Japanese economic miracle

The Japanese economic miracle refers to Japan's record period of economic growth between the end of World War II and the beginning of the 1990s. The economical miracle can be divided into four stages: the recovery (1946–1954), the high increase (1955–1972), the steady increase (1972–1992), and the low increase (1992–2017).[6]

Although heavily damaged by the nuclear bombardment in Hiroshima and Nagasaki, and other Allied air raids on Japan, Japan was able to recover from the trauma of WWII, and managed to become the third-largest economic entity of the world (after the United States and the Soviet Union) by the 1960s.[7] However, after three decades, Japan had experienced the so-called "recession in growth", as the value of the Japanese yen was raised. In an attempt to prevent further slowing of growth, Japan greatly improved its technological advances and raised the value of the yen, since devaluing the yen would have brought further risk and a possible depressing effect on trade.[8] The appreciation of the yen led to a significant economic recession in the 1980s. To alleviate the influence of the recession, Japan imposed a series of economical and financial policies to stimulate domestic demand. Nevertheless, the bubble economy that took place in the late 1980s and early 1990s and the subsequent deflationary policy destroyed the Japanese economy. After the deflationary policy, the Japanese economy has been through a time of low increase period which has lasted until today.

The Japanese economy was in ruins following the end of World War II. For example, "the Japanese cotton industry was brought to its knees by the end of the Second World War. Two-thirds of its prewar cotton spindles were scrapped by wartime administrators, and bombing and destruction of urban areas had caused a further loss of 20 percent of spinning and 14 percent of weaving capacity".[9] Moreover, by 1946, Japan was on the verge of a nationwide famine that was averted only by American shipments of food.[10] The virtual destruction of the Japanese standard of living, combined with the military threat presented by the Soviet Union, compelled the United States to support a wide-reaching economic recovery. Every country experienced some industrial growth in the post-war period, but those countries that achieved a heavy drop in industrial output due to war damage such as Japan, West Germany and Italy, achieved the most rapid recovery. In the case of Japan, industrial production decreased in 1946 to 27.6% of the pre-war level, but recovered in 1951 and reached 350% in 1960.[11]

By the end of the American occupation of Japan in 1952, the United States had successfully reintegrated Japan into the global economy and rebuilt the economic infrastructure that would later form the launching pad for the Japanese economic miracle.[2]

One reason for Japan's quick recovery from war trauma was the successful economic reform by the government. The government body principally concerned with industrial policy in Japan was the Ministry of International Trade and Industry.[12] One of the major economic reforms was to adopt the "Inclined Production Mode" (傾斜生産方式, keisha seisan hoshiki). The "Inclined Production Mode" refers to the inclined production that primarily focuses on the production of raw materials including steel, coal and cotton. Textile production occupied more than 23.9% of the total industrial production.[13] Moreover, to further stimulate growth, the Japanese government encouraged women to enter the labor market. The legislation on recruitment contains three components: the restriction placed on regional recruitment and relocation of workers, the banning of the direct recruitment of new school leavers, and the direct recruitment of non-school leavers under explicitly detailed regulations issued by the Ministry of Labour.[9]

The second reason that accounts for Japan's rapid recovery from WWII was the outbreak of the Korean War.[14] The Korean War was fought in territory that had been, until 1945, Chōsen (朝鮮) that Empire of Japan had annexed. As the United States was participating in the conflict on the Korean Peninsula, it turned to the Japanese economy for procurement of equipment and supplies because the logistics of shipping from the States soon became a significant problem for the military. Japan's industry was soon providing the required munitions and logistics to the American forces fighting in Korea. The demand stimulated the Japanese economy enabling it to recover quickly from the destruction of the Pacific War and provide the basis for the rapid expansion that was to follow.

