ESRI Research Note No.27

Japan’s High-Growth Postwar Period:
The Role of Economic Plans

Shinji Yoshioka and Hirofumi Kawasaki

August 2016

Economic and Social Research InstituteCabinet Office
Tokyo, JapanThe views expressed in “ESRI Research Note” are those of the authors and not those of
the Economic and Social Research Institute, the Cabinet Office, or the Government of Japan.
(Contact us: https://form.cao.go.jp/esri/en_opinion-0002.html)

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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Preliminary

Japan’s High-Growth Postwar Period:
The Role of Economic Plans

August 2016

Shinji Yoshioka and Hirofumi Kawasaki*(Abstract)
Japan experienced a high-growth period from the mid-1950s to the early 1970s. This study explores
the economic situation and policy coordination of the period, in particular focusing on the importantrole of economic plans and their indicative role for both economic policy coordination in thegovernment sector and guideline information supply for the private sector, along with short-term
policy coordination and analyses on the economy by annual and monthly economic reports. Somerelated policies to economic plans, including fiscal policy, monetary policy, and industrial policy, etc.,
are also included. Additionally, this study not only reveals the Japanese development process but also
provides additional benefits for the government authorities and private sector businesspersons indeveloping countries to help to catch up to the advanced economies.

Keywords: High Growth, Economic Plan, Japanese Development Process
JEL Classification Numbers: E20, H10, N15* Both are Senior Research Fellows of the Economic and Social Research Institute (ESRI), Cabinet
Office (CAO) and grateful to our colleagues at ESRI for their impressive contributions, in particular,
to Mr. Koji Sago for his assistance of drawing charts.

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

CONTENTS

1. Introduction ------------------------------------------------------------------------------------------

1

2. Macroeconomic Policy Management in Japan: The Role of Economic Plans ----------------

2

3. Japan’s Economic Situation in the Immediate Postwar Period4-------------------------------

4. Historical Overview of Japanese Economic Plans During High-Growth Period in 1950s
and 1960s-----------------------------------------------------------------------------------------------

10

5. Fiscal and Financial System During High-Growth Period --------------------------------------

24

6. Economic Plans and Industrial Policy-----------------------------------------------------------

29

7. Liberalization Process and Re-Integration into the International Economy -------------------

32

8. Infrastructure Building and Comprehensive National Development Plan------------------

36-----------------------------------------------------

41

10. Consensus Building with the Private Sector and Academic Authorities ---------------------

46

11. Evolution of Quantitative Method for Economic Planning----------------------------------

49

12. Short-Term Economic Policy Coordination ------------------------------------------------------

57

13. Policy Coordination Utilizing Economic Analysis Reports ---------------------------------

60

14. Conclusion ------------------------------------------------------------------------------------------

64

Appendix 1: Modern Economic Growth Theory and Development Economics

71

9. Human-Related Factors in Economic Plans--------------

Appendix 2: Business Cycle Dating, Composite Indicator (CI), and Stochastic BusinessIndicator -------------------------------------------------------------------------------------------------

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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

1. Introduction

In postwar Japan, we experienced a high-growth period for approximate 20 years, from the mid1950s to the early 1970s. The real GDP/GNP growth rate frequently exceeded 10 percent during thisperiod. Figure 1-1 depicts the general development of Japan’s postwar growth rate. The Japanese
economy shifted to stable growth in the early 1970s, to around 5 percent, after enjoying the highgrowth rate. Moreover, the bubble crash in the early 1990s caused lower growth, around 1-3 percent
at present.

Figure 1-1: Real Growth Rate in Japan
15%

10%

5%

0%

-5%

-10%

Source: Cabinet Office.

Japan experienced a high-growth period from the mid-1950s to the early 1970s, as Figure 1-1
depicts. Many studies have explored the factors behind this economic growth, including Kosai (1980),
Hayashi (1997), Yoshikawa (1992), and Ohkita (2010). Some of them insist on the importance ofinstitutional and structural changes in postwar Japan under occupied armies’ control, such as
agricultural land reform, zaibatsu dissolution, labor democratization, and so on, and others stress theroles of economic policies of Japanese government, such as industrial policies of MITI (Ministry ofInternational Trade and Industry), among others. Many of these studies employ the growth theory
application to Japan’s postwar economy, but few focus on features of economic development 1 . This
study applies a development economics focus to reveal findings about Japan’s postwar economy, inparticular during the high-growth period. We imagine that these sorts of Japanese experiences may be
helpful for development assistance to Asian developing countries. For these purposes, we take theapproach of economic planning and its significant role to economic policy coordination process, and1

We find out that Sadahiro (1991, 1992) and Ohno (2006) take this approach.
1

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

include some comprehensive surveys on standard development economics as appendices, derived
from Lewis (1954), Rostow (1960), Harris and Todaro (1970), and so on.

Apart from this introduction, this study consists of several additional chapters: the second chapter
focuses on macroeconomic policy management, in particular, the role of economic plan; the thirdchapter reveals Japan’s economic situation in the immediate postwar period, which means before theplanning exercises; the fourth chapter historically overviews Japan’s economic plans during thehigh-growth period in the 1950s and 1960s, which are the Five-Year Plan for Economic Self-Support(FY1956-60), the New Long-Range Economic Plan (FY1958-62), the National Income Doubling Plan
(FY1961-70), the Medium-Term Economic Plan (FY1964-68), the Economic and Social Development
Plan (FY1967-71), and the New Economic and Social Development Plan (FY1970-75) 2 ; the fifth
chapter glances at the fiscal and financial systems at that time; the sixth chapter focuses on the relation
between economic plans and industrial policy; the seventh chapter discusses how to liberalize andharmonize the domestic market in accordance with the international economy; the eighth chapter deals
with the relationship between economic plans and comprehensive national development plans fromthe viewpoint of infrastructure building; the ninth chapter reports human resources development ineconomic plans, including social security, education, and so on; the tenth chapter highlights theinvolvement of the private sector and academic authorities to formulate economic plans; the eleventh
chapter summarizes methodologies on economic forecast in economic plans, including utilization of
econometric models; the twelfth chapter reveals the importance of short-term policy coordination apartfrom the economic plans; the thirteenth chapter focuses on policy coordination utilizing analyticalreports issued regularly; and the final chapter concludes this study. In addition to these fourteen
chapters, the appendices include modern economic growth theory and development economics,
especially focusing on dual economy and business cycle analysis methodologies.

2. Macroeconomic Policy Management in Japan: The Role of Economic Plans

The market economy consists mainly of four sectors: households, corporations, government, andforeign sectors. At the goods and services markets, consumers buy goods and services to maximize
their utilities under their budget constraints while corporations supply them to maximize their profit.
On the other hand, in the labor market, households supply labor, which corporations demand.
Considering cross-border transactions, some households buy imported goods, and some corporations
also export and import goods. Financial transactions are included in both domestic and foreign markets.
The market mechanism adjusts these demands and supplies according to prices. The Economic
policies are official interventions of the government to the markets. The aim of government
intervention is mainly to resolve market failure or to improve resource allocation in microeconomic

2“FY” means fiscal year, which starts in April and ends in March of following year in Japan.
2

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

aspects and to stabilize macroeconomic fluctuations. In general, macroeconomic policies consist ofsome measures; which are fiscal policy, monetary policy, industrial policy, antitrust policy, labor policy,
and so on. This chapter mainly focuses on fiscal policy, monetary policy, and economic policy
coordination employing economic plans in postwar Japan.

Among the economic policies completed by the government and the central bank, fiscal policy is
one of the most important and contains three functions: (1) resource allocation; (2) income
distribution; and (3) stabilization of macroeconomic fluctuation. The first function is to be completed
by supplying public goods, including infrastructure, the second is by employing regressive tax systems,
pensions, and other social security measures, and the third is by combination of several policies basedon Keynesian economics. In Japan, the Ministry of Finance (MOF) has been in charge of the budgeting
process, which is one of the most symbolic policies. In the market economies, the main and driving
force of the economy is the private sector; purely theoretically, the price mechanism at the perfectcompetitive market would bring the optimal allocation of resources. External economies, monopolistic
markets, and other so-called market failures, are sometimes exceptional. Among those, the supply of
public goods would underrun the optimal level so that it is necessary that the government shouldintervene in the market, which is the basic theory of fiscal policy.

The Bank of Japan (BOJ), which is also called the central bank of Japan, plays a dominant role inmonetary policy independently from the government. Usually, the central bank is committed tocurrency stability, through the adjustment of money supply and/or interest rates, which control
macroeconomic aggregate demands 3 . In the words of “currency stability,” both domestic and foreign
currencies are included. The former means price stability reflected in the consumer price index (CPI)or other representative deflator, and the latter is measured by the foreign exchange rate. Some central
banks of both developed and developing countries, including the Bank of Japan, adopt an inflation
targeting policy, in which a central bank has an explicit target inflation rate for the medium term andannounces this inflation target to the public. Jahan (2012) provides more detailed explanations andpractical examples of the inflation targeting policy. Along with this price stability, the central bank is
responsible for financial stability, employing policies of prudence.

During the high-growth period of postwar Japan, the Ministry of International Trade and Industry(MITI) had been committed to industrial policy. The industrial policy was defined at Komiya (1975)
as follows: “The industrial policy is pointed as government policies that affect resource allocation
among industries and private firms’ activities level in individual industry. That is, the industrial
policies promote and/or depress production, investment, R&D, modernization, and industrial reform.”
Mainly, industrial policy has been regarded as a policy package to improve the performance of a3

Federal Reserve Board (FED), the central bank of the United States, has the dual mandate of
maximum employment and stable prices.
3

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

specific or aimed industry. In particular, capital crunch was a major problem4 so that MITI and othergovernment authorities funded the required capital to industries of high potential.

In Japan’s postwar economy, several policy measures, including those mentioned above-, wereavailable to promote economic activities, to modernize economic structure, and to stabilize
macroeconomic fluctuations, but it was absolutely required to coordinate policy measures to avoid
inconsistency. Economic plans were employed for this purpose and also played a significant role tostimulate private sector activities by revealing mid- and long-term economic directions and concrete
forecasts. In other words, economic policy coordination employing economic plans were two-sided;
one was to avoid the negative effects of inconsistency among policy measures and the other was topromote positive effects to enhance private sector activities by indicating the direction of government
economic policies.

Describing the character of economic plans in postwar Japan, Furuya (1979, p.297) stresses that
economic plans were recognized as “Generalized Market Research.” For example, the New LongRange Economic Plan pointed out the following features:(1) The plan indicates the guidelines of economic policies under the free corporation and freemarket system;(2) The government expects that inventive ideas and energy would be the driving force toeconomic development, avoiding direct controlling measures as much as possible; and(3) The government intends to carry out the plans by indirect measures such as fiscal andmonetary policies, etc.

This basic characterization of economic plans were taken over for posterior economic plans: For
example, the National Income Doubling Plan stated that “this economic plan will be carried out under
the free corporate and free market regime and will not enforce strict implementation in all economic
fields,” and the Economic and Social Development Plan insists that “this plan reveals basic directions,priorities, and responsibilities of government activities, but for private sector activities, demonstrates
desirable directions and the government indicates guidelines as necessary.” Economic plans in themarket economy work as indicative and indicate desirable goals and/or guidelines for private
corporations and households while those in a socialist economy are understood as the enforcing orderto the private sector from the government 5 .

4Furuya (1979) insists that Japan had lost a quarter of national wealth and one third of production
capacity, but not so much of labor force due to the war.
5 Komine (1993) also stresses the indicative character of Japanese economic plans.
4

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

3. Japan’s Economic Situation in the Immediate Postwar Period

War II widely destroyed Japanese economic and social infrastructure and productive facilities. For
example, Furuya (1979) insists that Japan had lost a quarter of its national wealth, and one third of
production capacity due to the war. As the war ended in August 1945, economic and social statistics
in 1945-47 were not available or not so reliable, therefore some economists focused on the Japanese
economy in 1948 or later; the national income had dropped by around fifteen percent; manufacturingand mining production had dropped by close to forty percent; the population had increased by twenty
percent. Figure 3-1 describes Japan’s postwar economic situation.

Figure 3-1: Postwar Economic Indicators (Unit: 1930-34=100)
150

100

50

0
1930-34
FY1948FY1949Population
National Life Level
Manufacturing Production
Imports

FY1950

FY1951
FY1952
FY1953National Income
Agricultural Production
Exports
Manufacture Productivity

Source: Hayashi (1997) p.58

Moreover, retail prices had been rising very rapidly, partly owing to imbalances between demandand supply. But the extraordinary inflation hike had been supported by the underwriting of theReconstruction Finance Cash Office bonds by the Bank of Japan and the comprehensive economic
policy according to the Dodge Plan 6 had ended this malignant inflation finally. Figure 3-2 depicts
inflation in the postwar Japan.

6More detailed information on the Dodge Plan and its Nine-Point Economic Stabilization Program
will be provided afterward.
5

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Figure 3-2: Inflation in Postwar Japan (Tokyo Retail Price Index)
700%
600%
500%
400%
300%
200%
100%
0%
-100%

Source: Hoshino (2003) pp.16-17

Kanamori and Omori (2016), Hashimoto et al. (2011), Hayashi (1997), and some other works pointout that the framework of the Japanese postwar economy and its economic policies were designed by
the GHQ (General Headquarter) of the Occupation authorities, to avoid another war. Since the GHQ
regarded that the militaristic trends in Japan before the war had been originated from landowners andzaibatsu that supported the military, agricultural land reform and zaibatsu dissolution along with labordemocratization ware identified as the top priority.

In prewar Japan, the landlord system was widely in use, and the GHQ regarded this regime as oneof the causal factors that had led Japan into the war because poor tenant farmers brought effective
motivation to another war. The GHQ thus ordered the agricultural land reform that all of farmland
owned by non-resident landowners and those except for reservation 7 owned by resident landowners
should be redistributed to tenant farmers. According to Miwa and Ando (2010, p.145), the proportionof tenant farmland had decreased from 45.9 percent in 1945 to 9.9 percent in 1950 after the agriculturalland reform. Much of the literature points out that the zaibatsu (family-run conglomerates in prewar
Japan) ware also regarded as a driving force to World War II because they had been heavily involvedin the military industries. The GHQ also ordered the dissolution of 15 zaibatsu, including Mitsubishi,
Mitsui, Sumitomo, Yasuda, and so on, and introduced a free and competitive market system. The Dietof Japan had enacted the Act for Elimination of Excessive Concentration of Economic Power for thispurpose. At present, the Anti-Monopoly Act has been executed for the same purpose in Japan. The
GHQ also ordered the democratization of the labor system in Japan. In 1945, the Diet had enacted theLabor Union Act to ensure the right to organize, to bargain collectively, and to strike. Also, the diet7

Reservation for resident landowner was approximate 4 hectares in Hokkaido, and 1 hectare
throughout the rest of Japan’s mainland.
6

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

had enacted the Labor Relations Adjustment Act in 1946, and the Labor Standards Act in 1947, forthe purpose of advancement of labor.

As Figure 3-2 depicts, the problem of inflation was widely recognized. Of course, inflation in
postwar Japan was two-sided, which was caused by excess demand and shortage of supply, and was
also a monetary phenomenon. In 1945, the government of Japan founded the Reconstruction FinanceCash Office (RFCO) to supply reconstruction money. The RFCO had issued RFCO bonds, and the
Bank of Japan had immediately underwritten these bonds and printed money. This excessive money
supply had directly caused extraordinary inflation and indirectly caused excessive demand. On theother hand, the war had mostly destroyed production facilities in Japan, and Japan had lost the colonies
that had formerly provided some raw materials, and had had very little access to international tradesystem to procure materials and fuels, etc.

To curb this extraordinary inflation, two-sided measures had been taken: the priority production
system to enhance supply and the Dodge Plan to compress demand. First, the government of Japan
had implemented the priority production system, which distributed limited materials, fuels, funds, andlabor focused on coal, steel, fertilizer industries, and so on, to promote production. On the other hand,
the GHQ had invited Mr. Dodge to advise some economic policies, which had been called the Dodge
Plan, to reduce demand by cutting government deficits. The priority production system was advised
by Professor Arisawa 8 to the Prime Minister Yoshida and was expected to work as follows:(1) Infusion of imported heavy oil in the production of steel;(2) Concentrated infusion of steel products in coal mines; and(3) Infusion of coal in the production of steel, and so on.

In fact, beginning in January 1947, 30 million tons of coal output were realized in the second halfof the same year. At the same time, through the priority allocation of funding by the RFCO was
supplied to priority industries, facilitating corporations raising funds that otherwise would havebecome the bottleneck in the economic recovery. But these funds were supported by loans of the RFCO
so that the total money supply increased, causing an acceleration of inflation. Finally, the Dodge Plancurbed extraordinary inflation with the Nine-Point Economic Stabilization Program 9 unveiled in
8

Hiromi Arisawa (1896-1988) was a leading economist in the postwar Japan. He was a professor ofTokyo University and later became the president of Hosei University (1959-62). He also served as amember of the Atomic Energy Commission of Japan.
9 The Nine-Point Program was released by the State and Army Departments in response to the request
in NSC 13/2, October 7, 1948. As described in NSC 13/2, Washington viewed that more austere
measures would be necessary to fight against inflation than the Tokyo plan. NSC 13/2 recommended,“we should make it clear to the Japanese Government that the success of the recovery program will inlarge part depend on Japanese efforts to raise production and to maintain high export levels throughhard work, a minimum of work-stoppages, internal austerity measures and the stern combating of
inflationary trends including efforts to achieve a balanced internal budget as rapidly as possible.”
Joseph Dodge (1890-1964) was a banker and served as an economic adviser for postwar economic
7

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

December 1948 as follows:(1) Balance of budget;(2) Reinforcement of tax collection;(3) Restriction on credit extension;(4) Wage stabilization;(5) Price control;(6) Control on foreign trade and exchange;(7) Material allocation for promotion of exports;(8) Enhancement of production of domestic raw materials/products; and(9) Reinforcement of food collection.

Implementing the above program, the Diet approved so-called “over balanced” budget for both FY
1949 and 1950. The initial budget went from ¥414.4 billion in FY 1948 to ¥704.9 billion in FY 1949,
a hefty 70.1 percent increase. But the reasons for this increase were, first, projected rises in nominal
expenses due to the extraordinary inflation and, second, increases in price adjustment subsidies. The
latter, in particular, was the result of the transfer of a hidden subsidy for exports and imports that had
been paid from trade funds to the General Account of the budget. At last, the 360 yen-per-dollar fixedexchange rate came into being under the Bretton-Woods regime, which opened global exporting andimporting markets to Japan. While inflation was controlled with implementation of the Dodge Plan,
the Japanese economy suffered from severe deflation because of deficient demand. This depression of
the economy was, however, resolved by the Korean War in 1950-53. Table 3-1 reports special
procurement caused by the Korean War. According to the Five-Year Plan for Economic Self-Support(FY1956-60), GNP in FY 1954 was ¥7,241 billion and the special procurement brought theindependent demand of $20.114 billion, which means that the special procurement order in each year
generated by the Korean War was accounted as around 1-2 percent of GNP 10 , using the 360 yen-perdollar fixed exchange rate. Until around 1955, by grace of these sizable and independent demands, theJapanese economy had recovered its prewar level activities as indicated at Figure 3-3. And a few years
later, the 1956 Annual Economic Report proudly declared “It is no longer termed postwar.”stabilization programs. He drafted and implemented financial and currency reforms in West Germany
for 1945-48 just before he was dispatched as the adviser to the Supreme Commander for the Allied
Forces (SCAP), General Douglas MacArthur.
10 This independent demand, of course, might have brought some Keynesian multiplier.
8

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Table 3-1: Special Procurement Order (unit: US$1,000)
Merchandise

Services

Total

1950.6-51.5

229,995

98,927

328,922

1951.6-52.5

235,851

79,767

315,618

1952.6-53.5

305,543

186,785

492,328

1953.6-54.5

124,700

170,910296,610

1954.6-55.5

78,516

107,740

186,256

total

974,607644,129

1,618,736

Source: Miwa and Hara (2010) p.149.

