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Number 1 Shimbun

Mr. Smith Goes to Tokyo (Part II)

No1-2018-05 05

When Charles Smith arrived in Tokyo in 1973 as Financial Times bureau chief, he had no idea he'd end up spending most of the rest of his life here. Now 82 and still an FCCJ Regular member, he's been writing his memoirs and has consented to share with us accounts of some of the most memorable moments in a long and interesting career. Here is the second installment.


Mr. Smith Goes to Tokyo (Part II)
by Charles Smith

Would Japan, to counter the oil shock’s damage to its trade balance, return with a vengeance to its widely condemned 1960s template and flood the world with a “heavy rain” of exports?

In the fall of the first year of the reopened Financial Times Tokyo Bureau, 1973, this was still a looming issue. Instead of tackling it directly I said, in two lengthy feature articles published in late November and early the following January, that 1974 was shaping up to be “the most difficult year” in the country’s economic history since the immediate aftermath of the Second World War.

I argued that Japan would be forced to rethink many of its basic foreign and economic policies, not just in trade but also in diplomacy. Ideas on foreign aid allocation and investment would need to be revised so as to give preference to countries that could sell energy – Indonesia, for example – while curbing ties with resource-poor neighbours such as South Korea. Money would probably have to be poured into huge and risky resource processing schemes in the Middle East that had barely caught Japan’s eye before the shokku.

Stalled negotiations on investments in resource-rich Russia and China would have to be restarted, I predicted, but would not be limited to raw materials development. To please China – then incorrectly seen as a possibly significant oil supplier – Japan would have to allow Beijing to have its way on the terms of a deadlocked aviation agreement. This would humiliate an older friend by blocking flights to Tokyo by Taiwan’s China Airlines, because Chinese Communist and Nationalist airliners couldn’t meet on the same tarmac. To influence Russia, Japan would need to help build an oil pipeline from eastern Siberia to Russia’s Pacific coast. That would be in return for 25 million tons of Siberian oil.

In order to bring my analysis to a suitably dramatic close I said that one other thing that might have to go was the “assumption of political stability,” at home. This was my own, far out, personal guess, offered without any support from external sources.

I do not think I believed that the ruling Liberal Democratic Party, in power for 20 years, risked being unseated by the elite Marxists of the Japan Socialist Party, even in an oil crisis. What did seem to have happened, though, was that a self-confident world had vanished. Was Tokyo faced with more fundamental changes than anyone had dreamed of in the 1960s to early ‘70s? Was it time for a country that could do anything to learn some new lessons?

So pressing did it seem to get those thoughts in print that I stayed behind in Tokyo on New Year’s Day, 1974, typing in a corridor overlooking the tranquil garden of our home, while my family made a trip to the seaside resort of Hayama. It was a case of family harmony versus professional stress, of which there would be many more I the weeks and months that followed.

Japan didn’t come apart the way I seemed to be suggesting. But before I plead guilty to reporting a train wreck that didn’t happen, I should say that something had gone wrong by the end of 1973. I believe Japan’s growth strategy from the early 1960s to the early ‘70s reflected an unduly casual view of its place in the world.

Because of an almost total lack of natural resources, the economy had been based during that period of “miracle” growth on importing huge amounts of raw materials. Oil and gas, metals and minerals were consumed at home or processed and re-exported as manufactured goods. As part of that scenario Japan had, by 1973, become the world’s biggest oil importer – accounting for between and eight and nine per cent of world consumption.

Dominant Source
Energy use had risen faster than GDP growth throughout the booming 1960s, and oil and had taken over as the economy’s dominant source of fuel following the closure of an inefficient and low yielding coal industry in the 1950s. By 1971 imported oil’s share of Japanese energy sources had passed 70 per cent, with most of that coming from the Middle East. What is barely credible from a distance of decades is that, until the crisis struck, the political implications of this change seemed to be unnoticed.

The reason presumably was that oil seemed to be painlessly obtainable from a network of American and European oil “majors,” which acted as intermediaries between Japan and the producing countries. No one in Tokyo appears to have foreseen during those brilliant decades that the Middle Eastern nations that were the original producers of much of the oil could challenge the majors’ trading oligopoly. If they could do that they could also play off oil against politics.

When neglect of this possibility came in the autumn of 1973 to be seen as an astonishing lapse by Japan’s leaders, a measure of surprise and distress was not to be wondered at. But it still needs to be asked whether the world and the FT should have labelled Japan disabled. Could we be accused of wishful thinking?

