Washington’s Missing China Strategy
To Counter Beijing, the Biden Administration Needs to Decide What It Wants
Over four hundred years ago, the first Occidentals to come to Japan, the Portuguese, wrote letters home stating that the Japanese were different from other Asians and Africans and more like Europeans than any people yet discovered. Visitors from Europe and the Americas are still writing the same kind of letters, but whether the Japanese are really more like Europeans is open to question.
Japan's twenty-four year rise from the ashes of burned-out cities is a remarkable story: the base on which to rebuild was weak, the methods followed often unorthodox and their success inexplicable by the criteria normally applied by Americans.
Let us look at the base-102 million people crowded into mountainous, quaky islands with an area equal to that of Montana; 84 percent of the land not arable, and possessing almost no valuable mineral resources. Her two great neighbors are members of a bloc with which trade is restricted, the raw materials and petroleum on which Japanese industry depends must be brought many thousands of miles, and exports must compete in markets where tastes are usually different from those of the homeland.
In examining the methods employed by the Japanese to achieve their economic recovery, one is continually discovering cultural influences at work that must be traced back to their origin to be understood. An example is the dominant role played by the Government. During the feudal period, the Shogunate and clan governments sponsored mining operations and some factories. At the time of the Meiji Restoration in 1868 these were transferred to the central government which, aided by foreign engineers, installed up-to-date machinery in the mines and built modern factories. Although the Government sold these in 1880, it continued to exercise firm control over big business through both lawful and extra-legal devices up to the end of World War II. During 1945 much of Japan's industry was bombed out of existence, and early in the Occupation the Zaibatsu combines, which 65 years before had bought many of the government enterprises, were dissolved. These acts might have broken the grip of the Government but didn't. The commercial banking institutions were unable to finance the rebuilding unaided, so the Government was called upon to provide some of the funds. The reform efforts of the Occupation bureaucracy also reinforced the position of the Government in directing business.
In 1864 a foreign chamber of commerce was organized in Yokohama. One of its purposes was to find a way of overcoming government obstructions placed in the way of trade. To quote from a contemporary account: "It was asserted by the Japanese merchants and it was strictly true, that not a transaction of any sort between them and foreign merchants was unknown and entirely uncontrolled by the local officials." In 1948, when British and American chambers of commerce were organized in Tokyo, their concern over government involvement was almost identical to that of their predecessor 84 years earlier.
Since government plays such an important part in business life, it will be worthwhile to see how it operates. First, despite a normal amount of complaining, the Government is generally regarded with sincere respect by both Japanese and foreign businessmen. The members of the bureaucracy are well educated, dedicated, able and hard working, and corruption and favoritism are negligible. The percentage of the population on government payrolls is substantially lower than in the United States and advanced countries of Europe.
Each government bureau has responsibilities toward business. The Economic Planning Agency of the Prime Minister's Office has a central policy-making role, preparing long-range plans for economic expansion and indicating where government direction and support should be focused. Influenced to some extent by this advice, the Ministries and independent agencies develop their own plans. The Cabinet also issues white papers on various topics-for example, expansion of scientific research-and these are accepted as guides by government agencies, trade associations and private businesses. Each bureau and branch of the Ministry of International Trade and Industry (MITI), which is the department most involved in business, is responsible for control over segments of industry. Other ministries, such as Posts and Telecommunications, Agriculture and Forestry, Transportation, etc., look after businesses within their scope. The Ministry of Finance, working with the Bank of Japan and commercial banks, cools off and stimulates the economy as desired and is second only to MITI in power. Although directives of the government agencies, sometimes termed "administrative guidance," are often extra-legal, they are, with rare exceptions, followed by the financial, commercial and industrial communities as though they were backed by law.
The Japanese, accustomed to coöperative action, also readily work together in voluntary private groups like Sumitomo, Mitsui and Mitsubishi, which have risen from the residue of the dissolved Zaibatsu. Their executive committees, tuned closely to the Government, coördinate the activities of member companies, size up new business opportunities, determine which of the group will go into them, help in the financing and sometimes draw personnel from other companies in the combine.
