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 surrender 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.

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)

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