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Japan Diary

April 6, 2007

Japanese economy has a long history---Osaka's example

Osaka is the second largest city in Japan. It was built in the sixteenth century and became a distribution center for Japan. Nearby farmers grew cotton. Therefore, Osaka area became a center for textile industry as well.
After Meiji era modernization a gigantic munitions factory was built. Although the factory vanished during one night's bombing in the Pacific War, its engineers established numerous venture businesses. Even now you can find many small factories in the eastern part of Osaka. Some of them are world monopoly in production of high-precision metal molds and parts.
Hereby, let me share with you impressions on Osaka economy.

Miscellaneous Thoughts on the Osaka Economy       June 7, 2005

Akio Kawato

The following are my personal thoughts about miscellaneous topics that came across my mind during my business trip to Osaka from May 26 to 28.

1. Accumulations of history
(1) Osaka city was established around the same time as Edo, today's Tokyo. Osaka, however, has a longer tradition of producing goods and services than Edo.

(2) Sakai, a historical commercial center along the Osaka Bay, has a long history of smithery including nail manufacturing, enabling local blacksmiths to quickly master the skills needed to manufacture harquebus when they were brought from Portugal via Tanegashima in the sixteenth century. As a result, Japan became the world's largest holder of harquebus, says an authoritative book.

As Japan shut itself from the outside world in the seventeenth century, the cultivation of cotton began in Kawachi Plain along the Osaka Bay, which later led to the emergence of the household textile industry in the middle of the nineteenth century. Also in Kawachi, there were watermills that utilized the stream originating from the Ikoma mountains in Nara. The watermills are said to have been used to create gold leaves and copper spreads. Talking about watermills that utilize the water streaming down from the mountains, I am reminded of the textile industry in New England and along the Appalachian Mountains in the United States.

(3) And last but not least is Osaka's rice market that became the world's first futures market.

The Edo shogunate endowed the Sumitomo family the rights to the Besshi copper mine in Shikoku Island in the Genroku Period. The family was involved in one-third of Japan's entire copper refinery from the Genroku Period and beyond (Around 1700 Japan is said to have produced 6,000 tons of copper a year, the world's largest amount. Naturally, copper was Japan's largest export item at that time). The Sumitomo family in later times also gained large capitals from mining and exporting coal, which served as the base on which the family established the most powerful private-run bank of that time.

2. The significance of the munitions industry in Japan's modern economic history--Osaka Army Arsenal
(Much of the references to the Arsenal below are based on the speech by Professor Hiroshi Miyake at Mukogawa Women's University)

(1) In discussing the economy of the Soviet Union, the munitions industry serves as a pivotal factor. When we talked about the development of the Japanese economy since the Meiji Era that began in 1867, have we not been overlooking the role played by the munitions industry? When people say that "the Japanese economy is based on small- and medium-sized enterprises," do they have sufficient knowledge about how these small- and medium-sized enterprises grew?

(2) Currently, East Osaka is known for being one of the centers for small- and medium-sized enterprises making metal molds and other products. But nobody remembers the other side of the story any longer, that the largest munitions factory in the Orient, "Osaka Army Arsenal," was located right next to the Osaka Castle on premises topping 1.32-million square meters, with 64,000 workers (including temporary workforce) and sales record equivalent to one-trillion yen in today's currency; that on the very eve of the end of the World War II (WWII) on August 14, 1945, the factory was demolished by a major air raid; that many of Osaka's large-sized enterprises traded with this munitions factory and grew through technological tie-ups with the factory; and that many of the small- and medium-sized enterprises in East Osaka were founded by former workers of this munitions factory.

(3) When it comes to war-related matters, Japanese people become amnesic, beginning to lecture Russia and Central-Asian countries with the attitude as if "Japan was outstanding from the beginning and thus benefits from its superb small- and medium-sized enterprises as a natural consequence."

However, Miyata Industry, a renowned bicycle maker, was established upon diverting gun-making machines for its own use, while major firms such as Daikin Industries and Nihon Spindle Manufacturing started as companies founded by former workers of the munitions factory. Factory workers in the pre-WWII era, who were working before lifetime employment was established in Japan, might have had the mentality to survive in the industry simply with their skills and tools.