It seems to me, looking back on FT editors’ reaction to some of our gloomy stories, that they weren’t exactly discouraging us. In Tokyo, our competitors included other pessimists. Meanwhile, in London and New York, traders in financial markets seemed to have grown used to telling each other that the Japanese miracle was “over.”

In Tokyo what happened was that Prime Minister Kakuai Tanaka’s main political rival, Takeo Fukuda, joined the cabinet as director general of the Economic Planning Agency. Fukuda was a former elite Ministry of Finance bureaucrat who had headed two of the Ministry’s main bureaus – banking and budget – before retiring in 1950 to lead what had become one of the Liberal Democratic Party’s biggest conservative factions.

When the FT’s editor Freddie Fischer and I interviewed him in 1976 to ask his views on the (by then) slowly recovering economy, he impressed me as relaxed and gracious. (Perhaps I was charmed at being called Smith-san). But in January 1974 what had counted was dynamism. On his first day in office Fukuda used his authority to order the Bank of Japan to withdraw support for the overvalued yen. In the next few days, ever-ready bureaucrats under his direction drafted a range of measures that switched the economy from fairly loose to ultra-tight money.

Trade Policy
A crucial area of change was trade policy. Fukuda scrapped the use of interest rate differentials at government banks as a way to discourage exports. Instead the Japan Export-Import Bank began encouraging exports with cheap loans. This was a return to the distant days of the Occupation when the Americans had urged Japan to use all available means to improve its trade balance.

While that was happening the bureaucrats at MITI were starting to mobilize unused capacity in industry to feed what would become a new export binge. From the media arose a chorus on how to become savvy in the neglected art of conserving energy.

The Foreign Ministry also had something to do. Diplomats were told to pass on the message that – believe it or not – Japan still wanted to increase manufactured goods imports from Europe and was not about to overwhelm the economies of friendly industrial competitors. We heard that improved export finance would be used mainly to increase sales of manufactures to primary producers who were structurally in surplus with Japan. Japan would still be a responsible member of the community of advanced industrial nations – perhaps just a shade less responsible than usual.

This was the theme of a succession of eloquent weekly briefings from the Gaimusho’s friendly and articulate press spokesman. It was good for our relationship that when we met around this time at an embassy dinner party we didn’t discuss trade. He told me how he admired the two Brahms sonatas for cello and piano and I stretched credibility by saying I could play them.

Over the next two or three years one of my main themes turned out to be the patient but fundamental restructuring of Japanese industry following a slogan which I had picked up somewhere. Perhaps the idea came from one of the bilingual Japan-watchers in American consulting companies who had won their linguistic spurs as interpreters during the Pacific War.

Four Words
The four-word motto – kei, haku, tan, sho (light, thin, short, small) – was a call to redesign and convert the leading edge of Japanese industry from resource-greedy sectors such as shipbuilding and steel to goods which stressed added value and innovative design over raw material content. These could be small tractors, mini cars, hand held calculators, industrial or home-use robots, computer-controlled machine tools and many others.

The aim was to shift the economy into new directions while reducing oil imports and, in the same breath, to steal a march on world markets with a range of products that western countries had not thought of. It worked. Within six months after I had churned out those disaster scenarios in the closing weeks of 1973, I was writing features with titles like “Japan’s Exports for a Changing World” and warning of a new era of structural Japanese trade surpluses that was soon to come.

That was an understatement. By April 1974 exports were up by 40 per cent over a year earlier and the long term capital deficit had fallen by over $1 billion in the closing months of 1973 to $160 million. In July, in a feature tactfully entitled “Pressures May Produce a New Sense of Purpose,” I reported that officials expected a balance of payments deficit of $5 billion for the fiscal year ending March 1975, only half what had been forecast in December 1973.

As part of the story I tried to explain how Japan, instead of being a conventional capitalist nation featuring private business and independent regulatory authorities, was run by a combined public-private team consisting of graduates from a handful of top universities. These people were making their way along a single career path starting with membership in an elite bureaucracy and leading to senior posts in a highly competitive, yet carefully coordinated, private sector.

The two sides worked together because elite young bureaucrats hoped to end their careers as company presidents, and those who had already made the shift from public to private were willing to work with kohai (former juniors from their own colleges). The procedure that linked the two sides was known by the magic four-Chinese character phrase gyosei shido – administrative guidance.

