& BUSINESS

22nd

REPORT
ANNUALs<"VTE'trOee'T,,,B.v/gw

THE RESEARCH INSTITUTE FOR
AND BUSINESS ADMINISTRATIONECONOMICS

KOBE UNIVERSITY
1976

KOBE
& BUSINESSECONOMIC
REVIEW
22nd

ANNUAL RERORT<s:"glg'E">v
THE RESEARCH INSTITUTE FOR
AND BUSINESS ADMINISTRATIONECONOMICS
KOBE UNIVERSITY

1976

CONTENTS
Page
Pioneering in Austalian Direct

Trade: Life ofF. Kanematsu, 1845-1913 .......,.Tadakatsu INouE 1
Productivity Bargaining and the Change

of Labour Management Relations in
the Japanese Foreign-going Shipping;
1965-1973 .....,.................................Hiromasa YAMAMoTo 17

On an Interpretable Depreciation Method .....,.........Isao NAKANo 27

A New Type of Data Banking System-BEICA System- ...................,.............Hiroshi SADAMicHi 47
Expectation in the Shipping Exchange ,.............,...Tetuji SHiMoJo 57

International Capital Movements andReal Capital Accumulation ,..........,...............Kazuhiro IGAwA 75

Legal System of the Free Movement ofWorkers and Migration Trends in theEuropean Economic Community ...........................Kunio SoH 85

PIONEERING IN AUSTRALIAN DIRECT TRADE:
THE LIFE OF FUSAJIRO KANEMATSU, 1845-1913
Tadakatsu INouE

Foreign trade in Kobe, begun with the opening of the port in the Hyogo districtin 1867, took for rather long period oftime the form ofthe so called "settlement trade"or "foreign firms trade." That is, those engaged in foreign trade were the foreign

trading houses situated in the settlements established in 1868, and the Japanesemerchants participated in foreign trade only as "selling merchants" selling export

goods to these foreign merchants or as a "buying merchants" purchasing import
goods from them. Therefore, from the point of view of the Japanese merchants,
except that foreign merchants were added to their business, there was not muchdifference from their traditional domestic trade. This situation existed not only inKobe but also in other open ports including Yokohama. According to Nihon Boeki
Shi (History of Trade in Japan) (1948) by Eitaro Tokumasu, the ratio handled byforeign merchants in the total amount of export and import was 99.6 per cent in
1874, 97.4 per cent in 1877, 92.2 per cent in 1882, 87.6 per cent in 1887 and 80.4
per cent in 1892. Although the figures show a decreasing trend, even in the 1890's
more than 80 per cent of the trade was done by foreigners.
It can not be denied that this settlement trade brought benefits to the Japanesepeople at a time, especially, when they were unfamiliar with foreign affairs as wellas lacking in the ability of foreign business practices. Nevertheless, under such a

trade system, the profit monopolization by foreigners was unavoidable. Although
the above cited History of Trade and Kindai Nihon Boeki Shi (History of Trade inModern Japan) (1959-61) by Kiyoshi Matsui threw light on the disadvantages of
the Yokohama merchants, the earlier history of Kobe was also fu11 of grievances
as for the Japanese merchants engaged in foreign trade. For example, describing

the indiscretion of tea manufacturers and the shrewdness of foreign merchants,
Kobe Kaiko Sanjunen Shi (Thirty Years Progress of Kobe Port) (1898) points out
the abuse of the peke (rejection) right by foreigners in the settlements in the following

terms:"Not only in tea trade but also in all trade of export goods through the foreign
firms in the settlements, the customary evil exists in the fact that, after the inspectionof samples, they contract with us as to the volume, the date of delivery and theirprice, but when the goods are delivered, they check them thoroughly and once they
dislike them without any definite reason, they devise pretences for cancellation, or

2

INOUE
TADAKATSU

demanding price reductions. Under such circumstances, if the goods are sold attheir reduced price, a Ioss for our domestic merchants is inevitable. However, toour regret, the goods are already in their warehouses, and if we refuse to comply
with their demands and take a long time for negotiations, even the storage charges
are imposed on us. Especially in the case of ordered goods, returned with the claimof not coming up the quality of the samples, our merchants are forced to disposeof these goods at discounted prices for prompt transaction, because it is yery diMcult

to dispose of such kinds of goods. Thus the foreign merchants knowing the circumstances of our domestic merchants, abuse of the peke right which they think thebest way to distress the Japanese merchants."

Although the beginning of trade in Kobe was such a humiliating one, gradually

there appeared merchants in the region who came to attempt to break the bonds
with these foreign trading houses and to trade directly with merchants overseas.
In Kobe Boeki Kyokai Shi (History of the Kobe Trade Association) (1968) several
men are listed of this type of merchants.

Kanbei Ikeda was a merchant who pioneered in the trade with Korea. At first
Ikeda was hired by a foreign firm in Yokohama, then as the company opened a branchoMce in Kobe, he came down here as an ofuce staff. Soon he resigned from thecompany to become an independent tea dealer and in 1882 opened a shop for tea
trade, establishing in the same year a branch oMce in Pusan, then proceeded to
Wonsan. His business activity was apparently trade in tea, though no precise records

are avairable. In an attempt to explore the trade with Australia, Seiuemon Ikeda,

Tokusaburo Hamada, Shin Horiuchi and some other merchants established in1883 a company named Makoto Shokai. This company is said to have sent men toAustralia for the inspection and in fact, scarce as they are, there are some evidences

to show that the company exported goods. A tea merchant named Sadakichi Takeda
is said to have inspected the American market in 1885 and visited in 1890 Vladivostok

with a business purpose related to the tea trade with a firm to which he had been

sending samples. In addition to these merchants, we can mention Taizo Takasu
who made a plan to export leather made in the Himeji district. However, most of
the efforts by these forerunners to explore foreign markets by themselves seem tohave aborted. As the Hristory ofthe Kobe Trade Association points out, the factthat "not only did they Iack in the knowledge on trading and establishing connections
with foreign firrns, but also their financial resources were insuMcient" would explain

the reasons why their ventures had failed.

Among these general trends, however, there were some successfu1 merchants
who were able to become independent traders and eventually lay a cornerstone in
the foundation of the development of trade in Japan as well as in Kobe. Both Shin-kichi Tamura, founder of the present Tamura Trading Company and explorer ofPIONEERING IN AUSTRALIAN DIRECT TRADE: 3

THE LIFE OF FUSAJIRO KANEMATSU, 1845-1913

the trade with Canada, and Fusajiro Kanematsu, the pioneer in the direct trade with

Australia and founder of the present Kanematsu-Gosho Trading Company are
typical examples of such merchants.

This paper attempts to throw some light on the Iatter merchant. Fortunately,
concerning the life of Kanematsu, usefu1 documents are available, which include

Buntaro Nishikawa's Kanematsu Goshuo (Old Mr. Kanematsu) (1914), Kanematsu
Co.'s Kanematsu Kaiko Rokul'unen (Sixty Years Retrospect of Kanematsu) (1950)
and Kanematsu no Kao (Profile of Kanematsu, 75 Years Young) (1965), and Kurando

Koga's essays on Fusajiro Kanematsu contributed to K G Mansuri (K G Monthly),Nos. 288, 302, and 314. Using these documents, we will make clear what kind of
person was he who went over to Australia as early as 1887 to open direct wool

trade? What experiences had he in his childhood? What situations and motives

brought him to such a venturous business at the time? How did he challenge
and overcome the diMculties he faced?

I. ChiIdhoodofKanematsu
Fusajiro Kanematsu was born on May 21 in 1845 in Osaka. His father, Yahei
Hiroma, had come from a small villege in Owari (Aichi Prefecture), working as alive-out clerk of a tatami-matting trader in Osaka when he was born. However,in less than three months after his birth, his father went away without saying good-bye

to the family. When he was about four years old, his mother, Yae, married a fish-monger named Kitamura of Kyoto, but again, his second father died when he wasthirteen years old-adverse circumstances indeed.
When he was eleven years old, he was an apprentice of a soybean products dealer

named Yoshiya in Kyoto, and this was the beginning of hard apprenticeship forhim. However, when we look at his boyhood career, we soon find that he changed
jobs very often. In less than two years, he quit his first job in Kyoto and became

an apprentice of Tanbaya Manzo in Osaka, but he could not stay there long andsoon came back to Kyoto, finding a job at a drygoods dealer named Funasho.
There he was treated so cruelly that he was said to have attempted one day to commit
suiside. After one and a haif years, he left this job again to find another one at a

candle dealer of the same city, followed by the apprenticeship at a rice dealer of

Osaka.
As to the reason why Fusajiro changed his jobs so frequently, the above mentioned Old Mr. Kanematsu and Sixty Years Retrospect say that it should not necessarily be attributed to his lack of perseverance but to his having been out of a proper
place. Nevertheless, it was socially sanctioned virtue at the time for every apprentice

to devote himself to his master no matter how hard his task might be. It is no doubt

4

TADAKATSU INOUE

that Fusajiro knew that he should have behaved just like expected, but at the sametime, it is probable that he was not a man who could easily adjust himself to thesociety with fixed social standings under the feudal regime. In his body, blood tolook for something else had always been streaming, boiled up by adverse circumstances and eventually made him feel unsatisfied with the existing state of affairs andthus changed his place of work as a migratory bird.

In 1862, when he was seventeen years old, looking to his temporary acquaintance, Fusajiro went up to Edo (Tokyo) and got ajob as a helper ofa gatekeeper
in the house of a certain Ohno who was then a steward ofa "Hatamoto" (top ranking

samurai of the Tokugawa Shogunate) named Okabe Suruganokami. Later he worked
for Okabe and before long he bought a "kabu" (title) to become a lower ranking
samurai. Presumably, his desire for self-expression explains such a behavior, that is,he thought it must be the best way to join the samurai class in order to achieve
glorious fame in the feudal society even if it were on the way to disintegration.
Although the reason is not clear, after about this event, he took the family name ofone of his relatives and came to call himself Fusajiro Kanematsu.

As a samurai, Fusajiro practiced gunnery, and in the war of Tsukuba he wasin the field as a platoon commander of the Shogunate forces, fighting for ten months.

This military life was, however, far from satisfying Fusajiro's ambitions. Consequently, he decided to quit samurai life and to engage again in business. The above
cited Old Mr. Kanematsu tells his state of mind at the time as follows.

"Once I had the aspiration to be samurai. But after observing the reality ofsamurai life, I became aware of my misjudgement and felt that ifI strived for the

military arts, I might be promoted to such a high rank as a battalion commander
or a regimental commander, but after all it would be nothing very great."

In 1865, Fusajiro Kanematsu resigned as a samurai for reasons of health andwent to the newly opened Yokohama port, spending some time there inspecting thestate of business, then went back to his home town, Osaka. Soon the war between
the Tokugawa and the Choshu-clan broke out, and taking advantage of this occasion,
the ex-samurai Fusajiro purchased sake (rice wine) casks to sell them to the forcesof the Choshu-clan and earned some money. Since then, however, while teaching
the village children writing and reading at his relative's home, he spent his days

waiting for his chance. In due course of time, the Meiji Restoration was accomplished, at that time Fusajiro was twenty-three years old.

II. Kanematsu in the Early Part of the Meiji Period

What Kanematsu attempted at first in the Meiji era was to engage in businessin the open port city. The main open port at the time was Yokohama accounting

PIONEERING IN AUSTRALIAN DIRECT TRADE: 5

THE LIFE OF FUSAJIRO KANEMATSU, 1845-1913

for 70 per cent of the foreign trade of Japan, so it was quite natural for him to turn

his eyes to this port. In transactions of cotton cloth, cotton yarn and groceries, hemade a considerable amount of profit, though it was said that he was "obliged togo back to Osaka" before long. Then he went to Kobe and became an agent in thecoal business. After one year of profitable business, his agency went bankrupt, andhe went to Niigata to attempt to trade with foreigners as well as domestic merchants,

which, within one and a half years, brought him a rather large fortune. Then, witha heavy purse, he went again up to Yokohama to begin business in the silkworm-egg
card export, which was in fashion at the time. This venture fit the market and thebusiness grew day after day. However, in 1870 as the Prussian-French War brokeout, the export to France, the largest market of silkworm-egg cards, was cut off.
As a result the price of the goods fell drastically and most of the dealers in the tradewere ruined. Fusajiro Kanematsu could not tide the diMculty either.
Penniless Fusajiro was thinking over one day the facts of reality and came tothe conclusion that it would be much better to spent time studying for the future
rather than to pass the time in irritation, and decided to learn English from Mr. &Mrs. Ballagh. This was an American missionary couple who had come to Kanagawa
in 1861 and was giving lectures on the Bible, in uncertain Japanese, to inhabitantsof the region. Together with a small number of classmates, Fusajiro attended thewarm-hearted lessons of this couple. The following year, as a foreign language
school was opened in Yokohama, he enrolled at this school. In addition to that,he learned English one time from Yajiro Ito who was then the chief oMcer in the

Bureau of Mining.
In February 1872, he left Yokohama and went back to Osaka, where he looked
for a proper business and at one time he made a plan to go to America which did

not realize. Kanematus's fate was suddenly change, however, when he met hisformer English teacher, Yajiro Ito, on the boat bound for Kobe. After having
criticizing his indecisive attitude, Ito recommended him to the Osaka oMce of the

Mitsui Gumi Exchange, the predecessor of the Mitsui Bank. In March 1873, atthe age of twenty-eight, the ex-successfu1 merchant Fusajiro became an employeeof the Mitsuis. Thus the Mitusi career of Kanematus .began and lasted until
November 1881. Although at first his position was not much different from thatof an apprentice, he did not care for that matter, being the oMce for his hard work
two hours earlier than other people. Gradually his honest and untiring attitude inwork was recognized and by the end of the third year he was promoted to theposition of an oMcer. When he resigned from the Mituis, Kanematsu was sittingin the seat of a director of the Osaka oMce.

While working for the Mitusis, Kanematsu made every effort to promote business in Osaka. In 1876 he endeavored to establish a rice exhcange in Osaka and on

INOUETADAKATSU

6

behalf of Motonosuke Mitsui he became a supervisor of this exchange. In 1878 hejoined the establishment ofthe Chamber of Commerce and acted as one ofits oMcers.

Through these activities in and out of banking, Kanematsu's name came to be
widely known in the business community, but he was not satisfied with the status of ahired banker.

Soon after the resignation from the Mitsuis, Kanematsu joined the establish-

ment of the Osaka Shosen (Merchant Marine) Company. According to Osaka
Shosen Kabushiki Gaisha Hachi'unen Shi (Eighty Years History) (1966), when he
was turning his mind to shipping, the situation of the industry was in chaos, for "inthe shipping industry of the inland sea which had developed mainly in Osaka andKobe, because of the scarcity of working capital, shipowners were prompt to seekfor daily profit and frequently alternated competition and alliance." With the
purpose of improving this situation, some leading businessmen of Osaka made anagreement with each other to unite the competing shipping companies to form one
consolidated shipping company, and Saihei Hirose, who was then the president of
the House of Sumitomo, was recommended as the organizer. Kanematsu's relation
with the rice exchange and the Chamber of Commerce brought him to participate inthis project, and with the formation ofthe t`Osaka Shosen" in May 1884, he was appointed director in charge of transportation. Nevertheless, in two years he resigned

from the company. The ernergence of opposition among the directors, which wasoften the case in such consolidated companies as the "Shosen" formed with competing enterprises, must have been the main cause for his resignation.

The next venture in which Kanematsu found an opportunity was a news paper.
Cooperating with Tomie Teramura, who acted with him when he resigned from the"Osaka Shosen," Kanematsu bought the "Osaka Nippo" (Daily News) which wasthen in financial diMculty, and entrusted its management to Toru Yano, the principal

ofa commercial high school. Kanernatsu's purpose of the purchase of the news paper

was said to publish business news based on the business community of Osaka. In
1888 the reorganized news paper began to be published under the title of the "Osaka

Mainichi Shinbun", but before that Kanematsu had already launched out toward
direct trade with Australia destined to be his life work.

IIL BoundforAustralia
In November 1887, Fusajiro Kanematsu was on the deck of a ship bound forAustralia. His purpose of this voyage was to survey the possibility of direct tradewith Australia.

Since he became the supervisor of the rice exchange in 1876, he came naturally
to be interested in the export ofrice. In fact, from that time on, rice was becoming

PIONEERING IN AUSTRALIAN DIREer TRADE: 7

THE LIFE OF FUSAJIRO KANEMATSU, 1845-1913

one of the most promising export goods. For example, the ratio of rice in the tota1
exports of 1882, 1884 and 1886 was 4.38 per cent, 6.41 per cent and 6.75 per centrespectively. Although the main customer ofrice at the tirne was England, he noticed

that, together with Germany, Australia was growing to the second largest rice
market. Having been attracted by this fact, he studied more about this country andfound that Australia was the world largest wool producing country as well as acountry endowed with rich natural resources. Old Mr. Kanematsu describes hisstate of mind at the time as follows,"Hereupon, he thought attentively. `Our commerce and industry are still at
an immature stage. Even though we have one or two cotton spinning enterprises,
their output is almost unworthy of counting. . . . . . Nevertheless, the demand for cotton

yarn is increasing so rapidly that there is no doubt that the cotton spinning industry

wM rise sooner or later. The next industry which is likely rise after cotton will be

the wool industry. But once the wool industry rises, we will immediately be shortof wool for production. If such a situation arises, now is the best time for opening

direct trade with Australia. If we export rice and other goods in return for wool,

it will lead to the promotion of our national wealth to a large extent...... From
now on, I am going to devote myself to the trade with Australia.' "In December of the same year, Kanernatsu arrived in Sydney and spent about
halfa year for the survey while touring various places in the country. Although
at that time the population of Australia was less than three million and the amountof trade with Japan had just reached the five hundred thousand yen level, theprosperous commerce in Sydney and Melbourn as well as the richness in live stocks
and natural resources gave Kanematsu the impression that the future of trade withthis country was far more promising than had expected.

In mid 1888, Kanematsu left for home with high expectations. When the ship

stopped at Hong Kong, he ran across a young man named Toranosuke Kitamura.
This youth was the son of a druggist in Kyoto, but when he was a little child his
father died, and when he was eighteen years old or so Kitamura went over to Hongkong, engaging in commerce for several years with Chinese merchants. Kanematsu
soon recognized the business ability of this youth, so, having told him about hisplans, Kanematsu asked him for assistance, and Kitamura agreed to become hisright-hand man. In fact, as we will see later, the acquisition of Kitarnura was oneof the most important by-products of this tour.

IV. Birth of the F. Kanematsu Japan-Australia Trading Co.

As soon as he came home, Kanematsu began to establish an enterprise for the
direct trade with Australia by asking widely his acquaintances and friends for co-

TADAKATSU INOUE

8

operation. They looked, however, upon his undertaking as too risky. As has been
mentioned before, it was the time that more than 90 per cent of trade was handled byforeign rnerchant houses in the settlements and many people thought it impossible
to run foreign business without the intermediary by foreigners. In addition to this,the trade with Australia, which Kanematsu was going to undertake, was still almost
unknown field of business. Therefore, it was rather natural for Kanematsu's friends

to have been reluctant to assist him in finance. According to Old Mr. Kanematsu,
they opposed to his attempt by saying: "He is now in a respectable position in thebusiness community and his annual income is not small. Furthermore, it is a timeof rapid economic progress, therefore not only are there ventures which should beundertaken domestically but also we can have a bright future by simply sitting andwaiting. We can not understand why he dares to undertake such a tough business."
And it was said that "when they came to see that they could not convert his mind,
they shut their mouth, and evefi there were some who went so far as to declare to
break off friendship with him."

Despite these adverse circumstances, Kanematsu's will to stick on the business
was solid enough. In an attempt to begin the business even alone, he sold his building

and lot in down town Osaka as well as his owned stocks, making about ten thousand

yen. In April 1889 he sold "Osaka Mainichi Shinbun" to acquire additional
funds. Meanwhile, financial assistance came from Saihei Hirose and some otherbusiness friends. By agreement, they were to loan him up to twenty and several
thousand yen. Adding his own yen to this borrowed money, he could finaly raise
about thirty thousand yen, enough as initial business funds.

The next problem he faced was where the business headquarters should belocated, but without hesitation he chose Kobe. His choice was appropriate for hisbusiness because the position of Kobe as a trading port was rapidly rising. Taking
the ratio of Kobe Port in total trade in Japan, for example, it increased from about

23 per cent in the years 1884-1886 to more than 33 per cent in the years 1888-1889,
and nearly 40 per cent in irnport alone in the latter period.

On August 15, 1889 he opened the Kanematsu Company at Sakae-machi, Kobe.
It was a small shop with a fifteen feet frontage and a thirty feet depth, and as to theemployees, there was only one clerk except Toranosuke Kitamura, the right-handman ofKanematsu. Nevertheless, as ifto demonstrate his ambition, a huge signboard

with "THE FUSAJIRO KA,NEMATSU JAPAN-AUSTRALIA TRADING CO."was proudly hanged up on the top of the shop-front.

V. Opening of the Sydney Branch and Direct Import of Wool
Following the establishment of the Kanematsu Company in Kobe, in order toPIONIEERING IN AUSTRALIAN DIRECT TRADE: 9

THE LIFE OF FUSAJIRO KANEMATSU, 1845-1913"sell Japanese goods in Australia and import Australian goods to be sold in thedomestic market," it became an urgent need to have an on-the-spot branch oMce
to operate as another base for the trade between the two countries.

On January 14 of the next year of the opening of the shop, Kanematsu andKitamura got on board the S.S. Tsinan, leaving Kobe for Australia. As the branchoMce was opened, Kitamura was to reside there. According to Old Mr. Kanematsu,

one day on board, Kanematsu asked Kitamura to swear an oath. "By chance, I
have come to share the business with you, therefore, success or failure will depend
upon the decision of both of us. I would, therefore, like to propose you the follow-

ing conditions: (1) Don't take tea for three years after arriving there. (2) Everymeal is to be limited to only one dish of Western food. (3) Carriages for transportation are prohibited. (4) In the oMce, clothing must be changed to working clothes.

(5) Be contented with the same work as that of a longshoreman, and except in inevitable cases, don't hire a longshoreman. Can you follow these five clauses? I havealready made up my mind, but I don't want to compel such hard things upon others.
Consider carefu11y and tell me yes or no." Having thought over for a while, Kitamura
readily consented.
In spite of neither being familier with the business practices and customs in theregion nor having reliable channels of information, as early as the end of the monththey arrived, the Sydney branch of the Kanematsu shipped the first cargo consistingof 29 barrels of tallow and 321 sheets of cowhide, then in May, 187 bales of cleaned

wool was shipped, followed by the cargo of sheepskin, harness, cowhide and bark in

the next month. In return for these goods, such goods as earthern wares, lacquer
wares, bamboo wares and other oriental sundries were brought there by ship.

The above mentioned 187 bales of wool were the goods the Kanematsu's Sydney

oMce had purchased for the Osaka Keito Boseki (Wool Spinning) Company on theRoyal Wool Exchange at the assorted price of less than one pound eithteen pence,and this became the first Australian wool imported by the Japanese. Naturally,

even before this shipment, Australian wool had been imported to Japan. In an
attempt at the self-supply ofwoolen products, the Meiji government had establishedin 1879 the Senju Seijujo (Wool Manufactory) in Tokyo, which was the first modern

wool factory in Japan introducing European techniques for wool manufacture.

Knowing that the Chinese wool, which had been imported through the Chinese
legation, was unsuitable as material for woolen cloth, the government had decided

to use Australian wool instead and ordered the buying-in to Kihachiro Okura.
Since then, the Okura-Gumi (Company) was providing the Senju Manufactory with

Australian wool. However, the wool was imported by foreign merchants and the
Okura-Gumi functioned only as a middleman.

The Osaka Wool Spinning Company, which first bought the wool Kanematsu

TADAKATSU INOUE

10

imported, was one of the enterprises coming into existence in the formative era ofthe-woolen industry in Japan, Although the establishment of the Senju Wool Manufactory by the government in 1879 led to emergence of the other commercial wool
factories, most of them were small sized enterprises with only one spinning machineand few hand looms. In around 1887, however, there appeared a small number ofwool factories installing to some extent modern production modes. Among theseenterprises was the Osaka Wool Spinning Company, which was organized in 1888
with a capital of 1oo,OOO yen. Despite applying Australian wool imported by the

Kanematsu, this company "did not have suMcient experience in equipment andcould not realize any profits," In addition to this, affected by the panic of 1890,
the company was forced to go into liquidation.

Turning back to Fusajiro Kanematsu himself, he could feel in Sydney that atleast the base for the direct trade with Australia was completed, then, trusting futureaffairs to Kitamura, he came home to Kobe on August 15 in 1890.

VI. Fixation and Development of the Direct Japan-Australia Trade

While he could see a gleam of success, Kanematsu had to face and overcome
further problems before fixing and developing his explored direct Australian tradeas a business.

Since his second visit to Australia in 1890, Kanematsu had been there threetimes by 1893, and when a wave of crisis rushed over Australia in that year,
he was at the new oMce in the Albert Building on O'Connel Street in Sydney towhich he had removed the oMce in 1891. The Sydney Branch of the Kanematsu
Company was also involved in the crisis, falling into unprecedent diMculties. For,

until 1915 when a Japanese bank (the Yokohama Specie Bank) opened its branchoMce in Australia, Kanematsu had to use foreign banks. Under the depression, he
could neither collect bills of credit sales nor convert goods such as rice or groceries

into cash. Meanwhile, the due date of bank loans was approaching fast. Again
according to the Old Mr. Kanematsu, tough as he was, Kanematsu could do nothingbut "in excessive desperation and having no other course open, try to drive out agony
by relying on the effect of spirits such as brandy or whisky." But one day, Kanematsu

determined to call on his bank. In uncertain English, he appealed to the manager
for what he had in mind as follows.

"Although the trade with your country has not yet reached a mature stage,
I believe that I, Fusajiro, have done my bit for what it is today. Throughout theyears since I started this business, with an inflexible will, I have devoted myself tothe business, but yet I have never had any ambitions but to promote the developmentof trade of both countries. Nevertheless, in this great crisis, if you insist on the col-

PIONEERING IN AUSTRALIAN DIRECT TRADE:

THE LIFE OF FUSAJIRO KANEMATSU, 1845-1913

lection of my notes on due date; I shall have no other way than closing the Kanematus

Company with much regret. If it turned out to be so, the trade, which has beendeveloped with great pain, will be aborted. I beg you understand what I really mean
and take generous measures for the sake of the trade between Japan and Australia."

