technology from abroad.7 Many scholars acknowledge that such policies of economic bureaucrats made the significant contributions to the economic success of East Asian economies, although they do not necessarily use the term “pilot agency” (Johnson 1982, 1995; Anchordoguy 1988; Okimoto 1989; Wade 1990; Gereffi and Wyman 1990; Woo 1991; Samuels 1994; Hatch and Yamamura 1996; Pekkanen 2003). The Manchurian government under Japanese influence established such an agency, called the Planning Bureau, in 1932. The Planning Bureau drafted

4

Introduction

“the Manchurian Industry Development Five-Year Plan,” and led the industrialization of the newborn nation. The wartime Japanese government instituted its own pilot agency, called the Planning Board, in 1937. In the postwar Japanese government, the Economic Stabilization Board (ESB) and the Ministry of International Trade and Industry (MITI) functioned as pilot agencies.8 This study focuses on the pilot agencies in Manchuria, wartime Japan, and postwar Japan. Pilot agencies also emerged in other East Asian countries in the 1960s and 1970s. Some examples include South Korea’s Economic Planning Board and Ministry of Trade and Industry, and Taiwan’s Council on Economic Planning and Development and the Industrial Development Bureau of the Ministry of Economic Affairs. Just like their Japanese counterparts, these Korean and Taiwanese pilot agencies took the initiative in guiding the industrialization of the newly developed countries (see Wade 1990; Gereffi and Wyman 1990; Woo 1991; Evans 1995 and Waldner 1999 for information on pilot agencies in South Korea and Taiwan). 2 Industrial associations (Gyo-kai dantai) Industrial associations (a.k.a. “trade associations”) are cartel-like organizations of private firms operating in the same industry. In contemporary Japan, there is one industrial association (gyo-kai dantai) in practically every industry, even though some industries are more tightly organized than others. Wartime Japan and Manchuria had similar institutions, called control associations (to-sei kai), in a number of key industries, such as the steel, coal, automobile, railroad, and trade industries. The obvious function of such associations is to serve as a political vehicle for member firms. Much like pressure groups in the United States, they carry the voices of member firms to the policymaking process by lobbying the government or petitioning political parties. However, unlike their American counterparts, industrial associations in Japan have other functions. Even though industrial associations are private organizations managed by their members, the government uses them as tools of indirect control. An industrial association coordinates interests among member firms and monitors their compliance with laws and governmental guidance. In some cases, when necessary, such associations even voluntarily regulate their member firms. In other words, they are partly an extension of a government agency within the private sector because they function as quasi law-enforcement agencies. These industrial associations allow the state to successfully implement and enforce its industrial policies without creating friction with private actors. Industrial associations also support the government in making economic plans and industrial policies. In order to draft effective economic plans and industrial policies, the government needs to collect as much detailed and accurate information regarding the industries as possible. Industrial associations assist government policymaking by providing information about their

Introduction

5

member firms and by proposing policy recommendations. In this sense, “trade associations and cartels are critical intermediaries between the state (principally MITI) and the market (or individual firms)” (Tilton 1996: 2). To distinguish them clearly from American-style pressure groups, I define an industrial association in a developmental state system as an organization of firms in a given industry that first, lobbies the government for policies reflecting the interests of member firms; second, helps the government enforce its administrative guidance by acting as a quasi-government agency; and third, assists the government in policymaking by providing valuable information regarding the industry. In other words, while pressure groups only meet the first criterion (resulting in a one-way relationship with the government), an industrial association meets all three criteria and is a vital component of a two-way relationship (Yonekura 1993). The contribution of industrial associations to Japan’s rapid industrialization was significant. Lynn and McKeown (1988) argue that industrial associations (they use the term ‘trade associations’) made the Japanese economic system more flexible in its ability to aggregate interests, and thus better able to work toward the good of the society as a whole. “The Japanese were able to subordinate many other concerns effectively for rapid economic growth, particularly in the 1950s and 1960s. And the network of trade associations and peak associations played a prominent role in policy making during this period” (Lynn and McKeown 1988: 174). Yonekura (1993) also claims that industrial associations “strengthened the effectiveness of government’s industrial policies by reducing the information asymmetry between the government and the industry” (Yonekura 1993: 183). Furthermore, Samuels (1983) claims that the state’s control over industry would have been impossible without the assistance of industrial associations. He argues, “While it is frequently acknowledged that committees in the Diet [the Japanese legislature] and the ruling Liberal Democratic Party (LDP), having limited expertise and staff, are dependent upon the bureaucracy for data and analysis, it is not as often recognized that the well-fabled Japanese bureaucracy is itself often dependent in the same way upon the industrial associations and firms with which it works so closely” (Samuels 1983: 499). In other words, while it is true that pilot agencies, such as MITI, played a critical role in leading Japan’s rapid economic growth, they could not have performed their functions without the assistance of industrial associations. Yet, despite the significance of industrial associations in Japan’s development, they have not been widely studied. Lynn and McKeown (1988: xiii) contend that “trade associations have not been the object of much scholarly research” in the United States. Also, “There is a relative abundance of government documents [in Japan] giving information on associations and their activities (most of which are not available in translation and have not yet been analyzed by non-Japanese scholars). But even in Japan, there is a paucity of analytic work on trade associations.” Tilton claims: “Debate whether the state or the

6

Introduction

market guides Japan’s economy often overlooks the importance of trade associations” (Tilton 1996: 190; also see Schaede 2000: 2–3). The origins of Japan’s industrial associations lie in the wartime period.9 In 1941 the wartime Japanese government established control associations (to-sei-kai) in six industries, including steel, coal, and automobiles, that were considered strategically important. In the following year, the government created control associations in 15 other industries. From that point, the number of industries organized under control associations steadily increased during the war period. The primary tasks of the control associations were to provide data and information regarding the condition of their industries (production potential, raw material supply, etc.), allocate production quotas and raw materials among member firms based on government plans, and, when necessary, reorganize nonproductive firms. The wartime pilot agencies outlined production quotas based on the information provided by the control association and issued administrative guidance for the member firms to follow. There is an unmistakable linkage between the wartime control association and the postwar industrial associations (gyo-kai dantai). Even though the Japanese government was strongly pressured by the American occupation forces to dismantle such organizations, the government continued to allow industries to reorganize themselves under similar groups. While there were some minor differences, the postwar industrial associations played a surprisingly similar role in assisting the government’s industrial policies.

III Alternative arguments How are such institutions built? What causes changes in institutional settings? What determines evolutionary path of institutions? Some scholarly groups try to solve those puzzles by focusing on the interests of the primary actors, an approach that is often referred to as applying rational choice theories. Those theories operate on the premise of individual rationality, which assumes that actors are rational and behave in ways that maximize their utility. That is, when actors make decisions, they examine all the available alternatives and choose those options that yield the most benefit. Rational theorists argue that institutions are built to advance the interests of the actors. In other words, an institution is built when it is more beneficial to build one than to do without it. Rationalists offer mainly two ways to address institutions. Some posit that actors build institutions to achieve mutually beneficial outcomes, and others claim that powerful actors build institutions to maximize their individual gains. 1 The collective action theory The collective action theory posits that actors build institutions to achieve mutually beneficial outcomes. Many rationalists view politics in terms of

Introduction

7

collective actions (Olson 1965; Bates 1981; Weingast 2002). Rationalists argue that collective action is hard to organize due to problems such as the lack of trust among actors, free riding, high transaction costs, and the absence of monitoring and enforcement mechanisms. Since the individual utility maximization behaviors of actors make it hard for them to overcome the collective action problems, they tend to end up with suboptimal or inefficient outcomes. Rationalists view institutions as one of the solutions to collective action problems because the rules and agreed procedures embedded in institutions decrease uncertainties, provide enforcement mechanisms, reduce transaction costs, facilitate trade-offs, etc. According to the rationalist view, this is the reason why actors build institutions. Weingast argues, “Appropriately configured institutions restructure incentives so that individuals have an incentive to cooperate.” Therefore, he contends, “the essence of institutions is to enforce mutually beneficial exchange and cooperation” (Weingast 2002: 670). Keohane (1984) argues that, in international politics, collective action problems often lead to mutually undesirable outcomes (e.g. market failure). States often fail to cooperate with each other because of high transaction costs among them and due to the lack of international laws. Because of this, some states build institutions that facilitate cooperation by reducing transaction costs, promoting reciprocity in interactions among member states, and by establishing reliable monitoring and enforcement mechanisms.10 Rationalists apply this view of institutions to explain institutional continuity. They maintain that when all actors benefit from certain institutions that make collective action possible, the institution becomes self-enforcing because defecting from the institutional arrangement could destroy the institution. Therefore, the institution develops a reproduction mechanism. For example, Weingast analyzes democratic consolidation and explains why some democratic institutions survive while others fail by focusing on the constitutional arrangements that affect actor incentives. He argues that the democracies with constitutions that guarantee the fundamental rights of its citizens make it far less likely for citizens “to resort to extraconstitutional means to defend themselves” (Weingast 2002: 682). Such a constitution becomes self-enforcing by providing actors with incentives to abide by its provisions. He claims: “The pact becomes self-enforcing when all parties are better off under the pact and when all realize that unilateral defection from the pact implies that the others will also defect, destroying the pact” (ibid.: 682). In short, institutions persist because the actors have incentives to abide by the arrangement, as gains from maintaining the existing institutions are greater than without it. In the rationalist view, institutional change occurs when it is no longer in the self-interest of actors to reproduce the existing institution. In this view, actors design and build institutions as a solution to the collective action problems because those institutions allow actors to cooperate and reach mutually beneficial outcomes. Once actors create an institution in a certain form, the reproduction mechanisms discussed above continue to

8

Introduction

encourage actors to maintain it in the same form. Its reproduction cycle ends when the institution ceases to serve the interest of the actors. That, in turn, leads to institutional change because actors will seek to replace it with a new institution. Based on the collective action theory, a hypothesis can be formulated as follows: H1: Actors build institutions to overcome collective action problems and achieve mutual benefits. The institutions continue to exist as long as they perform such function and advance actor interests. 2 A power-based rationalist theory While some rational-choice theorists are concerned about collective-action problems, another group of rationalists focuses on the pursuit of power among actors when explaining the origin and evolution of institutions. For example, Knight (1992, 1995) rejects the efficiency-based rationalist argument and argues, “Institutions are not created to constrain groups or society in an effort to avoid suboptimal outcomes, but, rather, are the by-product of substantive conflicts over the distributions inherent in social outcomes” (Knight 1992: 40).11 From this viewpoint, it is considered likely that political leaders attempt to design institutions for the purpose of gaining strategic advantages vis-à-vis other actors, who would resist such attempts. The stronger the political leaders’ bargaining power in relation to other actors, the closer the institutional outcome gets to the political leaders’ intended design. In this sense, institutional outcome reflects the asymmetries of the bargaining power of political actors.12 One advantage of this type of argument is that it explains inefficiencies caused by certain institutions that are extremely difficult for the efficiency-based argument to explicate. Knight claims that rather than focusing on collective goals, actors build institutions to advance their self-interests. Thus, “Social institutions may fail to achieve Pareto-optimal outcomes because it is not in the interest of those who establish those institutions to do so” (Knight 1992: 37–38).13 Ramseyer and Rosenbluth (1993, 1995) take a power-based rationalist approach to explain institutional evolution in Japanese politics and argue that powerful actors manipulate the institutional framework to their private advantage. They contend that political institutions in postwar Japan reflected the interests of LDP politicians, who had the power to manipulate the institutional environment to their own advantage. These institutions allowed LDP politicians to subordinate other social actors, such as bureaucrats and judges.14 Also, in their 1995 book, they echo their earlier argument and argue that prewar Japanese bureaucrats were just agents of powerful actors (oligarchs in the Meiji period, party politicians in the Taisho- period, and the military during the wartime period), who had the power to manipulate the institutional environment to their advantage.

Introduction

9

Additionally, Silberman (1993) argues that political leaders in Japan’s Meiji period attempted to secure their power by transforming the government into an autonomous bureaucratic state consisting of highly educated officials. In order to become a bureaucrat, one had to pass an extremely competitive qualification exam, which was open to everyone, but which only a select few had the ability to pass. This system provided political leaders with the legitimacy to govern the nation while effectively denying other social groups the means to challenge their power. In short, these rationalist scholars argue that powerful political groups pursue the development of institutions for their own benefit, and that resulting institutions are used as instruments to keep other actors under control and maintain the existing power structure. A hypothesis drawn from a power-based rationalist theory can be summarized as follows: H2: Institutional arrangements reflect the power balance among actors. Powerful actors build institutions to secure or further increase their power. The institutions continue to exist as long as the given power structure remains unchanged.

IV Historical institutionalism While rational-choice theorists try to explain change and continuity in institutions by focusing on the interest of actors, other scholars address such issues by paying close attention to the long-lasting impacts of decisions or policies made in the past. This approach is called historical institutionalism (Steinmo et al. 1992; Mahoney and Rueschemeyer 2003; Streeck and Thelen 2005). Historical institutionalist researchers present models to explain changes and continuity in institutional settings, emphasizing the importance of such factors in terms of critical juncture, path dependency, and ideas. 1 Critical juncture A critical juncture is defined here as an important moment in history marked by fundamental transitions from the preexisting settings. These can include regime shift, revolution, democratization, and establishment of a new economic system. Critical junctures often follow certain exogenous shocks that induce social transitions, such as war, economic crisis, and political turmoil. As such, exogenous shocks function as vital catalysts for institutional change because, if an existing institution fails to adapt sufficiently to the environment that follows a shock, its credibility will be significantly undermined. That, in turn, motivates policymakers to build a new set of institutions. Various factors, however, will influence the shape of the new institutional setting. Such factors include the domestic power balance, international political and economic conditions, intellectual discourse, and previous experiences of the policymakers. Such a juncture can be deemed “critical” if “once a

10

Introduction

particular option is selected it becomes progressively more difficult to return to the initial point when multiple alternatives were still available” (Mahoney 2000a: 513). Collier and Collier (1991) claim that all critical junctures share three basic components: first, antecedent conditions; second, cleavage; and third, legacy. “Antecedent conditions” refers to the conditions prior to the fundamental social transition. These are disrupted by “cleavage” or crisis that triggers change in the old system. The “legacy” component corresponds to the prolonged impacts of changes made during a critical juncture. Scholars believe that it is critical to study how policies made during a critical juncture establish a trajectory for institutional evolution in subsequent periods.15 2 Path dependency When analyzing institutional continuity, historical institutionalists explore mechanisms of institutional reproduction, which results in a condition often referred to as “path dependency.” Mahoney (2000b: 507) defines it as “historical sequences in which contingent events set into motion institutional patterns or event chains that have deterministic properties.” Pierson (2004: 10) describes it as “the dynamics of self-reinforcing or positive feedback processes in a political system.” Because of a self-reinforcing/reproduction mechanism, once a particular path becomes “locked in,” it becomes increasingly difficult over time to reverse it. Scholars have pointed out several mechanisms of path dependency that can contribute to the rigidity (or “stickiness”) of an institution. Studies of institutions explore various mechanisms of path dependency, such as increasing returns (North 1990; Arthur 1994; Thelen 1999) and sunk costs (Keohane 1984; Collier and Collier 1991; Pierson 1994). For institutions, increasing returns refers to the condition in which the benefits of a given institution increase as more actors take part in the institutional arrangement. As the institution generates more benefits, it self-reinforces its reproduction and makes the course of development harder to reverse. Sunk costs, in terms of institutions, refer to the unrecoverable time and effort invested in establishing the institutions themselves. The larger the sunk costs of a given institution, the harder it becomes to replace because, “The depth and interrelatedness of accumulated investments may make the adoption of previously plausible alternatives prohibitively costly” (Pierson 2004: 152). An increasing number of studies have analyzed various causal impacts of path dependency on institutional development (Thelen and Kume 1999; Mahoney 2002; Kato- 2003; Thelen 2004; Krauss and Pekkanen 2011). However, as Hall points out, existing studies on political institutions have not fully explored the mechanisms of path dependency. Hall claims that path dependency studies contain an unresolved issue: “What features of the social, economic, or political world give developments in the distant past such influence over subsequent actions?” He also contends, “We need better conceptualizations of how path dependence operates and more methodological sensitivity to the possibility that it might be operating” (Hall 2009: 247). Responding to such a

Introduction

11

demand in the field, I attempt to advance the discussion of positive feedback effects in path dependency by focusing on ideational factors that can also generate positive feedback cycles and have significant impacts on the evolutionary path of institutions. 3 Ideas in politics Policymakers cannot always obtain sufficient information to make rational decisions because there is a high level of uncertainty in politics. Since it is not easy for policymakers to make rational decisions without intellectual assistance, they must rely on some kind of ideational guidance. Such guidance plays a critical role when policymakers assess information before making decisions,16 because it helps them understand what current conditions could mean to the nation, and normally helps identify solutions to problems (for discussions on the role of ideas, see Hall 1989, 1992; Weir 1989, 1992; North 1990; Sikkink 1991, 1993; Haas 1992; Goldstein and Keohane 1993; Goldstein 1993; Halpern 1993; Kier 1995; Keck and Sikkink 1998; McNamara 1998; Beland and Cox 2011).17 Ideational guidance helps actors make policies, but it also constrains their decision-making by limiting the availability of alternative options. Once actors adopt a given set of ideas as the foundation of their ideational guidance, they will make the types of policies that comply with that guidance and will reject policies that contradict it. As much as it helps actors make policies, ideational guidance constrains actors’ policy choices. Therefore, ideational guidance can result in institutional continuity by locking actor policies into certain patterns (North 1990; Arthur 1994; Hall 1989; Weir 1989; Goldstein 1993; Kier 1995; Pierson 2004; Beland and Cox 2011). For example, Weir (1989) argues that the British economic bureaucrats adopted and kept their faith in Keynesian ideas in the 1930s, which continued to affect British economic policies through the 1970s. Kier (1995) also demonstrates how the military’s organizational culture continued to shape military doctrine in Britain and France during the interwar period. This book attempts to extend this argument about ideas and institutional continuity by presenting a mechanism in which ideational guidance can generate a positive feedback cycle, which then reinforces the lock-in effect. I argue that this positive feedback cycle occurs as follows: first, positive feedback can occur when policymakers hand down ideational guidance to their successors. The new generation of policymakers is likely to embrace their predecessors’ ideational guidance because they are products of the same educational system, professional training, and career experience as their predecessors. Because policymakers continue to rely on ideational guidance over successive generations, they continue to reproduce the existing institutions that were built based on the original guidance. Second, a positive feedback effect can also occur as the ideational guidance of policymakers spreads into other social groups. Some ideas may proliferate

12

Introduction

Figure 1.1 Positive feedback effect of ideas

into other social groups, as they interact with policymakers.18 As additional social actors accept ideational guidance from policymakers, they begin to support existing institutions that were built based on that guidance. When ideational guidance spreads from policymakers to other social groups, the political supports for existing institutions are reinforced. This makes it increasingly easier for policymakers to reproduce the existing institutions. Thus, ideational guidance generates a positive feedback effect and facilitates the reproduction of institutions for an extended period. These reproduction mechanisms make the path of institutional evolution increasingly hard to reverse (see Figure 1.1). In the next section, I will present my viewpoints on institutional change and continuity in the Japanese economy, drawing on an historical institutionalist approach.

V The evolution of the Japanese developmental state system and the legacy of a wartime idea – “to-sei keizai ron” Japan’s modernization started after the Meiji Restoration of 1868. In the Meiji period the government played a key role in industrialization by introducing modern technologies from advanced Western nations, establishing state-owned enterprises, and investing in industrial infrastructure. However, in the early 20th century the government’s roles gradually declined as private business became the driving force behind the Japanese economy, causing it to evolve into a liberal market-based economy by the 1920s. Most of the institutional features of the developmental state system, such as pilot agencies and industrial associations, did not exist prior to the mid-1930s.19 In fact, private firms operated with minimal government interference and the business leaders and party politicians, who wanted to keep the market free, had more influence over the policymaking process than the military officers and bureaucrats, who wanted tighter state control. However, three events in the late 1920s prompted a departure from the system of the 1920s. First, the Great Depression severely damaged the Japanese

Introduction

13

economy, causing many people to begin thinking that the selfish profit-seeking activities of private firms needed to be restrained. Second, the success of the Soviet Union’s Five-Year Plan (1928–33) shocked Japanese policymakers and convinced them that state economic planning was necessary. Third, in the late 1920s some Japanese policymakers started to believe that Japan was on an inevitable collision course with the Soviet Union or the United States, which would result in a total war with one of those nations. These events strongly encouraged Japanese policymakers to introduce a new economic system with enhanced state control. A prototype of the developmental state system was built in Manchuria in the early 1930s, where Japan had seized substantial control by 1932. Military officers, who led Japan’s state-building efforts in Manchuria, used that opportunity to establish an industrial base, which they believed would be indispensable for Japan’s future war against the United States. When building Manchuria’s new economic system, policymakers attempted to create a system that combined the virtues of both liberal market and Soviet-style command economies. Evidence suggests that the Great Depression and the success of the abovementioned Soviet Five-Year Plan had convinced Japanese policymakers of the need to put industry under state control. However, they did not go as far as to abolish private ownership because they acknowledged that the vitality of private entrepreneurship was an important part of industrialization. Therefore, the new system in Manchuria was virtually a fusion of the two systems. Manchuria was used as a breeding ground for the developmental state system because, at that time, such a policy experiment was not conceivable in Japan due to strong opposition from zaibatsu (corporate conglomerate) leaders – who were proponents of the liberal market economy. Furthermore, since Japanese zaibatsu had already gained strong influence in Japan’s other colonies (Korea and Taiwan), the developmental state system could not emerge in those places.20 Manchuria, on the other hand, did not have powerful private corporations to oppose tight state control, so military officers and bureaucrats had a free hand in designing its new economic system. The policy entrepreneurs in Manchuria included officers of the Kwantung Army – a division of the Japanese Imperial Army stationed in Manchuria21 – and Japanese bureaucrats placed in the Manchurian government. The most influential figures were Ishiwara Kanji and Miyazaki Masayoshi. Ishiwara was a staff officer of the Kwantung Army in charge of constructing Japan’s puppet state in Manchuria. Miyazaki, who assisted Ishiwara in his state-building efforts, was a Soviet economy specialist employed in a Japanese-owned, semi-public railroad company in Manchuria. My analysis of Manchurian state-building efforts indicates that the worldviews and educational/career backgrounds of these two individuals had significant impacts on their policies. In the early stage of his military career, Ishiwara studied the history of world warfare in Germany, where he became convinced that the world was approaching the age of total war. Furthermore,

14

Introduction

because he had come to believe that Japan would inevitably face total war with the United States as early as the late 1920s, he recognized the urgent need to build up Japan’s military and economic capabilities. This, he believed, could be accomplished by combining the strengths of liberal market and planned economies in Manchuria, thus transforming the new colony into an industrial base for Japan. This idea, which was later called, “to-sei keizai ron” (a theory of managed economy),22 became the ideational foundation for the developmental state systems in Manchuria and wartime Japan. Ishiwara and Miyazaki created a bureaucratic agency called the Planning Bureau (Kikaku sho) as a pilot agency of the Manchurian government. It was designed to function as the “economic general staff” (keizai sanbohonbu), by formulating grand strategies for the Manchurian economy and guiding its industrialization, much like a general staff office does in the military. This Manchurian agency became the prototype of the wartime and postwar pilot agencies in Japan. To control industry, the Manchurian pilot agency established the “special corporation system” (tokushu gaisha seido), in which the government exercised tight control over the management of each firm. Around this time, military officers found a political ally in a government faction consisting primarily of younger officials, called the “reformist bureaucrats” (kakushin kanryo-). The Kwantung Army summoned a large number of those reformist bureaucrats from Japan to manage the Manchurian developmental state system. Many of those Japanese military and bureaucratic officials, who had gained policymaking and administrative experience in Manchuria, would return to Japan during the war and build another developmental state system there. Ishiwara returned to the Imperial Army’s General Staff Office in Japan in 1935 and quickly attained tremendous influence over the Japanese political arena. Ishiwara’s ideas of the inevitable total war and to-sei keizai ron spread quickly among military officers and young bureaucrats, stimulating them to think seriously about the need to prepare the Japanese economy for the upcoming war. To-sei keizai ron competed with three other economic models (i.e. Marxism, national socialism (kokka shakaishugi),23 and free market liberalism), in the intellectual discourse of this period. Each model had enthusiastic proponents. Leftist activists, labor organizations, and Marxist scholars advocated Marxism, while right-wing activists and one faction in the military supported national socialism. For their part, big business leaders and party politicians tried to defend the liberal market economy. There was severe competition among these groups in determining the guiding principles of the Japanese economy. By the late 1930s, however, the proponents of to-sei keizai ron had defeated their rivals, and had begun introducing an economic system based on their ideas. Ishiwara and his followers established a pilot agency – the Planning Board (kikaku in) – in Japan in 1937. Their successful experience in Manchuria

Introduction

15

encouraged them to replicate the Manchurian model in wartime Japan. However, the Manchurian model, composed of pilot agencies and the special corporation system, required some modifications for suitability in Japan. Unlike Manchuria, where industry was still at a primitive stage, Japanese industry was much more developed and consisted of numerous private firms. Furthermore, even though the political power of big business was declining, the introduction of the special corporation system seemed unattainable because it would require private firms to give up a significant degree of their managerial freedom. Although Ishiwara lost his political influence in Japan shortly after the establishment of the Planning Board, his ideas and reform plans were carried on by the reformist bureaucrats. One of those reformist bureaucrats was Kishi Nobusuke, who had gained first-hand experience in managing a developmental state system as the Secretary of Industry in the Manchurian government. Kishi returned to Japan and became Vice-Minister of Commerce and Industry in 1939. The bureaucrats in pilot agencies established a type of industrial association, called the “control association” (to-sei kai) system in 1941. This control association system utilized indirect control, which some of those bureaucrats had studied in Germany. Although it was also a system of state control, this system was considered less threatening to the business because it allowed the members of industrial associations to control themselves on behalf of the government. The bureaucrats thought this method of indirect control was a viable alternative to the special corporation system. In summary, it can be said that Japan’s wartime economic system evolved from the Manchurian model with slight modifications necessary to suit the conditions of Japanese industry at the time. In the postwar period, the American occupation forces, which were strongly influenced by liberal antitrust ideology, tried to “democratize” the Japanese economy by dismantling Japan’s wartime economic system. As a part of the economic democratization policies, the Americans successfully dismantled the various zaibatsu and carried out a major agricultural landreform program. However, while the Americans achieved their economic democratization goals in those areas, they were unsuccessful in dismantling many institutions of the wartime developmental state system. Initially, the Supreme Commander for the Allied Powers (SCAP) agreed to allow the Japanese government to rebuild institutions of indirect state control, including pilot agencies (the Economic Stabilization Board) and industrial associations (gyo-kai dantai), for one year after the end of World War II, as a temporary measure to stabilize the war-torn economy. However, when SCAP instructed the government to dissolve those industrial associations after the one-year moratorium, Japanese policymakers, many of whom had served as economic bureaucrats during the war, passively sabotaged SCAP’s efforts by delaying compliance until the end of the occupation. As a result, the wartime institutions survived SCAP’s reform plans and continued to operate throughout the postwar period.

16

Introduction

Why did the postwar Japanese policymakers choose to maintain those wartime systems? This question is particularly intriguing considering that the wartime Japanese developmental state system did not expand the production capabilities of Japanese industry or ensure political advantages for bureaucrats and military officers. The keys that explain the reemergence of the wartime control institutions are the personal and ideational linkages that connect the Manchurian government, the wartime regime, and the postwar government. First, there was the important personal linkage connecting the officials of the Manchurian, wartime Japan, and postwar Japanese governments. Those bureaucrats who built the developmental state systems in Manchuria and/ or wartime Japan continued to occupy important positions in the postwar Japanese government, even though many military officials, politicians, and business executives were purged by the American occupation forces. Furthermore, a number of wartime bureaucrats became leaders of postwar political parties and business organizations. This important continuity in the power structure of Japanese politics partly explains the reemergence of wartime institutions in postwar Japan. Second, in addition to the continuity in the power structure throughout these periods, the policymakers’ continuing confidence in the validity of wartime ideational guidance – to-sei keizai ron – was equally important in explaining the institutional continuity. This is noteworthy because just having the same group of individuals does not always result in institutional continuity. Policy shifts can occur even if there is no change in the power structure. The wartime institutions were reproduced and continued to function in the postwar period because the Japanese policymakers kept the same ideational guidance. The wartime Japanese policymakers established such institutions as pilot agencies and control associations to embody key to-sei keizai ron concepts. Evidence shows that the postwar Japanese policymakers maintained their wartime ideational guidance and attitudes, such as distrust of a liberal market economy and the commitment to state control, and that those ideas were inherited by the postwar generation of bureaucrats. This ideational guidance also motivated them to reestablish those institutions in the postwar period. Pilot agencies were rebuilt to alleviate the shortcomings of a liberal market economy by preparing long-term plans for the national economy. Industrial associations were tasked with assisting the enforcement of pilot agency plans, coordinating industrial interests, and preventing market competition from veering out of the government control. Furthermore, bureaucratic ideational guidance began to spread among other actors, such as party politicians and business leaders, many of whom had objected to state control in the past. Although not all business leaders came to share such views, many postwar business leaders welcomed government intervention and assisted the government in its policy implementation programs. Members of conservative parties, such as the LDP, began to embrace the ideas of a developmental state system as well. As ideational guidance

Introduction

17

took root in the new generation of bureaucrats, and gained acceptance from other actors such as party politicians and business leaders, a strong positive feedback effect was generated. With increasing numbers of actors advocating the idea, opposition to the developmental state system weakened, making it easier for policymakers to maintain the institutions. This positive feedback effect generated by ideational guidance further facilitated the reproduction of the developmental state system. Thus, personal and ideational linkages among the governments of Manchuria, wartime Japan, and postwar Japan explain the prolonged life of those institutions for an extended period of time. Based on this understanding, I formulated the following hypothesis: H3: Policymakers rely on their ideational guidance when building institutions and institutional arrangements reflect their ideas. Institutions continue to exist and institutional change becomes less likely as those ideas are passed on to the next generation of policymakers and spread among other actors.

VI Points of contention There are two fundamental differences between the rationalist arguments and my argument. First, while the former maintains that decisions by actors to maintain an institution are driven by their perceptions of self-interest, the latter posits that such decisions are constrained by their ideas. For rationalists, self-interest incentives among actors (the pursuit of a mutually beneficial outcome) shape their decisions and institutions persist for extended periods because the actors who built them have incentives to maintain them. I argue that the ideas held by actors constrain their decisions, so institutions persist because their ideas make it difficult for them to choose alternative options.24 This does not mean that actors have no self-interests at stake. They do, and their ideas and interests may synchronize on some occasions, so their decisions may seem to serve their individual self-interests as well. However, their ideas and interests may conflict with each other on other occasions. This is the second difference between the rationalist arguments and my argument. Some rationalists argue that the self-interest of actors will prevail under such conditions because they believe that ideas are only useful when they justify their interests.25 Other rationalists claim that actor ideas are shaped by the institutions, which also reflect their self-interests.26 Therefore, rationalists do not believe that ideas can have a significant impact on institutions. In contrast, I argue that the decisions by actors regarding institutions will reflect their ideas and that when their ideas and self-interests conflict, they are more likely to make decisions based on their ideas – even if it negatively affects their individual interests. This is because under uncertain conditions, actors do not always have perfect information available to assist them in making rational decisions, so they often must rely on what their ideas tell them to do. They are

18

Introduction

thus constrained by their ideas and may not be able to choose options that more readily serve their individual interests. Although I test the validity of each argument in my case study of the Japanese developmental state system, I do not expect to find a single argument that will explain all cases and invalidate the rest. I suspect that all factors influenced institutional evolution to one degree or another. Thus, the explanation I am trying to present for the developmental path of institutions is multi-causal, not mono-causal, and I expect each perspective to help explain the developmental path of Japanese economic institutions to a certain degree. However, even though I present a multi-causal explanation, I will also discuss the weaknesses of each perspective in order to clarify the boundaries of its theoretical domain. A multi-causality explanation may not be as parsimonious as a mono-causal explanation, but I believe that it will allow me to avoid exaggerating the explanatory power of a single theory, and thus present a more accurate and comprehensive account of institutional evolution.

VII Existing literature on the Japanese economy Several studies have analyzed the important links between the wartime economic system and the postwar Japanese economy (Johnson 1982; Okazaki and Okuno 1993; Yonekura 1993; Kobayashi et al. 1995; Noguchi 1995; Gao 1997). While I draw upon some findings from these studies, I also attempt to advance the study of the Japanese economy by presenting an analysis of institutional change in the 1930s, and the process of institutional evolution from Manchuria to wartime Japan and postwar Japan. Although existing studies present some evidence to support their claims of similarities in the industrial policies of wartime and postwar Japan, they fail to present a convincing explanation as to what caused those institutions to change, why such similarities exist, and why postwar Japanese policymakers reestablished those wartime economic institutions. For example, Johnson (1982), Yonekura (1993), and Kobayashi et al. (1995) all claim that one of the reasons postwar Japan reestablished the wartime institutions was the personal linkage between bureaucrats of the wartime and postwar governments. They argue that many of the wartime bureaucrats who administered the managed economy assumed important positions in postwar Japan, and that this personal linkage facilitated the reproduction of wartime economic institutions. However, as my analysis will show in Chapter 5, personal linkage cannot fully explain the reproduction process of the Japanese developmental state system. In addition, my study presents the significant roles played by private firms in the policymaking and implementation processes, through their participation in industrial associations. Johnson’s study focuses primarily on the role of bureaucrats in controlling industry and leading economic development, and underestimates the roles played by private firms (Samuels 1983; Schaede 2000). This study aims at presenting an account of the development of the

Introduction

19

Japanese economy that captures the roles played by state and private-sector actors, as well as the significant conflicts between them. A study of Japanese industrial policies by Gao (1997) has an analytical interest similar to this study and addresses the significant impacts of economic ideology. Gao argues that an economic ideology that is inspired by the government’s industrial policies, which he calls “developmentalism,” exists in Japan. However, a major difference exists between this book and Gao’s book. While Gao is interested primarily in a series of changes in Japan’s economic ideas, I focus on the continuity in economic ideas from wartime Japan to the 1960s. That is not to say that economic ideas did not change at all during the period. Gao rightly points out that Japan had to adapt to new market environments after the end of World War II. He contends that there were three distinctive policy paradigms in Japan – the managed economy between the 1930s and 1945, export promotion in the 1950s, and market liberalization in the 1960s – and that such changes in industrial policies were induced by modifications in ideas. Nonetheless, I believe such changes are of minor importance compared to what did not change. This is particularly true when looking at the core institutions of the Japanese developmental state system because policies are more susceptible to changes than the overall functions of institutions. In other words, I am more interested in the continuity in the core institutions of the Japanese developmental state system than the minor changes in industrial policies. My analysis of Japanese economic institutions shows that the functions of pilot agencies and industrial associations in Japan showed remarkably little change from wartime through the 1960s. Furthermore, although there were some changes in the industrial policies of pilot agencies during the abovementioned period, there was also significant continuity in the industrial policies. The postwar pilot agencies (i.e. the ESB and MITI) maintained exactly the same types of industrial policies (e.g. economic plans and industry rationalization policies) as their counterparts in Manchuria and wartime Japan. However, Gao’s study underestimates this important continuity in Japanese industrial policies and does not pay sufficient attention to intellectual discourse among state elites.27 Another significant contribution of this study is its analysis of the important impact of Japanese policymaker experiments in Manchuria, as well as on policymaking in wartime and postwar Japan. Many scholars have studied the developmental path of the Japanese economy, but very few have explored the link between Manchuria and postwar Japan. Johnson refers to the experiences of some Japanese bureaucrats in Manchuria very briefly (Johnson 1982: Chapter 4). However, his analysis of those Manchurian experiences does not go beyond a few short references.28 Gao also makes brief references to Japanese policymakers’ experiences in Manchuria, but his account on Manchuria is even more limited than Johnson’s. He pithily introduces Ishiwara and Miyazaki, but does not look into any of their policy plans, writings, or other documents to prove his points (Gao 1997: 104–5). Despite his acknowledgement of the

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Introduction

significance of the Manchurian case, Gao, like Johnson, does not analyze the critical link between Manchuria and Japan. In this book, I will present a more detailed examination of Manchurian and Japanese industrial policies. I explore three types of industrial policies of pilot agency in Manchuria, wartime Japan, and postwar Japan: economic planning, industrial rationalization, and market stabilization. To illustrate that there is indeed a critical link between them, I examine how these industrial policies evolved from Manchuria through postwar Japan. I also examine the institution-building processes in wartime and postwar Japan and show how those processes reflected the experiences gained by policymakers in Manchuria. In addition, this study looks into the context behind the modification of the Manchurian model in wartime Japan. These issues have not been examined in the existing studies. In summary, even though several studies have explored some of the issues analyzed in this study, this study claims to make important contributions. My analysis of the institutional change and evolution, along with a theoretical framework of historical institutionalism, offers a new way to understand the developmental path of the Japanese political economy in a long-term viewpoint. This study is perhaps the first attempt to apply these theories of historical institutionalism to an analysis of the Japanese developmental state system. It aims at capturing the significant links between Manchuria, wartime Japan, and postwar Japan; the interaction between state and private-sector actors; and the vital impact of ideational guidance on the continuity of the core institutions of the Japanese developmental system.

VIII Outline of the book The rest of this book is structured as follows: Chapter 2 presents a brief comparative analysis of Japan’s economic systems in the Meiji period, the 1920s, and the post-1930s. Through this analysis, I demonstrate that there were fundamental differences among those systems and that the developmental state system did not exist before the 1930s. This is a critical finding of this study because it suggests that the origin of the developmental state system can be found in the 1930s and also allows me to draw a set of empirical questions. Chapters 3, 4, and 5 are the empirical chapters of this study, where I present case studies of Manchuria under Japanese control (1932–45), wartime Japan (1937–45), and postwar Japan (1946–65). In each of these chapters, I analyze the roles of pilot agencies and industrial associations in promoting economic growth and the process by which the policymakers of those periods made decisions regarding establishment of those institutions. Particular attention is given to the personal and ideational linkages among the three cases by evaluating how decisions made in previous case(s) affected subsequent institutional evolution. My analyses employ an analytical method known as “process tracing,”29 which investigates every step of the causal sequence between the

Introduction

21

explanatory variable and the dependent variable, explicating how the former brought about changes in the values of the latter. The concluding chapter compares and contrasts the industrial policies of pilot agencies and the functions of industrial associations in the three cases to illustrate how these institutions evolved throughout the periods. It then revisits my arguments on the prolonged causal influence of the decisions made at critical junctures and assesses the soundness of alternative explanations compared to my arguments. Then, I discuss the implications I can draw from this study concerning Japanese political economy and the study of institutions.

2

The early stages of Japan’s industrialization

This chapter reviews Japan’s political economy prior to the 1930s while focusing on the industrial policies of the Meiji period (1868–1912) and the conditions of economy and politics of the 1920s. The primary argument of this chapter is that Japan’s political and economic structures prior to the 1930s were significantly different from those after the 1930s. Japan’s economic systems after the 1930s were quintessential examples of the developmental state system, which is often associated with particular characteristics, such as powerful state elites, close state–business relations, and a number of unique business practices. First, meritocratic state elites (i.e. economic bureaucrats) had strong influence over the management of private firms and controlled the flow of capital and other scarce resources in order to achieve rapid industrialization. Second, the developmental state system entails close state–business relations through a network of retired bureaucrats who were reemployed in private firms, and through industrial associations that facilitated the cooperation of private firms with the state. Last, a developmental state system is marked by a number of unique business practices, such as bank-centered financial systems, lifetime employment systems, seniority-based wage/promotion systems, and a cordial relationship between labor and management (Johnson 1982, 1995; Wade 1990; Hatch and Yamamura 1996). However, Japan’s economic systems prior to the 1930s did not have those characteristics. The Meiji government’s approach to industrial development was mainly through the establishment of state-owned enterprises and investment in industrial infrastructure. However, it is uncommon for economic bureaucrats in a developmental state system to establish state-owned corporations because they already have ways to control the management of private firms and the flow of capital, and do not need to own businesses directly. Yet, the Meiji-period bureaucrats lacked such control over private firms, and thus, direct ownership was the only option available to them, even though it was very costly for the government. Additionally, since they were recruited primarily through personal ties to powerful politicians rather than passing by competitive qualifying examinations, Meiji bureaucrats were not as competent as their wartime or postwar counterparts, who dominated the policymaking process with their policy

Early stages of Japan’s industrialization

23

expertise. Furthermore, the 1920s economy was a liberal market-based economy, in which government intervention was kept to a minimum. Therefore, it was more similar to the economic systems in Great Britain and the United States than a developmental system, and the power of economic bureaucrats was much weaker before the 1930s than in later periods – particularly during the 1920s when business leaders and politicians dominated the political scene. The nonexistence of the developmental state system before the 1930s is critical to this study because it indicates that the developmental state system emerged in Japan during or after the 1930s. In the following pages, I briefly review the economic systems of the Meiji period and the 1920s, focusing on the power of the economic elite vis-à-vis other social groups, their industrial policies, and business practices among private firms. From the comparison of Japan’s political and economic structures in different time periods, I draw a set of empirical puzzles, which is explored in subsequent chapters.

I Industrialization in the Meiji period (1868–1912) The Japanese government began its modern state-building process after the Meiji Restoration of 1868. In the early stage of industrialization, the government carried out several policies to nurture industry by investing in state-owned enterprises, building industrial infrastructure, and encouraging technology transfers from advanced European countries by hiring foreign engineers. Although the Meiji government played an active role in facilitating industrialization, its industrial policies were fundamentally different from those of governments after the 1930s. The primary industrial policy of the Meiji government was called “shokusan ko-gyo-” (production promotion) policy, which primarily emphasized three areas: first, development of industrial infrastructures; second, establishment of state-owned enterprises; and third, facilitating acquisition of foreign technology. The Meiji government first began its modernization project with industrial infrastructure development, particularly in the financial, railroad, and maritime transportation sectors. The government considered development in these three sectors indispensable to modernization of the Japanese economy. Through the 1882 establishment of the central bank, the Bank of Japan, the government unified the currency system, which was fragmented and disorganized during the Edo period (1603–1867). The government also approved establishment of 153 private banks, which created a network of modern financial institutions throughout the nation. Then the government initiated a massive campaign to develop a nationwide transportation network. Not only did the government invest heavily in railroads and the maritime transportation industry, it also encouraged private investment in these sectors by introducing a modern private corporate system. According to Nakamura, the financial sector received 78.1% of total private investment in 1884, while investments in finance, railroad, and maritime transportation sectors accounted for about 77.1% of private investments in 1894. These figures make a clear contrast with the low level of

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Early stages of Japan’s industrialization

private investment in the manufacturing sector (2% of private investment in 1884 and 11.4% in 1894) (Nakamura 1978: 74), which was the central focus of industrial policies in later periods. Second, the Meiji government established a number of state-owned enterprises in a wide range of industries including railroads, steel, mining, shipbuilding, postal service, and telecommunications. Development in such industries required a large amount of capital and was associated with high risks. Private companies were unwilling to take such risks and incapable of taking such heavy financial burdens in the late 19th century. Therefore, the government chose to establish state-owned enterprises. Examples of state-owned enterprises include Tomioka Silk Mill, Japan National Railway, shipyards in Nagasaki and Hyogo, Yahata Steel, Takashima Coal Mine, Miike Coal Mine, Kamaishi Iron Ore Mine, and many more. The government invested public funds heavily in these state-owned enterprises, and the Ministry of Domestic Affairs (Naimu sho-) and Ministry of Industry (Ko-bu sho-) were directly involved in the management of those enterprises. As a result, the corporate structure and production systems of state-owned enterprises became a model for private firms that would enter those industries later. Direct management by the government was the primary instrument of its industrial policy until the 1880s. However, once a business was well established, the government transferred its ownership stake to private companies. Such state-owned enterprises were sold at relatively low prices, and the government offered private companies easy payment plans with low interest rates. These attractive deals were given to “seisho-” (political merchants) a term given to merchants who had close ties with the government officials and politicians. The most successful seisho- first harvested state-owned enterprises that had been nurtured by the government. They later established corporate conglomerates called zaibatsu. For instance, the government transferred Miike Coal Mine and Tomioka Silk Mill to the Mitsui zaibatsu, Nagasaki Shipyard and Takashima Coal Mine to the Mitsubishi zaibatsu, and Hyo-go Shipyard to the Kawasaki zaibatsu. Those enterprises grew into some of Japan’s largest firms in the later periods and played critical roles in Japan’s early industrialization. This privatization process caused rent-seeking activities by big business and became a source of the crony relationships between business and politicians that are discussed in the next section. Third, the government facilitated acquisition of foreign technology and machinery. The Japanese government invited a number of engineers from Europe and the United States to work for the government in the construction of factories, railways, and telecommunications. In 1874, as many as 213 foreign engineers were employed in state-owned enterprises (Nakamura 1978: 77). This contrasts strongly with the Edo government whose closed-door policy allowed no foreigners on Japanese soil except for some Chinese and Dutch. Additionally, the government imported foreign machines and technologies and then leased them to private firms. For example, the government imported enough spinning machines to run 10 factories. It then used some of them in

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two state-owned enterprises, but leased the rest to private textile firms to facilitate development of the industry (Nakamura 1978). There were significant differences between the Meiji government and the governments of the wartime and postwar periods in their industrial policies and their relations to industry. First, the primary focuses of industrial policies were different. The Meiji government’s main goal of industrial policies was development of industrial infrastructure, while expansion of production capacity – particularly in manufacturing industry – was the primary objective of industrial policies in the wartime and postwar periods, as will be discussed in the following chapters. Second, the level of state control over private businesses was much lower in the Meiji period because the government had limited policy tools to control them. The Meiji government had neither pilot agencies that had authority to plan and direct industrialization, nor industrial associations that allowed the government to coerce industry to assist in the enforcement of its policies. Those institutions would not emerge until the wartime period, so the Meiji government was unable to influence the management of private firms directly. Thus, when the government wanted to lead development of a certain industry, it needed to establish a state-owned enterprise. Yet, many state-owned enterprises were privatized by the end of the Meiji period because it was too expensive for the government to operate such businesses by itself. The post-Meiji governments rarely established state-owned enterprises.1

II Liberal market economy in the 1920s The Meiji government’s industrial policies focused on development of industrial infrastructures, establishment of state-owned enterprises, and acquisition of foreign technologies and machineries. However, private firms became the central players of the Japanese economy by the 1910s because the Meiji government had privatized many of its state-owned enterprises. Thus, the Japanese economic structure developed into a liberal capitalist system in which the government stayed out of market activities; economic bureaucrats did not play significant roles; and private business activities were largely free from government regulations. It can be seen, therefore, that the Japanese economic structure in the 1920s was fundamentally different from that of the postwar periods (Okazaki and Okuno 1993; Werner 2001; Miwa and Ramseyer 2002; Hoshi and Kashyap 2001). Okazaki and Okuno contend that, “The Japanese economy before the 1930s was basically an Anglo-Saxon type of classical market economy” (Okazaki and Okuno 1993: ii–iii). First, labor-management conditions were significantly different. Labormanagement conditions in the postwar period were marked by peculiar labor practices, such as lifetime employment, a seniority-based wage and promotion system, enterprise unions, egalitarian income distribution, and cordial labormanagement relations. Labor-management relations were quite hostile between 1919 and 1938. Labor unions organized workers in different companies and

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Figure 2.1 Labor disputes, 1910–45. Source: Nihon Keizai To-kei Kenkyu-jo (1958: 296).

were very active and hostile to companies, resulting in a number of labor disputes. Statistical data collected by Nihon Keizai To-kei Kenkyu-jo (Japan Economic Statistics Research Institute) show that there were as many as 2,388 labor disputes in 1919 – a sudden increase from 417 cases during the previous year. This number remained high until 1938, the year Japan shifted to a wartime economy (see Figure 2.1). Additionally, scholars suggest that the origin of the lifetime employment and seniority wage system can be found in the government’s labor policies during the wartime period (Okazaki and Okuno 1993; Kobayashi et al. 1995; Noguchi 1995). Second, while firms in the post-1930s periods relied heavily on indirect financing through bank loans, most companies in the 1920s financed themselves through the equity market,2 and individual stockholders exerted strong influence over corporate governance. This is important because the postwar government used bank loan-based financing as a tool to control private firms. By maintaining tight control over banks, the postwar government could indirectly influence the management of private firms, which heavily relied on bank loans to finance their business (Allen and Gale 2000; Hoshi and Kashyap 2001; Miwa and Ramseyer 2002; Hayes 2004). Hayes describes the heavy reliance of postwar Japanese firms on government by saying, “Japanese enterprises are primarily financed with borrowed money, a practice that differs from that found in most other industrialized countries. Whereas Western companies have somewhere around 60% equity investments, leaving 40% borrowed money, the Japanese have only 20% equity and 80% debt” (Hayes 2004: 163). However, according to data from Okazaki and Okuno, on average between 1966 and 1970, firms raised 81.2% of their funds from bank loans and only 6.8% from equities, while firms raised 119.0% of their funds from equities and –25.5%3 from bank loans in the period between 1931 and 1935 (Okazaki and Okuno 1993: 10). These data suggest that stocks were the major source of finance for Japanese firms until 1935, and the heavy reliance on bank loans started in the later periods. The primary reason behind the popularity of

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direct financing through the equity market was its lax regulatory environment. Compared to the post-1930s period, it was much easier for firms – even smaller enterprises – to list their stock on the market (Okazaki and Okuno 1993; Allen and Gale 2000). Most regulations in the financial sector were introduced after the outbreak of war with China in 1937,4 and, until then, firms were able to raise funds in the equity market with minimal restrictions. Hoshi and Kashyap claim, “The late 1930s and early 1940s was the time when bank financing became the dominant funding source for most of the industrial firms involved in the war effort” (Hoshi and Kashyap 2001: 4). Bank loan-based financing was not popular before the mid-1930s because of the nation’s low savings rate, the relatively free equity market, and the lack of the so-called “main-bank system” during the pre-1930s period (see Table 2.1 and Figure 2.2). Therefore, unlike their post-1930s counterparts, firms were forced to focus on short-term rather than long-term profits because of strong stockholder pressure and threats from take-over bids. Table 2.1 Corporate finance sources (%)

1931–35 1936–40 1941–45 1946–50 1951–55 1956–60 1961–65 1966–70

Equity

Bonds

Loans

119.0 43.1 16.7 13.0 14.1 14.2 16.2 6.8

3.1 6.7 6.4 3.5 3.8 4.7 4.4 3.1

−25.8 49.7 74.9 72.4 71.9 73.0 73.0 81.2

(Okazaki and Okuno 1993: 10)

Figure 2.2 Household savings and consumption rates, 1930–64. Source: Bank of Japan (1966: 50–51).

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By the 1910s, the Japanese equity market had developed to a size and activity level comparable to its counterparts in advanced nations. According to Miwa and Ramseyer, the stocks traded in the exchanges of Tokyo and Osaka were valued at 21.2% of gross domestic product (GDP) in 1900, 53.3% in 1910, and 51.1% in 1920. “These numbers easily place them within the range of modern advanced economies: 1990 turnover/GDP ratios of 31.5% for the United States, 28.6% for the United Kingdom, 22.1% for Germany, and 12.4% for Canada” (Miwa and Ramseyer 2002: 140). Finally, and most important to this study, there was no organization that performed the functions of the postwar industrial associations prior to the 1930s. This does not mean that Japanese business did not have cartels during that period. In fact, guilds and cartels in Japan have a long history extending back to the age of feudalism. Yet, such guilds and cartels were independent of government and performed their functions, such as quantity restrictions, price-fixing, standard setting, exclusion of outsiders, and lobbying, much like their Western counterparts. The government did not vest them with quasi-government agency status, and they did not assist the government in enforcing government policies or in drafting industrial policies. Again, the absence of the core institution of the postwar Japanese economic system prior to the 1930s suggests that its institutional origin can be found in the 1930s. Let me briefly discuss the history of cartels in Japan and illustrate the differences between the pre-1930s cartels and the industrial associations. In the Edo period (1603–1867), for each product or trade, businesses organized themselves into guilds, cartels, and chambers of commerce. For example, merchants had cartel organizations called za and kabu nakama, which monopolized the sales of certain products. In exchange for the payment of annual license fees, the Tokugawa shogunate guaranteed the cartel members exclusive rights to the sale of various products, such as gold (kin-za), silver (gin-za), copper, lime, silk, and vegetable oil (Hall 1991: 207; see also Schaede 2000: 230–31). The Meiji government abolished kabu nakama in 1872 as a part of its attempts to realize “freedom of business” (Fujita 1981: 3–4). However, the government did allow the formation of business organizations in industries, such as cotton spinning, banking, iron and steel, cement, and the like. These organizations were active in blocking imports, fixing prices, forming joint-purchase organizations, and lobbying the government for subsidies and protections (Schaede 2000; Lynn and McKeown 1988). For example, pig iron producers formed a joint sales and price-setting organization called the Pig Iron Cooperative Association (Sentetsu Kyo-do- Kumiai) in 1926 and aggressively pressured the government for protection from imports from India. “Although the government did not impose new tariffs to protect the pig iron producers, it granted per ton subsidies for the production of iron, which enabled the firm to earn profit in some years during the late 1920s when they would otherwise have had losses” (Lynn and McKeown 1988: 17). In other cases, those organizations lobbied the government to defeat policy plans that they found unfavorable. For instance, the Japan Cotton Spinners

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Association (established in 1882) pressured the government to withdraw “reformist efforts to introduce laws that would protect workers,” such as “the first major piece of labor legislation to come before the Japanese Diet in 1910” (ibid.: 11). The above examples indicate that business organizations in the 1920s were independent of the government and functioned in the same way that private organizations (i.e. business lobbying groups and cartels) do in other industrialized countries. Furthermore, they did not play the roles or have the power of the postwar industrial associations. In Schaede’s description of the business organizations prior to the war, “Most of these associations developed independent of government guidance and their primary objectives were to regulate quality and curb ‘undue’ competition; i.e., secure a stable profit margin … the large firms were constrained neither by rules on membership nor any other government controls on their formation. Large firms formed and joined the new associations voluntarily” (Schaede 2000: 239). Thus, it is reasonable to argue that business organizations prior to the 1930s were fundamentally different from the postwar industrial associations, and that the institutional origin of the postwar industrial association must be found in the 1930s. In summary, Japan’s economic system in the 1920s was quite similar to the Anglo-Saxon market-based economy. The Meiji government scaled back its roles in industrialization as it introduced liberal economic policies, such as the privatization of state-owned enterprises. That made the government marginal in the market, and private business became the central actor. Additionally, the lack of bank loan-based financing before the 1930s and the absence of the postwar-style industrial associations suggest that the government did not have control over the management of private firms during this period.

