The Japanese Economic Miracle – How Did It Happen?

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A very important period in the history of Japan was the post-war period. In this period after the end of World War II, what historians call the Japanese economic miracle took place. Described thus by the fact that the Japanese economy has gone through a great 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, the demography Japan 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 interventionism of the Japanese government and in another part because of US aid and assistance 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.

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 in a certain period. This period comprises 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 rise, steady rise, and low rise. 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 features are:

  • The cooperation of manufacturers, suppliers, distributors and banks in tightly linked groups, which were named keiretsu;
  • The powerful business unions and shuntō;
  • Good relations with government bureaucrats and guaranteed lifetime employment (shūshin koyō) in large corporations;
  • Highly unionized blue-collar factories;

In addition to these characteristics, after World War II, the US established a significant presence in Japan to hinder 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. In other words, everything the US wanted to avoid. But anyway, we will explain more in depth throughout the article.

The Japanese Economic Miracle - How Did It Happen?

post war in japan

As we know, Japan was humiliated in World War II. Like this? It served as the target of fire for the two atomic bombs that demonstrated to the world the awesome military might of the US at that time.

And despite being heavily destroyed by the nuclear bombing of Hiroshima and Nagasaki, and other allied air strikes on Japan, Japan 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, 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 was due, among other factors, to the United States imposing economic protection policies by oppressing Japanese production and forcing the Japanese yen to appreciate. And 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 took place 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 to this day.

The Japanese Economic Miracle - How Did It Happen?

Japan's recovery stage

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

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

One of the main economic reforms was to adopt the “Slanted Production Mode”. “Slanted production mode” refers to slanted production which especially focuses on raw material production. In addition, to stimulate production, the Japanese government supported the recruitment of labour, 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 US territory, so logistics became a big problem. However, as one of the biggest supporters of the United States in Asia, Japan stood out, supporting logistical operations and also gaining from firearms production.

Mass orders for firearms and other materials from the United States 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 internship in Japan

After gaining the support of the United States and achieving economic reform at home, 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 to complete its industrialization are complicated. But the main characteristic of this era is the influence of government policies of the government of Hayato Ikeda. A fact that we will explain later.

In 1968, the Japanese economics book said that the Japanese economy continued to grow vigorously after having a lull in the fall of 1965. The words “increase”, “growth”, and “rise” filled the summaries of the yearbooks from 1967 to 1971.

Increase in consumption in Japan

During the reconstruction period and before the 1973 oil crisis, Japan was able to complete its industrialization process. It thus 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 on daily necessities such as food and clothing has decreased. In contrast, consumption in 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 set out on an ambitious “income doubling”. He lowered interest rates and taxes for private players to motivate spending.

Prime Minister Hayato Ikeda pursued a policy of heavy industrialization. This policy led to the emergence of “excess borrowing” (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 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 system of excess borrowing, combined with the government's loosening of antitrust laws, led to a resurgence of keiretsu that mirrored war conglomerates, or zaibatsu.

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

The Ikeda Administration also instituted the Exchange Allocation Policy, ie a system of import controls designed to prevent the flooding of foreign products into Japanese markets.

The 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 governmental 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. Furthermore, this government was responsible for adhering to government intervention and regulation of the economy. So his government pushed for trade liberalization.

As early as April 1960, commercial imports had been liberalized at 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 show Japan's willingness to participate in the international order and promote exports.

The creation of these agencies was not only a small concession for international organizations. It also allayed some public fears about trade liberalization.

Other merits of Ikeda were:

  • Japan's global economic integration, joining the 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;

The Japanese Economic Miracle - How Did It Happen?

Stage of Stable Growth in Japan

In 1973, the first oil price shock hit Japan because of the oil crisis in 1973. This crisis was overwhelming. Where the price of oil rose from 3 dollars per barrel to over 13 dollars per barrel.

As a direct effect of this phenomenon, Japan's industrial production declined in 20%. For the supply capacity failed to respond to the rapid expansion of demand. In addition, increased investments in equipment often had undesired results.

To the detriment, the Second Oil Shock in 1978 and 1979 further aggravated the situation. As a result, the price of oil rose again from 13 dollars per barrel to 39.5 dollars per barrel. However, Japan was able to withstand the impact. And it managed to change from a product concentrator to a technology concentrating form of production.

This transformation was a product of the oil crises and US intervention. 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 between the United States and 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, ensuring the steady rise of its economy, as well as standing out among other capitalist countries that were significantly hurt during the oil crisis.

The Japanese Economic Miracle - How Did It Happen?

What do we learn from the Japanese economic miracle?

If you're asking yourself “what happened to the last period of the Japanese economic miracle?”, unfortunately I don't have much to say about it, after all it lasts until the present day and there were no major events during that period. For this and other reasons, it was not discussed in the article.

In a 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 dropped sharply in 1991.

The year of the completion of the Japanese asset price bubble coincided with two milestones. These 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 a subject for 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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