The appeal expressing his true feelings might have moved the manager. The
bank gave grace to Kanematsu. Meanwhile, the crisis was over and business con-ditions improved, and the Kanematsu Company, whose bankruptcy had once
seemed inevitable, could barely keep alive, As the situation became normal, Kanematsu returned home in February of the next year, but it is said that when his friends

saw him at the port, his appearance with worn out shoes and clothing was so depressing that they could not say anything but watching him in silence.

In 1901, eight years after the crisis he had met in Sydney, the Kanematsu Company was again involved in a storm of crisis at home. By this year, the business of

the Kanematsu Company had greatly expanded. In 1898, the company removed its
oMoe from Sakae-machi to Kaigan-dori and opened a branch oMce in Tokyo. Following the beginning of the silk yarn trade, the company started trade with China, though

this was based on the consideration to secure additional business because he knewthat Australia was a country apt to suffering frequently from natural disasters suchas drought. The business volume of the company also increased from around 60,OOO
yen in 1890-1891 to the 1,Ooo,Ooo yen level after 1898. The number of employees
including Fusajiro himself came to count 36 (27 in Kobe, 5 in Tokyo and 4 in Sydney)at the end of 1898. When the Kanematsu Company expanded to such extent, there
occurred a crisis beginning with a panic in the Tokyo Stock Exchange. Immediately

the banks that had been providing the Kanematsu with almost unlimited credits
began calling for the repayment of the loans. Thus Kanematsu was again in diMculties.

On this occasion, Fusajiro called on Yuboku Yamakawa, the manager of theKobe Branch of the Tokyo Specie Bank, though he did not have a special businessconnection with this bank. Submitting precise inventories, he asked Yamakawa forfinancial support. Yamakawa did not only see the inventories showing that there
was room for relief, but he also appreciated the painfu1 situation of Kanematsu
who was making every effort for the development of direct trade with Australia,

and so he decided to give relief to the Kanematsu Company. Then, accepting thesuggestion of Yamakawa, Kanematsu took action to reduce the size of business,
including the abandonment of the speculative silk yarn business, the reduction of
the Chinese trade and personnel reduction as well as wage cuts. At the same time,

renting his huge house to a foreigner, president Kanematsu moved to a tiny rented
house.
As shown in the foregoing, while Kanematsu's rnain effort was devoted to the

11

12

INOUE
TADAKATSU

operation of his enterprise, his eyes were never focussed only on his own business.

For example, in the middle of the 1890's he became one of the promoters
who persuaded the members of the Trade Association, the Chamber of Commerce andthe Municipal Assembly to organize the "Kobe-ko Shuchiku Kiseikai" (Society for
the Improvement of Kobe Port), and as the vice president of the society, Kanematsu

took the initiative for the improving movement of Kobe Port. It was also in thosedays that Kanematsu tried to unite wool manufacturers to realize the exemption

from the five per cent custom duty for imported wool. Working on the Finance
Minister, the Minister of Agriculture and Commerce and Diet members, he madeevery effort for the benefit ofwool manufacturers. As the result, the duty on imported

wool, together with that on cotton, was exempted after Aprjl 1 in 1896. It was felt

in the wool industry that this government decision was the result of Kanematsu's
efforts, and the four wool rnanufacturers decided to send a letter of thanks to him.

As if responding to the positive activities of Kanematsu in and out of the company, the surrounding situations turned favorable for his business. Taking advantageof the Navigation Subsidy Law in March 1896, the Nihon Yusen (Mail Steamer)
Company came to open a route to Australia and assigned to it the Yamashiro-Maruas the first ship. In 1897 the Japanese consulate was set up in Sydney and was promoted to a consulate general in 1901. In 1899 a treaty revision was carried out, bywhich the extraterritorial rights of foreigners were removed, resulting in the disap-

pearance of the notorious settlements. In 1911 a second revision of the treaty was

executed, by which the custom sovereignty of Japan was restored. Thanks to thesemeasures which created favorable conditions for his business, there was a steady
growth of the wool industry.

As has been shown in the foregoing, the Japanese wool industry began with theestablishment of the National Senju Wool Manufactory in 1879 followed by the
emergence ofprivate wool enterprises. Since then it had grown rapidly due to several

events sueh as the Sino-Japanese War in 1894-1895, the repeal of the import duty
for wool in 1896, the heavy raise in import duty for woolen products in 1899 andthe Russo-Japanese War in 1904-1905. There is no doubt that these events gave
stimulus to the wool manufacturing industry and eventually contributed to widen
the market for wool imported from Australia,

Responding to these changing situations around the Kanematus Co., the businessvolume of the company increased year after year, though the figures are available
only for the national level. As seen in the following table, around 1887 when Kanematsu first visited Australia, the total amount of the Japanese trade with Australia

was on the 5oo,OOO yen level. It increased, however, with a high tempo to the
1,OOO,ooO yen level in 1892, the 2,OCK),OOO yen level in 1897, the 4,OOO,OOO yen levelin 1902, the 10,OOO,ooO yen level in 1907 and the 20,Ooo,OOO yen level in 1912. Al-

PIONEERING IN AUSTRALIAN DIRECT TRADE:

THE LIFE OF FUSAJIRO KANEMATSU, 1845-1913
Value of Exports from Japan and Imports from Australia, 1887-1912(In thousands of yen)
Year

Exports

Imports

Total

1887
1892
1897
1902
1907

535
732

32
273

1,oo5

1,875

897

2,772

3,172

1,672

4,844

4,794

7,819

12,613

1912

8,629

12,792

21,421567

Source: Division of Research of the Kanematsu Co., Goshu (Australia), 1943.

though the figures show that the total amount doubled every five years, the increase

in wool was conspicuous as the highest among the traded goods. In the fiscal year

1890-1891 when the Kanematsu first attempted to import wool, the total volume
of wool imported to Japan was only 200 bales, which increased to 10,727 bales in
1904-1905 when Japan was fighting with Russia, and reached 25,550 bales in 19111912. 0f course, this rapid growth of the Australian wool trade was not brought

about by the Kanematsu Co. alone. Since around 1907, in an attempt for similarluck as that of Kanematsu, there appeared some Japanese trading firms engaging
in the Australian wool trade. Thus Takashimaya-Iida in 1905, Mitsui and Okura in1907 began to buy wool on the spot. According to the Sixty Years Retrospeet ofKanematsu, the share of the Kanematsu Co. in the total Japan-Australia wool trade
was as high as 58.0 per cent in the fiscal year 1909--1910, 65.5 per cent in 1910-1911

and 63.9 per cent in 1911-1912.

In the summer of 1911, as if symbolizing the success in the direct trade with

Australia, a new building of the Kanematsu Co. was completed. It was built on
the site of the old house which had been used for the company's oMces. The newbuilding was made of stone and had three stories, which Fusajiro, fi11ed with deep

emotion, named the NICHI-GO KAN (Japan-Australia Building).
In August of the next year, the Kanematsu Company changed its legal form
from that of the original sole proprietorship to a dormant partnership to realize
the business ideology of the ovvner. That is, Fusajiro had long held the belief thata business should not be owned by one proprietor alone, but owned cooperatively
with its employees. As early as 1899 he expressed his intention to give a part ofshares to employees, then in 1906 he made an agreement with them, by which, halfof the capital of 120,OOO yen was to be held by the employees and the dividends tobe paid from the revenue in each fiscal term. The change ofthe company's organisa-tion in 1912 aimed to put into legal form a share holding system by his employees

by making his 18 employees including Toranosuke Kitamura dormant partners asprovided by the Commercial Code.

13

14

TADAKATSU INOUEOn February 6 in 1913, Fusajiro Kanematsu died of illness at the age of sixtyeight. Once the news on his death crossed the ocean to reach Sydney, the Sydneyvaool and Stock Journal carried an anicle entitled "Wool Trade with Japan" andpraised his achievements as a pioneer in the wool trade between Japan and Australia.

VII. Conclusion
We have seen in the foregoing chapters the various entrepreneurial activities
of Fusajiro Kanematsu. Among his activities, however, the most impressive thing

was that Kanematsu, who was over forty years old and in a quite stable position
in society as well as in business, bravely challenged to an unknown enterprise suchas the direct trade with Australia, In the final chapter of this paper, we shall review

what Kanematsu drove to such a venture and what the source of energy for his
enterprising activities was.

It is true that Kanematsu was attracted by the wealth which might be realized

if he were fortunate enough to succeed in his attempt. Nevertheless, we should
regard it neither as the only motive to drive him into the venture nor as the prime

one. If he had pursued only his own private fortune, would he have excuted sucha plan as to give half of the capital to his employees? We can not deny the profit
motive in his behavior, but we must not take it for his sole and prime motive. Rather
we like to think that what led him to the venture was his strong desire for self-ex-

pression. As has been mentioned before, the desire for something was always in
his blood. In addition, the adverse circumstances, in which he was placed immediately
after his birth, must have strengthened his desire for achievement. The fact that hehad changed apprenticeships so often and even bought the title of a samurai can betaken for the evidence to support our assumption. Similarly, that he hung up thehuge sign board of "THE FUSAJIRO KANEMATSU JAPAN-AUSTRALIATRADING CO." on his oMce even though it was a tiny shop with two clerks seems
to be based on the same desire.

Then, in order to achieye his goal, why did he choose the direct trade with
Australia? What did he find in it to satisfy his desire?

As has been pointed out, Japan's foreign trade was controlled by nearly 90
per cent by foreign merchants even in the later part of the 1880's. It could not be
helped at the time when the Japanese were unfamilier with foreign affairs, but theresult was the monopolization of trading profits by foreigners. Meanwhile, among

the Japanese merchants in Kobe as well as in Yokohama, a movement to break down
the evils associated with the settlement-trading took place, but as long as the Japanese

rnerchants were confined themselves in the position of middlemen, there were naturallimitation beyond which they eould not proceed. In order to establish the sovereign-

PIONEERING IN AUSTRALIAN DIRECT TRADE:

THE LIFE OF FUSAJIRO KANEMATSU, 1845-1913

ty of commerce, it was indispensable to break bonds with the foreign merchants, andit was not only the earnest wish of the merchants in open ports but also that of theJapanese people led by the government policy to enrich and strengthen the country.

What moved the mind of Kanematsu was no other than such a situation. If he
attempted direct trade with foreign countries, especially in an unknown field, hewould win applause......this belief drove him to such a venture as the direct tradewith Australia.

15

PRODUCTIVITY BARGAINING AND THE CHANGE
OF LABOUR MANAGEMENT RELATIONS IN
THE JAPANESE FOREIGN•-GOING SHIPPING; 1965-1975
Hiromasa YAMAMoTO

In Japan it was a well-known fact that the seamen's union and foreign-goingshipping companies had maintained harmonious relations between them. It wasalso regarded that the seamen's union was conservative in its character both intrade union policy and in political activities, Accordingly it was a surprising factthat in 1972 the seamen's union struck for three months demanding the improvementof wages and other items. The strike of 1972 symbolizes the change of labour management relations in the Japanese foreign-going shipping.
In this article the writer intends to trace the main issues of collective bargainingof the industry and reveal the process and reasons why the labour management
relations changed.

I. Productivity Bargaining and its Aftermath
During two decades after World War II there were harrnonious labour-management relations in the Japanese shipping industry. On productivity bargaining it

was not an exception. The All Japan Seamen's Union decided at the fourteenth

National Convention of 1955 to co-operate with management in the program of
improving labour productivity, in sharp contrast with the left-wing union policy
which made clear their resistance to the program in many other sectors ofindustry.(i)In April 1961 the union agreed with the remedy of the manning clause for ocean-going vessels. The trade agreement before the remedy defined that the complement

was to be determined aoeording to standards such as gross tonnage, horse powersof the main engine and also areas in which the vessel would operate, without any

regard to the volume of work to be performed on board ship or to the degree of
utilization of labour saving devices. The new agreement on complement, abolishing
the old standards by which the manning scale had been set, defined that companies
might decide unilaterally the number of crew of respective company vessels in con-sideration of the volume of work under the premise of an eight hour work day and(1) H.Yamamoto,"TechnologicalDevelopmentandLabourRelationsintheJapaneseShipping
Industry," Kobe Economic and Business Review, No. 13, 1966, pp. 66-68.

HIROMASAYAMAMOTO

18

preyenting daily overtime work. Confiicts concerning the complement were to be
dealt with according to the ordinary grievance proceedure.

The new agreement on complement gave shipping companies an opportunity
to reduce the complement and crew costs. In addition, by the revisions of the laws

and regulatipns on complement in 1962 and 1963, shipping companies were nolonger required with some exceptions, to have a doctor on foreign-going vessels.
They were also able to reduce the number of radio operators on foreign-going vessels

from three to one as long as the governmental regulations were concerned, though
the actual complement had to be determined by negotiation with the union.

After the new agreement on complement became effective, shipping companies
carried out actively the building and replacement program of company fleets so as
to decrease the number of crew and crew costs. In 1960 the complement was fortyeight men in case ofa cargo ship of 10,OOO gross tons. In 1970 there were thirty men

or less in case of an automated cargo ship of the same size. Table 1 shows the de-velopment of the Japanese foreign-going fleet and the change of seafarers' employment during the period from 1962 to 1973. During the period the tonnage of
the Japanese foreign-going fleet increased by 36.52 per cent while the total numberof crews was reduced by 11.7 per cent. The number of seafarers who were employedby foreign-going shipping companies showed little change during the same period,

because the impact on employment due to automation and growing size of vessels
were counteracted by the increase of paid vacation and shorter working hours which
Table 1.

Toimage of Japanese Foreign-going vessels and Employment of Seafarers,
1962 and 1973

.Bargaining Groupyear

Gaiko Romu Kyokai(i)
1962

1973

Rate of increase 1973lChuso Senshu Romu
Kyokaic2)

1962

1973

over 1962(%)

Rate of increase 1973

over 1962(%)

Tonnage of foreign-going (A)vessels (1,OOO G.T.)

4,301

22,390

420.6

2,113

7,"8

TotalNumberofCrews (B)20,337

17,595

13.S

14,751

13,324

9.7

A/B (G.T.)

212

1,273

50!.7

143

559

290.1

omcers 1:necglneD-RPot6m Dept.

2,715

3,437

26.6

1,978

2,887

3,429

18.8

1,904

2,477
2,434

27.8

1,728

1,590

8.0

1,193

1,135

4.9

5,481

5,187

5.4

IRadio Dept.
Ratings Illlig91neD-RPot6rn Dept.

tCatering Dept.

Total

7,623

7,403

2.9

252.4

252

6,748

5,857

13.2

4,736

3,990

15.8

3,814

3,922

2.8

2,474

2,634

6.5

25,51525,638O.5

17,766

17,857O.5(1) Bargaining Group of 19 large shipping companies.
(2) Bargaining Group of small shipping companies.
Source; the All Japan Seamen's Union, Senin Chingin-kozo Chosah7o and Data of the G. R. K

PRODUCTIVITYBARGAININGANDTHECHANGEOFLABOURMANAGEMENRELATIONS IN THE JAPANESE FOREIGN-GOING SHIPPING; 1965-1973

the seamen's union got by bargaining.`2'
However, the program for improved productivity, as it developed, caused dis-appointment and discontent among union members towards employers and also
towards the union.`3' When the union determined the co-operation with rnanagement

for the program, the union promised its members to secure their employment andto get larger wage gains than before. But in reality the expectations ofunion members

were not always satisfied. Indeed, the union succeeded in preventing un-employment
which might occur, but the union failed to satisfy its members' expectation on higher

wages.

During the sixties most industries in Japan experienced a boom and unions
in those industries got considerable wage gains through yearly collective bargaining.

In contrast Japanese foreigh-going shipping had suffered from growing losses until

1967, which led to the amalgamations of shipping companies in 1964 under thestrong guidance of the government. In those slump years the seamen's union refrained from demanding yearly wage increases and got moderate wage gains throughbargaining. Under those circumstances there appeared dissatisfaction among union
members that they were not rewarded adequately notwithstanding their cooperation
ifi the program for improved productivity. Those feelings were especially strong

among radio operators and engine-room ratings whose chance of promotion were
delayed by the introduction of the new formula of complement. Revolts of the rank

and file against the seamen's union occurred in the followjng years out of suchdeep-rooted feelings. After the seamen's strike of 1966 a radical group in the union

tried to recall the main union oMcials, contending that the union members had got

few advantages from the co-operation in the program for improved productivity
and that the union oMcials had not done their best to get acceptable gains for theirmembers.`4' Though the recali movement did not succeed, the open criticism of
the union oMcials cast questions to union members how to appreciate union policy.

In 1968 another incident occurred in the union. In the preceding year the union
agreed with shipping companies to decrease the complement of radio operators on
board foreign-going vessels from three men to two. Early in 1968 a disappointed
fraction of radio operators resolved to withdraw from the seamen's union and toestablish a new organization, which was realized in 1972 with few memberships ofcraft basis(5).

(2) H. Yamamoto, "Available Jobs and Employment in Japanese Foreign-going Shipping,"
K B. E. R., No. 20, 1973, pp. 52-56.

(3) H.Yamamoto,"TechnologicalDevelopmentandLabourRelationsintheJapaneseShipping
Industry," pp. 69-70.
(4) I. Numata and H. Sasaki ed., Kaiin-sogi to Kaiin-Kumiai (Searnen's Strike and the Seamen's

Union), 1972, Rodo Junpo-Sha, Tokyo, pp. 137-41.
(5) ibid. pp. 117-21.

HIROMASA YAMAMOTO

20

The rank and file of the seamen's union revolted in 1971 against the union
oMcials. Favored by the boom in the shipping market and the financial assistancefrom the government, the Japanese foreign-going shipping had recovered from along slump lasting up to that year. Therefore, upon the renewal of the trade agree-

ment the seamen's union demanded from foreign-going shipping companies a wage
increase of 22.4 per cent and shorter work hours. In April, after three months'

negotiations without strike, the union concluded a provisional agreement withforeign-going shipping companies, in which the union got wage increases of 14.4

per cent. Immediately after an extraordinary occurrence emerged in the union.
The caucus of the union did not allow the executive committee to conclude theformal trade agreement, by reason that the wage gains were too small to recover theadaquate level of seamen's wages which had fallen during the slump years of theshipping industry, and that the executive committee had not done their best in thenegotiations. In June an extraordinary national convention was held, and there themembers of the executive committee were newly selected, though the provisional

agreement was recognized to be formal and effective in the duration of theagreement. (6)Reflecting the desire of the rank and file, the new executive committee was very

active in wage bargaining, and jn 1972 the seamen's union struck for three months

to get favorable wages and working conditions. At the same time the union took
a very cautious attitude toward productivity bargaining. The union discontinued
the experiment on interchangoability of crews which had begun on several container
ships.`7' In the tripartite committee on vocational education for seafarers the union

made clear its reluctance to introduce in the near future`S) general purpose crews
on board ships.

Under such conditions the harmonious relations between the union and theemployers came to an end. The shipping companies could hardly expect the cooperation of the union in the program for improved productivity. They had to search
for new devices to decrease the operating costs of their fleet so as to compete in theworld market.

II. Chartering Aetivities--New Type of Programfor Improyed Productivity
After the seamen's strike of 1972 the Japanese shipowners sold out vessels of
considerable tonnage to foreign shipowners, because the vessels became, according(6) ibid.,pp.111-15.
(7) and (8) H. Yarnamoto, "Bengi-chiseki-sen to Senin Mondai" (Flag of Convenience andSeamen's Unions), Keizai Keiei Kenkyu IVenpo, Kobe Univ. No. 24(1), 1974, p. 162.

PRODUCTIVITYBARGAININGANDTHECHANGEOFLABOURMANAGEMENTRELATIONS IN THE JAPANESE FOREIGN-GOING SHIPPING; 1965-1973

to the explanation of shipowners, unprofitable due to increasing crew costs. While

tonnage of vessels sold abroad were one million and 1.1 million deadweight tons
in 1970 and 1971 respectively, the vessels sold out abroad inoereased rapidly in 1972

and amounted to 2.34 million deadweight tons.`9' Most of them were old vesselsof less than 8,OOO gross tons, but among the vessels which were sold in 1972 wereconventional cargo liners and lumber carriers which were under five years of ship-age.

When the seamen's union made a research about the sales of Japanese vessels
to foreigners, the union found out that part of these vessels were manned by Asiancrews under flags of convenience, and chartered back again to the old proprietors.

The union condemned Japanese shipowners saying that "the chartered back vessels"
can not be considered as ordinary chartered vessels but are plotted beforehand by
the Japanese shipowners so as to escape the Japanese registry, and that their practice

was harrnfu1 to the employment and wages of Japanese seamen.(iO' The union
began to check the sales of Japanese flag vessels to foreign shipowners, as will be
described later.

In the course of their research the union made it clear that there was anotherpractice by the Japanese shipping companies to make use of low cost vessels of
foreign registry. When a Japanese shipowner desires to charter a foreign vessel overa long period, he may make foreign shipowners, whose vessels are operated under
Table 2. Foreign-going Vessels operated by Japanese Shipping Companies(1,OOO D.W.)
year

Japanese-fiag
foreign-goingvessels

(A)
1962
1963

10,oo6
10,36019M
1965

Vessels chartered

Totalfrom abroad(B)(A) + e)Annual rate of increase ( O/.)(B)(A) + (B)

(A)

(B)

------------------(A) + (B)

Import

9.3

3.8

11.2

19.8

129.6

11.6

20.2

33.5

16.3

14.7

24.3

30.2

25.3

15.3

17.1

15.7

16.5

15.9

24.0

25,774

17.4

22.4

25.5

22.9

16.0

30,976

17.3

20.4

19.1

20.2

17.3

11,06240,506

27.3

14.9

106.8

30.8

20.7

10,oo6770

11,1306.9

10,655

1,768

12,42314.2

2.8

12,082

2,360

14,4x 2

16.3

13.4

1966

15,022

3,073

18,095

17.0

1967
1968

17,387

3,581

20,96821,281

4,493

1969

25,627

5,349

1970

19,444

3.5---f--

1971

33,94817,Oll

50,959

33.4

15.3

53,8

25.8

4.6

1972

39,03818,952

57,990

32.7

15.0

11.4

13.4

4.8

1973

45,32627,7oo73,026

37.9

16.1

46.2

25.9

(1) at lst of April of the year.

Source; the Japan Shipowners' Association, Kai-un Shiryo, No. 113, Sept. 1973.

(9) based on the figures of the Japan Shipowners Association.

(10) For example, refer to "Senin Shinbun" (Newspaper of the All Japan Seamen's Union),
Sept. 21, 1973.

------

HIROMASA YAMAMOTO

22

Table 3. Foreign Vessels chartered by Japanese Firms

Terms ofTime charter longer

Charterthan 6 months

Voyage Charter andTime Charter shorter

Total

than 6 months(1,OOO D.W.)

Vessels

TonnageNo. of

Vessels(1,OOO D.W.)

Vessels(1,OOO D.W.)

1960

101

1,157

19

181

120

1,338

1961

70
74

979

72

142

1,896

1,087

36

110

1,687

1963

51

1,030

44

95

1,583

1964

104

1,744

38

140

2,387

1965

126

2,523

76

1966

140

2,4S2

57

917
6oo
553
643
922
899

TonnageNo. ofyear

1962

No. of

202

3,"5

197

3,351
4,593

22,24526,705

1967

137

2,853

123

1,740

1968

185

3,845

111

1,957

1969

5,368

61

11,650

30

1971

238
432
578

17,519

14

916
722
307

1972

599

20,580

60

1,665

2oo
296
299
462
592
659

1973

678

25,920

33

785

711

1970

[

Tonnage

5,872
6,248
12,372

17,826(1) at the end of June of the year.

Source; Ministry of Transportation, Kai-un Hakusho, each year.

flags of convenience, build a new vessel of the necessary type under the conditions;that instead of the foreign shipowners he will secure the building slip which candeliver the vessel in due time and afford loans for shipbuilding if necessary; andthat he will charter that vessel for a certain period at a predetermined charter rate.

In this case the Japanese shipowner can secure a stable supply of vessels ofa lower
charter rate, and the chartered vessels may be regarded to be, in a sense, under the
economic control of the Japanese shipowners.`ii' In addition, it is believed that someof the large Japanese shipping companies have established foreign subsidiaries inorder to operate vessels under flags of convenience.(i2) However, it is, needless tosay, quite diMcult to ascertain whether or not some chartered vessels of foreign
registry are under the economic control of the charterer.
If we put aside the problem whether or not there are hidden relationships between

Japanese charterers and foreign shipowners, we can find a tendency that in recent

years Japanese foreign-going shipping companies have increased the dependence
upon the tonnage chartered from abroad, Though the tonnage of Japanese foreigngoing vessels has shown a steady incerase, vessels which were chartered from abroad(11) As for estimated cost comparisons between Japanese-fiag vessels and chartered foreignflag vessels under economic control by Japanese shipowners, see "Kaiun," Aug. 1973,

pp. 12-13.
(12) "Senin Shinbun," Oct. 24, 1973.

PRODUCTIVITYBARGAININGANDTHECHANGEOFLABOURMANAGEMENTRELATIONS IN THE JAPANESE FOREIGN-GOING SHIPPING; 1965-1973

have increased more rapidly and from 1970 onward they amounted to one third andmore of the total foreign-going tonnage operated by the Japanese shipping companies.

Here we should be reminded of the fact that from the late sixties the rank and fileof the seamen's union began to criticize the union's co-operation with the programfor improved productivity. This fact suggests us that in order to secure the necessary

tonnage the Japanese shipping companies rather chose the chartering of foreign
vessels instead of the construction of new company vessels, because of the fear ofincreasing labour costs of the Japanese-flag vessels.

III. Securing Employment-Dilemma of the Seamen's Union
As we have described already, the employment of Japanese seafarers were in
stagnation and tended to decrease with the development ofthe program forimproved
productivity. When the shipping companies began to utilize chartered vessels fromabroad on a large scale in their fleet operations and sold out a considerable tonnageof company vessels, the security of employment became the most serious task forthe seamen's union to cope with. In addition to the effort to gain longer paid va-

cations and a shorter work week with which the union had tried to countervail thedecreasing trend of available jobs, more radical steps were needed to secure employment. The first step that the union took was to check the sales ofJapanese vessels

to foreign shipowners.