Figure 3-3: Postwar Economic Activities Until 1955 (Unit: 1934-36=100)

Real GNP

FY1946

ExportVolumeAgricultural,
Fishery, andForestry
Production

FY1946

Industrial
Production

0

20

40

60

80

FY1952

ImportVolume140

FY1955

180

200

136
31

FY1952139

FY1955187

FY194678

FY1952117

FY1955CY1948

160

111

134
7

FY195236

CY194875
21

FY195259

FY1955per capita Real Wage of per capita
GNP
Manufacturing Consumption

120

62

FY1955Population

100

94

FY194657

FY195295

FY1955CY1947114
30

FY1952100

FY1955FY1946118
57

FY195289

FY1955105

FY1946109

FY1952124

FY1955129

Source: EPA (1976) p.86.
Note: “CY” means calendar year while “FY” means fiscal year (see footnote 2).
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

4. Historical Overview of Japanese Economic Plans High-Growth Period in 1950s and 1960s

In September 1951, the Peace Treaty of San Francisco was signed and Japan recovered its
independence with the effectuation of the Treaty in April 1952. Under the GHQ regime, Mr. Dodge
reported that Japan’s economy had been standing on stilts of aids and subsidies when getting to Japanbut the Japanese government had to self-support its economy independently after the effectuation of
the Treaty. Economic Plans had been playing a great role for economic policy coordination under thefree market system. Because of this reason and others, the Economic Council Agency (ECA) was
founded in August 1952 according to the government reorganization with the parent body of the
Economic Stabilization Agency (ESA) and took charge of economic plan formulation and othereconomic policy coordination functions. EPA (1976) places that the Economic Council Agency mainly
took in commission of the formulation of economic plans, the general coordination of policies relating
to the economy, and the objective and neutral research and analysis on both domestic and foreign
economies. Around the founded time, the characters and operation policies were as follows according
to EPA (1997):(1) Main commissions of the ECA are formulation of general economic policies, coordinationof economic policies among Ministries and Agencies of the government, and research andanalysis on the current economic situation;(2) The ECA formulates economic plans and economic policies that are based on research andanalysis on the current economic situation;(3) The ECA provides basis for drawing up the economic policies, formulating long-term
economic forecasts like the Economic Restructuring Program, Self-Standing Economy Plan,and so on, which the Economic Stabilization Agency had plotted out;(4) The ECA plans general economic policies from the comprehensive viewpoint of fiscal,monetary, industrial, and trade policies; and(5) Other than above-mentioned, the ECA is in charge of electric power development andnational development plans.

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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
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Table 4-1: Economic Plans in Japan
Name

Five-Year Plan

New Long-Range

National Income

Medium-Term

Economic and

New Economic

for Economic

Economic Plan

Doubling Plan

Economic Plan

Socialand Social

Development

Development

Plan

Plan

Self-Support

Formulation data

December 1955

December 1957

December 1960

January 1965

March 1967

May 1970

PeriodFY 1956-60

FY 1958-62

FY 1961-70

FY 1964-68

FY 1967-71

FY 1970-75

Methodology of estimates

Colm approach

Alternative

Alternative

Econometric

Econometric

Econometric

growth rates

growth rates

model approachmodel approachmodel approach

approachapproachSelf-support ofMaximization of

Maximization of

Correction of theDevelopment to

Building

the economy

growth

growthdistortion

balanced andcomfortable

Full employment

Improvement of

Improvement offulfillingJapan withnational life

national life

economy andbalanced

Full employment

Full employment

societyeconomic

Purposedevelopment
GDP/GNP Growth(planned)

5.0%

6.5%

7.2%

8.1%

8.2%

10.6%

Rate

(actual)

8.7%

9.9%

10.7%

10.6%

10.9%

6.1%

Industrial Growth(planned)

7.4%

8.2%

10.5%

9.9%

10.2%

12.4%

Rate

(actual)

15.6%

13.5%

13.8%

13.6%

13.2%

3.6%

Inflation of(planned)

n.a.

n.a.

n.a.

2.5%

approx. 3%

4.4%

Consumer Prices(actual)

2.0%

3.5%

5.7%

5.0%

5.7%

10.9%

Balance of(planned)$ 0 million$ 150 million$ 180 million$ 0 million$ 1450 million$ 3500 million

Payment at the(actual)$ -10 million$ -20 million$ 2,360 million$ 1470 million$ 6320 million$ 130 million

final year
Source: Authors based on EPA (1997) pp.45-46 and Haruta (1980) pp.279-80.

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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
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In short, the Economic Council Agency was founded as an affiliated government entity with thedirection of a Minister of State and consisted of three divisions of Coordination, Planning, andResearch other than administrative section. The Economic Council was also founded as an affiliatedorganization of the ECA mainly to deliberate on important economic policies and plans 11 . Moreover,in July 1955, the Economic Planning Agency (EPA) was founded with the reorganization of the
Economic Council Agency. The Development division, in charge of comprehensive national
development plans, was added to the EPA, separated from the Planning division. And finally, the EPA
was reorganized into the Cabinet Office according to the government reorganization in January of
2001. In high-growth period in postwar Japan, the Economic Planning Agency played a strong role ineconomic policy coordination and economic plans, as highlighted below:(1) Five-Year Plan for Economic Self-Support (FY1956-60);(2) New Long-Range Economic Plan (FY1958-62);(3) National Income Doubling Plan (FY1961-70);(4) Medium-Term Economic Plan (FY1964-68);(5) Economic and Social Development Plan (FY1967-71); and(6) New Economic and Social Development Plan (FY1970-75).

EPA (1997) and Haruta (1980) summarize the above-listed Economic Plans as former Table 4-1.

Figure 4-1: Business Cycle and Index of Industrial Production (IIP) in Postwar Japan
70
60
50
40
30
20
10
0

Note:

(1) Shadowed durations indicate those of recession.
(2) Unit of IIP is year 2010=100.

11

The Economic Council advised government entities, and consisted of business leaders, academic
authorities, consumer representatives, and so on, and played a significant role in formulating
Economic Plans, because the Prime Minister issued a consultative document to the Council and the
Cabinet decided the Economic Plan in line with the submitted report by the Council. We’ll focus
further on the Economic Council in Chapter 10.
12

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
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Source: Cabinet Office and Ministry of Economy, Trade and Industry.

Japan underwent several recessions in the postwar high-growth period of the 1950s-60s. Figure 41 shows the development of Index of Industrial Production (IIP), which had been assumed
considerably coincident with the business cycle along with shadowed recession period. Furthermore,during this period, worsening the balance of payment triggered the hike of interest rate that led theturning point of the business cycle 12 . This sort of background information on business cycle 13 is usefulfor understanding Economic Plans in Japan.

4.1 Five-Year Plan for Economic Self-Support (FY1956-60)

A lot of economists and historians regard the Five-Year Plan for Economic Self-Support decided by
the cabinet in December 1955 as the first full-fledged economic plan in postwar Japan, mainly fromthe viewpoint of the determination procedure and the estimation methodology. The formulation
procedure was as follows: (1) The Prime Minister issued a consultative document to the Economic
Council; (2) The Economic Council, consisting of business executives, academic authorities,
consumer representatives, labor union leaders, and so on, discussed the theme to complete a report;and (3) the Cabinet decided the economic plan in line with the submitted report by the Economic
Council. The succeeding economic plans after this Plan assimilated this formulation procedure
between the Cabinet and the Economic Council.

The planning period of this Plan was for five years from FY1956 to FY1960. The main purposes ofthis Plan were set for the following two points: (1) Expanding equilibrium of balance of payment withno dependence on US assistance or special procurement caused by the Korean War; and (2)Achievement of full employment of a rapidly expanding labor force. Before this Plan, the concretetask to formulate economic policy started from aggregating and accumulating individual goods andservices at a microeconomic level. This plan, however, had put the basis on future estimation ofnational macroeconomic activity level represented by the GNP/GDP. This change in estimation
methodology was another reason that this Plan was regarded as the first full-fledged economic plan.
Thus, the following three steps were adopted: First, the size of the national output required for full
employment from labor force and labor productivity, i.e., per capita output, was estimated; second,
this estimated size of national output was checked whether it would be completed consistently withmacroeconomic self-support and stability; and third, the consistency of macroeconomic development
and growth path was verified with individual economic sectors. And finally, the real growth rate was
12This point is our focus in Chapter 13. And CAO (2007) p.162 Column 3-2, titled “Ceiling of the
Balance of Payment” also takes a look back on some features of the business cycle during the highgrowth period.
13 More detailed information on Japanese business cycle is provided at the Cabinet Office web site of
http://www.esri.cao.go.jp/en/stat/di/di2e.html (accessed on June 30, 2016).
13

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

set at around five percent within the planned period employing the Colm method as the estimation
methodology 14 .

This Plan revealed the intention of the government policy and the direction of private businessactivities describing an estimated future economy under the free market system and pointed out thefollowing ten fields of importance for implementing the Plan according to EPA (1976):(1) Enhancement of industrial basis (emphasis on streamlining and principle of investment
priority);(2) Promotion of international trade (harmonization to trade liberalization and upgrading oftrade structure);(3) Improvement of self-sufficiency rate and reduction of foreign exchange expense;(4) Promotion of national land preservation and development;(5) Stimulation of science and technology;(6) Development of small and medium-sized business;(7) Increase of employment and fulfilling social security system;(8) Adherence to principle of balanced budget and normalization of financial conditions;(9) Stabilization of prices (including distribution rationalization); and(10) Stabilization of national life and saving adequate consumption.

This Plan stood at the tipping point of high-growth period in postwar Japan and, for two years, thereal economy had actually overachieved the Plan. This rapid macroeconomic expansion contributed
actively to a self-supporting economy but the overheated economy brought the exacerbation of thebalance of payment at the same time. After two years of implementation, the New Long-Range
Economic Plan had succeeded to the Five-Year Plan for Economic Self-Support.

4.2 New Long-Range Economic Plan (FY1958-62)

As the first full-fledged economic plan, the Five-Year Plan for Economic Self-Support implemented
in FY1955 had completed its mission for two years in FY1957 and the New Long-Range Economic
Plan had succeeded. The EPA (1997, pp.99-102) points out four types of economic plans in postwar
Japan: (1) Targeting reconstruction and self-support from war damages; (2) Placing priority onachieving maximization growth; (3) Aiming at harmonization between growth and development; and(4) Guiding moderate growth. While the goal of the Five-Year Plan for Economic Self-Support seemedcategorized for the first purpose in general, the targets of the New Long-Range Economic Plan andthe succeeding National Income Doubling Plan were close to the second.

14

We focus on the methodologies of estimation in Chapter 11.
14

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Implementing the Five-Year Plan for Economic Self-Support, the Japanese economy had been
growing rapidly. For example, the real growth rate of national income soared to 13.9 percent (EPA
1972, p.106) in FY1956, and vastly exceeded the planned 6.5 percent of GDP growth. A lot of
economists pointed out the boom in 1955 had been led by exports and then in 1956 by investments. T
his rapid growth caused, however, some bottle-necks were recognized in economic activities. Among
those, following four points were regarded very profound: (1) Backlog of machinery orders; (2) Credit
crunch and expansion of overloan; (3) Accelerating inflation; and finally, (4) Deficit in balance of
payment. According to EPA (1972, pp.108-09), in July 1956, balance of payment turned to deficit.
Afterward, imports increased rapidly, for example, EPA (1976, p.110) reveals that imports expanded
by around 80 percent per annum from summer 1956 to spring 1957, and foreign currency reserves
declined from $941 million at the end of 1956 to $455 million. In mid-1956, the economic policy
stance had turned toward a tightening direction, which had terminated the boom. According to thesecircumstances, in April 1957, the Economic Council discussed and agreed following five points 15 :(1) The Five-Year Plan for Economic Self-Support was out of date, to be aborted in FY1957
and a new economic plan should be formulated to replace it;(2) The purpose of a new economic plan would be set at maximizing growth rate within
economic stability and balance to achieve full employment and to improve national life;(3) A new economic plan would be a five-year plan, starting in FY1958 and ending in FY
1962;(4) A new economic plan would mainly utilize indirect policy measures, including fiscal
policy, monetary policy, exchange rate policy, and so on, and partly, tax policy, fiscal
investment and loans, subsidies and grants, interest subsidies, antitrust policy, social security,
minimum wage, and so on, as would be applicable in general and cooperative ways; and(5) Priority sectors were subject to basic comprehensive economic management but the scope
would be flexible and not limited to bottleneck sectors.

After a long discussion at the Economic Council, the New Long-Range Economic Plan was decided
at the Cabinet in December 1957 and implemented in FY1958. The report of the Economic Council
stressed three important points of the new Plan: 1) increase in employment to absorb both labor force
entrants and those inadequately employed at agriculture and/or small businesses, 2) resolution ofbottlenecks and consistent expansion of basic sectors including transportation and energy, etc., and 3)
prevention of economic fluctuation within the context of a desirable and stable future path for theJapanese economy.

15

Asai (2000)
15

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

4.3 National Income Doubling Plan (FY1961-70)

The National Income Doubling Plan was one of the most famous and epoch-making economic
policies during the high-growth period in postwar Japan. This Plan was formulated directly becauseof the inauguration of Prime Minister Ikeda, who insisted on so-called “Monthly Salary Doubling
Policy” under the situation of higher economic growth than planned in the former Plan; the target of
the GNP/GDP level was to be realized in just three years, not the planned five years. The National
Income Doubling Plan thus sought to maximize growth; target growth rates were set at 9 percent for
the first three years of the Plan and 7.2 percent for the rest seven years. Other targets and goals werecoordinated consistently with this high growth rate 16 .

Other than seeking high growth, EPA (1976) points out that the National Income Doubling Plan was
designed to assure the performance of policy implementation in the following four fields:(1) Important targets were set at the public sectors, including infrastructure building,
improvement of social security and welfare, and so on, for which the government had director strong measures to implement;(2) Inclusion of human resources development to boost the potential abilities of people dealing
with education, job training, science and technologies, and so on;(3) Attention to inequality among people, not concentrating only on the macroeconomic
average situation; and(4) Focus on regional development, which resulted in the Comprehensive Development Plan
formulated later in 1962.

Table 4-2 shows a comparison between planned and actual figures during the National Income
Doubling Plan.

16

Takeda (2014) provides some informal information about this coordination.
16

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Table 4-2: Comparison Between Planned and Actual During National Income Doubling Plan
PlannedActualTarget Level in

per annum growth

Actual Level in

per annum growth

FY1970rate (%)

FY1970rate (%)

Population (thousand)

102,2200.9%

103,720

1.0%

Number of persons engaged (thousand)

48,6901.2%

50,940

1.5%

Number of persons employed (thousand)

32,3504.1%

33,0604.3%

GNP (FY1958 prices, yen, billion)

26,000.0

7.8%

40,581.2

11.6%

National income (FT1958 prices, yen billion)

21,323.2

6.9%

31,767.8

10.4%

Per capita national income (FY 1958 prices, yen)

208,601

6.9%

317,678

10.4%

Private consumption (FY1958 prices, yen billion)

15,116.6

7.6%

20,786.3

10.3%

Per capita private consumption (FY1959 prices, yen)

147,883

6.7%

204,079

9.4%

Share of the primary sector at national income

10.1%

n.a.

7.4%

n.a.

Share of the secondary sector at national income

38.6%

n.a.

38.5%

n.a.

Share of the tertiary sector at national income

51.3%

n.a.

54.1%

n.a.

Industrial production (FY1958=100)

431.7

11.9%

539.4

13.9%

Agricultural, fishery, and forestry production (FY1958=101)

144.1

2.8%

130.3

2.1%

Domestic cargo transport (ton kilo, billion)

97.5

6.9%

343.8

10.2%

Domestic passenger transport (person kilo billion)

210.9

7.6%

588.9

8.3%

Energy Demand (thousand ton equivalent to coal)

302,760

7.8%

574,095

12.0%

Exports (custom basis) (dollar billion)

9.32

10.0%

20.25

16.8%

Imports (custom basis) (dollar billion)

9.89

9.3%

19.53

15.5%

Source: EPA (1976) p.137 with some correction by the authors.
17

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

One of the most remarkable features of the National Income Doubling Plan was to include acomprehensive strategy for modernizing Japanese agriculture and industry. The Plan assumed thatlabor productivity across the primary, the secondary, and the tertiary industries would be growing at
an almost equal speed, i.e., the productivity growth rate was assumed at 5.6 percent at the primarysector, 5.5 percent at the secondary sector, and 5.5 percent at the tertiary sector. This assumption
strongly implied that the labor force would migrate from a low-productivity sector to a high sector.
According to this concept, the percentage of people in the agricultural population 17 would decline
from 36 percent in 1960 of beginning year of the Plan to around 25 percent in 1970 of the end year.
Figure 4-2 reports the share of the labor force in agriculture and forestry and manufacturing. Anothertarget is due to the change in consumption and is to reduce the proportion of starchy foods and toincrease that of stock farm products, fruits, and so on. On the other hand, the manufacturing sector
was expected to strengthen international competitiveness, and the following targets were listed 18 :(1) Expansion of firm scale;(2) Strengthening of measures against recession;(3) Cooperation between big business and medium- and small-sized companies; and(4) Maintenance of order at procurement of imported raw materials and foreign resources.

Figure 4-2: Share of Labor Force in Agriculture and Forestry and Manufacturing
0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
Agriculture and forestry

Manufacturing

Source: Authors calculation based on Statistical Bureau of Japan.

This labor shift among industries also resulted in a large population migration to urban areas,
17

Here, “agricultural population” was included both farmers and their dependent household persons,i.e., was defined as the sum of labor force engaged in agriculture and their families. According to theStatistical Bureau of Japan, the proportion of the labor force engaged in agriculture and forestry was
28.7 percent in 1960, which implies that the number of farm families was larger than that of the rest.
18 The Ministry of International Trade and Industry (MITI) was at the National Income Doubling Planin charge of industrial policy to complete this purpose.
18

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

including greater Tokyo, greater Osaka, and greater Nagoya. And this labor migration contributed not
only to high economic growth in postwar Japan but also to the reduction of the regional income gap,
since it was caused by differences in productivity among industrial sectors/areas. Labor/population
migrated from industrial sectors/areas of low productivity to those of high productivity, which raised
Japan’s entire productivity and brought high growth. Figure 4-3 depicts the correlation between the
net population migration to the three major urban areas (greater Tokyo, greater Osaka, and greater
Nagoya) and the gap of per capita income in each prefectural area, which shows that the income gap
decreases/increases according to the movement of the population migration.

Figure 4-3: Net Population Migration to the Three Major Urban Areas and Gap of Per Capita
IncomeSource: Nawata (2008) p.20 Figure 5.

The National Income Doubling Plan also stressed the importance of increasing industrial locations,accompanied by an increase of manufacturing output. Since industrial production would be assumed
to play a key role for doubling the national income, and to gain by 3.3 times from 1960 to 1970, theinfrastructure building including land and water procurement, construction and maintenance oftransport facilities such as roads, ports, bridges, airports, etc., and so on. And it was pointed out that it
was profoundly important for the government to show leading and indicative guidelines for allocationof manufacturing sites of private firms with respect for their free activities. Finally, the Plan stated that
the Pacific Belt Zone was regarded as the center of manufacturing allocation consistent with the Plan
since it linked the big four existing manufacturing areas (Tokyo, Nagoya, Osaka, and Kita-Kyushu).
But at the same time, the Plan emphasized the significance of reducing the regional gap in

19

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

manufacturing development and economic growth 19 .

4.4 Medium-Term Economic Plan (FY1964-68)

A few years later after executing the National Income Doubling Plan, while economic performanceon average was satisfactory, some problems of economic inequalities arose. For example, economic
development was characterized by both consumption and investment aspects; the former was foundout in the rapid spread of durable consumer goods, including some electric appliances, and the latter
was revealed in expanding increased investment, which was called investments-induce-anotherinvestments 20 . Table 4-3 shows the diffusion rate of durable consumer goods in urban and farm
families.

Table 4-3: Diffusion Rate of Durable Consumer Goods
1957.91958.91959.91960.8

1961.8

1964.8

Televisionurban family

7.8%

15.9%

33.5%

54.5%

71.9%

93.5%

Set

farm family

n.a.

2.6%

4.3%

11.4%

28.5%

81.7%

Washingurban family

20.2%

29.3%

36.7%

45.4%

55.0%

75.8%

Machinefarm family

n.a.

5.2%

6.8%

8.7%

14.5%

47.0%

Electric

urban family

2.8%

5.5%

9.7%

15.7%

26.6%

66.2%

Refrigerator

farm family

n.a.

n.a.

n.a.

1.3%

2.5%

14.5%

Cameraurban family

35.7%

43.1%

44.3%

47.2%

50.8%

61.8%

farm family

n.a.

15.9%

17.3%

16.0%

18.0%

23.9%

Source: EPA (1976) p.115.

On the other hand, the United Nations completed a meta-survey on social development plans inmember countries and revealed its results in 1960 that following ten categories were mainly focusedon all over the world 21 :(1) Health planning;(2) Nutrition Planning;(3) Housing and environmental planning;(4) Consumer supporting planning;(5) Education planning;(6) Labor planning;

19

The Comprehensive National Development Plan, first formulated in 1962, succeeded the concept
in this context. See chapter eight for more detailed information.
20 The investments-induce-another-investments effects were analyzed in the Economic White Paperof EPA (1962); chapter thirteen deals with this sort of economic analysis.
21 Hoshino (2003) p.455.
20

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”(7) Social security planning;(8) Social insurance and rehabilitative planning;(9) Agriculture planning; and(10) Refugee protection and support planning.

