The Japanese Economy 4th Edition

David Flath
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The Japanese Economy
THE
JAPANESE
ECONOMY
FOURTH EDITION

David Flath
Great Clarendon Street, Oxford, OX2 6DP,
United Kingdom
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This book is dedicated to curious and inquisitive free thinkers
everywhere.
 Preface to the Fourth Edition

This edition updates and expands much of the content of the previous edition.
In 2000, when the first edition of this book was published, readers may have
been seeking an explanation for Japan’s prosperity, an informed analysis of its
trade friction with the US and Europe, or an appraisal of its unique business
practices and institutions. These topics are all still addressed in these pages; my
own curiosity about such things is what first motivated me to write the book.
But in the last few years, much has transpired that a book on Japan’s econ-
omy should also aim to explain—negative interest rates, Japan’s ballooning
government debt, commercial banks’ persistent dominance of Japanese finan-
cial intermediation, the ongoing attempts to include women more fully in
the Japanese system of educating, training, and hiring employees, and much
more. Much of the new content of this edition is devoted to these topics.
I first began contemplating Japan in 1980 when as a young academic in
Raleigh, North Carolina I was presented with an opportunity to study the
Japanese language, visit Japan, and develop a course on the Japanese economy.
Thus, began an eventful journey in which I have learned from many, taught
others, and enjoyed the many pleasures of exploring a wider world. I invite
all readers of this book to join me.
Kyoto, March 2021
 Preface to the Third Edition

The Japanese economy continues to fascinate and reward those who consider
it from the perspective of the principles of economics. I invite all who open
these pages to join me in this. This edition includes a new chapter on the
tax system of Japan. I have also updated many of the tables and figures and
revised many of the other chapters to reflect new learning, current events,
and the latest data. Finally, let me acknowledge the splendid hospitality of my
colleagues at the Osaka University, Institute of Social and Economic Research,
where I completed this work while employed as an adjunct professor.
Kyoto, March 2013
 Preface to the Second Edition

It has been gratifying to learn of the many successful courses based on the first
edition of The Japanese Economy. And I hope that with this revision of the book,
it will continue to serve as a useful text and reference for students, scholars,
journalists, and the intellectually curious. In the five years since publication
of the first edition, much has transpired. Japan has emerged from a prolonged
recession and a banking crisis, both of which receive a more extended treat-
ment in this edition. I have also updated many tables and figures to bring the
data closer to the present. The basic format and most of the content remains
intact.
Raleigh, November 2004
 Preface to the First Edition

Very few universities outside of Japan offer courses on the Japanese economy;
I wrote this book out of the conviction that many more of them would offer
such courses, if only a suitable text were available. If courses on Japan are
to become a regular part of the economics curriculum in English-speaking
colleges and universities, as I believe they should, then the subject has to be
made accessible to students and faculty who presently have little familiarity
with Japanese history or institutions.
This is less of a leap to make than one might suppose. Anyone who un-
derstands the principles of economics already knows a lot about the Japanese
economy without necessarily even realizing it. Many specific topics on the
Japanese economy invite uncomplicated explanations based on standard bits
of economic logic, such as the axiom of revealed preference, the Ricardian the-
ory of comparative advantage, the Solow growth model, the life-cycle model
of saving, the quantity theory of money, the purchasing power parity theory
of exchange rates, public goods, Coase’s law, the welfare losses resulting from
monopoly, analysis of company specific skills, the Modigliani–Miller theorem,
and so on. Anyone now teaching economics courses at university level should
find enough in this book that is familiar, along with guideposts toward the un-
familiar, to teach a solid course based on the book. The book itself supplies the
relevant facts about Japan that economic arguments can illuminate, and also
explains the logic of the arguments.
For those not already versed in economics, this book will afford a broad
and, I hope, enticing introduction to the economic way of reasoning. This is
a book not only for specialists in economics, but also for political scientists,
historians, and others interested in Japan. For undergraduate students taking
a course based on this book, a prior course on the principles of economics may
be helpful, but is possibly not essential.
There may be more here than one should attempt to include in a one-
semester course. The chapters proceed from macroeconomic topics toward
microeconomic ones, but this is somewhat arbitrary and the chapters can be
taken in just about any order, and any of them can be skipped without ren-
dering the remaining chapters incomprehensible. The first chapter assesses
Preface
Japan’s current status as a developed nation with a high standard of living,
and the next three chapters describe the sequence of events that produced this
result. The remaining chapters are divided by subject area rather than chrono-
logically, Many of these “subject area” chapters refer to historical events,
but their main focus is on contemporary topics. A course emphasizing eco-
nomic history and development should include the first four chapters and the
chapter on industrial policy. A course emphasizing Japanese business should
include the last five chapters. A course emphasizing government policy should
include Chapters 8–13 and 16. A course emphasizing macroeconomics should
include the first chapter and Chapter 3–7.
People have helped me very much in this project in myriad ways, with com-
ments on earlier drafts, copies of their own articles, conversations, mentoring,
editing, and other forms of support. I am grateful to all of them and especially
the following. Colleagues at NCSU: Steve Allen, Bob Clark, Lee Craig, Bob Fearn,
Douglas Fisher, Tom Grennes, Tony Moyer, Doug Pearce, John Seater, Walt
Wessels. Colleagues at Osaka University: Hayashi Toshio, Charles Yuji Horioka,
Colin McKenzie, Royama Shoichi, Takagi Shinji. Friends and colleagues at other
universities: Jeff Bernstein, Hanai Satoshi, Hayashi Fumio, Iida Takao, James
Nakamura, Nakata Yoshihiro, Nariu Tatsuhiko, Hugh Patrick, Tish Robin-
son, Gary Saxonhouse, Paul Sheard, Richard Sylla, Takeuchi Nobuhito, Yishai
Yafeh, Yumoto Yuji, and David Weinstein.
I would also like to thank John Sylvester (former director of the NC Japan
Center), A. Scott Voorhees (of US EPA), Fujiwara Masahiko (of MITI), and my
editor at Oxford, Andrew Schuller, who faithfully conveyed the comments
of anonymous reviewers. I would like to acknowledge my mentors at UCLA,
Harold Demsetz and Armen Alchain—whatever economics I know I learned
from them. Thanks also to my first Japanese teacher, Kataoka Hiroko, who
introduced me to Japan. I also acknowledge the contributions of the many
students in the classes in which I tested the materials that became this book:
students at North Carolina State University, Osaka University, Sapporo Uni-
versity, and those from all over the world who took my classes at the Harvard
Summer School.
Many institutions have assisted me while writing the book and I thank them
also: North Carolina Japan Center, North Carolina State University, Osaka
University and Osaka Gas Company, and Nanzan University.
D.F.
Raleigh, April 1999

xiv
 Contents

List of Figures xvi

List of Tables xix

Introduction 1
1 Incomes and Welfare of the Japanese Today 11
2 Economic History, Part 1: The Tokugawa Period (1603–1868)
and the Meiji Era (1868–1912) 28
3 Economic History, Part 2: The Twentieth Century
(1912–1945) 61
4 Economic History, Part 3: Postwar Recovery (1945–1964) 93
5 Saving 119
6 Macroeconomy 133
7 International Finance 187
8 International Trade 209
9 Industrial Policy 251
10 Public Economy, Part 1: Government Spending 282
11 Public Economy, Part 2: Taxes 298
12 Environmental Policy 321
13 Industrial Organization 331
14 Finance 356
15 Marketing 398
16 Labor 423
17 Technology 454

Glossary 466
Index 484
 List of Figures

1.1. Gross domestic product (GDP) and gross national product

(GNP = GNI), Japan, 1994–2018 13
2.1. Japan population (total and urban), and per-capita real GDP,
730 CE to 1874 37
2.2. Increasing population with no change in income per person in
the first part of the Tokugawa period, 1600–1721 42
2.3. Rising per-capita income with unchanging population in the
latter part of the Tokugawa period, 1721–1868 43
2.4. Effects of the Meiji land tax reform 47
2.5. Price of silver in terms of Japanese currency and in terms of gold
on the London exchange, 1868–1897 50
2.6. Net value added in manufacturing and mining versus that
in agriculture, forestry, and fisheries, all in 1934–6 prices,
1885–1940 52
3.1. Japanese terms of trade, 1885–1940 (1934–6 = 100) 64
3.2. Real and nominal GNP, 1910–1940 76
3.3. Annual rates of growth in high-powered money (HPM) and real
GNP, 1910–1940 79
3.4. Changes in real government spending as a percentage of
previous year’s real GNP, 1910–1940 80
3.5. Movements along the boundary of Japan’s production
possibilities, 1885–1942 84
4.1. Real gross national product of Japan, 1885–2000 94
4.2. Annual percentage increases in money stock (M2), prices (GNP
deflator), and real GNP, fiscal years 1947–1955 108
4.3. Japanese government subsidies, US aid, and US procurement
spending in Japan, 1946–1955 109
4.4. The aggregate production function under constant returns to
scale 111
4.5. GNP per unit of labor, NNP per unit of labor, and annual net
investment per unit of labor at each alternative capital-to-labor
ratio, under constant returns to scale, constant saving rate s,
balanced trade, and constant rate of depreciation δ 111
4.6. The steady state 113
 List of Figures
4.7. Labor’s share in Japan, 1906–1940 and 1955–1998 115
4.8. Growth path of Japan’s real GNP, 1935–1995 117
4.9. Imputed growth path of Japan’s capital stock, 1935–1995
(1940 = 1) 117
5.1. Net national saving relative to net national income at market
prices; Japan, 1885–2018 122
5.2. Net national saving and net government saving relative to net
national income at market prices, Japan, 1955–2018 124
6.1. Real GDP potential growth rate and shortfall, 1956–2020 140
6.2. An aggregate demand curve 141
6.3. Money stock, nominal GNP, and real GNP, 1900–2018 142
6.4. A contraction of the money supply or expansion of money
demand 143
6.5. Bank of Japan loans and discounts (discount window lending)
and increase in base, 1956–2011 146
6.6. Supply and demand for excess reserves 150
6.7. Call rate and long-term prime lending rate, 1980–2020 152
6.8. Monetary base and money stock, 1980–2020 155
6.9. An aggregate supply curve 159
6.10. Flows into and out of the pool of unemployed workers 160
6.11. Unemployment rate during recessions, Japan, 1956–2020 166
6.12. Annual rates of change in employment and hours during
recessions, Japan, 1956–2020 166
6.13. Annual growth in real wage rate and in real GDP, Japan,
1956–2020 167
6.14. Growth rates in money, real GDP, and nominal GDP, 1956–2020 171
6.15. Fiscal policy in Japan, 1980–2019 175
6.16. CPI, all items less fresh food, y/y % change each month
(adjusted to remove effects of consumption tax increases),
January 2005–March 2020 179
6.17. Bank of Japan policies to expand the monetary base, 1990–2020 180
6.18. Bank of Japan purchases of commercial paper, corporate bonds,
ETFs and J-REITs, 2008–2020 181
6.19. Japanese government bond yields, 2005–2020 182
7.1. Japan’s current account as a percentage of GNP, 1885–2018 193
7.2. Japanese terms of trade and real exchange rates, 1980–2018 196
7.3. Deviations of the Japan–US forward exchange rate from covered
interest parity, 1972–1984 197
7.4. Nominal and real yen-per-dollar exchange rates, and reciprocal
of Japan’s terms of trade, 1950–2018 202
7.5. Movements in the Producer Price Index (PPI) and Consumer
Price Index (CPI), Japan and the USA, 1955–2019 203
7.6. The J-curve 206
8.1. Equilibrium under autarky 211
8.2. Equilibrium under free trade 212
8.3. International trade in relation to GNP, Japan, 1885–2018 213
8.4. Foreign direct investment (FDI) stocks, Japan, USA, and Europe,
2018 (US $Bn) 222

xvii
List of Figures
8.5a. Annual average tariff rates (customs duties divided by dutiable
imports) of Japan and the USA, 1868–2018 230
8.5b. Annual average tariff rates (customs duties divided by c.i.f.
imports) of Japan and the USA, 1868–2018 230
8.6. Effects of tariff or import quota and output-based producer
subsidy 247
9.1. Directing resources toward an industry with high value-added
per worker 253
9.2. The Fiscal Investment and Loan Program 267
10.1. Marginal valuations of defense by allies “Big” and “Little,” and
implied reaction curves of each in choosing its contribution to
the common defense 292
11.1. Tax wedge 304
11.2. Excess burden 308
11.3. General government debt of Japan, percent GDP, 1980–2017 312
11.4. Average interest rate on outstanding Japanese government
bonds and annual growth rate of nominal GDP, fy 1976–2018 316
11A.1. A tax fully shifted onto labor 319
11A.2. Output response to a tax fully shifted onto labor, showing
excess burden Bj 319
13.1. Herfindahl indices (summations of squared shares of industry
sales) of matched industries in Japan and the USA, 2010–2012 343
13.2. Welfare losses resulting from oligopoly 347
14.1. Financial intermediation in Japan 357
14.2. Financial surplus or deficit of each sector, Japan, 1980–2020 358
14.3. Implementation of the Interest Control Law of 1948 376
14.4. External fund-raising by private nonfinancial corporations in
Japan, 1980–2020 388
15.1. Retail and wholesale employment as a percent of the labor
force, Japan, 1952–2016 399
15.2. Retail stores per thousand persons, Japan and the US,
1952–2017 401
15.3. Number of retail stores in Japan, incorporated and
unincorporated, 1952–2016 402
15.4. Employees per retail store in Japan, incorporated and
unincorporated, 1952–2016 402
15.5a. Economic order quantity model 407
15.5b. Economic order quantity model, continued 407
15.6. Successive monopolies 413
16.1. Wages over workers’ careers 430
16.2. A wage scheme that deters shirking 432
16.3. Japanese women’s labor force participation rates at selected
ages, 1920–2019 448
16.4. Japanese women’s labor force participation over the life cycles
of selected birth cohorts 448
16.5. Japanese women’s share in managerial positions by the job
title (companies with 100 employees or more), 1985–2019 452