After the strike of 1972 the seamen's union found that many Japanese vessels
had been sold out to foreign shipowners. Being afraid that the sales ofthese vessels

would decrease the available jobs for union members, the union proposed in September to the employers' association to hold a joint council on employment. The
union also demanded to stop temporarily the sales and the laying up of vessels until

a mutual consent would be attained on the problem, After several sessions of thejoint council the employers' associations and the union concluded the agreement on
stable employment in case of sales of vessels.{i3)The agreement contains the following points:(1) when a shipowner desires the sale of company vessels, he will negotiate withthe union on the problem of employment which may occur;(2) the union will not object to sales of vessels if the following conditions are
satisfied by employer,(a) the employer will not dismiss the crew of the vessel concerned,(b) in preventing the decrease of available jobs, the employer will take possible

measures such as new construction or replacement,(13) "Kai-in," (Union rnagazine of the A. J. S, U.), May 1973, p. 7-9.

24

HIROMASA YAMAMOTO(c) in case of sales to foreign shipowner, the Japanese shipowner will not charterit back again.

At the national convention of 1973, the seamen's union determined the programfor securing employment of seafarers. The program included the following measures ;to endeavor legislation of the relate acts in order to maintain the necessary tonnageof Japanese-flag vessels which enables the fu11 employment of Japanese seafarers;

to demand governmental regulations against ownership and economic control of"flag-of-convenience vessels" by the Japanese shipowners; to demand the improvement and reorganization of the educational system for seafarers including retraining;

and to conclude a new agreement on employment with the shipping companies inorder to secure full employment of the union members.(i4)In the above-mentioned policy, there are a few points which draw our attention.

With regard to the ownership or economic control of flag-of-convenience-vessels
by the Japanese shipowners the union did not take particular measures other thandemanding legislation and governmental regulations against it. Also in actual union

activities the union has not engaged in organizing foreign crews on board flag of

convenience vessels.{i5' The union has not explained the reason why it does notengage in organizing foreign crews itselÅí However, we may infer two possible
explanations for this. One ofthe possible answers is that a boycott of handling cargo,

which is the most effective means for organizing crews on board flag-of-convenience-

vessels, may be judged illegal according to the labour legislation of Japan. The
other is that the organizing activities against fiag-of-convenience-vessels do notnecessarily lead to the stoppage of chartering of low costs foreign vessels by theJapanese shipowners. For example, a Japanese shipowner can charter a foreign-flag
vessel which is manned by an Asian crew at a low charter rate, if he charters it forextended period. In this case he can get the same advantage when chartering offlag-of-convenience-vessels,

In short, the seamen's union has no adequate means to check the shipowners'
reliance on foreign vessels in their shipping operations. Efforts of the union toorganise flag-of-convenience-vessels do not necessarily contribute to securing theemployment of Japanese seafarers, though they are usefu1 in the long run to improve

the wages and working conditions of Asian crews and also those of the Japanese
seafarers.

The next point which draws our attention is that the seamen's union did notrefer to the program for improved productivjty. It seems quite strange if we recal1(14) A. J. S. U., KntsLido Hokoku-sho (annual report), 1973.

(15) However, the seamen's union concluded trade agreement with employers of 53 "fiag of
convenience" vessels in order to secure the comparative wages and working conditions forJapanese seafarers on board those vessels in 1973.

PRODUCTIVITY BARGAINING AND THE CHANGE OF LABOUR MANAGEMENT 25
RELATIONS IN THE JAPANESE FOREIGN-GOING SHIPPING; 1965-1973

the fact that the growing reliance of Japanese shipowners on foreign vessels has comeout from the delay to implement the program for improved productivity. It is certainthat the development of the program has some impact on seafarers' employrnent
through the decrease of complements on board. However, the refusal to cooperate
in the program and demand for higher wages, both of which has been the responseof the union on productivity bargaing since 1972, seems to be more harmful to theemployment of Japanese seafarers when we consider the problem in the long spanof time. Because the attitude of the union toward productivity bargaining will
weaken the competing power of Japanese vessels more severely than before. Even
if the union succeeds in maintaining the present level of employment for a while
without improvement of productivity, it is likely to cause unemployment on a large
scale in the future.

So long as there are big differences of wages and working conditions among
different countries, the merchant rnarines of developed countries have to specialize

in vessels of more capital-intensive types and at the same time reduce complements

on board ships through automation and reorganization of working systems in orderto survive in the world market. Japan can not be an exception. In the process oftransition it is inevitable to emerge that a certain surplus of labour will occure.
Retraining for new jobs and other necessary measures should therefore be considered.

Therefore, it seems to the writer that the present policy of the seamen's union

on securing employment is a risky stake for the future employment. Nevertheless,the revival of the union's cooperation in the program for improved productivity is

unlikely so long as the bad feelings toward the program remain among the rank
and file of the union. Under these circumstances the union seems to maintain arigid and antagonistic attitude toward the employers.

DEPRECIATIONMETHODONANINTERPRETABLE
Isao NAKANO
The purpose of this paper is to propose and evaluate a new depreciation method
within the historical cost framework which will produce a clearly "interpretable"and potentially usefu1 depreciation expense value for any period of time. We shallbegin with a reference to Professor Thomas' statement about the impossibility of
non-arbitrary allocations. And we will assert that taking a different view on the"matching" concept will free us from his "impossibility" proposition. We will also
indicate the possibility that further research into cost allocation problems may not

be a priori insignificant. Then, based upon this possibility, vve will develop a
proposal for a cost allocation scheme (depreciation) which is "interpretable", i.e.,
which has a clear semantic content within the confine of the historical cost valuation.

I. Are All Alloeations Arbitrtrry?
Thomas claims that all financial accounting allocations are arbitrary, i.e., thatthey "suffer from logical defect of incorrigibility" in the sense that "there is no way

either to verify or to refute" them (Thomas, 1974, p. 2) (Thomas, 1975, p. 38). And
this alleged failure to theoretically defend a single (adopted) allocation scheme against

all other alternatives is said to arise from the "interaction" of inputs to a businessprocess in generating an output (Thomas, 1974, pp. 15-18), Flatly, verifiable depre••ciation calculation is impossible, he says, because machines and workers working

together will produce more outputs than the total that these inputs would haveproduced working separately, so that there is no way to identify each input's contribution to the outputs separately for each period and hence over time, too (Thomas,
1974, p. 16).

Underlying the above argument is Thomas' matching concept that "cost of
inputs should be associated with revenues (or cash inflows) in proportion to thecontributions that these inputs make to them" (Thomas, 1975, p. 37). This is so,
because the above-mentioned impossibility of determining each input's "contri-•bution" makes this contribution-proportional matching unattainable.
I think his assertion is correct as far as the "contribution-proportional" matchingis concerned. However, this does not mean that all possible allocations are boundto be arbitrary (i.e., incorrigible), because there is another matching concept andthis latter concept seems to generate a verifiable allocation scheme, as we will show

below.

28

ISAO NAKANO
ll. OnSacrificebasedMatchingThis latter matching concept I wi11 cal1 a "sacrifice-based" matching. To explain
this, we will restart with an explicit interpretation of the conventional, historical-

cost-based accounting measurement upon which we will build our matching concept.

. 1972 and 1975), accounting
In accord with a view by Rosenfield (Rosenfield,
ineasurement is defined here as assignment of a number ofunits of a chosen "standard

resource" (such as a monetary unit or some purchasing power) to an object withthe view to representing a certain "relationship" between the measurement object

and that standard resource. The "relationship" to be represented and reported
differs depending upon alternative valuation schemes. In the conventional acdcounting system, the "relationship" is nothing but the "historical cost" which reveals

the "quantity of the standard resource (unit of money in this case) sacrificed toobtain the resource" (Rosenfield, 1972, p. 65).`" Therefore, in thjs interpretation,

the generally accepted accounting principles (GAAP) dictate the use of the unit ofmoney as the "standard" in order to represent the "relationship" between themeasurement object and the units of the standard invested into the object, i.e., the"monetary sacrifice" incurred to obtajn it. And the reason why GAAP adopts"units of money" and not a purchasing power as the standard, is interpreted as
relating GAAP's adherence to a "criterion of success or failure of the firms (i.e.,

income concept) in terms of an increase or decrease in its holdings, command overor prospects of obtaining "money" over a period and not in terms of any purchasing
power (Rosenfield, August 1975, p. 53).

From this interpretation emerges a matching concept relating acquired money
to the money sacrificed to get it, or charging current revenue with costs of those

goods and services which are deemed to have traceable "physical" relationships
with the revenue, by the amount of the monetary "sacrifice" which can be considered

as incurred to generate the revenue. Conceptually, to understand the differences
between Thomas' "contribution-proportional matching" concept and our "sacrificebased matching" concept, note Figure 1.

(First Stage) Emphasis on "economic" relationship versus on "physical" relationship between inputs (costs) and outputs (revenues).

As shown in Figure 1, production of output (sales revenue) for a certain period
has, as a matter of fact, required consumption of a certain physical quantity of each(1) Some alternative "relationshjps" conceived for other alternative valuation schemes are thefollowing. (1) The quantity of the standard (i.e., money or purchasing power-the samein (2) and (3) below, toe) that can be obtained in exchange for the resource (selling price).
(2) The quantity of the standard that is required to replace the resource (replacement price).

(3) The quantity of the standard that will be obtained in the future in exchange for the
resource or its product (future net receipts). (Rosenfield, 1972, p. 65.)

ON AN INTERPRETA]BLE DEPRECIATION METHOD
of several inputs in the business process. (For example, consumption and/or deliveryof certain quantities of inventory goods, and consumption of a part of the total productive capacity over the usefu1 life of a plant asset). Such identified relationships

between produced output and physical quantities of inputs consumed or delivered
to generate the output shall be hereafter called "physical relationship". A uniquecharacteristic of our "sacrifice-based" matching concept consists in isolating this"physical relationship" for a basis of cost allocations.

sacrifice 1-->input 1

sacrifice 2e-> input 2

X-> an interaction process/sacrifice 3. output<- -) input 3
Fig. 1.

A Simplified Business Process

The following five exarnples will serve to elaborate this concept of "physical relationships".

(Ex. 1) During the year, the firm has attained sales revenue of$1,ooO,OOO by using
a certain machine. This machine's total estimated productive capacity oyer its service

life is equal to 50,Ooo units ofa certain kind of product. And assume that the wear
and tear from the use of the machine for this year brings about the consumption of
its total productive capacity of 2,500 units of the product. Here, we find a "physicalrelationship" of the consumed (2,5oo150,OOO=) 5% productive capacity of themachine corresponding to the $1,ooO,Ooo realized revenue.

(Ex. 2) Because of a sudden temporary physical breakdown and a decrease inoperation hours of the machine during this period, we assume that the machine
has incurred a loss of the productive capacity equivalent to 500 units of the productin addition to 2,5oo units which have actually been produced. In this case, theperceived "physical relationship" may be said to exist between the sales revenue of$1,Ooo,ooO (the same as (1) above) and the total consumed and lost productive
capacity of 3,OOO units of the product.(2'(Ex. 3) Let us consider a case of obsolescence. Assume that competitors begin
to acquire and use a new, more profitable type of machine than this firm's and that
this sudden obsolescence is expected to reduce the remaining service life of the lattermachine by 3 years which is equivalent to a loss of its productive capacity in theamount of 7,5oo units ofthe product. (No decrease in the product unit's contribution(2) The 5oo units' unproductive Ioss of the productive capacity may be considered relatqd tothe revenue in the sense of physical concomitance, i.e., that the loss has occurred simul-

taneously with the revenue.

29

30

ISAO NAKANO

to the net profit has occurred). Then, the physical relationship between the revenueof $1,OOO,OOO (the same as (1) and (2) above) and the machine's total lost productive

capacity of (2,5oo (for productive use)+7,5oo (because of obsolescence)=) 10,OOO
units' products is going to be used for cost allocation under our matching concept.

(Ex. 4) Assume that obsolescence has not only reduced the machine's remaining
usefu1 life by 3 years but has also cut down the machine's product unit's contribution
to revenue. Specifically, the differences ofthe firm's machine's physical function fromthe new advanced machine in the market has made it necessary to sell 3,eOO unitsof the firm's products in order to get the same revenue of $1,OOO,OOO for this period.

Were it not for the obsolescence, a sale of2,500 units would have earned the sameamount of revenue. In this case, we note that in the last analysis it is some kind of"physical difference" between the new and the old types (or kinds) ofmachines which
generates the above difference in each product's contribution to revenue. (Ex., an

improved quality of material composing the new machine which brings about ahigher degree of precision in the size and/or other dimension(s) of the producttherefrom; a completely djfferent kind of products produced from the new machine
which is attracting the demand formerly directed to the products of the firm's current

plant assets). If we assume that this firm actually made 3,ooO units of the productto get $1,ooO,OOO revenue, then the above "physical difference" clearly pertains to
the amount of revenue, in the sense that if no obsolescence had occurred in producing

3,OOO

the 3,OOO units, the revenue must have been (1,ooO,Ooo Å~ 2,soo ==) $1,2oo,Ooo•
Therefore, we can conclude that the revenue of $1,OOO,OOO is related to the effective

physical consumption of 3,OOO units' productive capacity plus the ineffective lossof 7,500 units' capacity because of the sudden reduction of the service life plus theother certain "physical difference" between the old and new machines which cannot
be expressed in terms of a different product unit number but which infiuences therealized sales revenues per unit. This "physical relationship" between the revenue
and the physical consumption, loss and differences provides a basis for cost allocationin this case.

(Ex. 5) The above case (Ex. 4) assumed the possibility of identifying a newor improved type or kind of plant assets which is drivjng the firm's assets jnto obso-

lescence. But sometimes we may not be able to detect such competitor plants. In
other words, not any specific competing plant but the general transition in customers'

demands might be the cause for the profitability reduction of the firm's old assets.
In this case, it is impossible to determine any physical difference between the firm's

fixed asset and any superior asset in the plant market, because the latter cannot be
identified.

However, we still believe that the cause(s) for the obsolescence of the asset canON AN INTERPRETABLE DEPRECIATION METHOD
be no other than some "physical factor(s)", such as the ill-adaptation of the physicalquality or kind of the products from the asset to the changed customer demand.
Such a state we shall call "physical irrelevance" of the old plant to the existing
situation. Therefore, as far as we stick to the physical state of the assets as a basis
for their cost allocations, our further task may be said to lie in evaluating this "physi-

cal irrelevance" (as well as productive consumption of the capacity of the asset) interms of allocated costs.

Hopefully, the above examples will suMce to demonstrate the applicabilityof the concept of "physical relationships" to all conceivable situations. In the(Second Stage) below, we will attempt to outline a cost allocation scheme which isbased on such "physical relationships."

In contrast to our emphasis on the "physical relationships" between inputs andoutputs, Thomas' "contribution-proponional matching" concept naturally pays
no direct attention to any dimensions of physical deterioration (or other changes)of the plant asset in allocating its total cost among periods. Rather, the net profit
or cash flow to be generated by the asset (i.e., the output side) is said to directly

dictate the pattern of the cost allocation. One of the most typical allocation procedures (the "implicit-rate approach") under thjs matching concept goes as follows(Thomas, 1974, pp. 13-14).
The accountant estimates the cash-flows associated with employing the input,
then uses these, together with the input's purchase price, to determine its implicit(internal) rate of return. This rate of return multiplied by each year's beginninginvestment determines the amount ofprofit on the investment to be reported during
each year. Amortization for a year is the arithmetic difference between the input's

net cash infiows and its book profit for the year (Thomas, 1974, p. 12). Note thedirect depedence of depreciation on the cash-flow. Such dependence we will call an"economic relationship."As an example, a firm purchases a machine for $13,773, in the expectationthat it will generate contributions of $5,OOO, $8,Ooo and $7,oo1 at the end of years One

through Three, respectively. The implicit rate of return on this investment is approximately 20 O/.. Table 1 (Thomas, 1974, p. 13) shows how depreciation is calculated

under the implicit-rate approach. All book values given are as of the beginning of
the year,

Thomas attacks the above depreciation policy in the following way. (1) Heinsists upon the arbitrariness of the assigning of a firm's total revenues or cash
inflows for any year to its various inputs, i.e., the estimating of the machine's contributions of $5,OOO, $8,OOO and $7,oo1 because of the "interaction" of various inputs

in producing output (Thomas 1974, pp. 15-17). (2) He claims that it is not persuasive
to assume, as is done in Table 1, that the profit rate for each individual year remains

31

ISAO NAKANO

32

the same and is equal to the overall 20% rate of return for the three year project asa whole. He points out and partially demonstrates that "infinitely many individual-

year rate of return patterns would be consistenV' (Thomas, 1974, p. 14) with theoverall rate of 20%. So, adoption of any single rate pattern signifies, according toThomas, an arbitrary selection,Thomas admits there are plural alternative cost allocation schemes other than
the above-mentioned "implicit-rate approach" but he ultimately concludes they are
all subject to some flaws which result in "arbitrary" allocations. I think this is a

plausible conclusion in the light of the inevitable interaction of the inputs whicharises from the adoption of the "contribution-proportional" matching concept rather
than an alternative "sacrifice-based matching" concept. Thomas has chosen to define
the cost allocation problem in an unsolvable way.
Table 1, Example of the Implicit-rate Approaeh(Same Rate of Return during Each Year)
(a)

Year

Book

(b)

(c)

Rate of

ProfitValue

Return(a) Å~ (b)1$13,773

20O/.

$2,755

2

11,528

20

3

5,834

20

(d)

Depreciation

Contribution(d)-(c)$5,OOO$2,245

2,306

8,Ooo

5,694

1,167

7,oo1

5,834

(Second Stage) Economic contribution versus sacrifice incurrence as the basis
for cost allocations.

The "contribution-proponional matching" concept attempts to identify theextent to which each singie input has contributed to the production of the output(revenue), i.e., attempts to allocate the output (revenue) to the plural inputs. The

purpose of doing this is to use each input's contribution proportion as a basis forthe input's cost allocation. But such an attempt to find the "economic contribution"of each input is doomed to failure because of "interactions" among the inputs.

In contrast, we want to proceed on a more promising way in constructing adefendable matching concept. For this purpose, our strategy consists in developing
the idea that accounting matching is based upon some perceived "physical (or tech-nical) relationship" between each input and the output and that accounting costallocation means evaluation of such physical relationships in terms of "the monetarysacrifice incurrence." Such selection of the "sacrifice incurrence" instead of "economic contribution" as a basis for eost allocations enables us to evade the prohibiting

effect of the input's "interactions" in cost allocation, because, as Figure 1 clearly

indicates, the amount of monetary sacrifice incurred is usually determinable andidentifiable with each input in contrast to the intricate interminglings of the inputs'

DEPRECIATION
ON AN INTERPRETABLE
METHODeconomic contributions.
(Ex.) To facilitate the readers' understanding of the concept of these "inter-actions", Thomas cites a case of a farmer manufacturing maple syrup (Thomas,
Sept.-Oct. 1975, p. 39). His "inputs" here include land, trees, an ax, labour, auger
spouts, pails (for catching the syrup from the sugar maple tree), a bucket (for collecting the contents of the pails) etc. "The output of this process is an inventory ofjugs fi11ed with syrup. There's no diMculty in attributing this output to the inputs`collectively', but any attempt to assign portions of it to individual inputs leads toparadoxes" (Thomas, 1975, p. 39).
My impression about this statement is that one must first of all specify theintended semantic content of the measure(s) which results from an allocation before

one can judge whether the allocation is meaningful or not. Even though Thomasstresses the arbitrariness of the current accounting's allocations in the sense of theimpossibility of specifying a single best allocaltion scheme, determination of such asingle optimal allocation is relative vis-a-vis prior specification ofthe semantic content

of the accounting information as a result of the allocations. If the reported accounting

income should convey information about the net increase in economic value in excessof the related inputs' values, then the rnatching concept to be applied must be the"econornic-contribution-proportional matching." However, if the meaning of theaccounting income measure is regarded as an excess of cash-inflows over the related

inputs' (ascribed) monetary sacrifices, then, the sacrifice-proportional matching

concept would have to be used in preference to the above economic contributionproportional concept.

Now, returning to the above "interaction" example about syrup manufacture,
let us suppose that one's "purpose" in matching output with inputs lies in discover-•ing what will be the difference between the cash inflow from the sale of the output
syrup and the monetary sacrifices incurred for the inputs in producing that particularquantity of syrup. If the pails (and/or buckets) should survive that production, thenthe amount of sacrifice for that particular quantity of syrup seems equal to thedifference between the pail's actual acquisition price and the price at the same dateofa pail which shows the same degree of deterioration as the actual one after the
manufacture of the syrup. This is so because if this particular productive activity

had not been carried out, the above difference would have been dispensed with bypurchasing at the acquisition date a used pail of the same degree of deterioration.
In this way, even if the "economic contributions" of the plural inputs interact, each

inpuVs "monetary sacrifice" in producing the output is relatively clearly identifiable and determinable. Ofcourse, the appropriateness ofthis sacrifice-proportional

allocation depends upon the usefulness of the resulting particular accounting data
(especially, the particular income concept) being greater than the alternative data

33

ISAO NAKANO

34

generated under the other matching and allocation concepts, This latter problem
can only be resolved by empirical research because, say, accounting concepts producing different kinds of semantic contents can not be evaluated on pure logicalgrounds.
Our exposition so far has hopefully clarified the difference between our sacrifice-proportional cost allocations on the basis of physical relationships and Thomas'
economic-contribution-proportional cost allocations based on the economic relationships between the output and the jnputs. In the next sections, we will develop a new,interpretable depreciation method (plant cost allocation scheme).

M. A Sacrificesbased Depreciation Method
The following proposed depreciation method is based on our standpoint thatcost allocation means evaluation of physical relationships in terms of monetarysacrifices, i.e., that the physical service consumed for a year is to be eyaluated byreference to the amount of the money which is considered as invested into the year's

consumed physical service at the acquisition date of the whole fixed asset (ex., awhole machine).
The arguments that follow will show that an "interest" factor pertains to ourconsideration. But we will ignore this element, because current conventional accounting does not include the imputed interest on the equity capital in the expenses.
A fixed asset is a bundle of physical or technical services which are planned tobe consumed in each of the service years. As time goes and the planned utilization of
the service proceeds, the asset grows older. The quality and quantity ofservice whicha brand new asset will provide by the firm's utilization for one year shall be called"one year's new service" and denoted "So." The physical service which a just oneyear-old asset (i.e., an asset after one year's utilization according to this firm's plan)

will provide for one year shall be called "one year's one-year-old service" anddenoted "Si." Similarly, "S2" shows "one year's two-year-old (asset's) service",and "S..i" one year's (n-1)-year-old (asset's) service, where n denotes the total
service years of the asset.

Using the above denotations, our first assumption is(A fixed asset)==Si+S2+......+S.-i+Sp, (1)where Sp is the service capacity of the scrap state of the asset.

To derive our second important assumption below, we denote the amount ofmonetary sacrifice which is regarded as paid (incurred) for one year's new service(So) as E(So). The amount of money which can be regarded as paid for one year's
one-year-oid service (Si) shall be expressed as "E(Si)." Similarly, the monetary

ON AN INTERPRETABLE DEPRECIATION METHOD 35
sacrifice for one year's two-year-old service (S2) shall be "E(S2)". E(S.-i) is themoney invested into one year's (n-1)-year-old service (S.-i). The money consideredas paid for the scrap value is E(Sp). Furthermore, A" shall denote the (total) ex-

penditure paid for the acquisition of the new asset. Then, a plausible assumption
seems to be that

AO-E(So)+E(Si)+E(S2)+.........+E(S.-i)+E(Sp). (2)In other words, our second assumption (2) is that the actual historical acquisition price paid for a new fixed asset consists of the sum total of the monetarysacrifices each of which has been incurred to get each single year's fixed asset's
physical service within the service years plus the scrap state of the asset. This as-

sumption seems to be supported by the assumption of the rationality of the buyer'spurchase behavior which would prohibit his paying more than the total monetarysacrifices for the consecutive year's asset services (including the scrap value).

Under the sacrifice-based asset cost allocation concept, our task to achieve suchan allocation may be said to lie in identifying the amount E(Si) of each monetarysacrifice for each year's physical service. Naturally, no direct observations of theacquisition price or the physical body of the asset per se would give any clue to theidentification of E(Si). Rather, we must make some inference to "indirectly" arriveat each one of the monetary sacrifices.

(1) The identification of E(So)Let us denote as A' the market price at the new asset's acquisition date (hereafter

denoted d.) of a one-year-old fixed asset of the same kind. We may infer that thisprice A', if it exists, consists of the monetary sacrifice E(Si) required by the plant

market for one year's one-year-old service (Si), the sacrifice E(S2) for one year's
two-year-old service (S2) etc., through the sacrifice E(S.-i) for one year's (n-1)year-old service (S.-i) and the sacrifice E(Sp) for the scrap value. That is,

Ai=E(Si)+E(S2)+.........+E(S,-i)+E(S.). (3)In this equation (3), its right-hand side does not inclue one year's new (asset)
service (So), because the equations refers to a one-year-used asset.

By comparing equations (2) and (3) above, the monetary sacrifice E(So) incurred
for the acquisition of one year's new (asset) service So can logically be isolated bysubtracting (3) from (2).

AO-Ai=E(S,). (4)In other words, our inference suggests that the amount of money invested into
one year's new physical service (So) of the plant asset is equal to the difference

between the buying price of the new asset and the buying price of a one-year-old
asset of the same kind, both at the acquisition date (d.) of the firm's actuallyISAO NAKANO

36purchased new asset.
This conclusion seems acceptable to our intuition and common sense, too, when
we note that if the firm did not need to utilize one year's new asset service So thisyear, but it could stop its operation this year and start to do business using the one

year's one-year-old service Si next year, using one year's two-year-old service S2
the year after next and so on, he did not have to purchase a new asset, i.e., that what

he had to do in this case was to buy a one-year-old asset at the same point-in-time(d.) and to keep it waiting for its operation in and after the second year.`3' Accordingly, the price difference between a new and a one-year-old asset at date (d.)
signifies the additional monetary sacrifice which the firm agreed to pay to get anduse one year's new service (So). Hence, this difference E(So) may be said to represent
the appropriate depreciation expense for the first service year of the asset.