Considering these domestic and international movements, the government of Japan decided toabolish the National Income Doubling Plan and formulated a new economic plan entitled the MediumTerm Economic Plan, which stated the importance of social development in the following two points:(1) It is required to speed up social development, more rapidly than economic development,
which corresponds to balanced development. Especially in Japan, social development is ofserious importance, including correcting distortions and resolving the dual structure, from theviewpoint of the approach to the developed countries; and(2) When the Japanese economy gets to the scope of developed countries from the viewpointof per capita national income and/or modernization of industrial structures, etc., the remaining
nationwide gap or disparity would not be acceptable as the developed countries with the delayof social development from the viewpoint of national life.

4.5 Economic and Social Development Plan (FY1967-71)

The year 1964 was significantly epoch-making for postwar Japan. First, the capital city of Japan,
Tokyo, hosted the Olympic Games for the first time in Asia. Also, for the preparation of the Olympic
Games, secondly, some traffic infrastructures were built, including the Shinkansen bullet train, theMetropolitan Expressway, and other expressways. In the international economic context, Japan
completed the transition to Article 8 nation of the IMF in 1964 22 , which implies that it would beprohibited to control foreign exchange as an excuse for the balance of payments. With these results,
Japan joined the OECD. After 20 years from the end of the war, Japan was on its way back toreintegration into the world economy.

After hosting the Olympic Games, Japan experienced the first full-blown recession in postwar in
1965. According to the business cycle dating identified by the Cabinet Office, the 1965 recession
began after October 1964 as the peak and ended in October 1965 as the trough for 12 months. Before
this 1965 recession, postwar Japan had experienced several recessions, but the character of theserecessions mainly appeared short-term, and the cyclical phenomena was caused by investment ininventory. In addition of this short-term and cyclical character, Toshida (2001, p.108) stresses that the22

After the Peace Treaty of San Francisco in 1951, Japan joined the IMF and IBRD in 1952. And
Japan transitioned to Article 11 nation of the GATT in 1963, which implies that it would not be
permitted to restrict imports as an excuse for the balance of payments. Japan joined the GATT in 1955.
See chapter 7 for more detailed information.
21

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

feature of the 1965 recession was combined causality that were medium-term phenomenon caused by
the equipment investment and the failure of coordination at the transit from an excess labor economy
to a labor shortage economy 23 . Apart from short-term and cyclical character, those causal factors
brought the following three features:(1) A boost for demand by fiscal policy was required since easing of monetary policy wasinadequate for recovery;(2) Compared with economic decline, damages among small- and medium-sized firms ,including bankruptcies, credit crunches, and business slumps, were profoundly severe (seeFigure 4-4); and(3) Price inflation even under recession did not decline.

Figure 4-4: Bankruptcy in FY 1965 Classified with Capital
523
1845

501

less yen 1 million in capitaland private establishment
yen 1-5 million in capital

Total
6060

yen 5-10 million in capital

more yen 10 million incapital
3191

Source: Toshida (2001) p.107.
Under these changes in circumstances 24 , the government of Japan decided a new economic plan,
entitled the Economic and Social Development Plan, in 1967 for the purpose of creating awell-balanced and fulfilling development in economy and society along with affluent national life,
management reconstruction, and modernization in low-productivity sectors, placing emphasis on thequality of the Japanese economy that had previously remained incomplete. According to this concept,
the Plan stressed following three points:(1) The realization of economic efficiency is to be pursued with optimal allocation of laborand capital to improve international competitiveness and to reduce the disparity among

23

Also see Figure 4-2.
The Economic and Social Development Plan stressed the importance of the process of urbanizationin addition to the above-mentioned internationalization in economy and society and earnest labor
shortage.
24

22

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

industries by growing productivity in low productivity sectors, including agriculture,
distribution, small- and medium-sized business, and so on;(2) The stability of prices is basic for affluent national life and economic health, and a dualsided price policy is to be carried out that includes short-term price stability to depress
extraordinary inflation and a long-term, structural, and essential price stability to improve
economic efficiency; and(3) The top priority is on social development, to achieve a welfare state with promotion ofregional development, amplification of social security, improvement of education, etc.

Unofficially, Hoshino (2003, p.356) points out that one of the biggest causes to demolish theMedium-Term Economic Plan only in one year and half and to formulate the Economic and Social
Development Plan is the difference of inflation rate between the planned and the actual. For example,
the annual inflation rate was forecasted around 2.5 percent at the Medium-Term Economic Plan but infact the inflation rate rose up to 4.8 percent in FY1964, and 7.4 percent in FY1965. Also it is stressedthat the Medium-Term Economic Plan had not included price policy while its successor regarded it as
one of the most important three policies. And among above-mentioned important three points, fromthe organizational viewpoints, the affluent national life had been supported by founding the NationalLife Bureau that held jurisdiction over price stabilization policy in the Economic Planning Agency inJune 1965.

4.6 New Economic and Social Development Plan (FY1970-75)

Passing over three years after implementation of the Economic and Social Development Plan, the
New Economic and Social Development Plan had replaced it in May in line with the basic directionof the Economic and Social Development Plan, taking particular note of the following change ofcircumstances:(1) Japan had occupied the position of the second-largest GNP/GDP country in the capitalist
world following the United States; its rise in international status had required morecommitment to international cooperation in resolving international currency issues, ODA
promotion, contributions to a prosperous world economy, and so on;(2) Japanese economy and society had been very dense; for example, industrial production
had reached a huge level, so that high-speed traffic and communications networks would be
required to achieve the full development all over Japan along with international networks; and(3) According to the changing labor and social conditions, the improvement of labor quality
would be strongly required, commensurate with upgraded production processes and social
activities.

Continuously from the previous Economic and Social Development Plan, the New Economic and23

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Social Development Plan also focused on national life and price policy. The New Economic and Social
Development Plan set the target of eight percent growth and three percent inflation. A medium-term
macroeconometric model 25 was employed for forecasting the economic conditions and somesimulation results were revealed by the Econometric Committee of the Economic Council, mainly forthe purpose of consensus building.

In the first half of the 1970s, the postwar world economy, including Japan, reached the end of thegolden age of the Bretton-Woods regime, which was characterized by the fixed exchange rate and free
trade system under GATT-IMF surveillance. In August 1971, the United States decided to suspend theexchange between gold and the dollar, and, later in December 1971, the yen appreciated from yen 360
to 308 against the dollar. Later, in early 1973, developed countries began to float their currencies,
including the yen. Another external shock hit the world economy, i.e., the first oil crisis triggered by
the fourth Middle East War (Yom Kippur War) resulting in price hikes and reduced supply of oil allover the world. Because of this oil crisis, the Japanese economy went into the triple difficulty of
inflation, recession, and external deficit. Many economists agree that the high-growth period in
postwar Japan ended sometime in the first half of the 1970s 26 .

5. Fiscal and Financial System During High-Growth Period

To achieve high economic growth, high capital accumulation is required. High savings are required
to sustain investments, and there must be a financial system to connect high savings to high capital
accumulation in an efficient way. Furthermore, the government must be supported by a solid fiscalbase to play an effective role. In this chapter, we glance at the Japanese experience and its fiscal andfinancial systems.

5.1 Fiscal System(Small Government and Balanced Budget Principle)
Sadahiro (1991) states that “Small Government” was the key characteristics in Japanese publicfinance during the high growth period. As denoted in Table 5-1, the tax burden ratio had been kept atless than 20 per cent throughout the period of high economic growth 27 . Tax reductions were
implemented every year because the tax elasticity to income exceeded unity due to progressive
taxation on personal income. The level of social security was low owing to the young population
25

An econometric model was first employed at the formulation process of the Medium-Term
Economic Plan (FY1964-68) and a constant effort to improve it was exerted at the Economic Planning
Agency. Detailed information is provided in Chapter 11 in this study.
26 Some studies stress that these external shocks forced the high-growth period to terminate while
Harada and Yoshioka (2004) highlight the importance of the internal factor of labor migration.
27 The Government Tax Commission submitted this guideline in 1960.
24

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

structure at that time. It was not until the mid-1970s that the conflict between social security and small
government surfaced. High growth, low burden, and young population produced a favorable
environment for savings.

Table 5-1: Government Size

(%)
1955

1960

1965

1970

1975

1980

Tax Revenues / NI

19.2

19.2

18.4

19.3

18.9

22.8

Social Security Contribution / NI

3.3

3.6

5.0

5.4

7.5

9.1

Social Security Transfer / NI

5.4

4.5

5.9

5.8

9.5

12.5

Public Expenditures / GDP

18.0

15.2

17.2

15.6

19.3

19.3

General Account Budget / GDP

11.8

10.4

11.0

10.9

13.7

17.7

FILP / GDP

3.5

3.7

5.3

5.0

6.9

7.4

FILP / General Account Budget

29.2

35.9

47.7

46.4

50.6

41.7

Source: Economic Planning Agency and Ministry of Finance.
Note: NI = National Income (at factor cost), FILP = Fiscal Investment and Loan Program.

After the Dodge stabilization policy in 1949, the government had kept the balanced budget principle
until 1965 without dependence on government bonds. Though deficit-financing government bonds forfinancing the deficits of current accounts were issued in 1965, thereafter until 1973, deficit-financing
bonds had never been issued, and only construction government bonds for financing the deficit ofcapital accounts were issued to perform sound fiscal management.
In spite of the balanced budget principle with low tax burden, high economic growth automaticallyyielded an increase in revenues, which enabled the government to steadily expand expenditures. The
government gave more weight to the investment category than to the non-investment category, suchas wages of public officers, defense spending, and subsidies.

(Fiscal Investment and Loan Program)
The Fiscal Investment and Loan Program (FILP), which was often called the second national budget,
played a significant role in tying social savings to social investments. As shown in Table 5-2, thefinancial resources of the FILP mainly came from accumulated funds of the public pension scheme,from postal savings, and from postal life insurance. Postal savings were funds absorbed from thepeople by the government itself as a bank activity. Post offices were located across the country andcontributed to the saving mobilization of the households by occupying a considerable weight inJapanese financial institutions. The scale of the FILP had expanded 300 billion yen in 1955
(approximately 30% of the general account budget) to 10 trillion yen in 1975 (50% of the same).

25

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Table 5-2: Fiscal Investment and Loan Program by Sources and Uses

(%)

1955

1960

1965

1970

1975

1980

SourcesSpecial Account

17.1

4.3

3.4

2.9

0.7

0.1

Trust Fund Bureau Fund
- Postal Savings

52.3
34.2

56.3
21.4

65.6
23.4

71.1
31.6

84.4
41.6

84.1
38.2

- Pension Fund
- Collection, etc.
Postal Life Insurance Fund

9.6
8.5
15.6

12.7
22.2
18.9

23.2
19.0
6.8

25.8
13.7
11.0

21.6
21.2
10.8

16.0
29.9
8.2

Government-guaranteed Bonds
Total
Uses

15.0
100.0

20.5
100.0

24.1
100.0

15.1
100.0

4.2
100.0

7.6
100.0

Housing
Improvement of Living Environment

13.8
7.7

12.8
9.3

13.9
12.4

19.3
11.6

21.4
16.7

26.2
14.1

Health & Welfare
Education
SMEs

2.1
4.5
8.1

1.8
3.5
12.8

3.6
3.1
12.6

2.8
2.2
15.4

3.4
2.9
15.6

3.5
4.4
18.7

Agriculture & Fisherysub-total
National Land Conservation

8.9
45.1
7.7

7.1
47.2
6.5

7.2
52.8
3.1

5.0
56.4
1.6

4.1
64.1
1.2

4.9
71.8
1.7

Road
Transportation & Communication

3.7
12.2

3.6
14.1

7.9
13.9

8.6
13.2

8.0
12.7

5.7
9.6

Local Development
sub-total
Key Industries

8.5
32.1
15.8

7.1
31.3
13.6

7.0
31.9
7.8

4.0
27.4
5.7

3.3
25.2
3.0

2.6
19.6
3.0

Trade & Economic Cooperation
sub-total

7.0
22.8

7.9
21.5

7.5
15.3

10.6
16.3

7.7
10.7

5.6
8.6

Total

100.0

100.0

100.0

100.0

100.0

100.0

Source: Ministry of Finance.
Note: Special Account = Industrial Investment Special Account.
The FILP funds were invested through the state’s special accounts, local governments, and public
corporations / foundations. Heavy weight was given to loans for such key industries as steel,shipbuilding, and power industries in the 1950s. As time passed, however, the weight of theseindustries declined, and loans to such living environmental facilities as housing, small and mediumsized businesses, and such infrastructure as roads had increased.

(Tax System)
The tax system of postwar Japan was based on Dr. Shoup’s recommendation in 1949 28 . Sadahiro

28

Carl Shoup (1902-2000) was a public finance professor from Columbia University. He led themission to revise the tax system in the postwar Japan.
26

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”(1992) summed up that the basic spirit of the Shoup tax system was a comprehensive income tax
principle focused on two kinds of equality: vertical and horizontal equality. Although Shoup did notallow preferential tax measures, it was partly amended to stimulate investment and savings throughthe introduction of special depreciation measures, abolition of the capital gains tax, cut in property
income tax rate (all of them in 1953), and preferential taxation on interest income.

Table 5-3: Tax Decreases by Preferential Measures(billion yen)

1950

1955

1960

1965

1970

1975

Savings promotion
Capital accumulation(non-taxable reserves)
Modernize equipment & machinery(special depreciation)

0.3

27.4

51.0

136.3

186.4

271.0

0.5

39.2

50.3

35.5

19.4

89.0

2.8

14.0

21.0

53.5

111.0

Industry promotion etc.*

0.5

12.8

26.5

26.5

153.4

186.0

11.2

-1.1

-7.6

-28.6

-96.0

Other
Total tax decrease (A)

1.3

93.4

140.7

211.7

384.1

561.0

Total tax revenues (B)

444.6

774.8

1,336.6

3,287.7

6,938.4

17,340.0

A / B ×100 (%)

0.3

12.1

10.5

6.4

5.5

3.2

Source: Nishimura (1994) p.200.
Note: * Figures of 1970 and 1975 included regional development, social development, resource
exploitation, and export promotion.
Table 5-3 shows the amounts of tax decreases by preferential measures. While measures to support
investments from the side of industries and enterprises had been dominant until the early 1960s, thelargest decrease since the mid-1960s was a measure to promote savings, that is, to provide a tax breakon interest income, contributions toward private life insurance, and so on. The so-called “Maru-Yu”
was a tax-free small-sum savings system was introduced in 1963 and continued until 1987. Tax
measures were reviewed (obsolete items were abolished and new items were added) every year inparallel with the budget-making process.

5-2. Financial System

Japan’s financial system during the high growth period had several characteristics: (1) indirect
financing and segmented financial institutions, (2) indirect control over credit allocation and interest
rate regulations, and (3) the main bank system29 .

(Indirect financing and segmented financial institutions)
Flow of funds was dominated by indirect financing. Bank deposits and lending were key instruments
29

These characteristics were summarized from Sadahiro (1992) and Teranishi (1993).
27

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

for channeling investible funds from surplus to deficit sectors of the economy (Table 5-4).

Table 5-4: Share of Uses and Sources of Funds (1966-70)

(%)

Japan

USA

Germany

Uses of Funds,

Currency

19.0

6.3

6.8

Household sector

Deposits

50.7

20.5

60.3

Insurance

12.7

18.1

16.6

Securities

14.9

52.6

16.1

Sources of Funds,

Own capital

50.7

64.6

66.7

Corporate sector

Borrowings

42.2

17.3

21.5

Securities

5.7

18.1

3.4

Source: Bank of Japan (1974) A Comparison by Economic and Financial Statistics.
Note: Currency = currency and monetary deposits, Deposits = time and savings deposits.

The financial system at that time was organized according to the principle of a division of labor
among financial institutions. They were segmented into several groups; city banks operating
nationwide, regional banks, cooperative banks (shinkin) specializing in the financing of SMEs,
agricultural financing institutions, long-term credit banks established for the special purpose of
supplying long-term funds to industries, and so on. There existed various regulations by segments, e.g.
the number and location of branches, financial instruments and services. Long-term credit banks 30
had an operational segmentation with commercial banks mainly dealing with short-term financing.
They had a different fund raising system from commercial banks. While the latter had deposits due
within three years as major fund sources, fund sources of the former were bank debentures due over
five years. Bank debentures were purchased by commercial banks rather than by households, because
commercial banks could borrow from the central bank by offering bank debentures as a collateral.
From the view of flow of funds, short-term savings flowed into commercial banks from households
as short-term deposits. Then commercial banks converted them into long-term funds, and lastly longterm credit banks provided long-term funds to non-financial enterprises.
This segmented financial system was complemented by public financial institutions. As explained
above, post offices around the country functioned as fund-raising institutions and government financial
institutions as credit suppliers, including two banks and nine public corporations 31 . They provided
credit to the private sector under the FILP system at lower interest rates than private banks did. Loansfrom the World Bank to private enterprises (electricity and steel companies) were intermediated by the30

The Industrial Bank of Japan (IBJ) was a leading player in three long-term credit banks. While the
IBJ was merged with two commercial banks in 2000, other two banks were heavily indebted andtemporally nationalized in the late 1990s.
31 Two banks were the Japan Development Bank and the Export-Import Bank ofJapan. Nine were the Housing Loan Corp., the Small Business Finance Corp. and etc.
28

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Japan Development Bank.

(Indirect control over credit allocation and interest rate regulation)
The monetary policy at that time was characterized by “over-loans” and “low interest rates.”
Despite the strict regulations, the allocation of funds was more or less left at the discretion ofcommercial banks. This was particularly true for city banks. The allocation of funds by city banks wascompletely free of regulations and funds raised by the banks through their deposit instruments or theinterbank call market were allocated to growing industries. However, a significant source of the basemoney was the central bank lending to commercial banks. To control the money supply, the Bank ofJapan relied on the “window guidance policy,” a kind of credit rationing in the base money market,
under the situation of lower official discount rate than money market interest rate (call rate).
Deposit and lending interest rates were regulated. The effectiveness of lending rate controls was
doubtful due to the use of practices such as compensating balances to circumvent the regulations.
However, controls on deposit rates were considered effective. Deposit rates had been almost fixedduring the period of high growth, and were lower than a liberalized money market rate.

(Main bank system)
Among several banks from which a private enterprise borrows, a bank that (i) is the largest lender
to the enterprise; (ii) has a long-term commitment; (iii) holds equity; (iv) delegates directors; (v) is
involved in comprehensive transactions, such as annuity investments and accounting services, isconsidered to be the main bank for that enterprise. The role of main bank in these close connection isto produce information on the borrower. It has been argued that the main bank, as a delegated monitor,
saves on the costs of information production and also helps in preventing the problem of moral hazard,
thereby reducing the agency costs of debt financing.

6. Economic Plan and Industrial Policy

Economists have given a lot of definitions to industrial policy and among those, Kaiduka (1973)
defines in short “the policy that the MITI implements.” Komiya (1984) describes industrial policy as
the policy to create intentionally industrial and trade structure for economic development 32 , which is
close to be called “targeting policy” at present. And these industrial policies were planned andimplemented combined with economic plans. For example, Okazaki (1998, table 9) confirms therelationship of some long-term industrial policies with the Five-Year Plan for Economic Self-Support
as following Table 6-1:

32Here, the coordination and/or assistance policies for declining industries are carefully removed.
29

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Table 6-1: Five-Year Plan for Economic Self-Support and Industrial Policy
Electric Power1956.1“Electric Power Six-Year Plan” Electric Power Development
Coordination Council

Steel

1956.5“Long-Term Twenty-Year Plan of Supply and Demand of Steel”
Ministry of International Trade and Industry

Petrochemistry

1955.7“Support Measures to Petrochemistry” Ministry of International
Trade and Industry

1956.2“Handling on Petrochemical Corporatization Plan” Ministry ofInternational Trade and Industry

Synthetic Fabric1955.6“Support Measures to Synthetic Resin Industry” Ministry ofInternational Trade and Industry

Machinery

1955.8Foundation of Fiber Industry Council

1955.9“Fiber Six-Year Plan” Fiber Industry Council

1956.2“Report on Support to Synthetic Fiber” Fiber Industry Council

1955.11

Foundation of Machinery Committee at Industrial Rationalization
Council

1956.5

Act on Temporary Measures concerning the Promotion of
Machinery Industry

Industrial Location

1956.4“Comprehensive Measures on Industrial Location” Ministry ofInternational Trade and Industry

1956.9Foundation of Conference on Mining and Manufacturing Area
Promotion

Source: Okazaki (1998) Table 9.

The National Income Doubling Plan also focused on industrial policy, mainly in Chapter 3 of Part
III, entitled “Upgrading of Industrial Structure and Mitigation of Dual Structure,” consisting of thefollowing five subsections:(1) Upgrading of manufacturing and strengthening international competitiveness;(2) Foundation of rational energy system;(3) Modernization of agriculture, forestry, and fishery;(4) Modernization of small- and medium-sized firms; and(5) Promotion of labor migration among industries and reduction of low-income groups.

