Chapter 5 Japan
Japan is a very important trade, investment and aid partner for Vietnam as well as theleading nation in East Asia’s dynamic manufacturing network. The mission fullyrecognized, even before departure, that Japan’s past and current experiences could not beapplied directly to Vietnam because of different development stages and socio-economic
circumstances. In this sense, Thailand and Malaysia offer more directly relevant
information for Vietnam than Japan. However, the mission believed that valuable lessons
could still be had from Japan if proper modifications were made. The mission succeeded
greatly in obtaining such important insights.
1. METI’s role
The Ministry of International Trade and Industry (MITI) is considred to have contributed
to Japan’s rapid industrialization in the postwar period from the mid 1950s to the early
1970s, although the exact extent and scope of this contribution is still debated. Mosteconomists agree that, while private dynamism was central, MITI also played an
important assisting role. On the other hand, the view that the Japanese economy wasorchestrated by a strong government dictating businesses what to do, a view sometimes
expressed by foreign observers, is not supported. As time passed and the Japanese
economy achieved high industrialization and maturity, the role of MITI also diversified
into environment, energy saving, safety standards, trade negotiation, intellectual property
rights, regional cooperation, and so forth. The overall influence of MITI on Japaneseindustries also declined as large private firms became competitive and globalized. In
2001, the government reorganized MITI into the Ministry of Economy, Trade andIndustry (METI)1.
Even in the high growth period from the mid 1950s to the early 1970s, MITI’s main role
was to coordinate and support private activities rather than dictating them. For declining
industries, MITI intervened more strongly in order to downsize and restructure them.
MITI also supported R&D in next-generation technology, but not always with success. In
the case of Japan’s highly competitive industries such as consumer electronics, cameras,
watches, automobiles and motorcycles, MITI’s role was small. Private firms were thedriving force of these industries. MITI sometimes tried to reorganize their industrial
structure but such efforts often failed to materialize or were rejected by the private sector
For example, in the early 1960s, Japanese automobile firms resisted MITI’s intension tomerge them into a few large firms to compete with Americans. It is important to have abalanced view of the role of MITI (METI) in the history of Japanese industrialization. Itshould be neither overestimated nor underestimated.
In the automobile and IT industries (the two METI divisions we met), the role of thegovernment was relatively modest. In the case of automobiles, METI has had no major
1

We use the term MITI in discussing the past and the term METI for more recent situations. However, thebasic policy orientation of this ministry did not change by the name change in 2001. For this reason, it isacceptable to use the two terms interchangeably.

1role in deciding output, investment, product design or global strategy of Japanese MNCs.
This has been true not only today but in the past as well. METI’s concern has beenvarious surrounding issues of the industry including air pollution, fuel efficiency, tradenegotiations and improving business environment in the East Asian region (sometimes
using ODA). These are the areas that cannot be handled by individual companies due toexternality or the need for diplomatic leverage. Although Japan had serious air and noise
pollution, traffic accidents and congestion due to heavy automotive use in the past, it
never imposed any numerical restriction on automobile production or registration. The
METI officials we met stated clearly that such restriction would violate the basic
principle of free enterprise. It said that road safety and congestion was a traffic control
problem of the government, not a problem of private companies that produce automobiles.
In the case of IT, the METI’s role was somewhat greater than in the case of automobiles
in creating a vision and setting and revising targets. This reflects the fact that IT is a fast
evolving industry requiring huge investment and constant adjustments in law andregulation in comparison with the automobile which is a relatively mature industry. But itshould also be noted that METI’s policy touches only part of Japan’s entire IT industry,
which accounts for over 8% of GDP2. METI’s current policy in this area is the e-Japan
Strategy initiated in 2001. This strategy aimed to make Japan a top IT nation by 2005.
However, the target for IT infrastructure (fastest and lowest-cost broadband access in theworld), which was one of the four original targets 3 , was already achieved in 2003.
Subsequently, the main concern shifted to the active use of IT by the general population.
While METI is relatively more influential in IT than in automobiles, the government still
remains a follower of industrial trends and opinion rather than an enforcer of a strategy ina top-down manner. METI continually listens to the views of the industry and experts informulating and revising e-Japan Strategy, as we will see below.
Clearly, the government’s supplementary role in industrialization reflects the very strong
dynamism and competitiveness of Japanese manufacturing enterprises. MITI had tocarefully listen to and work with the private sector and implemented policies that werereally desired by the industry. In rare cases where MITI tried to intervene in the strategy
and organization of private enterprises against their will, policy was not effective.
2. Channels with the private sector
To play a role appreciated by businesses, MITI needed effective communication channels
with them. In fact, MITI’s strong and multi-faceted linkages with the private sector in thepast were a favorite research topic of foreign scholars such as Chalmers Johnson, Daniel