(2) The identification of E(Si)Let us denote the purchase price at date d. of a two-year-old asset of the samekind as this firm's fixed asset as "A2." Then, following the same reasoning as in (1),A2==E(S2)+E(S3)+•••-•••••+E(Sn-i)+E(Sp)• (5)Verbally, the buying price of a two-year-old fixed asset can properly be assumed

to be the total of the money sacrifices which would have been incurred for the acquisition of the physical service bundle consisting of one year's two-year-old service

through one year's (n-1)-year-old service plus the physical state of the scrapped
asset. Then, subtracting (5) from (2), we get

AO-A2=E(S,)+E(S,). (6)Hence, substituting expression (4) of E(So) for the E(So) on the right-hand sideof (6),

AO-A2=:AO-Ai+E(S,). (7)Therefore,

E(S,) ==Ai-A2. (8)Formula (8) indicates that the monetary sacrifice incurred for the acquisitionof one year's one-year-old service (Si) can be computed as the difference between
the acquisition prices, both at date d., of a one-year-old asset and of a two-year-old
asset, both of the same kind as this firm's.

(3) We cannot use the purchase price of a one-year-old asset at the end of the first service year
instead of that at the new asset's acquisition date, because the difference between the actual
acquisition price of the new asset (at da) and the acquisition price of the one-year-old asset

one year later contains possible value changes during the first year which is anomalous forthe isolation of monetary sacrifices occurred at date da and attributable to the lst year.

ON AN INTERPRETABLE DEPRECIATION METHOD
An interpretation of this conclusion would be as follows. The difference means
the additional amount of money which would have to be paidjust for the acquisitionofa one year's one-year-old service (Si) in addition to the bundle of services embodied
in a two-year-old asset. In this sense, the difference can be considered as the monetarysacrifice for the one year's one-year-old service (Si).

But the firm we are considering here is assumed to have purchased at the beginning ofthe first year a brand new asset and not any used asset. So, some additional

justification will seem appropriate. Assume that two firms A and B have bought
the same kind of fixed asset, firm A a brand new one and B a one-year-old asset, inthe same perfect market at the same time. Then, a plausible assumption seems tobe that the monetary sacrifice for the one year's one-year-old service (Si) which firm

A incurred by buying a new asset equals the money for the same quality and quantityof service (Si) which firm B has paid by purchasing a one-year old asset. (If not, we

would have to conclude that the market is irrationally requiring different amountsof money payments for the same service (St), depending upon the difference of ageof the assets which contain the service). In that sense, one can measure firm A'smonetary sacrifice for Si by re'ference to firm B's. Now, if firm B gave up the ac-quisition of service Si and only needed a bundle of services older than Si, it could

have saved some money by first buying not a one-year-old asset but a two-year-old
asset. The exact amount saved is clearly equal to the difference between the purchaseprices of a one-year-old and a two-years-old asset (which is formula (8)).

(3) The identification ofE(Ss)

Let "A3" denote the expenditure required at date d. for the purchase of athree-year-old fixed asset-the same kind as this firm's. Then,

A3=E(S3)+E(S4)+.........+E(S.-i)+E(Sp). (9)Subtracting each side of equation (9) from (2), we get

Ao-A3=E(S,)+E(S,)+E(S2)=(AO-A2)+E(S2). (From (6)).
Therefore,

E(S,)=A2-A3=:(The acquisition price at this firm's asset purchase date (d.) of a

two-year-old asset) minus (The acquisition price at date d. of athree-year-old asset). (10)(4) Proceeding similarly, we can get the following general formula for E(Si),where O<i<n-1,

E(S,)=Ai-Ai-i, (11)where Si denotes one year's i year-old service, A' and A"i represent the purchase37

ISAO NAKANO

38

prices at d. of a i-year-old and (i-1)-year-old assets respectively.

(5) The identification of E(S.-i) (i.e., the monetary sacrifice for the plannedlast year's service of the asset).

Let A"'-2, A"-i and A" denote the acquisition prices at d. of a (n-2), a (n-1)
and a n-year-old assets respectively. (For concreteness, a n-year-old asset means the
scrap state of the asset for this firm). Then,

A"-2=E(Sn-2)+E(Sn-i)+E(Sp). (12)A"-'==E(S.-i)+E(Sp). (13)An-E(S.). (14)Formula (14) indicates that the buying price of the scrap state of the fixed
asset is assumed to equal E(Sp), the monetary sacrifice which the firm will willingly
incur to get the scrap. Iimagine this monetary sacrifice is equal to the net proceedsfrom the disposition of the n-year-used asset at d..

Subtracting (14) from (13),An-i-A"==E(S.-i)+E(S.)-E(Sp)=E(Sn-i)• (15)Therefore,(the monetary sacrifice E(S.-i) for the planned last year's fixed asset service)== (the acquisition price at d. of a (n-1)-year-old asset)-(the net proceeds at-

tainable at date d. from disposition of the n-year-old asset (scrap)).

IV. How to Calculate Sacrific"based Depreciation Expense inCase of Physical Breakdowns and Obsolescence
Our exposition so far has assumed the realization of the normal use of the
fixed asset in strict conformity with the asset's utilization plan. But how should
we calculate the "sacrifice-based" depreciation expense, if something "unexpected"
should occur in a year?

The unexpected occurrences which are relevant to our depreciation computation
could be classified into the following two categories.

(1) The events which directly cause absolute physical deterioration of the
fixed asset concerned: fire loss, extraordinary and sudden physical breakdown of
the asset etc.

(2) The events which result in a relative physical (and!or) functional deterioration of the asset: obsolescence of the firm's plants by competitors' acquisition of
more advanced (i.e., improved) assets or by decreased sales from changes in customer

demands.

ON AN INTERPRETABLE DEPRECIATION METHOD
The former case of "absolute physical deterioration" provides no additional
problems. If such unexpected events urges implementation of repairs, the accountant
will have to consider the asset after the repairs. What he must do is to evaluate therepaired asset in terms of the "monetary sacrifice" which the firm would have been
willing to pay to purchase at the past date of the actual purchase of the asset an

asset equivalent in functions to the current repaired asset. For example, assume
the damaged asset after repair is expected to have a remaining service life of 5 years.

Furthermore, suppose that in retrospect a used fixed asset of the similar kind andof an approximately same remaining output possibility could be bought for $2,350
at the past date of the actual purchase of the firm's asset. Then, the correct value ofthe monetary sacrifice for the repaired asset is equal to its past purchase price of$2,350. Accordingly, the total depreciation expense for this year will be the differ-ence between the beginning-of-year value of the asset's monetary sacrifice and its
end-of-year value of $2,3SO.

The following interpretation seems possible with respect to the above depreciation calculation for a period when abnormal physical losses have occurred. For
the following exposition, assume that at the beginning of this year the fixed asset in

the above paragraph had a remaining service life of 7 years. And this asset at thestart of this year was given a value of $3,500 as its proper monetary sacrifice. So,

At=E(S,)+E(S,,,)+E(S,.,)+E(S,.,)+E(S,.,)+E(S,.,)+E(S,+6)-=$3,500, (16)where Ai denotes the acquisition price (at the past date d. of the purchase of the firm's

fixed asset) of an asset with the same output possibility as the firm's at the beginningof this year, E(Si) the value of monetary sacrifice which is considered as incurred atdate d. for this year's planned asset service Si, E(Si+i) the monetary sacrifice fornext year's planned service Si+t,.........E(Si+6) the monetary sacrifice for the service

Si+6 planned to be consumed 6 years ahead from this year.

Now, as assumed above, an abnormal breakdown of the asset during this year
has decreased the asset's remaining service life to 5 years (last 5 service layers) asof the end of this year. This means that

Ai+i=E(S,.,)+E(S,.,)+E(S,.,)+E(S,,s)+E(Si+6)=- $2,350, (1 7)
where A"i shows the acquisition price at date d. of a used fixed asset with thesame output possibility as this firm's asset after the damage (and repairs, if made).

Taking the abnormal damage into account, this year's sacrifice-based depreciation expense is, from (16) and (17),39

ISAO NAKANO

40

E(S,)+E(S,.,) =Ai-Ai+i=$3,5oo-$2,350==$1,150. (18)
In this sense, the difference between the past acquisition prices of the beginning-of-this-year asset and of the damaged end-of-this-year asset indicates the exact
monetary sacrifice which can properly be regarded as incurred for the acquisition of
the total services lost this year (E(St) and E(Si+i)) (i.e., this year's total depreciation).

Now, let us proceed to the latter case of "obsolescence." In this context, obsolescence will mean those econornic events which by affecting the fixed asset generate

one or more of the following consequenoes: (1) reduction of the remaining usefu1
life of the fixed asset concerned ; (2) reduction of the amount of net profit per productunit; (3) simultaneous occurrence of both (1) and (2). In general, the possible causesof these consequences may be said to lie in competitors' acquisition of more advanced

plant assets andlor in changes in customer demands. These causes of "obsolescence"seem to be attributable to some "relative physical deterioration" or "physical ir-

relevance" of the firm's asset to the changed demand. So our problem now is how
to evaluate these specific kinds of "relative physical deterioration" or "physical ir-

relevance" in terms of "monetary sacrifice" which has been incurred for the currently
obsolete asset.

We will divide this evaluation problem into the following three cases: (1) The
case where the firm set out to purchase some of the obsolete assets in addition to
those already owned...(Case A). (2) The case where the firm sells the currently owned,

obsolete asset (therefore does not buy any of this kind). (3) The case where the firmneither purchases nor sells any of this kind of obsolete assets.

(Case A)
Three kinds of values of the fixed asset will be considered: its current selling

price, its current replacement price and its (subjectively determined) economic
value (for this firm). If the firm is assumed to behave in a rational manner, this Case
A of the firm additionally buying this obsolete kind of asset suggests thatthe selling price<the replacement price<the economic value. (19)This is so because a rational manager will set out to buy additional obsolete assets

only when he estimates its economic value to him to be larger than its current
replacement (i.e., current acquisition) prioe. (Our assumption in (19) of the replace-ment price being larger than the selling price could be justified by noting that a
dealer in (second-hand) plant assets will, to earn some profit, buy used assets only

at a price (=the selling price to a selling firm) below its salable value (=the replacement or current acquisition price for a buying firm).

Under the condition of (19), our problem of evaluating an obsolete asset canON AN INTERPRETABLE DEPRECIATION METHOD
be solved by noting that the maximum "objective" amount of money which thefirm would have paid at date d., with no regret ex post facto, to acquire the bundleof degraded services which are embodied in the existing obsolete asset, is its curTent"replacement price." (The economic value is assumed to be too subjective to bereported as external accounting information). So, if we define "the appropriatemonetary sacrifice" as a maximum amount of money which the firm would havebeen willing to pay for acquiring a specific service bundle or a service layer at thepast date of the actual purchase of the asset, the current replacement price of an
obsolete asset of the same kind and age as the firm's one may be said to be the appropriate monetary sacrifice paid for the degraded asset.
Accordingly, in this case A the total depreication for this year is concluded toequal the difference between the past acquisition price (at date d.) of the beginning-of-this-year asset and the "current" replacement price of the this-year-end asset(after the obsolescence).

(Case B)In this case, the assumption here of the firm selling the currently owned obsolete
asset indicates thatthe economic value<the selling price<the replacement price. (20)Formula (20) can be obtained because the firm sets out to sell the existing asset
only because its economic value from the future use of the asset is estimated to lie
below its current selling price. In this instance, the firm would have paid a monetaryamount up to this current seliing price if the firm had somehow known the future
obsolescence of the asset on past date d.. This is so since this selling price can safely

be recovered by the firm selling this obsolete asset when the firm has found theincurrence of the obsolescence. Consequently, the asset's "selling price" may besaid to be its appropriate monetary sacrifice.

Thus, our conclusion in case B is that the total depreciation expense for thisyear is equal to the difference between the past acguisition price (at date d.) of the
beginning-of-this-year asset and the current (year-end) selling price of the this-yearend asset after obsolescence.

(Case C)
Here is neither buying nor selling out of the obsolete asset by the firm. The
assumption of no sale taking place suggests thatthe asset's current selling price<its economic value.

And the other assumption of no additional purchase of the same kind of obsolete
assets means
the asset's economic value<its current replacement price.

41

ISAO NAKANO

42

Combining the above two inequalities, we get

the selling price<the economic value<the replacement price. (21)The firm would be willing to pay any amount up to the economic value of theasset. But we have assumed that the economic value is too subjective and also too
arbitrary (because of required predictions and of inevitable interaction of input
factors) to obtain the status of accounting information. So, under this restriction,

the maximum "objective" price which we can report as the amount the firm would
have been willing to pay at date d. to get the obsolete asset, is its selling price. In

this sense, the monetary sacrifice for the year-end obsolete asset seems to be determinable as its current selling price.

Consequently, in this case C we can conclude that the total depreciation expense
for this year is to be calculated as the difference between the past acquisition price(at date d.) of the beginning-of-this-year (used) asset and the year-end selling priceof the obsolete asset.

Throughout the cases A, B and C, we could apply the past acquisition price(at d.) of the this-year-end state of the asset without the obsolescence being taken

into account in place of the above recommended current replacement price or thecurrent selling price of the obsolete asset, if these two prices should exceed theformer past acquisition price of a used but not obsolete asset. This is so because

the "appropriate monetary sacrifice" as a maximum amount of money the firm would
have been willing to pay to get this year's consumed plant service layer, must be the"minimum" of the alternative three values being considered. (The firm would not
pay more than the minimum monetary amount which is suMcient to get this year's
service.)V. Conclusion
In this paper we have tried to show that under a "matching concept" different
from the Thornas' view a study into cost allocation problems is not a priori insigni-

ficant. And based upon our "monetary sacrifice-proportional matching concept,
we have developed a new depreciation method. In essence, this method compares
the past acquisition prices at the date of the actual purchase of the asset of the be-ginning-of-this-year and the end-of-this-year states of the asset and calculates thedifference as this year's total depreciation expense. If obsolescence occurs on theplant asset concerned, the end-of-year asset is to be evaluated in terms ofits "current"
replacement price or of its "current" selling price rather than its past acquisition price,

The advantages ofthis proposed depreciation method include the following three.
polnts.

ON AN INTERPRETABLE DEPRECIATION METHOD(1) "Reduced uncertainty in depreciation calculations." In principle, ourdepreication makes use of "past" acquisition price data alone. So, we are freed
from inevitable uncertainty of the conventional depreciation value arising from theuse of future uncertain data such as the estimated usefu1 life and the future salvage
value of the fixed asset, etc.

(2) "A clear semantic content" of our depreciation value.

The conventional depreciation calculation applies some predetemined computation formula (such as the straight-line, the declining-balance, the sum-of-years'-

digits formulas, etc.). Consequently, we do not know what the resulting depreciation

value is likely to reflect or report. Probably, the value refiects not so much any
substantive aspect of the fixed asset (economic resource) concerned, as the mere factof the accountant's behavior that the specific depreciation method has been applied
and that it has produced the specific depreciation value reported. In short, we canhardly decode any usefu1 semantic content out of the reported conventional depreciation measure.

In contrast, the depreciation value under our proposal clearly and sharply
represents a certain aspect of the fixed asset concerned. Suppose that a new plant
asset was purchased at $1,ooO by the firm the previous year and a one-year-used asset
ofthe same kind could be bought at $5oo at that time. Then, the 1,ooO fund (monetary

capital) which was invested into the new asset could have bought a one-year-usedasset, with ($1,ooO-$500=) $5oo money remaining at hand. Accordingly, if thefirm now possessed a one-year-used asset alone and nothing more, the $5oo capitalwhich could have been saved by acquiring a one-year-used asset at the beginning of
the previous year must be considered as "lost and gone." In this sense, the deterioration of the plant asset during the first service year involves the incurrence of mone-tary loss or "monetary sacrifice" in the amount of $5oo, which is the difference
between the acquisition prices of the new and the one-year-used assets both at thepast date of the firm's actual purchase of the new asset. To sum up, our proposed
depreciation represents the amount of "monetary sacrifice" which has been induced
during the fiscal year and which must be recovered out of the current revenue tomaintain (an equivalent of) the originally invested monetary capital.

Assume furthermore that at the past date of the firm's actual purchase of the
new asset the firm could buy a two-year-used asset of the same kind at $2oo. Then,a similar reasoning as above shows that in the course of the new asset deterioratjng
to be a two-year-used one the firm has incurred a capital loss or "monetary sacrifice"of $8oo (=$1,OOO-$2oo). This monetary sacrifice must be recovered via a charge
against revenue to maintain an equivalent of the original capital. And a part (=$5oo)of the total monetary sacrifice ($8oo) was already charged to the previous year's depreciation expense. So, the amount to be charged to and recovered from this (second)

43

"

ISAO NAKANO

year's revenue, i.e., the second year's depreciation may be said to be an as yet un-recovered monetary sacrifice of ($800-$5oo=) $3oo. This in turn is exactly equal
to the difference between the past acquisition prices of a one-•year-used asset andof a two-year-used asset.

Thus, we can generalize the above reasoning and conclude that our proposed
depreciation calculation clearly reflects the monetary sacrifice (or monetary loss)
which has been induced by this year's deterioration of the fixed asset concerned andwhich must be recovered out of this year's revenue to maintain the monetary capitaloriginally invested into the asset.

(3) "Potential usefulness of our depreciation information."

Let us continue with our example of depreciation in the above section (2). As
shown in Table 2, the revenues for the first year and for the second year are assumed

to be $6oo and $100 respectively. No other expenses are assumed to have been

incurred throughout the years. Then, the net income and the accumulated net
income for each year are caluculated as in Table 2.
Table 2Year

Sacrifice-based

Depreciation

Revenue

1

5oo

6oo

2

3oo

1OO

.

.

.

.

.

.

.

.

.

.

.

.

Net Income
for each year

Accumulated
Net Income

1oo
-2oo
.
.
.
.

1oo
-1oo
.
.
.
.

(The lst year)
The net incorne of $100 signifies that this amount of capital (or fund) increase

is attained in comparison with an alternative case where at the beginning of Year 1

a one-year-used asset was purchased and hence $500 cash remained on hand, so no
operations were done during Year 1. From this the net income figure of $100 serves
the potentially usefu1 purpose ofevaluating the relative advantage of this firm's actual

business operation for Year 1 in terms of the alternatively possible business policyof acquiring a one-year-used asset to provide for the operations from the 2nd year
on, holding $5oo cash and doing no operations for the first year.

(The 2nd year)
The accumulated net income (-$100) for Year 2 represents the relative disadvantage (i.e., a capital decrease) over Year 1 and Year 2 of the actually adopted
policy of buying a new plant in Year 1 and using (i.e., deteriorating) the asset as
actually done, as compared with an alternative strategy of purchasing a two-year-old

ON AN INTERPRETABLE DEPRECIATION METHOD
asset (at $2oo) at the beginning of Year 1, holding cash of $8oo (out of $1,OOO capital)and doing no operations for the two years. In this sense, the accumulated income
for Year 2 can serve the potentially usefu1 purpose of evaluating the actually adopted

business policy for the sum ofYear 1 and 2 in terms ofthe alternative "no operations"policy for these years (and only for these 2 years).

However, as for the depreciation expense for Year 2, its value $3oo can re-present the money saved by purchasing a two-year-used one instead of buying a
one-year•-used one. So, the net loss of $200 for Year 2 will mean a capital decreaseby doing business in Year 2 (by acquiring a one-year-used plant) instead of notoperating until the third year. However, this whole interpretation is based on the

unreal assumption that the firm bought a one-year-used asset at beginning of Year
2. This is contrary to the fact. This firm is assumed to have bought a new asset atthe beginning of Year 1. So, we must conclude that the net income for each fiscal
year after Year 1 does not have any significant and realistic semantic content withrespect to the evaluation of the firrn's business activity.

Of course, one could contend that the depreciation values for year 2 and thereafter signify each year's deterioration of the fixed asset as evaluated in terms of theacquisition price difference at a past date. The real problem, however, is whatmeaning the "evaluation" has when such old prices are to be applied for the valuation.

Lastly, the potential usefuIness of the income concept under our sacrifice-based

depreciation calculation will be evaluated from the function of business income as
an indicator of the maximum distributable fund after maintaining the beginning-ofyear capital.

In Table 2 above, the net income of $100 for Year 1 obviously represents the
maximum amount of fund available for distribution before one must conclude thatthe year-end size of capital (a one-year-used asset and some other asset(s)) after the

distribution is the same as the content of the capital if the firm has taken the "no-operations" policy after the beginning of Year 1 buying a one-year-old fixed asset
and holding $500 cash out of the $1,OOO capital invested. That is, if the managementof this firm should pay out more than the total annual income of $100 for Year 1,
this firm's total capital would certainly decrease or worsen, for in this case the tota1

economic resources would consist ofa one-year-used asset and a cash ofless than $5oo
(because of overpayment). In other words, this net income value signifies a very im-

portant "critical point" distribution over which would result in the management"regretting" the actually adopted business policy (including the dividend policy) for
this Year 1 (i.e., wishing it had done no operations). To express this situation, we

may characterize the above income value as a "regret point."

As for Year 2, the accumulated net loss of -$100 for Year 2 indicates that an

45

ISAO NAKANO

46

addition of $1oo (through earning of income) to the capital would have to be madebefore this firm stopped regretting the actually adopted course ofbusiness operations.

And the pet income of --$2oo (or net loss of $2oo) for Year 2 is the representationthat the total distributable amount (in excess of the regret point) of fund over the 1st

and 2nd Years has decreased by $2oo during Year 2. Since the management's
decision on dividend payout is said to partly relate to the firm's utility (or to the legal

requirement) with respect to maintaining invested monetary capital or keeping thelevel of operations at a minimum, our income information as an indicator of the"regret point" being exceeded or not should be a concern to the management infoming its income distribution policy.

REFERENCES[1]

Rosenfield, Paul, "The Confusion between General Price-level Restatement and Current
Value A(rcounting," The Journal ofAccountancy, October 1972.

[2]

[3]

, "GPP Accounting-Relevance and Interpretability," The Journal ofAccountancy,
August 1975.
Thomas, Arthur L., The Allocation Probiem: Part Two, American Accounting Association,
1974.

[4]

, "The Allocation Fallacy and Financial Analysis," Financial Analysts Journal,
September-October 1975.

A NEW TYPE OF DATA BANKING SYSTEM-BEICA SystemHiroshi SADAMICHi

I. introduction
Computer science has been making such rapid progress since the appearanceof the first program-stored computer EDSAC in 1949 that every ten years we haveseen a new generation of electronical data processing from the viewpoint ofsoftware computer technology. The first generation covered the period of the fifties

during which there was no operating system that could process jobs continuously one
after another without first having operators' intervention.

The sixties marked the second generation which was characterized by theoperating systems, uniprogramrned or multiprogrammed, and the wide-spread
introduction of what is now known as `the online real-time system.' Since thisperiod we have seen a remarkable advance in computer technology such as integrated

circuits,highspeed discs, etc. An eMcient way of slicing the relatively very ex-pensive CPU time came into practical use which allocated the time among manyjobs most eMciently. A great number of terminals in the form of either typewriters
or videodisplay units were connected with a central computer in the remote place,so that many small jobs from different terminals could be read in and processedby the central computer simultaneously.
The third generation in which we live now refers to the period of the seventies,

vvhich has witnessed another big step forward in both hardware and software tech-

nology. The invention of MOS or IC memory storage and the increasing usage of
MSI and LSI have made it possible to develop highly sophisticated software to theextent that there could be practically no limit on the size of main memory storage,

hence that of individual computer programs. Along with the real-time usuage thetime-sharing system came into wide use. Many kinds of data base systems havernade their appearance since the early seventies. One of the most widely used in
the United States is the DRI data base and its time-sharing system. This system has

hundreds of typewriter terminals located all over the country which are connectedwith one huge computer in Massachusetts. The bigger the central computer grows,
the quicker response can the terminals receive and the more you will have to pay.
There arises a most important problem to be solved.
Suppose you wish to make a simple statistical analysis of, for example, the grossnational product through one of the terminals. It will cost you about $1.00 to retrieve

HIROSHISADAMICHI

48

and print out one GNP series of quarterly data from 1948 : 1 to 1954 : 4 and at least$10.00 just to run a single, simple regression of the current with the one period lagged

GNP. So some new type of time-sharing system should be in order which can bringabout a more economical and practical usuage ofthe central bigger computer. Before
going further, we will take a brief look at the development of the philosophy lying
behind the eMcient usuage of the computers.

II. The Philosophy of the EMcient Usuage

Computers in the fifties were operated under the uniprogrammed operating
system so that each job could not be run until the prior job in process was done.
What mattered here was to minimize the amount ofidle time spent betweenjobs. The

main drawback of the computers in this period was that it was very uneconomical
to run such ajob as required a small amount of processing time (CPU time) and alarge amount of data reading and printing time (I/O time) since a greater part of

total computer time would be spent leaving the main memory storage unused which
was far costlier than the input-output units.

Most of computers which appeared after the early sixties have been operated

under the multiprogrammed operating system, which is capable of executing two
or more jobs simultaneously by allocating core memory storage and assigning asmall amount of CPU time to thejobs, one by one, while taking it away from anotherthat either needs I!O time or runs overtime. The idea is to minimize the amount ofidle CPU time spent by making full use of such a nature of the computer that the I/Ounits can operate in parallel with the central processor. All application systems thatrun today on real-time or time-sharing systems are operated under essentially thesame logic as described above.

The common feature ofboth the real-time and the time-sharing systems is thatterminals are just terminal typewriters or videodisplay units which function as asender or receiver of messages, not as a smaH computer which can run jobs. The
more terminals there are, the bigger computers are needed. But, the bigger computer,the more expensive CPU time. As mentioned earlier, it will cost at least $10.00 to run
only one simple regression and about $1.oo to print out one series of quarterly data.

So the amount of the CPU time of the central computer used in this regression
analysis will cost at least $9.00. This means that there might not be a big problem
for a real-time system which consumes only a little of the CPU time of the centralcomputer. However there arises a serious problem for time-sharing systems which
genefally use a far larger amount of the CPU time of the central computer.
A different type of time-sharing system is therefore in order. The new system will

be a mixed type of the time-sharing and the real-time systems with small-size or

ANEW TYPE OF DATA BANKING SYSTEM 49-BEICA SYSTEM-

medium-size computers as its terminals. This will allow the central computer tofunction more like real-time system engaged mainly in data management while theterminal computers do most of processing. In other words the new system will let theterminal computers take the place of the CPU of the central computer most of thetime. To expedite processing on the part ofterminal computers the central computer
will supply not only data in the usual sense but also various kinds of programs asdata in the wider sense. The central computer will concentrate on data management
and execute only those jobs which can not be handled by the terminal computers.
In this way we come up to a new stage where the optimal (economical and eMcient)utilization can be realized of the CPU's and I!O units of the central and the termi-

nal computers. To this approach we may refer as a new type ofdata banking systemsince the central computer acts mainly as a data bank depositing or with drawing
pieces ofdata from the data base in response to requests from the terminal computers.