Both Kobe Steel and Sumitomo Metal Industries had close ties with Osaka Army Arsenal and because the munitions factory used large volumes of chemical products, the areas around them became home to the chemicals industry. The legend of these strong military ties still lives on today in some companies in Osaka, accepting retired Self-Defense Forces (SDF) personnel as executives to help benefit their businesses with the Japan Defense Agency.

(4) Before WWII, large munitions factories were located in Tokyo, Nagoya and Osaka, all of which later grew into major industrial areas (those in Tokyo and Osaka were established in 1870; the one in Osaka is said to have been founded after the Meiji government moved the Dutch-made machines from Nagasaki Ironworks established by the Tokugawa shogunate in Nagasaki to avoid the risks of an impending clash, which actually broke out in 1877 and was known as the Seinan War).

Kawaguchi City in Saitama, north of Tokyo, has been home to the cast-iron industry since the Edo Period (1600-1867). The local industries must have enjoyed trade with a munitions factory that was later built in Akabane at the northern edge of Tokyo. Ota Ward in Tokyo is known to rival East Osaka in terms of small- and medium-sized enterprises specializing in metal molds and other products that underpin Japan's technological strength. Ota Ward's industrial sector was born amidst an economic boom brought about by World War I (WWI).

The sector grew rapidly helped by the outbreak of the Manchurian Incident in 1931 and the Sino-Japan conflicts that lasted for 14 years. A former major manufacturer of special steel, Nippon Tokushukou, was also established around that time as a company outsourced for the production of guns by the army. After suffering catastrophic damage from the air raids in WWII, Ota Ward came back to life in the wake of the Korean War that created demand in weapon productions and other related materials.
The compensation paid out to Japan from China at the end of the war between the two in 1895 (the compensation is said to have amounted to the three-year budget of the Qing government that ruled China at that time) was appropriated to Japan's newly established national factories like a major iron foundry in Yawata, northern Kyushu. The money must have also been used for munitions factories run by the army and the navy to prepare for the impending war with Russia.

(5) Today we tend to tell our history proudly to Russia and other countries of the former Eastern bloc and developing countries, as if Japan had achieved economic development since the late nineteenth century on its own in peaceful ways. But just as the process of economic development in the West, the Japanese economy in reality developed in liaison with wars.

Looking at Russia and Uzbekistan, we also tend to look down on these countries for failing to improve their productivity in civilian industries. That only shows that we are suffering from amnesia and euphoria, unable to remember our own history. It must be extremely difficult to develop an economy only through civilian production in peaceful times. Today, Russia struggles from a lack of funds and know-how to turn its once-powerful military industry for civilian use. Looking at this hardship, I deeply feel that Japan benefited tremendously from its history that forcibly reduced its military to a fraction, despite the acute tragedy that accompanied it.

3. Osaka economy to hit rock bottom
(1) Osaka has lost its core industries numerous times. When the Meiji Restoration in 1867 brought sweeping changes to Japan's administrative district divisions, Osaka lost its rice market, as feudal lords could no longer exchange their rice for money to be used for consumption that had formed the basis of the rice economy. The end of WWII deprived Osaka of its munitions factory, which had played a role similar to what Toyota now means for Aichi Prefecture.

(2) The fabric and textile industry that Osaka had fostered since the late nineteenth century declined shortly after WWII. Osaka's material industries such as steel, chemical and aluminum were eroded by China and other rivals, while the city's household appliance and automobile industries have been hollowed out. Kansai International Airport faces a flagging business and local small- and medium-sized enterprises have seen their production halved since large companies abandoned them to head for China and other promising areas. Sumitomo Bank is one of many Osaka-based companies which has moved its base to Tokyo in the past few years due to mergers and other necessities..

These moves have rapidly worsened the finances of Osaka Prefecture, the home of costly but low taxed bedroom communities. And Osaka City, despite its location in the wealthiest part of the prefecture, has been shaken by scandals involving faked overtime work and other corrupt practices of its bureaucrats. These misfortunes in the past three or four years have made Osaka fearful that it might be overtaken by Nagoya, a city booming with the success of the Expo 2005 Aichi, Japan.

