JAPAN’S ‘ECONOMIC MIRACLE’: REASONS FOR SUCCESS

INTRODUCTION

Japan underwent an incredible growth in the decades immediately after WW2. We will look at these factors and see why there was this “Japanese Economic Miracle.”

1. Role of the USA in promoting Growth
2. Role of the Government
3. Socio-economic reasons

HISTORY

Started in the Tokugawa (1603-1868) era – There was domestic economic growth in agriculture, industry and trade
- Population growth was almost non-existence; people kept their numbers low to achieve more wealth

Meiji Restoration (1868-1912) – end of Tokugawa Shogunate
- Started circulating paper money
- Replaced rice tax with land tax (land tax reform) to increase govt revenue
- There was rising per capita output,
- Cotton and silk products, used 10% of workers but accounted for 1/3 of exports
- Began to open and reorganise treaty ports
- Introduced foreign technology

WW1 – economic boom
- Zaibatsu- property agglomeration – interrelated and interlocked corporations
o Mitsui, Matsushita, Yasuda, Sumitomo
o Specialised in certain things and formed bank partnerships

And there was an impetus for industrialisation after the Meiji Restoration (1868)
- There was a development of heavy industries
- Increased production led to a search for markets and raw materials
- China and SEA became possible hinterlands
- At first Japan had a policy of aggressive expansion
- Initially, it was commercial, and then military
- Its economic policy during the WW2 was similar or at least based on traditional policies
- While it was seen as a “miracle”
- But Japan did have an advanced economy before the war
- Eco recovery was quite quick due to expertise


SOME REASONS FOR JAPAN’S ECONOMIC SUCCESS

1. ROLE OF THE USA

Problems after the war

- The arrival of the USA plunged Japan into rapid change, unprecedented since the Meiji Restoration
- From 1945 to 1952, there was an estimated US$1.9b in assistance
- US called it democratisation; did not abolish the government and civil service
- After the war, Japanese cities were left weakened by bombings
- 1/3 had lost their homes, ¼ of physical capital lost
- Tokyo’s population fell from 7m to 3m from 1940-45
- Osaka from 3m to 1m
- After bombing, 4% of Toyoma was left standing, 42% of Yokohama, and 40% of Tokyo.
- Construction costs were high
- Houses loss; people slept in subways
- Agricultural production only reached pre-war levels by 1950s
- Deep economic distress
- Factories destroyed – about 40% of pre war
- Although some believe this was a blessing at the bombing levelled obsolete methods and factories, allowing for the rebuilding to continue
- There was no air manufacturing
- There was a lack in textile manufacturing

US Occupation

- US led allied occupation
Supreme Commander for the Allied Powers (SCAP) – General Douglas MacArthur of that office, so much so he became synonymous with the title
- There was a fear of Communism
- Japan was to be the workshop of democracy in the region
- “Reverse course”
o China and the Korean War – led to shift to fit into the containment policy of the US and were similar to Europe’s Marshall Plan. According to George Kennan’s policies, Japan would serve as an industrial engine of East Asia. A strong Japanese economy would prevent Communism from spreading in Asia. Public sector workers lost right to strike, blow to ideological freedom (1950 Red Purge), halt to Zaibatsu busting process, and loosening to anti-monopoly laws.
Significance for Japanese Foreign Policy: This ‘reverse course’ made Japan the corner stone of US policy in Asia. Further it forced Japan’s foreign policy to be based around its relationship with the US.
- Purged war supporters, military leaders, civil servants

a) US aid

- Shipped in aid, food supplies
- Wartime propaganda had portrayed the American as beasts, but after the war, people saw them as kind.
- Japanese became attracted to USA system and lifestyle
- Especially their affluence
- Brought lots of goods with them, especially consumer goods, chewing gum, chocolate
- USA however realised that they needed the civil service on their side

Some Reforms

- Landholding
o Land confiscated from absentee landlords and redistributed to tenants
o Resident landlords forced to sell land away, if they owned more than 2.5 acres
o Possibly the main achievement in Occupation
o Despite US not knowing what to do with land scarcity, the Ministry of Agriculture in Japan had experts and were behind it
o Soon most farmers owned at least most of the land, rather than working for landlords
o “yeoman” farmers
o Pride of ownership compensated for small lands – so production went up
o Land Reform Measure: 28 Dec 1945
o Also rice and agriculture had price ceilings

