During a lecture before the Eugenics Society in 1937, British economist John Maynard Keynes stated that “a greater cumulative increment than 1 per cent per annum in the standard of life has seldom proved practicable”. Moreover, Keynes continued, “generally speaking the rate of improvement seems to have been somewhat less then 1 per cent per annum cumulative”. Of course, Keynes was speaking during the great depression, and therefore his remarks may be tainted with a particular pessimism. But they draw into sharp relief the experience of economic growth in post-war Japan: between 1950 and 1973, GDP growth averaged 10%, a rate of sustained growth never before seen .By 1962, the English publication Economist, with poetic flair, dubbed Japan’s recovery an “economic miracle” . This designation caught on and became a general catch phrase for spectacular economic growth. In the case of Japan, a multitude of explanations have arisen for why Japan underwent an ‘economic miracle’. Crucial to elucidating Japan’s post-war boom is the distinction between, and relative importance of, endogenous and exogenous influences upon the economy and society. International conditions, general post-war prosperity, the Cold War and the Korean War, in particular, all influenced domestic conditions within Japan. An understanding of Government policy and pre-existing economic structures are vital to any assessment of Japan’s economic recovery and expansion. Ethno-economic approaches have highlighted the “uniquely Japanese cultural psychological features” that ostensibly contributed to the re-construction of the economy . This selection of possible factors and influences is only a short-list. Economists and historians alike have propagated various theories to explain the dynamic process of post-war Japanese economic growth. Re-evaluation of the economic, social and political dynamics in the post-war period is necessary to ascertain the reasons for Japan’s economic miracle.
On august 15, 1945, Emperor Hirohito called upon the people of Japan to “endure the unendurable, bear the unbearable”. The United States had dropped “cruel bombs” on Hiroshima and Nagasaki. Euphemistically, Hirohito noted, “The war has not turned in Japan’s favor”. These new armaments, he believed, threatened “not only to the extermination of our race, but the destruction of all human civilization”. Forced to surrender unconditionally by the utilization of nuclear weapons, Japan faced an uncertain future with two primary concerns; the war-time destruction of Japan’s human and material resources, and Allied policy towards their subjugated nation.
Tokyo’s partial destruction is symbolic of Japan’s defeat and wartime losses. Reduced to a near “wasteland”, Tokyo’s end of war population was 2,800,000 compared with 6,700,000 in 1940. Of course, Tokyo’s devastation represents only a small element in a much larger picture: defeat meant the dismantling of Japan’s empire. Attended by Winston Churchill, Franklin Roosevelt and Chiang Kai Shek, the Cairo Conference discussed the allied position in relation to Japan and East Asia, and resulted in the Cairo Declaration, issued December 1943. This declaration stipulated plans for the “stripping of all the islands in the Pacific which Japan has seized or occupied since the beginning of the First World War in 1914, and restoring to the Republic of China all the territories Japan had stolen” . Territorial losses were compounded by the Yalta agreement of February 1945; when the Soviet Union demanded and received the rights to the southern half of Sakhalien, and the Kurile Islands. Further territory was lost to the United States in trusteeship through the terms of surrender, including; Ryukyu, Bonin, Izu, Iwō and Marcus . Japan was reduced to its four main islands; Hokkaido, Honshu, Shikoku and Kyushu. Defeat and loss of its overseas territories and assets indicated the failure of militarism and expansionism, and discredited among the Japanese geo-political strategies based upon such principles. Territorial loss was not the only consequence of Japan’s failed strategy of imitating European imperialism.
Material losses were considerable and contributed to the hardship that the population faced in the immediate post-war period. According to Shigeto Tsuru , the total loss of material wealth amounted to the aggregate accumulation of assets over the decade of 1935 to 1945. This left Japan’s total material wealth, in 1945, at a level equal to that of 1935. The total loss of material wealth was not evenly spread among different sectors or between types of assets. Japan’s merchant fleet incurred a particularly high level of damage during the war. Before the war, there were six million tones of commercial ships. Whist four million tones were constructed during the war, 8.6 million tones were sunk, leaving roughly 1.5 million tones at the war’s end. Substantial repairs were required for the vast majority of remaining ships. Damage to industrial plants and equipment was also significant. To indirectly gauge this destruction, the level of manufacturing production in 1946 had declined to 29% of the 1934-1936 medium.
