Multifaceted Story behind the Japanese Economic Miracle

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During the past century and a half, the overall economic balance of the world has remained almost unchanged and it seems that huge income inequalities between developed and developing countries have remained a persistent reality.
A study from the World Bank showed that from 101 countries identified as ‘middle-income’ in 1960 only 13 reached ‘high-income’ status almost five decades later. The number of non-western countries that have reached the general level of prosperity of Western Europe and North America during the past two centuries is alarmingly low.

Nevertheless, there still are a few outliers from the overall trend which managed to escape the middle-income trap and to catch-up with the rich countries. Most of these countries happen to be from the Asian region, and additionally nowadays the world has been witnessing China’s upsurge, which since 2010 reached the status of the world’s second-largest economy. Ironically, China overtook this position from Japan, the country that was the first among the Asian economic miracles to prove to the world that the “middle-income trap” is not an inevitable destiny. And at the same time, the case of Japan is regarded, in many respects, as very special. Japan became the world’s second-largest economy in 1968, only a little over two decades after experiencing total military defeat, and until recently it was considered as the only large country with a diversified economy that has risen from a below-average developmental level to the forefront of world development.

That is why many useful lessons can be drawn from reexamining the Japanese economic miracle. Knowing how Japan accelerated its growth, identifying key success factors and picking the ones that can be emulated may assist currently developing countries in enhancing their industrial and economic performance. Hence, numerous researchers have examined these issues and stressed different factors. Some of them viewed the subject through the lens of neoliberalism, thereby crediting Japan’s success to the global market. Some emphasized the role of state interventions and advocated for more autonomous states with more control over the economy. Finally, there is also an opinion that the success underlying behind Japan’s economic model was a coherent whole, that required exceptional international circumstances that no longer exist and cannot be repeated.
We analyzed the reasoning behind those various explanations and tried to derive “take-home messages” from each of them separately and jointly. We were determined to find, as the old adage would have us believe “the truth that should lie somewhere in the middle”. Thus, we compared and contrasted different factors that played a role with the intention to rank them with regards to their importance. We hope that if not all, then some of these lessons can be learned and repeated by other countries, as well.

Japan’s Imperial Past – Preconditions for Miraculous Growth

The beginning of the so-called Japanese economic miracle – the period when the country achieved exceptionally high growth rates for several consecutive years – dates back to the late 1950s. However, the miracle did not happen from scratch. The defeat in World War II had crushed the Japanese economy and even though the rise from this point can be referred to as miraculous, one should not forget that Japan was quite an advanced and powerful country before the defeat. The strong position that Japan held next to the main players in the global arena during WWII, together with the imperialistic ambitions it held, are clear signs of a strong economic and political background. Preconditions for this advancement had been building up since the 19th century.

In the mid of 19th century, after centuries of isolation, the West pressured Japan to open its markets and to trade, though on unequal terms. Realizing its military backwardness, Japan decided to follow the Westerner’s will, though temporarily. To be able to fight back the Japanese planned to “gather wisdom from all over the world”. Japan imported modern military technology and knowledge and built advanced schools for engineers where prominent Western scientists would teach. After gaining some military advantage over neighboring countries, already at the end of the 19th century, the Japanese started to colonize them. The resource-rich Korean peninsula became its first target, followed by Formosa (now Taiwan), Sakhalin and other Russian islands, Manchukuo (now Manchuria), etc. Acquiring colonies meant resources for Japanese industries as well as new markets and vast economic opportunities, for which the central administration alone could not administer/take advantage of. There was a need to involve the private sector which by then was mostly represented by family businesses enriched by trade during the Edo period (Tokugawa Shogunate, 1603-1868). As a result, a mutually beneficial relationship was built between the state and the private sector during the Meiji Restoration (1868-1912). Family businesses became so rich that they soon turned into vertically integrated conglomerates known as Zaibatsu. Japan became the first non-European country to industrialize.

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To conclude, the military industry became a cornerstone of the Japanese economy in the late 19th and early 20th century which created positive externalities for the whole economy. No doubt that the educated engineers, the technological and industrial base became important preconditions for post-World War II growth. Still, it is unlikely that these preconditions were sufficient to allow Japan to become the second-largest economy in the world. Certain geopolitical circumstances also played a role in unlocking Japan’s full potential.

International Politics during Cold War Era

Much of the world of the post-World War II period was engrossed in the Cold War and almost all regions were the object of rivalry between US-Soviet influences. Consequently, it is impossible to understand the reasons behind the Japanese economic miracle without viewing the full picture of the ongoing geopolitical context of that time.

After Japan’s total defeat in the war, allied forces led by the United States occupied the country. Not surprisingly, the initial aim of the occupation forces was to neutralize Japan as a former enemy and still potential threat. That is why General Douglas McArthur, who was appointed as Supreme Commander for the Allied Occupation Powers, implemented policies against Japanese militarism and economic concentrations which had served as the backbone of its military industry. The relationship between Japan and the US reflected an asymmetrical balance of power between the two states. This situation could persist as long as the US was accepting of a weak and dominated Japan.

With Moscow and Beijing signing a friendship treaty and communist forces winning the civil war in China in 1949, the US came to realize that the distribution of powers was rapidly changing in the East Asian region and that its influence in the region was facing significant threats. The outbreak of war in Korea was the final signal for action. It made the US realize that what was needed in those circumstances was not a poor, unstable country which could be easily encroached by communists, but a stable nation, capable to support itself and at the same time to serve as a deterrent against any other war threats which might thereafter arise in the Far East. Consequently, US intentions in Japan “reversed course.”

