In the June 1967 GATT Kennedy Round negotiations for across-the-board tariff reductions, it was agreed that tariffs would be reduced by 50% during the five years beginning from July 1968.

As a result, for passenger car imports into Japan with wheel bases of 2,700mm or less, tariffs were reduced a number of times from 36% in 1968 to 6.4% in 1972 (the second time that year) and were finally eliminated entirely in 1978. Japan was the only country among the leading industrialized nations to establish zero tariffs for automobiles.

Liberalization of Capital
For Japan, capital liberalization was a hurdle that would have to be cleared sooner or later.

The first measures were implemented in July 1967, permitting 50% capital liberalization for some industries and 100% liberalization for a few others, including motorcycles.

A second capital liberalization was implemented in March 1969, granting limited concessions in some areas of the automobile industry.

Thereafter, the Japanese government decided to implement a 50% deregulation of domestic investment in the automobile sector, effective as of October 1971. In May 1973, the 50% ceiling on investment was removed and 100% investments were permitted, marking the attainment of complete capital liberalization for the automobile industries.

Industrial Restructuring
The advent of an era of free movement of capital provided Japanese automobile manufacturers with an opportunity to restructure, through mergers and the formation of business groups, in order to ensure the mass production that was necessary for survival in international competition.

Some of the early alliances established during this period were short-lived, but successful tie-ups led to the emergence of two main business groups. Toyota concluded tie-ups with Hino in 1966 and with Daihatsu in 1967, creating its own group, while Nissan absorbed Prince in 1966 and later established a tie with Fuji Heavy Industries, forming the Nissan Group.

Tie-Ups between Japanese and U.S. Manufacturers
Under this situation, various automobile manufacturers who were not part of the Toyota or Nissan groups began to seek ties with foreign manufacturers.

In June 1971, Mitsubishi established capital and operational ties with Chrysler. In September that year, Isuzu created an alliance with General Motors. Toyo Kogyo (today's Mazda) and Ford concluded a capital tie-up in November 1979, and Suzuki also forged an alliance with GM in 1981.

The Growth of Exports
The annual volume of Japanese four-wheeled motor vehicle exports (cars, trucks and buses) first passed the 100,000 mark in 1964, but this was still the lowest level of automobile exports among the six leading industrialized countries (the U.S., the U.K., France, Italy, West Germany and Japan). During the next 10 years, however, Japanese automobile exports were to increase at a precipitous rate.

In 1970, Japanese four-wheeled motor vehicle exports reached the 1,090,000 mark, surpassing Italy, the U.S. and the U.K. (in that order) and making Japan the world's third largest automobile exporter. In 1971 Japanese exports surpassed those of France, and in 1974, with a total of 2,620,000 export units, Japan moved past West Germany to become the largest exporter of automobiles in the world. In 1965 exports accounted for less than 10% of total production. By 1975, that figure had grown to 38.6%.

Developing an Infrastructure for Export Markets
The growth of the Japanese automobile export market between 1965 and 1975 was led by passenger car exports, reversing a pattern of truck-dominated exports up until 1965. For cars, a 51.9% share of the export market in 1965 rose steadily to a 73% share in 1971. Passenger car exports in Japan's total automobile production output rose from 10.4% in 1965 to 40% in 1974, with unit figures rising from 100,000 in 1965 to 1,827,000 in 1975, when Japan again surpassed West Germany to become the world's largest exporter of passenger cars.

Whereas Southeast Asia and, to a lesser extent, Africa and Latin America had been the main markets for Japan's truck-dominated exports, the rapid expansion of passenger car exports beginning in the mid-1960s soon established the United States as Japan's top export market.

The huge growth in passenger car exports at this time can be attributed to various factors, including the improved performance of Japanese cars, due in part to the rising technological level of parts manufacturing, competitive pricing made possible by cost reductions accompanying mass production, and the long-term market development strategies of Japanese manufacturers.

Beginning in 1965, for example, overseas sales distribution systems were set up through mergers or 100% ownership, in contrast with the previous trend of distributorships contracted with local companies. Also, manufacturers were meticulous about meeting specifications for particular export markets: complying with the requirements of the Muskie Act in the United States after 1968, or meeting the specific demands of cold-climate markets (Canada, Scandinavia), for example. Expanding the after-sales service networks in export markets was another priority, and subsidiary companies and factories were set up for that purpose in Europe and North America.

The oil crisis of 1973 brought Japan's years of rapid growth to a halt and had a profound impact on the automobile industry. Yet, despite the recessionary world economy, the resulting new demand for small, fuel-efficient cars in the United States and rapidly expanding markets in the Middle East spurred Japan's automobile exports on to a second phase of strong international growth.