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Japan Table of Contents



Revolutionary Change

Since the mid-nineteenth century, when the Tokugawa government first opened the country to Western commerce and influence, Japan has gone through two periods of economic development (see Decline of the Tokugawa; The Emergence of Modern Japan, 1868-1919; World War II and the Occupation, 1941-52 , ch. 1). The first began in earnest in 1868 and extended through World War II; the second began in 1945 and continued into mid-1990s. In both periods, the Japanese opened themselves to Western ideas and influence; experienced revolutionary social, political, and economic changes; and became a world power with carefully developed spheres of influence. During both periods, the Japanese government encouraged economic change by fostering a national revolution from above and by planning and advising in every aspect of society. The national goal each time was to make Japan so powerful and wealthy that its independence would never again be threatened.

In the Meiji period (1868-1912), leaders inaugurated a new Western-based education system for all young people, sent thousands of students to the United States and Europe, and hired more than 3,000 Westerners to teach modern science, mathematics, technology, and foreign languages in Japan (see Historical Background , ch. 3). The government also built railroads, improved roads, and inaugurated a land reform program to prepare the country for further development.

To promote industrialization, the government decided that, while it should help private business to allocate resources and to plan, the private sector was best equipped to stimulate economic growth. The greatest role of government was to help provide the economic conditions in which business could flourish. In short, government was to be the guide and business the producer. In the early Meiji period, the government built factories and shipyards that were sold to entrepreneurs at a fraction of their value. Many of these businesses grew rapidly into the larger conglomerates that still dominates much of the business world. Government emerged as chief promoter of private enterprise, enacting a series of probusiness policies, including low corporate taxes.

Before World War II, Japan built an extensive empire that included Taiwan, Korea, Manchuria, and parts of northern China (see Diplomacy , ch. 1). The Japanese regarded this sphere of influence as a political and economic necessity, preventing foreign states from strangling Japan by blocking its access to raw materials and crucial sea-lanes. Japan's large military force was regarded as essential to the empire's defense. Japan's colonies were lost as a result of World War II, but since then the Japanese have extended their economic influence throughout Asia and beyond. Japan's Constitution, promulgated in 1947, forbids an offensive military force, but Japan still maintained its formidable Self-Defense Forces and ranked third in the world in military spending behind the United States and the Soviet Union in the late 1980s (see The Postwar Constitution , ch. 6; Defense Spending , ch. 8).

Rapid growth and structural change characterized Japan's two periods of economic development since 1868. In the first period, the economy grew only moderately at first and relied heavily on traditional agriculture to finance modern industrial infrastructure. By the time the Russo-Japanese War (1904-5) began, 65 percent of employment and 38 percent of the gross domestic product (GDP--see Glossary) was still based on agriculture, but modern industry had begun to expand substantially. By the late 1920s, manufacturing and mining contributed 23 percent of GDP, compared with 21 percent for all of agriculture. Transportation and communications had developed to sustain heavy industrial development.

In the 1930s, the Japanese economy suffered less from the Great Depression than most of the other industrialized nations, expanding at the rapid rate of 5 percent of GDP per year. Manufacturing and mining came to account for more than 30 percent of GDP, more than twice the value for the agricultural sector. Most industrial growth, however, was geared toward expanding the nation's military power.

World War II wiped out many of the gains Japan had made since 1868. About 40 percent of the nation's industrial plants and infrastructure were destroyed, and production reverted to levels of about fifteen years earlier. The people were shocked by the devastation and swung into action. New factories were equipped with the best modern machines, giving Japan an initial competitive advantage over the victor states, who now had older factories. As Japan's second period of economic development began, millions of former soldiers joined a well-disciplined and highly educated work force to rebuild Japan.

Japan's highly acclaimed postwar education system contributed strongly to the modernizing process. The world's highest literacy rate and high education standards were major reasons for Japan's success in achieving a technologically advanced economy. Japanese schools also encouraged discipline, another benefit in forming an effective work force.

