Japan's Economic Transformation 1947-1991

• Japan's economic transformation occurred from 1947 to 1991
• The objectives are to understand Japan's economic transformation and analyze the factors that contributed to it

Post-War Japan

• Japan surrendered unconditionally on August 14, 1945
• World War II cost Japan an estimated 2.6 to 3.1 million lives and $56 billion USD
• Japan experienced rapid and sustained economic growth from 1945 to 1991, known as the Japanese Economic Miracle
• Four main factors contributed to Japan's rapid growth: technological change, capital accumulation, increased labor quality/quantity, and increased international trade
• Strategic planning and cooperation by firms, individuals, and the government helped Japan become the third-largest economy

The Cold War Geopolitical Environment

• Japan's relationship with the Cold War is crucial to understanding its growth, especially in the context of East Asia
• The Supreme Commander Allied Powers (SCAP), led by General MacArthur, oversaw the occupation of Japan
• The US occupied Japan for seven years, implementing reforms to eliminate militarism and feudalism

US Occupation Phases

• 1945-1947: 'Liberal' phase focused on establishing democracy and pluralism
• SCAP encouraged the growth of the labor movement, enfranchised women, and implemented agricultural reform to eradicate tenancy
• Individuals associated with militarism were put on trial or purged from public life, excluding the royal family and essential industrialists
• In 1947, a new constitution was proclaimed, vesting political authority in the Prime Minister and the Diet, with the Emperor as a symbol
• Article 9 of the constitution renounced the right to wage war and possess armed forces
• 1948-1951: The US shifted its focus to economic recovery and eventual rearmament due to concerns about communism
• SCAP introduced financial austerity in 1949 to curb government expenditure and encourage export sector growth
• The US pegged the yen at a competitive exchange rate of 360 yen to $1

Shigeru Yoshida's Role

• Yoshida's government assisted SCAP, holding anti-communist views
• Yoshida aimed to build prosperity, rein in the Japanese Left, and cooperate for rapid economic and social stability to end the occupation

Significance of the Cold War Context and the US

• By 1951, the Occupation ended after signing a peace treaty at an international conference in San Francisco
• The treaty granted Japan full sovereignty in April 1952
• It was a lenient document that ended Japan's imperial control and reparations, except for the Ryukyu Islands under US control
• The settlement did not end Japan's state of war with the Soviet Union, and India refused to sign the treaty
• The Chinese were not invited to attend the conference

US Policy Shift

• US policymakers shifted their stance during the 1951 Korean War to allow Japan to rearm and join the Western alliance
• Yoshida resisted rearming to avoid diverting scarce economic resources from domestic growth

The 'Free Ride'

• The treaty laid the foundation for Japan to concentrate on economic growth without the burden of defense under an American security umbrella
• Yoshida's refusal to rearm fully led the US to use its bases in Japan for regional defense, compromising Japan's sovereignty
• The US gained the right to use bases for regional defense without consulting Japan and was given extraterritorial rights in 1952
• The US made it clear that Japan must open relations with Taiwan to ratify the peace treaty, impacting Japan's diplomatic freedom and commercial ties with mainland China