III. Comparison Between Differellt Types of Computer Usuage

We shall discuss here how differently the computers are used nowadays fromthe viewpoint of data management. The programming systems may be classified
into 4 different types-the batch, the real-time, the time-sharing, and the data basesystems-on the basis of the way they manage their subprograms and data files.

The batch system is most widely adopted

Chart1. BatchSystems

in the third generation of the computer age,

The batch system refers to the way of pro- Central Computer
cessing on the part of the operating system Operating Systemthose jobs of which each aims to make analy- ' [ isis ofa single set of data forasingle purpose. Program

It is characterized by the fixed ordering of l[analytical processes and the preassigned ar- Data
rangement of data determined by the analy-

tical program. Each program is fed into the chart 2. Real-time Systems
central computer together with all data to be

central computer [analysed. In other words each job stands

alone on itself. Typical examples are payroll OPerating Systemsystems, cost accounting systems, scheduling, letc.
Program Management System
The real-time and the time-sharing sys- li
tems are both featured by the highlevel ProgramPackage

management of subprograms so that they are li
Data Pool 1

capable of complicated analyses for many i

50

HIROSHISADAMICHI

purposes. The real-time system is more suited to the type of jobs to work on

one huge set of homogeneous data for many purposes. The program management
system enables you to make a free combination of analytical processes in any orderin sharp contrast to the batch system. However the structure of data files are determined uniquely by the analytical progfams in the system as is the case with thebatch system. The real-time systems are typically installed in such a field as banks,
airlines, etc.

The time-sharing system concentrates on many sets of heterogeneous data withhigher complexity of analyses. Analyses in the time-sharing system is therefore far
more time-consuming than in the real-time system. It may be said that the real-timesystem is more data-oriented while the time-sharing system is more program- or
analysis-oriented. So the time-shar-ing system is richer in a variety of Chart 3• Time-sharing systemanalyses and incorporates several Central Computerprog.ram packages each of which fOperating Systeml
has its own setof data under con- ltrol. As in the real-time system ProgramManagementSystemeach set of data in the time-sharing ll lisystem is solely dependent on its Program Package Program Package

particular program package so that Il ll
any program package may not have Data Pool Data Pool
access to any other set of data thanits own. APL, MARK III, andChart 4. Data Base Systems
ASTRO-FOIL present somegoodexamples.
Central Computer
The data base system may be Operating Systemsaid to be a more sophisticated 1
version of time-sharing system. Its program Management Systemdevelopment got started in the early l[ llseventies and has now come near program Package Program Package

completion. Thissystemembodies 11 ll

not only the program management Data Management Systemsystem but also the data manage- Il Il
ment system which interfaces be- Datapool DataPool
tween the program packages andthe sets of data. The file structure of each set of data is far more independently

determined of the program packages and so much more flexibility and eMciency canbe attained in data management of the new system. The introduction of the data
management system features the data base system as you can tell from its name. In

ANEW TYPE OF DATA BANKING SYSTEM SI-BEICA SYSTEM-

so far as the data management system is part of the entire system it must be subject

to the way programs in the program packages handle data. So most of the data basesystems so far developed do not implement those complicated statistical programs

which may bear heavy burden on the data management system and center morearound the filing or retrieving of collective data. DRI system, IBM's GIS and IMS,
GE's IDS may be classified under this category of data base systems. It should be

noted that the data management system incorporated in the data base system issomething new that has not been treated in so systematic a way. We are now on
our way to the new era when more emphasis will be put on a more sophisticated,
eMcient and economical way of managing data.

IV. ADataBankingSystem
Now we live toward the end of the third generation of the computer age. Yet
some important problems on how to rnanage information in an optimal way still
remain to be solved. The data base systems have made a great deal of improvement
in data management with little attention paid to economic efficiency. As pointed
earlier you have to pay at least $10.00 forjust running a simple regression using datain the data base through a terminal typewriter. You may retrieve time series databut may not cross section data from the data base simply because of the poor natureof the data management system. Here we can see two main problems in the present
data base systems or time-sharing systems in general. The first problem is to develop

a more sophisticated type of data management system and the second one is how
to cut down the cost of using the central computers. These two problems are con-flicting each other. Generally speaking, the bigger computer you have, the more
eMcient and sophisticated data management system you can work out. But the bigger
machine, the costlier to use. Since we can not do anything about the first problem
except for making use of bigger computers, we will have to find any better solution
to the second problem. Carefu1 examination may reveal the fact that the trouble withthe present time-sharing system lies in its terminal typewriters doing nothing but
sending or receiving messages from the central computer which actually does every-

thing. Why not let the expensive big computer do only the job of data management
and the inexpensive small machine take care of the rest of thejob? The idea behind
it is how to make the optimal allocation ofprocessing time between the costly centralcomputer and the cheap terminal machines. This new philisophy of economic
eMciency is different from the old one in that what matters in the former is two

different kinds of CPU time, not the CPU time and IIO time which concerns the!atter. The terminals here are no longerjust terminals but smaller computers which

are capable of processing the information received from the central computer. In

HIROSHISADAMICHI

52

this new system as shown in Chart 5, the central computer holds a huge deposit ofdata in a wider sense that covers programs as well as data, and functions mainly asa manager of the department of this data storage, while the terminal computers play

the role of managers in charge of the departments of data processing. The centralcomputer provides the terminal machines not only with data but also with those
programs which analyse the data on the site of the terminal machines. The centralcomputer may be called `the data bank' because it is a bank doing such information
services as depositing and offering programs and data in response to the requests fromterminal computers. To this new system as a whole we shall refer as the data banking
system.

Chart5. DataBankingSystem
Central Computer Terminal Computer/

Operating System Operating System'1 'lData Management System Program Management System

11 11Data Deposit Program Package

Data Program DataPool j
Each terminal computer has its own program management system as the masterscheduler which controls its exchange of information with the central computer andsupervises alljobs to be processed on its side. It may have its own program package
and data pool equipped on the terminal side, which generally contain those programsand data either used very frequently or unnecessary to be stored in the central bank.

It may also transfer some jobs which it can not process eMciently to the centralcomputer for their execution.

In the data banking system the high speed CPU and huge memory storage ofthe central computer will be fu11y utilized to attain the highest eMciency in data
management such as retrieval, sorting, updating, etc., so that each terminal computer

may be relieved of its fatal burden on data management and increase eMciency inthe utilization ofits CPU. Thus, the data banking system will have solved the'two
probiems we posed concerning the defects of the current time-sharing system, thatis, the lesser use of the expensive CPU of the central computer and the greater andmore eMcient utilization of the cheap CPU of the terminal computer.

V. A Pilot Model of the Data Banking System
BEICA system (Business & Economic Information Control and Analysis System)

A NEW TYPE OF DATA BANKING SYSTEM-BEICA SYSTEMpresents a pilot model ofthe data banking systemjust described above. This system
has been developing under the 3-year project starting in 1974 at the Research Instituteof Kobe University. It uses as its central computer HITAC-8350 which has main
memory storage of 256 KB with 4 disc drives of 120 MB and as its terminal machine

HITAC-10 which has core memory of 64 KB with no auxiliary storages. The terminal
computer is connected with the central one in the in-line, not telecommunicative,

method.
BEICA system is a data banking system designed principally for simulation

analyses of strategic management and economic planning. Included in the data
deposit of the central machine are the time series data of over 3,OOO items from thenational accounts, the international financial statistics of about 200 countries fromthe International Monetary Fund, the financial and income statements data of over800 Iarge manufacturing corporations and a package of over 100 programs andsubroutines for the terminal computer.

Chart6. BEICASystem

Central Computer

Terminal Computer

HITAC-8350

HITAC-10

EDOS

PCOS

l

]

BEIC :ATLAS

11

Data Deposit
National Accounts
International Statistics

Corporation Data
Programs and Subroutines

BEIC (Business & Economic Information Controller) is the data management
system in the central computer, Among the programs in the data deposit there are two

important application programs-STEPS (Statistical Techniques for Economic
Planning and Simulation) and STAFFS (Statistical Techniques for Appraising
Firms' Financial Statements).

ATLAS (All-round Techniques for Linking Applications and Subroutines) isthe program management system of the terminal computer. It is also stored in the
program file of the data deposit and is called into the terminal computer by theoperating system PCOS. Once ATLAS gets started it supervises all the jobs to beprocessed on the terminal side.

53

HIROSHI SADAMICHI54ATLAS is a conversational type of system so that you may communicate withthe machine in ATLAS language. When an ATLAS statement is typed in, thelanguage processor of ATLAS interprets it and requests your retyping if any grammatical errors are found. If there is no error in the statement, the caller sends
messages to the central computer to call for the necessary programs in the data
deposit. The loader then executes the statement after loading the programs received

from the data deposit. The statement may exchange data with the central computer
during its execution if necessary. If the statement has been executed successfu11y theChart7. SampleProgram

JOB'MANAGEMENT ANALYSIS OF CHEMICAL FIRMSt

NOTE

DEFINITION OF SETS

CROSS
TIME
ANAL (CHEM)

CHEM-'4001'-'4999'

RUN

TX =1960-1970; T==1970

CROSS
T

DRAW

CAPITAL-t26oo,

SET
NOTE***ANAL <TX)

TIME

RUN

BIGCHEMBIGCHEM=TRUE CAPITAL>10
TIME SERIES ANALYSIS ***DRAW

SAL='31oo', CAPIT-='2600t, ASS-:'2000'

PRINT
REGRESS

NEWPAGE, COL(10), 'FIRM CODE-', CROSS@SAL/CAPIT WITH ASS

END

RUN

CROSS SECTION ANALYSIS***NOTE***CROSS
ANAL (BIGCHEM)
T
RUN

DRAW

+

ÅÄ
LET

+
+

SET

PRINT

DIVIDEND='4730', PROFIT='4790', GPROFIT='3500'
SALE='31oo', WORKER='2940', CURRASS='11oo'
CURRDEBT== '21oo', ASSET-'2000'

X#1 ==DIVIDENDIPROFIT; X#2-=SALEICAPITAL;
X#3 = PROFIT/ASSET ; X#4=GPROFIT/SALE ;X#S=CURRDEBTICURRASS; X#6=SALEIWORKER
HICHEM-=TRUE/X#1>O.6; LOCHEM==TRUE X#1<O.6
NEWPAGE, 'GROUP 1 : FIRMS WITH HIGH DIVIDENDRATIOtPRINT (HICHEM) CROSS@, COL(10), X#1-X#6
NEWPAGE, tGROUP 2: FIRMS WITH LOW DIVIDENDPRINTRATIO'PRINT (LOCHEM)CROSS@, COL(10), X#1 O/.-X#6 %.

LET
DISCRIMSTOP

CLASS -- 1 ; CLASS -=2] X#1<O.6

X#2-XS6 BY CLASSA NEW TYPE OF DATA BANKING SYSTEM-BEICA SYSTEMATLAS monitor gets control back again and asks you to type in the next statement.
If not, the program in execution will ask you what to do with errors encountered.

We shall show in chart 7 one sample program written in ATLAS language. Thisis a program actually written for the application program called STAFFS, which
ATLAS reads into the terminal computer from the data deposit of the central computer. What this program does is (1) to make a time series analysis of regressing
capital turnover on assets for each chemical firm, and (2) to carry a cross section
analysis to find a discriminant function of two groups of chemical firms with higher

divident ratio and those with lower ratio. Each ATLAS statement consists of thesubject part and the description part, The subject part refers to the type of analysis
and the description part gives the information necessary for analysis.

It should be noted here that there are three classes of statements in the sample

program. The first class refers to those statements which are ready to be executed.

The second class consists of those statements which are executed only after theappropriate programs are called in from the central computer. Most of statisticalprograms such as REGRESS and DISCRIM belong to this second class. The thirdclass includes those statements which are executed by the central computer. All thestatements associated with the data in the data deposit fall under this class. CROSS,TIME and DRAW are these examples, The very existence of these three classes ofstatements features the role of the terminal computer in the data banking system.

REFERENCES[1] Data Resources Inc., Reference Manuals ofAID, EPL, XEPL, MODSIM, Data Resources,
Inc., Massachusetts, 1975.
[2] Dixson, W. J., ed., BMD Biomedical Computer Programs, University of California Press,
Berkeley, 1973.
[3] Rustin, R., ed., Data Base Systems, Prentice-Hal1, Inc., New Jersey, 1972.
[4] Sadamichi, H., "Statistical Techniques for Appraising Firms' Financial Statements," Annual

Report on Economics and Business Administration, Vol. 26, No. 2, Research Institute for
Economic & Business Administration, Kobe University, 1976.

[5] Sugiura, I., ASTRO-FOIL Program System for Economic Planning and Forcast, Nippon
HyOronsha, 1973.

55

EXPECTATIONS IN THE SHIPPING EXCHANGE
Tetsuji SHIMoJo

1. Preface
Many attempts have been made,`i' to build models to explain the determining
and varying processes of the ocean freight levels, and to forecast their future undervarious given conditions. Not for mere theoretical inquiries, but for the practical

forecast of the actual markets, a huge and complex model only can serve. And
moreover, very large diMculties can be expected in collecting data, in realizing
models, and in making estimates usefu1 for their business.

Generally speaking, theoretical studies may be undertaken under the assumptionthat all informations needed for the model are available in time, while practicalthinking must cease if some information is unavailable. This is true also in the ship-ping market forecasting, some problems are left unsolved in the assumption that thequantity of shipping services supplied and demanded are measurable and available
for any period we need. Very often we cannot get seaborne trade statistics even forthe period as close as the previous year, and worse, we depend entirely upon thestatistics composers for precision, classification of the data, and so forth.

The more precise a forecast we want, the more recent information we need.
It would be very usefu1 if we had a method through which we could get the information needed for market forecasting from the materials available rather easily'.
In this respect, our attention should be called to the fact that every fixture made in

the Baltic Exchange is immediately reported everyday. Freight rates and charter
hire rates in these fixtures must contain many informations for our purpose, as they
are fixed by the experts who are engaged to pay all their attention to reflect all infor-

mation they have at the moment. What we must do is to extract this informationfrom the fixtures.

"Market tells about market" is an old saying.`2' We will begin with the comrnon
sense assumption that, in other words, the connection between voyage charter rates
and time charter rates tells us about the future levels of the market. Arthur Lewis[1] and Yoshinobu Maeda [2] examined this proposition in their empirical studies,and W. G. Weston [3] tried to make it pracrically applicable. In this paper, we will
(1) For the review of these attempts, see T. Shimojo [8].
(2) A Japanese saying well known in the stock rnarkets is meaning more precisely `Ask themarket about the market.' I don't know if there is such a saying in western countries.

TETSUJI SHIMOJO

58

trace its cause rather theoretically and propose a method to extract the informationand to use it for the forecast,`S'

2. Concept of Expectation Curve Method
Evaluating the current market levels, and prospecting their trend in the future,
one can assume the market level at any time points in the future. Or he can draw his

own "expectation curve" by plotting the expected values for several time points.
'Ihe expectation curve is a line drawn from a point on the vertical axis to the righthand in a graph, of which the vertical axis represents the market level and the horizontal axis represents the time from the present to the future. This curve apparently
is a continuous line, but we cannot assume whether it be a straight line or not.

We can suppose that the men in the Shjpping Exchange, or in the Stock Markets
always have their own expectation curve in their minds. These curves are changing
their forms from time to time according to the informations they come to know. Or wemay say that they always prepare such curves in their minds to make their bestprospect at any time. The prospectis an important element ofthe `idea' they propose
foracertaintransaction. But it will be demonstrated later that the prospect is notalways the same as the idea they quote.
All chartering contracts are more or less future contracts, which will be performed in the future. After fixing a contract, one does nothing but adhere to it evenif current prices are far from promise. One can only regret one's wrong prospect.
This is the reason why one used one's best ability to find the best prospect.

In long-temi contracts, one is constantly restricted by the terms and conditions

during the continuance of the contract. As the market may change during the duration, the differences between the levels prospected at the time of contract and thecurrent actual levels will become at times larger or smaller. If an average level of theactual market during the duration of the contract is similar to the fixed level, thenthe prospect can be said to have been appropriate. Contracts are made coincidentallywith interests concerned. When a contract is fixed, it means that the level of prospect

was found as a meeting point between the two parties. The point may be deemed
as least regret rather than largest satisfaction for them.

It can be said from the above explanation that, when a certain transaction isoffered, the prospect born in mind depends upon the time of commencement andthe duration of the contract. We have already assumed that each of the panies has
its own expectation curve. Their prospects, therefore, are to be shown as a part ofthe curve. Fig. 1, in which the expectation curve is drawn as a straight line, tells a(3) This paper is ajoint abstract from my own papers, for which I owe very much to Iate Prof.
Dr. Sernpei Sawa [X and [q above all.

EXPECTATIONS IN THE SHIPPING EXCHANGE
case where the prospect in the market decreases as the time moves away from thepresent. A level MN will be appropriate for the contract commenced at the time B
and performed during the duration B to D. As the point N is the central point ofBD, MN represents the average ofthe levels prospected for any time between B and D.

y

A

F

l
1
s

1

1
l
'

l
1

prescnt

c'

'

1
t

l
l

I

;
r
1

i

1

t

,

j

l

1
t

I

l

1

'

'

,

1
1

:
o

M

BND

t

futureFig.1. ExpectationCurve

Suppose a man in the market has an expectation curve in his mind like as inFig. 1, he evaluates the present level as FO and prospects the levels as AB at the time

B and CD at the time D. In other words, his expectation curve is expressed in theequatlon

y==b+mx,
where his levels of prospect y is separated into two parts, the current actual level b

and the difference mx which is extending in proportion to the time x by a parameterm. In Fig. 1, the parameter m is, needless to say, less than zero. In short, the prospectborne by the man in the market will be represented by b and m, which corresponds
to the level he prospects for the moment and the trend of the market in the future
respectively.

In the ship chartering market, as they aim at a certain time point in the future
at the bargaining for the contract, it will be easier to deal with the expectation thanin the stock market. An offered transaction has a time to commence and a duration.

We can summarize these two factors into a new concept of "prepositive time" whichis construed as the time giving an average level of prospect from an expectation curve.
If the expectation curve is a straight line,

prepositive time = lead time of the contract

1+ -i- duration of the contract.
The lead time is the time difference between the time of contract and the time ofcommencement of the contract,59

TETSUJI SHIMOJO

60

Given a prepositive time of the contract, a man in the market will get a prospectappropriate for the contract by rneans of his expectation curve at the moment. But
his prospect wi11 not be quoted as his idea for the contract without any modification.

He may modify this level in order to stand himself on more profitable grounds inthe following bargaining process. The ideas quoted by the two parties will converge
in the course of the bargaining process to a cormnon level, otherwise, the bargaining

will cease without success. During the bargaining process, bSoth parties insist on

their quotation being more appropriate, and the ideas will converge to a common
kebVieeifieCsisOSoefretiOtheeilhpearAeyV:itatChCeOthdgnmgek2.theatmosphereofthemarketandthefavour-

When the contract is fixed,, we may say that the expectation curves of the two
persons have met at a point, at least, as far as the prepositive time is concerned.

Their expectation curves may have moved in the course of bargaining by new infor-

mations on the market. In any way, the point they have reached in the end must
be a point in the ex-post expectation curves of the two parties. Collecting such points

from many iixtures in a certain period, we can reproduce an aggregated ex-post
expectation curve for that period. And we feel this curve will tell us well about what

we were looking for. This is what we call the Expectation Curve Method.

3. EstimationofExpeetationCurves
Let us try to deal with the data extracted from the actual market. It is desirable
for our purpose to choose such a period where we can find many fixtures for one traderoute. Otherwise we face to many diMculties in convening the various freight rates
into a standard one considering the differences of cargoes and routes, and it seems

that the improper conversion of the data might lead us to misunderstanding on theinterrelation between the rates and the prepositive times. For such a consideration,

we chose the coal trade from Hampton Roads to U. K. or Continent for the years
1955 to 1957, for which we can use the weekly reports [4] of the Maritime ResearchInc.

We firstly picked up the lead times and the numbers of voyages from the fixtures

for the said trade, and assembled them into monthly tables which we call the L-V
Tables, and of which a sample is shown in Tab. 1. Tab. 1 contains the average rates(upper) and the number of fixtures (lower) classified by the lead time (L) and thenumber of voyages (V). We can say the following about these 36 tables;(1) There are comparatively many fixtures of the near future and of short terms;(2) There are very few fixtures of the far future and of short terms for the diMculties to distribute the risks''(3) There are a few fixtures of the near future and of long terms no matter how

EXPECTATIONS IN THE SHIPPING EXCHANGE
the rates may be;(4) The foreward fixtures are almost all long terms.

We secondly calculated the prepositive times from the L-V Tables. As alreadydefined, the prepositive time is calculated as the sum of the lead time and a half ofthe duration. And duration is a product of the number of voyages and the time (inmonths) taken for a voyage. The standard ships of those days used to take about

40 days for a round voyage from Hampton Roads to Europe. Thus we could get
new tables named the FBPT Tables (Fixtures By Prepositive Time Tables), of whicha sample is shown in Tab. 2.
As a final step, we estimated the parameters b and m in the equation

y= b+mx
for each month by means of the least square method, denoting the rates by y andthe prepositive time by x. We adopted in the above course the assumption that the
curve may be expressed by a linear equation, for the scattered graphs we obtained

from the above FBPT Tables seemed to be approximately a straight line. A sampleof the graphs is shown in Fig. 2.

Table 1. A Sample of L-V Tables (Jan. 1956)k)xi(.

1

2
3

4

1

2

3

986
42

981

966

972

952

980

938

3

6

5

6

7

8

10

12

1

1

11

2

959

910

1

4

1

910

1

6
9

860

12

735

18

5

1

763

3

777

763

1

1

27

710

675

36

672

654

L: Lead Time, V: Number of Voyages

1
1

2
2

61

TETSUJISHIMOJO

62

Table 2.

195ol

A Sample of FBPT Tables (Jan.

No. of Fix.

Avr. Rate

Avr. P.T.

42
9

986

1.0

2

'978

1.9

3

14

976

2.5

4

3
1

929
910

3.6

5•

6

839

7.4

767
734

20.8

P.T.
'1

5.0

6

9
12
18

4

24
30

2
3

674

29.3

36

2

654

35.3

Avr.

86

924

4.7

y
$

eee

.

12.8

.

t

.
•

.

e

.

5

o

'10
Fig. 2.

30 rnonth x

20
A Seattered Graph (Jan.

1956)

Through the above estimation, we obtained the results shown in Tab. 3, in which

Yr., Mo., No., P.T., A.R., and R represent respectively Year, Month, Number of
fixtures, Prepositive Time, Average Rates, and Correlation CoeMcients. In this table

we can see that the coal fixtures in January 1956 numbered 86 with an average rate

$9.36, and that the relation between the rates and the prepositive times was represented by the equationy = 990-11.477x
for which the correlation coeMcient was O.9542. In other words, the fixtures ofthis
month were apt to decrease in proportion to the length of the prepositive time, andthe decreasing ratio was about 11.5 cents a month of the prepositive time. And if
it were possible to find a contract that commences instantly and finishes immediately,

the rate appropriate for such a contract would be $9.90.

IN THE SHIPPINGEXCHANGE
EXPECTATIONS
Table 3.

63

Results of Estimation

Yr.

Mo.

No.

P.T.

A.R.

m

b

R

55

1

3.3

733

781

55

2

14
23

4.3

7"

55

3

53

4.6

55

4

46

5.2

659
677

55

5

34

2.9

770

55

6

95

3.5

823

55
55

7

83

3.5

8

52
68
73

5.4

828
791

4.3

905

5.1

937

9.6

9oo

-14.850-23.794-6.897-5.701-10.709-12.577-8.530-8.406-12.439-10.982-10.549-14.080-11.477-10,674-10.236-11.870-9.238-9.986-5.611-5.309-4.7435.1

1018-6.440

1051

70

2.1

1270

85

3.0

1482

-15.945-22.092

1304
1548-O.9851-O.9761-O.9236-O.8911-O.8141-O.9665-O.9361-O.9612-O.9249-O.9780-O.9694-O.9624-O.9542-O.9323-O.9770-O.9904-O.9585-O.9679-O.9940-O.9791-O.9953-O.9750-O.7724-O.8338

1

111

7.7

1357

-O.91"

121

6.9

1228

1297

3

84

3.7

57
57
57

4

3.1

2.6

11230

52

669

7

696
665
526

-O.8507-O.8706-O.6399
O.4978O.5444

57

56
72
35
38

962
922
725

-9.365-10.110-4.620-5.030

1429

2

57

8

57
57

9
10

57

57

55

9

55
55

10

55

12

56

1

56

2

56

3

56
56

4

52
49
86
38
82
37

5

56
56
56
56

6

56
56
56

11

4.5

882

2.2

933

4.7
4.5

936
918

8.4

928

8.1

979

115

7.6

1043

52
43

5.8

983

4.8

964
973

10

52
59
63

3.1

11

12

57

57
57

7
8

9

5

6

2.6

595

34
33

5.6

461

5.3

433

2.6

462

11

55
38

4.0

"6

12

23

1.9

398

O.808
26.951
5.683
6.470
3.679
1.646
16.174

846
691

706
802
867
858
837

959
994
930
964

990
966
1014
1075
1114
1041

990
990
1oo6

980
938

430
399
453

mo
368

O.92"
O.9421
O.9446
O.8774
O.7268O.9450

Now we have five factors for each month, i.e., Number of Fixtures, Average
Prepositive Times, Average Freight Rates, Expectation CoeMcients, and Real Time
Rates, of which the last two concepts need no more explanation as they have often
appeared in the above discussion under the symbols m and b. We will give similar
symbols to the rest, n, x and .v, respectively. What we must do next is to let the fivefactors tell about the future.

"

TETSUJISHIMOJO

l,

15

I I
ITI;, T
10

II.II"JIJI"

TJ

t Ai
5

tt

2' 4" 6 8 10 12 24 6' 8 10 12 2 '4 6 '8 10 12ciFig. 3.

1

1955 1956 1957

Changes of the 3 faetors n, b and m. n is represented by kinked line, while

m is expressed by length of arrows andb is located at root of arrows.