The National Income Doubling Plan forecasted that industrial production in the target year of
FY1970 would increase by around 3.3 times larger than FY1960, so that the six targets were set as
follows from the viewpoints of industrial policy:(1) Improving international competitiveness by investing in newly introduced equipment andpursuing large capacity facilities with building industrial complexes;
30

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”(2) Strengthening of investment funds and capital base;(3) Securing stable supply of imported raw materials and fuels at reasonable prices;(4) Promoting optimal allocation of industries to reduce regional disparities;(5) Encouraging research and development activities and training technologists; and(6) Modernizing small- and medium-sized firms and establishing streamlined divisional
cooperation among firms.

The National Income Doubling Plan forecasted that the growth rate of agriculture would be 2.9
percent per annum, which was far lower than GDP/GNP and the national income growth rate. But it
estimated that the population engaged in agriculture would decrease by 2.9 percent so that productivity
would grow at the rate of 5.8 percent per annum. And the Plan stressed that one of the most essential
points of agricultural modernization was the introduction of management systems equivalent tobusiness enterprises. The Plan set the targets to modernize small- and medium-sized firms on reducing
disparity among firms, proper-sizing of firms, investing new equipment, strengthening capital base,liberalizing labor relationships, and so on.

While industrial policies in postwar Japanese high-growth period were planned and implemented
with a deep combination of economic plans, as mentioned above, theoretically, industrial policies wereregarded as counteraction for broad market failures, including coordination with external economic
effects, increasing returns to scale, intertemporal resource allocation problems, and so on. Concerning
the theoretical basis for industrial policies, according to Ohno (2006, pp.173-74), the following two
concepts were important:(1) Excess competition was one of the most important reasons for official intervention.
Encountering a recession, the Japanese government frequently recommended industries toagree on output cartels, to scrap and consolidate excess capacity, and accept or promote
corporate mergers. In addition, the government often resorted to export quota allocation toforestall the accusation of “torrential exports” by trading partners.
(2) Infant industry promotion was another excuse for government strong guidance, which isa classical theory of industrialization first proposed in the nineteenth century. In short, thistheory suggests that burgeoning industries with high initial cost should be temporarily
protected from imports by tariffs if they can reduce costs and reap profits, according to thelearning effect and increasing returns, which are the key determinants of the validity of infantindustry promotion.

Whether industrial policies were effective and promoted high growth in Japan or not has been longdebated. Okazaki (1998), Ohno (2006), Aghion and Griffith (2005), Krugman (1994), and some otherstudies support the positive role of industrial policy for Japanese high growth in the postwar period.
31

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Komiya et al. (1984) appear neutral, since they do not support government intervention but accept its
positive role in information diffusion. On the opposite side, some studies contest the validity ofindustrial policy, including Flath (2005), Kohama and Watanabe (1996), Miwa (1996), and Tsuruta(1982). Not on a theoretical framework but on practical views, some policy analysts and economists
belonging to the development-state school insisted that the government played a sizable role ineconomic development, in particular, in East Asian countries. From the viewpoint of this developmentstate school, for example, Johnson (1982) focuses on Japanese development and policy of MITI
(Ministry of International Trade and Industry), Amsden (1989) deals with Korean development as
Asia’s next giant, and Wade (1990) analyses Taiwanese economic development. While the World Bank
(1993) highlights government's role in human capital accumulation, promotion of high saving,
reduction of poverty, and so on; in other words, anything but industrial policy. It inquires “DidIndustrial Policy Increase Productivity?” (World Bank 1993, p.312) and answers “Overall, theevidence that industrial policy systematical promoted sector with high productivity change is weak.”(World Bank 1993, p.316) Among these studies on industrial policy, Ono (2006, p.171) summarizes
its effects on the automobile industry, which is one of the most remarkable leading industries in Japan:

As for the automobile industry, both rejection and acceptance of official intervention
existed. MITI tried to merge automobile companies prior to trade liberalizatio nbecause domestic producers were considered too small and numerous to compete
effectively with the American giants. But automobile companies refused MITI’s
initiative, remained separate, and did very well subsequently. However, it should also
be recalled that the automobile industry was protected by high tariffs in its early stageof development.

7. Liberalization Process and Re-Integration to International Economy

During the first decade after the war, the Japanese economy had been managed under strong controlof the government. The government directly regulated prices and production of some importantmaterials and trade. But this strong control and regulation by the government had been regarded
temporary and gradually, and the economic regime was transferred to toward the free market system.
Concerning international trade and capital transfer, the postwar Japanese economy began with a closed
regime and also gradually had been liberalized. And the single exchange rate was introduced after the
Dodge Plan in 1952, which promoted external transactions to a sizable extent. Sadahiro (1992)
summarizes regulation of the postwar Japanese economy in Table 7-1.

32

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Table 7-1: Trends of Postwar Government Control
Peak Time
Date

Number as ofNo.

1949.41950.4

1951.31952.3

252

233

49

24

7

1947.2

64

57

16

8

6

Number of Price Control

1949.3

2129

2128

531

327

148

Number of State Enterprises Implementin g1948.3

15

12

7

0

0

Number of Production Goods under 1946.2
Government Allocation
Number of the Goods under Government
Rationing

Government Controls
Source: Sadahiro (1992) p.45 Table 6.

Some economic plans in their early stages, including the Five-Year Plan for Economic Self-Support,
the New Long-Range Economic Plan, and the National Income Doubling Plan, strongly proceededwith economic liberalization, in particular external areas such as trade and foreign exchange. For
example, the Five-Year Plan for Economic Self-Support points out four directions of the Plan:economic self-support, increase in employment, economic stabilization, and coordination withqualitative improvement and quantitative development in the Japanese economy. Among these four
directions, the Plan states that the Japanese economy had been dependent on U.S. aid and special
procurement orders generated by the Korean War, but had to set the target of expanding exports tobalance of payments and catch up with the world trends of trade liberalization. Along with somerelated economic plans, trade liberalization proceeded as follows:

Table 7-2: Outline of Trade Liberalization Process in Postwar Japan 1960-86
date1960.4liberalized

number of

proportion

liberalized

(%)

items
41

1,443

liberalized item(s)coffee beans, sewing machines for household use, ceramics, iron scrap,
and beef fat

1960.742

1,504

Cow hides

1960.1044

1,985

pig iron and cocoa bean

1961.462

2,645

raw cotton, raw wool, radios, motorbikes, ordinary ferrous material,
bicycles, buses, and cargo trucks

1961.765

2,757

soybeans and instant coffee

1961.1068

3,257

silver, nickel, and wristwatches

1961.1270

3,427

stainless steel, general plate glass, and clothes

1962.4transition from positive list system based on SIT C classification (item number: 4120) to negative list

33

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

System Based on Brussels Tariff Nomenclaturedate

liberalized

residual quantitative import restriction

number of

proportion

items

non-

(%)

Total

industrial

agriculturalliberalized

products

products

items

liberalized item(s)1962.4

73

466

492

general plate glass

1962.10

88

232

292

crude oil, pulp for paper, andgraphite

1963.4

89

197

229

steel ingot and caustic soda

1963.8

92

155

87

68

192

crude sugar

152

84

68

189

sorghum

136

69

67

174

color television sets

1964.5

136

69

67

174

fresh lemon

1964.10

123

56

67

162

ammonium chloride,

1964.1
1964.4close to 93

ammonium sulfate, andbulldozer
1965.10over 93

1966.4

122

55

67

161

passenger cars

120

54

68

165

cocoa powder and continuous
fiber (synthetic)

1968.4

122

54

68

165

cosmetics

1969.4

120

52

68

163

frosted plate glass

1969.10

118

50

68

161

sewing machines forindustrial use

1970.2close to 94

1970.4

109

45

64

152

wine

98

39

59

141

boiler, coffee, and machine
tools

1971.1

80

31

49

123

whisky and color film

1971.6over 94

60

20

40

106

black tea

1971.10close to 95

40

12

28

87

pork

1972.4over 97

33

9

24

79

ham, bacon, light and heavy
oil, peripheral devices ofcomputers, aviation radar

1973.4

32

8

24

83

Higher-priced calculators,
electronic accounting
machines, and integrated
circuits (less than 200
elements)

34

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

1973.11

31

8

23

82

dates, inedible seaweed, anddenatured dates

1974.10

30

8

22

84

malt

1974.12

29

7

22

83

integrated circuits (more than
200 elements)

1975.4

29

7

22

84

n.a.

1975.12

27

5

22

82

computers and peripheraldevices

1977.4

27

5

22

80

tobacco1978.4

27

5

22

79

canned ham or bacon1980.1

27

5

22

73

gold vein, balloons, andairships

1980.5

27

5

22

78

(5 items added because of
ratification of Convention on
International T rade inEndangered Species of Wild
Fauna and Flora)

1981.10

27

5

22

79

(DDT added)

1982.3

27

5

22

79

civilian aircraft and engines
and parts

1984.5

27

5

22

80

(mensurative and detective
parts and accessories fornuclear fuel material added)

1984.7

27

5

22

80

High-test molasses and othersugars1985.4

27

5

22

80

pork preparation

1986.4

27

5

22

80

leather and leather shoes

Note: After 1973, the liberalized proportion had not been calculated.
Source: Komiya (1988) p.189 Table 3.

These liberalization measures proceeded along with the multilateral trade negotiations, usuallycalled a “Round,” under the GATT regime such as following Table 7-3:

Table 7-3: GATT Trade Rounds
Year

Place/Name

Subjects Covered

Countries

1947

GenevaTariffs

23

1949

AnnecyTariffs

13
35

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

1951

Torquay

Tariffs

38

1956

GenevaTariffs

26

1960-

Dillon Round

Tariffs

26

Kennedy Round

Tariffs and Anti-dumping Measures

62

Tokyo Round

Tariffs,

Measures, “Framework”

102

Tariffs, Non-tariff Measures, Rules, Services,

123

1961
19641967
19731979

Non-tariff

Agreements

1986-

Uruguay Round

1994

Intellectual

Property,

DisputeSettlement,

Textiles, Agriculture, Creation of WTO, etc.
Source: WTO web site (https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm)(accessed on June 30, 2016)

Concerning the re-integration of Japan into the international economy, Japan joined some importantinternational organizations on world economy with some implications as follows: First, Japan joined
the GATT as a provisional member in 1953 and obtained full membership in December 1955, andfinally, transitioned to Article 11 nation of the GATT in 1963, which implies that it would not be
permitted to restrict imports as an excuse for the balance of payments; Second, Japan joined the IMF
in 1952 and completed the transition to Article 8 nation of the IMF in 1964 , which implies that it
would be prohibited to control foreign exchange as an excuse for the balance of payment. The
negotiation processes are fully explained by some existing literature, for example, Komiya (1988), in
particular, whose fourth chapter deals with the GATT entry process and the third chapter of Asai (2015),
in particular, focuses on the IMF process.

Moreover, some international organizations provide important statistics manuals in economic fields,
including the System of National Accounts of the United Nations, the Balance of Payments of the IMF,
the Consumer Price Index of the International Labor Organization as follows:
SNA:

http://unstats.un.org/unsd/nationalaccount/sna.asp

BOP:

http://www.imf.org/external/pubs/ft/bop/2007/bopman6.htm

CPI:

http://www.ilo.org/public/english/bureau/stat/guides/cpi/

8. Infrastructure Building and Comprehensive National Development Plan

8.1 Infrastructure Building

Infrastructure building is the most important measure that the public sector can provide in theplanning practice. Recognizing that insufficient infrastructure might become a bottleneck that36

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

constrains higher economic growth, the National Income Doubling Plan addressed the infrastructurebuilding first in the list of key challenges. The Plan indicated not merely the sum total of cumulative
public investments during the planning period but also their allocation among sectors for the first time.
Investment amounts and allocations, which included public works budgets of the central and local
governments 33 and investment expenditures of public corporations, were projected at constant prices(Figure 8-1) 34 .

Figure 8-1: Public Investment Allocation in the Economic Plans
100%
90%
80%

others70%

telecom
rail

60%

water and forest
education

50%

health40%

sanitary
housing30%

agriculture
port

20%

road
10%
0%
1961-70

1959-63

1967-71

1970-75

NID

ME

ESD

NESD

Source: Authors based on the National Income Doubling Plan (NID), the Medium-term Economic Plan
(ME), the Economic and Social Development Plan (ESD), and the New Economic and Social
Development Plan (NESD).
Note: Figures for rail and telecom in NID are middle values of projected range.
Corresponding to rapid motorization (Figure 8-2), road construction had the largest share among
public works sectors. Introducing the idea of beneficiary burden, automobile-related revenues such as
gasoline tax were earmarked for road construction 35 and those tax rates were raised as needed. Tolls
33

Local own expenditures were much smaller than expenditures subsidized by the central government.
While the investments of public corporations for highway, housing, waterworks, etc. were includedin the projected infrastructure table of the National Income Doubling Plan, those for railway andtelecommunication were not. The projected range of the latter investments was written in the text
instead. In the succeeding plans the amounts of the latter ones were also included in the table.
35 This program was not a cabinet law but a lawmaker-initiated legislation led by Kakuei Tanaka(1918-93). He was elected to the House of Representatives from Niigata Prefecture in 1947, held
prominent positions in the cabinet and the party, and became the Prime Minister (1972-74).
34

37

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

for express highways were pooled not only for redemption but also to construct new express highways.
These systems indeed played an important role to construct necessary roads in the high growth era,but they were recently criticized as constructing roads nobody used despite the fiscal consolidationneeded. Finally, the public highway corporations were privatized in 2005, and earmarked revenues forroads were abolished in 2009.

Figure 8-2: Traffic Volume by Sectors
9,000

60%

8,000
50%
7,000
6,000

40%

5,000
30%
4,000
3,000

20%

2,000
10%
1,000
0

0%
1950

1960

1970

1980

1950

passenger (100 million person Km)
road

rail

1960

1970

1980

freight (100 million Ton Km)

sea

air

road share (rhs)

Source: Authors based on Inoki (1989) pp.122-123.

Because private enterprises provide electricity in Japan, electric power development was notincluded in the projected infrastructure table except for pilot plants that government electric
institutions managed. Alternatively, figures of energy demand and supply by sources were projectedin the chapter for private sectors. Power development was a major sector that the fiscal investment andloan program (FILP) funds were distributed to in the 1950s through the public financial institutions.
In tandem with economic planning, the special development act for each sector was enacted: road(1953), soil and water conservation (1960), port (1961), housing (1966), etc., and five-year
development plans for those sectors were prepared independently by ministries having jurisdictions
over them. Although the targeted figures in the economic plan were not the same as those of theindividual plan in the strict sense, economic planners and officials in relevant ministries shared the
direction of each infrastructure development through the planning process.

8.2 National and Regional Development Plans

It is natural to bear specific projects or locations in mind when planning infrastructure building.
Transportation development will change flows of people, goods and services, and then will haveprofound impact on economic conditions of particular regions. Public works will also create jobs. As
38

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

the National Income Doubling Plan aimed to mitigate the so-called dual economic structure36 andincrease social stability, an equitable development across the Japanese archipelago would be an
important agenda, especially in the political context. On the other hand, infrastructure development
will bring about fierce struggles for local interests, unless there is a grand design. To address thesechallenges, the first comprehensive national development plan was compiled in 1962, and the second
one in 1969, which were schematized by the Comprehensive National Land Development Act37 .
Mikuriya (1989) understood the national development plan that drew a vision for the future Japan as
a companion of economic plan. The Economic Planning Agency was in charge of these plans at thattime 38 , and the National Land Council played the same role as the Economic Council did in economic
plans. While manufacturing concentrated in the four major industrial areas alongside the Pacific Belt
Zone in the early 1960s, the 1962 Plan proposed the New Industrial Cities Program, under which 15
areas were designated; most were outside the Pacific Belt Zone (Figure 8-3) 39 . They were given
preferential treatment for taxes, budget expenditures, loan terms, etc., to promote industrialization.
The 1969 Plan worked out the nationwide network and large-scale development projects, and then led
to developing express highway network across the archipelago, Shinkansen bullet train network 40 , andbridges between Honshu and Shikoku, etc.

36

A large gap between traditional sectors and modern ones, such as agriculture and industry, smalland-medium-sized business and huge ones,, and rural villages and metropolitan cities, still existed.
37 Although the Act was legislated in 1950 with a hierarchical scheme of national, regional, andprefectural plans, only development plans for specific areas were decided in the 1950s; that is, plans
for water hydroelectric resource development modeled on the TVA (Tennessee Valley Authority)
created under the New Deal in the United States.
38 The National Land Agency was established in 1971, and the function of comprehensive
development plan moved to it. The Ministry of Land, Infrastructure, Transport and Tourism has beenin charge since the reorganization of government ministries in 2001. The naming of development plans
and acts also changed to the National Spatial Plan and Planning Act. The new Act has dropped anarticle that prescribed prefectural plans.
39 Replying to the strong requests from less-developed regions alongside the Pacific Belt Zone, thegovernment proposed another program called the Special Areas for Industrial Consolidation anddesignated six areas which located alongside the Pacific Belt Zone.
40 The Shinkansen bullet train first launched between Tokyo and Osaka in 1964, just before the Tokyo
Olympic Games. Its construction was financed by the IBRD (International Bank for Reconstruction
and Development) loan. It was extended to Hakata (Fukuoka City, North Kyushu) in 1975, and the
Shinkansen network now covers Hakodate (South Hokkaido), Niigata, Kanazawa, and Kagoshima(South Kyushu).
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Figure 8-3: New Industrial Cities and Special Areas for Industrial Consolidation

Central Hokkaido

New Industrial City
Special Area for
Industrial Consolidation

Pacific Belt Zone

Hachinohe
Akita Bay

Niigata
Sendai Bay
Toyama, Takaoka
Joban, Koriyama
Kashima

HarimaMatsumoto, Suwa
NakaumiEast Suruga Bay

Bingo

East Mikawa

ShunanSouth Okayama
Tokushima
Oita
Toyo
Hyuga, Nobeoka
Shiranui, Ariake, Omuta

Source: National Land Agency

Regional development plans at the block level were also compiled under the Act, which listed
smaller projects than did the national plan. On the other hand, prefectures and large cities also
compiled their development plans individually, although they have not ever been prepared based on
the Act. As local governors are elected by their citizens, those plans usually tend to reflect their publicpledges or visions. They can express their opinions when the central government prepares the national
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
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and regional development plans according to the Act.

Figure 8-4: Hierarchical Structure of Economic Plans in Japan

Source: Authors.

There were lots of plans prepared, as described in Figure 8-4, how the planned targets might come
off through the budgeting process. While the government budget was formulated on an annual basis,the planned targets were the cumulative amount for the planning period and estimated at constantprices. Thus it would be difficult to reflect the planned figures directly to the annual budget. In addition,
it would be desirable for the government to manage macroeconomic policy flexibly by considering
the current macroeconomic conditions rather than paying much attention to the planned figures.
However, sharing information among planners, officials in each ministry and budget authorities
through the planning process would be useful to develop infrastructure efficiently.

9. Human Related Factors in Economic Plan

The National Income Doubling Plan (1960) emphasized the importance of human-related factors ineconomic development as strongly as that of economic factors. Preceding plans had treated suchproblems as somewhat external to economic planning and had not explicitly mentioned theirquantitative targets. The 1960 plan devoted two chapters to human-related factors: human resource
development and social security.

9.1 Human Resource Development

The third chapter of the public sector part of the Plan was titled “Development of Human Abilities
and Advancement of Science and Technology.”
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Although Japan's labor force did not constrain higher economic growth in postwar Japan owing toabundant cheap labor, the Plan understood that the growth rate of the labor force would slow down in
the long run. A slowdown in labor input, progress in science and technology, and advancement ofindustrial structure; all would urge the development of quality human resources.

In view of the increasing importance of human resource development, especially ensuring thenumber and quality of scientists and engineers, the following was expected:(1) to increase the annual number of university graduates of science and engineering schoolsby 16,000 over the current figure of 29,000 in the ten-year period;(2) to increase the annual number of engineering high school graduates by about 85,000
over the current level of 95,000 in the same period;(3) to enhance graduate education to secure a sufficient number of teachers for the above
education and for this purpose to promote academic-industrial cooperation;(4) to promote the policy of secondary education for all and to raise the proportion of juniorhigh school graduates who go on to senior high school from 59.8 percent in 1960 to 72
percent by 1970; (the proportion actually reached 82 percent in 1970 and it exceeded 90
percent in 1974. Figure 9-1)(5) to increase skilled workers through vocational and job training; and(6) to raise the expenditures for research and development (R&D) from 0.9 percent of GNP
to 2.0 percent 41 by 1970.