Aid to Japan and Access to US Markets

• The USA provided $2.2 billion in humanitarian and development aid over seven years
• The USA contributed tens of billions of dollars through procurement policies of its military forces based in Japan and the region
• In 1948, the USA stressed the need for economic recovery and eventual rearmament
• A vital reason for Japan's rapid growth was due to the Cold War, where the USA was prepared to nurture and sponsor its development within the Bretton Woods system
• Washington believed Japanese economic growth would undermine the appeal of the Left within Japanese politics
• It was very much in American interests to ensure that the Japanese economy remained healthy
• In 1949, SCAP introduced a policy of financial austerity to curb government expenditure, reduce inflation, and encourage export growth
• The US maintained procurements for the American military which contributed greatly to Japan's economy
• The US eased Japan's path into the world economy by sponsoring its entry into the General Agreement on Tariffs and Trade (GATT) organization in 1955
• Washington tolerated Japan's protectionist restrictions to defend its growing heavy industry sector while opening its own markets to Japanese goods
• The Eisenhower administration in 1955 allowed Japanese goods such as textiles access to the American domestic market
• The US therefore gave consent to the protectionist policies pursued by MITI (Ministry of International Trade and Industry) and helped provide an international trading environment for Japanese exports
• MITI was created by the US to launch industrial and technology policies that fueled Japan's economic growth
• The Kennedy administration lowered American trade barriers in the 1960s to assist in the stabilisation of Japanese politics
• As a result Japanese automobiles and motorcycles began to enter the American market for the first time and in 1965 USA suffered its first trade deficit with Japan
• The US intended to plant genuine democracy in Japan and to demilitarise the country
• Efforts to break up the Zaibatsu were less successful - By the early 1950s, the zaibatsu had recovered and the army too made a comeback when the USA grew worried at the growth of communism in Asia
• Japan continued to benefit commercially from the Cold War tensions in the region
• In 1965 the USA brokered the opening of diplomatic relations between Japan and South Korea
• With the Vietnam War reaching its peak, the US encouraged Japan to expand its trade links with Southeast Asia
• US scrapped Japan's totalitarian political system and replaced it with a democratic constitution
• The US advocated major reforms through land, labour and industrial reforms
• The US forced Japan to set the yen at a rate whereby all of Japan's major industries could export successfully
• Although the USA's defense burden was 6-7% of GNP, she allowed Japan to keep their defense spending at 1%
• The US also granted Japan the 'most favoured nation status' which granted her all trade advantages, such as low tariffs
• USA helped Japan greatly to economic recovery i.e. during the Korean War, the Japanese economy was aided by the USA's need for trucks, clothing, bedding and other goods for its armed forces.
• It allowed Japanese goods to flood the American markets which boosted the Japanese economy tremendously
• Toyota was saved from imminent bankruptcy by American procurements
• These economic measures helped to stimulate the regional economy and benefited Japanese exports
• Japan also gained directly from the Vietnam War

Other External Developments

• The period between the Korean War and the first oil shock of 1973 was one of steady progress because of the stability provided by the American-dominated Bretton Woods financial and trading system
• The expansion of international trade in this period was advantageous to a state that had orientated itself towards exports
• Japan was particularly well placed to take advantage of the shift towards oil for much of its industrial plant was new, replacing factories that had been destroyed during the war.
• Japan was able to benefit from the ever-growing demand for ocean-going oil tankers

Role of Domestic Developments

• The Government of Japan played a key role in the country's economic success

Political Stability and Ikeda's "Income Doubling Plan"

• In 1960, Hayato Ikeda became the LDP Prime Minister and charted a new political course for Japan
• Ikeda's 'income doubling' concept was a vital turning point accepting Japan's discomfort with its expansionist past and downplaying defence
• Ikeda forecasted that real GNP would be doubled in the 12 following ten years
• Real income more than doubled in the next decade, and per capita real income even tripled between 1960 and 1973
• The 1960s was the most remarkable decade of the Japanese economy as far as the real growth rate is concerned

Industrial Planning and the Manufacturing Boom

• Postwar policy made industry productive and technologically advanced, characterized by the government's refraining from direct intervention
• Information and recommendations guiding industrial development were offered instead
• Such "indicative planning" was key in overcoming crucial problems from the late 1950s to early 1960s
• The economic boom in manufacturing attracted many rural people to major cities, with wages in smaller businesses lower than in large concerns
• Larger firms cut costs by subcontracting to smaller firms
• Amid intensifying international competition, the government passed the Basic Small Business Law in 1963
• This law ensured small businesses took measures to avoid excess competition and rationalized subcontracted transactions
• Funding was provided to modernize small business facilities and promote cooperation among firms

R&D and Technological Modernization

• Automakers such as Toyota and Nissan farm out around 70-80% of their work to outside firms
• At the same time, Japan's continuing lag in basic research as of the 1980s also became a matter of concern to MITI and the government generally
• In 1971, the Japanese government combined two laws to make the law on Temporary Measures for the Development of Specified Machinery and Electronics Industry
• The law was the forebear to the development of numerical control (NC) of manufacturing, and research on very large scale integration (VLS)