Residential housing, which was built from wood and hence particularly susceptible to incendiary bombs, was destroyed in huge quantities. Ninety cities had been bombed, devastating approximately 2 and half million homes. Concurrent with the repatriation of soldiers, settlers and other expatriates, there was a shortage of 4.5 million residential units by the conclusion of the war . Loss of human life and labour-power was another consequence of the war. Shigeto estimated the total loss of life at 2 and a half million, through an analysis of official mortality figures and their omissions. Tipton, on the other hand, puts the figure closer to 3 million dead . Irrespective of the exact number, the aggregate affect of this loss of life on the labour supply was offset by an influx of expatriates who were skilled and willing to work for reduced wages. Characteristic of this development was the forced return of roughly 200,000 railroad workers from China . This development was conducive to economic recovery. On the whole, “despite all the destruction”, U.S. Ambassador Edwin W. Pauley stated in December 1945, “Japan still remains, in workable condition”.
Within this “workable condition”, the Japanese people continued to struggle. In 1947, Dazai Osmu published a popular novel, The Setting Sun, sometimes taken as an allegory for post-war Japan, which centered on a deteriorating aristocratic family. Kazuko, one of the principle characters, chose to resist anomie and struggled on against pessimism. Dazai committed suicide, but his hopeful message in the mist of Japan’s maelstrom resonated with the public. The failure of expansionism and Japan’s pre-defeat geo-political strategy forced a revaluation of values and adaptation to new realities. An innovative response to the Great Kanto Earthquake, argued Joseph A. Schumpeter, was responsible for the boom of 1924-1925. Reminiscent of this position, Kenneth Boulding postulated the “creative defeat” thesis; that Japan’s economic miracle amounted to an imaginative response to the bankruptcy of past strategies and defeat . However, before recovery was possible, even within this workable situation, Japan’s second hurdle asserted itself: Edwin W. Pauley headed the U.S. Reparations mission to Japan.
War reparations constituted a mainstay of U.S. occupation policy, at least during its initial stages. In fact, the fist priority of U.S. policy was punitive, driven by fears of Japanese remilitarization, and retribution for Pearl Harbor and the war. Ambassador Pauley echoed this sentiment in his December 7th 1945 statement, “four years ago today Japan attacked Pearl Harbor. America will never forget the attack. Japan will never forget the consequences”. He went on to recommend a provisional reparation policy. This plan included, but was not limited to, the appropriation of half of Japan’s coal-burning electricity plants and all steel capacity in excess of 2,500,000 tones per annum (initial post-war capacity, 11,000,000 tons). It would also expropriate vast quantities of other materials and capital goods central to manufacturing production, particularly if related to war industries. According to the Potsdam Declaration, issued in July of 1945, “Japan shall be permitted to maintain such industries as will sustain her economy and permit the exaction of just reparations in kind, but not those which would enable her to re-arm for war” . The reparation policy was not only based on a conception of retributive justice; it served to augment the policy of demilitarization.
Demilitarization, along with democratization, became the byword of U.S. policy. The “democratic revolution from above” had a substantial influence upon the course taken by post-war Japan. Labour unionism as a result of democratization exploded, which would have consequences for management and employment structure. Transformations in the position of women and minorities also resulted from U.S. policy. Political reform in the guise of democratization had multiple economic effects, both directly and indirectly. But the program of demilitarization was to have the most direct effect upon the economy.
Disbanding of the armed forces was only the first step in demilitarization. Constitutional reform, with the insertion of article nine, bound the Japanese people to “forever renounce war as a sovereign right of the nation and the threat or use of force as means of settling international disputes”. This amounted to a major break with Meiji nationalism and militarism in general. Article nine became a comparative advantage for economic success, because it alleviated the fiscal burden of sustaining military forces. For the U.S. observers at the time however, the roots of militarism could not be affected by demobilization and constitutional reform alone: militarism was indivisible from monopoly.
