RelationsJapan's Economy since Pearl Harbor: Part 1

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Institute of Pacific Relations

Japan's Economy since Pearl Harbor: Part 1Author(s): Andrew J. GrajdanzevReviewed work(s):Source: Far Eastern Survey, Vol. 12, No. 12 (Jun. 14, 1943), pp. 119-123Published by: Institute of Pacific RelationsStable URL: http://www.jstor.org/stable/3022395 .

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JAPAN'S ECONOMY SINCE PEARL HARBOR:

Part I

ANDREW J. GRAJDANZEV

The present war in the Pacific would have been

impossible without a major development of industryin Japan and fundamental changes in its structure.

In 1929, Japan(1) was a great textile power; her

industry was predominantly so-called light industry,

specializing particularly in the production of textiles.

In the same year, her production of coal was less

than 7% and of steel and machinery less than 5% of

United States' production. It is true that such com-

parisons in themselves are misleading. Japan and the

East are far distant from the United States and only

part of the might of the United States could be and

can be diverted from the continental territory of the

United States to the potential theaters of war. Yet the

differences were so great that it would have been follyfor Japan to start a war in that year.

The ten years between the occupation of Manchuria

and the Pacific war were used by Japan in securingher rear by wars in China; in the advance to the

south, obtaining die sources of raw materials; in ex-

panding production facilities in Japan Proper. The

results of this expansion can be seen from the follow?

ing figures of the gross value of industrial productionin Japan:

figures are available?was due to the rise of prices.

In February 1942, the Japanese newspapers publisheda statement by Shoji Watanabe, Director of Mitsui

Seimei (Mitsui Life Insurance Co.), which claimed

that production had increased by ?23 billion and

that "not a yen of this huge sum existed before." His

comparison is no doubt with the year 1936, because

in 1937 Japan launched her new six-year program of

armaments and five-year plan for expansion of "pro?ductive power." In 1936 the gross value of produc?tion was ?12,258 million. Thus, if the statement byWatanabe is accurate, the gross value of productionin 1941 was about ?35 billion. Judging by 1941 whole-

sale prices in the United States and Japan, an exchangeratio of four Japanese yen for one U.S. dollar(2)

appears reasonable. In terms of U.S. dollars, the grossvalue of the 1941 industrial production of Japan would

thus be about ?9 billion, or about one-seventh of the

gross value of industrial production in the United

States.

Factors Favorable to Japan

This represents a great improvement, but none too

great for the task begun in December 1941. However,

Million yen Percentages of total1929 *937 *938 ^29 1937 !938

Textiles 2,998 4,242 3,985 38.8 25.8 20.3Metals 690 3,488 4,687 8.9 21.2 23.8

Total 7,717 16,412 19,667 100.0 100.0

These statistics do not cover household industry or

small enterprises with less than five workers or with?

out any prime mover; these industries must have

developed much less rapidly than those covered by the

above table.

A considerable part of this increase in the value

of industrial production?probably not less than one-

third of the figure for 1938, the last year for which

(1) Japan Proper unless stated otherwise.

Mr. GrajdanzeVis a memberof the International Secretariatof the Institute of Pacific Relations.

there are several factors which work in favor of the

Japanese planners: (1) changes in the compositon of

Japan's industrial production; (2) the possibility of

using the resources of most of Eastern Asia; (3) con-

tinued expansion of industry in Japan, a processwhich is heightened by (4) the long period needed

by the United States to organize an effective army and

to make good the naval losses suffered at Pearl Harbor.

The changes in the composition of Japan's indus-

(2) The approximatevalue of theyen n therestrictedxchangemarketthat existed beforethe war was 23.5 U.S. cents.

JUNE 14, 1943 1 19



trial production are indicated in the table above. The

textile industry, which held firstplace in 1929, droppedto second place in 1938; no doubt by 1941 it had

dropped to fourth place, after metals, machinery and

tools, and chemicals. Metals and machinery produc?tion, responsible for 17.7% of the total gross value of

production in 1929, rose to 43.2% in 1938 and con-

tinued to rise thereafter.

