The Japanese economic miracle - How did it happen?

A very important period in Japan's history was post-war. In this period after the end of World War II, what historians call the Japanese economic miracle occurred. Thus described by the fact that the Japanese economy has undergone a major economic boom, leading to extraordinary results in the numbers of the economy.

During this economic boom, Japan became the second largest economy in the world (after the United States). However, in the 1990s, demography Japan began to stagnate and the workforce was no longer expanding as in previous decades, despite worker productivity remaining high.

This economic miracle happened mainly due to the Japanese government's economic interventionism and elsewhere because of US aid and assistance through the Marshall Plan. But several other factors influenced the Japanese economic miracle period, and I will explain to you what really happened.

The Japanese economic miracle - how did it happen?

Introduction to Japan's economic miracle

The Japanese economic miracle is basically a designation for the growth of the Japanese economy over a period of time. This period includes the end of the Second World War and the end of the Cold War, putting in numbers, between 1945 and 1991.

This economic miracle can be divided into four stages. They are recovery, high increase, steady increase and low increase. These will be explained separately later in the text, so please be patient.

First, I have to 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 closely connected groups, which were called keiretsu;
  • The powerful business and shuntō unions;
  • Good relations with government bureaucrats and the guarantee of lifelong employment (shūshin koyō) in large corporations;
  • Highly unionized workers' factories;

In addition to these characteristics, after the Second World War, the USA established a significant presence in Japan to halt the expansion of Soviet influence in the Pacific. In contrast, the US was also concerned about the growth of Japan's economy.

Why were they worried? because there was a risk that an unhappy and poor Japanese population would turn to communism and, in doing so, ensure that the Soviet Union controlled the Pacific. That is, everything the US wanted to avoid. But anyway, we will explain more deeply in the course of the article.

The Japanese economic miracle - how did it happen?

Post-war in Japan

As we know, Japan was humiliated in the second war. As well? It served as a target for the two atomic bombs that demonstrated to the world the fearful military power of the United States at that time.

And despite being heavily destroyed by nuclear bombing in Hiroshima and Nagasaki, and other air strikes allied with Japan has managed to recover. Reaching the rank of 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 way. That is, stimulating the growth of the private sector, first by instituting regulations and protectionism that effectively managed economic crises. After these steps, concentrating on expanding trade.

However, three decades later, Japan experienced a so-called “growth recession”. This was due, among other factors, to the United States imposing economic protection policies by oppressing Japanese production and forcing the Japanese yen to appreciate. This appreciation left the country in a significant economic recession in the 1980s.

In an attempt to ease 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 that policy, the Japanese economy entered a period of low growth that continues today.

The Japanese economic miracle - how did it happen?

Japan's stage of recovery

Now, as promised, let's explain each of the four stages of this miracle. But it is noteworthy to ask that, if we look at it, generally all countries experienced some level of industrial growth in the post-war period.

But it is a fact that countries that experienced a significant drop in industrial production due to war damage such as Japan, achieved a faster recovery. And the first reason for Japan to recover quickly was the government’s good and effective economic reform.

One of the main economic reforms was to adopt the “Inclined Production Mode”. The “Inclined production mode” refers to the inclined production, which focuses especially on the production of raw materials. In addition, 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 took place 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 the USA, so logistics became a big problem. However, as one of the United States’ biggest supporters in Asia, Japan stood out, supporting logistical operations and also gaining from the production of firearms.

The mass orders for firearms and other materials by the United States have greatly stimulated the Japanese economy. This allowed Japan to recover from wartime destruction and provided Japan with the foundation for the next stage of high growth.

The Japanese economic miracle - how did it happen?

High growth stage in Japan

After winning support from the United States and achieving economic reform internally, Japan managed to grow from the 1950s to the 1970s. In addition, Japan also completed its industrialization process. And it became one of the first industrialized countries in Asia.

The reasons for Japan to complete its industrialization are complicated. But the main feature of that time is the influence of the government policies of Hayato Ikeda’s government. We will explain this soon.

In 1968, the Japanese economy book said that the Japanese economy continued to grow vigorously after taking a break in the fall of 1965. The words "increase", "growth" and "rise" filled in the yearbook summaries from 1967 to 1971.

Increased consumption in Japan

During the reconstruction period and before the 1973 oil crisis, Japan was able to complete its industrialization process. Thus, it obtained significant improvements in living standards and witnessed a significant increase in consumption. For example, the average monthly consumption of urban family households doubled in the period between 1955 and 1970.

