Japanese Economy A2012 Fall

　 Seinan Gakuin UniversityNoriaki EZOE

Professor Ph.D.Economics Department

Seinan Gakuin University　 JapanMail address: ezoe@seinan-gu.ac.jp

Homepage address: https://w3.seinan-gu.ac.jp/~ezoe/

1

Part Ⅰ Chapter 4 Japanese Economic History, Postwar Development (1945 – 1970s)

What you will learn in this chapter1 Reform and Postwar Recovery :1945--19492 Analyzing Economic Growth3 Postwar high growth : 1950s—1970s

2Japanese Economy

1 Japanese history: 1945—1970ｓ

Postwar Recovery and growthShowa　1945 : Surrendered, Allied military occupation began 1947 : Japan adopted a new constitution1952 : The Treaty of San Francisco ：The Allied occupation ended 1956 : Japan was granted membership in the United Nations . 1964 : Tokyo Olympic ： Japan achieved rapid growth to become the second- largest economy in the world. 1973 : The high growth ended in the mid-1970s ( Nixon Shock, oil crisis )1978 : Second oil crisis Japanese Economy 3

1.1 Postwar Recovery: 1945-1949Douglas MacArthur, (1880 - 1964) head of GHQ

1945 Tokyo

The Japanese economy collapsed due to input shortage. Inflation surged. Living standards plummeted. The US occupied Japan and forced democratization and demilitarization (but later partly reversed).1 Demilitarization : establishment of a new constitution.(1947) 2 Economic democratization: three reforms (next) 3 Various forms of democracy: enlarged voting rights , new education system, and political system were introduced. These reforms transformed Japan to a democratic society.

Japanese Economy 4

Topic : New Constitution 1947 GHQ draft as the base; initial Japanese drafts,

maintaining emperor’s sovereignty, were rejected.• Natural law--social contract among people (preface)• Sovereignty resides with the people• Emperor is the symbol of the state and people’s unity

(without political power).• Basic human rights--not just freedom, but also

guarantee of minimum living standards• Pacifism (Article 9)• Balance of power among legislature, executive and

judiciary

PP.155-56

Article 9 ControversyArticle 9 describes ``Pacifism’’.• Renunciation of war• No possession of military forces• Denial of the state’s right of belligerency

Self-Defense Forces Established in 1954 : Is SDF unconstitutional or not ?

Interpretation of LDP Government (until 2009)--Invasion is prohibited but self-defense is permitted.--SDF is a minimal power and not military forces

Alternative interpretations of Art.9--All war and military forces are prohibited, including for self-defense.--All war and military forces are prohibited, but Japan has self-defense rights.--War and military forces are permitted for the purpose of self-defense.

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Three Economic ReformsPostwar occupation: economic and institutional restructuring

1 Anti-Trust Measures the Zaibatsu (Mitsui, Mitsubishi, Sumitomo, Yasuda) were dissolved (1946-1951) which had controlled the prewar Japanese economy.

At the end of the war, major Zaibatsu groups held about 40 percent of equity (paid-in capital). The occupation force required the auctioning off of the shares owned by their holding companies, and thus the Zaibatsu groups were technically dissolved in 1946 and 1947.(they were revamped as keiretsu corporate groups mainly tied together through cross-shareholding of stock in the aftermath of the Occupation)

The Anti-Monopoly Law (1947) was introduced to maintain competition. - --- The aim was the creation of a more competitive economy. These policies made many markets more competitive, prompted vigorous investment demand, and enhanced consumer welfare.

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2 Land reform (1946 - 50):

Prior to reform, land ownership was highly concentrated. --All land above 1ha (4ha: Hokkaido) must be sold at the very low price. 6 million families get the land.Land reform decentralized ownership in the interest of equalizing income and wealth.

--- The reform establish an owner-farmer system. This contributed to income equality and political stability .