Civilian Needs NeglectedBut these figures do not tell the whole story. Civilian

needs in metals, tools, and machines have been almost

completely neglected and production today is limited

to war demands. Civilians cannot buy even nails. In

this way, the munitions industry between July 1937and December 1941 was expanded "seven or eight-fold" and the productive capacity of aircraft industryincreased "more than ten times." These results con?

vinced the Japanese militarists that after the occupa?tion of Southeast Asia they could do even better. The

sameShoji

Watanabe declared:

The future demands thatJapan should increase in strengthmore than eight times that of her present status. Japanmust be prepared for at least twenty more years of war.There is no need to fear that, for the success of the Imperialforces has assured that she will not sufferfrom the lack of

necessary raw materials.

Major General Kenryo Sato, Chief of the MilitaryAffairs Section of the Army, was equally optimisticwhen, in the speech mentioned above, he said:

America provoked Japan to war because of her mistakenbelief that Japan had been economically exhausted by theChina Affair.She is going to repeat the same mistake again.

For Japanese investments in the industrial develop?ment of Japan, Manchuria, and Occupied China, the

japan Times and Advertiser of March 10 and 18, 1942,

gives the following data for 1937-1941:Year Million yen1937 2,0631938 3>978*939 7>2571940 8,282

1941 7,821Total 29,401

Discountingcases of double

counting,the

newspaperestimates the actual investments in this period at ?25billion. The Weekly Bulletin, issued by the Board of

Information, estimated that investments in "industrial

development" from July 1937 to November 1941were ?23 billion. The above-mentioned ?29.4 billion

was raised in the following way:Source Million yen

29,401

ihe amount from debentures and shares was raised

as follows:

Source Million yen

Japan 13,942Manchuria 3>?97China 824

17,863

It is not clear from this table whether, for example,by "amount raised in Manchuria," it is meant that

both the population of Manchuria (including the

Japanese) and the financial institutions supplied the

?3,097 billion. Such a sum would represent quite an

achievement; ?3 billion is almost one-quarter of the

amount raised in Japan, the population of which is

more than twice as great as that of Manchuria which

until recently was mainly an agricultural country. It

is more likely that this figure means that Japanese

companies operating in Manchuria raised this sum in

debentures and shares, i.e., the figures indicate not the

origin of the funds, but their destination. They showhow great (relatively) is the new construction carried

011 in Manchuria and the extent of the Japanese effort

to create an industrial base on the continent for future

military operations.It should be pointed out that, while the first table

gives the figures for the gross value of industrial pro?duction, the figures given for investments include not

only industry but also transportation and even agri?culture. These figures indicate that, in the last three

years (1939-1941), new investments reached seven or

eight billion yen a year, or about two billion dollars,

a substantial sum even by American standards. These

large sums represent savings?voluntary and com-

pulsory?made by the Japanese population from their

income.

National Income of Japan

The following table gives the estimates of the

Research Division of the Japan Economic Federation

for the national income of Japan. These estimates

cliffer from those of other Japanese authorities only

by 7% to 10%.Year Million yen1933 12,064

1934 i3?o451935 14.865

1936 16,320

1937 20,4761938 22,518

1939 24,519

Out of a national income for 1939 estimated at

?24.5 billion, some ?7.3 billion were invested in "in?

dustrial development"; ?6 to ?7 billion were spenton the war and preparations for the future war; and

?2 to?3

billion were

spent

on the Government

120 FAR EASTERN SURVEY



apparatus.(3) There remained for civilian consumptionnot more than ?8 billion, or less than one-third of the

total. In February 1942, the Minister of Finance,Okinobu Kaya, informed the Diet that he estimated

the annual national income for 1942-43 at ?45 billion.

Of this sum, ?15 billion would be spent for civilian

consumption; ?23 billion for public financing; and

?6 billion for industrial expansion. In his testimony

before the Budget Committee on February 3, 1943,he estimated the national income for 1943-44 at ?50billion.

The figures he gave for 1942-43 were criticized bythe magazine Diamond. It pointed out that in the

Diet Session in 1939 the then Minister of Finance

estimated the national income at only ?25 billion.

Evidently, it was added, the ?45 billion figure was

arrived at by including Government spending, which

under the 1942-43 budget would amount to ?20

billion. However, this criticism by the Diamond is

not valid. In the figure for 1939-40 (?25 billion),the Ministry of Finance also included a part of Gov?

ernment spending. Since expenditures on battleshipconstruction are as much a part of the national spend?

ing as expenditures for food and clothing, such inclu-

sion is justified.If these official estimates are correct, the national

income of Japan has increased from ?25 billion to

?45 billion between 1939-40 and 1942-43, or, on the

average, by six to seven billion yen a year. For 1943-44,the increase is expected to be only five billion yen.

