economic development of japan essay

UC Berkeley’s Premier Undergraduate Economics Journal

• Growth & Development

The Japanese Economic Miracle

HANNAH SHIOHARA – JANUARY 26TH, 2023

EDITOR: PALLAVI MURTHY

Economist Milton Friedman once said that “The best way to grow rapidly is to have the country bombarded.” Though it is hard to imagine a country prospering after losing everything, the Japanese post-war economy did just that. Japan unconditionally surrendered on August 14th 1945, with World War II costing the country an estimated 2.6 to 3.1 million lives and 56 billion USD . Though Japan was left with almost nothing, their economy recovered at an incredible speed. Known as the Japanese Economic Miracle, Japan experienced rapid and sustained economic growth from 1945 to 1991, the period between post World War II and the end of the Cold War. As depicted in Figure 1, the real growth rate was positive until 1973 and increased for 20 consecutive years. In less than ten years, Japan’s economy was growing at a peak rate last observed in 1939, with the economy growing two times faster than the prewar standard every year past 1955. There are four main factors that allowed for this super rapid growth: technological change, accumulation of capital, increased quantity and quality of labor, and increased international trade. Through strategic planning and cooperation by firms, individuals, and the government, Japan manipulated these factors to become the third-largest economy in the world. Though it has been 77 years since the end of World War II, many elements of Japan’s economic recovery remain relevant to our society and can be applied to countries that have recently emerged from conflict. 

Figure 1. Japan’s real economic growth rate between 1950-1973 in 4 year increments. 

Factor 1: Technological change

After the war, Japan had lost more than a quarter of its industrial capacity and was only left with over-depreciated capital stock that had no use. This allowed Japan to adopt an abundance of new technologies without having to wait for assets to be fully depreciated, fueling Japan’s voracious appetite to start fresh and innovate. Figure 2 depicts the number of contracts signed to import new technology, mainly in industries such as iron, steel, petrochemicals, electronics, motor manufacturing, and chemical engineering—sectors characterized by extremely high growth rates. 

Figure 2. Number of contracts with a life of more than a year and paid in foreign currency that Japan signed to import new technology between 1950 and 1969. 

Furthermore, several government policies favoring these technological changes were implemented. First, the government aggressively used expansionary monetary policy to create “cheap money,” such that growing industries had access to low-cost funds. Interest rates were rigid and closely monitored to be kept low, and corporate businesses were over borrowing while banks over loaned. The government also rewarded growing businesses with generous depreciation provisions and tax deductions; large, more rapidly growing corporations had lower tax rates than smaller, slower-growing firms. Personal income taxation was also slowed through partial exemption of interest and dividend incomes from taxation.

Foreign countries greatly influenced and inspired the creation of new technologies, and Japan began importing tremendous amounts of goods as well. For example, machine tools and robots were imported and became widely used in the automobile industry, while imported generators were adapted to improve the efficiency of the electric utility industry. In 1963, the Japan Information Center for Science and Technology wrote  210,000 abstracts of foreign scientific papers to make foreign ideas and knowledge accessible. The Japanese also took the new technologies they imported and improved it themselves, making the technology an estimated 20% more efficient. 9500 large firms reported on spending a third of their R&D expenditure and “modifying and perfecting the imported technique.” 

Factor 2: Accumulation of capital 

In order to import and implement the new technologies mentioned above, the Japanese concentrated their capital into investing in rapidly growing manufacturing industries. In contrast, people in other countries were investing more in housing or other social overhead capital. This difference came from the Japaneses’ great desire to close the technological gap between Japan and foreign countries and increase their international competitiveness. At the time, the returns of these investments were high because the marginal productivity of capital was so high. In order to balance these large investments and avoid extremely high inflation, there was also a high rate of personal saving. During 1959 and 1970, the ratio of personal savings to disposable income averaged at 18.3% in Japan, while it was only 12% in Germany and 7% in the United States. 

