Privatizing State-Owned Enterprises: A Japanese Case Study 
 (Archived document, may contain errors)
 No. 51 September 4, 1986
 Katsuro Sakoh, Ph.D. Senior Fellow
 Japan's industrial competitiveness and trading skills have been trumpeted 
endlessly in the U.S. and elsewhere. Yet Japan's mounting budget deficits and 
the inefficiency of its government are virtually unknown outside of Japan. 
Total government debt in Japan reached 52 percent of GNP in 1984, higher than 
the 47 percent in Britain, 45 percent in the U.S., and 21 percent in West 
 Confronted by this, Japan has launched a program-to slash the debt without 
raising taxes.' It is based on the privatization of government-owned 
enterprises and offers a way of trimming government spending without cutting 
services. It thus avoids the political minefield of asking voters to give up 
benefits and privileges.
 To be sure, few Japanese enterprises since World War 11 have been 
government-owned. These mainly have been three huge public corporations: Japan 
National Railway (UNR), the Nippon Telegraph and Telephone Public Corporation 
(NTT), and the Japan Tobacco and Salt Public Corporation (JTS). Japan Air Lines 
(JAL) is a semi-public corpo.ration in which the government owns 35 percent of 
the stock.
 The burden on the Japanese taxpayer of even this limited government ownership 
has been *immense. By 1983, for example, the railway was losing About $25 
million daily and had accumulated more
 than $120 billion short and long term debts. With 420,000 workers, Japan 
National Railway is one of the most inefficient and overstaffed railroads in 
the world. It has several times as many employees per revenue mile as any other 
railroad system in the industrialized world.I Losses and featherbedding in the 
other public enterprises are equally alarming.
 Soon after becoming Prime Minister in 1982, Yasuhiro Nakasone introduced bills 
of privatization to the JapaneseiDiet. His first bills were for privatizing 
Nippon Telegraph and Telephone Public Corporation (NTT) and Japan Tobacco and 
Salt Public Corporation (JTS). By last year, they were being managed privately, 
although still owned by the state. Nakasone then introduced a bill transferring 
the railway to private management. Later this year he plans to introduce a bill 
calling for the sale of government-held stock in Japan Air Lines. Both bills 
are scheduled to be executed by next year.
 Japan will benefit enormously from privatization. The railway's annual loss, 
which amounts to almost 20 percent of Japan's annual $50 billion deficit, 
eventually will be plugged. Selling government-owned assets and stocks will 
bring additional money into the treasury. And the deregulation that has been 
accompanying privatization will stimulate economic growth, increase tax 
revenues, and open further Japan's markets to foreigners.
 To be sure, Nakasone faced powerful opposition to his privatization strategy. 
This included:
 Labor Unions.- Government corporations have the largest and most powerful 
labor union in Japan, which argued that privatization would reduce the number 
of workers and would transfer worker loyalty from the union to the company.
 Leftists. The Japanese Socialist Party, the second largest political party in 
the country, and the Japanese Communist Party strongly opposed privatization 
because their main support comes from the unions.
 Bureaucrats. Government bureaucrats predictably were loath to lose their power 
within these public corporations.
 Some LDP members. Even Nakasone's own political party, the ruling Liberal 
Democratic Party (LDP), included members benefiting from government control of 
the corporations and thus fought against privatization.
 1. Peter F. Drucker, "Clouds Forming Across the Japanese Sun," The Wall Street 
Journal, July 13, 1982. Nakasone has been able to deflect much of this 
opposition by creating personal advisory bodies that bypass the bureaucracyl 
appointing pro-privatization presidents to these corporations, and urging 
private firms to hire the public corporation employees made redundant by 
privatization, especially those in the Japan National Railway.
 From Brazil to France and from Turkey to West Germany, meanwhile, government 
officials are rediscovering the virtues of the free market economy. The Reagan 
Administration, too, is embarking on a privatization strategy of its own. it is 
firmly pushing ahead with plans to denationalize Conrail, public housing, the 
postal service, and other publicly held monopolies. And Britain's Prime 
Minister Margaret Thatcher's success in selling off such Ptate assets as the 
oil, aerospace, and automobile industries, is a model for U.S. privatization 
policies. Now, Japan's experience-will add to the demonstration of benefits in 
allowing private enterprise into the public sector.
 Japan's total national debt stands at $700 billion. This is the result of 
Japanese economic policies and the jarring economic events of the 1970s. Prior 
to that time, Japan followed the balanced budget policy introduced by the U.S. 
occupation forces following World War II. As late as 1960, the ratio of 
Japanese government expenditures to GNP was smaller than that of any Western 
country. The ratio that year was 18 percent for Japan, compared to 30 percent 
for the U.S. and 38 percent for Britain.