From the fixtures reported daily at the shipping exchanges in the world, we caneasily estimate these five factors every month or even every week. But a diMculty
will arise if there are not suMcient fixtures, when we cannot estimate the expectation

coethcients and the real time rates unless we adopt more trade routes with somenecessary conversion. For example, there would be a method to estimate the parameters with the index nurnbers placing a spot-rate as the basis for the respective
trade route.

4. Use of the Fiye Factors
To consider the uses of these five numbers, we must examine their nature, thesignificance of their changes, and their relationship to the future of the markets. We
can see in the markets the favourableness(4) for either party according to the situationof each moment. We wish we could explain the concept with numbers.
The prepositive time represents the time of performance of the contract. The
average prepositive time represents, therefore, the degree to which the total fixturesof the month lean to shorter or longer ones. On the other hand, the expectation
coeMcients signify the degree to which the men in the markets as a whole prospect
the future as inclining or declining. Moreover, it will be noted in observing these(4) By `favourableness' I mean "shite" relation in Japanese. "Shite means a leading actor in

the Noh play.

SHIPPINGEXCHANGE
EXPECTATIONS IN THE
factors that the favourableness of the market is playing an important part in thebargaining processes.

Shipowners and charterers originally stand on opposite grounds, so that they
behave reversely as long as they have the same prospect. And it is natural that they

have almost always similar prospects, as they see and hear the same informations
through the same sources. It is no curious matter, especially in such a market thata shipbroker and a chartering agent often change their positions towards each other.

It seems impossible that a man changes his prospect according to his stand as a
shipbroker or a chartering agent.

If they have the same prospect, they behave reversely. This is the reason why

there remains room to bargain and to compromise. In this process, which of themstands on more favourable ground, which bargains in a more favourable way, andwhich obtains more favourable rates, all depends upon the situation of ships andcargoes at that moment.
Tone of the market is the entirety of the rates which is embodied from the confidence of both parties to their own prospect. It may be thought, therefore, that the
fixtures in a certain time are affected more by either assertion. We can see it in thechanges of our five factors.

There appears the tendency to shorter fixtures in case (a) where the shipbrokers

center on the offers of shorter periods, prospecting the future will show an upward
trend, or in case (b) where the chartering agents offer shorter contracts in view of adownward trend in the future, another case (c) where there are many ships or cargoes

ready for immediate requirements. The former two cases (a) and (b) cannot takeplace in a moment. And needless to say, the cases of the tendency to longer fixtures
can be explained in the reverse way.

What we have to note in the above discussion are the following matters; Ifthere
are many shorter fixtures under the case (a), the initiative of the market is on the
shipowners' side, so that the situation is favourable for the shipowners; If the sameconsequences take place under the case (b), then the charterers have the initiative,
and the situation is favourable for them.

We can now conclude our discussion as follows:

When the market is prospected upward,
Shipowners prefer shorter contracts, andCharterers prefer longer contracts.

When the market is prospected downward,
Shipowners prefer longer contracts, andCharterers prefer shorter contracts.

We can say in other words using our factors:

When the expectation coeMcient m is high and the average prepositive time x is

65TETSUJISHIMOJO

66

short, or when m is low and x is long, then the favourableness of the market is on the

shipowners' side.

When m is high and x is long, or when m is low and x is short, then the favourableness of the market is on the charterers' side.

In the bargaining process, shipowners and charterers may have their own ideas,
differing far from each other, due to their wishfu1 thinking or as a strategic design.

Though they have simiIar prospects, their confidence and impudence may differ, or

either of them may have to reserve more room to compromise owing to the urgencyof his ships or cargoes. Estimating our factors from fixtures of the month andobserving the favourableness, we can expect that the factors enable us to forecast
the future of the markets.

5. Long-termRateCurves
Now we are at the stage to consider the theory of Z. A. Zannetos [5], who
inquired into the long-term charter rates of the oil tankships. The differences are
not vita1 between oil tankships and general cargo ships, especially tramp ships, ofwhich we have been mainly conscious. But the duration of charter contracts in theformer trades are conspicuously longer.

Z. A. Zannetos points out the following ten factors as the most important
determinants of the long-term rates.

1. The short-term rates as ofa moment of time.
2. The expectations about the future that short rates create.
3. The status oftie-ups at a particular point of time.

4. The level oforders outstanding.
5. The size ofa particular vessel.
6. The type of the propulsion system of the vessel.

7. The duration of the charter agreement,

8. The lead time.
9. The type of cargo carried by the vessel.

10. The type of currency in which payment is made.
These factors will be classified by ourselves into three more generous groups,(A) the current rate level, (B) the factors that affect rates in the future, and (C) the
particular characteristics of the agreement.

"The short-term rate is expected to influence the long-term rate both on the
upswing and during periods of low spot rates," he says, and "the long-term tankshiprate is expected to be lower than the short-term, under normal conditions." Ifnormal

conditions mean a situation of comparably high tone, it is acceptable to us. In
evidence he states, "if we assume certainty and exclude economies of scale in long-

EXPECTATIONS IN THE SHIPPING EXCHANGE
term contracts, the long-term rate would be approximately equal to the arithmetic
average of the current spot rate and the expected spot rates over the interval coveredby the long-term contract. For this reason alone, it is obvious that the long-term rate

will not fluctuate as much as the short-term rate."

Removing the restrictive assumptions, he points out the reasons which cause
the differences between long-term and short-term rates; (a) The uncertainties andexpectations concerning the movement in spot rates over the period that thelong-term contract covers: (b) The risks of unemployment that are eliminated by
the long-term agreement: (c) The nuisance of frequent contracts: (d) The savingsin the administrative costs and the brokerage fees: (e) The mortgageability of thelong-term contracts. For these reasons he also appreciates the importance of his
seventh factor, the duration of the charter agreement. We did, moreover, combine
this factor with the lead time to our own factor, the prepositive time.

Among the above reasons, we take a special interest in the expectation that henumbers also as his second factor. He states, "the expectation of the buyers in thetankship markets are over-all elastic. ...If a buyer expects the short-term rates toincrease proportionately more in the future than the present rate increase, he will
also expect future long-term rates to follow in sympathy. In fact the impact of expectations, based on spot rates, may be so great as to distort any correlation between

short-term and long-term rates. That is, once the short-term rates generate expectations they may become captive of their own creation."
As to the far-off future, he mentions, "Because of the uncertainties in the move-

ment of short-term rates over an extended period of time, it is natural to expect
decisions to be made on the basis of deviations from the static long-run costs. Thisis the only objective criterion available to the owners and will logically serve as apoint of departure, especially for those whose imaginative anticipation of future
short-term conditions is not very strong. The deviations from this cost-based, longterm rate will be determined by the short-term conditions that are expected to prevail,but will grow fainter and fainter as the duration of the charter is extended."Thus, he draws a graph as shown in Fig. 4 and states, "Theoretically, there is an

infinity of such curves corresponding to the infinite number of possible short-term
rates, When the spot rate is below the normal long-term rate, the market long-term
rate will tend to be greater the longer the duration of the contract. On the other
hand, when the short-term rates are very high, the market long-terrn rates will belower the longer the charter's duration."

The main differences between what he draws and what we imagine lie in two
points: The Zannetos' long-term rate curve is an actual and explicit chain of points,
each of which is placed by the level and duration of a long-terrn contract. While, our

expectation curve is an imaginary and implicit chain of similar points that a man in67

TETSUJISHIMOJO

68

Y= a+blx2(or r=ce-bx)

5

2

.:

k

:,

a

Normal rateca

Y==a-blx2(or 1'=-ee')x)

Time duration of charter
Fig. 4.

Charter Duration and its Impact on Charter Rates (Zannetos)

the market expects at the moment of his bargaining. As far as our ex-post expectation
curve is concerned both are almost identical with the exception of the length of theduration : We are considering the rates in a somewhat abstract way, so that we havepointed out only three factors to affect the future rates, the current rate level, theexpectatjon coeMcient and the prepositive time, which we classified in a more generous

way. The other factors suggested by Zannetos are, as already mentioned, absorvedin these factors in a certain sense, and some of them are to be removed in the courseof making data.

6. ShapeofExpectationCurve
We have considered the expectation curve to be a straight line. But in a sense
it may be of a more complex shape. The expectation curve which the people in themarket have in their minds are not so clear that we can draw them explicitly in agraph. The curve may be a straight line for a very short time in the future while it

may become dim in a far-off future. Or otherwise, at least, it may converge at somelevel like as the normal level of Zannetos.

We will pursue the shape and nature of the curve in a stricter way. Approximately we can imagine that the curve; (1) has an intercept by the evaluation on thecurrent market level; (2) has a rising or falling gradient toward the future for a while ;(3) and in more distant future it may approach a horizontal line with a certain level,(1) The current market level is rather diMcult to evaluate. At the moment a
fixture is reported to us, the news is nothing than a past event. It will only be an

EXPECTATIONS IN THE SHIPPING EXCHANGE
event in the immediate past, when we are going to our own bargaining. Are we going

to determine our own rates higher or lower than that? How do we evaluate themarket level at this instant of time? All depends upon our own critique on thechanges thereafter of the situation that has created the latest fixtures. Informations

at this instant of time are nothing else than what can be now seen and what can be

now heard.
Zannetos adopted the spot rates, as intercept of the ex-post expectation curve,at the moment of or its neighbourhood of the determination. We imagine no such
explicit rates, however, when we consider the real time rate which is a clearer terminal

point of the expectation curve. The problem for us will be at which point on thevertical axis the curve starts, the curve which is formed in the future. "What kindof actual consequences can occupy the same moment as the decision which aims atthem?"{s)A real time rate does also consist of the many fixtures fixed during some spread
oftime, so that it may be an average level evaluated by many parties. But it is obviousthat the rate has consequently given an important effect to their fixtures. We, therefore, want to attach importance to the changes of this factor rather than to the actual
rates.

(2) The prospect on the changing phases of the market levels from the next
moment of the fixture to the foreseeable future may have a direction along a straightline. It is not a mere extrapolation of the past inclination, as Bross says.`6' As far
as it is an extrapolated one, it witl keep a monotonous inclination. We may, therefore,

consider it as being a trend along an almost straight line, unless we think about the
distant future.

Above all, we assume that the expectation curve is formed in the minds of themen in the market. Though they have a huge forecasting organization, their conclusion can only improve their confidence to their own expectation curves, and not
make the curves complex. Of the seasonal fluctuations and of the substantial projects

planned by the important party, broadly known informations are already taken into
consideration in the current market tone, and can add no more complexity to their
expectatlon curves.

(3) How excellent an intuition a man may have, or how scientifically precise a
forecast may be, confidence in them must be much smaller the more it concerns thefar future. For this reason, the farther in the future, the less fixtures are made. As

Zannetos says, they may become rational expectation, and converge at the level oflong-term cost or the long-term stable level. In the far-off future, the expectation(5) Shackle [Z p. 42.
(6) Bross [1] chapter 3.

69

TETSUJI SHIMOJO

70

curve may become dim and meaningless for the market level.
From the fact that the long-term rates converge at a stable level in the distantfuture, we must not conclude that the shorter rates may also be around the converging
line. The shorter rates owe to the expectation curve, while the longer rates have no

explicit curve to owe to, other than the long-term stable level. The shorter andlonger rates are owing to different logics. Zannetos suggested it too, but his long-term rate curve was continuous. Or this may be so because his curve contained noshorter rates which are owing to the expectation curve.

7. The Transient Expectation Curye
One of our motives to take the expectation curves of shipowners and charterers
is to consider how they utilize their own expectation in their bargaining processes.

As it is not convenient for us to assume a curve deliberately complex and to bringdiMculties into our theory, we assume a simple line with a limit of the short prepositive

times. That is, we imagine the expectation curve as representing a straight line whichstarts from a point b on the vertical axis and has a gradient of m, as shown in Fig. I.

At the same time, whichever shipowners and charterers feel the current market
level to be high or low, they may anticipate that the market will be back to a level inthe far-off future. The idea that the current level can never remain as it is for everis very natural without consideration when it may change the level and what level
it may go back to. If so, a man having an expectation curve like AA' in Fig. 5 must
expect the time when the market level will at Iast become static on the level CC' inspite of his evaluation as to the current level. This may be a regulating effect in his

deep mind.
Hence, we face the ambiguity that he will owe to his expectation curve for ashorter contract, and on the other hand, that he will consider a rate of a longer con-tract due to his idea of the static level. What contract duration does he consider as

being long and what short? Without solving this problem, we can not use this theory

A

At-----"-----------"

cFig. 5.

c,

Two Phases of Expectation

EXPECTATIONS IN THE SHIPPING EXCHANGE
in our further study of the bargaining processes. e
At the time when the market is favouring the..shipoiwner,.he can strongly insist
on the rate prospected by his short-term expe.cJation curve. IBut his idea will not be
accepted by a charterer as it. is unless -his. 'b'l e-r- is "a- -vg!y-s-h..grt. and prompt one. The

confidence in his success in the bargaining process depends ubon the prepositive time

; rate near the current level for a contract
length of his offer. He cannot insist on theof longer prepositive time. According to an empirical study(7', it is possible to makea charterer accept the level which a shipowner now believes adequate for a contractof within 3 to 4 months in prepositive time. While a contract of 8 months or morein prepositive time must depend only upon the long-term static level.

The whole phase of the expectation curve which the men in the market havewill be divided into two parts, the short-term and long-term portions. As the prepositive time becomes longer, the curve will gradually shift from the short-term to

the long-term static level. Contracts of within 3 months in prepositive time cansuccessfu11y be on or around the short-term expectation curve, while longer contracts
will be far from it and approach the long-term static level. And at last contracts of

as long as over 8 months will be almost along the latter. We can consider such q
curve for its similarity to be a transient curve. And the rapidity of transition from
(7) Yoshida [10], he computes the total expected entropy from the probability matrices for each

prepositive time. Each matrix contains 3Å~3 combinations of the cases, up, even, anddown, in prospects and results which are extracted from the data we used above. One of
his results will be shown in Fig. 7.

1.cr'x'-SNN.,,O..

.9

.8

.7

tA A

A

N

N,...

X

'V.

.6

x

.5'

.4

rp

x

X<kiv

•---

es
Sa "'

ir-xX NÅ~'Å~.,SS"is..

xr:e. 955'v56

1(:XÅ~ 1957- --IIE : oo 195SN56--••-IV' : A

A 1956-v57 (lst halO.------- V : nm 1955 (2nd half) •--56•vs7

.3

A
hLs

.2

':-Å~)S...x;:.:2=..6'"L'>t•--

.1

o

N
1

234
Fig. 7.

"sx'
Nit. ..N7fblt..e-.
.u"-.5=.-=ie-G;liii4i -- =g=

5 6 7 8 9 10 11 12'?repositive time

Confidence in Expectations

71

TETSUJISHIMOJO

72

A---------i---------------i-----L---

Fig. 6.

.-- N

A Transient Expectation Curve

one to the other is due to the market situation and the personality or the risk preference of those concerned.

A transient expectation curve may be as shown in Fig. 6, which is only a sample.
This curve is drawn for the situation where the current market level is well above
the long-term static level. We will denote the intercept as Actual Level or abbreviateA, and the long-term static level as Normal Level or N. Needless to say, we candraw other curves as for the opposite situation. In general, this curve seems to havethe following characteristics :(1) When the prepositive time is very short, this curve coincides with the short-term expectation curve with an intercept at A.

(2) When the prepositive time is adequately long, the curve will approach thenormal level or the long-term static level without limit.

(3) The curve may be real in every point between the case (1) and the case (2),and no point can be away from its neighbourhood. Thus we can assume thiscurve as being continuous.

8. To a Bargaining Process Model
The transient expectation curve with these characteristics can express better thebull and bear attitudes or the risk preference than the linear expectation curve. Fig.

6 is of a rather extreme case, where the short-term expectation is in an upswing inspite of the high tone of the current market-a very bu!lish case. We can draw an
infinite number of curves between the finites A and N. In any way, orie of thesecurves will be an initial condition of the bargaining process. The ideas of the shipow-

ners and charterers will be drawn from their own curves, and then, they step up toeach other in the bargaining process. What we want to do with these tools is to trace
the process and to find out the factors affecting the final fixtures.

The transient expectation curve is an assumption to be used jn observing theprocess through which a man creates his idea. We suppose that everybody has always

his own rate schedule corresponding to any variation of the prepositive time toEXPECTATIONS IN THE SHIPPING EXCHANGE 73
propose a rate idea whenever he is requested to do so. The transient expectation curveis also considered to be a locus of the points which will give him the same utility ofcontracts offered by others. This fact can mean an indifference curve. The theoreticaltracing of the bargaining process can be made along the meeting process on theindifference surfaces of both shipowner and charterer.
There are still some diMculties in the empirical inquiries to this theory. It will

be rather easier to assume an equation satisfying the various conditions, than toestimate parameters from actual data, to interpret them, and to extract inforrnations
needed for market forecasting from changes of the parameters. These will be investi-

gated more deeply at another occasion.

REFERENCES[1] Bross, Irwin, D. J., Designfor Deeision, New York, 1953.
[2] Lewis, Arthur, "The Interrelation of shipping Freight," Overhead Costs, London, 1951.

[3] Maeda, Yoshinobu, "Relation between Freights and Charterages" (in Japanese), KOnan
Ronshu, No. 5, Dec. 1954.
[4] Maritime Research Inc., Chartering Annual, 1955, 1956 and 1957.
[5] Sawa, Sempei, Introduction to Shipping Dynamics (in Japanese), Tokyo, 1962.

[ol , Economics of Elasticity (in Japanese), Tokyo, 1967.
f7] Shackle, G. L. S., Decision, Order and Tiine in Human Affairs, Carnbridge, 1961.

[8] Shimojo, Tetsuji, "The Quantitative Analysis of Shipping Markets-A Survey weighting on
Japanese Works-," Annual Review of Kobe University of the Mercantile Marine, Jan. 1973.
[9] Weston, W. G., "Short-term Freight Market Forecasting," PVestinform Shipping Report,

No. 50, 1955.
[10] Yoshida, Shigeru, "Risk Preference in the Shipping Markets" (in Japanese), not published.
[11] Zannetos, Z. A., The Theory ofOil Tankship Rates, MIT Press, 1966.

INTERNATIONAL CAPITAL MOVEMENTS AND
REAL CAPITAL ACCUMULATION
Kazuhiro IGAwA

In treating the topic of real capital accumulation in an open economy, we mustat the start clarify a number of points. This is because there is a vast literature ex-plaining rather different economic phenomena within the framework of using similarterminology, which would involve us in a waste of time to understand completely.
(i) International capital movements: In some literature this term refers to direct
foreign investment. It is usual in such literature that real capital moves internationallyand the marginal productivity of capital is equalized in every country. In considering

the actual world economy, however, it is more acceptable to interpret such capital

movements in two steps: real capital investrnent and portfolio investment. Real
capital movements can be interpreted as an increase in investment of real capitalin one country which is financed by portfolio investment of foreign counuies, anda disinvestment of real capital in other countries with a corresponding decrease inportfolio investment in the first country.

(ii) International portfolio investments are listed in the capita1 account in thebalance of payments accounts, and movements of capital goods, some parts of which
may be caused by direct investment, are kept in the trade account. Thus it is moreconvenient to confine the term "capital movements" to the international portfolio
movements and we will use the term in this context.

(iii) Capital accumulation could include not only real capital accumulation but
also financial assets accumulation. But it is better to use this term only for realcapital accumulation. This is because we easily can capture an accumulation offinancial assets, by looking at international portfolio movements. Thus, we reserve
the term "capital accumulation" to refer to real capital accumulation.

Taking into account the above three points, we will show how international
capital movements affect capital accumulation in a more realistic world. First we
will investigate capital accumulation in a world of no capital movements in order tomake clear the effects of capita1 movements. We will find that the capital accumulation process is affected by international trade, but its long run equilibrium (station-ary) level is not affected. Next we will introduce international capital movementsin the model and will find that not only the process of capital accumulation but also
the long run stationary level of real capital are affected by capital movements.

KAZUHIRO IGAWA

76

I

We can set up the following simple model to investigate the fundamental relations of capital accumulation in an open economy.

(1) Goods and assets are aggregated into four classes. One is goods which canbe used either for consumption andlor investment. Second is real capital which isa fundamental factor for production. Third is bonds which are issued to correspondto the stock of real capital. Those goods, bonds and real capital are homogeneousamong different countries. The fourth is money, and under the fixed exchange rate
system money can be treated as if it were internationally homogeneous.

(2) Perfect competition prevails in all markets, and the three types of economic

agents in our model behave as follows. Households act so as to maximize theirutility; firms produce goods in an eMcient way and also decide an investment (increaseor decrease of real capital) ; the government, including the monetary authority, determines policy variables,

In this context, we can assume the following supply and demand functions
for a closed economy, which are familiar from the usual economics textbook.
(i) Supply of goods: the aggregate production function is(1) X==F(K)dFldK==FK>O
d2F/dK2=FKK<O
where X is output and K is real capital.

(ii) Demand for goods: aggregate demand for goods is the sum ofconsumption,
investment and government expenditure, and can be expressed in real term as(2) D=D(r, y, a)
and OD/Or==D,<O
OD/Oy=D,<O
OD/Oa==Da<O
where r is the rate of interest on bonds, y is real income and "a" represents realbalances, that is, y= Y/P and a==M/P, where Yis the level of money income, M isnominal money supply level and P is price level of goods.

(iii) Supply of bonds: bonds are issued exactly corresponding to real capital,

which can be interpreted as a specific way of financing investment. Thus we canconsider K as the supply of bonds.

(iv) Demand for bonds: aggregate demand for bonds can be expressed in asimilar way to equation (2), asINTERNATIONAL CAPITAL MOVEMENTS AND
REAL CAPITAL ACCUMULATION(3)B =B(r, y, a)

OB!Or=Br>OOBIOy==B,>O
OB/Oa ==Ba>O
where B expresses the units of bonds. The rate of interest on bonds is expressed as
the ratio of interest payment per unit of bond to the price of bonds,

r--R/ewhere R is the interest payment per unit of bond which correspond to unit of realcapital and e is the price of a bond. R is detemined by the value marginal productivity of real capital and can be expressed as R=PFK.

(v) Supply ofmoney: under a flexible exchange rate system the supply ofmoney
is a policy variable, but under a fixed exchange rate system it is determined endogenously, refiecting balance of payments surpluses and deficits.

(vi) Demand for money: the aggregate demand for money can be expressed inreal terms as(4) L=-L(r, y, a)while the demand for money in value terms is PL.
Using the supply and demand functions of above, we can get market equilibrium
relations in a closed economy as follows.

(i) Goodsmarket(5) X=D(r, y, a)(ii) Bondmarket(6) K==B(r, y, a)(iii) Moneymarket(7) M-=PL(r, y, a)
Assuming no government taxes, disposable income becomes

y=- Y/P-= F(k)Alternatively to the interest rate on bonds, we can use the relative price of bonds togoods, this is because,

r=R12=FKP12=FKIq whereg==e/P
One of the three equations (5), (6), (7) is not independent, in view of the constraint

expressed by Walras' Law,(8) y==D+q(B-K)+(L-a)
We can call this short run (temporary) equilibrium, and from the equilibrium conditions we can determine the price level of goods and the interest rate on bonds,
given level of real capital and money supply and assuming the existence and stability

77

KAZUHIRO IGAWA

78,

of the system.

K and M can be treated as exogenous in the short run but will be endogenous
in the longer run. Mis policy variable in a closed economy and we can assume that
it is a constant. A change in the level of real capital is determined by the investment

functjop. Firms decide on their plans to invest, considering future profits, and in a
simple case, this can be expressed as follows.

(9) .K=I(r, K)
11,<O, IK<OWhen real capital and money supply do not change any more we will call it long run(stationary state) equilibrium, From the short run relations we can consider r as afunction of K, and we will get long run equilibrium real capital stock K, by putting
k equal to zero, if the system is stable.

II

Before considering the goods market in an open economy let us assume that thecountry is in a situation of long run equilibrium, that isI}t='.D' fKt'-/tK'"(`'R'

whereais thelong run real money supply andfis the long run interest rate on bonds.

Let us first consider the case ofa small country. When the country begins to
trade, it will export (or import) goods if the domestic price level of goods is lower(higher) than the world price level. Corresponding to the balance of trade, themoney supply of the country will increase or decrease, under a fixed exchange rate

system or gold standard exchange rate system. Given a world price level P", theshort run equilibrium conditions become as follows.

(5-1) X=D(r,y,M!P")+T(6rl) K =B(r, y, M/P ")where Tis the balance of trade. From these equations r and T (instead of P) aredetermined, given M, K and P" and assuming the markets to be stable.

The dynamic adjustment equations are(9) rt-=I(r, K)(10). M==P*T
assuming for simplicity that the dynamic adjustment is stable and non-oscillating,the adjustment process wM be as follows. If the initial price level P is lower that P*then Tis positive and r will become higher than F, considering equation (6-1). Thus,INTERNATIONAL CAPITAL MOVEMENTS AND 79
REAL CAPITAL ACCUMULATION

k is negative and th is positive, at first stage. When K becomes suMciently low, r.
will become lower than before and becauseof these two, K will become zero. But,
M is still positive and r becomes further low level and rt will become positive, inlater stages of adjustment. Increases in M-make T (and M) small and increases in K
make rt small. Since the long run equilibrium situation is the same as before, thevariables will return to the same values as before, a, ,l9, F, in equations (L. R), exceptthat P becomes P" and M becomes M".
If P is higher than P" then the reverse adjustment will occur, that is, M will
become M" which is smaller than before and K will increase at first and return (at alater stage) to the original level .1?. The long run equilibrium situation is the same

as before. This is the well known gold specie-flow mechanism and it is not surprisingthat even in the non-small country case, the same thing happens and the only difference is that P" is determined in the system.

In the case of flexible exchange rates, the foreign exchange rate changes so as tobring about a balance of trade equilibrium. As can be easily seen, we would get thesame long run equilibrium situation under a flexible exchange rate system.

llI

So far we have considered the case where only commodities are traded internationally. If international capital flows are allowed; the situation will be different

even in long run equilibrium. This is mainly because a balance of payments equilibrium does not necessarily imply an equilibrium of the trade account itself. It is
possible that the trade account is positive (or negative) and the service account isnegative (or positive) because of internationa! net negative (or positive) indebtedness,and the balance of payments is in equilibrium.