xviii
 List of Tables

1.1. GDP per capita and its composition; Japan and selected other
nations, 2018 16
1.2. Revealed preferences, 2005 17
1.3. Estimated value of nonmarket goods as a percentage of GNP,
Japan and the USA 21
1.4. Hours per week devoted to various activities by men and women
in Japan and other countries, 1999–2006 22
1.5. International comparisons of income distribution, after taxes,
2013 24
2.1. Japan population (total and urban), and per-capita real GDP, 730
CE to 1874 37
2.2. Conditions at the start of modern economic growth, Japan and
selected other nations 56
2A.1. Periods of Japanese history 58
3.1. Japan’s international debt and investment position, end-1913
and end-1919 62
3.2. Scale of the major zaibatsu, 1928 67
3.3. Employment in Japan, by sector 69
3A.1. Formation of the four major zaibatsu: principal affiliated
enterprises and their dates of entry into the zaibatsu orbits 86
3A.2. Japanese prime ministers 90
4.1. Average annual growth rates in real GNP and population, Japan
1885–2005 114
5.1. Net national saving rates of Japan and selected other nations,
1970–2018 125
6.1. Business cycle turning points in Japan, 1888–2020 136
6.2. Components of the Cabinet office diffusion index used for dating
turning points of the business cycle 137
6.3. Real GDP during Japan’s recent recessions 139
6.4. Real and nominal variables during Japan’s recent recessions 158
6.5. Unemployment rates (percentages of labor forces), selected
countries, 1965–2019 159
List of Tables
6.6. Monthly flows into and out of the unemployment pool and
natural rates of unemployment, selected countries and years 161
6.7. Gross flows into and out of the unemployment pool of Japan,
1985–2000 161
6.8. Unemployment insurance in Japan and selected other countries,
1985, 2004, and 2014 163
6.9. Output, employment, and unemployment during Japan’s recent
recessions 164
7.1. Double-entry accounting 188
7.2. Accounts of the balance of payments of Japan, 2019 191
7.3. Libor-based yen-dollar covered interest parity deviations 198
7.4. International variation in retail prices, July 2020 200
7.5. Estimates of the short-run and long-run price elasticities of
demand for Japanese imports and exports 206
8.1. Exports and imports of Japan in the early Meiji era (1870s) 217
8.2. Intra-industry manufacturing trade indices, Japan and selected
other countries, 1980 to 2008 219
8.3. Inward and outward stocks of foreign direct investment, Japan
and selected other countries, 2019 221
8.4. Japanese companies among the world’s 100 largest multinational
enterprises ranked by estimated dollar value of foreign assets,
1999 and 2011 223
8.5. Voluntary export restraints of Japan 235
8.6. Japan Economic Partnership Agreements and Free-Trade
Agreements, as of September 2020 242
8.7. Protection of agricultural commodities in Japan, 2018 246
9.1. Domestic price subsidies (“price”) and Reconstruction Finance
Bank loans (“RFB”), 1946–1950 (1934–6¥mn) 262
9.2. Sources of industrial funds, 1946–1975 (% of external funds) 268
9.3a. Composition of JDB loans, 1951–1974 (¥bn and %) 270
9.3b. Equipment purchases of private firms financed by government
intermediaries and by the Japan Development Bank, 1954–1967 270
9.4. Composition of ExIm Bank loans, 1950–1975 (¥bn and %) 271
9.5. Rationalization plans and related measures, 1951–1974 273
9.6. Reductions in interest burden arising from public loans and
reductions in taxes resulting from special depreciation allowances,
by industry, 1961–1980 275
10.1. Government employees as a percentage of all employment, Japan
and selected other nations, 1988–2017 283
10.2. Government expenditures, by purpose, percent GDP, Japan and
selected other nations, 2000–2018 286
10.3. Government-provided local public goods, Japan, USA, France,
and the UK, 1980s and 2010s 290
11.1. Taxes in Japan, 1886–1945 299
11.2. Taxes in Japan, 1950–2015 301
11.3. Taxes in Japan and selected other countries, fy 2017 302
11.4. Debt-related financial assets and liabilities of the general
government of Japan, end of March 2019 313

xx
 List of Tables
13.1. Descendants of the Presidents’ club members of the six financial
keiretsu 333
13.2. Scale of keiretsu Presidents’ club companies, excluding banks and
insurance companies, in relation to the Japanese economy, 1994 337
13.3. Companies that head the 40 most significant enterprise groups
(Presidents’ club memberships are stated in parentheses) 338
13.4. Market shares of leading Japanese companies, 2018 342
14.1. Reorganization of major Japanese banks, 1990–2005 361
14.2. Financial Intermediaries of Japan, end-March 2019 367
14.3. Private nonfinancial corporations of Japan, annual financial
transactions, 1980–2019 387
15.1. Stores per thousand persons, selected countries, 1980s, 1990s,
and 2017 400
15.2. Store formats recognized by the Census of Commerce of Japan in
1997 and backdated to 1991 403
15.3. Employees per store, by format, 1991–2014 403
15.4. Floorspace per store in m2 , by format, 1991–2014 403
15.5. Numbers of stores, by format, 1991–2014 404
15.6. Composition of sales across store formats, 1991–2014 404
16.1. Average ultimate expected tenure of employment in selected
countries, 1979–2017 425
16.2. Job switching in Japan and the USA 427
16.3. Expected ultimate tenure of employment of employees of
different sized firms, Japan and the USA, 1979 428
16.4. Composition of union membership in Japan by type of union,
1930–2017 439
16.5. Union membership in Japan and other nations, 1970–2018 439
16.6. Unionization in Japan by firm size and industry, 2009 and 2018 440
16.7. Strikes in Japan and selected other nations, 1990 and 2018 444
16.8. Labor force participation rates of persons aged 15–64, Japan and
selected other countries, 1956–2016 445
16.9. Composition of Japan’s labor force aged 15 and over, by type of
employment and by sex, 1920–2019 446
16.10. Women’s share of managerial employment in selected countries,
2010 and 2018 451
17.1. Research and development spending in Japan, 2017 455
17.2. Research and development spending, sources of funds in Japan,
fiscal year 2017 457
17.3. International comparison of R&D spending, 1985, 1995, 2008,
and 2017 458
17.4. Estimates of the rate of return from R&D spending in Japan and
the USA 460

xxi

Why study the Japanese economy? Well, the best
reason is the joy and satisfaction that accompanies
a deeper understanding of the world and our place
in it. Learning about Japan’s economy and how it
came to be should instill an appreciation of the
pervasive role of trade and the power of economic
incentives in organizing and shaping societies ev-
erywhere. This book is for anyone curious about
economics, for it is impossible to appreciate eco-
nomics without vivid examples of its application.
This book is also for anyone broadly interested in
Japan, for it is impossible to fully understand Japan
without learning what basic economics has to say
about it, which is much.
The principles of economics apply in
Japan as they do elsewhere
In the following pages we shall encounter some
of the most famous contributions to modern eco-
nomics. Without them, convincing explanations
for many of Japan’s economic peculiarities would
be impossible. The peculiarities include the famous
Japanese employment practices (lifetime employ-
ment, seniority-based wages), Japan’s “miracu-
lous” postwar rapid economic growth, Japan’s
once high national saving rate, Japan’s evolving
patterns of international trade, the allocation of
public resources in Japan, the patterns of regu-
lation of Japanese industries, special contractual
arrangements between Japanese firms and the
The Japanese Economy. Fourth Edition. David Flath, Oxford University Press.
© David Flath (2022). DOI: 10.1093/oso/9780192865342.003.0001
Introduction
wholesale and retail distributors of their products,
and much else. The Japanese economy is a kind of
test case that validates modern economic thought.
More specifically, Solow’s model of a grow-
ing economy correctly accounts for Japan’s rapid
recovery from the devastations of the Pacific
war (Chapter 4). Modigliani’s life-cycle model of
saving correctly predicted that postwar Japan’s
youthful demographic profile and rapid economic
growth would cause an enlarged national sav-
ing rate and that population aging would reverse
this (Chapter 5). The Ricardian model correctly
anticipates that resource-poor, skilled-labor-rich
Japan will import oil and export manufactures
(Chapter 8). Becker’s theory of investment in
company-specific skills and Lazear’s theory of
mandatory retirement together form a coherent
explanation of Japanese employment practices
(Chapter 16). Nor is this all. Samuelson’s the-
ory of revealed preference clarifies the logical
difficulties we encounter in comparing the eco-
nomic well-being of citizens of Japan with those
of other nations (Chapter 1). Coase’s exposition of
the problem of social cost affords the indispens-
able framework for evaluating the achievements
and limitations of Japan’s environmental policies
(Chapter 12). The modern theory of industrial or-
ganization offers convincing interpretations of the
many contractual arrangements linking Japanese
firms and their suppliers or customers (Chapter 13)
and linking marketing channel members to one
another (Chapter 15). All of these explanations fit
Introduction
squarely in the mainstream of modern economics.
Despite the country’s fascinating strangeness, the
principles of economics apply in Japan as they do
elsewhere.
Major themes
The book follows a progression of topics, begin-
ning with those that focus on Japan’s economy
as a whole and proceeding to those that focus
on particular institutions or sectors of the econ-
omy, or aspects of Japanese business. The order is
arbitrary in that each chapter can stand alone, in-
dependently of the others. Thus, the reader may
alter the order or skip from one chapter to another
and not lose the thread of discourse. Even so, four
threads do run through all the chapters: Japan’s
economic growth and development, Japan’s in-
tegration with the world economy, government
policies and their effects, and peculiar economic
institutions and practices. Here are some previews
of each of these major themes.
Japan’s economic growth and
development
Japan today enjoys one of the highest standards
of living of any nation, a state of economic well-
being comparable to that of the USA. The Japanese
people live long, healthy lives, eat well, are well ed-
ucated, and have accumulated a substantial stock
of durable goods. Japan’s phenomenal economic
growth since the end of World War II is only a
part of a much longer account of how the na-
tion achieved its current high standard of living.
The story of Japan’s economic development begins
long before the twentieth century.
When Europeans reached Japan in the sixteenth
century, they beheld a country engulfed in civil
wars. Soon after the end of that eventful cen-
tury, the wars ended and the victors, led by
Tokugawa Ieyasu, imposed on Japan a highly reg-
imented, caste-based, political–economic regime
that retained its essential features for the next 250
years. The political system of the Tokugawa era
(1603–1868) has been described as feudalistic. The
country and its population were under the divided
2
suzerainty of military rulers whose political status
was determined by the taxable yield of the lands
under their control. The overlord in this scheme
was the shōgun, the mantle assumed by Tokugawa
Ieyasu and passed to his descendants. The shogu-
nal domains, known as the tenryō, encompassed
the most fertile lands and the largest cities, Edo
(now Tokyo), Osaka, and Kyoto the imperial capi-
tal. Directly under the shōgun stood the daimyō, the
military rulers of the next largest domains, known
as han, and below them still others of the samurai
class, warriors with no wars to fight—in effect, an
hereditary and hierarchical civil bureaucracy. The
Tokugawa capital, Edo, grew from a small fishing
village of no consequence in 1600 to a city of 1 mil-
lion in 1700, a direct result of the shogunal decrees
obliging all of the two to three hundred daimyō
to reside there in alternating years and their fam-
ilies to remain there year-round as quasi-hostages.
With daimyō under the watchful eye of the shogu-
nate, they were effectively prevented from forming
dissenting coalitions.
The policy that most epitomized the Tokugawa
political outlook was the closure of the coun-
try. The point was to forestall change altogether
and perpetuate the status quo indefinitely. Con-
tact with foreigners was an unwanted disruption
and a potential source of instability. Under de-
cree of the third shogun of the Tokugawa dynasty,
in 1642, foreigners were expelled,and Japan was
closed to the outside world, with the minor excep-
tion of limited official trade with the Dutch and
Chinese, conducted through the southern port of
Nagasaki.
Almost the entire productive effort of Japan in
the Tokugawa era was devoted to feeding the na-
tion, which meant that most of the population,
around 80%, were of the agrarian caste, and mainly
engaged in the cultivation of rice. Most of the re-
mainder of the population, other than the 7% or
so who were of the samurai caste, were merchants
and artisans, both of which were held in lower
esteem than farmers under the Confucian ideol-
ogy embraced by official doctrines of the country’s
rulers. The farmers were obliged to pay rice taxes
to the samurai under a scheme that made land in-
alienable, but ceded responsibility for managing
the local affairs of agricultural communities to the
inhabitants themselves.

