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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: -

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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
4
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,
5
the latter part of 1950 to 1960.”6

The chart below Japan GDP from 1951 to 1980 and shows how it has progressed: -

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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

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