2

Japan’s IT industry is divided into (i) contents and platform (cable TV, mobile phone service,broadcasting, etc); (ii) hardware (computers, mobile phones, audio-visual equipment, consumer electronics,etc); and (iii) information service (system maintenance, software production and sales, information
processing, etc). The value of these segments amounted to 19 trillion yen, 9 trillion yen and 14 trillion yen
respectively in 2003 with the total of 42 trillion yen (this may contain some double-counting if purchasers
are not final consumers). Japan’s GDP in 2003 was 502 trillion yen.
3
The other three original targets were e-business, e-government and human resource development (ITtraining)—see Table 1 below.

2

Okimoto, the World Bank, and Campos and Root 4 . At present, METI still maintains
many communication channels inherited from the MITI days although the private sector
is now relatively more independent from METI compared with the past.
Deliberation councils still play an important role in linking government, industry andexperts and in generating consensus and solving problems among them. Special
committees and study groups also play a similar role. Whatever the name may be, themechanism for listening to the industry’s needs and opinions before making a policy iswell established in Japan. These councils, committees, and study groups meet as
frequently as necessary and produce reports to identify new issues and map out future
directions.
In addition to councils, committees, and study groups set up by the government,
industrial associations such as the Japan Automobile Manufacturers Association (JAMA)
and the Japan Electronics and Information Technology Industries Association (JEITA)
provide permanent bridges between the government and businesses. METI usually works
with industrial associations to gather information and formulate policies. METI also
contacts individual companies by telephone, email and informal meetings as needed.
Before going to an FTA negotiation, for example, METI approaches businesses throughan industrial association and individual contacts to determine Japan’s negotiating position.
In the case of introducing a new law, the draft is routinely discussed in an official open
committee attended by concerned businesses and experts. The draft law also receives
public comments for at least one month.
Japanese enterprises are required by law to report basic data such as production, sales andexports to the government every month. However, data collected by industrial
associations are usually faster than official data. When METI needs special or sensitive
data from enterprises, it must explain the reason. Enterprises cooperate only when theyagree with the purpose of such data collection.
3. Quick implementation and flexible revision
METI’s industrial strategy is frequently reviewed and adjusted. In the case of the IT
industry, strategies are revised every one to three years depending on the targeted productor service. Let us take e-Japan Strategy mentioned above as an example.
Table 5-1 shows the evolution of this strategy from January 2001 (establishment) to
September 2004. Within this 45-month period, key targets were revised annually and new
goals were introduced constantly. Two new bodies were created to revise the strategy. In
light of early achievement of the initial targets, the completely revised e-Japan Strategy
II was formulated in July 2003. Although IT is an area in which speed is essential, it must
4

See Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975,
Stanford University Press, 1982; Daniel I. Okimoto, Between MITI and the Market, Stanford University
Press, 1989; World Bank, The East Asian Miracle: Economic Growth and Public Policy, Oxford University
Press, 1993; and Ed Campos and Hilton L. Root, The Key to the Asian Miracle: Making Shared GrowthCredible, Brookings, 1996.