Problem—economic inefficiency --Average farm remained small: 1.09ha (1941)0.99ha (1955)

--More incentive to produce? Estimated productivity did not rise.--Study shows no difference in rice farmers’ land productivity or labor productivity (1939-41 data) :

Owned land (3,780kg/ha, 20kg/laborday) Tenanted land (3,687kg/ha, 19.6kg/laborday)

--- On the other hand, the small lot size has prevented farmers from taking advantage of scale economies.

Agriculture has gradually become heavily subsidized and has been placid under numerous government controls.Japanese Economy 8

3 Labor reform (1946)

three labor laws were enacted: the labor union law, the labor working conditions law, and the business and labor relations.

Workers were granted the rights to organize in unions and to engage in collective bargaining. As a result of these changes, labor unions spread. The percentage of unionized workers jumped from 3.2 percent in 1945 to 41.5 percent in 1946, and then to 53.0 percent in 1948.

--- The intent and effect labor reform was to give the working class a louder voice in corporate management.

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Table : recovery period

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1.2 Recovery process High inflation after the warThe supply side: devastation of plant, and infrastructure. (Damage 25.4% of Japan's national wealth) ---accelerate the recovery of productive capacitiesThe demand side: the returning soldiers and civilians. ------consumer demand increased

Table 1 shows : The severe shortage of production combined with a swelling of demand resulted in rampant inflation.

To tame the inflation, the government took drastic action : froze prices, and rationed necessities. But, the government could not combat inflation.

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Japanese Economy

Various Economic Policies (1946) stimulate the supply side The Priority Production System: To accelerate the recovery of productive capacity in major industries, the government directly planned the growth of coal and steel industries in 1947, which had spillover benefits for the overall economy.

PPS

12

Dodge Line

Korean War

Industrial Production Index

Source: Historical Statistics of Japan, vol.2, 1988.

(1949) restricting the demandThe Dodge plan (1949) (Economic Stabilization Programs ) The government implemented a balanced budget, suspension of new loans from the Reconstruction Bank, and the reduction and abolition of subsidies. The exchange rate was set at $1=360 yen 　　　　 Washington sends Joseph Dodge(right) ,1948. a US banker with strong belief in free market and sound budget

(1949) The Shoup tax system : government revenues were derived mostly from income tax. (Prof.Carl Sharp was sent by US president) 　 As a result, the inflation stopped, 　　　but the economy went into a deflation.　　　　　　　　　　　　　　　　　　　　

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Cold War broke out (1950) The Early Days of the Cold War

1947: the Cominform was organized by the Soviet Union.1948 :the blockade of Berlin by the Soviet Union. Communist power gained in China.

The occupation policy changed. ---The most notable change was the creation of the "Self-Defense Forces." In addition, the policy of breaking up large companies was not fully carried through. The priority shifted to strengthen the Japanese productive capacity.

1950: The Korean War broke out.

• Japan received large procurement orders from the U.S. Army . • The special export demand( although short-term ; until 1952 ) helped the

full recovery of Japan's economy.Japanese Economy 14

2 Analyzing Economic Growth2.1 Long run economic growth

the history of economic growth in JapanSteady growth from the Meiji period to World War II. Figure 1 illustrates. Three observations (Ito Ch.3).

1. the rapid economic expansion in Japan was not unique to the postwar era.2. Japan's growth accelerated between the end of the war and the oil-price crisis of 1973-74.3. Japan's economic growth has consistently outpaced that of the US.

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Figure : Japan's GNP13

12

11

10

9

8

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1825 1893 1901 1909 1917 1925 1933 1941 1949 1957 1965 1973 1981 1989.-------log of GNP (billion yen, 1980 prices); ---- trend of prewar GNP extrapolated to postwar years; --- peak level of prewar GNP.

Figure : Growth rates of Japan (solid line) and U.S. (broken line).

16

12

8

4

0

-4

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1955 1958 1961 1964 1967 1970 1973 1976 1979 1982

Table : Real GNP growth rates of postwar Japan.1 Japan’s growth was phenomenal.2 After the oil crisis, it showed the high performances.3 The trend line of prewar was surpassed by the postwar line.

We attempts to explain the reasons behind Japan's rapid economic growth from the end of World War II to 1973, and the reasons for the slowdown after the first oil crisis.

