Japan's postwar occupation and the economic boom in the 1950's

Written by Maciamo on 15 May 2004

From: http://www.jref.com/society/japan_postwar_economic_miracle.shtml

When Japan surrendered to the United States in August 1945, the Americans started occupying the country with main purpose to demilitarize and democratize.

In order to obtain the support of the population and assure a smooth transition, the US decided to retain the Imperial institution, although the emperor would lose his divine status. Women were immediately given universal suffrage, which also proved very popular.

The Communist party became legal for the first time in Japan. The occupational forces thought of dismantling zaibatsu (financial combines), which they saw as the money-bags behind the military. They also wanted to decentralize education systems and the police, so as to weaken the power and influence of the central government. Nevertheless, the Americans did not care very much about Japan's economic recovery, and let it up to the Japanese to care about it.

When the Cold War began and China's Communists routed the Nationalists, the US government feared that the movement would spread to Japan and set on a "reverse course" in 1947. They sharply scaled back their plans to dissolve subsidiaries of the zaibatsu, relinquished their claims to war reparations, then initiated a crackdown on Japanese Communists and pushed for the creation of a national police. Instead of having to pay war reparations to Britain and most Asian countries, the US arranged commercial treaties for Japan with countries such as the Philippines.

While the postwar inflation resulted in a total augmentation of of 15.000% from 1945 to 1949, the United States were now committed to solve Japan's economic problems. Japan's economy was to be cured by imposing three harsh measures : a balanced budget, the suspending of all state loans to industry, and the abolition of all state subsidies. The yen was set to a favourable rate of 360 for 1 US$ to stimulate exports.

But as these new regulations put tremendous stress on the Japanese economy, nearly drawing it into depression, the Korean War commenced. This misfortune for the ones, became a great fortune for the others. Americans military procurements surged. Orders from Japan amounted to two billion US$ between 1951-53, approximately 60% of all its exports. Large companies amassed profits for the first time since the end of the war and Japan's GDP soared like never before.


Another Source says:

Japan’s economic growth between 1955 and 1973 has often been described as “miraculous,” as an industrial expansion of the speed and duration experienced by Japan during this time was unprecedented internationally. In the late 1950s, Japan’s gross domestic product (GDP) grew at an average rate of 9.1% a year; in the 1960s, the real heyday of what is now known as Japan’s high-growth era, the figure was over 10%. In the short span of three decades after the end of World War II, Japan went from being an economic basket-case in the eyes of the world, its industries largely reduced to rubble by wartime bombing, to being one of the wealthiest nations on the planet and an exemplary success story of economic development.

Scholars have advanced many theories to explain why Japan was able to grow so quickly and for so long. Much attention has been given to the role of the powerful central government bureaucracy in Japan’s economic rise: civil servants in organizations like the Ministry of International Trade and Industry, it has been argued, worked closely with the business community to chart strategic plans for economic development and deftly guide the nation’s industrial and financial advance. What has been called Japan’s “developmental state” thus quarterbacked Japan’s high-speed growth through the judicious application of “industrial policy” to promote rising sectors (like automobiles), chart the decline of moribund ones (like mining), and encourage the export economy. Other observers have traced Japan’s rapid growth to favorable international conditions (readily available technology and open access to international markets); some have emphasized Japanese trade policy (protection of the domestic market combined with aggressive export drives); and a few have suggested that Japan got a “free ride” to prosperity by relying on the United States for its military defense during the tense decades of the Cold War. Recently, more economists have tended to stress the importance of domestic consumption and rising living standards in Japan as crucial factors in propelling and sustaining Japan’s almost twenty-year-long economic boom.