With the civil wars ended and the daimyō se-
cure in their right to impose taxes on the lands
under their official control, land reclamation and
irrigation proceeded apace in the seventeenth cen-
tury, and the population of Japan grew commen-
surately, expanding from about 17 million in 1600
to 30 million in 1700. Then, for the next 150
years, the population grew hardly at all. This fits
the Malthusian model of an agrarian economy
in which equilibrium income per person is de-
termined by the birth rate and death rate, and
labor productivity only affects the equilibrium size
of the population. The increase in labor produc-
tivity caused by expansion of arable land caused
population to expand without much affecting in-
come per person. By 1700, land reclamation had
approached the limits of Japan’s mountainous ge-
ography. Families of all castes began deliberately
to limit their offspring, including resorting to in-
fanticide, in calculated attempts to raise their own
living standards, and did achieve some success; in-
come per person did improve slightly. Moderate
technological advance and increased commercial
activity in the late Tokugawa period substantially
offset what would have been the declining effect
on population size of the lowering of the birth rate,
but without much affecting income per person.
The Tokugawa economy was Malthusian.
By the beginning of the nineteenth century,
the world outside Japan had undergone dra-
matic changes. The industrial revolution in Eu-
rope rendered Japan technologically backward.
Nevertheless, Japan had indigenously developed
sophisticated economic and political institutions,
including futures markets, wholesaling and retail-
ing networks, double entry accounting, and the
mechanisms of local self-government. In these
ways, Japan carried the seeds of its later rapid
economic development.
The dispatch of American warships to Japan in
1853 ended Japan’s two centuries of near seclu-
sion from the outside world. Commodore Perry’s
demand that Japan should open its ports to for-
eigners set in motion a chain of events that cul-
minated in the 1868 Meiji Restoration, a political
revolution that ended shogunal rule and estab-
lished in its place an oligarchy of energetic young
reformers intent on transforming Japan into a mil-
itary power capable of dealing with the Americans
Introduction
and Europeans on more equal terms. The Meiji oli-
garchs quickly dismantled the far-reaching Toku-
gawa era controls on economic activity, freeing
powerful market forces that soon provided a dra-
matic stimulus to Japan’s economic development.
Japan’s seclusion had already ended with the estab-
lishment of foreign treaty ports in 1858. Now the
Meiji oligarchs abolished the caste system, abol-
ished the system of feudal domains, dispossessed
the samurai, and replaced the system of rice taxes
payable in kind with a monetary land tax that for
the first time in Japan rendered agricultural land
alienable. Soon after the implementation of the
land tax, the Meiji government was able to forgo
inflation, and under the capable direction of the fi-
nance ministry by Matsukata M(asayoshi), secured
the convertibility of its currency into silver after
1886 and into gold after 1897. Commercial banks
facilitated the private financing of new industrial
enterprises, and in 1882 a central bank, the Bank
of Japan, was founded. Much has been made of the
Meiji government’s official promotion of industry
under the political slogan shokusan kōgyō (increase
production, encourage industry), but, actually, the
government pilot plants established under this set
of policies were small elements of the national
economy. The spirit of the age was one of laissez-
faire, not government planning and direction. The
first mechanized industry to develop on a large
scale in Japan was cotton spinning, and it pros-
pered in the final decade of the nineteenth century
with little direct government support.
Another Meiji era (1868–1912) political slogan,
fukoku kyōhei (rich country, strong army), identifies
the central preoccupation of Japanese government
leaders near the dawn of the twentieth century: im-
perialist expansion and warfare. The Sino-Japanese
War of 1895 was concluded swiftly with a Japanese
victory and gained Japan colonial possessions (Tai-
wan and the Pescadores) and a sizable indemnity.
Japan’s victory in its 1905 war with Russia cost it
100,000 war dead and required an expenditure of
about half of its national income in that year. The
Portsmouth treaty ending the conflict conferred
no financial indemnity upon Japan but expanded
the Japanese empire to include a colony on the
southern part of the island of Sakhalin and interna-
tionally recognized spheres of Japanese influence
in the Korean peninsula and in China’s Kwantung
3
Introduction
peninsula. Japan annexed Korea in 1910. The fol-
lowing year, the 1858 commercial treaties that had
established extra-territorial settlements of foreign
traders in Japanese ports and limited Japanese tar-
iff rights were fully retired, bringing to fruition a
cherished goal of the Meiji political leaders.
Japan entered World War I as an ally of Britain
but managed largely to avoid actual hostilities.
Japan took advantage of the worldwide rise in in-
terest rates attending the war by switching from
net international borrower to net lender and ex-
panding aggregate output. The resulting real de-
preciation of the yen stimulated foreign demand
for Japanese goods and switched domestic demand
from imports to domestic goods. The business
groups known as the zaibatsu expanded from their
initial strongholds in mining, banking, and bro-
kerage of foreign trade into shipbuilding, iron
and steel, and insurance. Nevertheless, the za-
ibatsu form of organization, in which a few fami-
lies maintained concentrated ownership in diverse
holdings through the pyramiding of shares, was at
no time the only viable way of financing and ad-
ministering businesses in Japan. Cotton-spinning
companies were among the largest corporations in
Japan in the first decades of the twentieth century
and were, for the most part, diversely held joint-
stock enterprises. Also, about half the labor force
of Japan continued to work as self-employed farm-
ers, and another quarter of the labor force worked
in small enterprises.
The 1920s was a time of economic malaise in
Japan, partly owing to mistaken macroeconomic
policies, but also exacerbated by the 1923 Tokyo
earthquake. Japan took important strides toward
establishing parliamentary democracy in those
years, enjoying alternating rule by two political
parties, the conservative Seiyūkai and more lib-
eral Kenseikai–Minseitō. Japan joined Britain and
the USA in arms limitation agreements, diplomatic
treaties, and the establishment of an open world
trading regime anchored by the gold standard. In
pursuit of these aims, Japan sought to rejoin the
gold standard at the same parity it had maintained
from 1897 to 1917. To accomplish this, the gov-
ernment authorities had to reverse the substantial
inflation that had occurred in Japan in the in-
tervening years. The Tokyo earthquake dealt a
devastating blow to a Japanese economy already
4
seriously weakened by deflationary monetary poli-
cies, ultimately leading to a severe banking cri-
sis in 1927. An unwise and unfortunately timed
deflationary drive restored Japan’s prewar gold
parity in January 1930 just as the worldwide
Great Depression began. Then, in September 1931,
the Japanese army, without the authorization of
Japan’s elected government, undertook the oc-
cupation of Manchuria, a province of China in
which Japan had maintained a sphere of influ-
ence since 1905. A Japanese puppet state was
quickly established there, and the Japanese army
set about experimenting with central planning in
the province, deriving few lessons from its abject
failure.
Under the able counsel of the brilliant Takahashi
K(orekiyo) as finance minister, Japan abruptly
abandoned the gold standard in December 1931
and then instituted the expansionary monetary
and fiscal policy that effectively insulated Japan
from the worldwide Great Depression—but too
late. After the assassination of the prime minis-
ter in May 1932, the Japanese military insinuated
itself into the choosing of prime ministers and
cabinets and in conducting Japan’s foreign af-
fairs. Democracy and cooperation with Britain and
America were effectively ended from that time.
Takahashi, too, the “Keynes of Japan,” fell before
assassins in the failed coup of February 26, 1936.
In July 1937, Japan initiated war with China, and
the government of Japan began to switch the econ-
omy to a war footing, increasing arms purchases
dramatically. A series of diplomatic blunders led
Japan in 1941 into the disastrous war with the Al-
lies which it could not win, and which left the
Japanese economy in ruins.
For six years and eight months after the war,
from August 1945 to April 1952, the government
of Japan was completely subordinate to that of
the USA. This was the period of the American
Occupation. The Americans drafted a new consti-
tution that permanently established democracy,
dissolved the zaibatsu, redistributed agricultural
land, and enacted laws legitimizing labor unions.
Additionally, the Americans allowed or di-
rected the continuation of wartime price controls
and rationing, embargoes on foreign trade, and
inflation-financed subsidies of industrial firms.
Japan’s postwar recovery did not begin until these

disastrous policies were suspended as part of Amer-
ica’s “reverse course” from a punitive toward a re-
constructive Japan policy, beginning in 1949. The
rapid economic growth of the Japanese economy,
from this time until the mid-1970s, is a triumph of
unfettered capitalism. The ongoing process of sav-
ing and investment eventually restored the stock
of wealth that Japan had dissipated in the war.
The elevation of the growth path of Japan’s aggre-
gate output above the trajectory extrapolated from
the prewar years reflects the dramatic enlargement
of Japan’s national saving rate compared with the
prewar era. In fact, Japan’s national saving rate was
until the 1990s among the world’s largest, which
accounted for its persistent trade surpluses.
Japan’s integration with the world
economy
After its opening to trade in 1858, Japan immedi-
ately began to export the goods that, before then,
had lower prices at home than elsewhere, includ-
ing silk and tea, and to import the goods that
previously had higher prices at home, including
cotton and wool, just as Ricardo’s theory of com-
parative advantage would have predicted. Japan’s
integration into the world economy contributed
to the international division of labor and thereby
expanded the consumption possibilities of both
Japan and other countries.
This continues to be true today. Japan’s major
imports include the oil and other natural resources
that it lacks, and that would surely command high
prices in Japan were it to forgo international trade.
Similarly, Japan exports manufactures that inten-
sively employ the capital and skilled labor it has in
abundance and, through foreign direct investment
in lesser developed nations, exports the services
of the entrepreneurs and managers it also has in
abundance. Japan is the supreme example today
validating the Ricardian theory of comparative
advantage.
But this very fact has been viewed by some
as anomalous; for the other developed nations,
but not Japan, engage in substantial intra-industry
trade, the import and export of like products. Intra-
industry trade does not comport easily with no-
tions of comparative advantage. If a nation exports
Introduction
the goods for which it has relatively low incremen-
tal costs of producing and imports the goods it
has high incremental costs of producing, then how
can it both export and import like-goods? Newer
theories point to the pursuit of oligopoly profit as a
motivation for intra-industry trade. Even if nations
have the same incremental costs of producing a
good so that none has a comparative advantage,
they may still each supply goods in all of the na-
tions’ respective markets, simply to capture a share
of the profit that accompanies competition among
the few.
Much intra-industry trade arises as the intra-
company shipments of multinational enterprises,
companies that produce goods in more than one
nation. Possibly this reflects the fact that multi-
national enterprises include many of the world’s
largest companies and are characteristic of the
oligopolistic industries most apt to invite intra-
industry trade. One reason for the small extent of
Japan’s intra-industry trade is that foreign multi-
national enterprises control relatively few assets in
Japan. The Japanese government once restricted
foreign control of domestic assets, but that pol-
icy ended with enactment of the Foreign Exchange
and Investment Control Law of 1980. The limited
presence of foreign multinationals in Japan now,
decades after de jure restrictions on inward foreign
direct investment were lifted, is perhaps because
peculiarities of the Japanese language and culture
make it a difficult place for foreigners to live and
work. Government protectionism has little to do
with Japan’s low stock of inward foreign direct in-
vestment or the small extent of its intra-industry
trade.
Protectionist interferences with trade generally
constrict a nation’s consumption possibilities,
even though they enrich the protected industries.
Protectionism is, on net, harmful to the nation
that imposes it, and thus represents the triumph
of a narrow special interest over the broader na-
tional interest. Special interests seeking protection
are more likely to prevail in industry-by-industry
referenda than in economy-wide referenda. This
is why international treaties were necessary to
prompt Japan and the other developed nations
to reduce their tariff rates; the treaties broadened
the political question of free trade versus protec-
tion in a way that undercut the special interests
5
Introduction
within each nation. As a full participant in the
rounds of multilateral agreements to reduce tariff
rates, Japan has joined the developed nations in
liberalizing its trade policies. The continuing in-
stances of protectionism by Japan have analogues
in other nations. For instance, Japan’s restrictions
on rice imports can be compared to America’s re-
strictions on sugar imports. The sad saga of 1980s
Japan–USA trade friction was not about Japan’s
“closed” markets or “unfair” practices: it was about
how best to deal with or deflect the political pres-
sure inside the USA for protection from expanded
Japanese imports. Partly, the expanded imports
from Japan reflected the rapid growth of Japan’s
economy. But the most vituperative trade disputes
between Japan and the USA surfaced in 1985, af-
ter several years in which extreme real appreciation
of the US dollar relative to the yen had added fur-
ther stimulus to American purchases of Japanese
goods.
Nations gain not only from their exchange of
one another’s commodities and services, but also
from their exchange of claims on one another’s
future incomes, sometimes referred to as intertem-
poral trade. A nation’s extent of intertemporal
trade equals its imbalance of trade in commodi-
ties and services. If a nation exports more than
it imports, then it necessarily accumulates claims
on the future incomes of foreigners, for the ex-
ports had to have been exchanged for something.
The converse is also true. One expects a nation
with a high national saving rate to accumulate
foreign assets, that is, to lend to other nations
or accumulate IOUs issued by trading partners,
and so to export more than it imports, achiev-
ing a trade surplus, as indeed Japan has done.
In the past, Japan, like other countries, has also
resorted to foreign borrowing, and has incurred
temporary trade deficits to maintain consump-
tion when confronted with the windfall losses of
a natural disaster such as the 1923 Tokyo earth-
quake or an event such as the first oil shock.
Some adjustments of trade balances reflect not au-
tonomous shifts such as these in nations’ propen-
sities to save, but prior movements in exchange
rates. Economists have not succeeded very well
in explaining short-term movements in exchange
rates, but they have had a little more success
6
in identifying the underlying bases for long-term
trends in exchange rates. For instance, the gradual
real appreciation of the yen relative to the US dol-
lar which was evident throughout the 1950s and
1960s exemplifies a phenomenon known as the
Balassa–Samuelson effect. Short-term movements
in exchange rates are a less well understood. Prob-
ably they exhibit the influence of macroeconomic
policies, but in a complicated way. Exchange rate
movements caused by macroeconomic policies do
bring about consistent changes in trade balances
but with a lag of up to two years.
Government policies and their effects
Monetary and fiscal policy, trade policy, public
spending, environmental policy, government reg-
ulation, and other government policies are sig-
nificant elements of any nation’s economy, and
Japan is no exception. That said, the government
of Japan has a smaller presence in its economy
than is often recognized. In 2017, government em-
ployees comprise less than 10% of Japan’s labor
force (in the USA it is 18%). With the privati-
zation of telecommunications and the national
railway, there no longer exist large public enter-
prises in Japan. Government spending, including
transfers, amounts to about one-third of the na-
tion’s aggregate output, which is comparable to
the USA and less than many of the European na-
tions. The national government in Japan controls
almost all public expenditures either directly or in-
directly. Centralization of control economizes on
administrative costs but limits the range of choices
available to citizens willing to move from one local
jurisdiction to another. The objects of public ex-
penditure are largely the same in Japan as in other
nations. They include defense, education, health
insurance, and social security pensions.
The scale of the public sector is a measure of
only one dimension of government’s role in the
economy. Another dimension is regulation, the
setting of rules that private firms must obey. There
is little that is extraordinary about the govern-
ment regulation of industry in Japan. The national
government has asserted explicit control over the
pricing and entry of firms in the public utilities,

