An important period in Japan’s history was the post-war era. During this period after the end of World War II, what historians call the Japanese economic miracle occurred. It is described as such due to the fact that the Japanese economy experienced a significant economic boom, leading to extraordinary results in economic figures.
During this economic boom, Japan became the second largest economy in the world (after the United States). However, in the 1990s, Japan’s demography began to stagnate and the workforce was no longer expanding as it had in previous decades, despite worker productivity remaining high.
This economic miracle happened mainly due to the economic intervention of the Japanese government and partly because of aid and assistance from the U.S. through the Marshall Plan. But several other factors influenced the period of the Japanese economic miracle, and I will explain to you what really happened.
Table of Contents
Introduction to the Japanese economic miracle
The Japanese economic miracle is basically a designation for the growth of the Japanese economy during a certain period. This period spans from the end of World War II to the end of the Cold War, quantified as between 1945 and 1991.
This economic miracle can be divided into four stages. They are recovery, high growth, steady growth, and low growth. These will be explained separately later in the text, so I ask for your patience.
First, I must highlight the characteristics of the Japanese economy that made it distinct during the years of the “economic miracle.” These characteristics are:
- The cooperation of manufacturers, suppliers, distributors, and banks in strongly interconnected groups, known as keiretsu;
- The powerful business unions and shuntō;
- Good relations with government bureaucrats and the guarantee of lifetime employment (shūshin koyō) in large corporations;
- Highly unionized worker factories;
In addition to these characteristics, after World War II, the U.S. established a significant presence in Japan to hinder the expansion of Soviet influence in the Pacific. In contrast, the U.S. was also concerned about the growth of Japan’s economy.
Why were they concerned? Because there was a risk that an unhappy and poor Japanese population would turn to communism, thereby ensuring that the Soviet Union controlled the Pacific. In other words, everything the U.S. wanted to avoid. But anyway, let’s explain more deeply as we go through the article.
Post-war in Japan
As we know, Japan was humiliated in the Second World War. How so? It served as a target for the two atomic bombs that demonstrated to the world the fearsome military power of the U.S. at that time.
And despite being heavily destroyed by the nuclear bombing in Hiroshima and Nagasaki, and other allied air attacks on Japan, Japan managed to recover. It reached the position of the second largest economy in the world in the 1960s, with the exception of the Soviet Union.
The Japanese government contributed to the Japanese economic miracle in its own way and in the best possible manner. That is, by stimulating the growth of the private sector, first by instituting regulations and protectionism that effectively managed economic crises. After these steps, focusing on expanding trade.
However, three decades later, Japan went through the so-called “growth recession.” This occurred due, among other factors, to the United States imposing economic protection policies that suppressed Japanese production and forced the appreciation of the Japanese yen. This appreciation left the country in a significant economic recession in the 1980s.
In an attempt to alleviate the influence of the recession, Japan imposed a series of economic and financial policies to stimulate domestic demand. However, the bubble economy that occurred in the late 1980s and early 1990s and the subsequent deflationary policy destroyed the Japanese economy.
And after this policy, the Japanese economy entered a period of low growth that continues to this day.
The recovery stage of Japan
Now, as promised, let’s explain each of the four stages of this miracle. But it is worth noting that, if we observe, generally all countries went through some level of industrial growth in the post-war period.
But it is a fact that countries that experienced a significant decline in industrial production due to war damage like Japan, achieved a faster recovery. And the first reason for Japan’s rapid recovery was the good and effective economic reform of the government.
One of the main economic reforms was adopting the “Inclined Production Mode.” The “Inclined Production Mode” refers to production that focuses especially on the production of raw materials. Additionally, to stimulate production, the Japanese government supported the recruitment of labor, especially female labor.
The second reason for the recovery was the Korean War. This war occurred on the Korean peninsula, and the United States ended up participating in the war, thus providing an opportunity for the Japanese economy.
This is due to the fact that the Korean peninsula is far from U.S. territory, so logistics became a major problem. However, as one of the largest supporters of the United States in Asia, Japan stood out, providing support for logistical operations and also benefiting from the production of firearms.
The mass orders for firearms and other materials from the United States significantly stimulated the Japanese economy. This allowed Japan to recover from wartime destruction and provided the foundation for the next stage of high growth.
High growth stage in Japan
After gaining the support of the United States and achieving internal economic reform, Japan managed to grow from the 1950s to the 1970s. Furthermore, Japan also completed its industrialization process. And it became one of the first industrialized countries in Asia.
The reasons for Japan completing its industrialization are complicated. But the main characteristic of this era is the influence of the government policies of Hayato Ikeda. A fact that we will explain shortly.
In 1968, the book on the Japanese economy stated that the Japanese economy continued to grow vigorously after having a pause in the autumn of 1965. The words “increase,” “growth,” and “rise” filled the summaries of the yearbooks from 1967 to 1971.
Increase in Japan’s consumption
During the reconstruction period and before the oil crisis of 1973, Japan managed to complete its industrialization process. It achieved significant improvements in living standards and witnessed a substantial increase in consumption. For example, the average monthly consumption of urban household families doubled between 1955 and 1970.
