Japanese economic growth post-1945

1 Preface to the Japanese economic miracle

1.1. Pre-war economic growth and industrialisation

1.2. War-time impact on the economy – losses

1.3. Consequences of WWII

1.4. American occupation

1.5. Initial plans

1.6. Dodge and Japanese economic policies

1.7. International economic environment

Japan became the fastest growing economy after the WWII until the 1973, when it’s growth slowed
down and by 2000, it achieved a low growth level. One of the main factors that explains this slower
growth in the last 3 decades is the slow population growth: it’s getting old quickly.

- Tendency to have smaller families

- With increase in living standards, people are living more and more

It provokes a lower demand (old people tend to save more than buy).

1.1. Pre-WWII economic growth and industrialisation

Japanese main industries were the textiles (cotton) and transport system (railways were already
established). Yet, one of their main problems was the lack of resources (not much coal).

NB: apart from its limited stock of coal, oil and mineral resources and despite its later industrialisation,
Japan had some similarities with Britain:

• island nation

• relatively open elite

• high degree of urbanisation

• high rates of (male) literacy

• high productivity in its agricultural sector

1.2. War-time impact on the economy – domestic losses

Japan participated in the war next to the Axis. By September 1945, Japanese losses were extensive:
fire-bombing of Tokyo and other large cities. Also, atomic bomb dropped on Hiroshima and hydrogen

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bomb on Nagasaki. Civilian and military casualties: 3 million war dead + loss of a quarter of the national
capital stock.

1.3. Consequences of WWII

It supposed the end of imperial ambitions: Japan lost its colonies (Korea and Taiwan) and it was
expelled as an occupying power in the South-East Asia and from the coastline of Chinese mainland.

However, on the basis of the increased wartime production, modern industry had grown and developed.
It could go through the conversion of its industry to a peacetime activity. Output increases:

• Manufacturing = 24%

• Steel= 46%

• Non-ferrous metals = 70%

• Machinery=252%

American occupation – significance for Japan’s future

After the WWII, Japan was occupied by the first time on its history. The USA, as the major power
occupying Japan, controlled the economic policy between 1945-1952. Their main goal was to
democratize the Japanese business system. American occupation implied:

• Participation of Japan in the world economy (trade and capital), but not in the international
labour mobility

• Social mobilization and cohesion: despite the defeat, it was a unified nation, there wasn’t a
social fracture.

• Development of industrial capacity and expertise: college educated managers and each time,
more skilled workforce.

• Specification of government policies: government intervention in the economy

In addition, the American-type consumption was spread. For instance, the branded goods and sport:
Coke Cola and Baseball.

1.4. Initial plans of Japanese government

Japanese authorities attempted to restore the pre-war economic establishment. Inflation and
devaluation were seen as a way to boost the post-war economy and support the “traditional” economic
institutions.

• Objective: re-establishment of the pre-war industrial dominance of the zaibatsu

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 • American opposition: they rejected the economic and political power of the zaibatsu. They
saw the Zaibatsu as a threat for stability; they wanted to democratize the economy and impose
fair competition.

1.6. Dodge and Japanese economic policies

Joseph Dodge (1990-1954) was a banker and supervisor of US military procurement in WWII. Senior advisor to
Allied occupation administrations (in Germany, Austria). It was also an advisor to Economic Cooperation
Administration = Marshall Plan (not the major advisor, but an important one). Considering his action in Japan, in
1949 he became the Financial adviser to General Douglas MacArthur (Supreme Commander for the Allied Powers
SCAP). He successfully advocated: “recognition of the equality of women, new laws supporting labor unions, and
educational reform, …”.

He was a key financial figure in Japan. He designed the Dodge Line, a plan to revitalize the Japanese
economy (in some way, similar to the Marshall Plan).

Dodge Line - policy of financial and monetary contraction

Among the different policies of the Dodge Line, it’s important to highlight:

• Balance the consolidated national budget through an Austerity programme. Many workers
were laid off, but inflation was over.

• Establish a single exchange rate (Y360 to $1): this exchange rate was quite low. It was a price
advantage in exports.

• Establish the US Aid counterpart fund, which replaces the Reconstruction Finance Bank (RFB-
influenced by zaibatsu).

• Establish a market economy: eliminate the “Black Market”.

• Decrease government intervention: phase out price controls and subsidies.

1.5. International economic environment

• Bretton Woods system

• Cold War starts

• Korean War (division of peninsular in two states). Japan became a supplier of war material to
America. Thus, it took advantage of this war.

• Japan was the major base for US military operations

• Vietnam War

The export sector of the Japanese economy also benefited from:

• low tariffs associated with the GATT

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 • low prices of oil and other raw materials consumed by the industrial sector.

In addition, important role of the MITI (Ministry of International Trade and Industry), which was a state
body to assist industrial expansion: it tried to guide the development of the nation’s economy and
promote the business and economic growth. It was a midpoint between the centralized government
economic planning of the Soviet Union and the free market economy of the USA.

Japan: Growth of real GDP, per cent per annum

Japan: Real GDP – %p.a.

annual rate of growth

1946-1955 10,9%

1955-1973 9,6%

1973-1990 3,9%

1990-2000 0,5%

2000-2009 0,6%

Source: National Planning Agency, National Income Statistics

2.1. Post-war growth of output per capita

High growth rate of Japan from the post-war years until the 1970s. This tendency of high growth
completely changed afterwards.