transport, telecommunications, and financial ser-
vices industries, as have almost all other nations of
the world. Antimonopoly law pertains to firms in
all industries. Japan’s antimonopoly law is a legacy
of the American Occupation and has survived to
the present day but without the vigorous support
of the elected governments. Resources devoted to
the enforcement of antimonopoly laws are limited
and penalties for violations are small. It is fair to
say that antimonopoly law has imposed fewer con-
straints on the practices of corporations in Japan
than in the USA. Furthermore, the patent laws of
Japan afford only weak protection for inventions,
promote the early revelation of discoveries, and
encourage the licensing of inventions on terms fa-
vorable to users. All of this is quite sensible from
the point of view of promoting the rapid diffusion
within Japan of foreign innovations and, perhaps
for that reason, was optimal, given the country’s
status as a late developer.
The preceding remarks are quite at variance with
the popular notion that a coterie of elite govern-
ment bureaucrats direct the allocation of resources
in Japan’s economy. Proponents of that view focus
particular attention on the public-sector financial
intermediaries of Japan. The postal saving system
of Japan, founded in 1875, allows individuals to
make time deposits and purchase life insurance at
post office establishments throughout the coun-
try. It may be the largest depository institution in
the world. Postal savings deposits now comprise a
whopping 22% of all financial deposits in Japan. In
a process known as the Fiscal Investment and Loan
Program, these postal deposits and other public
funds are transferred to government financial in-
stitutions, which issue loans to local governments
and to private businesses. By manipulating the
process just described, it seems that the govern-
ment of Japan might have redirected the allocation
of loanable funds toward favored industries that
would have been shunned by profit-seeking fi-
nancial intermediaries. Favored sectors in Japan
have also enjoyed special tax breaks and subsidies,
and special exemptions from antimonopoly laws,
but these have not really had much bite. During
the 1950s, and continuing until 1964, compre-
hensive foreign exchange rationing conferred de
facto government control of the pattern of im-
ports into Japan. This control was exercised by the
Introduction
Ministry of International Trade and Industry MITI
(renamed METI—the ministry of economy, trade,
and industry—in January 2001), the same ministry
that directed the policies of the key government
financial intermediaries.
This is what the much-vaunted industrial pol-
icy of Japan really amounted to, which is to say,
it didn’t amount to much. The Japanese industries
that benefited the most from public loans, other
subsidies, and protectionism were mostly politi-
cally powerful but economically anemic ones such
as coal mining, textiles, and shipbuilding. Japan
prospered despite government experiments with
industrial policy, not because of them.
The record of monetary and fiscal policy in Japan
includes both successes and failures. Japan has en-
dured fifteen business recessions since 1950, tem-
porary downward deviations from the economy’s
equilibrium growth path. But avoiding all of these
recessions—including the three recessions of the
1990s “lost decade” and the 2008 global reces-
sion triggered by the Lehman bankruptcy—would
have been equivalent to about a 1–2% perma-
nent rise in Japan’s national income. To put this
in perspective, contemplate that technological ad-
vance, on average, accomplishes this every year in
Japan.
The overall picture here is that Japan’s macroe-
conomic policy has mattered very little. But there
have been policy mistakes. Japan’s Heisei recession
that so weakened the asset positions of commercial
banks there, followed the unnecessary and sharp
monetary contraction of 1990 directed by the Bank
of Japan governor, Mieno Y(asushi). In the years af-
ter that event, the Bank of Japan entered uncharted
territory in which the conventional ways of con-
ducting monetary policy had become inoperative,
a world of zero or even negative interest rates and
firmly entrenched deflation. Before this, the Bank
of Japan conducted monetary policy by adjusting
its ongoing securities market transactions to influ-
ence short-term interest rates, with the interbank
overnight interest rate—the call rate, Japanese ana-
logue of the US federal funds rate—as its operating
target. Through arbitrage, a lower call rate was
quickly reflected in other interest rates including
commercial bank prime lending rates. Lower inter-
est rates led banks to expand their loans, and in
doing so increase the stock of money in the form
7
Introduction
of bank deposits, a stimulus to aggregate demand.
In February 1999, the BOJ had lowered the call
rate to zero, previously unimaginable. Lowering
the call rate further had become impossible. This
situation has continued with some interruptions
ever since, from February 1999 until August 2000
and then from April 2001 to July 2006 and since
December 2008. And now the US Federal Reserve
Bank and the European Central Bank face the same
liquidity trap dilemma. The BOJ has tried many
things—expansion of the monetary base, massive
purchases of securities, intervening in the mar-
ket for Japanese government bonds to lower their
yields—but has not succeeded in raising Japan’s
inflation rate and escaping the zero-interest-rate
situation. Japanese economy watchers need to be
apprised of these developments if they are to fol-
low current events.
Japan’s recessions and deflation since the 1990s
have eroded incomes and pushed households and
businesses into lower marginal tax brackets and
reduced tax revenues. Furthermore, the aging of
the Japanese population has increased government
spending on retirement pensions and health care
relative to the wages and incomes subject to tax-
ation. The result of all this been an explosion of
Japanese government debt, alarming to many, less
alarming to the fully informed. All government
expenditures must eventually be funded by taxes.
Accumulating government debt merely postpones
tax collection. Questions about government debt
are fundamentally questions about taxes: Are cur-
rent taxes high enough? Is the structure of taxes
minimally burdensome? Are the taxes fair? These
questions are complicated because the incidence
and burden of each tax depends on the behav-
ior people adopt in attempts to avoid tax bur-
dens. For instance, taxes on corporate income in-
duce corporations to supply less output, employ
fewer workers, and sell at higher prices, which
shifts the tax burden away from corporate share-
holders and onto the corporation’s customers and
employees. Such tax shifting is extensive to the
point that virtually all taxes may be presumed
to be taxes on work and on the reward from
paid employment, which induce wasteful substi-
tution of leisure for the commodities and ser-
vices that may be purchased with the wages from
paid employment. It is wasteful because the value
8
placed on the added leisure is less than the value
placed on the commodities and services that could
have instead been produced and consumed. In
this way, the burden of taxes is greater than the
revenue generated. A back-of-envelope calculation
suggests that the burden of Japan’s taxes is cur-
rently 6.6% greater than tax revenues, roughly 2%
of the market value of aggregate output (GDP).
Tax reforms such as switching from income taxes
to a national sales tax as Japan is now undertak-
ing, are aimed at broadening the tax base, lowering
marginal tax rates, and decreasing the excess bur-
den … so that taxes may be raised further with
little political resistance. Whether Japanese taxes
are high enough or Japanese government spending
is low enough are political questions to be resolved
through elections.
Economic institutions and practices
peculiar to Japan
Much of the fascination with Japan’s economy,
and the greatest challenge for economists, arises
from the many unique institutions and practices,
and peculiar features, of the Japanese economy.
These include the Japanese employment sys-
tem (lifetime employment, seniority-based wages,
and enterprise unions), the self-organization of
Japanese firms into business groups, the special
arrangements between Japanese banks and their
client firms, and the complex and fragmented
Japanese marketing system. Satisfying economic
explanations for such structures can take a variety
of different forms. They can relate the peculiari-
ties to underlying givens like geography. They can
identify the apparent peculiarities as illusory in
the sense that the Japanese arrangements solve a
universal problem no less satisfactorily than alter-
natives might do. And finally, they can relate the
peculiarities to a confluence of historical events
unique to Japan. The best explanations fit more
than one of these patterns.
Japan’s distribution system, though frequently
labeled “inefficient,” is manifestly not. Japan’s pro-
liferation of small stores reflects its geography. The
ubiquity of stores affords households the added
convenience of next-door shopping, which they
particularly value because it enables them to shop

frequently, maintain low household stocks of daily
necessities, and economize on scarce living space.
Japan’s distribution system evolved this way, in
part, because the geographic centricity of the
country means that the added costs of restocking
a superabundance of small stores, as opposed to a
smaller number of large ones, are relatively small.
From these pivotal observations many others fol-
low. For instance, the large number of small retail
shops and owners tipped the political balance in
favor of regulations protecting small stores from
competition with larger ones. Japan’s Large Store
Law, which placed significant legal obstacles to
the opening of stores with large floor space, con-
tributed further toward the proliferation of small
stores, but probably would not have been toler-
ated in Japan if it had imposed very large costs
or tended to run counter to the economic forces
already shaping Japan’s distribution sector. The
complexity of marketing channels in Japan, for in-
stance the large number of wholesale steps, is also
derivative of the ubiquity of small stores; explain
the one, and the other follows.
The employment practices that pertain to the
regular male employees of the large compa-
nies, about one-fifth of Japan’s labor force, rep-
resent a sophisticated response to the universal
problems inherent in recruiting, training, orga-
nizing, and motivating workers. These practices
include seniority-based pay and promotion lad-
ders, mandatory retirement, and on-the-job train-
ing. The seniority-based pay schemes discourage
quits and, at the same time, enlarge the oner-
ousness to employees of early dismissal, which
enables the employers to economize on the costs of
training workers in company-specific skills, while
preserving performance incentives. Other features
of Japan’s labor markets follow from the ones
just noted. For instance, Japan’s low unemploy-
ment rates largely reflect the infrequency with
which the regular male employees of the large
companies experience bouts of unemployment.
The organization of workers into enterprise rather
than industry-wide unions has also received some
encouragement from the strong attachments of
workers to their incumbent employers. Women in
Japan have long had high labor force participa-
tion rates and now comprise around half of the
Introduction
labor force but have remained largely outside the
lifetime employment and seniority-based pay sys-
tem. The institutions for educating, hiring, and
training employees that evolved in Japan over
the last hundred years have favored the career
advancement of men and foreclosed opportunities
for many Japanese women. This is a dilemma with
no easy answer.
In Japan, banks have long played a domi-
nant role in financial intermediation, collecting
deposits from households, and extending loans
to private businesses and to government. In the
USA, and some other nations, securities markets
are a more important source of funds and banks
less important. Here the Japanese peculiarity may
be less consequential than is often supposed. The
universal problems that financial intermediaries
must face invite a range of possible solutions,
none necessarily superior to the others. Govern-
ment regulations play an important role in de-
termining which specific arrangements emerge in
any nation, but there is a fundamental arbitrari-
ness to it, in the sense that one set of arrange-
ments solves the problems about as well as some
others might have done. The dominant role of
banks in Japanese financial intermediation owes
a lot to government regulations that effectively
cartelized and protected the banks but insured de-
posits. When Japanese regulatory constraints on
euromarket finance were lifted in the mid-1980s,
the Japanese domestic banking cartel began to un-
ravel. With decartelization, Japanese banks’ profits
eroded, and their lending grew reckless. This was
particularly so under the expansionary Japanese
monetary policy following the February 1987 Lou-
vre Accord. The resulting run-up in asset prices in
1988–9 was followed by a crash in 1990–1 that
left the Japanese banks’ net worth in a precarious
state. And the 1990s slow-down in macroeconomic
growth and investment worsened the situation of
Japanese commercial banks still further. In spite
of all this, bank loans remain the most important
source of external funds to Japanese businesses.
Even though Japanese companies are now rela-
tively free to issue securities rather than only re-
lying on bank loans for funds, many of them have
nevertheless retained their strong attachments to
particular banks.
9
Introduction
The self-organization of Japanese firms into
business groups originated with the zaibatsu.
The zaibatsu were vast commercial empires, each
controlled by a wealthy family through the pyra-
miding of closely held shares; they reached their
fullest development soon after World War I. The
zaibatsu represented a form of corporate gover-
nance, highly effective and successful in some
industries, but absent and apparently unnecessary
in others, for example cotton-spinning. With
the appropriation and disbursal of the zaibatsu
founding families’ shares by the American Occu-
pation government of Japan, the zaibatsu were
dissolved. But when the Occupation ended, the
constituent member firms of the old zaibatsu soon
re-established their former alliances. The members
of each one of the new groups, called financial
keiretsu, traded with one another and were linked
by cross-shareholding. With the demise of the
founding families of the zaibatsu, the large banks
now insinuated themselves into the governance of
the former zaibatsu member corporations. Perhaps
this was natural, given the important role of the
banks as suppliers of funds to the companies, as
discussed above.
10
A final comment
To know Japan—or any country for that matter—
is more than an ability to recite a litany of facts
about its history, geography, institutions, and cul-
ture. Knowledge without insight does not lead to
understanding. Disciplined thinking is needed to
organize the disparate facts into a coherent system
that can be grasped whole. Modern economics is
the academic discipline underlying this book. It is
the economics of Smith, Malthus, Ricardo, Samuel-
son, Becker, Coase, and others—great minds of
the past who strived to understand the world.
Economics textbooks that only describe imagi-
nary worlds can make the subject seem sterile and
pointless. To see the power of economics you must
use it to think about the actual world, of which
Japan is a microcosm and a worthy object of study.
Having extolled the power of economics let me
hasten to note its limitation. Economics is not
the be-all and end-all. In universities today, Japan
studies are often represented as multidisciplinary,
encompassing not only economics, but also po-
litical science, sociology, history, literature, and
more. We can and should learn from all of them.
 Incomes and Welfare of the
Japanese Today
Japan is a prosperous country. Most of its cit-
izens eat well, live comfortably, and enjoy the
many blessings of life in the twenty-first century.
To go beyond such banalities, a precise measure
of economic well-being is needed. The national
income and product accounts provide the con-
ceptual framework for such a measure. National
income records the aggregate monetary value of
the flow of goods produced and traded in the
market. Market goods are major contributors to
our well-being. Nonmarket goods such as home-
cooked meals, time away from paid employment,
and sunny days also contribute to well-being—and
we want to measure their contribution too. But
from calculations of national income alone we can
still learn much that is worth knowing.
In this book we will use national income
to gauge and compare the contributions to
Japanese economic well-being from international
trade (Chapter 8), business cycle stabiliza-
tion (Chapter 6), and technological advance
(Chapter 17). When in the 1850s Japan opened
to international trade after two centuries of
nearly complete closure, the immediate result
was a permanent increase in Japanese income
per person by about 8%. Business recessions—
including the ones triggered by the oil shocks
of 1974 and 1979, the Japanese asset price crash
of 1991, the global financial crisis of 2008, and
many others—altogether are lowering Japanese
economic well-being by the equivalent of a 1%
permanent reduction in income per person.
The Japanese Economy. Fourth Edition. David Flath, Oxford University Press.
© David Flath (2022). DOI: 10.1093/oso/9780192865342.003.0002
1
Technological advance starting in the late nine-
teenth century increased income per person in
Japan by an average of 3% each year over the next
hundred years, ultimately increasing income per
person sixteen-fold. Technological advance is the
root and branch of Japanese economic prosperity.
We might not know that if we had no usable
measure of the contribution of market goods to
our economic well-being.
One aim of this chapter is to compare the eco-
nomic well-being of the Japanese today with that
of their own forbears and people of other nations.
Differences in relative prices over time and across
space complicate such comparisons. The way for-
ward is rooted in the principal of revealed pref-
erence. It is the bedrock on which all economics
rests, the principal that a person’s choices may re-
veal her own consistent ranking of the alternatives
before her. Is a Japanese person, in her own estima-
tion, better off than her foreign counterpart? If she
could have consumed the same goods as the coun-
terpart but chose not to, then the answer is “yes.”
In the current chapter we will apply this logic.
Another difficulty in welfare comparisons is how
to measure the contributions of nonmarket goods.
What is the price of a sunny day or an ocean view?
And what does that even mean? What is the price
of a home-cooked meal or a day off from work?
We will boldly answer these questions and explain
how the choices made by Japanese people reveal
their valuations of non-market goods just as they
do for market goods.
Incomes and Welfare of the Japanese Today
Cross-country comparisons of economic well-
being revolve around a typical or average person,
but what about the variation within each country?
The distribution of wealth matters if we are com-
paring a person chosen randomly from Japan with
one chosen randomly from another country. The
distribution of Japanese wealth is less skewed than
that of the USA and some other countries. That
means that a Japanese person chosen randomly is
more likely to have an income that is close to the
national average. An American chosen randomly
is likely to have an income well below the na-
tional average. The smaller inequality of wealth in
Japan compared to the US should raise your assess-
ment of the economic well-being of the average or
typical Japanese compared to that of the typical
American, even if you are a non-egalitarian.
There are many topics to address here. We will
begin with the basics.
National income, GNP, and GDP
Income is the monetary amount that could be
spent in a given period and leave wealth un-
changed. Income is not only the basis for spending
but also the result of it, a manifestation of the cir-
cular flow of economic activity in which spending
by one is income for another. Accordingly, there
are two ways to measure income. One way is to add
up the incomes in each category—wages, rental
income from the employment of capital (build-
ings, machines, and tools), and economic profit.
The second way is to add up the spending on fi-
nal goods and services that gives rise to the flow
of income. The restriction to final sales is to avoid
a problem of double counting that would arise
if intermediate transactions were aggregated. For
example, wheat is sold first to the miller, then as
flour to the baker, and finally as bread to the house-
hold; only the final sale—that of the bread—needs
to be included for a complete accounting. Aggre-
gate spending on final goods and services is in
principal equal to aggregate income.
Consider the income of Japanese “nationals,”
defined to include all citizens and permanent resi-
dents of Japan and the government of Japan. Some
Japanese nationals are working outside of Japan’s
geographic borders, and some of those who live
12
and work within Japan’s borders are not Japanese
nationals but foreigners. The aggregate income of
Japanese nationals is reported in the system of na-
tional accounts as the Gross National Income (GNI)
of Japan.1 The aggregate spending on final goods
and services that gives rise to the GNI of Japan—
and is in principal equal to it—is the Gross National
Product (GNP) of Japan.
When considering the pace of aggregate pro-
duction in Japan’s economy, our focus will be
on all economic activity within the geographic
borders of Japan, including production by non-
Japanese nationals operating within the country
and excluding production by ex-patriot Japanese
nationals. The value at current market prices of
all final goods and services produced within the
geographic borders of Japan in a given period
is the Japanese Gross Domestic Product (GDP).
Figure 1.1 shows the trajectories of GDP and GNP
(= GNI) for Japan, from 1994 to 2018 calendar
years. They move together, but Japan’s GDP is 1–
4% lower than its GNI, reflecting that the value
of production by Japanese companies outside of
Japan outweighs that of foreign companies within
Japan.
A rise in income expands consumption possi-
bilities, not just in the immediate time period
but in the future too. This is the fundamental
link between income and economic well-being,
that a rise in income is a relaxation of the con-
straint on spending in the market. The spending
itself is promoting economic well-being but not
always in an obvious or direct way. The aggre-
gate spending on final goods and services that
makes up gross product (Y, meaning either GNP or
GDP) includes final purchases by households (C,
“consumption”), by businesses (I, “investment”),
by government (G), and by foreigners (X, “ex-
ports”). This is represented by the fundamental
equation of the national income and product
accounts.
Y = C + I + G + X − M,
1
It is “gross” national income because it ignores depreci-
ation of the capital stock, the depletion of wealth caused by
the wearing out of buildings, machinery, and tools. Net Na-
tional Income and its twin, Net National Product, subtract
depreciation from their “gross” counterparts.
 Incomes and Welfare of the Japanese Today