1953-55 1955-60 1960-65 1965-70 1970-75 1975-80 1980-85

7.0 8.6 10.6 11.2 4.6 5.1 3.9

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2.2 Analyzing sources of economic growthWhy Could Japan Accomplish High Economic Growth?

Economic growth can be viewed from either the demand side or the supply side. ( Balanced growth can be achieved when both demand and supply grow without disruptions )

Aggregate demand can be understood as the definition of GNP: • Yd = C + I + G + (EX — IM) (1) where aggregate demand (Yd) is the sum of consumption (C), investment (I), government expenditures (G), and net exports (EM — IM)

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2.2 Analyzing sources of economic growthWhy Could Japan Accomplish High Economic Growth?

--Review of Text: Growth Economics--

Economic growth can be viewed from either the demand side or the supply side. ( Balanced growth can be achieved when both demand and supply grow without disruptions )

Aggregate demand can be understood as the definition of GNP: • Yd = C + I + G + (EX — IM) (1) where aggregate demand (Yd) is the sum of consumption (C), investment (I), government expenditures (G), and net exports (EM — IM)

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• Review of Text: Growth Economics• Supply side:

– Growth is measured as changes in real GDP per capita • The aggregate production function shows how productivity (real GDP per worker) depends on

the quantities of physical capital per worker (K/L)

human capital per worker (H/L) and the technology (T)

Japanese Economy A 　 　 Chapter 4 21

The source approach

Output Growth (GDP) can be analyzed by supply side: decompose growth of output into growth of the factors of production.( See Tables)

The source approach demonstrates how the growth rate can be divided into contributions from various factors of production. : this approach answers the question of why Japan grew so fast.

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Table :Source: Denison and Chung 1976a, pp. 98-99.

Factor Absolute Relative Absolute Relative

Labor 1.85 21.0 1.30 32.5

Capital 2.10 23.8 0.79 19.8

Technological progressand residuals

4.86 55.2 1.91 47.8

Total 100 100

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Table :Source: Shinohara 1986, p. 17.

Factor Absolute Relative Absolute Relative

Labor 1.59 15.0 1.01 20.9

Capital 3.40 32.0 1.29 19.8

Technological progressand residuals

5.53 53.0 2.54 52.5

Total 100 100

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Country Japan US

Period 1960 - 1970 1970 - 1980

Average growth 10.62% 4.84%

ObservationsThese tables suggest1 The high growth rate of Japan depends on all three of the major factors.2 Capital accumulation was more important than labor in Japan, in contrast to the US experience.3 More than half of Japan's growth is attributed to "technological progress and residuals.

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Review of Text: the savings–investment spending identity

• savings and investment spending are always equal for the economy as a whole.

• In a open economy : Y = C + I + G + X - IM, C = Y – T - S, With these two equations, we can write saving as S = Y – C – T, = I + G + X – IM – T. Hence, S – I = (G - T) + (X - IM) (**) In words, accounting identity reduces to Saving – Investment = Gov’t deficit + Trade Surplus (or deficit)

Japanese Economy 26

Implications: saving and growthFrom (**), S – I = (G - T) + (X - IM).The equation dose not imply any causal relationships. But, it gives us a macroeconomic implication. This can be interpreted ; (other things being equal),1.　 A high saving likely reduces the capital cost of investment, which sustain a high level of investment. The high level of Investment makes it possible to adopt the advanced technology, which results in faster economic growth.2. A high saving rate will finance government deficits without causing a high real interest rate or borrowing from abroad. 3. A high rate of saving will produce foreign lending (capital outflow). This will, in the long run, establish the country as a world lender..

Japanese Economy27

Some implications for the Japanese economy

Historical facts : In Japan the saving rate has been consistently high. - During the 1950s and the 1960s, the first implication, higher investment, was realized.- After the oil crisis of 1973-74, investment plummeted and government deficits grew. Government deficits has been financed without a borrowing from outsides. - In the 1980s, with government deficits reduced and investment still low, capital outflow soared. Japan has become a world largest lender.