3

be admitted that METI’s policy formulation and execution is extremely fast and flexible.
Moreover, agreed actions are immediately put into practice without delay. This is in
sharp contrast to Vietnam where the process of drafting and approving industrial
strategies and master plans normally takes years, and implementation is often delayed
while operational rules and regulations are being prepared. In the fast-changing IT
industry, five-year or ten-year targets are not meaningful since it is hard to predict theindustry’s direction beyond immediate future.
Table 5-1. Evolution of Japan’s IT Policy in Recent Years
Activity

Outcomee-Japan Strategy (Jan.2001-)
Jan.2001 IT Basic Law & IT Strategy Headquaters established"e-Japan Key Targets" decided: (1) infrastructure, (2) eMar.2001 business, (3)e-government, (4) HRD; to become top IT
nation by 2005

Infrastructure
target achievedby 2003"e-Japan Key Targets 2002": (1) fast internet 30 million
households, (2) very fast internet 10 million households,
Jun.2002(3) 98% electronic application & reporting to governmentby end FY2003

Achieved by
2003

Sep.2002 Special Study Council established to map out new strategy
e-Japan Strategy II (Jul.2003-)"e-Japan Key Targets 2003": Increasing IT use in (i) seven
leading areas: health care, food, life, SME, finance,
Aug.2003 learning, job, public service; (ii) five cross-cutting areas:next-generation infrastructure, security, R&D, HRD,
international strategy
Dec.2003 Evaluation Special Study Council establishede-Japan Strategy II Acceleration Package decided: Asia &Feb.2004 global strategy, security contents, deregulation evaluation,
e-governmentMar.2004 ESSC's first report"e-Japan Key Targets 2004": reflecting Acceleration
Package above; numerical targets introduced forJun.2004
improving life quality and enhancing firms'
competitiveness; to remain top IT nation after 2006
Sep.2004 ESSC's second report
Source: METI Commerce and Information Policy Bureau.

The VDF-MOI mission has found in all of the countries it visited, namely Thailand,
Malaysia and Japan, that effective industrial policy formulation requires constructive andcontinuous contacts with businesses and a mechanism to frequently review and flexibly
adjust the policy in implementation. Without these, policy becomes too slow and out ofsynch with the requirements of the industry.

44. Numerical targets
One of the questions raised by the VDF-MOI joint research is how Vietnam should use
numerical targets in industrial strategy formulation in the future. It is clear that setting
rigid numerical targets for all industries and products and requiring them to be met byany means is no longer appropriate in an economy under market-orientation and global
integration. But this does not mean that all numerical targets must be abolished. Thailand
uses numerical targets for the total output and exports of automobiles and motorcycles,
and Japan currently uses numerical targets for the household use of broadband internet
and the promotion of e-government. Which numerical targets are appropriate and which
ones are irrelevant and even harmful?
In reality, Vietnam’s policy making is shifting gradually away from rigid targets to softer
guidelines and recommendations. However, quantitative mentality is deeply entrenchedfrom the days of economic planning and difficult to overcome immediately.
For the rethinking of numerical targets, it is useful to classify them into different groups.
Table 5-2 shows the hardness of targets, the level of aggregation and the periodicity ofrevision as three key characteristics of real-sector numerical targets. This framework
allows us to selectively adopt numerical targets rather than accepting or denying them intotality.
Table 5-2. Three Characteristics of Numerical Real-sector Targets
Hardness

Aggregation

Periodicity

Legal order

Macro level(GDP, total export)

5 to 10 years ahead
or longer

Indicative targets

Sectoral(manuf./agri./service,
SOE/FDI/Priv, etc)

2 to 3 years

Business plans byfirms or industries

Industry level(automobile, steel,garment, electro. etc)

AnnualForecasts

Product level(cold rolled steel,camera, engine, etc)