Figure 9-1: Percentage of Students Who Go on to Senior High School and University
100
90
80

senior high school

70

（％）

60

university

50
40
30
20
10
0

41

This figure includes all R&D expenditures conducted by government, universities, and private
sectors. An average of other developed countries was around 2 percent at that time.
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
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Source: Ministry of Education, Culture, Sports, Science and Technology
Note: Years 1955-75 are shadowed.

Cooperative industrial relations had contributed to productivity and skill formations in factories.
According to Yonekura (1993), an enterprise union (a union organized at the company rather than theindustry level) offered a cooperative workforce to management in exchange for job security and stablewage increases with seniority. This stable workforce enabled management to introduce new
innovations successively and retrain workers when necessary. Rigid job classifications were notrequired, since wages were determined not by job classification but by seniority, rank, and meritevaluations. Therefore, the organized workforce in Japan was flexible and trained for multi-functional
duties by the company. Japan's multi-functional workforce had made the famous just-in-time
production system possible. So long as jobs were secured, unions did not oppose the introduction of
new innovations. Under job security contracts with unions, managers had to transfer or retrain workers
when they introduced new innovations. Incremental innovations (kaizen) were successively realized
through quality control circles. Moriguchi (2013) points out that human resource upgrade of blue collar
workers from junior high school to senior high school had a high affinity for quality control circles.

9.2 Social Security and Welfare(From Poverty Alleviation to Universal Social Insurance)
The social security system offers a social safety net to ensure sound and anxiety-free lives against
difficulties that might endanger the stability of living such as illness, injury, unemployment, retirement
without means to earn money, and unforeseen accidents. Thanks to the social safety net, people canlead attractive and challenging lives without fearing risks. If the social safety net becomes unstable,
people will feel uneasy and many of them will restrain consumption and save money for future
anxieties. This will badly affect the economy and society will be less active.

The social security policies had developed in accordance with the socioeconomic changes. Japan
had suffered mightily from war-related damages, including millions of lost households, five millio npeople including soldiers returned from overseas, many war orphans and disabled veterans, andestimated unemployment varied from five millions to 13 million. The Ministry of Health and Welfare
estimated that 8.8% of households, approximately three million people, needed aid in December 1945.
Poverty alleviation measures were urgently required in social policies at that time.

The Public Assistance Act was legislated in September 1946, and was completely revised in 1950
based on the right of living prescribed in Article 25 of the new Constitution. It is a modern public
assistance program that a person living in poverty has a right to be publicly assisted in a
nondiscriminatory and equal manner. The Child Welfare Act (1947) and the Act on Welfare of43

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Physically Disabled Persons (1949) were also enacted.

During the deliberation of the Public Assistance Act, they discussed scenarios in which all
unemployed persons and those in poverty could be publicly assisted, but the government would havelacked financial resources and it might have produced lazy persons. Responding to this discussion, theUnemployment Insurance Act was enacted in 1947 42 as social insurance. If an employee loses his/herjob, he/she can receive unemployment insurance up to six months. If he/she cannot find a new workwithin six months and has neither family support nor financial resources, he/she may resort to the
public assistance program. It was the initial step toward a matured social security system that
integrated social insurance and welfare.

Thanks to the high economic growth in the 1950s, people’s living standard was improved.
Accordingly, it became more important to implement the measures to prevent general citizens fromfalling into poverty due to illness or aging, in addition to poverty alleviation measures. While publichealthcare insurance and pension plans started in the prewar period, they were financially distressedby the postwar inflation. High economic growth made them afford to expand their operations, but they
had not fully covered such traditional sectors as farmers, self-employed, and small businesses. A
migration of population from farming villages to cities had made it necessary to depend on social
security rather than mutual aid within large families. The Liberal Democratic Party, established in
1955 by the merger of conservative parties, laid out a promise to fulfill the universal healthcare
insurance and pension plans. The National Healthcare Insurance Act was legislated in 1958, theNational Pension Act in 1959, and all citizens were universally covered by 1961.

(Social Security in the Economic Plan)
In the National Income Doubling Plan, the fourth chapter of the public sector part focuses on thesocial security, titled “Fulfillment of Social Security and Betterment of Social Welfare.”

The Plan stated that the dual economic structure and various gaps of wage and income were old
problems of the Japanese economy. Although higher growth since 1955 had indicated some decline ofdual economic factors and underemployment, the further decline could not be expected without
promoting labor mobility among industries, especially from the traditional sectors to the modern
industrial sectors, and paying special attention to those left behind. While they feared that the widening
gap in income and wealth would bring about social instability, they warned that such measures as aminimum wage system, if excessively enforced, might choke economic growth by discouraging
entrepreneurship and incentive to work.

42

It was replaced by the Employment Insurance Act in 1974, which expanded their operations frominsurance to services for employment stabilization.
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Considering these reserves, they argued that the role of social security should become more andmore important to prevent a widening gap in income. In addition, the economic impact of social
security could not be ignored: creating effective demand, counter-cyclical feature, and capital
accumulation by pension system43 . It would also have a structural virtue to promote labor mobility
and to reduce the income gap between agriculture and manufacturing. The Social Security
Subcommittee Report went as far as to state, “valuing social security makes it possible for the economy
based on laissez-faire to grow. In this context a quantum leap of social security is essential to thiseconomic plan.”

Figure 9-2: Percentage of Social Security Benefit and Contribution to GNP
15%

10%

5%

0%
1946 1950

1955

1960

1965

1970

1975

1980

1985

1990

Social security benefits

Social assistance grants(benefits+grants)

Social security contributions

1995

Source: Economic Planning Agency (1946-54: National Income Report, 1955-98: National Accounts,
68SNA).
Note: Years 1955-75 are shadowed.

As for social security, based on the prospect that public healthcare insurance and pension plans
would attain to universally cover all citizens in 1961, the National Income Doubling Plan pointed out
the next homework assignment: increasing benefits and harmonizing different plans 44 . They alsoemphasized upgrading the unemployment insurance system with the outlook for fierce labor mobility

43

The Social Security Subcommittee, which was a subsidiary of the Economic Council, estimatedthat the maturing of the pension system would produce an accumulated fund of some four trillion yen.
GNP in 1960 was around 16 trillion yen, according to the National Accounts (68SNA, baseyear=1990).
44 Plans covering employees of public sector and big business usually pay better benefits than planscovering farmers, self-employed and nonworking persons. These differences still remain in both
healthcare insurance and pension plans.
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among industries. It was in the 1970s that the percentage of social security benefits to GNP had jumped(Figure 9-2).

On the other hand, social welfare was also necessary to complement social security. They discussed
that the objective of social security and welfare is to prevent people from falling below certain living
standards, that is, not to save poverty but to prevent people from falling into poverty. Although
universal social insurance would soon come true, the insurance system had its own limitations.
Therefore, social assistance for mother-child, physically or mentally disabled, and etc. should havebeen improved.

They added their view on the minimum standard of living, which used to be considered to bephysical subsistence level and absolute. But they argued it relatively determined in accordance withthe development of ordinary people’s lives on the ground of public perception for social solidarity thatcitizens should guarantee one another certain living standards.

Finally, some expressed alarm at Japan's employment practices, that is, lifetime employment,
seniority-oriented wage system, and odd retirement allowance 45 , might impede labor mobility. They
even proposed that universal child allowance should be studied 46 , which would be expected to promote
the seniority-oriented wage system to be remedied. In hindsight, farmers and young generations moved
from rural areas to metropolitan cities in the high growth era independently of these practices. In the
1980s, these practices were regarded as major factors contributing to the success of Japan Inc., alongwith industrial policy. Now they are blamed for discouraging labor mobility from low productivity
sectors to high productivity ones once again. These practices are common in the public sector and big
business, which covered a smaller portion of employment in the 1960s than it does today. For a coupleof stagnant decades, regular employees have gradually been replaced by non-regular employees suchas dispatch workers and temporary ones who are outside these practices. Anyway it should be notedthat the economic plan emphasized the importance of structural change, that is, the resource
reallocation toward the more productive sectors.

10. Consensus Building with Private Sector and Academic Authorities

10.1 The Role of the Economic Council

As explained in Chapter 4, the Economic Council, an advisory committee to the Prime Minister,45

It was usual in Japanese big companies that the longer an employee was in office, the more generous
his retirement allowance was.
46 There exists a strong objection against a universal benefit from tax resources in Japan. It is in 1972
that the child allowance system with income-test started.
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deliberated the new economic plan and submitted a draft to the government. Then the Cabinet
approved it, and it became the official economic plan of the government.

The council discussed various economic matters to prepare the new economic plan. This process
generally took from several months to a year. The council was composed of around 30 members who
were learned and experienced persons from diverse backgrounds 47 . When deliberating the new plan,
additional temporary members were appointed, and more than 200 persons participated in the planning
process. In case of the National Income Doubling Plan, four additional committees were establishedin the Economic Council: (1) the Overall Policy Committee in charge of coordinating the generalplanning, (2) the Public Sector Committee with ten subcommittees, (3) the Private Sector Committeewith seven subcommittees, and (4) the Committee for Quantitative Analysis 48 . According to Sadahiro(1993), although members were not appointed as official representatives of their belonging socialgroups but experts in some fields of the plan, their opinions reflected the opinions of their groups, andagreements made at the Council were expected to affect the decision making of their groups.

The Economic Planning Agency, as secretariat of the Council, coordinated the planning process.
According to Komine (1993), the Agency, on the one hand, prepared discussion materials for theCouncil based on members’ requests. On the other hand, the Agency worked to form a consensus
among many ministries in the government. When the Agency distributed the draft economic plan to
all ministries of the government, it received no less than 1,000 comments. These comments werediscussed amongst one another and compromises were reached. From his experience participating in
the planning process, Professor Komine thinks the hypothesis of Aoki (1981) reasonable that eachministry acts as an agent of an interest group in the society and negotiations among various ministries
are regarded as a kind of social bargaining.

It can be said that in Japan social bargaining was implemented efficiently in the process of drafting
the economic plan.

10.2 Information Sharing in the Planning Process

Komine (1993) also views economic planning from the point of information sharing. He discussed
47

Most members were business leaders, and some academic professors, economists and journalists.
Some were ex-bureaucrats. Labor leaders and consumer representatives also joined the council in thelate 1960s.
48 Ten subcommittees for the Public Sector were: (1) Public Investment Allocation, (2) Industrial
Location, (3) Transportation System, (4) Housing and Living Conditions, (5) Land and Water
Management, (6) Energy Policy, (7) Science and Technology, (8) Education and Training, (9) Social
Security, and (10) Fiscal and Monetary Policy. Seven subcommittees for the Private Sector were: (1)General, (2) Advancement of Industrial Structure, (3) Foreign Trade, (4) Agriculture and Labor
Movement, (5) Small and Medium Business, (6) Wage and Employment, (7) Living Standards.
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two points.

First, the basic policy stance of the Prime Minister was made public through economic planning.
One of the most important roles of the economic plan was to show the long-term economic vision heldby the Prime Minister. When a new Prime Minister was nominated, he was expected to come up withnew economic targets and policies in a new economic plan. Prime Minister Ikeda drew up the National
Income Doubling Plan officially to show his intention to pursue his campaign promise to double
average wages in ten years. The feasibility of each Prime Minister’s agenda was reviewed through theplanning process by the government and the Economic Council, and a more realistic policy package
was made public in the form of an economic plan.

Second, information was shared by private companies and the government. Long-term economic
projections for the economic growth rate, industrial structure and the labor market situation were
presented in the economic plan. As an argument that setting guidelines improves economic growththrough so-called announcement effects, he introduces Sato (1990) as follows:
When the government forecasts a certain level of economic growth, privatecompanies believe that is guaranteed through the policy instruments. They set theirown target based on this projection. In the process of setting targets, the officiallyprojected growth rate is taken to be the bottom line of growth, and they try to do
better. Consequently, the growth rate achieved turns out to be better than the
projection proposed in the economic plan.

He proceeds to explain why the Japanese government had succeeded in gaining the confidence fromthe private sectors. Much information was exchanged between the government and private businessbefore plan guidelines were set. He argues the notion that these guidelines were government products
and simply handed down to private business to be wrong. There was a two way flow of information
between the government and private business and give-and-take attitude on both sides. The
government tried to gather information about the actual state of industry, and private business tried tounderstand macroeconomic conditions. Thus when guidelines were finally formulated, their basic
thrust was already clear to private business.

Furthermore, he reminds us that the Japanese government maintained a so-called time-consistenteconomic policy by including long-term policy commitments in the economic plan, and refers theargument by Blanchard and Fisher (1989) that a government which promises long-term commitmen t
to carrying out a policy will produce a better outcome than one which implements economic policies
from a short-term point of view. He concludes that sharing of information and time-consistenteconomic policy resulted in private sector confidence in government economic management, andstable long-term expectations as well as savings and investment behavior oriented to a long-term
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perspective.

10.3 Academic Authority

Eminent academic professors of economics and related fields belonged to the Economic Council.
Many academic scholars joined subcommittees according to their specialties.

It is notable that all members of the Quantitative Committee were university professors or research
institute fellows. They developed quantitative analyses and econometric models used for the planning
exercises with planners in the Economic Planning Agency. They presented those studies at aninternational conference 49 and submitted papers to academic journals 50 .

10.4 Communication with the Public

As closely explained in Chapter 13, the Economic Planning Agency published the Annual
Economic Report (White Paper on Economy). The first report was written in 1947, under Professor
Tsuru’s leadership 51 , to analyze the current economic conditions and to promote understanding of not
only leaders but also ordinary people. It explained economic difficulties in an easy-to-understand way:for example, all of three sectors of the economy, government budget, private enterprises, andhouseholds, went into the red. Since then the report had been published every year and often generated
phrases on everybody's lips; “it is no longer termed postwar” (1956), “investment induce investment”(1961), etc. The director in charge of the White Paper used to be regarded as a chief economist of thegovernment, and a multitude of staff grew as economists and were active in various institutions.

11. Evolution of Quantitative Method for Economic Planning11.1 Method Before the Econometric Model 52(Colm Approach)
The first full-fledged economic plan, the Five-Year Plan for Economic Self-Support (1955),
assumed an average five percent economic growth rate for the planning period on the basis of the so49

Shishido (1965) and Watanabe (1965) are papers presented at the Conference of the Social Science,by Research Council Committee on Economic Stability, the Brookings Institution.
50 Examples are Tatemoto et al. (1967), Tsukui (1968), etc.
51 Shigeto Tsuru (1912-2006) was a prominent economist in Japan. He earned a PhD. from Harvard
University in 1940 and lectured there. Returning to Japan in 1942, he held public office till 1948. Heserved as vice-minister for the Economic Stability Board (1947-48), and his work is best known fordrafting Economic White Paper of 1947. In 1948 he took up a professorship in Hitotsubashi University
in 1948, and became its president from 1972-75.
52 This section owes a lot to Shishido (1965).
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called the Colm approach 53 . At first economic growth was projected simply on the assumption of labor
availability and labor productivity for the future. A breakdown of expenditures were then estimated.
The Self-Support Plan assumed an annual growth rate of labor force at two percent, which wasconsidered desirable from the viewpoint of employment policy, and that of labor productivity at three
percent, and as a consequence total of a five percent GNP growth rate. In regard to the external balance,
required imports were first estimated by means of the import ratio to GNP; then an export target wasderived on the basis of world trade growth rate and the elasticity of Japanese exports to world trade.
Although the Plan misjudged labor for the strictest constraint at that time, ignoring other more
important constraints such as capital and foreign exchange, the economy grew rapidly due to an
unexpectedly high growth of exports. Because the growth rates of GNP and exports doubled the targets,the plan had to be replaced by another one.

(Alternative Growth Rates Approach)
Recognizing a methodological shortcoming in the Colm approach, the next plan, the Long-Range
Economic Plan (1958), adopted a method called “Alternative Growth Rates Approach” suggested byProfessor Okawa 54 . This method aimed at selecting among several alternative growth rates an optimal
one consistent with full-employment, external balance, and the availability of domestic savings. They
prepared 4.5 percent: around the prewar average, 8.9 percent: around the postwar average, and 6.5
percent: middle between the two. After checking the aforementioned balances, they took 6.5 percent
as the most reasonable target. As a result of paying little consideration to the strong upward trend that
had been prevailing since 1955, there were some serious underestimations; while the assumed exports
target of 10.5 percent did not diverge seriously from the actual performance of 12 percent, the four
percent assumption for the private investment target was far off from the actual 17.4 percent. The
actual GNP growth rate of 10.5 percent was so much divergent from the target that this replacement
plan was itself destined to be quickly replaced.

The National Income Doubling Plan (1960) also adopted an “Alternative Growth Rates Approach.”
After several experiments examining such factors as labor, energy, foreign exchange and domestic
savings, the rate of 7.2 percent, on the assumption that GNP would double in ten years, was selectedin the draft 55 . However, because of a demand from the highest level 56 , the plan declared in the53

Colm (1952). Gerhard Colm (1929-72) was best known for his work as the Chief Economist of the
National Planning Association (1952-68). He also served as a leading economic adviser for the
Roosevelt and Truman administrations. He was forced to immigrate to the United States as a refugee
from Nazi Germany.
54 Kazushi Okawa (1908-93) was a notable economist in Japan and famous for his work on the longterm economic statistics. He was a professor of Hitotsubashi University and served in the government
several times. He was appointed as the first president of the Economic Research Institute, Economic
Planning Agency (1958-61).
55 Because the base year of figures in the plan was the 1956-58 average, projected annual GNP growthrate was 7.8 percent for 13 years (1957-70).
56 Osamu Shimomura (1910-89) was one of the most famous among the Prime Minister Ikeda’s brains.
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preamble that the target growth rate for the first three years (FY1961-63) was set at 9 percent,recognizing that there would be very strong factors to support economic growth, such as rapid
innovation, abundant labor, and so on. It implied a rate of 6.4 percent for the remaining period to attain
7.2 percent on the average for the ten years, and the plan stated that the doubling of national income
should be attained in and around ten years in view of various future uncertainties.
The plan assessed the supply and demand balance of key commodities and the labor market, and it
presented not only macro targets but also such structural figures as exports, imports, industries, energy
supplies, employment, and so on.

11.2 Econometric Model and Input Output Analysis

Although the National Income Doubling Plan presented various figures from macro to micro, there
were some inconsistencies between them. For example, the growth rate of private investment was
projected at 6.9 percent, while that of such capital goods supply as steel, machinery, etc. was assumed
more than 10 percent. Addressing these challenges, the Economic Planning Agency tried a state-of-art
method at that time, econometric modeling, with close collaboration with young and energetic
university professors who gathered to the Quantitative Committee under the Economic Council as
described in chapter 10.

They made use of an econometric model called “Medium-term Macro Model” and an Input-Output
Analysis model originally developed by Wassily Leontief 57 , to prepare the Medium-term Economic
Plan (1965). The Plan was submitted to the Prime Minister with a 12-page supplementary material
titled “National Accounts in the Targeted Year,” the reports of the Quantitative Committee and othercommittees attached. It was the first time that an econometric model, which was supposed to be studied
just for academic use, was utilized for such practical use like economic planning 58 .

The Medium-term Macro Model was composed of about 40 equations and 60 variables, half ofwhich were from the National Income Statistics and rest from international trade, labor, price andmonetary statistics. A solution to the model, a set of final demands, would become an input for the
Input-Output Analysis Model output, labor demand, and required capital by sectors could then be
In the late 1950s he argued that the Japanese economy was in a historic burgeoning era, and he had
shown a more optimistic view on economic growth of Japan than other economists in the Economic
Planning Agency or the Bank of Japan. He joined the Ministry of Finance in 1934 and worked until
1959. He became a board member of the Development Bank of Japan (DBJ) in 1960, and the firstpresident of the Research Institute of Capital Formation, DBJ in 1966.
57 Wassily Leontief (1906-99) won the Nobel Prize for Economics in 1973 for his works on inputoutput tables and the linear activity model of general equilibrium with these tables.
58 Around the same time, another macroeconometric model was developed for a short-term forecastby the Economic Research Institute of the Economic Planning Agency. It was used for a short-term
forecast and its multipliers were used to assess the economic impact of fiscal and monetary policies,
etc. It had evolved into the EPA World Econometric Model in the 1980s.
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obtained. Inconsistency among planned variables was dissolved, and more importantly pricedevelopment analysis became possible, which was necessary for curbing inflation that emerged as a
critical issue in the mid-1960s. The latter also made it possible to analyze such nominal values assavings-investment balance, balance of payments, and fiscal variables.

Another merit of model is that it could be easily judged whether discrepancies between planned
forecasts and actual figures were brought about by errors of the model itself or inaccurate assumptions
for exogenous variables. The Quantitative Committee studied discrepancies for 1967 and 1968, andreported that errors owed to inaccurate assumptions were larger than those of the model itself.