The early postwar years were devoted to rebuilding lost industrial capacity: major investments were made in electric power, coal, iron and steel, and chemical fertilizers. By the mid-1950s, production matched prewar levels. Released from the demands of military-dominated government, the economy not only recovered its lost momentum but also surpassed the growth rates of earlier periods. Between 1953 and 1965, GDP expanded by more than 9 percent per year, manufacturing and mining by 13 percent, construction by 11 percent, and infrastructure by 12 percent. In 1965 these sectors employed more than 41 percent of the labor force, whereas only 26 percent remained in agriculture.

The mid-1960s ushered in a new type of industrial development as the economy opened itself to international competition in some industries and developed heavy and chemical manufactures. Whereas textiles and light manufactures maintained their profitability internationally, other products, such as automobiles, ships, and machine tools, assumed new importance. The value added to manufacturing and mining grew at the rate of 17 percent per year between 1965 and 1970. Growth rates moderated to about 8 percent and evened out between the industrial and service sectors between 1970 and 1973, as retail trade, finance, real estate, information, and other service industries streamlined their operations.

Japan faced a severe economic challenge in the mid-1970s. The world oil crisis in 1973 shocked an economy that had become virtually dependent on foreign petroleum (see The Value of the Yen , ch. 5). Japan experienced its first postwar decline in industrial production, together with severe price inflation. The recovery that followed the first oil crisis revived the optimism of most business leaders, but the maintenance of industrial growth in the face of high energy costs required shifts in the industrial structure.

Changing price conditions favored conservation and alternative sources of industrial energy. Although the investment costs were high, many energy-intensive industries successfully reduced their dependence on oil during the late 1970s and 1980s and enhanced their productivity. Advances in microcircuitry and semiconductors in the late 1970s and 1980s also led to new growth industries in consumer electronics and computers and to higher productivity in already established industries. The net result of these adjustments was to increase the energy efficiency of manufacturing and to expand so-called knowledge-intensive industry. The service industries expanded in an increasingly postindustrial economy.

Structural economic changes, however, were unable to check the slowing of economic growth as the economy matured in the late 1970s and 1980s, attaining annual growth rates no better than 4 to 6 percent. But these rates were remarkable in a world of expensive petroleum and in a nation of few domestic resources. Japan's average growth rate of 5 percent in the late 1980s, for example, was far higher than the 3.8 percent growth rate of the United States.

Despite more petroleum price increases in 1979, the strength of the Japanese economy was apparent. It expanded without the double- digit inflation that afflicted other industrial nations and that had bothered Japan itself after the first oil crisis in 1973. Japan experienced slower growth in the mid-1980s, but its demand- sustained economic boom of the late 1980s revived many troubled industries.

Complex economic and institutional factors affected Japan's postwar growth. First, the nation's prewar experience provided several important legacies. The Tokugawa period (1600-1867) bequeathed a vital commercial sector in burgeoning urban centers, a relatively well-educated elite (although one with limited knowledge of European science), a sophisticated government bureaucracy, productive agriculture, a closely unified nation with highly developed financial and marketing systems, and a national infrastructure of roads. The buildup of industry during the Meiji period to the point where Japan could vie for world power was an important prelude to postwar growth and provided a pool of experienced labor following World War II.

Second, and more important, was the level and quality of investment that persisted through the 1980s. Investment in capital equipment, which averaged more than 11 percent of GNP during the prewar period, rose to some 20 percent of GNP during the 1950s and to more than 30 percent in the late 1960s and 1970s. During the economic boom of the late 1980s, the rate still kept to around 20 percent. Japanese businesses imported the latest technologies to develop the industrial base. As a latecomer to modernization, Japan was able to avoid some of the trial and error earlier needed by other nations to develop industrial processes. In the 1970s and 1980s, Japan improved its industrial base through technology licensing, patent purchases, and imitation and improvement of foreign inventions. In the 1980s, industry stepped up its research and development, and many firms became famous for their innovations and creativity.

Japan's labor force contributed significantly to economic growth, not only because of its availability and literacy but also because of its reasonable wage demands. Before and immediately after World War II, the transfer of numerous agricultural workers to modern industry resulted in rising productivity and only moderate wage increases. As population growth slowed and the nation became increasingly industrialized in the mid-1960s, wages rose significantly. But labor union cooperation generally kept salary increases within the range of gains in productivity (see table 9, Appendix).

