Japan Railway History

Japan Railway History 13

Changes in Japan’s Transport
Market and JNR Privatization
Mitsuhide Imashiro
Transport Marketin Postwar JapanThe railway virtually monopolized
Japan’s postwar transport market due tothe lack of other means of transportation,
representing 52% of freight and 92% ofpassenger transport in 1950 (1) . The
economy began to pick up during theKorean War as a result of Japan’s role asa staging post for UN forces, and thenentered the rapid-growth period. The astonishing recovery was not entirely freeof bottlenecks, such as freight backlog atrailway stations because demand had exceeded JNR’s capacity.
To reduce the backlog, the government
started building expressways between
Nagoya and Kobe, and Tokyo andNagoya. At that time, roads in Japan weregenerally unpaved and narrow. The
number of commercial trucks and busesrose during the 1950s and, by 1960, therailway’s share fell to 39% of the freightmarket and 76% of the passenger market. Conversely, automobiles grew to
15% and 39%, respectively. However,the booming economy increased overall
demand, so railway stations were stillbacklogged with freight and suffered fromBirth of JRs at Shiodome Freight Terminal on 1 April 1987

50Japan Railway & Transport Review • September 1997

passenger congestion despite therailway’s falling share. The railway’s
monopoly collapsed with the growth of
the new automobile age. By 1970, its
share was only 18% and 49% of thefreight and passenger markets—automobiles had 39% and 48%, respectively.

Car Ownership and Rural Railways
Private vehicle ownership was becoming common in the 1970s as typified by
the Japanized phrase ‘mai kaa’ (my car).
Soon after the war, the fledgling Japanese
auto industry was building vehicles under the license of British and French
automakers, but by the late 1960s, it had
sufficient capacity to expand sales in both
the domestic and foreign markets, especially North America. Private cars formed
28% of the domestic passenger market,
striking another blow to rural railways(2).
Private railway lines were quickly replaced by private bus services but JNRlines could not be closed due to local
resistance, although their unprofitability
was obvious.
By 1980, the railway’s share of domestic
freight was just 8% and had even fallen(Transportation News)to only 40% of the passenger market. It
managed to hold on to a larger share ofpassengers because of the vast numberof commuters in large cities, and thepopular shinkansen between Tokyo andOsaka. Despite the rising income levels
and the popularity of car ownership,people still used trains to commute, because of the shortage of parking spaces
and traffic congestion in cities. Cars weremainly used for weekend outings.
As income rose, people in rural areas
where there was no road congestion or
shortage of parking spaces also boughtcars and many households even had twoor more cars. By 1980, private cars represented 39% of the passenger market.

Decline and Fall of JNR
Although the Japanese transport market
was experiencing massive structuralchanges, JNR still continued making profits through the 1950s and early 1960s,
unlike the European railways which ran
deficits from the mid-1950s. This wasbecause Japan was 10 years behind Europe in entering the new age of car ownership. JNR stunned the world byopening the Tokaido Shinkansen in 1964
to upgrade the old Tokaido trunk line
which was unable to meet demand. Atthat time, railways were generally viewed
as a declining industry and the plan toconstruct the Tokaido Shinkansen wascriticized by some as a foolish investment
on a par with the Great Wall of China(which did not stop the Mongol hordes)
and the battleship Yamato (the largest
battleship ever built but which was sunkby aerial bombardment in WWII).
The 1964 Tokyo Olympics and theTokaido Shinkansen symbolized Japan’s
postwar recovery and growth. Its success put an end to the criticism and theword shinkansen even became synonymous with high-speed trains in the English language. Although the Tokaido

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Shinkansen was a technological marvel
and grew to become JNR’s bread andbutter, ironically, its opening marked thefirst year that JNR entered the red.
Attempts were made to stem the losses
mainly in three directions: by raising
fares to increase revenues; by reducing
staff through mechanization of labourintensive operations and closure oflightly-used freight stations, rural lines,
etc., to improve productivity; and by
seeking more financial support from thegovernment.
However, higher fares were of coursevery unpopular, and as motor and airtransport grew rapidly through the 1960sand 70s, fare hikes did not bring proportionally increased revenues. In particular, in 1976 when JNR raised passenger
fares by 50%, the traffic volume fell very
sharply, with many long- and mediumdistance passengers shifting from rail toroad and air.
Although no real labour dismissals wereincluded in JNR’s productivity measures,
meaning only partial replacement of retiring employees, major trade unions
stood firmly against the workforce reduction. Labour-management relations deteriorated year-by-year and there was anendless series of disputes, including long
strikes from the late 1960s to early 80s.
The government was always reluctant toloosen the purse strings, and, to makematters worse, could no longer afford to
support the railways after tax revenues
fell as a result of the two world oil crises.
Although the government provided somefunding each year, it only covered partof the huge deficit; most of the losses
were covered by private and government
loans, which later accumulated enormous interest charges.
Despite the mounting problems, political pressures forced the JNR to continue
making huge investments in infrastructure including new shinkansen financed
by loans.
The annual losses continued growing