5,80,000

5,60,000
GNP=GNI

5,40,000
Billions of Yen

5,20,000

5,00,000

4,80,000 GDP Figure 1.1. Gross domestic

product (GDP) and gross
national product (GNP = GNI),
4,60,000
Japan, 1994–2018
Source: Cabinet Office, National
4,40,000
Income and Product Accounts,
94

96

98

00

02

04

06

08

10

12

14

16

18
2008 SNA.
19

19

19

20

20

20

20

20

20

20

20

20

where “imports,” M, is subtracted from aggregate
final purchases so that the right-hand side of the
equation adds up to spending on final goods pro-
duced by the home country and not by foreign
ones. Here, if Y stands for GDP, then exports and
imports have the standard interpretation as cross-
border sales and purchases. If Y stands for GNP,
then exports and imports are understood to also
include any cross-border factor payments (wages
and capital rental payments earned by expatriate
nationals). This adjustment adds to exports any
sales of final goods by expatriate nationals (which
approximately equals the factor payments they re-
ceive), and adds to imports any purchases of final
goods from foreign producers within the country’s
own borders (which approximately equal the fac-
tor payments earned by these expatriate foreign
producers).
We next consider how each element of spending
for purchases of final goods and services is mea-
sured, and how each contributes to the economic
well-being of households.
Spending is either for consumption,
investment, or accumulation of foreign wealth
The fundamental equation of the national income
and product accounts (Y=C+I+G+X−M), partitions
20
spending for purchases of final goods based on
who is doing the spending—households, busi-
nesses, government, or foreigners. In thinking
about how national income is used to promote
economic well-being, households are the proper
focus. Note, then, that businesses are owned by
households, the government is providing a stream
of goods and services to households, and the for-
eign sector is trading with households directly or
with the other domestic sectors just identified. This
suggests another useful way of partitioning the
spending on final goods and services that add up
to the gross product: spending that is for consump-
tion, and spending that is for domestic or foreign
investment.
National income is disposed as consumption, in-
vestment, or purchase of foreign assets. That is,
either it is traded for goods and services used up
by households in the immediate period (consump-
tion); or it is used to accumulate machines, tools,
and other durables that will add to the economy’s
capacity to produce goods and services in future
periods (investment); or it is used to buy land,
property, or securities from foreigners (accumula-
tion of foreign wealth).
In the national accounts, spending by businesses
for final goods and household spending for new
houses is labeled investment while other spending

13
Incomes and Welfare of the Japanese Today
by households is labeled consumption. Most con-
sumption services of houses arise from spending in
earlier periods. Consequently, a price must be im-
puted to the services of owner-occupied housing.
A similar imperfect imputation could be made for
other household durables but is not in the official
statistics of Japan (and other nations).
In the national accounts of Japan, government
purchases of final goods are identified as either
consumption or investment, but in the accounts
of the USA (until quite recently) and many other
countries, such an explicit allocation of govern-
ment purchases is not indicated. Of course, in-
dividual researchers may make their own conjec-
tures about the extent of government purchases
that should be counted as investment and con-
sumption. In the Japanese national accounts, gov-
ernment purchases of buildings, roads, and other
public works are counted as investment, while pur-
chases for national defense and compensation of
government employees are counted as consump-
tion.
It may seem odd to count defense spending
as consumption; military weapons purchased in
one year will presumably continue to be used
to deter foreign attacks in future years. These
purchases thus represent investments in an eco-
nomic sense, rather than consumption. The rea-
son for treating the entirety of defense spending
as consumption in Japan’s national accounts is
that the national government is prevented by law
from issuing bonds in excess of that needed to
finance investment (kensetsu, lit. construction), ex-
cept in extraordinary circumstances. Counting de-
fense spending as consumption thus nominally
restrains appropriations for defense.2 The point
here is that the economic distinction between con-
sumption and investment in principle guides the
presentation of national income accounts, but in
fact it does so only imperfectly.
Based on this discussion, we modify the funda-
mental equation by noting that spending on final
goods by households C includes both consump-
tion CC and investment in the form of spending
for housing CI . And spending on final goods by
government G also includes both consumption in
the form of services that government provides to
households GC and investment in the form of pur-
chases of durable goods GI . Foreign investment,
14
the net accumulation of claims on the future in-
comes of foreigners, equals exports minus imports
(“net exports”). This is because exports not fully
paid for in the current period must entail a promise
of future payment. More on this in Chapter 7.
The fundamental equation becomes the follow-
ing.
Y = CC + CI + I + GC + GI + X − M,
where CC + CI = C and GC + GI = G. Rearranging, we
get this.
Consumption Saving
Domestic Foreign
investment investment
.
Y = CC + GC + I + CI + GI + X – M
This expression shows how the gross product Y is
devoted either to consumption, including goods
and services households themselves purchase and
ones provided to them through the government,
or to investment, including both domestic invest-
ment and foreign investment. The consumption
obviously contributes to economic well-being; it is
the very embodiment of economic well-being. But
what about investment?
Investment contributes to sustainable
consumption
The level of economic well-being inherent in the
national accounts is the portion of national in-
come devoted to consumption. Investment raises
the possible future level of consumption. Based on
the Solow growth model (explained in Chapter 4),
a market economy will approach a steady state
in which consumption per person rises only with
technological advance. In this way of thinking,
higher fractions of national income devoted to in-
vestment will sustain higher steady-state levels of
consumption. Japan’s once high saving rate and
correspondingly high investment rate enabled it
to attain a higher sustainable consumption level.
To argue as some have that Japan’s saving lowers
2
In fact, in every year since 1974 the national government
has issued bonds in excess of that needed for investment.
Special deficit-covering bonds had to be authorized in each
year by the Diet. It seems that extraordinary circumstances
have in fact become ordinary.

economic well-being because it takes away from
immediate consumption is to adopt a myopic view
that places little weight on future consumption
possibilities. The upshot is that steady-state con-
sumption is the embodiment of economic well-
being and tends to rise or fall along with national
income.
Consumption levels and national income
Table 1.1 reports for Japan and the other G7
countries in 2018, each’s per-capita GDP and its
composition, partitioned into consumption and
investment. Investment, the acquisition of durable
goods and of claims on future foreign income,
is, by definition, gross accumulation of wealth—
saving. But only the portion of investment beyond
what is needed for replacing the buildings, ma-
chines, and tools that have depreciated with use
represents a net accumulation of wealth. Net sav-
ing is gross saving minus depreciation, shown in
the table. For Japan and most other countries with
advanced economies, consumption (private and
public combined) absorbs the greater part of ex-
penditures on final goods, ranging from around
75% to 85% of GDP. Basic economic numeracy lies
in knowing this and other such facts evident in the
table.
The national accounts are computed in the do-
mestic currency of each respective country. Inter-
national comparisons of consumption per person
based on these accounts must make some assump-
tion about the rate of conversion between cur-
rencies. The simplest procedure is to use current
exchange rates, and that is what we have done in
the first column of the table.
This procedure (conversion at current exchange
rates) is justified by the purchasing power parity (PPP)
thesis. Under the strongest form of this thesis, the
price of each good will be the same in all coun-
tries that trade freely with one another if reckoned
in the currency units of any one of the coun-
tries, based on current exchange rates. In a trivial
sense the PPP thesis is true, for divergences from
PPP can always be associated with some barrier
to trade that is the result of either government
interference with trade or natural impediments.
Consumption activities that use land tend to have
higher relative prices within Japan than elsewhere,
Incomes and Welfare of the Japanese Today
which is a reflection of the obvious difficulties of
international trade in these items.
Comparison of national incomes or consump-
tion levels converted into common currency units
at current exchange rates imperfectly accounts for
the differences in relative prices across countries.
For instance, the dramatic appreciation in the yen
from 260 yen/dollar in 1985 to 135 yen/dollar in
1990, a period in which domestic inflation rates
in Japan and the USA were roughly the same, did
not have a great effect on the relative consumption
possibilities (“purchasing power”) of Japanese and
Americans. There are many consumption goods
in both countries that are not easily traded in-
ternationally. The 1985 fall in the yen price of
dollars meant a fall in the yen prices of goods
that Japanese bought from Americans relative to
the yen prices of goods in Japan not traded in-
ternationally, including land. The rise in Japanese
purchasing power was not as great as if yen prices
of all goods bought by the Japanese had fallen in
the same proportion as the change in the exchange
rate.
Real income indices and revealed
preferences
Another way of ranking the consumption possibil-
ities of citizens of different countries is to deter-
mine for the representative citizen of each whether
her income is enough to have purchased a com-
parable consumption bundle to that chosen by
the other given the prices in her own country. If
another’s chosen bundle was attainable, then the
one reveals by her choice a preference for her own
bundle. If for example an American could have
purchased a similar consumption bundle to that
chosen by the Japanese but did not, then the Amer-
ican must prefer her own bundle. This procedure
requires us to determine the value of each one’s
consumption bundle in the domestic prices of ev-
ery other country. Kravis, Heston, and Summers
have done this for 34 countries, including Japan, in
1975 and for 60 countries, again including Japan,
in 1980.3 More recently, The World Bank has
3
Irving B. Kravis, Alan Heston, and Robert Summers,
World Product and Income, International Comparisons of Real
15
16
Table 1.1. GDP per capita and its composition; Japan and selected other nations 2018

Units = % GDP unless otherwise noted

Consumption Domestic investment Foreign investment
Country Population Exchange rate Per-capita GDP CC Gc I CI GI X−M X M Net saving Gross Saving Depreciation GNI=GNP
Incomes and Welfare of the Japanese Today

(ths) ($ per person) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%)

Canada 37,058 1.296 C$/$ 46,311 78.9 57.9 20.9 22.5 10 8.5 4 −2.0 32.1 34 4 20.6 16.6 98.7
France 67,265 0.847 €/$ 41,446 77.2 53.9 23.3 22.9 13.5 6 3.4 −1.0 31.7 32.8 3.7 21.9 18.2 101.9
Germany 82,906 0.847 €/$ 47,639 72 52.1 19.9 21.2 12.5 6.3 2.4 6.2 47.4 41.3 9.1 27.3 18.2 102.8
Italy 60,459 0.847 €/$ 34,499 79.3 60.3 19 17.8 10.4 5.3 2.1 2.4 31.5 29.1 2.7 20.2 17.6 101.1
Japan 126,443 110.423 ¥/$ 39,186 75.4 55.6 19.8 24.1 16.9 3.4 3.8 0.2 18.5 18.3 1.8 24.4 22.6 103.7
UK 66,436 0.75 £/$ 43,062 84 65.5 18.5 16.9 10.1 4.1 2.7 −1.4 30.6 32 0.9 15.5 14.6 98.5
US 327,436 1 62,853 82.1 68 14.1 20.7 11.2 6.4 3.2 −3.1 12.2 15.3 1.6 17.6 16 101.2
OECD* 1,350,252 PPP 39,384 77.3 60.1 17.2 22.4 n.a. n.a. n.a. 0.3 30 29.7 n.a. 22.7 n.a. n.a.