Factor 3: Quantity and quality of labor

The increase in quantity and quality of labor also greatly contributed to Japan’s success, with the National Bureau of Economic Research estimating that it accounted for nearly 30% of the postwar Japanese growth. As people returned from war, there was a large increase in labor, allowing for wages to rise less than labor productivity in the 1950s. Even in the 1960s, productivity kept pace with wage increases, giving firms the ability to be efficient and grow. Labor also moved from low-productivity sectors such as agriculture and forestry, to high productivity sectors such as aviation, automobile, and electronics.

A key element to the Japanese Economic Miracle was the keiretsu . Keiretsu were very large business groups that linked banks, trading companies, and industrialists through ownership or stock and long standing exclusive relationships. Their mere size gave them the financial strength and connections they needed to outperform their domestic and foreign rivals, aggressively gaining market share in high-growth sectors with long term potential. The government also worked in favor of the keiretsu, implementing policies that would minimize any competition for the firms. The Ministry of International Trade and Industry allowed “administrative” cartels and collusive activities to take place, with more than 1,500 of them going unprosecuted. For example, mergers amongst the five largest firms in a given industry were approved, supporting anti-competitiveness. At the same time, the workplace culture of keiretsu played a large role in its success, because it improved the quality of labor. The Japanese business environment was extremely competitive, and all companies went to great lengths to keep up with one another. In order to continuously update product designs and implement new production techniques, employees were expected to work extremely long hours and stay loyal to the firm for a lifetime. They were held to high standards with strict rules, such as how low to bow to various superiors, with training for these roles starting at a young age. In fact, several of the world’s most practiced industrial practices such as total quality control, lean production, and cross-functional product teams are said to be first implemented in the keiretsu. 

Factor 4: International Trade

Finally, Japan’s exports grew rapidly after the war, boosting the economy. By providing tax deductions for overseas sales expenditures and preferential loans, the government was able to lower the prices of exports, making them relatively cheaper than other countries. The mergers and anticompetitive behavior they encouraged were also mainly in sectors that exported their products. However, the single most important factor in international trade that allowed Japan to stay ahead of its competitors was its ability to change what they were exporting every couple of years. Between 1950 and 1965, Japan went from primarily exporting textiles and sundry goods to machinery, and finally to metals. Due to increased efficiency and corporations’ ability to keep up with changes in the international trading stage, Japan was able to provide goods that were in the most demand, increasing exports and thus real economic growth. 

Lessons learned from the Japanese Economic Miracle 

Today, most war-stricken countries are developing countries whose economies are primarily based on agriculture . For example, there were 15 countries at war in Sub-Saharan Africa in 2019. Specifically, Ethiopia’s civil war continues to be one of the most devastating conflicts of 2022. Agriculture in Ethiopia accounts for nearly 46% of GDP and 85% of total employment. 

Since it is evident that favorable government policies played a crucial role in Japan’s economic recovery, comparable policies should be implemented in today’s post-conflict countries. For example, governments should shift their revenue source  away from personal and business income taxes and to natural resource rights . Since these countries are abundant in natural resources and because natural resource extraction tends to decline during war, there will be a large demand for commodity goods in post-war economies. Instead of taxing firms’ operating in the primary sector, the government could tax the sale of the right to extraction, done through an auction that the African Union can oversee in cooperation with the Union African Development Bank and OECD. By making tax cuts in personal and business incomes, citizens and businesses can have some leeway in their post-war recovery. Taxing natural resource rights instead will make it easier for firms in high-growth sectors to make profits, but still ensure revenue for the government. 

Furthermore, increased international collaboration will be imperative for the economic growth of post-conflict countries. While increased exports and the sharing of knowledge with foreign countries greatly contributed to Japan’s success, international agreements can help developing economies of today. Since commodities are subject to significant fluctuations in price, some economists have suggested negotiating international “commodity stabilization agreements” to protect vulnerable, but growing sectors. Also known as price band buffer stock programs , governments would purchase a given quantity of goods at a fixed price, and then sell them for a fixed price such that prices are contained within a band. Though these policies are controversial as they cause inefficiency, research shows that price stabilization for coca, coffee, jute, wool, and wheat is greatly beneficial to its exporting countries. They would generate greater export revenue as well as create a positive pure welfare impact. Some of the poorest developing countries located in West Africa, Latin America, and Asia would be greatly supported by these policies. 

