9/82 TRADE FRICTIONS AND CAPITAL LIBERALIZATION

THE JAPAN SECURITIES ECONOMIC RESEARCH INSTITUTE

May 3,1982

What is intensifying the Trade Frictions?

Trade frictions between Japan and the US and Japan and the EC are becoming increasingly serious. It is also the worst element presently in the stock market. Although only recently such theories as "the superiority of the Japanese economy" or "the uniqueness of Japan" or "the special characteristics of Japan" had been popular, now a counter reaction is appearing to that in the theories that "the superiority of Japan is causing trade frictions". It is most ironic that the strengths of Japan also invite being called its weakness.

Trade frictions are not something that have come about recently, they have been around for a long time. In the 1960s there was the cotton textile problems between the US and Japan and it was resolved in the form of Japan voluntarily restricting its exports. This became a major political problem when this was reflected in synthetic textiles and again that was resolved with Japan agreeing to restrict its exports. In this way major problems developed two times with respect to textiles. Thereafter the flames of trade frictions grew again in steel, color televisions and automobiles. Each time Japan resolved the problem by agreeing to control exports. Recently however, the problems have not been those of individual industries but trade relations in their entirety. Thus one could say that as these new problems have unique characteristics, the resolution thereof will not be achieved with responses in individual industries.

It is notable that recently in the debate the positions of the US and Europe and that of Japan have become completely in opposition and increasingly do not leave much room for resolution. In other words, it is Japan's positions that "the cause of the trade frictions is the superiority of Japanese corporations and that Japanese workers work very hard compared to the incompetence of American and European companies which have workers which do not work". The Americans and the Europeans state that "Japan has established tariff and nontariff barriers and the government and industry work together to restrict imports." When the positions of the two parties are so resolutely opposing, it will develop into unbending opposition with no room for compromise or appeals to nationalism.

In this background of emotional opposition, a debate is going on about the principles of free trade and protectionism. As each side is advocating free trade while criticizing the other side, any room for compromise disappears and the road to resolution is lost. There is a necessity to debate in a form corresponding to reality and not by mutually advocating principles and that is the only path to a real resolution.

CORPORATE TIES AND BUSINESS COMMUNITY

We have discussed in earlier articles the point that a source of trade frictions can be found in corporate ties. Now we will change this viewpoint a little and look at the matter from the relationship of capital liberalization. As mentioned before, foreigners have stated that the intimate corporate ties found in Japan serve to prevent the new entries of foreign corporations. However the following was stated in the US-Japan's wisemen report:

"Japanese corporations prefer to develop stable long term business relationships rather than doing business with suppliers offering the lowest price at a certain point in time.''

This involves first of all the determination of the party to do business with and then making of stable long term business, not the determination of the party to do business with based on such conditions as price, quality or service. It is the establishment of ties between companies in advance. That does not involve transactions in the market. It is a mutual transaction with specified parties. Of course competition does not disappear in this kind of situation, but it is not the type of competition visualized in the textbooks of economists. However, no matter how much one decides in advance the party with which one will do business, if the conditions to the business become too hard, it is still possible to change parties. Consequently, in order that such changes not be made, it is necessary to maintain transaction conditions that are the same as or close to those of a potential rival. The result of this may be that it appears that the decision about who to do business with is based on competition with rivals, but it is a different type of logic from that of competition. Previously this difference has been ignored. There has been a basic misunderstanding in the concept of thinking that the competition between corporations and the competition between individuals is the same.

It is needless to say that the source of this stability in transactions between corporations is because of the ties between corporations.

The traditional "Japanese management theory" has completely overlooked these intercorporate ties. However, as shown in a previous report, in Japan, that there are many intercorporate transactions and that corporate ties are widespread and strong have become a kind of cause and effect relationship. Corporate ties are made in order stabilize intercorporate transactions, but at the same time, many intercorporate transactions are made because there are corporate ties. Although there is the holding of shares, the dispatch of executives and financings as weapons for intercorporate ties, the holding of shares is particularly important. Moreover this holdings of shares for the purpose of corporate ties is divided into mutual holding of shares and one sided holding of shares, but the onesided holding of shares is primarily for group (keiretsu) purposes, while the mutual holdings of shares is made at the time of conclusion of horizontal ties between large corporations such in cases of corporate groups, etc. This kind of group and horizontal corporate ties are a part of Japanese business society and is a major characteristic of Japan when compared to countries like the US. In the US, although it is said that there is interlocking of corporate directorships, the characteristic is more one of ties among directors than between corporations. Moreover, in the US there is no interholding of shares and in general there are severe restrictions on the holding of shares by corporations. Commercial banks are prohibited from holding shares and other business corporations are strictly limited in shareholding of other corporations by the Clayton Act. This greatly differs from Japan, and the corporate ties in the form of holding the shares of a corporation in Japan has reached a level which cannot be compared with the US and other companies.

