34

As Mr. Peterson observed, "Since the commercial banks of Japan provide the major source of funds to corporations via an aggressive lending policy, they are ultimately dependent upon the Bank of Japan."

The second most important element in the zaibatsu group

of interrelated interests is the trading company:

"Large trading companies handle nearly 75 percent of
Japan's export trade and nearly 90 percent of Japan's
total foreign trade. This gives Japanese companies a
market advantage. Because of the huge volume of sales
they handle, trading firms are able to operate on small
profit margins.

"This special business-government relationship
has implications for Japan's view of the role of price
in international markets. The Japanese Government has
used restrictions such as quotas, high tariffs, credit
restrictions, and state trading to give an advantage to
domestic products. These restrictions have covered a
wide range of products including certain 'technology-
intensive' goods such as computers and advanced electronic
products. Japan is the only country in the world with
which the United States has a negative trade balance in
technology-intensive products."29

When a U. S. manufacturer of electronic products seeks to establish distribution of its product in Japan, he must necessarily make arrangements with a trading company to handle the distribution. As the U. S. industry's experience in attempting to negotiate such relationships in television and radios has demonstrated, much time is consumed in negotiations, without an agreement being consummated. The trading company must be sensitive to the economic interests of other members of the Japanese industrial group with which it is closely aligned. Its

29 U. S. Dept. of Agriculture, Foreign Agricultural Service, Foreign Agriculture, March 13, 1972, p. 8.

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ability to arrange bank financing to carry the inventory of the U. S. goods required to fill the distribution pipeline and to service the trade is dependent upon the evaluation of the Japanese commercial bank, and, in turn, the Bank of Japan as to the "appropriateness" of the arrangement from the point of view of the policies of the Government of Japan for the protection of the Japanese manufacturers with whose products the imported articles would compete.

Japanese interests are highly sensitive to the nuances of

the competitive considerations involved in any proposed entry for American electronic products into the Japanese market. As stated by Mr. William H. Brown, 30 managing director of Fuji National City Consulting, Ltd., Japan's present-day domestic commercial behavior is typified by a

"vast network of buyers and suppliers, makers, traders,
wholesalers, and retailers [in] a web of highly personal
and intimate relationships. *** Such strong inter-
personal relations take a long time to build, but they
stand the test of time and adversity. Newcomers must be
patient. But for those 'inside,' the world is secure, warm,
and predictable."

As he states, "this network of personal loyalties is both intractable and exclusive."

The point of these references is that it is not merely

the trade restrictive effect of "administrative guidance" supplied

by the Government of Japan within the context of the import licensing and standard terms of settlement regulations which inhibit U. S. exports;

30 The Japan Economic Journal, January 18, 1972, p. 24.

36

it is also the total effect of the structure of Japanese culture manifested in the financial-industrial complex of Japan which supplies the cohesion of policy and action which effectively exclude directly competitive American products from the Japanese market.

C. RESTRICTIONS ON U. S. INVESTMENT IN JAPAN

It is the general experience of U. S. manufacturing corporations which establish branches or subsidiaries in foreign countries that the presence of such instrumentalities generates a flow of exports to that country even though the overseas subsidiary engages in the manufacture of goods to serve the foreign market. The Government of Japan is keenly aware of the import-generating influence of a U. S. branch or manufacturing subsidiary located in Japan, and it has rigorously limited the right of U. S. manufacturers of electronic products to take such action.

The formation of a branch office in Japan is governed by the Commercial Code and the Foreign Exchange Control Law. Foreign firms are required to register with the local office of the Legal Affairs Bureau of the Ministry of Justice. The control by the Government of Japan of the foreign exchange requirements of the branch in Japan may prevent the branch from operating entirely. The U. S. corporation upon forming a branch in Japan must file a report with both the Minister of Finance and the Minister of International Trade and Industry which sets forth the branch's business program and financing plan for a period of three years. The branch is unable to introduce operating funds,

37

technical knowledge, or trademarks from its U. S. parent without a license. The license is not granted until the formal acceptance by the Ministers of the Establishment Report. Delays in the approval of such reports are commonplace.31

The establishment of a manufacturing subsidiary in Japan

is even more difficult. Shares of existing manufacturing corporations in Japan may be acquired only up to 25% of the total shares issued by the corporation. This ceiling deprives foreign interests from appointing a director to the management. A further limitation preventing the acquisition of as much as a 7% interest by a single foreign investor makes it difficult even to attempt the less than 25% total interest in a Japanese corporation through the acquisition of stock on the stock exchange. 32

The establishment of a new company in Japan by a U. s. corporation is kept under close control by the Government of Japan. For most sectors of the electronic industries, investment by a U. S. corporation in a newly established company in Japan is limited to not more than a 50% interest in a joint venture formed with an approved Japanese company. A few sectors of the electronic industries are listed in Class 2 for which a 100% ownership interest may be acquired by a U. S. corporation upon approval by the Government. These sectors are the industries producing radio and TV sets, tape recorders, and record

31 Price Waterhouse & Co., "Information Guide for Doing Business in Japan," October 1970, pp. 35, 36.

32 Ibid., p. 34; Dept. of State Airgram A-900, American Embassy, Tokyo, August 31, 1970, p. 4.

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players, not including, however, the manufacture by such firms of integrated circuits and semiconductors.33 It is noteworthy that in the recent agreement by the Government of Japan to undertake further liberalization measures, no commitment was made with respect to the liberalization of U. S. investment in manufacturing subsidiaries in Japan. The Government of Japan merely agreed in principle to allow the establishment of sales subsidiaries, "except for computers and related activities."34

The Government of Japan retains the right to impose severe conditions upon its grant of approval for U. S. investment, even in 50/50 joint ventures. Thus far it has allowed only one joint venture to be established in the field of semiconductors, and then only upon the agreement by the U. S. manufacturer that it would make its semiconductor patents available to its Japanese competitors, and accept a restriction on the volume of the output of the joint venture by MITI. 35 In other electronic components the Government of Japan has allowed only four joint ventures.36

The dual requirement that the U. S. manufacturer turn over its patents and technology to its Japanese competitors, and accept as a partner in the joint venture a Japanese competitor selected by MITI, is designed effectively and speedily to strip the U. S. industry of

33 Price Waterhouse & Co., "Information Guide for Doing Business in Japan," October 1970, p. 64.

34 U. S. Treasury Department, press release, February 11, 1972. 35 The Japan Economic Journal, January 4, 1972, pp. 2, 11; Appendix for Part 1, p. 1-B-5, U. S. Dept. of Commerce, Foreign Market Survey, DIB 71-07-509 (January 1971).

36 Appendix for Part 3, p. 3-B-5, U. S. Dept. of Commerce, Foreign Market Survey, DIB 71-07-509 (January 1971).