III Zaibatsu dominance and party politicians This section starts with a brief introduction of politics during the Meiji Restoration to provide readers with a general understanding of the early stage of Japan’s political development. It is followed by a discussion of several important features of politics in the 1920s that were the keys to the development of a liberal market economy. More specifically, it probes into the reasons why the political coalition of big business leaders and party politicians came to dominate politics, and examines their relations to other political actors, such as bureaucrats and the military. It then compares the 1920s systems with the post-1930s systems, which were dominated primarily by the coalition of the military and bureaucrats (wartime), or by bureaucrats and Liberal Democratic Party (LDP) politicians (postwar). The central political actors in the Meiji period were what are known as “han-clique politicians,” who were from either Satsuma-han (present-day Kagoshima) or Cho-shu--han (present-day Yamaguchi) – two feudal domains that played central roles in the Meiji Restoration. Han-clique politicians monopolized important positions in the government, such as cabinet posts, governorships,

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and high-ranking bureaucratic positions. A handful of extremely powerful han-clique politicians were called oligarchs (genro-) and prime ministers were appointed from among those oligarchs. “Those influential individuals often acted through the Privy Council, which advised the emperor on matters of constitutional interpretation, emergency decrees, martial law, treaties, and international law” (Hayes 2004: 22). Even though the Meiji constitution defined the Emperor as sovereign, he was politically inactive and had no real decision-making power. Important decisions were made through meetings among the oligarchs and the Emperor’s role was to give legitimacy to decisions made by the oligarchs. The legislative branch of the Japanese government – the Imperial Diet – was established in 1890. It consisted of a House of Representatives, the members of which were popularly elected, and a House of Peers, the members of which were nobles with inherited membership. The first national election was held in the same year.5 Even though political parties were formed soon thereafter, their political salience was limited until the late 1910s for the following reasons: first, there were severe limitations on Diet member roles because the introduction of legislation required the approval of a minister, most of whom were oligarchs. Most Diet members did not act as lawmakers, so their main function was to deliberate the oligarch bills. Second, party affiliation was much less important than birthplace in this period. Han-clique politicians from Satsuma-han or Cho-shu--han built exclusive networks among themselves, and those who were born in other places had very little chance for political success. Thus, the oligarchs and han-clique politicians marginalized political parties during the Meiji period and a competitive party system did not take root until the 1910s. Politics in the 1910s and 1920s is often referred to as the “Taisho- democracy” because democratic institutions made significant development during the Taishoperiod (1912–26). As awareness of politics developed among the population, a series of mass movements involving workers, students, and farmers demanding further political rights spread throughout the nation. The motivation behind these popular political movements was the government’s failure to address inflation and labor unrest. Additionally, the introduction of Marxist ideology and the success of the Russian Revolution further facilitated popular movements, and leftist parties, such as the Communist Party and various socialist parties, were formed in this period. Although the government reacted with hostility toward Marxists, whose activities were banned and suppressed by the Peace Preservation Law of 1925, it could not ignore popular demands for democracy, which resulted in several important political developments, including universal suffrage for men in 1925,6 the development of a competitive political party system, and the end of oligarchy dominance. There were several significant differences in the political system of the 1920s and those of the later periods, and those differences are often overlooked by scholars of Japanese politics. First, the bureaucracy, which possessed strong influence over the policymaking process in the wartime and postwar periods, was not a very powerful actor in this period. As the government’s roles in

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industrialization gradually diminished through the privatization process, bureaucratic power declined in the late Meiji period. However, many scholars believe that the bureaucracies have been in power since the beginning of the modern state in Japan. For example, Pempel claims that, “There is wide-spread agreement that much of the industrial and social transformation that Japan achieved in the late nineteenth and early twentieth century was due to strong bureaucratic leadership” (Pempel 1992: 20). Similarly, Hayes believes that Japan has a long history of autonomous bureaucracy beginning in the Meiji period and claims, “The power of the bureaucracy is not a new development in Japanese politics, but is the product of long-standing political style and traditions. The bureaucracy was an important element of the political modernization during the last half of the nineteenth century” (Hayes 2004: 58). Furthermore, Fulcher (1988) argues that Japanese society was highly bureaucratized during the Edo period (1603–1867), and that this tradition of strong bureaucracy continued throughout Japan’s modernization period. (For an elitist view of the Japanese bureaucracy, also see Maki 1947 and Silberman 1965.) These scholars generally assume that an autonomous bureaucratic structure dominated Japanese policymaking from the Meiji period, an assumption that can lead to overestimations of bureaucratic political power. They often overlook the fact that the power of bureaucrats varies from time to time, and there was a time when bureaucratic influence was limited. There are four reasons to believe that the bureaucracy was not a very powerful political actor during the early periods. First, while the wartime and postwar bureaucracies were meritocracies of talented individuals recruited through highly competitive examinations, bureaucrats in the early periods were not as competent because they were often appointed through favoritism. The elite nature of the bureaucracy allowed bureaucrats to dominate the policymaking process in the post-1930s systems. Describing the wartime bureaucrats, Maki claims that bureaucrats were “carefully selected and trained to become a member of the governing elite. Education and selection were planned to help in the creation of the bureaucracy as a class, not as a mere agglomeration of government officials and workers. Only those who passed the government examination could hope to become true bureaucrats” (Maki 1947: 395). Hayes describes the meritocratic nature of the postwar bureaucrats by saying, “The higher civil service is a thoroughly professional and elite group made up of the top graduates of the best educational institutions in the country, especially Tokyo and Kyoto universities” (Hayes 2004: 59; also see Johnson 1982: Chapter 2). However, the quality of the Meiji bureaucrats was adversely affected by the problem of “jo-jitsu ninyo-,” defined as appointments through favoritism. The han-clique politicians had strong influence over the bureaucratic appointment process and gave such government positions to their relatives or persons from the provinces of Satsuma or Cho-shu- (see Watanabe 1959; Shimizu 2007). Watanabe describes the Meiji bureaucracy as an “aristocratic class,” rather than a meritocracy (Watanabe 1959: 139). Unlike the postwar bureaucrats,

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who were highly respected, people despised the bureaucrats who gained their positions through favoritism by calling them “electric wire” or “incompetent,” because the han-clique politicians summoned them by telegram when vesting them with government positions (Shimizu 2007: 51). This favoritism in the appointment process caused “a spread of incompetent bureaucrats” (ibid.: 24). Although the government introduced a civil service examination system in 1887, those incompetent bureaucrats remained in ministries for several decades. Shimizu claims, “Ten years after the introduction of the civil servant examination, the university-educated bureaucrats became more salient in ministries as they began to assume the section-chief positions. However, the senior positions were occupied by han-clique bureaucrats … Thus, the influence of han-clique [bureaucrats] in government agencies was still considerable” (Shimizu 2007: 73–74). While the postwar bureaucracy had strong influence over the policymaking process thanks to its policy expertise, Meiji period bureaucrats had no such influence because they did not have such talents. Second, zaibatsu leaders accumulated tremendous political power during the 1920s (as detailed below), and resisted government interference with their businesses and markets. Since zaibatsu leaders firmly believed in liberal market economic theory, they strongly resisted bureaucratic attempts to extend state control over the market, even during the war period. (For more details on zaibatsu ideational stances and resistance to state control, see Chapter 4.) In some cases, zaibatsu leadership pressure ousted prominent bureaucrats who were attempting to tighten state control from their offices.7 Third, those party politicians who were close allies of zaibatsu leaders assisted their efforts to limit the power of the bureaucracies. During the Taisho- Democracy period, party politicians, who expanded their influence in the democratization movement, began to pull the bureaucracies into their control. In 1913 the Yamamoto Cabinet, led by the Seiyu-kai Party, revised the Bunkan Ninyo- Rei (the Civil Servant Appointment Ordinance), relaxing the requirements for appointments of senior bureaucratic positions. Before the revision, the ordinance required all senior officials to have passed the civil servant examination, but Seiyu-kai repealed this requirement, making it possible for the governing party to make political appointments.8 This encouraged the bureaucrats to affiliate and strengthen ties with the political parties, which in turn allowed the parties to gain significant influence over the bureaucracies (Shimizu 2007: Chapter 5). Furthermore, Prime Minister Hara Takashi (Seiyu-kai, 1918–21) and his fellow party members built local political support bases through the use of pork-barrel politics, thus establishing party politician predominance over the bureaucrats in local politics as well. Hara also abolished the county system, which had allowed the Ministry of Internal Affairs to dominate local politics, and thereby significantly weakened another power center of the bureaucracy (Ando- 1975: 204). Lastly, bureaucrats did not then possess the policy tool that would vest them with leverage over private business in the postwar period, namely amakudari, or “descent from heaven.” Amakudari basically refers to the reemployment of

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retired bureaucrats by private firms. Such ex-bureaucrats would often take executive positions in private firms where they would protect the interests of their former ministry, thus allowing that ministry to monitor and exert control over the firms. This practice was one of the primary reasons the bureaucrats retained strong control over business in the postwar period. However, this practice was not common before the end of World War II (see Johnson 1995). The second difference between the 1920s systems and the wartime systems is the relative weakness of the military’s political power during the earlier period. Established in 1871 and consisting primarily of recruited commoners mainly from rural regions, the military was still a new political force with limited influence compared with the bureaucrats and Meiji politicians, who had their roots in the samurai class. The weakness of the military was evident in its political defeats against the business-party coalition where its interests often conflicted with those of zaibatsu leaders and party politicians. While the former wanted to expand the government’s expenditures to modernize Japan’s military forces, the latter advocated friendly relations with the Western powers and a balanced budget. The weakness of the military vis-à-vis the business-party coalition is most evident in Prime Minister Takahashi Korekiyo’s decision during the Washington Naval Conference in 1922. At that conference, Japan and major Western powers met to create a balance of power in the Far East. The Takahashi Cabinet ratified the Washington Treaty, which required Japan to downsize its naval power severely, and made other concessions to Great Britain and the United States, which strongly pushed for the treaty, in spite of fierce criticisms from the Japanese military, which had demanded increased defense spending. Despite the military’s strong opposition, the administration’s policies reflected the interests of the zaibatsu leaders, who heavily relied on exports to European and American markets and which wanted friendly relations with Europe and the United States.9 Close political ties between party politicians and zaibatsu leaders led the country to arms-reduction and international compliance throughout much of the 1920s, with the military lacking the means and political capability to compete with them until the mid-1930s. Again, some scholars overlook the time period in which the military showed signs of relative weakness. Pempel believes, for example, “Unlike their counterparts in the U.S., Britain, and even France, Japanese civil and military bureaucrats were relatively free from major checks from electoral or parliamentary spheres” (Pempel 1992: 20). Yet, in reality, the military was by no means autonomous and was relatively weak as a political actor during this period. Third, initiative in the policymaking process was vested in the hands of zaibatsu leaders and their political allies, party politicians, who guided Japan to a laissez-faire economy. During the Taisho- period, the power of party politicians grew significantly, eventually replacing the Meiji oligarchs as the primary policymakers. The first truly party-based government was formed in 1918 and was led by Prime Minister Hara Takashi, the leader of Seiyu-kai, which was the majority party in the Diet. The emergence of a two-party

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system marked the political scene in this period, and the two major parties, Seiyu-kai and Kenseikai (renamed Minseito- in 1927), formed governments alternatively. As described by Hall, “Both [parties] were conservative in that they represented elite interests. They inclined, however, toward civil interests as against the military, and they cooperated with business much more than did the bureaucracy itself. It was common knowledge that the Seiyu-kai supported the interests of Mitsui zaibatsu, while the Minseito- supported those of Mitsubishi” (Hall 1991: 316). This political coalition between party politicians and zaibatsu leaders dominated the political scene between 1918 and 1932. The rest of this section will take a closer look into the influence of the business-party coalition. A sudden surge of exports to the belligerent countries of Europe during World War I brought about a boom in the Japanese economy, which allowed Japanese industry to develop rapidly. However, wealth was unevenly distributed among the major corporate conglomerates, or zaibatsu, such as the Mitsui, Mitsubishi, Sumitomo, and Yasuda groups. According to Nakamura, the paid-up capital of the Mitsui, Mitsubishi, and Sumitomo groups accounted for 30.1% of all firms in Japan in 1928, and, with their plentiful capital obtained through new investments and aggressive take-over bids, they extended their business activities into various new industries, such as electric machines, synthetic fibers, chemical fertilizer, long-term loans, and trust funds. In this highly oligopolistic economy, “The power of the zaibatsu grasped complete control of the Japanese economy, both in quantitative and qualitative senses” (Nakamura 1978: 116). The increasing economic power of the zaibatsu leaders allowed the expansion of their political influence as well. During the Meiji period (1868–1912), political power was concentrated in the hands of the Meiji oligarchs, but the following Taisho- period (1912–26) witnessed the rise of party politicians. Big business owners who obtained extraordinary political influence through their close ties with important politicians and government officials were called “seisho-” (political merchants). There are four primary factors that contributed to the rise of zaibatsu political influence during this period. The first factor is the development of kinship-based networks called keibatsu. In such networks, business owner families made marriage arrangements between their sons and daughters and those of powerful party politicians, thus tying the families together through kinship. In some cases, zaibatsu families adopted the sons of politicians. Some examples of the practice include the following: the sons-in-law of Mitsubishi zaibatsu founder Iwasaki Yataro included Kato- Takaaki (president of Kenseikai, prime minister 1924–26), Shidehara Kijuro- (prime minister 1945–46), and Kiuchi Jushiro- (a member of the House of Peers). Ando- argues that such kinship ties were among the primary reasons behind the Okuma Cabinet’s pursuit of expansionist policies on the Asian continent, and the thrust of “the twenty-one demands” imposed upon the government of the Qing Dynasty in 1915 by then-foreign minister Kato- Takaaki. Kato- led

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the government towards an expansionist policy that reflected the interests of the Mitsubishi zaibatsu, which was taking aim at business opportunities on the continent (Ando- 1990: 259). Additionally, a leader of the Sumitomo zaibatsu adopted a brother of Saionji Kinmochi (president of Seiyu-kai, prime minister 1906–08, 1911–12), who later became the head of the Sumitomo family. The founder of the Furukawa zaibatsu also adopted the second son of Mutsu Munemitsu (foreign minister 1892–96). Such kinship ties between zaibatsu leaders and politicians made it easy for them to communicate with each other and to harmonize their interests. The second factor is political contributions. Zaibatsu leaders provided party politicians with financial resources, and, in exchange, politicians pushed the government to make policies that were favorable to the zaibatsu. This interdependency between zaibatsu leaders and party politicians was the foundation of their coalition. For example, the Mitsui zaibatsu leaders made financial contributions to members of the Seiyu-kai Party through its personal relationship with the party’s senior member, Inoue Kaoru, and the Mitsubishi zaibatsu leadership provided the Kenseikai Party with financial support through Kato- Takaaki. Furthermore, Sumitomo supported Saionji, and the Furukawa zaibatsu was known to be a patron of Hara Takashi (prime minister 1918–21) (Morikawa 1978: 116). A book on the corporate system published in 1930 by one of the most prominent economists at the time, Takahashi Kamekichi, explains how money built cozy relationships between business and party politicians: When a company seeks for profit through political means, it needs to build close relationships with either the Seiyu-kai Party or the MinseitoParty. In plain words, [the company] needs to contribute campaign funds and other money to a party … Also, if the company’s executives became party members, they paid a large amount of money as member dues from the company’s account. This is because the membership is guaranteed to provide political benefits. (Takahashi 1930: 72) One example of the corrupt relationship between zaibatsu leaders and party politicians is known as “the Echigo Railway scandal.” This scandal occurred in 1927 when the government had decided to expand the governmentowned Japan National Railway system by acquiring local private railways. An executive director of Echigo Railway who was arrested for bribing politicians admitted to giving 200,000 yen to members of the House of Peers, such as Sakai Tadamasa, who then pressured the government to purchase the railroad at a high price. The media covered the Echigo Railway scandal and criticized the crony relationships between party politicians and the zaibatsu leadership. For example, the Kokumin Shimbun, one of the major newspapers at the time, provided extensive coverage of the case and quoted some commentators who

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spoke on the causes of such scandals. One such, Abe Isoo, commented, “Politicians and business owners are inseparable, and this is the major reason for political corruption today” (Kokumin Shimbun, November 12, 1929). Sakai Toshihiko also asserted, “The fundamental problem [of the Echigo Railway scandal] is the secret strife between different zaibatsu groups … Because today’s major political parties are completely under the control of the zaibatsu groups, political parties behave in ways that serve the interests of the zaibatsu groups. Therefore, political scandals are always tied together with political parties” (Kokumin Shimbun, November 12, 1929). The third center of zaibatsu power was an advisory committee, called the Agriculture, Commerce, and Industry Council, which was formed within the Ministry of Agriculture, Commerce, and Industry in 1896. The Council was Japan’s first advisory committee and was designed to explore the views of business owners and other stakeholders on important economic issues including trade, currency systems, exchange rates, the gold standard system, financial systems, immigration, and labor issues. Although the council’s policy recommendations did not always produce policies favorable to the business community, its meetings functioned as a vehicle for delivering zaibatsu leadership viewpoints to the government. For example, the Commerce and Industry Council submitted its policy recommendation regarding the sodium industry in 1913. The recommendation complained that British sodium producers were dumping their products in the Japanese market and urged the Japanese government to take appropriate measures – including creation of an anti-dumping measure and other protections for domestic sodium producers (Naigai Sho-gyo- Shimpo-, August 20, 1913). Although the government was slow to respond to the industry’s demands, the Ministry of Commerce and Industry finally decided to provide domestic producers with subsidies (about 210,000 yen) to support their sodium production after the Commerce and Industry Council submitted a policy recommendation in 1927. The members of the council included Dan Takuma, the president of the Mitsui zaibatsu. A newspaper at the time commented, “The policy is expected to contribute significantly to the development of our nation’s chemical industry. [The government’s decision] suggests that the industry’s demand since the time of the Okuma Cabinet [1914] had finally become reality” (Naigai Shogyo Shimpo, November 22–26, 1927). The council also submitted similar recommendations for various policy measures regarding government support for the steel, shipbuilding, and agricultural industries. The fourth factor is business executives turned politicians. In the Taishoperiod, an increasing number of zaibatsu executives and managing staff competed in local and national elections, with some winning seats in the Diet or local assemblies. Such politicians were particularly prevalent in the House of Peers. Examples of politicians with business roots include Hara Takashi, who is known as Japan’s first “commoner” prime minister. Although Hara had no title of nobility, and was thus considered a commoner, he was not an

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ordinary man. Hara was the vice-president of Furukawa Mining, a key company of the Furukawa zaibatsu, and maintained close ties with the zaibatsu leadership even after his career change. When the Furukawa zaibatsu was threatened with the suspension of its mining rights because its operations had seriously polluted the town of Ashio in the early 20th century, Hara worked hard to protect his former employer. Prime Minister Takahashi Korekiyo,10 who succeeded Hara as premier, was sensitive to business interests as well. The Takahashi Cabinet’s decision to accept arms reduction demands in the Washington Naval Conference of 1922 reflected the interests of zaibatsu leaders, who wanted friendly relations with European nations and the United States, on which they relied heavily for their markets. Additionally, Shidehara Kijuro-, who was closely tied to the Mitsubishi zaibatsu, was ambassador plenipotentiary in the Washington Conference. Later, Shidehara served as foreign minister (1924–31) and adopted a pacifist doctrine, often referred to as “Shidehara Diplomacy”, which prioritized peaceful relations with Europeans and Americans, just as the zaibatsu leadership wished. In summary, the rise of popular demands brought about several important political developments toward democracy during the 1920s: the Meiji oligarchs gradually lost their influence, the government introduced universal suffrage for adult men, and a competitive party system took root. Politics in the 1920s differed from the later period in the following points: the bureaucracy’s power was limited; the military was still in the primitive stage as a political actor; and the policymaking process was dominated by zaibatsu leaders and party politicians.

IV Conclusions This chapter examined the Japanese political economy prior to the 1930s. It focused on industrial policies in the Meiji period, the economic system of the 1920s, and the political coalition between business and political parties. I also compared Japan’s political economy before and after the 1930s. My analysis of the above allowed me to reach the following conclusions: first, I found significant differences between the Meiji government and the governments in the wartime and postwar periods, in their industrial policies and their relations to industry. The primary focuses of industrial policies were different. The Meiji government’s primary industrial policy goal was the development of industrial infrastructure, while expansion of production capacity – particularly in the manufacturing industry – was the primary objective of industrial policies in the wartime and postwar periods, which will be discussed in the following pages. Furthermore, the level of state control over private business was much lower in the former period because the government had limited ability to control business. Moreover, while the Meiji government relied solely on state-owned enterprises to influence corporate activities, the wartime and postwar government used pilot agencies and industrial associations to do so.

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Second, the economic system in the 1920s was quite similar to the AngloSaxon, market-based economic model. The Meiji government scaled back its roles in industrialization at the same time as it introduced liberal economic policies, such as the privatization of state-owned enterprises. That made the government marginal in the market and allowed private business to become the central actor. Furthermore, many features of the postwar Japanese economy, such as pilot agencies, industrial associations, lifetime employment, the seniority-based wage system, a high savings rate, and cordial labor-management relations did not exist during the period. Particularly, the absence of industrial associations and a bank loan-based financing system before the 1930s indicates that the government did not have control over the management of private firms during this period. Third, the coalition of big business leaders and party politicians dominated Japanese politics in the 1920s. The two groups were closely tied by kinship relations, political contributions, and the advent of politicians who were former businessmen. This coalition allowed zaibatsu leaders to keep the market free from governmental interference, and the powers of state elites (the bureaucracy and the military) were significantly limited. These findings suggest that there were clear discontinuities in Japan’s developmental path before and after the 1930s. Lastly, the analysis of the pre-1930s Japanese political economy reveals important empirical puzzles: first, why did the Japanese economy transform from a classical liberal market economy to a developmental state system after the 1920s? Second, how and why did the business-party coalition (which favored a liberal market economy) lose power by allowing other actors to seize power? Third, under what circumstances did the developmental state system emerge in Japan and who was responsible for its institutional foundation? Finally, what options did policymakers have when they worked to build a new system in the 1930s and why did they choose a developmental state system? The following chapters attempt to answer these questions through processtracing analyses of institutional evolution in Manchuria, wartime Japan, and postwar Japan.

3

Institution-building in Manchuria (1932–45)

In the previous chapter, I made the point that there were some important disparities in the Japanese political economy before and after the 1930s that suggest a fundamental institutional change took place during the 1930s. The following chapters attempt to clarify the process of institutional change by focusing on several historical events that had significant impacts on the process. One of those events is the formation of a new state in Manchuria by Japanese military officers and bureaucrats in the early 1930s. This chapter presents a case study of the developmental state system in Manchuria (1932–45). Japan expanded its sphere of influence into the northern part of China and Manchuria, where it built a puppet government under its control in the early 1930s. Japanese military officers, who had substantial control over the state, attempted to rapidly transform Manchuria into an industrial supply base for their mother country. To accomplish this, they introduced several new industrial policies that were considered too radical for Japan and its previously acquired colonies such as Korea and Taiwan, where zaibatsu leaders and party politicians strongly opposed government involvement in the market. Unlike in Japan, Korea, and Taiwan, military officers had a free hand in policymaking in Manchuria, and were able to build a new economic system in which the state had extensive control over various aspects of economy. To that end, the military summoned a large number of bureaucrats from Japan to manage the Manchurian developmental state system. Many of those Japanese military and bureaucratic officials who experienced policymaking and administration in Manchuria later returned to Japan during the war and built another developmental state system there. Thus, it is safe to say that Manchuria, under Japanese control, is the oldest case of the developmental state system in East Asia. The Manchurian case is critical because the policy choices in wartime Japan and postwar Japan (and perhaps other East Asian cases as well) are closely tied to the experiences of policymakers in the Manchurian industrialization process. In other words, the evolutionary path of the Japanese developmental state system was influenced by the Manchurian case and an analysis of the Manchurian developmental state system provides critical insights into the origin of the Japanese developmental state system. Through a close analysis of policymaking

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in Manchuria under Japanese control, I try to find answers to the following questions: who built the developmental state system in Manchuria? What induced them to build the system? What influenced the evolution of those institutions? I will begin this chapter with a brief historical description explaining the process through which Japan expanded its interests in the region in the early 20th century and how Japan ended up establishing a Manchurian puppet state in 1932. It is followed by a discussion of two core institutions of the Manchurian developmental state system, namely the Planning Bureau and the special corporation system. The Planning Bureau was a pilot agency that planned and orchestrated rapid industrialization of the Manchurian economy, while the special corporation system functioned as a tool of indirect state control for the government. I focus on these two institutions because they function as the central institutional features of the Manchurian developmental state system, which later became the model for the Japanese developmental state system.

I Historical background Japan’s advance to Manchuria The Russo–Japanese War (1904–05) ended with the conclusion of the Treaty of Portsmouth, which granted Japan control of Russia’s Chinese Eastern Railway, a portion of the Trans-Siberian line cutting across the northeastern part of China, built by the Russians. In 1906 Japan established a semi-public corporation called the South Manchuria Railway Company (Mantetsu) to manage the railway and colliery inherited from Russia.1 “[Mantetsu] was formally chartered as a commercial organization, but for all intents and purposes, it functioned as an arm of the Japanese government in Manchuria” (Matsusaka 2001: 4). The Japanese government established the Kwantung Government General (Kanto--cho-) to govern leased territories in Kwantung province in 1906, and stationed the Kwantung Army in the region to protect Mantetsu facilities and narrow strips of land adjacent to the railway. Japan’s concessions in Manchuria expanded during World War I. The conflict in Europe had created a power vacuum in Asia by forcing the European powers to withdraw from the region, thus offering a perfect window of opportunity for Japan to expand its sphere of interest. As a result, Japan thrust “the twenty-one demands” (a set of further concession requirements) before Chinese leader Yuan Shih-kai in 1914, after which the Chinese government agreed to extend Japan’s leasing rights in Kwantung Province and Mantetsu for 99 years, recognized that Japan would be given priority when granting railway rights for Southern Manchuria and East Inner Mongolia, and granted Japanese nationals the rights of free transaction, business operation, and freedom to lease land for construction and agricultural purposes.

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Establishment of Manchukuo The management of Japan’s concessions in Manchuria was not an easy task. A number of anti-Japanese movements, including guerrilla attacks on Japanese forces, railway sabotage, and boycotts of Japanese products, persisted for years. Acknowledging the need for solid dominance over Manchuria, Lieutenant Colonel Ishiwara Kanji and his men in the Kwantung Army carried out a secret military operation in 1931 (the Manchuria Incident) to initiate a skirmish between the Chinese forces and the Kwantung Army. Ishiwara’s plan succeeded in allowing the Kwantung Army to seize substantial control over Manchuria. In the following year, another Kwantung Army scheme came to realization with the establishment of an independent state, called Manchukuo, which was completely independent from China. Manchukuo was, in law, reigned over by Manchu Emperor Pu-Yi (commonly known as the last emperor of the Qing Dynasty), based on the principle of “Gozoku kyo-wa,” meaning harmony among five ethnicities (Japanese, Chinese, Manchu, Mongolians, and Koreans). However, the Manchurian Emperor’s edicts were subject to the approval of the State Council (Rippo- In), the members of which included senior Manchurian politicians. Although the State Council was designed to serve as a legislative body, its functions were nominal. The executive branch of the Manchurian government was the State Affairs Board (Kokumu In), which consisted of the heads of cabinet departments.2 Ministerial positions were held by Manchu and Chinese3 politicians, including Prime Minister Chang Ching-hu, but the powers of the Emperor and ministers were limited. Instead, important decisions were made at the vice-minister level, which was occupied largely by Japanese bureaucrats dispatched from the Japanese government. Bowing to pressure from Japanese military officers, the Manchurian government established a bureaucratic body to lead the nation’s industrialization – a pilot agency – and a system of indirect state control over industry – the special corporation system. In the following sections, I will examine the organizational structures and functions of these two institutions.

II Institutions of the Manchurian developmental state system 1 Pilot agency: the Planning Bureau In December 1934 the Manchurian government released an outline of its plan to establish the Planning Bureau, in which the new agency’s organizational structure and operational goals are described as follows: Organization [The Planning Bureau] will support planning of the national policy, and the agency involves experts in administration, finance, defense, military affairs, and economy, and chiefs of the Legal Bureau, the Budget Bureau and each department’s general affairs section.

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Operations 1 State control and management of strategic industries, industrialization of rural districts, and partial nationalization of international trade. 2 Reform of industrial system, establishment of the Central Land Law, simultaneous application of centralized and decentralized political system, and democratization. 3 Achievement of international status that is equal with [Western powers] in the areas of defense, diplomacy, and military affairs. 4 To regulate capitalistic liberalism, promote production, and plan the integration of East Asian Bloc economy, in order to improve and develop the national economy. (Manshu- Nippo- (The Manchuria Daily), July 29, 1934) The new agency consisted of two sections. The first section took charge of planning important economic and financial policies, while the second section collected statistical data on various economic issues and monitored the progress of policy implementation (Manshu- Nippo-, December 17, 1934). The bureau was established under the National Affairs Board General Affairs Agency, and directed by Japanese bureaucrats, who served as bureau chiefs.4 There were a number of other economic bureaucratic bodies in the Manchurian government including the Department of Industry and the Department of Finance. Unlike the Planning Bureau, their main administrative functions were implementation of policies, rather than planning. However, they worked closely with the Planning Bureau in drafting development plans, and there was some overlap among their tasks. In the following sections I will discuss industrial policies of the Manchurian pilot agency to illustrate the degree of influence they had over industries and the approaches they took to facilitate Manchurian industrial development. Industrial policies in Manchuria The Manchurian pilot agency handled two primary types of industrial policies, including economic plans and industry rationalization policy. An official policy statement of the Manchurian government titled “Outline of Manchukuo Economy Building” (Manshu-koku Keizai Kensetsu Yo-ko-), described state control and industry rationalization as the central tasks of the Manchurian pilot agencies. It stated that the agencies must “apply state control and rationalization policies to strategically important sectors in order to effectively utilize every natural resource within the nation and pursue the development of each sector of the economy” (Manshu- kokushi 1970: 397–98). The idea behind economic planning was that the government would compose production expansion plans for various industries for the coming five years or so. The figures in the economic plan were calculated from then current economic and industrial conditions (inflation rates and unemployment rates), and the

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projected growth rates of the national economy. Such plans set an annual production quota for each industry and specified the resources each industry (or sometimes each firm) would need to reach their set goals. The government would allocate scarce resources, such as capital, raw materials, and technology among industries in accordance with the plan. While economic planning focuses primarily on production expansion, the main objectives of industrial rationalization policies were improvements to efficiency, productivity and technological advancement. The government provided various incentives, such as tax breaks and subsidies to encourage investment in new technology and cost reductions, while intervening in firm management directly or indirectly when necessary to ensure that businesses would prioritize national interest over private interests. Economic plan: the Manchurian Industry Development Five-Year Plan The most imperative policy drafted by the pilot agency of Manchuria was the Manchuria Industry Development Five-Year Plan (Sangyo- Kaihatsu Gokanen Keikaku) of 1937. In the first four years after the establishment of Manchukuo, the Planning Board and other government agencies focused on development of transportation, telecommunication, and financial systems, after which they turned their attention to increasing national power. The bureaucrats of the Planning Bureau drafted the five-year development plan, which was adopted by the Manchurian government and promulgated as the Manchurian Industrial Development Five-year Plan on November 5, 1937. The five-year plan calculated the current production capacity of major industries in Manchuria, laid out goals for annual production in each major industry, and estimated the resources necessary to reach those goals. For example, within five years, the plan aimed at multiplying the production capability of steel production from 400,000 to 1,850,000 tons, coal from 11.7 million to 27.2 million tons, aluminum from 4,000 to 20,000 tons, and electric power from 0.46 million to 1.4 million kilowatts. It also planned to initiate production of automobiles and airplanes in Manchuria and forecast production of up to 4,000 cars and 380 airplanes by the end of 1942 (Manshu- kokushi 1970: 533–34). The plan estimated it would require as much as 2.5 billion yen5 to achieve those goals and expected to raise money through public and private investments from Manchuria and Japan. The five-year plan achieved some success in the first few years, with production levels in parts of the industrial sector – particularly steel, coal, electric power, and ammonium sulfate – increasing dramatically. However, a serious shortage of financial resources6 prevented its total success (see Chapter 6 for more information on the results of the Manchurian five-year plan). Yet, it should be noted that even though the plan did not achieve all its goals, it did allow Japanese policymakers to build confidence in their state control abilities. This new approach to industrialization would later be adopted by the Japanese government when the Planning Board, a Japanese pilot agency, initiated its

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economic policies through the Production Expansion Four-Year Plan of 1938 (see Chapter 4). The postwar Japanese government also had its own version of economic plans, including the Priority Production Policy (1947–49, see Chapter 5), the Economic Independence Plan (1956–60), and the Income Doubling Plan (1960–70). Those Japanese bureaucrats who had gathered experience during the implementation of the Manchurian five-year plan later returned to Japan and carried out similar policies during and after World War II. Thus, it is important to note the linkage between the policies of the Manchurian pilot agency and those of the Japanese pilot agencies. Industry rationalization policy Another major ingredient in the tasks of the Manchurian pilot agencies provided by the Outline of Manchukuo Economy Building of 1932 was industry rationalization policies. One example of such policies was the Planning Bureau’s rationalization policy for developing the paper pulp manufacturing industry. In 1939 the government decided to improve production of pulp products in Manchuria and announced various measures to assist pulp manufacturers. A Japanese newspaper reported the government’s policies as follows: 1 The structure of three new corporations, special corporations partly owned by the government.7 2 Production quotas and locations of factories are assigned as follows: (i) Kanebo- and Japan National Policy Pulp, location Jiamusi, quota 60,000 tons (pulp for paper 20,000, pulp for rayon 40,000); (ii) Oji Paper, 8 Yakeshi, 50,000 tons (paper 40,000, Kraft paper 20,000); (iii) Jinzo Seni and Seishi Federation, Heihe, 120,000 tons. 3 [The government] estimates that these projects will require about 120 million yen, and each company will be capitalized at the following amount: (i) Kanebo- and Japan National Policy Pulp, 30 million yen (Kanebo28 million, National Policy 2 million); (ii) Oji Paper, 30 million yen; (iii) Jinzo Seni and Seishi Federation, 60 million yen. 4 In order to compensate for the three companies’ geographical disadvantages, [the government] will give special treatments for railroad and shipping fares. 5 Prices for each company’s product will be leveled off at the average in the Japanese market, and [the government] will set the price of raw material differently among the companies in order to level off their profitability. 6 [The companies must] guarantee 5% dividends annually [to investors], while building their factories. (Naigai Sho-gyo- Shinpo- (Naigai Industrial Report), January 13, 1939) This article reveals several critical elements of the Planning Bureau industrial control. First, provision 2 indicates the agency had set a goal for the industry’s annual production and had divided the production quota among related firms. Second, provision 3 shows that the agency determined the firms’ financial

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scale and the location of their factories. Third, as seen in provision 4, the agency provided firms with financial assistance. In this case, the government subsidized the firms’ transportation costs. Last, and most important, provision 5 shows that the agency controlled profitability and limited competition among related firms by manipulating raw material prices to level out profitability. To accomplish this, the government set the price of raw materials high for firms with high profitability, and lower for firms with smaller profit margins. This guaranteed each firm’s profitability to a certain level and allowed each to survive. Additionally, the prices of each firm’s products were set at the same level to limit competition among them to within a certain range. In summary, the Manchurian government established bureaucratic bodies that had extensive authority to lead rapid industrialization. The Manchurian pilot agencies drafted blueprints for the nation’s industrialization and carried out the plan to advance Japanese and Manchurian national interests. Furthermore, their industry rationalization policies encouraged private-sector investment in certain industries, promoted increases in the production of certain goods, and assisted the improvement of individual firm productivity. 2 Special corporation (tokushu geisha) The government established another institution in Manchuria that allowed it to control industry more effectively. It was called the “special corporation” (tokushu geisha) system. While special corporations were not owned by the state, various regulations kept their management under tight state control. In Manchuria, corporations were categorized in four groups (state-owned enterprise, special corporation, semi-special corporation, and private corporation), depending on the level of state involvement in their management. The special corporation system was an attempt to combine the features of liberal market and socialist economic systems, much like industrial associations, which were used as a tool by the wartime and postwar Japanese governments to control private firms indirectly. However, when compared to the industrial association system, the special corporation system allowed the government to maintain tighter control over industry. The idea of the special corporation system first appeared in the Outline of Manchukuo Economy Building of 1932, and it was institutionalized by the Strategic Industry Control Law of 1937, which laid out the Manchurian government’s approach to exerting control over industry. This approach was slightly different from that of the wartime Japan and postwar Japan. While the Japanese systems were based on industrial associations, those associations in Manchuria did not become significant factors of state control. The special corporation system allowed the state to have stronger direct control over private firms, while the industrial association system provided a more indirect approach, and relied on voluntary cooperation by private firms with the state.9 The special corporation system was designed as the state’s instrument for exerting tight control over industries critical to national interests. The line

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between controlled industries and free industry was drawn clearly in the Outline of Manchukuo Economy Building of 1934. Only state-owned enterprises and special corporations were allowed to operate in 22 vital industries. These included banking, railways, telecommunications, aviation, petroleum, steel, electric power, and others. Special corporations were allowed to operate in another 24 industries including automobile production, maritime transportation, forestry, coal mining, gas, and insurance. Ordinary private firms were not allowed to operate in any of the industries listed above. The Strategic Industry Control Law spelled out the state’s control over the management of special corporations in the following language: Article One: The law orders those who wish to operate business in strategic industries to obtain approval from the competent minister. Article Two: The law orders those who operate business in strategic industries to submit business reports and business plans to the competent minister. Article Three: The competent minister can compel those who operate businesses in strategic industries to follow orders necessary for state control. Article Four: The competent minister can compel those who conduct business to report their business activities and assets and can instruct its staff to investigate business financial records and other documents, if necessary. Article Five: Those who conduct business in strategic industries must obtain approval from the competent minister in the following cases: 1 2 3 4

When When When When

they they they they

form or modify control agreements; expand or remodel their production facilities; transfer a part or whole business to another person; merge with another enterprise. (Manshu- kokushi 1970: 402)

These propositions reveal that the government exerted extensive control over the management of special corporations, even though they were privately owned. Without governmental approval, special corporations could not make important management decisions, such as remodel facilities, merge with other companies, or transfer business assets. The law also vested the government with legal authority to compel special corporations to submit reports in order to monitor their activities and solicit information. In addition, the government required three of the most important special corporations – the Central Bank of Manchuria, the Manchurian Heavy Industry Co., and Manchuria Petroleum – to reserve permanent positions within the company for a number of government officials who would direct their activities (Manshu- kokushi 1970). Furthermore, the financial activities of special corporations were limited, as they were ordered not to pay excessive dividends (no more than 6%) to shareholders (Osaka Asahi Shimbun, March 15, 1940). Thus, even though the government did not own them, it could compel the

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managers of special corporations to follow its guidance, approve or disapprove their projects, submit reports on their business activities, and investigate their properties. The first case of a special corporation in Manchuria was the Manchuria Central Bank established in 1932, after which two semi-special corporations (Manchurian Aviation Co. and Ho-ten Munitions Co.) were established. Following the proclamation of the Strategic Industry Control Law in 1937, Manchuria Telecommunications Co., Manchuria Petroleum, Do-wa Automobile, and Manchuria Coal and Sulfur were established. By 1945, the government listed a total of 97 special and semi-special corporations.

III Explaining the establishment of the Manchurian developmental state system The second half of this chapter analyzes the reasons why those institutions of industry control (i.e. pilot agencies and special corporations) emerged in Manchuria and why they were designed in those forms. While tracing the process of institutional building in Manchuria, I evaluate three hypotheses related to institutional evolution, based on the theory of collective action, the power-based rationalist theory, and the ideational theory. In the following pages I discuss how each perspective would explain the establishment of a developmental state system in Manchuria and why some hypotheses have difficulty addressing some issues. Pre-occupation conditions and the collective action theory The collective action theory posits that actors build institutions to achieve mutually beneficial outcomes. This theory assumes that collective action is hard to organize because of such problems as the lack of trust among actors, free-riding, high transaction costs, and the absence of monitoring and enforcement mechanisms. Since the individual utility maximization behaviors among actors make it hard for them to overcome such collective action problems, they end up with suboptimal or inefficient outcomes. Rationalists view institutions as one of the solutions to collective action problems because the rules and agreed upon procedures embedded in such institutions decrease uncertainties, provide an enforcement mechanism, reduce transaction costs, facilitate trade-offs, etc. In fact, a number of collective action problems were preventing the Manchurian economy from properly functioning and kept it underdeveloped prior to 1932. Industrial activity was very limited before the Kwantung Army seized control, in spite of its abundant natural resources. The Manchus, who established the Qing Dynasty in the 17th century, kept their ancestral land – Manchuria – off-limits to the majority Han Chinese for centuries. Thus, Manchuria remained underpopulated and underdeveloped until the 1930s. When Manchukuo was established in 1932, its population was about 1.32 million. Yet, its population in 1911 was 0.55 million – less than half that figure (Kanto- Kyoku 1937: 26).

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The level of education was quite low in Manchuria. Only 490 students were enrolled in elementary schools in 1915, compared to 46,504 students in 1935, and there were no middle schools until 1918 (Kanto- Kyoku 1937: 667). This meant a serious shortage of skilled labor. In 1927 there were 486 industrial factories in the region employing 44,636 workers in Manchuria (ibid.: 365), while Japan had 53,680 factories with over 2 million workers (Nihon To-kei Kenkyu-jo 1958: 56–58). In 1927 Manchuria’s annual industrial production reached 162 million yen (Kanto- Kyoku 1937: 333), while Japanese industry produced 6.95 billion yen (Nihon To-kei Kenkyu-jo 1958: 58). Furthermore, the nation’s financial system was underdeveloped, causing a shortage of capital. In 1920 there were only 21 banks in Manchuria, which had issued loans totaling about 186 million yen (ibid.: 629–30), while Japan had 2,144 banks lending about 1.74 billion yen in the same year (Bank of Japan 1999: 194). One of the main reasons for the poor condition of the Manchurian economy at the time was the social and economic instability caused by the lack of an effective governing body to provide public goods, such as a reliable currency system, education, and public safety organs. No one wanted to take responsibility, and everyone wanted a free ride. Manchuria’s social instability started with a population increase after the collapse of the Qing Dynasty in 1912. When that occurred, Han Chinese who had been barred from entering Manchu ancestral lands during the Qing period began immigrating into Manchuria. As a result, the population of Manchuria grew from 547,145 in 1911, to 845,233 in 1920, and to 1,058,851 in 1926 (Kanto- Kyoku 1937: 26). In other words, the population almost doubled within just 15 years and the ancestral Manchu land “turned into a Han Chinese colony” (Manshu- kokushi 1970: 74). Following the massive migration of Han Chinese, a number of warlords, such as Zhang Zou-lin, ruled over Manchuria. Those warlords frequently fought against each other, resulting in serious political turmoil. Thus, the Manchurian economy experienced serious stagnation during the period, and social instability was partly to blame. Furthermore, the competing warlords created multiple monetary exchange systems, resulting in tremendous confusion during business transactions. There was no universal currency in Manchuria before 1932, although there were at least eight currencies printed or minted by provincial governments and banks.10 Therefore, business transactions within Manchuria required frequent currency exchanges, which added to the high cost of doing business. Poor public safety also made business in Manchuria difficult and risky. A large number of armed bandits were active in various locations in the territory, robbing businesses and residents, because the warlords did not provide effective measures against such violent activities. It was estimated that there were about 30,000 bandits in Fengtian Province, 10,000 in Jiling Province, 14,000 in Rehe Province, and several thousand in Heilongjiang Province (Muto- 1988: 158). Two of the first tasks the Kwantung Army and its puppet government undertook after 1932 were to establish a universal currency system (the Manchurian

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yen) and to get the marauding bands under control. In June 1932 the Manchurian government established the Manchurian Central Bank, which was authorized to print the new currency, Manchurian yen. The government then allowed people to exchange preexisting currencies in their possession for silver or the new currency to unify the currency system in Manchuria. The government also established the Police Bureau within the Civil Administration Department and introduced a new police system modeled after Japan’s national police. The Manchurian police force collaborated with the Kwantung Army in fighting armed robbery, and those efforts contributed to a sudden increase in the number of bandits arrested after 1932.11 The government introduced a tough measure against bandits, which allowed police to execute them on the spot without court order, when necessary (Muto- 1988: 164). In summary, because local warlords had failed to cooperate and collectively provide such public goods, Manchuria remained underdeveloped before 1932. One can argue that such collective action problems as free-riding, lack of trust, and high transaction costs made it difficult for the warlords to cooperate, but the newly established Manchurian government under Japanese control did function as an effective agent, providing public goods and services, including a reliable currency system and public safety organs, which were critical to a healthy economy. Thus, one can argue that the actors in Manchuria built the new economic system to overcome collective action problems. Some passages in Kwantung Army documents seem to support the claim that the Army was considering providing public goods. One such passage states that the Army “aims at creating a real Xanadu for coexistence and mutual prosperity for all the ethnic groups in Manchuria by providing good administration, ensuring public safety, developing industry and transportation, and promoting public welfare in the occupied territory.”12 It also states that the Army aimed at “increasing people’s income by controlling finance, establishing a currency system, and developing transportation system and industry.”13 Furthermore, the Manchurian government’s policy platform published in 1933, titled “The Outline for Establishment of the Manchurian Economy,” contends, “The ultimate goal of our economy building is to enrich and stabilize the economic life of citizens, improve living standards, strengthen the nation’s economic power, contribute to the development of the world economy, raise the cultural level, and realize our ideal of model nation building.”14 Under Japanese occupation, Manchuria rapidly transformed into a major industrial region. The production levels in some industrial sectors increased dramatically within four years after the establishment of Manchukuo, particularly in the steel, coal, electric power, and ammonium sulfate industries. For example, the production of pig iron expanded from 342,000 tons in 1931 to 648,000 tons in 1936; coal production from 9,232,000 to 11,031,000 tons; ammonium sulfate (a major ingredient for fertilizer) from 28,000 to 181,000 tons; and salt from 405,000 to 785,000 tons in the same period (Suzuki 1992: 186) (see Table 3.1 for Manchurian industrial growth between 1925 and 1935).

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Table 3.1 Industrial growth in Manchuria, 1925–35

1935 1934 1933 1932 1931 1930 1929 1928 1927 1926 1925

Total industrial output

Number of factories

Cotton

Steel

Pig iron

Electric power

187.5 140.7 116.0 119.4 87.0 100.6 122.8 140.3 137.3 101.6 100.0

200.0 186.4 159.5 141.0 130.6 124.4 118.0 112.8 103.3 103.2 100.0

771.8 529.4 207.9 194.3 118.7 242.8 492.2 319.6 90.1 401.9 100.0

– 353.8 338.8 197.5 158.8 233.8 212.5 137.5 125.0 150.0 100.0

631.7 490.6 454.5 380.0 287.8 271.5 226.6 229.7 202.2 152.2 100.0

562.8 313.0 252.2 214.0 205.6 186.9 172.4 154.3 133.4 114.5 100.0

The production level of 1925 was set at 100. Source: (Kanto- Kyoku 1937)

Problems of the collective action theory However, this theory overlooks several important factors related to institution building, and thus has serious weaknesses. First, it is true that the new Manchurian economic system brought about rapid industrialization and benefited multiple actors as a result of increased employment and larger profits. However, just because it benefited multiple actors does not mean the system was established for mutual benefit. Additionally, some actors benefited more than others did. Even though Manchukuo put forward the ideal of “gozoku kyo-wa” (harmony among the five ethnicities), the biggest beneficiary of all was the Japanese policymakers. A large portion of Manchurian industrial production was exported to Japan, and many capital goods, such as manufacturing machinery, were imported from Japan. Trade between Japan and Manchuria increased in the period and accounted for 75% of Manchuria’s exports and 40% of its imports in 1936 (Suzuki 1992: 186).15 Furthermore, close attention to the Manchurian pilot agency’s industrial policies reveals a heavy emphasis on developing defense-related areas, such as the steel, coal, automobile, aviation, and chemical industries. This is because Japan used Manchuria as its supply center for such defense-related products as well as a market for their manufactured products, as I will demonstrate in the following sections. The Japanese leadership had a clear intention of taking advantage of Manchuria’s abundant resources, cheap labor, and enormous territory to carry out their military ambitions. Second, not all actors had access to the policymaking process in Manchuria. As a matter of fact, the political power of Japanese military officers was much stronger than that of other actors in Manchuria, most of whom had limited access to the policymaking process. Although Manchukuo was designed as a state for cooperation and harmony among five ethnicities (gozoku kyo-wa), the Kwantung Army exerted a remarkably strong influence

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over the state’s policymaking process. Hoshino Naoki, a Japanese bureaucrat who served as the director of the General Affairs Agency, commented in his memoir, “Without doubt, the center of Manchurian politics was the State Affairs Board Conference [a meeting of cabinet members] … It was designed in such a way that the government does not start functioning until the State Affairs Board Conference makes a decision on every single matter, regardless of the level of importance” (Hoshino 1963: 44–45). Hoshino explains the process of policymaking in Manchukuo: the agendas of the State Affairs Board Conference were submitted by the director of the General Affairs Agency, a position reserved for a Japanese official. In order to prepare the agendas, the director regularly held “a preliminary meeting of vice-secretaries of all departments – that is, the representatives of Japanese officials – on every Wednesday” (Hoshino 1963: 45). The attendees of this meeting, called “Suiyo- kaigi” (the Wednesday meeting), included the director of the General Affairs Agency, the vice-secretary of each department, and the chief of the Legislation Bureau. Practically all the attendees were Japanese. It also became a custom of the meeting to include the Japanese military officer serving as a supreme counsel in the Department of Military who was also a staff officer from the Kwantung Army (ibid.: 46). The military officer presented the Army’s view, thus allowing the Army to intervene in the policymaking process. Hoshino contends, “The Kwantung Army, the true power holder in Manchuria, presented its view, and the meeting carried out its discussion based on [the Army’s view]. Therefore, it goes without saying that [the involvement of the Army] gave the impression that the meeting’s decisions cannot be easily altered … it was an undeniable fact that the meeting became the center of Manchurian politics and administration” (ibid.: 46). Through this mechanism, the Kwantung Army influenced the policymaking process of the Manchurian government. If one group of actors dominates politics, why would that group try to design an institution that would benefit all actors, rather than advancing its own interests? The theory of collective action does not offer a reasonable answer to this question because it does not assume that one actor (or one group of actors) will possess unequally strong influence in the decision-making process. However, such a condition can occur, and it is highly problematic to ignore such a political power balance, which can have a significant impact on the course of institutional development. In short, a weakness of the collective action theory is that it assumes that all actors will voluntarily advocate an option that would allow them to achieve mutual benefit and fails to take into consideration that some actors have more influence in decision-making. Finally, this theory does not explain why the actors chose a developmental state system. A developmental state system did lead Manchuria to rapid industrialization, but it was not the only option open to the policymakers. If the primary purpose of building a new institution was to overcome collective action problems and achieve mutual benefit, they could have done so in other ways as well. In other words, these existed multiple Pareto optimal choices.

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The policymakers could have chosen a liberal market economic system, such as the one Japan had at the time, or a socialist system, which had brought tremendous success to the Soviet economy during this period.16 In order to explain the choice of a developmental state system, one must look closer at the individuals who possessed the power to design institutions. The Kwantung Army’s intentions and the power-based rationalist theory The power-based rationalist theory presents another perspective on the institutionbuilding process, and focuses on actor pursuit of power when explaining the origin of institutions. This perspective views institutions as a by-product of political conflict among political actors and assumes that the most powerful actors establish rules that are most favorable for them. That is, powerful political actors attempt to design institutions for the purpose of gaining strategic advantage vis-à-vis other actors. This means that the larger the disparity between the powerful actors and the rest, the closer the institutional outcome gets to the powerful actors’ intended design. Thus, the institutional outcome reflects the asymmetries of the bargaining power of the political actors. The power-based rationalist theory offers a more plausible argument than the collective action theory, which focused solely on economic aspects of institution building. The power-based rationalist theory looks into the political context behind institution building. In Manchuria, there was a considerable power asymmetry at the time the Manchurian developmental state system was established. It is problematic to neglect this political context, which seems to have had a significant impact. The main political actors involved in the establishment process of the Manchurian developmental state system were Japanese military officers, Japanese bureaucrats, and Manchurian politicians. As I demonstrated above, Japanese military officers exerted tremendous influence in the policymaking process in Manchuria. Japanese bureaucrats assisted the military’s state building project and took charge of administrative works. The head of the state was the Manchurian emperor, and Manchurian and Chinese politicians occupied ministerial positions in the government, but their political influence was limited, and Japanese military officers were the most powerful actors of all. The power-based rationalist theory would assume that the Manchurian developmental state system reflected this power balance among the actors. Therefore, as there was a significant power disparity between Japanese military officers and the rest of the actors, one could argue that the Manchurian developmental state system was established by Japanese military officers to advance their self-interest. The primary concern of Japanese military officers was the security of their mother country. They were interested in putting the Manchurian economy under their tight control, and in rapidly industrializing it, so that it would provide industrial supplies – particularly defense-related products – to Japan. Official documents of the Kwantung Army reveal that its staff officers were well aware of the abundance of natural resources in Manchuria and their

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strategic importance. Colonel Itagaki Seishiro- of the Kwantung Army General Staff Office wrote a report titled “Manchuria and Mongolia from a Strategic Viewpoint” in 1931. In the report, Itagaki stressed the strategic importance of Manchuria as follows: “It is obvious that Manchuria and Mongolia are so rich in natural resources and have almost all of the resources needed for the [Japanese] Empire’s economic self-sufficiency.”17 Another document, prepared two years prior to the occupation of Manchuria, states that the Kwantung Army “will immediately put Manchuria and a part of Mongolia under our control. Then, we must establish an operating base for use of natural resources [which is important for Japan’s] long-term global strategies.”18 Furthermore, the Army was prepared to “draft a plan to increase production of defense-related materials, such as steel, coal, oil, wool, cotton, aluminum, magnesium, paper pulp, and the like.”19 Military officers expected that an economic system involving tight state control, such as a developmental state system, would allow them to achieve their goals. For example, Lieutenant Colonel Ishiwara Kanji underscored the need for state control over Manchurian industry as early as 1929. He claimed, “In theory, industry should develop by itself … but, necessary control over industry must be applied.”20 Four years later the Manchurian government under the control of the Kwantung Army published a policy platform titled “The Outline for the Establishment of the Manchurian Economy.” It clearly stated the government’s plan to “apply state control and rationalization policies to strategically important sectors, in order to effectively utilize every natural resource within the nation, and pursue development of each sector of economy.”21 In summary, the Army’s real intention in the establishment of the Manchurian developmental state system was not to provide benefits to all residents in Manchuria, but to create an industrial supply base for Japan’s national security apparatus. Thus, as the power-based rationalist theory suggests, institutional outcomes reflect the power relations among actors and the interests of powerful actors. The power-based rationalist theory appears to provide a more convincing account for the foundation of the Manchurian developmental state system than the collective action theory, but the power-based rationalist theory also has difficulties in explaining certain aspects of the foundation process. Problems of the power-based rationalist theory One important problem for the power-based rationalist theory is that it does not explain why the policymakers chose a developmental state system rather than some other system. If the military’s interest was to exert tight control over Manchurian industry, it could have done so with a socialist system. By abolishing private property rights and establishing state-owned enterprises, the military could have obtained much tighter control over industry. Why did the military not do so? As I demonstrate in the next section, where I take into account the complex context behind the institution-building process, the ideational theory offers a more convincing answer to this question.

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Another critical empirical problem of the power-based rationalist theory is the fact that the institutional outcome of the Manchurian case did not solely reflect the interests of the Kwantung Army. It was not just the power balance among the military and other actors that influenced institution building; the ideas of the actors mattered as well. Those other actors included bureaucrats and private entrepreneurs, who were not as politically strong as the military officers in Manchuria, but who were capable of persuading the military to accept their policies when implementing their state-building plans. However, before further discussing the relationship between the military and other actors in the implementation process, in the next section, let me discuss the design process of the Manchurian state-building plans and the ideational theory. Policy entrepreneurs and the ideational theory The third institution-building perspective is the ideational theory, which focuses on the ideas of the actors. Policymakers cannot always obtain sufficient information to make rational decisions because there is a high level of uncertainty in politics. Therefore, they must rely on some kind of ideational guidance, which plays a critical role when they assess information before making decisions. Once actors adopt a given set of ideas as their ideational guidance, they are committed to certain types of policies that comply with the guidance and will reject policies that contradict it. This argument focuses on those individuals who play the most important role in introducing new ideas into the policymaking process (i.e. policy entrepreneurs). It analyzes how such entrepreneurs developed a new idea and how their idea became the ideational guidance for the nation’s economic policies. My analysis of the institution-design process in Manchuria focuses on two central figures who made imperative contributions to the emergence of the new economic systems in Manchuria. Those policy entrepreneurs were Ishiwara Kanji and Miyazaki Masayoshi. Ishiwara was a staff officer of the Kwantung Army in charge of building a wartime economic system in Manchuria. Miyazaki was a specialist of economics in a Japanese semi-public railroad company in Manchuria who assisted Ishiwara in drafting blueprints for the new economic system. Ishiwara’s early days Though there were a number of Japanese military officers and bureaucrats involved in the process, the mastermind behind the establishment of a developmental state system in Manchuria was clearly a man named Ishiwara Kanji, a staff officer of the Kwantung Army. Ishiwara carried out Kwantung Army operations that seized substantial control of Manchuria and organized specialists to compose a blueprint for the new state’s economy, which would embody his ideal of to-sei keizai (managed economy). According to one account, “A plan for industrial development in Manchuria became an agenda

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when Colonel Ishiwara announced a shift from ‘national security based on military capability to national security with increase in national power” (Manshu- kokushi 1970: 528). As such, Ishiwara’s contributions to the Manchurian economy were substantial. Let me briefly discuss Ishiwara’s personal background and the development of his theory of final war, which strongly influenced institution building in Manchuria. Ishiwara Kanji was born in Tsuruoka, Yamagata prefecture in 1889. He graduated from the Central Military Preparatory School in Tokyo at the age of 18 and then advanced to the Military Academy. Upon graduation, he was first assigned to the 32nd Infantry Regiment in Yamagata, then to the 65th Infantry Regiment in Fukushima. After spending two years in Korea with his regiment, he attended the Army Staff College. Ishiwara’s school years were decorated with outstanding academic achievements. He graduated from the Army Staff College second from the top of his class and received an Imperial Sword from the Emperor, an honor reserved for just a few top graduates. Despite his academic excellence, he was not a typical honor student. His teachers and classmates remembered him as an audacious, bold, cynical and inconsiderate man. He was an aggressive debater and did not hesitate to express and defend his opinion even against his teachers and senior officers. Such conduct was quite unusual at that time, as it was considered socially unacceptable to challenge higher authority. Ishiwara’s peculiar personality became an obstacle to success earlier in his career. The Army Headquarters did not think highly of Ishiwara and worked to keep the troublemaker away from the center of things, while many of his Army Staff College colleagues swiftly received appointments to more prestigious positions. However, later in his career, his celebrated successful operations in Manchuria made him an heroic figure and gained him a central position in the Army. His boldness made him a charismatic figure, and he became highly popular among members of the general public as well as Army officials. His enthusiastic supporters included right-wing activists, businessmen, politicians, bureaucrats, and the like. Hata (1962) claims that Ishiwara certainly had what it took to be a charismatic dictator like Stalin or Hitler.22 Development of Ishiwara’s worldview: the theory of final war Ishiwara was given an opportunity to study military strategy in Germany between 1922 and 1924. During this period, Ishiwara developed his worldview, which was later embodied in his writings, such as On the Final War. Ishiwara’s diary gives a detailed account of his activities in Germany and allows us to explore the development of his worldview. During his stay in Germany, he had chances to meet military officers and experts through his visits to the German General Staff Office and other important military institutions, and through the weekly meetings that he and his colleagues from Japan hosted to exchange views with European military officers and specialists. Ishiwara was also eager to absorb Europe’s latest research on military history and strategies.

