A Decade of Revitalization

The “Lost Decade” denotes the 1990s when the Japanese economy was mired in uncertainty after the bursting of the economic bubble. The term “second defeat” has also been often used, comparing the 1990s to Japan’s defeat in World War II, after events such as the acquisition by a U.S firm of bankrupt Long-Term Credit Bank of Japan (becoming Shinsei Bank), and the arrival of a top French executive at Nissan.

How did the Japanese live amidst their “first defeat”—the decade following August 15, 1945 (Showa 20)? U.S. air raids had reduced many of Japan’s major cities to ash. Inflation was rising rapidly and the streets were filled with the unemployed. Simply put, the Showa 20 s should have been the “Lost Decade” for Japan. The reality, however, was not so simple. For the country’s economy, that decade never turned into a “Lost Decade.” Rather, the Showa 20 s became the “decade of revival,” with the Japanese economy accelerating quickly, leading to the high growth of the following years.

During the period of rapid economic growth beginning in the Showa 30 s (1955–1964), Japan witnessed the emergence of a series of entrepreneur heroes. However, it is important to remember that even in the Showa 20 s when the Japanese economy was still in the preparatory stage for takeoff, the nation already had several heroes who played a pioneering role: Sazo Idemitsu of Idemitsu Kosan and Yataro Nishiyama of Kawasaki Steel (the predecessor of today’s JFE Group), both accomplished feats referred to as “miracles” in the early summer of 1953.Footnote 1

Yet Another Miracle

In June 1953, one month after Idemitsu Kosan’s Nissho-Maru II returned to Kawasaki Port from Iran with a full load of gasoline and diesel fuel, a blast furnace was fired up in Chiba on the opposite shore of Tokyo Bay, drawing nationwide attention—Kawasaki Steel’s No. 1 blast furnace at its Chiba Works.

Kawasaki Steel (Kawatetsu) was a young company led by the inaugural president, Yataro Nishiyama, that had been spun off from Kawasaki Heavy Industries just a few years before, in 1950. With a capital of 500 million yen at the time, Kawasaki Steel would invest an astounding 16.3 billion yen to build the new Chiba Works, an integrated pig-iron-to-steel production facility equipped with a blast furnace. This plan was not only unprecedented in scale, but also daring in the sense that it would break the status quo in an industry then comprised of three ironworks (Yawata Iron & Steel, Fuji Iron & Steel, and Nippon Kokan Kaisha/NKK), plus three dedicated steelmakers (Kawasaki Steel, Sumitomo Metals, and Kobe Steel).

The media reported amusingly that Bank of Japan Governor Hisato Ichimada had ridiculed Kawasaki Steel’s plan for Chiba Works, saying that if such a plan was implemented Kawatetsu would come to a standstill and the Chiba Works would grow weeds on its roof. The Ministry of International Trade and Industry (MITI), the supervising authority over the steel industry in favor of maintaining the status quo, also strongly objected to the construction of the Chiba Works, which involved the installation of a blast furnace. Yataro Nishiyama resisted these “government pressures” and brought the No 1 Blast Furnace Kawatetsu Chiba Works into operation. Nishiyama’s achievement drew nationwide attention. It was perceived as “another miracle” puncturing the government-led control over the economy that had remained in place long after Japan’s defeat.

Sazo Idemitsu and Yataro Nishiyama, who pulled off back-to-back “miracles” in the early summer of 1953, possessed rebellious spirits, refusing to pander to the establishment. Complacency cannot produce a pioneer who ushers in a new era. As is often the case with pioneers, they did not adhere to the proverb that “the nail that sticks out gets hammered;” instead they opted to stand tall even if hammered.

Key Points of Nishiyama’s Innovativeness

Yataro Nishiyama was born in 1893 (Meiji 26) in Azuma Village (present-day Ninomiya-machi, Naka County, Kanagawa Prefecture). After graduating from the First High School (Ichiko), Nishiyama studied at the Department of Metallurgy, Faculty of Engineering, Tokyo Imperial University. In 1919 (Taisho 8), he joined Kawasaki Dockyard and built his career in the steelmaking field. Nishiyama became the first president of Kawasaki Steel, which was spun off from Kawasaki Dockyard (later, Kawasaki Heavy Industries) in 1950 (Showa 25). It was three years before the company’s first blast furnace at Chiba Works came online.