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Table : Net national saving rates of Japan and selected other nations, 1960-2000 (Flath; Table 5.1 p. 99)

Recent trend : Japanese saving rates has fallen rapidly.-- . Ageing PopulationJapanese Economy 29

1960--73

1974---79

1980---89

1990--2000

1960---2000

Japan 28.8 22.7 20.4 16.0 20.4USA 10.5 9.7 6.6 5.7 7.3

Germany 16.4 11.3 10.0 8.8 10.6

France 17.8 13.2 6.7 7.3 9.7

Italy 16.2 14.7 10.8 8.6 11.5UK 12.9 8.2 5.1 4.2 6.4

Canada 12.9 12.5 9.7 5.7 9.2OECD 15.4 12.7 9.9 n.a. n.a.

The Savings–Investment Spending Identity

Investment spending (I) = National savings (NS)+ Capital inflow(KI) in an open economy I = SPrivate + SGovernment + (IM − X) = NS + KI

Next figures

Japanese Economy 30

Budget　deficit

Figure :The Savings–Investment Spending Identity

Japanese investment spending in 2007 was higher as a percentage of GDP (23.8%). It was financed by a higher level of private savings as a percentage of GDP (32.1%), which was offset by both a capital outflow (−4.9% of GDP) and a relatively high budget deficit (−3.4% of GDP).

Shareof GDP

25%20151050

–5–10–15

Investment　spending Savings

Capital　inflows

Private　savings

Shareof GDP

25%20151050

–5–10–15

Investment　

spending Savings

Private　savings

Budget　deficit

Capital　outflows

(a) United States (b) Japan

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U.S. investment spending in 2007 (equal to 18.8% of GDP) was financed by a combination of private savings (15.7% of GDP) and capital inflows (5.2% of GDP), which were partially offset by a budget deficit (−1.6% of GDP).

The international Background: 1950s – 1970s

• The international economic order contributed to the Japanese economic recovery and growth.

Cold WarThe instability of the 1920s and 1930s was replaced with a bipolar world in which the United States and the Soviet Union opposed each other in both geopolitical and ideological arenas. International Trade systemThe United States designed to encourage trade through its sponsorship of the United Nations, the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade .

Technology TransferAmerican companies were encouraged to license technology to Japanese companies in the new international environment. Japan redirected its trade towards the huge and expanding American market. Japanese Economy A 　 　 Chapter 4 32

3 High Economic Growth

Japanese Economy 33

Mid 1950s to early 1970sOverviewRationalization (1950s)—new technology and investment for productivity & cost reductionQuality and productivity movement (private sector-led)From political conflicts to economic growth (1960)—“Income Doubling Plan”Re-integration into the world economyRising living standardsNegative aspects—pollution, traffic congestion…

-4%

-2%0%

2%

4%6%

8%

10%12%

14%19

53

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

High growth period

Stable growth period No growth period

Shift from political to economic agenda

Post WW2 Real Growth

1st Oil Shock

2nd Oil ShockYen floats

Bubble collapses

Rationalization (1950s)

• Korean War inflation reduced Japan’s cost competitiveness, especially coal & steel.

• Competitiveness was regained by investingin mass production and new technology.Industry must exit if uncompetitive (coal).

• Funds: private company profits from theKorean War boom.

• Tight macroeconomic policy under a fixedexchange rate to force rationalization.

• 1956 Economic White Paper: “We are no longer in the postwar period”—the recovery phase is over, new sources of growth must be found.

Ohno PP.162-65

Anti-rationalization negotiation, 1955

Anti-rationalization rally, 1961

Quality and Productivity (Kaizen) Movement were Private-sector Driven• Private sector, not government, led quality and productivity

improvement; private absorptive capacity was very strong.• NPOs were created by the initiative of top executives of

private firms with nationwide networks for dissemination• Cooperation between managers & workers within factories• Collaboration among government-industry-academia

• Productivity techniques imported from the US (mostly top-down, statistical) were revised to fit Japanese production environment (bottom-up, mindset change, continuous effort by teamwork)

Role of Private Sector Organizations in Introduction, Development and Diffusion of Foreign Technologies

US & European Countries

Private Companies

Source: Adapted from Tsuyoshi Kikuchi “The Roles of Private Organizations in the Introduction, Developmentand Diffusion of Production Management Technology in Japan” (original paper published in the Bulletin of the Graduate School of International Cooperation Studies No. 4, 2011, Takushoku University).