(3) However in the past one to two years, Osaka has been enjoying favorable exports of materials to China that helped push up capital investments in this sector and recovered the jobless rate to a level around 5.9 percent. Now, just as it was with domestic demand, overseas demand for materials has been stabilized after rising, creating a plateau for the Osaka economy.
4. Small- and medium-sized enterprises in East Osaka and their current situations(1) Creation Core Higashi Osaka Creation Core Higashi Osaka serves as a showcase and commercial consultancy for local products created using advanced technologies. The facility was set up, co-sponsored by the Ministry of Economy, Trade and Industry and local public entities. It is said however that the original concepts of the facility were not decided upon by bureaucrats but by local small- and medium-sized enterprises through in-depth discussions. While some of the products displayed there were still in their invention stages, all of them demonstrate advanced technologies. Many local high school students were visiting to see them.
Similar facilities built by government initiatives often end up as clean empty buildings, smelling of government bureaucracy. But this center in East Osaka was full of vitality. That must have been made possible by people like Mr. Shimoda, an official who is devoted to the success of the center since its foundation.

(2) Local voices: What is missing are human resources and information rather than money
My experiences from visits to several local factories of metal processing and mold manufacturing have been summarized as follows:

(a) Until three years ago mold manufacturers faced severe situations, with their production halved due to the outflow of neighboring major companies to overseas bases. The number of manufacturers was reduced to one-fourth of what it was. But now people in East Osaka no longer panic. Having determined that a skyrocketing economy will never come back again, they are looking forward to developing businesses that can sustain through difficulties.

(b) As major companies moved overseas, mold manufacturers in East Osaka once saw 30 percent of their products shipped to overseas markets. However, these major companies began procuring parts locally, thus reducing imports from Japan. What's worse, these large Japanese companies transferred domestic molding know-how to local companies abroad. The large firms would have been happy to have their Japanese sub-contractors accompany them overseas. Yet they did not want to take any responsibility for the move, and refrained from explicitly asking those small firms to come with them. They said instead, "We are going to China tomorrow. If you have the will, why don't you come as well?" That has made many small- and medium-sized enterprises in East Osaka bear a deep grudge against large Japanese firms.  

(c) Moving overseas is apparently hard for small- and medium-sized enterprises, as to them this would mean sending all of their best forces in labor control, production control and accounting to overseas.

(d) A president of a small company said, "China has taken everything away from us. I could yell, saying, 'Now we are naked, come and take anything!'" The remark does not necessarily represent an anti-Chinese sentiment. The anger of the local people was rather targeted at domestic large companies which have abandoned them. Plus, local businesses question the production abilities of Chinese people. "Chinese people are not good at businesses that require patience. They tend to make money by fast and easy ways. Mold manufacturing requires the opposite mentality. Mold production, too, is in the waves of digitization but the finishing process requires millimeters of adjustments that can only be done by human hands. Even computer-run machines experience worn out of their grinders, which inevitably causes glitches." These are the common perceptions held among local businesses.

(e) For these businesses, the lack of human resources poses a more serious problem than the lack of funds. "Young men nowadays do what they are told to do at least, but they lack the motivation to step forward on their own," said an executive of a local company, which instead is thinking of recruiting young women. In the past companies gave under-par rookies a chance through in-house training but now they can no longer afford to have idle staff.

(f) On top of this, small- and medium-sized enterprises in East Osaka are suffering from an inability to clearly observe the situations surrounding them and to trade with foreign businesses without outside help. Although they "can create products comparatively easily," what is missing are abilities in market research, acquiring customers and corporate management. The companies have neither time nor resources to survey market demand nor receive orders on the Internet.

5. What can be done?
Through my limited experiences as outlined above, I have come up with the following ideas to help develop the Osaka economy:

(1) Market research and liaison services for small- and medium-sized enterprises
One idea is for retired employees of large trading companies and other experienced persons to create a network for carrying out market research and communication services, etc., with foreign customers on behalf of local small- and medium-sized enterprises. The government sector would sponsor the network on a fixed price basis and clients would pay commissions in proportion to the services they receive.

(2) More Effective Use of Kansai International Airport
Many US firms have factories in China. They ceaselessly need to send semi-conductor parts and other components from home to their factories in Asia. So, we would build large-scale customs-transit warehouses on the opposite shore of Kansai International Airport where US and Japanese firms can keep their parts/unfinished products before shipment to their plants in China and ASEAN countries to allow for quick delivery systems. This would, however, require efforts to lower labor costs by automating jobs wherever possible

(3) Streamlining local governance mechanisms
In Osaka, there are many multiple bureaucratic functions of the prefecture, local offices of the central ministries and the city. Despite their possible effects on job creation, much could be done in terms of administrative reforms. ---The End


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