14.5. Capitalism and Free Enterprise in Japan

Japan's economy was devastated by World War II. Its cities, factories, and farms lay in ruins. To help it recover, the United States offered guidance and financial assistance. The debris of war was removed, and a democratic political system and free market economy were introduced. Today, nearly 50 years after the end of the War, Japan stands as the world's second-largest economic power.

Although many factors contributed to Japan's spec­tacular recovery, one of the most important was its economic system. Like the United States, Japan put the means of production in private hands. Similarly, market forces, rather than a central authority or planning agency, allocate its resources. In short, Japan embraced capitalism. But Japanese capital­ism differs from that of the United States. In fact, some economists say that Japanese capitalism is so different from the Western model, it should be con­sidered a different system.

Producer vs. Consumer Economics. Since the days of Adam Smith, American and British econo­mists have argued that economic systems exist to meet consumers' needs and wants. Business firms are driven to satisfy consumer wants, not necessari­ly out of love for consumers, but as a way to earn the greatest profits. In other words, fulfilling consumer wants goes hand in hand with profit maximization.

This is not the philosophy in Japan. Japanese man­agers view market share rather than profit-maxi­mization as their principal objective. While Japa­nese firms are interested in earning profits, they are viewed as a means to an end, rather than the end itself. The end is strengthening the firm, and nation, by capturing an ever-increasing share of world mar­kets. Consider these differences.

• Dividends vs. investment as the goal of prof­its. In the U.S., profits are viewed as something to be enjoyed in the short run. For that reason, most corporate profits are distributed as divi­dends to shareholders. The remaining amount is reinvested in the firm. (An average of 65 percent of U.S. corporate profits were distributed as divi­dends in 1992.)

With their eye on the long-term goal of market share, Japanese corporations hold an opposite view. The largest portion of corporate profits is "plowed back" into the business.

• Expected rates of return on investment are lower in Japan than in the U.S. Investment in new equipment, new and improved products, and more efficient production methods are costly and can take years to earn a return. Before making a major investment, American firms calculate the probable return. This is compared to whatever the funds could earn if they were put in treasury bonds or an alternative investment.

Japanese managers make similar calculations. But the Japanese are willing to wait longer for an investment to pay off, and they accept a lower return while they do. When, for example, Nissan began to sell its Infiniti line of luxury automo­biles, the company announced that it did not expect to begin to earn a profit for five years.

• Treatment of labor in U.S. and Japan. Labor is treated differently in the United States than in Japan. In the United States, workers

— are dismissed when they are no longer needed,

— frequently quit their present jobs for higher-paying or more attractive positions elsewhere,

— earn more than their Japanese counterparts, and receive bonuses based on individual perfor­mance. (However, the earnings gap has nar­rowed greatly in recent years.)

In Japan, workers

— earn less than their American counterparts,

— hold jobs guaranteed by their companies and almost never leave their jobs, and

— receive bonuses based on team results.

• The role of government. American business and government believe that competition between buyers and sellers provides the greatest quantity of goods and services at the lowest prices. For that reason, government has enacted antitrust laws. Antitrust laws prohibit the creation of monopolies and the restraint of trade.

This is not the case in Japan. In Japan, giant firms organize enormous, vertically integrated groups, or keiretsu. This is accepted and encour­aged. In 1987, for example, it was estimated that the keiretsu controlled about 650 companies, employed about 1.8 million people, and account­ed for 18 percent of corporate profits in Japan.

The Mitsubishi Group is typical of the keiretsu. Wages are paid through the Mitsubishi Bank, offices are rented from Mitsubishi Real Estate, and storage space is provided by Mitsubishi Warehouse. Air conditioning is provided with equipment manufactured by Mitsubishi Electric, machinery is manufactured by Mitsubishi Heavy Industries, trucks are made by Mitsubishi Motors, and fuel is supplied by Mitsubishi Oil. Finally, management can rest comfortably in the knowledge that its factories and equipment are insured by Tokyo Marine and Fire, the Mitsubishi keiretsu 's insurance company.

Cooperation among firms also extends between keiretsu. Although the exact relationship is a closely guarded secret, it is known that the CEOs of the major groups regularly meet to discuss problems and policies of mutual concern.

The advantages of this system include:

• Stable costs. With controlling interest in each of the companies in the hands of the keiretsu, and executives serving on each other's boards of directors, large manufacturers can dictate prices that they will pay to hundreds of suppli­ers. Compare this to American markets where suppliers determine prices and are free to sell to one's competitors.

• Long-term planning is encouraged. At the hub of each keiretsu is a bank or cash-rich com­pany able to provide low-cost, long-term capi­tal. In the U.S. some of the largest corporate stockholders are major financial organiza­tions-mutual funds, insurance companies, and pension funds. But the similarity ends here, for unlike the Japanese, they are required by law to maintain an arms-length distance.

With assured financing, stable costs, and coop­eration within-and even between-keiretsu, Japanese managers can plan for the long term. The success of the typical American corpora­tion is most often measured in terms of annu­al profits.