Japanese Economy Final Draft

Q: - Explain the rapid growth of Japanese economy between 1945 and 1980? Japan has been growing for a century before and during the World War period at 4.5%, twice the Western Europe rate under the Meiji government who boosted the economic growth of Japan through trade. Japan has being one of the biggest economies before and during the World War. The end of Second World War caused disaster to Japan’s economy. Economist and observers alike have very different views on what led to Japan rapid growth between 1945 to 1980, observers like Chalmers Johnson, Robert Wade, and economist Joseph Stiglitz, have attributed Japan’s growth to the policies of the Ministry of International Trade and Industry (MITI) but other economist argue that growth was export driven and so on. In the mid 1800s Japan started to take advantage of international trade and technologies, that meant Japan was enjoying economies of scale but it was shot lived with the outbreak of the First World War that disrupted and trade and halted Japan’s economic growth and then the outbreak of Second World War was the beginning of the end of Japan economy, which eventually came about in 1945 when Japan lost the War. Japan lay in ruins after The Second World War that destroyed 40% of its capital stock and killing millions of its workforce. The table shows how physical damage suffered by Japan before and after The Second World War: -

QuickTimeª and a decompressor are needed to see this picture.

After the War, the Post War era began; with Japan being occupied by America and led under the name SCAP “The Supreme Command for Allied Power.” Whose intent was upon democratising Japan and permanently destroying her capacity to make war? They implemented sweeping reforms in land, Education, political and anti trust measure that were put in resulted in the breaking up of Zaibatsu”1. A five-year plan was then drawn up by Joseph Dodge, who give priority in recovery of the basic industries, namely, steel, coal, fertilizer, gas, cement, and railroads. The technology that was being imported under the Dodge plan provided Japan with 1

G.C.Allen, Japan Economic Policy, 1980,Pg 129.

innovation and efficiency in industries that was given priority and was part of investments that came in the “Dodge Plan” “but it was controlled and strictly regulated”.2 This plan was a success and the Japanese economy stabilized by 1949 but the most important feature of the plan was investment concentrated in manufacturing, infrastructure and power industries. This helped improve Japan economy and provided a stepping-stone for further growth. This helped to bring back the Japan market economy into the International trade market. Korean War and the Cold War from 1949 to 1952 galvanised Japan economy, as it increased demand for Japanese manufacturing and economy grew quickly as US ordered soared to two billion US$ between 1951-53 helping large companies make immense profits like never before as exporting amount to 60%. It was one the many economic booms that Japan went through up until 1970, which solved the backlog caused by the Dodge Plan. The Korean meant U.S. allowed Japan to export goods to the US while protecting its domestic market and relaxed regulations on equipment that Japan was barred from buying previously, that now enabled Japan to buy equipment that was required to upgrade its existing worn out hardware, which was previously un attainable. This boosted Japan steel industry for example the steel industry, whose reconstruction based on the priority production system had been stopped by the Dodge Line policy, took advantage of the Korean War to expand its capacity by importing new equipment and realized not only lower prices for its products but also improved quality. Japan whose export-driven economy that was consequently been 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 Japan continued towards its rapid growth and benefited from the reforms left by US, when it was given sovereignty when the San Francisco treaty was signed in 1952. The new Prime Minister Hayato Ikeda was elected in 1960 who saw a vision of “doubling income in ten years” and economy size. Japan introduced polices targeting companies who she saw had potential of increasing returns for example Japan invested $123 billion in steel industry rationalizations and subsidies were providing money to be invested in the Japan’s domestic market. The Ministry of International Trade and Industry (MITI) that was created in 1949 provided guidance and regulated to stop excess competition and the speed of investing to stop overloading. They played an important part in the success and growth of Japan’s economy. Japanese government has taken measure since the end of world war to protect its industries from collapsing, “The Japanese stated industrial policy have been to reduce 2

Takatoshi Ito, The Japanese Economy, Massachusetts Institute of Technology, 1992 pg 59

imports and foster higher growth in key industries, and to change industrial structure” 3 four policies of government that has remained consistent included: • •

• •

Creating infrastructure where Japanese have helped fund industrial ports power plants etc Allocating resources among industries. Where government has given subsidies and import protecting to certain targeted industries. For example infant industries are protected by import restrictions until their domestic manufacturer are able to compete with foreign ones. Take couple of manufactures like automobiles in 1965, colour TV in 1971, computers in 1975 etc. These manufacturers that now dominate the markets would have succeeded without the import protecting during infancies Industrial restructuring among individual industries Dealing with problems of small and medium size firms