11.3 Multi-sector Econometric Model and Turnpike Model(Medium-term Multi-sector Econometric Model)
Persistent inflation was caused partly by excess demand, and partly by productivity gaps among
sectors. Oil shocks accelerated inflation in the 1970s. Considering that those challenges required moreconsistent sector analysis, the Economic Planning Agency tried to link a macroeconometric modelwith an input-output model simultaneously, and finally constructed the Medium-term Multi-sector
Econometric Model to prepare the Economic Plan for the Second Half of the 1970s (1976). Major
features of the model were given below (Figure 11-1):
 The model consists of 15 sectors (15 commodities (goods and services) and 14 industries).
 Macro consumption is determined by consumption function, and then divided by sectors inaccordance with their relative prices.
 Investment in each sector is determined by the stock adjustment principle or the accelerator
principle.
 Exports and imports of each sector are determined by their demand conditions and pricecompetitiveness.
 Intermediate input matrix is derived by multiplying the output vector by the input coefficientmatrix.
 Capital stock of each sector is obtained by the capital accumulation equation: adding
investment to the previous stock minus depreciation.
 The number of employees of each sector is gradually adjusted to its optimal level that isdetermined by its output and unit labor cost.
 Production function with capital and labor inputs determines the potential output of eachsector.
 Wages of steel and machinery sectors 59 are determined by the Phillips curve, and they59

In Japan wages are negotiated at the annual spring round and those sectors whose labor unions
belong to the JCM (Japan Council of Metalworkers' Unions) have played a leading role; this includes
steel, automobiles, electrical products, etc.
52

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

diffuse to other sectors.
 Supply-demand balance and unit cost of each sector affect its price development. Supplydemand balance is represented by capacity utilization rate (actual output divided by potential
output) or inventory rate. Cost consists of labor and intermediate and other inputs.

Figure 11-1: Flow Mechanism of the Model

Source: Economic Planning Agency (1984) p.7.

Besides planning practice, this model was utilized to assess the impacts of tax reform as to introduce
the consumption tax in 1989, replacing commodity taxes whose rates varied by goods and services 60 .

(Turnpike Model)
Using the same data with this model61 , another type of multi-sector model was developed, named
the Long-term Multi-sector Model, or the Turnpike Model. Suppose that you are planning to drive andwant to minimize your driving time. You should drive the following route: get on a nearest express
highway as quickly as possible and keep driving on the expressway until you reach to a closest exit to60

The consumption tax is a VAT (value-added tax) type tax where taxes included in intermediate
inputs and investments can be deducted. An input-output table can incorporate this multistep
mechanism explicitly. The 1989 reform was revenue neutral, but its impacts differed by goods andservice. Consequently the impact on GDP was not neutral. Because a VAT for investments isdeductible, such revenue-neutral reform as in 1989 will be expected to promote investments andenhance growth.
61 Capital stock matrix was also needed, which was estimated by perpetual inventory method with abenchmark of the National Wealth Survey. The National Wealth Survey conducted by the Economic
Planning Agency in 1970 is the latest data. Annual capital flow matrices estimated for the Mediumterm Multi-sector Model were accumulated and depreciated with benchmark of the 1970 stock data.
53

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

the destination.
The turnpike theorem62 argues that a balanced growth path 63 is just like an express highway.
According to Tsukui (1966), economic planners can derive interesting suggestions from the strong
version of turnpike theorem: all efficient paths at some time approach the balanced growth path andspend most of the planning period in its neighborhood no matter what target (or what start point) may
be set up. Therefore, planners are wise to put aside a vexing question of value judgments and plan tolead the economy efficiently toward the balanced growth path and then to keep it growing along that
path. (Figure 11-2)

Figure 11-2: A Turnpike Path
good 1projection
A

B
good 2
Source: Authors.

Tsukui (1968) tested the turnpike theorem on the Japanese economy for 1955-60. He constructed alinear programming version of the dynamic Leontief model, and compared the computed growth pathwith the actual one. He found the discrepancies between them was very small, and concluded that theJapanese economy had grown from 1955 to 1959 with a very high efficiency that would be difficult
to attain even under intensive central planning 64 . He was a member of the Quantitative Committee andadvised the Economic Planning Agency to develop the Long-term Multi-sector Model.

The model was an application of the turnpike theory to the actual Japanese economy with a numberof modifications for the purpose of practical use. Major differences from a standard model are (1)constraints on increases in exports and imports, and (2) the assumption of technological changes based62

The turnpike theorem was first enunciated by Dorfman, Samuelson, and Solow (1958) and wasproved by Morishima (1961), Radner (1961), McKenzie (1963), etc. for various versions.
63 von Neumann (1945) used a disaggregated general equilibrium model, while Ramsey (1928) used
a macro model.
64 Until the 1960s, the Soviet Union was believed to perform better economically than the UnitedStates. A symbolic episode was the Sputnik Shock that occurred when the Russians launched theworld's first artificial satellite in 1957.
54

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

on engineering information 65 . Due to these modifications, the model no longer showed the turnpike
property in its purest form characterized by a linear balanced growth path. However, the model still
held the essential features in the sense that the optimal path solved by the model was not affected by
the change in terminal conditions.
The model was solved by linear programming 66 methodology. Production function with factor
substitution is approximated by a linear combination of more than one production process. A puttyclay approach was adopted for capital stocks: once capital stocks were installed in a particular sector,
they were assumed to be inconvertible from one sector to another, but not necessarily so between
production processes within a sector.

The objective function to be maximized in the Model was based on utility defined by thecomposition of consumptions by sectors and benefits from non-productive social overhead capitalstock 67 over the entire simulation period. The problem of arbitrariness inevitably involved in setting
terminal conditions was circumvented by solving the model well beyond the planning period anddisregarding the solutions for the excess periods 68 .

This model was used to draw a long-term optimal and realistic growth path, such as “Japan in theyear 2000” prepared by the Economic Council in 1982 before deliberating a new economic plan.

(SNA)
Econometric models were advanced in tandem with the development of GDP statistics. When these
multi-sector models were first developed in the mid-1970s, GDP statistics were not yet compiled on
the System of National Accounts (SNA) defined by the United Nations in Japan. Thus it took lots ofwork and time to prepare data for these models; no less than 20 periods of Input-Output tablesconsistent with GDP components. The 1968-SNA was introduced in 1978 in Japan and GDP statistics
came to be compiled by the commodity flow approach, which reduced somewhat the burden for datapreparation. The Economic and Social Research Institute (ESRI) is scheduled to introduce the 2008SNA 69 by the end of 2016. The 2008-SNA will compile GDP statistics based on a supply-use table,
and the multi-sector model data have the same format with a supply-use table (Figure 11-3). If supply65

Delphi study was conducted to make the intermediate-input coefficients and capital coefficient for
the future. Delphi study was to hear a forecast from multiple experts in each industry with feedback
and follow-up hearings.
66 Rapid progress in computer technology makes the simulation speed much faster than at that time,and now non-linear programming models can be solved easily.
67 While such infrastructure as roads and ports become capital inputs for the production function of
the transport sector, such public capitals as parks produce benefits for consumers.
68 Investments at the last period will become zero to maximize the objective function, including theconsumption at the last period.
69 Another salient feature of the 2008-SNA is the capitalization of Research and Development (R&D),
recognizing that intangible assets now play a more important role in the knowledge-based economy.
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

use tables were provided every year and retroactively for more than 20 years, the burden would be
reduced a lot, although we no longer maintain a multi-sector econometric model70 .

Figure 11-3: Data Structure of the Modelindustrial
sector, etc.
external sector

total(output)

inventory

imports(by goods and services)

government fixed
capital formation(by use)private investment in machineryand equipment(by indistry)

private housing
investment

consumption ofprivate non profit institutions
serving households

government final consumption

final consumptionof households(by object)intermediate
input

goods and services

fixed capitalformation

consumption

exports(by goods and services)

industrial sectors

inventory investment(by industry)

goods
and
services, etc.

compensation of employees
business surplus
consumption of fixed capitalindirect tax(less) subsidies
statistical discrepancies
total(output, value added)

Source: EPA (1984) p.5.

11.4 Critique of Econometric Model

The introduction of rational expectations in macroeconomics in the mid-1970s was an intellectual
revolution and a serious challenge for large-scale backward-looking econometric models. Thesemodels have steadily lost their potency in the academic world since the Lucas critique (Lucas 1976).
Lucas (1976) argued that changes in policy have an immediate effect on agents’ decision rules since
they are inherently forward-looking and adapt to the effects of the new policy regime. This implies
that the reduced-form coefficients in econometric models change with changes in policy coefficients.

Although large-scale econometric models are still utilized for practical use, we cannot ignore theLucas critique. In addition to existing large-scale econometric models, we must take interest in
economic models built on firm micro-foundations 71 . If multi-sector analysis is required, a computable

70

The Cabinet Office has developed the Economic and Fiscal Model to prepare economic and fiscal
projections for medium to long-term analyses since 2002. This model incorporates hundreds of fiscal
variables not only for the central government but also for local governments and social security funds
in a macroeconometric model in response to the need of fiscal consolidation analysis.
71 The Lucas critique suggests that we should model the deep parameters relating to preferences(utility function) and technology (production function) that are assumed to govern individual behavior.
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

general equilibrium (CGE) model 72 will be useful. If cyclical fluctuation or policy shock analysis isof interest, a dynamic stochastic general equilibrium (DSGE) model will be a cutting-edge tool favoredby the monetary authorities.

12. Short-Term Economic Policy Coordination

As reported in Figure 8-4, other than long-term economic plans and comprehensive national
development plans, some short-term economic policy coordination tools were also employed in Japanto stabilize business cycle fluctuations, including estimation of economic outlook 73 for each fiscal
year and preparation of temporary economic measures. These policy measures have been also
indicative and based on the free market system. The main purpose of economic stabilization in Japan
had been shifted from cooling-off an overheated economy to avoid balance of payment deficits inhigh-growth period to a boosting, or reflation, policy after the bubble burst in the 1990s.

Yoshioka (1998) reports that the main contents of economic outlook of each fiscal year are 1) Gross
Domestic Product; 2) Labor and Employment; 3) Industrial Production; 4) Prices; and 5) Balance ofPayment. Table 12-1 reports some economic indicators of outlook and actual results quoted from EPA(1976) 74 .

Table 12-1: Short-Term Economic Outlook and Actual Figures in 1955-60
FY1955

FY1956

FY1957

outlook

actualoutlook

actualoutlook

actualReal Growth Rate (%)

4.5

10.8

0.2

6.2

6.5

7.8

Growth of Industrial Production (%)

1.5

11.4

7.2

24.8

12.5

12.3

CPI Inflation (%)

-1.7

-1.2

0.0

1.3

0.4

2.5

Current Account Balance ($ mil.)

+53

+326

+205

-229

-50

-148

FY1958

FY1959FY1960outlook

actualoutlook

actualoutlook

actualReal Growth Rate (%)

3.0

6.0

5.5

11.2

6.6

12.5

Growth of Industrial Production (%)

4.5

0.0

6.1

25.0

11.8

22.5

CPI Inflation (%)

0.2

-0.4

0.5

1.8

1.1

3.8

+150

+464

+160

+193

+150

-70

Current Account Balance ($ mil.)(Source) EPA (1976) pp.608-703.

72

The Global Trade Analysis (GTAP) is famous as a multi-country and multi-sector trade-linked CGE
model; the GTAP database is also used to analyze climate change policy as well as trade policy.
73 This economic outlook also has been one of the most important foundations of the fiscal budget.
74 In high-growth periods, e.g., the 1950s, Japan’s labor market had had some excess supply of labor
due to dual economy so that employment and labor indicators are not reported.
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

It will be easily found out that growth rates had some tendency to be underestimated while balanceof payments were sometimes overestimated. According to this economic outlook, the consistency
among economic policy measures, including fiscal policy, monetary policy, labor policy, trade policy,
energy policy, and so on, were ensured in the government agencies 75 . For example, tax revenue would
be estimated consistently to nominal growth rate mediated with some elasticity value, and monetary
policy would be tightened/loosened if the inflation rate would upturn/downturn, respectively.
Concurrently with the announcement of the numerical outlook, the government had also revealed basic
policy stances and important policy topics in each fiscal year for the indicative purpose. Based onthese economic outlook and policy stances and topics, the Minister of State addresses the Economic
Policy Speech at the ordinary session of the National Diet. The policy stances and topics in FY1956,
which was the first year of implementation of the Five-Year Plan for Economic Self-Support, e.g., areas follows:(1) Basic Policy Stances: The challenges will be promotion of the tendency toward economic
normalization, enhancement of industrial basis under the stable economy, active measures topromote exports, and expansion of job opportunities in a nod to the importance of employment.
(2) Important Policy Topics:
1) Promotion of exports;
2) Enhancement of industrial basis;
3) Promotion of small- and medium-sized enterprises and construction of new
agricultural communities;
4) Promotion of science and technologies;
5) Preservation of national land and promotion of development;
6) Expansion of the job opportunities;7) Stabilization of the national life;8) Conservation of balanced budget and normalization of monetary system; and
9) Stabilization of prices.

The annual outlook of the economy had been estimated according to so-called step-by-step or trialand-error approach, while many long-term economic plans employ an econometric approach that
adopts econometric models for estimation of growth rate, inflation, and so on 76 . The step-by-step
approach is based upon some results of a specific enquête or hearing and original economic research.
All items will be predicted by checking interdependency among them and repeating trial-and-error
processes step-by-step. The Economic Outlook of Japan has been employing this approach for a longtime. Advantages of this method are as follows:(1) Structural changes are easily introduced;
75
76

Here, the central bank has been included into the integrated government.
Chapter 10 of this study deals with a quantitative method for economic plans.
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”(2) Government intentions are easily reflected; and(3) Low cost compared with the construction of a large macroeconometric model and database.

Since both step-by-step and econometric approaches are employed for short-term economic outlook
and medium- and long-term economic plans, Yoshioka (1998) summarizes some advantages anddisadvantages of these two methods below in Table 12-2:

Table 12-2: Advantages and Disadvantages of Forecasting Approach
Step-by-Step Approach

Econometric Approach

Cost

Less

More

Consistency

Less

More

Objectiveness

Less

More

EasierMore Difficult

Reflection of Structural Changes

EasierMore Difficult

SoftwarePossibly general-purpose

Econometric application

spread-sheet application(model simulation)

ImplementationofGovernment

Intentions

Source: Authors based on Yoshioka (1998) p.9 Table 3.

As reported in Table 12-1, the short-term economic outlook had some tendency to underestimate
economic growth, and temporary economic measures had been formulated and implemented whennecessary. During the high-growth period in postwar Japan, in particular in the1950s-60s, one of themost difficult targets to achieve was balance of payments. When the economy was in boom andoverheated, imports expanded according to GDP/GNP and balance of payment turned negative. Under
the Bretton-Woods regime, the fixed exchange system had been adopted and the government had been
obligated to maintain an adjustable peg system. This was called the ceiling of balance of payment toconstrain the Japanese economic growth until mid-1960s 77 . Table 12-3 describes temporary economic
policy measures during foreign exchange crisis in 1957-58.

Table 12-3: Economic Policy Measures During Foreign Exchange Crisis in 1957-58
datetightening

1956.7.17

Tightening the window guidance (Bank of Japan)

1957.3.20

Official discount rate rose from 7.30% to 7.67% (Bank of Japan)

1957.5.8

Official discount rate rose from 7.67% to 8.40% (Bank of Japan)
Announcement of withdrawal of foreign deposit (Government)

1957.5.14
77

policy measures

Shortening of the duration of Pound Sterling import usage from four months to

See Figure 13-1 in the next chapter.
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

three and 20 percent reduction of import usage application (Government)

loosening

1957.6.1

Administrative guidance to moderate import L/C (Government)

1957.6.4

Pull-up of import guarantee rate (Government)

1957.6.19

Comprehensive measures to improve balance of payments (Government)

1957.6.20

Pull-up of import guarantee rate (Government)

1957.6.28

Deferment of 8% of infrastructure investments (Government)

1958.5.1

Pull-down of import guarantee rate (Government)

1958.6.18

Official discount rate reduced from 8.40% to 7.67% (Bank of Japan)

1958.9.5

Official discount rate reduced from 7.67% to 7.30% (Bank of Japan)

1959.2.19

Official discount rate reduced from 7.30% to 6.94% (Bank of Japan)

1959.4.1

Expansion of import usage application (Government)

Source: Asai (2015) p.231.

One of the most remarkable features of the measures taken at the above-mentioned occasion wasthat for monetary policy, in particular, interest rate manipulation was assigned to the target of exchange
rate level for the first time. Of course, more direct and brutal import-curbing measures were also
applied to reduce imports, including withdrawal of foreign deposits and pull-up of import guarantee
rate. After the bubble burst in the early 1990s, however, a lot of temporary economic expanding
measures were formulated and implemented to boost the Japanese economy.

13. Policy Coordination Utilizing Economic Analysis Report

While dealing with long- and short-term economic policy coordination, the economic policy
authorities of Japanese government during high-growth period also issued an annual economic report,
sometimes called “Economic White Paper.” This report was first published in 1947, immediately after
the end of World War II. According to EPA (1972), the report of 1948 evaluated the effect of thepriority production system, those of 1949 and 1950 analyzed the stabilization process after the war,and that of 1951 focused on the economic impact of the Korean War.

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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Figure 13-1: Balance of Payments and Official Discount Rate

(JPY billion)

700

10

600

9

500

8

400

7

300

6

200

5 (%)

100

4

0

3

-100

2

-200

1

-300

0

Net exports(lhs)

Official discount rate(rhs)

Source: Bank of Japan and Ministry of Finance.
Note: Mr. Koji Sago of ESRI, CAO has kindly assisted with this chart.

Economic White Paper of FY 1962 points out three features of the Japanese business cycle during
the high growth period 78 : (1) economic fluctuation is quite large; (2) worsening of the balance of
payments triggered monetary tightening that led to contraction; and (3) the inventory stock fluctuation
was the main factor of the business cycle. As above Figure 13-1 reports inverse correlation between
deficit in balance of payment and interest rate, the ceiling of the balance of payment was regarded as
one of the highest obstacle to be overcome. When the economic boom brought the deficit in balanceof payment, the government (Bank of Japan) had to tighten monetary policy to maintain the fixedexchange rate and not to come down to the foreign currency shortage under the Bretton-Woods regime.
After the foreign exchange crisis in 1957-58 focused on at the former section, the Economic White
Paper of 1964 analyzed the relationship between the economic expansion and the balance of payments
as follows: The economic expansion in the previous year had been more than expected, which resulted
in overtaking the prewar economic level recorded in 1934-36 for the first time. Compared with the
prewar level, industrial production increased by 60 percent, and national income rose by 30 percent.
Exports, however, did not grow so much and resulted in $1.3 billion that was less than the planned$1.6 billion and imports expanded close to $2.6 billion due to the economic boom. The Economic
White Paper of this year pointed out that the deficits of balance of payments originated from expansionof consumption, both macroeconomic expansion of consumption in quantity and microeconomic
consumption shift in quality from essential goods to luxury goods.

78

EPA (1972) p.187.
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Figure 13-2: Mechanism of Investment Inducing Investment

direct< induced output >dirct+indirect
10
27

B

5

C

4

D

1

→

requiredinvestments
20

A

4 SteelA

3B

8 Machinery

B

4

C

4 Construction →

C

1

D

11

D

E
×
output inducement
multiplier10.7 Other
0.3 Electricity

E×marginal capital
output ratio

1

Investments

Source: Figure I-1-2, Economic White Paper FY1961, p.293, Economic Planning Agency.

One of the most important factors contributing to the high growth in postwar Japan was a rapid
increase of investment, which was called “Investment Inducing Investment” process in Economic
White Paper FY1961, from which the above Figure 13-2 was quoted, to depict the process employing
the method of the input-output table as follows:(1) Independent increase of investment, 10 units, will be distributed to machinery industry Bof 5 units, to construction industry C of 4 units, and to other industries D of 1 unit at the left
column;(2) According to the output inducement multiplier, these direct effects in demand will induce
another indirect output of 17 units, therefore in total of direct and indirect output increase will
size up to 27 units that are distributed to above Figure 13-2 at the center column;(3) According to the marginal capital-output ratio, the required investment will add up to 20
units equivalent with output of 27 units at the right column; and(4) As independent demand, the above increase of investment of 20 units will originate
another cycle of the Investment-Inducing-Investment process.

Table 13-1: Growth of GNP, Investment and Consumption in Main Countries (unit: percent)
GNP Growth

Growth of Private

Growth of Private

Investment

Consumption

West Germany

6.7

9.6

6.7

Italy

5.5

8.1

3.7

France

4.1

7.0

3.6

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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Netherlands

6.2

5.8

4.7

United Kingdom

2.4

5.2

3.0

United States

2.5

1.9

3.5

Canada

3.5

2.4

4.3

Ceylon

3.3

11.8

3.5

Philippines

4.9

9.8

4.4

Taiwan

6.8

5.6

7.1

Australia

6.8

8.1

7.2

Japan

9.7

29.4

6.8

Source: Figure I-1-4, Economic White Paper FY1961, p.291, Economic Planning Agency.
Note: Figures are mainly of average growth rate during 1953-59 including some exceptional
figures due to data availability. Addresses of country names are subject to those in
FY1961.

