Virtually all of these indirect sales are made through intermediary companies

 In Japan, as in Europe and the United States, there is a
significant difference between list prices and transactions
prices of steel products. However, unlike the situation in
the other countries, list prices until recently were arrived
at jointly by 43 steel producers under the guidance of the
Japanese Ministry of ~nternational Trade and Industry (MITI).
These companies met m¿nthlY with their trading companies and,
- 207-
except for slight variations, announced uniform prices (14,
pp. 5, 6) and (9, pp. 36-39). This system, known as the
"koka i hanba i se ido" or "kohan" system, for shdrt, was first
establ ished in June 1958 in an effort to reduce price cutting ,~ ' ~;
during recessions (13, p. 103) and (9, pp. 36, 371. These
prices are termed "joint open sales prices" (JOSP). Prices
for large users such as the automobile industry are given

separately. In addition, the industry quotes "joint open sales
standard prices" (JOSSP). The JOSSP are intended to represent
the pr ices steelmakers consider necessary for longrun industry,
growth. However, these JOSP and JOSSP have shown extreme
inflexibility and are above transactions prices except during
periods of strong demand.
It should be understood that the Japanese distribution
system differs markedly from that of the U.S. In the U.S.,
approximately 80 percent of the steel is sold directly by the
steel company to the end user. 61/ Japanese steel companies
sell approximately 90 percent of their steel products indirectly
through middlemen. 62/
61/ According to the American Iron and Steel Institute's Annual
statistical Report in 1975, 80.5 percent of the steel was sold
by steel mills to end users and 19.5 percent was sold to steel service centers and distributors.
62/ See the estimate of Kawahito (13, p. 981, or Japan Iron and
Steel Federation, Tekko Tokei Yoran, 1976, pp. 107-109 (in
Japanese), for the raw data from which this ratio is computed.

Virtually all of these indirect sales are made through
intermediary companies known as trading companies. Trading
companies market almost all Japanese steel exports and the bulk
of domestic sales. The trading companies actually take possession and reship to the end user about 20 to 25 percent of the
steel which they purchase. 63/ In addition, there are small
steel service centers for local demand who usually purchase their
steel from the trading companies. The t~6.b. prices at which
the steel service centers purchase their steel from the trading
companies are called "market prices." It is estimated that
abou t 5 percent of total transactions occur at these "market
prices," wi th such transact ions r is ing as a percentage of the
market during contractions. Sales not made through trading
companies are generally those of the Big Five steel producers
to a large buyer of steel. e.g., sales to a Japanese automobile
manufacturer 1 ike N issan.
The major functions of the trading company, as intermediary between steel producer and domestic end user, are
threefold: finance, delivery, and product finishing. 64/
Generally speaking, trading companies are involved most frequently in transact ions between steel producer and end user
63/ Kawahito (13, p. 99). and Japan Iron and Steel Federation,
Tekko Tokei Yoran, 1976.
64/ In addition to th~ information from public sources cited
in this section, cons~derable information has been obtained
from our interviews o~ steel industry and government steel
specialists in Japan. -209-
when the consuming firm has a high debt-equity ratio. These
consuming firms find the credit extended by the trading
companies attractive. ~/
Most contracts between steel producers and trading
companies involve the use of the so-called "uchikosen"
system, by which the price of the steel is first determined
through direct negotiation, and then the commission of the
trading company follows as a predetermined proportion of the
sales price. Trading companies claim that competition among
them prevents the commission from exceeding competitive
rates ~/; the commission is currently about three percent.
The nature of contracts between trading companies and steel
consuming companies change substantially wi thcycl ical
fl uctuat ions in the economy. Dur ing recess ions, par ticular ly
in times of tight credit, trading companies frequently extend
the f inane ing per iod under which end user s may pay for the
65/ For example, Japanese Fair Trade Commission statistics
reveal that about 100 percent of Mitsubishi Heavy Industries'
steel purchases are handled by trading companies, compared to
about 50 percent of Nissan's transactions. Nissan has a
relatively high proportion of internal finance. As an
exception to the pattern, Matsushita Electr ic has 100 percent
of its steel transact ions handled by trad ing compan ies, despite
its relatively low debt-equity ratio. 

Matsushita uses trading
companies, not because of the financing they provide, but
because of the services they render in cutting producer steel
to sizes meeting Matsushita's distinctive requirements.
66/ For a good analysis of this subject, which concludes that
tne commission fees are not excessive, see Krause and Sekiguchi
(15, pp. 394-397).
steel. Trading companies usually pay steel producers cash for
products received and sell them on credit to end users. 67/
Thus, Japanese steel producers are selling steel either
to large end users or to trading companies (who are even larger
buyers): one would surmise, then, that the kohan system of
prices does not generally characterize the transactions prices
at which the Japanese steel producers sell their products. In
fact, it is known that the prices at whi~h~teelmakers sold
their steel to the trading companies were arrived at privately'
outside the large monthly meetings (14, p. 6).

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