How Japan emerged as a global economic power after the Second World War?

Question

Sujoy Das · Accepted Answer

In September 1945, Japan had nearly 3 million war dead and the loss of a quarter of the national wealth. How did Japan become the second largest economy in the world in the 1980s? Postwar Japanese economic takeoff was due to a variety of factors that had to do with American policies toward Japan, the international market, social mobilization, existent industrial capacities and experience, and government policies and expertise, among other things.

Wartime experience:

Between 1937 and 1945, during the war years, Japanese economy received rapid development. Production indices showed increases of 24 percent in manufacturing, 46 percent in steel, 70 percent in nonferrous metals, and 252 percent in machinery. Much of the increasingly militarized economy was diverse and sophisticated in ways that facilitated conversion to peacetime activity. On the automobile industry, for instance, of the 11 major auto manufacturers in postwar Japan, ten came out of the war years: only Honda is a pure product of the postwar period. Three of the ten: Toyota, Nissan, and Isuzu, prospered as the primary producers of trucks for the military after legislation passed in 1936 had driven Ford and General Motors out of the Japanese market. Other corporate giants on the postwar scene gained comparable competitive advantage during the war years. Normura Securities, which is now the second wealthiest corporation in Japan after Toyota, was founded in 1925 as a firm specializing in bonds. Its great breakthrough as a securities firm, however, came through expansion into stocks in 1938 and investment trust operations in 1941. Hitachi, Japan's largest manufacturer of electrical equipment, was established in 1910 but emerged as a comprehensive vertically integrated producer of electric machinery in the 1930s as part of the Ayukawa conglomerate that also included Nissan. Similarly, Toshiba, which ranks second after Hitachi in electric products, dates back to 1904 but only became a comprehensive manufacturer of electric goods following a merger carried out in 1939 under the military campaign to consolidate and rationalize production. Whole sectors were able to take off in the postwar period by building on advances made during the war. (this paragraph is based on John Dower, 1992, pp.54-55).

After the war was over, many of the wartime companies and much of the technology used during the war were converted to peaceful economic development. Japanese private companies expanded quickly and fearlessly. They borrowed massive amounts from banks and took on large debts. The private companies developed rapidly, against the conservative advice of the government that they merge so as to compete more effectively against Detroit's Big Three. Instead, Toyota, Nissan, Isuzu, Toyo Kogyo (Mazda), and Mitsubishi all decided to produce full lines. An upstart motorcycle company founded by Honda Soichiro defied bureaucratic warnings and entered the auto market in 1963 with great long run success. In 1953, two young mavericks, Morita Akio and Ibuka Masaru, struggled for months with reluctant state officials before winning permission to purchase a license to make transistors. Beginning with the radio in the 1950s, their infant company, Sony, soon emerged as the global leader in quality an innovation in consumer electronics goods. (Gordon, 248-49)

Nationalism and the desire to catch up with the West persisted after WWII, but now the efforts were focused on economic and industrial goals. For example, machine gun factories were converted to make sewing machines; optical weapons factories now produced cameras and binoculars.(Pyle, p.242)

The great devastation of the Japanese economy during the war and the need to rebuild it from scratch often led to the introduction of new technology and new management styles, which gave these companies a chance to update and upgrade themselves. Their changes were met with a friendly international environment of free trade, cheap technology and cheap raw materials. During the Cold War years, Japan was the client and friend of the advanced U.S. economy and Japanese markets were allowed to be closed while the American market was open to Japanese goods.

U.S. policies toward Japan after 1947

During the Cold War, strategic interests led the U.S. to allow Japan to export to the US while protecting its domestic market, enabling the formation of cartels and non-market driven factors in Japanese economy, and the development of an asymmetrical trade relationship with the U.S. The export-driven economy that Japan consequently developed also benefited enormously from an international market of low tariffs (by joining the GATT, forerunner of WTO), low prices of oil and other raw materials needed for industrial development.