 In the early'1970s,, the commitment to small government and a balanced budget 
was abandoned as Japanese economists fell under the influence of the Keynesian 
economic theory, which advocated government intervention and an expanding 
welfare state. Pressure from the U.S. also pushed Japan toward budget deficits. 
Japan at that time was experiencing the very high economic growth rate of about 
10 percent annually with low inflation and a trade surplus of $6 billion with 
the U.S. The Nixon Administration demanded in the early 1970s that Japan 
stimulate its domestic economy with government spending to increase imports 
from the U.S. Tokyo complied by raising wages for government employees and 
expanding social welfare, public works, and other government programs. As a 
result, the annual budget jumped from 20 percent of GNP in 1971 to 34 percent 
in 1981. Social security expenditures soared from 4.5 percent of GNP in 1971 to 
11 percent in 1981.2
 These "big government" policies along-with the explosion of oil prices sparked 
the highest inflation rate in Japan's postwar history, reaching a staggering 25 
percent in 1975 and depressing overall economic growth. Japan's national debt 
began to increase by 4 to 5 percent of GNP each year. In 1980, Prime Minister 
Zenko Suzuki came to office vowing to "slash the national debt." He began by 
holding down outlays for social security, education, government salaries, and 
agriculture subsidies. The annual growth rate of government expenditures fell 
from double-digit figures in the.1970s to an average 3 of about 4 percent for 
the last five years. Jap4nts annual government budget deficit also dropped 
 Trimming government spending, however, proved to be politically risky. 
Bureaucrats, Liberal Democratic Party members,, opposition party members, labor 
unions, farmers, and others strongly opposed cuts in their programs. Opposition 
became so fierce that Suzuki was forced .to resign in 1982 after only two years 
in office. A member of his Cabinet, Yasuhiro Nakasone, who was directing the 
Administrative Reform Department, succeeded him as Prime Minister.
 Once in office, Nakasone continued trimming the growth of government spending. 
But he also tackled the deficit problem in a new way: he sought to privatize 
the Japan National Railway, Nippon Telegraph and Telephone'Public Corporation, 
and the Japanese Tobacco and Salt Public Corporation--and to sell the 
government's stock in Japan Air Lines (JAL) .
 Japan's government-owned corporations seriously drained the treasury under 
the.economic stimulation policies of 1972 because of the higher wages and 
larger retirement pensions included in the expansionist government budget. As 
the Japanese economy slowed during the 1970s-, the drain became more 
pronounced. Government subsidies to keep the corporations afloat, meanwhile, 
made them,more inefficient and increased their debt.
 2. OECD Economic Surveys Japan Organization for Economic Cooperation and 
Development, July 1983.
 3. Quarterly Economic Review Nomura Research Institute, Vol. 16. No. 2, May 
1986. Political opposition to Nakasone's privatization plans was vociferous. 
Labor unions, facing a loss of power and privilege, mounted a general strike; 
political parties, which depend on labor votes and financial support, blocked 
the privatization bills in the Diet; and entrenched government bureaucrats, who 
stood to lose their regulatory authority, attempted to sabotage the process. ,
 In addition, there was great-concern among people who-depend upon the services 
provided by the public corporations. Commuters and office workers, for example, 
raised questions about whether railway fares would rise or services be 
 In order to overcome these objections, Nakasone took steps to:
 1) Assure the public that the government only.gradually would transfer the 
assets and management of the state-owned corporation's to the private sector 
and would not lower the quality of service.
 2) Str ongly urge private businesses to offer employment to those public 
corporation employees who voluntarily left their jobs.
 3) Give extraordinary power to his personal advisory bodies and policy 
deliberation councils to bypass the parliamentary debates and bureaucratic 
 -.4) Replace the president and executive officers of the public corporations 
who were not only balking at privatization but had close political connections 
with anti-denationalization factions in the ruling Liberal Democratic Party 
(LDP)'. Nakasone, for example, dismissed the Japan National Railway president 
and installed his own man, an unprecedented action in postwar Japan.
 5) Appeal to the public through the mass media., As a result,, all' newspapers 
have given considerable coverage to the collapse of railway worker discipline 
and the ineptitude of railway officials under state control and ownership.
 The JNR became the main target for Nakasone's privatization, especially after 
JNR's own-streamlining attempts failed completely in 1983. The collision 
between the labor union and management demonstrated that there was no hope for 
the rehabilitation of the JNR under state ownership. In 1983, the railroad 
employed 420,000 work6rs, lost $25 million a day, and staggered under more than 
$120 billion in debts. To accomplish JNR's privatization, Nakasone's strategy 
has included:
 Establishing a private advisory body,.the Special Administrative Research 
Council. The advantage Of such a private body is that it can bypass any 
stalling tactics that might be employed by politicians or bureaucrats who 
oppose privatization.- --In 1983, this Council recommended:
 1) Eliminating around 200,000 JNR jobs by 1985, bringing the level down to 
180,000 by 1987. This is proceeding on -schedule.