These widespread and strong corporate ties create difficulties for new entries and are becoming a cause for trade frictions.

Moreover, it does not stop at only that, these corporate ties create a Japanese style business community. Although it is said that there is the so-called "zaikai" (business circles) as the Japanese business community, that is a meeting of corporate managers of corporations with a wide range of ties and an attempt to cooperate. In that case we have intercorporate competition, but that primarily takes the form of competition for rank or market share in the same industry and corporations of differing industries cooperate. The "zaikai" which stands at the top of this cooperation becomes exclusive to external elements like this or foreign capital. The stronger the cooperation inside the business circles (zaikai) the more exclusive it becomes to outsiders.

The government rides on top of this business community and the government's administrative guidance stands at the top of the logic of the business community, further strengthening such characteristics. This gives rises to statements of "Japan.Inc" by the US Commerce Department and others.

POLICIES OF RESISTANCE TO CAPITAL LIBERALIZATION

In the 1960s Japan carried out a policy of trade liberalization and from the 1970s the policy of capital liberalization made progress. In each case they held a sense of danger of being controlled by foreign capital and both the government and business circles and the mass media urged on this sense of danger. However, as a result, in response to trade liberalization and capital liberalization, did Japanese corporations merely adequately resist, or did they achieve high growth based on using this sense of danger? On that point appeared the assertion that "For trade liberalization and capital liberalization, in fact Japanese corporations were in no kind of danger. That is how strong Japanese corporations were." Needless to say that is tied to the "theory of Japanese management" and the "theory of the superiority of the Japanese economy."

Clearly the sense of danger spurred on by statements of the government and industry that "this is terrible, this is terrible", served to strengthen the defensive sense and corporate sense in Japanese managers and employees, and it cannot be denied that this supported the sense of community of the "theory of Japanese management" and that based on that they tided over the sense of danger. However, it was not only that, from the standpoint of the corporations about trade liberalization and capital liberalization, it not only involved the delaying of the liberalization, there was an essential difference there.

Of course the area where corporations were to be hit by trade liberalization was the dimension of the international competitiveness of their products and in order to counter this they had no choice but to increase productivity and improve the quality of their goods. That is where "Japanese management" showed its power. This was the road to defending corporations against trade liberalization. However, in the case of capital liberalization, the basic conditions are different. Not only is it that the strengthening of the international competitiveness of a corporation and the improvement of its productivity could not become a policy with respect to capital liberalization, but to the contrary, that kind of company would be the source of attractiveness to foreign capital as a subject for a takeover. Of course the essence of capital liberalization is liberalization with respect to takeovers, but ironically, tiding over trade liberalization meant that one became attractive as a takeover subject.

Consequently, even if the superiority of Japanese corporation and the dedication to work of Japanese laborers helped them tide over trade liberalization, they will not be effective in getting over capital liberalization. To the contrary it is probable that the overcoming of trade liberalization creates a weakness with respect to capital liberalization.

Thus, why is it that Japanese corporations have been able to overcome capital liberalization? Before that we must get to the problem of how far foreign capital has advanced into Japan, but it can generally be said that the advance of foreign capital into Japan is minimal compared to the US and the European countries. More than anything else I would like to draw attention to the fact that there have been almost no cases of takeovers of Japanese corporations by foreign capital. Although it is well known that in the US and Europe there frequent takeover bids or tender offers, in Japan there have been virtually no such examples. There has been only one case of a takeover bid by Bendix for an auto parts maker.

The most important reason for why foreign capital has not taken over Japanese corporation is the structure of stable shareholders by having the companies one does business with hold one 's shares based an a stable shareholder structure, becomes a defense against takeovers. In the late 1960's to early 1970's there were a number of large scale stable shareholder structures put together, but that does not need explanation here. While the government on one hand was pushing capital liberalization for measures, on the other hand it was pushing the creation of stable shareholders structures. This was superficially the carrying out of capital liberazation while in fact preventing take overs and effectively blocking capital liberalization. This creation of stable shareholder structures in response to this, from the viewpoint of the party acquiring the shares, served the purpose of strengthening the group. This was desired by the company issuing the shares, and the company acquiring the shares was not acquiring the shares as a simple means of association. The acquisition of shares itself already means corporate ties. Based on those intercorporate ties, intercorporate transactions increased and the transactions would become stabilized.

The major reason that intercorporate ties were strengthened and that the scope of the network expanded, was as a defense against takeovers in response to capital liberalization. This is not a situation where an explanation can be made as in the case of trade liberalization about the superiority of Japanese corporations. Putting all these together, until now there has been swashbuckling boasting that in any case this is all due to the superiority of the Japanese corporations and the wonder of Japanese management. However, that theory does not come through this time. The Japanese intercorporate relations which are currently in the limelight of trade frictions, will become a big problem again in relation to capital liberalization. Thus the method of intercorporate relations in Japan will become a problem again.

THE JAPAN LAWLETTER, September, 1982. By Roderick Seeman