Historian Seiichiro Yonekura highlights the following three points regarding Yataro Nishiyama’s innovativeness, demonstrated in the construction of the Kawatetsu Chiba Works.Footnote 2

  1. 1.

    By entering the integrated pig-iron-to-steel production, the company broke the status quo in the steel industry, creating vigorous oligopolistic competition among the six major manufacturers (Sumitomo Metals and Kobe Steel were also prompted by the success of Kawatetsu Chiba Works to launch integrated pig-iron-to-steel production).

  2. 2.

    Kawatetsu Chiba Works itself “was beyond the league of any existing plants,” due to its sheer size, streamlined layout, coastal location suitable for importing raw materials and exporting finished products, and its proximity to the large consumer area in Tokyo.

  3. 3.

    Nishiyama promoted capital investment through the active use of external capital. The breakdown of the 16.3-billion-yen financing plan drafted by Nishiyama consisted of 8 billion yen from a counterpart fund, 3.1 billion yen in corporate bonds, 1 billion yen in bank loans, 2.5 billion yen in capital increase through share issuance, and 1.7 billion yen in cash on hand. Counterpart funding is a system whereby the government of the recipient country (in this case, the Japanese government) sells goods donated by the donor country (in this case, the United States) and uses the profits for social development projects.

Of these, (1) was representative of the development pattern commonly observed in Japan’s major industries from wartime to high-growth periods: aggressive entry of second-tier firms into the market, intensification of oligopolistic competition, and strengthening of the industry’s international competitiveness as a whole.Footnote 3 The pattern of “construction of new coastal factories through major bank loans” described in (2) and (3) was not confined to the steel industry but was also adopted by other major industries, becoming a typical pattern of capital investment during the high-growth period. Points (1), (2), and (3) embodied Yataro Nishiyama’s rebellious spirit of breaking the status quo, and were important precursors to Japan’s high economic growth.

The Man who Changed the History of Japan’s Steel Industry

Yataro Nishiyama’s construction of the No. 1 blast furnace at Kawatetsu Chiba Works changed the history of Japan’s steel industry. To understand this point, we must return to the eve of World War II.

As already noted, the steel industry, similar to the coal and other industries, became one of the main targets of government wartime economic controls. The Iron and Steel Industry Law was enacted in 1937 and the rationing of steel and scrap iron began in 1938. The Steel Control Board was established in 1941. Furthermore, in 1943 major steel mills came under the direct control of the Ministry of Commerce and Industry, although this was short-lived because of the defeat in 1945.

At the outbreak of the Second Sino-Japanese War in July 1937, the Japanese government favored Nihon Seitetsu (Japan Iron & Steel), the leading company at the time, and severely restricted others’ entry into pig iron production. However, as pig iron imports from India and scrap iron imports from the U.S. were increasingly likely to be disrupted,Footnote 4 the Iron Manufacturing Industry Law promulgated one month after the outbreak of the Sino-Japanese War reflected a reversal of position, allowing steelmakers to enter pig iron production.

Having met certain efficiency standards set by law, other steelmakers in addition to Nihon Seitetsu began producing pig iron. As a result, the ratio of production by the top three companies with respect to pig iron fell from 97.8% in 1937 to 88.5% in 1944. On the other hand, the concentration ratio of top companies in the steelmaking industry grew in the early 1940s as “scarce resources were invested in a limited number of firms” (the concentration of the top three firms regarding steel products rose from 56.2% in 1937 to 64.9% in 1944).Footnote 5 Still, the oligopolistic trend in the pig iron manufacturing industry was much stronger than in the steel manufacturing industry.

After World War II, the concentration of the top three companies in steel manufacturing declined significantly, falling from 64.9% in 1944 to 49.6% in 1950. Osamu Ito categorized market structure into eight types: Type A (monopoly), Type B (top 1 firm and multiple lower tier firms), Type C (2 tiers, upper and middle), Type D (3-tier, upper, middle, and low), Type E (middle-tier oligopoly), Type F (middle-tier oligopoly and lower tier), Type G (one monopoly firm in the middle tier, plus lower tier firms), and Type H (atomized type). He noted that competition would gradually increase from the least competitive Type A to the most competitive Type H.Footnote 6 The market structure of standard steel products changed from Type B in 1937 to Type D in 1949, and then to Type F in 1955. Similarly, the structure of the pig iron market transitioned from Type C in 1937 through Type D in 1949 to Type F in 1955.Footnote 7

In the postwar period, two factors contributed to intensification of competition among companies in the Japanese steel industry. One was the division of Nihon Seitetsu into Yawata Iron & Steel and Fuji Iron & Steel under the Law for the Elimination of Excessive Concentration of Economic Power. The other was the innovative entrepreneurial efforts by corporate managers in the second and lower tier firms, such as Yataro Nishiyama of Kawasaki Steel.