Since it is national policy to keep employment steady, the Government and all except small companies practice lifetime employment-that is, men are hired on graduation from school and kept on the payroll until they retire or die. Although this system, as regards government functionaries and supervisory employees, is a natural sequel to the feudal practices in effect for samurai during the Tokugawa period (1603-1868), it was not adopted until about fifty years ago for blue-collar workers and then because the complicated newly introduced machinery could be operated only by permanent staffs trained in its use. The Japanese believe this system creates deep loyalties, reduces nervousness and tension, and permits spending more time on in-company training than is possible where job- hopping is common. It also helps keep salaries and wages down, as competition for men is negligible. The system has face-saving devices for shelving low producers.
The Government pays unemployment insurance to those who are out of work; however, thanks to the lifetime employment system, there is less call for this type of assistance than in most other countries. Private employment agencies are virtually nonexistent. Government labor offices find jobs for those who need them and expect applicants who are able to work to take whatever is offered, even if different from what they have been doing. Japan is behind the United States and Europe in its care of long-term unemployed, but since it has what may be the lowest jobless rate of any industrialized nation, there are not many in this category. The public favors the creation of "make work" by Government and industry if necessary to prevent idleness, so there is some overstaffing. The nation's prosperous condition, however, is solving this problem as the demand for labor is rising steadily.
Japanese industry has been quick to install the newest, most efficient labor-saving machinery obtainable. Where there are two foreign manufacturers offering equally good but differently designed versions of the same product, the Government will often encourage one domestic firm to try one and another the second and to compete. In 1955 the Government and private industry established the Japan Productivity Center. By arranging visits to the United States for countless executives and engineers and special courses in major Japanese cities, attention has been focused on improving productivity. In 1968 labor productivity was 14.1 percent higher than in the previous year and this was the third consecutive year with a rise of over 10 percent.
The "love of work" ethic is strong throughout the country and its origins go back to antiquity, perhaps stemming from the terrace wet-rice agriculture which requires coöperation of everyone who farms in a particular valley. If anyone, through laziness or a lack of responsibility, allows the dikes around his paddies to collapse, the farms below his will be inundated. Therefore the group or community feels it has the right and obligation to compel all members to coöperate and work hard. Each Japanese knows that his associates, family and neighbors are looking over his shoulder, and to be acceptable he must conform to what is expected.
The president of one famous company, probably motivated by the thousands of unseen employees looking over his shoulder, thought he would experiment to determine the maximum number of hours he could work in a single week. He kept pushing himself until he reached 92 hours, which he thought were too many! A problem some Occidental managers run into is how to get their Japanese employees to leave the office at night at a reasonable hour, or to take vacations to which they are entitled.
In the postwar period, there has been a socioeconomic leveling which has eliminated most of the rich and most of the poor, leaving a great middle class. This has created a huge market-one big enough to consume most of what Japan's mass-production factories can turn out. The difference in income between college graduates and the poorest paid in the same organization is small at the outset and widens only slowly; as a consequence, there is little class conflict.
Japanese have a more than ordinary willingness to take progressive action. This is partly due to their system of decision-making by committee which entails collective responsibility for results, and not only insures maximum input of ideas, but protects individuals from loss of face or punishment if a scheme fails. If a plan succeeds-and of course most do or the economy would not be growing so fast-no one individual is likely to be given credit. If anyone is boastful or demands personal credit, there will be disharmony in the group, which in Japan's social structure is intolerable. The idea of collective responsibility is related to a feeling called shu-jo- no-on (gratitude to nature and other human beings for one's success). To conform to this concept requires abandoning the idea of individual power domination in favor of coöperative group action where no man's success may be attributed to his brains and the strength of his two arms unaided and alone. The great emphasis on harmony sometimes surprises Occidental visitors; a manager may describe with pride the spirit of concord prevalent in his factory, rather than the profits it makes, even where the profits are high.[i]
Partly because in feudal times survival was dependent upon tight village or clan loyalties accompanied by suspicion and competitive attitudes toward outsiders, the Japanese have a strong sense of belonging and are intensely loyal to the organizations for which they work. This allegiance foments extraordinary competitive zeal in business. Japanese firms, in vying with one another or against foreigners in overseas markets, will at times cut prices to the point where profits vanish. The Government is called in when conditions in an industry become intolerable. As a solution, MITI may impose a type of cartelization.