Presumably the authorities recognize that it would be

impossible to maintain the former tempo of de?velopment.

Inflation and the National Income

For this same three-year period, the index number

of wholesale prices(4) stood in June 1939 at 148.9, and

in April 1942 (the latest figure available) at 189.2,

showing an increase of 27%. This would suggest that

at least seven billion of the 20 billion yen increase in

the national income for this period was due to infla?

tion. Actually, however, a greater percentage may be

due to inflation, for this increase was the result of the

development of the armament industry, and the pricesof everything used in munition and armament indus?

tries ? metals, machinery, building materials ? were

rising more rapidly than the general level of prices.Also, these industries were heavily subsidized by the

Government to prevent an even higher rise of prices.Such subsidies would have to be deducted from the

"increase" of national income. Actually, then, the

(3) Exact figures ortheseexpenseson war and administrationare not available.

(4) This index number was preparedby the Japanese Depart?mentof Commerceand Industrywith the year 1929 as 100.

growth of real national income was slower than the

official figures suggest.If all Japanese income remaining after the pur-

chase of available commodities at established priceswas used to purchase bonds (both corporate and Gov?

ernment) and shares, the rise of prices would have

been very much slower.(5) The Government vigorously

promoted bond sales. In September 1942 it was stated

by Finance Minister Kaya that the total amount ofsavings since July 1937 nac* reached ?56 billion; from

April to June 1942, ?6,570 million; and the plannedtotal for savings in 1942-43 was ?23 billion.((j) This

last figure, one notices, corresponds to that given above

"for public financing." But these borrowings did not

stop the march of inflation. No doubt a considerable

part of these savings are not real savings but only

banking credits to the corporations occupied with

armament production and construction.(7) In spite of

increased taxation and saving campaigns, the Govern?

ment has been forced to use the printing press as

indicated in the following table:

NOTE ISSUE OF THE BANK OF JAPAN

Million yen IndexDecember 18, 1937 1,804 100December 14, 1940 3,810 211December 19, 1941 6,079 336

Within four years the amount of notes increased

more than three times. During 1941 alone it increased

by 59%. The war in the Pacific in 1942 has undoubt-

edly brought a sharper rise.

Twelve "Control Associations"

Savings alone are not enough for the expansion of

the armament industries. It is also necessary to direct

that expansion into the proper channels. For this

purpose, the businessmen of Japan were organizedinto twelve "control associations." Each of these asso?

ciations was to supervise within a given branch of

industry the completion of the plans worked out bythe Government. This arrangement, it was hoped,would combine the advantages of private initiative

with those of Government direction. Kohei Goshi, a

well-known economist, wrote in Jilsugyo no Nippon

(Business Japan) in May 1942:At a recent meeting of Army and Navy officials, the

Minister of Commerce and Industry, the associations, etc,the policy of the Government of transferringthe industrialcontrol of the Administrations to the control associationswas clearly stated. These associations should bring harmony

(5) It would be impossible to avoid a price rise completelybecause of shrinkingsupplies and the use of inferior labor,poorer mines, etc.

(6) Savings in 1940-41were estimated by the government t

?12,817 billion and in 1941-42at ?16,020million.C) Notice above the part the banks played in the supply offunds for "industrialdevelopment."

JUNE 14, 1943 121



between existing cartels and the Administrations. These

Administrations do not make Government administrative

organs unnecessary; for only that part of administrative

control of the Government Administrations will be trans-

ferred to the control associations which is really beyondthe sphere of their activities.

On the other hand, control associations are not merelyan extension of cartels or syndicates. The control associa?

tions are neither Government officesnor cartels, but are

strongly tinged with a public color, and at the same timetheyhave the potentialities of cartels. Some economists think

that these public and private functions of the associations

are not compatible, but they miss the new conception and

function of these control associations. Article 4 of the KeyIndustries Associations Ordinance (promulgated before the

start of this war) reads: "the control associations shall exer?

cise synthesized control over the industries concerned and

cooperate with the formulation and conduct of state plan?

ning of the industries concerned for the sole purpose of

developing the national economy to the highest efficiency."