Anti-monopoly reforms became central to the overall project of demilitarization and democratization advanced by the U.S.A. and their occupation administrators. Japan’s financial cliques, the zaibatsu became the target of reform efforts. Japanese bureaucrats, tasked in part with economic administration, were opposed to zaibatsu dissolution and attempted to delay and undermine application of the new policy. Those Japanese economists concerned with, and critical of monopoly were generally of, a Marxist disposition, and considered the issue not in terms of either “monopolistic” or “competitive capitalism” – a distinction not without its critics in European political economy- but rather capitalism or socialism. Outside of this school of economic thought, Japanese politicians and economists considered close relations between Zaibatsu and government as the most efficient policy for economic recovery. Cooperation between policy makers and entrepreneurs had been the traditional dynamic since the Meiji restoration, a trend which had intensified during the 1930s. The initial U.S policy, however, was not geared toward economic re-construction, but rather to suppressing Japan’s standard of living. The Far Eastern Commission, in April 1947, defined the standard of living tolerable to be equivalent to that of 1930-1934’s level . Dissolution of the Zaibatsu was therefore consistent with the more punitive policies enacted by the U.S occupation.
Establishment of the Holding Company Liquidation Commission (HCLC) was the first step in the commencement of zaibatsu dismantling. Holding companies, at the zenith of zaibatsu structures, were required to hand over their stocks to the commission, which were then sold on to the general population through a market mechanism. To prevent the reformation of monopolies a Fair Trade Commission was enacted under the Anti-Monopoly Law; and then to supplement that legislation the Elimination of Excessive Concentration of Economic Power Law was ratified by the Diet on December 18 1947. Faced with opposition by the Japanese, who considered the anti-monopoly measures inimical to their interests, the process of Zaibatsu dissolution ultimately proved ineffectual.
Pressure from American power-elites started to mount. Criticism and dissatisfaction with zaibatsu dissolution was increasingly expressed in legislative and business circles towards the end of 1947 and 1948. The initial HCLC’s list of 325 companies to be dissolved was reduced to 100 by the first of July 1948. By the formal repeal of dissolution policy in December 1948, all but nine zaibatsu groups had been removed from the HCLC list. This represented a major about face on the part of the occupation’s policy. The policy on reparations also followed a similar trend. E.W. Pauley’s original proposal for reparations outlined in November 1946, sought to remove industrial and military equipment worth 2,466 million yen (1939 prices). By May 1948, the Draper-Johnston proposal planned reparations to a total worth of 662 million yen. In the spring of 1949, only 160 million yen’s worth of equipment had been expropriated when the program was terminated. The end of zaibatsu dissolution, reparations and punitive measures in general signify a “reverse course” on U.S. policy towards Japan .
Interpretations of the reverse course generally focus upon international conditions and the developing geo-political landscape. The late 1940s saw the development and deepening of the Cold War between the U.S.A. and Soviet Union. China had fallen to the Communist party, lead by Mao Zedong, in 1949. Marxism and other left-wing political philosophies had unparalleled popularity among the Japanese public. There was concern among U.S. power elites that policies aimed at artificially stifling standards of living would push Japan toward a socialist or communist orientation. George Kennan, instrumental in affecting the reverse course, later wrote in his memoirs that “the ideological concepts on which these anti-zaibatsu measures rested bore so close a resemblance to soviet views… the measures could only have been eminently agreeable to anyone interested in the future communization of Japan”. It is debatable if Kennan understood the motivation of the anti-monopoly policy, but his comment underlines the cold war psychology prevalent within some sectors of U.S. foreign policy makers. Ultimately Japan was reassessed in U.S. geo-political strategy. Economic recovery and stabilization came to be considered of paramount importance to contain Soviet communism and its offshoots. Exogenous influences, mediated through U.S. interests, caused the shift in policy, which was indispensable to economic recovery.