American visitors are often surprised at the lack of enthusiasm shown for the profit motive. They can elicit more interest and respect from their Japanese contacts by talking about helping them increase their market share, or achieving growth or benefiting Japan. The making of profits is not the main goal of Japanese business. Early in the Meiji period the old despised merchant class, which was profit-motivated, clashed ideologically with the samurai, who were more concerned with public welfare. The samurai won out, and for nearly a hundred years the Japanese have soft-pedaled the idea that business exists to make profits. Actually, of course, given the progressive spirit of the people, their preoccupation with growth and their hard work, profits have come almost automatically. In the past five years leaders of the Keizai Doyukai, an élite policy-making group, have, without abandoning the old aims, been making a special effort to get profit included in the list of approved objectives. This is motivated by a desire to cut down waste, to reduce excessive expenditures for business entertainment and gifts, and to curtail losses due to excessive competitiveness.
Enterprises are financed in a way that is puzzling to Occidentals. If a firm finds itself earning bigger profits than are needed for dividends and other normal purposes, it is not likely to increase dividend rates, provided they are already at a generous level, say, 15 percent of par. Instead, the directors, in anticipation of a rainy day, will bury some of the high profits in a multitude of lawful reserves, and siphon off some of the surplus into subsidiaries. The reluctance to increase the dividend rate is partly a result of fear that if they were too generous in dividend payments they might be accused of profiteering by the Government and advised to reduce prices. Shareholders make their profits not from dividend rate increases, but from recapitalizations. When these occur the number of outstanding shares are increased by 50 or 100 percent The stockholders are offered preëmptive rights to buy the new shares at par. Since stock of an expanding company usually sells far above par, these rights are valuable.
Commercial banks have helped fuel the boom by lending upwards of 90 percent of their deposits. In such an overloaned position, they have had to borrow from the Bank of Japan and this has provided a further government control over business, for the Bank can lend or not as it wishes, and stipulate terms which the commercial banks must pass on to their customers.
Unfriendly business take-overs, such as sometimes occur in the West, are regarded as almost criminal in the eyes of the Japanese. Their system makes take-overs by domestic rivals very difficult, and by foreign interests impossible. On an average, about one-third of the shares in large companies are held by friendly banks, insurance companies and related corporations. The stability of these great stockholders, who rarely sell their holdings, leaves management free from worry about take-overs. Foreigners are no problem because none may acquire more than 7 percent of the shares of an existing firm without first getting government permission.
Corporations depend on loans from banks and insurance companies for most of their capital. They prefer borrowings to equity capital, because the amount they must earn to pay the tax-deductible interest is only about two-fifths of what they would have to earn to pay dividends of the same amount. To pay a 9 percent dividend, for example, gross profits have to be about 23 percent, as taxes take a little less than half the profits; and before dividends are paid, special reserves must be set aside too. Major corporations operate with an average net worth of only 17 percent of combined debt and equity. The system has worked well thus far because Japan has had no depression for over twenty years, and because the banks and financial institutions are also shareholders and willing to carry clients during adversity. The Government, in pursuing its full employment policy, does not want to see large employers fail and, when necessary, gives such assistance as it can, including inducing prosperous big firms to merge with or assist shaky rivals. There are numerous bankruptcies among new enterprises, however. During the current boom, many men are starting their own businesses, but failures involve so few people as not to cause serious dislocation.
One of the reasons why so many new firms come into existence is because the Japanese are enterprising and capital is available. Japan has the world's highest rate of personal savings, 21 percent of income (as compared to 7 percent in the United States). Japanese save, not so much because of any special need to provide for unemployment or sickness, but rather because of their country's financial structure. Credit, in the form of installment plans and charge accounts, is not yet as common as in the West, so people accumulate the funds before they make their acquisitions. And in addition, the cost of land in the metropolitan areas is so high-about three times the price of comparable sites in America-that many people despair of owning a home in the city and let their savings pile up for use after retirement, when they will move to the country. Individuals do not invest their savings in the stock market to the extent they do in the United States, but deposit them in banks and other financial institutions.
Concerns, unless hard up, generally pay all employees bonuses, usually amounting to from one to three months salary, twice a year. While the December bonus usually goes for purchases, most of the June bonus goes into savings accounts.