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With the help of a group of retired German military officers whom he hired, he deepened his understanding of theories and thought on European warfare. Among the many theories and ideas to which he was exposed, Ishiwara’s worldview was influenced most significantly by a highly publicized and heated debate between Hans Delbruck, a professor at Berlin University, and Erich von Ludendorff, a staff officer of the German Army. The main focus of the debate was the German General Staff’s strategy in World War I. Ludendorff and his followers in the Army defended Germany’s strategy in World War I, while Delbruck rigorously criticized the General Staff for failing to adapt to the changing nature of combat during the war. In his studies of European military history from the Persian War to the Napoleonic War, Delbruck analyzed the development of warfare using two concepts called the “strategy of annihilation” and the “strategy of exhaustion.” Victory in battle is the single most important goal of war for the former strategy, but it is just one of many means to achieve war’s political ends for the latter. Delbruck claimed that German strategy during World War I was a quintessential example of annihilation strategy, which he believed was a critical mistake. Development of trenches and machine guns had changed the nature of warfare, and thus, he believed that Germany should have employed the strategy of exhaustion and aimed at breaking the Anglo-Franco alliance through political means and attempted to avoid fighting with the United States. Ishiwara developed his understanding of military history borrowing Delbruck’s concepts. He classified wars into two categories. One was decisive war (kessen senso-), in which military capability is the single most important factor in a state’s pursuit of its political ends. The main goal of warfare is to completely subdue the enemy and break its will by using force. Decisive war is prominent when power is not balanced evenly among states and/or when offensive tactics have the advantage over defensive tactics. In such situations, wars end in a short time. The other type of war is protracted war (jikyu- senso-), in which the value of military capability is not absolute vis-à-vis other means. Protracted war occurs when each country’s power is relatively balanced and/or when defensive tactics have advantage. Such wars tend to last for an extended period of time, and competition among countries involves diplomacy, economic development, technological advancement, education, and the like.23 In other words, the success of a country in such a war depends not just on its military capability, but also on nonmilitary factors. He believed that the history of warfare was characterized by alternative shifts between periods of decisive and protracted warfare. According to Ishiwara, most ancient wars were fought in a decisive manner. The Greek and Roman empires possessed invincible armies that made them so much more powerful than their neighboring states. The political ends of those empires were achieved through military actions. Other means, such as diplomacy and economic pressure, were not very important. The medieval period was a period of protracted war among smaller states. Wars were fought mainly by small armies of mercenaries, and combat was confined to a relatively smaller scale. During

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that period, a number of prolonged wars had been concluded through diplomatic negotiations. The French Revolution and Napoleon changed this trend with innovations, such as conscription systems and national militaries, thus enlarging the decisive power of the military and shifting the trend back to decisive war. However, during World War I, the development of defensive warfare tactics (i.e. trench tactics and machine guns) made decisive war impossible, and the trend once again shifted to protracted war.24 Ishiwara predicted that Japan would fight a decisive war with the United States within approximately 30 years. He argued that World War I had been a war of exhaustion fought among Western powers to determine the champion of the Western civilization. This war had exhausted the old European powers, such as Great Britain and France, and allowed the United States to rise as the hegemon in the West. Ishiwara believed that Japan would soon dominate the East and advocated the establishment of what he called “the East Asian League” with Asian countries joined under Japan’s leadership to resist Western colonialist power. This, he believed, would inevitably lead to “the final war” between the United States and Japan, which would determine the world hegemon. The theory of final war and to-sei keizai ron Ishiwara thought that the final war would occur only after development of weapons of mass destruction and military aircraft that could circle the globe without refueling. Such developments would give advantages to offensive strategies, thus making decisive war possible. He predicted that it would take at least 30 years to reach this point, and urged that Japan make every effort to prepare for all-out war with the United States. Until then, the two countries would fight a protracted war by competing with each other through strategies of endurance. As mentioned above, the military is not the only factor in a protracted war. States must also compete in arms build-ups, economic developments, technological advancements, diplomacy, and the like. Ishiwara thought that economic development was particularly important because Japan faced an immediate need to augment its production capability, strengthen its munitions industry, and build a self-sufficient economy. Ishiwara identified the essence of national defense and the goals of the national economy as follows: “Today, the amount of military expenditure is no longer the issue, but [the state’s survival] is determined by its production capacity.”25 “Since this [war between Japan and the United States] is a protracted war, it is critical that the East Asian League is able to self-sufficiently supply munitions as well as other commodities that are necessary for the lives of people in the region.”26 It was this conviction that linked security and economic development. In other words, it was a strategy for fighting a protracted war. Ishiwara also emphasized the need for state control over the economy in his writings and lectures. In order to obtain economic might that would rival that of the United States, he believed that the state must play a critical role in

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setting the development goals, allocating resources, and promoting strategically important industries (i.e. munitions and heavy industries). He called for “a shift from the outmoded liberalism and capitalism of the older Western democracies toward the power and efficiency of state control” (Peattie 1975: 73). Ishiwara laid out the goal of the state’s economic management by saying, “Economic planning must be a concrete and comprehensive plan that augments productivity in every aspect of national economy at the same time that it maintains equilibrium [in the market]” (Ishiwara 1986b: 183). This goal can be achieved, he said, “by setting production goals that must be reached by all means, finding the most suitable persons in each industry and putting them in full charge [of reaching the goals], mobilizing the persons concerned, and enforcing augmentation of production. The government should manage the relationships among each industry strictly and benevolently” (Ishiwara 1986a: 282). It is important to note, however, that for Ishiwara, state control did not mean Soviet-style total control of the economy, and he was skeptical of the effectiveness of such a system in Japan. Ishiwara argued: It goes without saying that power of the bureaucracy must be enhanced under state control. However, enhancement does not mean expansion [of its jurisdiction] … It goes against the principle of state control to put everything under the control of bureaucrats, and it does not fit our national character. (Ishiwara 1986b: 270) Ishiwara claimed management of most private corporations should be left in the hands of businessmen, although he believed that they were obligated to serve the state interests. Direct control should only apply to strategically important industries, such as munitions, steel, coal, heavy industry, and the like. His theory of final war remained the center of his worldview throughout his military career.27 When he became the central figure in policymaking, the policies and schemes he designed for state building were aimed primarily at preparing Japan for the final war with the United States. The main pillar of his state-building schemes was industrial development through state control while maintaining a suitable level of private economic activities. This economic idea, which aimed at combining the features of socialist and liberal market economies, was an archetype of to-sei keizai ron. The spread of Ishiwara’s idea Through his writings28 and lectures given on various occasions, Ishiwara’s idea became widely absorbed and accepted by a wide-ranging audience, some of whom became his devoted followers. His idea was particularly popular among the following four groups of people: young elite military officers, economics experts, right-wing activists, and a number of politicians and businessmen.

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Ishiwara’s ambitious plans first attracted the attention of a number of young elite military officers who felt the need for reform in Japan’s defense policy. For those who sought such answers, Ishiwara’s idea posed a bold solution. After returning from Germany, Ishiwara spent two years at the Army Staff College where he taught military studies, including a course on European war history, to young military elites. His lectures left strong impressions in “a number of his students at the Staff College, including Matsumura Shu-itsu, Katakura Tadashi, and Imai Takeo, all of whom went on to general rank and positions of prominence in the Army” (Peattie 1975: 78). Some of his students at the Army Staff College, like Katakura, worked hand in hand with Ishiwara in the Army Staff Office, assisting his attempt to build a new economic system in the late 1930s. He was also involved with groups of elite officers who invited him to give talks. Those reform-minded elite officers formed study circles to exchange views and build personal ties. One of the most prominent study circles of elite officers, called Isseki-kai, was formed by the Army’s absolute elite, who advocated fundamental reform of the Army. Many of its members (e.g. Nagata Tetsuzan, Itagaki Seishiro-, To-jo- Hideki, and Suzuki Teiichi29) later became the central figures of the Army and the government. Ishiwara also lectured on Senso- Shi Taikan (General Outline of the History of War) to general staff members of the Kwantung Army and hosted study groups involving all staff officers (Nomura 1992). Proliferation of Ishiwara’s idea is evident in a policy recommendation prepared by a group of young military officers led by Katakura Tadashi in 1933. They submitted this policy recommendation, titled “Outline of Policy Measures for Political Emergency,”30 to their senior officers. In their recommendation, the young officers called for fundamental reforms in the Japanese political system. Their recommendation encompassed various issues including diplomacy, politics, defense, economy, social policy, media control, and education. For national defense, they urged the nation to “move forward with military buildup and war preparation, assuming that there will be a war against the United States, the Soviet Union, and China around 1936.”31 They also claimed that the emergent political conditions of the day required the military to introduce state control and become the driving force of political reform, which “should be aimed at enlargement of the nation’s power” and “preparation for the rapidly changing international conditions.”32 They asserted that the main focus of the nation’s economic policies should be “improvement of our nation’s condition in the world economic war and facilitate citizen happiness … [The state] should control strategic industries and promote its development.”33 It is clear that the policy recommendations of these young officers reflected the core principles of Ishiwara’s ideas, such as preparation for total war, economy as a crucial part of defense, and state control over strategic industries. Second, Ishiwara’s ideas permeated through economics experts in Manchuria and Japan. Ishiwara lectured Senso- Shi Taikan to the staff members of the Mantetsu Research Bureau in 1930 and frequently met them to discuss

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economic issues. Those Mantetsu Research Bureau economists became strong supporters of Ishiwara’s ideas and, employing their expertise in economics and statistics, later helped him draft developmental plans for Manchuria. Third, right-wing activists were the most enthusiastic advocators of Ishiwara’s ideas. On his way home from Germany, Kokuchu-kai, a nationalist organization, invited Ishiwara to give a speech in Harbin, China. Ishiwara recalls that this was the first time he presented his theory of final war.34 He kept a close relationship with members of Kokuchu-kai throughout his military career. He later formed another multinational political organization called To-a Renmeni (the East Asian League) to promote an economic and military alliance in East Asia, which attracted many rightwing activists. Ishiwara became a charismatic figure among the members of these organizations and his worldview quickly spread among their members. Lastly, a number of important political and business figures were also exposed to Ishiwara’s ideas. Ishiwara set up meetings with Prince Konoe Fumimaro (prime minister 1937–39, 1940–41), Nakano Seigo- (journalist and Diet member), and Matsuoka Yo-suke (foreign minister 1940–41), during which he expounded his idea. He also built close connections with successful businessmen, namely Aikawa Yoshisuke (president of Nissan), Tsuda Shingo (president of Kanebo- Textile), Ikeda Shigeaki (executive director of the Mitsui zaibatsu, president of the Bank of Japan and later minister of finance) (Hata 1962: 243). Ishiwara in Manchuria In 1928, at the age of 40, the Imperial Army assigned Ishiwara Kanji to the General Staff Office of the Kwantung Army in Manchuria. Upon arrival, Ishiwara took charge of planning Kwantung Army operations. The provinces in Manchuria at that time were governed by local warlords, such as Zhang Xue-liang. Ishiwara thought it was necessary to bring the resource-rich region under Japan’s direct control and make it a major industrial area, which would allow Japan to prepare for the upcoming final war. To that end, Ishiwara and his colleagues in the operation section spent two years analyzing Japan’s interests and strategy in Manchuria, cumulating in a policy recommendation titled “Personal View on the Manchurian-Mongolian Problem” (ManmoMondai Shiken) in 1931. In that document, Ishiwara urged Japan to build an economic bloc encompassing Manchuria and China in order to face the challenges posed by the United States. Manchuria’s ample natural resources and labor were “sufficient to build a foundation for [Japan’s] big leap forward.”35 He also believed that the vast land area in Manchuria would be a buffer zone between Japan and another potential enemy, the Soviet Union. Ishiwara was concerned with Soviet expansion into Asia and claimed, “In view of the traditional Russian policy in that area, once the Soviets advanced into Manchuria, it would become a base for the communization of Asia. Not only would the internal stability of Manchuria become impossible to maintain, but Japan

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would be unable to maintain its own national defense, and China’s defenses, too would become imperiled” (Peattie 1975: 97). Based on Ishiwara’s theory of final war, his policy recommendation explicated Manchuria’s strategic importance to Japan’s security and justifications for Japan’s conquest over the region. The Japanese government and the Imperial Army strongly opposed the Kwantung Army’s expansion plan because they feared that it would invite international censure. However, Ishiwara’s view quickly proliferated among Kwantung Army officers and he eventually led a military operation that drove the Chinese Army out of the region and established a puppet state in Manchuria. This, he thought, was critical if Japan was to win the final war against the United States. Miyazaki Masayoshi Although Ishiwara was a master of military strategies, his knowledge of economics was limited. Thus, he needed economics experts to assist him in integrating his ideas into a concrete set of policies. He found such experts in the research institution of the Southern Manchurian Railroad Company (Minami ManshuTestudo- Kabushiki Gaisha, or Mantetsu), a Japanese railroad company that had operated in Manchuria since 1905. With the help of economists in Mantetsu, Ishiwara composed blueprints for restructuring the Japanese and Manchurian economies in preparation for the final war against the United States. Among those experts, Miyazaki Masayoshi played the central role in further developing the idea of managed economy. Miyazaki Masayoshi was born in Kanazawa, Ishikawa Prefecture in 1893. Upon graduation from one of the top-ranking high schools in Ishikawa in 1911, he received a scholarship from the local government to study Russian and spent three years in Harbin and Moscow. He then received another fellowship from Mantetsu to study political economy in St Petersburg University in 1914. Unlike other policy entrepreneurs in this study, Miyazaki is a mysterious figure, and we have very little information regarding his personal life. Even though his contribution to the foundation of the Japanese economic system is recognized by a number of researchers,36 there are few detailed studies of Miyazaki’s work.37 This contrasts notably with Miyazaki’s political ally, Ishiwara Kanji, whose life is widely recognized for his military and political achievements, and who has been featured in many biographies. Izumiyama Sanroku, who worked under Miyazaki during the war,38 described him as, “a great man unknown to the public” (Izumiyama 1953). The lack of attention to Miyazaki’s contribution is partly due to the confidential nature of his tasks. Miyazaki worked closely with Ishiwara Kanji as an economic advisor, and his mission was to compose a secret blueprint for Japan’s industrialization. Miyazaki directed a number of economics experts who worked behind the scenes. Their works were treated as “top-secret” documents and most did not become public until long after the end of World War II. Perhaps because of this reason, Miyazaki did not leave much information or publicize

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his writings and, as a result, his contributions to the creation of the Japanese economic system were not widely known – even among specialists of the Japanese economy. Even though not much is known about Miyazaki in his early years, he stands out because he was one of very few Japanese who was in the country, and thus directly witnessed the radical transformations of the Russian Revolution. His firsthand experience as an observer of one of the most dramatic political events of the century undoubtedly left a deep impact on his worldview. He wrote the following in an essay he contributed to a magazine published by his high school’s alumni association: “I was in St Petersburg at the time of the [Russian] Revolution in 1917 and closely witnessed this major event … I discovered a clue to understanding the world from this unprecedented event.”39 Although Miyazaki does not say what the “clue” was in the essay, through a close examination of his writings we can shed some light on the development of his worldview. During his stay in Russia, Miyazaki wrote a series of columns for a Japanese newspaper, the Tokyo Nichinichi Shimbun, titled “Roshia Tsu-shin” (Russia Report), in which he reported on the culture, politics, and history of Russia to Japanese readers. In one such column, Miyazaki analyzed the nature of the Russians by saying, “The Russians are born-idealists, while the Japanese are born-realists.” He also noted, “Winter in Northern Europe is incredibly brutal. Facing this harsh nature, one has only two choices; either resist it or remain silent … Without doubt, Russian lives are lives of resistance. [They] resist nature, the government, society, parents, and themselves. It is the Russians who turn their back on everything.”40 Kobayashi (1995) claims that Miyazaki believed that there were fundamental differences between the Russians and the Japanese. Therefore, he reached a conclusion that the revolutionary approach of the Bolsheviks was applicable to Russia, but not to Japan.41 Miyazaki wrote: Though Soviet-style planned economy is an effective method of rapid industrialization, it was only possible for the Soviet Union, which succeeded the repressive traditions of Tsarist Russia. It is difficult to duplicate the system in Japan, which has experienced a liberal economy, even if it has a powerful bureaucratic system. In Japan, strategically important industries should be put under state control through the guidance of bureaucracy, but free competition should be allowed to light industry and the commodity industries. (Kobayashi 1995: 56) This conviction caused him to conclude that Japan should build a system of indirect state control, which combined the features of a liberal market and socialist economies. After receiving a degree from St Petersburg University in 1917, he was hired by Mantetsu. He was then promoted to Chief of the Russia Section of the Mantetsu Research Bureau in 1923. Mantetsu found his expertise and

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deep understanding of Russia valuable, as the Soviet Union’s rapidly growing economy and military were seen as serious threats to the security of Manchuria and the company. Soon after his promotion to the chief position, Miyazaki was sent to the Soviet Union where he spent four months touring major cities and inspected the Soviet economy in great depth. The Mantetsu Research Bureau also engaged in the collection of Russian books and documents, gathering more than 30,000 Russian-language books and documents by 1925. Miyazaki and his men in the Russia section translated many of them for publication in Japan. They provided a source of wide-ranging information regarding the geography, history, politics, and economy of Russia and Europe. The research efforts of the Russian section became particularly important when the Soviet Union initiated its first five-year economic plan in 1928. The overwhelming Soviet success in rapid industrialization stunned Mantetsu and the Kwantung Army,42 prompting the Russia section to collect a vast amount of data on the Soviet Union’s industries, finance, trade, agriculture, labor, mining, and other topics, which they then analyzed to determine the keys to the success of its five-year plan. The fruits of this research played a crucial role when Japan established a managed economy system in Manchuria a few years later. Members of the Mantetsu Research Bureau identified effective methods of state control and industrial development from the Soviet success and then waited for a chance to utilize their knowledge in Manchuria. That moment arrived with the Manchurian Incident and the birth of Manchukuo in 1932 where establishment of a new economic system was an immediate necessity. Because it lacked expertise in economics, the Kwantung Army asked experts in the Mantetsu Research Bureau for assistance. However, the newly born nation required Mantetsu to perform more than just research. Miyazaki replied to the call and bustled around to establish a new research institution designed to draft economic plans for Manchuria. Even though Mantetsu managers were reluctant to become involved with the Kwantung Army, Miyazaki managed to convince them to provide full support for those plans. The new research institution was named the Manchuria Economic Research Association (MERA) and was established in January 1932. SogoShinji43 became the first chairman to lead the association. MERA was organized as follows: section one general economic affairs; section two industry and immigration; section three transportation; section four commerce and finance; and section five legal matters and culture. Miyazaki was appointed as a chief in section one and played a key role in the management of the institution. MERA’s main objectives were to plan and draft blueprints for economic policies that could be immediately implemented in Manchuria. In the minutes of a MERA meeting, the association’s raison d’être was defined as follows: The Manchuria Economic Research Association aims at planning economic developments in Manchuria and Mongolia, rationalizing

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Miyazaki and other members of MERA made strenuous efforts to incorporate Ishiwara’s idea in the economic policies of the new Manchurian government. The fruits of their research were summarized in a policy report, the “Manchurian Economy Control Plan” (Manshu- Keizai To-sei Keikaku), drafted in June 1932. Five staff officers, including Ishiwara from the Army, met top executives of the Research Bureau in June 1932 to discuss the plan. During that meeting, Miyazaki presented the plan’s main points to the Army officers (Kobayashi 1995). After the meeting, the Army adopted the plan as the basic standard for building the state, and obligated all of its future policies and operations to follow it. Miyazaki and his fellows in the Research Bureau44 sketched out the substance of the Manchurian Economy Control Plan in the Outline for the Establishment of the Manchurian Economy (Manshu-koku Keizai Kensetu Ko-yo-). The Manchukuo government gave approval to the outline in 1933, and the new country’s economic system, including pilot agencies, was constructed following Miyazaki’s blueprint.

The Outline for the Establishment of the Manchurian Economy The Outline for the Establishment of the Manchurian Economy was one of the first official documents that laid out Ishiwara and Miyazaki’s to-sei keizai ron. Miyazaki and his staff in MERA published this proposition at Ishiwara’s request, and it was adopted by the Manchurian government in 1933 – one year after the establishment of Manchukuo. It stipulates the two policy entrepreneurs’ views on a liberal economy, the goals of the state, approaches to state control, means of control, and other matters. The Outline consists of 10 provisions,45 the second of which defines the goals of the state and provides four principles upon which the policies of the state should be based, as follows: Provision 2: Principle of Economy Building In view of the dangers of an uncontrolled capitalist economy, we will apply a necessary level of state control over our economy, and we plan to facilitate healthy and vigorous development of a national economy by utilizing the benefits of [private] capital investment. The ultimate goal

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of our economy-building efforts is to enrich and stabilize the economic life of the citizenry, improve living standards, strengthen the nation’s economic power, contribute to the development of the world economy, raise the cultural level, and realize our ideal of model nation building. We must push forward with our economy-building efforts under the following four principles to reach the goals listed above: 1

2

3

4

For benefit of the whole nation, exploit natural resources, prevent profits of business activities from being monopolized by a specific social class, and ease everyone’s lives. Apply state control and rationalization policies to strategically important sectors in order to effectively utilize every natural resource within the nation, and pursue development of each sector of the economy. On exploitation of natural resources and promotion of business, we must seek investments from around the world based on the spirits of open door and equal opportunity. In particular, the technology, experiences, and other essences of civilization of developed nations must be absorbed and utilized effectively and appropriately. We must pursue the fusion and rationalization of an East Asian economy, starting with gravitating toward cooperation with Japan and by further building a relationship of mutual assistance between us.

The four principles above must be maintained thoroughly in any circumstances. (Reprinted in Manshu- kokushi 1970: 397–98) The gist of the Outline is summarized as follows: First, it holds that a liberal economy has problems, and the government must control and regulate the market. However, it does not call for the total state control seen in the Soviet model. It does not try to abolish the market system and leaves room for private business activities. It even acknowledges that economic development requires input from private-sector actors. By drawing a clear line between industries that should be managed directly by the state and those that should be left free to private parties, it attempts to allow state control and the market system to coexist. In other words, it aims at building a new economic system through a fusion of a liberal market and state-planned economies. Second, the Outline stresses that public benefits take priority over private benefits and obligates private actors to cooperate with the state in its pursuit of economic goals. It reflects the conviction of Ishiwara, Miyazaki, and their followers, that profit-seeking activities on the part of business owners caused the Great Depression, subsequent economic difficulties, and corruption in Japan’s political system. Thus, the Outline repeatedly calls for “cooperation between public and private actors” in its provisions. In its preface and conclusion, it states that the great mission of economy building requires “publicprivate cooperation” (Manshu- kokushi 1970: 396–401), and attempts to

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redirect the incentives of private actors in order to build a new underlying moral standard for the national economy. Third, the Outline sets the state’s goal at economic development with heavy focus on defense-related industries. It defines their goals in economic development: “Our principle is to enrich the national economy, and augment national wealth by developing natural resources and establishing fundamental industries and the defense industry” (Manshu- kokushi 1970: 400). The Outline specifies the range of state control and defines strategically important industries as follows: a) The following industries should be gradually put under necessary control [by the state] to facilitate their development depending on the level of domestic demands: metal, machinery, oil, paper pulp, sodium, ethyl alcohol, silk, textile, flour, cement, and breweries. b) The industries that are not listed above should be left free to develop for the moment, but may be put under control in the future, if necessary. c) Unified management will be applied to production of electricity for abundant and inexpensive power supply. (Manshu- kokushi 1970: 400) Development of defense-related industries was considered critical for Manchuria to assist Japan’s future war against the United States. By utilizing the abundant natural resources in Manchuria and putting its economy under state leadership, Ishiwara and Miyazaki believed Japan and its economic bloc in East Asia could build up sufficient economic and military power to match Western great powers. Pilot agencies The Outline for the Establishment of the Manchurian Economy embodied Ishiwara and Miyazaki’s plan to build what they called the “Economic General Staff Headquarters” (keizai sanbo- honbu). This bureaucratic body would have operational command over the nation’s economic affairs. Much like a general staff office in a military organization, it would be in charge of drawing strategic plans and leading operations related to the national economy. For Ishiwara and Miyazaki, these institutions were critical because they believed that Japan and Manchuria must form a bloc economy and fight an economic war with its rivals, such as the Soviet Union and the United States. They were concerned that the Japanese economy lacked both concrete plans for its economic development and institutions that could guide the industrialization of Japan and Manchuria.46 In the effort to build such an economic general staff headquarters, the Kwantung Army leadership planned to establish a bureaucratic institution that would draft long-term economic plans for the new state, lead development of the Manchurian economy, control Manchurian industry, and develop an

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East Asian economic bloc. In April 1933 the Kwantung Army issued the following press release that revealed its plan to create pilot agencies in Manchuria (and Japan): The efforts to make a concrete plan for the establishment of the JapanManchuria Economic Bloc has been accelerated by the urgent pressure of the international economy. The Kwantung Army … has composed a blueprint to establish Planned Economic Staff General Headquarters in Japan and Manchuria that will be vested with a unified authority [to manage their economies] and will allow those institutions to collaborate with each other in controlling industries. The Chief of Staff of the Kwantung Army, General Koiso [Kuniaki], brought this blueprint to Tokyo and presented it to the [Japanese] central government. (Osaka Jiji Shinpo- (The Osaka News Report), April 9, 1933) For a few years after the establishment of Manchukuo, the Kwantung Army temporarily designated Miyazaki’s Economic Research Association and the Kwantung Army Special Service Bureau as the economic staff general headquarters in Manchuria (Osaka Jiji Shinpo-, April 9, 1933). Later, in 1934, the Kwantung Army established the Planning Bureau (Kikaku Sho) within the Manchurian government and concentrated the administrative competence to lead Manchuria’s development in the newly created agency. Special corporation system Another important institutional development resulting from the Outline for the Establishment of the Manchurian Economy of 1933 was the system of special corporations. The Outline provides that “important industries of strategic importance and public nature are to be managed by state-owned enterprises or special corporations.” The outline describes this policy as “feasible, and the best means of state control over the national economy in the current condition.”47 Based on this outline, a number of special corporations, such as the Manchurian Central Bank and the Manchurian Aviation Company, were established. However, as the outline lacked detailed provisions concerning special corporations, the government also enacted the Important Industry Control Law in May 1937. This law stated, “The competent minister can issue necessary orders for the sake of public interest and [apply] state control to those who operate in important industries regarding their business activities.”48 Prior to the enactment of the law, the cabinet meeting adopted “The Outline of Japan-Manchuria Economic Activities” (Nichiman Keizai Katudo- Taiko-) on March 31, 1936. This outline stated that the government would control important industries in areas, such as transportation, telecommunication, and national defense and the like, “based on the principle of one industry one company [Ichi sangyoissha]” (Tokyo Nichinichi Shimbun, September 2, 1936). Additionally, the

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Industry Department, upon the enactment of the Important Industry Control Law in 1937, announced that the government would “put the designated important industries under its special guidance and supervision based on the principle of one industry one company” (Kikuchi 1939: 20). Although the Manchurian government had the power to impose total control over all industry by nationalizing all private enterprises, it did not choose that approach, partly because Ishiwara and Miyazaki understood the importance of the vitality of private corporations and did not want government control over industry to become too tight. Ishiwara described his ideal approach to state control in the following words: “It is inevitable that the state must utilize coercion to a significant degree in order to limit private profit-seeking activities that went too far during liberal economy period” (Ishiwara 1986a: 90). However, he also notes, “the creativity and vitality of each individual is still the most important factor for fully maximizing the capacity of the society and nation. And, we must respect individual freedom as long as it does not cause futile frictions and redundancies … legal restrictions must be kept as few as possible. And, it is preferable to expand the range of self-governance rather than bureaucratic control” (ibid.: 90). Ishiwara’s idea is reflected in Manchurian government policy platforms, such as the Outline for Establishment of the Manchurian Economy. The outline states, “Considering the dangers of an uncontrolled capitalist economy, we will apply a necessary level of state control over our economy, and we plan to facilitate healthy and vigorous development of the national economy by utilizing the effects of [private] capital investment.”49 The outline contends that state control is needed in certain areas, but it also recognizes the need to optimize private business activities. Furthermore, as mentioned earlier, the outline draws a clear line between the important industries to be put under tight control and the rest. It makes clear that those non-strategic industries are “to be left to free management by private [entrepreneurs].”50 This understanding of the significance of private entrepreneurship and the limit of state control might have encouraged the military to ease the level of state control. In other words, although it was in the military’s interests to keep the number of corporations to a minimum, its idea – to-sei keizai ron, which aimed at fusion of liberal market and socialist economies – also told the military officers that they needed to make the most of private entrepreneurship. This explains why policymakers in Manchuria did not adopt a socialist system, even though it would have allowed them to impose even tighter control over industry. The implementation of the economic development plans In the rest of the chapter I will explore the implementation process of the economic development plans, paying close attention to the relationship between the military and other actors. I will also reveal another critical problem of the power-based rationalist theory. It is true that the military’s primary

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interest – transforming Manchuria into an industrial supply base for Japan – had a significant impact on the Manchurian developmental state system, as the power-based rationalist theory suggests. It also allowed the military to remain dominant by allowing it to control private corporations and compel them to serve its interests. Thus, power relations among the actors are indeed an important factor that affected institution building. However, the argument fails to address the fact that the military accepted policy proposals made by other actors, such as bureaucrats and business leaders, even though those proposals sometimes conflicted with military interests. Those military officers possessed extraordinarily powerful influence in Manchuria and could have ignored the demands of other actors, but they would accept such policy proposals if they could be convinced that those proposals were more consistent with to-sei keizai ron than the military’s original plans. The military and bureaucrats When implementing its economic development plans, the powerful military elite made concessions to other actors on some occasions. This was not because other actors were strong enough to hold out against the powerful military, but because some actors were capable of persuading the military to modify its policies. Furthermore, the military depended on other actors on other occasions because it lacked the intellectual and administrative expertise that were necessary to implement their development plans and manage a developmental state system. For example, despite the pervasive political power of the Kwantung Army, military officers depended heavily on the economic expertise of young bureaucrats from Japan in implementing its ambitious development plans. More specifically, the number of Japanese officials in the Manchurian government increased rapidly in the mid-1930s because the Kwantung Army was in the process of implementing the Manchuria Industry Development Five-Year Plan and desperately needed experienced bureaucrats. Therefore, the Kwantung Army asked each ministry in Japan to send talented bureaucrats. A number of young, talented bureaucrats answered the Army’s call and left their jobs in the Japanese government to assist the Army in its endeavor to build a new economic system. Despite their youth, they often attained very important positions in the Manchurian government. For example, Kishi Nobusuke (former chief of the Document Section of the Ministry of Commerce and Industry) was assigned as Vice-Secretary of the Department of Industry. Hoshino Naoki (former chief of the National Asset Section in the Ministry of Finance) became Secretary of the General Affairs Agency in Manchuria. Shiina Estsusaburo- (former official of the Industry Rationalization Bureau in the Ministry of Commerce and Industry) served as a Chief of the Mining Section in the Department of Industry. These young bureaucrats from Japan began to play important roles in the policymaking process in Manchuria. In the case of the special corporation

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system, the Army made major concessions to the bureaucrats, even abandoning its previous policies at the bureaucrats’ requests. The bureaucrats’ authority in the policymaking process was limited because they were required to consult with and receive approval from the military, as discussed above, but the military could not run the government without the bureaucrats’ expertise in public administration. This gave the bureaucrats a certain level of discretionary power, particularly in policy specifics. That is to say, there was a division of labor between the military and the bureaucracy. While the former set national political and economic policies at the board level, the latter took charge of implementing specific economic policies, utilizing their expertise in fiscal, monetary, financial, and industrial policies. The testimonies of two senior Japanese bureaucrats illustrate the fact that the Army sometimes had to make concessions to the bureaucrats due to its lack of expertise in certain policy areas. First, Hoshino Naoki, who served as a bureau chief in the Department of Finance, found a major problem in Manchuria’s tax system when he and his fellow officials were drawing up the next year’s national budget in 1934. The problem was a Kwantung Army decision to delegate the authority to collect land tax and commercial tax to local governments. Since these were the most important sources of the central government’s revenue, the bureaucrats at the Department of Finance thought that the decentralization scheme would seriously limit the central government’s options in fiscal policy. Hoshino arranged a meeting with Major General Itagaki of the Kwantung Army General Staff Office to discuss the issue. Initially, Itagaki refused Hoshino’s request to revoke its plan to decentralize the tax system. Itagaki explained, “I was the one who announced this policy as a part of Manchukuo’s generous policies … If we were to revoke it soon after its announcement, the Kwantung Army would lose face. It would also cause a negative effect on the governance of the state” (Hoshino 1963: 77). However, Hoshino insisted on the appropriateness of his plan and explained how damaging the Kwantung Army’s plan would be to the new country. After a prolonged discussion, Hoshino succeeded in persuading Itagaki, and Itagaki said “All right. You win … If you think it is the best way, do it that way. I will take back [my decision] and support your plan” (Hoshino 1963: 78). The bureaucrats of the Department of Finance designed Manchukuo’s tax system according to their plan. That plan allowed Manchukuo to strengthen the basis of its fiscal policy, which was critical to financing its industrialization. This testimony reveals that the powerful military gave in to the bureaucrat’s request, even though it went against military interests. This did not occur because the bureaucrats had greater political power, but because they had the intellectual capacity to persuade the military. The second testimony is that of the Vice-Secretary of Manchuria’s Department of Industry, Kishi Nobusuke. Kishi came to Manchuria in 1936 after resigning as a section chief in Japan’s Ministry of Commerce and Industry. In his first meeting with Major General Itagaki Seishiro, the Kwantung Army Chief of General Staff, he expressed his aspiration to lead the industrialization of

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Manchuria and unwillingness to submit to the military’s pressure in the following words: I did not come to Manchuria because I had no job in Japan. [I came here because the] development of Manchuria’s industry is critical to governance of Manchuria and to Japan. It is a big mistake that [the Manchurian economy] is put under the control of military officers. Military officers should be concerned with defense of Manchuria … and should not interfere with the economy and money counting. I studied [economics] in the university and am trained in the area. So, I would like the military officers to leave the economy to me, although I will consult with the Army in other areas, such as governance of Manchukuo and other political matters. If this condition cannot be granted, and if the Kwantung Army will tell me do this or that, I am not the right person for the job. (Kishi et al. 1981: 28–29) Major General Itagaki,51 who was the leading figure in the Kwantung Army, replied to Kishi saying, “We invited you to let you handle the economic matters, so do it as you wish” (Kishi et al. 1981: 29). Itagaki kept his word and allowed Kishi and his fellow bureaucrats extensive authority in implementing their plans. Kishi recalls that there was hardly any intervention by the Kwantung Army in the implementation process of the Manchurian Industry Development Five-Year Plan (ibid.: 29). The military had summoned Kishi to Manchuria, so they could have replaced him with someone else, if they wished. However, they knew that they had to rely on Kishi’s expertise in industrial policies, even though it could mean that the military would not always find those decisions in its best interests. In short, even though the military was the most powerful political actor in Manchurian politics, its political dominance does not wholly explain the institutional outcome. Japanese bureaucrats had some level of discretion due to their policy expertise. When the interests of the military and the bureaucracy did not coincide with each other, the military sometimes made concessions to the bureaucrats. The military and private entrepreneurs Not only did the military make concessions to bureaucrats, but in some cases concessions were made to private actors as well. In one case, the military adopted the policy recommendation of a business actor that went against the Army interests. For example, special corporations, as already noted above, were one of the central institutional features of the Manchurian developmental state system. The establishment of special corporations clearly reflected the interests of the Kwantung Army, which wanted to keep corporations under extremely tight control. Originally, the Army wanted to allow only one company to operate in each industry. This principle of “one industry one company”

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(ichigyo--issha) was similar to the economic policy of the postwar French government that created a “national champion” in certain industries. The idea was to concentrate scarce resources and government support in one company and avoid waste by eliminating competition in the industry. It also made it easier for the government to control important industries because there was only one company in each industry. Yet, in spite of the Kwantung Army’s tremendous political power, the special corporation system did not evolve exactly in the way the military had originally designed. In the mid-1930s young Japanese bureaucrats were putting the five-year plan into practice and analyzing Manchuria’s economic conditions and potential. At that time, the Vice-Secretary of the Department of Industry, Kishi Nobusuke, and his fellow bureaucrats in the department had reached the conclusion that it would be impossible to carry out the five-year plan without private investment and business entrepreneurs because there were two major obstacles to Manchuria’s rapid industrialization plan. First, due to certain changes in the financial market in Japan, there was a serious shortage of capital in Manchuria at the time. Manchuria had been a popular destination for Japanese capital when the Japanese economy was struggling with a longlasting recession, but when it began to recover by the mid-1930s, Japanese investors stopped investing in Manchuria. Implementation of the five-year plan required a vast amount of capital, and Kishi had to find a way to finance it. Second, Manchuria lacked experienced entrepreneurs who could lead the management of private firms. The Kwantung Army’s hatred of the zaibatsu prevented large Japanese corporations from entering Manchuria.52 Furthermore, even though the managers of Mantetsu had experience in business management, they were inexperienced in heavy industries – the central focus of the five-year plan. Because of the above, Kishi was convinced that the five-year plan needed to be modified to reflect the reality of the Manchurian economy. The biggest modification that Kishi made was the incorporation of Japanese private entrepreneurs into the five-year plan. He thought experienced businessmen would contribute to the plan by providing management expertise and by raising funds from outside sources to finance the plan. Initially, the Kwantung Army was reluctant to allow businessmen to enter Manchuria because it wanted to make Manchuria a “sanctuary” that was free from zaibatsu corruption (see Manshu- kokushi 1970; Hoshino 1963), unlike other colonies like Korea and Taiwan, where Japanese zaibatsu-affiliated companies had strong influence over the local economy. Kishi solved this problem by promising to limit offers to the so-called “newly established zaibatsu” (shinko- zaibatsu), which were considered different from the corrupt, older zaibatsu firms. From a handful of candidate firms, Kishi and the Kwantung Army chose Aikawa Yoshisuke’s Nihon Sangyo(Nissan).53 Kishi, Hoshino Naoki (Secretary of the General Affairs Agency), Ishiwara Kanji (the Kwantung Army General Staff), and other officers visited Aikawa in Japan several times to persuade him to invest in Manchuria.

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Aikawa received a draft of the five-year plan and ordered his staff to evaluate it. His men told Aikawa, “This paper is an armchair theory written by scholars,” because it “only rotates resources around [different industries] and lacks a timetable for execution” (Aikawa 1965: 324). Yet, even though Aikawa was not certain about the future of the Manchurian economy, he eventually decided to relocate substantial parts of Nissan to Manchuria, where the Manchukuo government and Kwantung Army had promised maximum support of the company. Aikawa incorporated his company and a number of local heavy industry corporations into a large-scale conglomerate called the Manchurian Heavy Industries Corporation (Manshu- Ju-ko-gyo- K.K., a.k.a., Mangyo-), in 1937. On his first visit to Manchuria in 1936, Aikawa met with staff officers of the Kwantung Army and pointed out flaws in its industrial plan, especially the lack of coordination among various industries. He claimed that the Kwantung Army’s principle of “one industry one company” in the plan must be abandoned, and that all industries should be integrated into a hierarchical subcontract structure under a general development scheme. Aikawa commented: “There are two ways to develop industry and exploit resources in such a vast place like Manchuria: One is a linear structure in which each industry develops independently, and the other is a pyramid structure that tries to develop industry systematically. A more common approach is the linear structure, and Manchuria’s special corporation system belongs to this type. We should abandon the ‘one industry one company’ principle, which is based on the linear structure all at once, and we must systematically develop the economy in the pyramid structure”54 (Manshu- kokushi 1970: 547). He also contended that the development of advanced industries like automobiles and airplanes required the simultaneous enhancement of a large number of related industries, such as subcontracting parts manufacturers, maintenance factories, highway/airport facilities, and the like (Suzuki 1992: 269). The military strongly opposed Aikawa’s propositions, primarily for the following reasons: first, some officers insisted that there was no need to alter the military’s principle of “one industry one company,” primarily because having multiple companies in one industry would weaken the government’s ability to control that industry. Among those who opposed Aikawa’s idea were the two top figures of the Kwantung Army at the time, Kwantung Army Commander Ueda Kenkichi, and To-jo- Hideki, Chief of the Kwantung Army General Staff Office (Manshu- kokushi 1970: 549). Second, young officers of the Kwantung Army did not support Aikawa and his plans due to their distaste for zaibatsu. Even though Aikawa did not belong to the traditional zaibatsu groups, they thought that he might behave like such zaibatsu in the future (ibid.: 549). Thus, it was clearly in the military’s interest to maintain tight control over industry by minimizing the number of firms in each industry. In other words, to keep the “one industry one company” principle. Yet despite its initial opposition, the military eventually accepted almost all aspects of Aikawa’s propositions, and the institutional outcome reflected the

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military’s concessions.55 The government announced that, “The principle of one industry one company is appropriate for a formula in the early period of [state] building, but because businesses have grown and now require tight mutual interlocking relations, they need to take the form of comprehensive management. [The state] must obtain results of real industrial development by considering the systematic collaboration of business, or the nature of local business, rather than the principle of one industry, one company” (Kikuchi 1939: 7). For example, on January 12, 1939, the Manchurian government announced its new plan to expand the paper manufacturing industry, aiming at increasing paper production to 23 million tons per year. A newspaper article reported that the government “will repeal its initial plan to build a single-national policy enterprise56 and change it to a new system of three corporations: 1 Kaneboand Japan National Policy Pulp; 2 Oji Paper Co.; and 3 Jinzo- Sen’i and Seishi Federation” (Naigai Shogyo Shinpo-, January 13, 1939). A newspaper in Manchuria reported the government policy change in an article titled, “Fundamental Reconsideration of Manchurian Special Corporation” as follows: Since its establishment, the Manchurian government maintained a high level of state control as the fundamental principle of economic building. The government let special corporations operate in strategic industries that are related to national defense or public interests, and controlled those industries on the bases of “one industry one company … [However,] the special corporations’ unique nature does not meet the reality of business. Therefore, the public has made strong demands for fundamental reform to the special corporation system and modifications to the Commercial Law, particularly the Corporation Law. The government ordered the Department of Industry, Department of Justice, and the Planning Bureau to study concrete plans for reform of the special corporation system. (Manshu- Nichinichi Shimbun, March 27, 1939) In summary, the Kwantung Army established the special corporation system to maintain control over privately owned firms in strategically important industries. The Army introduced the “one industry one company” principle, which allowed the government to control firms tightly. Nonetheless, it withdrew the policy and relaxed the level of state control to reflect policy recommendations from private actors. This suggests that institutional outcomes do not solely reflect the interests of the most powerful actors. It was not just the power balance among actors that influenced institution building: ideational factors mattered as well. Bureaucrats and private entrepreneurs were not as politically strong in Manchuria, but they were still capable of persuading the military to accept their proposals. Thus, the powerful military abandoned its original policies and chose the ones that were more consistent with the idea of to-sei keizai ron. To determine why the military accepted those policies, even though

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some of them went against its interests, one must look into the intellectual context as well.

IV Conclusions With the assistances of young Japanese bureaucrats and private entrepreneurs, the Kwantung Army put the development plans crafted by Ishiwara and Miyazaki into practice and Manchuria was developed into a critical Japanese supply base to support Ishiwara’s grand strategy of fighting a final war against the United States. However, Ishiwara and Miyazaki’s development-oriented economic policies were slightly modified to reflect the views of bureaucrats and business entrepreneurs. Those modifications redefined industrial policies and the role of the government, resulting in a more efficient industrial structure. Manchurian pilot agencies drafted blueprints for the nation’s industrialization and carried out those plans to advance the national interests of Japan and Manchuria, and their industry rationalization policies encouraged private firms to invest in certain industries. This improved business productivity and promoted an increase in the production of certain goods. Furthermore, even though the government established the special corporation system (built around the principle of the one industry one company) to ensure control over privately owned firms in strategically important industries, it withdrew that principle and relaxed the level of state control based on policy recommendations from private actors. In this chapter, I made the following argument: the institution-building process is influenced primarily by two factors: power relations among actors and policymaker ideas. The Japanese military officers dominated Manchurian politics, and the institution outcomes reflected this power structure in some respects because the military built the Manchurian developmental state system in order to turn Manchuria into an industrial supply base that would support Japan’s military ambitions. However, to explain the institution-building process of the Manchurian developmental state system fully, one must look into ideational factors. Military officers developed to-sei keizai ron, which aimed at a fusion of liberal market and socialist economies. The idea became their ideational guidance and had significant influence over their decisionmaking. They chose to establish a developmental state system, rather than a socialist system because they believed that it was the most effective way to industrialize Manchuria rapidly. Furthermore, the military accepted a number of demands from bureaucrats and private entrepreneurs, even though those demands sometimes went against military interests. Military officers accepted those proposals because they had become convinced that they were more consistent with to-sei keizai ron than the military’s original plans. Thus, the Manchurian case suggests that when interests and ideas contradict one another, actors sometimes behave according to their ideas. The study of institutional evolution in Manchuria allows us to draw important implications for our understanding of the postwar Japanese

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economic system and institution evolution. First, the origin of the postwar Japanese economic system can be found in the institutions built in Manchuria. As will be discussed in Chapters 4 and 5, the policymakers in wartime and postwar Japan duplicated the establishment of pilot agencies, which then drafted and carried out similar industrial policies, including the economic planning and rationalization policies that led Japan’s rapid industrialization in those periods. Second, institutions do not always evolve in the way policymakers intend. Even though the Manchurian pilot agencies clearly reflected the plans of policy entrepreneurs who intended to build an “Economic General Staff Office,” the special corporation system developed into a form slightly different than that which they originally designed. Thus, in some cases, institutional evolution can lead to unintended consequences that reflect the views of non-elites, even under a regime where state elites dominate the policymaking process. In this sense, examination of the development of the special corporation system is critical to our understanding of institutional evolution because it demonstrates that institution policies do not simply mirror the interests of the most powerful actors. Even the most powerful political actors sometimes make concessions, which are reflected by the institutional outcomes.

4

The rise of a wartime economy in Japan (1937–45)

In the previous chapter, through my analysis of the institution-building process of the Manchurian developmental state system, I argued that the institution outcome in the Manchurian case reflected the political power relations among actors and their ideas. This chapter examines the process in which the Japanese economy transformed from a liberal market-based economy in the 1920s to a developmental state system between 1937 and 1945. This period was marked by a critical juncture for the Japanese economy because the war between Japan and China had broken out in 1937 and tensions between Japan and the United States intensified at the same time. Ishiwara’s prediction of the final war seemed to be becoming reality. This set of circumstances motivated Japanese policymakers to build a new economic system that would prepare Japan for its military endeavors. As in the case of Manchuria, military officers and bureaucrats in wartime Japan built a developmental state system to promote rapid industrialization and production expansion. This chapter consists of two parts. In the first, I take a close look at the two core institutions of the Japanese wartime developmental state system – pilot agencies (the Planning Board and the Ministry of Commerce and Industry) and control associations (to-sei kai). I first clarify the roles that these institutions played in the wartime developmental state system and then I compare and contrast them with similar institutions of developmental state system in Manchuria and postwar Japan. In the discussion of pilot agencies, I will take a close look at two types of Planning Board industrial policies (economic planning and industry rationalization) to search for similarities between the Japanese wartime and Manchurian pilot agencies. I also examine the role of control associations – the wartime industrial associations – to illustrate how they assisted the government’s effort to rapidly increase the production capabilities of the nation in order to strengthen its defense. In the second part, I trace the process of institution building while evaluating three hypotheses related to the rise of a developmental state system in wartime Japan. More specifically, I examine how each hypothesis addresses the following puzzles: 1 Why did a developmental state system emerge in Japan during the war? 2 What influenced the institutional outcomes of wartime policymaker attempts to build a new economic system? 3 What is the

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relationship between the developmental state systems in Manchuria and wartime Japan?

I Institutions of the Japanese wartime developmental state system 1 Pilot agency: the Cabinet Planning Board The wartime Japanese developmental state system had its pilot agency – the Cabinet Planning Board – which was established in 1937. The Planning Board Administrative Order of 1937 provided the status and functions of the agency as follows: Article one: The Planning Board is made accountable directly to the Prime Minister and takes charge of the following tasks: 1 2

3

4

It drafts plans of the expansion of national power in peacetime and reports them, with explanations, to the Prime Minister. It examines documents submitted by each ministry … regarding the expansion of national power in peacetime, and submits reports with the agency’s perspectives to the Cabinet through the Prime Minister. It submits a report on the control of budgets for items important to the expansion of national power in peacetime to the Cabinet through the Prime Minister. It plans task coordination efforts among all ministries in the establishment and implementation of the national mobilization scheme.

In order to carry out the tasks listed above, the Planning Board can request all ministries and agencies to submit information or demand explanations.1 The Planning Board assumed the central role in planning and implementing rapid economic growth schemes aimed at the “expansion of national power.” In addition, the National Mobilization Act of 1938, which authorized the government to mobilize all economic resources and manpower to carry out war operations, vested the Planning Board with the additional authority to distribute capital, natural resources, and labor among the various sectors of the economy. The act put the Planning Board in charge of drafting a resources allocation plan, which was called the “budget of resources.” In wartime, when resources were scarce due to the strong demand for munitions from the Army and Navy, allocation of resources became a crucial component of military operations. Thus, the government instructed the Planning Board to plan efficient allocation of resources among the military, industrial, and private sectors to ensure that Japan could achieve the goals of successful war operations and

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economic growth. Its authority over resources vested the agency with tremendous influence on economic policymaking in Japan. In other words, the Planning Board functioned as a pilot agency during the war by administering state control over resources and by leading economic development. The Planning Board’s tasks were considered so significant that its chief was granted cabinet member status, and a number of prominent figures, such as Taki Masao (a former chief of the Cabinet Legislation Bureau), Aoki Kazuo (a former finance minister), and Hoshino Naoki (a former finance minister in Manchuria) served in that post. The staff members of the Planning Board were reformist bureaucrats who were strongly inclined toward state control, including Uemura Ko-goro-, Azuma Eiji, and Wada Hiroo. Staff members were recruited primarily from the Ministry of Commerce and Industry (MCI) – the other wartime pilot agency – and many of them assumed key roles in leading Japan’s economic development after the end of World War II.2 Collaborating closely with the MCI, the Planning Board drafted important industrial policies including the National Mobilization Act of 1938, the Production Expansion Four-Year Plan of 1938, the Outline for Establishment of a New Economic System of 1940, and various other industrial policies. In the following pages, I look closely into two types of pilot agency industrial policies (long-term economic plans and industry rationalization policies) to clarify what the reformist bureaucrats of the Planning Board and MCI tried to achieve. Industrial policies of the wartime pilot agencies Economic Plan: The Production Expansion Four-Year Plan of 1938 The Production Expansion Four-Year Plan (Seisanryoku Kakuju- Yonkanen Keikaku) drafted by the Planning Board in 1938 was the first long-term economic plan in Japan. It was modeled after the Manchurian Industry Development Five-Year Plan of 1937, and its drafting was originally initiated by Miyazaki Masayoshi and his colleagues in the Japan Manchuria Economics Research Association (JMERA, Nichiman Zaisei Keizai Kenkyu- Kai) at the request of Ishiwara Kanji. These were the same individuals who drafted the Manchurian economic plan. Ishiwara returned to Japan in 1933 and quickly attained tremendous power at Army Headquarters. With Ishiwara’s support, JMERA composed an economic plan titled “the Important Industries Five-Year Plan” (Ju-yo- Sangyo- Gokanen Keikaku) in 1937, which was supposed to be adopted by the Hayashi Cabinet (Nakamura and Hara 1970: xxxvii). However, when Ishiwara fell out of power, the economic plan was sidelined for a while. It was revitalized by the Planning Board in January 1938, and the cabinet meeting adopted the “Outline for the Production Expansion Plan” (Seisanryoku Kakuju- Keikaku Yo-ko-) in January 1939. The Outline stated the economic plan’s main objective as follows: “Reflecting on current domestic and international conditions, this plan aims at building up the strength of our nation in preparation for drastic national developments. Accordingly, we will attempt to

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Table 4.1 Production expansion four-year plan, 1938–41

1938 1939 1940 1941

Steel (kt)

Pig-iron (kt)

Iron ore Coal (kt) (kt)

Production machines

Ships (t) Electric power (kw)

4,615 5,630 6,280 7,260

3,300 4,000 5,293 6,362

2,250 3,200 4,400 5,700

76,000 118,500 172,500 200,000

402,000 550,000 600,000 650,000

58,565 65,803 71,725 78,182

10,131,500 8,098,000 9,514,500 10,836,500

* kt means 1,000 tons. (Seisanryoku Kakuju- Keikaku Yo-ko- (The Outline of the Production Expansion Plan), Planning Board, January 17, 1939)

make comprehensive production capability build-up plans for important defense industries and the key industries of Japan, Manchuria, and China, which would allow us to reach required goals by 1941, at any cost” (ibid.: 244). The plan selected 13 industries with 36 products (steel, coal, chemical products, production machines, railroad, ship, electric power, etc.) as “defense industries and key industries,” and laid out annual production goals for each product. Table 4.1 shows some of production goal examples. “A Document Regarding Steel Production Expansion,”3 adopted by the cabinet on December 27, 1940, details measures for production expansion in the steel industry as follows: Iron ore: [The government will] promote development [of the mining industry] in Japan, Manchuria, and China under a coherent policy while making efforts to attain iron ore from South Asia. Coal: [The government will] give priority to the supply of resources, technology, labor and the development of maritime and land transportation systems to increase production of coal throughout Japan, Manchuria, and China. Additionally, [the government will] plan rational rationing of coal for steel production and take measures to minimize the use of coal for other purposes. Finance: Financial resources needed for expansion of steel production is expected to reach a vast amount just to meet the demands of the existing production expansion plan, and will [soon] require even larger amounts. Therefore, it is impossible to expect the private financial companies in the current financial system to raise such large amounts of money. Accordingly, the Japanese government will provide special measures to address this problem, such as the use of public funds.4 After the government established control associations in 1941, the control association in each industry assigned its member firms with annual production quotas. The control association also ensured that its members complied with the government plan.5 Even though the Production Expansion Four-Year Plan set such ambitious goals, the aggravating war situation and declining imports of natural resources

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made it extremely difficult for each industry to reach its quota. The actual amount of production during the four years between 1938 and 1941 fell well below the expected amounts. According to a survey taken by the Planning Board,6 industries were already having difficulties expanding production in the second year. The survey reports that even though iron ore, pig iron, and special steel products attained about 90% of their production goals in 1938, production of all steel products in 1941 was expected to shrink by 10%, due to the shortages of electric power and natural resources (Nakamura and Hara 1970: 231–32). Table 4.2 and Figure 4.1 show a significant gap between the projected and actual production of steel. Although the Production Expansion Four-Year Plan failed to achieve its projected goals, its introduction to Japan was an epoch-making event because

Table 4.2 Production goals and actual results of important industrial commodities, 1938–45

1938 1939 1940 1941 1942 1943 1944 1945

Iron (000 t)

Steel (000 t)

Coal (000 t)

Heavy oil (000 t)

Goals

Results

Goals

Results

Goals

Results

Goals

Results

– 3,650 3,850 4,450 4,604 3,781 2,848 555

2,617 3,225 3,580 4,210 4,208 3,945 2,644 411

4,615 5,630 5,120 4,620 4,879 4,142 2,707 402

4,803 4,581 4,483 4,212 4,031 4,101 2,613 315

– 53,896 58,000 59,000 57,000 55,000 58,200 20,566

48,684 51,748 57,367 55,602 54,169 55,538 49,325 16,140

– 429 619 299 – – – 50

610 389 330 216 142 384 72 59

(The Economic Stabilization Board Industrial Bureau (Keizai Antei Honbu SangyoKyoku), “A General Overview of Resource Mobilization Plan Between 1938 and 1945,” May 17, 1951)

Figure 4.1 Steel production, 1938–41. Source: Nakamura and Hara (1970: xxxviii).

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it marked the first attempt by the Japanese government to employ a long-term economic plan. Learning from the mistakes they made during wartime,7 postwar bureaucrats drafted a number of long-term economic plans during the postwar period. As I demonstrate in the next chapter, those postwar economic plans were more sophisticated than the ones used in Manchuria and wartime Japan, and achieved tremendous success. Industry rationalization policies8 Another aspect of industrial policy in wartime was industry rationalization. As mentioned in Chapter 3, while long-term economic plans aim primarily at production expansion, industry rationalization policies focus on improvements to the industrial efficiency. As an example of wartime industry rationalization policies, let me discuss rationalization policies in the steel industry. The government introduced the Production Expansion Four-Year Plan in 1938, but the steel industry of the time was already having difficulties meeting production goals due to energy and resource shortages. Thus, the government set out the Steel Production Rationalization Policy in 1941 to improve industrial efficiency. The primary objective of this policy was to give priority to firms and factories with high productivity in receiving scarce resources and capital, while simultaneously closing firms and factories that were not sufficiently productive. It also reallocated the workers from the closed factories to other factories. This policy was used to shut down 21 firms operating 44 factories.9 Under the government’s guidance, the Iron and Steel Control Association made a press statement to explain the purpose of the policy: Production conditions are deteriorating. If they are left untouched, [the industry] will be unable to attain production increase demanded by the state and might even fail to prevent production from falling. Therefore, we must give priority to production rationalization in the steel industry in the immediate future. To achieve this goal, the association assigned priority production quotas in the second half of 1941. Our policy was to give priority to production rationalization and focus on effective uses of resources, facilities, labor, and transportation. Additionally, our production quota allocation will prioritize those factories with good performance and efficiency. That is, we will increase operation rates at the priority factories. Furthermore, surplus workers from the closed factories, which could be utilized in other factories, are expected to reach a large number, and their reassignments should contribute to production expansion to a significant degree. (Nihon Ko-gyo- Shimbun, December 18, 1941) Similarly, the government set out a rationalization policy in the automobile industry in 1941. It decided to integrate four domestic automakers (Toyota, Nissan, Nihon Diesel Industry, and Manchurian Auto) into one company,

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called the Japan Automobile Rationing Company, which was to be managed by the Automobile Control Industry. By consolidating the production and sales (rationing) of automobiles, the government worked to improve the efficiency of automobile production in Japan (Osaka Asahi Shimbun, June 12, 1941). In summary, the Japanese government established pilot agencies that were similar to those in Manchuria. Like their Manchurian counterparts, the Japanese pilot agencies were vested with extensive authority to draw industrialization blueprints and control the industries. They also laid out policies – long-term economic plans and industry rationalization policies – that were almost identical to those seen in Manchuria. 2 Control associations (to-sei kai) Although the Japanese government introduced pilot agencies modeled after the Manchurian system, the industrial control system it established was slightly different from Manchuria’s special corporation system. In 1941 MCI and the Planning Board drafted a bill to organize firms in each industry into cartel organizations, called control associations (to-sei kai). The bill was adopted at a cabinet meeting and issued as the Important Industries Group Ordinance on August 29, 1941. That ordinance established control associations (and the subgroups, control unions, or to-sei kumiai) in industries that the government designated as “important,” and anyone who operated a business in such important industries was required to become a member of the industry control association. The ordinance states that the objectives of control associations are, “to manage comprehensive control of the concerned industry and cooperate with government policy drafting and enforcement in order to maximize the full potential of the national economy” (Suekawa 1942: 135). To achieve those goals, it also provided instructions tasking control associations with performance of the following actions: 1 Assist the government in drafting and carrying out its plans regarding production and rationing as well as allocation of resources, capital, and labor in the industry of concern. 2 Provide business management guidance [to the members] regarding production and rationing in the industry of concern. 3 [Assist] development of the industry of concern. 4 [Assist] technological advancements, efficiency improvements, product standardization efforts and accounting improvement efforts. 5 Conduct research and study efforts related to the industry. 6 Monitor the business operations of member firms. (Suekawa 1942: 135) A noteworthy feature of this ordinance is that it follows the German model’s “Führer” principle, vesting the president of each control association with extensive authority over members. It also states that the president has

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authority to appoint and fire executive officials and to take charge of general affairs. Furthermore, “decisions in control associations are made solely by the president, and the general assembly meeting of members can only give suggestions to the president on certain issues. Therefore, the general assembly meeting has no influence over the president’s decision-making who can make decisions that directly contradict the opinion of the general assembly meeting’s opinion” (Suekawa 1942: 124–25). It also allows the president to fire executives of member firms if the firms violate laws or administrative orders, damage public interests, or violate the association’s rules (Article 27). The law also provides that control associations are authorized to “submit policy proposals to competent ministers” (Article 17), and to “levy a fine to those members who violated association rules” (Article 21).10 Immediately after the announcement of the new act, the government selected approximately 20 industries that would be covered by the control association system. Table 4.3 lists the control associations established between 1941 and 1942. These were the first two groups of control associations, and the ones the government considered to be most important to its war operations. The steel industry was the first industry to be organized under the control association system when the Iron and Steel Control Association was established in November 1941. Association members included Japan’s leading steel makers, such as Nihon Steel Co. and Nihon Ko-kan Kabushiki Kaisha. Hirao Hachisaburo-, the president of Nihon Steel Co., became the first chairman of the Iron and Steel Control Association. The Steel Control Association was a large organization, with a staff of over 300 workers, including delegates sent from member companies and their retired employees.