After gaining support from the United States and achieving domestic economic reform, Japan's economy was able to soar from the 1950s to the 1970s. Furthermore, Japan also completed its process toward industrialization and became the first developed nation in East Asia. The Japanese Economic Yearbooks from 1967 to 1971 witnessed a significant increase. In 1967, the yearbook said: the Japanese economy in 1966 thus made an advance more rapidly than previously expected.[15] In 1968, the yearbook said that the Japanese economy continued to make a sound growth after it had a bottom in the autumn of 1965.[16] The words "increase", "growth" and "upswing" filled the summaries of the yearbooks from 1967 to 1971. The reasons for Japan to complete industrialization are also complicated, and the major characteristic of this time is the influence of governmental policies of the Hayato Ikeda administration, vast consumption, and vast export.

In 1954, the economic system MITI had cultivated from 1949 to 1953 came into full effect. Prime Minister Hayato Ikeda, whom Chalmers Johnson calls "the single most important individual architect of the Japanese economic miracle," pursued a policy of heavy industrialization.[17] This policy led to the emergence of 'over-loaning' (a practice that continues today) in which the Bank of Japan issues loans to city banks who in turn issue loans to industrial conglomerates. Since there was a shortage of capital in Japan at the time, industrial conglomerates borrowed beyond their capacity to repay, often beyond their net worth, causing city banks in turn to over-borrow from the Bank of Japan. This gave the national Bank of Japan complete control over dependent local banks.

The system of over-loaning, combined with the government's relaxation of anti-monopoly laws (a remnant of SCAP control) also led to the re-emergence of conglomerate groups called keiretsu that mirrored the wartime conglomerates, or zaibatsu. Led by the economic improvements of Sony businessmen Masaru Ibuka and Akio Morita, the keiretsu efficiently allocated resources and became competitive internationally.[18]

At the heart of the keiretsu conglomerates' success lay city banks, which lent generously, formalizing cross-share holdings in diverse industries. The keiretsu spurred both horizontal and vertical integration, locking out foreign companies from Japanese industries. Keiretsu had close relations with MITI and each other through the cross-placement of shares, providing protection from foreign take-overs. For example, 83% of Japan's Development Bank's finances went toward strategic industries: shipbuilding, electric power, coal and steel production.[19] Keiretsu proved crucial to protectionist measures that shielded Japan's sapling economy.

Keiretsu also fostered an attitude shift among Japanese managers that tolerated low profits in the short-run because keiretsu were less concerned with increasing stock dividends and profits and more concerned about interest payments. Approximately only two-thirds of the shares of a given company were traded, cushioning keiretsu against market fluctuations and allowing keiretsu managers to plan for the long-term and maximize market shares instead of focusing on short-term profits.

The Ikeda administration also instituted the Foreign Exchange Allocation Policy, a system of import controls designed to prevent the flooding of Japan's markets by foreign goods. MITI used the foreign exchange allocation to stimulate the economy by promoting exports, managing investment and monitoring production capacity. In 1953, MITIs revised the Foreign Exchange Allocation Policy to promote domestic industries and increase the incentive for exports by revising the export-link system. A later revision-based production capacity on foreign exchange allocation to prevent foreign dumping.

During the time of reconstruction and before the 1973 oil crisis, Japan managed to complete its industrialization process, gaining significant improvement in living standards and witnessing a significant increase in consumption. The average monthly consumption of urban family households doubled from 1955 to 1970.[20] Moreover, the proportions of consumption in Japan was also changing. The consumption in daily necessities, such as food and clothing and footwear, was decreasing. Contrastingly, the consumption in recreational, entertainment activities and goods increased, including furniture, transportation, communications, and reading.[20] The great increase in consumption stimulated the growth in GDP as it incentivized production.

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, in 1980, the nominal GDP had soared to a record $1.065 trillion.

