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The miracle of Japanese Economy after the Second World War (WW2)

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DOI: 10.13140/RG.2.2.10191.53925

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 The miracle of Japanese Economy after the Second World War
(WW2)
Md Zafar Alam Bhuiyan
Assistant Professor
Department of Fashion Design
The Shanto-Mariam University of Creative Technology,
Dhaka, Bangladesh

Abstract

Introduction: As the latecomer in the world economic turmoil in nineteenth-century (especially

in the second half), Japan adopted an across-the-board policy of modernization in search of parity
with the industrial West, under the slogan fukoku kyōhei: “enrich the country, strengthen the
military.” Growth in Japan’s per capita GDP between 1870 and 1940 replicates the success of the
economy of this movement, that continued throughout the prewar era. Japan was gradually
catching up with two of the world’s most advanced industrial economies, Britain and the United
States, Japan’s per capita GDP grew from 23% of Britain’s and 30% of America’s in 1870 to 42%
of Britain’s and 41% of America’s on the eve of the Pacific War (Elington, 2004). Following various
causes (given below) after the WW2, Japan showed the unprecedented development of its
economy with repairing, rebuilding and even with the renovation as a whole. The crucial and
critical war abruptly reversed and delayed this progress, indeed, in terms of per capita GDP.
However, the war sent the modern Japanese economy back to square one, erasing virtually all
the gains it had made since the end of the nineteenth century (Elington, 2004).

Objectives of the study:

• To know the real causes of Japanese economical renovation secret for its development
after WW2 which surprised the rest of the world building an economic boomed country
almost from ashes.
• To apply the knowledge in the development of Bangladesh, if possible.
Limitations of the study:
• Regarding the shortage of time and related logistic supports, a wide distance,
communication gaps, primary data couldn’t collect, which is most essential for an
outstanding assignment in the Masters level.
• Instead of rigorous checking, here some information may there be misinterpreted
unintentionally as the information has taken from the web pool like Google, Google
Scholar, ResearchGate, and other available sites.
Background:
Viewed and analysis in this historical context, the experience of the Japanese economy in the
last 70 years, World War II can be termed as an extension of the national catch-up effort (to pass

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a norm) that began in the late nineteenth century. Consequently, there are constant features
underlying the economic dynamism and vigour of the prewar and postwar eras. But there are
also differences. The basic growth factor common to the prewar and postwar economies was the
“backwardness” of the Japanese economy relative to the world’s advanced industrial economies.
(Gerschenkron, 1962) Because it was co (Ohno, 2005) (Macpherson, 2007) (Labor Situation in
Japan and Its Analysis: General Overview 2015/2016, 2015) (Seliger, 2010) (Kawasaki, 2016)ming
from behind, it was able to benefit greatly from technology imported from more advanced
countries. “Technology” here includes not only technical know-how relating directly to
manufacturing but also social and economic systems and institutions. Alexander
Gerschenkron stressed the fundamental difference in the development process of advanced and
developing economies in his classic works on “backward” economies, and his theories have since
been incorporated into formal models of economic growth. The wide disparity in per capita
income between Japan and the industrial West reflected a gap between the technologies
supporting the Japanese economy and the world’s frontier technologies. For Japan, this signified
a high potential for rapid growth through the adoption of those advanced technologies.
This analysis applies to Japan’s postwar economy, just as it does to the situation before the war.
The history of the modern Japanese economy from the late nineteenth century on is awash in
examples of the importation of Western technology in the broadest sense, including the adoption
of Western systems and institutions.

Japan’s Miracle After Second World War (WW2): At the end of the World War II, in East Asia,
the world that experienced continual substantial economic growth and no other East Asian
country enjoyed more economic success than Japan. The Japanese economic boom grew at the
annual rate of more than ten per cent from the mid-1950s until the Arab oil shocks of the early
70s. The Japanese experienced steady growth then managed to maintain much more favourable
economy until the 1990s. Numerous factors contribute to economic growth, and although some
reasons are more important than others, economists and economic historians agree that all of
the following contributed to Japan's economic rise:

Capitalism backed by the State. Beginning the 1870s, soon after the Meiji Restoration, the new
political leadership faced the obstacle of Western imperialism. Quick decision was taken by
Japan's oligarchs to build both a robust economy and a strong military force. Then the Meiji
leaders steadily considered different economic models and made the cautious decision to
assume a Prussian-style government- to be directed capitalism where the government
significantly plays a role in the determining that is produced and assigns the capital by controlling
of the financial system. In that time though, free trade is considered harmful much of the time,
it happened. The legal framework is considered subservient or submissive (prepared to obey
others unquestioningly) to state interests and, significantly, the economy was viewed as the
existing to serve the interests of the nation, not the individual. On the other hand, the Japanese

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rejected the Anglo-American laissez-faire model of the economy where the market mainly
controls what products are produced, and the capital is allocated by the bank and stock market.
However, here, Free-trade is considered extremely required. It is noted that business and
government are viewed as separate entities, and the framework of legality (or rules of the
economic game) is measured imperative. Especially, the economy is viewed for serving the
individual, not the state. By the great state support to a few industries, Japan had become, a
world leader in aluminium, shipbuilding, and rayon even before World War II. Japan's defeated
in World War II meant a fundamental devalued of the military, the Japanese sustained to chase
the goal of economic power. The Japanese government continued its practice of promoting and
protecting particular industries and discouraging foreign and even domestic competition after
the war. Through tariffs and later and so-called policies, the government were achieved first
informal trade barriers such as environmental or consumer production regulations written in a
way that excluded foreign or even aspiring domestic firms from entering new markets.

U.S. Aid: Due in large part to concern about the spread of communism in Russia, China, North
Korea and Vietnam, America (and to some extent other members of the Allied Forces) provided
technological and economic experts to train their Japanese counterparts.

The Korean War. While the U.S. did not defend South Korea with the intention of helping the
Japanese economy, massive American purchases of goods and services during the war served as
a major economic boost to the still-recovering Japanese economy. The World Free Trade Boom.
Due in part to the post-war climate engineered by the U.S. and Britain, free trade substantially
increased relative to the 1930s, creating a favourable situation for Japanese exports.

Destruction of the Old Order: Pausing all older decisions and economic policies, new strategies
were developed for the economic reconstructions.

Rebuilding the economy with patriotism: As with the beginning of the Meiji period, the sense
of urgency associated with rebuilding the economy with tremendous patriotism in order to
preserve the national interest helped to stimulate support at all levels of society for the self-
sacrifices that were necessary to restore and indeed surpass the level of development that had
been attained up to WWII.

Eager and Plentiful Labor Force: After the war, 6 million soldiers and civilians returned from
Japan’s overseas colonies and “spheres of interest”; with such a large workforce in need of
employment, the cost of production was very low, allowing Japan to produce goods which
could effectively compete on the international market.

Confucian Ethics: A final factor was the cultural force of Confucian ethics, which supported the
principle of sacrificing the needs of the individual for the greater needs of the collective.

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The shift from Dependent to Less Dependent Industries. Before the 1950s, a number of leading
Japanese industries, epitomized by textiles, were heavily dependent upon expensive raw
materials. By the latter part of the same decade, the Japanese were producing goods such as cars
that required fewer imports. This made Japanese exports less expensive. Even though Japan's
miracle was not export-led and the country did not begin substantial exporting until the 1960s
when the export boom did occur in Japan, it made a strong economy even stronger (Elington,
2004).

A Surplus of Well-Educated Workers. As late as 1950, fifty per cent of Japan's population lived
on farms (Seliger, 2010). Japan's excellent schools and a high birth rate placed employers from
the 1950s until the late 1960s in the enviable situation of having a large supply of young, well-
educated, rural high school or junior high school graduates who were no longer needed on farms
and who desired industrial employment (Maitra, 1991).

Surplus Funds for Investment: Private savings, which banks and other financial institutions, in
turn, lend to expanding businesses, are extremely important for economic growth. Japan’s high
savings rates enabled Japanese industrialists during the miracle years to obtain massive amounts
of funds for expansion very cheaply (Gerschenkron, 1962).

Trade Union Structure/Industrial Relations: Japan has industrial rather than craft unions which
means management negotiates with one rather than several labour unions. Also, lifetime
employment in major industries, a seniority system where people are rewarded eventually if they
remain with one company, and worker participation strategies all have contributed to
harmonious and productive Japanese workplaces (Kawasaki, 2016).

