§ 3.10 p.m.
§ Lord Kearton rose to move, That this House takes note of the Report of the European Communities Committee on Relations between the Community and Japan (13th Report, 1988–89, HL Paper 65).
§ The noble Lord said: My Lords, the inquiry was carried out by Sub-Committee A of the Select Committee, which I had the honour to chair. My thanks go to members of the sub-committee who brought to their task hard work and a great experience of affairs. The sub-committee is greatly indebted to its distinguished specialist adviser, Sir Michael Wilford, a former ambassador to Japan who has a deep knowledge of that country.1322
§ The numerous witnesses, drawn from the academic, industrial, commercial, banking, scientific and political communities, gave oral and written evidence which covered a wide field, and all had taken great care in its preparation and presentation, as the minutes of evidence show. The sub-committee is most grateful to them. A special tribute is due to Sir John Whitehead, the present British Ambassador to Japan, and to his staff for their helpfulness in making the visit to Japan by members of the sub-committee so far-ranging and illuminating. Throughout the inquiry, the sub-committee clerk, Mr. William. Sleath, was indefatigable. His work was of the highest possible standard. The sub-committee is warm indeed in its thanks to him.
§ My acknowledgements reflect the fact that the report deals with an important subject. The starting point was a Commission communication last year on relations between the Community and Japan. That recognised that Japan was firmly established as a great economic power, with increasing political influence. The communication expressed a desire for closer ties to strengthen the third side of the triangle formed by the Community, the United States and Japan. It called for a strengthened dialogue and co-operation between member states and the Commission at all levels so as to ensure a unified and coherent approach.
§ The subjects of concern were: the continuing trade imbalance of the Community with Japan; access to the Japanese market by the firms of the Community; and the policy of member states to inward investment in all its forms from Japan. The communication concluded that the general relationship between the Community and Japan was moving in the right direction, but not fast enough significantly to reduce tensions.
§ The introduction to the committee's report brings out Japan's extraordinary post-war growth rate which has resulted in a GDP per capita at current exchange rates 50 per cent. higher than that of the United Kingdom, and 10 per cent. higher than that of the United States. Japan's current rate of growth is still higher than that of the USA and the Community. Trade surpluses have been established and increased to about 90 billion dollars per year. More than half of that surplus is in trade with the United States, with the figure for the Community some 20 billion dollars, and with the United Kingdom some 6 billion dollars, on the most recent information.
§ The major upward revaluation of the yen in recent years has not so far dented the dollar surplus, although as a percentage of Japanese GDP the surplus has almost halved. The Japanese expect the surplus to be maintained at about 2 per cent. to 2.5 per cent. of GDP. The surplus means that Japan has been building up large foreign assets, expected to reach about 400 billion dollars net by the end of the year, and perhaps reaching 1,000 billion dollars net by the mid-1990s. Simultaneously, the large net overseas balances of the United States have been eliminated, and the United States is on course to be by far the world's biggest debtor by the mid-1990s. That change already has altered and will continue to alter the political balance between those two 1323 powerful eonomies. It is now economic success or failure which gives power to and stabilises or destabilises countries, as recent events in Eastern Europe so dramatically show.
§ The report goes on to consider the reasons for Japanese trading achievements. Is it easier for the Japanese to export than for other countries to export to them? Undoubtedly, the Japanese economic growth began, and continued for many years, with the shelter of a highly protected market. Exports were aided by a low exchange rate for the yen. Moreover, exports had to be given a high priority as Japan had to import its fuel, its key raw materials and much of its food. Exports had to be concentrated upon manufactures.
§ With an economy in ruins in 1945, the Japanese turned to the best foreign examples that they could identify to rebuild their manufacturing base. They took licences widely, and Western firms gladly co-operated. The Japanese went on to improve in many cases the processes that they acquired, and in due course they became highly inventive and innovative as well. In several areas of high technology, the Japanese established a world lead. The tables have turned. In those vital areas, it is the West which has now to catch up and to keep pace to restore the balance.
§ Successive Japanese Governments have recognised that with success Japan must become an open market. Positive steps have been taken to reduce tariffs, to remove other barriers and to eliminate restrictions. The encouragement of imports has a high priority. While there is still some way to go to make Japan a completely open market, the committee concluded that deeply rooted perceptions of Japan as an almost closed market were out of date.