First we will consider the small country case. The short run equilibrium conditions are :(5-2) X=D(r",y,MIP')+T(6-2) K= B(r ", y, M/P")+C
where C is bond holdings by foreign countries, if it is positive. If C is negative, it
expresses holdings of foreign bonds by this country, in terms of the unit of bond of

this country. We can determine C and Tgiven K and M and the world price P" andthe world interest rate r'.

We must note two points regarding the above equilibrium conditions. First,
the existence of an internationally homogeneous bond does not imply that the priceof the bond itself is equal but rather implies that the interest rate for the bond isequal, so that if the marginal (value) productivity of capital is higher in this country

than that for the world, then the bond price of this country is higher than the world

KAZUHIRO IGAWA

80

price. Thus, the marginal productivity of capital is not necessarily equalized acrossthe world. Secondly, in disposable income we must now include international interest
payments or receipts. This will give us equation (11),(11) y-F(K)-FKC
where FK reflects the fact that the real interest payment for unit bond is determinedby the marginal productivity of real capital. We must note that the rate of intereston bonds is adjusted through a change in the price of bonds, as mentioned above.

We will now determine the effects of a change in M and K on the short run
equilibrium value of C and T. These effects are usefu1 for an investigation of the

dynamic adjustment mechanism. From equations (5-2), (6-2) and (11), we will
get the following simultaneous equations.

(i2) [6,:.D;,Ff] [SZ]..[{7 :.D,y[.Fi:.F:.C),]dK+[:B:,i.P,"]dM
which in turn yielddT 1 FK-Dy(Fx-FKKC) -DyFK(13) dK ='2in 1 -B.(FK-FKKC) 1-ByFK

dC 11 FK-Dy(FK'FKKC)(14) dK =='Z o
1 -B.(F.-FKKC)

dT 1 -DaP"(15)
dM=-A -B.P" 1-ByFK <O-DyFK

dC 1 1-DaP"(i6) dM=7 o-B.p* <O

where A.,.1-DyFK <oO 1- B,FK
If it is assumed that FKKC is very close to zero, then dT!dK, and dCldK become
positive. On the other hand dT/dM and dC!d714 are negative. These can be explained
as follows.

(i) An increase in real capital will normally increase disposable income, and thedemand for goods and bonds. But the increase in the supply of goods and bonds
will be greater than the increase in domestic demand for them, because the income
effect is normally positive and less than one. Therefore foreign demand for goods
and bonds must be increased to attain market equilibrium.

(ii) An increase in the money supply increases real balances, which in turnincreases the domestic demand for goods and bonds; therefore the foreign demand
for goods and bonds must be decreased to clear the market, because the supply does
not change.

Dynamic adjustments are expressed as

INTERNATIONAL CAPITAL MOVEMENTS AND 81
REAL CAPITAL ACCUMULATION(9-1)e K=I(r",K)- M=P"L(r*,y,M!P")-M(10-1)
where M is equal to the balance ofpayments surplus (or deficit) and we are familiar

with this relationtquation (10-1)-in the monetary approach. Linearizing thesedifferential equations and we obtain the following coeMcient matrix.

[IpK*Lp(F.-F.Kc-FKCK) Laww?]
where CK==dC/dK
The trace of this matrix is negative and the determinant is positive. Thus the equilibrium is locally stable. The phase diagram is shown in Fig. 1.

.K==O

M

n

r

.M=O

M
----------------------

li

u
o

R

K

Fig. 1

If we can assume that P"L,(FK-FKKC-FKCK) is everywhere positive and (L.-1)
is everywhere negative, this system is also globally stable. By taking the discriminant(D) i.e., (traoe)2-4(determinant)D == (IK +La - 1)2 -4IK (La- 1)=(IK -La + 1)2 ;lll O

We know that both roots are real and in the adjustment process there are no oscillations.

IV
As the dynamic adjustment path does not oscillate, it is easy to see the propertiesof the adjustment process if we know an initial position. Let us make clear the initial

and terminal situations. A long run equilibrium. can be obtained, putting K=O and.
M=O.
Including short run equilibrium conditions and given P* and r", we will get

KAZUHIRO IGAWA

82

following long run equilibrium conditions with capital movements.

F(K)=D(r", FK(K)= FKC, M/P")+T
K=B(r", F(K)-FKC, M/P')+C(17) I(r", K)=O

(18) F.C=:T
K=-k, M-M, c==6, T==T
The last equation can be obtained by putting ?lir and k equal to zero in the following

relation, which is known as Warlas' Law.

(lg) p*(y-D)+e(K-B)+Al-o
The initial situation is in long run equilibrium without capital movement given
P', that is

F(K)=D(r, F(K), M/P")
K=B(r, F(K), M/P")(17-1) I(r, K)==O(18-1) T==O
K==k, M==Al, r==f
Although the last equation (18-1) can be derived from the first equation, we include
it to make clear the difference between the two situation.

Adjustment processes are as follows. When the home country begins to allow
for capital movements, foreign investors will buy domestic bonds if the interest rateon bonds is higher in the horne country than in the foreign countries. That is, ifr>r*, then C>O. Because of the decrease in the interest rate, the demand for goods
will increase and the trade account will worsen (T<O). But the balance of payments

will be positive, because the demand for. money has increased, and M>O. The lowinterest rate also brings positive investment and k>O. If the initial shock from
capital movements is not very strong, non-oscillating adjustment mechanism graduallyproceeds. In a later stage, the trade account will become positive, and must it be so,

because of the increase of real capital and the increase of interest payments to theforeign country. The capital fiow will be positive C>O as K>O, but in the long run

it becomes zero, and we will get the situation of k=O and M==O.
If r<r*, then the reverse adjustment will occur, that is, AZf<O and rt<O during
the adjustment process.
This implies that if r>r" (r<r") then the initial position of K and M are in thearea below (above) the line M= O and to the left (right) of the line K==O, in Fig. 1.
What determines the relative size of the interest rate on bonds, will be discussed in
the following section.

In the non-small country case, we cannot get as simple result for the dynamicINTERNATIONAL CAPITAL MOVEMENTS AND 83
REAL CAPITAL ACCUMULATION

adjustment process as that above. In this case, not only the price level but also theinterest rate will be adjusted so as to clear the markets, and a similar adjustment
process may be followed for the long run interest rate and for the long price level.

But, taking into account the fact that both countries (in two countries case) are
accumulating real capital, the adjustment process will not be simple, and the conditions that the roots of the differential equations are real will not be satisfied evenin the case when the system is globally stable.

Comparing the initial situation, i.e. Iong run equilibrium without capital fiows-

which is also a long run equilibrium for a closed economy-with the final situation,i.e. Iong run equilibrium with capital flows, we can see that the two equilibrium
situations are different except for the trivial case in which the price of goods and theinterest rate on bonds do not change.

It is diMcult to decide whether capital movement will or will not produce awelfare gain for the home country. We can show this by using Fig. 2 and Fig. 3.

(K)

(K)-

l-.IT

=

t

l"-1----

Tl

,

llC-

-i-t

:

:

:

:

f

o

IK-

;:

i-

1

1

:

l

;l
:,

o
t

l
ll

t

'

,

.-l
KI:

K

,
}'

l'

::

l:

;

:t

t

:

,

5

e

a

r

r

e

a

6

FK

Fx
Fig. 2

Fig. 3

We make the simplyfying assumption that the marginal productivity of capital is--- -- A-

constant. Initial income is given by the rectangle OKar, in short (Oa). The longrun equilibrium output and income are given by the rectangle (05) and (06) res-pectively, point j is obtained by using the relation that T is equal to FK6. As vvill
be easily seen if point e is to the left to point a, this country will suffer a welfare loss,

measured by income. We can make the case that this country will have a welfare
gain, when point j is to the right of point a. A more complicated analysis would
be called for, if we were to consider the case of a decrease in the marginal productivityof capital.

K

IGAWA
KAZUHIRO

84v
As a concluding section, we will discuss the following two points.

(i) We found, in the previous section that the international trade of goods does

not of itself change the long run equilibrium situation. Thus, most of the policy
interest will be on the process of adjustment. But capital movements will alter thelong run equiljbrium position and the welfare level of the country. Therefore, in thiscase, it is natural for the country to choose policies that will prevent unfavorable

effects from capital movements, by looking at a welfare level measured by income or

by looking at optimum capital accumulation level, or some other indices. It will
also be important to follow policies which reflect a desirable adjustment process eventhe long run equilibrium is a desirable situation.

(ii) In the previous section, we discussed the adjustment process of two alternative

situations, i.e. r>r" and r<r", without explaining why it happens to be the case.

This is a similar problem to the "comparative cost" or "Heckscher-Ohlin" trade
theory, and the problem in this context is what gives rise to the difference in interest

rates on bonds among countries. We do not intend to give a complete answer to thisquestion in this paper, however, we will mention three causes which explain it. One
is an investment function. If capital accumulation is higher (lower), because of ahigh (low) investment rate, the marginal productivity of capital will be lower (higher)

and the interest rate on bonds will be lower (higher). Another is the technique of
production. If at the same real capital level, the marginal productivity of capital ishigher (lower) in some country, then the interest rate on bonds will be higher (lower)

in that country. The third factor has to do with the demand for bonds. If demandis relatively biased (not biased) toward bonds then the interest rate on bonds will
be lower (higher), because the price of bonds wjll be hjgher (lower). The interest rate

will also be affected by the stage of financial development and by the institutional

financial mechanism itself. To tackle the problem from the financial side it isnecessary to use a model which treats mainly financial assets and financial institutions, which is beyond the scope of this paper.

REFERENCES[11

S. Fischer & J. A. Frenkel, "Investment, the Two-Sector Model and Trade in Debt andCapital Goods," J. Int. Ecan., Aug. 1972, 2.

[2]

J. A. Frenkel, "A Theory of Money Trade and the Balance of Payments in a Model of Accumulations," J. Int. Eeon., May 1971, 1.

[3]

E. Sakakibara, "A Dynamic Approach to Balance of Payments Theory," J. Int. Econ., Feb.
1975, 5.

THE LEGAL SYSTEM OF THE FREE MOVEMENTOF WORKERS AND MIGRATION TRENDS
IN THE EUROPEAN ECONOMIC COMMUNITY
Kunio SoH
The purpose of this study is to go into the EEC's legal system on the free move-

ment of workers and the migration movement in the European Economic Community.
EEC's provisions and legislations on the free movement of workers will be describedin the first and second part of the study, and the migration movement of the Community will be examined in the third part, in the fourth part conclusions will besummarized.
I. Workers and Social Objectiyes of the Community

The purpose of the EEC is not to attain merely economic objectives which
would have the effect of improving the living conditions of the nationals of theMember States, but also to fulfi1 social objectives laid down by the Treaty. In thefirst phrases of the preamble to the EEC Treaty the heads of state of the six signatory

governments declare themselves on the social objectives of the Community as follows :RESOLVED to ensure by common action the economic and social progress of theircountries by eliminating the barriers which divide Europe,

AFFIRMING as the essential objective of their efforts the constant improvementof the living and working conditions of their peoples,

ANXIOUS to strengthen the unity of their economics and ensure their harmonious
development by reducing the differences existing between the various regions andthe backwardness of the less favoured regions.

Article 2 of the EEC Treaty from this standpoint provides that the Community
shall have as its task, by setting up a common market and progressively approximat-

ing the economic policies of the Member States, to promote throughout the Community-a continuous and balanced expansion of economic activities, an increasein stability, an accelerated raising ofthe standard ofliving-. Article 3 ofthe Treaty

further provides that the activities of the Community, for the purposes set out in

Article 2, shall include, on the conditions and in accordance with the time-tableprovided in this Treaty:-(c) the abolition, as between Member States, of obstacles

to freedom of movement for persons;-(i) the creation of a European Social Fundin order to improve the possibilities of employment for workers and contribute toKUNIO SOH

86

the raising of their standard of living-.

From this it is clear that the objectives of the social character of the Community

are ranked very high amongst the aims of the Community,(" although the legal
framework of the Community's action in the social field is less rigid, except in somepoints more directly linked with the attainment of the common market.

II. EEC's Provisions and Legislations concerning theFree Movement of Workers
In pursuit of the objective of the abolition of "obstacles to the free movementof persons-" as defined in Article 3 (c), EEC, the Treaty seeks to secure within its
territorial application the operation of a principle of non-discrimination in regard

to wage-earners and persons subject to a contract of employment contained in
Articles 48 to 51, EEC, under the chapter heading "Workers," while self-employedpersons are subjected to the rules on freedom of establishment contained in Articles

52 to 58, EEC, under the chapter heading "Right of Establishment." The free movement of "Workers," therefore, relates only to persons who are employed by others
and not to those who are self-employed.
The free movement of persons, more specifically, of workers, is one of the "fourfreedoms" of the EEC. In an economic unit such as the Community and in an
economically and technologically changing society, the use of manpower is an im-

portant measure, and thus workers must be able to move wherever they are mostneeded. Arts. 48 to 51 lay down the principles for the free movement ofworkers andprovisions for the social security of Community migrant workers.(2' The problemson the social security for migrant workers will not be dealt with in this study.

Art. 48 establishes a framework of guide-lines which seek to identify and thence

to remove the obstacles to the common policy of the Community which are to befound in many types of national legislation which discriminate against the foreign

migrant workers.
Art. 48 (1) provides that this freedom of movement is to be secured by the endof the original transitional period "at the latest." As this is in absolute terms, theArticle may perhaps be considered to have become directly applicable with the expiryof this perjod on December 31, 1969. In fact, a series of Regulations and Directives

were promulgated and issued between 1961 and 1970 in order to meet the demands(1) It wou}d seem that the provisions of Article 2 have to be read and applied in the same way

as the comparable provisions of Arts. 2 and 3 of the ECSC Treaty.
(2) The general scope of the Articles 48 to 51 is more comprehensive than the isolated provisionsof Art. 69 of the ECSC Treaty and Art. 96 of the Euratom Treaty which deal only withspecialised categories of workers from the relevant industries.

87
THE LEGAL SYSTEM OF THE FREE MOVEMENT OF WORKERSANDMIGRATION TRENDS IN THE EUROPEAN ECONOMIC COMMUNITYof this time-table.

Art.' 48 (2) defines the freedom of movement as entailing the abolition of any

kind of discrimination based on nationality between workers of Member States asregards employment, remuneration and other conditions of employment. But, thisArt. 48 (2) does not define "workers ofthe Member States" nor qualify this expression

by reference to skilled, serni-skilled, or unskilled occupations. According to thejudgement of the Community Court, the "workers" concerned include all empolyees,
not merely manual workers;(3' and the concept of workers arises not from internal

national law but from Community law and not only a present worker but also one
who, having left his job, is capable of taking another.`" On the other hand, theconcept of the worker concerned also is applied to the phrase "wage earners andassimilated workers" according to Art. 4(1) of Regulation 3 of 1958 (O.J. 1958, 561),
but in that context of the phrase it is interpreted in relation to the social security

matters with which Art. 51 of the Treaty and Regulation 3 are concerned.

These "workers of the Member States" are nationals of Member States of theCommunity as defined in the Regulation 1612168 (O.J. 1968, L257/2), but by a
Decision of October 15, 1968, the Council of Ministers made Arts. 48 and 49, EEC,
and their implementing instruments appHcable to French Overseas Departments,`5'
pursuant to Art. 227(2), EEC, and in practice stateless persons and refugees who

reside permanently in one of the Member States are based on equal footing withnationals for the purpose of social security.(6'This restriction of the concept of workers in Art. 48 to nationals of Member

States is applied in the United Kingdom, the Republic of Ireland and Denmark asfrom January 1, 1973. However, as to the U.K., the defination of "nationals" and"nationals of Member States" or "nationals ofMember States and overseas countries
and territories," according to a Declaration (annexed to the Accession Treaty) by
the U.K. Government, are to be understood to refer to:(a) persons who are citizens of the U.K. and Colonies or British Subjects notpossessing that citizenship or the citizenship of any other Commonwealth country
or territory, who, in either case, have the right of abode in the U.K., and are therefore

exempt from U.K. immigration control; and(b) persons who are citizens of the U.K. and Colonies by birth or by registration
or naturalization in Gibraltar, or whose father was so born, registered or naturalized.

As a result of the Declaration, it is clear that many who are in every ordinary

(3)

(4)

Vaasen-G6bbels v. Beambtenfonds voor het Mljnbedrijf (1966), C.M.L.R., p. 521.
Unger v. Bestuur der Bedrijfsvereniging voor Detailhandel en Ambachten (1964), C.M.L.R.,
p. 319.

(5)

The French Overseas Departments are Martinique, Guadeloupe, Reunion, and Guiana.

(6)Reg. 3/58, Art. 4; Reg. 1408/71, Art. 1(d), (e).

88

KUNIO SOH

sense and in law citizens of the U.K. should be excluded from the freedorp of movement that all other Community citizens are to enjoy.("
Art. 48(3) enumerates the rights arising from the principle of non-discrimination

stated in Art. 48(2), and subjects them to justifiable limitations imposed by thehost Member State on grounds of public policy, public security and public health.

The principle of non-discrimination in the employment of workers assures equal
opportunities without differentiation in the recruitment of workers by allowing
the acceptance of specific offers (Art. 48(3), (a)), except where the special nature ofthe
position to be fi11ed is inextricably linked with certain linguistic requirements. It also

includes the right to move freely in the Member States of the Community of Workers
who have been so recruited (Art. 48(3), (b)), to reside in any such Member State inorder to carry out duties under the contract of employment (Art. 48(3), (c)) and,most important, to remain there at the end of the term of employment subject toconditions to be drawn up by the Commission (Art. 48(3), (d)).

Art. 48(4) restricts the application of the prescribed freedom of movement by
excluding from its ambit those employed in the public service. There is no definitionof "public service" in the Treaty, but practice suggests that free movement extends
to nationalized industries, whereas workers in public service or nationalized industries

are less likely to move from country to country.

In order to establish effectively the freedom of movement for workers Art. 49,
EEC, makes it clear that the principle of free movement ofworkers was to be achievedby progressive stages, as defined in Art. 48, in particular:(a) by ensuring close collaboration between national employment service;(b) by systematically and progressively abolishing such administrative proceduresand practices and such qualifying periods for eligibility for available employment

which are provided by domestic legislation and agreements previously concluded
between Member States as an obstacle to the freeing of workers' movements; or(c) for free choice of employment;and(d) by setting up a system for the communication of job opportunities and abalancing machinery to equalize supply and demands, in such a way to avoid serious
threats to the standard of living and of employment in the various regions and industries.

According to the provision of Art. 49, EEC, the Council is empowered to issue
directives and regulations to this end, acting on a proposal from the Commission
after consulting the Economic and Social Committee, so as to secure the implementation of the principle of free movement of workers defined in Art. 48, EEC.

(7) See W. R. B6hning, The Migration of Morkers in the United Kingdom and the European
Community, 1972, pp. 316-69.

THE LEGAL SYSTEM OF THE FREE MOVEMENT OF WORKERS AND 89
MIGRATION TRENDS IN THE EUROPEAN ECONOMIC COMMUNITY
The implementation of the free movement for workers can be divided into three
discernible stages, each stage being governed by a Regulation of general application.

The first stage was inaugurated by the issue of Regulation 15 of August 16, 1961,
O.J. 1961, 1073, followed by Regulation 18 extended the scope of beneficiaries of thefreedom ofmovement to actors and musicians. Regulation 15 was replaced by Regulation 38/64 of March 25, 1964, O.J. 1964, 965 (the second stage) but was not superseded in substance, and Regulation 18 is still in force. The final solution upon theend of the transitional period was provided by Regulation 1612/68, O.J. 1968, L25712,

whereby Reg. 38/64 was replaced. The Reg. 1612168 has been supplemented by aCommission Regulation 1251!70, O.J. 1970, L14214. A Directive on the abolition of

restrictions on the movement and residence within the Community of workers ofMember States and their families was adopted with each Regulation, the existing
one being Directive 681360, O.J. 1968, L257f15. The principal contents of Regulationof each stage will be laid down as follows:(1) In the first stage, Regulation 15 and a Directive of the same date soughtto (a) abolish quota restrictions on labour movements between Member States,
provide for the obtaining of specified occupation work permits from the intend host

Member States, define the rights of migrant workers in regard to dismissal, tradeunion membership or aMliation, and in respect of their dependent family; and (b)to harmonise varying national rules within the Coinmunity as to documents to be
carried by migrant workers and their dependants.`B' In addition, in order to coordinate inforrnation and resources with regard to job availability and the state of

the Community labour market in general, a European Co-ordination OMce, anAdvisory Committee, and a Technical Committee were set up. In the stage, thepriority of the national labour market for an initial period of three weeks was allowed

by Reg. 15. But, an exception was made in respect of specified job offers made to

named individuals who were nationals of other Member States; in such a case thenamed individual could accept the job offered at once.

(2) The second stage was based upon Reg. 38!64 of March 25, 1964 and a Directive of February 25, 1964 (O.J. 1964, 240). Reg. 38164 allowed migrant workers tochange jobs after two years (in Reg. 15 four years) abolished the minimal initial
three-week national labour priority defined in Reg. I5. However, a safeguard provision was included (Art. 2) to persuit the Member State to reintroduce a limited
national labour market priority of two weeks for periods of three months at a time,(8) In this phase, special groups, such as frontier workers, seasonal workers, actors and musi-cians were not covered by Reg. 15, they were included in the latter Regulations 18 and38/64.

KUNIOSOH

coin the event of an exoess of labour in a particular region or industry,`9' But, thesafeguard did not affect frontier workers or offers of positions to individually-named

workers. The right of the migrant worker to be accompanied by members of his
family was extended so as to comprehend, in addition to his spouse and minor
children, other dependent children and dependent ascendant relatives. Directive
64!240 required modification of national rules on residence permits so as to allow

the holder of such a permit to move anywhere within the host country for which it
was issued. The validity of residence perrnits was also required to be co-extensivewith that of work permits.

(3) In the third phase, Reg. 1612/68, which came into force on November 9,
1968, replaced Reg. 38164 in its entirety and provided, for the first time, a general

legal framework for the accomplishment of the objectives of Art. 48, EEC. The
basic principles of this Regulation, as laid down in the first article, may be quoted
here:"1. Any national of a Member State, irrespective of his place of residence, shallhave the right to take up an activity as an employed person, and to pursue suchactivity within the territory of another Member State in accordance with theprovisions 1aid down by law, regulation or administrative action governing theemployment of that State,
2. He shall, in particular, be eligible for employment vacancies in the territoryof another Member State with the same priority as nationals of that State."
From this basic principle, Reg. 1612/68 covers all wage earners, including frontier

and seasonal workers, the worker's spouse and children under 21 years of age or who

are dependent upon him, if they pursue a wage earning activity, under equal conditions of employment. National workers no longer enjoy any priority, subject tocertain important safeguards. A Community migrant worker is entitled to national

treatment concerning housing in the host country. He may acquire ownership of ahouse and is entitled to be placed on the waiting list for houses, not only for himself

but also his family. Equal access must be given to vocational training, schooling forhis children. Community migrant workers are entitled to unrestricted membershipin trade unions and have the right to vote. Formerly after three years and now fromthe inaugurating of their employment, they can hold oMce in the union, except when
(9) The safeguard clause defined in Art. 2 of the Reg. 38/64 was invoked by the Netherlands
for the province of Overijssel for all oocupations between April 1967 and April 1968, by

France for certain areas and cHcupations up to July 1968 (in 1963 France maintained
priority for French nationals as labourers, oMce workers and shop assistants throughout
the country) when the American bases were closed and by Belgium for surface and underground miners in the provinces of Limbourg, Hainault and Liege. See H. ter Heide, theFree Movement of Workers in the Final Phase, C.M.L.R., Vol. 6, No. 4, .1969, pp. 466-67,
and A. Campbell, Common Market Law, Vol. III, 1973, p. 141.

AND
OFTHEFREE MOVEMENT OF WORKERS 91
SYSTEM
THE LEGAL
IN THEEUROPEAN ECONOMIC COMMUNITYMIGRATION
TRENDS
it is combined with governing functions. All individual or collective contracts of

employment which discriminate in their terms against Community workers in so
far as acoess to employment, employment itself, wages or other conditions ofwork ordischarge are concerned, are void by operation of law.

Directive 68/360, which accompanied Reg. 1612!68 on the same date (O.J. 1968,
L257113) provided for the issuance ofa "Residence Permit for a National ofa Member
State of the EEC," on production by the worker of a valid identity or passport and a

declaration from the future employer, to migrant worker.(iO' The residence pemit
will be valid for a period of at least five years throughout the territory of the hostcountry and will be automatically renewable. The permit may not be withdrawn only
because of the holder is no longer working. The validity of the residence permit is

not affected by an absence abroad up to six months or due to the performance ofmilitary service.`"' The contract ofemployment does not lose its validity as a resultofillness, accident or involuntary redundancy affect it. Seasonal workers and workers

whose employment is restricted to a period of between three and twelve months are
permitted to accept temporary residence permits.`i2' If the worker has been involun-

tarily unemployed in the host country for more than twelve consecutive months, theresidence permit may be limited to a period of not less than twelve months at thetime of the first renewal.

Thus, it may be said that the principles of free movement of workers have beenaccomplished since the end of 1968. However, the right defined in Art. 48(3), (d)"to remain in the territory of a Member State after having been employed "in that

State..." was not covered by Reg. 1612/68. Reg. 1612/68 covers the case where a

Community worker has taken up employment in another Member State and wishes
to remain either when out of work due to accident, illness or involuntary unemployment or in order to take up another employment, while the Regulation fails to makeprovision for the case where the worker desires to continue his residence in theMember State after his retirement on reaching the age limit, after premature retire-

ment owing to an industrial accident or an occupational disease, or if he takes up

employment in an adjacent Member State. Moreover, it does not regulate theposition of the surviving spouse and of the members of the family residing with the(le) There is, however, an understanding by the Council that in order to forestall abuse of thisprovisions, a residence permit, which is still required, should not be issued if the worker
has not found employment within three months, i.e., the unsuocessful job-seeker could betreated after three months as a tourist who had overstayed his permission to stay. See
B6hning, op. cit., p. 15.

(11) WUrttembergische Milchverwertung-Sad-Milch AG v. Ugliola (Case 15/69) C.M.L,R.,
1970, p. 194. See Campbell, op. cit., p. 539.
(12) No residence permit is required if the migrant or seasonal worker enters for a period ofless than three months. See K. Lipstein, The Law of the European Economic Cemmunity,

1974, p. 90.

KUNIO SOH

92

worker.