Despite the high debt ratio of its firms, the nation by comparison with most others is in sound fiscal condition. The national debt is small, and individual indebtedness inconsiderable. The economy is well balanced, and not dependent upon any one product, so it is not as subject to boom or bust as it was in the early part of the century when silk was so important. Most large companies try to diversify, both by entering new types of business and by investing in other concerns. Because of the lifetime employment system some concerns find it necessary to get into new business in order to absorb redundant employees. In such cases, the employment policy results in progress rather than stagnation.
One of the main forces behind Japan's rapid growth is its educational system. Buddhist priests and monks, commencing in the sixth century, started a movement which in time led to education for all, from nobles to charcoal workers. By the year 800 there were five colleges in Kyoto. A Portuguese, writing in 1565, stated that most men and women in the great towns of Japan could read and write-quite an accomplishment considering that to be fully literate one had to know more than 2,000 characters. The masses in the Latin countries had not yet learned 26 letters. Thanks to terakoya, or temple schools, chiefly taught by Buddhist clergy, more sophisticated schools taught by Confucianists, and clan, central government and private schools, learning was probably disseminated more broadly in Japan than in contemporary Europe during most of the millennia before the Meiji Restoration. When Japan was reopened a century ago, the high level of literacy made it easy to introduce Western technology. Abstract ideas, however, have been slow of adoption.
Although some other nations are catching up, Japan continues to lead Asia in education, and has nearly 900 universities and other institutions of higher learning (several score are currently closed due to the activities of radical students). Unquestionably love of knowledge is one of the central ingredients upon which Japan's success has been built. Careers in commerce or industry attract the majority of students, including ultra- leftist youths. The stated objectives of Japanese business-to achieve growth, to improve the livelihood of the public and to benefit the nation generally-appeal to the idealism of most young people. Incidentally, one characteristic that distinguishes Japan from many other Asian nations is the almost total absence of nepotism, except in small or family-owned enterprises.
Among the attractions of employment with major companies are the fringe benefits. Big firms provide employees with apartments, dormitories or homes, at one-fifth to one-tenth the prevailing market price; many sell company-owned land to their employees at bargain prices on long-term payments. Employers, including government agencies, also own or rent vacation villas on the seashore and in the mountains, where employees and their families can spend their holidays at low cost. Baseball, tennis and swimming facilities, instruction in flower arrangement, traditional musical instruments and the tea ceremony, etc., are often provided free, and in some instances employees may enjoy the long sleep at no charge in company- owned cemeteries, surrounded by those with whom they worked. Big organizations also provide medical and dental services and some have hospitals.
An important concept for the Japanese is that called amaeru, which may be defined as a longing to be protected, cared for and cherished. Although present to some extent in other countries, it is unique in its strength in Japan. The paternalism of employers satisfies this longing. (On the political side, the solicitude for the welfare of the Japanese people displayed by Americans during and after the Occupation period also satisfied this need.)
In vogue is a system of salary increases and promotions called nenko joretsu; generally, unless business is poor, employees are given pay raises once every year and at frequent intervals are raised in rank as well. In order to facilitate these promotions, far more levels are established than in American business. Often people of different rank do the same work side- by-side; the difference in rank is acceptable on grounds of longer service. Management is slow to promote men over those who entered the organization at the same time and with the same educational qualifications, recognizing that this may cause hurt feelings and disturb the collective harmony considered so precious. To get around this, often two men will be promoted simultaneously, although only one will actually be given an increase in responsibilities. At director levels, rather than promote a man over those senior to him, older men may be retired from the parent organization and transferred to a subsidiary, where they will be given titles commensurate with their age and dignity.
One interesting feature of the postwar boom is that it has been led by men mostly between 50 and 85 years of age (the average company president is nearly 58); the octogenarian President of EXPO '70, super businessman Ishizaka, did not rise to the top executive level until he was 63!