Failures to establish a higher level of imports into Japan were due to an incomplete knowledge of the Japanese market, and of Japanese business and commercial culture. Japan will never be an easy market, but the committee heard enough success stories by British and other European firms to encourage others to try harder. In that connection, the Department of Trade and Industry's "Opportunity Japan" campaign deserves high praise. The increasing interest in Japanese study centres and language training centres is also to be welcomed; but there is a long, long way to go before European knowledge of and enterprise in Japan match Japanese knowledge of and enterprise in the United Kingdom and Europe. A TUC delegation which recently visited Japan was surprised to find:
The Japanese knew more about 1992 than we did".
§ Although Japan has a large surplus in its visible trade with the Community, the entrance of Japanese goods into the Community is not free and unfettered. There are many restrictions and quotas, some of them resting on informal agreements with Japanese exporters in particular industries.
§ The European Commission has competence (to use the legal term) in trade negotiations with Japan. The committee felt that that competence should be encouraged and developed. The committee would 1324 like to see a considerable reinforcement of the Community office in Tokyo, and closer co-operation between individual member states in all matters of inward and outward trade with Japan. The Commission already has some important successes to its credit. With full support, it could achieve more.
§ What are the factors which have led to the Japanese resurgence since 1945? There was a democratic constitution imposed by the Americans; there was an enormous determination to make good the ravages of war (as a society, the Japanese had a dedication to the work ethic); there was a powerful national consensus on the overall policies to be followed which, in turn, led to social harmony; there was the emergence of an exceptionally gifted group of manufacturing entrepreneurs whose drive and leadership built up great enterprises. Those entrepreneurs, moreover, believed in humanistic management methods and succeeded in convincing their employees that their own well being, and that of the firm, were synonymous. The committee talked to management and trade unions in Japan and found no evidence of the "us" and "them" polarisation that over the post-war years affected so many areas of British industry; fortunately, not all.
§ The committee noted too the great stress placed on education and the competitive nature of the educational system from primary schools through to university. It was struck by the emphasis given in the manufacturing industries to training, to product quality and to customer satisfaction. It noted that, while companies and government agencies worked together in the early stages of industrial and product development, there was intense competition between companies in the marketplace itself. The whole market for Japanese products was protected for many years, but it was never easy. It was the lessons learnt in the competitive home market that proved effective in overseas markets.
§ The capital requirements of industry and commerce were financed by a high level of domestic personal savings which were channelled at low interest rates into areas which government agencies, in deep consultation with a wide range of other groups, judged most likely to promote industrial and economic advance. Companies themselves gave a low priority to distributing profits as dividends but rather ploughed them back into development and investment. Over and over again it was emphasised to the committee that Japanese companies in all manifestations of enterprise and growth were committed to the long-term view.
§ The Japanese policy of taking the long-term view is reflected in the great importance their manufacturing companies place on investment in research and development and in the fact that gross fixed investment as a proportion of GDP has been far higher for decades than the average for the Community or the United Kingdom. It is significant that the long view and the re-investment of profits have been adopted by those European and UK companies successful in Japan.
§ The Japanese stock market has not played a key role in the economic rise of Japan. Many Japanese firms are linked together in conglomerates, with 1325 extensive cross-holdings. Customers, suppliers and banks also have holdings. Usually only 20 or 30 per cent. of group shares are able to be traded; takeovers are virtually unknown. The weight of savings has driven up equity prices to very high levels compared with Western markets. Price/earnings ratios are phenomenal! price/dividend ratios even more so.
§ The links within conglomerates make for labour stability when restructuring is necessary as market conditions change. Thus when shipbuilding operations had to be reduced following the rise of South Korea as a major competitor, the workers could be and were transferred and retrained within the conglomerates.
§ In passing, it may be noted that Japan has retained, after further modernisation, about half of its peak shipbuilding capacity. Though currently not fully utilised, the industry was confident that it would be needed in the 1990s. The committee was told that Japan was still training 500 marine engineers a year and that Britain had been the inspiration and source for much of the methods of training. The United Kingdom's output of marine engineers is now about one-twentieth of that of Japan.
§ The committee inquired into the structure of the financial community in Japan. Because it was restored under American influence, its post-war development was closely regulated and compartmentalised to a high degree. So although funds steadily accumulated and Japanese banks and financial houses became among the world's largest, the wide-ranging and innovative market skills of the City of London were not developed. But this is all changing. Deregulation and decompartmentalising of the Japanese financial markets proceed apace.