 2) Splitting the national railway system.into six regional passenger railway 
companies and one nationwide freight company in 1987. (The stock in these 
enterprises, for some time, will be held by the government.) This too is on 
 3) Transfering JNR to private management by 1987.
 4) Allowing JNR to expand its business into such fields as hotels, shopping 
centers, and real estate development.
 Creating the JNR Reform commission in 1983, which has been seeking to:
 1) Reduce the work force by urging employees to take early retirement or to 
move to such private companies connected with JNR as its catering services or 
to other private companies. Some 150,000 have left already, with 90,000 
expected to find jobs outside JNR or retire by next year.
 2) Reshuffle the JNR management team in a manner that will speed the 
privatization process-.
 Introducing by the end of this year a JNR reform bill to the Diet, thus making 
the privatization procedure official. With .Nakasone's ruling LDP controlling 
the Diet, the bill is expected to pass.
 Selling a large portion of nonrailway assets, mainly valuable land, to help 
pay the old debt. Even so, the government will have to "write off" about $70 
billion of the estimated $157 billion debt. Three of the new companies, the 
Hokkaido, Shikoku, and Kyushu lines, will be free from any obligation to assist 
in paying off "old JNRII debts,, while the other four companies will together 
assume about $100 million of those debts. JNR privatization, of course, will 
not be complete until the government actually relinquishes its ownership of the 
railways. What is troubling about this is that Nakasone's plans are very vague. 
All that his government says is that it gradually will sell stock to the public 
of those railway companies that become profitable. Privately, government aides 
predict that all seven railways will be profitable by 1990 and that all of 
their stock will be bought by the,private sector by 1995.
 Privatization of NTT began in April 1985 with the legal transfer of its 
managementfrom the government to the private sector. Compared to the JNR case, 
the process has been smooth. For one thing, NTT was not losing money as JNR 
was. Thus, NTT's 320,000 employees could remain with the company as it was 
being privatized. For another, pro-privatization NTT managers, including the 
president, have been politically active in the privatization process. NTT's 
unions, moreover, favor privatization. The reason: as a state enterprise, NTT 
had linked its salary levels to those at JNR and at government agencies. NTT 
employees thus concluded that their salaries would increase under private 
management. And because NTT was not divided into regional'companies as JNR will 
be, the public has not worried that NTT's basic services will be curtailed.
 NTT was quite confident that technologically it could compete with any new 
companies in the telecommunications industry. In fact, privatization was seen 
as'a way to make it even more competitive. The belief among political leaders 
was that private management and a competitive environment would encourage 
greater technical innovation and permit NTT to adapt quickly to changing 
telecommunication technology. It was hoped, moreover, that forcing NTT to face 
competition would lead to better service to consumers and open the Japanese 
telecommunications equipment market to foreign competitors--an important point 
in trade talks with the U.S.
 The Nakasone strategy for NTT privatization included:
 Passing a NTT privatization bill in the spring of 1984 that converted'the 
enterprise into a privately managed corporation in April 1985. This ended 116 
years of government management.
 Stripping NTT of its-monopoly privileges. Immediately, new pompanies such as 
Daini Denden, Inc., Japan Telecom Co., Ltd., and Teleway Japan Ltd., were 
established, and others are being formed. They will compete with NTT in the 
telecommunications market, especially between such large cities as Tokyo and 
Osaka. Along with opening the common carrier market, Nakasone deregulated 
secondary network service areas like the value-added networks (VAN), which 
perform such data transmission tasks as money transfers for the banking 
industry and credit card verifications. This has spurred formation of joint 
U.S.-Japanese ventures. Examples: IBM and NTT; General Electric Corporation and 
Japan's NEC Corporation; and U.S. Tymnet and Hitachi Ltd.
 The government will sell 12 percent of NTT stock to the public this fall and 
plans to sell an additional 12 to 15 percent each year for the next four years. 
The government will retain 30 percent of the stock for the foreseeable future. 
The Japanese Ministry of Finance expects that sale of the 70 percent of NTT 
stock will bring six to eight trillion yen (or 40 to 50 billion U.S. dollars at 
the current exchange rate) into the Japanese treasury.
 In contrast to the smooth sailing of the NTT-privatization bill, efforts to 
privatize the 75-year-old, government-run tobacco and salt monopoly encountered 
stiff opposition. It came from the 90,000 tobacco farmers who wield strong 
leverage within Nakasone's Liberal Demociatic Party. They fear that "complete" 
JTS privatization will prompt massive imports of tobacco leaf from at least a 
score of nations that produce the crop at much lower prices than Japan. 
opposition also came from the Ministry of Finance, which feared losing some of 
the $1.7 billion annually contributed to the treasury by JTS. And labor leaders 
were apprehensive that a reduced Japanese domestic tobacco industry would mean 
fewer union members.
