The key to Japan’s industrial prowess

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Many can still recall the watershed event in September 1985 of the finance ministers and central bank governors of the so-called Group of Five – Britain, France, Germany, Japan, and the United States.  An agreement was produced to readjust exchange rates, which brought about a rapid rise in the value of the Japanese yen against other major currencies.  This had seriously weakened the competitiveness of the products of major Japanese automakers so heavily dependent on exports to the U.S. market, and directly contributed to a conspicuous rise in the number of non-Japanese cars entering the United States, from South Korea especially.  The situation also evolved into a previously unlikely collaboration between U.S. and Japanese automakers, to begin production inside the United States.  Such is the high regard bestowed by Japan’s rival economies on Japanese industrial might, then and now.  And this is still so, despite Japan’s perennially low economic growth over the last two decades!  How did all this come about?

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Here are several factors to consider.

Motor industry.  During the early 1950s, Japan’s Ministry of Trade and Industry (MITI) adopted a policy of developing the automotive sector as a strategic industry.  Unlike the Bank of Japan, which insisted on limiting incentive financing to the more basic industrial areas such as food production and domestic appliances, MITI believed that this was the only way to strengthen Japanese industry as a whole.  In hindsight, this proved to be correct as automotive manufacturing forced Japan to seek the export market to offset its own small domestic vehicle market, and the rest as they say is history.  Japanese motor manufacturers like Toyota and Honda not only forced themselves to become technologically competitive, but the reward of voluminous export sales directly impacted on Japan’s own industries related to automotive manufacturing, such as steel, glass and rubber industries.  A multitude of machine tool industries subsequently emerged that transformed into an economy that eventually surpassed the automotive sector, and contributed to Japan’s image as an industrial powerhouse without whom the rest of the world simply cannot function.  Japanese corporations roamed neighboring countries in search of government infrastructure contracts like airport building and bridge construction, to name a few.

Oil Crisis.  Added to Japan’s already well developed auto industry, the two oil crises in the 1970s helped Japan in two ways.  Due to Japan’s relatively low per capita income in the mid-1950s and small land areas, MITI announced in 1955 that the auto industry should focus on developing a mini-sized car for the masses; by the 1970s Japan already led the world in this category.  At the same time, the American auto industry had for decades relied on large-sized vehicles and that by the time they realized that they needed to retool for mass production of small cars during the 1970s, it was already too late; U.S. passenger car production dropped by over 2 million units, unable to satisfy the fast growing domestic consumer preference for small cars.  The Japanese auto manufacturers thus helped to fill the void.  This also indicates that the root of the growing trade deficit of the United States against Japan during the 1980s could not possibly be blamed on Japanese exports.

U.S. and other manufacturers throughout the world began adopting Japanese production and management methods, but Japanese auto makers had first-mover advantage over others, and continue to do so until today despite being forced to relocate overseas to escape the fall in productivity in Japan caused by a readjusted yen after the Plaza Agreement in 1985.

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