The Reserve Fund for Overseas Market Development to promote foreign currency earnings by providing special financing was offered by the Japan Development Bank for automobile and petrochemical industries in 1963 and Textiles, ammonium sulphate and non-ferrous metals in 1967 and encouraging improvements in structural change through tax exemption. These policies helped Japan sustain rapid growth up to 1973.”Policies like control over foreign investments and a system where money was gathered from domestic saver and it was investment in domestic firms but it was fortunate that Japan had high saver otherwise they would have to borrow from foreign to maintain growth”4. Japan in 1980 devoted 30% GNP to investment where as US devoted only 17% to its GNP to investment.”5 The long economic boom felt by The International Economic was another factor in which global gross domestic product from 1960 to 1950 grew at a rate of 5% and the world trade tripled between 1955 and 1970. This increase growth was extremely beneficial to Japan rapid growth. This meant demand for Japanese products went up as Japan had already established a competitiveness manufacturing industry and the fixed exchange rates also help, as Japan export in 1955 went upwards of 80% and in 1970 it reached 95%. That the money then invested in in new technologies to keep the efficiency levels high. Another aspect of international environment that benefited Japan was the availability to cheap and stable raw material and energy needed for its heavy chemical industrializations, and the large scale of development of oil began in Middle east, meant production of oil was increasing and in a state of perpetual state of excess. This international economic environment improved “Japans terms of trade considerably in

3

Takatoshi Ito, The Japanese Economic, Fourth Printing, 1950,Pg197 Takatoshi Ito, The Japanese Economy, Massachusetts Institute of Technology, 1992 pg 63, G.C.Allen, Japan’s Economic Policy, The Mac Millan Press Ltd, 1980,Pg 129,130, 4

5

the latter part of 1950 to 1960.”6 The chart below Japan GDP from 1951 to 1980 and shows how it has progressed: -

QuickTimeª and a decompressor are needed to see this picture.

Japan education system allowed firms to achieve mass fortune and increased Japan’s GDP as he above table show because they had a large skilled labour workforce available. That improved productivity as the skilled labour force was available to adapt there skills to the new technology, this was all possible due to Japan's highly acclaimed post-war education system contributed strongly to the modernizing process. The world's highest literacy rate and high education standards were major reasons for Japan's success in achieving a technologically advanced economy. Japanese schools also encouraged discipline, another benefit in forming an effective work force. But after the war occupation forces made changes through school reforms like passing a law that guaranteed academic freedom, extended the length of compulsory education from six to nine years, and provided for coeducation. The American higher education system was adopted. In 1960s college and university graduates numbered nearly four times their pre-war counterparts, and there were some 565 universities and junior colleges. Foreign technology that began to be imported into Japan via technical cooperation “grew rapidly from 27 agreements in fiscal 1950 to 101 in 1951, 133 in 1952,103 in 1953 and 82 in 1954”7. Which means that she was overcoming her deficiency by importing foreign “know-how and the technical education system meant the successfully assimilation of know how. That meant Japan didn’t have to spend enormous amount of money in Research and development, as they were able to copy from her neighbours that will also possible due to international trade. In my opinion Japan rapid economy was the result of two factors that contributed to this dramatic rise in economic power and fortune would be the policies of the Japanese government as well favourable international climate for example The Korean War. While it cannot be doubted that both these factors were crucial in the 6

Takafusa Nakamura, The Post-War Japanese Economy, Its Development Structure, University of Tokyo Press, 1982, p63 7 Takafusa Nakamura, The PostWar Japanese Economy, Its Development Sturcture, University of Tokyo Press, 1982, P45

rise of Japan's economic fortune, I believe that the international climate contributed more to the rise of Japan. Both the policies of the Japanese government and the favourable post-war international climate contributed greatly to Japan's economic rise following the end of World War 2. However, the international climate provided the greater contribution, as it facilitated both the access to markets and the transfer of technology, without which the Japanese economy would not have experienced exceptional growth. The roles of the United States and of the General Agreement on Tariffs and Trade (GATT) are particularly important in this regard. Bibliographies Books Takafusa Nakamura, The Post War Japanese Economy, Its Development Structure, University of Tokyo Press, 1982 Takatoshi Ito, The Japanese Economic, Fourth Printing, 1950 G.C.Allen, Japan Economic Policy, 1980 G.C.Allen, Japan Economic Expansion, Oxford University Press, 1965 Nakamura, University of Tokyo Press, 1982 Japan Economic Expansion, G.C.Allen, Oxford University Press, 1965 Actual Text Words:- 1611