Industrial Policy

Ichiro Suzuki

Decades ago, when Japan was at the height of its economic might, it was taught in business school classrooms that much of Japan’s success was attributed to the bureaucracy’s policy making. The Ministry of International Trade and Industry (MITI) back then figured out what would be the industries that would define the future and planned what would be promoted. At the time when capital was scarce, the Ministry of Finance made sure that sufficient amount of capital flowed into the industries designated by the MITI. The best and the brightest young minds coveted to work for these two ministries. 

At the beginning of the 1990s, Japan had lost its luster. An unprecedented real estate bubble had popped, dragging down the banking system and hence the entire economy. It took Japan two decades to overcome the aftermath of the bubble’s bust. When the Japanese economy restored its health at last, the country found itself in a different world. Out of nowhere, it seemed to outsiders, a new revolutionary communication technology named Internet had changed the way business was done, making a seismic shift from the technology in which Japan boasted supremacy. In the digital age, Japan’s once famed electronics industry was relegated to an also-ran. 

With a shift of fortune away from Japan, talks of industrial policy faded. The Internet didn’t come into being under planning by the U.S. government. It has emerged from private corporations’ relentless efforts amid intense competition. No one can call the shots correctly, not always at the very least, however smart he or she might be. It is best to leave it to market forces. That is what made America great, it came to be believed. 

As the world moved into the 21st century, China emerged as a major player with its torrid growth rates. China’s double-digit growth rates were originally attributed to a surge in inputs due to mass inflows of low cost work force from rural China into large cities as well as productivity upswing brought by construction of new roads, bridges, railways, airports etc. Large scale real estate development in cities also helped. Investments in infrastructure and real estate accounted for as much as 30% of economic growth at that time. 

On top of infrastructure, manufacturing industries made great contribution to the Chinese economy. Starting from entry level export industries such as textile, China moved the ladder of value fast. Top-down guidance from the Communist Party made a great difference in catching up with and moving over developing counties. Economies of decentralized decision making structure wouldn’t have moved up as fast as China did. Today, Chins is a world leader in electric vehicles, batteries, renewable energy and is competing the U.S. intensely in AI. The CCP’s industrial policy has delivered stunning results, many people believed.

Years later, the world once again witnessed the second largest economy slipping into stagnation caused by real estate market bust, which afflicted Japan before and the CCP vowed to avoid. Stagnation of China’s domestic economy, however, didn’t make a dent in policy makers’ belief in industrial policy. Amid rampant weakness in consumption and high youth unemployment rates, Chinese factories continue to crank out highly competitive industrial products at sold them at reasonable prices. That it makes sense for the government to support certain strategic industries. sounded especially true in the United States where factories moved out to low labor cost countries. Joe Biden made a decision to bring semiconductor manufacturing back to the U.S. soil, sensing the risks associated with being a design center of the world. The U.S. CHIPS & Science Act was a landmark policy enacted for the purpose of promoting semiconductor manufacturing, technology leadership and supply chain security. Donald Trump is stepping up such a policy, by driving trade partners to invest a vast amount of capital to the areas designated by the government. 

For strong proponents of free enterprise, China’s meteoric rise to the second largest economy was a result of a fierce drive to catch up with developing countries in the West. China has invented no new, new things en route to where it stands today in the global economy. Concepts of EVs had been around for a long time before Wang Chuafu of BYD or Elon Musk took them seriously. Neither was renewable energy, nor AI, nor humanoid robots. China’s industrial policy has brought some already existing embryonic ideas to global leadership positions, and that’s more than good enough. 

Japan’s Prime Minister Sanae Takaichi advocates ‘responsible fiscal expansion’, which can also be considered as one form of industrial policy. She intends to make long-term investments in targeted industries. Shortage of capital investments have long been considered as suppressing growth potential of the Japanese economy. Management of Corporate Japan, who are older than their counterparts elsewhere, may have lost animal spirits and have held onto far too much cash on their balance sheets. Takaichi wants to change this, to the direction of greater risk-taking. Semiconductors leads the list, not surprisingly. The defense industry ranks high, too, at a time of shifting global security frameworks after eighty years of stability. So is a certain part of agriculture for food security. The bond and foreign exchange markets are predictably showing dissatisfaction with the policy, in the face of massive debt outstanding, sending the yen and government bond prices down. The stock market on the other hand has been hailing to Takaichi, recognizing the policy’s potential. If it is properly implemented, her policy would lift nominal growth rates of the economy, and that would lower the debt to GDP ratio by enlarging the latter. However, if the government is perceived not as responsible as they say they are, the markets would not hesitate to give Takaichi a Liz Truss treatment, as they did in London in 2022. 

About the author: Mr. Suzuki was a retired investment banker based in Tokyo, Japan.