Japan’s Ministry for Economy, Trade and Industry was on a high. It was June 2018 and Meti, as it is more commonly known, had just forced through the $18bn sale of Toshiba’s prized memory chip business to a private equity consortium.
The deal appeared to justify the ministry’s billing as the creator of the nation’s industrial base. It was the largest private equity deal in the country’s history and relieved genuine concern that its most famous conglomerate could go bust. Critically, it appeared to unlock something bigger.
The problem-solving reputation of Meti, an arm of government that became the principal architect of Japan’s postwar industrial economy by leveraging its power to channel investment and promoting consolidation in a range of sectors, seemed restored.
The Toshiba deal highlighted the range of Meti’s modern prerogatives from managing the fortunes of tens of thousands of small businesses, to promoting the shift to automation, policing national security in industry and shaping energy policy in Asia’s largest advanced economy.
But the deal, though successful, turned out to be a false dawn. Just four years later, Toshiba’s future is once again unclear, putting Meti’s reputation back on the line. Private equity groups in the US and Singapore are lining up a bid to take Toshiba private, taking one of the country’s most famous companies off the Tokyo Stock Exchange and into foreign ownership.
Now, Meti must decide whether to support or block the buyout, a position made complicated by a scandal last year when its senior officials were accused of colluding with Toshiba to apply pressure on foreign investors to back management and shun activists in a pivotal vote on the company’s future.
The pending decision is likely to expose a rift within Meti over the future direction of Japan’s economy, says Nicholas Benes, a corporate governance expert. Some at the ministry are pushing for more transparency and openness to foreign capital, he says, while others are under pressure from domestic industry groups not to be seen to be “selling-out Japan Inc”.
The protectionists have until now wielded, and cultivated, the most influence. “Not only has Meti historically protected Japan Inc from foreign capital, it devotes so much time to deals that satisfy its pretension that Meti is running the industry,” says Shigeaki Koga, the former director of the ministry’s economic and industrial policy department. That “pretension”, critics say, sometimes colours the ministry’s judgment in the way that it chooses to intervene, or not, in companies.
The Toshiba deal is just one issue facing a ministry that former officials say is beginning to look overstretched. The global trade turmoil caused by Covid-19 and exacerbated by the war in Ukraine has exposed some of the frailties of Japan’s economy, which is heavily dependent on imported energy, raw materials and food. The plummeting yen will only make matters worse.
Yet the shifting tides of the global economy also give Meti an opportunity to position itself once again as the nation’s protector. At the behest of Prime Minister Fumio Kishida, the ministry is heavily involved in rethinking how best to develop or gain access to vital supply chains for products such as semiconductors, an industry once dominated by Japan. And it is also steering the Kishida administration’s shift towards energy security, which could eventually see Japan’s dormant nuclear industry reawaken.
If this sprawling ministry of nearly 8,000 staff, overseen by the gaffe-prone minister Koichi Hagiuda, can find the right mixture of protectionist policies and targeted inward investment it might yet recapture a measure of its historic influence. But critics say it will need to tear itself out of its bureaucratic overcaution.
“It has been only a year or two since Meti decided to do something on semiconductors, which should have been done five years ago,” says Masahiko Hosokawa, a former Meti official who was in charge of trade control. “It is [now] at the edge of being too late.”
Finding its place
The ministry, formerly known as the Ministry of International Trade and Industry (Miti), built Japan’s economic “miracle” through the early 1970s until the burst of the bubble in the late 1980s, say its many advocates and former officials. But it was left bitter at its hugely diminished role and reduced influence during the “lost” decades that followed.
By 2018 its powers had been partially restored after six years of “Abenomics” — the period under Shinzo Abe that put revitalisation at the centre of industrial policy. The government loaded Meti supremos such as the powerful strategist Takaya Imai — who became Abe’s chief of staff — at the very top rungs of national decision-making.
Yet even at the height of this resurgence, the ministry’s powers never came close to where they had been during the postwar period when it shaped key industries to drive the nation’s rapid growth.
Since then its role has fundamentally changed. With the exception of certain sectors such as nuclear power plants and utilities, it is no longer capable of wielding its influence over entire industries.
Once a prestigious destination for aspiring civil servants, Meti has struggled to retain young talent in recent years, while the rotating appointment of officials has hindered the passage of knowhow to compile long-term industrial strategy.
Instead, it has more recently refocused on the government’s efforts to encourage the private sector to be more involved in the economy by supporting start-ups and rebooting struggling companies via consolidation or cross-border acquisitions.
“Since the 1990s, Meti’s mission has been to revive the lost dynamism of Japanese businesses,” says Keita Nishiyama, a recently retired official who played a key role in establishing the government-backed investment fund behind the bailouts of chipmaker Renesas in 2013 and display units of Sony, Hitachi and Toshiba in 2012. He now advises buyout group KKR.
Critics say the injection of state money under Abe was unnecessary, sometimes wasteful and reminiscent of Meti’s postwar interventionist stance, pointing to the availability of ample liquidity provided by global private equity funds such as KKR and Bain, which is leading the potential buyout of Toshiba.
Nishiyama argues that state-backed capital can at times be more effective than PE funds at removing company resistance to change: “We didn’t think it was intervention but it was a form of government activism,” he says.
More recently Meti has been cut out of some of this dealmaking. The recent tie-up between Sony and Honda in electric vehicles — the type of deal where the ministry would have traditionally pushed to be involved — happened without any guidance from government officials.
Meti “co-ordinated industries so that everyone could survive,” says Koga, the former Meti director, and its senior bureaucrats benefited from amakudari or a “descent from heaven” into executive positions in the private sector. “But as industries grew, they no longer needed the protection of Meti, especially after the oil crisis of the 1970s and [more recently after] the US shifted its focus of trade conflict from Japan to China. Meti was ‘jobless’ in the 1990s and 2000s,” as they had no significant role to play.
