Has the 1987 breakup and privatization of the old Japanese
National Railways (JNR) been a success? There is no telling
how many times this question has been asked in the 25 years
since JNR became the group of six independent regional
passenger operators, and the nationwide freight operator,
Japan Freight—loosely called the JRs today. However, nobody
has yet to answer the question, which may itself fall into the
category of nonsense. The paths that the JRs have taken in
their first 25 years and their varied achievements are complex,
making a clear black-and-white judgment impossible.
At the very least, we can say that the JNR breakup and
privatization has probably been a relative success because
without it the management’s achievements would be poorer
than those of the JRs. Moreover, railway transport in Japan
would be in dire straits now.
But has the JNR breakup and privatization been a
success in the absolute sense? This article looks at the
achievements of the JRs over 25 years and discusses their
future issues. Due to space limitations, however, this will only
cover the surface of the topic.
A lot of data can be (and has been) presented showing that
the JNR breakup and privatization was a success. Such
data includes improvements in the overall account balance
of JR companies, increased productivity as the result of
reduced workforce (460,000 in 1965 to 201,000 at the
start of JRs in 1987), and controlled fare increases in JRs’
passenger companies. However, it is not an easy task to
simplify the factors behind every item of data but focusing
on the breakup brings some into perspective.
The economic theory of industrial organization often
analyzes the border between a company and its market,
or the optimum company scale. Increases in scale may
create ‘economy of scale’ whereby increasing the scale of
a company reduces unit production costs. (This differs from
cost reduction due to mass production at a given scale.)
Economy of scale is said to be easy to achieve, particularly
in process industries, such as railways.
However, if the company scale becomes too bloated,
transmission of information and communication within the
organization no longer runs smoothly–objectives cannot
be shared, and the organization as a whole may no longer
work efficiently. In economics, we say the ‘transaction costs
become large’. Ultimately, the optimum company scale is
thought to be determined by the balance between cost
reduction through economies of scale and increases in
transaction costs due to expansion of the organization. (Of
course, there are other analytical approaches.)
The scale of a purely private company is determined
automatically by the decisions of the company’s
management. However, JNR could not determine its own
scale because the management decisions were greatly
affected by political intervention and the organization
became bloated. Seen from this viewpoint, the reduced
scale of the six new JR passenger companies resulting from
the breakup is, to some extent, appropriate. However, serious
consideration is needed to determine whether the scale of
JR Freight is appropriate for current business conditions.
So, what about the JNR ‘privatization?’ We can say that
sufficient stimulus was given to the new JR companies for
them to realize they are in the midst of severe competition,
and they probably have been given sufficient management
freedom. Strict government administration in the JNR era,
as demonstrated by legislative control of fares, inevitably
provided fodder for political fights and was used for political
purposes. Just as the proposal to eliminate expressway tolls
is being used in political fights in Japan today, politics played
a major role in JNR operations. Eliminating constant political
intervention was a major achievement of privatization.
If the new JRs had continued to be reliant on government,
today’s success would probably not have occurred.
Innovation occurs in both intangible and tangible ways.
A good idea like Shonan-Shinjuku Line trains sharing the
track of a relatively empty freight line as a means of running
more than one passenger line instead of having their own
dedicated track, would probably never have been achieved
by the old JNR due to conflicts of interest among the various
parts of the railway administration.
Companies also pursue economies of scope while they
pursue economies of scale. Economy of scope means,
for example, using the assets of the main business for
services in other fields to reduce overall costs. For the JRs,
economies of scope in railway-related business fields were
made easier by privatization. A typical example is building
shopping spaces called ekinaka inside the ticketed area.
NEWDAYS, JR East’s well-known convenience store chain
run by JR East Retail Net Co., increased the number of
shops from 226 to 432 during the last decade. The idea of
using stations as venues for consumption instead of just
for moving passengers as well as the lack of restrictions
preventing such business expansions has made the ekinaka
project very successful.
There are many other factors requiring analysis, such
as reform of labour relations and relations between unions,
unbundling of long-term debt, and the presence of the
Management Stabilization Fund (MSF, a fund established
by the government to compensate for expected financial
losses of the less profitable JR Hokkaido, JR Shikoku and JR
Kyushu), but they are too numerous to mention.