Moreover, the proportions of consumption in Japan were also changing. Consumption on daily necessities, such as food and clothing, decreased. In contrast, consumption on recreational activities, entertainment, and goods increased. This increase in consumption stimulated GDP growth by encouraging production.
Influence of Japanese Government Policies
Under Prime Minister Ikeda, a former MITI minister, the Japanese government embarked on an ambitious “income doubling” plan. He lowered interest rates and taxes for private players to motivate spending.
Prime Minister Hayato Ikeda followed a policy of heavy industrialization. This policy led to the emergence of “excess lending” (a practice that continues to this day) in which the Bank of Japan issues loans to city banks, which in turn lend to industrial conglomerates.
As there was a capital shortage in Japan at the time, industrial conglomerates took out loans beyond their capacity to pay. Thus causing city banks to go into debt with the Bank of Japan. This gave the Bank of Japan total control over the dependent local banks.
At this pace, the excess lending system, combined with the government’s leniency regarding antitrust laws, led to the resurgence of keiretsu that mirrored the wartime conglomerates, or zaibatsu.
And at the center of the success of the keiretsu were the city banks, which issued loans generously, formalizing cross-shareholdings in various industries. The keiretsu stimulated horizontal and vertical integration, blocking foreign companies.
The Ikeda Administration also instituted the Foreign Exchange Allocation Policy, that is, a system of import controls designed to prevent the flooding of foreign products in Japanese markets.
MITI (Ministry of International Trade and Industry) took advantage of this policy to stimulate the economy. Thus promoting exports, managing investments, and monitoring production capacity.
Other government measures adopted
In addition to the other measures already mentioned, the government made several other adjustments that paved the way for Japan’s success. One of these measures was only possible due to the financial flexibility that had been formed. This measure was the rapid expansion of government investments in Japan’s infrastructure.
Ikeda’s government also expanded government investment in the communications sector, which had previously been neglected. Furthermore, this government was responsible for adhering to government intervention and regulating the economy. Thus, his government boosted trade liberalization.
By April 1960, commercial imports had been liberalized by 41% compared to 22% in 1956. Ikeda planned to liberalize trade to 80% in three years. However, his plans faced strong opposition. It is a fact that no government can be fully accepted; otherwise, it would be a dictatorship.
However, this same government also set up several allied foreign aid distribution agencies to demonstrate Japan’s willingness to participate in the international order and promote exports.
The creation of these agencies not only served as a small concession to international organizations. It also dissipated some public fears about trade liberalization.
Other merits of Ikeda were:
- Global economic integration of Japan, joining GATT in 1955;
- Joined the IMF and OECD in 1964;
- By the time Ikeda left office, GDP was growing at a phenomenal rate of 13.9 percent;
Stable Growth Stage in Japan
In 1973, the first oil price shock hit Japan due to the oil crisis in 1973. This crisis was devastating. Where the price of oil rose from $3 per barrel to over $13 per barrel.
As a direct effect of this phenomenon, Japan’s industrial production decreased by 20%. Because the supply capacity could not respond to the rapid expansion of demand. Additionally, the increasing investments in equipment often had undesirable results.
In detriment, the Second Oil Shock in 1978 and 1979 further aggravated the situation. As a result, the price of oil rose again from $13 per barrel to $39.5 per barrel. However, Japan was able to withstand the impact. And managed to shift from a product concentrator to a technology-concentrating form of production.
This transformation was a product of the oil crises and U.S. intervention. As the price of oil increased, production costs also rose. And in an attempt to reduce costs, after the oil crisis, Japan surprised. As it began to produce more eco-friendly products with less oil consumption.
Another factor was the friction between the United States and Japan. Due to the fact that Japan’s rapid economic growth could harm U.S. economic interests. Thus, in 1985, the United States signed the “Plaza Accord” with Japan, West Germany, France, and Great Britain.
As a result of these changes, Japan adapted to a technology concentration program, ensuring the constant increase of its economy, in addition to standing out among other capitalist countries that were significantly harmed during the oil crisis.
What did we learn from the Japanese economic miracle?
If you are wondering “what happened in the last period of the Japanese economic miracle?”, unfortunately, I don’t have much to say about it, after all, it continues to this day and there haven’t been major events during this period. For this and other reasons, it was not commented on in the article.
Coincidentally, the conclusion of the economic miracle coincided with the conclusion of the Cold War. While the Japanese stock market reached its highest peak in history at the end of 1989, recovering later in 1990, it plummeted dramatically in 1991.
The year of the conclusion of the Japanese asset price bubble coincided with two milestones. They were the Gulf War and the dissolution of the Soviet Union. Furthermore, this episode marks another important phenomenon in Japan’s history. The famous lost decades, however, this is a topic for another article.
To conclude, let’s list the books that served as sources for this article, in addition to giving credit to the famous Wikipedia for some references and technical information about the Japanese economic miracle.
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