“For decades Meti was looking for things to do to protect its power base,” says Benes, “long after Japan ceased to be a manufacturing economy”.
Keeping the lights on
The most urgent priority for Kishida, in power for just six months, is to strengthen the country’s energy and economic security against the backdrop of the war in Ukraine.
He has leaned on Meti bureaucrats to do so. Their influence is seen by many in the decision of the Kishida administration to reject calls to pull out of two major energy projects developed with Russia on the island of Sakhalin north of Hokkaido and one in the Arctic.
The decision by Shell and BP to abandon its Sakhalin oil and gas projects in the wake of the Ukraine invasion sent shockwaves across the industry in Japan. The projects, dating back to the 1970s, were developed in co-ordination with Meti. In total, Japan has more than $8bn worth of investments in energy facilities in Russia.
Nobuo Tanaka, the former head of the International Energy Agency, says the country was reluctant to leave the Sakhalin projects because of the upfront investments. But Japan staying in business with Russia while piling additional sanctions on Moscow has created a dilemma for Meti. Kishida last week joined other G7 countries in banning coal imports from Russia and has pledged to reduce Japan’s dependence on it for energy.
But it will not be easy for Japan to diversify away from the liquefied natural gas in the Sakhalin-2 project given that it is locked in on cheaper, long-term contracts. It accounts for about 10 per cent of the gas used in Tokyo and 50 per cent in Kishida’s native Hiroshima.
The decision by the government to stick with the Russia projects is seen as a big political victory for the ministry. “The number one thing Meti cares about is making sure the energy supply is stable and that any blackouts or any potential issues with supply shortages are avoided” says Tom O’Sullivan of energy consultancy Mathyos. “They have very low tolerance for that kind of stuff.”
And Japan is vulnerable to external shocks. When an earthquake knocked out several power stations in March Tokyo came close to a blackout. The incident rekindled the debate about reopening some of the country’s mothballed nuclear reactors, 54 of which supplied about a third of Japan’s energy before the Fukushima disaster in 2011.
A recent opinion poll hinted at a shift in the public’s mood. For the first time since the triple meltdowns in Fukushima 53 per cent of people said nuclear reactors should restart if safety can be assured, with 38 per cent wanting them to remain closed.
Although the Kishida administration is probably the most outspoken of recent cabinets on the need to restart nuclear power plants, convincing the public ahead of the upper house election in July that it can be done safely presents a significant political risk.
“Meti’s wish is to see more polls like [that] so Japan can proceed with restarts and then use the gas it wouldn’t be consuming [if the nuclear plants are restarted] to sell at high prices to Europe,” Tanaka says. “That would make them a big player on the international stage and the money made like that could be, for example, used to subsidise gasoline prices.”
The pressures created by the new energy crisis are just part of a deeper shift in the way that Meti’s responsibilities are being redrawn by geopolitics and Japan’s own view of industries essential to its long-term survival as a major economy.
Meti’s reinvigorated role as “protectionist-in-chief” was evident even before the pandemic accelerated that shift. In 2019, the ministry assumed effective control of the newly revised Foreign Exchange and Foreign Trade Act (Fefta), giving it powers to scrutinise all inbound investment, similar to those of the US congressional committee on foreign investment, or Cfius.
Shortly after coming to power, Kishida declared that “economic security” was to be a policy priority amid the Covid-related breakdown of supply chains. The focus, said the prime minister, would be on promoting research in emerging technologies, fortifying critical infrastructure and other programmes aimed at rebuilding Japan’s industrial resilience.
For Meti, this translated into a mandate to become more involved in areas where it has traditionally had a large say, including the semiconductor industry.
In the late 1980s, Japanese semiconductor companies spent lavishly to expand production, overtaking the US to reach just over a half of the global market share. But after a bruising trade conflict with the US government, Japan ceded its dominance in the chipmaking industry to companies in South Korea, Taiwan and eventually China. Only one Japanese company, Kioxia, is now in the top 10 chipmakers.
That’s a frustrating state of affairs for Meti. In a widely distributed presentation by the ministry to journalists and others in June, a chart showing the decline in Japan’s share of the global chip market ended with a stark warning: “In the future, Japan’s share will come down to almost 0 per cent!?” In 2019 it stood at 10 per cent.
However, the country still plays a pivotal role in the manufacturing of semiconductor equipment and materials. The US wants to keep those technologies out of Chinese hands, while Japan wants to retain what’s left of its chipmaking knowhow so it can secure supplies with the help of allies such as the US and Taiwan. In November, the Taiwanese group TSMC said it would build a $7bn chip manufacturing plant in Japan together with Sony — half of the investment is set to be subsidised by Meti.
“The semiconductor strategy is different from the familiar industrial policy of strengthening Japanese companies to earn foreign currency. The goal is closer to securing strategic goods such as oil and food,” says Kazumi Nishikawa, director of Meti’s IT industry division who heads the national chip strategy and compiled the Meti presentation. “The biggest challenge is building consensus among people, and letting people know that this is something that cannot be left entirely to the private sector.”
The difficulty for Meti is that, over the next few weeks, Toshiba will almost certainly provide the Japanese public with evidence that certain problems can indeed only be solved by the private sector.
In the seven years since Toshiba was first caught in an accounting scandal, the company has lurched from financial crisis to conflict with its shareholders. To solve its many problems, Toshiba’s largest investors and a growing contingent of the company’s own management increasingly believe that the group must be delisted and taken private.
Meti has so far seemed to step back from the fray: the big question, say both Meti officials and Toshiba investors, is how long the interventionist ministry will be able to resist intervening.