At the beginning of the 1960s, trade friction between Japan and foreign countries was increasing. While its shipbuilding, textile, and other industries were rapidly increasing their exports, Japan cited balance of payments worries as justification for strictly restricting imports and foreign exchange transactions. The United States and Europe were dissatisfied with the situation and made repeated calls for Japan to liberalize trade.
Facing pressure from overseas, the Japanese government gradually began to lift import and foreign exchange restrictions. With this, the deregulation of the Japanese economy had begun, and Japan started to open its markets to the outside world.
As deregulation progressed, restrictions on capital were finally relaxed allowing direct foreign investment. Foreign companies could then set up subsidiaries or joint ventures in Japan, acquire equity in Japanese companies, and participate in the management of those companies. In July 1967, the first round of capital deregulation authorized foreign ownership of companies in designated industries. Depending on the industry, foreign ownership of 50 or even 100% of certain companies was permitted.
Record companies were classified in the "up to 50%" category. CBS Inc. was very interested in expanding its music business into Japan and rapidly began to search for a partner to set up a subsidiary there. At the time, CBS Records commanded a 20% share of the worldwide record market and boasted technological successes such as the LP record. Although CBS Records had been supplying Japan Columbia Inc. with master recordings for many years, the two companies could not reach an agreement on a joint venture in Japan.
In summer 1967, Harvey Schein (then president of CBS International and later president of Sony Corporation of America) visited Japan to talk to various record companies. However, while all of them listened earnestly to Schein's plans, none of them would give him a straight answer with regard to setting up a joint venture. Schein presumed that not answering with a clear "yes" or "no" was normal business practice in Japan.
In October of that year, after several frustrating months, Schein thought of Akio Morita whom he had a relationship with through Sony's broadcast equipment business. Morita was then Sony Executive Vice President. Schein had great respect for Morita as a businessman and merely wanted to ask for some advice, but upon hearing Schein's proposal Morita immediately responded, "How about setting up a joint venture with Sony?" After his experiences with other Japanese companies, Schein was taken aback by the speed with which Morita proposed the venture. It had taken him just thirty minutes to reach an agreement with Morita!
A week later Schein, Columbia Group President Goddard Lieberson, and CBS International Vice President Walter R. Yetnikoff visited the Sony Corporation headquarters to discuss the joint venture in detail. They met with Morita, Senior Managing Director Kazuo Iwama, Senior Managing Director Taketoshi Kodama, Managing Director Noboru Yoshii, and Director Norio Ohga among others. Ten days after the meeting, Sony submitted a draft contract to CBS and Schein was again surprised at how quickly Sony had made a move. Difficult negotiations followed, but both teams worked hard to reach an agreement quickly. Before the end of the year, they had signed a contract committing them to the establishment of a joint venture company, and submitted an application to MITI. News of the proposed contract, and the fact that Sony had already applied for MITI approval, sent shock waves throughout Japan's recording industry. Inside Sony, a new department was formed under the direction of Ohga to establish the new record company.
In March 1968, CBS/Sony Records Inc. was born. Capitalized at 720 million yen, it had the honor of being the first foreign-Japanese joint venture to be set up in the wake of Japan's capital deregulation. However, the road to reach that stage had been full of twists and turns with the company name turning out to be a considerable stumbling block. With its international reputation as a leading record company, CBS insisted that the new company be called CBS/Sony. However, Sony was adamant that it should be known as Sony/CBS since the company would be based in Japan and because Morita's team believed that the new venture would establish Sony as a major worldwide manufacturer of both hardware and music "software." Another reason that Morita and his team were so keen for it to be called Sony/CBS was that Sony wanted to take direct charge of the company's operations. In the end, as neither side was willing to concede, the new company was named CBS/Sony Records on the basis of alphabetical order.