Japanese workers at all levels are to a surprising degree self-propelled. Knowing what their organization's objectives are, having a lifetime commitment and possessing the self-assurance that comes from having been with the same employer for a long time, employees at lower levels frequently take responsibilities that in the West would be reserved for managers. Comparative studies indicate that the Japanese are also more disposed than Occidentals to proceeding as they feel proper, even if in doing so they disobey orders. The explanation for disobedience usually offered by an employee is that he was proving his loyalty by so doing, for had he proceeded as ordered, the action would have been wrong and injured the enterprise. Another explanation attributes disobedience to the feudal custom of assenting to anything proposed by a superior-even if the underling knows it is wrong and cannot be carried out; later, the employee quietly substitutes a workable plan. Unless the results of disobedience are calamitous, supervisors normally are not much ruffled by the "misunderstanding" of orders.
Much of Japan's technology has been purchased from the West, chiefly from the United States. Payments in the form of royalties and service fees in the postwar period have exceeded $1.5 billion. Until the mid-1960s foreigners gladly licensed Japanese concerns, but enthusiasm has waned as many Japanese firms, once the license periods expire, have tried to enter markets which the licensers preferred to keep for themselves.
More and more foreign concerns insist upon owning at least 50 percent, and preferably a controlling interest, in any firm that uses their technology. The Government refuses to agree to this in most instances and is encouraging Japanese companies to accelerate their own research and development. Nevertheless, the government appropriation for science and technology in 1968 was only $535 million, as compared to more than $17 billion in the United States. By almost any measurement, Japanese research and development is far behind that of the United States. The Government recognizes that it will be necessary to buy foreign technology if the economy is to continue to grow at a rapid rate. To do this, and also to obtain a steady infusion of new ideas into business management, Japan's leaders know that they must open the doors to foreign equity investment. But domestic pressures against this are so strong that the Government has felt it prudent to move slowly.
The target date for capital liberalization is 1972. Even then it is expected that the Government will retain the authority to prevent outsiders from taking over or dominating any domestic industry. Many Japanese fear that if foreign firms were allowed to enter freely they would overwhelm the country, and economic stability and labor tranquility would be disrupted. The Ministries are apprehensive that foreign concerns would not accept the Government's extra-legal administrative guidance, thus endangering the politico-economic establishment. There is also doubt that the majority of Westerners would show adequate understanding of Japan's mores, and fear that they would eventually find themselves at odds with their employees, their bankers, their suppliers, their joint venture partners, their customers, their trade associations and the Government. Such problems would lead to business failure, and perhaps even damage foreign relations.
Japanese question whether foreign businessmen, for example, could be expected to develop enough understanding of the complicated giri and ninjo psychological concepts in the short time most of them stay in Japan to operate harmoniously. Giri, which plays a compelling role in Japanese society, may be defined as "sense of duty," or "recognition of a debt of gratitude." One of the meanings is akin to keeping "face." In business, much man?uvring is in response to giri influences. Ninjo is humaneness, sympathy and kindness. The occasional mass layoffs in Western factories, and the coldness with which Occidentals are believed to dismiss employees, seem to the Japanese to demonstrate a lack of ninjo.
The American Chamber of Commerce in Japan has for many years been offering instruction to its members in Japanese psychology, business practices, law, customs and related culture, believing that resident expatriates will thus have a better chance of satisfying both the demands of home offices for profits, and Japanese insistence that the gears of foreign-controlled companies mesh with the Japanese system. Several universities, private training firms and trade associations in Tokyo are also offering courses for foreigners. So different is the culture, however, that it generally takes about three years in residence, and faithful attendance at the training seminars and courses, before the average Westerner develops confidence in his ability to do business in Japan.
About half the existing offices of foreign companies in Japan-mostly the smaller ones-are staffed exclusively by Japanese. One might think that this would solve the problem, but it doesn't. If executives at headquarters responsible for the operation are unfamiliar with Japan's customs and business practices, the indigenous staff is not likely to receive the understanding or coöperation requisite for success and a smooth-running operation.
The massive transplantation of U.S. business methods and ideas, without adaptation to local conditions, which many Japanese predict would follow complete liberalization, is looked upon with consternation. Chairman Sazo Idemitsu of Idemitsu Kosan, one of Japan's most powerful business leaders, expressed this concern in the Asahi Evening News in August 1965. "I have repeatedly pointed out," he said, "that the American methods of business management will not fit Japan. The differences of social make-up and spiritual life must be taken into consideration . . . The Japanese method . . . is based upon harmony and loving kindness toward one another.... The American business method might make an appeal at the beginning with its aggressiveness and novelty. But Japanese people cannot take American aggressiveness into their hearts."