In June 1953, Nishiyama commissioned the blast furnace at Kawatetsu Chiba Works, the most advanced of its kind in Japan at the time. The construction of the Chiba Works, financed by a long-term loan provided by the Japan Development Bank and by a loan from Kawatetsu’s main bank, Dai-Ichi Bank, was the highlight of the “First Rationalization Plan” implemented in Japan’s steel industry in the early 1950s.

As the plan progressed, the Japanese government adopted the principle of providing equal assistance to all companies that met certain criteria for efficiency. For example, from 1952 onward, the Japan Development Bank provided long-term loans to six companies: Fuji Iron & Steel, Yawata Iron & Steel, NKK, Kawasaki Steel, Sumitomo Metals, and Kobe Steel.Footnote 8

The mechanism at work here, whereby the Japanese government in principle provided equal assistance to all companies meeting certain efficiency criteria, was what Japanese economist Juro Hashimoto dubbed the “equal opportunity principle for honor studentsFootnote 9”—observed also in the implementation of the Iron Manufacturing Industry Law of 1937. However, not until the implementation of the “First Rationalization Plan” did this principle fully take root in the steel industry. Yataro Nishiyama was clearly the person behind the “equal opportunity” principle, as he developed the Kawasaki Steel Chiba Works, the main highlight of the “First Rationalization Plan.”

Following the completion of the “First Rationalization Plan,” the second rationalization plan was launched in 1956, mainly involving competition among the three existing blast furnace steelmakers (Yawata Iron & Steel, Fuji Iron & Steel, and NKK) and the three others that formerly used open hearth furnaces (Kawasaki Steel, Sumitomo Metals, and Kobe Steel). These companies all rushed to construct blast furnaces, a reflection of the “Kawatetsu shock” triggered by the construction of Kawasaki Steel’s Chiba Works. Their action, however, was also inspired by the government’s 1957 New Long-Term Economic Plan to make the country self-sufficient in pig iron, with a specific goal of constructing ten blast furnaces by FY1962.

Upon entering the 1960s, the competition among the six blast furnace steel mills to build integrated steelworks accelerated, driven by the remarkable growth of steel demand and the “Income Doubling Plan” announced by the government in 1960. During this period, a series of large-scale integrated iron works were established in coastal locations: Sumitomo Metals (Wakayama) and NKK (Keihin) in 1961, Fuji Iron & Steel (Nagoya) in 1964, Yawata Iron & Steel (Sakai) in 1965, NKK (Fukuyama) in 1966, Kawasaki Steel (Mizushima) in 1967, Yawata Iron & Steel (Kimitsu) in 1968, Kobe Steel (Kakogawa) in 1970, and Sumitomo Metals (Kashima) in 1971.Footnote 10

In the competition for capital investment among steel companies during the period of high economic growth, the “equal opportunity principle for honor students” was evident throughout. This overarching long-term trend shows that Yataro Nishiyama had changed the rules of the game. Just as Yasuzaemon Matsunaga transformed the electric power industry, Nishiyama changed the history of the Japanese steel industry.

Decision-Making with a Rational Thinking

It is important to note that Yataro Nishiyama’s actions in breaking the status quo were not the product of passion but were backed by sound calculation and experience. His greatness came not only from audacity, but also from the meticulousness of decisions based on a clear rationale.