Close Government Corporate Ties

• Government and industrial firms engaged in long term planning and both made use of consensus decision-making
• MITI guided industrial development by targeting specific industries for growth and designating declining industries to be scaled down or dismantled
• MOF and MITI shared the creation and implementation of policies designed to systematically target and develop strategic industries and technologies

Government's Trade Policies

• Ikeda stressed on the importance of exports
• Superior mechanisms for marketing products abroad were devloped
• Japan developed superior mechanisms for marketing its products abroad
• Japan's $387.965 billion exports, 96% were manufactured goods compared to the USA's 65% of exports during the same period

Protectionism and an undervalued Yen

• Japan's overseas investment in the consumer electronics industry was motivated by protectionism and labour costs
• Under the protection of tariffs on foreign goods, Japan was able to make progress in import substitution

Case Studies

• Case Study 1: Japan's Shipbuilding Industry saw an increase in the productivity of heavy industry with a substantial rise in steel production and Japan becoming the world's largest shipbuilder
• By 1970, iron and steel were the leading exports from Japan, accounting for over US$2.8 billion, or 14.7%, of total exports
• Case Study 2: During WWII, Japan's automotive industry was mostly focused on the war effort, with Toyota, Nissan, Isuzu and Kurogane building trucks and motorcycles for the Imperial Japanese Army
• The export of Japanese passenger cars increased about 200-fold during the 60s, rising to almost 20% of production
• Case Study 3: The Electronics Industry In the 1950s U.S. companies failed to fully utilise transistors
• In 1985, Japan shipped 13.4 million colour televisions, compared to only 3.5 million in 1994

Keiretsu System

• A key element of Japanese success was the keiretsu where Individual companies gained financial strength and connections that allowed them to undercut foreign and domestic rivals
• Horizontal keiretsu, also known as a financial keiretsu, is characterised by the cross-shareholding relationships formed between firms which are centred around a major bank
• A keiretsu may provide a manufacturer the ability to form stable, long-term business partnerships
• When member firms of a keiretsu are associated through cross-shareholdings, which is to say that they own small portions of equity in each other's businesses, they remain somewhat insulated from market fluctuations

Socio-Economic Changes

• Tokyo traditionally encouraged high savings by limiting such government benefits as welfare, education and social security and keeping consumer prices high and credit limited
• Tokyo then channelled these vast savings into cheap loans for strategic industries
• The high rate of personal savings by the Japanese and Japan's financial and banking practices were beneficial to capital formation for economic growth
• Employees in Japan are generally known for their loyalty to their places of work and for having clear ambitions to see the companies they work for succeed and prosper
• The personal responsibility of the Japanese employee is great
• Corporations in Japan generally exist for long periods of time and tend to place their employees welfare first
• The government was very eager to invest in education
• Traditionally, Japan has been a highly education-minded, regimented society
• Historically, Japan boasts a 99 percent literacy rate

Japan after the Collapse of the Bretton Woods System

• The average annual increase in GNP from 1971-1979 was 4.6% and from 1980-1990 it was only 4.1%
• In 1985, however, the strategy began to be realised
• Japan exported the credit expansion to Southeast Asia and South Korea in the form of direct investment

Japan's Economic Stagnation after 1985

By the end of 1989 the Nikkei 225 Stock Index reached a level of 915 yen in 1938 Low interest rates, together with tax reforms that provided further stimulus, helped the economy to boom once again

• But the supremacy of the yen was short-lived

Crisis of the Banking System

• Starting from the 80s, the financial system gradually stopped responding to internal and external development conditions of the Japanese economy

Conclusion

• Post-war system reforms and structural changes (1945-1954);
• Expansion and growth of the international competitiveness of the country (1955-1974);
• Adjustment and liberalisation of foreign economic relations and strengthening of the international competitiveness (1974-1989);
• Economic stagnation ("lost decade") and the decline in international competitiveness (the 90s);
• Structural reforms (after 2002).