Table 4.3 Control associations established, 1941–42 Name Steel Control Association Coal Control Association Mining Control Association Electronic Machines Control Association Industrial Machines Control Association Precision Machines Control Association Metal Industry Control Association Trade Control Association Ship-building Control Association Cotton Staple Fiber Control Association Silk Control Association Source: Yonekura 1993: 191.

Year Cement Control Association Automobile Control Association Vehicles Control Association Wool Control Association Hemp Control Association Chemical Industry Control Association Light Metal Industry Control Association Oil and Fats Control Association Leather Control Association Railroad Control Association

1941 1942

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The Iron and Steel Control Association’s Articles of Association, adopted in November 1941, state that its objectives were, “To assist [the government] in drafting and enforcement of policies regarding the steel industry by administrating industry general management aimed at establishing a self-sufficient steel industry in the East Asian Co-prosperity Sphere” (Nihon Ko-gyo- Shimbun, November 5, 1941). Additionally, the organizational rules of the Iron and Steel Association adopted in January 1942 provided rules of conduct that were more specific, and officially acknowledged the extensive authority of its president, as its provisions clearly stated that association actions would be based on the president’s orders. For example, Article 3 states, “Steel makers must use the compounding ratio of pig iron and scrap steel set by the president when producing steel products.” Additionally, Article 10 stated, “The president assigns production quotas to steel makers for all sorts of steel products. Steel makers must produce steel following this direction” (Nihon Ko-gyoShimbun, January 16, 1942). When comparing the industrial structures of Manchuria and wartime Japan, one can find several important differences. Even though they are both designed as tools of state control over industry, wartime Japan’s control association system and Manchuria’s special corporation system were quite different. The special corporation system allowed the Manchurian government to influence firms more directly than Japan’s industrial association system. The control association system was established as a tool of indirect control that allowed bureaucrats to coerce firms into cooperating with the state by facilitating communication between the state and the industry, collecting information from the industry, and monitoring and enforcing the compliance of individual firms with state policies and guidance (see Chapter 6 for a more detailed comparison of the industrial control of Manchuria and wartime Japan). This system of control associations was inherited by postwar Japan and continued to function as a tool of indirect control. In this sense, the state’s control over industry in Manchuria was different from wartime/postwar Japan.

II Explaining the rise of the wartime Japanese developmental state system In the rest of this chapter, I will trace the institution-building process of the wartime Japanese developmental state system and analyze the reasons why those institutions of industry control (pilot agencies and control associations) emerged in wartime Japan. By means of a process-tracing analysis, I evaluate the validity of three hypotheses: the collective action hypothesis, the power-based rationalist hypothesis, and the ideational hypothesis. The Japanese economy in the early 1930s The Great Depression of 1929 caused tremendous damage to the world economy and many countries observed a drastic slump in their economic

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activities. For example, gross national product (GNP) shrank by 13% in the United States, 23% in the United Kingdom, and 12% in Germany within just two years after 1929 (Werner 2001: 43). Japan was no exception to this dramatic global economic downturn, particularly because the American market had been a major destination for major Japanese exports, such as silk, textiles, and other light industrial products. Due to competing currency devaluations among many countries, a wave of serious deflation also hit the international market, causing prices for Japan’s export goods to drop radically and deteriorating the profitability of Japanese firms. To make matters worse, the creation of a bloc economy diminished demand for Japanese products, and Japan’s industrial production index dropped uniformly across all sectors. Trade declined substantially (exports shrank by 53% and imports by 55% between 1929 and 1931), reducing corporate profitability to almost zero (Suzuki 1992: 42). Japan’s main exports at the time were silk and cotton products, which accounted for 64.2% of the nation’s exports in 1929. The price of silk and cotton products fell by 65.9% and 56.7%, respectively, between 1929 and 1932, and those products plunged by 54.0% and 42.0%, respectively, during the same period.11 Due to the huge drop in its major exports, the Japanese economy suffered a major recession, which contracted its national income by 24.3% in the same two-year period (Economic Planning Agency 1964: 288) (see Figure 4.2). The unemployment rate skyrocketed from 4.33% in 1929 to 6.88% in 1932; this figure was much worse among day laborers – 7.11% and 11.59%, respectively (Nihon To-kei Kenkyu-jo 1958: 278). See Figure 4.3 for unemployment rates. The price of agricultural products also plunged, and the average income of farmers shrank by more than half within two years after the onset of the Great Depression. Data suggest that the average annual income of farmers was 1,047 yen in 1928, but had declined to only 478 yen in 1931 – a 54.3% decline within two years (ibid.: 160). Other data suggest that farmer income

Figure 4.2 Japan’s national income, 1927–32. Source: EPA 1964.

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Figure 4.3 Unemployment rates in Japan, 1929–34. Source: Nihon To-kei Kenkyu-jo (1958: 278).

had declined by two-thirds within three years after 1929 (Tokyo Asahi Shimbun, April 26, 1935). A newspaper report at the time describes the struggling rural economy as follows: “The fact is that the direct reason of the severe recession in rural areas in 1930 made it clear that agricultural production is vulnerable to the power of the market in a capitalist system … as a result of this severe recession, decline in income of rural areas is estimated to be no smaller than 800 million yen from last year. Decline in income is 34,573,000 yen in rice, 37,900,000 yen in silk, 43,000 yen in vegetables, and 26,000 yen in fruit, which adds up to 79,000,000 yen. Since these products account for about 80% of Japan’s agricultural production, the total income loss should exceed 80,000,000 yen” (Kobe Yu-shin Nippo-, December 20, 1930). It was also reported that, “Perhaps, the total amount of debts among farmers in Japan is estimated to be about 6 billion yen. Furthermore, about 80% of those debts are loans with interest rates ranging from 7% to 15%. That is, interest payments add up to 0.6 billion yen. How can farmers afford to pay such a large amount of money?” (Tokyo Asahi Shimbun, April 26, 1935). Thus, poverty spread throughout the nation within a short period. In every respect, it was the most severe recession Japan had experienced since it began modernizing in the late 19th century. The collective action theory The collective action theory posits that actors build institutions to achieve mutually beneficial outcomes. This theory assumes that collective action is hard to organize because of problems such as the lack of trust among actors, free-riding, high transaction costs, and the absence of monitoring and enforcement mechanisms. Since the individual utility maximization behavior of actors makes it hard for them to overcome collective action problems, they end up with suboptimal or inefficient outcomes. Rationalists view institutions

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as one of the solutions to collective action problems because the rules and agreed upon procedures embedded in institutions decrease uncertainties, provide enforcement mechanisms, reduce transaction costs, facilitate trade-offs, etc. In the early 1930s the Japanese economy was in a deep trouble. It had been hit hard by the Great Depression in 1929 and a number of collective action problems seemed to be exacerbating the already struggling economy. Accordingly, one can argue that the actors built the pilot agency and control associations to avoid mutually unfavorable conditions caused by collective action problems. Some evidence from the case of wartime Japan seems to support this argument. Intellectuals and policymakers in the 1930s attempted to analyze the causes of the economic crisis, and some believed that selfish and irresponsible corporate activities were responsible for the major economic breakdown. For example, one of the most prominent Japanese economists at the time, Takahashi Kamekichi, criticized Japan’s corporate system in his book published in 1930. In that book, Takahashi alarmingly stated that the Japanese economy was seriously damaged by irresponsible and inappropriate corporate conduct that was caused by: 1 opportunistic business management and lack of long-term prospects; 2 reckless financial management; 3 phony accounting and excessive dividend payments; 4 moral hazard and unproductive business projects; and 5 greedy shareholder demand for high dividends (Takahashi 1930: 4). This view was shared by many policymakers as well. For example, Hoashi Kei,12 a senior bureaucrat in the Planning Board, spoke about the cause of the Great Depression and the reason behind the institution-building in the following words, “The balance in the entire nation’s economy was disrupted by allowing individuals to act freely and produce things in a disorderly manner. The economic crisis occurred because the balance in the production sector was routinely disrupted, and the equilibrium between production and consumption was broken” (Hoashi 1941: 11). He then states, “The initial reaction to such an economic crisis was a sector-specific defense mechanism, such as cartels and trusts. However, such self-protection mechanisms, organized individually in each sector, were powerless against economic crises of international scale or national scale. We could not expect to survive this nationwide economic crisis with individual actions. Therefore, [the lawmakers] started to think that we must apply effective and overarching regulations over the national economy in order to make it through the crisis … We then began considering such policies as modification of capitalism and managed economy” (Hoashi 1941: 12). These writings suggest that the institutions of the wartime Japanese developmental system were established for the purpose of regulating the selfish activities of private corporations. They were designed to prevent harmful business conduct derived from collective action problems, such as overproduction, excessive investment, and irresponsible management. For example, if companies were not regulated and acted solely in their self-interest, they would produce as much as possible when the economy was doing well. They would invest more to increase their production capability and pay large

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dividends to stockholders to attract more capital. However, when the economy slows down, companies would face a sudden decline in price and mounting inventories; resulting in the kind of economic crisis that Japan experienced in the 1930s. Thus, Japanese policymakers recognized a need to establish institutional mechanisms that regulated self-indulgent corporate executives and would lead them to mutually beneficial outcomes with careful planning and monitoring. Therefore, one can also argue that the wartime Japanese policymakers built the pilot agency and control associations to overcome collective action problems and lead the economy to healthy growth. However, this explanation has some critical empirical problems that seriously undermine its validity. First, if the institutions were established to overcome collective action problems and reach mutually beneficial outcomes, most, if not all, actors would support establishing such institutions. Yet, in actuality, there was fierce resistance to policymaker attempts to build those institutions throughout the wartime period. The opposition came primarily from zaibatsu (big business) leaders, who would have benefited from such institutions. (The zaibatsu leadership’s strong and continuous opposition will be discussed in depth later in this chapter.) The collective action theory fails to offer a valid explanation for the reason behind the zaibatsu leadership’s opposition. Second, the institutions did not function as well as the policymakers had expected. As illustrated above, not only did the production of certain important products fail to reach their expected levels, but production largely shrank (see Table 4.2 and Figure 4.1 above). This theory has difficulty explaining the reason why policymakers built institutions that failed to provide economic gain. Evidence suggests that the policymakers built the wartime Japanese developmental state system for reasons besides economic necessity; there were additional important factors that influenced its institution-building process. The power-based rationalist theory The power-based rationalist theory explains the institution-building process by focusing primarily on actors’ pursuit of power. This perspective views institutions as a by-product of political conflict among political actors and assumes that the most powerful actors establish rules that are most favorable for them. Powerful political actors attempt to design institutions for the purpose of gaining strategic advantage vis-à-vis other actors. However, if opposition from other actors is sufficiently strong, policymakers will have to make concessions. Thus, the institutional outcome will reflect the interests of the opposing actors as well as the policymakers. The end of party politics and the rise of the military Unlike Manchuria, where the military dominated politics, there was severe political competition between two political camps – the business-party

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coalition and the military-bureaucrats coalition – in wartime Japan. The power-based rationalist theory would argue that the wartime developmental state system reflected the political conflict between the two camps. The primary interest of the business-party coalition was to defend the laissez-faire economy that developed during the 1920s. As discussed in Chapter 2, private corporations were relatively free from government influence at the time and their leaders wanted to prevent the government from intervening in the market and business management policies. The political parties13 were closely tied with zaibatsu leadership through campaign donations and family ties, and thus many of their members helped zaibatsu leaders advance their interests in economic issues. The military leadership, on the other hand, wanted to put the economy under tight government control, as it had done in Manchuria, because Japan was facing an increasingly hostile political environment in the 1930s. Tensions between Japan and China were escalating because Japan had invaded Manchuria and established its puppet state – Manchukuo – in 1932, which also antagonized the United States and Great Britain. Therefore, the Japanese military leadership wanted to build a system of rapid industrialization in Japan in order to further advance Japan’s overseas territories and prepare Japan for a possible major war. The bureaucrats allied with the military officers, even though they were not necessarily interested in the military’s overseas ambitions. The bureaucrats wanted to expand the government’s roles in leading industrialization because it would significantly strengthen their policy authority over industry. Contrary to the common belief that the military completely dominated politics in wartime Japan,14 there was a relentless political conflict between the zaibatsu-party coalition and the military-bureaucratic coalition throughout the war. The power-based rationalist theory would argue that the institutional features of the wartime Japanese developmental state system reflected this political conflict. Even after the military-bureaucrat coalition became the central figure in wartime politics, the business-party coalition continued to resist their plans to impose state control. Therefore, one can argue that the wartime Japanese developmental state system developed characteristics of both liberal market and state-planned economies as a result of compromises between the two competing groups of powerful actors. Power transition in the 1930s The political dominance of zaibatsu leaders and party politicians came to an end in the mid-1930s as the coalition between military leaders and young bureaucrats rapidly accumulated power. The political power of zaibatsu leaders was undermined by a chain of recessions in the late 1920s. Economic crises, such as the Great Depression, inflicted tremendous damage on the Japanese economy, and many companies, including those affiliated with zaibatsu, faced serious hardship. For example, Suzuki Sho-ten – Japan’s biggest trading

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company at the time – filed for bankruptcy in 1927, and a number of larger banks, such as Tokyo Watanabe Bank, Taiwan Bank, and Nakai Bank became insolvent in the same year. Given the weakening influence of the business sector and intensifying security concerns in Asia, the political influence of the military grew rapidly and began to replace the business sector as a new power holder. Various terrorist actions and coup attempts by military officers and right-wing groups, the primary targets of which were big business owners and their party politician allies, had a decisive impact on the existing power balance. In 1930 a right-wing activist shot Prime Minister Hamaguchi Osachi in Tokyo Station. Hamaguchi died a few months later. There were two military coup attempts (the March Incident and the October Incident) in 1931. In 1932 a right-wing group called Ketsumeidan assassinated Inoue Junnosuke, a former finance minister, and Dan Takuma, a chief director of the Mitsui zaibatsu group. Three months later a group of young Navy officers, Army cadets, and rightwing members carried out a major coup attempt (the May 15 Incident), killing Prime Minister Inukai Tsuyoshi during an assault on his official residence. Four years later a group of some 1,400 Army officials occupied various government institutions and assassinated a number of important government leaders including Finance Minister Takahashi Korekiyo and Internal Affairs Minister Saito- Makoto (the February 26 Incident). Those actions were aimed at defeating the zaibatsu-party coalition, which was primarily concerned with restricting government intervention and arms building, in order to maintain friendly relations with Western nations. The military’s animosity towards party politicians and zaibatsu leaders stem from two sources. The first reason was due to the institutional structure in the military. Military officers were primarily recruited from recession-struck rural regions where farmers had been experiencing poverty and hunger since the late 1920s. Deeply concerned with the tremendous economic hardship of their hometowns, they blamed the selfish profit-seeking activities of the zaibatsu leadership and corrupt politicians (Suzuki 1992: 42; Kato- 1979: 96; Gao 1997: 94). Thus, wealthy business owners like Dan were seen as perfect targets. The second reason is more political: the incumbent party, Minseito- (1929–31), was largely in favor of a balanced budget and tried to overcome the economic problems after the Great Depression by cutting government spending. Hamaguchi and Finance Minister Inoue, for example, were targeted because they signed the London Naval Treaty in 1930, which forced Japan to reduce its naval power and because their tight fiscal policies had reduced the military budget. Additionally, politicians often opposed the military’s expansionist policies in Asia. Inukai was considered to be a major political obstacle by military leaders because he strongly opposed recognition of Manchukuo,15 which the Army considered to be the “lifeline” of Japan’s defense against the Soviet Union.16 Even though military leaders were not directly involved with (and not sympathetic to) the reckless coup attempts by the young rebellious soldiers, and even though the attempts did not result in a total overthrow of the existing

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Figure 4.4 Government spending increases, 1929–41.

system, those violent political actions allowed the military to seriously weaken its political rivals (party politicians and business owners) and minimize their influence over the policymaking process. The increased political clout of the military was evident in the rapid growth of military spending. As I discussed in Chapter 2, the zaibatsu-party coalition had functioned as an effective limiter against the military’s arms build-up ambitions. However, as the military began to increase its political power, the government’s military budgets kept pace. Military spending expanded from 494 million yen in 1929, to 1 billion yen in 1935, and to 3 billion yen in 1941. As a percentage of the government budget, such spending rose from 28.5% in 1929, to 46.7% in 1935, and to 37.0% in 1941 (see Figure 4.4). Rise of the reformist bureaucrats The military leadership, which wanted to force the zaibatsu chiefs and party politicians out of power, found a political ally in the bureaucracy. That coalition partner was a group of young government officials called “reformist bureaucrats” (kakushin kanryo-), who were characterized as “anti-liberal, anti-parties, nationalistic, pro-military, pro-fascist, and above all in favor of strengthening governmental control” (Johnson 1982: 124). Reformist bureaucrats were particularly sympathetic with the military’s anti-zaibatsu sentiment because they spent their training periods in rural areas where people were experiencing tremendous hardship due to the severe recessions in the late 1920s (Werner 2001: 45). Like most military officers, they also believed that zaibatsu profit seeking and the corrupt liberal policies of the politicians, which were insensitive to the poor, had resulted in inhumane conditions in rural areas. Such reformist bureaucrats began to take over important government positions in the early 1930s,17 replacing conservative bureaucrats who were inclined toward liberal economic policies, and the political power balance within the bureaucracy

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shifted in favor of the military. Unlike their predecessors, reformist bureaucrats were highly talented meritocrats who had graduated from the nation’s top universities and who had passed competitive qualifying examinations. Johnson states that the reformist bureaucrats “were found in all ministries and rose to influence after the assassination of Inukai [during the February 26 Incident] as part of the vigorous intrabureaucratic competition to fill the political vacuum left by the political parties. By cooperating with the military, whether for ideological reasons or just because that was the way the wind was blowing, some bureaucrats rapidly advanced their own careers” (Johnson 1982: 124). The power-based rationalist theory seems to offer a plausible explanation for the institutional evolution of the wartime Japanese developmental state system, and the power relations among the major political actors certainly had some impact on the way wartime economic institutions developed. While political context is an important factor in institutional evolution, this argument has some shortcomings. First, it fails to take into consideration some important factors in the political changes of the 1930s. The military-bureaucracy coalition became dominant, not just as a result of victorious political battles, but also because its policies attracted support from other actors, such as scholars and journalists. While scholars and journalists had limited political power compared to other actors, such as zaibatsu leaders and party politicians, their intellectual advocacy in favor of military-bureaucratic coalition policies made that coalition even more influential in policymaking. Therefore, one must take a close look at the intellectual context behind the institutional evolution as well. Second, the institutional features of the pilot agency and control associations were not solely shaped by the power balance between the two political camps. While it is true that the military-bureaucracy coalition faced continuing opposition from zaibatsu leaders and party politicians throughout the war (as discussed below), that did not mean that institutional outcomes would reflect the interests of both political camps. Even though the military-bureaucracy coalition modified its policies to some extent by relaxing the levels of state control, its policies still reflected the coalition’s ideas, not those of the zaibatsu leaders. Rationalist arguments overlook such ideational and historical context, which limits their explanatory power, and thus leave the following important questions unanswered: Why did the policymakers shape the institutions in the way they did? What did they want to achieve by building the institutions? To solve those questions and provide a full account of the complex nature of institutional evolution, one must look into its intellectual context as well as its political context. As I suggest below, there was an important intellectual link between the developmental state systems in Manchuria and wartime Japan, and the wartime Japanese economic system reflected policymaker ideas. The ideational theory The ideational theory tries to explain institutional evolution by paying close attention to actor ideas. Policymakers cannot always obtain sufficient information

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to make rational decisions because there is a high level of uncertainty in politics. Therefore, they must rely on some kind of ideational guidance, which plays a critical role when they assess information before making decisions. Once actors adopt a given set of ideas as their ideational guidance, they become committed to the types of policies that comply with the guidance of those ideas and will reject policies that contradict it. Furthermore, policymakers’ ideas often reflect their past experiences and personal background. The ideational theory illustrates how those factors influence policymaker ideas. In the case of wartime Japan, such an analysis is particularly critical because the ideas of both the military officers and bureaucrats clearly reflected their experiences in Manchuria. Intellectual discourse and competing ideas In the interwar period, four schools of thought, namely liberalism, Marxism, kokka shakai shugi (national socialism), and to-sei keizai ron constituted much of the intellectual discourse among scholars, policymakers, journalists, and political activists. Advocates of each idea competed with one another and presented different perspectives and policy recommendations as solutions for the troubled Japanese economy. I will examine each school of thought and discourse among them below. By doing so, I discuss the reason why to-sei keizai ron attracted wide support and became the ideational guidance for the wartime policymakers. This will be followed by a discussion about how the military-bureaucracy coalition incorporated its ideas into institutions. Liberal economic market theory The advocates of liberal economic market theory formed a school of thought called Kindai Keizaigaku (School of Modern Economics). They were influenced by classical economics (liberalism), the German neo-historical school of political economy, Keynesianism, and other non-Marxist economics theories. The primary feature of this school, which was the ideational foundation of the 1920s economic system, was its anti-Marxist stance and antipathy toward state control. Not only was it the most popular theory among academic economists, it was also advocated by big business owners and party politicians. The study of economics in Japan started with studies of classical economic theory in the 1870s. Then, a group of Japanese scholars who had studied economics in Germany founded Japan’s first scholarly society dedicated to economics, called Nihon Shakai Seisaku Gakkai (Japan Social Policy Association)18 in 1896. The members of the association were inclined toward scholars of the German neo-historical school of political economy, such as Gustav Schmoller and Adolf Wagner, who held strong anti-Marxist views. Tokyo University introduced economics as a subfield in its Legal Studies Department in 1908, and then created the Economics Department in 1919. Other schools followed Tokyo University and began publishing various economics journals. The

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liberal school remained the mainstream of economic study until the late 1930s (Hayasaka 1984), and some examples of prominent liberal scholars include Fukuda Tokuzo-, Koizumi Shinzo-, and Nakayama Ichiro-. Liberal economic theory was also widely supported by many business executives. However, liberal economic theory quickly lost its popularity in the early 1930s, primarily due to two historical events, the Great Depression and the success of the Soviet economy. The miserable experiences of the Great Depression triggered serious doubts on the effectiveness and appropriateness of liberal market-based capitalism among an increasing number of policymakers and academics who had misgivings about the increasing power of big business owners throughout the world. According to Hall, there was “widespread uncertainty about whether the capitalist economy would survive the Depression. The rise of oligopolies, militant trade unions, and the managerial revolution had called long-standing models of free market capitalism into question” (Hall 1989: 384). The discrediting of liberal economic theory was a worldwide phenomenon; many European countries and the United State adopted Keynesian policies to overcome economic hardship through demand stimulus. Policymakers, scholars, journalists, and the like in Japan also began to believe that government must regulate the market and business to rein in the “evils of capitalism.” The Great Depression also caused some intellectuals and scholars to question liberalism and contend that the liberal market system had structural flaws, which invited a major economic breakdown. For example, one of the most prominent Japanese economists at the time, Takahashi Kamekichi, claimed that the Japanese economy was seriously damaged by irresponsible and inappropriate corporate conduct, such as reckless financial management, excessive dividend payments, moral hazards, and the like (Takahashi 1930: 4). Takahashi thought that the existing liberal market system was problematic and that the government must regulate the market. He held a negative view of the profit-seeking activities of corporate executives and individual investors, and rejected a core assumption of liberal economists like Adam Smith and David Ricardo, that utility-maximizing behavior makes the market function properly. Another event that discredited liberal economic theory was the surprising success of the Soviet Union’s Five-Year Economic Plan (1928–33), which started a year before the Great Depression. The Soviet Union succeeded in developing and modernizing its economy at an astonishing speed. One Japanese newspaper reported that Stalin had announced that the Soviet Union was expecting to achieve its goals one year ahead of schedule. Within two years of the inauguration of the plan, industrial output had increased by 25%, and by 40% in the heavy industry sector, and investment in industry grew by 84% (Kobe Shimbun, November 2, 1930). It was particularly remarkable at that time because most other countries were suffering from the relentless impact of the Great Depression, but the Soviet economy never seemed to stop advancing. Another Japanese newspaper reported on the state

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of the Soviet economy in its article titled, “People Who Do Not Know the World Recession” in 1932, as follows: America, which used to enjoy seemingly everlasting prosperity, has been defeated by the stock crisis of 1929 without the least resistance. Since then, the shock wave of the Great Depression has shaken the economic foundations of many countries, all of which are suffering from deficits and unemployment. Meanwhile, the working class in the Soviet Union is living enviable lives … The results of the so-called Industry Five-Year Plan and collective management of agriculture were higher wages for the workers and full employment. Additionally, factory worker incomes increased by 24% within the three years between 1928 and 1931, and several million workers were absorbed by newly created industrial sectors. (Kokumin Shimbun, January 10, 1932) It was obvious that Japanese intellectuals and policymakers were stunned and frightened by the fact that the Soviet Union’s new system allowed the backward agricultural nation to transform rapidly into a fully industrialized country while all the capitalist countries were struggling with the prolonged recession. One newspaper article commented that the success of the Soviet Union made many people think that “their five-year plan has succeeded and is making other more industrialized countries worried means a defeat of capitalism” (Osaka Mainichi Shimbun, April 30, 1931). Similarly, another report noted, “there are two conflicting economic systems in today’s world. All countries except for Russia have haphazard capitalist economic systems, and only Russia has adopted a socialist economic system. Since the fall of 1929, the world economy has not yet shown any sign of recovery, even though politicians, businessmen, and scholars alike racked their brains to find effective measures against recession. It is hard to deny that many are feeling that ‘the end of capitalist economy’ has arrived” (Manshu- Nippo-,, January 6, 1932).19 Japanese leaders clearly perceived the threat of the rapidly growing Soviet economy, particularly because it resulted in a significant military build-up in Japan’s backyard. For instance, General Arima Hiroshi, who was stationed in the Soviet Union for two years as a military attaché to the Japanese embassy, told the media upon his return in 1931 that “the Soviet military expects a great war in the future and possesses an army totaling 1.2 million troops … It exhibits astonishing new weapons in grand parades, which are held twice a year, and is urgently enlarging its military capability. Their communism now looks more like militarism and the entire population is inclining toward nationalism” (Osaka Jiji Shinpo-, July 28, 1931). Additionally, Lieutenant Shimanuki Takeharu of the Imperial Army General Staff Office Operation Section commented, “The military powers of Japan and the Soviet Union were relatively balanced in East Asia [until 1932]. However, Japan’s military capability in Manchuria is several times smaller than that of the Soviet forces. And, it is beyond comparison in the categories

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of aerial forces and tanks” (Hata 1962: 238). The Soviet military capability in the Far Eastern region was doubled within three years after 1935, while that of the Japanese forces remained at the same level. The Soviet had about 240,000 troops in the region, and Japan had only about 30% of that (ibid.: 238). One newspaper article described the military’s fear of the rapidly growing Soviet military power as follows: Recently, the Soviet Union’s military industry has moved ahead by leaps and bounds thanks to its first and second Industry Five-Year Plans. Their army is far better quantitatively and qualitatively than during the Tsarist period when it was considered as the world’s biggest army. It has also concentrated significant military power and established logistic supply facilities along the border between Russia and Manchuria … and our army is highly concerned with this fact. Our military power in Manchuria is several times smaller than the Soviet Far Eastern forces, and the numbers of airplanes and tanks are beyond comparison. Thus, the [Japanese] Army is planning to enlarge its forces in Manchuria, air power, and machine units to ensure the nation’s security. However, to achieve this goal, [the Army] acutely feels the necessity of the state protection and promotion and tight control over defense-related industries, such as aviation, automobiles, and petroleum, which are closely related to the Army. Therefore, state control over these industries will gradually become a concrete agenda [for the government]. (Osaka Asahi Shimbun, April 5, 1936) Finally, Kishi Nobusuke, section chief at the Ministry of Commerce and Industry, recalls his impression of the Soviet Five-Year Plan: “I was shocked when I heard about the plan for the first time. It was completely different from the liberal [market] economy we were accustomed to, and I remember I felt somewhat threatened by their idea and aspirations to set goals [for the national economy] and achieve them” (Kishi 1981: 17). These two events undermined the people’s faith in liberal capitalism and enhanced their inclination toward some kind of state control. Marxism The second school of thought was Marxism, which was the biggest intellectual rival of liberalism in the 1920s. Marxism was widely advocated by some economists, left-wing activists, and the working class. An increasing number of economists began to study Marxist theory around the turn of the century. Examples of Marxist economists in the prewar period include Kawakami Hajime, Ouchi Hyo-e, and Noro Eitaro-. Their scholarly activities were closely linked with the Marxist movement, and they made significant contributions to the rise of the socialist/communist political movements in the 1910s.

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However, their fate took a drastic turn when Marxist activists, who called for revolutionary action against capitalist regimes, became the prime target of the government’s ideological suppression (tenko- (conversion) movement)20 after the passage of Chian Iji Ho- (the Peace Preservation Law) of 1925 in the Diet. Government suppression intensified after the Manchurian Incident of 1931,21 and the government arrested a large number of Marxist party members and forced them to make ideological conversions. The fall of the Marxist movement appeared decisive when leaders of the Japanese Communist Party, Sano Manabu and Nabeyama Sadachika, were arrested and made a public statement renouncing the party’s ideology in June 1933. Their statement contended, “The Japanese Communist Party called for violent demonstration in the past, and in fact, we organized it, albeit at a small level. It was definitely a mistake … [The Party] has also shown some signs of corruption that is not a characteristic of the proletariat” (Sano 1933: 4–5). The converted activists renounced their party by claiming that, “From an objective standpoint, we cannot say that our party is a party of the working class” (ibid.: 5). They also criticized the Soviet Union and the international communist organization that they used to look up to as leaders of worldwide communist movement. “We admit the necessity to condemn the Comintern [Communist International], which we considered as the highest authority. We assert that the Comintern has recently become sectionalized and bureaucratized, turned into a tool of the Soviet Union, lost the spirit of progressive proletariat union, and has gone along with the bourgeois in each country” (ibid.: 8–9). Looking back on the Communist Party’s condition around 1933 in his autobiography, Nabeyama echoed Sano’s criticisms of the Party and claimed that it was driven by the “impulsive conduct of bourgeois intellectuals, who did not trust and offered affront to the people. The Party became a toy of bourgeois intellectuals. Those who joined the party as new members were mostly from this class, but they were not proletariats” (Nabeyama 1949: 147). He continues his critique that the Party was radicalizing and calling for unrealistic goals, such as a nation-wide general strike, “with no mass support for them. And, the party was pursing sensationalism, even though it could not accomplish a 100th of its goals” (ibid.: 149). Ideational suppression soon expanded to Marxist scholars, who also abandoned their belief or ceased their academic activities. An example of those scholars is Kawakami Hajime, a professor of Kyoto University, actively involved with the Marxist movement and a member of the Japan Communist Party. Kawakami was arrested by the police in 1933 and forced to abandon his belief in Marxism publicly. In prison, he wrote a letter that was published in a national newspaper in 1933. In the letter, he announced his ideological conversion as follows: As a person arrested for being a Communist, I spend my life in prison. Nothing else is left for me if I insist on remaining a Communist. If I wish

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to regain my freedom, sooner or later I must abandon my affiliation to Communism … I shall henceforth renounce participation in any activities – whether they are legal or not – and retire to my study. This is what I have decided. By making this public announcement, I am no longer a Communist. (Kawakami 1933, reprinted in Lu 1997: 404) Kokka shakai shugi (national socialism) The third school of thought was kokka shakai shugi (national socialism). The advocates of national socialism were nationalist intellectuals, young soldiers, and right-wing activists. They called for the establishment of a system of extensive state control over the economy under the absolute sovereignty of the Emperor. The advocates of national socialism included right-wing nationalists, such as Kita Ikki, Okawa Shumei, Mitsukawa Kametaro-, and their followers in the military. Kita published a book, titled Nihon Kaizo- Ho-an Taiko- (An Outline Plan for the Reorganization of Japan) in 1919. In the book, he claimed that capitalism brought about class struggle and corrupted political parties, and that Western ideologies undermined the Japanese spirit. He proclaimed the need for a coup d’état to defeat the privileged classes (i.e. business and party politicians) and revolutionize the state structure under the Emperor (Kato- 1979). Though they both demanded some type of state control over economic activities, the economic perspectives of national socialism were distinct from Ishiwara and Miyazaki’s to-sei keizai ron in the following respects: first, national socialism rejected the capitalist system altogether, advocating limitations on private property as well as direct state control and ownership of important industries. Kita argued, “No Japanese family shall possess property in excess of one million yen … Any amount that exceeds the limitation on private property shall revert to the state without compensation … No private industry shall exceed the limit of ten million yen in assets … Any industry whose assets exceed the limitation imposed on private industry shall be collectivized and operated under state control.”22 Also, it renounced the market system. Kita called for creation of a Ministry of Commerce to replace the commodity market. The ministry would “distribute all agricultural and industrial commodities produced by the state and private parties, [and] adjust domestic commodity prices.”23 Kita’s ideas differed from to-sei keizai ron, which does not set any limitation on private property, although it obligated firms and households to cooperate with the state to achieve its goals. Furthermore, to-sei keizai ron did not reject the market system, though it set various regulations. Second, the primary goals of national socialism were the alleviation of poverty in rural areas, income inequality, and the evils of capitalism, rather than economic development. In his book, Kita discussed protection of the rights of labor and women, fair distribution of wealth, worker involvement in

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decision-making, provision of social welfare, and the improvement of labor conditions. Kita called for the creation of a Ministry of Labor “to protect the rights of all workers employed by state- and privately owned industries.”24 He also stated, “One half of private net profits shall be distributed to workers employed in such industries … Workers shall elect their own representatives to participate in the industry’s management planning and bookkeeping. Similar provisions shall apply to farm workers and landlords.”25 This is another difference from to-sei keizai ron, which posits that growth of the national economy will eventually improve worker living standards; thus, government economic policies should set growth as the priority. Third, national socialism believed that large and strategically important industries should be nationalized and managed directly by the state. Kita called for the creation of a Ministry of Industry to be vested with the following tasks: Various large industries expropriated by the state [for exceeding the limitation on private property] shall be reorganized, unified, and expanded to form a truly large industrial organization through which all types of industries may acquire the competitive advantages now possessed by comparable foreign industries. The ministry [of Industry] shall also operate industries urgently needed by the nation, but not undertaken by the private sector.26 In other words, state-owned enterprises become the key to this industrialization plan. In contrast, to-sei keizai ron acknowledges the importance of private entrepreneurship in facilitating economic growth. Although it agreed with national socialism in that the excessive profit-seeking activities of business owners are harmful to the nation, and that some strategically important industries must be put under tight control by the state, to-sei keizai ron believed that “management of most private companies should be left in the hands of efficient private entrepreneurs” (Ishiwara 1986b: 184). Similarly, one of the Imperial Army’s policy provisions contained in An Army Pamphlet,27 states: “As long as it does not contradict state expectations, the desire of individuals for creation and entrepreneurship needs to be met in order to encourage their incentives to work.”28 Because of these ideological distinctions, the advocates of national socialism criticized to-sei keizai ron. Kita asserted, “I oppose to-sei keizai ron because it is based on today’s capitalist system” (Kato- 1979: 107). Although national socialist economic policies were similar to those of Marxism, the ideas were distinct on two important points: first, national socialists recognized the rights of citizens to private property within a certain range. Although the theory posited that an excess amount of private property should be nationalized, unlike Marxism, it did not call for the complete abolition of private ownership and business activities. Second, national socialism did not call for a proletariat overthrow of the monarchy. Supporters of national socialism were radical right-wing/nationalist activists and young military officers, and they were loyal adherents of the imperial system. Kita confirms the significance of the Emperor: “We must make clear the fundamental principle

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that the Emperor is the sole representative of the people and the pillar of the state.”29 Thus, despite similarities in their economic policies, national socialists (imperialists by nature) and Marxists (anti-imperialists) never got along with each other. To-sei keizai ron National socialism became popular among low-rank military officers and members of the Ko-do--ha (Imperial Way) Faction of the military, which played a central role in the terrorist actions of the early 1930s. However, a rival faction in the military, called the To-sei-ha [Control] Faction, which advocated to-sei keizai ron,30 was critical of national socialism because its members thought it was impossible to develop the economy by rejecting the capitalist principle and private ownership. The Ko-do--ha Faction lost the competition with the To-sei-ha Faction because so many of its members were arrested for their terrorist actions. For example, Tachibana and Okawa were arrested shortly after the May 15 Incident. Tachibana was sentenced to life in prison, and Okawa received a five-year sentence. Kita was also arrested for his involvement in the February 26 Incident, along with many young officers of the Ko-do--ha Faction, and was executed in 1937. At the time of the February 26 Incident, Ishiwara Kanji, who was serving as Chief of the Operation Section at the Army General Staff, was put in charge of suppressing the rebels at the Army’s Martial Law Headquarters. Ishiwara successfully carried out the mission, and shortly thereafter, those members of the Ko-do--ha Faction who supported national socialism were removed from important posts of the Army. The incident weakened all actors involved, including the targets (zaibatsu leaders and party politicians) as well as the rebels (Ko-do--ha Faction). That worked to the great advantage of advocates of to-sei keizai ron (To-sei-ha and reformist bureaucrats), as their ideological and political rivals were ousted from power. Most importantly, Ishiwara became the most influential figure both in the military and political spheres. Many of his former colleagues from the Kwantung Army General Staff Office in Manchuria, such as Katakura Tadashi, were also appointed to posts under Ishiwara. This so-called Manshu--ha (Manchuria Faction),31 with help from reformist bureaucrats, came to dominate the policymaking process. However, the rise of to-sei keizai ron did not depend solely on the political victory of To-sei-ha, but also on its intellectual victory. One of the reasons behind the failure of the Ko-do--ha coup attempts was the lack of intellectual support for their policies. National socialism was popular among less-educated young soldiers and right-wing activists, but it did not attract support from scholars, journalists, and bureaucrats because their ideas were considered premature and unrealistic. This explained why senior military officers were mostly unsympathetic as well. In contrast, to-sei keizai ron was much more sophisticated and its effectiveness had been proved, to some extent, in Manchuria. Thus, the intellectual superiority of to-sei keizai ron over national socialism was a critical

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contributing factor to its successful dominance in wartime Japan. Let me briefly discuss the intellectual support for to-sei keizai ron in the late 1930s. To-sei keizai ron quickly received wide support in the academic sphere in the late 1930s. According to Hayasaka, the influence of to-sei keizai ron “rapidly increased at the time of the Manchuria Incident [1932], and it became the mainstream of the field of economics in the later period of the 15-Year War [the war between Japan and China, 1937–45]” (Hayasaka 1984: 138). Scholars and intellectuals like Naniwada Haruo, Okuma Nobuyuki, and Ryu Shintarocalled for a regime change based on to-sei keizai ron. For example, Ryu Shintaro-, a prominent journalist and an editorial writer for Asahi Shimbun, called for further strengthening of state control over industry in his books, Junsenji To-sei Keizai (Semi-Wartime Managed Economy, 1937) and Nihon Keizai no Saihensei (Restructuring the Japanese Economy, 1938). Ryu claimed, “Japan’s entire economy is suffering from its hereditary disease or ‘the lack of planning’. Our economic system has no ‘planning’ or ‘control’, and that seems to be the biggest problem of current Japanese economy” (Ryu 1937: 277). Ryu pointed to the growing government budget as the result of the uncontrolled economy and contended, “In order to overcome this imbalance and contradictions, there is no other way than to increase the production capability of Japanese capitalism” (ibid.: 281). He then enviously referred to the “remarkable expansion of military capability through Soviet socialism,” which arouses “our great lust for ‘planning’ of the national economy” (Ryu 1937: 283). He went on to say, “A mere increase in production is not good enough. It must be driven by state control. It is necessary to entirely control [the economy]. And it must be a control with the strong authority of the state” (ibid.: 283–84). However, even though he revealed his admiration for the Soviet success, the type of state control he called for was one that combined the market system and a Soviet-style command economy. He emphasized this point by saying, “Given today’s capitalist system, freedom and control do not necessarily contradict one another” (ibid.: 285). Ryu argued that the best way for the country to enlarge production would be to improve productivity by cutting costs. In order to achieve that goal, the existing state control, which was limited within the areas of distribution and rationing, needed to be extended to the area of production. Ryu claimed that the key to state control over production was to limit private profit-seeking activities by private firms and to monitor their accounting. At the core of his vision was the viewpoint that Japan must shift away from profit-seeking to production maximization, and then to a state-controlled economy. In summary, thanks to its intellectual advantages, and due to various events that shifted circumstances in its favor, to-sei keizai ron overwhelmed its rivals in the intellectual competition by the late 1930s. Given the victory of to-sei keizai ron, economic policies reflected neither national socialism nor Marxism. The Japanese government never imposed any limits on private property, even at the height of World War II, and its primary goal was not income inequality but economic development.

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Putting to-sei keizai ron into practice In this section, I explore the process in which to-sei keizai ron was institutionalized in order to build a wartime economy in Japan. In the analysis, I explain how the experiences of some policymakers in Manchuria affected their decisions. Those military officers and bureaucrats who built a developmental state system in Manchuria later occupied important positions in the Japanese government. When they had a chance to build a wartime economy, they created a copy of the Manchurian pilot agency in Japan. Yet, the Manchurian special corporation system was not introduced to Japan because Japanese industry was more mature than its Manchurian counterpart, and because a large number of private firms were already in operation. Furthermore, since business leaders strongly opposed such tight state controls, introduction of the special corporation system was not viable in Japan. Instead, they established a system of indirect control – industrial associations – that was designed to promote a cooperative relationship between the state and industry. Wartime Japan’s industrial association system was modeled after a similar system in Nazi Germany and reformist bureaucrats introduced this German model as an alternative to the Manchurian special corporation system. As a result, the developmental state system combined the lessons of policy experiences in Manchuria and the German model, and thus evolved into a slightly different form in wartime Japan. Early attempts for state control by Kishi and Yoshino in MCI One of the most prominent reformist bureaucrats was Kishi Nobusuke of the Ministry of Commerce and Industry (MCI). Kishi was an elite MCI bureaucrat who had spent three years in Manchuria serving as the head of the Manchurian Industry Department where he led the implementation of industrial policies. Rejoining MCI upon his return to Japan in 1939, Kishi would become ViceMinister (1939–40) and Minister (1941–43). In the following pages, I examine how Kishi became an advocate of to-sei keizai ron by looking into his educational and career background. I also analyze how he and his fellow bureaucrats translated their ideas into policies that established control associations. Kishi was born in a suburb of Yamaguchi Prefecture in 1896. He attended the nation’s most prestigious school, Tokyo Imperial University – the precursor of Tokyo University. During his college years, he was exposed to the intellectual debate between conservatives and progressives. Progressive scholars ranged from advocators of democracy to socialists, but their overarching feature was their displeasure with the autonomous state. Minobe Tatsukichi, for example, aroused heated discussions by questioning the Emperor’s sovereignty. Conservative scholars, most prominently Uesugi Shinkichi, as Kishi’s mentor, eagerly defended the sovereignty of the Emperor and advocated tight state control over politics and the economy. Though Kishi was sympathetic to the conservative school, he found some appeal in a third school of thought, national socialism, which stood midway

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between the progressives and conservatives and which called for an egalitarian society under imperial sovereignty. Kishi studied the work of Kita Ikki, a national socialist, titled Nihon Kaizo- Ho-an Taiko- (An Outline Plan for Reorganization of Japan), which he manually copied by himself. He was deeply impressed by Kita’s criticism of profit-seeking activities by zaibatsu owners, calls for state control over industry, and regulations governing business activities. Kishi later commented, “Mr Kita was one of those people who impressed me most in my college life. His book, Nihon Kaizo- Ho-an Taiko- was based on his national socialism … It was very close to my idea, and the book presented a concrete plan [for reorganization]” (Yoshimoto 1957: 66). In his second year at the university, Kishi passed the national civil service exam. Upon graduating in 1920, he found a position in the Ministry of Agriculture and Commerce. The ministry was later divided into the Ministry of Agriculture and the Ministry of Commerce and Industry in 1925. Kishi was assigned to the latter. In 1930 MCI Industry Bureau Chief Yoshino Shinji initiated the establishment of a new MCI office called the Industry Rationalization Bureau, and Kishi became a chief of the Document Section in that bureau. During his years at MCI, Kishi became involved with drafting one of the Japan’s first attempts to extend government influence over industry. In preparation for this policy change, Yoshino sent Kishi to Europe to investigate industrial policies in Europe, particularly Germany, in 1930. During his visit Kishi investigated German industrial policies, such as technology standardization policies, the cartel system that prevented excessive competition, and protection and intervention for automobile makers. He periodically reported his findings to his senior officer in the ministry. In his report to Kido Ko-ichi, Chief of Industrial Rationalization Bureau at MCI, sent on July 13, 1930, Kishi wrote the following account of the state of industrial rationalization policies in Germany: 1 Enhancing cooperative spirit: The true spirit of rationalization lies in national cooperation. This is the biggest difference between German rationalization (policies) and its American counterpart. It is not just a matter of one firm or one industry, but also a matter of the entire national economy. Thus, unless everyone who is involved, including suppliers, retailers, consumers, scholars, and bureaucrats, cooperates under the spirit of joint-work, rationalization will never take place … 2 The problem of control rules within cartels: Control within organizations is always a problem in Japan. However, as long as humans live social lives, it is natural for members to obey rules made by the members themselves. It is exactly the same feeling we have when we obey [government] laws. In addition, each member clearly understands it is in their best interest to obey the rules. Hence, it is not necessary to use coercive force in control rules. The sharing of experience and technology, unification or simplification of standards and similar subjects, are also the matters of rationalization; and thus, they cannot be accomplished without the cooperation of all

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citizens. I can only deplore the current conditions of our country. There is no reason to believe that this reasonable thing cannot be done in Japan.32 This report became the foundation of Ju-yo- Sangyo- To-sei Ho- (the Important Industries Control Law) of 1931, drafted by Kishi and Yoshino in MCI. The law was one of the first attempts to expand the government’s influence over industry, albeit at a level of control that was considerably lower than subsequent laws of this kind. This law allowed the formation of cartels and vested the government with authority to order non-cartel members to follow the cartel’s agreement. In this law, “Industrial control” did not actually mean direct state control over industry; instead, it referred to the promotion of cartels in certain industries, particularly the automobile industry, which was in a very primitive stage. The law attempted to influence corporate management indirectly, but had very limited impact on private firm autonomy. In other words, while the law allowed the formation of cartels (and vested the government with authority to order non-cartel members to follow the cartel agreements), government authority was limited to enforcing cartel agreements, and the government did not have authority to issue orders or guidance to the cartels themselves. Thus, the impact of this law on private firms was quite limited. Kishi and Yoshino would have preferred stronger tools for state control, but zaibatsu leadership opposition to such policies was expected to be too strong to overcome. Therefore, Kishi and Yoshino selected indirect control through cartel-like organizations, which would rely on voluntary compliance and self-governance among member firms. This sharply contrasts with the Outline for the Establishment of Manchurian Economy of 1932, which vested the government with authority to directly supervise and regulate industry through the special corporation system. The primary reason for the difference was the strong opposition to state control from business leaders and party politicians. While the Kwantung Army dominated policymaking in Manchuria by preventing zaibatsu from entering, those business conglomerates remained very influential in Japan where party politicians protected their interests. Furthermore, the law was a temporary legislation valid only for 10 years, perhaps because of the ministry’s deference to the business community, which was strongly concerned about state intervention.33 However, Article 3 of the law states: “the government can order cartels to modify or revoke [their agreements] when they unfairly raise prices, prevent prices from falling … , or harm general consumer interests.”34 Kishi and Yoshino hoped to use this clause as grounds for future expansion of the government’s control over industry. It is worthwhile to note the important similarities between the Important Industries Control Law of 1931 and industrial policies during the postwar period. The postwar bureaucracies (e.g. the Ministry of International Trade and Industry, MITI, and the Ministry of Finance) aimed at controlling industry indirectly through administrative guidance that was self-enforcing through industrial associations. This method

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was quite similar to what Kishi and Yoshino tried to achieve by enacting the Important Industries Control Law in 1931. Another notable point is that the law, which was drafted by reformist bureaucrats like Kishi and Yoshino, refers to protection of “the interests of general consumers,” implying that the liberal economic idea was still prevalent in the early 1930s. This sharply contrasts with policies in Manchuria and policies in Japan drafted after 1937, which firmly required corporations to serve state interests and made no reference to the interests of consumers. In fact, what the Important Industries Control Law of 1931 accomplished was minimal; however, Kishi and Yoshino hoped to use it as a foundation for future expansion of government control over industry. Kishi worked together with Yoshino in attempts to make MCI the center of state control for several years. However, their efforts to strengthen state control over industry invited strong opposition from the zaibatsu leadership. Zaibatsu opposition The zaibatsu-party coalition lost significant political influence during the wartime period, as its rival – the military-bureaucracy coalition – seized power. However, this did not mean that the military and bureaucracy kept the zaibatsu completely under their control. Throughout the wartime period, zaibatsu leaders fought fiercely against any attempt to impose state control over the economy. Overall, the military and bureaucracy had stronger political power, but zaibatsu executives occupied important positions in the government, and, in some cases, succeeded in removing reformist bureaucrats from office as part of efforts to stop the expansion of state control. For example, after reformist MCI bureaucrats (Yoshino and Kishi) managed to introduce the Important Industries Control Law of 1931, their attempts to regulate industry were countered by strong opposition from the business sector and its political allies, party politicians, even though the law had very little impact on the level of state control. The Minister of Commerce and Industry, Machida Chu-ji (1934–36),35 commented, “Normally, industry should be kept free [from government intervention],” and told the press that the law would not be strictly enforced (Ho-chi Shimbun, July 7, 1935). Furthermore, in 1936 the newly formed Hirota Cabinet designated Ogawa Go-taro-36 as the incoming Minister of Commerce and Industry. Immediately upon his assumption of office, Minister Ogawa ordered Yoshino and Kishi to submit letters of resignation, and they were forced to leave MCI. Kishi later commented, “Someone told Mr Ogawa that ‘men named Yoshino and Kishi are dominating commercial/industrial policies. If you would like to do your job as MCI Minister, you ought to fire Yoshino and Kishi’ … Mr Ogawa did fire Vice-Minister Yoshino and then me. I was just told to go to Manchuria” (Hosokawa 1986: 24). Industrialists and politicians were determined to halt Yoshino and Kishi’s policies and defend the autonomy of the market. A number of other reformist bureaucrats who shared the same

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view as Kishi and Yoshino were also forced to leave MCI, and it took another four years for their plan of state control to be realized. During that period, the power of zaibatsu leaders declined and the military-bureaucracy coalition assumed control, and the intensifying war with China allowed the government to take increasingly active roles in leading industrial development. Ishiwara’s seizure of power and “the Manchuria Faction” In the early 1930s reformist bureaucrats were not strong enough to induce a regime change in the Japanese economy by themselves, and zaibatsu leaders and party politicians seemed to have successfully defended the liberal economic system. However, the establishment of institutions of state control was initiated by the man who had built the Manchurian developmental state system, Ishiwara Kanji. Ishiwara returned from Manchuria to Japan in 1933 as a hero of the Manchuria Incident and served as Commander of the Fourth Infantry Regiment in Sendai for a few years. In 1935 he was appointed Chief of the Operation Section at the Army’s General Staff Office. The Operation Section was responsible for planning all Imperial Army operations and thus restricted to the Army’s top elites. As war with China became viewed as increasingly inevitable, the Army’s political influence expanded significantly. It demanded, and received, increasing amounts of resources to support its war efforts, and weakened party politicians began to bow to military pressure. As military political influence strengthened, the political salience of the Operation Section and its chief, Ishiwara, came to the fore.37 Immediately after the February 26th Incident, Ishiwara became the most influential figure in Japanese politics for about two years. Ishiwara used that time to build the foundation of a developmental state system under the strong leadership of the military and the bureaucracy. While Ishiwara was seizing tremendous power in the General Staff Office, a number of people (from within and outside the Army) gathered to form a faction-like group around him. That group, which was sometimes referred to as the “Manchuria Faction” (Manshu--ha), was centered on core members who had been actively involved in building the Manchurian state. Within the Army, it included Itagaki Seishiro- (Chief of the Kwantung Army General Staff Office), Hayashi Senjuro- (army general, prime minister in 1937), Imada Shintaro(member of the Imperial Army General Staff Office), and Katakura Tadashi (member of the Imperial Army General Staff Office). Outside of the Army, it included Sogo- Shinji (director in Mantetsu), Asahara Kenzo- (former Diet member), and Miyazaki Masayoshi (Head of the Japan-Manchuria Economic Research Association). Ishiwara also received wide support from members of a political organization in Manchuria called Kyo-wa kai, which he had founded earlier. Furthermore, he built close ties with important figures in politics and business, such as Prince Konoe Fumimaro (a descendant of an old aristocratic family and prime minister from 1937–39 and 1940–41), Ikeda Shigeaki (leader of the Mitsui zaibatsu), Tsuda Shingo (President of Kanebo Textile), and Aikawa Yoshisuke (President of Nissan). Lastly, Ishiwara was tightly

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linked with reformist bureaucrats, such as Kishi Nobusuke, Hoshino Naoki, and Shiina Etsusaburo-, with many of whom he had worked in Manchuria. Even though Ishiwara possessed overwhelming power in Japan, he never tried to become dictator himself. The reason why he chose to stay behind the scenes was his firm belief in military ethics, which taught that soldiers should keep away from politics. Instead, he became a kingmaker and dominated government personnel affairs, including the appointment of the prime minister. He planned to form a few short-term administrations with Prince Konoe or Hayashi as prime minister, during which he would carry out drastic reforms as he frequently reshuffled the cabinet. The reforms were to have been finalized by making his comrade from Manchuria, Itagaki Seishiro- (Chief of the Kwantung Army General Staff Office), prime minister and then allowing Itagaki to govern the country for an extended period. In 1937 Ishiwara sabotaged the formation of a cabinet by retired Army General Ugaki Kazushige, who had been chosen as the next prime minister by influential elder politicians. Traditionally, elder politicians known as genrohad monopolized the authority to choose the prospective prime minister, whose name would be submitted to the Emperor for approval. However, Ishiwara challenged this tradition by blocking nominations for Army Minister. Because he was unable to find anyone willing to serve as Army Minister in his cabinet, Ugaki had to give up his bid for the prime ministry. Ishiwara then pushed the candidacy of General Hayashi Senjuro- for prime minister. Hayashi eventually obtained approval from the Diet and the Emperor, and the Hayashi Cabinet was inaugurated in February 1937. Seven out of the eight members of the Hayashi Cabinet were either military officers or reformist bureaucrats, and no party politicians were included. It was the first non-partisan government38 since the birth of party politics in Japan in the 1890s, and was sometimes referred to as the “Manchuria Cabinet.” Under the strong leadership of Ishiwara and the Manchurian Faction, the government adopted the Planning Board Administrative Order (Kikakuin Kansei) in October 1937. The Planning Board’s authority was further expanded when the government adopted the National Mobilization Act (Kokka So-do-in Ho-) of 1938, which vested the Planning Board with authority to distribute capital, natural resources, and labor among different sectors. The Act also authorized the Planning Board to draft annual resource-allocation plans. Just as they created the Planning Bureau in Manchuria, Ishiwara and the members of the Manchurian Faction wanted to create a powerful economic agency that could stimulate rapid industrialization and tightly control industry. Thus, one of the core institutions of the wartime Japanese developmental state system clearly reflected the political conditions at the time. Ishiwara, Miyazaki, and the Planning Board The wartime Japanese developmental state system’s pilot agency – the Cabinet Planning Board – was one of the most important and successful manifestations

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of the ideals of Ishiwara Kanji, who built a similar institution in Manchuria (the Manchurian Planning Bureau) and tried to duplicate it in Japan. It was called the Economic General Staff Office (Keizai Sanbo- Honbu) in the Political Administrative Institution Reform Plan of 1936 – an administrative reform plan drafted by Miyazaki and his think-tank and later adopted by the Japanese government. It was designed to function the same way as a military General Staff Office and vested authorities with the responsibility for planning wartime economy strategies, controlling the resource distribution, and crafting policies leading to rapid economic growth. While placing the government under his influence in 1937, Ishiwara turned to his economic advisor, Miyazaki Masayoshi, for assistance in analyzing the current situation and potential of the Japanese economy and for drafting economic reform plans. Ishiwara summoned Miyazaki to Tokyo and formed the aforementioned think-tank, the Japan Manchuria Economic Research Association (JMERA), in 1935. They collected bright, young economics experts from private firms and Japan’s top universities including, for example, Izumiyama Sanroku (Mitsui Bank), Koga Hidemasa (Tokyo Imperial University), and Tsushima Juichi39 (Ministry of Finance). Ishiwara ensured that JMERA was provided with a large amount of financial assistance from the government budget, which allowed it to grow into a large research institution with more than 50 staff members by 1937. JMERA staff members drafted a number of reform bills at incredible speed. The main objectives of JMERA were threefold: 1 to conduct extensive studies of the Japanese economy and the economies of Japan’s enemies; 2 to design administrative reform in Japan; and 3 to draft development plans for Japan and Manchuria. JMERA began by initiating a series of extensive cross-national economics and industrial policy studies. Those studies were a result of Ishiwara’s realization that the Japanese government lacked reliable data on the Japanese economy as well as its enemies. The central objectives of these studies were to analyze and collect data on Japan’s current economic conditions and industrial potential, that of its enemies, and to research industrial policies of European powers. Ishiwara believed that reliable data on the economic capabilities of Japan and its enemies were critical when drafting Japan’s military operations. In particular, Ishiwara wanted to know the actual conditions and potential of the Soviet economy, which was growing at an astonishing rate and which was believed to pose a real threat to Japan and its colonies at that time. He also asked the members of JMERA to study the industrial policies of Great Britain, France, Germany, the United States, and Italy. The fruits of those studies were integrated into their industrial plans, which will be discussed below. Second, JMERA drafted a policy proposal titled Seiji Gyo-sei Kiko- KaizoAn (the Political Administrative Institution Reform Plan) in 1936, which called for the most fundamental structural reforms to Japan’s existing political system since the Meiji Restoration. The main pillars of the reform plan were the following:

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Cabinet reform Establishment of new ministries (defense industry, aviation, trade, etc.) Establishment of an “Economic General Staff Office” Establishment of a fascist political party led by the prime minister Nationalization of the banking industry Educational reform Agricultural reform (community farms)

Above all, the third initiative was of particular importance to Ishiwara’s industrial policy. Ishiwara and JMERA attempted to create an agency in complete charge of making economic and industrial policies, allocating the government budget, and making decisions on personnel affairs. By establishing an Economic General Staff Office, Ishiwara wanted to duplicate Manchukuo’s powerful General Affairs Board. As he posed in his idea of “Manchuria-asprecedent” (Manshu- senko- shugi),40 Ishiwara imported the fruit of political experiments from Manchuria and hoped that creation of this powerful economic planning agency would allow him to set forth the guideline for the nation’s industrial development, just as he and his men in the Army’s General Staff Office did for military operations. Lastly, JMERA formulated a plan to build strong industrial bases in Japan, its colonies, and its East Asian allies, in order to prepare for the final war with the United States. Those industrial policies were embodied in the Important Industries Five-Year Plan (Ju-yo- Sangyo- Gokanen Keikaku), drafted in 1937. Given Ishiwara’s conviction that industrial development was a critical part of military operations, the Important Industries Five-Year Plan was an indispensable part of his efforts to prepare Japan for its Final War. Taking the Soviet Union’s successful five-year plan as a guideline, JMERA drafted an ambitious plan to increase production capabilities of certain industries that were considered strategically important by 2 to 18 times within five years. Even with his political influence and popularity, it was not easy for Ishiwara to obtain Diet approval for such extremely ambitious reform plans. Most of the initiatives in the Political Administrative Institution Reform Plan were not approved by the Diet because they were considered too radical. Some politicians, even those who were sympathetic to Ishiwara, criticized the plan as “a real communist policy.” Party politicians and business owners strongly opposed the plan and worked to prevent government control over industry. However, the government adopted the third initiative and established the Planning Board (Kikaku In) in 1937, and this agency, along with its close ally the Ministry of Commerce and Industry, were the economic pilot agencies of the wartime period. Ishiwara’s downfall Although Ishiwara and the Manchurian Faction certainly dominated Japanese politics, the end of their reign was not long in coming. They were brought

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down by the expansion of battle lines in China, led by radical expansionists in the Army like Muto- Akira (Chief of the Operation Drafting Section), Umetsu Yoshijiro- (Vice-Minister of the Army Ministry), and To-jo- Hideki (Chief of General Staff of the Kwantung Army). A small military skirmish near Beijing between the Chinese Army and the Kwantung Army in July 1937 (the Marco Polo Bridge Incident) developed into a series of large-scale combat actions in the northern part of China. Ishiwara and members of the Manchurian Faction strongly opposed the escalation of tensions and combat with China because they believed that Japan should remain peaceful for several more years and concentrate on military and industrial growth at home and in Manchuria. Prior to the incident, Ishiwara swore in front of the cadres of the Foreign Ministry, “I will not dispatch a single soldier [to China] under my watch” (Hata 1962: 251). Ishiwara did all he could to stop the war, but his efforts were in vain.41 Japan ended up sending 23 army divisions, or 700,000 soldiers, and military expenditure swelled to more than 3 billion yen in 1938. As a result, the government lacked financial resources to implement Ishiwara and Miyazaki’s Important Industries Five-Year Plan, which required at least 8.5 billion yen. Ishiwara quickly lost his influence in the General Staff Office, and his political rivals succeeded in discharging him from his post and sending him back to Manchuria, where he continued his efforts to restore peace with China. In Manchuria, Ishiwara was shocked when witnessing the much-changed Manchukuo, where Japanese bureaucrats and military officers dictated every aspect of politics. Although he acknowledged the need for Japanese leadership, he had a firm belief that the country should maintain the principle of Gozoku kyo-wa (coexistence of five ethnicities). He fiercely criticized the staff officers of the Kwantung Army, particularly Chief of Staff To-joHideki, who established repressive control over the people of Manchuria using the military police. To-jo- then used his influence over the military police to obstruct Ishiwara and the activities of his followers. To-jo-’s attacks on Ishiwara became more severe after he became Minister of the Army in Japan in 1940. Ishiwara was shuffled into unimportant positions, and then given a reserve commission, which ended his military career in 1941. He continued his political activities in the East Asian League and vigorously spread his theory of final war, urging Japan to focus on its industrial and military development rather than the war in China. However, he never had a chance to return to the center of power. Many members of the Manchuria Faction were also discharged from their positions in Army headquarters and dispatched to separate locations, and the dismantled Manchuria Faction quickly lost its influence in the policymaking process. Miyazaki and his colleagues in JMERA also faced tough consequences after losing its political patrons in Army headquarters. The association was given no further tasks to perform and was forced to dismiss its members in 1940.

