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Chapter 6 – Business-Government Trade Relations CultureQuest End of Chapter Case Japan: Zaibatsu and Keiretsu . . . the Sumo Wrestlers of Business Governments around the world have routinely intervened in trade and investment policy. Japan’s postwar economic rise shows how government intervention was used first to promote Japanese industry and exports and then, as a result of external pressures, to increase domestic demand and consumption. Much of Japan's post-World War II success was the result of a well-crafted economic policy closely administered by the government in alliance with big businesses. Historically, Japan’s economy was controlled by zaibatsu, huge conglomerates. The main ones, Mitsubishi, Mitsui, Sumitomo, and Yasuda, were interested primarily in making profits and expanding their heavy industries, banking, and international trade, and their leaders largely ignored the mounting financial crisis. To support its growing heavy industry, Japan needed a steady supply of oil, iron ore, and coal. Thus began a period of military aggression in Southeast Asia, Korea, and China, which eventually led to the outbreak of war in the Pacific on December 7, 1941. After Japan's defeat in World War II, Allied forces under U.S. General MacArthur occupied Japan, with the purpose of establishing a “stable democracy.” General MacArthur had planned to dismantle the zaibatsu and other monopolistic companies after the war, but concerns about the U.S. involvement in Korea and the growing Cold War with the Soviet Union led the United States to focus instead on Wild IB 3E CQ Case for Text strengthening the Japanese economy. In fact, the financial aid the United States pumped into Japan helped the zaibatsu, which reemerged, with the addition of some new groups, as a stronger network of interdependent companies called keiretsu. The keiretsu are conglomerates that share resources, customers, and distributors. Unlike the former zaibatsu firms, which were controlled by holding companies, horizontal keiretsu are tied to a bank that may hold shares in other companies; hence, the companies and bank have very strong links financially. The companies may be affiliated, or they may be in completely different industries and of varying sizes. Keiretsu may also take a vertical form. In this case, they usually include a supplier and a distributor, and a large manufacturer is at the center. One of the advantages of keiretsu is that they can take over large projects that smaller companies could not support. The keiretsu have long enjoyed a very close relationship with the government. Since 1990, the United States has challenged some of their exclusionary practices, and, as a result of changes in their economic influence and roles, it has gradually become easier for foreign companies to do business in Japan. The outbreak of the Korean War accelerated Japan's opportunity to export its products, and from 1954 until 1972, the gross national product increased at a rate of more than 10 percent annually. Silk textiles were a major export, accounting for about onethird of the total. Production increased by 300 percent in the decade following 1962. Bolstered by its cheap labor force, high-quality products, and government-supported industrial output, Japan became a leader in exporting ships, steel, and electrical goods, followed by automobiles and electronic products. By 1971, Japan was the third-largest exporter in the world. Wild IB 3E CQ Case for Text Faced with two oil crises in the 1970s, Japanese companies started developing more fuel-efficient products and more efficient manufacturing processes. Throughout this period, the value of the yen was as low as 308 to the dollar, making imports very expensive. In 1985, the Plaza Accord (G-5 Plaza Accord), an agreement among the world's major industrialized countries, took steps to reduce this imbalance by lowering the value of the dollar. Japan also agreed to stimulate consumer desire to buy American. As the rate of the dollar dropped, imports became cheaper and the price of exports became higher. Thousands of import regulations were eliminated, and Japanese business began to feel the competition as profit margins dropped. Many companies adapted by cutting their production costs and moving their manufacturing operations to Europe and America. Japan's so-called bubble economy grew soon after the signing of the Plaza Accord and of other trade agreements in the mid-1980s that committed Japan to a policy of increasing domestic demand and lowered interest rates. By 1991, though, Japan had plunged into its worst recession in the modern era. The Japanese economy has continued to remain weak well into the current decade. Japan's huge trade surpluses and what many claimed were unfair trading practices damaged its relations with the United States and with major countries in Europe. By 2000, these relationships were strained even further by a perceived lack of understanding and attempts by the Japanese government to reform its economy. Despite the government's efforts, which included spending vast sums from the public coffers on infrastructure projects, prospects for the short term remained bleak. Wild IB 3E CQ Case for Text The government is now actively pursuing more foreign investment by pushing ahead with measures to create a new tax system, better work environments, and improved health and education services for foreign nationals. Multimedia Exploration In Japan, Sumo wrestlers are not just big, they’re some of the hottest sex symbols around and they capture the hearts—and minds—of many an admirer. READ, SEE, and HEAR more about Japan and why culture is so important in shaping its people, its economy, and the way business is done. TEST YOUR KNOWLEDGE by answering the questions as well. Wild IB 3E CQ Case for Text