* The Organisation for Economic Cooperation and Development is a consortium of 37 of the developed countries including the seven also listed here separately, the “G-7".
Source. OECD.Stat, National Accounts at a Glance.
 Incomes and Welfare of the Japanese Today

Table 1.2. Revealed preferences, 2017

Value of Japanese bundle at prices of Value of foreign bundle at Japanese prices

respective country ÷
÷ Japanese income
Income of respective country

Revealed preferred to Japanese

bundle
Germany 0.79 1.32
France 0.82 1.27
United States 0.94 1.23
Canada 0.90 1.16
Ambiguous
United Kingdom 1.01 1.09
Italy 1.01 1.03
New Zealand 1.09 1.01
Revealed dis-preferred to
Japanese bundle
Australia 1.09 1.00
Sweden 1.06 1.00
Norway 1.15 0.91
Ireland 1.24 0.86
Israel 1.35 0.85
Switzerland 1.51 0.76

This comparison is based on 26 consumption categories. Two of the categories are government goods and services, those provided
collectively and those provided individually. The 26 categories include all final goods other than investment goods. The prices are
relative to world price and the quantities (volumes) are the corresponding amounts consistent with expenditure.
Source: Constructed by the author using data from: International Bank for Reconstruction and Development/The World Bank, Purchasing
Power Parities and the Size of World Economies, Results of the 2017 International Comparison Program, 2020.

continued and expanded this international com-
parison project to include 176 countries in 2017.4
Some of the data from the World Bank study is
depicted in Table 1.2.
In 2017, the representative Japanese could have
purchased the consumption bundle of the UK,
Italy, New Zealand, Australia, Sweden, Norway,
Ireland, Israel, or Switzerland, but not that of Ger-
many, France the USA, or Canada. (For instance,
the value of the US bundle at Japanese prices was
1.23 times that of the Japanese bundle.) But nei-
ther could the representative citizen of the UK,
Italy, or New Zealand have purchased the con-
sumption bundle of the Japanese. The represen-
tative citizen of Germany, France, the USA, or
Canada could have purchased the Japanese bun-
dle. (For instance, at US prices the value of the
Japanese bundle was 94% the value of the US
one.) From this we conclude that the represen-
tative citizens of the Germany, France, the USA,
and Canada each had a revealed preference for his
bundle over that of the Japanese. The representa-
tive Japanese citizen had a revealed preference for
their bundle over that of the representative citizen
from Australia, Sweden, Norway, Ireland, Israel, or
Switzerland. But the representative Japanese did
not reveal a preference for their bundle over that
of the Briton, Italian, or New Zealander; nor vice
versa.
It could have happened that this procedure
would have produced the startling conclusion that
the representative citizens of two countries each
had a revealed preference for their own chosen
Gross Product, Baltimore, Md.: Johns Hopkins University
Press, 1982; and UN and Commission of the European Com-
munities, World Comparison of Purchasing Power and Real
Product for 1980 (Phase IV of the International Comparison
Project), Part One: Summary Results for 60 Countries, 1986, and
Part Two: Detailed Results for 60 Countries, 1987.
4
International Bank for Reconstruction and Develop-
ment/The World Bank, Purchasing Power Parities and the Size of
World Economies, Results of the 2017 International Comparison
Program, 2020.

17
Incomes and Welfare of the Japanese Today
bundle over that of the other. This would indicate
a difference in tastes. In fact, international com-
parisons of this sort have found little evidence of
taste differences between any pairs of countries.
The index number problem
The ambiguous comparisons (in 2017) for Japan
and the UK, Japan and Italy, and Japan and New
Zealand reflect what is called the index number
problem. This is the problem or impossibility of
constructing a single statistic or index, based only
on the quantities and prices of the goods, that
will in all cases correctly rank consumption bun-
dles in order of preference. That the representative
Japanese cannot have purchased the British bun-
dle does not allow us to infer whether they prefer
the British bundle or their own.
Too much has been made of the fact that exactly
duplicating American standards of suburban living
in Japan is beyond the means of all but the very
wealthiest Japanese. For it may well be the case
that the reverse is also true: exactly duplicating the
Japanese bundle while in the USA may be beyond
the means of most Americans. In each country
some items are relatively scarcer than in the other
country. In Japan, compared with the USA and
other countries, consumption activities that use
land tend to be relatively scarce. On the other
hand, items of consumption that are relatively less
scarce (can be obtained at lower real marginal cost)
in Japan than elsewhere include public health and
safety, public order, and national defense.
Substitution
Scarcity of some goods relative to others can be off-
set in inventive ways. In Japan, land is scarce and
expensive, but the Japanese economize by living in
smaller dwellings than they would if land were less
scarce, and by keeping smaller stocks of food and
daily necessities but making more frequent shop-
ping trips. Further economies are achieved by con-
ducting social activities in shared spaces outside
the home, either at eating and drinking establish-
ments or the workplace. If it were not for these
substitutions, both in production—substitution of
shopping time for household storage space—and
in consumption—substitution of social activities
18
in shared spaces outside the home for social activ-
ities at home—the Japanese would feel the pinch
of land scarcity far more than they do.
Many cultural differences between the Japanese
way of daily life and that of Americans and oth-
ers are merely time-honored ways of adapting to
persistent scarcity of land and other goods, and
are not, as it might superficially appear, the re-
sult of fundamental differences in preferences.5 For
instance, many Japanese sleep on futons that are
folded and put away each morning, rather than
on beds that permanently occupy space. The fu-
tons allow the same space that is used for sleeping
at night to be used for other activities during the
day. The traditional diet, which derives protein
from soybeans, fish, or sea products, is a natu-
ral adaptation to the scarcity of red meat in a
mountainous island nation with little pastureland.
The beautiful but compact Japanese garden and
miniature bonsai afford a touch of nature but with-
out occupying much space. The ubiquitous coffee
shops and small bars and restaurants enable social
activities to use shared public spaces, further econ-
omizing on scarce land. All the cultural items just
mentioned, and perhaps others as well, are exam-
ples of substitution in response to relative scarcity.
For instance, Susan Hanley even goes so far as to
suggest that the ubiquity in Japan of multigen-
erational living arrangements and relatively small
family sizes are further adaptations to the scarcity
of space.6
Nonmarket goods
Comparison of the Japanese consumption bun-
dle with those of other countries based on na-
tional income and product accounts encompasses
only market goods, including those purchased
by governments. Many important contributors
to economic well-being are omitted in such a
5
For a formal statement of this view of culture, see Gary
Becker and George Stigler, “De Gustibus Est Non Disputan-
dum,” American Economic Review, vol. 67, no. 2 (March1977),
76–90.
6
Susan B. Hanley, “Traditional Housing and Unique
Lifestyles: The Unintended Outcomes of Japan’s Land Pol-
icy,” in John O. Haley and Kozo Yamamura (eds.), Land Issues
in Japan: A Policy Failure? Society for Japanese Studies, 1992,
195–222.
 Incomes and Welfare of the Japanese Today
comparison. These are nonmarket goods, goods Shadow prices of nonmarket goods
that are enjoyed but not bought and sold. Though
Nonmarket goods are traded only in an indirect
such goods are not traded directly, actions can re-
or roundabout fashion, so their prices too, can
sult in their diminution and augmentation and
only be observed indirectly. These “shadow prices”
the goods are in that sense objects of choice. The
equal the marginal values that optimizing individ-
most important nonmarket goods are household
uals place on the nonmarket goods.
production, leisure, and amenities.
Home production is gauged to economize on the
household resources. One decides to clean or shop
Household production
for oneself or one’s family on consideration of the
“Household production” refers to goods produced
price of paying someone else to do it. The principle
and consumed within the household. These in-
cost of home production is forgone leisure, which
clude preparation of meals at home, child-rearing,
is itself a nonmarket good.
care of aged parents at home, cleaning one’s own
Leisure itself may be had only at the sacrifice of
house, shopping, and so on. Notice that only
other goods. More leisure taken means less of other
goods consumed at home as well as produced
goods are produced. The shadow price of leisure is
there are nonmarket goods. Commuting to work is
the value of output lost when an increment of la-
among the productive activities of households but
bor is withheld either from home production or
it does not directly result in consumption. Com-
from outside employment7 —what economists call
muting to work is an intermediate good rather
the value of marginal product of labor. In the compet-
than a final one. The other examples of house-
itive economy, the wage rate also equals the value
hold production just mentioned are final goods,
of marginal product of labor. For this reason, the
but they are nonmarket goods. They are not traded
shadow price of leisure and of home production
directly and are not included in GNP in any way,
can be approximated by wage rates.
a significant omission.
Amenities would seem to entail no choice and
thus command no price in any meaningful sense.
Amenities
What is the price of a beautiful day? But in fact,
“Amenities” are present in the environment and
even beautiful days do have a price. Some ge-
are not the result of human artifice. These are sun-
ographic regions have more sunshine than oth-
shine, beautiful scenery, clean air, and the like.
ers. As the pursuit of sunshine congests those ar-
There is a growing awareness that human actions
eas, the price of land there is bid up, and wages
are eroding amenities. The process of urbaniza-
driven down. Migration will cease only when the
tion and industrialization converts natural areas
marginal individual finds all places to live and
into displeasing zones of pollution. Amenities are
their attendant employment opportunities equally
scarce goods. Their presence contributes to eco-
agreeable, given the land prices and wages. The
nomic well-being and their diminution erodes it.
places with more amenities will come to have
But they are nonmarket goods, neither produced
higher land prices and lower wages than those
nor traded directly and not counted as income in
lacking amenities. From these compensating dif-
the national income and product accounts. Envi-
ferentials in land prices and wages, one can infer
ronmental damage reduces economic well-being
but does not reduce the GDP.
7
Allocation of time across household production, leisure,
Leisure and market work is indeed affected by the marginal wage
rate. In the mid-1990s the Japanese government reduced the
“Leisure” is idleness from economic pursuits. threshold for number of hours worked beyond which pre-
Leisure is valued just as commodities and services mium over-time compensation would have to be paid. This
induced a reduction in working hours per week, which was
are. One may have more commodities and less largely accompanied by an increase in leisure by both men
leisure and consider oneself worse off than be- and women and an increase in time devoted to household
fore. The national income and product accounts production by men and a decrease by women. Jungmin Lee,
Daiji Kawaguchi, and Daniel S. Hamermesh, “Aggregate Im-
measure the economic value of commodities and pacts of a Gift of Time,” American Economic Review Papers &
services only, not leisure. Proceedings, 102 (3), 2012, 612–616.