Without efforts to fundamentally re-order the business practices through dissolution of economic power, or expropriation of industrial resources, among other fiscal burdens, it is manifestly self-evident that Japan’s economy should have prospered. Inflation, which had plagued Japan’s population and hampered growth, was coming under control. In the Tokyo area consumer goods were undergoing deflation in 1949, down from a peak of 32.8% inflation in the month of January 1946 . But even with the reduction of inflation, by the mid-1950, the economy had reached a point of deadlock. Commencement of the Korean War in June of 1950 provided the impetus for Japan’s ailing economy.
Korea’s tragedy has often been labeled “a gift from the gods”, from the perspective of Japanese economic growth. Within a number of days after the war began, Japan was transformed into a base for military operations. “Special procurements” became the order of the day, war supplies brought in U.S. dollars. The U.S.A. had acquired 970 million dollars worth of produce by the ceasefire on July 28 1953. However special procurements continued on until 1955, amounting to an estimated total of 3.56 billion dollars. Whilst geographic location definitely contributed to international competitiveness in the production of Korean war supplies, business flexibility, which resulted from historical demand patterns characterized by fluctuation and quantitative limits, also proved beneficial . Ironically, competitiveness - caused in part by limits to mass production - would provide the momentum within the business community to invest in expanded production capacities.
Multiple corporations, only months into the conflict, proposed the development of new steel plants and the modernization of production. In particular, Kawasaki Steel planned to construct an integrated steel plant, of a type never before built in Japan. Such plans for the modernization of steel production were supported by the Ministry of International Trade and Industry (MITI), which considered a program of increased investment in production.It was to be largely financed by private banks, rather than the government itself. This proposed plan was indicative of two trends in post-war economic policy; reliance upon private investment for capital formation, and government interventionism. Since the Meiji era there existed a close relationship between financial cliques and government, but the importance of private banks for investment funds constituted a new development.
In the pre-war 1934-36 period, 86% of all industrial investment came from within the corporation, either through retained profits or new shares, with only 14% comprising outside sources of capital . By 1951 sources of industrial funding had radically altered: 74.1 % of all capital investment was derived from outside sources, leaving only 25.9% to be internally sourced. Loans from Banks constituted the largest source for investment, accounting for 62.8% of the aggregate funds. Alteration of the 1947 Fair Trading Act had removed restrictions upon stock ownership among financial institutions and corporations, helping to reconsolidate former zaibatsu structures: not however, without modification. Banks started to occupy a more central role in zaibatsu-type monopolies than previously had been the case. This new group structure became known as the “Keiretsu” or main bank system, which moreover represented a major transformation in the regime of accumulation.
Establishment of the main bank system facilitated long-term investment funds through the development of long-term relationships between corporate firms and financial institutions . Manufacturing became dependent upon financial capital, vastly increasing the debt to equity ratio of industrial corporations. To illustrate this dynamic, the Nissan Automobile Manufacturing Corporation spent the equivalent of 90.2% of their labour costs on financing debts in 1965. In the same year, the relative outlay by General Motors was 0.3%. This did not greatly impair the profitability of manufacturing firms, because interest payments were counted as tax deductions. Given ready access to relatively cheap credit with an effective government subsidy, corporations invested in the latest technologies and quickly regained and superseded pre-war production levels.
In fact, investment was channeled into key sectors through a production priority system to facilitate growth. Introduced in 1947, this system was designed to avoid bottlenecks and rationalize resource allocation in order to maximize its utility. Four main industries were favored by the priority system; coal mining, iron and steel, electricity and marine transportation. Allocation of government funds to these industries for investment in equipment totaled between 60% and 90% in the years from 1952 to 1954. More importantly, 50% of commercial banks’ new funds were compulsorily channeled into priority industries. Japan’s overall trend in investment heavily favored capital-intensive and high value-added production, leading to a transformation of its industrial structure.