In addition, consumption proportions in Japan were also changing. Consumption in daily necessities, such as food and clothing, has decreased. In contrast, consumption of recreational activities, entertainment and goods increased. This increase in consumption stimulated GDP growth by encouraging production.

The Japanese economic miracle - how did it happen?

Influence of Japanese Government Policies

Under Prime Minister Ikeda, a former MITI minister, the Japanese government has embarked on an ambitious "income doubling". 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 loans” (a practice that continues today) in which the Bank of Japan issues loans to city banks, which in turn grant loans to industrial conglomerates.

As there was a shortage of capital in Japan at the time, industrial conglomerates borrowed beyond their ability to repay. Thus causing the city’s banks to go into debt with the Bank of Japan. This gave the National Bank of Japan full control over local dependent banks.

At this rate, the excess loan system, combined with the government’s loosening of anti-monopoly laws, led to a resurgence of keiretsu that mirrored war conglomerates, or zaibatsu.

And at the heart of the keiretsu’s success were city banks, which issued loans generously, formalizing cross-shareholdings in various industries. The Keiretsu encouraged horizontal and vertical integration, blocking foreign companies.

The Ikeda Administration has also instituted the Foreign Exchange Allocation Policy, that is, a system of import controls designed to prevent the flood of foreign products in the 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.

The Japanese economic miracle - how did it happen?

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 formed. This measure was the rapid expansion of government investments in Japan’s infrastructure.

The Ikeda government has also expanded government investment in the previously neglected communications sector. In addition, this government was responsible for adhering to government intervention and regulating the economy. So his government pushed for trade liberalization.

As early as April 1960, commercial imports had been liberalized in 41% when 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 has also set up several allied foreign aid distribution agencies to show Japan’s willingness to participate in the international order and promote exports.

The creation of these agencies not only had the role of a small concession for international organizations. It also dispelled some public fears about trade liberalization.

Other merits of Ikeda were:

  • Japan’s global economic integration, joining GATT in 1955;
  • He joined the IMF and OECD in 1964;
  • By the time Ikeda stepped down, GDP was growing at a phenomenal rate of 13.9 percent;

The Japanese economic miracle - how did it happen?

Stable Growth Stage in Japan

In 1973, the first oil price shock hit Japan because of the 1973 oil crisis. This crisis was overwhelming. Where the price of oil has grown from $ 3 a barrel to over $ 13 a barrel.

As a direct effect of this phenomenon, Japan’s industrial production decreased by 20%. Because the supply capacity has failed to respond to the rapid expansion of demand. In addition, increasing investments in equipment have often had unwanted results.

In detriment, the Second Petroleum Shock in 1978 and 1979 further aggravated the situation. As a result, the price of oil rose again from $ 13 a barrel to $ 39.5 a barrel. However, Japan was able to withstand the impact. And it was able to switch from a product concentrator to a production technology concentrator.

This transformation was a product of the oil crises and the intervention of the United States. As the price of oil increased, the cost of production also increased. And in an attempt to reduce costs, after the oil crisis, Japan surprised. Because it started to produce more ecological products and with less oil consumption.

Another factor was the friction of the United States with Japan. Due to the fact that Japan’s rapid economic growth could harm US economic interests. Therefore, in 1985, the United States signed the “Plaza Agreement” with Japan, West Germany, France and Great Britain.

As a result of these changes, Japan has adapted to a program of technology concentration, guaranteeing the steady growth of its economy, in addition to standing out among other capitalist countries that were significantly injured during the oil crisis.

The Japanese economic miracle - how did it happen?

What do we learn from Japanese economic miracle?

If you are asking yourself "what happened to the last period of the Japanese economic miracle?", Unfortunate I don’t have much to say about it, after all it lasts until today and has not had major events during that period. For this and other reasons it was not commented on in the article.

In coincidence, 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 in late 1989, recovering later in 1990, it fell sharply in 1991.

The year of the completion of the Japanese asset price bubble coincided with two milestones. They being the Gulf War and the dissolution of the Soviet Union. In addition, this episode marks another important phenomenon in the history of Japan. The famous lost decades, however this is the subject of another article.

Finally, we will leave the books that served as a source for this article, in addition to giving credit to the famous wikipedia for some references and technical information about Japan's economic miracle.

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