- Labour organisation
o US hoped for a viable union policy just like had happened in the USA in 1930s in the New Deal
o Would also teach them about democracy
o They changed Japanese law that banned strikes etc
o Trade Union Law in 1945 had great approval
o Labour Standards Law in 1947 provided basic standards and protection for workers
o However as more and more joined Unions, began demanding more pay etc
o Wanted to strike by 1948 but banned by SCAP, so drove a wedge between USA and some more progressive sectors
o SCAP’s changing view of unions also allowed bosses to take a tougher stand against unions
o Toshiba and Nissan replaced workers with more docile ones
o Labour laws and mechanisms for solving labour disputes are still around
o But Generally highly unionized blue-collar factories till this day – allowing for good morale and job security

- Zaibatsu was reorganised or dismantled
o Saw it as large capital, as evil; also because it worked with the military
o Allies tried to remove concentration of capital
o Confiscated stock holdings for 56 members of 14 largest zaibatsu
o Sold to open market
o Large firms like Mitsui and Mitsubishi broken up into smaller parts
o But many realised that reducing their powers did not help anyone
o Workers lost jobs etc
o Plus banking sector was never reorganised, so by the 1952 MacArthur had began to ignore the restructure and the zaibatsu began rebuilding, later going to help in economic growth.

- Education
o Made along Allied lines
o Reduced patriotic texts etc

- Constitution
o Wanted to reduce the power of the military and improve conditions for democracy
o Weeded out militaristic – right wing, industrialists, journalists in a bloodlest purge (210,000)
o Punished the war criminals like Tojo Hideki and other for crimes against humanity
o Emperor kept in place – New Year’s Day the emperor reaffirmed its commitment to democracy and renounced all claims to divinity
o New constitution completely changed the Meiji one; sovereignty shifted from the imperial to the people
o Established 2 houses – House of Representatives and House of Councillor
o Supreme Court
o Article 9 – no armed forces; except for a self defence force - “land, sea and air forces as well as other war potential” would not be maintained

- Local government
o Increased decentralisation
o Greater autonomy at grassroots levels


The USA wanted to achieve economic stability

- By 1948, Joseph Dodge, a Detroit banker came in to review financial conditions and introduced the Dodge Line – monetary stabilization
- Deflation, job layoffs, cutbacks – very harsh
- But reduced inflation and set many companies on better ground
- Also helped by Korean War
- But democracy was a product of affluence
- SCAP met some technocrats led by Okita Saburo (the father of the economic miracle)
- Dodge line plays a big role in this “reverse course”
o Restoration of private foreign trade
o Shut down Reconstruction Finance Banks
o Reduced price controls
o Attained fiscal control – subsidies now not from Bank of Japan but from taxes
o Laid off workers – 100k railway workers, 20k telephone workers
o US spending increased aggregate demand in Japan

b) US military protection

- By 1951 most allied nations signed a joint security pact with Japan.
- With the USA, they signed a Mutual Security Treaty, allowing US to station troops there, and also US had control over Ryukyu Islands and gave the US the right to deploy troops in Japan without Having to consult with Japan
- Would defend Japan and placed under “nuclear umbrella”
- Peace treaty in 1951, San Francisco granted Japan full independence with no reparations, no punitive economic restrictions and no commitment to massive rearmament
- Japan was allowed a Self Defence Force in 1954 (150,000)
- With Japan under US nuclear umbrella, just needed to spend a little of it GNP, where once it spent about 60%
- Left it available to invest in capital and for families for consumption and savings
- By 1960, only spent 1% of GNP on defence
- Also access to US tech
- Favourable terms with saved the Japanese on R&D

c) US spending in East Asia (Korean War)

- Military hostilities in the Korean peninsula further boosted the economy in 1950 because the U.S. government paid the Japanese government large sums for "special military procurement."
- These payments amounted to 27% of Japan’s total export trade
- Demands for new factories
- More jobs – more income
- Increased consumption
- Toyota and Nissan began building trucks which starts the road to future expansion
- By 1955, Japan was reaching full recovery
- “Special procurement boom”
- Prime Minister referred to the $3b windfall “as gifts from the Gods” because before 1949, the US had put in place certain austerity measure and this stifled demand (Before Dodge came in, the USA was taking special care to make sure the Japanese would not suffer too many problems so many of the changes were cautious)


2. ROLE OF GOVERNMENT

- Agriculture also provided help in economic growth
- But 41% of labour was here (compared to West Germany - 18%, USA - 4%)
- Soon, younger people started looking for urban jobs
- Birth rates in before the war were high so by 1950s workers were increasing in number