19
Incomes and Welfare of the Japanese Today
the marginal values that individuals place on the
amenities. These represent the hypothetical prices
that people would be willing to pay if amenities
could be augmented so that there were fewer rainy
days or cleaner air. Using this method, Blomquist,
Berger, and Hoehn found that in the United States,
the 1980 shadow price of reducing average humid-
ity by 1% was $43 per year, of increasing sunshine
by 1% was $48 per year, of being on a coastline
was $468 a year, and so on.8 Akai and Ohtake ap-
plied a similar method to calculate shadow prices
revealed by the 1985 variation in house rents and
wages across Japanese cities with populations ex-
ceeding 100,000 persons. They found that varia-
tion in life expectancy at birth explained much
of the variation in house rents and wages. An in-
crease in life expectancy at birth of about 6 months
had a shadow price of ¥434,000 per month (at
the time, 1985, equivalent to around $2000 per
month).9 The Akai and Ohtake association of life
expectancy with environmental amenity comports
with the finding of Muller that ambient air pol-
lution has had a large effect on mortality across
the United States.10 As air quality has improved,
premature deaths in the US associated with am-
bient air pollution (mostly among the elderly)
have fallen from 435,000 in 1957 to 108,000 in
2016—a hugely valuable contribution to American
economic well-being not reflected in the national
accounts.
The shadow prices of environmental amenities,
once inferred, can be used to compute the dif-
ference in values of environmental amenities be-
tween cities. Blomquist et al. found a $5,146 per
year11 difference in amenity value between the
American city with the highest amenity value
(Pueblo, Colorado) and the one with the lowest
(St Louis, Missouri). Akai and Ohtake found even
wider variation in amenity values across Japanese
cities. At the top end, with the prefectures in which
the cities lie shown in parentheses, Yonago (Tot-
tori), Hirosaki (Aomori), Beppu (Oita), Morioka
(Iwate), Niigata, and Kagoshima had amenity val-
ues around ¥750,000 per month higher than the
cities at the low end, Ashikaga (Tottori), Toyota
(Aichi), Isesaki (Gunma), and Okazaki (Aichi).12
The cities at the top end of amenity value are out-
liers. Tokyo ranked twenty-fifth among the 189
cities (in other words in the top eighth) with an
20
amenity value of around ¥75,000 per month more
than the cities with the lowest amenity values.
Comparing the value of nonmarket goods in Japan
and the United States
Much of what has been written about the qual-
ity of life in Japan compared with other countries
amounts to an enumeration of nonmarket goods
in Japan and elsewhere.13 Such lists are informa-
tive but difficult to incorporate into systematic
evaluations of overall economic well-being. For
this it is necessary to construct shadow prices of
the nonmarket goods. There were two early at-
tempts to estimate the contribution of nonmarket
goods to economic well-being in the USA based on
shadow prices: one by Nordhaus and Tobin,14 and
the other by Eisner.15
Nordhaus and Tobin proposed adjustments to
the national income and product accounts to re-
flect the economic value of nonmarket goods.
These adjustments include an imputation of the
value of household services, the value of leisure,
the opportunity costs of educating students, and
changes in the value of environmental amenities
(which they inferred as the difference in wage
8
Glenn C. Blomquist, Mark C. Berger, and John Hoehn,
“New Estimates of Quality of Life in Urban Areas,” American
Economic Review, vol. 88 (March 1988), 89–107.
9
Akai Nobuo and Ohtake Fumio, “Chiikikan kankyō
kakusa no jisshō bunseki (Empirical analysis on regional dis-
parities of environment),” Nihon Keizai Kenkyū (Economic
Journal of Japanese Center of Economic Research), Vol. 30,
1995, 94–137.
10
Nicholas Z. Muller, “Long-Run Environmental Account-
ing in the US Economy,” NBER Chapters, in: Environmental
and Energy Policy and the Economy, volume 1, 2019, 158–191,
National Bureau of Economic Research, Inc.
11
The $5,146 per year amounted to 31% of 1980 GNP per
person = $16,700.
12
The ¥750,000 per month corresponds to about 3.9 times
the 1985 GNP per person (= ¥2.303-million).
13
See e.g. Naomi Maruo, “The Levels of Living and Welfare
in Japan Reexamined,” Japanese Economic Studies, vol. 8, no.
1 (Fall 1979), 42–93.
14
William D. Nordhaus and James Tobin, “Is Growth Ob-
solete?” in NBER Fiftieth Anniversary Colloquia Series, Eco-
nomic Research: Retrospect and Prospect, v, Economic Growth,
New York: ColumbiaUniversity Press, 1972.
15
Robert Eisner, “The Total Income System of Accounts,”
Survey of Current Business, vol. 65, no. 1 (January 1985),
24–35. For a critique of Eisner’s analysis, see Richard Rug-
gles, “Review of The Total Incomes System of Accounts by
Robert Eisner,” Review of Income and Wealth, series 37, no. 4
(December 1991).
 Incomes and Welfare of the Japanese Today

Table 1.3. Estimated value of nonmarket goods as a percentage of GNP, Japan, and the USA

USA Japan
Nordhaus and Tobin 1965 Eisner 1981 Kanamori–Muto 1980 Economic Planning Agency 1996

Household production
Household chores 48% 33% 11% 15.20%
Student time 10%
Leisure 101% 28%
Amenities −6% −5%

Sources: William D. Nordhaus and James Tobin, “Is Growth Obsolete?” in NBER Fiftieth Anniversary Colloquia Series, Economic
Research: Retrospect and Prospect, v, Economic Growth, Columbia University Press, 1972; Robert Eisner, “The Total Income System of
Accounts,” Survey of Current Business, vol. 65, no. 1 (January 1985), pp. 24–35; Hisao Kanamori, “Japanese Economic Growth and and
Economic Welfare,” in Sheigeto Tsuru, (ed.), Growth and Resources Problems Related to Japan, New York: St Martin’s Press, 1980
(updated to 1980 by Hiromichi Muto et al., “Nihon no keizai seicho to fukushi,” in Futo et al., Sofutoka to GNP tokei: sofutonomikusu
shirizu, vol. 2, Tokyo: Okurasho,1985); Economic Planning Agency, ‘Monetary Valuation of Economic Welfare,’ in Shigeto Tsuru, (ed.),
Growth and Resources Problems Related to Japan, New York: St Martin’s Press, 1980 (updated to 1980 by Hiromichi Muto et al., ‘Nihon
no keizai seichō to fukushi,’ in Futo et al., Sofutoka to GNP tokei: sofutonomikusu shirizu, vol. 2, Tokyo: Okurasho, Unpaid Work in
1996,” May 21, 1998. English version here: http://www5.cao.go.jp/98/g/19981105g-unpaid-e.html.

rates between urban and rural places). Their adjust-
ment for annual degradation of the environment
amounted to 6% of the GNP in 1965. They also
proposed elimination of the US defense budget
from the national product on the grounds that
it represents procurement of intermediate goods
only.
Eisner proposed a different set of adjustments
from those of Nordhaus and Tobin but in the same
general spirit. Eisner made no adjustment for the
eroding value of amenities. He did impute an op-
portunity cost to student education and household
work. Eisner treated the defense budget as only
partly intermediate.
Similar adjustments for Japan to the Nordhaus–
Tobin and Eisner ones for the USA, constructed by
Kanamori and Muto, yielded quantitatively simi-
lar additions to the estimated national income as
shown in Table 1.3. Some differences may never-
theless be worth noting. First, the Japanese have
apparently enjoyed fewer leisure hours. Leisure is
a normal good. As people become wealthier, they
demand more of it. Over the decades, the average
work week has gradually shrunk in all the devel-
oped economies, more in the USA than elsewhere.
In Japan, until recently, the typical work week still
included Saturday morning. Data on the allocation
of time across countries is reported in Table 1.4. It is
apparent from the figures in the table that Japanese
men and women both enjoy about one hour less
of leisure each week than do American men and
women.
Second, household production may in some
ways be more significant in Japan. A relatively large
fraction of Japanese women who participate in the
labor force are employed in small family businesses
that are often complementary with home produc-
tion. A further indication of significant home pro-
duction is the larger percentage of the aged cared
for at home by their grown children. In Japan, as
in the USA, payments to retirement homes add to
the national income as reported in the national
income and product accounts, but care for the
aged at home is a nonmarket good and is not re-
flected. This omission is more serious for Japan
than for the USA or other countries. Despite this,
the estimate of value of household production in
Japan produced by Kanamori and Muto is less than
that for the USA produced by Nordhaus and Tobin
and by Eisner. One reason is that Muto adopted
a much less expansive definition of household
production. Muto considered only full-time house-
wives as performing any household production,
whereas Eisner and Nordhaus and Tobin counted
all time devoted to household production activ-
ities by all persons in the economy, including
those who are employed, or are unmarried, and
of all ages and both sexes. The EPA estimates in-
cluded household production by men in Japan.
Notice in Table 1.4 the dramatic imbalance of

21
Incomes and Welfare of the Japanese Today

Table 1.4 Hours per week devoted to various activities by men and women in Japan and other countries, 1999–2006

(Units=hours per week)

Japan U.S.A. Canada Germany France U.K.

Male Work and Studies 49.1 47.4 46.6 36.1 40.8 41.6
Job and travel as part of 35.5 30.2 30.9 17.6 22.1 22.8
or during job
Studies 4.0 1.9 2.1 2.4 2.2 2.5
Commuting to and 2.5 n.a. −1.7 1.5 1.4 1.8
from work or studies
Housework and family 7.2 15.3 15.3 14.7 15.1 14.6
member care
Leisure 118.9 120.6 121.4 131.9 127.2 126.4
Sleep 56.2 58.4 56.8 57.6 59.9 58.3
Meals and other 17.5 10.8 16.1 16.1 21.0 14.4
personal care
Volunteer activities 0.3 1.3 1.3 1.1 1.1 0.6
Watching TV 15.7 17.4 14.8 14.1 14.8 16.8
Travel (not commuting 6.0 n.a. n.a. 7.4 5.6 7.1
and not job-related)
Other 8.8 6.4 10.1 8.7 8.6 9.0
Total 168.0 168.0 168.0 168.0 168.0 168.0

Female Work and Studies 49.7 48.1 47.0 36.9 42.7 38.6
Job and travel as part of 16.7 21.1 21.4 9.4 10.9 10.9
or during job
Studies 3.4 2.2 2.5 2.2 2.1 2.5
Commuting to and 1.1 n.a. −1.3 0.8 0.9 1.0
from work or studies
Housework and family 28.6 24.8 24.4 24.5 28.8 24.3
member care
Leisure 118.3 119.9 121.0 131.1 125.3 129.4
Sleep 52.8 58.9 57.7 58.1 63.7 58.8
Meals and other 21.5 14.5 16.9 16.9 21.1 15.3
personal care
Volunteer activities 0.3 1.5 1.7 1.0 0.8 0.8
Watching TV 15.3 15.5 10.8 10.2 14.1 15.2
Travel (not commuting 6.3 n.a. n.a. 7.4 2.7 7.5
and not job-related)
Other 6.1 9.2 7.3 8.8 8.6 12.0
Total 168.0 168.0 168.0 168.0 168.0 168.0
Survey Date 2006.10 2006.1 2005.1 2001.4 1998.2 2000.6
~2006.12 ~2005.12 ~2002.4 ~1999.2 ~2001.9
Age of tabulated 10 years 15 years 15 years 10 years 15 years 10 years old
old and old and old and old and old and and over
over over over over over

Source. Govt of Japan, Statistics Bureau, 2006 Survey on Time Use and Leisure Activities, Summary of Results, Questionnaire B, Table 1,
p. 24. http://www.stat.go.jp/english/data/shakai/2006/k-gaiyou.htm
(Primary sources: Japan:“2006 Survey on Time Use and Leisure Activities Volume 8“; Korea: Korea National Statistical Office, “2004
Report on the Time Use Survey“; U.S.A.: U.S. Bureau of Labor Statistics (BLS), “News-American Time Use Survey-2006 Results”; Canada:
Statistics Canada,” Overview of the Time Use of Canadians 2005”; EU: EUROSTAT,” Comparable time use statistics-National tables from
10 European countries-February 2005.”)

22
Another random document with
no related content on Scribd:
smoke candle, certain of the smoke grenades and in various forms
of colored smokes. The basis of this was the Berger Mixture, which
had the composition:
Zinc 25
Carbon tetrachloride 50
Zinc oxide 20
Kieselguhr 5
This formula produced a light gray carbon smoke, with much
carbon in the residue. In this mixture the zinc and carbon
tetrachloride react to form zinc chloride and carbon; the kieselguhr
keeps the mixture solid by absorbing the tetrachloride, while the zinc
oxide is practically useless, as its absorbing power is small.
In order to accelerate the reaction and to oxidize the carbon,
thereby changing the color of the smoke from gray to white, an
oxidizing agent was added. Sodium chlorate was chosen for
economic reasons. The reaction now proved to be too violent, and
the zinc oxide was replaced by ammonium chloride. This cooled the
smoke, retarded the rate of burning and added to the density of the
smoke, since the obscuring power of the ammonium chloride is high.
The kieselguhr was replaced by precipitated magnesium carbonate,
which is as good an absorbent, gives a much smoother burning
mixture, and also adds somewhat to the density of the smoke by
virtue of the magnesium mechanically expelled. The mixture then
had the composition:
Zinc 34.6
Carbon tetrachloride 40.8
Sodium chlorate 9.3
Ammonium chloride 7.0
Magnesium carbonate 8.3

Size of Smoke Particles

 In the problem of smoke production, the size of the particle is of
great importance. Being a physical quantity it can easily be
correlated with such physical properties as settling, diffusion,
coagulation, and evaporation. These factors are more important in
connection with toxic smokes, since there the penetration factor
must be considered.
Smoke appears to consist of particles of all sizes from 10⁻³ cm.,
which may just be resolved by the unaided eye, to molecular
dimensions, 10⁻⁸ cm. The larger particles settle out most rapidly and
so do not remain long in suspension.

Measurement
Wells and Gerke have developed a form of ultra-microscope
which is well adapted to the measurement of the size of smoke
particles. The ultra-microscope is a low power microscope using
intense dark ground illumination for viewing particles which are too
small to be seen by transmitted light. They are rendered visible in
this way, since any object, no matter how small, which emits enough
light to affect the retina is visible, provided the background is
sufficiently dark. Thus stars are visible at night and dust particles are
easily seen in a sunbeam in a darkened room. The larger particles,
viewed in this way, do not appear larger but brighter. The apparent
size of the particles is determined by the diffraction pattern and is
thus dependent only on the optical system used to view them. The
more intense the incident light, the brighter the particles appear. In
the ultra-microscope described, the image of an intense source,
such as a concentrated filament lamp, or an arc, is focused upon the
particles in the microscopic field, but the axis of the illuminating
beam, instead of coinciding with the axis of the microscope, as
ordinarily used, is perpendicular to it. The beam itself, therefore,
never enters the microscope at all, but passes under the objective
into a blackened chamber where it is absorbed. The field of the
microscope is made dark by placing underneath the objective
another “black hole” or blackened chamber with an opening just a
little larger than the field.[34]
The method used for measuring the velocity consisted in causing
the particle to describe a definite stroke many times in succession in
an electric field. This was accomplished by reversing the direction of
the field with a rotating commutator. The convection due to the
source of light is perpendicular to this motion so that a zigzag line is
obtained (see Fig. 88). The amplitude of this oscillation is an
accurate measure of the distance traversed by the particle under the
electric force for a definite small interval of time. The speed of the
rotating commutator and the electric field are both susceptible of
precise measurement, so that the size of a single particle is precisely
determined.