Course reversal predominantly included new policies aiming to boost Japanese production by relaxing anti-monopoly measures. As a result, the power of the monopolistic zaibatsu firms with strong ties to the national government – now called keiretsu – increased. This development, although unacceptable according to free-market philosophies, was quite essential for the laggard economy to be able to utilize the economies of scale when opening its markets to already financially and technologically strong competitor producers.

Moreover, the US tolerated restrictive measures imposed by Japan on imports from the US to protect its domestic industries while they would develop. At the same time, the US opened its own markets to Japanese goods despite existing protectionist demands from interest groups inside the country. Consequently, the American market became one of the major destinations for Japanese products. At the initial stages, Japan even was enabled to use the practice of price dumping – selling the products at a price below normal – on the US market. To continue this, the US not only absorbed Japan’s exports and tolerated Japanese protectionism but also subsidized the Japanese economy with low-interest loans and the transfer of technology to Japanese firms.

To sum up, because US foreign policy during the early Cold War prioritized the cultivation of strong anti-communist allies, it was ready to curtail certain economic interests of insiders for the sake of its own geopolitical ambitions. Japan seized the moment and in exchange for a political alliance with the US, raised demand for its own economy’s goods.

Internal Economic Policies

The capitalist development state (or just the developmental state) – today this phrase is used to refer to the Japanese pattern of development, that significantly differed from the Western market economies or the communist command economies. The Japanese state was characterized by strong state intervention, as well as extensive regulation and planning by bureaucrats, particularly from the Ministry of Industry and Trade (MITI), which was established in 1949.

One of the most important decisions that had to be made by MITI at the initial stage was to choose an industry in which to invest, to mobilize the majority of capital. The economy could be concentrated either on light industries (e.g. textiles) and agriculture, or higher value-added but riskier to enter, heavy industries. Significant expertise in engineering, accumulated during the Imperial Era, tempted bureaucrats to choose the latter. There was another strong argument also favoring heavier industries: as people’s incomes go up, demand for food and textile changes very little, whereas demand for products such as appliances and automobiles increases much more. Hence, offering the right products at the right time to Japanese consumers would be vital for expanding the domestic industrial base. But the question was how to nurture industries in which

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Japan, as a capital-scarce and labor-abundant country, did not have a comparative advantage.

There was a need to somehow mobilize scarce foreign currency to finance technology imports and ultimately to close the gap that existed between Japanese and foreign companies. And one of the first important steps became the adoption of laws that allowed MITI to control the flows of foreign currency. Those laws obliged everyone to sell their foreign currency to the government. Any transactions between residents of Japan and foreigners, as well as all the foreign currency transactions between residents, came under strict state control. All imports, and especially of consumer goods and luxury goods, were also severely controlled. As a result of such strict supervision, MITI ensured that dollars earned from exports or taken as loans were invested to “nurture” chosen industries.

The channel through which money was supplied to business was the commercial banks and the state-owned development bank. More importantly, the so-called over loaning system was established which allowed businesses to borrow cheap and long-term money from the banks, which, from that perspective, was beyond their capacity to repay. Beyond being an additional tool of control for MITI, channeling money through banks was advantageous compared to capital financing as it allowed enterprises to focus on more long-term goals, while capital-financed firms are usually pressured by stakeholders to focus more on short-term profitability. Later, this served as an important advantage for Japanese firms over their American counterparts, as the latter were forced to focus on dividends and short-term gains.

Another defining characteristic of the Japanese development state that served as a crucial factor for the success of MITI, was the unprecedentedly successful cooperation between the state and big business. The country functioned as a single, whole political machine made up of businessmen, politicians and bureaucrats, accurately described as “Japan Inc.” Among the most significant achievements of this public-private cooperative scheme is that in order to incentivize technology imports, government served as a guarantor for foreign companies that the money for technologies acquired by the Japanese companies would be paid. Those guarantees were very important considering that initially, when Japan was not well-established in international markets, foreign companies had little trust in them and were less likely to trade. Moreover, “Japan Inc.” provided negotiating power to Japanese companies to achieve profitable contracts and low prices, that would not be attained if all the companies were represented on the negotiation table as separate players. MITI often intervened in the agreement process of importing technologies to

Japan from abroad and served as a bargaining agent to extract favorable terms for the Japanese side.

However, with these obvious successes, MITI had made some serious mistakes too, and there are some famous cases illustrating those failures. Thereby, we will never know for sure what would happen if the firms were allowed to trade freely without all the restrictions imposed by MITI. Nevertheless, the limited evidence that we have today suggests that overall, the government involvement in the economy played an important positive role for the success of the Japanese economy, however only within the limited context of the period. Japan had so many other special circumstances that came together, that it is not appropriate to attribute the success to one of them independently from others.

Conclusion

To conclude, what was miraculous about Japan’s rapid development was “ability and good luck joined together in perfect timing.” International circumstances and opportunities given to Japan were in many respects exceptional, and Japanese policymakers were provided with many such “growth ingredients” that are inaccessible for many other needy countries (hence, “luck”). But the Japanese were also smart enough to use these opportunities and to take maximum benefit from the close alliance with the most powerful country in the world – the United States (hence, “ability”). Thus, corresponding to the line of reasoning used in the introduction we can say that the Japanese model of development is a coherent whole resulting from many different interrelated factors. However, some shareable lessons might still be learned. For example, it can be stated that unlike what neoliberal theories might preach, monopolies benefitting from economies of scale might be good for an economy at the initial stage of development under certain circumstances, or that state mechanisms of controlling capital can be quite beneficial if applied correctly and if the governing body has a long-term orientation. Furthermore, the model of a special cooperative relationship between government and the private sector might be similarly replicated in the context of another country.

ISET Student Club is supported by Friedrich-Ebert-Stiftung

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