- To help Japanese growth there needed to be some political stability
- Pact between the voters and the Liberal Democratic Party (LDP)
- LDP mainly dominated but were never too powerful as had some opposition
- Also had support of some big companies and sectors like ship building, electronics and banking

Income Doubling

- One key policy from the government was the Income-Doubling Plan of 1960 by PM Ikeda
- Plan was to create a industrial belt from Tokyo to Yokohama to Kyushu in the west
- New roads, bullet train etc
- Planned to double GNP and personal income
- Set broad targets for the economy
- Offered tax benefits, direct and indirect assistance to companies

Planning and Guidance

- Guidance from (Ministry of International Trade and Industry) MITI
- Financial policies were to benefit large scale enterprises
o Usually implemented through Bank of Japan and Ministry of Finance (MOF)
o Keep capital cost low
o MOF restricted reliance on stock market for bonds and fostered relations between creditors and banks for long term planning. This also meant they control foreign exchange and imported technology
o MITI had the authority to channel foreign currency to large firms

- Also did not have a large system of welfare and had low taxes, keeping money in individual hands
- Allowing for more investment, more so than say Britain or Sweden
- Did not nationalise industries like in Europe, kept it private hands

- While it did not have a “command economy”, it allowed that the government would allow directive allocation of resources.
- MOF and MITI especially
- “Indicative planning, etc
- Business cooperation with government -> known by many as Japan, Inc.

- 1950s - Diet passed laws; controls over access to world markets, shape and regulate private investment, preferential allocation of foreign currency to import raw materials, regulations limiting foreign investment
- Tax breaks and incentives for targeted industries
- MITI channelled low cost loans and benefits to chosen areas
- Chemicals, iron, steel, shipbuilding in the 1960s, automobiles and electronics in 1970s, computer, computer chips and high end tech in 1980s,
- Oil refining, plastics, petrochemicals, electronics, automobiles – many of these were new to Japan so could start from scratch
- Protection of “infant industries”
- Gyosei Shido (administrative guidance)

- Chalmers Johnson believes that a key factor was the not so invisible hand of the state sponsored development

MITI
- MITI was created with the split of the Ministry of Commerce and Industry in May of 1949 and given the mission for coordinating international trade policy with other groups, such as the Bank of Japan, the Economic Planning Agency, and the various ministries.
- Japan was still recovering from the economic disaster of World War II. With inflation rising and productivity failing to keep up, the government sought a better mechanism for reviving the Japanese economy.
- Exports and imports
- Domestic industries and businesses not specifically covered by other ministries in the areas of investment in plant and equipment, pollution control, energy and power, some aspects of foreign economic assistance, and consumer complaints.
- This span has allowed MITI to integrate conflicting policies, such as those on pollution control and export competitiveness, to minimize damage to export industries
- The close relationship between MITI and Japanese industry has led to foreign trade policy that often complements the ministry's efforts to strengthen domestic manufacturing interests.
- MITI facilitated the early development of nearly all major industries by providing protection from import competition, technological intelligence, help in licensing foreign technology, access to foreign exchange, and assistance in mergers.
a) Promotion of industrial production and foreign trade

- Japan also had a large supply of workers – birth rates and rural movers
- Body of experience managers from zaibatsu
- Started in the 1920/30s so by the 1950s these were managers material
- Many of these also had a warlike want to defeat the US in economy
- In addition, new industries started coming up
- Banking and Finance, some tied in to old zaibatsu and some were regional
- But relations between the banks became good

b) Export oriented

But not just a planned cooperative between government and businessmen
- Japan’s success also depended on low cost raw materials
- Currency exchange rate
o Stabilised by Bretton Woods and IMF
o Created predictable and stable monetary flows

- Open world markets
o Entered GATT in 1955 because it needed access to cheap imports and markets for exports
o End of protectionism led to the Japanese being able to export good as it no longer faced barriers
o Nor did it have problems obtaining raw materials
E.g. Cheap oil from Middle East
o While after the war, many countries had some kind of economic miracles; the Japanese took advantage of it more than anyone else.