2.2. Sources of growth

Edward Fulton Denison (1915-1992): Why growth rates differ: postwar experience of nine western countries (1967). Growth
accounting model (1962: The Sources of Economic Growth in the USA). He was a pioneer in the measurement of the

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United States gross national product and one of the founders of growth accounting. His model was
applied to Japan gross national product analysis. What he did was:

• Estimation of growth of output: gross national product

• identification of the contribution of each input (land, labor and capital) in the growth of output

• Disaggregation of sources of growth: break down the sources of growth within each input; see
what were the causes that provoked such input to experience growth.

• Productivity analysis: see what amount of growth is left and it will be the residual or productivity.

Sources of Economic Growth for Japan 1953-1971 (% per annum)

National income 8,8

INPUTS 3,1

• LAND 0

• LABOR 1,9

• CAPITAL 2,1

PRODUCTIVITY 4,8 55%

National output of Japan increased an 8,8% per year. 55% of such growth was due to Productivity
growth.

Disaggregation of sources of growth

LABOR 1,9 CAPITAL 2,1 PRODUCTIVITY 4,8

CHANGE

Employment 1,2 Inventories 0,7 Advances in 2

knowledge

Age-Sex 0,1 Non-residential 1,1 Improved 1

Composition buildings and response
equipment allocation

Hours 0,2 Dwellings 0,3 Economies of 1,9

scale

Education 0,4 International assets 0

Hugh Patrick and Henry Rosvksy: Asia’s New Giant: How the Japanese Economy works

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2.2. Changing structure of the Japanese economy

• Contraction of the Primary Sector

• Growth and contraction of the Secondary Sector

• Expansion of the Tertiary Sector, the dominant sector by 1970s (there was a major shift in the
economic structure of the labour force). It becomes a service sector economy

Japanese economic structure (by employment of labour)

Japan: economic Primary Secondary Tertiary

structure, labor force

1955 41 24 35

1965 25 32 43

1975 14 34 52

1985 9 33 58

1995 6 32 62

2005 5 26 69

Source: Cabinet, Statistical Bureau

Economic structure (by capital investment)

Japan: economic Primary Secondary Tertiary

structure, labor force

1955 19 34 47

1965 10 40 50

1975 5 39 56

1985 3 35 62

1995 2 31 68

2005 1 27 72

Source: Cabinet, Statistical Bureau

Oil dependency 1971: primary energy

source

Japanese dependency on oil = 75,2%.

That’s why, the oil crash had a huge impact
on its economy.

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Japan GDP: % Annual rate of growth: 1963-2003

Figure 1. Japanese GDP growth

Finance for corporation

There was a major post-war shift: from direct financing (equity, shares/stocks issued to the public or to
some other private companies) to indirect financing (bank loan). The ratio of direct to indirect financing
evolution was:

• 1931 = 9:1

• 1935= 7:3

• 1945= 1:9

• 1960s=1:9  bank loans provided nine out of ten Yen raised by companies.

After the war, despite indirect US rule ruing the American occupation, the Japanese bureaucratic
structure remained largely intact, and the major banks were used by the Japanese government (which
directed the economic development) to issue loans.

❖ Government banks loaned funds to large private city banks which, in turn, loaned to
business (over-loaning practice).

Reciprocal shareholding of Mitsubishi Bank (1974)

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 • left column: companies Mitsubishi owned
• right column: companies that hold shares of Mitsubishi

Parent-child relationship

KEIRETSU

The former Zaibatsu - diversified industrial group owned and controlled by a wealthy family- were
replaced by flexible business alliances horizontally and vertically, the Keiretsu: clusters of
independently managed businesses, characterized by cross-shareholdings and long-term transactional
relationships.

• Horizontal Keiretsu

Each horizontal keiretsu comprised several members including a main bank, large financial institutions,
the largest manufacturing firms and a large trading company. Within each group, companies held each
other’s shares and participated in interlocking directorates. They also engaged in intragroup financing
and joint R&D ventures.

- Objectives: long-term stability, efficiency, reduced risk and mutual support.

- Six great enterprise groups: Mitsui, Mitsubishi, Sumitomo, Fuyo, Dai-ichi- Kangyo and Sanwa
were organized horizontally.

• Vertical Keiretsu

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Giant vertical keiretsu were organized in the automobile, electronic and other industries: Nissan,
Toyota, Hitachi, Matsushita, Sony… Clustered around the large industrial firm, there were large
numbers of smaller companies (subcontractors of parts and suppliers of services).

The vertical keiretsu provided efficient, long-term reciprocal benefits for the parent company and its
suppliers, including:

o coordination of planning and investment

o sharing of technology and information

o control of quality and delivery

o flexibility throughout the business cycles

• Keiretsu: distribution and other services

The distribution keiretsu allowed manufacturers to control the marketing strategy of products.
Manufacturers used these networks to:

• constraint price competition among retailers

• maintain high profit margins in the domestic market

This also assisted Japanese companies to compete in the international markets. Implication 
Japanese consumers subsidized the international competitiveness of large manufacturing firms.

The welfare society in Japan

In Japan, a welfare society rather than welfare state existed. There was also a high employment
policy: small and medium sized companies assisted to prevent them from bankruptcy in order to
maintain employment. The welfare society and high employment enabled the Japanese state to direct
funds to industrial development as “soft” bank loans.

Conclusion- Japanese economic growth

After WWII Japan was able to re-build its economy on the basis of investment, consumer demand and
exports. The oil shock disrupted the growth path, but it did not derail it.

Why was there a slower growth at the end of the C20th?

• Domestic conditions: changed in the age structure (aging population; workforce and demand
shifts)

• External conditions: slower growth of the international economy; growing competition from
neighboring economies in Asia (especially China) and increased demand for resources from
these economies.