The Clinton administration’s pressures on the Japanese government in 1995 to increase U.S. companies’ share in Japan’s automobile and auto parts markets and Eastman Kodak’s accusation that Fuji Film uses unfair competitive practices in the Japanese market are the latest in a long series of assertions that Japanese companies collude with each other and with the government to suppress competition. Those who make such assertions tend to focus on three elements — industrial policy, the keiretsu (enterprise groups), and lifetime employment — that suppress competition in the Japanese business system. U.S. negotiators’ view that Japan’s “closed” system fosters collusion and restricts competition also leads them to insist that their efforts to help U.S. firms in the Japanese market are also in the interests of Japanese consumers.
Given Americans’ insistence on the virtues of competition, it is surprising that so many people see no inconsistency in believing that Japan had nearly four decades of economic growth with a fundamentally collusive business system. A more compelling argument is that, in the 1970s and 1980s, Japan’s business system was fueled by competition, not collusion, and it was this competition that powered Japanese economic growth.
Today, however, the sustainability of the key features of Japan’s business system in the face of a five-year recession and the strong yen is in doubt. The prospects for change in the Japanese industrial system as a consequence of these forces are much stronger than any pressures that the U.S. government generates. In this article, I examine the nature of competition in Japan, the implications of its industrial policy, the keiretsu, and the Japanese employment system and assess the prospects for fundamental change in the near future.
Competition and Industry Structure
Traditional economic theory espouses the view that free competition is the source of sound economic development. It maximizes total social welfare and forces companies to be innovative and to price their goods and services competitively. In this view, monopolies threaten the efficiency of markets, reduce innovation, and slow economic growth. On the other hand, individual firms pursue strategies to reduce competition — to find “niches” where they have a monopoly or a commanding, dominant position and to drive competitors to the wall. Weak firms either go out of business (in the pure competition model) or are acquired by strong firms trying to increase their dominance.