High productivity growth played a key role in postwar economic growth. The highly skilled and educated labor force, extraordinary savings rates and accompanying levels of investment, and the low growth of Japan's labor force were major factors in the high rate of productivity growth.

The nation has also benefited from economies of scale. Although medium-sized and small enterprises generated much of the nation's employment, large facilities were the most productive. Many industrial enterprises consolidated to form larger, more efficient units. Before World War II, large holding companies formed wealth groups, or zaibatsu (see Glossary), which dominated most industry. The zaibatsu were dissolved after the war, but keiretsu--large, modern industrial enterprise groupings-- emerged. The coordination of activities within these groupings and the integration of smaller subcontractors into the groups enhanced industrial efficiency.

Japanese corporations developed strategies that contributed to their immense growth. Growth-oriented corporations that took chances competed successfully. Product diversification became an essential ingredient of the growth patterns of many keiretsu. Japanese companies added plant and human capacity ahead of demand. Seeking market share rather than quick profit was another powerful strategy.

Finally, circumstances beyond Japan's direct control contributed to its success. International conflicts tended to stimulate the Japanese economy until the devastation at the end of World War II. The Russo-Japanese War (1904-5), World War I (1914- 18), the Korean War (1950-53), and the Second Indochina War (1954- 75) brought economic booms to Japan. In addition, benign treatment from the United States after World War II facilitated the nation's reconstruction and growth.

The United States occupation of Japan (1945-52) resulted in the rebuilding of the nation and the creation of a democratic state. United States assistance totaled about US$1.9 billion during the occupation, or about 15 percent of the nation's imports and 4 percent of GNP in that period. About 59 percent of this aid was in the form of food, 15 percent in industrial materials, and 12 percent in transportation equipment. United States grant assistance, however, tapered off quickly in the mid-1950s. United States military procurement from Japan peaked at a level equivalent to 7 percent of Japan's GNP in 1953 and fell below 1 percent after 1960. A variety of United States-sponsored measures during the occupation, such as land reform, contributed to the economy's later performance by increasing competition. In particular, the postwar purge of industrial leaders allowed new talent to rise in the management of the nation's rebuilt industries. Finally, the economy benefited from foreign trade because it was able to expand exports rapidly enough to pay for imports of equipment and technology without falling into debt, as had a number of developing nations in the 1980s (see Level and Commodity Composition of Trade , ch. 5).

The consequences of Japan's economic growth were not always positive. Large advanced corporations existed side-by-side with the smaller and technologically less-developed firms, creating a kind of economic dualism in the late twentieth century. Often the smaller firms, which employed more than two-thirds of Japan's workers, worked as subcontractors directly for larger firms, supplying a narrow range of parts and temporary workers. Excellent working conditions, salaries, and benefits, such as permanent employment, were provided by most large firms, but not by the smaller firms. Temporary workers, mostly women, received much smaller salaries and had less job security than permanent workers. Thus, despite the high living standards of many workers in larger firms, Japan in 1990 remained in general a low-wage country whose economic growth was fueled by highly skilled and educated workers who accepted poor salaries, often unsafe working conditions, and poor living standards (see table 10, Appendix).

Additionally, Japan's preoccupation with boosting the rate of industrial growth during the 1950s and 1960s led to the relative neglect of consumer services and also to the worsening of industrial pollution. Housing and urban services, such as water and sewage systems, lagged behind the development of industry. Social security benefits, despite considerable improvement in the 1970s and 1980s, still lagged well behind other industrialized nations at the end of the 1980s. Agricultural subsidies and a complex and outmoded distribution system also kept the prices of some essential consumer goods very high by world standards (see Living Standards , this ch.). Industrial growth came at the expense of the environment. Foul air, heavily polluted water, and waste disposal became critical political issues in the 1970s and again in the late 1980s (see Pollution , ch. 2).

Data as of January 1994

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Japan Table of Contents