Private Sector Organizations

(JPC, JUSE, JMA, etc.)

•Dispatch of study missions to US & Europe•Invitation of foreign advisors•Translation of foreign literature into Japanese

<To Learn>

•Study on adaptability of new technology (by committees and working groups: industry-govt.- academia joint research)•Trial application and modification of techno- logy (pilot projects)

<To Test & Modify>

•Guidance and advices•Education and training•Qualification and certification system•Award system•Enlightenment and movement

<To Diffuse>

(Technology Transfer) (Technology Transfer)

Labor Surplus Ends around 1960

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1953

1954

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1956

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8

1951

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1954

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1956

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1963

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1965

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1967

1968

1969

1970

Middle　school　graduates

High　school　graduates

0

20

40

60

80

100

1955 1960 1965 1970

500+

100- 499

30- 99

5- 29

Job offer/job seeker ratio(Public job matching service)

Wage Gap by Employment Size(Large firms’ wage=100)

Unemployment Ratio

Golden Eggs—some left,others stayed

Ohno PP.177-78

Poverty Surplus labor

Mutual help for survival

Formal jobs

Informal jobs Unemployment

Rural VillagesUrban Centers

Labormigration

Not all migrants can find jobs. Most of them go to the unstable informal sector or join the pool of the unemployed.

Pool of Underclass

Internal Labor Migration ModelLewis, Fei-Ranis, Harris-Todaro

Traditional SectorModern Sector

Japanese SMEs and “Dual Structure”

• SMEs’ problems—low productivity, low wage, job instability SME Policy for protecting weak SMEs

• As the labor market tightened around 1960, the wage gap began to narrow. Government also subsidized farmers.

• Today, high-tech SMEs are considered as the source of Japanese competitiveness (but not all of them).

Agriculture

Large firmsHigh & stable salaryLife-time employment

Low wageJob insecurityExploited by large firms

Migration

Parent-subsidiary relationSMEs

Consumption Boom—Cause or Effect?

0

20

40

60

80

100

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

(%)

B&W　TV

Washingmachine

Refrig-erator

Color　TV

Automobile

Air-conditioner

Ohno P.185

Three Divine Devices (late 1950s)

Three C’s(1960s)

Household Ownership Ratios of Consumer Durables

3.3 Economic Results• Results : Rising living standards, consumption boom

and new life style.-- great increases of GDP, per capita income, and real wages (low unemployment rate) Japan as a Developed Country (see Table 3 )• Negative Side Effects

– Poor Infrastructures--- traffic congestion-– unequal development among geographic regions and

among economic sectors– Environmental pollution (Minamata Disease and Itai-Itai

Disease in the late 1960s)– the high rate of inflationJapanese Economy A 　 　 Chapter 4 42

3.4 The end of rapid growth

Nixon Shock(1971) :U.S. stopped the convertibility of the dollar into gold. The yen exchange rate up.

Oil crisis (1973,1978)War in the Middle East caused the price of oil to rise.

These external shocks brought Japan's rapid growth to an end. The economy grew at slower and steadier rates.

Japanese Economy 43

Real GDP Growth (Fiscal Year – April to March)

Source: The System of National Accounts site, Cabinet Office.

Average 1974-90 4.2%

Average 1991-2010 0.9%

Average 1956-73 9.1%

Japanese Economy 44

The three major factors in the end of the postwar Japanese miracle

-The oil crises, -The decrease in investment, -and The slowdown in technological progress

They were not independent of one another.

The real reason of Japan's growth rate fall ?