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Competition and Entrepreneurship. Even though the government played a larger role in the
Japanese economy than was the case in the United States, domestic private competition in such
industries as motorcycles, automobiles, and consumer electronics was fierce. Successful
Japanese entrepreneurs in these, as well as other industries, were able to build powerful
companies that benefited the entire economy (Elington, 2004).

A Stable Political Situation. During the miracle years, the voters continued to elect members of
one political party, the Liberal Democratic Party, thereby avoiding the political unrest that hurt
the economies of other nations during this time.

Low Military Expenses. While Japan today has one of the largest armed forces in the world,
because the U.S. viewed Japan as strategically important during the Cold War and thus
shouldered a major portion of the costs of Japan's defence, Japan was freed from the burden of
spending a large portion of its wealth on its military.

The devastating Japanese economy rose quickly from the ashes of World War II. By 1956, real
per capita GDP had overtaken the prewar 1940 level. During the recovery period (1945–56), per
capita GDP rose at an average annual rate of 7.1%. Recovery was followed by the era of rapid
growth era. As the graph reveals, Japan began closing in on the West once again, and at a speed
far exceeding its prewar progress.
In 1973, Japan’s per capita GDP was 95% that of Britain and 69% that of the United States. That
was the last year of the so-called rapid-growth era, but the Japanese economy continued to
expand at a comparatively brisk rate for almost two more decades (Labor Situation in Japan and
Its Analysis: General Overview 2015/2016, 2015). By 1991—the last year of the “bubble
economy”—Japan’s per capita GDP was 120% that of Britain and 85% that of the United States.
Despite the setback of World War II, the process of catching up with the West, begun a little more
than a century earlier, was basically complete (Macpherson, 2007).

The graph below compares changes in real per capita gross domestic product in Japan, the United
States, and Britain between 1870 and 2008. The values used are the natural logs of each country’s
per capita GDP in 1990 US dollar purchasing-power equivalents. Japan’s per capita GDP in 1945,
the year of its surrender in World War II, was $1,346 in 1990 US dollars—a mere 11% of the US
figure for the same year and just 47% of the per capita income Japan itself achieved in 1940, the
year before its entry into World War II (Ohno, 2005).

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Related other causes:
If the knowledge and know-how gap with the West was a persistent feature of the Japanese
economy before and after World War II, why did the catch-up process accelerate so dramatically
in the postwar era? This is the question tackled by Fumio Hayashi and Edward Prescott in their
paper “The Depressing Effect of Agricultural Institutions on the Prewar Japanese Economy.”
According to Hayashi and Prescott, the chief factor was an acceleration in the reallocation of
resources, especially labour, from the relatively low-productivity agricultural sector to the non-
agricultural sector, which enjoyed higher productivity and per capita income overall. The two
authors posit that the main reason for this acceleration was the removal of prewar obstacles to
migration resulting from postwar reforms that undermined the patriarchal system. They point
out that under the prewar Civil Code, the male head of the household was empowered to keep
his male heir (generally the eldest son) on the farm instead of allowing him migrating to the city.
Under the postwar Civil Code and Constitution, the patriarch was stripped of such dictatorial
powers, removing a major barrier to migration and the reallocation of labour.
The distribution of resources between sectors and the presence or absence of barriers to
redistribution are certainly important elements in our understanding of long-term economic
growth. Hayashi and Prescott have made a valuable contribution to our understanding of the
Japanese postwar “miracle” by drawing a quantitative correlation between the speed of
reallocation from the farm sector and the pace of economic growth in Japan. But their specific
conclusions regarding the nature of the barriers to reallocation before the war are open to
debate. After all, given the large income differential between the farm and non-farm sectors,
patriarchs themselves would have incentives of urban migration.
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I would propose an alternative explanation for the acceleration of resource reallocation and
economic growth after World War II; one that focuses on institutional changes that began during
the war. Japan’s wartime government instituted a wide array of reforms aimed at mobilizing
resources for the war effort, as I have explained in detail elsewhere. One important focus of this
mobilization effort was the reallocation of labour to the munitions industry.
Under the Labor Mobilization Plan, the government implemented policies to promote the
strategic allocation of labour to the war industries. One way the government accomplished this
was by nationalizing the employment agencies that had been under the control of individual
municipalities and instituting a system whereby those agencies worked closely with local schools
to help place graduating students—a key source of new labour—in jobs throughout the wider
region. This cooperative government-supported job-matching system provided the institutional
foundations for key reallocation mechanisms of the postwar labour market, particularly the
market for new graduates. Prominent among these mechanisms was the shūdan
shūshoku (“group employment) programs that helped young people from rural communities
travel to the city en masse in search of work upon graduation from secondary school.
In my view, the biggest factor behind the accelerated labour reallocation that Hayashi and
Prescott focus on in their article was the enhanced matching function of the labour market
stemming from those institutional changes. Before the war, the transaction costs associated with
labour-market matching constituted a major barrier to the redistribution of labour between
sectors. Systemic changes instituted by the government lowered this barrier.
Much the same applies to the reallocation of capital, another basic factor of production. During
the war, the government adopted policies to promote the priority allocation of funds to the war
industries and government bonds. One result of this massive, nationwide fund-raising and
allocation effort was the replacement of direct financing, which had supported economic
development before the war, with a rapidly expanding system of indirect financing based on bank
savings and postal savings. For many years after the war, this system provided the financial
foundation for rapid economic growth by facilitating the absorption of savings and the efficient
allocation of capital.