The high-growth era was characterized by noteworthy stability in Japanese politics and patterns of policymaking. In 1955, the two major conservative parties in Japan merged to form the Liberal Democratic Party (LDP), an entity often accused by its detractors of being neither very liberal nor very democratic. Crafting a political dynasty based on strong support in the countryside, ideological flexibility, and the enthusiastic promotion of economic growth, the LDP was an electoral powerhouse, claiming a majority in the Diet and a firm hold on the prime ministership from its founding until the early 1990s. The dominance of the Liberal Democrats at the polls prompted many critics to question just how democratic postwar Japan actually was; moreover, many commentators have claimed that policymaking was actually shaped less by the democratic process than by a complex network of cozy backroom relationships among LDP politicians, powerful corporate leaders, and leading government bureaucrats. This informal coalition of elites, often termed the “iron triangle,” was said to have been responsible for much of the top-level decision-making in the Japanese state after World War II. Skeptics, however, have noted that similar constellations of influential elites are hardly uncommon in the industrial democracies of the West; significantly, it seems that a majority of the Japanese people were content with the LDP and the “iron triangle”—and particularly the political stability and economic prosperity they appeared to deliver—during the high-growth decades.


Japan's postwar economic miracle (1950-1990)

Written by Maciamo on 16 May 2004
In 1951, Japan's GNP was US$14,2 billion, half of West Germany, 3x less than Britain, and a mere 4,2% of the US economy. By 1970, Japan had overtaken all European economies, and represented over 20% of the US's GNP. In 1975, it was double of the UK's, and 1980, it reached US$1040 billion, roughly 40% of the US's.

We have seen what favourable conditions have prompted the economic boom following the American occupation. But what are the factors that allowed the Japanese economy to sustain its exceptional growth during the three decades from 1950 to the late 1980's?

First of all, Japan benefited from the American military protection, which spared the government from high defense spendings. The same happened in West Germany, and both nations experienced the most formidable economic growth in the postwar era. But whereas West Germany's GNP increased 28,5x between 1951 and 1980 - compared to 18,7x for France, 12,7x for Britain and only 8x for the USA, Japan's increased 73x !

Their are obvious reasons for which we should minimize this number at first. The yen was intentionally set to a very low rate in the 1950's, and was worth 3x to 4x more in 1980's. At equal exchange rate to the US$, the Japanese economy didn't grow 9x faster but less than 3x. The second reason is that Japan was completely destroyed in 1945, its cities flattened and industry annihilated, while the US did not suffer any damages on their home land and had nothing to rebuild. It thus took Japan many years to recover its prewar level. Had the country ended the war intact, the economic "miracle" would not have happened. The same goes for Germany, which GNP stood at 68% of the UK's in 1951, while it had obviously been superior to it during its WWII peak.

Coredo, Nihombashi, Tokyo

However, the Japanese economy continued to grow steadily, quintupling its size every decade.

But the Japanese economic miracle didn't owe only to having to reconstruct the country and mobilising the entirety of the war's military spending, installations and energy into business. Although the economy was based on the American liberal system, the government boosted business by providing low interest loans to sectors designed for growth, and organized the economy to facilitate development as much as possible. For example, the MITI (Ministry of International Trade and Industry) pressured iron and steel producers to acquire the licence rights of a new Austrian oxygen furnace together, thus sharing the costs and benefits, while the logic of Anglo-saxon free-market would have had each company obtain the licence individually at much higher expenditure.

Japanese enterprises borrowed massively from banks, which drew their funds from high households savings. Inflation made it easy for them to pay them back without difficulty - until the bubble burst in 1990, which left the banks with innumerable bad loans and brought many to bankruptcy or need of financial support from the state.

Nominal GNP of Five Major Nations, 1951-1980 (amounts in US$ billion)

West Germany
1951 14.2 328.4 28.5 35.1 41.4
1955 22.7 398.0 43.0 49.2 53.9
1960 39.1 503.8 70.7 60.0 71.9
1965 88.8 688.1 115.1 99.2 100.2
1970 203.1 992.7 184.6 145.5 124.0
1975 498.2 1549.2 418.2 339.0 234.5
1980 1040.1 2633.1 816.5 657.1 525.5

Source : Keizai Koho Sentaa, Japan: An International Comparison (Tokyo: Keizai Koho Sentaa, (1983), p.5.