Chapter 7

JAPAN AND THE EMBODIMENT OF MERCANTILISM AND NATIONALIST

ECONOMICS:
THE MEIJI DYNASTY

N O course in nationalist economics can possibly avoid an extensive exposition of how Japan
transformed from a feudal, backward and agricultural economy in the 19 th century to a super-
economic power than she is today. That transformation is one of the phenomenal events in the
world’s economic history. But that is not the only factor which the Japanese example significant. Japan’s
significance lies on the fact that her development strategy has become a model for many nations in Asia.
Among those who have consciously patterned their approach to development of Japan’s are South
Korea and Taiwan, currently referred to as “new Japans”, and Malaysia, one of the fastest industrializing
states in Southeast Asia which is determined to be the “Japan” of the ASEAN.

To this day Japan remains as much the embodiment of the mercantilist state as when she
started out consciously to become an industrial power in the 19 th century. One cannot read business
pages of today’s newspaper without coming across aired by Western nations, particularly the U.S.,
against the protectionist policies of Japan which had kept out foreign goods from her market.

What is unique about Japan is that she has not stopped being mercantilist even if she has
already achieved the status of highly industrialized state. This contrast with England and the U.S., both
of whom liberally open their respective economies to foreign goods after they have achieved developed
status even as they sought to open the markets of other countries for their own goods.

The story of Japan’s modernization has an ironic beginning.

In 1858, the U.S. government forced Japan to open her economy to foreign trade by using a
naval contingent, led by Commodore Perry, to intimidate Japan for that purpose. Japan was then an
agricultural country, with no modern army, much less a navy, with which to defend herself.

Japan was forced to adopt a policy limiting her tariff on imported goods to a maximum of 5%.
This, at all intents and purposes, was zero tariffs, considering that the U.S. government at that time was
levying tariffs as high as 500%. The policy expectedly led to a flood of foreign goods that destroyed
many of Japan’s local industries and as an economic history of that country describes it:

In 1858 she was forced to open to foreigners who were given extra-territorial rights, and
from 1866 she was unable to levy import duties higher than 5 percent. Thus Japan moved from
closed economy from almost completely free trade. The immediate consequences were
disturbing. Her monetary system and the parity between gold and silver were different from
those abroad, and she lost on her account. Foreign goods damaged several Japanese handicraft
industries such as paper, sugar and cotton cloth.
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Japanese raw cotton could not withstand foreign competition. Her foreign trade and
payments in deficit and it has been suggested that the outflow of gold and silver between 1853
and 1881 was of the order of 200 million yen.1

The humiliation of Japan in the hands of a foreign power led to a change of government. The
Tokugawa dynasty, from which the U.S. extracted the concessions, was replaced by the Meijis. The
Meijis were intensely nationalistic, and they aspire to beat the West in their own game by becoming as
advanced and powerful, if not more so.

The Meijis conceive a unique strategy. They instituted a drastic land reform program and
simultaneously went into heavy industrialization. Landlords were forced to sell their estates and to
receive government bonds in exchange. They were then prodded to invest in industries organized by the
government, using the land bonds with which to pay for their investment in industries established by
the government. The state pioneered and directly engaged in industries. It becomes an entrepreneur
because there was an absence of private entrepreneurs. Japan had no prior experience in putting up
industries and managing them.

Two general courses of action were open to the government:

(1)It could develop a modern industry directly through government enterprises, or (2) it
could encourage private investment in industry by extending to investors various forms of state
aid including technical assistance, subsidies and easy credit. Actually both courses were tried
during the first decade for the Meiji period.2

Japan more than the U.S., hewed closely to the European mercantilist tradition. While the U.S.
government provided the private sector all-out assistance in the form of tariff protection, it did not go as
far as to establish, own and operate industrial enterprises. The government left that to private
enterprise. In the case of Japan, however, the state did not wait for private enterprise to establish
industries. The state itself functions as entrepreneur.

What is more, the state took the initiative to establishing a large number of manufacturing
establishments equipped with western machinery for producing new products of goods hither to
manufactured by primitive methods3

While the government eventually transferred ownership of the industries it had originally
established to the private sector, it continue to protect domestic industries intensely, and severely
limiting the level of foreign investment in the country. In other words, true to the mercantilist tradition,
Japan has made it a policy to import as little as possible while exporting as much as possible

That policy continue today long after Japan has become a major economic power

3
Chapter 7
That policy continues today as long as Japan has become a major economic power. Only last
year, U.S. Secretary of Commerce William Verity remarked, in complaining of Japan’s import policy:
“Japan has this continuing mentality that it’s just a little old developing country that must keep its
market closed.”

Japan is a live model of how underdeveloped, pre-industrial economies can take off into full
industrialization with minimum foreign investment and foreign loans. Her strategy was and continues to
be carried out in transparent violation of every precept laid down by laissez-faire and free enterprise
economies.