Although already a well-known fact in 1985, the Kokutetsu
Kaikaku ni Kansuru Iken (Opinions on Restructuring of JNR)
report by the Supervisory Committee for JNR Reconstruction
makes no mention of Japan’s declining birth rate and greying
society. Such changes in Japan’s social environment were
probably not seen as a serious problem back then. Or possibly
there were other serious problems that outstripped recognition
of this issue by JNR at the time. In either case, such changes in
the social environment were seldom noted at the JNR division
and privatization. As a consequence, the new JRs are being
forced to deal with this social environment today.
What is now seen as a serious problem in this
perspective is the widening management gap between
the three JRs on the main island of Honshu (JR East, JR
West and JR Central) and the three companies on the three
smaller islands (JR Kyushu, JR Shikoku and JR Hokkaido).
Since regional lines take the early brunt of the declining birth
rate and greying society through depopulation, JR Kyushu,
JR Shikoku, and JR Hokkaido are now facing management
crises. The MSF plays an important role in supporting
their managements today, but neither JR Hokkaido nor JR
Shikoku can be supported by the MSF alone when looking
at their recent profit and loss statements. In the FY2010, JR
Hokkaido registered an operational loss of \28.475 million
while the return from the MSF was \24,089 million, and JR
Shikoku registered an operational loss of \9322 million while
the return from MSF was \7490 million. The previous section
presented a relatively positive assessment of the scale of the
JRs. Considering the declining birth rate, greying of society
and repercussions on depopulated regions, we may have
come to the point where we need to reflect on whether it was
a good idea to break up JNR into regional JRs based on
geographical and political lines.
Note must be taken of the three JR companies on
Honshu that seem at first glance to have stable management.
We need to recognize that the current management situation
is a management accomplishment as a result of unbundling
long-term debt. The companies did assume a part of the
debt, but the greater part of \31 trillion was taken over by the
state-owned JNR Settlement Corporation (JNRSC). This is
the greatest reason why we cannot judge the JNR brea
collapse soon after the formation of the JRs put these debt
repayment estimates into disarray. Worse, government policy
intentionally restricted the sale of assets at the peak of the
bubble. While unthinkable for a private company, government
control of asset sales meant that the best timing was missed,
creating an unfortunate situation in long-term debt terms,
although selling off the assets might have resulted in a more
severe situation for the post-bubble Japanese economy. We
must remember that the JNR’s long-term unpaid debt still
squeezes Japan’s finances.
It goes without saying that the JRs must make further
management efforts to maintain and grow their businesses.
Having achieved complete privatization, the three larger
JRs on Honshu have appropriate oversight by shareholders
and the market, indicating that the management efforts are
working to some extent. The three smaller island JRs are still
wholly owned by the government, and for this reason they
are still bound by business law regulations. Even so, they
seem to have a degree of management autonomy.
Sorting out points that are difficult for the JR companies
to overcome under their own management efforts will
probably be meaningful in gaining an outlook for the future
of the JR companies.
The first point is securing an environment of fair
The government trial last year with a \1000 unlimited
distance weekend toll on expressways and other trials on
eliminating tolls altogether greatly disrupted competition
between road and rail. The measures were implemented
at the end of the Liberal Democratic Party administration
and in the early days of the Democratic Party of Japan
administration. Ingenuity and efforts to provide lower fares
and better services in inter-urban air and rail transport
must not be lost by implementing an expressway toll
system warped by massive infusion of public money (the
government allocated \100 billion in the FY2010 budget).
The suspension of expressway tolls in the Tohoku region
struck by the great earthquake, tsunami and nuclear
disaster in March 2011 was unavoidable to some extent, but
extended implementation of such measures needs careful
consideration as discussed in my other articles included in
the reference materials section.
Second is securing fair burden. Noting just one of many
key points here, ridership of rural lines has dramatically
decreased, and a major role many of those lines play today
is that of transporting students to school. However, usage
by students commuting to school is with season tickets at
a substantial discount, and the loss from that discount is
financed by cross-subsidization from other passengers.
Since education has external nationwide benefits, the cost
should be borne reasonably by the nation as a whole. Rail
operators carrying the costs of government policy such as
student discounts is not a fair burden. The same can be said
for discounts for the disabled. It is important to improve the
three island JRs’ management conditions by correcting such
unfair burdens, even if the benefit is not so large.
Third is elimination of unreasonable political intervention.
Blatant political interventions, which were often seen in the
JNR era, are no longer seen today, but the JRs constantly
face potential threats. Eliminating inappropriate intervention
and securing autonomy at the discretion of rail operators will
continue to be important.