§ The major Japanese banks and security houses started many years ago to establish footholds overseas. Nomura, the giant security house, is this year celebrating the setting up of its London office 25 years ago. In recent years the Japanese have started to buy in the financial expertise and experience they lack. The committee learnt that of all the banks operating in London, British banks held about 40 per cent. of the assets, Japanese banks about 25 per cent. and United States banks about 10 per cent. At present 90 per cent. of Japanese business in London is with overseas customers, strengthening London's international standing.
§ The penetration of the British equity market and of retail banking is still relatively modest. But with the increasing weight of exportable Japanese capital and the sensitivity of the United States to the Japanese purchases of assets —some regarded as quintessentially American —becoming evident, it would be no surprise if the Japanese did not become much more active players in London, particularly as 1992 approaches. The year 1992 gives Europe-wide opportunities from a London base. The committee was told that the Japanese had been exemplary employers in the City and had acted with restraint and discretion —to which my comment would be, the long view again. First build your foundations.
§ The committee could not but notice that the financial service developments were largely one way. Financial institutions from the Community and the 1326 USA have made some inroads into the Japanese markets but these are modest. Few restrictions of entry still remain, the most publicised being foreign membership of the Tokyo stock exchange. The committee's view is that it will require a major effort by the City institutions in particular, very considerable commitment and investment by them and the long view as regards the remittance of profits to establish a meaningful presence. Past niggardliness in connection with Japan contrasts perhaps with the several billions lost in writing off low performance loans to third world countries.
§ Modern telecommunications have globalised the world's financial markets and the process is continuing. As the Japanese acquire the skills of London and other Western markets, just as they have acquired the skills of Western manufacturing know-how, it came as no surprise to t he committee that some of the bankers seen in Tokyo foresaw Tokyo becoming the financial capital of the world.
§ The committee looked at manufacturing investment by Japan into Britain and the Community. This has taken place alongside investment in bonds, financial houses and property. Some of the investment is financed by local loans, backed by the high standing of the parent companies in Japan. In fact the country's own savings have been used by the Japanese to buy up the country's interests.
§ The manufacturing investment has taken place over the last 15 years and is accelerating. The United Kingdom has attracted rather more 1.han one-third of the Community total; the TUC envisages a continued rapid rise. The Japanese have moved on from their earlier policy of plants assembling items made from imported components and are now sourcing more and more of their components inside the United Kingdom and the Community. Responding to government pressures, moves are afoot to increase local technical back-up by establishing some research and development.
§ The committee noted that the Community's share of Japan's overseas investment was still only 10 per cent. or so of the total. That is 10 per cent. of what Japan is spending overseas. The United States has the major slice at 50 per cent.; South-East Asia and South America both have rather more than Europe.
§ The committee concluded that Japanese inward investment into the Community was to be welcomed, provided that it was balanced and led to technology transfer. It was particularly welcome in the United Kingdom. The committee's visits confirmed that the methods of Japanese management were suitable for adoption in the United Kingdom. The Japanese investment would help to restore in many fields the overseas competitiveness of goods made here and would allow exports, as well as reducing imports.
§ The committee considered the Japanese progress in science and technology and the increasing emphasis being placed by Japan on basic research. That is notwithstanding that all their post-war success has been based on applied research leading to technological advances. But the Japanese have recognised that applied research usually rests on 1327 basic research done years earlier, often several decades earlier. Now that they are in the forefront of technology in so many areas, they have decided that they must contribute to basic research as a source for progress in the next century. Again the long view.
§ The committee received much evidence strenuously encouraging links between the West and Japan in matters of basic research so long as due care was taken that co-operation was reciprocally beneficial. In previous years it was plain that it had been largely one way, to Japan's advantage.
§ The committee heard evidence and also saw for itself that the Japanese success has its less impressive side. The distribution system, for instance, is archaic, cumbersome, overmanned and very expensive. The system makes the mark-up between producer and final consumer very high. Agriculture is also inefficient to a degree. Both are areas where Western practice is in a different league. Another feature of Japan is the fantastic price of land in urban areas and the consequent sky-high prices in Tokyo and elsewhere of flats and houses. The situation is currently causing social stress and, if unreformed, could act as a destabiliser of Japanese society.