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Institution building by reformist bureaucrats Though Ishiwara had successfully established an agent of economic control (the Planning Board), he failed to create an institution to control corporate activities (an equivalent of the Manchurian special corporation system) before he and his Manchurian Faction lost their influence in 1938. Thus reformist bureaucrats, such as Kishi Nobusuke and Shiina Etsusaburo-, who had returned from Manchuria, set out to accomplish the task of building a system of state control over industry in the early 1940s. After three years of service in Manchuria (see Chapter 3 for more on Kishi’s experiences in Manchuria), the Japanese government ordered Kishi to return and assume the position of MCI Vice-Minister in 1939. This was the highest post reserved for bureaucrats. The expansion of the war with China motivated the government, led at the time by Army General Abe Nobuyuki, to expand industrial production capacity. The government needed a person who could orchestrate the establishment of a war economy, and Kishi, with his expertise in managed economy gained in Manchuria, was a perfect candidate. As part of efforts to transform the Japanese economy into a wartime economy in which the government had strong control over industry, Kishi and his fellow reformist bureaucrats drafted Keizai Shintaisei Kakuritsu Yo-ko(Outline for Establishment of a New Economic System) in 1940. This plan was the collaborative work of young reformist bureaucrats and the To-sei-ha military officers, such as Colonel Akinaga Tsukizo-,42 Minobe Yo-ji (an MCI official), Sakomizu Hisatsune43 (an official at the Ministry of Finance), and Mouri Hideo (a Planning Board official). The Konoe Cabinet adopted the Outline in 1940. The Outline aimed at introducing fundamental changes to Japan’s capitalist system, focusing primarily on the following three points: first, it set forth the goal of national economy as national defense and called for the establishment of what it called “kokubo- keizai” (national defense economy). Towards that end, it urged the nation to devote all its energies to expanding production capabilities. Second, it redirected the goal of business activities from pursuit of profit to serving the public interest (i.e. national defense and augmentation of production capability). The Outline provided that, “Firms should determine the prices of major products based on reasonable production costs and appropriate [levels of] profit. Firms should refrain from making profits through speculation and monopoly [actions] that damage the maintenance of order in the national economy.”44 Third, state control over the economy should be executed indirectly through economic organizations.45 Firms were encouraged to form associations in order to voluntarily regulate themselves and collectively manage their business activities. This final part became the foundation for the control associations. The Outline limited the government’s roles to supervision and guidance, and economic organizations were tasked with carrying out government plans. Even though the leaders of the economic organizations were private entrepreneurs,

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they were vested with the legal authority to regulate member firms. This indirect state control through economic organizations was regarded as “separation of capital and management.” It aimed at limiting – if not completely nullifying – the autonomy of business owners (i.e. the zaibatsu families) and allowing the state to intervene in their management. Continuing zaibatsu opposition As the military-bureaucracy coalition performed the groundwork for introducing institutions of indirect state control in line with strategic military purposes, they met strong opposition from the zaibatsu-party coalition, which was determined to defend the liberal market economy. The Konoe Cabinet was formed on a delicate balance between advocates of state control and guardians of business autonomy. The former included a group of individuals who had worked closely with Kishi in Manchuria, such as Hoshino Naoki and Army Minister General To-jo- Hideki. The latter included businessmen and party politicians, such as MCI Minister Kobayashi Ichizo-, Railroad Minister Ogawa Go-taro-,46 Health Minister Kanemitsu Tsuneo,47 and State Minister Hiranuma Kiichiro-.48 The split within the administration reflected the political context at the time. Reformist bureaucrats and To-sei-ha military officers formed a coalition aimed at further enhancing state control over industry, while businessmen and party politicians banded together to defend the autonomy of the business sector. This faction was assisted by some nationalist groups and the Ko-do--ha military officers.49 Konoe appointed Kobayashi Ichizo-, a successful businessman, as the minister of MCI. Kishi thought that a minister from the business sector would reduce criticism of the growing power of the government in business circles, even though he did not feel a sense of obligation to the businessman because he was certain of Prime Minister Konoe’s trust. Kishi was eager to establish a wartime economy with strong state control, using his experience in Manchuria. However, his underestimation of his new superior eventually cost him his post. Kobayashi had no intention of quietly becoming a front for Kishi’s policies, but rather maintained his solid determination to defend business autonomy. Like Kishi, “Kobayashi was also a proud, aggressive man with a mind of his own” (Kurzman 1960: 150). Kobayashi strongly believed that, “What is best for the national economy is the healthy growth of our corporations, and corporations never grow strong if the principle of free competition is ignored. Bureaucrats should keep away from our business” (Hosokawa 1986: 45). The clash between Kishi and Minister Kobayashi became unavoidable when the cabinet adopted the Outline for Establishment of a New Economic System in 1940. Business leaders and their political allies, such as party politicians and radical nationalist groups, fiercely attacked the plan. Protests were raised even among the cabinet members, including MCI Minister Kobayashi, Railroad Minister Ogawa, Health Minister Kanemitsu, and Communications Minister

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Murata. The Cabinet met several times to coordinate member opinions, and the Outline was amended significantly to reflect business concerns. However, despite those amendments, opponents continued their efforts to scrap it altogether. One group of politicians and nationalists submitted a letter to Prime Minister Konoe, condemning the Outline as follows: “The bureaucratic planned economy assimilates the Communist Party’s platforms and its execution will destroy the nation’s traditional spirit and confuse the economy. It follows the footsteps of the Soviet Union” (Ito- 1983: 183). The Konoe Cabinet’s decision to adopt the outline marked the beginning of a serious political battle, as Kishi and Outline proponents referred it to the Cabinet and forced them to adopt it while Kobayashi was visiting the Dutch East Indies to conduct negotiations on oil imports. Upon his return, Kobayashi “angrily demanded that the proposed plan be scrapped crying, ‘Many of the provisions in this plan smack of Communism’”50 (Kurzman 1960: 153). The battle between Kishi and Kobayashi continued for months. A few months later, Kobayashi took advantage of a golden opportunity to oust Kishi that occurred when a group of bureaucrats in the Planning Board, including Wada Hiroo and Katsumada Seiichi, were arrested for involvement with communist movement (The Planning Board Incident).51 Because Kishi had a close relationship with the Planning Board, Kobayashi demanded his resignation. Kishi consulted with Prime Minister Konoe on the matter, but was surprised to find that Konoe was unwilling to defend him. While Kishi eventually agreed to submit a letter of resignation, he was not completely defeated and began waiting for the proper moment to fight back. With the help of sympathetic military officers, Kishi scoured Kobayashi’s past history in search of any allegations of wrongdoing that could be used against him. As a result, Kobayashi was accused of tax fraud and of showing confidential documents to a friend, and was forced to resign. There is additional evidence of zaibatsu leadership resistance against the military-bureaucracy coalition’s attempt to impose state control. First, in order to secure their profits, zaibatsu leaders sometimes refused to obey government requests. For example, Kishi failed to coerce the zaibatsu investments in certain sectors, such as tungsten and molybdenum production, which were vital to the government’s war efforts. Business leaders thought such sectors were too risky and unprofitable, and that investing in them would harm their profitability. With no direct control over the firms themselves, Kishi had to establish public enterprises to mine for those rare metals. Second, zaibatsu leaders succeeded in forcing the To-jo- Cabinet, which had succeeded the Konoe Cabinet in 1941, to accept a number of their representatives as cabinet members. Those zaibatsu representatives were called Cabinet Advisors and were given status equivalent to ministers without portfolio. Thus, zaibatsu leaders were able to involve their own representatives in industrial policymaking as well. For example, Mitsui Zaibatsu’s Fujiwara Ginjiro- (President of Oji Papers)52 became a minister without portfolio and was given responsibility for policies regarding iron and steel. There were Cabinet Advisors for

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shipbuilding and land transportation as well. This significantly curtailed the power of reformist bureaucrats, who wished to direct production and distribution in all industries. Kurzman (1960) argues, “[The cabinet advisor system] was a major victory for industry, and was to prove a major defeat for the military” (Kurzman 1960: 182). To-sei keizai ron embedded in control associations When To-jo- Hideki formed a new Cabinet in October 1941, Kishi was immediately appointed to the position of MCI Minister. Kishi quickly set about completing his unfinished business – the establishment of wartime economy. He placed close associates, with many of whom he had worked in Manchuria, in important MCI posts. For instance, Shiina Etsusaburo-, former Chief of the Planning Section in the Department of Industry in Manchuria, became ViceMinister of MCI. The To-jo- Cabinet consisted primarily of the proponents of state control, and To-jo-’s willingness to use repressive power substantially weakened the influence of the zaibatsu leaders. Strongly backed by To-jo-, Kishi concentrated all his energies on finalizing his plan of establishment of state control, which had been laid out in the Outline for Establishment of a New Economic System of 1940. The plan was accelerated by the growing tension between Japan and the United States because it was expected that the nation would soon face serious shortages of important materials, such as industrial products, munitions, food, capital, labor, and the like. On August 29, 1941, the government issued the Important Industries Groups Ordinance, which formed cartel-like organizations, called control associations (to-sei kai), in 21 vital industries including steel, coal, mining, automobile and industrial machine production, and shipbuilding. Every firm operating in those industries was obligated to become a member of the respective association. The leaders of the control associations were selected from managers of member firms, and they were vested with the authority and responsibility to ensure that member firms obeyed government orders. Control associations functioned as a bridge between the government and business and as an instrument of indirect state control. The reformist bureaucrats wanted to create a cartel-like organization that would encourage private firms to serve public interests. This reflects one of the principles of to-sei keizai ron – the fusion of liberal market and socialist economies. They kept the corporations private because they knew that private entrepreneurship is the lifeblood of economic growth. For example, Hoashi Kei,53 Director-General of the Important Industries Association (an umbrella organization of control associations), described the significance of private entrepreneurship saying, “We must fully appreciate that the principle of ‘laissezfaire’ functioned as the driving-force of economic growth in the past”. He also claimed, “We must utilize such entrepreneurial innovations, even in a managed economy” (Hoashi 1941: 11).

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Bureaucrats tried to enforce the coexistence of private entrepreneurship and state control by manipulating incentives for private corporations in ways that would encourage cooperation with the government’s economic plans. For instance, the Important Industries Groups Ordinance obligated the control association members to “cooperate with government policy drafting and enforcement in order to maximize the full potential of the national economy” (Suekawa 1942: 135). It also vests control associations with the authority to punish their member firms if they “harm public interests” (Article 27). The bureaucrats aimed at creating a wartime economy that consisted of a cooperative relationship between the government (tasked with setting the trajectory of the national economy) and private corporations (which handled actual production). Control associations were indispensable institutions for managing this wartime economy. The Director of the MCI General Affairs Bureau, Shiina Etsusaburo-, talked about Japan’s wartime economy saying, “The management foundation of the wartime economy is [the government’s] resource distribution plan. Based on this plan, [the government] sets priority orders, after which, production plan will be implemented … The main body that executes the actual management of wartime production is control association. This main body of economy control is the backbone of wartime economy management.”54 MCI Minister Kishi also spoke about government expectations for control associations during a speech at the inaugural general meeting of the Iron and Steel Control Association on November 20, 1941. Kishi stated that: The Iron and Steel Control Association was born from the demand for a new economic system, and obviously, its functions and features are different from business interest groups and government advisory agencies. I must make it clear that it is an agency that carries out national policies [under the principle] of public-private cooperation … I expect members [of the control association] to remember that the missions of the Iron and Steel Control Association can only be accomplished when the president, the members, and each one of the workers devotes themselves to the principle of public-interest-first with self-awareness as patriotic businessmen. (Kishi 1942: 154, 157) Bureaucrats tried to introduce the concept of “public interest priority” in private business activity by introducing the control association system and demanding that private corporations act in accordance with government economic plans. Hoashi talked about the “public interest priority” principle, saying: Individual business managers will be requested to behave while keeping the current conditions and future plans of the whole economy in their minds … They must understand the responsibilities their business needs to fulfill the government’s plan. They also need to subordinate their profit-seeking activities to the trajectory of the national economy. (Hoashi 1941: 13)

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He also explains the meaning of the “public interest priority” principle, that: It does not mean that you need to operate your business without making any profit. But it does mean that you need to make the best use of your ingenuity and fulfill your duty within the framework of the national economic plan … That is to say, kasshi ho-ko- [maximize your use for the nation], rather than messhi ho-ko- [sacrifice yourself for the nation]. The bottom line of the new economic system does not seek to atrophy economic activities with meaningless ethical regulations, but to respect entrepreneurial ingenuity and promote their responsible actions. It also attempts to create an economic system in which those who serve the public interest can make profit. (Hoashi 1941: 15–16) Despite fierce opposition from zaibatsu leaders and party politicians, the military-bureaucrat coalition succeeded in establishing a control association system that embodied one of the principles of to-sei keizai ron (i.e. fusion of liberal economy and socialist economy). The opposition from zaibatsu leaders did encourage the policymakers to relax the level of state control, but the institution-building process can be better explained if it is viewed as a result of efforts by military officers and reformist bureaucrats to combine the virtues of liberal market and socialist economies, rather than as a by-product of a compromise made between the military-bureaucracy and zaibatsu-party coalitions.

III Conclusions World War II ended with Japan’s surrender on August 15, 1945, and Kishi was arrested as a war criminal. After spending three years in prison, he was released following a decision by the occupation forces not to indict him. Kishi returned to the political arena and continued to play a critical role in the formation of postwar Japan’s managed economy. The fate of Manchukuo was sealed when the Soviet Army invaded Manchuria, in violation of its non-aggression treaty with Japan, in August 1945. By that time, the Kwantung Army was incapable of defending Manchuria because a large number of its divisions had been dispatched to various battlefields around the Pacific. Seven days after the Soviet invasion, Japan surrendered to the Allied Forces. The Soviet Army occupied Manchuria, dethroned the Emperor of Manchukuo, and dismantled the government. Industrial facilities, mines, power plants, railroads and the like were confiscated by the Soviet Army and later handed over to the Chinese government. Over 1 million Japanese immigrants in Manchuria fled the country and returned to Japan. Yet even though the dreams of Japanese policy makers in Manchuria suddenly vanished, their experience of state-building and handling a managed economy became a vital component of Japan’s postwar development, as I will demonstrate in the next chapter.

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My argument in this chapter can be summarized as follows: the power transition in the 1930s put the military-bureaucracy coalition in the center of power. The Japanese military officials and reformist bureaucrats drafted a number of policies and proposals and implemented them to institute a developmental state system in the wartime period. Yet their policymaking and policy implementation ran into many obstacles. The strong opposition from zaibatsu and party politicians forced the military officials and bureaucrats to take an approach that was different from their Manchurian model. So, the wartime Japanese developmental state system reflected the power relations among actors to some extent. However, one must pay close attention to the policymakers’ ideas to account for the following important questions: Why did they come to think that a new economic system was necessary? Why did they manage to introduce a totally new economic system? Why did the policymakers shape the institutions in the way they did? What did they want to achieve by building the institutions? The military-bureaucracy coalition’s to-sei keizai ron made them believe that the existing liberal economic system had serious problems, and the government must play an active role. Various events such as the Great Depression, the Soviet success, and the power transition made to-sei keizai ron the mainstream in intellectual discourse, and the military-bureaucracy coalition’s new policies won strong support from scholars and journalists. This intellectual triumph of to-sei keizai ron created a strong momentum for an institutional transition. Also, when the policymakers designed new institutions they tried to substantiate the principles of to-sei keizai ron. They established the Planning Board to embody Ishiwara’s ideal of the “Economic General Staff Office” – a pilot agency with extensive authority to lead industry. Also, they created the control association system, which would realize a fusion of liberal economy and socialist economy. Thus, the institutional outcome not only reflected the political context at the time of institution-building, but, more importantly, it was influenced by the ideational context. Finally, some of the findings from my analysis of policymaking in wartime Japan reveal problems in the common understandings of wartime Japanese politics. First, it is sometimes believed that the military and business collaborated with each other during wartime, and that zaibatsu leaders supported the military’s war efforts in Asia because it would allow them to control markets and resources there. This view was commonly held by the Americans and their allies, and it encouraged them to dissolve the zaibatsu conglomerates after World War II. For instance, “President Truman moved to break up the zaibatsu as he viewed them as a source and major supporter of militarism” (Hayes 2004: 41). Truman’s conviction was supported by reports from the American occupation forces in Japan. A report of the Mission on Japanese Combines led by Corwin D. Edwards, a professor at Northwestern University, states the following: “This drive for exports and for imports of raw materials has been an outstanding motive of Japanese imperialism. Thus the concentration of Japanese wealth and economic power must carry a substantial

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share of the responsibility for Japanese aggression. It is in this sense that the zaibatsu – that is, the money clique – are to be regarded as among the groups principally responsible for the war and as principal factor in the Japanese war potential.”55 However, my study reveals that zaibatsu interests sharply conflicted with those of the military and reformist bureaucrats, and that the two groups were rarely in a state of collaboration. It is true that the zaibatsu enjoyed their freedoms in Japan’s colonies (Korea and Taiwan), and that some newly established zaibatsu like Aikawa’s Nissan were linked with the military in Manchuria, but zaibatsu chieftains and the military-bureaucracy coalition continued to fight with each other throughout the wartime period as zaibatsu leaders strove valiantly to protect their ideals of economic liberty and freedom from state control. Second, even though it is commonly believed that the military government dictated every aspect of Japanese politics, economy, and society during World War II, neither the military nor the bureaucracy obtained full control over the nation’s industry during the wartime period. For example, Hall describes the political condition in the late 1930s saying, “Japan now moved toward full-scale military mobilization and centralized economic planning. The government passed increasingly under military domination, while nationalist and patriotic slogans were used to exhort the people to dedicate themselves to the national effort” (Hall 1991: 341). Others believe that bureaucrats, with the help of the military, dominated politics in Japan throughout much of the prewar period. Pempel claims that, “Unlike their counterparts in the U.S., Britain, and even France, Japanese civil and military bureaucrats were relatively free from major checks from electoral or parliamentary spheres” (Pempel 1992: 20). This statist/elitist view oversimplifies Japan’s political structure in wartime and overlooks the intense political competition between the zaibatsu and the military-bureaucracy coalition. My analysis of the wartime policymaking process suggests that while the military-bureaucracy coalition eventually seized a substantial level of political influence over the policymaking process, they were forced, at times, to make various concessions to zaibatsu leaders and party politicians. Sometimes they even lost their battles against the zaibatsu leaders, as when Kishi lost his government positions on occasion. Their policymaking and implementation had not achieved all they had wanted, and thus, the bureaucrats continued their mission to create an ideal form of managed economy in the postwar period.

5

Institutional evolution in postwar Japan (1946–65)

In the previous chapters, I demonstrated that the fundamental elements of the Japanese developmental state system first emerged in Manchuria, and were later adopted in wartime Japan. In other words, the origin of the postwar Japanese developmental state systems can be found in Manchuria and wartime Japan. Additionally, through careful analyses of institution-building processes in Manchuria and wartime Japan, I argued that the institution outcomes reflected the political power relations among actors, and, more importantly, the ideational guidance of the policymakers. This chapter examines Japan’s institution building in the postwar period. In particular, I focus on the context behind the reproduction of wartime economic institutions in postwar Japan. Many institutional features of the developmental state system in Manchuria and wartime Japan were reproduced by Japanese policymakers during the postwar period, despite American occupation forces’ policies aimed at dismantling wartime systems as part of efforts to democratize Japanese society. Although the Americans succeeded in some important reforms, such as complete national disarmament, the disbanding of various zaibatsu, and agricultural land reform, they failed in their efforts to bring down all of the wartime economic institutions. Post-war Japanese policymakers reorganized the wartime pilot agencies (the Planning Board and Ministry of Commerce and Industry) into the Economic Stabilization Board (ESB, Keizai Antei Honbu), which was then vested with extensive power to control various economic activities. This was believed necessary to facilitate the recovery of the Japanese economy from the devastation of the war. The government scaled back the ESB’s power in 1952 as the economy started to grow steadily, but another powerful institution – the Ministry of International Trade and Industry (MITI) – emerged as a pilot agency to guide the subsequent periods. Much like their wartime counterparts, postwar pilot agencies led economic development through their industrial policies. Furthermore, despite specific orders from the American occupation forces instructing the Japanese government to dismantle the wartime control associations, which were considered an important component of the Japanese war-fighting mechanism, policymakers rebuilt them as

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industrial associations (gyo-kai dantai). These new industrial associations consisted of the same members and functioned in a manner quite similar to their wartime predecessors. This chapter aims primarily at examining the mechanism of path dependency in the Japanese economy by paying close attention to the following puzzle: why, in spite of all the political changes, did those wartime institutions survive the postwar reform and continue to play the same roles as in the previous period? The structure of this chapter is as follows: first, I examine the postwar pilot agencies (the ESB and MITI) and the new industrial associations. As I did in previous chapters, I pay close attention to the policies and functions of those institutions and discuss what roles they played in pushing forward Japan’s postwar economic growth. This is followed by my analysis of the institution-building process after World War II, a look into how these institutions were restructured, and how they continued to perform functions much like their wartime predecessors. Finally, I will analyze the mechanism of path dependency in these institutional settings, focusing primarily on the linkages in power structure and the continuity of economic ideas between the wartime and the postwar regimes.

I Core institutions of the postwar Japanese developmental state system 1 Pilot agencies: the ESB and MITI The Economic Stabilization Board The Japanese government established the ESB in February 1946 as an extra-ministerial bureau of the Prime Minister’s Office (So-ri Fu). According to the 50-year anniversary book of the Economic Planning Agency (the successor of the ESB), the ESB was “perhaps the most powerful economic agency in postwar history. It recruited many talented individuals from inside and outside of the government and took charge of a critical mission to recover and stabilize Japanese economy after the war” (Economic Planning Agency 1997: 57). The primary objectives of the new agency were fighting inflation and ensuring a stable supply of food and other commodities. The government described the goals of the new agency as to “promote citizen incentives for hard work, actively develop production and distribution [of goods and services], and stabilize the everyday life of the citizenry.”1 The ESB started as a rather small agency with five bureaux and 316 officials. However, due to the mutually exacerbating problems of inflation and food shortages, its portfolio expanded to controlling the flow of capital and commodities in 1949. The newly empowered agency consisted of 10 bureaux2 and more than 2,000 officials. The Economic Stabilization Board Establishment Act of 1947 (Keizai Antei Honbu Secchi Ho-) describes the ESB’s jurisdiction and authorities as follows:

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Institutional evolution in postwar Japan Article 4: The Economic Stabilization Board is an agency responsible for carrying out the following administrative tasks: 1 Planning and drafting the basic policies for economic stability; 2 Coordination of concerned government agencies’ tasks; 3 Price control; 4 Administration of economic control; 5 Investigation of investment and business activities of foreigners. (Economic Planning Agency 1997: 822)

The law delegated extensive authority to the ESB and set its tasks to include “planning and drafting the basic policies for economic stabilization involving production of commodities, rations and consumption, labor, prices, physical policies, finance, currency exchange, trade, construction, transportation, etc. Additionally, [the ESB] coordinates the related governmental institutions’ policies.” This clause designated the ESB as the central player of the Japanese government’s economic policy. Another clause specifically stated that the ESB had the authority to “draft plans to strengthen economic control.” That law also put the ESB above other ministries and agencies by authorizing it to “issue orders to the heads of the related governmental institutions in order to carry out its missions.” The law provided the ESB with various powers to control prices and manage rations. It allowed the ESB to “make decisions, issue orders and permissions, and carry out other measures regarding prices [of commodities],” to “limit or prohibit certain sales plans, monitor quality, marketing methods, retailing locations (if found necessary),” and to “provide the National Subsidy Fund for price stability.” The law empowered the ESB with the authority to monitor enactment of its policies and investigate violations. It also allowed the ESB to “monitor the economic policies of other governmental institutions” and to “investigate violations of economic laws.” To prevent and investigate violations of economic policies, the ESB could “educate policeman about the aims of economic policies” and “provide recommendations to the police and other agencies” (Economic Planning Agency 1997: 821–22). With these extensive powers allowing control of various Japanese economic levers, the ESB played an important role in leading the country to recovery and growth in the immediate postwar period. However, the ESB’s policy dominance in economic affairs came to end with the conclusion of the occupation by the Allied Forces. Seven years after the war’s end, Japan signed the San Francisco Peace Treaty in September 1951. The occupation forces left Japan in April 1952, at which time the Japanese government regained full autonomy in policymaking, and began carrying out administrative reforms. In 1952 the once mighty ESB was reorganized into a smaller agency called the Economic Council Agency (later renamed the Economic Planning Agency), and was staffed with about 400 officials. This new agency’s task was limited to long-term government economic planning through issuing policy recommendations and conducting various research and surveys. The ESB’s most potent powers, such as price controls and ration distribution, were given to other ministries, and MITI became the central player in making and enacting industrial policies.

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The Ministry of International Trade and Industry MITI was established in May 1949 by merging the Trade Agency, the Coal Agency, and the Ministry of Commerce and Industry. The Ministry was established to advance the development of domestic industries and promote international trade (particularly exports). According to the Act for the Establishment of the Ministry of International Trade and Industry, the Ministry’s tasks included “promotion and coordination of international trade and commerce, control and coordination of foreign currency for trade … promotion, improvement, and inspection of production, distribution, and consumption of mineral and industrial products, rationalization and improvement of commerce, mining, and industrial business.”3 To perform these tasks, Article 4 of the Act lists 113 clauses that provide the ministry’s administrative powers, including authorities “to draft blueprints for basic policies regarding commerce, mining, industry … to collect, maintain, and analyze statistical data regarding commerce, mining, industry, to draft bills and administrative plans regarding trade and commerce … to manage and distribute foreign currency for trade.” Furthermore, the article states that the ministry is obligated to promote “rationalization and improvement of businesses relative to its jurisdiction” and assist financing of their business activities.4 MITI’s formal powers were not as overriding as those of the ESB because MITI did not inherit certain direct control levers enjoyed by the ESB, such as the authority to control prices, investigate violators, and issue orders to other ministries. However, it did inherit many of the ESB’s administrative prerogatives, including the powers to craft the nation’s economic plans, draft bills regarding industrial development, manipulate the flow of capital (to assist growth of certain industries), and supervise and sometimes intervene in the management of private firms – if necessary to advance government interests. Furthermore, as many scholars point out, MITI had access to some informal powers that allowed it to enforce its administrative guidance effectively – even though such guidance was not legally binding (Johnson 1982; Anchordoguy 1988; Okimoto 1989). These informal powers derived from the extensive network of retired bureaucrats employed among the corporate executives and in the government licensing authorities (who could punish disobedient firms by voiding their licenses to operate in certain businesses).5 Thus, MITI became one of the most powerful ministries in the postwar period and played an active role in leading Japan’s rapid economic growth. In the following section, I will examine the industrial policies of ESB and MITI to analyze the ways in which pilot agencies promoted economic recovery and development.

Postwar industrial policies The industrial policies of the postwar pilot agencies were characterized by three policy types: industrial rationalization, economic planning, and market stabilization. The first two policy types were refinements of wartime industrial

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policies. Industrial rationalization policies aimed at improving industrial productivity, while economic planning policies focused primarily on production capability expansion. Agency market-stabilization policies primarily worked to prevent companies from going bankrupt during recessions. The government did not have policies of this type during the war period because demand was constantly rising at that time, and there was no need for them. Economic planning policies The first type of industrial policy under discussion involves economic planning. These policies were almost identical to the economic policies of the Manchurian pilot agencies and the wartime period, such as the Manchurian Industry Development Five-Year Plan (1937–41, see Chapter 3) and the Production Expansion Four-Year Plan (1938–41, see Chapter 4). However, the postwar economic plans were much more effective because knowledge regarding economic theory had become more sophisticated due to the experiences in planning accumulated over time. In policies of this type, the government composed a production expansion plan for various industries covering the next five to 10 years. The figures in the economic plan were calculated from economic and industrial conditions (including inflation and unemployment rates) of the period, and the projected growth rates of the national economy. Such plans were designed to set achievable goals for each industry and define what and how each industry (or sometimes each firm) would need in the way of resources to reach those goals. The government would then allocate scarce resources, such as capital, raw materials, and technology, among various industries in accordance with the plan. Examples of economic planning policies in the postwar period include the Priority Production Policy (1947–49), the Economic Independence Plan (1956–60), the Income Doubling Plan (1961–70), the Midterm Economic Plan (1964–68), and the New Economic and Social Development Plan (1967–71). Table 5.1 shows a summary of economic planning policies and shows the focuses and objectives of each economic plan. In the following pages, I take a close look at the priority production policies. In 1947 the ESB initiated a policy based on an approach called the “Priority Production System” (Keisha seisan ho-shiki), which aimed at rapid economic recovery through heavy focus on steel and coal production. The system was constructed around a policy that concentrated scarce resources (i.e. labor, capital, natural resources) in the production of certain goods that were considered critical to economic recovery. When the ESB determined that shortages of coal and steel were seriously inhibiting the recovery of Japan’s economy, their solution was to increase the production of coal, then use that coal primarily in iron and steel production, a large portion of which, in turn, would be used for further coal production increases. The ESB considered production of coal and steel crucial to development of Japanese industry because, at the time, coal was the primary source of energy, while steel was

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Table 5.1 Economic planning policies in postwar Japan

Years

Projected GNP growth Result Objectives

Economic Independence Plan

Income Doubling Plan

Midterm Economic Plan

New Economic and Social Development Plan

1956–60 Hatoyama Cabinet 4.9%

1961–70 Ikeda Cabinet

1964–68 Sato- Cabinet

1967–71 Sato- Cabinet

7.8%

8.1%

8.2%

8.7% To realize a stable economy and full employment

10.0% To achieve significant improvement in living standards, full employment, and stable economic growth

10.1% To eliminate imbalance, improvement of underdeveloped sections in everyday life, and to achieve harmonious economic growth

9.8% To create well-balanced and fulfilling society

Source: Economic Planning Agency 1997: 45–46.

necessary for the production of important economic infrastructure, such as railroads, ships, production machines, and the like. The production of steel significantly shrank after the end of World War II, due to the shortage of coal. The domestic production of coal only satisfied 30% of the national market demand in 1946.6 This shortage became a major obstacle for steel production because steel production requires coal both as a fuel and as a raw material. The shortage of steel, in turn, caused coal production to stagnate because coal miners needed equipment made from steel.7 Because this vicious cycle had become a major bottleneck for Japan’s economic recovery, the government decided to provide the coal industry with all the necessary resources to increase coal production, and then give the steel industry priority when rationing coal in order to increase steel production, which would then be channeled to the coal industry in the form of heavy equipment. In this way, the government hoped the resulting increases in coal and steel production would allow other industries to rebuild their facilities, which would provide a firm foundation to the recovery of the entire Japanese economy. In August 1946 the Yoshida Cabinet adopted “the Outline of Drafting and Enactment of the Basic Resources Demand-Supply Plan,” which was the first official document that laid out the Priority Production System.8 The government followed that policy until 1948. The Outline provided for enactment of the Priority Production System as follows:

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1 Considering various conditions of domestic economy, [the government] will mark the fourth quarter of this year as a turning point for Japan’s economic recovery and set forth a fundamental policy change with the drafting and enactment of this resource demand/supply plan. 2 All domestic policies will concentrate on increasing coal production. The government will provide all necessary resources [needed to] increase coal production. 5 With regard to distribution of coal, the government will give priority to the provision of necessary materials and resources for increasing coal production. Additionally, in order to achieve production of 30 million tons of coal, the government will provide necessary material (particularly steel) as early as January and make efforts to assist other basic industries, such as chemical fertilizer, electric utility and important export industries. 9 The government adopts the priority distribution system with no exceptions.9 The ESB carried out the Priority Production Policy through: 1 allocation of resources (domestic); 2 provision of loans from public funds;10 3 price controls; 4 price difference compensation;11 and 5 allocation of imported resources. The government plan called for channeling scarce resources into the coal mining and steel industries to increase the production of those goods. For example, the government rationed out important commodities, such as steel and cement to the coal mining industry, which received about 80%–90% of what it demanded, even though other sectors received rations that were only about 20%–30% of what they needed. The government also gave priority to the coal mining industry by providing the coal miners and their families with subsidized housing, extra food, and other commodities.12 Additionally, while steel production only met 26% of the national market demand, 61% of the steel produced was allocated to the coal mining industry. Furthermore, the government significantly increased the amount of coal rationed to the steel industry, and “provision of coal for steel production increased 62% in 1947 from the previous year” (Japan Iron and Steel Federation 1959: 23).13 The outcome of the Priority Production Policy was remarkable. The production of steel and coal expanded by 207.7% and 65.5%, respectively. Production of industrial and mining products increased 61.8% within just two years (see Table 5.2).14 Table 5.2 Growth of steel and coal production, 1946–48 Year

Steel (000 t)

Coal (000 t)

Industrial production*

1946 1947 1948

557.2 952.1 1,714.7

20,382 27,234 33,726

100.0 131.8 161.8

* The production level of 1946 is set at 100. Source: Bank of Japan 1999: 92–100.

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Industrial rationalization policies After assuming the initiative of industrial policies in 1952, MITI introduced its industrial rationalisation policies. The primary objectives of this policy were promotion of international competitiveness, technological advancements, and increasing exports. The context behind this policy initiative was the need for Japanese industry to prepare for a new economic environment featuring reduced government control. The Japanese government adopted various liberalization measures15 advocated by the American occupation forces in 1949, which drastically reduced government subsidies and price controls, and it was also expected that the government would be forced to open domestic markets to foreign competitors. Furthermore, the financial aid from the United States aimed at rebuilding the Japanese economy was expected to terminate shortly, and Japan needed to start exporting in order to earn foreign currency. Finally, the war in the Korean Peninsula, which had increase substantially the demand for Japanese industrial commodities, was about to end. Thus, industry desperately needed government assistance in improving productivity and boosting international competitiveness. MITI’s first industrial rationalization policy appeared as the Corporate Rationalization Promotion Law (Kigyo- Go-rika Sokushin Ho-)16 in 1952. The pillars of the law included: 1 promotion of corporate research and development (R&d) activities; 2 promotion of corporate investment in modern factories and equipment; 3 development of industrial infrastructure (highways and ports); 4 conservation in the use of raw materials and energy; and 5 business consultations for small and medium-sized enterprises. MITI’s major policy tools for industrial rationalization were subsidies, tax cuts, and accelerated depreciation. For instance, MITI utilized public funds to assist corporate R&D and investment in plants and equipment. These public funds were channeled primarily through two banks, the Development Bank of Japan (DBJ) and the Industrial Bank of Japan (IBJ). The DBJ was a publicly owned bank established in 1951 that was financed fully by the government. It provided long-term, low-interest loans to private firms that were developing the new equipment and technologies that were considered critical to Japan’s industrialization. The IBJ was established in 1902 as a public bank, but the government privatized it in 1950 in compliance with the directive issued by the American occupation forces. Even though it became a private bank, the government retained very strong influence over most of its activities. IBJ’s funds came directly from the government budget, but the government used the bank to issue bonds and provided long-term loans to private firms. Using these two sources of public funds, MITI assisted the financing and rationalization of private firms (MITI 1991: vol. 2, 517). The government also assisted corporations by financing the acquisition of new technologies, machines, equipment and factories through tax cuts and accelerated depreciation. The government reduced tax on fixed corporate

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assets (i.e. machines, facilities, and land) used for research and development. Corporations were also allowed to depreciate the values of those fixed assets at very rapid rates (e.g. 50% in the first year) to further reduce their tax burdens. As an example, in the following pages we will look at the steel industry. In the years between 1951 and 1966, the government carried three successive rationalization plans to assist the industrial technology advancements and promote exports. The First Rationalization Plan (Dai Ichiji Go-rika Keitaku; 1951–54) focused on the modernization of steel rolling equipment, an area where Japanese firms were far behind their foreign competitors. Additionally, the government planned to promote investments in production facilities for steel slab, plate, and piping. The First Rationalization Plan started with enactment of the Corporate Rationalization Promotion Act (Kigyo- Go-rika Sokushin Ho-) on March 7, 1952. The Act reflected a report published by MITI’s Industry Rationalization Council (Sangyo- Go-rika Shingikai), which consisted of steel experts from the bureaucracy and business world.17 The Council’s plan was to invest 53 billion yen18 in the steel industry over a threeyear period to help steel makers acquire foreign technology/production machines and for the construction of new factories. A report by the Steel Section of MITI’s Industry Rationalization Council laid out the rationalization plan for the steel industry as follows: “[The government should] invest a large amount of equipment rationalization fund for three years. By promoting construction of highly efficient factories … [the industry should] achieve a 10% cut in production costs of iron and a 20% cost cut for steel products … Once the production costs of iron and steel decline to the point where the industry can export their steel products without subsidies, the iron and steel industry can stand on its own feet” (Japan Iron and Steel Federation 1959: 691). The steel industry invested larger amounts between 1951 and 1953 than the government had expected. The total amounts rose as high as 36.9 billion yen in 1951, 37.9 billion in 1952, and 39.6 billion in 1953 (MITI 1991: vol. 2, 520). During that period, MITI estimates that the industry cut approximately 8.3% off its iron production costs. This was a little short of the council’s ambitious goal of a 10% cut, but the plan did achieve a certain level of success, and thus showed that industrial rationalization policies had effectively promoted growth in Japanese firms as well as improvements to their competitiveness. Industrial rationalization and economic planning policies became important pillars of the Japanese government’s growth-oriented policies in the postwar period, and a number of scholars have studied those policies as the key to the success of postwar Japanese economy (Johnson 1982; Anchordoguy 1988). Both economic planning and industrial rationalization aimed specifically at assisting the rapid growth of the Japanese economy. However, postwar Japan’s industrial policies included more than these growth-oriented measures. There was another important aspect of Japanese industrial policy, which took the form of market-stabilization policies.

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Market-stabilization policies The third type of industrial policy was market stabilization. While industrial rationalization and economic planning policies aim at industrial growth and development, the main objectives of market-stabilization policies involved limiting competition in order to prevent less-competitive firms from bankruptcy during recessions. It is important to note that for liberal, market-based economies, there is nothing wrong with non-productive firms going out of business because it increases economic efficiency by eliminating inefficient actors. However, when the goal is expansion of production capability, the loss of firms – even if they are productively inefficient – is undesirable because it will result in a reduced number of producers, and the capital and resources invested in those firms will be wasted. Therefore, the government of the period tried to prevent corporate bankruptcy whenever and however possible. This policy type became an important component of government industrial policies in the early 1950s because demand for steel and other industrial products declined significantly toward the end of the Korean War. During that period, the Japanese economy maintained steady growth, thanks to government assistance, even though corporate profit levels plunged after 1951 (see Figure 5.2 and Figure 5.3 later in this chapter for more information on the volatile condition of the Japanese economy between 1950 and 1964, and the increasing numbers of corporate bankruptcies). The first government market stabilization attempts appeared in 1952. However, various legal difficulties were encountered when implementing those policies. Article 1 of the Antimonopoly Law clearly prohibits “private monopolization, unreasonable restraint of trade, and unfair trade practices,” as well as “unreasonable restraint of production, sale, price, technology, etc., and all other unjust restriction on business activities through combinations, agreements, etc.”19 Therefore, industry and the government could not rely on private cartel organizations to ensure market stabilization, as they did in the prewar period, so the government was forced to initiate a new policy that would allow it to circumvent the Antimonopoly Law introduced by the American occupation forces. The new policy was called “kankoku so-tan” (advised production cut). The basic idea of kankoku so-tan was that MITI would set production amounts for each firm and provide “administrative guidance” (gyo-sei shido-) to each firm, “advising” them to limit production temporarily to their assigned quota.20 Another example of market-stabilization policies was government-led price-setting mechanisms, such as the “open-sales system” (ko-han seido), which I will discuss in the next section. Industry leaders welcomed these policies as an alternative to their old cartel system.21 In order to operate a cartel system, it is critical to ensure the enforcement of rules by punishing violators. In postwar Japan, MITI functioned as the system enforcer through distribution of administrative guidance. However, such guidance was not legally binding, because it had no actual basis in law.

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In other words, MITI had no legal power to punish those firms that did not obey its guidance. What motivated firms to comply with MITI guidance was its informal powers. MITI used the authority vested in it by the Foreign Exchange and Trade Control Law (Gaikoku Kawase Oyobi Gaikoku Bo-eki Ho-), enacted in 1949,22 to control the distribution of foreign currency. Thus, MITI could decide how much foreign currency each firm could obtain to pay for imports of raw materials and other goods. Firms could not exchange currencies without MITI’s approval. As most manufacturing firms in Japan relied heavily on imported raw materials, energy, and equipment, it was critical for them to secure sufficient amounts of foreign currency to pay for their imports. Thus, MITI was able to enforce its rules by threatening to reduce foreign currency allotments for firms that failed to comply with its administrative guidance. MITI possessed the abovementioned authorities until the law was substantially amended in 1980. In summary, the pilot agencies of the postwar period (first the ESB, and then MITI) reemerged as the key actors in reestablishing and developing the Japanese economy through their industrial policies, which included industrial rationalization, economic planning, and market stabilization. 2 Industrial associations (gyo-kai dantai) In its efforts to democratize the Japanese economy, the Supreme Commander for the Allied Powers (SCAP) instructed the Japanese government to dissolve control associations because SCAP believed, “The To-sei Kai, having been organized for war production purposes, are poorly suited to peacetime production … It is psychologically desirable to direct the abolition of these purely wartime control agencies, and to allow industry to reconvert with as few restrictions as possible” (SCAP-IN 1108, August 8, 1946).23 However, the economic turmoil immediately after the end of the war forced SCAP to rely on some forms of economic control as emergency measures for stabilization. Therefore, SCAP allowed the Japanese government to “establish the necessary trade associations to be used as temporary stabilization devices.” However, it also stated, “the existence of all industry trade associations as temporary stabilization devices within selected industries, and the public agencies … shall be limited to a period of one year.”24 On September 28, 1946, the government abolished the Important Industry Bodies Ordinance of 1941 – the wartime legislation that established control associations. However, after the government abolished the Ordinance, those wartime control associations simply renamed themselves industrial associations (gyo-kai dantai) and continued to cooperate with the government, thus playing an important role in the postwar period. In the following pages, I examine the roles of industrial associations in the postwar period, focusing on the example of the steel industry. SCAP instructed the Japanese government to dissolve the Iron and Steel Control Association (Tekko- To-sei Kai) – a steel industry wartime control association on February 11, 1946 (Yomiuri Shimbun, February 14, 1946).

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However, recognizing the need for some form of industrial association, SCAP gave approval to steel industry’s plans to organize its members under a new temporary organization called the Japan Iron and Steel Council (Nihon TekkoKyo-gikai) (SCAP-IN 728, February 11, 1946). However, it was reported in a Japanese newspaper that SCAP was planning to dismiss the association as part of industry democratization efforts once the Japanese economy had stabilized (Yomiuri Shimbun, February 15, 1946). The association’s primary functions were “to allot production quotas, distribute raw materials, facilitate communication among producers and customers, make documents with statistical data, and conduct research and studies” (JISF 1959: 44). In spite of the above, the government enacted the “Price Adjustment Public Corporation Law” (Kakaku Cho-sei Ko-dan Ho-) on April 15, 1946, which ordered the elimination of “control organizations that were engaged in setting designated prices and the like” (Yomiuri Shimbun, September 26, 1946). Thus, the government dissolved the Japan Iron and Steel Conference along with 14 other control associations on September 26, 1946. However, the steel industry strongly needed some form of organization to facilitate communication among firms because it was facing a severe recession at the time. Therefore, the industry formed the “Japan Iron and Steel Union” (Nihon TekkoRengo-kai), an organization of steel producers for the purpose of “socialgathering” (shinboku) and research. That organization merged with the “Japan Iron and Steel Industry Managers Federation”25 (Nihon Tekko-gyoKeieisha Renmei) and then reorganized as the “Japan Iron and Steel Federation” (JISF, Nihon Tekko- Renmei) on November 1, 1948. To avoid being dismissed by SCAP, JISF and its postwar predecessors emphasized that, “They aim at industrial research and information-exchange, and have no controlling nature,” (JISF 1959: 44). However, the organization was essentially a reincarnation of the wartime Iron and Steel Control Association and consisted of the same members. At the time of its establishment, JISF consisted of 177 members. JISF’s statutes, adopted by its members upon establishment, stated the objectives of JISF as “contributing to national economic development through promotion of fair and free business activities in the steel industry, maintenance of stability in the industry, stable production of iron and steel, and research on steel production and labor problems” (JISF 1959: appendix, 64–66). The statutes provided that the federation’s basic policies had to be approved by the general meeting of members. The board of directors made decisions regarding matters that did not require the approval of the general meeting. The board consisted of a president, directors, and auditors. The president was selected from among the directors, who were elected by members through a secret ballot. This decision-making mechanism marks the primary difference between the wartime control associations and the postwar industrial associations. “The difference between the Iron and Steel Conference [a postwar predecessor of JISF] and the Iron and Steel Control Association is that the control association was a dictatorial organization ruled by the association’s president based on

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the ‘Führer principle,’ while the conference is a voluntary, democratic and self-ruled organization. [JISF’s] supreme decision-making organ is a committee of executive directors consisting of about 10 major steel makers” (JISF 1959: 44). The Führer principle of the control associations had its root in the Nazi-German cartel system, which became the model for Japan’s wartime control system. The government delegated significant powers to the president of each control association, which allowed those presidents to dominate the decision-making process of their industry, as discussed in Chapter 4. However, the postwar industrial associations renounced the Führer principle and adopted a more or less equal system, even though large corporate groups had much stronger influence than the rest of the members, as in the case of the steel industry. In the following section, I examine how JISF exercised its control over the steel industry, and how it cooperated with the government by assisting and influencing a number of economic development policies. JISF roles in industrial policies In this section, I examine what roles JISF played in the abovementioned three types of industrial policies. First, the keys to successful economic planning were to collect information regarding the production capabilities and growth potentials of virtually all firms, as precisely as possible. The resulting plans outlined how much each firm was expected to grow, which firms would receive what (and how much) resources each year, and which firms would be permitted to invest in new factories and facilities. In order to design an achievable and effective economic plan, the relevant pilot agency needed enormous amounts of information. However, the agency lacked the manpower necessary to collect information from a huge number of firms. Therefore, they had to rely on the industrial association in each industry to fulfill that role. Industrial associations collected information from their member firms and submitted that information to the pilot agency, which, in turn, designed the government economic plan to cover the next five to 10 years. For example, when preparing a new economic plan, Prime Minister Kishi Nobusuke requested that JISF present a 10-year forecast in October 1959 (JISF 1969: 789). In the following year, JISF submitted a report titled “Overview of the Japanese Steel Industry in 1970”26 to the government. The report estimated that the Japanese economy would grow at 7.2% over the next decade, and that industrial production was expected to expand at an average of 9.1% each year. Based on these numbers, it calculated that the domestic demand for steel products would reach 45 million tons in 1970, from 13 million tons in 1959. In order to meet this demand, the report said, “The proportion of blast furnace production in the total iron production must be increased from current 58% to 73% … [meaning] about 30 new blast furnaces (average of 2,000 tons/day) need to be built … the industry must import 49 million tons of iron ore and 2,450 tons of coal” (ibid.: 789). Based on those market forecasts and suggestions submitted by JISF and the industrial associations in other

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industries, the Ikeda Cabinet27 composed the Income Doubling Plan in 1960, which aimed at doubling national income within 10 years. Second, the keys to success in market stabilization were strict enforcement of rules and coordination of corporate interests, and MITI and JISF worked hand in hand to ensure that that occurred. JISF coordinated the member interests and set rules regarding production and prices, while MITI used its administrative authority to punish violators. Member complaints regarding the rules were monitored and resolved by JISF and MITI working together. With this division of labor, MITI and JISF worked together successfully to carry out a number of market-stabilization policies. One such example in the steel industry was the “open-sales system” (ko-kai hanbai seido), which was introduced during the 1958 recession. That system aimed at stabilization of iron and steel product prices and the establishment of a harmonious relationship among those product makers. The open-sales system functioned as follows: first, steel makers scheduled their production and sales amounts (based on their monthly MITI guidance) and submitted those schedules to MITI. Second, the makers reported their product prices to MITI and announced them publicly. Third, all steel makers simultaneously began sales of their product for that month at designated locations. Those sales were not allowed to exceed the amounts specified in the sales schedule, and they were required to maintain the announced prices throughout that month. The open-sales system was designed to ensure a constant supply of iron and steel products in the market and to stabilize their prices so that steel makers could avoid cutthroat competition and secure reasonable profits. This price-fixing mechanism was unique in the sense that even though such rules were set by the JISF, the government played an essential role by enforcing cartel rules regarding production and sales amounts. If a maker had production capacity beyond their quota, MITI could shut down and seal some of their furnaces to prevent a supply surplus in the market. MITI and JISF jointly formed the Monitoring Committee to keep a close eye on potential violators. The Committee was chaired by the chief of MITI’s Heavy Industry Bureau and consisted of MITI officials and sales managers and dealers from the industry. It had the authority to “conduct on-the-spot inspections (at steel mills) and demand access to company documents” (JISF 1959: 779–80).28 To strengthen the monitoring system even further, the committee established the Monitoring Committee Secretariat in 1962. This committee was chaired by JISF’s senior director and consisted of employees of MITI’s Heavy Industry Bureau and JISF. Furthermore, presidents of the member firms were obligated to submit written pledges to the Monitoring Committee.29 If member firms violated the rules, MITI punished the violators. MITI’s TekkoShikyo- Taisaku Yo-ko- (Outline of the Iron and Steel Market Condition Measures) issued on June 20, 1958, stated, “For those makers who violate [the rule], MITI will issue administrative guidance, which will be accompanied by severe punishment” (ibid.: 780).

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Even though it was unique in the sense that the government played the role of rule-enforcer, the open-sale system was really nothing but a cartel, which violated the Antimonopoly Act. Yet JISF justified this system by saying that it was an attempt to “form an agreement on production and sales under MITI’s administrative guidance. It is neither a cartel nor a state control, but an effort to cope with the situation through cooperation between the government and the industry.” JISF further denied that it was a cartel by saying, “Each firm can set prices freely. MITI interferes only when prices fluctuate outside a certain range.” Unlike other price-fixing mechanisms, it neither contradicts the market principle nor hinders development of the industry because “it prevents the survival of inefficient firms by allowing prices to fluctuate [within a certain range]” (JISF 1959: 48). Third, JISF also played a number of roles in industry rationalization policies, but compared to the previous two policy types, JISF involvement in this area was limited because the government itself took charge. However, JISF did make policy proposals and occasionally demanded policy changes, some of which were approved by the government. One example of successful JISF policy advocacy was the 1953 steel subsidy case. In May 1953 MITI issued the “Basic Plans for Industrial Policy in the Future” and announced that it would provide the steel industry with subsidies (approximately 25 billion yen) to encourage price reductions. However, the steel industry feared that in exchange for the subsidy, MITI might strengthen its control over the industry and interfere with corporate management. Therefore, in response to the subsidy plan, JISF established the Steel Price Measures Committee to gather viewpoints from member firms on the issue. The committee then released “A Request Regarding Export Promotion and Price Cuts of Steel and Iron,” in which the following two points were made: first, what determines the price of iron and steel is the price of coal. Thus, a subsidy for the coal industry is preferable, and the steel industry does not need it. Second, the government should provide subsidies to the coal industry and reduce the price of domestic coal to the same level as imported American coal (see JISF 1969: 156). The government accepted the industry’s proposal and withdrew its plan to tighten state control over the steel industry.

II Explaining the evolution of the postwar Japanese developmental state system In this section, I will trace the process of institution building in postwar Japan and examine the context behind wartime and postwar institutional continuity in Japan. My analysis here aims at explaining why the postwar Japanese economic system developed into a similar form to its Manchurian and wartime counterparts, and why wartime economic institutions continued to exist in the postwar period. While seeking out the answers to those puzzles, I analyze the validity of three hypotheses and examine what factors influence the course of institutional evolution.

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Aftermath of the war and the collective action theory The war left the Japanese economy in a state of devastation and the postwar economic crisis was the primary concern of Japanese policymakers during the years immediately after World War II. Over 3 million Japanese citizens lost their lives, which was roughly 4% of the nation’s entire population of 74 million in 1941, and several million more were wounded in combat and aerial bombardments. In addition to the human losses, the war caused tremendous destruction to Japan’s economic fundamentals. Damage from assaults and bombings of buildings, transportation facilities, and other industrial infrastructures were estimated to be 134 billion yen, or 41.5% of the country’s wealth. About one-quarter of all buildings, one-third of all industrial machines, and 80% of all ships were demolished (Kojima 1973: 174). The unemployment rate skyrocketed immediately after the war as well. More than 7.6 million soldiers lost their jobs as the military was dissolved; the end of munitions production caused 4 million layoffs; and 1.5 million immigrants returned from Japan’s former colonies. There was a total of 13.1 million unemployed workers (Nakamura 1978: 148). There were also shortages in food production due to the loss of the rural labor force, and poor weather in 1945 brought about serious hunger and malnutrition. The government worked to prevent mass starvation through rationing, but amounts were far from sufficient. “In December 1945, rations supplied only a little better than half of [the government’s required amount of 2,200 kilocalories]. During mid-1946 and mid-1947, when the delivery system broke down most abysmally, the figure sometimes dropped to little more than one-quarter or one-third of what was required” (Dower 1999: 97). To make matters worse, the Japanese economy suffered from serious inflation. As Figure 5.1 shows, the consumer price index surged from 15.9 in 1946 to 205.4 in 1949. That is a 1,186.2% increase in price within three years (Bank of Japan

Figure 5.1 The Consumer Price Index in Japan 1946–64. Source: Bank of Japan 1999: 396.