- The period of rapid economic growth between 1955 and 1961 paved the way for the "Golden Sixties". The second decade that is generally associated with the Japanese economic miracle. In 1965, Japan's nominal GDP was estimated at just over $91 billion. Fifteen years later, the nominal GDP had soared to a record $1,065 billion by 1980.
- Ikeda's adherence to government intervention and regulation of the economy his government pushed trade liberalization. By the April of 1960, trade imports had been 41 percent liberalized (compared to 22 percent in 1956). Ikeda planned to liberalize trade to 80 percent within three years. His plans however met severe opposition from within Japanese society.
- However, governmental plans to liberalize trade faced fierce opposition from both industries who had thrived on over-loaning and the nationalist public who feared foreign enterprise takeovers. Ikeda's income-doubling plan was largely a response to this growing opposition and widespread panic over liberalization, adopted to quell public protests. Ikeda's motivations were purely pragmatic and foreign policy based however. He moved toward liberalization of trade only after securing a protected market within through internal regulations that favored Japanese products and firms.
- Ikeda also set up numerous allied foreign aid distribution agencies to demonstrate Japan’s willingness to participate in the international order and to promote exports.
- Ikeda furthered Japan’s global economic integration by joining the GATT in 1963, the IMF in 1964. By the time Ikeda left office, the GNP was growing at a phenomenal rate of 13.9 percent despite a largely protected domestic economy.

- Booming world demand for manufactured goods
o Japan found itself producing exactly what the world was demanding
o Steel, fabricated metal, ships, precision equipment
o By 1974 Japan accounted for 6% of world’s imports and exports
o But exports only accounted for 11% of GDP
o So Japan was less reliant on foreign trade than other countries
o But 1 of, if not the, largest exporter in the world

1980s

- While by 1980s, many industries were in trouble, 2 industries improved –cars and electrical manufacturing
- By late 1980s, 14 of the 25 largest firms were in these industries
- Toyota and Nissan were the biggest
- From 1974 to 89, production rose from 7m to 13m per annum
- With the USA becoming more protectionist, Japan tried to renegotiate voluntary restraints
- Even more so – began setting up factories in USA, so don’t have tariffs and used cheaper labour in USA and stronger Yen to their benefit

- Toshiba and Hitachi in electrical also prospered
- They too began moving factories abroad.
- 5 other small firms began concentrating on smaller products
- Fujitsu, NEC, Sony, Mitsubishi Electric and the biggest, Matsushita
- VCRs, computers, household equipment
- Retail trade also improved
- There began to be a change where previously the Japanese would shop at smaller shop, now they began moving towards less family oriented stores,
- Some were small like 7-11 type and other were 3-4 stories outlets like Seiyu, Tokyu, Takashimaya



c) Protectionist Industries

- From the end of WW2, Japanese government restricted import and foreign currency. This was allowed by article 14 of the IMF because of economic instability and shortage of dollars.
- Western economies, by 1959 were arguing that Japan should liberalise its economy
- So started liberalising trade and investment capital and then by mid – 60s, foreign exchange too
- Because of Japanese protectionist policies, USA was inclined to license their technology, as it was harder to set up shop in Japan. So they licensed their technology to the Japanese.
- Protectionist measures were not an issue immediately because the US chose to ignore or dismissed it
- USA was willing to let it go because it needed the ally in the region
- Government was able to reserve domestic producers for domestic consumption
- However, some critics feel that Japanese government favoured suppliers over consumers; e.g. because of protectionist measure, the domestic corporations could charge high prices at home
- One of the reasons Japan could move on was the tolerance of the people for these practices.
- In return they got lifetime employment, steady improvement of SOL and pride in their country

How Protectionism was shown

- Tariffs, import quotas, foreign exchange quotas and until 1980, restrictions on inward foreign direct investment
- In 1955, Japan joined GATT but – the 1947 agreement prohibited the use of quotas except to maintain BOP or protect agriculture and promote economic development
- So Japan managed to change quotas to tariffs
- And used foreign exchange rationing
- But it is involved in multilateral tariff reductions; in GATT, WTO
- Has problems with USA
- in 1985, USA tried to increase exports to Japan
- Demanded concessions from Japan


3. SOCIO ECONOMIC REASONS

a) Work culture and frugality

- Workers possessed skills and motivation
- War had given them psychological environment and a determination to catch up; Saw the US army and what they had. Blondie showed them what a middle class family could have

Savings

- In the 1960s and 1970s, capital was still scarce
- Many Japanese saved a lot, because of the war and uncertainty of what would happen next
- Set aside about 13% of their income
- By 1974, the average family set aside about 25% of their income, 4 time more than in USA
- This meant that the central government could mobilise these savings for public investment
- Called the Fiscal Investment and Loan Programme
- Public housing, SMEs, transport and communications
- The added benefit was that it kept taxes low – especially with little welfare
- Banks also loans to corporations
- e.g., textile industries borrowed to convert to synthetics
- 6 banks played a major role in this investment
- -Mitsui, Mitsubishi, Sumitomo and Fuji (from old zaibatsu) and Daiichi and Sanwa Bank