Comparison past with the present:

As the foregoing indicates, Japan’s postwar economy had the great inherent potential for growth
from the outset. Its dynamic potential derived from two basic factors: (1) the gap between
Japanese technology and the world’s frontier technologies and (2) a large agricultural sector with
relatively low productivity. Systemic changes instituted during the war helped the economy tap
into this potential, achieve the rapid growth charted in the graph, and ultimately catch up with
the industrial West.
It follows, however, that Japan would find it difficult to maintain the same pattern of rapid growth
once this potential was exhausted. By 1990, both sources of dynamism had dried up: The catch-

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up process was virtually complete, as we have seen, and the portion of the labour force employed
in the agriculture sector had dropped to 6.5% from the 1955 level of 36%.
Assuming that the foregoing is a valid analysis of the rise and fall of rapid economic growth in
postwar Japan, what are the implications for the nation’s economic future?
First, as many others have pointed out, if the Japanese economy already stands on the frontier
of global technology, then further growth will depend on its own ability to expand those frontiers.
The 1956 White Paper on the Economy famously announced that the postwar recovery period
was over. It warned that the economy had exhausted the growth potential of reconstruction and
impressed on the nation the need for a new growth paradigm. “We are about to find ourselves
face to face with a very different situation,” it warned. “The days of economic growth via recovery
are over. Henceforth, growth will be sustained by modernization.”
More than a half-century later, Japan stands at a different stage of development, yet it faces a
similar challenge—that of creating a new paradigm for economic growth. This is the problem it
has confronted since the 1990s, and it continues to struggle with it. I believe that to surmount
this hurdle, we must develop new institutional mechanisms conducive to the massive allocation
of resources for technological research and development. The essential lesson to be learned from
the “Japanese miracle” is that well-designed systems and institutions have an important role to
play in promoting the efficient allocation of resources and stimulating new growth.
Conclusion:

Bibliography
Elington, L. (2004, September). Learning From the Japanese Economy. Japan Digest.

Gerschenkron, A. (1962). Economic Backwardness in Historical Perspective: A Book of Eassey

(Cambridge, MA).

Kawasaki, S. Y. (2016). Japan’s High-Growth Postwar Period: The Role of Economic Plans. Tokyo: ESRI.

Labor Situation in Japan and Its Analysis: General Overview 2015/2016. (2015). Japanese Economy and
Labor Situation, 1. Retrieved October 29.10.18, 2018

Macpherson, W. J. (2007). The Economic Development of Japan 1868-1941. New York: Cambridge
University Press.

Maitra, R. (1991, May 10). The Foundation of Japanese 'Economic Miracle'. EIR, 18, 18. Retrieved
October 2018 29.10.18, 2018

Ohno, K. (2005). The Economic Development of Japan. (N. G. Studies, Ed.) Tokyo: Yuhikaku Publishing Co.
Ltd., Tokyo. Retrieved October 29.10.18, 2018

Okuno, T. O. (1999). Contemporary Japanese Economic System and its Historical Origins. New York:
Oxford University Press.

Seliger, B. (2010). Theories of economic miracles. Seol: Hanns-Seidel-Stiftung.

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 Takada, B. M. (1999, March 23). Japan’s Economic Miracle: Underlying Factors and Strategies for
Growth. Retrieved October 29.10.18, 2018

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