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1999: 396). Finally, between 1944 and 1946, Japan’s gross national product (GNP) shrank by a stunning 93.7%, industrial production by 96.0% and agricultural production by 94.6% (Economic Planning Agency 1964: 290–92). While product shortages and inflation were the primary problems of the Japanese economy in the immediate postwar period, the lack of collective action worked to exacerbate those problems. Because every industrial sector strove to obtain as many resources as possible to operate their businesses, the economy as a whole was using scarce resources, such as raw materials, energy, labor, and capital, in an inefficient manner. As discussed above, serious shortages of coal and steel were creating a bottleneck in the national economy. Thus, it was necessary to concentrate these scarce resources in the production of coal and steel, while reducing the amount of resources available to other industries. In the long run, those other industries would benefit from increases in coal and steel production because coal and steel were critical materials for almost all industries. However, the initial cut in their resource share required them to make short-run sacrifices, and that made it very difficult for business owners to engage in collective action. The government worked to solve these problems by establishing agencies with extensive powers, such as the ESB, to control the flow of scarce resources. Additionally, industrial associations assisted the ESB’s fight against inflation and resource shortages by coordinating member interests, providing market information, and monitoring member compliance. The government and the business owners hoped to reach a mutually beneficial outcome by providing public goods (i.e. economic plans, rules and regulations, and monitoring system). By the late 1940s, the Japanese economy had overcome its initial difficulties and had started to recover from the devastation of war. However, it then faced another type of problem in the process of economic growth. The Korean War had brought about a short-term sudden increase in the demand for steel and other industrial products, but those demands declined significantly towards the end of the war, and even though the Japanese economy continued to develop, corporate profit levels plunged after 1951, as shown in Figure 5.2.30 This cycle of recession and boom caused serious instability in the market. Figure 5.3 shows the increasing number of corporate bankruptcies between 1952 and 1961, which illustrates the volatile market conditions. The institutions of the postwar developmental state system were built in that volatile and difficult economic context. The collective action argument The collective action theory posits that actors design and build institutions as solutions to collective action problems because those institutions allow actors to cooperate and reach mutually beneficial outcomes. When all actors benefit from an institution that makes collective action possible, the institution becomes self-enforcing because defecting from the institutional arrangement

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Figure 5.2 Profit-capital ratio of Japanese firms, 1950–64. Source: Bank of Japan 1999: 336–337.

Figure 5.3 Corporate bankruptcies, 1952–61. Source: The Ministry of Internal Affairs Website www.sounu.go.jp.

can destroy it. Therefore, the institution develops a reproduction mechanism. In other words, institutions persist because the actors have incentives to abide by the arrangement, as gains from maintaining the existing institution are greater than without it. In this view, institutional change occurs when it is no longer in the self-interest of actors to reproduce the existing institution. However, they continue to maintain those institutions as long as they find that they serve their individual interests better than other available alternatives would. Therefore, this theory could explain the institutional continuity from the wartime to the postwar period, as follows: the actors built a developmental state system during wartime to reach mutually beneficial outcomes and the

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system continued to exist in the postwar period because it continued to function as a mechanism for collective action. Accordingly, concerned actors, such as the Japanese policymakers, the American occupation forces, and business owners all had firm incentives to maintain the wartime economic institutions. In the following pages, I discuss the condition of the Japanese economy in the immediate postwar period and examine how those wartime economic institutions helped actors advance their mutual interests. The collective action needed during this period was the ability to coordinate a cooperative reduction in the amount of production when the economy is weak. However, without a mechanism that provides rules, set procedures, and provides a monitoring system, collective action problems, such as lack of trust, high transaction costs, and free riding make it extremely difficult for business owners to cooperate with each other. Thus, once again, pilot agencies and industrial associations functioned as mechanisms for overcoming collective action problems. As discussed above, MITI introduced the kankoku so-tan policy (advised production cut) system, in which it set temporary production quotas for each firm and issued “administrative guidance” to each firm, “advising” them to limit production to the temporary quota. Industrial associations assisted MITI by providing detailed information on the business plans and production capabilities of their members, and also by monitoring member compliance with MITI guidance. MITI punished violators by cutting their foreign currency allotments. In summary, postwar Japanese policymakers rebuilt the wartime economic institutions, such as pilot agencies and industrial associations, because they needed a mechanism to overcome collective action problems that were causing serious damage to the Japanese economy. The structure of these institutions developed in the same way as their wartime counterparts because the policymakers and other actors faced similar types of collective action problems. This may explain the continuing existence of pilot agencies and industrial associations in Japan during and after World War II. The postwar economic institutions did allow Japanese policymakers and business owners to reach mutually beneficial outcomes. The government managed to get inflation under control by 1951 (see Figure 5.1) and the production of coal and steel rapidly increased after 1947 (see Table 5.2). The number of corporate bankruptcies declined after 1957 (Figure 5.3). Problems of the collective action theory The explanation based on the collective action theory lacks empirical data to support its claim. Just because institutions brought about some positive outcomes, it does not mean that all actors supported the establishment of those institutions. In fact, many important actors strongly opposed reestablishment of the wartime economic institutions. As I discuss below, the American occupation forces allowed the Japanese government to reestablish pilot agencies and industrial associations temporarily, but they ultimately wanted to disband these

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institutions and liberalize the Japanese economy. While some business owners supported reestablishment of industrial associations, many of them opposed such plans and demanded that the government abolish regulations and state control. This theory assumes that actors are interested in building institutions that allow them to reach mutually beneficial outcomes. Therefore, it does not make sense that SCAP and some business owners would oppose the government’s plan. However, the evidence suggests that it was not in everyone’s interest to rebuild the institutions. In the next section I will discuss the conflicts of interests between SCAP and the Japanese policymakers in the immediate postwar period. SCAP plans for Japanese economic liberalization The Allied Forces put Japan under their control following the nation’s surrender in August 1945 and occupied Japan for the next seven years. The occupation force members were almost all Americans, and US Army General Douglas MacArthur was appointed Supreme Commander for the Allied Powers (SCAP). However, during the occupation, SCAP did not govern Japan directly. Instead, it chose to exert control indirectly by working through the Japanese government. Thus, even though the Japanese Diet continued to function as a legislative body, important legislation required SCAP approval, and SCAP directives to the Japanese government had significant influence on most policymaking decisions. The major objectives of SCAP were demilitarization, democratization, and the social and economic liberalization of Japan. Its initial plan to reform the Japanese economy was specified in a document issued by the State-War-Navy Coordinating Committee (SWNCC),31 as follows: A program to demilitarize industry with the aim of preventing Japan from again developing an economic war potential shall be enforced. There shall be developed and established a system of controls that can be continued after military occupation has ceased and that will assure the continued economic disarmament of Japan. Japan shall be permitted to retain no specialized facilities for the production or repair of implements of war, naval vessels or aircraft of any type and shall be deprived of its heavy industry capacity in excess of normal peacetime requirements and of designated key industries of high military importance … The development of democratic organizations in labor, industry, and agriculture shall be encouraged, and a wider distribution of ownership, management and control of the Japanese economic system shall be favored.32 Political and economic liberalization reforms in Japan were of particular importance to the American occupation forces because the Americans and their allies had fought atrocious wars with the fascist states, and believed that

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the potential for war would not end until they transformed their former enemies into liberal democratic states. “MacArthur believed that America, with its ‘advanced spirituality,’ had a civilizing mission to perform, a moral obligation to free the Japanese people from the ‘enslavement of feudalism.’ Japan was ‘the world’s great laboratory for an experiment in the liberation of a people from totalitarian military rule and for the liberalisation of government from within’” (Takemae 2002: 7). In order to achieve these goals, SCAP forced the Japanese government to carry out a number of structural reforms which aimed at abolishing all nonliberal, totalitarian, and feudalist systems including the imperialist military organizations, zaibatsu groups, the agricultural landlord system, and the wartime economic institutions. In the first step, SCAP dismantled the Imperial Army and purged military personnel from all government institutions. It then disarmed some 7 million Imperial Army soldiers and dissolved all military agencies. It also prohibited those former soldiers from obtaining positions in any public institution. Next, SCAP dissolved the zaibatsu groups because it was believed that those corporate conglomerates had assisted militarist war efforts in order to expand their business opportunities in Asia. However, as I pointed out in Chapter 4, this allegation was not necessarily true. Nevertheless, SCAP and the US government firmly believed that they needed to curtail the power of the zaibatsu. Zaibatsu dissolution was felt to be in keeping with the antitrust concept of liberal theory. Zaibatsu firms monopolized various markets and damaged consumers by keeping the level of competition low. Thus, SCAP made the Japanese government issue the “Holding Company Liquidation Committee Act” (Mochikabu Kaisha Seiri Iinkai Rei) of 1946, and the Antimonopoly Act of 1947.33 The government then carried out the dissolution of zaibatsu groups based on those laws. SCAP also implemented liberalization reform plans in the areas of agriculture and labor. First, SCAP carried out land reform for the purpose of liberalizing rural regions.34 The land reform program substantially reduced the income inequality in rural areas, and it is often referred to as the most successful of all SCAP reforms. Second, SCAP attempted to liberalize industrial labor by instructing the Japanese government to adopt the Trade Union Act (Ro-doKumiai Ho-) of 1946, the Labor Relations Act (Ro-do- Kankei Ho-) of 1946, and the Labor Standard Act (Ro-do- Kijun Ho-) of 1947, which would encourage unionization of labor by recognizing employee rights to organize, strike, and collectively bargain with managers. The effects of SCAP labor liberalization policies appeared immediately in the rapid increase in the number of unionized sectors and labor disputes.35 SCAP also introduced policies aimed at nurturing economic liberalization and market-based capitalism in order to force the Japanese economy away from its wartime systems. However, despite SCAP’s initial plans, some wartime institutions ended up being revived with new names and played important roles in the postwar economic development of Japan. In fact, according to Takemae (2002), the establishment of the powerful ESB was originally initiated by SCAP. He said,

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“Under strong pressure from SCAP, the Economic Stabilization Board was created as an emergency measure” (Takemae 2002: 310). Even though it was SCAP’s intention to deregulate and liberalize the Japanese economy, occupation officials acknowledged that it was necessary to keep the Japanese economy under tight government control for a short period of time in order to overcome the turmoil that existed after the war (Economic Planning Agency 1997: 38). SCAP’s memorandum issued on May 17, 1946 (SCAP-IN 960), stated, “There is no objection at this time to the establishment by the Imperial Japanese government of the Economic Stabilization Board, to exist for a period of one year.”36 It is important to note that while SCAP signed off on the creation of the powerful economic agency, it wanted to terminate such emergency measures as soon as possible. SCAP resumed its plan to liberalize the Japanese economy in February 1949 when it summoned Josef Dodge, the president of Detroit Bank, to advise and assist Japan’s efforts to end inflation. Dodge drafted a series of fiscal stabilization policies, later called “the Dodge Line.” His anti-inflation policies included: balancing the budget; unifying currency exchange rates; and ending state control and promoting market competition. Government expenditures were reduced from 669 billion yen in 1949 to 633 billion in 1950 – a 9.4% reduction.37 The primary objective of this policy was to end government subsidies and price controls in order to weaken government influence over industry, as well as to contain inflation. The major component of this budget cut was the price-difference compensation and subsidies to the coal mining and steel industries.38 As a result of policies implemented under the Dodge Line, the value of the currency and prices of commodities stabilized, and the inflation that had persisted since the end of the war, finally was brought under control. “The price index that combines government prices and underground prices remained relatively unchanged on average throughout 1949, and the prices of consumer goods declined by 10%. Wage levels stabilized significantly in comparison to previous years. The ‘vicious cycle of price and wage’ had met its end” (Economic Planning Agency 1997: 56). Therefore, the ESB’s control over commodity distribution and price was drastically relaxed. “Between 1949 and 1950, the number of commodities [the distribution of which was controlled by the ESB] shrank to 1/5 for capital goods and to 1/4 for consumer goods, and the number of commodities [the prices of which were controlled] shrank to 1/4” (ibid.: 56). SCAP’s economic reform plans were driven in large part by its ideational guidance, which Takemae calls “America’s own tradition of decartelization dating from the Sherman Anti-Trust Act of 1890.” Takemae describes SCAP’s strong adherence to anti-trust doctrine as follows: US hostility to the monopolistic suppression of free enterprise had also produced the Clayton Anti-Trust Act of 1914. Although anti-cartel fervor cooled during the 1920s, it rekindled in the 1930s under the New Deal,

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Institutional evolution in postwar Japan culminating in the Robinson-Putman Act of 1936. This reformist zeal carried over into planning for post-surrender Japan. Inside MacArthur’s headquarters, the officials most closely involved in zaibatsu-dissolution were either New Dealers themselves, or had helped plan the Japanese deconcentration programme in wartime Washington. Among them were Charles Kades, Thomas Bisson, and Eleanor Hadley of Government Section, and J. McI. Henderson and Edward C. Welsh of the Economic and Scientific Section (Anti-Trust and Cartels Division). (Takemae 2002: 334–35)

This strong faith in anti-trust doctrine was an important factor behind SCAP plans to dissolve the zaibatsu system and control associations, which were thought inappropriate for the postwar Japanese economy. Japanese policymaker reactions The reaction of Japanese policymakers to SCAP economic policies was mixed. First, with regard to the SCAP instruction to establish the ESB as a temporary measure, the Japanese government first responded with little enthusiasm and then proposed creation of a new bureaucratic body to be named the Central Promotion Headquarters (Chu-o- Suishin Honbu) in March 1946. However, SCAP rejected that plan because they thought the proposed agency would be insufficiently powerful and directed the creation of an agency whose administrative powers would overcome any other ministry in the area of economic policymaking (Economic Planning Agency 1997: 38). Bowing to this pressure from SCAP, the Japanese government adopted the plan for a stronger economic recovery agency. A document issued to the Japanese government in September 1946 titled “Postwar Reconstruction of the Japanese Economy” (Nihon Keizai Saiken No Kihon Mondai) emphasized the need for “an agency for comprehensive planning and investigation,” as follows: “The function of the Economic Stabilization Board should be strengthened so that it may assume the task of collecting basic data and drafting overall plans for economic reconstruction … By making such an agency a brain trust for the prime minister and giving the premier the power to issue orders to various ministers, if necessary, a systematic and unified administrative operation should be made possible” (MOFA 1946: 131). Although the Japanese government and SCAP both agreed on the need for a powerful economic recovery agency, there was an important difference between their two views. While SCAP considered such an agency a temporary measure, the Japanese government wanted to make it a permanent body that would lead the nation’s economic growth. “Postwar Reconstruction of the Japanese Economy” does not specify the establishment of the ESB as a temporary measure. Indeed, the document states, “The period of growing capitalism based on the principle of laissez-faire is already past,” and that today’s world economy requires “planned adjustment between production and consumption.”

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It also says that the world economy has “entered an era of State capitalism or of controlled, organized capitalism” (MOFA 1946: 12). Thus, the government took advantage of the SCAP instruction by reconstructing the same wartime economic institution. Additionally, MITI was established in May 1949 by merging the Ministry of Commerce and Industry (MCI), the Trade Agency, and the Coal Agency. Prime Minister Yoshida Shigeru and Trade Agency Director Shirasu Jiro- led the establishment of this powerful economic bureaucratic body. The main objective of its establishment was to prepare for the economic liberalization policies that were expected to be introduced by the Dodge delegates (Asahi Shimbun, February 6, 1949), and send a message to the world that Japan would prioritize export promotion from that point (Nihon Keizai Shimbun, February 6, 1949). Yoshida was critical of MCI bureaucrats who focused primarily on protection and nurturing of domestic industry, so he pushed forward with the establishment of a government agency that would be internationally oriented (MITI 1991: vol. 2, 423).39 As in the case of pilot agencies, industrial associations also reemerged in the postwar period, despite SCAP’s determination to dismantle all such institutions because they were considered part of the wartime regime. The SCAP’s determination is evident in its instructions to the Japanese government issued on August 6, 1946 (SCAP-IN 1108). The instruction states, “In order to release industry from certain wartime production controls and to establish more democratic methods of increasing the production of essential materials and commodities for reconstruction of a peacetime economy … Dissolve existing Control Associations [to-sei kai] and repeal or rescind all laws, ordinances, regulations and ministerial ordinances relating thereto” (SCAP 1952: 239–40). However, the economic turmoil immediately after the end of the war forced SCAP to rely on some form of control over the economy as an emergency measure to facilitate stabilization. The SCAP instruction to dissolve control associations reflected the US government’s preference of public control over private control (i.e. cartels). SCAP’s instruction to the Japanese government (SCAP-IN 1394), issued in December 1946, states, “Joint Chiefs of Staff Directive 1380/15 requires that private controls over Japanese industry be abolished and that, where controls are necessary, public agencies be established to exercise those controls.”40 In order to carry out this policy, SCAP instructed the Japanese government to exercise basic control over industry, “through allotments of critical materials to manufacturers, rather than by the control of distribution of manufactured products by private monopoly companies or associations” (SCAP 1952: 343).41 It seemed that the Japanese government had complied with the SCAP instruction and had decided to abolish the industrial association system when it adopted the Antimonopoly Act in 1947. The legislation of the Antimonopoly Act was an important part of SCAP’s economic democratization plan because it functioned as the legal foundation for dissolution of zaibatsu

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groups and the control associations. In a SCAP memorandum dated November 6, 1945, the Japanese government was urged to enact “such laws as will eliminate and prevent private monopoly and restraint of trade, undesirable interlocking directorates, undesirable intercorporate security ownership and segregation of banking from commerce, industry and agriculture and as will provide equal opportunity to firms and individuals to compete in industry, commerce, finance, and agriculture on a democratic basis.”42 The Japanese government adopted the draft antimonopoly law composed by SCAP’s AntiTrust and Cartels Division43 in August 1946, and the Diet passed the bill on March 22, 1947. The new law established the Fair Trade Commission (Ko-sei Torihiki Iinkai), modeled after the US Federal Trade Commission, which took charge of enforcing the law and monitoring unfair conduct in the market. Article 8 of the Antimonopoly Act provided strict restrictions on cartels, stating that no business organization shall engage in any act that falls under any of the following items: (i) Substantially restraining competition in any particular field of trade; (ii) Entering into an international agreement or an international contract as provided for in Article 6; (iii) Limiting the present or future number of entrepreneurs in any particular field of business; (iv) Unjustly restricting the functions or activities of the constituent entrepreneurs; (v) Inducing entrepreneurs to employ such act as falls under unfair trade practices. These restrictions were designed to prohibit the establishment of cartel-like organizations among private firms, which would interfere with market competition. The rules significantly limit industrial associations’ activities, such as coordinating interest among group members regarding production and prices. Thus, if the Act had been enforced properly, in accordance with SCAP’s original intentions, most industrial associations would have been outlawed. However, the legislation of the Antimonopoly Act did not, despite SCAP intentions, lead to the abolition of industrial associations. SCAP noted that the Japanese government’s representatives were informed as early as July 1945 (SCAP 1952: 343) that industrial control should be exercised by the government rather than private associations. However, the Japanese government deliberately sabotaged enforcement of this recommendation and allowed the industrial associations to control distribution of raw material, fix prices, and issue regulations. In response, SCAP complained in an official document saying, “The Japanese Government is not carrying out fully the provisions of memoranda, reference paragraphs [regarding dissolution of control associations] in that an adequate program for the dissolution or reorganization of control associations on the prefectural and local level has not been formulated. Private control associations in certain areas continue to regulate competition, prevent the expansion and growth of small businesses, exclude new enterprises and exact from small businessmen large sums of money” (SCAP-IN 1890,

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February 16, 1948). The document said that “[t]heir reason for failing to follow the instructions” was because the Japanese policymakers believe that “only by a private monopoly could an adequate control of industry be exercised” (SCAP 1952: 343). Additionally, in order to dodge SCAP demands, the government provided industrial association workers the same status as government employees (MITI 1991: vol. 2, 290). Those workers received a nominal civil servant status, called “commodity adjustment officials” (busshi cho-sei kan), but continued to maintain affiliations with their companies, which were members of the industrial associations. This allowed the Japanese government to assert that the industrial associations were operated by government agents, and thus were not private organizations. Those industrial associations once again became private organizations after the end of the occupation, and continued assisting government efforts to promote industrial development, just as did their wartime predecessors. Furthermore, the Japanese government clarified the ambivalent legal status of such industrial associations when it defanged the Antimonopoly Act by amendment in 1953 (see Hadley 2001: 31; and Misonou 1987: 69, for the amendments to the Antimonopoly Act). Thus, the wartime control associations were recreated by changing their names to industrial associations and continued to cooperate with the government, playing an important role in the postwar economy. The context behind SCAP’s failed reform There are primarily two reasons why SCAP failed to bring down the wartime economic institutions. First, SCAP chose to preserve the bureaucracy and allow bureaucrats to take the initiative in policymaking, even though the same bureaucrats were the creators of the wartime economic institutions. Had SCAP purged the bureaucracies more thoroughly, and placed other actors (such as business executives) in charge, it is likely that the postwar institutions would have developed in a different form. Second, SCAP was forced to water down its economic liberalization plan due to pressure from the US government. In the late 1940s the rivalry between the two world superpowers intensified in Europe and Asia, and the policy priorities of the United States regarding Japan changed from political reform to stimulating economic growth because it needed Japan to become a reliable ally in the region. Thus, despite strong SCAP resistance, the US government changed a number of its policies. In the following pages, let me illustrate how these factors affected the intellectual competition between SCAP and the Japanese policymakers. One of the reasons why the wartime system reemerged in the postwar period, despite various SCAP reforms aiming at elimination of wartime systems, was that SCAP did not fully purge the bureaucracies. However, why did SCAP allow so many bureaucrats to stay in power, even though it had the power to purge them? The key to answer this question is the lack of policy expertise that existed in SCAP at the start of the occupation. Although the

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Americans wanted to take substantial control over the Japanese government, as they did in Germany, the occupation simply did not have sufficient human resources, knowledge, and skills to do so. Therefore, SCAP was forced to keep the Japanese bureaucrats in power in spite of their involvement in the war. Kobayashi et al. (1995) present the testimonies of American occupation force officials, such as Dr Sherwood Fine, an advisor to the director of the SCAP Economic and Scientific Section, who testified to the following: The occupation of Japan started much earlier than we had expected. Our original plan was that the occupation forces were to govern Japan directly, but we did not have enough time. So, we could not prepare sufficiently, and our plan was changed. The other reason is that we had a hard time gathering Japan experts that we needed for governance of Japan. (Kobayashi et al. 1995: 123–25) The lack of available expertise and insufficient preparation for the occupation of Japan forced the American occupiers to rely on the Japanese bureaucrats in governing Japan, which meant that SCAP could not expel all the bureaucrats who had administrated the wartime control systems, even though it had initially planned to completely dismantle the wartime regime. The second reason behind the SCAP failure was the drastic change in international politics. As the Cold War intensified, the US government’s goals for Japan shifted from economic liberalization to rapid recovery. This was because further economic troubles and uncertainties could have stimulated the rise of a communist movement, and the Americans wanted to make Japan an ally against the communist camp in East Asia. On October 7, 1948, the US National Security Council (NSC) issued a policy recommendation (NSC 13/2), directing a major shift in the policies regarding the occupation of Japan. First, NSC 13/2 opened a path for Japan’s rearmament by suggesting the reinforcement of a Japanese police establishment.44 Second, NSC 13/2 urged acceleration of Japan’s economic recovery in the following words: Second only to U.S. security interests, economic recovery should be made the primary objective of United States policy in Japan for the coming period. It should be sought through a combination of United States aid program envisaging shipments and/or credits on a declining scale over a number of years, and by vigorous and concerted effort by all interested agencies and departments of the United States Government to cut away existing obstacles to revival of Japanese foreign trade, with provision for Japanese merchant shipping, and to facilitate restoration and development of Japan’s exports. In developing Japan’s internal and external trade and industry, private enterprise should be encouraged.45 It also states, “Production in, importation into and use within Japan of goods and economic services for bonafide peaceful purposes should be

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permitted without limitation.”46 More importantly, NSC 13/2 instructed SCAP to allow the Japanese government to take the initiative in pursuit of these goals (i.e. economic and military reinforcement) as much as possible. It states: While SCAP should not stand in the way of reform measures initiated by the Japanese, if he finds them consistent with the overall objectives of the occupation, he should be advised not to press upon the Japanese Government any further reform legislation. As for reform measures already taken or in progress or preparation by the Japanese authorities, SCAP should be advised to relax pressure steadily but unobtrusively on the Japanese Government in connection with these reforms and should intervene only if the Japanese authorities revoke or compromise the fundamentals of the reforms as they proceed in their own way with the process of implementation and adjustment.47 The occupation policy in the early period that was laid out by the SWNCC envisioned keeping Japan completely disarmed, demolishing its wartime institutions, and discouraging industrialization. However, the NSC’s policy recommendations marked a major shift in the occupation policy. Takemae (2002) claimed that the SCAP “reform program lost steam as US priorities switched to economic recovery. From May 1948, anti-trust and cartel deconcentration policies were ignored or reversed, and by December 1949, the dissolution program had been abandoned” (Takemae 2002: 173). Furthermore, the Japanese economy faced a serious recession between 1949 and 1950 due to the drastic government budget cuts imposed under the Dodge Line; thus, further liberalization reform seemed unlikely. It should also be noted that the war on the Korean Peninsula accelerated the policy change because the United States dispatched its troops to the peninsula via Japan, and had designated Japan as a major source of logistics supply.48 On May 17, 1951, the NSC issued another policy recommendation with regard to US policy in East Asia. The document, titled “United States Objectives, Policies and Courses of Actions in Asia” (NSC 48/5), stressed the threat of the Soviet Union in East Asia stating, “Current Soviet tactics appear to concentrate on bringing the mainland of East Asia and eventually Japan and the other principal off-shore islands in the Western Pacific under Soviet control.”49 It further stated, “Asia is of strategic importance to the United States,” and claimed, “Soviet control of the off-shore islands in the Western Pacific, including Japan, would present an unacceptable threat to the security of the United States.” The document also urged the US government to “Assist Japan to become a self-reliant nation friendly to the United States, capable of maintaining internal security and defense against external aggression and contributing to the security of the Far East.” For that purpose, it suggested that the US government “proceed urgently to conclude a peace settlement” and “bilateral security

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arrangements,” “facilitate transition from occupation status to restoration of sovereignty,” and “assist Japan to become economically self-supporting and to produce goods50 important to the United States and to the economic stability of the non-communist area of Asia.” Following the conclusion of a peace settlement, it recommended that the US government “[a]ssist Japan in the development of appropriate military forces,” and “[a]ssist Japan in the production of low-cost military material in volume for use in Japan and other non-communist countries of Asia.” These instructions from the US government made it harder for SCAP to impose further liberalization reform on Japan and pressured SCAP to assist Japan’s industrialization and rearmament, even though many wartime economic institutions were still intact. Miwa contends that SCAP strongly opposed the shift in the occupation policies directed by the NSC, but under pressure from the Department of Army and the Department of State, reluctantly accepted the policy shift (Miwa 2002: 66). Following the NSC’s instructions, SCAP allowed the Japanese government to establish the National Police Reserve in 1950, which was reorganized as the Japan Self-Defense Forces (SDF) in 1954. Additionally, SCAP put a halt to its plans to dismantle the wartime economic institutions. In summary, SCAP had intended to allow temporarily the Japanese government to maintain those wartime institutions, such as pilot agencies and industrial associations, in order to alleviate the economic turmoil existing after the war. The postwar pilot agency, the ESB, continued to exercise industrial control for seven years, after which its control powers were distributed among other economic ministries (such as MITI), following the 1952 administrative reforms. The establishment of the ESB unintentionally paved the way for the resurgence of powerful economic agencies in the postwar period, such as the wartime control associations, which were reorganized as industrial associations after the war. SCAP had allowed the existence of such institutions as a temporary measure to promote economic stability, but under its original plan those institutions would have been abolished and the Japanese economy liberalized within a year. However, SCAP’s lack of policy expertise prevented it from purging the wartime bureaucrats, and that made it difficult for the occupation to carry out their reform plans. Additionally, the intensification of the Cold War in East Asia, and pressure from the American government made it difficult for SCAP to repeal those temporary measures. The economic turmoil after the war and the rising tension in East Asia interrupted SCAP efforts to democratize and liberalize the Japanese economic system. Thus, even though reforms instituted during the occupation period were successful in some areas (i.e. land reform and zaibatsu dissolution), they fell short of completely dismantling the wartime economic institutions. This historical context explains why SCAP failed to eliminate such wartime institutions as pilot agency and industrial associations. However, it does not provide the answer to the question why Japanese policymakers reproduced those institutions rather than replacing them with other kinds of institutions. Evidence shows that some important actors strongly opposed the reproduction

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of these wartime institutions. Also, as discussed in Chapter 4, they did not allow policymakers to achieve their goals or generate mutual benefits. The collective action theory seems to lack empirical support. In the following pages I will evaluate other hypotheses based on the power-based rationalist theory and the ideational theory. The power-based rationalist theory The power-based rationalist theory maintains that institutions are by-products of power struggles among actors at the time that the institution is built. Knight claims, “The mechanism of selection among the possible institutional alternatives is bargaining competition among the actors over the various alternatives. Institutional development is a contest among actors to establish rules that structure outcomes to those equilibria most favorable for them” (Knight 1995: 108). Thus, institutional change occurs when there is a fundamental shift in the existing power structure. Conversely, it explains continuity in an institutional framework as a lack of change in the existing power structure. In other words, there is no such thing as path dependency in institutional development because institutions are shaped by the current power structure, rather than factors in the past. However, the current power structure may reflect some historical factors. In fact, there was a substantial continuity in the Japanese power structure between the wartime and the postwar periods. Although the American occupation forces purged all military officials and a substantial number of party politicians and zaibatsu members from government posts, they kept the bureaucracies almost intact. Therefore, bureaucrats continued to occupy the most important positions in the postwar government. Additionally, a number of bureaucrats assumed senior positions in political parties and business organizations in the postwar period. Thus, those persons who established and managed the Japanese wartime developmental state system remained at the center of power in postwar Japan. This personal linkage, during and after the war, explains the institutional continuity present in the Japanese economy. Personal linkage As a matter of fact, this power-based explanation is quite popular among the existing studies of the Japanese political economy. A number of scholars attribute personal linkages to the continuity in Japanese economy from wartime to postwar period (Johnson 1982; Lynn and McKeown 1988; Yonekura 1993; Kobayashi et al. 1995). Such personal linkages are often witnessed among bureaucrats, politicians, and business leaders. That is, those wartime bureaucrats who were engaged in wartime economic planning also occupied important positions in the government, political parties, and economic organizations in the postwar period. Thus, those scholars argue that this personal linkage was responsible for the institutional continuity.

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Yonekura claims, “The bureaucrats who carried out industrial policies in the postwar period were the people who engaged in administration of managed economy during the war” (Yonekura 1993: 195) and discusses several examples of such personal linkages. The most prominent example is Kishi Nobusuke and Shiina Etsuzaburo-, who served as Minister and Vice-Minister of Commerce and Industry in 1942, respectively. Those bureaucrats pursued political careers in the postwar period and held senior positions in the governing Liberal Democratic Party. Kishi eventually served as prime minister (1957–60), and Shiina became MITI Minister (1961). They, once again, had obtained significant influence over economic policymaking in the postwar period. Furthermore, MITI Vice-Minister Yamamoto Takayuki (1949–52) served as the Chief of the MCI General Affairs Bureau Production Expansion Section in 1942. It should also be noted that in 1961, most of the important MITI posts were occupied by persons who had engaged in state control during the war. “Vice-Minister Shiseki Ihei was Chief of the Corporation Bureau Supervision Section; the Minister’s Secretariat Okezume was in charge of economic control in the Military Ministry’s Mobilization Section; … the Chief of the Heavy Industry Bureau Sahashi worked in MCI’s Industrial Affairs Bureau in 1941, the Metal Bureau in 1943, and the Steel Bureau, and Chief of Corporation Bureau Matsuo worked on economic control in the Corporation Bureau and the Mobilization Bureau” (Yonekura 1993: 195). In addition to MITI, there were important personal links between the ESB (which later became the Economic Planning Agency) and the wartime Planning Board. ESB director Wada Hiroo (1947–48) and ESB Councilor Inaba Shu-zowere both Planning Board researchers during the war. ESB Financial Bureau Chief Sata Tadataka was also a Planning Board researcher. ESB Economic Recovery Plan Office Director and Vice-Director Sasaki Yoshitake and Saeki Kiichi were also researchers in the Planning Board. Sasaki later became MITI Minister. Furthermore, many of these people had connections to Manchuria as well. For instance, Kishi Nobusuke served as Vice-Director of the Department of Industry, and Shiina Etsusaburo- was Chief of the Mining and Industry Bureau of the Department of Industry. Sasaki Yoshitake and Saeki Kiichi worked in the Mantetsu Research Bureau in Manchuria before serving in the Planning Board in wartime Japan. Yamanaka Shiro- and Yoshiue Satoru – Chiefs of the ESB Statistics Bureau – also worked in the Mantetsu Research Bureau.51 There were also important personal links between the wartime control associations and the postwar industrial associations. Just to name a few, the President of the Japan Iron and Steel Federation (JISF), Watanabe Yoshisuke, served as a director in the wartime Iron and Steel Control Association, while JISF’s permanent Director and Chief of the Labor Bureau, Minazu Risuke, was Chief of the Research Bureau of the Steel and Iron Control Association. Osaka Bureau Chief, Tejima Yu-ji, was the Chief of General Affairs for the control association during the war. Lynn and McKeown acknowledge this personal linkage and claim that, “The continuity in leadership of the Japanese peak associations and the

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associations in the steel industry is striking … the organizations, such as Keidanren and the Japan Iron and Steel Federation, which officially trace their histories back only to the immediate postwar period, are substantially extensions of organizations that existed during and before the war” (Lynn and McKeown 1988: 32). In summary, the power-based rationalist theory offers a simple and convincing explanation for the institutional continuity observed in postwar Japan. It posits that the primary reason postwar Japan maintained the wartime economic institutions is that the bureaucrats who built them continued to occupy the important positions in the postwar government and other important sectors, such as political parties and big business. Those bureaucrats had vested interest in those institutions, which allowed them to stay in power. Therefore, even though the military disappeared from the power structure after the war, the other part of the wartime ruling coalition – the bureaucracy – remained at the center of power, and this continuity in the Japanese power structure explains the prolonged life of wartime economic institutions. Problems of the power-based theory The power factor was indeed an important factor of the institutional continuity in the Japanese economy. However, this theory overlooks several other important aspects. First, the personal links between the wartime and the postwar period do not fully explain the resurgence of the developmental state system. While it is true that many wartime bureaucrats occupied senior positions in the postwar government, some of them worked to build a different kind of structure than the wartime developmental state system. For example, a number of wartime bureaucrats joined the postwar Socialist Party and advocated socialist policies. Wada Hiroo was a former bureaucrat in the Planning Board in the wartime period who served as ESB director in the postwar period under the Socialist Party-led Katayama Cabinet (1947–48). In that position, Wada pushed forward socialist policies including nationalization of the coal industry (pp. 154–155). Wada joined the Socialist Party in 1949 and became the Chairman of the Leftist Socialist Party52 in 1954. Also, Hoashi Kei was a bureaucrat in the Planning Board and served as the director-general of the Important Industry Association (an umbrella organization of control associations) during the war. However, Hoashi also joined the Socialist Party and he was later elected to membership in the House of Representatives during the postwar period. Furthermore, some wartime bureaucrats began to advocate a liberal economic system after the end of World War II. For example, Uemura Ko-goro- served as a Chief of the Planning Board’s Research Bureau (where he promoted the drafting of the National Mobilization Law) and later the president of the Coal Control Association during the war. After the war Uemura became the president of Japan Airlines and Nippon Broadcasting and served as the third president of Keidanren (Japan Federation of Economic Organizations) – a premier

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organization for big business, established in 1946.53 Even though Uemura was one of the reformist bureaucrats who built the wartime developmental state system, he called for liberalization of Japanese economy in the postwar period. This indicates that just having the same individuals in positions of power does not necessarily lead to the same policy outcomes. Therefore, we need to look closer at the policymakers and see what else remained constant during and after the war. Second, why did the bureaucrats reproduce the wartime system, even though it had failed to achieve their initial goals? If it did not advance their wartime interests (the rapid industrialization of the national economy), why did they choose the same policy in the postwar period? The power-based rationalist theory and collective action theory fail to answer these questions. Additionally, the wartime system did not always allow the bureaucrats and military officials to remain in power during the wartime period. Ishiwara Kanji, who initiated the introduction of pilot agencies in wartime Japan, lost his political influence within a few years, while a zaibatsu leadership scheme led to the arrests of a number of bureaucrats in the Planning Board (the Planning Board Incident 1939–41). Furthermore, Kishi Nobusuke lost his position twice due to political battles against zaibatsu-affiliated politicians, and was even arrested as a war criminal after the end of World War II. So, it can be seen that the developmental state system did not always allow bureaucrats and military officials to stay in power. However, if the wartime developmental state system was only moderately successful in advancing the interests of the bureaucrats and military officials during the wartime period, why did they reproduce it in the postwar era? In the following pages, I try to respond to these questions, which are left unanswered by the rationalist theories. The ideational theory In contrast to the previous two theories, the ideational theory looks into the mechanism of path dependency in its analysis of institutional evolution. In my analysis, I focus on positive feedback effects generated by ideational factors. As I demonstrated in previous chapters, ideational guidance plays a significant role when policymakers make decisions under highly uncertain circumstances. Once actors adopt a given set of ideas as their ideational guidance, they become committed to certain types of policies that comply with that guidance and reject policies that contradict it. Therefore, as much as it helps actors make policies; ideational guidance also constrains actors’ policy choices. This indicates that ideational guidance can cause institutional continuity by “locking” actor’ policies into a certain pattern. In Chapter 1 I discussed two types of positive feedback generated by ideational factors. First, positive feedback can occur when policymakers hand down their ideational guidance to their successors. The new generation of policymakers is likely to embrace the ideational guidance of their predecessors because they are products of the same educational system, professional

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training, and career experience. Thus, as policymakers continue to rely on the ideational guidance over generations, they continue to reproduce existing institutions that were built based on the original guidance. Second, a positive feedback effect can also occur as the ideational guidance of policymakers spreads into other social groups, and some ideas may proliferate into other social groups as they interact with policymakers. As additional social actors accept ideational guidance from policymakers, they also start supporting existing institutions that were built based on that guidance. As the ideational guidance proliferates from policymakers to other social groups, the political supports for the existing institutions are reinforced, making it increasingly easy for policymakers to reproduce the existing institutions. Thus, ideational guidance generates a positive feedback effect and can bring about the reproduction of institutions for an extended period of time. These reproduction mechanisms make the path of institutional evolution increasingly hard to reverse. In the following pages I will discuss the intellectual struggle within Japanese policymakers to explain how they ended up retaining the wartime economic institutions. Then I will discuss the ideational linkage between the policymakers in the wartime and postwar periods. I argue that ideational linkage played a critical role in causing a path dependency in the Japanese political economy. The wartime economic idea – to-sei keizai ron – was carried over into the postwar government by those bureaucrats who assumed important positions in the postwar government. The bureaucrats maintained their faith in the economic idea throughout the period. The idea then generated a positive feedback effect, as those bureaucrats passed it on to their junior colleagues in the bureaucracy and diffused it into the minds of party politicians and business executives. Ideational competition among Japanese actors Although the majority of postwar Japanese policymakers accepted the wartime economic ideas as their ideational guidance, some advocated the establishment of a socialist system, which would allow the government to directly control important industries through nationalization. In addition, others wanted economic liberalization and sought to keep state involvement to a minimum. Therefore, just as Japanese policymakers struggled with SCAP, ideational competitions existed among Japanese actors as well. In the following paragraphs I highlight the context behind the predominance of the wartime economic idea over socialism and liberalism. First, the advocates of the wartime economic system faced a serious challenge from those who supported socialist policies in the late 1940s. Unlike during the wartime period, the postwar government did not outlaw Marxist movements and socialist ideas received strong support from a large number of voters – primarily urban residents, labor activists, students, as well as leftist parties, such as the Japan Socialist Party and the Japan Communist Party. However, support for a socialist system was not limited to within leftist circles. Even some policymakers who undertook the drafting of government economic

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policies considered socialist policies, such as the nationalization of certain industries, to be a viable option for the Japanese economy. Such policymakers believed that nationalization would allow the government to control the industry more directly, and would make it easier for the nation to recover from the devastation of the war. For example, the Special Survey Committee of the Ministry of Foreign Affairs (MOFA) prepared a document titled “A Perspective on the Basic Economic Policies of our Nation”54 on December 7, 1945. While the document points out the necessity of “planned management” of the national economy, it also states that the nation’s choices lie between “a planned economy and liberal economy,” and “private ownership and nationalization” (Nakamura and Hara 1990: vol. 1, 94). Furthermore, Professor Arisawa Hiromi, one of the brains behind the Priority Production Policy, suggested nationalization of the coal industry as a possible way to increase coal production during the drafting process of the Plan at the Sub-committee on Coal.55 Arisawa said, “We should not predetermine that the coal industry must operate on the basis of capitalist management. If private ownership poses impediments, we need to consider the possibility of public ownership [of coal mines].”56 The Yoshida Cabinet and his liberal party colleagues were reluctant to adopt a nationalization policy, but the American occupation forces did encourage the government to adopt a temporary nationalization measure in order to resolve the coal shortage problem. On September 4, 1946, SCAP sent a document titled “A Memorandum Regarding the Ownership of Coal Mines” suggesting that “there are enough reasons to discuss a plan for nationalization [of coal mines], as the coal industry is closely related to all economic activities … If the coal industry is to be nationalized, it should be done immediately.”57 The nationalization policy became a major agenda item when the Japan Socialist Party (JSP) won 143 out of 466 seats in the Lower House during the March 1947 election. This made the JSP the leading party and they soon formed a coalition government with conservative parties (the Democratic Party and Kokumin Kyo-do- To-). Katayama Tetsu became Japan’s first Socialist prime minister. The Katayama Cabinet originally planned to impose state ownership of the coal industry as a permanent measure, but was forced to tone down its plan to temporary “national management of the coal industry” in order to obtain support from its coalition partners. The Minister of Commerce and Industry, Mizutani Cho-saburo- (JSP), explained the government’s national management policy before the Lower House meeting on July 3, 1947, in which he listed four reasons why the government needed to directly manage the coal industry, including the following: financial difficulty in the development of new coal mines; the need for transparency in the use of public funds for coal production; efficient use of resources for coal production; and improvement of efficiency in production and management.58 The governing parties submitted the “Temporary Management of the Coal Mining Industry Bill” (Rinji Sekitan Ko-gyo- Kanri Ho-) in September 1947. That bill called for temporary (three-year) state management of all coal

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mines in Japan by obligating coal mine owners to follow government instructions in their business activities. It would also authorize the government to give direct orders to coal mine owners if they were necessary to increase coal production. While the bill did not go as far to nationalize coal mines, it was designed to take away all decision-making powers from the coal mine owners. Despite strong opposition from the conservative parties, such as the Liberal Party, the Diet passed the bill on December 9, 1947. However, when the conservative Liberal Party returned to power in 1948, the party quickly submitted “A Bill Regarding Abolishment of the Temporary Management of the Coal Mining Industry” (Rinji Sekitan Ko-gyo- Kanri Haishi Ni Kanshuru Ho-ritsu), which was adopted by the Diet on May 2, 1950, thus terminating the national management of the coal industry even before the temporary legislation expired. The negative response to the national management of the coal industry imposed certain limits on the range of state control over industry, and there were no further attempts to impose nationalization or national management on any industry thereafter. However, it is important to note that some policymakers did support socialist policies and did attempt to establish a new economic system that would have been different from the wartime system. Second, those who called for liberalization of the Japanese economy criticized continuation of the wartime system and pressured the government to abandon or significantly weaken state controls. The strongest demands for liberalization came from the business community. Even though some business leaders, such as Inayama Yoshihiro, strongly assisted government plans to maintain the wartime system, other leaders, such as Ishizaka Taizo- and DokoToshio, vigorously pressured the government to deregulate industry and reduce its interference in the market. For example, Ishizaka, the second president of Keidanren – Japan’s most prestigious business association – made a speech titled “The Condition of Liberalization and Trajectory of the Business Community” at the organization’s 20th general meeting in 1959. In the speech, Ishizaka called for liberalization and deregulation in the following statement: “Free exchange of capital, technology, and goods across borders is the ultimate goal of economic development in free nations.” He also pointed out that other countries were already undertaking liberalization of their economies and asserted that Japan must “respond to this world trend and reform today’s system of protection and control over industry as soon as possible. However, the government interferes and provides guidance in every part of the economy and is impeding its normal operation” (Yasuhara 1985: 49). More importantly, pressures for liberalization came from within the government as well. Some bureaucratic agencies – most prominently the Fair Trade Commission (FTC) – strongly opposed government state control policies. The FTC was established in 1947 to enforce the Antimonopoly Act following a powerful endorsement by the American occupation forces. After its foundation, it acted as a free market guardian and engaged in fierce battles with other bureaucratic agencies in the Japanese government.

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For example, after MITI and JISF introduced the MITI-organized open-sales system (which was a price-fixing arrangement) in 1958, the FTC urged JISF to abolish the system and threatened to file a case against the industry if they failed to do so. JISF responded by issuing a statement claiming that the system should not be abolished because their consumers (automakers, shipbuilders, construction companies, etc.) were demanding the system be maintained to ensure price stability (JISF 1969: 46). MITI also came to defense of JISF and defended the legality of the open-sales system by claiming it was a preventive measure against a spike in the price of steel products, which was a fundamental resource of the national economy, and by claiming it was different from the type of temporary cartels that were only allowed during serious recessions. Furthermore, MITI claimed that the government-led cartel-like practice did not violate the Antimonopoly Act because it was an administrative action based on a governmental decision, and not a private cartel arrangement. MITI further argued that such administrative actions were allowed by the Act for Establishment of the Ministry of International Trade and Industry, Article 3, No. 2, which lists MITI duties as follows: “to promote production of export goods … to encourage, improve, and coordinate production, distribution and consumption of industrial commodities.”59 The FTC was overwhelmed by the strong political pressure from MITI and the industries, and JISF and MITI would go on working closely together to operate the open-price system for years to come. Despite that loss, the FTC challenged MITI policies on various other occasions, but it was defeated in most such encounters due to MITI’s superior political power and support from influential politicians, such as Kishi Nobusuke and Ikeda Hayato (Misonou 1987; Johnson 1982). Also in defense of liberalization, Prime Minister Yoshida Shigeru made the following statement discussing his view on the future of the Japanese economy at the plenary session of the House of Representatives on December 13, 1948. “Japan’s economic recovery can only be achieved by joining the [liberalization] trend of the world economy and being a part of it. For that purpose, I believe our future economic policies should limit the system of managed economy adopted during the war period to within a necessary range, and also transform [the Japanese economy] to a liberal economy to make it a part of the world economy.”60 Yoshida also expressed his willingness to push forward liberalization at the Diet by saying, “I would like to completely abandon state control as soon as possible and move on to a liberal economy. However, in the Japanese economic conditions of today, which seriously lacks resources, state control is inevitable in certain areas. However, I am planning to gradually abolish unnecessary control measures.”61 Unfortunately for Yoshida, even though he was an advocate of liberal economy, the Japanese economy did not recover to the extent that would allow the government to relax state control before he resigned as prime minister in December 1954. His successors, such as Hatoyama, Kishi, and

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Ikeda maintained the wartime system of state control, even after the economy had fully recovered. Ideational linkage and path dependency As the power-based rationalist theory suggests, the personal linkages between the governments of Manchuria, wartime Japan, and postwar Japan, had important impacts on the establishment of the postwar Japanese developmental state system. However, just having the same individuals in positions of power does not necessarily result in the same policies. As I mentioned above, there were some wartime bureaucrats who became advocates of socialism in the postwar period, and there were also a number of politicians and business executives who called for the establishment of a liberal economic system. It is natural to assume that actor policy preferences can change when there are drastic changes in circumstances, such as war, foreign occupation, and economic crisis. Furthermore, as I demonstrated in Chapter 4, the wartime system failed to achieve the rapid industrialization envisioned by policymakers because Japanese industrial production capabilities actually shrank, rather than expanded, during the wartime period. It should also be noted that the system did not always help policymakers secure their political power, as shown in the examples of Kishi and the young officials of the wartime Planning Board. Therefore, there were numerous reasons why the postwar policymakers could have chosen a different approach. What, then, caused the postwar Japanese policymakers to reproduce the wartime economic institutions, such as pilot agencies and industrial associations? A comparative analysis of the policymaking process in Manchuria, wartime Japan, and postwar Japan reveals that the policymakers in all three cases shared certain economic ideas, which became the ideational foundation and justification for the indirect state control system. Those ideas included “distrust of liberal economy,” “the need for economic planning,” and “prevention of excessive competition” – all of which were key concepts of to-sei keizai ron. These ideas were important because the wartime Japanese policymakers established economic institutions, such as pilot agencies and industrial associations to embody these ideas. Pilot agencies were designed to alleviate the problems of a liberal economy by preparing long-term plans for the national economy, while industrial associations functioned primarily to assist enforcement of pilot agency plans, as well as to coordinate industry interests in order to keep market competition from veering out of government control. These concepts were repeatedly referred to by military officials and bureaucrats in Manchuria and wartime Japan, and by bureaucrats and politicians in the postwar period, in their writings, speeches, official documents, reports, and the like. A close analysis of such documents reveals how those economic ideas disseminated among policymakers, and why they were maintained for an extended period of time. Even though political and economic conditions changed quite drastically from the wartime period, through the occupation

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period, and then to the Cold War era, Japanese policymakers continued to advocate the same economic ideas. Therefore, I argue that the Japanese policymakers maintained strong commitments to the same ideational guidance, even after the end of World War II, and that this ideational guidance also encouraged them to reestablish such institutions in the postwar period. In other words, this ideational linkage is another important factor explaining the path dependency in the Japanese political economy system. Now, let me examine two of the abovementioned ideas – “distrust of liberal economy” and “the need for economic planning.” For example, a special committee62 of the Ministry of Foreign Affairs published a report titled “The Way of the Japanese Economy” (Nihon Keizai Saiken no Ho-to) on December 27, 1945. That report discussed the problems of liberal economies and the need for economic planning, as follows: “As free markets disappear and production scales have drastically increased, free competition, which is driven by profit-seeking activities, has come to impede economic growth. And, planning and coordination is now necessary between production and consumption.”63 Another report by the committee, titled “Postwar Reconstruction of the Japanese Economy” (Nihon Keizai Saiken No Kihon Mondai), which became the basic outline for the Japanese government’s economic recovery policies, also contended: A comprehensive year-to-year reconstruction program will have to be formulated in order to revive the Japanese economy from the extreme destitution in which it finds itself now. The waste of economic power that would result from allowing laissez-faire play to market forces will be forbidden in order to ensure that all the meager economic power remaining may be concentrated in a direction toward reproduction on an enlarged scale, and that ensures the process of reconstruction may be expedited.64 Moreover, the document recognizes the need to control the market and calls for establishment of some form of pilot agency saying, “The period of growing capitalism based on the principle of laissez-faire is already past,” and that today’s world economy requires “planned adjustment between production and consumption.” It also says that the world economy has “entered an era of state capitalism or of controlled, organized capitalism” (MOFA 1946: 12). In fact, the document described the role of the ESB with the very same words used by the wartime policy entrepreneurs, such as Ishiwara Kanji and Miyazaki Masayoshi. The document claims, “Such a system would correspond to the general staff in the armed forces. A similar system is required in the fields of public administration and economy, in accordance with the trend toward systematization in modern society” (ibid.: 131). More specifically, the document called for “reestablishment of the wartime control organizations … in order to resume industrial production and protect citizen lives”65 (ibid.: 261). Distrust of liberal market economies did not mean that policymakers completely rejected the principles of free markets and competition, but it did

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mean that they believed that markets needed some kind of regulation and coordination to prevent problems. The Foreign Ministry’s report, “the Way of the Japanese Economy,” pointed out that the government should “allow as much market competition as possible,” and “promote competition among big businesses” (Okita et al. 1992: 106–7). At the same time as measures for promoting economic recovery, it also called for “economic planning with an emphasis on trade,” “tighter ‘public control,’” and “organization of cartels with a public nature in the most important industries” (ibid.: 107). This clearly shows that the report was echoing the ideal of an indirect state control system envisioned by wartime policymakers, which combined aspects of both liberal market and command economies. Support for these three ideas was found among some business leaders and party politicians who fought fiercely against military officials and bureaucrats during the war to keep state control over the industry to a minimum. For example, the platform of the Reform Party, a conservative party founded by Miki Takeo and Shigemitsu Mamoru66 in 1952, stated, “Our party will modify capitalism and promote citizen welfare based on the idea of kyo-do--shugi [cooperationism]”67 (Miyamoto 1962: 179). Miyamoto explained that the party’s principle of “kyo-do--shugi” meant the establishment of an economic system that “combines the strengths of capitalism and socialism while eliminating the weaknesses of the two systems” (ibid.: 179). This is exactly the same to-sei keizai ron principle that was followed by bureaucrats and military officials during the war, as discussed in Chapter 4. When members of two major conservative parties, the Democratic Party and Liberal Party, joined to form the Liberal Democratic Party (LDP) in 1955, they inherited the ideas of to-sei keizai ron. This was evidenced by the LDP party platform publishing a document titled “Policies of the New Party,” which stated the following: “[Aiming at] achieving full employment and prosperity with equilibrium in balance of payment and stable currency exchange, we will compose annual plans for the national economy and take measures for production rationalization, promotion of trade, unemployment and improvement of labor productivity” (Miyamoto 1962: 422). This party platform was designed to “improve living standards, achieve full employment, and increase income through expansion of production by applying systematic planning [to the economy] and [by] avoiding cutthroat liberalism, while maintaining the principle of free enterprise and respecting innovation and the responsibility of each individual” (ibid.: 420). The idea of “prevention of excessive competition” was also shared among the policymakers as an important agenda item of postwar economic policies. For instance, MITI Minister Ikeda Hayato explained the intent of the government’s plan to amend the Export Import Transaction Law (Yushutsunyu- Torihiki Ho-), which aimed at regulating the suppliers and dealers of export goods at the House of Councilors in May 1960, as follows: “As the liberalization of trade presses forward in the future, it is expected [that] excessive competition in

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importing will intensify. And, the government is [being] pressured to take measures [in preparation] for that.”68 As a measure to prevent excessive competition, Minister Ikeda asserted that the government should change the law to allow “suppliers and dealers to make agreements that would abate outsiders, if the cause of excessive competition lays in domestic production/sales.” He also stated that the government should provide dealer groups (that collaborate in trading) with legal status as trader associations. Trader associations were designed to function as industrial associations for the trading industries. Just as industrial associations, they functioned to prevent excessive competition within their industries. As a result, the government applied the industrial association system, which had its roots in the wartime system, to the trading industry, which had not previously been covered by that system. In response to opposition party accusations that this amendment would water down the Antimonopoly Act, Prime Minister Kishi Nobusuke aggressively challenged the legitimacy of the Antimonopoly Act itself by saying, “It goes without saying, that the Antimonopoly Act is an evil law for Japanese industry and economy.” He then defended the government’s plan to amend the trade law as follows: “If you look at the current condition of Japan’s trade, we already have problems due to excessive competition. From the standpoint that excessive competition would cause further problems when trade is liberalized, [the government] will allow private traders to remove these problems through collaboration. Of course, the government is not going to allow this without limit. We will allow it [collaboration among traders] while carefully considering the interests of consumers, farmers, fishermen, and small firms.”69 Furthermore, the idea of “prevention of excessive competition” was widely shared among the bureaucrats. For instance, MITI’s White Paper on International Trade (Tsu-sho- Hakusho), published in 1959, refers to a ministry plan to amend the Export Import Transaction Law in the section titled “Prevention of Excessive Competition in Exporting.” It states: The problem of excessive competition in exporting is that domestic suppliers engage in cutthroat competition in prices and other trade terms, which brings about deterioration of quality, loss of trust, decline in foreign currency, and inhibition of long-term export developments. This is a difficult problem of Japan’s exporters … and we must prevent this disease by all means available. To that end, suppliers and traders need to recognize the disadvantages of excessive competition and make efforts to prevent it. We must also create a system that prevents pressure for low-price trading by organizing small firms and effectively carry out cooperative action regarding exports.70 The major difference between the postwar and wartime periods is that these ideas disseminated among various business managers in the postwar period, making it easier for the policymakers to rebuild the wartime system. In this

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sense, the idea of a managed economy was not simply inherited by various bureaucrats; it had also diffused into the awareness of other actors. For example, Ishikawa Ichiro-,71 the first president of Keidanren (Japan Business Federation), made the following comment: “It would lead to serious consequences, if they were to organize a trust in a place like the United States, where capital is abundant, markets are huge, technology is advanced, and rich in resources. However, in places like Japan where capital is scarce, resources are poor, technological advance is slow, and markets are small, the weak sheep must get together and form a flock. Lions do not form flocks. [But] the Japanese industry cannot survive without banding together.” He further noted, “Since we do not have an economic theory that allows us to build a perfectly healthy economy, it is natural that we must cool down the economy when it gets too heated, and take every available measure when it faces a recession” (Yasuhara 1985: 33–34). The fifth Keidanren president, Inayama Yoshihiro (1980–86), who was also the president of Japan Iron and Steel Federation, gave a speech at the first conference of the open-sales system on June 26, 1958. In the speech, he explained the need for limits on price competition among firms, in the following words: “There have been a lot of discussions on the problems of competition, but we have not yet hammered out solutions for them. Some say price competition is the nucleus of a liberal economy, but it could lead to disastrous consequences if it [competition] destroys corporations and industries, and makes the entire nation go wrong. This is the kind of condition the steel industry is facing right now” (Inayama 1986: 123). Therefore, he said, “We reached the conclusion that there was no other choice then establishing order [in the market] and adjusting prices by everyone who makes up the market, whether it is a large firm or a small firm. However, we have a legislation called the Antimonopoly Act that prohibits cartels. I am convinced that this [law] will lead the liberal economy to a dead-end” (Inayama 1986: 230). Furthermore, he emphasized the need for state-led market adjustments and coordination among members of the industry saying, “market competition causes numerous problems … so, steel makers and MITI got together recently and agreed that ‘it could lead to an unfortunate result for the Japanese economy as a whole if we do not take some action.’ As a result, we agreed to adjust the market by coordinating supply and demand, and by eliminating unreasonable pricing under the guidance of MITI” (ibid.: 230–32). Of course, the above does not mean that all business owners advocated these ideas. Among the successive Keidanren presidents, Ishizaka Taizo- (the second president) and Doko- Toshio (the fourth president) were prominent supporters of economic liberalization and were skeptical of the government’s administrative guidance and market interference. However, even they believed some modifications to capitalism were necessary. For example, Ishizaka, who was known as a “flag-bearer” for economic liberalization, commented on Japan’s attainment of membership in the Organisation for Economic

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Co-operation and Development (OECD) by saying that it was gratifying that Japan had become a part of the world’s open economy. He then noted: “The most important thing under a liberalized economy is that those of us who are engaged in corporate management must take responsibility [for our actions] and concentrate our efforts in self-improvement, reinforcement of international competitiveness, prevention of excessive competition, and the establishment of order in exporting” (Yasuhara 1985: 52, emphasis added by the author). Though Ishizaka advocated the liberalization of the Japanese economy, he acknowledged that excessive competition needed to be prevented through “voluntary private-sector efforts” and called for an amendment to the Antimonopoly Act (ibid.: 52). In other words, he also thought that some mechanisms, such as a cartel organization, were necessary. One context behind the diffusion of these ideas among various actors is that there were movements of individuals from the bureaucracies to the political parties and to the business sector after the war. In addition, some businesspersons spent time in the bureaucracy during the occupation, after which they returned to the business sector. Former bureaucrats employed in political parties and the business sector could be counted on to cultivate support for bureaucratic policies among their new party politician and business leader colleagues. That is to say, there was a synergic effect between personal linkage and ideational linkage. Examples of wartime bureaucrats-turned-politicians include Kishi Nobusuke and Shiina Etsusaburo- from MCI, Ikeda Hayato and Miyazawa Kiichi from the Finance Ministry, and Sasaki Yoshitake from the Planning Board.72 Examples of businessmen who temporarily held bureaucratic posts at the ESB in the occupation period and then returned to the corporate world include the following individuals. Deputy Director Nagano Shigeo later became an executive director of Japan Steel Co., Vice-Minister Fujii Heigo was an executive of Japan Steel Co., Chief of the Trade Bureau Fujisawa Jiro- (a trading company executive), Chief of the Production Bureau Sugaya Juhei (Sumitomo Metal), Chief of the Traffic Hirai Ko-ichi (Osaka Sho-sen (maritime transportation)) (Kobayashi et al. 1995: 34). For the most part, those businessmen cooperated with the bureaucracy in carrying out government economic stabilization policies at the ESB, and then returned to their companies a few years later having gained firsthand experience in indirect state control. Such personal linkages among the bureaucracy, political parties, and the business sector facilitated ideational diffusion into political and business spheres (see Figure 5.4). In summary, the personal and ideational linkages between the governments of Manchuria, wartime Japan, and postwar Japan had significant impacts on the institutional continuity of pilot agencies and industrial associations, and a number of Japanese bureaucrats who served in Manchurian pilot agencies testified to the significance of their experiences in Manchuria. For example, Kishi Nobusuke (former vice-secretary of the Department of Industry) recalled how he had imbibed the idea of industrial guidance in Manchuria and expressed his feelings with the following words: “Whether it was drawn well or not, Manchukuo’s industrial development was a piece of art that I created.