Role of Keiretsu

- These took over the traditional role of the zaibatsu, providing capital in their areas or regions or firms associated with them (groups became known as keiretsu)
- e.g. Fuji group helped in Eastern companies like Hitachi and Nissan
- Daiichi – Furukawa and Kawasaki
- Keiretsu became very important in post war growth because they were similar to zaibatsu
- But they were slow to enter into new areas like auto making and electronics
- So alongside the Keiretsu, also had new, enterprising firms like Toyota and Honda, Sony, Sharp and Sanyo in consumer goods, Fujitsu in computing
- The Japanese were also very good at adapting foreign methods
- And using new technology, usually from the West
- Also exploited industries that could not be used elsewhere, eg Sony revolutionarised the world by using a transistor that had not found a use to make portable radios

- After war, keiretsu or “enterprise groups” became the vogue
- The zaibatsu groups after the Occupation, regrouped like Mitsui and Mitsubishi, began buying each other’s stock, planning. other keiretsu formed around banks
- Different from zaibatsu because the individual companies had independence from center company or bank
o They were bound by mutual interest and growth
o Companies promoted the idea of family
o “community”
o The day began with callisthenics and white and blue collar worker ate together
o Regular workers began getting lifetime employment and regular raises in accordance to the companies’ performance
o (of course, part-timers were laid off first in case of bad times)
o Wages rose steadily
o Large firms established relations with union leaders
o Gave rise to increasing urban culture that spurred a consumer buying spree

Growth

- Japan grew about 1954 to 74, real growth by about 10% per annum
- Shipping tonnage increased by 5times
- Steel production by 13times
- Auto making by 197 times

Sacrifices

- From 1950s to 70s – 6 day work week with overtime very normal, as the Japanese were hardworking and really wanted goods that could be bought
- After decades of hardship, this was easier by comparison
- “also compulsive oversavers”

b) Employment System

- Change in the work climate
o In 1955 41% was in the primary industry
o But changed in 1970s; new jobs in manufacturing
o Agriculture now had only 14% of workforce
- Among the new income earners were the white collar workers drawing regular salaries and enjoying lifetime employment
- saraii-man or salaried workers
- Became a symbol to aspire to
- Blue collared workers even wore white shirts to show off

- 3 jewels of Japanese system
o Lifetime employment, seniority (nenko) wage and enterprise unions
o Lifetime employment and seniority system was conducive for all. It gave them security. And employers got loyalty and the skills of their workers
o In house training made more sense. Firms would not waste millions on retraining only for them to go elsewhere.
o Enterprise unions made sure there was little turmoil in 1940s and 50s
o Each company kept tabs and sponsored its own union, unlike in USA where there is a collective union for all workers in the same industry (United Auto Workers or UWA).
o Created closer bonds between employer and employee and increased dialogue etc

c) High literacy

Development of Education

- Under SCAP, there was compulsory education for all up till 9th grade (secondary school)
- Teacher’s college and other institutions were upgraded
- Decentralised so the Ministry of Education had a smaller role to play.
- PTAs, local admin had more control
- Education also helped create old boys networks
- Also new businessmen were highly risk taking, more so than Western counterparts
- 1950s MITI were reluctant to import new transistor for fear of limited usage. but SONY were willing to do so

- Also benefited from being good in math and science
- Did not feel threatened by new tech

- University – accelerated growth in 70s and 80s
By 1998, graduates tripled from 1980


Rising Standards

- Education standards rose
- Much of the rising expenditure in the Japanese people was education
- For example, juku or cram schools helping them to prepare for college
- Because they wanted to improve their children’s lives
- In high status neighbourhoods, every child was obliged in the 1980s to attend a few hours of juku a week

Historically

- Even from the Meiji era,
- Primary, secondary schools and universities were introduced into Japan in 1872 as a result of the Meiji Restoration
- But changed after 1947.
- Since 1947, compulsory education in Japan consists of elementary school and middle school, which lasts for nine years (from age 6 to age 15). Almost all children continue their education at a three-year senior high school,
- In 1950 only half the Secondary school graduates carried on post Secondary Education but by 1974, 90%.

CONCLUSION

By 1970s, Japanese economy was second only to USA
- Commercial shipping tonnage 22 times more than USA, in 1974
- Raw steel production almost reaching USA levels
- And gaining in plastics, consumer electronics and vehicles

There were many reasons why Japan underwent such phenomenal growth in the 1950s to 1970s. It would be hard to pick just one.

However, by the 1980s, this growth will come to a halt and Japan would have to confront some very serious problems.