Without this shift in the industrial structure towards industries with high-productivity, Japan’s economic miracle would not have been possible. In 1947 primary industry employed 53.4% of the population, which had fallen to 30.2% by 1960. At the end of the high growth period only 12.9% of the population was employed in primary industries. Secondary industries on the other hand, went from employing 22.3% of the population in 1947 to 43.3% by 1974. Even within the secondary industries there was a shift away from light production towards heavy and chemical industries with a higher technological complexity and productivity levels. Illustrative of this shift is the changing percentage of commodities in existence by 1950 produced during the high-growth period. In 1955 these commodities constituted 92.8% of industrial production; in 1960, 81.2%, and by 1969 only 61.9%. Conversely, commodities appearing after 1950 steadily grew as a percentage of industrial production. The percentage of heavy and chemical industries relative to total industrial production continued to increase from 51% in 1955 to 75% in 1975. Labour productivity rapidly rose as a result of structural change in industry. If Japan’s labour productivity level of 1950 is indexed at, say, 100, then its index in 1973 would have been 1412. By comparison, in 1973 U.S productivity would only measure 210 and West Germany 411. It was this shift from low to high productivity which sustained Japan’s exceptional growth rates.
The Japanese administrative apparatus worked closely with zaibatsu-type firms to assist the development of high productivity industries. “Administrative guidance” was the method employed to manage private actors in accordance with public interests. This method involved the trading of favors and the exertion of influence. But business did not always conform to the expectations of the bureaucracy. Notable exceptions of corporations ignoring administrative guidance to their benefit do exist. At one point, the government advised Toyota, Nissan, Isuzu, Mazda and Mitsubishi to merge in order to compete with Detroit’s automotive industry. They opted to produce separate lines and remained internationally competitive. On the whole, however, corporate and bureaucracy links remained close, which represented a continuity with pre-war practices. This was not limited to channeling investment from private banks into prioritized industries. The MITI assiduously pursued export markets with a view to sustaining effective demand.
The export-led hypothesis is a popular explanation of Japan’s economic recovery and boom. According to this thesis, openness to external markets is of paramount importance for economic growth. Pressure from foreign competition forces local producers to increase efficiency in order to survive. This, in turn, leads to increased growth. Evidence used to support the export-led thesis is the fact that Japan’s post-war exports grew faster than their gross national product. Particularly within the manufacturing sector, exports kept rising as a proportion of total domestic production. Another theory reverses this thesis, postulating that Japan’s export growth is a result of domestic resources development. Given industrial production’s dependence upon financial capital in furtherance of development, it can not be argued that growth is export-led. But equally, the importance of exports cannot be negated by the significance of internal resource development.
John Maynard Keynes’ incredulity towards the notion that growth could exceed 1% per annum is flatly contradicted by Japan’s post-war prosperity. During the high-growth period Japan’s GDP growth averaged 10% per annum. This ‘economic miracle’ resulted from a confluence of both exogenous and endogenous influences. Moreover, economic development required a level of re-invention on behalf of the Japanese. The defeat of Japan’s imperial project rendered old strategies redundant and forced adaptation to new realities. But before Japan could undergo economic recovery and boom, America’s policy of reparations and zaibatsu dissolution had to be discontinued. These policies were reversed, partly because of the internal opposition from the Japanese, but more importantly because of the cold war and U.S. fears that Japan could fall under Soviet influence. When the cold war intensified with the commencement of the Korean War, Japan was well placed to benefit. Military expenditure, known as special procurement, provided an impetus for the development of Japanese industries. Given Japan’s predicament, government ministries, particularly the Ministry of International Trade and Industry, pursued a priority production system. Crucial and high value-added industries were favored by the government and they channeled investment from private banks into industrial firms. This dependence upon financial capital was offset by government subsidies and tax cuts. Long-term development could then be pursued with a reduced cost and risk, given government support. Ultimately, the central element in Japan’s economic miracle was the transformation of industrial structure from light to heavy industry. This modification of the industrial structure, while adaptive, was not completely without precedent. Close government and business ties originated in the Meiji era and therefore Japan’s economic miracle rested upon a particular cultural heritage. Whilst not a complete reinvention then, Japan’s economic miracle was at once, a creative stratagem and a stroke of luck.
Written by Mathew Toll.
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(Written early 2008)