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Figure 5.4 Positive feedback effect in the Japanese developmental state system.

I feel an infinite attachment to this work. I will never forget about it until I die” (Yoshimoto 1957: 103).

III Conclusions This chapter examined the process of institutional evolution in postwar Japan, and within it I made the following arguments: the institutions of the developmental state system (pilot agencies and industrial associations) that emerged in Manchuria and were later adopted in wartime Japan, continued to play important roles in the postwar Japanese economy. Japanese policymakers reproduced a developmental state system in the postwar period because of the continuity in the power structure and the ideational guidance of the policymakers. The American occupation forces allowed the bureaucracy to retain power because they needed the expertise of the bureaucrats. Bureaucrats who retained strong faith in their wartime economic idea – to-sei keizai ron – created policies that reproduced wartime economic institutions, such as pilot agencies and industrial associations. The bureaucratic idea behind to-sei keizai ron began to generate a positive feedback effect as it was handed down to the next generation of bureaucrats and spread into the mindsets of party politicians and business executives. This explains the path-dependent evolution of the Japanese developmental state system core institutions. This institutional continuity in the Japanese developmental state system contrasts sharply with the apparent discontinuity in Japan’s security policies. The occupation period can be viewed as a critical juncture for Japanese security policy, in which the wartime regime and its aggressive military policies (the antecedent conditions) were seriously undermined by defeat in World War II (cleavage). As a result, postwar Japanese policymakers minimized the nation’s military capabilities, instead adopting and maintaining more peaceful security policies throughout much of the postwar period (legacy). They even successfully resisted

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multiple American demands to increase Japanese military capabilities during the Cold War. This fundamental policy change can be explained by the personal and ideational discontinuity concerning security policies after the war. That disastrous military failure delegitimized Japan’s military regime, causing Japanese policymakers to adopt a new security paradigm called the “Yoshida Doctrine” (see Pyle 1996), which required Japan to rely on the United States for security of its territory and refrain from significant rearmament. Moreover, SCAP purged the officials of the Imperial military forces and prohibited them from assuming positions in the public sector, which resulted in a clear personal discontinuity between the Imperial military forces and the postwar SelfDefense Forces. Therefore, the wartime idea of militarism was not inherited by postwar policymakers and SDF officials. However, Japanese policymakers maintained their faith in the wartime economic idea (i.e. to-sei keizai ron). Furthermore, SCAP did not purge the majority of the economic bureaucrats who occupied important political and government positions in the postwar period. Thus, the personal and ideational continuity regarding economic policies allowed Japan’s wartime economic institutions to persist, even after the end of World War II.

6

The evolution of the Japanese developmental state

The preceding chapters demonstrated that the origin of key institutions of the postwar Japanese developmental state system, such as pilot agencies and industrial associations, lies in the critical policy decisions made in Manchuria and wartime Japan. Pilot agencies emerged first in Manchuria as part of efforts to create the “Economic General Staff Office” (Keizai Sanbo- Honbu). The Manchurian model was introduced to wartime Japan, where it was modified by bureaucrats of the Japanese pilot agencies by adding the industrial association system. Postwar Japan inherited this system of indirect state control from Manchuria and wartime Japan, adjusting it slightly to the new environment after World War II. I argued that the wartime period (1937–45) was a critical juncture for the Japanese economy. The reformist bureaucrats and military officials replaced the 1920s liberal market economic system with a developmental state system when they adopted a new ideational guidance, to-sei keizai ron, which had proved effective in their policy experiments in Manchuria. They built pilot agencies and control associations reflecting the ideals of to-sei keizai ron. After the war, they reproduced these institutions because their ideational guidance had generated a positive feedback effect. This positive feedback effect of ideational guidance was an important mechanism of path dependency in the Japanese developmental state, as the idea was inherited by a new generation of policymakers and spread among other actors. In this concluding chapter, I will examine similarities and differences among the institutions of developmental state systems in Manchuria, wartime Japan, and postwar Japan, and then discuss the process of institutional evolution throughout the three periods. I will then discuss implications that can be drawn from this study regarding Japanese political economy and the study of institutions. Finally, I will wrap up this study by briefly talking about prospects for future research.

I Evolution of developmental state systems in Manchuria, wartime Japan, and postwar Japan In this section, I compare and contrast the pilot agencies and industrial associations in Manchuria, wartime Japan, and postwar Japan, and discuss

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how those institutions evolved throughout the three periods. I start with an analysis of pilot agencies and their functions and examine how they evolved over time, focusing on their industrial policies. Then I analyze industrial associations in wartime Japan and postwar Japan, paying close attention to their relations to the state and organizational structures. 1 Pilot agencies The Manchurian pilot agency – the Planning Bureau (Kikaku Sho) – marked the first attempt by Japanese policymakers to build an institution that could function as an “Economic General Staff Office.” Wartime Japan later adopted the Manchurian system and established its own pilot agency – the Planning Board (Kikaku In), and the postwar Japanese government had the Economic Stabilization Board (Keizai Antei Honbu) and Ministry of International Trade and Industry (MITI, Tsu-sho- Sangyo- Sho-) (see Table 6.1). There are several important similarities among the pilot agencies of the three cases. First, all pilot agencies composed long-term plans for economic growth and industrialization, collected information regarding the national economic conditions of the period, and assessed its potential for growth and development. Based on the collected information and assessments, the agencies set achievable but ambitious goals for each industry. Their plans also laid out what each industry would need, in terms of resources, to achieve those goals if they grew at the expected rates. The agencies then implemented various measures to secure industrial access to the resources needed. For instance, the Manchurian pilot agency drafted the Manchurian Industry Development Five-Year Plan in 1936 and the Second Manchurian Industry Development Five-Year Plan in 1941. The wartime pilot agency composed the Production Expansion Four-Year Plan of 1938. Similarly, the postwar pilot agencies followed in the footsteps of their predecessors and carried out a number of economic plans including the Priority Production Policy (1946–48), the Economic Independence Plan (1956–60), and the Income Doubling Plan (1961–70), to name just a few. Furthermore, efficient allocation of scarce resources was an important part of pilot agency economic plans. Such allocation meant concentrating the government efforts and available resources (i.e. raw materials, technology, equipment, capital, and labor) on those industries that the pilot agencies

Table 6.1 Pilot agencies of Manchuria, wartime Japan, and postwar Japan

Pilot agencies

Manchuria

Wartime

Postwar

The Planning Bureau Department of Industry

The Planning Board Ministry of Commerce and Industry

ESB (1945–57) MITI (METI) (1949~)

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considered critical to the nation’s economic growth, or to the attainment of strategic goals. For example, in order to “fast-forward” postwar Japan’s economic recovery, the ESB selected the coal and the steel industries as central focus points for government assistance and implemented various measures, such as tax relief and subsidies to ensure that those industries could acquire a sufficient amount of needed resources. As the economy started to grow steadily in the 1950s, the focus shifted to export industries, such as textiles, electronics, and the like. In the case of Manchuria, the pilot agencies selected railroads, steel, aviation, petroleum, and 18 other defense-related industries as important for the purpose of advancing Manchuria and Japan’s strategic interests. Similarly, the wartime pilot agencies chose defense-related industries as important and concentrated resources there because the government needed to expand the production capacities to meet the ever-growing demands stemming from the war in the Pacific. However, the postwar period economic plans were more effective in attaining their intended goals than those in Manchuria and wartime Japan. The discrepancy in the performance levels of those plans is due, at least partly, to improvements in the skills and tools used for policymaking. As bureaucrats accumulated experience in making economic plans, their plans became increasingly sophisticated and realistic. Bureaucrats in the postwar period utilized advanced analytical methods based in economics and mathematics, such as Keynesian macroeconomic models, to systematically forecast the nation’s growth. Additionally, postwar bureaucrats had better tools for collecting information regarding industrial business activities, conditions, and growth potential. Such information-gathering tools included industrial associations, personal networks through amakudari (reemployment of retired bureaucrats by private firms), and financial controls. The producers of the Manchurian economic plan lacked such policymaking tools and skills; thus, their plans were inadequate to the task of orchestrating the complex process of industrial development. For instance, when an expert at Nissan assessed the blueprints of the Manchurian Industry Development Five-Year Plan, he commented that the plan was just “an armchair theory written by scholars,” because it “only channels resources around [different industries] and lacks a timetable for execution” (Aikawa 1965: 324). Wartime bureaucrats had control associations and the policymaking experiences gained in Manchuria to assist them in collecting corporate information, so they were better equipped for collecting accurate information than their Manchurian counterparts. However, they still failed to achieve their intended goals. This was partly due to the shortage of raw materials and energy caused by the war, but another major factor was their limited theoretical knowledge. Miyazaki Isamu, who spent his entire postwar bureaucratic career at the Economic Planning Agency (EPA) – the successor to the Economic Stabilization Board (ESB, Keizai Antei Honbu)1 – decried the lack of intellectual backbone in the economic policies of the wartime and immediate postwar periods, saying that those policy decisions were made using simple methods that were

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“not backed by knowledge of the study of economics” (Miyazaki 2005: 104). To overcome this problem, the postwar pilot agencies exerted tremendous efforts to absorb the latest developments in economics and statistics and to apply them to their policies, particularly long-term economic plans, to make them more effective. For example, Kanamori Hisao, who served in both the Ministry of Commerce and Industry (MCI) and the EPA, recalled how he and his colleagues at the MCI’s Research Statistics Bureau translated a number of academic papers, such as [Wassily] Leontief ’s input-output table, [Trygve] Haavelmo’s multiplier effects of a balanced budget, and [Paul] Douglas’s production functions, thereby gleaning new knowledge that could be used as tools for economic planning (Kanamori 1985: 30). Kanamori said, “The importation of such knowledge was stopped during the war,” and they were put in charge of “obtaining knowledge from the United States, including academic theories, policies, research and statistics” (ibid.: 30). He looked back at his impression of those foreign ideas and observed, “Everything was useful in assessing the current situation of postwar Japan, and I was surprised by the fact that unknown new fields of studies had been developed on the other side of the Pacific Ocean” (ibid.: 30). Many young bureaucrats were also dispatched to foreign universities to study economics and statistics in order to “incorporate theoretical and international views into economic planning and economic policies” (Miyazaki 2005: 103). For example, the EPA sent Miyazaki Isamu to the Massachusetts Institute of Technology (MIT) in 1957, and Kanamori Hisao to the University of Oxford in 1958. Miyazaki studied Keynesian economic theory under Everett Hagen, while Kanamori studied international economy under Roy Harrod. These advanced methodological tools, obtained after the war, made the postwar pilot agency policies more sophisticated and effective. The second similarity among the pilot agencies of the three cases is their industry rationalization policies, which aimed at improvements to corporate productivity. My case studies reviewed industry rationalization policies in Manchuria, wartime Japan, and postwar Japan. For example, the Manchurian government provided financial support to pulp producers to reduce their transportation costs, while the wartime government introduced the Steel Production Rationalization Policy in 1941 – and shut down 21 steel producers with productivity levels that did not meet government minimums. The postwar government provided subsidies, tax cuts, and accelerated depreciation policies to promote industrial research and development, investments in advanced technology and equipment, and efficient use of energy and raw materials. However, the wartime industrial rationalization policies were slightly different from those of the postwar period. Wartime rationalization policies concentrated on elimination and consolidation of inefficient small factories and enforced cooperation among domestic firms. Unlike its postwar counterpart, the wartime government rarely promoted foreign technology imports or encouraged largescale investments in advanced technology, so the rationalization policy of that

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era was not so much about further efficiency advancement as it was about eliminating inefficient firms. This was perhaps because the outbreak of World War II terminated Japan’s economic interchanges with Western industrialized countries, and Japan seriously lacked the financial resources necessary for technological advancement at the time. Therefore, wartime government options were limited. The final similarities present in all three cases is pilot agency reluctance to nationalize industries because they considered the management skills and vitality of private business entrepreneurs to be the driving force of economic growth. The agencies sometimes regulated certain market functions through price controls, limited profit-seeking activities by private firms,2 and interfered with corporate business management through administrative guidance, but they rarely nationalized private firms or limited private property rights. For example, the Manchurian government specified that only special corporations, which were tightly controlled by the government but privately owned, could operate in important industries that were related to national security or public interest. Also, it acknowledged that the government should “leave the rest of industries the free management of private entrepreneurs.”3 Additionally, the wartime government specified the nature of the government control over industry when it introduced its wartime economic system in 1941. One government document specifically stated, “The standard of business management should be private, and management through state-owned enterprises and statutory companies should be limited to special circumstances.”4 Yet, nationalization of firms in important industries is a common policy in socialist countries, developing countries (such as those in Latin America), and even in some industrialized countries.5 One exception to the Japanese government’s disinclination for nationalization was its attempt to impose national management on the coal industry, which occurred when the Socialist Party assumed power in 1947. Originally, the Socialist Party had thought to nationalize the coal industry, but since it was unlikely that their conservative coalition partners would support such a policy, they compromised and introduced a national industry management program as an alternative plan. The plan preserved private ownership of coal mines, but required the government to take a leadership role in their management. The Socialist Party’s compromise bill passed the Diet in December 1947, but when the Liberal Party returned to power in 1948, the law was repealed. After that attempt, the Japanese government never again attempted to nationalize industries or manage them at a national level. Yet, even though they have many similarities, the postwar pilot agencies were different from their predecessors in Manchuria and wartime Japan in two important aspects. The first difference is that the postwar agencies played an active role in market stabilization. During the war, demand for industrial goods was constantly rising and industries did not face recession problems. Thus, the pilot agencies focused solely on production expansion and did not need to be concerned about corporate bankruptcies. However, the

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prevention of corporate bankruptcy – particularly among large industrial firms – became important as part of the growth-oriented policies of the postwar period because the Japanese economy was again connected with the world economy. This was because the Japanese economy, after the end of World War II, operated under different conditions from the Manchurian and the wartime economies, which were isolated from the world market and confined within the autarkic framework of the Greater East Asian Co-prosperity Sphere. A document issued by the ESB described the new economic environment in the postwar period saying, “Our economy cannot exist apart from the world economy, and thus, its recovery must take place in accordance with the standards of the world economy.”6 The postwar Japanese economy relied heavily on exports to large overseas markets, such as the United States; thus, private firms were vulnerable to volatile market forces. Furthermore, pressure from the foreign trade partners and the general trend toward trade liberalization pushed forward by the General Agreement on Tariffs and Trade (GATT) negotiations forced the Japanese economy to operate under the premise of future market liberalization.7 Therefore, it was crucial for the pilot agencies to design a market stabilization system that would allow domestic firms to survive world market volatility. For example, MITI and the steel industry established a state-led cartel called the open-sales system in 1958, in which MITI acted as the cartel’s enforcer by using its administrative powers to punish violators. Second, the ultimate goal of industrial policies changed after World War II. While production capability expansions and efficiency improvements were common objectives of industrial policies in the three cases examined in this book, the pilot agencies in Manchuria and wartime Japan tried to expand production and rationalize industry for purposes that were somewhat different from those of the postwar Japanese pilot agencies. The ultimate goals of the Manchurian and wartime Japanese agencies were the establishment of autarky and a “national-defense economy” (kokubo- keizai). For example, a wartime government document on the Production Capacity Expansion Plan clearly stated its policy goal in the following words: “This plan aims at attaining self-sufficiency of important resources within our territories and will avoid depending on third country resources as much as possible, even at times of military contingency.”8 This policy was adopted because Ishiwara and others were convinced that, in an age of total war, the nation’s security would not solely depend on military capabilities; economic power was also vital. Thus, the primary objective of pre-war industrial policies was to increase the production capabilities of Manchurian and Japanese industries, particularly in defense-related areas. In contrast, the postwar government shifted its goals to economic recovery, improvement of market competitiveness, and trade promotion. After the end of World War II Japan abandoned its previous ambition of building a selfsufficient economic sphere in East Asia and worked to become part of the

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world economy. Thus, first Japan focused on recovery of the national economy, and then shifted its priority to building competitive industries and promoting trade (particularly exports that would allow Japan to earn foreign currency). For example, the Special Survey Committee of the Ministry of Foreign Affairs Research Bureau issued a document titled “Basic Problems for the Reconstruction of the Japanese Economy” in September 1946. In that document, the committee attempted to provide direction for future economic policies and listed three areas as economic priorities: economic democratization and the advancement of technological standards; promotion of manufacturing industries and foreign trade; and development of national territory and rationalization of consumption.9 Additionally, the Economic Stabilization Board Ordinance (Keizai Antei Honbu Rei) of 1946 identified the primary objectives of the agency. Those objectives stated that the ESB “administers emergency economic stabilization measures regarding production of commodities, rationing and consumption, trade, labor, prices, fiscal administration, finance, transportation, and construction.”10 Therefore, in the immediate postwar period, the pilot agency was preoccupied with recovery in the national economy. As the Japanese economy regained its growth momentum, the pilot agency’s focus shifted to industrial development and export promotion. At its establishment in 1949, the government set the main tasks of MITI as follows: promotion of international trade; promotion of international cooperation in commercial exchange; promotion and improvement of production, distribution, and consumption of industrial goods; and rationalization of commerce and industry.11 In summary, postwar pilot agencies evolved from their Manchurian and wartime predecessors and continued to function as the directors of rapid economic growth. Japan’s postwar agencies inherited the industrial policies of their predecessors, such as long-term economic planning and industrial rationalization policies. They also restrained themselves from nationalizing firms and allowed private entrepreneurs to manage their companies within the framework of their industrial policies and restrictions. Despite the similarities among the agencies of the three cases, they had some important differences. Those differences grew as postwar agencies incrementally developed their institutional structures. First, the learning effect and intellectual sophistication allowed the postwar industrial policies to become so much more effective than those of their predecessors. Second, while the governments of Manchuria and wartime Japan did not need to be concerned about corporate bankruptcies caused by market demand fluctuations, the postwar Japanese government had to introduce market stabilization policies to regulate market competition and minimize corporate bankruptcies. Finally, Japan’s defeat in World War II caused postwar agencies to shift their policy goals from establishment of autarky and a national-defense economy, to economic recovery, market competitiveness improvements, and export promotion.

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2 Industrial associations When comparing the industrial structures of wartime Japan and Manchuria, one can also find several important similarities and differences. Even though they were both designed as tools of state control over industry, wartime Japan’s control association system and Manchuria’s special corporation system were quite different. The special corporation system allowed the Manchurian government to influence corporate management more directly than Japan’s industrial association system, so entrepreneurs in Manchuria like Ishiwara Kanji and Miyazaki Masayoshi promoted the special corporation system, which was attainable in Manchuria due to the absence of strong zaibatsu groups there. However, faced with strong opposition from zaibatsu leaders, Kishi Nobusuke and Yoshino Shinji in the MCI were forced to use a different approach. They chose, instead, to rely on voluntary compliance with government policies, which was enforced through a mechanism of self-governance. Thus, the control association system was established as a tool of indirect control that would allow bureaucrats to enforce corporate cooperation with the state by facilitating communication between the state and industry, collecting industrial information, and monitoring and enforcing corporate compliance with government policies and guidance. Postwar Japan inherited this control association system and continued to use it as a tool of indirect control. However, there were important differences between the wartime control associations and the postwar industrial associations as well. First, the decisionmaking process within the industrial association became more democratic in the postwar period – distributing relatively equal power among the members – at least among the major firms. In contrast, pre-war control associations vested their presidents with extensive power to make decisions and to handle personnel affairs. For example, the Important Industry Groups Ordinance of 1941 gave control association presidents the authority to appoint and fire executive officials and to take charge of general affairs. In addition, such presidents could make decisions without consulting the general assembly of members, which could only give suggestions to the president on certain issues. It also allowed the president to fire the executives of member firms if those firms violated laws or administrative orders, harmed the public interest, or violated association rules. Furthermore, the law stated that control associations were authorized to submit policy proposals to competent ministers, and to levy fines from members who violated association rules (Suekawa 1942: 124). Nonetheless, this concentration of power was amended in the postwar industrial association. This change is noted in the Japan Iron and Steel Federation’s official history book, Sengo Tekko-shi (History of Steel in the Postwar Period): “The difference between the Iron and Steel Conference [later renamed to JISF] and the Iron and Steel Control Association is that the control association was a dictatorial organization ruled by the association’s president based on the ‘Führer principle’, while the conference is democratic and voluntary

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control organization. [JISF’s] supreme decision-making organ is a committee consisting of executive directors from about 10 major steel makers” (JISF 1959: 44). Another difference is that market stabilization became an important task of the postwar industrial associations, while the wartime control associations devoted their energy to coercing private corporations to serve the “public interests.” For example, the wartime government described the main objectives of state control in a document called “The Outline for the Establishment of New Economy,” as follows: to incorporate private firms into government economic plans and maximize their production capability, while allowing them to manage themselves; and to guide the national economy towards serving public interests by establishing economic organizations (such as control associations) that will unite the national economy towards accomplishing national security goals. It also made reference to control over corporate management by stating that the government, “prevents speculative and monopolistic profit-seeking activities that would undermine maintenance of order in the national economy, while allowing corporations to make an adequate level of profit.”12 These were the tasks that control associations were expected to accomplish. Additionally, the Important Industry Group Ordinance of 1941, which became the legal basis of control associations, stated that the objectives of control associations were “to manage comprehensive control of the concerned industry and cooperate with government policy drafting and enforcement efforts in order to maximize the full potential of the national economy.”13 Furthermore, it defined the functions of control associations as: to assist the government’s policymaking and policy enforcement; to provide business guidance to member firms; to assist the development of the industry; to monitor member activities; to conduct research; and to set industry standards, improve efficiency, and facilitate technological advancement. Thus, the primary functions of wartime control associations were to limit private firms’ profitseeking activities and ensure that they served the interests of the state. Thus, market stabilization was a matter of limited importance. The postwar industrial associations also functioned as tools of state control. They provided the government with valuable information regarding the conditions, business plans, and future potential for each member firm. Such information was indispensable to the pilot agencies when composing long-term economic plans. They also assisted the pilot agencies in enforcing their policies and monitoring corporate compliance with those policies. In addition to those functions, postwar industrial associations played an important role in market stabilization. The Japanese economy had isolated itself from the world economy during the wartime period, but was integrated into the world market after the war and became subject to market fluctuations. Accordingly, industrial associations cooperated with pilot agencies in structuring various mechanisms to stabilize the market. The main objective of market stabilization was to regulate competition among firms, especially during times of recession, in order to minimize corporate bankruptcies.

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Corporate bankruptcy was considered undesirable because it could lead to declines in the nation’s production capability because all the resources invested by the company would be wasted, and because it would increase unemployment (Calder 1988: 72).14 In summary, industrial associations continued to operate in the Japanese economy after the end of World War II, but their structure and functions evolved over time. Management of the wartime control associations was dominated by their presidents, who held extensive decision-making authority, but the postwar industrial associations developed a more democratic structure, in which members (at least those of large firms) had more or less equal voices in decision-making. Furthermore, while the wartime control associations focused on encouraging private firms to serve the public interest, the functions of postwar industrial associations included market stabilization.

II Implications In this section, I highlight a few important implications from this study. First, I will discuss the implications of study findings with regard to our understanding of institutional evolution. Rationalist theories fail to take into consideration a number of critical factors related to institutional evolution, such as historical context and the stickiness of institutions, as I demonstrated above. Here, I will explain why it is problematic to disregard those factors. Second, I will discuss implications for the nature of state control in Japan. Many studies on the postwar Japanese political economy have overestimated the power of the bureaucracies in the policymaking process; however, as this study shows, those bureaucracies could not draft and implement industrial policies without the assistance of industrial associations, which regulated the industries in tandem with bureaucratic administrative guidance. In that sense, state control in Japan was indirect in its nature because the bureaucracy controlled industry through the self-regulating mechanism of industrial associations. 1 The significance of historical factors in institutional evolution As I have demonstrated so far, the course of institutional evolution reflects various historical factors. Without paying close attention to those factors, one cannot fully account for the complex nature of institutional evolution. The collective action and power-based rationalist theories do not take historical factors into consideration. However, the former has serious empirical problems, and the latter’s explanation leaves many important questions unanswered. First, the collective action theory suggests that actors build institutions to overcome collective action problems and achieve mutually beneficial outcomes. Yet, institutions do not always lead to mutually beneficial outcomes. The developmental state systems in Manchuria and postwar Japan were quite successful in expanding production capabilities and speeding up the process of industrialization. However, the wartime developmental state system was

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relatively unsuccessful in those same areas. Despite this, wartime policymakers did not replace it with another system. Furthermore, postwar policymakers reproduced the wartime system, even though it had not functioned as well as had been expected. More importantly, the biggest problem of the collective action theory is that there were fierce political battles among all actors regarding economic policies in wartime and postwar Japan. If those institutions were built for mutually beneficial outcomes, there would be no reason for actors to fight with each other because everyone would benefit from their existence. This suggests that the institutions were not established to reach mutually beneficial outcomes, but to achieve some other goals. Additionally, even if institutions allow actors to overcome some collective action problems and reach mutually beneficial outcomes, this does not necessarily mean that the actors built those institutions for that purpose. Thus, this theory lacks empirical support for its claims. Second, the power structure did influence the course of institutional evolution to some extent, as the power-based rationalist theory suggests. However, that factor was only one of many important factors that affected the evolution of developmental state systems in Japan. While personal linkage between the wartime government and the postwar government did have certain impact on the institutional continuity in the Japanese developmental state system, the powerbased rationalist theory overlooks several other critical aspects of institutional evolution. For example, the theory only takes current political factors into consideration and does not adequately analyze historical and ideational factors. Even if power structure stays unchanged, it does not necessarily result in a reproduction of the existing institution. Individuals may change their policy stances over time, especially at times of radical change, such as war, foreign occupation, and economic crisis. In the case of postwar Japan, some wartime bureaucrats became advocates of socialism or liberalism. Thus, the wartime developmental state system reemerged in the postwar period, not just because the same individuals were in power, but also because those individuals maintained the same ideational guidance during and after the war. This ideational linkage explains why the postwar policymakers reproduced the developmental state system, even though it did not always advance their interests during the wartime period. The wartime developmental state system failed to expand the Japanese industrial production capability and did not necessarily ensure the political advantages of bureaucrats and military officials, yet postwar policymakers reproduced a developmental state system because they retained faith in their ideational guidance and believed that the system would work – partly due to their successful experiences in Manchuria. Furthermore, the ideational guidance generated a strong positive feedback effect because it was passed on to the next generation of bureaucrats and diffused to other actors, such as party politicians and business leaders. As more actors advocated the idea, opposition to the developmental state system became weaker. This positive feedback effect, generated by ideational guidance, further facilitated the reproduction of the developmental state system.

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The evolutionary path of institutions reflects various factors, including some seemingly distant events in the past. At first glance, the postwar Japanese economy seems to have very little to do with the policies made in Manchuria and wartime Japan, but it inherited its core institutions from the developmental state systems of those two periods. Those institutions still exist in today’s Japan, even after more than 60 years. Similar examples can be found in many other countries. Thus, it is not possible to explain why institutions evolved in the way they did without considering the unique histories of the countries where they were formed. Institutions do not emerge solely reflecting the factors at the time of their foundation; they are also considerably influenced by factors from the distant past. That is why historical analysis is crucial in the study of institutions. 2 State control This study’s findings also have implications for the nature of state control in the Japanese economy. Researchers probing the Japanese economy (and the East Asian economy for that matter) have a tendency to overestimate the power of the bureaucracies. Many scholars have described the power structure in postwar Japan as an “iron triangle” consisting of close ties among Liberal Democratic Party (LDP) leaders, bureaucrats, and big business owners (Hayao 1993; Johnson 1982, 1995). In this model, it is understood that the bureaucracies are solely responsible for lawmaking because they monopolize the policy expertise and other intellectual resources required for policymaking. Hayao depicts the interdependent relationship within the triangle as follows: The LDP depends on the bureaucracy for policy expertise, while the bureaucracy relies on the party to pass its proposals in the National Assembly. The LDP counts on big business for electoral funds; in return, big business depends on the LDP for support of capitalism, a favorable business climate, and political stability. Finally, the bureaucracy relies on business for jobs after retirement (a practice the Japanese refer to as amakudari “descending from heaven”), while business depends on the bureaucracy for favors in the drawing up and implementing of legislation. (Hayao 1993: 8) Johnson (1982) also sees the triangular power structure and argues that the Diet is nonfunctioning as a lawmaking apparatus and delegates lawmaking power to the bureaucracy. He contends, “Although it is influenced by pressure groups and political claimants, the elite bureaucracy of Japan makes most major decisions, drafts virtually all legislation, controls the national budget, and is the source of all major policy innovations in the system” (Johnson 1982: 20–21).

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What is missing in this picture is the bureaucracy’s reliance on business (i.e. industrial associations) in policy making process. Business leaders did not just provide political contributions to politicians and postretirement employment to bureaucrats; they also played an important role by collecting vital information required for policymaking, assisting policy enforcement, and monitoring corporate compliance with their policies. Even though MITI had 12,398 employees15 in 1960, it would have been virtually impossible for the ministry to exert control over the vast numbers of privately owned firms without the assistance of industrial associations. At that time (1960), there were 165,896 firms in the manufacturing sector, 226,110 firms in the wholesale and retail sectors, and 2,558 firms in the mining sector under MITI jurisdiction (Bank of Japan 1999: 332–33). However, while the economic bureaucrats never directly controlled industry, even under the totalitarian wartime regime, indirect state control over industry through industrial associations allowed the bureaucrats to stimulate private firms’ cooperation with the state in policymaking, policy enforcement, and to monitor private firms to ensure compliance with their policies. Samuels argued, “Most available descriptions of the Japanese political economy exaggerate state power at the expense of private power, as if the two were mutually exclusive” (Samuels 1987: 21). He described the importance of industry in Japanese politics saying, “While it is frequently acknowledged that committees in Diet and the ruling LDP, having limited expertise and staff, are dependent upon the bureaucracy for data and analysis, it is not as often recognized that the well-fabled Japanese bureaucracy is itself often dependent in the same way upon the industrial associations and firms with which it works so closely” (Samuels 1983: 499). The findings of this study seem to support Samuel’s arguments. While the power of the bureaucracy has declined significantly since the period of rapid economic growth (1955–73), industrial associations still play an important role in today’s Japanese economy (Schaede 2000; Vogel 2006). Therefore, the significance of industrial associations and indirect state control must not be taken lightly.

III Perspectives for future study Finally, I would like to make a few comments on future perspectives for the study of the Japanese economy and the study of institutions. First, this study explored the origin and evolutionary process of two important institutions of the postwar Japanese economy, namely pilot agencies and industrial associations. However, the postwar economy had other important institutions as well. These included the bank-centered financing system and the keiretsu system, which also played important roles in postwar Japan’s rapid economic growth. As with pilot agencies and industrial associations, these also emerged during World War II, having their origins as parts of Japan’s wartime economic system (Okazaki and Okuno 1993; Kobayashi et al. 1995; Noguchi 1995), and functioned as tools of indirect state control over industry.

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The wartime government established the bank-centered financing system to control the flow of capital among different sectors, and also to indirectly influence corporate business management. The bank-centered financing system refers to the formal or informal corporate networks in which banks and firms maintain tight and prolonged relationships. Japanese firms rely heavily on bank loans to finance their business activities instead of raising money directly from the equity market, and this allows banks (particularly the one that finances them the most, known as the “main bank”) to exert strong influence over the business management of debtor firms. Those banks are tightly controlled by the government (particularly by the Ministry of Finance). Thus, the bank-centered financing system provides a way for the government to control heavily indebted firms indirectly – through its tight control over banks – even though the government does not directly control the management of private firms. Using this system, the government controlled the flow of capital and gave priority to the strategically important industries. It also influenced the business activities of private firms, providing them with guidance as to when, where, and how much to invest. The institutional origin of the keiretsu system is also found in the wartime economic system, where bureaucrats of wartime pilot agencies created a new system of corporate networks that would allow them to control small and medium-sized enterprises (SMEs) indirectly. Those bureaucrats arranged matches between SMEs and large corporations. Thus, by putting SMEs under the influence of large firms, which were indirectly controlled by the government through industrial associations and the bank-financing system, the government could also expand its control over SMEs. The bank-centered financing and keiretsu systems were also important parts of the postwar Japanese economy, but their institutional origins and evolution have not been studied sufficiently. I expect this study to be followed by further studies of these institutions of indirect state control. Second, neighboring countries, such as South Korea and Taiwan are often considered to have various similarities in their economic systems with the postwar Japanese system (Wade 1990; Gereffi and Wyman 1990; Woo 1991; Evans 1995; Waldner 1999). Thus, it is extremely likely that the success of the Japanese economy, the experiences of these countries under Japanese occupation, and close interactions with Japanese business leaders encouraged them to develop similar economic systems. Most interestingly, South Korea’s President Park Chung-hee (1963–79), who established a developmental state system in postwar South Korea, served as a Kwantung Army lieutenant in Manchuria during the wartime period. Additionally, Park and the men in his administration had very close personal ties with those Japanese politicians and bureaucrats who had served in Manchuria, such as Kishi Nobusuke and Shiina Etsusaburo-. Thus, it is quite likely that his experience in Manchuria, his personal ties with former Manchurian administrators, and/or the wartime Japanese ideation guidance affected his plan to establish a developmental state system in South Korea. It is intriguing to study how the developmental state system established in Manchuria and wartime Japan spread to those countries in the postwar period.

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However, while those East Asian economies share various important commonalities with Japan, there are also some important differences. For instance, the South Korean government nationalized banks and other financial institutions until the 1980s and retained much tighter control over financial institutions than Japan, and Korean business conglomerates (known as chaebol) function much more like prewar Japanese zaibatsu than do members of the postwar keiretsu system (see Woo 1991). Furthermore, while the centers of both the Japanese and Korean economies are large firms, the Taiwanese economy consists primarily of smaller companies. Therefore, it is equally intriguing to analyze why the developmental state system in South Korea and Taiwan evolved in ways different from that of Japan. Historical institutionalists have focused on the issue of institutional evolution in recent years and have presented several excellent cross-national analyses of path dependency (Pierson 1994; Thelen and Kume 1999; Mahoney 2002; Thelen 2004). However, there has been no cross-national comparative analysis on institutional evolution in East Asian developmental state systems. Thus, such a study would make a significant contribution to our understanding of the historical development of and interactions among the East Asian economies. Third, the Japanese economy has gone through considerable changes in recent years, due partly to the globalization of the world economy, the decade-long recession in the 1990s, multinational negotiations in the WTO and other international organizations, and other factors (Anchordoguy 2005; Vogel 2006). Some core institutional features of the Japanese developmental state system, which survived the drastic social change in the immediate postwar period (such as pilot agencies and the bank-centered financing system), experienced major changes as a result. The power and functions of pilot agencies like the Ministry of International Trade and Industry (renamed METI in 2001) and the Ministry of Finance were significantly reduced after the administrative reforms of the late 1990s. For instance, METI no longer composes economic planning policies, and private firms have become less reliant on financing through bank loans – making the Ministry of Finance’s indirect control over firms much less effective. However, some core institutions of the developmental state system, such as the industrial associations, continue to play an important role in the Japanese economy. Industrial associations still maintain their primary functions, such as interest coordination, information gathering, assisting government law enforcement, and self-regulation (Schaede 2000). Furthermore, globalization has forced keiretsu to internationalize, reallocating some production lines overseas and making foreign firms part of the keiretsu structure (Hatch and Yamamura 1996), even though the ties among firms within the keiretsu framework are much looser than before. Thus, researchers must shed light on these recent institutional changes and continuities, and it would be particularly interesting to compare institutional developments in the wartime and immediate postwar period with those of recent years. Such a comparative historical analysis should further advance our understanding of institutional evolution and Japanese political economy.

Notes

1 Introduction 1 See Johnson (1982); Anchordoguy (1988); Okimoto (1989); Wade (1990); Gereffi and Wyman (1990); Woo (1991); Evans (1995); Gao (1997); Waldner (1999); Woo-Cumings (1999); and many more. 2 For example, Evans states: “My aim is not to explain the origins of predatory, developmental, and intermediate states, a task for historical scholarship that goes well beyond the ambitions of this study. Instead, the idea is to take existing structural types as starting points” (Evans 1995: 45). 3 Collier and Collier (1991); Steinmo et al. (1992); Thelen (1999, 2004); Pierson (2004). 4 Okazaki and Okuno (1993); Yonekura (1993); Noguchi (1995). 5 To avoid the danger of “concept stretching,” I define the term, “the postwar period,” here as the time between the end of World War II and the mid-1960s. 6 Other important institutions contributed to the Japanese developmental state system including the bank-centered financing system and the keiretsu system. As with pilot agencies and industrial associations, these, too, emerged during World War II as parts of Japan’s wartime economic system and functioned as tools of state control over industry. I acknowledge the importance of those institutions in the development of the Japanese economy, but they are beyond the scope of this book. I focus on the relationship between the state and industry in the manufacturing sector, rather than expanding its analytical scope into the systems of financial control and corporate networking. 7 Pilot agencies are by no means unique to East Asian countries. Bureaucratic bodies that have similar functions can be found in Europe and Latin America as well. However, more successful cases of pilot agencies are found in East Asia than in other regions (see Gereffi and Wyman 1990 and Waldner 1999 for cross-regional comparisons of pilot agencies). This study does not argue that Japan established unique institutions, but attempts to explain what caused them to emerge, as well as how they evolved. 8 The ESB was established in 1946 to cope with the serious economic turmoil caused by World War II. The Japanese government, under the direction of the American occupation force, vested the agency with extensive authority to lead the recovery of the Japanese economy. It performed the central pilot agency role until 1952, when it was divided into smaller and weaker agencies. After 1952 MITI assumed the role of pilot agency and led Japan’s rapid growth. 9 The Manchurian government controlled industry through a different system called the special corporation system, in which the government exercised tighter control over the management of each firm. For example, those operating in industries that

Notes

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18

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were considered strategically important were obligated to submit information regarding various aspects of their business activities, obtain government approval for their business, and accept government officials as members of their boards of directors. For example, North and Weingast (1989) argue that the development of property rights in 17th-century England allowed the country to overcome collective action problems and achieve economic growth. Bianco and Bates (1990) claim that political leaders with solid reputations and effective threats can facilitate collective action by rewarding compliance and punishing defection, and they suggest that policymakers may take initiative roles in building institutions that would alleviate collective action problems. Knight also claims, “The mechanism of selection among the possible institutional alternatives is bargaining competition among the actors over the various alternatives. Institutional development is a contest among actors to establish rules that structure outcomes to those equilibria most favorable for them” (Knight 1995: 108). Although he recognizes that some institutions provide public goods, Knight thinks, “Such benefits are merely by-products of distributional conflict and they are not, therefore, the principal element of explanations grounded in rational action” (Knight 1992: 20). He claims, “Self-interested actors will prefer socially inefficient institutional rules if those rules give them greater individual utility,” and also contends, “Social efficiency cannot provide the substantive content of institutional rules. Rational self-interested actors will not be the initiators of such rules if they diminish their own utility” (ibid.: 34). A similar argument is made in the study of international regimes. Neo-realists argue that powerful states build institutions in order to advance their interests or maintain the current balance of power (Kindleberger 1973; Gilpin 1971; Krasner 1991). According to this so-called hegemonic stability theory, institutions are built by the hegemon to expand its power or prevent other states from becoming more powerful. They claim that LDP politicians created institutional constraints “to monitor and police their bureaucratic agents,” so “[b]asic principal-agency theory suggests that they [bureaucrats] are more likely just implementing LDP preferences” (Ramseyer and Rosenbluth 1993: 99). See Lipset and Rokkan (1967); Collier and Collier (1991); Pempel (1998); and Pierson (2004). North calls such ideational guidance a “mental map.” He believes it can have a considerable impact on policymaking because “political markets are far more prone to inefficiency” compared to economic markets. This is because, “It is extraordinarily difficult to measure what is being exchanged in political markets and in consequence to enforce agreements” (North 1990: 362). Therefore, North thinks policymakers rely on their mental map when making decisions. Some scholars differentiate approaches that treat ideational factors as an explanatory factor in institutional analysis from historical institutionalism. Schmidt (2011) proposes a term, “discursive institutionalism,” for such approaches and contends that it should be considered as another type of “new institutionalism.” Pierson talks about the way ideas can proliferate from one social group to another as follows: “Ideas are frequently shared with other social actors in ways that create network effects and adaptive expectations. Sociologists have emphasized that the development of norms or standards of appropriateness is a collective, self-reinforcing process. Social interactions involving activities as innocuous as a handshake ‘chronically reproduce’ themselves” (Pierson 2004: 39). Other features of a developmental state system, such as the bank-centered financial system and keiretsu system, were also nonexistent during this period. Just like pilot agencies and industrial associations, the wartime government built those institutions to strengthen its control over industry (Okazaki and Okuno 1993; Noguchi 1995; Hoshi and Kashyap 2001).

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20 In this sense, Japan’s colonial policies in Manchuria were fundamentally different than those in Korea and Taiwan. That explains why the developmental state system did not emerge in Korea and Taiwan until after the end of World War II. Also, that is the reason why this book focuses primarily on Japan’s colonial policies in Manchuria. However, the Manchurian policies had some impact in the rise of developmental state systems in other East Asian states. Korea, for instance, adopted the developmental state system in the 1960s under the leadership of President Park Chung-hee who was a lieutenant of the Kwantung Army (later regimented in the Manchurian Imperial Army). Woo suggests that Park’s experience in Manchuria influenced his development policies in the post-World War II period (Woo 1991: 40). 21 The Kwantung Army was stationed in Manchuria from 1904 to defend Japan’s new assets obtained from Russia. It played major roles in the establishment of Japan’s puppet state – Manchukuo – and subsequent state-building efforts in Manchuria. 22 Although the theory of managed economy is a direct translation of the Japanese term “to-sei keizai ron,” it refers to the ideational foundation of the particular type of managed economy advocated in wartime Japan. So, it differentiates from the ideas of other types of managed or command economies such as socialism. I also use the term here to refer to the idea of the Japanese wartime economic system, which tried to combine the features of both liberal market and socialist economic systems. 23 Kokka shakaishugi, which calls for establishment of a nationalistic totalitarian regime, can be translated as “national socialism.” However, it was different from its German counterpart (Nazism), as kokka shakaishugi advocated egalitarian policies that were more similar to Marxism. However, it was distinct from Marxism in its intense devotion to the Imperial monarchy. In this book, I use the term national socialism to refer to kokka shakaishugi. 24 Put another way, in the rationalist argument, when actors make a decision, they consider what is most beneficial through their individual cost-benefit calculation. In my argument, when actors make a decision, they consider which option best suits the principles of their ideational guidance. 25 For example, Fiorina claims that the “role [of ideas] is more often viewed as supplemental than fundamental. To put it another way, ideas are used as justifications, rationalizations, even instruments of persuasion, by those seeking to advance some interest” (Fiorina 1995: 114). 26 Knight contends that, “If ideology consists in part of one’s beliefs about how the world works, an important aspect of one’s belief will be the ideas about how people act and how they are supposed to act. These ideas are a product of the expectations derived from institutional rules” (Knight 1992: 81). 27 For example, he fails to consider debates within the military during the war such as the one between the To-sei-ha Faction, which advocated to-sei keizai ron, and the Ko-do--ha Faction, which supported kokka shakaishugi (national socialism). 28 For instance, Johnson does not make any reference to those individuals who were involved in drafting the plan, and does not explain why they designed their development plan in such a way, or how it is related to wartime or postwar Japanese industrial policies. Furthermore, he does not discuss the significance of the establishment of the Manchurian pilot agency (the Planning Bureau), which became the model for wartime Japanese pilot agencies. 29 Mahoney defines it as “the effort to infer causality through the identification of causal mechanisms” (Mahoney 2000a: 412). 2 The early stages of Japan’s industrialization 1 Nonetheless, there were a few exceptions that remained state-owned until a much later period (e.g. Japan Railway, Japan Postal Service, Japan Tobacco and Salt Public Cooperation, and Nippon Telegraph & Telecommunications).

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2 Stock trading started when Japan’s first equity market, the Tokyo Stock Exchange, was established in 1878. It started with only four listings, but 402 companies were listed in 1918. The number exceeded 1,000 by the 1920s (Okazaki and Okuno 1993). 3 That means a portion of the money raised from equities was deposited in bank accounts because firms had more money than they needed. 4 For example, Rinji Shikin Cho-sei Ho- (The Temporary Law of Fund Adjustment) of 1937 required all firms above a certain size to obtain government permission prior to increasing their equity base or merging (Allen and Gale 2000: 40). Such regulations extended the government’s control over private-sector financial activities, thus allowing the government to ensure the flow of capital into the munitions industry during the wartime period. 5 Until 1925 suffrage was granted to only about 1% of the male population and restricted to those possessing a substantial amount of property. 6 The Universal Suffrage Bill of 1925 granted suffrage to all men aged 25 years old or older, expanding the number of eligible voters from 3 million to 14 million. 7 For example, Shinji Yoshino and Kishi Nobusuke, young high-ranking officials in the Ministry of Commerce and Industry, who tried to implement a plan to strengthen state control over industry, were fired by Minister of Commerce and Industry, Ogawa Go-taro-, a former businessman. It was a deliberate attempt by big business leaders and party politicians to emasculate the power of the bureaucracy (for more details, see Chapter 4). 8 This was the second time political parties were to increase politically appointed positions. Japan’s first party-based cabinet was formed in June 1899 by the KenseitoParty led by Okuma Shigenobu. Watanabe describes Prime Minister Okuma’s victory over the han-clique politicians and bureaucrats, saying, “The bureaucrats who sat in power for a long time were panicked by the political party’s seizure of power. The party side snatched such senior government positions as vice-minister, ministry councilor, bureau chief, governor, etc. [from the bureaucrats]” (Watanabe 1959: 141). The party appointed its members to these posts to weaken the power of the bureaucrats and the han-clique politicians. However, the Okuma Cabinet decision was retracted by his successor, Prime Minister Yamagata Aritomo, several months later. Yamagata was known as the guru of the han-clique politicians and bureaucrats. It took another decade for the political parties to get the bureaucrats under control. 9 In addition to the military’s grudge about this treaty, Takahashi’s efforts to trim military spending in the mid-1930s, when he was serving as finance minister, was the reason why he and a number of other senior officials were assignated by young military officers during the so-called February 26 Incident. That incident marked the beginning of the military’s rise in the Japanese political sphere, and the power transition in the 1930s will be discussed in depth in Chapter 4. 10 Takahashi used to be a bureaucrat but served as president of the Bank of Japan before entering politics. 3 Institution-building in Manchuria (1932–45) 1 Mantetsu was capitalized at 200 million yen and employed over 400,000 workers (140,000 of whom were Japanese). It was Japan’s biggest corporation at that time (Kobayashi 2005: 32). 2 The cabinet consisted of eight departments including foreign affairs, justice, finance, education, military, civil affairs, industry, and transportation. There was also an agency directly responsible to the prime minister, called the General Affairs Agency (So-mu Cho-). 3 The Minister of the General Affairs Board was an exception and had strong political power, but the position was reserved for Japanese bureaucrats.

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4 For example, Matsuda Reisuke (former official at the Japanese Ministry of Finance, Budget Bureau); Kanda Susume (former official at the Japanese Ministry of Commerce and Industry) served as the bureau chief between 1939 and 1940; and Furumi Tadayuki (former chief of the Japanese Ministry of Finance, Document Section) served between 1941 and 1942. 5 It exceeded the Japanese government’s annual budget of the time (about 2.4 billion yen). 6 Major reasons for the shortage include the decline in inflow of investment from Japan and the war with China. Japan recovered from recession in the mid-1930s, and Japanese investors redirected their investment from Manchuria to Japan. Additionally, the war with China that began in 1937 also made Manchuria less attractive to Japanese investors. 7 Those partly state-owned corporations were called “Jun Tokushu Kaisha” (semispecial corporations). 8 A type of paper pulp made using a fully chemical method. 9 I will further discuss differences between the industrial control in Manchuria and Japan, and its implications to institutional evolution, in Chapter 6. 10 Those currencies include Fengtian piao, Xiantaiping piao, Guolu yin, Zhenping yin, Jilingguan tie, Taiping, Heilongjian shen guan tie, and Rehe shen guan tie (Manshu- kokushi 1970: 76). 11 The number of bandits arrested by the authority in Manchuria increased from 38 in 1925 to 1,060 in 1935 (Kanto- Kyoku 1937: 737). 12 The Kwantung Army Chief of Staff, “Manmo- ni Okeru Senryo-chi To-chi ni Kansuru Kennkyu” (A Report on Governing the Occupied Territories in Manchuria and Mongol), September 1930. Reprinted in Kakuda 1967: 53–56. 13 Ibid. 14 Reprinted in Manshu- kokushi 1970: 397. 15 It is important to note that Manchurian economic development was based on export-led industrialization, which is one of the key elements of the East Asian economic development in the post-World War II period. 16 For more discussion on the success of the Soviet economy, see Chapter 4. 17 Itagaki, Seishiro, “Gunjijo- Yori Mitaru Manmo- Ni Tsuite” (Manchuria and Mongolia from a Strategic Viewpoint), July 1931. Reprinted in Kobayashi and Shimada 1964: 142. 18 The Kwantung Army Chief of Staff, “Manmo- ni Okeru Senryo-chi To-chi ni Kansuru Kenkyu-” (A Report on Governing the Occupied Territories in Manchuria and Mongolia), September 1930. Reprinted in Kakuda 1967: 53. 19 The Kwantung Army, “Itagaki Ko-kyu Sanbo- no Jo-kyo-handan” (The Senior Staff Officer Itagaki’s Evaluation of the Situation), April–May 1932. Reprinted in Kobayashi and Shimada 1964: 176. 20 The Kwantung Army, “Kanto-gun Manmo- Ryo-yu- Keikaku” (The Kwantung Army’s Plan for the Occupation of Manchuria and Mongolia), July 1929. Reprinted in Kakuda 1967: 44. 21 The Manchurian government, “Manshu-koku Keizai Kensetsu Ko-yo-” (The Outline for the Establishment of the Manchurian Economy), 1933. Reprinted in Manshukokushi 1970: vol. 1, 397–98. 22 Hata notes, “Japanese fascism did not produce even a single dictator and lacked a leader who took a full responsibility in the course of the great war … however, if I were to choose candidates [for dictator], Kita and Ishiwara had the greatest potential” (Hata 1962: 262). 23 Ishiwara Kanji, “Senso-shi Taikan” (Overview of War History), July 4, 1929. Reprinted in Kakuda 1967: 35. 24 Ibid.: 36. 25 The original source of this quote is Ishiwara Kanji’s “Senso-shi Taikan”, published in 1941. This book was developed from his earlier work with the same title

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(published in 1929). He added some follow-ups in the 1941 version, in which he clarified many of his earlier claims. However, the basic argument is the same in the both versions. The 1941 version was reprinted in 1986 (Ishiwara 1986a: 269). Ibid.: 281. Ishiwara Kanji’s brother, Rokuro-, acknowledged the significance of the theory in Ishiwara’s life and later commented, “If I were to engrave an inscription on Kanji’s tombstone, it would be the following: ‘Ever since Ishiwara Kanji presented his theory of final war in 1925, it became the foundation of his ideas and actions until his death in 1949’” (Ishiwara 1986a: 288). It is said that several tens of thousands of copies of On the Final War were sold (Ishiwara 1986a: 98). Suzuki later served as the president of the wartime Japanese pilot agency, the Planning Board (1941–43) and directed state control over industry. The original title was “Seiji Teki Hijo- Jihen Boppatu Ni Shosuru Taio- Yo-ko-.” Reprinted in Hata 1962: 312–21. Ibid.: 317. Ibid.: 312. Ibid.: 318. Kokuchu- kai (the National Pillar Society) was founded by Tanaka Chigaku, a Buddhist priest. Tanaka developed a unique view that combined teachings of a Buddhist priest, Nichiren (1222–82), and nationalism. Ishiwara met Tanaka in 1919 and became a devoted follower of a Nichiren sect. His view of religion was deeply influenced by Tanaka. A significant portion of Ishiwara’s writings was devoted to discussions of Nichirenism and Japan’s roles in Asia. (He believed that Japan had a divine mandate to unite Asia and defeat the United States in collaboration with other Asian nations.) However, this study focuses on the secular side of Ishiwara’s worldview because his religious views were not directly linked with his economics discussions. Ishiwara, Kanji, “Manmo- Mondai Shiken”, May 1931. Reprinted in Kakuda 1967: 77. See Hata 1962; Peattie 1975; Gao 1997. One exception is a biography of Miyazaki by Kobayashi (1995). Kobayashi focuses on Miyazaki as “the man who created Japan Inc.” It is the first detailed study on Miyazaki’s contribution to Japan’s economy. Izumiyama served as finance minister in the Yoshida Cabinet in 1948. Quoted in Kobayashi 1995: 44. Ibid.: 35. Ishiwara agrees with Miyazaki on the unsuitability of socialism to the Japanese and claims, “A method that is suitable to the unintelligent and obedient Russians is not appropriate to our nation” (Ishiwara 1986b: 270). I will discuss the Soviet five-year plan and the responses of Japanese and Manchurian policymakers in Chapter 4. Sogo- became the president of Japan National Railway after the end of World War II and led its bullet train project. He is often referred to as the “father of the bullet train.” More specifically, it was drafted by the Mantetsu Research Bureau First Section, the chief of which was Miyazaki Masayoshi. Those provisions include the preface, principles of economy building, means of economic control, transportation, agriculture, manufacturing industry, financial system, commerce, private economy, and the conclusion. For example, Ishiwara wrote, “As the society developed, individual freedom began to cause frictions in various areas. Today, limitless freedom has ended up impeding the efficiency of the society as a whole.” He urged establishment of state control “in order to fix these problems [caused by individual freedom] and maximize the efficiency of society” (Ishiwara 1986a: 89–90).

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47 Manshu-koku Keizai Kensetu Ko-yo- (The Outline for the Establishment of Manchurian Economy), Manchukuo government, March 1, 1933. Reprinted in Manshukokushi 1970: 397. 48 Juyo- Sangyo- To-sei Ho- (The Important Industries Control Law), Manchukuo government, May 1, 1937. Reprinted in Manshu- kokushi 1970: 402. 49 Reprinted in Manshu- kokushi 1970: 396–97. 50 Ibid. 51 The military’s flexibility at the time may have had something to do with Itagaki’s open-mindedness. However, even after Itagaki left the Kwantung Army in 1937, the Army continued to cooperate with the bureaucrats and even adopted policy recommendations from business actors, as discussed below. 52 In contrast, major zaibatsu had no difficulties advancing into other colonies such as Korea and Taiwan, where they quickly established their presence and gained a certain level of political influence. This is why developmental state systems did not emerge in Korea and Taiwan during this period. 53 Aikawa founded Nissan in 1928 and quickly expanded the company through a series of aggressive mergers and acquisitions. By the late 1930s the size of the company surpassed that of traditional zaibatsu groups like Mitsui and Mitsubishi. 54 Aikawa’s proposal was also important to the development of Japanese economy because it introduced the idea of integrated industrial structure, upon which Japan’s postwar keiretsu system was based. As we see below, during World War II the Japanese government adopted the industrial integration scheme as a vital part of its industrial policy and actively engaged in the establishment of the keiretsu system. 55 Most importantly, the Kwantung Army abandoned its “one industry one company” principle and introduced a hierarchical subcontracting structure, which was similar to the post-war keiretsu system. The Kwantung Army originally preferred the “one industry one company” principle because it allowed simpler and more direct control over industries; however, senior officials in the Army like Ishiwara were convinced by Aikawa’s counsel. 56 National policy enterprise (kokusaku kaisha) was another term used for special corporations. 4 The rise of a wartime economy in Japan (1937–45) 1 Kikakuin Kansei (The Planning Board Administrative Order), October 23, 1937. (Nakano Bunko website, www.geocities.jp/nakanolib/rei/rs12-605.htm) 2 For example, Wada Hiroo became the director of the Economy Stabilization Board – the postwar Japanese pilot agency in 1947, and Uemura Ko-goro- became the president of Keidanren (Japan Business Federation), an elite association for major corporations, just to name a few. Because it is important in understanding the reemergence of wartime institutions in the postwar period, this personal linkage between the wartime and postwar agencies will be discussed more in Chapter 5. 3 The National Diet Library website, www.ndl.go.jp/horei_jp/kakugi/txt/txt00299.htm. 4 The Planning Board, Tekko- Seisanryoku Kakuju- Keikaku (A Document Regarding Steel Production Expansion), December 27, 1940. 5 For example, the articles of association of the Iron and Steel Control Association states that, “The president [of the association] will assign production quotas to steel makers for all sorts of steel products. Steel makers must produce steel following this direction” (Nihon Ko-gyo- Shimbun, January 16, 1942). 6 The Planning Board, Seisanryoku Kakuju- Keikaku Jisshi no Jyo-kyo- Oyobi Kongo no Taisaku (The Current Condition of the Production Expansion Plan and Future Measures), October 1939. 7 See Yonekura 1993 for lessons of wartime planning.