Monthly & quarterly

Under economic planning, hard numerical targets commanded all levels of aggregationfrom macro to product level, with five-year plans and annual budgets as key planning
cycles. Under market-orientation and international integration, however, legally binding
targets are no longer feasible or desirable. Numerical targets should be much less in5number and remaining ones should be of the other three types (indicative targets,business plans, or forecasts).
Long- and medium-term targets on GDP growth, overall export performance or industrial
structure may still be adopted, but they should be indicative without legal obligation. At
the sectoral and industry levels, the appropriate choice of targets depends on the nature ofeach sector or industry. For material industries supplying mainly domestic markets suchas steel, cement and power, numerical targets based on realistic demand forecast
scenarios are still useful. But private enterprises, not the public sector, should gradually
become the major supplier, and policy should shift from direct intervention like price andinvestment control to indirect coordination of the industry’s interest such as drafting
reports and master plans, and strengthening human resources, supporting industries,
marketing, procurement, and so on.
For processing- or assembly-type export-oriented industries such as electronics,
motorcycles, automobiles, garment, footwear and food processing, collective numericaltargets are less meaningful and should be indicative at best. The effort of individual
producers and global market competition should determine quantitative performance, andthe main goal of enterprise managers should be innovation, competitiveness and strategic
positioning rather than achieving predetermined numerical targets regardless of demand.
Furthermore, for dynamically evolving industries like IT, software and consumer
electronics where new products and markets emerge constantly, quantitative forecasts
beyond a few years are largely meaningless.
5. Vietnam in global and regional competition
Japanese MNCs are striving to expand their business operation in highly dynamic andcompetitive global markets. Whether they invest in Vietnam is not a bilateralconsideration between Vietnam and Japan but one move among many to take a strategic
position in the context of global innovation, production and marketing. While improving
Vietnam’s business conditions is important, this effort must always be made in fullunderstanding of Vietnam’s position in the global and regional business environment.
Even if Vietnam improves its investment climate, that will not necessarily accelerate FDI
inflows if the speed of improvement is slower than in other host countries or if
improvements are made in the areas that do not interest foreign businesses.
The importance of evaluating Vietnam in the context of global and regional businessstrategy was clearly shown in the following three meetings.
First, the Japan Bank for International Cooperation (JBIC) explained the results of theannual survey of Japanese manufacturing MNCs to the mission. According the latest
surveys in 2003 and 2004, Vietnam was the fourth most popular FDI destination forJapanese MNCs after China, Thailand, and the US. But unlike China, Thailand, and theUS, Japanese MNCs had few concrete plans to invest in Vietnam although generalinterest was high. This was partly because Vietnam was a relatively new FDI hostcountry and it would take some time for Japanese companies to gather information and6draft business plans. Japanese MNCs lauded low-cost labor, market potential, and humanresources as three attractive points of Vietnam, while the weaknesses in the legal andpolicy system and insufficient infrastructure were the main drawbacks in comparison
with other FDI destinations.
Second, Mr. Susumu Sanbonmatsu of the Research Institute of Economy, Trade andIndustry (RIETI) under METI discussed the strategic dynamics of Japanese MNCs. In his
research, key strategic ingredients are markets, product line, and value chain positioning.
To introduce new products for each major market continuously, MNCs must always planand invest ahead (global innovation chain). Moreover, for high-quality, low-cost, andspeedy production, MNCs must allocate different functions and processes to various
countries correctly (global supply chain). In all this, management leadership andcorporate culture play very important roles. The essential point here is that MNCs cometo Vietnam if that improves their performance in global innovation chain or global supply
chain. The government must know what Vietnam can offer to attract them when it
launches an FDI marketing campaign.
Third, Honda Motor Company explained its business situations and strategy to expand
Asian production5. Recently Honda received a license to produce cars in Vietnam, forwhich the company was grateful. Honda hopes to build good relations with MOI in
particular, and with the Vietnamese government in general, to realize Vietnam’s potential
with rising income and highly skilled labor. For motorbikes, India, China, Thailand,
Indonesia, Philippines, and Vietnam are the key production sites of Honda. For cars,
China and Thailand are particularly important in East Asia. When car production starts in
Vietnam, Honda plans to assign Vietnam to produce certain parts for global export.
Honda already exports automatic transmission from Indonesia to Asia, EU and US, andits plant in the Philippines also exports manual transmission to global markets.
6. Partnership based on business architecture
The mission also exchanged views with Prof. Takahiro Fujimoto of Tokyo University at
his project office. He is the leading Japanese authority in business architecture theory andhis current research documents the integration-based manufacturing system which is at
the heart of Japan’s competitiveness6. For this purpose, sixteen Japanese MNCs such as
Toyota, Canon, Honda, Matsushita, and Sony cooperate with this project.
According to Prof. Fujimoto’s theory, comparative advantage is created when theorganizational capability of an enterprise or a country is matched properly with thearchitectural property of its product (integral or modular). Production partners should
also be selected appropriately from the viewpoint of business architecture. Japan is an
5