This expression had become popular with former Japanese language interpreters for the US armed forces who were now active interpreters of a changed Japan. But it was older than them. The system of what Chinese might call “lips-and-teeth” collaboration between business leaders and bureaucrats was a holdover from World War II.

If one needed signs of continuity it wasn’t hard to be nostalgic. In my second year in Tokyo I interviewed the head of the aircraft industry division at Mitsubishi Heavy Industries while researching a story on Japan’s efforts to re-create its aircraft sector after the old one had been systematically demolished by the Occupation. He was the soft-spoken son of General Hideki Tojo, Japan’s longest serving wartime prime minister.

The Ministry of International Trade and Industry (MITI), the mastermind of innovation in the years after the oil shock, had its own streak of continuity. MITI had been established in 1949 as part of an American-sponsored plan for Japan to revive its economy by boosting exports of manufactured goods. The drab headquarters of the new ministry, in Tokyo’s Kasumigaseki district, had housed the Ministry of Munitions up to 1945.

Kisha Kurabu
The Team Japan theme provided the basis for many news stories and features on Japan’s post-oil shock recovery which I wrote between 1974 and 1978. When the economy was back on track the next job was to describe how the same Japanese bureaucrats were warding off pressures from the United States and Europe to reduce massive trade surpluses.

In both cases my sources were similar. I talked to general trading companies (sogo shosha) on the Japanese side and to Western diplomats and envoys who needed to negotiate export restraint agreements with Tokyo without breaking the rules of international trade. The underlying doctrine of a resourceful Japan was fed to me by a handful of bureaucrats at MITI, including a couple of vice ministers for international affairs.

These officials were the most senior people on the international trade side of the Ministry. (There was a separate hierarchy of officials on the industry side who were involved in what seemed to be permanent conflict with the trade wing). They were fluent English speakers in a nation still renowned for its fumbling foreign language ability; and they used their skills to tell a tale of Japan’s struggle to survive and rebuild.

I was innocent or credulous enough to think that this was close to the real story. But there was one other factor I haven’t yet mentioned. This was (and is) the kisha kurabu – reporters’ clubs – which gave reporters from a few powerful Japanese media exclusive briefings at individual ministries. The arrangement was scandalously biased – all the more so because it was assumed that selected writers would report favorably on everything they were told. When I look back on my early years in Tokyo I can see that something like a gaijin – foreigner – kisha kurabu existed at MITI, with me as one of its more dedicated members.

As a kurabu member you naturally wrote what you were told but, in return, you were on the inside of the story. I remember being fascinated by reports on how a vice-minister had ordered Toyota Motor Corporation and Nissan Motor Company to cut back “voluntarily” on car exports to the United States at a moment when Detroit seemed about to force its government to introduce import quotas. The order provoked fury but was obeyed.

There were plenty of other cases where we thought we could see senior bureaucrats setting out for protégé industries lines of conduct that were usually followed, though sometimes under protest and often after modification. In MITI’s case the protégés included the electronics, petrochemical, motor vehicle and steel industries and the textiles sector then still powerful.

Similar teams of bureaucrats and related companies existed in other sectors such as post and telecoms and pharmaceuticals. While this might seem a far-fetched comparison it now strikes me as something like the age-old European term “sheep farming,” with companies cast as the sheep and bureaucrats as highly trained sheep dogs.

The Japanese sheep farmers were getting results. During the 18 months after I wrote my pessimistic 1974 new year’s feature Japan moved from what had seemed like semi-bankruptcy to what we admiringly ( or uncomfortably) began to call chronic surplus. The balance of payments was in the black by $3.6 billion in fiscal year 1975. The overvalued yen of December 1973 was back to being undervalued.

At the FT in London the debate was between admirers of the world’s possibly most competitive industrial nation and a bevy of commentators who set out to the prove the impossibility of doing business with the country because of non-tariff trade barriers (NTBs) and so called “positive” lists of approved imports in some of the most sensitive sectors (anything not listed was disapproved). It was characteristic that when the paper discussed such things in its editorials we often referred, not to the country by name, but to “The Japanese.”

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Charles Smith, who is sharing his memoirs with readers of Number 1 Shimbun, has been in Asia for 45 years including 11 years as Financial Times Tokyo bureau chief and two stints as Tokyo bureau chief of the Far Eastern Economic Review. He lives in Tokyo and continues as an FCCJ regular member.

 

Published in: May 2018

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