§ There is a paradox in the Japanese internal situation. Income comparisons based on present exchange rates appear to indicate that the Japanese now have one of the largest GDPs per capita in the world. However, this is not reflected in living standards, particularly in the highly populated urban areas. The yen buys less at home than abroad. The committee was repeatedly told in Japan, 'You tell us that we are rich. We do not feel rich". It is clear that a Japanese expatriate in Europe usually has a much higher standard of living than he would have at home.
§ The committee received varied evidence on likely developments in Japan in the years ahead. These took into account demographic changes and possible changes in the work ethos. A few years ago Sir Roy Denman, when he was director-general for external affairs for the Community, said that the Japanese were workaholics living in rabbit hutches. That remark stung, perhaps because it was then near the truth. The Japanese Government are currently actively encouraging their own and other Japanese employees in general to take the holidays and time off to which they are entitled. The national housing programme, which builds some 1,500,000 houses a year, has, year by year, increased the average size of a house. Moreover, with increased travel overseas, more Japanese are better able to compare their standards of living at home with that of other countries. However, the weight of the evidence that the committee received and the committee's own assessment of what it heard and saw during the visit to Japan, indicated that changes in the ethos of Japanese society are more likely to evolve slowly than to be subject to any sudden change.
§ It was particularly noticeable that politicians in Japan are marginal in their influence on economic affairs. It is the consensus which is powerful in Japan. This consensus between senior civil servants, 1328 the great institutions of Japan and the leaders of manufacturing, banking and commerce has a cohesion and consistency which is independent of politicians. It is this complex, which apparently includes in the outer ring the national representatives of the myriad company trade unions, which is effectively the government of Japan.
That concludes my introduction to the debate. The committee's conclusions are set out on page 27 of its report. They make challenging reading. Paragraph 97 states that the Japanese economy,
is growing ever more powerful, sustained by continuity in national policy. The Japanese purpose is to dominate in ever more sectors of business, finance and technology".
In the view of the committee there is no unique Japanese secret to their success. Paragraph 99 of the report states:
It is based on high quality, painstaking service to customers, excellent management, thorough research and patient investment".
The report states that the management of Japanese industry is based on the best Western practices and that the success of the Japanese also reflects a thorough study of markets. Patient investment, the long view, has been a decisive element in Japan's success.
§ The conclusions outline the steps the Community should take. Later speakers will deal with them and expand in detail. In time, in the committee's opinion, those steps must be taken if Japan is not to establish an economic lead which will lead to world economic dominance. Japan, backed by and leading the Asian communities on the Pacific rim, could reduce Europe, and even America, to secondary status in the next century. This need not happen. Europe has the brains, the manpower and the resources, just as America has, to form a firm third side of the world triangle; that is, the triangle of Europe, the United States and Japan. These economies, both competitive and co-operative, with no single one dominating and with a commitment to free and expanding trade, could provide a great creation of wealth to benefit the whole world. The question is, can Europe, and especially the Community and the UK, muster the will and determination to be the third side?
§ Lord Harmar-Nicholls
My Lords, the noble Lord said that the committee had suggested that British management should, to some extent, copy the Japanese. Did the committee look into the position relative to trade unions? In the shipbuilding industry for example, how far do the unions decide who will do what jobs as compared with this country? Did the committee — —
§ Lord Harmar-Nicholls
My Lords, the noble Lord gave us a very clear indication of the recommendations of the committee after its deep research. I am asking him about the recommendations as regards the trade union element.
§ Lord Kearton
My Lords, the trade unions are organised essentially on a company basis. 1329 Companies can be very large, employing 200,000 or 300,000 people. We met the central representatives of the trade unions and found there was what one might call a loose co-operation between all the trade unions. The central body in Tokyo acted for the great mass of individual trade unions in negotiations with the major consensus that I have described. We found that the attitude of the unions and of all the people we met was extremely constructive. As I said, they identify their own welfare with the welfare of the firm. The noble Lord, Lord Murray of Epping Forest, was a member of the delegation to Japan. He will be speaking later in the debate and I am sure he will enlarge on that particular topic.
§ Moved, That this House takes note of the Report of the European Communities Committee on Relations between the Community and Japan (13th Report, 1988–89, HL Paper 65). —(Lord Kearton.)