While the circumstances of a country emerging from war in 1945 is drastically different from today, concentrating on dominating high and long-term growth industries is a key goal that remains relevant and effective for recovering economies. This will require the cooperation of governments and foreign countries through favorable taxation policies and negotiations that give growing but vulnerable firms an advantage. By identifying a country’s comparative advantage and fulfilling that industry’s potential, a country may be able to experience rapid recovery and growth to birth their own “Economic Miracle.”

Featured Image Source:  nippon.com  

Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty,  or the University of California, Berkeley in general.

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Economic Development of Japan  Updated July 28, 2022

Spring 2022 -  Thursday 16:40-18:10     Classroom F

Instructor: Prof. K. Ohno

This course is completed for 2022

This course reviews the history of Japanese economic development from the Edo period (17-19c) to present. Topics are chronologically arranged. Economics is the main focus but social, political, diplomatic and military issues are also covered as necessary background. The reason for Japan's early industrialization, impact of external influences, interaction between economics and politics, and the state's role and private sector dynamism will be featured. Historical data will be amply presented and academic debates by economists and historians will be explained.

Course schedule for Spring 2022

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The Economic History of Japan: 1600-1990

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This multi-volume series covers the whole of modern Japanese economic history. The series encompasses both the institutional aspects of Japanese economic development, and the results of econometric and cliometric research to place the key moments of Japanese economic history in a more general context. Volume three, A Dual Structure, covers the first half of the twentieth century when Japan’s economic modernization brought the country into the circle of world powers between the two world wars; the economic system established in the Second World War transformed the economy; and postwar reconstruction provided the foundations for an extraordinary economic dynamism. Where appropriate the book looks back to the nineteenth century and forward to the 1960s. Thematic in its approach, A Dual Structure explores how it was that during a prolonged period of hardship for the world economy, particularly during the deflation of the 1920s and the worldwide depression in the early 1930s, Japan’s economy managed to overcome these crises and turbulence, before entering into a period of remarkable high-speed economic growth. Issues examined in particular include the development and transformation of Japan’s financial system and monetary policy, the emergence of big business as an economic power, the Japanese empire and its colonies, wartime controls, and the economic democratization, reconstruction, and high-speed growth that followed. At the centre of this study is a consideration of the ‘dual structure’ of the Japanese economy which emerges in this inter-war period, of small-scale companies on the one hand, large industrial firms on the other, and the increasing flow of labor into the cities which resulted. Written by leading Japanese scholars, and available for the first time in English-translation, the contributions have been abridged and re-written for a non-Japanese readership.

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Japan in the 21st century: environment, economy, and society, by pradyumna p. karan cartography by dick gilbreath lexington: university press of kentucky, 2005 401 pages, isbn 13: 978-0-8131-9118-8, paperback, reviewed by ronald kalafsky.

The fourteen-chapter text covers a broad range of topics on Japan. A dominant theme concerns the myriad changes and challenges facing the country. The lead chapter sets the tone immediately by addressing these upheavals. The second chapter provides an inclusive physical geography of Japan, including how the landscape has been impacted by humans over the centuries. Chapter three provides cultural and historical settings for Japan, necessary backgrounds for any study of this country. Ensuing chapters encompass population patterns, including the study of urbanization patterns across the country, without which no study of Japan would be complete. The importance of agriculture throughout Japan’s history and its continued influence on the political arena (despite scarce land and employment numbers) are addressed as well.