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A session of the Supervisory Committee for JNR Reconstruction taking evidence from JNR Chairman Fumio(Transportation News)
Takagi (standing)

year-on-year and by the late-1970s, hadreached ¥1 trillion. They were generated
both by the interest charges, as well as
by operating losses from the freight sector, rural trunk and branch lines, and JNR
bus and shipping operations. By 1987,
the deficit totalled ¥25 trillion, similar tothe combined national debts of several
developing countries(3).

Proposed JNR Divisionand Privatization
The division and privatization of JNR wasfirst suggested in a proposal presented in1982 by the Ad Hoc Commission on Administrative Reform, and the powerful
Supervisory Committee for JNR Reconstruction was established in 1983. Thecommittee announced a report in 1985
Kokutetsu Kaikaku ni kansuru iken (Opinions on the restructuring of JNR) which
said, ‘JNR’s finances collapsed because it
failed to respond correctly to the changesof the time by reforming its management
or increasing productivity to meet thechange in transportation structure. The
cause of the failure to meet the change intransportation structure correctly is foundin a structural issue contained in the styleof management itself; JNR relied on centralized management of all railways in thecountry under the huge organization of apublic corporation’(4).
The report also said, ‘reconstruction un-der the existing system is no longer possible...’ urging privatization and division
to solve its problems. The proposal recommended privatizing and dividing JNR
into six regional passenger railway companies (the JRs) and a freight company(JR Freight), and a number of smaller
other companies in the information, telecommunications and R&D fields. It wasrealized that JR Hokkaido, JR Shikoku,and JR Kyushu, as well as JR Freight,
would have problems maintaining profitability due to their small customer base,whereas JR East, JR Central, and JR Westwould be profitable due to the large number of commuters and customers using
the shinkansen. For this reason, two measures were proposed to adjust profits between the companies: formation of a ¥1.3
trillion Management Stabilization Fund(MSF) for the three island companies, andformation of a Shinkansen Holding Corporation (SHC) to lease the Tokaido,Sanyo, Tohoku and Joetsu shinkansen toThe 1966 Toyota Corolla fuelled the ‘My Car’ boom
(Toyota Automobile Museum)Japan Railway & Transport Review • September 1997

51

Japan Railway History 13

Buses replaced rail services on the closed JNR Akaya Linethe JRs. The details of the MSF and SHC
as well as subsequent changes to the proposal have already been described in theprevious issues of JRTR(5),(6). A special
measure comprised of fees calculated on
the basis of avoidable costs was also introduced to lighten the burden of JRFreight.
Another government body, JNR Settlement Corporation (JNRSC) was established to assume and liquidate the oldJNR debts by selling unused land, and tofind jobs for employees surplus to the JRrequirements(7),(8).
Although the original intent was to list
all the JRs on the stock market, only JR
East and JR West are listed at present andJR Central is preparing for listing.

(Transportation News)JNR debt, 3. The positive business effortsof the JRs themselves, and 4. The reduced
labour costs.
As a result, unlike in the JNR days, theJRs have managed to avoid genuine fareincreases for a long time afterprivatization. The three island JRs increased their fares by 10% only once,
which compares favourably to the numerous fare increases by private railway
companies within the same time span.
However, it should be noted that the JR
fares were rather high in the first place.
The implemented reforms were changed

after the privatization in two ways. First,
the SHC system of leasing the shinkansen
to the JRs was changed in 1991; JR East,
JR Central and JR West were allowed topurchase the lines on deferred payment
from the SHC. In fact, this idea had been
proposed by the JRs originally because
they feared that the leasing system would
cause future problems with listing stocks.
Purchasing the shinkansen lines, even bydeferred payment, is imposing a heavier
burden than the leasing programme, but
was a wise choice from the longer perspective. The original concept of the JNR
privatization of separating infrastructurefrom operations has still not been settled.
Second, the plan for JNRSC to sell theunused JNR land was delayed because
the government feared it would fuel skyrocketing land prices.
The booming economy at the time of JNR
privatization was lucky for the JRs, but
the subsequent serious depression has
made it impossible to sell the land held
by JNRSC, delaying the debt redemption.
This remains a serious issue and the current debt of ¥28 trillion is equivalent toapproximately ¥200,000 for every man,woman, and child in Japan, or about 5%of the total national debt.