They were created because of the blind alley reached bythe Government control machinery. Therefore the initiative

and creative spirit of the private industries must form thecore of the activities of the control associations, and while

the control associations are quite different n nature from

the existing cartels, the autonomous character of the exist?

ing cartels should be strongly reflected in the control

associations.

Bureaucracy, Army and Business

There are today no labor unions in Japan and polit?ical parties have ceased to exist. Only three organizedforces occupy the field: the bureaucratic machinery of

the state, the armed forces, and the associations of

businessmen. The first two of these, the bureaucracyand the armed forces, were to do the planning for

industrial production, while the execution of these

plans was entrusted to the control associations, a kind

of self-government in industry. According to Kohei

Goshi, these associations were somewhat different from

the cartels, but how, he did not explain.Not all were satisfied with this arrangement. Yoji

Minobe, Chief of the General Affairs Section of die

Commerce and Industry Ministry, in the May 1942

issue of Kaizo, wrote that

(1) The present economic administrative structurewhich

is decentralized and founded on the old liberal economyshould be revised so as to be suitable for syntheticeconomic

planning and its conduct. (2) The present structurewhich

only exercises negative supervision over private industries

is not only unconstructive but is also unsuitable for the

conduct of wartime economy. (3) The present narrow juris-diction of local governments and their decentralization

should be corrected so as to make them thoroughly coordi-

nated and unified forthe conduct of a synthetic nd planned

economy. (4) Consistency should be maintained between

the economic administration in the homeland and the out-

lying territories n the conduct of industrial economy.

Thus, in Minobe's view, there was too much liberalism

in the existing structure. The system of checks and

balances and decentralization should be done awaywith; there should be no sectionalism; and a syntheticand active leadership was to be enforced.

These two viewpoints illustrated by Goshi and

Minobe clearly reflect the struggle that has been goingon inside Japan. The industrialists wanted to keeptheir cartels and syndicates under the name of "con?

trol associations"and at the same time to

preservetheir own autonomous control of production. But the

planners, influenced by the Soviet example and pressed

by the necessities of war, wanted sweeping changestoward centralization and an active control of industry

by the planners themselves.

Advantcsge to Business

The indications are that the businessmen have been

getting the best of the struggle. On January 21, 1943,the control associations were granted "full official

status" by an Imperial ordinance stating that "official

actionby

the control association is to be regarded as

having the same effect as the official action of the

Government Administrative Office." Thus, the asso?

ciations were put in the same position as the Adminis?

trative Office.

Later, on February 5, 1943, Chozaburo Mitani in the

Parliament asked Lieutenant-General Suzuki, the Pres?

ident of the Cabinet of the Planning Board, about the

contradiction in business policy which allows "well-

known firms to be caught between die nation and capi?tal." The question as stated is not clear but it seems to

voice the contradiction between the national interest

in prosecutinga successful war and

privateinterests

in making profits. Suzuki's answer was:

Today we are in the midstof war. We are in circumstances

which make it imperative that we win the war. Thus today,whether that [form] is God or the ocean, it is all the same.

Based upon this ideal all industries must be managed.

This cryptic answer may be interpreted to mean: if

business interests will help us to win the war, let them

have their profits!

Priorities for More Wars

The Japanese economy today is one of extreme

scarcity; there are shortages everywhere. Under these

conditions it is important to know which industries

are getting first claim, i.e., what is the system of

priorities, and also within each industry who is gettingthe raw materials? The question was answered bySuzuki. In May 1942 he listed the following order of

priorities to meet competing demands:

(1) Adequate supply of war materials. (2) Security of

supplying power and of the production required for replen-ishment of war materials. (3) Supply of materials absolutely

necessary for the expansion of productivity,which is essen?

tial for the successful prosecution of protracted warfare.

(4) Stabilization of livelihood.

122 FAR EASTERN SURVEY



In other words, first come all the supplies for the

actual prosecution of the war; second, for tomorrow's

war; third, for the long-term war; and fourth, what

is left, for civilian consumption.The necessary shift from peacetime to wartime in?

dustries brought many dislocations. The position of

small enterprises became especially precarious because

so many of them were in the export and domestic

civilian market and also because the control associa?tions are made up of representatives of large corpo-rations who are not too concerned with the fate of

small-scale enterprises.