The last half of the book addresses the political and economic environments in Japan and their impacts. Chapter nine provides insight on issues within the Japanese political system. Three chapters discuss the economic geography of Japan, including its rapid industrialization and rise to global economic heights. A helpful discussion of the various industrial regions across the country is also provided. Any up-to-date and thorough text on Japan must include a discussion on the challenges facing the country since the collapse of the bubble economy and consequent economic malaise throughout much of the 1990s. Karan systematically examines this issue and discusses its impacts. In chapter twelve, the author offers a look at attempts to navigate through future economic environments in which traditional manufacturing activities are less dominant. The next-to-last chapter briefly examines the environmental impacts of Japanese industrialization and the challenges facing the environment well into the future. This chapter covers an interesting and relevant topic, so perhaps the author could have provided slightly more information on this front. The fourteenth and final chapter examines the myriad challenges facing Japan into the twenty-first century, including economic and demographic concerns. Like the previous chapter, this chapter is almost too short as it presents valuable insights on what faces Japan in the coming decades. At the same time, these brief chapters could also provide the foundations for additional studies on these topics, especially if this text is to be used in an upper-level class setting.

While a majority of the chapters in the book are comprehensive and largely very good, chapter five stands out in particular. This chapter, entitled “Regional Realities,” examines the unique individual regions of Japan, such as Kant¬ and Hokkaid¬, for example. As Karan mentions at the beginning of chapter five, many observers err in seeing Japan as a largely homogenous country, whether culturally or topographically. The author emphasizes the ways in which each of Japan’s regions is unique: topographically, economically, and across numerous other characteristics. It is worth noting that the text accomplishes this without resorting to rote descriptions of each region. Instead, Karan provides interesting insights into each distinctive region and often compares them with others.

A noteworthy asset of this text are the “Field Reports” in each chapter, which serve as brief case studies and provide timely empirical evidence for material described in the main body of the book. In one instance, four such case studies are found in the chapter on demographic trends. Given the saliency of Japan’s current and impending demographic issues, these reports impart needed empirical support to these concerns.

A generous number of maps and photographs are provided throughout this work. The photos are useful for relating points in the text and would be especially useful in introductory level classes. The maps are simple and straightforward, complementing the text material in most cases. Perhaps finer detail could have been provided on some thematic maps dealing with economic and environmental issues. Overall, the book provides a very good geographical examination of Japan.

The scope of Japan in the 21ST Century provides a solid background for further study and is suitable for a number of disciplines, including geography, history, or political science. From an introductory examination of Japan for those with little background in the country, to an advanced undergraduate seminar on East Asia or Japan, this book can be used widely across any university or college curricula. In advanced classes, for example, the book could be coupled with a work such as Shutting Out the Sun , by Michael Zielenziger, to examine the seismic cultural shifts occurring in the country. In a high school setting, it is appropriate for advanced classes, given some of the more complex material on politics and economics.

This book is comprehensive, without losing the reader’s interest. Moreover, it is a sound reference for both student and instructor. Even the advanced Japan scholar will find new material. Japan in the 21ST Century accomplishes the difficult task of creating interrelationships between what appear to be disparate subjects (e.g. the physical environment and the economy). While such wideranging geographies of a country can become quickly dated, Karan’s work should prove extremely useful in the classroom for a number of years.

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Zielenziger, M. Shutting Out the Sun: How Japan Created its Own Lost Generation . New York: Nan A. Talese, 2006.

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Working Paper Japan's Model of Economic Development

Relevant and nonrelevant elements for developing economies.

Japan was the first non-western country to accomplish successful industrialization, and the dominant perception of its ‘industrial policy’ had over-emphasized specific characteristics of Japan. However, from the perspective of today’s development thinking, Japan’s economic history shared a wide range of common factors in usual economic development: macroeconomic stability, human resource development, and economic infrastructure. Industrial policy in Japan sometimes worked well and sometimes did not, depending on how effectively it counteracted market failure and took advantage of market dynamism. We must note, however, that the external conditions faced by Japan were widely different from what today’s developing countries face.