Japan finally caught up with the United States and the Western European countries technologically at some point in the mid 1970s. Since it is harder to develop a country's own new technology than to merely obtain licenses, then growth rate fall.

Japanese Economy 45

TableJapan during oil crises.

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1st Oil crisis GNP growth inflation 2nd oil crisis GNP growth inflation

1971 4.5 -0.8 1977 5.3 11.1

1972 8.5 0.8 1978 5.2 13.1

1973 7.9 15.7 1979 5.3 9.1

1974 -1.4 31.6 1980 4.3 7.2

1975 2.7 3.0 1981 3.7 11.0

1976 4.8 5.0 1982 3.1 7.9

Monetary　Growth　and　Inflation　(12-month　change)

-20%

-10%

0%

10%

20%

30%

40%19

65Q1

1966

Q1

1967

Q1

1968

Q1

1969

Q1

1970

Q1

1971

Q1

1972

Q1

1973

Q1

1974

Q1

1975

Q1

1976

Q1

1977

Q1

1978

Q1

1979

Q1

1980

Q1

1981

Q1

1982

Q1

1983

Q1

1984

Q1

1985

Q1

1986

Q1

1987

Q1

1988

Q1

1989

Q1

1990

Q1

1991

Q1

1992

Q1

1993

Q1

1994

Q1

1995

Q1

1996

Q1

1997

Q1

1998

Q1

1999

Q1

M2+CDWPICPI

Monetary Growth and Inflation (12-month change)

Bretton Woods fixed dollar system ends General float

begins

1st oil shock 2nd oil shock

Plaza Agreement

Bubble

Bubble collapses

Ohno P.187

Japanese Economy 47

Growth Slowdown in the 1970s-80s• Japan’s economic maturity—income reached

the world’s highest level• Oil shock and global stagflation• General floating of major currencies

Catching　Up:　Real　Per　Capita　GNP(1995　dollars,　conversion　at　actual　exchange　rate)

0

10000

20000

30000

40000

50000

US 10582　12060　13046　15454　17310　18754　21392　23858　26744　28157　

J apan 776　 1336　 2127　 3984　 6962　 11676　16486　15658　28912　40421　

1950 1955 1960 1965 1970 1975 1980 1985 1990 1994

US

J apan

Per　Capita　Income　at　PPP(US=100,　price- level

adjusted)

0

20

40

60

80

100

1955 1965 1975 1980

ItalyUKJapan

FranceW.Ger.US

Japanese Economy 48

Productivity　Change　by　Industry　(%/ year)

-4-202468

1012

Food

Tex

tiles

Woo

d　prod

ucts

Pap

er　and

　pulp

Che

micals

Oil　an

d　ga

s

Cer

amics　et

c.

Iron

　and

　ste

el

Non

ferrou

s　met

als

Met

al　pro

duct

s

Gen

eral　m

achine

ry

Elec

trical　m

achine

ry

Trans

port　m

achine

ry

Pre

cision

　mac

hine

ry

1954- 731974- 90

McKinnon-Ohno　(1997)　chap.2

Productivity Slowdown(estimated by labor-material Cobb-Douglas prod. func.)

Japanese Economy 49

ConclusionFactors of growth (1) The imported foreign technology (2) The high saving rate (3) large supply of high-quality labor (4) The sound monetary and fiscal policy:The reasons of the high growth:- a sustained period during , the prices of the raw materials and agricultural commodities which Japan had to import were relatively low.-sound policy decisions by Japan's monetary and fiscal authorities through the 1950s and the 1960s,-and a high saving rate, which provided sufficient funds to support a high investment rate.

Slow down:economic maturity—Japan caught up with the developed countries technologically.Japanese Economy 50

ReferencesDadid Flath [2005], The Japanese Economy, Oxford University Press. Takatoshi Ito [1992], The Japanese Economy, MIT Press.( Ch.3)Morishima, M. [1982], Why Has Japan Succeeded? Cambridge University Press. Kenichi Ohno[2006], The Economic Development of Japan, GRIPS Development Forum.Reischauer, E. [1988], The Japanese today, Harverd University Press.

51Japanese Economy