Table 13-1 is also quoted from Economic White Paper FY1961 and reports growth rate of GNP,
private investment, and private consumption in main countries. During this period, Japan experienced
a high growth in GNP/GDP, investment, and consumption; among those, growth of investment was
extremely high by international comparison. This high-growth investment had supported the Japanese
economy from both demand- and supply-side during the high-growth period.

Table 13-2 reports the subtitles of each issue of the Economic White Paper, which indicate the mostimpressive and important economic topics in each year during the high-growth period. Among those,
it is suggested that one of the most required targets of government authorities is to catch up to
developed countries by growing the economy. Among those, Kiyosawa (2003, p.28) insists that the
Economic White Paper FY1957 focused on the small- and medium-sized enterprises as one of the mostdelayed modernized sectors that brought stagnated employment situation; this analysis had had sizableeffects on the legislation of the Small and Medium Enterprises Basic Act in 1963.

Table 13-2: Subtitle of Economic White Papers during High-Growth Period
Subtitle
FY1955

Road to Progress

FY1956Growth and Modernization of Japanese Economy

FY1957

Too Rapid Expansion and Correspondence to It

FY1958

Revival of Business Cycle

FY1959Rapid Recovery and Challenges for the Future

FY1960Growth Power and Competitiveness of Japanese Economy

FY1961

Challenge for Growing Economy
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

FY1962

Transfiguration of Business Cycle

FY1963

Road to Developed Country

FY1964

Japanese Economy under the Open Regime

FY1965

Challenges for Stable Growth

FY1966

Road to Sustainable Growth

FY1967

Improvement of Efficiency and Welfare

FY1968Japanese Economy in the Globalization

FY1969Challenges for Affluence

FY1970

New Dimension of Japanese Economy

Source: EPA (1972) pp.725-53.

In addition to annual economic reports, the government of Japan has started issuing the Monthly
Economic Report from April 1958 79 , which has been announced at the ministerial level meeting
consisting of the Prime Minister, related Ministers, and the Governor of the Bank of Japan. This
monthly report aimed to figure out the government's assessment of the state of the economies byanalyzing the trends of Japanese and overseas economies; it has long been accepted as a basic
information package on the economy by both government sector for policy formulation and by theprivate sector for business planning. More statistically, the Indexes of Business Conditions have been
compiled and issued from August 1960 80 . This indicator has been derived by integrating statistics ofproduction, employment, consumption, and various other key indicators that are sensitive to change
economic activities. This index had been first designed as a diffusion index (DI) that indicates only
the directions of business cycle, i.e., expansion or contraction. From April 2008, the government ofJapan has officially adopted a composite index (CI) that does not only indicate the direction but alsomeasures the tempo and the magnitude or the volume of economic fluctuations. More detailed
information on the Indexes of Business Conditions are provided in Appendix 2, along with theestimation methodology of a stochastic business indicator reported in Stock and Watson (1989, 1990).

14. Conclusion

The Japanese economy had experienced unprecedented high economic growth in the 1950s-60s,
which had been supported by a variety of factors. Among those, both adequate economic policies of
the government and active animal spirits of entrepreneurs were important, along with healthy
consumer spending. In particular, Japanese economic policy was managed according to economic
plans and the animal spirit had resulted in a large investment, which was called the “Investment
Inducing Investment” process. On the other hand, at present, some developing countries are at the gate

79
80

EPA (1972) p.356.
EPA (1972) p.356.
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

of a fruitful era if adequate growth can be achieved.

This study mainly aims to reveal the role of the economic plans during the high growth period in
postwar Japan. For another purpose, however, it is able to describe some lessons from Japanese
postwar experiences on economic plans for developing countries. Hopefully, this study reveals boththeoretical and practical aspects of Japanese economic planning exercises in the postwar high-growth
period, and contributes to favorable economic environment in developing countries. Since policy
resources are more limited and scarce in developing countries than in developed nations, economic
policy coordination is more difficult but important in developing countries. In the high growth period,
Japan had been one of them, and this study's focus on economic plans in Japan could contribute toeconomic development in some countries.

The basic knowledge relating to economic planning that this study focuses on is helpful for thecurrent and expected future leaders who are or will be in charge of government public policies. Not
only for government leaders but also for current and future private firms’ executives, this study
provides systematic and practical basic knowledge about a variety of economic policies and policy
coordination process and methods. In particular, in a practical level of economic plans and policy
coordination exercises utilizing short-term policy coordination tools and annual and monthly
economic reports will be helpful for both the public and private sectors.

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T he Role of Economic Plans”

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T he Role of Economic Plans”

Appendix 1: Modern Economic Growth Theory and Development Economics

Ohkita (2010, chapter 3) surveys and summarizes several reviews on factors of high growth inpostwar Japan as follows:(1) Patric and Rosovski (1976), in particular in Chapter 1, stress economic factors whileother studies focus on Japanese uniqueness in government policy, labor practices, orcultural differences from Western economies and societies;(2) Kosai and Ogino (1980) regard Japanese high growth during this period as the catch-up
process to advanced countries, therefore it is a one-time event;(3) Ohkawa and Rosovski (1973) take much notice of upward swing of Kuznets cycle andsome unutilized factors such as technology and excess labor, and delay of wage increasethat allowed rapid expansion of both profit and wage; and(4) Minami (1970) puts importance on the backwardness of Japan's economy, which
accelerated economic growth in the early stages of development.

From the viewpoint of the practical aspect of economic plan exercises, simplified growth models
are sometimes assumed and employed, including the Harrod-Domar model (Harrod 1939 and Domar
1946), the neoclassical Solow-Swan model (Solow 1956 and Swan 1956), the AK model (Romer
1986) and other endogenous growth model (Romer 1994), and so on. Paying attention to above
reviews on Japan's high growth, this appendix deals with some growth theories and other theoreticalbackground, including growth account (Solow 1957), growth convergence (Barro 1991, and Barro andSala-i-Martin 1991 and 1992), and others.

The Harrod-Domar growth model is often regarded as a dynamic version of Keynesian
macroeconomic theory and treats the investment in a dual aspect, such as demand in the short run andproduction factor in the long run. The model thus starts as follows:(EQ 1） GDP component under balanced budget

Y = C + I +T
C = c(Y − T ) = c(1 − t )YS = I = s (Y − T ) = s (1 − t )Y
T = tY
where

or
i.e.,

c + s =1

Y

GDP

C

consumptionI

investment

Tgovernment expenditure (identical to tax revenue)caverage and marginal propensity to consume

Ssavings
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”(EQ 2)saverage and marginal propensity to savetaverage and marginal tax rate

Introducing capital stock assuming fixed capital coefficient(increment of capital stock is identical to investment)

K = λY

K
Y

or

λ≡

K

capital stock

λcapital coefficientΔ

increment symbol

I = ∆K = λ∆Y
where(EQ 3)

Growth rate expressions(1 − t )YI∆Yλλ = s(1 − t )
G=
=
=
Y
Y
Y
λ
where

G

growth rate

According to the Harrod-Domar growth model under some simplified assumption including fixed
capital coefficient and balanced budget at the government, the growth rate is subject to savings rate.
For developing countries, therefore, the higher the saving rate is, the higher the growth rate. Ohkita(2010, p.69, Table 3-3) reports the following statistics that depict growth rate, capital coefficient, andsavings rate in Japan during the high growth period from 1951-76.

Table A1-1: Growth Rate, Capital Coefficient, and Saving Rate in Japan
1951-56
growth rate
capital coefficientsavings rate

1956-61

1961-66

1966-71

1971-76

7.8%

10.1%

9.2%

10.9%

5.0%

2.8

2.9

3.4

3.2

6.5

28.0%

29.6%

31.8%

34.4%

32.6%

Source: Ohkita (2010) p.69 Table 3-3.

Many studies reveal that the equilibrium of this model is not stable, and call it a "knife-edge
equilibrium." Above growth rate G in the Harrod-Domar model is a very important key rate variablebecause it will cancel both excess supply and demand and clear the goods market. This growth rate G
also in general called the warranted growth rate (GW) and introducing labor and labor growth, weobtain the natural rate of growth (GN) as follows:(EQ 4)

Warranted growth rate and natural rate of growthGW =s (1 − t )λ72ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

GN = ∆L

L

≡n

where

L

worker or labor engaged in work

Repeatedly, these three types of growth rates such as the actual growth rate, the warranted growthrate, and the natural growth rate are not necessarily identical. And these rates are developed to thegrowth account.

Utilizing the same notation as the Harrod-Domar theory, the neoclassical Solow-Swan growthmodel introduces the linear homogenous production function under the assumption of constantdepreciation and diminishing returns to scale, representing a steady state of growth, as follows:(EQ 5)

Production function

Y = F (K , L )ory = f (k )

where

F

production function for output (GDP)fproduction function for output (GDP) per workeryoutput (GDP) per workerkcapital stock per worker (or capital equipment ratio)i.e., k ≡ K(EQ 6)

i.e., y ≡ Y

LL

Representation of steady state of growth∆k = sf (k ) − nk

The Solow diagram is drafted according to above Solow equation, with the vertical axis of output
and investment (=savings) Y, I and S and the horizontal axis of capital stock K. The nK line means socalled break-even line and represents the equilibrium level of output and investment that are linear
because of the constant returns of scale in the production function. The gray curve represents the output
subject to the production function. And the green line depicts the initial (or old) investment while thered does the shifted (or new) investment after the savings rate rises. These three curves--green, red,and gray--are upward convex or positive in the first derivative but negative in the second due to theassumption of the diminishing returns of scale. K0 * and Y0 * are equilibria of the output and capitalstock before the savings rate hike. Certainly, K1 * and Y1 * are those after the savings rate change.
Without a savings rate change, however, these equilibria are stable 81 since the capital stock positionat the left-side of the equilibrium forces net increase of capital stock of positive investment, and viceversa, the capital curve underscoring the nK line implies negative investment. Both K0 * and Y0 * pair81

This stability of the equilibrium of Solow-Swan model is one of the most drastic changes comparedwith the knife-edge equilibrium of the Harrod-Domar theory.
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and that of K1 * and Y1 * are regarded as the steady state of correspondent saving rates. Therefore, theSolow-Sean growth theory also supposes that the high savings rate results in high growth, as does theHarrod-Domar model. Figure A1-1 reports the diagram:

Figure A1-1: Solow Diagram

Source: Authors based on Acemoglu (2009) p.50 Figure 2.8.

If the neoclassical Solow-Swan growth theory holds, the output per capita, i.e., y or Y/L withnotation here, would converge to a certain level. Developing countries of low per capita GDP haveconsiderable chances to grow faster while the growth rates in developed countries are not necessarily
so high or even low, which means convergence in growth. This convergence theory is empirically
explored, e.g., by Barro and Sala-i-Martin (1991, 1992). And some economists consider that the rapid
growth in emerging and developing countries observed in the actual world economy implies thisconvergence theory.

An AK model is regarded as one of the simplest and most easily handled models in the endogenous
growth theory 82 . While both the Harrod-Domar model and the Solow-Swan model are widely used asbaseline models of economic growth, it is still considered by many economists to be unsatisfactory as
a description of the process leading to economic growth or development. This is because the model
views improvements in total factor productivity or technological progress to be an important sourceof growth in output per worker, but does not provide an explanation as to where these improvements
come from. The endogenous growth theory therefore begins with a simple AK model containing a82

Acemoglu (2009) focuses on the AK model as one of the simplest and the first-generation models
of endogenous growth (p.388, chapter 11).
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
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linear production function, depending on the capital stock as follows using the same notation as before:(EQ 7)

Production function

Y = AK
where(EQ 8)ory = AkA

productivity parameter standing for technology or efficiency

Endogenous growth rate

∆Y = A∆K = AI = AsY then
∆Y
∆y
or
= As
= As − nYyThe AK model suggests that the growth depends on both savings rate and productivity. The final
two equations that declare the growth rate and per capita growth rate state that the output grows
linearly with the savings rate and productivity and that per capita growth rises with the same two
factors and declines with labor (or population) increase. Since this AK model does not assume thediminishing returns of scale but constant returns, the capital deepening indicated with capital
equipment ratio and technological progress lead long-run growth. Rebelo (1991) insists that one of themost drastic changes of the AK model from Solow-Swam model is that the exogenous parametersalter the long run growth rate of per capita output rather than the level of per capita output. And also,
this theory does not imply the convergence of the growth at all. The following Figure A1-2 depicts the
AK model diagram83 .

Figure A1-2: AK Model Diagram

Source: Authors.

83

The investment is also represented by the break-even line in the Solow-Swan model.
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
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Based on Barro (1991, 1998), the above-mentioned growth models result in the growth accounting
approach, which aims to reveal the decisive factors for growth. First of all, we have to include
productivity or technological progress in (EQ 5), assuming a Cobb-Douglas production function andemploying the same notation, we obtain a new production function as follows:(EQ 9)

Production function with productivity

Y = AK α L1−α
α

where

parameter representing capital share

Differentiating (EQ 9) with respect to time, we obtain the basic growth accounting formula asfollows:(EQ 10) Growth accounting

∆Y ∆A
∆K
∆L
=
+α
+ (1 − α )YAKLAbove (EQ 10) of basic growth accounting suggests that three types of decisive factors for growth
are observed as follows:(1) Productivity growth, called total factor productivity (TFP);(2) Capital stock accumulation; and(3) Increase of workers (or labors)

Figure A1-3: Growth Accounting in Postwar Japan
16%

14.4%

All Industries
12%

Manufacturing

1.4%

14%

Non-Manufacturing

11.1%
8.8%

10%

7.2%

0.4%

8%
4.5%

6%
4%
2%

5.1%
4.2%

0.0%
3.7%

3.8%

2.8%

2.1%

5.9%
3.1%
-0.5%

1.0%

1960s 1970s 1980s

0.6%

2.7%

0.4%

0.7%

0%

0.2%

5.2%

6.9%

2.4%

1960s 1970s 1980s

4.6%
6.4%
0.2%

4.4%

0.3%
4.5% 3.3%

2.2%

0.0% 0.6%
1960s 1970s 1980s

-2%
TFP

Capital Contribution

Labor Contribution

Source: Yoshikawa (1999) p.232 Figure 2.

76

Output Growth

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Figure A1-3 depicts growth accounting in postwar Japan from the 1960s to 1990s. Senhadj (2000)
applies this growth accounting methodology to a lot of worldwide countries while Cette et al. (2009)
applies it to main advanced countries such as France, Japan, the United Kingdom and the United States
for the long term, since 1890. Among these studies, Cette et al. (2009) p. 31 Table 2 reveals that the
total factor productivity in Japan during 1950-73 is the largest among reported advanced countries inthe table.

Apart from above-mentioned standard modern growth theory that can be applied for both developed
and developing countries, we have recognized for a long time that a developing economy contains avery important issue of the dual economy, consisting of two sectors such as capitalist and subsistence
sectors. According to Lewis (1954), Yoshioka (2003) summarizes some features of both sectors as
follows:(1) At the capitalist sector, the wage rate is set equal to marginal productivity of labor. On
the other hand, at the subsistence sector, it is set equal to subsistence level while marginal
productivity of labor is nearly zero;(2) Huge disguised unemployment exists at the subsistence sector, which could be a nearly
infinite resource for unskilled labor supply for the capitalist sector;(3) All of capital stock exists only at the capitalist sector while none is utilized at thesubsistence sector; and(4) The capital accumulation or investment originates from benefit of capital while wages
for both sectors are consumed totally.

Of course, some simplification is also assumed, including a closed economy, etc. And this Lewis
model is not regarded as dynamic, but seems comparative-static. In any case, the Lewis model accepts
both capital formation and labor migration as economic growth origins; Figure A1-4 depicts therelationship between labor and marginal productivity/output at subsistence sector of Lewis model asfollows:(1) The vertical axis of the upper panel represents marginal productivity of labor, and thatof the lower shows output, while the horizontal axes of both panel depict labor;(2) The blue curve shows the relationship between labor and marginal productivity at theupper panel while the red curve shows that between labor and output;(3) The area around the pink break line of the left side is correspondent to the scope of thecapitalist sector while that of the right side is to the subsistence sector;(4) Labor migration from the subsistence sector to the capitalist sector results in output
decrease but higher marginal productivity at the subsistence sector.

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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Figure A1-4: Relationship between Labor and Marginal Productivity/Output at Subsistence
Sector of Lewis Model
Marginal Productivity

Labor
Labor Migration
OutputTurning
Point

Labor

Scope of Lewis Model

Scope of Market Economy

Source: Authors based on Yoshioka (2003) p. 5.

Lewis (1954) assumes that a practically unlimited excess labor at the subsistence sector exists. In
reality, however, when the economy completes the large-scale labor migration from the subsistence
sector to the capitalist sector, the output of the subsistence sector begins to decrease while the marginal
productivity turns positive even before the Lewisian turning point 84 . The price of goods of the84

Rostow (1960), in particular, Chapter 2: “The Five Stages of Growth - A Summary” takes anotherconcept of so-called “Take-off.” Rostow’s five stages of development/growth are (1) Traditionalsociety; (2) Preconditions for take-off; (3) Take-off; (4) Drive to maturity; and (5) Age of High massconsumption.
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

subsistence sector -- food price hikes are assumed according to scarcity -- causes some extent of returnof labor to the subsistence sector where the subsistence wage is guaranteed. This is not necessarily thecausality of the middle income trap focused on by Gill and Kharas (2007), but requires additional
elements than the capital accumulation at the capitalist sector. Among those, e.g., Asian developing
countries enjoyed the outcomes of the Green Revolution that drastically improved the productivity at
the subsistence sector to supply more foods. Harris and Todaro (1970) also evolve the argument on
the dual economy and development and result in the importance of rural development policy.
At the end of this appendix, the middle income trap 85 is noteworthy to be focused on. This newconcept in development economics first attracted the attention of Gill and Kharas (2007), and isunderstood in a vague sense among academic authorities of the development economics as follows:(1) The national economy goes stagnant after attaining the level of per capita income ataround US$3,000- $10,000 level;(2) It takes very long to attain the higher level of per capita income at around US$20,000
level or it is not achieved yet;(3) Some factors are considered, including wage hikes without productivity improvements,
failure to introduce new and advanced technologies, distortion originated from corruption
or heavy rent seeking, strong dependence on natural resources and/or primarycommodities, delay of institutional modernization process of e.g., financial and judicial
system, and so on.