Fukunari Kimura

WIDER Working Paper 22/2009

Number of tables 12

© UNU-WIDER

Developing Countries

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Meiji and Economic Miracle in Japan Essay

The rapid modernization and industrialization that took place in Japan happened almost by chance. In 1853, Japan had reluctantly given in to Western influence during the Tokugawa Reign. However, the overthrow of Tokugawa in 1968 by the Meiji Restoration marked the actual beginning of ‘economic miracle’. The period that followed the coup was marked by sharp disagreements on how the country would deal with Western influence.

Consequently, one school of thought was of the view that all Western influence should be eliminated from Japan, while another group deemed acceptance as the only logical response to Western influence. Eventually, a path of modernization was embarked on and history was changed in the process.

As part of the transition from the Tokugawa era, Japan’s early policies of isolation meant that the country had little if any access to Western technology. Nevertheless, the Meiji Restoration “was able to make the gap smaller by agricultural technology developed during the Tokugawa Period and also, instituting measures that enabled Japan to import technologies and ideas from the Western countries” (Rosovsky 29). In the period of about twenty-five years, beginning from the 1880s, the rate of economic development in Japan was unprecedented. In the end, Japan had become a global force both economically and militarily.

The factors that culminated in the Meiji Economic Miracle are not isolated incidents, but they are hurdles that all developing countries must cross before realizing overall success. Currently, the globally acknowledged Millennium Development Goals have laid out priorities for lifting world nations from poverty. Key among these goals is the need to make elementary education available to all children. For example, by the 1920’s it was not only the economic horizon of Japan that was different, but most of the other spheres of life had been transformed radically.

Notably, among these changes was the democratization of the country and a highly and uniformly educated citizenry. The nationalization of the education and the shift of power from individuals to the parliament were of particular importance to the democratization of Japan.

Prosperity during and after the Meiji regime has often been attributed to the accumulation of talents and knowledge following sustained efforts from the government. It is important to note that Japan’s rapid modernization and economic prosperity have only been witnessed in a few countries around the world including West Germany and Israel. These countries are all beneficiaries of what is known as a knowledge-based economy such as the one that drove Japan’s industrialization to unprecedented levels.

The shape of an economic regime most often determines its level of economic prosperity. For example, the only difference between Japan and China in the early 1900s was the education levels of citizens. However, it took China several centuries to align its educational regime with that of its neighbor. The take-off period of the Japanese economy depended on educational policies that ensured that all citizens had the same advantages when it came to education.

A modern education system has also been applied by other countries around the world, such as Denmark, to beat the odds that come with overpopulation and lack of natural resources within a country. Although the Meiji Restoration was using education as a means of modernization, it ended up “raising the quality of the people’s skills, modernizing their thought, and making it possible for them to participate successfully in modern economic activities” (Rosovsky 34).

Works Cited

Rosovsky, Henry. Japanese Economic Growth: Trend Acceleration in The Twentieth Century . California: Stanford University Press, 2003. Print.

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IvyPanda. (2020, August 20). Meiji and Economic Miracle in Japan. https://ivypanda.com/essays/meiji-and-economic-miracle-in-japan/

"Meiji and Economic Miracle in Japan." IvyPanda , 20 Aug. 2020, ivypanda.com/essays/meiji-and-economic-miracle-in-japan/.

IvyPanda . (2020) 'Meiji and Economic Miracle in Japan'. 20 August.

IvyPanda . 2020. "Meiji and Economic Miracle in Japan." August 20, 2020. https://ivypanda.com/essays/meiji-and-economic-miracle-in-japan/.

1. IvyPanda . "Meiji and Economic Miracle in Japan." August 20, 2020. https://ivypanda.com/essays/meiji-and-economic-miracle-in-japan/.

Bibliography

IvyPanda . "Meiji and Economic Miracle in Japan." August 20, 2020. https://ivypanda.com/essays/meiji-and-economic-miracle-in-japan/.

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