New Banking Aids

The People's Rehabilitation Bank was established

in the summer of 1941 to aid small manufacturers and

traders by purchasing their unused equipment. In

March 1942 this bank was permitted to make tempo?

rary loans to those in urgent need of funds pendingthe assessment of the value of idle equipment. This

step was taken to encourage amalgamations amongsmaller manufacturers and traders "to complete the

new industrial structure." It is doubtful, however,whether this bank can do much to alleviate the plightof the small businessmen. Even with capital received

from their unused equipment, they still have the

problem of shortages in both labor and raw materials.

Many small businesses actually faced extinction, thoughlater developments have offered some new oppor-tunities.

Problems of readjustment arose also for the large

enterprises. On March 1, 1942, a Wartime Financing

Bank was formed toadvance funds (1) to important industrial corporationsunable to obtain the necessary funds for expansion of their

productive capacity from ordinary financial institutions;

(2) to corporations which as a result of the changes in theindustrial structure of the nation were obliged to leave

part of their equipment idle or which were unable to com?

plete the installation of new equipment already begun;(3) to companies obliged to hold stock of vital commodities

in accordance with Government instructions: (4) in order

to prevent undue rises or falls in stock exchange prices.

Big Corporation Mergers Encouraged

This bank was to absorb the "Concord Securities

Corporation" organized for the same purpose in the

summer of 1941. The initial capital of the bank was

to be ?300 million, of which two-thirds was to be

supplied by the Government and one-third by the Con?

cord Securities Corporation and certain other banks.

Further mergers were encouraged by the Government

among big corporations, a policy which correspondedto the prewar trend of business. Japanese newspapershave carried frequent news items on mergers of cor?

porations of all kinds, including banks, newspapers,and

shippinglines. It

maywell be that the end of

the present war will find the national economy con?

trolled by fewer persons than in any other major

country.

(In ihe next issue of the Far Eastern Survey, this studywill be concluded with an analysis of Japan's use of the

labor power and resources now available to her.)

PACIFIC MISCELLANY

VICHY DEALS WITH NANKING

The Tokyo radio in a broadcast recorded by The Asso-

ciated Press^1* reported the signing o? documents dealingwith the "retrocession of exclusive French concessions" in

China by Foreign Minister Chu Min-yi, representative of

the Puppet Government, and the Vichy representative at

Nanking. Tokyo interpeted this action as conclusive evi?

dence that the French authorities are determined to collabo-

rate in the establishment of a new order in East Asia. The

Vichy representativeis said to have

signedover the French

concessions in Tientsin, Hankow and Canton.

PREPAR1NGFOR THE BURMA CAMPAIGN

According to Tokyo, a bill has been passed to build a

Burmese National Army ol 25,000 soldiers which will be

under the command of a Japanese officer.

INDIA

According to Mr. Amery, Secretary of State for India,in the House of Commons, 14,898 persons were imprisonedin India following conviction in connection with the Con?

gress Party rebellion, and 11,623 were detained for an

indefmite period. The figures covered the position on

March 15 and did not include the Northwest frontierprovinces.

DO GOOD CHILDREN NEED ERASERS

The Japanese Ministry of Commerce and Industry has

decided to allot some of the rubber received from the

southern regions for the production of erasers which will

be distributed to the good children of the primary schools.

LABOR MOBILIZATION

According to a Japanese report in the Yomiuri Hochi

Shimbun, 11,464 shops were closed in Tokyo alone up to

the end of March as a result of the National Mobilization

Law. Through the closing of these shops approximately

15,000 workers have been made available in Tokyo, ofwhom one-third are already employed in munitions factories.

JAPAN DISCOVERS THE IPR

The Japanese radio, commenting in English on the reportof the Mont Tremblant Conference, pretends to have justdiscovered the existence of the Institute of Pacific Relations.

It refers to the organization as "once quite well known and

highly propagandizeel," and then by some remarkable

development of thought states that it "hardly knew that

the Institute as such even existed, let alone being aware

that its meeting was being held."

(i) New York Times, May 19, 1943.

JUNE 14, 1943 123

Documents

RelationsJapan's Economy since Pearl Harbor: Part 1