Idemitsu's views can best be understood when one realizes that business management methods are largely abstract concepts. The Japanese, although hungry for foreign technology, have never shown much enthusiasm for abstract Western ideas. (Even after a century of enormous missionary effort, only about one Japanese in 170 is Christian.) The fact that the Japanese may not well understand and are slow in accepting U.S. management techniques should not, of course, be interpreted as a sign of anti- Americanism. In all Japanese public opinion polls Americans rate as the most popular of foreigners. The relatively rapid transfer of business ideas between the United States and Europe, where the cultures are so similar, has given us an unrealistic yardstick with which to measure our progress in Japan.
Fortunately, however, the Japanese are pragmatists. Even though they fear strange management concepts borne on the wings of invading Occidental companies, they recognize that some alien ideas are needed. To counteract their severe labor shortage, and too rapid rise in retail prices, for example, many Japanese believe that American marketing methods must in some degree be adopted. The five tiers or so of wholesalers and jobbers in the Japanese structure not only are wasteful of labor, but make retail prices excessive and create such anomalies as automobiles and TV sets of Japanese make being sold abroad at one-half to two-thirds of the Tokyo price.
Recognizing that her citizens would not be hurt, but in some instances benefited, the Japanese Government in the summer of 1969 promised to dismantle the antiforeign capital fence, taking it down partly in 1970 and 1971, and finishing the job in 1972. Specifically, it has already been announced that starting in October 1971 foreign companies may enter joint ventures with Japanese automobile manufacturers, with participation limited to 50 percent.
There are continuing intergovernmental discussions regarding means of speeding up the process and resolving other economic and political problems at the same time. It is hoped that both Japanese and American lobbyists will be cautious in their public pronouncements during these negotiations, for careless remarks could be misinterpreted and complicate the task needlessly. Thanks to the enormous reserve of giri debts of gratitude to Americans built up in Japan over the past two dozen years and the huge reservoir of good will in the United States toward the Japanese, it should be relatively easy to solve the occasional differences that must inevitably arise.
Now that the Japanese Government has determined to liberalize, the time has come for American companies to start preparing their Japan programs for the 1970s. Besides considering such matters as whether to export or manufacture, thought should be given to what types of personalities will best be able to obtain coöperation from the Japanese; there will be neither growth nor profits if there is misunderstanding and discord.
Attention should also be given to determining what American management concepts should be followed in Japanese operations, and what Japanese methods retained. Those introduced should be presented in such a way that the Japanese do not feel that foreign abstract ideas are being imposed roughshod. It should be remembered that the Japanese may, if they feel ill- treated, reimpose strict controls.
American firms should also include in their plans a program for educating their staffs in Japanese psychology, business practices, etc. This instruction should not be limited to the men to be assigned to Tokyo or Osaka, but include concerned home-office personnel, particularly where the Japan office is staffed entirely by Japanese. Strangely, even though Japan is expanding industrially at a faster rate than any other nation, and has a system that is unlike our own, few universities in the United States offer courses that explain how it operates, or how the Japanese think, Now that opportunities to work with the Japanese are to expand greatly, courses of instruction must be offered.
American efforts to learn how the Japanese system functions, and the reasons why, will be much appreciated by the Japanese, and allay some of their fears. We expect foreigners to follow our ways when they establish operations in the United States. We owe it to the Japanese to make an effort to learn something about theirs in exchange for the privilege of coming into their country despite their misgivings.
[i] This spirit of harmony, however, has another side. In order to keep the majority contented, first-class organizations, particularly in small cities and towns, try to avoid hiring any of the approximately three million members of the suppressed classes. The Eta, the most numerous, have lived in segregated communities for possibly as long as 1,300 years, and their lot has been no happier than that of the Negro in North and South America- according to a Japanese professor who has studied both. Others include the almost incredible kitsune mochi no ie, or families possessing foxes (invisible ones), who are found in Western Honshu, and the hinin (un- humans), who are so low in the social scale that even the Eta look down upon them. Koreans are also discriminated against.