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The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of SnoQap, any other agency, organization, employer or company. Assumptions made in the analysis are not necessarily reflective of the position of any entity other than the author(s). These views are subject to change and revision.

The Japanese Economic Miracle: A Case Study in Recovery

The Japanese Economic Miracle: A Case Study in Recovery

The twentieth century is especially distinguished from those before it by the tremendous growth in world population. As of April 2019 the world’s population is currently estimated to be 7.7 billion people. Around 200,000 years were needed for the population to reach 1 billion people. Only 200 years more were needed to reach 7 billion. This exponential growth is staggering and introduces new dynamics (political, social, economic, etc.) to a world already becoming quite crowded.

Another interesting aspect of the twentieth century is the alarming rate at which technology advanced. Automobiles to submarines; radio to television; computers to the internet. There only elapsed little more than half a century from the foray of the first airplanes into the skies to the launching of the first rockets into space and onto the moon. It is clear, however, that not all of the advances of this time were wholly good. Alongside the car rolled the tank; next to antibiotics wafted mustard gas. Anyone will know that human suffering is a constant throughout our history. History books are absolutely full to the brim with stories of old wars and conflicts, from the Spartans and Persians at Thermopylae to the Punic Wars to the Napoleonic Wars and so much more. However, the explosion in world population growth rate and technological advances interacted to aid in creating an era of human history characterized by explosive and violent warfare of the like that had never before been seen.

The First World War was predicted by contemporaries such as U.S. President Woodrow Wilson and writer H. G. Wells to be the “war to end all wars” for they hoped that the sheer destructiveness and desolation of the conflict would persuade humanity to completely forgo war into the future. For those living at the time, it was simply called the Great War. Great though it was in scale, it obviously was not an end to all war as predicted. 

In fact, only around 20 years elapsed before another great war broke out. World War II once again enveloped the world in conflict and resulted in historical scars that have yet to fully heal. Some of the aforementioned scars were not just historical, but physical as well in the form of bomb craters. WWII was characterized in part by an increased use of aircraft and bombing from above, and perhaps no such bombings are more synonymous with the conflict than with those that ended it: the dropping of atomic bombs on the Japanese cities of Hiroshima and Nagasaki. In Hiroshima, bombed on August 6, 1945, the death toll is estimated close to 100,000 (out of a population of about 300,000). Three days later, the bombing of Nagasaki causes a death toll slightly smaller than Hiroshima but just as horrific. Complications related to nuclear fallout and radiation poisoning likely led to a fair amount of deaths for years following the initial bombing.

Post-WWII Japanese recovery in the wake of such tragedy up until around 1991 has been referred to by some as the Japanese Economic Miracle. The post-war economic growth was encouraged by a combination of Japanese government intervention and U.S. financial aid. Also instrumental in attracting economic activity to Japan was the Cold War political climate which resulted in U.S. occupation, thus bringing in a large amount of people into the country in order to set up a bulwark against encroaching Soviet influence into the Pacific.

In a study titled “Theories of economic miracles” published by Bernhard Seliger in Ordnungspolitische Diskurse (“Discourses in Social Market Economy”), he seeks to analyze and attempt to learn from the so-called economic miracles that have happened in so many countries. Seliger distinguishes the Japanese Economic Miracle from the subsequent “East Asain Miracle” that see the growth of “tiger states” (South Korea, Taiwan, Hong Kong, etc.) and “small tigers” (Malaysia, Indonesia, Thailand, etc.). He references Japan as uniquely successful among East Asian countries partly because of its larger adoption of Western technology and administration in the Meiji Restoration of the nineteenth century. Japanese military dominance gave way to ruin during WWII. Immediate post-war threats to Japanese stability included inflation, unemployment and shortages; however, cooperation with U.S. Occupying forces (known as SCAP, or Supreme Command of the Allied Powers) and the outbreak of the Korean War led to a rapid increase in Japanese economic growth. In 1951, one year into the Korean War, industrial production in Japan rose by 36.8%. From 1950 to 1973, in a period called by some scholars as the “high-growth” stage, the economic growth rate was found to be 10% annually. Growth continued into the 1970’s and 1980’s, though at a gradually decreasing rate (1970s: 5%; 1980’s: 4%).

Seliger also provided numerous competing explanations for the miraculous Japanese recovery. One specifically focuses on the role U.S.-led economic and political reform, financial aid and low defense spending due to the newfound U.S.-Japanese alliance. Contrary to this is the view that the roots of the economic miracle lay in the nineteenth century in the modernization efforts of the Meiji Restoration. In either case, the post-war export-oriented approach of Japanese industry paired with the closing of the market to foreign consumer goods. The Ministry of International Trade and Industry (MITI) may have closed the consumer market but kept open the ability for industries to import the required inputs and intermediate goods needed to put out finished goods. Additionally, Japan was also able to achieve large trade surpluses as a result of the low entry rate of the yen into the international monetary system and the fixed exchange rates of the time. 

Seliger clearly describes and outlines the ways in which Japan became a model developmental model amongst East Asian countries, but also goes on to describe the failings of the Japanese model and its lessening appeal to economic theorists. In the 1980’s, the cycle of trade surplus accumulation and cheap bank credit was soured by the formation of “zombie companies” (too big to fail, but no growth) that were caught in a cycle of stagnation. This failing in the Japanese model manifested itself in the 1990’s and 2000’s.

Another economic scholar of the postwar Japanese economy, Masahiro Takada, wrote on the underlying factors and strategies for the growth witnessed during the Japanese Economic Miracle. Takada refers to the occupation of Japan and to three major reforms implemented by SCAP during that period: the breakup of the zaibatsu, land reform , and labor democratization. 

Zaibatsu were essentially Japanese mega-corporations that exerted massive economic and political influence. They were often given special treatment in the form of decreased taxes and government grants. Their presence in the Japanese economy encourage tense relationships between labor and management, stifled independent creativity and entrepreneurship, and hindered the formation of a Japanese middle class. With the disintegration of the zaibatsu came the possibility of fierce competition in all industry sectors.

 The land reform was aimed at tearing down the remaining semi-feudal land practices still prevalent in the country by forcing landlords to sell what land they had to the government for redistribution to tenant farmers. Many of these landlords owned the land but did not necessarily have the ability or knowledge required to properly till it. The effectiveness of the reform is demonstrated by 90% of cultivated land being tilled by owners rather than renters, as opposed to that figure being only 54% before the reform.

The third reform, aimed at labor democratization, enabled the formation of unions by Japanese workers. As a result, union formation rose from roughly 0% in 1945 to almost 60% in 1948-1949. Though the reform was slow to be accepted by management, the unions eventually achieved improved working conditions and higher wages which expanded the domestic consumption markets.

Japan is but one country in a long list of countries (one other specific country being Germany) that have been said to have an “economic miracle,” and it seems today that the effects of that miracle have worn off somewhat as evidenced by the decreased growth rate. However, it must not be forgotten that Japan was able to recover in the aftermath of defeat and in the wake of one of the most destructive weapons to ever be utilized in warfare. Regardless of the current performance of the Japanese economy, its ability to recuperate and rebound serve to other countries looking to develop economically as a case providing valuable lessons about what does and does not work in bouncing back. 

Takada, M. (1999). Japan’s economic miracle: underlying factors and strategies for the growth. Professor Wylie, 18, https://www.lehigh.edu/~rfw1/courses/1999/spring/ir163/Papers/pdf/mat5.pdf.

Seliger, B. (2010). Theories of economic miracles (No. 2010-01). Ordnungspolitische Diskurse, https://www.econstor.eu/bitstream/10419/55426/1/685102815.pdf.

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