Our discussion contained many concrete actions that Honda planned to undertake in the near future whose
details cannot be reported here.
6
Business architecture is divided into two main types: integral (creating original parts for each product)
and modular (combining common parts available in the market). Japan’s competitive firms often exhibit
integral architecture while Chinese firms usually have modular architecture. However, not all Japanesefirms are competitive or integration-based. According to Prof. Fujimoto, about half of Japanese firms areglobally oriented and only 10-20% have integration-based manufacturing.

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industrial country with integral capability while the US is an industrial country withmodular capability. The US and China are appropriate production partners since they areboth modular. Japan and ASEAN countries would also become good partners if ASEAN
improves integration-based manufacturing capability. On the contrary, if ASEAN
pursues modularity-based production (copy production with low quality and low priceunder excess competition), it will lose out to China since China is much bigger and betterat modular manufacturing than ASEAN (see Figure 1-3 in chapter 1 of this book).
Vietnam must shift from modularity-based businesses to integration-based business inorder to avoid direct confrontation with China and to build a more productive relationshipwith Japan. Prof. Fujimoto emphasized that Vietnam should learn the skills suitable for
integration-based manufacturing. The government and donors (including Japan) should
also support this effort in the private sector. More specifically, local capability in productdesign and engineering must be raised in a way directly linked to production processes.
Human resource development for the purpose of high-quality manufacturing isparticularly important. In fact, these are exactly the targets that Japanese firms are trying
to achieve and what the Japanese government has been helping with its technicalassistance programs in ASEAN. However, Prof. Fujimoto’s theory puts these ongoing
efforts in a new theoretical perspective7.
The mission raised three questions related to this view. First, can modularity-based local
firms (such as Vietnam’s local motorcycle assemblers) survive WTO and FTAs andbecome the basis of further development or will they be eliminated? Second, in light of
the finding that industries in developing countries go through three stages: (i) the rise of apioneer to start a new business; (ii) expansion of copy production with low quality andlow price; and (iii) emergence of an innovator to raise quality and competitiveness8, does
the transition from quantity to quality (from (ii) to (iii)) require FDI or can it be done bydomestic effort only? Third, architectural evolution is private sector-driven in Japan, butdoes it perhaps require policy intervention in developing countries?
Whether the government and ODA can play useful roles in speeding up the upgrading
process of industries was also discussed. While policy support is theoretically desirable,
actual policies based on insufficient information tend to assist wrong producers (weak orpolitically connected producers), leading to a waste of public money. Unproductive
copycats who will disappear soon and innovative imitators who will contribute toindustrialization must be distinguished before assisting local producers. But such a
distinction may not always be possible.

7

Ohno previously argued that Vietnam should break through the “glass ceiling” of industrialization by not
only agglomerating assembly and parts industries (quantitative expansion) but also enhancing technicalabsorption (qualitative improvement) in the future. Prof. Fujimoto’s advice is basically the same as this but
phrased in a more analytical language. See chapter 1 of this book, and also chapter 1 of VDF’s Improving
Industrial Policy Formulation, edited by Kenichi Ohno and Nguyen Van Thuong, and published by the
Publishing House of Political Theory, 2005.
8
Tetsushi Sonobe and Keijiro Otsuka, Roots and Strategies of Industrial Development: Lessons from theEast Asian Experience, Chisen Shokan, 2004 (in Japanese).

8Application of business architecture theory to industrial dynamics in developing countries
is a new and evolving field in the Japanese academic circle, and answers to the questions
raised above cannot be given immediately. But they may provide useful insights toVietnam’s industrialization in the near future when these ideas are better organized andexpressed.

9