 Bowing to strong political pressure, Nakasone rejected the most sweeping 
recommendations of the Administrative Reform Council, his private advisory 
body. It had called for completely abolishing the JTS monopoly powers in 
tobacco manufacturing. Nakasone agreed to maintain JTS status as sole producer 
of cigarettes and buyer of domestic tobacco leaf even after privatization. Even 
so, Nakasone proposed measures that would begin the JTS privatization process 
by transferring control from bureaucratic hands to private management. As 
important, it abolished the JTS monopoly on distributing cigarettes. Foreign 
manufacturers, who formerly had to distribute their products through JTS, now 
can set up their own networks. Already, the U.S. tobacco giants of R. J. 
Reynolds Tobacco Co. and Philip Morris Companies, Inc., have forged links with 
Japanese firms to distribute American cigarettes.
 Nakasone's compromise on JTS privatization became law in mid-1\u223\'a784. The 
following April, JTS was transformed into a privately managed 
corporation--Japan Tobacco, Inc. (JTI). During each of the next four years, 
12'percent of the government's stock in JTI will be sold to the public. 
Privately, government officials predict that all
 of the stock eventually will be in private hands. Officially, however,, the 
Nakasone government says that the state will retain 52 percent of the stock for 
the indefinite future.
 Unlike the railway, telecommunications, and tobacco corporations, JAL has been 
managed privately since it was founded as a semi-government corporation in 
1951. Initially the government owned nearly 60 percent of the shares, but 
gradually reduced this to 35 percent. JAL is regarded as one of the world's 
best-managed airlines. Still, the Nakasone government concluded that there is 
no reason for the government to remain a shareholder. Without the state as a 
partner, JAL may be able to respond more rapidly and flexibly to market 
developments. Indeed, bureaucratic intervention and-state financial assistance 
have spawned irresponsible management and poor morale among JAL's 20,000 
workers. The crash of a JAL 747 jumbo passenger jet into a mountainside near 
Tokyo in August 1985 dramatized many of the company's serious management 
problems. other airlines in Japan, moreover, are fully in private hands.
 To privatize JAL, Nakasone appointed a new president and chairman of the 
airline last October to restructure the JAL before a scheduled "total" 
privatization next July. Then last spring, the government -allowed All Nippon 
Airlines, a privately owned Japanese carier, to begin flying Pacific routes, 
ending JAL's monopoly of international routes. This fall, the Diet is expected 
to approve these measures in a JAL privatization and anti-monopoly bill. And a 
few months later, the remaining government-held JAL stock will be released 
slowly on the market for private investors.
 Though the Nakasone government has treated each public corporation in quite a 
different way, the objective has been the same: transforming a managerial 
system based on state ownership and control into private management and 
eventual private ownership. Nakasone expects a number,of benefits from 
privatization. Among them:
 1) Reduction of the annual budget deficit by about 20 percent or $10 billion. 
I 2) An infusion of nearly $100 billion into the government treasury from sales 
of stock in the state-owned enterprises.
 3) Increased efficiency that will stimulate the Japanese economy to expand, 
thus yielding substantial additional tax revenue. 4) More open markets, thus 
benefiting Japanese consumers and foreign competitors.
 Rejuvenating the domestic economy and reducing the national debt by selling 
state-run enterprises is not only a Japanese phenomenon. It initially started 
in Britain when Conservative Prime Minister Margaret Thatcher came to power in 
1979. Her government already has sold $28 billion worth of state assets, 
including public housing and major publicly owned companies in the automotive, 
telephone, and aerospace industries. The British government is.planning to 
privatize British Airways, British Gas, government-owned airports, and many 
other public enterprises. Privatization has not only helped Thatcher balance 
her budget, it has rejuvenated the private sector.
 From denationalizing the cotton mills in Pakistan to privatizing the state 
airline in Turkey to bringing the nationalized industrial giants to the stock 
market in formerly socialist France, world leaders are following Thatcher's 
lead. So doing, they provide their citizens with a more efficient private 
sector, a less intrusive or costly public sector, and a greater range of 
choices for the individual in what he consumes or where he works.
 Under the Reagan Administration, the U.S., too,-is embarking on privatizing 
electric power companies, Conrail, Amtrak, public housing, the postal service, 
airports, and other holdings. Because*of strong resistance,from Congress, 
however, the pace of privatization has been much slower than elsewhere.
 What began six years ago in Britain as a rigid doctrine to roll back the 
frontiers of the state has come to be seen as pragmatic and routine in the 
industrial democracies.and other countries as well. The privatization movement 
is an important global phenomenon, which recognizes the importance of free 
market vitality in rejuvenating stagnant national economies hide-bound by state 
planners and managers. Japan's experience will be a valuable addition to this 

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