(references)
Acemoglu, Daron (2009) Introduction to Modern Economic Growth, 2009, Princeton University Press.
Barro, Robert J. (1991) “Economic Growth in a Cross Section of Countries,” Quarterly Journal of
Economics 106(2), May 1991, pp. 407-43.
Barro, Robert J. and Xavier Sala-i-Martin (1991) “Convergence across States and Regions,” Brooking
Papers on Economic Activity 1991:1, 1991, pp. 107-82.
Barro, Robert J. and Xavier Sala-i-Martin (1992) “Convergence,” Journal of Political Economy 100(2),April 1992，pp. 223-51.
Barro, Robert J. (1998) “Notes on Growth Accounting,” Journal of Economic Growth 4(2), June 1998,
pp. 119-37.
CAO (2013) World Economic Trends 2013 Autumn Report, Cabinet Office, December 2013
Open access at http://www5.cao.go.jp/keizai3/2013/1209world3.pdf (accessed on June 30,
85

CAO (2013, chapter 2) lists Argentina, Brazil, Chile, Malaysia, Mexico, and Thailand as middle
income trapped countries and notes Japan, the United States, Korea, Hong Kong, and Singapore astrap breaking economies.
79

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

2016).
Cette, Gilbert, Yusuf Kocoglu, and Jacques Mairesse (2009) “Productivity Growth and Levels in
France, Japan, the United Kingdom and the United States in the Twentieth Century,” NBER
Working Paper No. 15577, December 2009.
Open access at http://www.nber.org/papers/w15577.pdf (accessed on June 30, 2016).
Domar, Evsey (1946) “Capital Expansion, Rate of Growth, and Employment,” Econometrica 14(2),April 1946, pp. 137-47.
Gill, Indermit and Homi Kharas (2007) An East Asian Renaissance: Ideas for Economic Growth, 2007,
Washington, DC: World Bank.
Open access at
http://siteresources.worldbank.org/INTEASTASIAPACIFIC/Resources/2262621158536715202/EA_Renaissance_full.pdf (accessed on June 30, 2016)
Harris, John R. and Michael P. Todaro (1970) “Migration, Unemployment and Development: A TwoSector Analysis,” American Economic Review 60(1), March 1970, pp. 126-42.
Harrod, Roy F. (1939) “An Essay in Dynamic Theory,” Economic Journal 49(193), March 1939,
pp.14-33
Kosai, Yutaka and Yoshitaro Ogino (1980) Contemporary Japanese Economy, Nihon Hyoron Sha,
June 1980 [in Japanese, 『日本経済展望』].
Lewis, W. Arthur (1954) “Economic Development with Unlimited Supply of Labor,” Manchester
School of Economic and Social Studies 22, May 1954, pp.139-91; reprinted in A. N. Agarwala
and S. P. Singh (eds.) The Economics of Underdevelopment, Oxford University Press, 1963.
Minami, Ryoshin (1979) Tipping Point in Japanese Economy – From Excess Labor to Shortage, Sobun
Sha, 1970 [in Japanese, 『日本経済の転換点 –労働の過剰から不足へ』].
Ohkawa, Kazushi and Henry Rosovski (1973) Economic Growth in Japan – Trend Acceleration in the20th Century, Toyo Keizai, 1973 [in Japanese, 『日本の経済成長 – 20 世紀の趨勢加速』]
Ohkita, Yoichi (2010) Economy of Postwar Japan, Toyo Keizai, 2010 [in Japanese, 『戦後日本経済論』]
Patric, Hugh and Henry Rosovski eds., (1976) Asia’s New Giant: How the Japanese Economy Works,
Brookings Institution, 1976.
Rebelo, Sergio (1991) “Long-Run Policy Analysis and Long-Run Growth,” Journal of Political
Economy 99(3), June 1991, pp. 500-21.
Romer, Paul M. (1986) “Increasing Returns and Long-Run Growth,” Journal of Political Economy
94(5), October 1986, pp. 1002-37.
Romer, Paul M. (1994) “The Origins of Endogenous Growth,” Journal of Economic Perspectives 8(1),Winter 1994, pp.3-22.
Rostow, W. W. (1960) The Stages of Economic Growth: A Non-Communist Manifesto, Cambridge
University Press, 1960; in particular, Chapter 2: “The Five Stages of Growth - A Summary,”
pp. 4-16.
80

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Senhadj, Abdelhak (2000) “Sources of Economic Growth: An Extensive Growth Accounting
Exercise,” IMF Staff Papers 47(1), 2000, pp. 129-57.
Solow, Robert M. (1956) “A Contribution to the Theory of Economic Growth,” Quarterly Journal of
Economics 70(1), February 1956, pp. 65-94.
Solow, Robert M. (1957) “Technical Change and the Aggregate Production Function,” Review of
Economics and Statistics 39(3), August 1957, pp. 312-20.
Swan, Trevor W. (1956) “Economic Growth and Capital Accumulation,” Economic Record 32(2),November 1956, pp. 334-61.
Yoshikawa, Hiroshi (1999) “Potential Growth Rate of Japanese Economy,” Economic Review 50(3),Hitotsubashi University, July 1999, pp. 228-37 [in Japanese, 「日本経済の潜在成長率」、『経済研究』一橋大学].
Yoshioka, Shinji (2003) “A Note on a Theoretical Model for Economic Development: Mathematical
Representation of Lewis Model,” TSQ Discussion Paper Series 2002/2003-No.9, March 2003.

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T he Role of Economic Plans”

Appendix 2: Business Cycle Dating, Composite Indicator (CI), and Stochastic Business Indicator

This appendix focuses on the business cycle and consists of three parts: the first part describes thepractical process and basic methodology of the business cycle dating in Japan; the second reveals thecalculation process of the composite index (CI), officially adopted as reference series for assessing
business cycles; and the third addresses the estimation process of the stochastic business indicator
proposed by Stock and Watson (1989, 1990), which is not estimated at the CAO.

(Business Cycle Dating)According to CAO (2016), at present in Japan, the reference date of a business cycle is first
discussed in the Investigation Committee for Business Cycle Indicators, based on historical diffusionindexes, composed of all selected series of coincident diffusion indexes. Consecutively, the Presidentof ESRI determines the reference date. The historical diffusion indexes determine the peak and troughfor each selected time series of diffusion indexes (this is referred to as the individual turning point),
which are calculated by marking the period from trough to peak with a plus, and the period from peak
to trough with a minus. Since the change in direction is determined by smoothing irregular month-tomonth movements of individual time series, the historical diffusion index calculated from these values
is relatively smooth, and reflects the basic movement of the business cycle. The last month when thehistorical diffusion index compiled from a selected series of coincident indexes stays below the 50percent line corresponds to the cyclical trough; the last month when this index stays above the 50percent line corresponds to the cyclical peak.

In addition, the peaks and troughs of each individual time series are dated by applying the BryBoschan method, which was developed by the U.S. National Bureau of Economic Research (NBER)
and reported at Bry and Boschan (1971). In simple terms, this method determines the cyclical peak or
trough by providing a series of rules. Two examples of this rule: that five months or more are requiredin the period between peak and trough, and that the duration of one cycle must be 15 months or more.
This procedure, which also involves multiplication of the 12-month moving average, was presented
along with a computer program to actually run it. CAO (2015a) reveals the reference dates of businesscycle in Japan as following Table A2-1:

Table A2-1: The Reference Dates of Business Cycles in Japan
Peak (By Month)

Trough (By Month)

Peak (By Quarter)

Trough (By Quarter)

Jun. 1951

Oct. 1951

2Q 1951

4Q 1951

Jan. 1954

Nov. 1954

1Q 1954

4Q 1954

Jun. 1957

Jun. 1958

2Q 1957

2Q 1958

Dec. 1961

Oct. 1962

4Q 1961

4Q 196282

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
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Oct. 1964

Oct. 1965

4Q 1964

4Q 1965

Jul. 1970

Dec. 1971

3Q 1970

4Q 1971

Nov. 1973

Mar. 1975

4Q 1973

1Q 1975

Jan. 1977

Oct. 1977

1Q 1977

4Q 1977

Feb. 1980

Feb. 1983

1Q 1980

1Q 1983

Jun. 1985

Nov. 1986

2Q 1985

4Q 1986

Feb. 1991

Oct. 1993

1Q 1991

4Q 1993

May. 1997

Jan. 1999

2Q 1997

1Q 1999

Nov. 2000

Jan. 2002

4Q 2000

1Q 2002

Feb. 2008

Mar. 2009

1Q 2008

1Q 2009

Mar. 2012

Nov. 2012

1Q 2012

4Q 2012Source: CAO (2015a)(Composite Index)
From April 2008 on, the government of Japan has officially adopted a composite index as reference
series for assessing business cycles, named Indexes of Business Conditions prepared by the Cabinet
Office. This Indexes of Business Conditions (hereafter, CI) consists of three indexes: leading,coincident, and lagging indexes. Each Index includes components as shown in Table A2-2:

Table A2-2: Components of Indexes of Business Conditions
Leading Index
L1: Index of Producer's Inventory Ratio of Finished Goods (Final Demand Goods)
L2: Index of Producer's Inventory Ratio of Finished Goods (Producer Goods For Mining andManufacturing)
L3: New Job offers (Excluding New School Graduates)
L4: Machinery Orders at Constant Prices (Manufacturing)
L5: Total Floor Area of New Housing Construction Started
L6: Consumer Confidence Index
L7: Nikkei Commodity Price Index (42 items)
L8: Money Stock (M2) (Change from Previous Year)
L9: Stock Prices (TOPIX)
L10: Index of Investment Climate (Manufacturing)
L11: Sales Forecast DI of Small Business
Coincident Index
C1: Index of Industrial Production (Mining and Manufacturing)C2: Index of Producer's Shipments (Producer Goods for Mining and Manufacturing)C3: Index of Producer's Shipment of Durable Consumer Goods
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
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C4: Index of Non-Scheduled Worked Hours (Industries Covered)
C5: Index of Producer's Shipment (Investment Goods Excluding Transport Equipments)
C6: Retail Sales Value (Change From Previous Year)
C7: Wholesale Sales Value (Change From Previous Year)
C8: Operating Profits (All Industries)
C9: Index of Shipment in Small and Medium Sized Enterprises (Manufacturing)
C10: Effective Job Offer Rate (Excluding New School Graduates)
Lagging Index
Lg1: Index of Tertiary Industry Activity (Business Services)
Lg2: Index of Regular Workers Employment (Industries Covered) (Change From PreviousYear)
Lg3: Business Expenditures for New Plant and Equipment at Constant Prices (All Industries)
Lg4: Living Expenditure (Workers' Households) (Change From Previous Year) (Not Including
Agricultural, Forestry and Fisheries)
Lg5: Corporation Tax Revenue
Lg6: Unemployment Rate
Lg7: Contractual Cash Earnings (Manufacturing)
Lg8: Consumer Price Index (All items, Less Fresh Food) (Change from Previous Year)
Lg9: Index of Producer's Inventory (Final Demand Goods)
Source: CAO (2015b).
Summarizing CAO (2016) 86 , the Indexes of Business Conditions (CI) is calculated according tofollowing four steps:

Step 1: A formula is used for calculating the symmetric percent change of individual series as in thefollowing:ri (t ) = 200 ×
where

y i (t ) − y i (t − 1)y i (t ) + y i (t − 1)rSymmetric percent changeyIndividual seriesiNumber assigned to each indicatortTime point

If the given time series is zero or a negative value, or is already in percentage form, simple
arithmetic differences are calculated:ri (t ) = y i (t ) − y i (t − 1)86

Yoshizoe et al. (2003) provide more detailed information and discussion.
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Then, outliers are trimmed using the following formula:ϕ 2 (ri (t ) ) =ri (t ) < −k × (Q3 i − Q1i )− k × (Q3 i − Q1i ) forri (t ) for− k × (Q3i − Q1i ) ≤ ri (t ) ≤ k × (Q3i − Q1i )k × (Q1i − Q3 i ) forri (t ) > −k × (Q3 i − Q1i )

where

Q1

The first quartile in the interquartile range

Q3

The third quartile in the interquartile range

Step 2: The trend of individual series (mean percent change) is calculated by the trimmed 60-month
backward moving average as follows:60∑ ϕ (r (τ ))µ i (t ) =τ = t − 59

where

μ i (t)i

60
Mean percent change

Next, percent change normalized by interquartile range is calculated by applying the following
formula:Z i (t ) =where

ϕ (ri (t ) ) − µ i (t )Q3 i − Q1i
Zi (t)

Mean percent change

Step 3: Composite percentage change is calculated by adding up trend (composite mean percent
change), and the mean of percent change normalized by interquartile range (composite percent change
normalized by interquartile range). In this process, composite percent change normalized byinterquartile range is multiplied by the mean of interquartile ranges (composite interquartile range) sothat the levels of the trend component and the cyclical component coincide as follows:nµ (t ) =∑ µ (t )iinn∑ Z (t )i

Z (t ) =innQ3 − Q1 =∑ (Q3 − Q1 )
i

i

i

n

V (t ) = µ (t ) + (Q3 − Q1) × Z (t )
where

V(t)

Composite percent change
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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
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nNumber of individual indicators (y)Step 4: As in the previous calculation method of composite indexes, composite percent change iscumulated as follows:

I (t ) = I (t − 1) ×

200 + V (t )200 − V (t )Finally, the index is rebased so that the value for the reference year is equal to 100. The current
reference year is 2010.

(Stochastic Business Indicator)
Other than the above business cycle indicators, including CI in Japan, Stock and Watson (1989,1990) propose another type of stochastic business indicator that assumes a unique and latent index,
affecting and revealing some observable indicators, such as production, labor, income, andconsumption, among others. According to Stock and Watson (1989, 1990), assuming that this uniqueand latent index and the error terms follow autoregressive (AR) process, the model of stochastic
business indicator is mathematically represented in the following model:

y i (t ) = α i + β i c(t ) + u i (t )c(t ) = γ + τ 1 c(t − 1) + τ 2 c(t − 2) + ... + τ n c(t − n) + e(t )u i (t ) = λ i u i (t − 1) + λ i u i (t − 2) + ... + λ i u i (t − m) + ε i (t )
where

y

Observable business indicators (i=1, 2, 3, ...)c

Unique and latent business indicatoru, e, εError term (i=1, 2, 3, ...)i

Number of observable indicatorsnNumber of lags of AR process for cm

Number of lags of AR process for uα, β, γ, τ, λParameters

Using lag operator L, above model can be expressed as follows:y i (t ) = α i + β i c(t ) + u i (t )φ (L )c(t ) = ω + e(t )θ (L )u (t ) = ε (t )Here, φ represents a lag polynomial of φ = 1 − φ1 L − φ 2 L2 − ... − φ n Ln and θ does that of86ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

θ = 1 − θ 1 L − θ 2 L2 − ... − θ m Lm . On the other hand, error term e is a scalar stochastic variable that(

follows e ~ N O, σ2), and ε is too a scalar stochastic variable that follows ε ~ N (O,σ H ). Of
2

course, O is a null matrix.

Since this model for stochastic business indicator includes latent variables, the equation system isrepresented as a state space model. According to Okusa (1992), the generalized state space
representation of the stochastic business indicator is as follows:
1) State variable δ c(t ) 
 c(t − 1) 







c(t − n + 1) δ= u (t )  u (t − 1) 





u (t − m + 1)2) Observation equation yy (t ) = Zδ (t )3) Transit equation δδ (t ) = Xδ (t − 1) + ξ (t )4) Disturbance term ξξ (t ) ~ N (Oi +1 , σ 2 Σ )where

Z = [βOi , nIi

Oi , m ]φ1 φ 2  φ n −1 φ n
1 0  000 1  


  


0 0  1
0
X =



Oim, n
87

O n ,im

Θ1
Ii

Θ2
Oi

Oi


Ii


 Θ m −1
 Oi
 Oi



Oi

Oi



Oi








Θm 

Oi 

Oi 
 

Oi 

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Of course, the state variable δ is an n+m vector. According to usual definition, Ik means a unit matrix
with k rows and columns, and Ok,l represents a null matrix with k rows and l columns. And, Σ means(a diagonal matrix with its elements of Σ = diag 1 0 ' n −1h1h2  hn −1

hn)

0 ' ( n −1) m ,while h is a diagonal element of H. φ is a parameter of n-degree lag polynomial for the latent index.
Θ is a diagonal matrix with elements of θ, which is a parameter of m-degree lag polynomial for theerror term u.
Since the above-mentioned general form of the state space model quoted from Okusa (1992) isquite complicated, this study assumes the following three points, which seem adequately plausible, tosimplify the model according to existing literature, including Stock and Watson (1989, 1990) andOkusa (1992):
1) The observable indicators are taken from production, labor, income, and consumption,i.e., i=4.
2) The unique and latent business indicator c is subject to AR(2) process, i.e., n=2.
3) The error term u is subject to AR(1) process, i.e., m=1.

Above model for stochastic business indicator will be transformed into following simplified state
space model system:

1) Observation Equations

 y1 (t )  α 1   β 1
 y (t ) α   β
 2  =  2+ 2
 y 3 (t )  α 3   β 3    y 4 (t ) α 4   β 4

 c(t ) 
0 0 
u1 (t ) 
0 0 u (t )1 0  2 
 u 3 (t ) 
0 1 
u 4 (t )

1 0
0 1
0 0
0 0

2) Transit Equations

 c(t )  φ1 φ 2
 u (t )   0 0
 1  u 2 (t ) =  0 0 
u 3 (t )   0 0
u 4 (t )  0 0

1

0

0

0

0 λ1

0

0

0

0

λ2

0

0

0

0

λ3

0

0

0

0

 c(t − 1) 
0   c(t − 2) 
0   e(t ) 
0   u1 (t − 1) 
0  u 2 (t − 1)

λ 4  u 3 (t − 1) u (t − 1)
 4This simplified state space model will be solved with a Kalman filter presented by Kalman (1960).
In this appendix, further explanation for a state space models and Kalman filter is outside the scope of88

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

this study. For comprehensive information on application of state space model to econometric field,
Harvey (1981) is one of the most useful studies. Apart from Kalman's original paper, Meinhold andSingpurwalla (1983), Snyder and Forbes (1999), and Grewal and Andrews (2002) will provide further
information on Kalman filter and its algorithm.

Figure A2-1: Stochastic Indicator and Index of Business Conditions (CI) (2005=100)
120
110
100
90
80
70
60
50

Recession

Stochastic Indicator

CI

Source: Yoshioka (2010) p.18 Figure 2.

Finally, Figure A2-1 above depicts CI calculated by the government and estimation results of
Yoshioka (2010), which employs stochastic business indicators.

(references)Bry, Gerhard and Charlotte Boschan eds., (1971) Cyclical Analysis of Time Series: Selected
Procedures and Computer Programs, National Bureau of Economic Research, 1971
Open access at http://papers.nber.org/books/bry_71-1 (accessed on July 20, 2016).
CAO (2015a) “The determination of Business-Cycle Peak and Trough,” Cabinet Office, July 24, 2015.
Open access at http://www.esri.cao.go.jp/en/stat/di/150724rdates.html (accessed on June 30,2016).
CAO (2015b) “The Changed Components of the Indexes of Business Conditions,” Cabinet Office,August 6, 2015.
Open access at http://www.esri.cao.go.jp/en/stat/di/150806components.html (accessed onJune 30, 2016).
CAO (2016) “Guide for Using Diffusion Indexes and Composite Indexes,” Cabinet Office, 2016
Open access at http://www.esri.cao.go.jp/en/stat/di/di2e.html (accessed on June 30, 2016).

89

ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
T he Role of Economic Plans”

Grewal, Mohinder S. and Angus P. Andrews (2002) Kalman Filtering (Second Edition), 2002, John
Wiley & Sons.
Harvey, Andrew C. (1981) Time Series Models, Philip Allen, London, 1981.
Kalman, Richard E. (1960) “A New Approach to Linear Filtering and Prediction Problems,” Journalof Basic Engineering 82 (Series D), 1960, pp. 35-45.
Meinhold, Richard J. and Nozer D. Singpurwalla (1983) “Understanding the Kalman Filter,” American
Statistician 37(2), May 1983, pp. 123-127.
Okusa, Yasushi (1992) “A Probability Model of the Coincident Economic Index in Japan,” Doshisha
University Economic Review 44(1), 1992 pp.25-60 [in Japanese 大日康史「日本における確率的景気指数の開発」、『同志社大学経済学論叢』].
Snyder, Ralph D. and Catherine S. Forbes (1999) “Understanding the Kalman Filter: An Object
Oriented Programming Perspective,” Working Paper 14/99, Department of Econometrics andBusiness Statistics, Monash University, December 1999.
Stock, James H. and Mark W. Watson (1989) “New Indexes of coincident and leading economic
indicator,” NBER Macroeconomic Annual 4, 1989, pp. 351-409.
Stock, James H. and Mark W. Watson (1990) “A Probability Model of the Coincident Economic
Indicators,” Lahiri, Kajal and Geoffrey H. Moore eds., Leading Economic Indicators: New
Approaches and Forecasting Records, Chapter 4, Cambridge University Press, 1990, pp. 6389.
Yoshioka, Shinji (2010) “Identifying Trough of Recent Recession in Japan: An Application of
Stochastic Business Indicator,” Annual Review of Economics vol.26, Nagasaki University,
June 2010, pp. 9-23.
Open

accessat

http://naosite.lb.nagasaki-

u.ac.jp/dspace/bitstream/10069/24466/1/keinen26_9.pdf (accessed on June 30, 2016).
Yoshizoe, Yasuto et al. (2003) “New Developments in Business Cycle Indicators,” Economic Analysis
No.166, February 2003, Economic and Social Research Institute, Cabinet Office [in Japanese
美添泰人ほか「景気指標の新しい動向」、『経済分析』第 166 号].

Open

access at http://www.esri.go.jp/jp/archive/bun/bun166/bun166.html (accessed on July 20,2016).

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ESRI Research Note No.27“ Japan’s High-Growth Postwar Period:
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戦後日本の高度成長期の研究 :経済計画の役割2016 年 8 月
吉岡真史・川崎泰史(要 旨 )
日本は 1950 年代半ばから 1970 年代初頭において高度成長期を経験した。本研究では、この時期の経済状況と経済政策調整、特に、経済計画が果たした重要な役割につき、政府部門
における政策調整ならびに民間部門におけるガイドライン情報に焦点を当て、加えて、短期政策調整さらに年次経済報告や月例経済報告の役割とともに取り上げている。経済計画に関連する諸政策、財政政策、金融政策、産業政策などについても含まれているところである。
加えて、本研究は日本経済の発展過程を明らかにするだけでなく、付加的に途上国の政府当局や民間企業のビジネスパーソンに対しても利益をもたらし、先進国を目指すキャッチア
ップに資することもなろう。
キーワード: 高度成長、長期経済計画、日本経済の発展過程
JEL Classification Numbers: E20, H10, N15