According to Hidemasa Morikawa, Yataro Nishiyama envisioned meeting three challenges when he decided to build the Chiba Works of Kawatetsu: (1) the prospect of steel market expansion, (2) financial planning, and (3) securing technical capabilities. Nishiyama took measures to meet these challenges that included: (1) market research as of 1949, before the Korean War; (2) lobbying MITI (the Ministry of International Trade and Industry), which was in charge of overseeing the counterpart fund, and inviting Shosoku Omori, the managing director of Dai-Ichi Bank, to become chairman of Kawatetsu; and (3) recruiting highly skilled blast furnace engineers (including Saburo Asawa) from Showa Steel, formerly a group company under the wartime Manchuria Railway (South Manchuria Railway). Morikawa concludes that Nishiyama was not so much a “passionate person” as a “passionate organizer” with the ability to think critically and rationally.Footnote 11

Into the Era of High Economic Growth

Hiroyuki Itami, who wrote a critical biography of Yataro Nishiyama entitled “The Dream and Decision of Yataro Nishiyama, A Salaryman Company President Who Pulled out High-Speed Economic Growth” (Itami 2015), shares Nishiyama’s recollections about the construction of the Chiba Works. It was published in the November 8,1958 edition of the Kawasaki Steel Newspaper, an in-house publication:

It was quite a commitment. But it was also based on a meticulous and careful plan, and I think what made me so determined was my awareness of the trends of the times. In other words, the postwar industrial revolution and advances in science and technology changed the old iron manufacturing methods, and everything became mass-produced, precise, and automated, making it impossible to compete using the old methods in terms of quality and price. Kawatetsu also gave up on the old method and decided to start the continuous production from pig-iron-to-steel rolling.

In addition, the international situation of the time had left postwar Europe exhausted. The European countries prioritized reform of their steel industry, and as a result Japan’s steel industry came under pressure. The situation became so serious that the Japanese industry would have been destroyed if it continued the status quo.

The same would have been true on the domestic front. The population was growing and domestic resources were scarce. Therefore, the entire country had to seriously consider how to feed itself. Before the war, the cotton industry was a major exporter, but after the war the cotton consuming regions [of the world] were already entering the self-sufficiency phase. Under these circumstances, Japan would be forced to become self-sufficient through heavy industry in the coming years. To do so, it was first necessary to improve the steel industry, the foundation of all heavy industry. We began construction of Chiba Works, agreeing that we would first build a blast furnace and establish integrated steel making operations, then work on modernization, starting with the manufacturing of sheet metal.Footnote 12

As this recollection shows, Yataro decided to build the Chiba Works based on his accurate “perception of the trends of the times;” his standpoint was rooted in the big picture. It was also driven by his strong sense of mission, taking into full account the domestic and international situations.

The “equal opportunity for honor students” principle normalized by Nishiyama went beyond steelmaking, and was adopted by other major industries. Competition for capital investment intensified among companies that met certain efficiency standards, and this opened the door to the era of high economic growth. From 1951 to 1953 the Japanese economy returned to pre-World War II levels in terms of both production and consumption. From the mid-1950s to the early 1970s, the Japanese economy enjoyed a period of high growth remarkable in global history. In 1968, Japan overtook other developed countries in GNP (Gross National Product), becoming the second largest economy among capitalist countries, after the United States.

During this period of high economic growth, Japanese living standards improved dramatically. Engel’s coefficient (the ratio of food costs to personal consumption) shrank, while expenditures on durable consumer goods such as the “three sacred treasures” (black-and-white TVs, electric refrigerators, and electric washing machines), and the “3Cs” (color TVs, air conditioners, and passenger cars), increased significantly.

Urbanization and the increase in the number of single-generation households also helped spending on factory manufactured products, mainly consumer durables. For Japan’s postwar heavy and chemical industries that had lost their military clients, this expansion of personal consumption was an important market factor supporting their growth.

Meanwhile, the average annual growth of private-sector capital investment, described as “investment spurring investment,” was more than twice that of personal consumption during this period.Footnote 13 Along with expansion of personal consumption, capital investment served as the engine propelling the Japanese economy’s high growth rate. Japan’s strong economic growth was driven by “domestic demand” in the form of consumer spending and private-sector capital investment. This characteristic distinguishes Japan from the other later-emerging Asian economies.

Following the construction of the Chiba Works, Yataro Nishiyama devoted himself to the construction of the Mizushima Iron Works, a driving force of the private-sector capital investment era. As Hiroyuki Itami noted: Nishiyama “pulled out a period of high economic growth.” In July 1966, the year before the Mizushima Iron Works’ blast furnace became operational, Nishiyama stepped down as president of Kawasaki Steel. He passed away in August of that year.