THIS CHAPTER DEALS with the Japan strategy of I.G. Farben, a giant German chemical firm which dominated the world market in the inter-war period. In that era, I.G. Farben was a technological as well as organizational leader in the world chemical products market. For I.G. Farben, Japan was both an opportunity and a challenge: the Japanese market supplied a new business opportunity, and Japanese chemical companies were new challengers to its world dominance.

The Japanese economy in the inter-war period can be characterized by its high growth rate. It experienced an annual growth rate of more than 4 percent, among the highest in the world at that time. Moreover, the speed of Japan's industrialization was remarkable, matched only by some small East European countries. Japan seized the opportunity of the First World War to begin development of its heavy industry and chemical industry, the pace of which did not slacken even during the World Depression of the 1930s. Japan can claim to be among the first Newly Industrializing Economies (NIE).

The key feature of the Japanese economy during the inter-war period, however, was economic nationalism in its tariff, commercial, and foreign capital policies, although these differed between the 1920s and 1930s in both structure and severity. In the 1920s, relatively free trade, although policy measures to protect domestic industries, such as imposition of custom duties and limits on the quantity of imports, were implemented. The prevalent attitude toward European and American firms was one that welcomed their direct investment in line with the liberalization policy followed since the turn of the century. The gold standard was established around the turn of the century; it was abandoned at the outbreak of the First World War, but reintroduced in January 1930. Also the Commercial Law Act was enforced, and foreigners acquired the right to deal in real estate and make direct investments. Various restrictions, however, were placed on the management control that could be assumed by European and American firms over their subsidiaries based in Japan. In general, the 1920s were a time of relatively weak economic nationalism.

The 1930s brought rapidly increasing protectionism in Japan, such as tariff increases on imported industrial products, as well as the promotion of domestic products and the replacement of imports with domestic products.