Under the leadership of Prime Minister Ikeda, former minister of MITI, the Japanese government undertook an ambitious "Income Doubling Plan" (所得倍増計画). The plan called for doubling the size of Japan's economy in ten years through a combination of tax breaks, targeted investment, an expanded social safety net, and incentives to increase exports and industrial development. To achieve the goal of doubling of the economy in ten years, the plan called for an average annual economic growth rate of 7.2%. In fact, Japan's annual growth averaged more than 10% over the course of the Plan, and the economy doubled in size in less than seven years.[21]

Ikeda introduced the Income Doubling Plan in response to the massive Anpo protests in 1960 against the US-Japan Security Treaty, as part of an effort to shift Japan's national dialogue away from contentious political struggles toward building a consensus around pursuit of rapid economic growth.[22] However, Ikeda and his brain trust, which most notably included the economist Osamu Shimomura, had been developing the plan since mid-1959.[23]

Under the Income Doubling Plan, Ikeda lowered interest rates and rapidly expanded government investment in Japan's infrastructure, building highways, high-speed railways, subways, airports, port facilities, and dams. Ikeda's government also expanded government investment in the previously neglected communications sector of the Japanese economy. Each of these acts continued the Japanese trend towards a managed economy that epitomized the mixed economic model.

The Income Doubling Plan was widely viewed as a success in achieving both its political and economic objectives. According to historian Nick Kapur, the plan "enshrined 'economic growthism' as a sort of secular religion of both the Japanese people and their government, bringing about a circumstance in which both the effectiveness of the government and the worth of the populace came to be measured above all by the annual percentage change in GDP."[24]

Besides Ikeda's adherence to government intervention and regulation of the economy, his government pushed trade liberalization. By April 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. However, his liberalization goals met with severe opposition from both industries who had thrived on over-loaning and the nationalist public who feared foreign enterprise takeovers. The Japanese press likened liberalization to "the second coming of the black ships," in reference to the black ships Commodore Matthew C. Perry had sailed into Tokyo Bay in 1853 to open Japan to international trade via a show of military force. Accordingly, Ikeda moved toward liberalization of trade only after securing a protected market through internal regulations that favored Japanese products and firms, and never achieved his ambitious 80 percent goal.

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. The creation of these agencies not only acted as a small concession to international organizations, but also dissipated some public fears about liberalization of trade. Ikeda furthered Japan's global economic integration by negotiating for Japan's entry into the OECD in 1964. By the time Ikeda left office, the GNP was growing at a phenomenal rate of 13.9 percent.

In 1973, the first oil-price shock struck Japan (1973 oil crisis). The price of oil increased from 3 dollars per barrel to over 13 dollars per barrel. During this time, Japan's industrial production decreased by 20%, as the supply capacity could not respond effectively to the rapid expansion of demand, and increased investments in equipment often invited unwanted results—tighter supply and higher prices of commodities.[25] Moreover, the Second Oil Shock in 1978 and 1979 exacerbated the situation as the oil price again increased from 13 dollars per barrel to 39.5 dollars per barrel. Despite being seriously impacted by the two oil crises, Japan was able to withstand the impact and managed to transfer from a product-concentrating to a technology-concentrating production form.

The transformation was, in fact, a product of the oil crises and United States intervention. Since the oil price rose tenfold, the cost of production also soared. After the oil crises, to save costs, Japan had to produce products in a more environmentally friendly manner, and with less oil consumption. The biggest factor that invited industrial changes after the oil crises was the increase in energy prices including crude oil.[26] As a result, Japan converted to a technology-concentrating program, ensuring the steady increase of its economy, and standing out beyond other capitalist countries that had been significantly wounded during the oil crises. Another factor was the friction between the United States and Japan, as Japan's rapid economic growth could potentially harm the economic interests of the United States. In 1985, the United States signed the "Plaza Accord" with Japan, West Germany, France and Britain. The "Plaza Accord" was an attempt to devalue the US dollar, yet harmed Japan the most. Japan attempted to expand international markets through the appreciation of the Japanese yen, yet they over-appreciated, creating a bubble economy. The Plaza Accord was successful in reducing the U.S. trade deficit with Western European nations but largely failed to fulfill its primary objective of alleviating the trade deficit with Japan.