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8 The term “industry rationalization policy” was used to refer to government policies in Japan prior to this period as well. However, the power of bureaucracy at the time was limited, as discussed in Chapter 2. For instance, they were incapable of shutting down inefficient firms in the name of rationalization. Thus, the rationalization policies in Japan before wartime were in name only and fundamentally different than rationalization policies during wartime. 9 Among those factories, there were three heavy-plate factories, five thin steel sheets factories, five tin plate factories, two large factories, 15 medium-sized factories, and 16 small factories. 10 In the Iron and Steel Control Association’s case, the fine was 5,000 yen for violation of its articles of association and 10,000 yen for violation of the control rules (Nihon Ko-gyo- Shinbun, November 5, 1941). 11 The numbers are based on author’s calculation from the data in Nihon To-kei Kenkyu-jo 1958. 12 Hoashi became involved with the drafting of the Outline for Establishment of a New Economic System of 1940, which paved the way for control associations (to-sei kai). 13 Of course, there were some party politicians who advocated managed economy such as Nakano Seigo- of Menseito-. 14 For example, Hall (1991); Pempel (1992); and Ramseyer and Rosenbluth (1995). See the end of this chapter for their statist/elitist argument. 15 Manchukuo was a puppet state established by the Japanese military in 1932. Chapter 3 examines the state-building and industrialization of Manchukuo in great depth. 16 The Soviet Union was considered the major threat to Japan at that time because its military and economic power was growing rapidly thanks to the success of the Five-Year Economic Plan (1928–32). 17 Some examples of reformist bureaucrats include Yoshino Shinji (chief of the Industry Bureau in the Ministry of Commerce and Industry), Kishi Nobusuke (chief of the Document Section in the MCI Industrial Rationalization Bureau in 1930), and Hoshino Naoki (chief of the National Asset Section in the Ministry of Finance in 1932). 18 It later split into smaller groups such as Nihon Keizaishi Gakkai (Japan Economics History Association, 1930) and Nihon Keizai Gakkai (Japan Economics Association, 1934), but its anti-Marxism sentiment was retained by its successors. 19 Another newspaper article noted that, “There are two worlds conflicting right in front of our eyes. On the one hand, there is the haphazard capitalist world that is struggling amongst the murderous recession. On the other hand, there is the world of socialism centered on the Soviet Russia that is speeding up establishment of a socialist system through planned economy … ”, and a follow-up article noted that, “Today, it is a widely known fact that planned economy is more advantageous [than market economy]. It is evident from the fact that a British economist, [Paul] Einzig, proposed a world five-year plan, and the plan was discussed seriously by scholars from all over the world at an international conference on planned economy in Amsterdam” (Osaka Jiji Shinpo-, March 6 and March 9, 1932). 20 There was ideological suppression against the liberal market economists during the war as well. Although, compared with the Marxists, oppression came much later (the late 1930s) and was less intensive for the liberal economists, their activities were also restricted. In the name of “ideational control,” the government restricted scholarly works associated with individualism or liberalism, as they were believed to contradict the state’s guiding principle – to-sei keizai ron. A liberal economist, Oko-chi Kazuo testified that ideational control became particularly intense during the time between the outbreak of the war with China (1937) and the Pacific War (1941) (Hayasaka 1984: 148).

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21 The Manchurian Incident refers to a military conflict between Japan and China that occurred in 1932. Ishiwara Kanji led a secret operation to provoke the conflict, which allowed Japan to seize substantial control over Manchuria. 22 Kita Ikki (1923) Nihon Kaizo- Ho-an Taiko-, reprinted in Lu 1997: 414. 23 Ibid.: 414. 24 Ibid.: 415. 25 Ibid.: 415. 26 Ibid.: 414. 27 The Imperial Army published this document in October 1934. It was titled Kokubono Hongi to Sono Kyo-ka no Teisho- (Propositions of the True Meaning of National Defense and its Reinforcement), and presented the prospect of supporters of to-sei keizai ron in the Army. 28 Kokubo- no Hongi to Sono Kyo-ka no Teisho-, The Japanese Ministry of Army News Section, October 1, 1934, reprinted in Sugihara et al. 1990: 367. 29 Kita Ikki (1923) Nihon Kaizo- Ho-an Taiko-, reprinted in Lu 1997: 412. 30 Its name derives from its advocacy for tight state control. 31 I will discuss more about Manshu--ha below. 32 Kishi Nobusuke, Kido Ko-ichi Ni Ate Doitsu no Sangyo- Go-rika wo Ho-jita Tegami (A Letter from Kishi Nobusuke in Berlin to Kido Koichi Reporting German Industrial Rationalization), July 13, 1930, reprinted in Kishi et al. 1981: 289–91. 33 Even with the considerable compromises Kishi and Yoshino made, it was reported that business leaders expressed strong objections to the legislation (Ho-chi Shinbun, July 7, 1935). 34 Ju-yo- Sangyo- To-sei Ho- (The Important Industries Control Law), April 1, 1931. Source: The Nakano Library Database, www.geocities.jp/nakanolib/hou/hs06-40.htm. 35 Machida was a member of the Minseito- Party. 36 He was a member of Minseito- Party and a fiscal policy specialist. Before running for office, he was a professor of economics at Kyoto University. 37 The primary reason why the Army appointed Ishiwara to such a powerful position was to quiet down the fierce factional battle between the Ko-do--ha and the To-sei-ha, which was dividing the Army into two camps. Ishiwara, at that time, was considered to hold a neutral position and the Army thought his popularity and charismatic leadership would solve the problem (Hata 1962). 38 The preceding governments, such as the Saito- and Okada Cabinets, were also led by prime ministers from the military, but their cabinet members included party politicians. 39 Tsushima later became a member of the House of Peers and served as Finance Minister in 1945. 40 What Ishiwara meant was to experiment with new policies in Manchuria to test their validity and then import the successfully tested policies back to Japan. 41 Ishiwara faced a particularly hard time convincing the expansionists because of his past actions. Rejecting the request of ceasefire, Muto- told Ishiwara, “I was deeply impressed by your actions when you were playing an active role in the Manchurian Incident … I am doing exactly the same thing in Inner Mongolia by following your example” (Hata 1962: 251). 42 Akinaga used to be a staff officer of the Kwantung Army and was involved in drafting economic policies in Manchuria. Later, he became the chief of the Planning Board’s First Bureau. 43 He became the Minister of Postal Service in the Ikeda Cabinet in the postwar period. 44 The National Diet Library website, www.ndl.go.jp/horei_jp/kakugi/txt/txt00294.htm. 45 When using the term, “economic organizations” (keizai dantai), reformist bureaucrats meant such institutions as control associations. However, they called it “economic organizations” at this point to avoid opposition from zaibatsu. 46 The same person who expelled Kishi from MCI five years earlier.

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47 A former vice-president of the Tokyo Chamber of Commerce. 48 Hiranuma was a retired prosecutor and a founder of a nationalist organization, Kokuhonsha. He was closely connected with the Army’s Ko-do--ha Faction, which advocated the government’s economic control plan. Hiranuma became prime minister in 1939 and held various minister posts subsequently. 49 These officers were proponents of national socialism, and called for limits on private property as well as state-ownership of firms in strategic industries. Their rivalry with the To-sei-ha Faction prompted them to protest reformist bureaucrats and To-sei-ha plans. 50 Accusation of being communist had a particular political significance at this time. Much like the United States during the time of McCarthyism, the taint of communist involvement could ruin one’s social and political life. The government was eager to suppress communist movements in Japan and arrested a number of communists and their sympathizers. 51 Kobayashi (2005) argued that business leaders and State Minister Hiramuma were operating behind the scenes of this incident in an attempt to restrain the MCI and the government, which were inclined towards state control. See also Kishi et al. 1981: 39. 52 Fujiwara started his business career in Mitsui Bank and became the president of Oji Papers, which held about 90% of the Japanese market for paper products. He was one of the main figures in the Mitsui zaibatsu and was often referred to as “the King of Paper.” 53 Hoashi was a former bureaucrat at the Planning Board and one of the drafters of the Outline for Establishment of a New Economic System of 1940. 54 From Shiina Etsusaburo-’s speech at a business conference in Osaka in 1941. The title of the speech was “Ju-yo- Sangyo- Dantai To-sei Rei Ni Kansuru To-kyoku No Taido” (The government’s view on the Important Industries Control Act). Reprinted in Kokusaku 1983: 565. 55 “Report of the Mission on Japanese Combines”, a report to the US Department of State and the US War Department, March 1946. The document is reprinted in Merrill 1996: vii. 5 Institutional evolution in postwar Japan (1946–65) 1 Keizai Kiki Kinkyu Taisaku Jisshi Yo-ko- (The Outline for Economic Crisis Emergency Measures), issued January 26, 1946. Source: The National Diet Library website, www.ndl.go.jp/horei_jp/kakugi/txt/txt00706.htm. 2 These bureaux included production, construction, trade, fiscal finance, commodities, auditing, energy, price, and labor. 3 Tsu-sho- Sangyo- Sho- Secchi Ho- (The Act for the Establishment of the Ministry of International Trade and Industry), May 24, 1949. Houko Database, www.houko. com/00/01/S27/275.HTM#s1. 4 Ibid. 5 See Johnson 1982; Anchordoguy 1988; Okimoto 1989; Hatch and Yamamura 1996, for a detailed analysis of MITI’s political powers in postwar Japan. 6 Nihon Keizai Saiken No Kihon Mondai (Postwar Reconstruction of the Japanese Economy), Special Survey Committee, MOFA, September, 1946. 7 The shortage of steel at the time was causing serious safety and efficiency problems in coal mines. Arisawa Hiromi, who investigated a number of coal mines when drafting the Priority Production Plan, explained the impact of the serious steel shortage saying, “In coal mines, they lay rails to drag trams. At that time, they were using bamboo for rails – not steel, bamboo! When you drag a heavy tram [on bamboo rails], it can fall easily. You cannot make it efficient that way. What’s more, there were no wires, so they used hemp ropes, which easily break. And, they

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21

Notes

had no steel framing to reinforce the tunnels. So, they could not dig as much as they wanted” (Economic Planning Agency 1988: 85–86). “Sho-wa 21 nen Dai Yon Shihanki Kisho Busshi Jukyu- Keikaku Sakutei Narabini Jisshi Yo-ko-” (The Outline of the Drafting and Enactment of the Planning of Demand and Supply of Basic Materials in the Fourth Quarter of 1946), ESB, October 1946. The National Diet Library website, www.ndl.go.jp/horei_jp/kakugi/txt/txt00767.htm. The sources of public funds included the Recovery Finance Fund, the Japan Export Bank, and the World Bank. This refers to subsidies to compensate for the differences between producer and market prices. The government hoped to use this system to maintain low prices and stable provision of coal and steel products and to producers for losses. See MITI 1991: vol. 2, 270. Additionally, the government specified its plan for preferential treatment of the coal workers in food rationing. It stated, “In order to achieve production of 30 million tons next year, we must increase miner workloads … To prevent hunger during work hours and improve labor morale by providing sufficient calories, [the government encourages] provision of meals to miners who engage in heavy labor, and provides other necessary food on top of the extra ration of rice” (MITI 1992: vol. 3, 83–84). In 1947 coal miners received seven cups of rice per day (three cups for their family), while the ration of rice for the rest of the population was 2.5 cups per day (ibid.: 87). The Priority Production Policy was financed mainly through a governmental financial institution, called the Recovery Finance Fund (RFF, Fukko- kinyu- kinko). The RFF was established in January 1947 to aid the recovery of Japanese economy. In 1947 the RFF provided the steel industry with a large number of loans (105 million yen for investments in plants and equipment, and 1.46 billion yen for business operations (JISF 1959: 23)). Bank of Japan 1999: 92–100. Examples of such liberalization measures include the Dodge Line Policy (1949), which aimed at balancing the budget and controlling inflation. The policy, advocated by SCAP (see below), drastically cut government expenditures by terminating various industry subsidies and state controls over markets. The Liberal Party’s Diet member, Nakamura Jun, who advocated the bill, explained its objectives as follows: “As Japan signed the peace treaty, our nation will become fully independent. And our economy must become independent. Thus, it is our imminent task to develop our industry and increase exports. In order to do so, I believe we must promote production of products that are good and cheap, and make our industry successful in international competition by facilitating the rapid rationalization of firms” (MITI 1991: vol. 2, 517). Sangyo- Go-rika Shingikai No To-shin (The Industry Rationalization Council Report) of June 25, 1950. Reprinted in JISF 1959: 691. The source of this fund was bank loans (private banks and public financial institutions), corporate bonds, and stock sales. Shiteki Dokusen No Kinshi Oyobi Ko-sei Torihiki No Kakuho Ni Kansuru Ho-ritsu (the Act on Prohibition of Private Monopolization and Maintenance of Fair Trade, a.k.a. The Antimonopoly Law), April 14, 1947. For example, MITI provided the cotton industry with administrative advice to limit monthly production to less than 60 million pounds, cutting production level by 25% in February 1952. Each cotton producer received an official letter from the chief of the MITI Textile Bureau informing them of their production quota (Misonou 1987: 61). MITI applied similar policies to other industries including the synthetic fiber industry, the rubber industry, and the like. I discuss the industry’s reaction to market-stabilization policies in the next section, in detail.

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22 The law allowed MITI to exercise “necessary but minimal control or adjustments on external transactions.” The law’s original objectives were to “enable the normal development of external transactions, the facilitation equilibrium in our balance of international payments and the stability of our currency, as well as to contribute towards the sound development of our national economy” (from the METI website, www.meti.go.jp/policy/anpo/kanri/top-page/Taro13-foreign-exchange-and-for.pdf). 23 SCAP 1952: 239–40. 24 Ibid. 25 It was established in May 1946 to allow the executives of steel-producing firms to socialize and exchange information regarding labor issues. 26 JISF, “Sho-wa 45 Nendo Ni Okeru Wagakuni Tekko-gyo- No Ko-zu” (The Projected Condition of Japan’s Steel Industry in 1970), October 1960. Reprinted in JISF 1969: 789. 27 Ikeda Hayato succeeded Kishi as prime minister in 1960. 28 Kanshi Iinkai Secchi Yo-ko- (Outline for Establishment of the Monitoring Committee), issued by MITI on July 8, 1958. 29 Tekko- Shikyo- Taisaku Yo-ko- (Outline of the Iron and Steel Market Condition Measures), issued by MITI on June 20, 1958. 30 Profit-capital ratio represents the proportion of net profit to total capital. 31 The State-War-Navy Coordinating Committee (SWNCC/SANAC) was established in December 1944 to coordinate the views of the State, War, and Navy Departments in matters concerning their interests. It cooperated with the Joint Chiefs of Staff to obtain military approval on their policies. The Committee drafted instructions regarding the occupation of Germany and Japan reflecting the interests of the respective departments. SCAP was put under the direct supervision of SWNCC. In June 1949 the Committee was renamed the State-Army-Navy-Air Force Coordinating Committee. 32 SWNCC 150–52, August 12, 1945. 33 This legislation broke up zaibatsu group holding companies and transferred their stocks to the newly established Holding Company Liquidation Committee at under-market prices. Then, the family members of zaibatsu groups and the executives of their holding companies were barred from taking any managerial positions in the future. Dissolution started with the four largest zaibatsu (Mitsui, Mitsubishi, Sumitomo, and Yasuda), but a total of 83 holding companies were liquidated by 1947. As a result, zaibatsu owner families lost their control over their group firms, and zaibatsu groups were broken into smaller companies. Those companies severed from zaibatsu groups became more or less autonomous in their management, but they soon formed loosely tied corporate groups later known as keiretsu groups, which became a major characteristic of postwar Japanese corporations. 34 Until the end of World War II, a large portion of rural farmland was owned by absentee landlords, whose lands were farmed by tenant farmers. “Before the war, 46% of the land had been cultivated by tenant farmers who paid 75% of their rents in kind. The proportion of farmers who owned no land came to 28%” (Hayes 2004: 39). SCAP made the Japanese government purchase farmland from landlords who owned more than 7.5 acres of farmland and then sell that land to the tenant farmers at affordable prices via subsidized loans. Within five years, almost all farmers possessed their own farmland. 35 On average, there were 764 labor disputes each year during the five-year period between 1946 and 1950, compared to an average of 184.2 per year in the previous five-year period (1940–45). 36 See SCAP 1952: 184. 37 Bank of Japan 1999: 133. 38 Price-difference compensation was cut from 43.5 billion yen in 1949 to 13.0 billion yen in 1950, and subsidies for import of coal, iron ore, and pig iron shrank from 20.6 billion yen in 1949 to 7.1 billion yen in 1950 (JISF 1959: 64).

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39 Johnson 1982 and Okimoto 1989 contain detailed analyses on the context behind the establishment of MITI. As these existing studies have excellent discriptions of MITI, I do not give a detailed account here. 40 SCAP-IN 1394, December 11, 1946, in SCAP 1952: 343. 41 The ESB’s classified document also notes that SCAP told the ESB that, “Adjustment of supply and demand must be exercised fully by the government or through establishment of public enterprises. Either way, it must be done by some government agencies not private ones” (MITI 1991: vol. 2, 285). 42 SCAP-IN 244, November 6, 1945 (SCAP 1952: 40). 43 This so-called “Kime Draft” was written by Posey T. Kime, a former Indiana State Court of Appeals judge. The Kime Draft reflected the US government campaign to eliminate international cartels (see Hadley 2001: 31; and Misonou 1987: 18). 44 NSC 13/2 suggested that, “The Japanese Police establishment, including the coastal patrol, should be strengthened by the re-enforcing and re-equipping of the present forces, and by expanding the present centrally directed police organization.” Reflecting this recommendation, the Japanese government established the National Police Reserve in 1950, which was reorganized as the Japan Self-Defense Forces in 1954. 45 “Recommendations with Respect to United States Policy Toward Japan,” NSC 13/2, US National Security Council, October 7, 1948. 46 Ibid. Although, it provides several conditions such as limiting Japan’s economic war potential and prohibiting manufacture of weapons of war and civil aircraft. 47 Ibid. 48 The sudden increase in demand for industrial goods by US troops in Korea allowed Japanese industry to break free from the recession. “The amount of exports swelled from a monthly average of 59.7 million dollars from April to June 1950 to a monthly average of 70.2 dollars from July to September 1950 to a monthly average of 95.8 million dollars from January to March 1951.” Additionally, payments from the sales of commodities and services to the US troops increased from a monthly average of 5.2 million dollars between July and September 1950 to a monthly average of 20.1 million dollars between October and December 1950 and then to a monthly average of 29.7 million dollars between January and March 1951 (MITI 1989: vol. 1, 457). Thanks to these “special demands” (tokuju) from the Korean Peninsula, the Japanese economy shifted from a recession to a boom within a very short period of time. 49 NSC 48/5, the US National Security Council, May 17, 1951. 50 It estimated that “Japan’s potential in heavy industry is roughly equal to 50% of the Soviet Union’s present production.” Therefore, it claimed that “it is important to U.S. security interests that U.S. military and economic assistance programs be developed in such a manner as to maximize the availabilities of the material resources of the Asian area to the United States and the free world” (ibid.). 51 Miyazaki Isamu, former Director of the Economic Planning Agency, who assisted in drafting the Income Doubling Plan, testified that the ESB found those people from Mantetsu who had expertise in managed economy useful when it carried out the Priority Production Plan (Kobayashi 2005: 106). 52 The Japan Socialist Party split into the Rightist Socialist Party and the Leftist Socialist Party in 1951. 53 He started his public servant career at the Ministry of Agriculture and Commerce and later served as Chief of the Research Section of the Resource Bureau. Then, he became Chief of the Research Bureau of the Planning Board and led efforts resulting in the National Mobilization Law. In 1941 he assumed the position of president of the Coal Control Association. After World War II he became an executive director (1946) and later vice-president (1951) of Keidanren, with which he is credited for turning into a machine to collect political contributions. Uemura

Notes

54 55

56 57 58 59 60 61 62

63 64

65 66 67

68 69 70

193

built a close relationship with the LDP, utilizing his personal ties with bureaucrat-turned politicians such as Kishi and Shiina. This system of political contribution through Keidanren became known as the “Keidanren system.” The original title of the document was “Kongo no Wagakuni no Kihonteki Keizai Seisaku ni Kansuru Ko-satu,” MOFA Research Bureau, December 7, 1945. The Sub-committee on Coal (Sekitan Sho- Iinkai) was a private advisory organization established by Prime Minister Yoshida Shigeru in November 1946. The committee, which consisted primarily of university processors and bureaucrats, drafted various economic policy plans, including the Priority Production Plan, upon Yoshida’s request. Arisawa served as chairman of the committee. Sekitan Sho- Iinkai Dai 1 Kai Gijiroku (A Memorandum of the First Meeting of the Sub Committee on Coal), November 5, 1946 (Nakamura and Miyazaki 1990: 161). Sekitan No Shoyu-ken Narabini Hojokin Shishutsu No Ho-ho- Ni Kansuru Memorandamu (A Memorandum Regarding the Ownership and Subsidies Payment for Coal Mines). Reprinted in MITI 1991: vol. 2, 326. Minister of Commerce and Industry Mizutani Cho-saburo-’s remarks at the plenary session of the House of Representatives on July 3, 1947. The Diet Proceedings Record Search System at the National Diet Library website, www.kokkai.ndl.go.jp. Tsu-sho- Sangyo- Sho- Secchi Ho- (The Act for the Establishment of the Ministry of International Trade and Industry), May 24, 1949. Houko Database, www.houko. com/00/01/S27/275.HTM#s1. Prime Minister Yoshida’s statement in the plenary session of the House of Representatives, December 13, 1948. Source: The Diet Proceedings Record Search System at the National Diet Library website, www.kokkai.ndl.go.jp. This is a statement made by Yoshida at the plenary session of the House of Representatives, November 18, 1948. Source: The Diet Proceedings Record Search System at the National Diet Library website, www.kokkai.ndl.go.jp. This special committee was organized by Prime Minister Yoshida Shigeru to discuss ways to recover the devastated Japanese economy in 1946. The members of the committee included academic economists and bureaucrats. It was this committee that drafted the Priority Production Plan. “Nihon Keizai No Ho-to” (The Way of the Japanese Economy), Special Survey Committee of the Ministry of Foreign Affairs, Japan, 1946. Reprinted in Nakamura and Hara 1990: 94. “Nihon Keizai Saiken No Kihon Mondai” (Postwar Reconstruction of the Japanese Economy), Special Survey Committee of the Ministry of Foreign Affairs, Japan. First published in September 1946; this English translation of the report was quoted from Okita et al. 1992: 94. This part of the document was deleted in the second edition, perhaps due to pressure from SCAP. Miki served as MITI minister (1965–66) and foreign minister (1966–68), before becoming prime minister (1974–76). Shigemitsu served as foreign minister during and after the war (1943–45, 1954–56). The Reform Party merged with a group of politicians of the Liberal Party led by Hatoyama Ichiro- (prime minister 1954–56) and became the Japan Democratic Party in 1954. The Japan Democratic Party’s platform, published in 1954, also states that the party will “compose an economic plan and clarify the nation’s goals” for achievement of economic autonomy (Miyamoto 1962: 368). From MITI Minister Ikeda Hayato’s statement in the House of Councilors plenary session. Source: The National Diet Library website, www.kokkai.ndl.go.jp. From Prime Minister Kishi Nobusuke’s statement during the House of Councilors plenary session. Source: The National Diet Library website, www. kokkai.ndl.go.jp. MITI website, www.meti.go.jp/hakusho/tsusyo/soron/S34/00-03-01.html.

194

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71 He was also the president of Nissan Chemical Inc. Ishikawa served as the president of Keidanren between 1948 and 1958. 72 These bureaucrats-turned-politicians who occupied central positions in the government included prime ministers (Kishi, Ikeda, and Miyazawa), and ministers (Shiina, Wada, and Sasaki). 6 The evolution of the Japanese developmental state 1 Miyazaki entered the ESB in 1947 and serviced the EPA for 33 years. He became involved in drafting a number of important economic policies such as the Income Doubling Plan and eventually became vice-director (1979–80) and director (1995–96) of the EPA. 2 For example, the Price Control Law (Kakaku To-sei Ho-) of 1946 and the Excessive Profit-Seeking Action Prevention Act (Bo-ri Ko-i Nado Torishimari Kisoku) of 1939. 3 The “Outline for the Establishment of the Manchurian Economy” (Manshu-koku Keizai Kensetsu Ko-yo-), issued by the Manchurian government in February 1933. 4 The “Outline for the Establishment of New Economy” (Keizai Shintaisei Kakuritsu Yo-ko-), adopted at the cabinet meeting on December 7, 1940. 5 For instance, the Socialist-led government in France and the Labour-led government in Britain nationalized a number of core industries. 6 “Kongo Torubeki Keizai Shisaku Ni Tsuite” (The Future Economic Policies to be Taken), Economic Stabilization Board, March 3, 1949. 7 Japan signed the GATT in 1955 and joined multinational liberalization negotiations such as the Geneva Round in 1956 and the Kennedy Round 1967. It hosted the Tokyo Round in 1979. 8 “The Outline of the Production Capacity Expansion Plan” (Seisanryoku KakujuKeikaku Yo-ko-), by the Planning Board, was adopted by the Cabinet on January 14, 1939. Reprinted in Nakamura 1970: 244. 9 “Basic Problems for the Reconstruction of the Japanese Economy” (Nihon Keizai Saiken No Kihon Mondai), issued by the Special Survey Committee of the Ministry of Foreign Affairs Research Bureau in September 1946. 10 The Economic Stabilization Board Ordinance (Keizai Antei Honbu Rei), Article 1, August 12, 1946. 11 From Article 3 of the Ministry of International Trade and Industry Establishment Law (Tsu-sho- Sangyo- Sho- Secchi Ho-), May 24, 1949. 12 The “Outline for the Establishment of New Economy” (Keizai Shintaisei Kakuritsu Yo-ko-), was adopted at the Cabinet meeting on December 7, 1940. 13 The Important Industry Groups Ordinance (Ju-yo- Sangyo- Dantai Rei), August 29, 1941. Reprinted in Suekawa 1942: 135. 14 Calder talks about this “unusual character” of Japanese postwar political and business leaders and claims that they had “an extremely low level of tolerance for political risk and uncertainty” (Calder 1988: 72). 15 Ministry of Internal Affairs website, www.stat.go.jp/data/chouki/27.htm.

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Index

Abe Isoo 36 Abe Nobuyuki, General 112 Aikawa Yoshisuke 60, 72–73, 107, 119, 167 Akinaga Tsukizo-, Colonel 112 Allen, F. and Gale, D. 26, 27 Anchordoguy, Marie 2, 3, 123, 128, 179 Ando- Yoshio 32, 35 Antimonopoly Act (1947) 134, 140, 143–44, 145, 155, 160, 162 Aoki Kazuo 79 Arima Hiroshi, General 96 Arisawa Hiromi 154 An Army Pamphlet (Japanese Imperial Army) 100 Arthur, W. Brian 10, 11 Asahara Kenzo- 107 Asahi Shimbun 102, 143 Azuma Eiji 79 Bank of Japan 23, 27, 48, 60, 126, 135, 137, 177, 183n10 Bates, Robert 7 Beland, D. and Cox, R. 11 Bianco, W.T. and Bates, R.H. 181n10 Bisson, Thomas 142 bureaucracy: favoritism, appointments through (jo-jitsu ninyo-) 31–32; ideational guidance 16–17; leverage over private business (amakudari) 32– 33; military in Manchuria and 69–71, 75; policymaking influence in 1920s 30–31 Cabinet Planning Board in wartime Japan 78–83 Calder, Kent 174 cartels 28 Central Bank of Manchuria 46–47, 49

Chang Chin-hu, Prime Minister of Manchukuo 41 classical market economy 25 Clayton Anti-Trust Act (US, 1914) 141–42 collective action theory: aftermath of war and 135–36; argument for 136–38; economic institutions 6–8; pre-occupation conditions in Manchuria and 47–52; problems in Manchuria with 50–52; problems in postwar Japan with 138–39; wartime Japan 87–89 Collier, R.B. and Collier, D. 10 control associations (to-sei kai) 15; embeddedness of to-sei keizai ron in 115–17; wartime Japan 83–85 corporate conglomerates (zaibatsu) 24; Agriculture, commerce and Industry Council 36; dominance of, party politicians and 29–37, 38; Echigo Railway scandal (1927) 35–36; economic power of leadership 34; export surge during World War I 34; House of Peers 36–37; kinship ties and expansionist policies 34–35; opposition to state control 106–7; opposition to state control, continuation of 113–15, 117; policymaking process and laissez-faire economy 33–34; political influence of, factors in development of 34–35; political investments by leaders 35; political power of leadership 32 Corporate Rationalization Promotion Act of 1952 (Kigyo- Go-rika Sokushin Ho-) 128 critical junctures 9–10

Index Dan Takuma 36, 91 defense-related industries, prioritization for 66 Delbruck, Hans 56 Development Bank of Japan (DBJ) 127 developmental state system, evolution of: economic institutions and 12–17; effect in wartime Japan of 165–74; Manchuria under Japanese control 39–76, 165–74; in postwar Japan 134–63, 165–74; prototype state system 13; rise in wartime Japan 85–117, 118–19 Dodge, Josef 141 Doko- Toshio 155, 161 Douglas, Paul 168 Dower, John 135 Echigo Railway scandal (1927) 35–36 Economic General Staff Headquarters in Manchuria 66–67 economic institutions 1–2; bureaucratic experimentation in Manchuria 19–10; bureaucratic ideational guidance 16–17; collective action theory 6–8; core institutions of postwar economy 2–6; critical junctures 9–10; developmental state system, evolution of 12–17; developmental state system in postwar Japan, core institutions of 121–34; economic literature 18–20; Economic Stabilization Board (ESB, Keizai Antei Honbu) 4, 15; future study of, perspectives for 177–79; historical factors, significance in institutional evolution 174–76; historical institutionalism 9–12; ideas in politics 11–12; industrial associations (gyokai dantai) 4–6, 21; International Trade and Industry, Ministry of (MITI) 4; managed economy, theory of (to-sei keizai ron) 12–17; multicausality 17–18; path dependency 10–11; pilot agencies 3–4, 21; Planning Bureau 3–4; power-based rationalist theory 8–9; rationalist theory, power-based 8–9; self-interest, institutional maintenance and 17–18; state control and evolution of 176–77; wartime institutions 18–19, 93, 120, 134–35, 138, 140, 145, 148, 151, 153, 157, 163–64; see also industrialization, early stages of;

205

Manchuria under Japanese control; postwar Japan; wartime Japan economic literature 18–20 Economic Planning Agency (EPA) 86, 121–22, 125, 135–36, 141, 142, 150, 167, 189–90n7 Economic Stabilization Board (ESB, Keizai Antei Honbu) 4, 15, 120–21, 122–23, 124, 126, 130, 136, 140–41, 142, 148, 150, 151, 158, 162, 166–67, 170, 171, 180n8, 190n8 Economic Stabilization Board Establishment Act of 1947 (Keizai Antei Honbu Secchi Ho-) 121–22 economic systems, comparative analysis of 20, 22–38 economy: in early 1930s 85–87; in Manchuria, building principles for 64–66; in Manchuria, establishment of 64–74; planning policies in postwar Japan 124–26 Edo period (1603–1867) 23, 28 Edwards, Corwin D. 118 equity market finance 26–28 Evans, Peter 3, 4, 178 Excessive Profit-Seeking Action Prevention Act of 1939 (Bo-ri Ko-i Nado Torishimari Kisoku) 194n2 On the Final War (Ishiwara Kanji) 55 final war theory 55–57; to-sei keizai ron and 57–58, 75 Fine, Sherwood 146 Foreign Affairs, Ministry of (MOFA) 142–43, 154, 158, 189n6, 193n54 foreign technology, acquisition of 24–25 free market liberalism 14 Fujii Heigo 162 Fujisawa Jiro- 162 Fujita Teiichiro- 28 Fujiwara Ginjiro- 114–15, 189n52 Fukuda Tokuzo- 95 Fulcher, James 31 “Fundamental Reconsideration of Manchurian Special Corporation” 74 Gao Bai 18, 19–20 Gereffi, G. and Wyman, D. 2, 3, 4, 178 Germany, industrial rationalization policies in 104–5 Goldstein, J. and Keohane, R. 11 Goldstein, Judith 11

206

Index

Great Depression 12, 13, 65; wartime Japan and 85, 86, 88, 90, 91, 95, 96, 118 guilds 28 Haas, Peter 11 Haavelmo, Trygve 168 Hadley, Eleanor M. 142 Hadley, John O. 145, 192n43 Hagen, Everett 168 Hall, John W. 28, 34, 119 Hall, Peter A. 10–11, 95 Halpern, Nina 11 Hamaguchi Osachi, Prime Minister 91 “han-clique politicians” 29–30 Hara Takashi, Prime Minister 32, 33– 34, 35, 36–37 Harrod, Roy 168 Hata Ikuhiko 55, 60, 97, 111, 184n22, 185n30, 188n37, 188n41 Hatch, W. and Yamamura, K. 3, 22, 179, 189n5 Hatoyama Ichiro-, Prime Minister 125, 156–57 Hayao Kanji 176 Hayasaka Tadashi 95, 102, 187n20 Hayashi Senjuro-, General and Prime Minister 79, 107, 108 Hayes, Louis 26, 30, 31, 118 Henderson, J. McI. 142 Hirai Ko-ichi 162 Hiranuma Kiichiro- 113 Hirota Cabinet 106 historical factors, significance in institutional evolution 174–76 historical institutionalism 9–12, 20, 179 Hitler, Adolf 55 Hoashi Kei 88, 115, 116–17, 151 Ho-chi Shimbun 106 Holding Company Liquidation Committee Act of 1946 (Mochikabu Kaisha Seiri Iinkai Rei) 140 Hoshi, T. and Kashyap, A. 25, 26, 27, 181n19 Hoshino Naoki 51, 69, 70, 72, 79, 108, 113 Hosokawa Ryuichiro- 106, 113 House of Peers 36–37 hypotheses: actors build institutions to overcome collective action problems 8; collective action 47–52, 87–89, 136–49; ideational 54–64, 93–117, 152–63; institutional arrangements reflect the power balance among

actors 9; policymakers rely on their ideational guidance when building institutions 17; power-based rationalism 52–54, 89–93, 149–52 ideas in politics 11–12; feedback cycles 11–12 ideational competition in postwar Japan 153–57 ideational linkage, path dependency and 157–63 ideational theory: policy entrepreneurs in Manchuria under Japanese control 54–55; postwar Japan 152–63; wartime Japan 85, 93–95, 98–99, 118 Ikeda Hayato, Prime Minister 156, 157, 159–60, 162, 191n27, 193n68, 194n72; Cabinet of 125, 133, 188n43 Ikeda Shigeaki 60, 107 Imada Shintaro- 107 Imai Takeo 59 Imperial Diet 5, 29, 33–34, 36, 60, 98, 108, 110, 144, 155, 156, 169, 176, 177; establishment of 30 Inaba Shu-zo- 150 Inayama Yoshihiro 155, 161 industrial associations (gyo-kai dantai): economic institutions 4–6, 21; Manchuria under Japanese control 172–74; postwar Japan 130–34, 172– 74; wartime Japan 172–74 Industrial Bank of Japan (IBJ) 127 industrial policies: Gao’s view of 19; in postwar Japan 123–24; rationalization policies in postwar Japan 127–28 industrial production in Manchuria 48 industrialization, early stages of 22–38; business practices 22; cartels 28; classical market economy 25; corporate conglomerates (zaibatsu) 24; direct management by government 24; Edo period (1603–1867) 23, 28; empirical puzzles 38; equity market finance 26–28; financial sector, investment in 23–24; foreign technology, acquisition of 24–25; guilds 28; “han-clique politicians” 29–30; Japan Cotton Spinners Association 28–29; labor-management conditions 25–26; liberal market economy (1920s) 25–29, 38; Meiji period (1868–1912) 22–23, 23–25, 37; meritocratic state elites 22; Pig Iron Cooperative Association (Sentetsu

Index Kyo-do- Kumiai) 28; political merchants (seisho-) 24; production promotion (shokusan ko-gyo-) 23; protectionism 28; “Shidehara Diplomacy” 37; state-business relations 22; state-owned enterprises, establishment of 24; “Taishodemocracy” 30, 36–37; zaibatsu dominance, party politicians and 29–37, 38 Inoue Junnosuke 91 Inoue Kaoru 35 institution building: in Manchuria under Japanese control 39–76; by reformist bureaucrats in wartime Japan 112–13 institutional continuity, discontinuity of security policies and 163–64 institutional evolution in postwar Japan 120–64 institutional origin, political economy and 1 institutions of wartime developmental state system 78–85, 118 intellectual discourse in wartime Japan, competing ideas and 94 International Trade and Industry, Ministry of (MITI) 4, 128, 143, 145, 179; postwar Japan 120, 121, 122, 123, 127, 128, 129, 130, 133–34, 138, 143, 145, 148, 150, 156, 159, 161; White Paper on International Trade (1959) 160 Inukai Tsuyoshi, Prime Minister 91, 93 Ishikawa Ichiro- 161 Ishiwara Kanji, Lieutenant-Colonel 41, 53, 64, 65, 66, 68, 72, 75, 79, 99, 100, 101, 152, 158, 172; downfall of 110–11; early days 54–55; final war theory 55–57; Kwantung Army in Manchuria and 60–61; Miyazaki and the Planning Board 108–10; Planning Bureau, creation of 14–15; seizure of power by 107–8; spread of idea of 58–60; state-building in Manchuria and 13–15; worldview development 54–55 Ishizaka Taizo- 155, 161–62 Itagaki Seishiro-, Colonel, later General 52–53, 59, 70–71, 107, 108 Ito- Takashi 114 Iwasaki Yataro 34 Izumiyama Sanroku 109

207

Japan Cotton Spinners Association 28–29 Japan Economic Statistics Research Institute (Nihon Keizai To-kei Kenkyu-jo) 26 Japan Iron and Steel Federation (JISF) 126, 128, 131–32, 150, 151, 156, 161, 172; History of Steel in the Postwar Period (1959) 172–73; industrial policies, roles in 132–34 Japanese Manchuria Economic Research Association (JMERA) 79, 109–10, 111 Johnson, Chalmers 2, 3, 18, 19–20, 22, 31, 33, 92, 93, 123, 128, 149, 156, 176 Junsenji To-sei Keizai (Semi-Wartime Managed Economy, Ryu Shintaro-, 1937) 102 Kades, Charles 142 Kanamori Hisao 168 Kanemitsu Tsuneo 113 Kanto- Kyoku Kanbo- Bunshoka 47–48, 50, 184n11 Katakura Tadashi 59, 101, 107 Katayama Tetsu, Prime Minister 154; Cabinet of 151, 154 Kato- Junko 10, 91, 99, 100 Kato- Takaaki, Prime Minister 34–35 Katsumada Seiichi 114 Kawakami Hajime 97, 98–99 Keck, M. and Sikkink, K. 11 Keohane, Robert 7, 10 Kido Ko-ichi 104 Kier, Elizabeth 11 Kikuchi Kazue 68, 74 Kishi N. et al. 71 Kishi Nobusuke, Prime Minister 15, 69, 70, 72, 97, 103–7, 108, 112, 113, 114, 115, 116, 117, 119, 132, 150, 152, 156–57, 160, 162, 172, 178 Kita Ikki 99–100, 101, 104 Kiuchi Jushiro- 34 Knight, Jack 8, 149, 181n11, 181n12, 182n26 Kobayashi H. et al. 18, 26, 146, 149, 162, 177 Kobayashi Hideo 62, 63–64 Kobayashi Ichizo- 113, 114 Kobayashi T, and Shimada T. 184n19 Kobe Shimbun 95 Kobe Yu-shin Nippo- 87 Koga Hidemasa 109 Koiso Kuniaki, General 67

208

Index

Koizumi Shinzo- 95 Kojima Tsunehisa 135 Kokumin Shimbun 35–36, 96 Kokusaku Kenkyukai 189n54 Konoe Fumimaro, Prince and Prime Minister 60, 107, 108, 112, 113, 114 Krasner, Stephen 181n13 Krauss, E. and Pekkanen, R. 10 Kurzman, Dan 113, 114, 115 Kwantung Army 13; Economic General Staff Headquarters 66–67; industrialization of Manchuria, objective of 70–71; “one-industry-onecountry” (ichigyo--issha), principle of 71–72, 74; policymaking process, influence on 51; power-based rationalist theory and intentions of 52–54; private entrepreneurs and 71– 74; public goods, provision by 49; seizure of control in Manchuria 47, 48–49; see also Ishiwara Kanji, Lieutenant-Colonel Labor Relations Act of 1946 (Ro-doKankei Ho-) 140 Labor Standard Act of 1947 (Ro-doKijun Ho-) 140 Leontif, Wassily 168 liberal economic market theory 94–97; implementation in liberal market economy (1920s) 25–29, 38; problems in Manchuria under Japanese control 65 Lipset, S.M. and Rokkan, S. 181n15 Lu, David 99, 188n22, 188n29 Ludendorff, Erich von 56 Lynn, L.H. and McKeown, T.J. 2, 5, 28–29, 149, 150–51 MacArthur, General Douglas 139–40, 142 Machida Chu-ji 106 McNamara, Kathleen 11 Mahoney, James 10, 179, 182n29 Mahony, J. and Rueschemeyer, D. 9 Maki, John M. 31 managed economy, theory of (to-sei keizai ron): economic institutions 12– 17; final war theory and 57–58, 75; postwar Japan 153, 157, 159, 163, 164; practice in wartime Japan of 103; spread of final war theory and 58–60, 75; wartime Japan 101–3 Manchukuo, establishment of 41

Manchuria: Central Bank 46–47, 49; development plans in, implementation of 68–69; Economic General Staff Headquarters 66–67; Economic Research Association (MERA) 63–64; education levels in 48; “Fundamental Reconsideration of Manchurian Special Corporation” 74; Heavy Industry Company 46–47; industrial production in 48; Legislation Bureau 51; Outline of Manchukuo Economy Building (1932 and 1934) 45, 46, 64– 66, 68; Petroleum Company 46–47; social and economic instability in 48; South Manchuria Railway Company 40; State Affairs Board 41, 51; Strategic Industry Control Law (1937) 45, 46; Telecommunications Company 47; transformation into industrial region 49–50; warlords in, competition between 48, 49 Manchuria Daily 41–42 ‘Manchuria faction,’ influence in wartime Japan of 107–8 Manchuria under Japanese control 20, 39–76; bureaucrats and military 69– 71, 75; collective action theory, preoccupation conditions and 47–52; collective action theory, problems of 50–52; defense-related industries, prioritization for 66; development plans, implementation of 68–69; development state system, evolution of 165–74; economy in Manchuria, building principles 64–66; economy in Manchuria, establishment of 64–74; final war theory 55–57; final war theory, to-sei keizai ron and 57–58, 75; ideational theory, policy entrepreneurs 54–55; industrial associations 172–74; institution building 39–76; Ishiwara, early developments 54–55; Ishiwara, final war theory 55–57; Ishiwara, Kwantung Army in Manchuria and 60–61; Ishiwara, spread of idea of 58– 60; Ishiwara, worldview development 54–55; Japan’s advance into Manchuria 40; Kwantung Army, power-based rationalist theory and intentions of 52–54; liberal economy, problems of 65; managed economy, theory of (to-sei keizai ron), final war theory and 57–58, 75; managed economy, theory of (to-sei keizai ron),

Index spread of final war theory and 58–60, 75; Manchukuo, establishment of 41; military and bureaucrats 69–71, 75; military and private entrepreneurs 71– 74, 75; Miyazaki and 61–64; pilot agencies 66–67, 75, 166–71; pilot agency 41–45; Planning Bureau 41– 45; Planning Bureau, economic planning 43–44; Planning Bureau, industrial policies 42–45; Planning Bureau, Manchurian Industry FiveYear Development Plan 43–44, 69; Planning Bureau, operations 42; Planning Bureau, organization 41; Planning Bureau, rationalization of industry, policy of 44–45; policy entrepreneurs and ideational theory 54–55; power-based rationalist theory, Kwantung Army intentions and 52– 54; power-based rationalist theory, problems of 53–54; pre-occupation conditions, collective action theory and 47–52; private entrepreneurs and military 71–74, 75; public benefits, prioritization over private 65–66; special corporation system 67–68; special corporation (tokushu geisha) 45–47; state control, goals of 66 Manshu- Nichinichi Shimbun 74 Manshu- Nippo- 96 market-stabilization policies in postwar Japan 129–30 Marxism 14, 97–99; ideology of 30 Matsumura Shu-itsu 59 Matsuoka Yo-suke 60 Matsusaka Yoshihisa T. 40 Meiji period (1868–1912) 22–23, 23–25, 37; financial sector, investment in 23– 24; foreign technology, acquisition of 24–25; industrialization, early stages of 23–25; meritocratic state elites 22; political merchants (seisho-) 24; production promotion (shokusan kogyo-) 23; state-business relations 22; state-owned enterprises, establishment of 24 meritocratic state elites 22 Merrill, Dennis 189n55 Miki Takeo 159 military: bureaucrats in Manchuria and 69–71, 75; private entrepreneurs in Manchuria and 71–74, 75; rise of, end of party politics and 89–90, 118; weakness in 1920s of 33

209

Minazu Risuke 150 Minobe Tatsukichi 103 Minobe Yo-ji 112 Misonou Hitoshi 145, 156 Mitsukawa Kametaro- 99 Miwa, Y. and Ramseyer, J.M. 25, 26, 28 Miwa Ryo-ichi 148 Miyamoto Yoshio 159, 193n67 Miyazaki Isamu 167–68, 192n51 Miyazaki Masayoshi 54, 65, 66, 67, 68, 75, 79, 99, 107, 111, 158, 172; Ishiwara and the Planning Board 108–10; Manchuria under Japanese control 61–64; Planning Bureau, creation of 14; state-building in Manchuria and 13–14 Miyazawa Kiichi 162 Mizutani Cho-saburo- 154 Morikawa Hidemasa 35 Mouri Hideo 112 multi-causality 17–18 Muto- Akira 111 Muto- Tomio 48, 49 Mutsu Munemitsu 35 Nabeyama Sadachika 98 Nagano Shigeo 162 Nagata Tetsuzan 59 Naigai Industrial Report 44 Nakamura T. and Hara A. 79, 81, 154 Nakamura Takafusa 23–25, 34, 135 Nakano Seigo- 60 Nakayama Ichiro- 95 Naniwada Haruo 102 Napoleon Buonaparte 57 National Mobilization Act (1938) 78, 79, 108 national socialism (kokka shakai shugi) 14, 99–101 Nihon Kaizo- Ho-an Taiko- (An Outline Plan for the Reorganization of Japan, Kita Ikki, 1919) 99–100, 104 Nihon Keizai no Saihensei (Restructuring the Japanese Economy, Ryu Shintaro-, 1938) 102 Nihon Keizai Shimbun 143 Nihon Ko-gyo- Shimbun 82, 85 Nihon Shakai Seisaku Gakkai (Japan Social Policy Association) 94–95 Nihon To-kei Kenkyu-jo 48, 86, 87, 187n11 Noguchi Yukio 18, 26, 177 Nomura Otojiro- 59 Noro Eitaro- 97

210

Index

North, Douglass 10, 11, 181n16 North D. and Weingast, B. 181n10 Ogawa Go-taro- 106, 113 Okawa Shumei 99 Okazaki T. and Okuno M. 18, 25, 26, 27, 177 Okimoto, Daniel 3, 123, 128, 180n1, 189n5, 192n39 Okita S. et al. 159 Okuma Cabinet 34–35, 36 Okuma Nobuyuki 102 Okuma Shigenobu, Prime Minister 183n8 Olson, Mancur 7 Osaka Asahi Shimbun 46, 83, 97 Osaka Jiji Shinpo- 67, 96 Osaka Mainichi Shimbun 96 Ouchi Hyo-e 97 Outline of Manchukuo Economy Building (1932 and 1934) 45, 46, 64–66, 68 Park Chung-hee 178 party politics, end of 89–90 path dependency 10–11; ideational linkage and 157–63 Peace Preservation Law (1925) 30 Peattie, Mark R. 58, 59, 61 Pekkanen, Robert 2, 3 Pempel, T.J. 31, 33, 119 personal linkage in postwar Japan 149–51 Pierson, Paul 10, 11, 179 Pig Iron Cooperative Association (Sentetsu Kyo-do- Kumiai) 28 pilot agencies 3–4, 21; Manchuria under Japanese control 41–45, 66–67, 75, 166–71; postwar Japan 166–71; wartime Japan 78–83, 166–71 Planning Board, Ishiwara, Miyazaki and the 108–10 Planning Bureau 3–4, 41–45; economic planning in Manchuria 43–44; industrial policies 42–45; Manchurian Industry Five-Year Development Plan 43–44; operations 42; organization 41; rationalization of industry, policy of 44–45 policy entrepreneurs and ideational theory 54–55 policymaker reactions to plans for economic liberalization 142–45

political economy, scholarly attention to 1–2 postwar Japan 20, 120–64; collective action argument 136–38; collective action theory, aftermath of war and 135–36; collective action theory, problems of 138–39; core institutions of developmental state system 121–34; development state system, evolution of 165–74; economic planning policies 124–26; Economic Stabilization Board (ESB, Keizai Antei Honbu) 120–21, 122–23, 124, 126, 130, 136, 140–41, 142, 148, 150, 151, 158, 162, 166–67, 170, 171, 180n8, 190n8; evolution of developmental state system 134–63; ideational competition 153–57; ideational linkage, path dependency and 157–63; ideational theory 152–63; industrial associations 172–74; industrial associations (gyo-kai dantai) 130–34; industrial policies 123–24; industrial rationalization policies 127–28; institutional continuity, discontinuity of security policies and 163–64; institutional evolution in 120–64; Japan Iron and Steel Federation (JISF), role in industrial policies 132–34; maintenance of wartime systems in 16; managed economy, theory of (to-sei keizai ron) 153, 157, 159, 163, 164; market-stabilization policies 129– 30; Ministry of International Trade and Industry (MITI) 120, 121, 122, 123, 127, 128, 129, 130, 133–34, 138, 143, 145, 148, 150, 156, 159, 161; path dependency, ideational linkage and 157–63; personal linkage 149–51; pilot agencies 166–71; policymaker reactions to plans for economic liberalization 142–45; power-based rationalist theory 149–52; powerbased rationalist theory, problems of 151–52; rationalist theory, powerbased 149–52; Self-Defense Forces (SDF) 148, 164, 192n44; Supreme Commander for Allied Powers (SCAP), failed reforms in context 145–49; Supreme Commander for Allied Powers (SCAP), plans for economic liberalization 139–42, 164; Yoshida Doctrine 164

Index power-based rationalist theory: economic institutions 8–9; Kwantung Army intentions and 52–54; postwar Japan 149–52; problems in Manchuria with 53–54; problems in postwar Japan with 151–52; wartime Japan 89–93 power transition in the 1930s 90–92 private entrepreneurs and military in Manchuria 71–74, 75 Production Expansion Four-Year Plan (1938) 79–82 prototype of developmental state system 13 Pu-Yi, Emperor of China and Manchukuo 41 public benefits in Manchuria, prioritization over private 65–66 public interest prioritization in wartime Japan 84, 112, 115, 116–17 Pyle, Kenneth 164 Ramseyer, J.M. and Rosenbluth, F.M. 8, 181n14, 187n14 rationalist theory, power-based: economic institutions 8–9; postwar Japan 149–52; wartime Japan 89–93 rationalization of industry in wartime Japan, policies for 82–83 reformist bureaucrats: institution building by 112–13; rise in wartime Japan of 92–93 Ricardo, David 95 Robinson-Putman Act (US, 1936) 141–42 Russian Revolution 30 Russo-Japanese War (1904–5) 40 Ryu Shintaro- 102 Saeki Kiichi 150 Saionji Kinmochi 35 Saito- Makoto 91 Sakai Tadamasa 35, 36 Sakomizu Hisatsune 112 Samuels, Richard 2, 3, 5, 18, 177 Sano Manabu 98 Sasaki Yoshitake 150, 162 Sata Tadataka 150 Schaede, Ulrike 2, 6, 18, 28, 29, 177, 179 Self-Defense Forces (SDF) 148, 164, 192n44 self-interest, institutional maintenance and 17–18 Sherman Anti-Trust Act (US, 1890) 141

211

Shidehara Kijuro-, Prime Minister 34; “Shidehara Diplomacy” 37 Shigemitsu Mamoru 159 Shiina Etsusaburo- 69, 108, 112, 115, 116, 150, 162, 178 Shimanuki Takeharu, Lieutenant 96–97 Shimizu Yuichiro- 31–32 Shirasu Jiro- 143 Shiseki Ihei 150 Sikkink, Katheryn 11 Silberman, Bernard S. 9, 31 Smith, Adam 95 Sogo- Shinji 63, 107 Soviet Union, Five-Year Plan (1928–33) in 13 special corporation (tokushu geisha) system in Manchuria 45–47, 67–68 Stalin, Josef 55 state control: early attempts at 103–6; evolution of economic institutions and 176–77; goals of 66; state-owned enterprises, establishment of 24; zaibatsu opposition to 106–7 Steinmo, S., Thelen, K. and Longstreth, F. 9 Streeck, W. and Thelen, K. 9 Suekawa Hiroshi 83–84, 116, 172 Sugaya Juhei 162 Sugihara S. et al. 188n28 Supreme Commander for Allied Powers (SCAP) 15, 130–31, 143, 144–45, 153, 154, 164, 190n15, 191n31, 192n41; failed reforms in context 145–49; Instructions from (SCAP-IN) 130, 131, 141, 143, 144–45, 192n40; plans for economic liberalization 139–42, 164 Suzuki Takashi 50, 73, 86, 91 Suzuki Teiichi 59 Taisho- period (1912–26) 30; “Taishodemocracy” 36–37 Takahashi Kamekichi 35, 88, 95 Takahashi Korekiyo, Prime Minister 33, 37, 91 Takemae Eiji 140–42, 147 Taki Masao 79 Tejima Yu-ji 150 Thelen, K. and Kume I. 10, 179 Thelen, Kathleen 10, 179 Tilton, Mark 2, 5, 6 To-jo- Hideki 59, 73, 111, 113, 114, 115 Tokugawa shogunate 28 Tokyo Asahi Shimbun 87

212

Index

Tokyo Nichinichi Shimbun 62, 67–68 total war, concerns about possibility of 13 Trade Union Act of 1946 (Ro-do- Kumiai Ho-) 140 Truman, President Harry S. 118 Tsuda Shingo 60, 107 Tsushima Juichi 109 Ueda Kenkichi 73 Uemura Ko-goro- 79, 151–52 Uesugi Shinkichi 103 Ugaki Kazushige, General (retired) 108 Umetsu Yoshijiro- 111 Vogel, Steven 177, 179 Wada Hiroo 79, 114, 150, 151 Wade, Robert 2, 3, 4, 22, 178, 180n1 Waldner, David 1, 3, 4, 178, 180n1, 180n7 wartime institutions 18–19, 93, 120, 134–35, 138, 140, 145, 148, 151, 153, 157, 163–64 wartime Japan 20, 77–119; Cabinet Planning Board 78–83; collective action theory 87–89; control associations, to-sei keizai ron embedded in 115–17; control associations (to-sei kai) 83–85; development state system, evolution of 165–74; developmental state system, rise of 85–117, 118–19; economy in early 1930s 85–87; Germany, industrial rationalization policies in 104–5; Great Depression and 85, 86, 88, 90, 91, 95, 96, 118; ideational theory 85, 93–95, 98–99, 118; industrial associations 172–74; institution building by reformist bureaucrats 112–13; institutions of wartime developmental state system 78–85, 118; intellectual discourse, competing ideas and 94; Ishiwara, downfall of 110–11; Ishiwara, Miyazaki and the Planning Board 108–10; Ishiwara, seizure of power by 107–8; liberal economic market theory 94–97; managed economy, theory of (to-sei keizai ron) 101–3; managed economy, theory of (to-sei keizai ron), practice of 103;

‘Manchuria faction,’ influence of 107– 8; Marxism 97–99; military, end of party politics and rise of 89–90, 118; Miyazaki, Ishiwara and the Planning Board 108–10; national socialism (kokka shakai shugi) 99–101; party politics, end of 89–90; pilot agencies 78–83, 166–71; Planning Board, Ishiwara, Miyazaki and the 108–10; power-based rationalist theory 89–93; power transition in the 1930s 90–92; Production Expansion Four-Year Plan (1938) 79–82; public interest prioritization 84, 112, 115, 116–17; rationalist theory, power-based 89–93; rationalization of industry, policies for 82–83; reformist bureaucrats, institution building by 112–13; reformist bureaucrats, rise of 92–93; state control, early attempts at 103–6; state control, zaibatsu opposition to 106–7; wartime economy, rise of 77–119; zaibatsu opposition, continuation of 113–15, 117 Washington Naval Conference (1922) 33 Watanabe Tsuneo 31, 183n8 Watanabe Yoshisuke 150 Weingast, Barry R. 7, 181n10 Weir, Margaret 11 Welsh, Edward C. 142 Werner, Richard A. 25, 86, 92 Woo-Cumings, Meredith 180n1 Woo Jung-en 2, 3, 4, 178, 179 Yamamoto Cabinet 32 Yamamoto Takayuki 150 Yamanaka Shiro- 150 Yasuhara Kazuo 155, 161, 162 Yomiuri Shimbun 130–31 Yonekura Seiichiro- 2, 5, 18, 84, 149–50, 180n4, 186n7 Yoshida Shigeru, Prime Minister 143, 156–57, 193n55, 193n60; Cabinet of 125–26, 154, 185n38; Yoshida Doctrine 164 Yoshimoto Shigeyoshi 104, 163 Yoshino Shinji 104, 105, 106–7, 172 Yoshiue Satoru 150 Yuan Shih-kai 40 Zhang Xue-liang 60 Zhang Zou-lin 48