Birth of JRs
The new JRs became reality on 1 April
1987 and their operating balances soon
improved dramatically compared to theJNR days. In their first year of operation,
their combined operating profits totalled¥340 billion, rising to ¥900 billion in1992. The good results were due to four
principal factors: 1. The steady growthin transport demand resulting from theeconomic boom at that time, 2. The release from the huge burden of the old

52

Komachi (Akita mini-shinkansen) and Yamabiko coupled on the Tohoku Shinkansen

Japan Railway & Transport Review • September 1997

(JR East)

Copyright © 1997 EJRCF. All rights reserved.

Future Challenges
The recession over the last 4 years hascaused falling demand for railway transportation and consequent downward
fluctuations in operating profits since
1992–93. In addition, the government’s
low interest rate policy to fight the recession has worsened the financial positionof the three island JRs, which rely heavily
on the working profits from the MSF tooffset their operating losses. JR Freight isalso suffering from the recession in competition with air and road.
The recession has revealed a number ofproblems that were hidden by the booming economy when the JRs were formed.
We have reached the point where newdiscussions and solutions are needed.
The effect of deregulation at privatization
was insufficient. Although the government has now accepted price cap regulation in addition to previously-used ratebase regulation, it is still reluctant toeliminate the bureaucracy responsible forregulating the railways. Future deregulation of domestic air transport will probably create demand for further
deregulation of railway operations.
In addition, the railways must survive theincreasingly severe competition with airand road by investing selectively in markets where they excel other means oftransportation. For example, the 1200-km
trip between Tokyo and Sapporo in
Hokkaido is dominated by air with a 95%
market share. In contrast, the shinkansen
enjoys the dominant share of the 350km trip between Tokyo and Sendai, forcing out the airline companies(9). JR East
has recently begun competing aggressively with air transport by introducing
new express services, such as the Akita
mini-shinkansen(10).
In addition to competition, the railways
must complement other transportmodes—for example, by providing better access to airports, and supplement-Copyright © 1997 EJRCF. All rights reserved.

A JR Shikoku expressway bus crossing the Seto Ohashi bridges

ing rail services with car rentals. Otherissues are the need for cost sharing bylocal communities. Cost sharing is now
taken for granted in construction of minishinkansen running on conventionallines, as well as in extension of theshinkansen network.
At least, privatization has given the JRs
the freedom to make these critical decisions without the political interference
common during the JNR era.
■0(3)

Notes

0(7)

(JR Shikoku)

M. Imashiro, Restructuring of the Japanese National Railways and Its Problems, Outcome of

the Privatization of the Japanese National Railways , Institute of Business Research, Daito
Bunka University, March 1992.
0(4)Supervisory Committee for JNR Reconstruction,
A View on JNR’s Reform—Paving the Way forRailways in the Future, July 1985.

0(5)Y. Okano, The Backdrop to Privatisation in Japan, JRTR 2.

0(6)K. Nakamura, Privatization and Beyond: the JRCase, JRTR 8.

0(1)

0(8)

lometer basis, Ministry of Transport, National

I. Smith, 10 Years of JR Operation—The Explicitand Implicit Aims of JNR Privatization, JRTR 13.

Transportation Statistics Handbook, 1993,
0(9)pp. 20–27.
0(2)S. Konno, JNR Privatization—The Last 10 Yearsand Future Perspectives, JRTR 13.

On passenger-kilometer and freight tonne-ki-M. Imashiro, Maintaining Public Transport inMinistry of Transport, Survey on Regional Passenger Flows, March 1996.

(10)

Japan’s Countryside—Burden Sharing and Sub-Akita Shinkansen Opened, Photostory, JRTR 11.

sidies, JRTR 9.

Mitsuhide Imashiro
Professor Mitsuhide Imashiro finished his postgraduate studies at Seikei University in 1978. He
lectures at Daito Bunka University, and has been visiting professor at Stirling University in Scotland. In 1991, he published Outcome of the Privatization of the Japanese National Railways.

Japan Railway & Transport Review • September 199753