Fig. 87.—Ultramicroscope for Measuring Size of

Smoke Particles.
 Fig. 88.—Measurement of Smoke Particles by Use
of Ultramicroscope.

When a sample of smoke is viewed in the ultra-microscope, it

appears like the starry heavens, except that the stars are dancing
violently about. At first little distinction is made between the particles,
as there seems to be no order in their motion, but soon it becomes
evident that the brighter particles are more sluggish than the dim
ones. This is due to the greater mass of the bright particles, for they
are larger. The particles are all moving slowly away from the source
of light and eventually diffuse to the walls of the cell.
When the electric field is turned on, about one-third of the
particles immediately migrate, about equally in both directions, to the
two electrodes. If the field is reversed, the direction of migration is
reversed and if the commutator is used the particles oscillate
regularly. Sometimes the particles may be seen to combine and
become neutral, in which case oscillation ceases.

Concentration of Smoke
In measuring the concentration of smokes, the following terms
are useful:
Density. The density of a smoke is defined as the reciprocal of
the thickness of the smoke layer in feet necessary to obscure a
given filament. Thus six inches of a smoke of density 2.0 is required
to obscure an electric light filament, whereas one requiring four feet
would have a density of 4. Another way to show the significance of
this definition is to point out that if a definite weight of a stable smoke
is diluted with air after it is formed, the product of the volume by the
density always remains constant. Any marked variation in this rule
may be taken as evidence that the particles of smoke are
undergoing a change, in most cases due to evaporation.
Total Obscuring Power. The volume of smoke produced per unit
weight of material used is the second factor in determining the value
of a smoke. The product of this volume per unit weight by the density
of the smoke is the real measure of effectiveness, and is called the
total obscuring power (T. O. P.) of the smoke. If the volume is
expressed in cubic feet per pound and the density in reciprocal feet,
the unit of T. O. P. is square feet per pound. That is, it expresses the
square feet of a smoke wall, thick enough to completely obscure a
light filament behind it, which could be produced from a pound of the
reacting substances. The total obscuring power of some typical
smokes are as follows:
Phosphorus 4600
NH₄Cl(NH₃ + HCl) 2500
SnCl₄ + NH₃ + H₂O 1590
Berger Mixture 1250
SnCl₄ + NH₃ 900
 SO₂ + NH₃ 375
In all measurements of density, and therefore of T. O. P., the rate
of burning must be considered. If a slow burning material be
compared with a rapid one, the former will not reach its true
maximum density, as a great deal of the smoke may settle out during
the time of burning. Comparisons of T. O. P. are significant only
when made on smoke mixtures of the same type and in about the
same quantities.

Measurement
Two methods of measuring the effectiveness of a smoke cloud
have been devised, one, the smoke box, which measures the
obscuring power directly by observing at what distance a lamp
filament is obscured by intervening smoke, the other, the Tyndall
meter, which measures the intensity of the scattering of the light.
The earliest measurements of smoke intensity are perhaps those
of Ringelmann (Revue Technique, 19, 286), who devised the well
known chart of that name, intended mainly for measuring intensities
of black smoke issuing from a chimney at a distance. The first
measurements for military purposes are probably due to Bertrand,
who made numerous comparative studies with his “salle
opacimetrique.” This was a room 23 × 14 × 3.6 meters, with 7
windows. Two doors, one provided with 3 oculars 2 cm. in diameter,
gave access to the room. On the other door, opposite the first, were
hung several black signs. Six pairs of columns were spaced along
the room at measured distances. When a smoke is produced in the
room, the black paper signs first become invisible, then the door
itself, and finally the columns, pair by pair. They reappear in the
reverse order, and as a measure of relative opacity Bertrand took the
time elapsing between the detonation and the reappearance of the
farther door.
Fig. 89.—Tyndall Meter.
 Fig. 90.—Cottrell Precipitation Tube.

Smoke Box. The smoke box, used by the C. W. S., was

constructed of wood with tight joints, and had a moveable brass rod
running through it to which was attached a small size 25-Watt Mazda
lamp. The density of each smoke introduced in the box is determined
by moving this lamp back and forth until a point is reached when the
pattern of the filament can just be distinguished by the observer
looking in at the glass window, external light being excluded by a
black cloth. The thickness of the smoke layer between the glass
window and the light is recorded as the measure of the smoke
density. For field tests, a larger box, 6 × 8 × 8 feet (288 cubic feet)
was constructed. The observation light was moveable in a line
connecting the mid-points of opposite sides of the box. To insure
uniform distribution of smoke, a fan with 18-inch blade revolved at
any desired speed between 60 and 250 r.p.m. With this, results are
obtained indicating both the original density and its stability.
Tyndall Meter. The Tyndall meter was first devised for studying
smokes and mists. Tolman and Vliet adapted it to Chemical Warfare
purposes, and used it in studying the properties of smokes.
The apparatus (Fig. 89) consists eventually of an electric light
bulb, a condensing lens giving a beam of parallel light which passes
through the diaphragm, and a Macbeth illuminometer for measuring
the strength of the Tyndall beam. In case the material is a liquid
suspension or solution, it is introduced into a cylindrical glass tube,
while smokes and mists are premixed directly through the apparatus.
The long closed tubes are provided, respectively, for absorbing the
beam after it has passed through the disperse system and for giving
a dark background for observing the Tyndall beam. Methods of
standardization are given in the Journal of the American Chemical
Society, 41, 299.
A third method for analyzing smokes consists in the use of an
electrical precipitator. This apparatus consists essentially of a
modified Cottrell Precipitator, with a central wire as cathode
surrounded by a cylindrical foil as anode (Fig. 90). The smoke to be
analyzed is drawn through the apparatus at a known rate, and the
particles of smoke precipitated on the foil by means of a high
voltage, direct current. The determination of concentration is made
by weighing the foil before and after precipitation.

Apparatus for Smoke Production

Smoke Box

The smoke box was developed for the Navy for use when it was
desirable to have the smoke screen generated away from the ship.
(The smoke funnel, described later, was operated on board ship).
The float consists of an iron container (holding the smoke mixture)
surrounded by an iron float to support the apparatus when it is
thrown into the water (Fig. 91). The iron container consists of a
cylinder 22 inches high and 10 inches in diameter. One inch holes
are bored 1½ inches from the top of this cylinder, from which the
smoke is emitted. The iron float is about 2 feet in diameter and 8
inches deep. This box holds approximately 100 pounds of smoke
mixture, and is so constructed that it will float one hour. When
ignited, the mixture burns 9 to 9½ minutes. The smoke produced has
a T. O. P. of about 1900. Fig. 92 shows the Navy Smoke Box in
action.
Fig. 91.—Navy Smoke Box.
 Fig. 92.—Navy Smoke Box in Action.

Smoke Candle

Smoke candles are used for producing a cloud of smoke for

screening purposes in or behind the lines. They are made by
packing about three pounds of the modified Berger Mixture in a
container (Fig. 93) (galvanized can 5¼ inches by 3½ inches) and are
lighted by means of the match head type of ignition. Smoke is given
off at a uniform rate for about 4 minutes, forming a dense, fog-like
cloud which hangs low (Fig. 94). This smoke is absolutely harmless,
and can be breathed without discomfort. The obscuring power is
high and, with a favorable wind, a small number of the candles will
produce a screen sufficiently dense to allow operations to be carried
out unseen by the enemy.
 Fig. 93.—B. M. Smoke Candle.

Smoke Grenade

The smoke grenade is also designed for use in trench and field
warfare, where it is desired to produce a dense smoke screen. It is
made by packing 340 grams of the standard smoke mixture in an
ordinary light metal gas grenade. Around the top of the grenade are
vents closed by a zinc strip. The ignition is caused by the standard
bouchon when the grenade is thrown. The heat of the reaction burns
through the zinc strip and a dense cloud of smoke is evolved for 45
seconds.
 Fig. 94.—Smoke Cloud from B. M. Candle.

Stannic chloride has also been used extensively in hand

grenades, as it gives a very disagreeable cloud of smoke upon
detonation. Due to the high prices and urgent need of tin for other
purposes, silicon tetrachloride was substituted for tin tetrachloride
towards the close of the war. A mixture of silicon tetrachloride and
chloropicrin was also used. This not only gives a very good smoke
cloud, but combines with it the toxic properties of the chloropicrin
cloud.
The method of firing the smoke grenade is the same as that of
any grenade using the same type of bouchon. Usually the grenade is
grasped in the hand for throwing in such a manner that the handle of
the bouchon is under the fingers. The safety clip is pulled out with
the other hand and the grenade is thrown with an overhand motion.
When the grenade leaves the hand, the handle of the bouchon flies
off, allowing the trigger to hit the cap which ignites the fuse.
 The white phosphorus combined hand and rifle grenade became
the standard smoke grenade by the end of the war. Stannic chloride
was used to clear out dugouts, but not as a smoke producer.

Stokes’ Smoke Shell

Fig. 95.—Stokes’ Smoke Shell.

The Stokes’ smoke shell was perfected to furnish a means of

maintaining the best possible smoke screen at long ranges by
means of an easily portable gun. The 3-inch Stokes shell, as
adapted for combustion smokes, weighs about 13 pounds and
contains about 4 pounds of standard smoke mixture. This shell is
designed to produce a continuous screen over a period of 3 to 4
minutes.

Livens Smoke Drum

 The Livens smoke drum was designed for use with the 8-inch
Livens projector, so as to produce a smoke screen of large volume
and long duration at long ranges. The drum, as adapted for
combustion smokes, weighs 17.5 pounds empty and 49 pounds
loaded. The smoke-gas mixture was specially adapted for use in the
Livens drum.

Fig. 96.—Livens Smoke Bomb.

Smoke mixtures in Livens were never used to any considerable

extent in the war and it is questionable if they ever will be. A Livens
can usually only be fired once before resetting, hence Stokes
mortars are used whenever possible.
 Smoke Funnel

The smoke funnel was developed for the production of a white

smoke cloud from the stern of a vessel. The smoke producing
materials are liquid ammonia and silicon tetrachloride, with carbon
dioxide as a compressing medium. This is the most satisfactory
compressing medium, because: (1) The silicon tetrachloride is forced
out at nearly constant pressure. (2) The carbon dioxide is easily
compressed to a liquid and can be handled in this form. Further, it
has a vapor pressure of 800 pounds at 60° F., and a cylinder can be
nearly emptied without loss in efficiency. (3) Carbon dioxide is
sufficiently soluble in silicon tetrachloride to cause the latter to
effervesce and thus materially aid in its evaporation on spraying. (4)
Liquid carbon dioxide, behaving in a manner similar to liquid
ammonia, affords a means for the silicon tetrachloride to “keep pace”
with the ammonia, under changes in temperature, and thus ensures
a more nearly neutral, and therefore the most effective, smoke.

Fig. 97.—Navy Smoke Funnel.

 The smoke funnel proper consists of an open end cylinder, about
2 feet in diameter and 7 feet long, mounted in a horizontal position
on an angle iron frame. At one end is an 18-inch fan securely
fastened to the cross supports. This fan is operated by hand, through
gears giving a ratio of about 30 to 1. The silicon tetrachloride enters
the cylinder through a pipe, which terminates in four spray nozzles,
while the ammonia enters through a single nozzle. The air forced
into the funnel serves to hydrolyze the silicon tetrachloride and mixes
the vapors. The resulting reaction evolves a dense white cloud of
very large volume and high obscuring power. One set of cylinders is
capable of maintaining this cloud for over 30 minutes. Under normal
conditions the discharge is at the rate of 2 pounds of silicon
tetrachloride to 1 pound of ammonia. To stop the smoke, the silicon
tetrachloride is closed first, the ammonia allowed to run about half a
minute, and the fan is shut off last.

Fig. 98.—Navy Smoke Funnel in Operation.

Smoke Knapsack
 The smoke knapsack furnishes a portable apparatus for smoke
production. The gross weight is about 70 pounds; when in operation
it gives a dense white smoke for about 15 minutes. The operation
may be intermittent or continuous and the quantity of smoke is
sufficient to completely hide one platoon of men in skirmish
formation with a 5-mile per hour enfilade wind. The apparatus
consists of two steel tanks about 26 inches in height and 6 inches in
diameter. From the side of each tank, but near the bottom, extends a
short pipe on which is placed a suitable valve. A flexible armored
hose connects the valve to a short length of pipe which is equipped
with spray nozzle. The cylinders are charged with silicon
tetrachloride and ammonia under pressure. The valves may be
operated with the left hand, while the sprayer apparatus is held in the
right. The release buckles are within easy reach of both hands.

Shell

While many special devices have been developed by means of

which the gas troops and infantry are able to set up smoke clouds on
short notice, the smoke shell, fired by the artillery, always played an
important part in this work. In the same way that a large number of
the poison gases were adapted to artillery use, so were most of the
smoke producing substances.
As a filler for smoke shell, phosphorus easily ranks first, and is
approached only by sulfur trioxide in very humid weather. A rough
approximation to the relative values of some of its rivals is given in
the following table:
White phosphorus 100
Sulfur trioxide 60-75
Stannic chloride 40
Titanium chloride 25-35
Arsenic chloride 10
Comparison of the value of different forms of phosphorus for shell
purposes has invariably pointed to the superiority of the white
variety. Mixtures of white and red (2 to 1) have also proved effective.
A complete barrage over a front of 200 yards can be established
in from 40 seconds to 1 minute and maintained by firing a salvo
followed by battery fire of 3 seconds. Four 4.5-inch howitzers could
maintain an effective barrage over a front of 1000 yards. The
influence of sunshine is very marked, as in moist, cool weather one
shell every 15 seconds is sufficient.

Fig. 99.—Smoke Screen for Tanks.

Screening Tanks
Tests have demonstrated (see Fig. 99) that successful smoke
screens for tanks may be produced by spraying oleum into the
exhaust. On a 7-ton tank of the Renault type (40 H. P.) 110 cc. per
minute produced a large volume of smoke, which had excellent
covering power, and which could be made intermittent or continuous
at will.