Because Article 9 of the Japanese constitution forbids Japan from rearmament, Japan has lived under the umbrella of U.S. military protection, spending only 1 per cent of their GNP on the military's defensive abilities (which is a huge sum of money as the Japanese economy grew to be the second largest in the world), which, percentage wise, helped save the Japanese much money if they were militarily on their own.

The welfare society in Japan

In Japan, a welfare society rather than welfare state exists, characterized by total employment, including cartels of small and medium sized companies to prevent them from bankruptcy in order to maintain total employment.

The welfare society and total employment enabled the Japanese state to devote much of the money it would have spent on welfare to industrial development, in the form of bank loans.

The birth of the welfare society:

During the American occupation:1946-49, Japanese economy was sustained by $500 million annually from the US. Despite this help, because of wartime devastation, Japanese economy was in shambles.

In reaction, the American occupational forces invited the Detroit banker Dodge to balance Japanese economy, who introduced the Dodge Plan (1949): balance budget, reduce inflation, repay Japanese government debts. Fix exchange rate ($1=360 yen). (compared with $1=110 yen today)

That this exchange rate made Japanese yen too expensive shows the high inflation going on in Japan before 1949.

Reaction to the Dodge Plan: massive laying off of workers and economic recession, because Japanese goods became less competitive in the international market (too expensive) (Dodge hoped that after the initial pain, Japanese economy would start steady development later on).

In reaction: state bank loans to private companies to prevent them from bankruptcy. In the 1950s, major concern of Japanese economy was capital accumulation and export promotion; also medium sized companies protested against tax increases. These concerns prevented the formation of a welfare state because that would require tax increases. Instead, the state promoted a welfare society through legislation. The welfare society, through maintaining near total employment via liberal government loans to private companies, dispensed with the need for unemployment benefits. Retirement pensions came largely from personal savings and company compensation, rather than benefits from the state.

The welfare society saved Japanese government much money, which was liberally loaned to companies and guaranteed a secure supply of funding to many companies, leading some to competition and technological innovation. (but it also prevented some companies from upgrading themselves because of guaranteed funding, so it was a two sided story).

Under the welfare society, limited unemployment benefits do exist, but they are provided by the private companies. The unemployment insurance premiums are borne by workers and employers on a fifty-fifty basis. The government pays only a partial sum of the management and operation costs--14 percent of the cost for unemployment insurance and the other services concerning unemployment is covered directly out of the national treasury account. The wage withholding is, in principle, set at 1.1 percent of the total annual salary. However, the actual rate of contribution to these schemes was lowered to 0.9 percent in fiscal 1992, and has been at 0.8 percent since fiscal 1993. Unemployment benefits were 60 percent to 80 percent of the wage before becoming unemployed for a period of 90 to 300 days, which was extended to 330 days after 2001. Conditions vary depending on age and length of time contributing to the system. The larger private companies were also responsible for subsidized housing, health benefits, retirement pension and other benefits for recreational activities in a package called lifetime employment, practiced after 1960. All these, naturally add to the cost of big corporations, which then pass the cost on to the consumers in the form of higher prices.

Financing the Japanese economy and cooperation between the state and businesses

In the years from 1950 on, Japanese leaders in the bureaucracy and ruling political party, working in tandem with corporate executives, actively sought to manage and develop the economy. Over the 23 years from 1950 to 1973, Japan's gross national product (GNP; the total value of goods and services produced in a year) expanded by an average annual rate of more than 10 per cent with only a few minor downturns. There was also a high rate of investment in technology. (Gordon, 246) Japan developed an export-oriented economy: much of what it manufactured would be sold abroad and the foreign currency they made would be invested in the purchase of technology, management, raw materials and energy sources for its further industrial development. Japan is a country with few raw materials for industrial development and non known oil reserves except for recent limited offshore discoveries. Today over 70 percent of manufactured goods from Japan are exported abroad. When this export driven economy first started in the 1950s, Japan had a favorable international environment: The United States led in negotiating a more open trading system through treaties such as the General Agreement on Trade and Tariffs (GATT, predecessor to today's WTO, World Trade Organization). Cheap and reliable energy supplies in the form of oil from the Middle East and elsewhere fueled industrial expansion at relatively low costs. Relatively affordable licensing agreements also gave Japanese companies open access to a host of new technologies from transistors to steel furnaces.