For fi11ing this gap mentioned above, Commission Regulation 1251170, O.J.
1970, L142f24 provides that any Community migrant worker may continue to remainin that Member State if:(a) he has reached the qualifying age for an old age pension and has been employedin the host state for at least the last twelve months, and resided there continuously

for more than three years; or(b) ceases work because of permanent incapacity to work, provided he has resided

there for more than two years (no condition is to be imposed as to the length ofresidence if the incapacity arose from an industrial accident or occupational disease) ;or(c) been a frontier worker (namely retaining his residence in the territory of thefirst state to which he returns, in principle, each day or at least once a week) after
three year's continuous employment and residence in the territory of that state.

The requirements of qualifying period of residence and employment under (a)or of residence under (b) are waived, ifthe worker's spouse is a national of the Member

State concerned. The same privilege is granted to members of the worker's family
who resided with him before he died in the host state, provided that the deceased
resided there continuously for two years, or if his death was due to an industrial
accident or occupational disease, or if the surviving spouse is a national of the stateof residence or was such a national before losing the nationality of that state bymarriage to that worker.

Thus, the "embryonic rights of Community citizenship,"(iS' as they apply tothe migrant worker and his family, were promulgated in this series of Council re-gulations and directives. The existing Regs. 1612168 and 1251/70 and Directive
681360 apply also to the three new Member States as from January 1, 1973 ; but during
the transitional period the U.K. may derogate in certain respects from the provisionsofRegulation 1612168 in relation to Northern Ireland, as may the Republic ofIreland,in relation to the whole ofits territory (Act ofAccession, Annex VII). Furthermore,
it must be noted that citizens of the U.K. Colonies and Islands, i.e. citizens of the

Channel Isles and Isle of Man, are excluded from benefiting from Community
provisions relating to the freedom ofmovement for persons or services, i.e. Chapter
1, 2 and 3 of Title III of the EEC Treaty (Protocol No. 3 to the Act of Accession).
Such persons are defined in that Protocol. They conserve, of course, their existingrights in the U.K.

Certainly, migrant workers of the Community are treated equally as nationals(13) L. Levi-Sandri, Bulletin ofEuropean Communities, No. 11, 1968, p. 6. See B6hning, op.
cit., p. 19 and Encyclopedia of European Community Law, Vol. II, European Cornmunity
Treaties, Bloo47.

AND
THE LEGALOFTHEFREE MOVEMENT OF WORKERS 93
SYSTEM
IN THEEUROPEAN ECONOMIC COMMUNITYMIGRATION
TRENDSof the host state on grounds of the principle of non-discrimination based on nation-ality between workers of the Member States as regards employment, remunerationand other labour conditions defined in Art. 48, EEC. On the other hand, as will beseen from the third part, the migration trends in the Comniunity has increased rapidly

since the early sixties, namely, just from the incipience of implement of the freemovement for workers in the Community. Have these Regulations concerning thefree movement of workers mentioned above provided an added incentive for Community workers to migrate within the Community? For answering this question,
we shall examine the migration trends of the Community.

III. Migration Trends of the Labour Market of the Community

Manpower movements within the Community increased regularly between
1958 and 1961. They rose from 156,OOO migrant workers in 1958 to 292,ooO in 1961
(workers with work permits issued by Member States). However, three years later,
migrations within the Community have decreased to below the 1961 levels and wereput at 240,OOO.(i`' After that, the EEC manpower resources were beginning to be
used up, mainly because of the progressive industrialisation of Italy which is a major

labour-supplying country in the Community.
In the case of Germany, the proportion of new Italian recruited entrants rosefrom 50% in 1958 to 65% in 1961 and decreased continuously from 46% in 1962 to

4%. in 1970, while the proportion of new recruited entrants from the non-EEC
countries, especially Greece, Turkey and Spain respectively have increased rapidly
since 1960 and 1961 (41 e/. in 1960 to 78 O/. in 1970 for Greece; 31 % in 1961 to 77 O/,
in 1970 for Turkey;41 O/. in 1960 to 83 O/. in 1970 for Spain), Portguese increased from58 O/. in 1964 to 90 O/. in 1970 and new entrants from Yugoslavia increased from 35 O/.
in 1969 to 53 O/. in 1970. Thus, a widespread recruitement system in the Mediterraneanarea generally provides around two-fifth of the total annual influx of foreigners andbetween 500/. and 90O/. of the influx from the Mediterranean countries themselves,
while the decline of Italian new entrants to Gerrnany had set in before 1964, i.e.
before the EEC significantly freed the movements of workers.<'5'

Certainly, the absolute number of Italian workers places a most important
percentage amongst the number of all Community migrant workers (76O/. in 1972).
In this sense, Italian Workers play a more important role than those of other Member

States of the Community. But, today, Workers from Yugoslavia and Turkey outnumber Italians, who formed 40 O/. of all foreign work-force till 1962 and formed only
(14)

Campbell, op. cit., p. 533.

(1 5)B6hning, op. cit., pp. 34-35. The figure of foreign workers in the Community used in thisstudy mostly quoted from a distinguished work written by B6hning mentioned above.

KUNIO SOH

94

18O/. in 1972.('6' The reasons of the decline of Italian workers are mainly becauseof the progressive industrialisation of Italy itselÅí For this, Germany was compelled

to seek its foreign workers on markets outside the EEC. Thus a series of bilateralagreements were signed between Germany and the Mediterranean countries between
19oo and 1968.(i7>In the case of France, the number of newly entering workers from Italy decreased

steadily from about 88,100 in 1958 to 6,7oo in 1970 and the proportion of permanent
entrants from Italy fell from 62 0/. in 1958 to 20/. in 1970. Although the absolute

number of Italians formed 80 O/. of Community migrant workers in France in 1972,
Italian workers formed less than 13 %. ofall foreign workers in France, while workers

from North African countries,(i8' Portugal, Turkey and Yugoslavia rose sharply.
Portuguese rose from 5,100 in 1958 to 91,6oo in 1970, Turks rose from 200 in 1964
to 14,1oo in 1970 and Yugoslavs rose from 500 in 1958 to 10,900 in 1970. The dropin the number of Italian new entrants was due to the Italian boom at the beginningof the sixties and the pull of German wage levels during that decade. Thus, in thecase of France, the drop of migration from the EEC countries to France derives
more from the mature character of the migration stream than from the freedom of
movements within the EEC,(i9)In the case of Belgium, over 200,OOO foreigners were resident in the country,
in 19oo (3.1 O/. of the population), 93 O/. of them coming from neighbouring countries.

Italian workers played an important part after the first World War, and they rose
sharply during the early years of the post-war period because of heavy recruiting forthe mining industry from 1947 to 1952. In 1956, there were serious pit disasters at
Quaregnon and Marcinelle,{20' there was a drop in Italian emigration to the Belgium

mines. Nevertheless, Italian workers play a still more important part as comparedwith those of other Member States in Belgium. In 1972, Italians formed 72.5% of(1ol In 1974, there were a total of 2.49 million foreign workers in Germany. See Wirtschaft
und Statistik, 11.74, S. 767.

(17) Recruitment agreements have been concluded between Germany and other countries
mainly the Mediterranean area, such as Germany-Italy (December 20, 1955), GermanySpain (March 29, 1960), Germany-Greece (March 30, 1960), Germany-Turkey (October30, 1961), Germany-Morocco (May 21, 1963), Germany-Portugal (March 17, 1964),
Germany-Yugoslavia (October 12, 1968).
(18) France's coloured immigrants can be divided into three groups:(a) North Africans-Algerians, Moroccans, and Tunisians being the most importantgroup -numerically; (b) the people of Francophone Black Africa-being composed of the
Cameroons, the Central African Republic, Congo (Brazzaville), Dahomey, Gabon, Guinea,
the Ivory Coast, Madagascar, Mali Mauritania, Niger, Chad, Senegal, Togom and Upper
Volta; (c) Black French from the four Overseas Departments (see note 5).
(19) B6hning, op. eit.,p. 31.

(20) I.C.E.M., "Ita]ian Communities Abroad," Jnternational Migration, 1971, Vol. IX, No
112, p. 121.

95
THE LEGAL SYSTEM OF THE FREE MOVEMENT OF WORKERSANDMIGRATION TRENDS IN THE EUROPEAN ECONOMIC COMMUNITY

all Community migrant workers and formed 39.5 % of all foreign workers in Belgium.

Furthermore, the share of nationals from EEC-Acountries is higher than those from
non-EEC-countries (560/, of the total foreign work-force in 1968). This is different

from both cases of Germany and France. However, the influx of new entrants fromthe traditional Iabour suppliers of the EEC, especially from Germany and France,
has been less variable than that from the more recent countries of origin, like Spain

and Turkey, or from the extra-European countries. Since 1969, it seems that Belgium

has been reconsidering its immigration policy and is attempting to reassert the
primacy of the labour market for non-EEC-countries.
In the case of the Netherlands, at the beginning the last decade, the immigration

gathered momentum with Italy providing between 20 % and 40 % of the new entrants.

However, it was quickly overtaken by Spain, Turkey and Morocco. Italian new entrants decreased continuously from 3,2oo in 1962 to 1,2oo (EEC estimate) in 1970,
while Spaniards rose from 5,5oo in 1963 to 7,1oo in 1970 and, Turks rose from 700
in 1963 to 6,9oo in 1970. In recent years, the Italian work-force has become stationary

at the 11,OOO level. There are at least twice as many workers from neighbouring

Belgium and Luxembourg (in 1957, Benelux formed a Common Labour Market)
in the Netherlands as from Italy. In 1972, migrant workers ofEEC countries stoodat 410/. (about 50,Ooo, of which 12,OOO Germans, 9,ooO Italians, 1,700 French,
27,800 are workers of Belgium and Luxembourg) of aH foreign workers (121,Ooo,excluding Surinams and Dutch Antillians) in the Netherlands. However, it must be

noted that the proportion (namely 41 O/.) would stand at 260/. if the number ofSurinams and Dutch Antillians were included in the total foreign work-forces.

In the case of Luxembourg, the immigration of workers gathered momentum
coming mainly from Italy in the fifties. However, the Italian new entrants decreased

from 9,823 in 1961 to 551 in 1970, although their number in employment remained
steadily at the 11,OOO level since 1961. In 1970, Italian workers formed 39 O/, (10,900

out of 28,7oo) of the Community migrant workers and formed 27 O/. of all foreign

workers (40,900) in Luxembourg. However, more important, it must be noted thatthe number of the total foreign work-force formed 37.5 % of the total working popu-

lation in Luxembourg.
Finally, in the case of Italy, although it is on the way to becoming an immigration

country,(2i) in the present stage that the migration from other EEC-countries to
Italy is insignificant to be examined here, because Italy is a major labour-supplying

country in the EEC and because foreign workers there form the lowest percentage(O.3 O/.) amongst the Member States of the Community (see annexed table).

In addition, there is no examination into the migration movement in the U.K.,(21) B6hning, op. cit., p. 39.

96

KUNIO SOH

Ireland and Denmark, because it is not the main objective of this study to examine

the migration trends after the establishment of the EEC's system of free movementof workers since 1970, although, before that period, there were some workers ofGermany and France emigrating mainly to the U.K.
Thus, although the composition ofthe immigrant work-force differs from country

to country within the Community because of historical, geographical and economic
reasons, al1 EEC-countries have received Italian workers, especially Germany, France

and Belgium. It must be noted that the new entrants of Italy emigranting to other
EEC-countries have decreased continuously since the early sixties, irrespective of theimplement of free movement for workers of the EEC except for the case of Belgium,
where Italians have been decreasing only since 1968. It must, also, be noted thatworkers from non-EEC-countries, especially the Mediterranean area and North
African countries, have increased sharply since the early sixties, although they areunable to derive any benefit from the EEC's system on the freedom of movement
for workers.

IV. Conclusions
After examining the EEC's legal system of the free movement of workers andmigration trends in the Community, the following results can be found:
It has been noted that, although the principle of free movement of workers was

accomplished in 1970, this does not mean that the workers of EEC-countries canfreely (unconditionally) claim any job anywhere within the Community. Indeed
this freedom ofmovement is not yet "complete" since the Member States maintained

a safeguard clause, whereby the EC Commission acts at the request of a Member
State to determine whether a dangerous sjtuation exists on the labour market in aparticular area or branch of industry and consequently can suspend the activitiesof the Community system for vacancy clearance.
Migrant workers have been moving into big cities and industrial areas ofMember

States since the establishment of the Community. This phenomenon has resulted inunbalanced development in regional policy and employment policy which are subject
matters of the Community. To reduce the differences existing between the various
regions and the backwardness of the less favoured regions, is one of the importantsocial objectives of the Community, although migrant workers are able to obtainhigher incomes in the host country than that of their home countries.

Although the legislations on free movement of workers are applicable to theEEC-countries, some discrimination exists in relation to migrant workers who havearrived from non-EEC-countries sjnce the establishment of the EEC. These migrants
do not always enjoy freedom ofmovement within the host country, let alone freedom

THE LEGAL SYSTEM OF THE FREE MOVEMENT OF WORKERS AND 97
MIGRATION TRENDS IN THE EUROPEAN ECONOMIC COMMUNITY
to bring in their families, to change theirjobs, or to join trade unions, although they
have played a still more important part since the early sixties. Such problems regard-

ing the improvement of social conditions of workers of non-EEC-countries havebeen indicated in a proposal called "Social Action Programme" submitted by the

EC Commission to the EC Council on October 25, 1973.
As for migration trends in the Community, the regulation concerning the freemovement of workers has not provided an added incentive for Community nationals
to migrate, and the wage differentials are a stronger incentive to migration than theabolition offormal restrictions amongst Member States.`22' Finally it seems necessarythat the worsening situation of the non-Community migrants-, called "Europe's
new lower class," be improved as a Community matter.
Annexed Table:

Number of Foreign Workers and Propordon of
Foreign Workers in the European Community
All foreign
All foreign

Total population(in thousands)

Total working

population(in thousands)

workers andworkers of
EC-countries

workers andworkers of
EC-countries

Annual(in brackets)

averages(in brackets)

as % of(in thousands)

total working

population

1972
1972
1972
1972
1972

Belgium
France

9,700

2,878

220(i) (126.7)

7.6 (4.4)

51,5oo15,6001,520(i) (299.0)

9.7 (1.9)

Germany

61,5oo22,6oo2,350 (577.5)

10.4 (2.2)

Luxembourg

350

1OO

37.5 ( 28.3)

37.5(28.3)

Netherlands

13,Ooo3,8oo

122(2) ( 50.2)

3.2 (1.3)

Italy54,413

12,79044 (18,O)

O.3 (O.1)

1971

Britain

53,82823,691

1,665(3) (625.0)

7.0 (2.7)

1971172

Denmark

4,963
3,O14

1,865

37 ( 8.4)

2.0 (O.4)

1971.1

Ireland723

2 ( 1.2)

O.27(O.1)

1972

Total

252,268

84,047

5,997.5(1,761.3)

7.1 (2.0)(1)=Estimated(2)=Excludmg Surinams and Dutch Antillian(3)--Including the kish
Source: Bundesarbeitsblatt, Bundesministerfdir Arbeit und Sozialordnung, Jg. 24, 1973;

EC Statistical OMce, "General Statistics" No. 1, 1975; The Statistics andInformation Bureau of the Labour Ministry of Japan, "Foreign Labour Situation under Zero Growth," 1975, p. 230.

(22) H. Werner, Migration and Free Movement of "(orkers in
Migration, Vol. XII, No. 4, 1974, p. 325.

Mestern Europe, International

KOBEECONOMIC & BUSINESS REVIEWCONTENTS
NO. 17 (1970)
An Outline from OMce Management to MIS in Japan.................................Minoru Beika

Japanese Economic Growth since the Meiji Restoration:
A Social Aocounting Approach.............................................Nobuko IVose
EMciency of Optimal Growth Policies for Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Hikoji Katano

Decasualization of Dock Labour-Experiences at the Port of Kobe-........................Hiromasa Yamamoto
The Characteristics of Recent Corporate Mergers in Japan.............................,Jiro Ono
Estudos Brasileiros no Japao......................................................Yoshiaki Nishimukai

A Note on the Integration of Economic Theory
andOrganizationTheory..............,.................................HTidekiYoshihara

NO. 18 (1971)
Environmental Pollution Problems from theView Point of Business Management..................... ....... .....Minoru Beika
Patterns ofthe Japanese Engineering Trade (1951-1970)............... ......, .....Fukuc Kawata
Opimal Process of Economic Development.............................. ....... .....Hikoji Katano

Wage and Behaviour Difference in Collective
Wage Bargainings of Japanese Shipping Companies .

-A Case Study of the Japanese Shipping Industry.....,.................................... Hiromtzsa Yamamoto
On Accounting Communication.......................,..............,........................Isao Nakano

NO. 19 (1972)
Patterns of Export Trade of Argentina and Brazil:
A Comparative Study.................,....................................Fukuo Kawata
Entrepreneurship in America..............,.............................................Tadakatsu Inoue

Generalization of Two-Gap Theory............................,.........................Hikoji Katano

Aocounting Measurement and Homomorphism.......................................Isao Nakano
An Interpretation of Two Stage Least Squares
Estimators as Indirect Least S(luares
Estimators in the Overidentined Case........................H7iroshi Sadamichi
A Note on the One-dimensional Random Search..............................Komayuki Itow

Exchange Rate Systems and Distribution of
Seigniorage ........,......................................................Kazuhiro Igawa

NO. 20 (1973)
An Analysis of the Brazilian
Balance of Payments: 1960-1972...............................,.......Fukuo Kawata

International Money Flow and
the Multinational Corporations .......................................Masahiro Fuiita

Estimation of Investment Allocation
Ratios of Japanese Economy: 1960-1969...........................Hikoji Katano

Available Jobs and Employment inJapanese Foreign;going Shipping..............................Hiromasa Yamamoto

Homomorphism and Business Income Measurement............................

.....Isao Nakano

Assets Choice and Optimal International Reserves.............................

.Kazuhiro Igawa

NO. 21
Regional Development Policies of Japan in Recent Quarterof the Twentieth Century................................................Minoru BEiKA

National Income and Expenditure
at Factor Cost in Japan 1955-1970:
A Macro-Aocounting for Growing Economy.....................Nobuko NossE
EMciency and Aoceptability in Optimal Growth Path ..............................Hjkoji KATANo
An Equitable Distribution of the Costs and Benefits of Economic
Integration .,.......................................................Yoshiaki NisHiMuKAI

Japanese Business Abroad: Past, Present and Future ........................Hideki YosHiHARA

KOBE UNIVERSITY ECONOMIC REVIEW 21, 1975
Edited by Faculty of Economics,
Kobe University, Kobe, JapanCONTENTS
Dilemmas of Anti-Monopoly Policy in Japan ..................................,.... Kojiro Niino
Fixed Capital and Extended'
Reproduction .................................... Nobua Okishio

Direct Foreign Investments andthe Specific Factors Model ....................................... Kiyoshi Ikemoto

The Output Adjustment Mechanism
in a Multi-Sectoral Economy ..........................................PVataru Fukudu

On the Long Run Path of Consumption and
Pollution: Paths of Rolling Plans .............................. Tetsuya Kishimoto
Recent Fertility Patterns in Metropolitan
Regions of Japan .....................................,............. Shinichi Takahashi
ttlHITte,-.ny,.lntMle,M-1"llltllllp,1,"t.tOMIII,-hh,,tllltllll,l-,,t.qtll"lt,h,,,,ttlM"l,-ih,,f.qntMel,ltitlr,llltlllb-n",t,tltlllllP"h,Iv,utanle,"htl,,tMtM)li"

THE ANNALS OF THE SCHOOL OF
BUSINESS ADMINISTRATION• KOBE UNIVERSITY 1975
Edited by the School of Business Administration,

Kobe University, Kobe, JapanCONTENTS
Heutiger Stand und Problematik der 'Unternehmensbesteuerung in Deutschland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . , Gunter PVohe

Economic Aspects of Organization
Theory and Decision Theory .......................................Marceil Schweilzer
Causality and Matching Concept .........................................................Ryuji Taketia

Flow of Funds Aocounts and CapitalMarket Structure in Japan (2) ..,..................................,....... Jiro Ono
A Causal Model of Shopping Behavior ........,..,.................................Masanori Ttvnura

Ein Abriss der Thcorie der Seeverkehrsmarkte ....................................Kunio Miyashita

Personnel Management in the UnitedStates during the 1920s ..........,.....................................Koji OkubaycLshi,qltnep,h,,t•qlnlllli,Ak,ir.tllllltjt,h,i,gellllltb•ltkitny,ellSIte,e,,,,t.ttllftlle,•","r,11111tit,'h,,r•,"tUUt),n-,i,rtISIItbkij--llttll},"'-,rgltuaN"h,-it""ISII,"t

KOBE UNIVERSITY LAW REVIEWInternational Edition No. 10, 1974
Edited by Faculty of Law
Kobe University, Kobe, JapanCONTENTS
Research on Labor Co-Determination in West Germany .........................., Keiiji Kubo
La garde h vue et son contr61e en droit compare (1) ........................... KuniJ'i Shibahara

THE RESEARCH INSTITUTE FOR ECONOMICS AND
BUSINESS ADMINISTSATION, KOBE UNIVERSITYHISTORICALSKETCH
In 1919, a research organization named the Institute for Commerce wasfounded in Kobe Higher Commercial School, one of the chief predecessors ofKobe University, with a gift made by F. Kanematsu & Company, a leading
mercantile firm in Kobe. The organization was designed to carry on and facilitate integrated research on business and commerce and to formulate andpublish the results of these studies and investigations in such form as to makethem available to the business community.

With the founding of Kobe University of Commerce, successor of Kobe
Higher Commercial School, in 1929, the Institute extended its research ac-

tivities by adding several divisions. One was the famous Latin-American
Library, which soon became the center of research in this field in Japan. A
room for statistics equipped with various computing machines was establishedand began publication of Jabyo- To-kei Keizai monthly and Sekai Bo'eki To-kei
annually. A filing room was prepared to deposit press clipping files systemat-

ically arranged by topics and dates. Another room was designed to become
the center of all possible original records and data having to do with the beginning and progress of Japanese business.

On the campus of Kobe University of Commerce, another organization
named the Institute for Business Mechanization was founded in 1941 utilizing

business machines donated by the IBM Corporation and others. With Professor Yasutaro Hirai as its head a broad and forward-looking plan for business mechanization in Japan was developed.

In 1944, Kobe University of Commerce changed its name to Kobe University of Economics. After the War, however, the University was consolidated with three other colleges in Hy6go Prefecture to become Kobe University.

With this development, the two Institutes were also amalgamated into the
Research Institute for Economics and Business Administration, Kobe University. At present, the Institute, with its twenty four fu11-time professional

staff members, carries on studies and investigations in international economy,business administration, and information systems in Japan.

LOCATION AND BUILDINGSThe Research Institute for Economics and Business Administration is
located on the campus of Kobe University, Rokko, Kobe. It consists of two

three-storied buildings. One is named the Kanematsu Kinenkan and has afloor space of about 2,9oo square meters, which includes a president's room,
forty-one oMces, six rooms used as a library, a room for statistics, etc. An-otherisbuiltin1964. It has a floor space of about 1,900 square meters,
which is chiefly used as the Documentation Center for Business Analysis, alibrary and a conference room.

ORGANIZATION
Under the directorship of the president, the Institute operates
research groups. Each research group and its sections are as follows:

A GroupofInternationalEconomy(1) International Trade(2) InternationalFinance(3) MaritimeEconomy(4) Latin-AmericanEconomy(5) International Law ofEconomy(6) International Labour Relations

B GroupofBusinessAdministration(1) InternationalManagement(2) Business Administration and Information Systems(3) Accounting(4) Business Statistics

with twoBesides the regular work of the Institute, research committees may be creat-ed to carry on any special work requiriilg the joint study of academic andbusiness circles. At present, there are four standing research committees,that is, Experts Group on Structural Change in World Economy, Committee
of International Finance, Conmittee of Information Systems and ResearchGroup for the Domestic Water Transportation.
For convenience and greater eMciency in carrying out its research activities, the Instjtute has a general oMce which is responsible for 1) the collection

and preservation of a comprehensive collection of books, periodicals, pamphlets, and original records and data of finance, trade, commerce, industry
and business generally; 2) the classification, cataloguing, indexing, arranging,annotation and compilation of these research materials; and 3) the formulation and publication of the results of the investigations and studies accomplished by the professional staff members of the Institute.

As an a{filiated institute, the Documentation Center for Business Analysis
has been established in 1964. It is the first systematic jnformatjon facility inthe field of business administration in Japan that has been recognized andauthorized by the Ministry of Education. The purpose is to collect and to
make intensive control of all kinds of materials on business administrationand to make them available to scholars, universities, governments, and business world with the aid of modern documentation techniques.

i

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KOBE UNIVERSITY[l/
ECONOMJCS&BUslNEss
ADMINISTRATIoN li[ii

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Secretary: Keiichi
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Dr.•of Economics l,ProfessorofMaritimeMinor : Minoru BEiKA

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Dr. of Econo:nics
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i Jiro YAoProfessor of lnternational liFinance d

Il Toru KANoI:

1/ Masahiro FuJtTA

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Law l' l/Akio MoRi
Professor of lnternatienal i

FinanceliDr. of Economics I
Professor of lnternational :

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Dr. of Economics :Ph. D, in Statistics il fsao NAKANo] HiromasaYAMAMOTOProfessor of lnternatienal ;;lLabour Relations i/ Yoshiaki NlsHIMUKA!

Professor of Regional Il, Tetsuji sHiMeJol
1 Kazuhiro lGAwAi'li Hidekl yosHiHARA

Prefessor of Internatienal

Professor of Business

Financc
Dr. ef Busincss Administratlon

Professor of Business
Statistics

Dr. of Business Administratlon

Asseciate Professor ef

Accounting

Associatc Profes$er of [Business Statisticslil[ Kornayuki ITow

Associate Professor of

Associate Professor of li

International Trade IlResearchAssociateoflnter- i Yukie UcHIDA

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Office : The Kanernatsu Memorial Hall

KOBE UNtVERSITYROKKO, KOBE JAPAN

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Associate Professor of

Ph. D, in Ecenometrics

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Associate Profssor ofInternational Management/l Kunio SoHiDr. of Business Administratlon

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Management

Professor of lnternational 1i Nobuko NossE
i Hikojl KATANo

Professor of Business

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and Information SystemsiResearch Associate ofiEconomctrics

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