A. Government regulation in the form of loans:

Private banks, as well as public institutions such as the Industrial Development Bank, drew on individual savings to channel capital to businesses. In the early years of Japanese economic development from the 1950s to 1960s, 1/3 of the bank loans came from private savings. The average household saved under 10 per cent of its income in the early 1950s, but savings rate soared steadily as the economy grew and reached 15 percent by 1960 and topped 20 percent by 1970. Households have continued to save in excess of 20 percent since then. These funds, deposited in savings accounts of commercial banks or in the government run postal savings system, made up a vast pool of capital available for investment in industry. (Gordon, 246) There has been such extensive government regulation of Japanese industry that Japanese capitalism is sometimes called "brokered capitalism" to refer to the extensive role the state plays in it. Of all government ministries, perhaps MITI has been the most instrumental. MITI and the Ministry of Finance encouraged the rationalization of firms and industries and guided the structural transformation of the economy. MITI stimulated the movement of capital and labor out of declining industries such as coal and textiles and into promising new industries with high growth potential--first into electronics, steel, petrochemicals, and automobiles, and later into computers, semiconductors, and biotechnology. (Pyle, 247)

Since MITI achieved most of its goals with the distribution of loans, where did the money come from? As mentioned above, a sizable amount of money came from personal savings, which was then channeled to economic development. The Ministry of Finance and MITI established the Japan Development Bank in 1951 with access to a huge investment pool known as the Fiscal Investment and Loan Plan (FLIP), which comprised the nation's savings in the postal savings system, a favorite place for individuals to put their money in because their accounts were tax exempt. FLIP thus amassed the savings four times the size of the world's largest commercial bank. It became a powerful policy tool which MITI used to provide low-cost capital to industries it favored for long term growth. The Ministry of Finance was ensuring the availability of capital. It put restrictions on the inflow or outflow of capital. It could ration and guide the flow of capital to large firms in industries such as steel, shipbuilding, automobiles, electronics and chemicals that were adopting new technology and were central to increasing productivity and exports. They also used tariffs, direct and indirect subsidies to key industries, for development. (Pyle, 247-48)

Where else does the money come from for MITI and the Ministry of Finance? Another important reason to explain the money for economic growth, besides the small percentage of Japan's GDP on military spending (1%), has been the minimum the government spent on welfare. Instead of building a welfare state, the government has encouraged the Japanese to become a welfare society--through total employment, in order to reduce or eliminate the need for the state to spend on unemployment benefits. Although retirement pension did exist for some workers in large companies, it was primarily the result of contributions of the company and the workers, and state contribution was minimal. Again, like unemployment benefits, pensions were paid out by individual employees and their companies on a 50/50 matching basis. Unlike the U.S. social security system, the Japanese state was involved in the process only in entrusting the money from both sides to a designated company for investment and payment upon the employees' retirement based on an agreed upon sum of annuity at the beginning of the employees' employment. This system also encouraged employees to stay in the same company for life in order to get the amount of pension promised at the beginning. The money the Japanese state saved from public spending was invested in the economy in the form of liberal bank loans from the Bank of Japan to the citibanks and other regional banks that boosted competition and technological innovations. (Gao, 2001)

According to John Dower, the Japanese bureaucratic control of economy through the many banks could trace its origin again to the war. Before 1927, there were about 1,400 ordinary commercial banks in Japan. That number steadily dropped so that by 1945, by mergers and absorptions, it was 61. And there has been little change since. The so called "city banks" which are really national banks, that stand at the hub of the postwar enterprise groups were in most instances greatly strengthened by critical legislation introduced between 1942 and 1944, which designated a certain number of "authorized financial institutions" to receive special support from the government and Bank of Japan in providing the great bulk o

How Japan emerged as a global economic power after the Second World War?

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