Industrial Policy in Japan:
70-Year History since World War II
By Tetsuji Okazaki

Introduction:
Phases of the Postwar Japanese Economy

Author Tetsuji Okazaki

and the second after the transition to a market economy (1949–
1973). Second, in the period of stable growth (1974–1990), theaverage growth rate substantially declined, but it was still higher thanthat of the US, and Japan almost achieved its goal of catching up
with the advanced Western countries, which it had long been aiming
for since the Meiji Restoration in 1868. Finally, in the period of longstagnation after 1991, the average growth rate declined to less than
1%. In these macroeconomic environments, the government
attempted to address various economic issues using industrial
policies.

More than 70 years have passed since the end of World War II. In
E C O N O M I C H I S T R Y
this period, the Japanese government, more specifically the Ministryof Commerce and Industr y (1945–1949), the Ministr y ofInternational Trade and Industry (MITI, 1949–2001) and the Ministryof Economy, Trade and Industry (METI, 2001–present) designed andimplemented a numberof industrial policies, i.e. micro-level policy
E C O N O M I C F O C U S
interventions to firms, industries and markets. In this article, after
dividing the postwar history of the Japanese economy into threephases, I briefly describe the industrial policies implemented in eachof these phases.
Chart 1 shows the growth path of per capita GDP in Japan,
measured by international Geary–Khamis dollars at 1990 prices,compared with that of the United States. We can clearly identify threephases in the postwar growth path of the Japanese economy. First,
in the period of economic recovery and high growth (1945–1973),
the average annual growth rate was 7.6%. It is notable that, during
the recovery process, the growth rate was almost as high as that in
the so-called “high-growth period” after 1955. This first phase canbe divided into two sub-phases, the first when the Japanese
economy was under the control of the government (1946–1949),

In 1945, when World War II ended, per capita GDP in Japandeclined sharply, falling as low as 50.6% of that in 1944.
Furthermore, the decline in industrial production was still more
serious. As shown in Chart 2, the production index of the mining andmanufacturing industries was around 20–30% of the prewar level.
Meanwhile, inflation was galloping. In this critical situation,
reconstruction of the economy was an urgent issue for thegovernment. As the scarcest materials were coal and steel, a policy
to promote the production of these two materials, the “priority
production policy”, was implemented in 1947 and 1948.

CHART 1

CHART 2Growth of per capita GDP in Japan & US
Geary-Khamis dollars, 1990
100,000
Per capita GDP, Japan
Per capita GDP, US

Economic Recovery under Planning & Control

Production indices (1934-36=100)
140
120
100

Mining and manufacturing
Coal

Iron and steel
Textile80
10,000

60
40
20

1,000
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Source: Maddison Project Database

0
1946

1947

1948

1949

Source: Ministry of Finance ed., Showa Zaiseishi: Shusen kara Kowa made (Financial Historyof Showa: From the End of World War II to the Peace), vol. 19, Toyo Keizai
Shinposha, 1978

Japan SPOTLIGHT • March / April 201757

ECONOMIC HISTORYThis policy had a special feature, reflecting the characteristics ofthe regime under which the Japanese economy operated in thisperiod. Since the late 1930s, when the Sino–Japanese War brokeout, a large part of the Japanese economy had been under theplanning and control of the government. Prices were controlled and,accordingly, commodities were rationed, based on the plan decided
by the government. The priority production policy was implemented
based on this system.
In order to increase the production of coal and steel, materials
were concentrated into those two industries by distribution control.
Further, the government established a special public financial
institution, the Reconversion Finance Bank (RFB). According to thefund allocation plan by the government, the RFB selectively loaned
money to the firms that were supposed to be essential to recovering
production of the strategic industries, including coal and steel. To
perform this function, the RFB raised funds by selling its bonds
directly to the Bank of Japan (BOJ). The impact of this policy on
industrial production is shown in Chart 2. After the policy
commenced in January 1947, coal production increased, but it is notclear whether it was because of the policy, as it also increased prior
to the policy’s introduction. It is noteworthy that steel production
started to increase from early 1947. We can say that the direct
impact of the priority production policy was on the recovery of steel
production, which arguably contributed to making an increase in coalproduction sustainable.
On the other hand, it is also notable that textile production
declined in 1947. As resources were concentrated in the coal andsteel industries, the allocation of resources to other industries was
reduced by the policy. In this sense, the decline in textile production
was a negative side effect of the priority production policy. This
policy had other negative side effects as well. The policy, in giving
priority to production increases, reduced the incentive of private
firms to enhance efficiency, and the monetization of the RFB bondsby the BOJ accelerated inflation.

Transition to Market Economy & Promotionof Industries
The Japanese economy transited from a regime of planning andcontrol to a market economy in 1949, when the US minister Joseph
Dodge came to Japan to give advice on economic policy to theoccupation authorities (GHQ) and the Japanese government. With
respect to macroeconomic policy, Dodge instructed the Japanese
government to balance its budget, stop new loans from the RFB, andset a fixed exchange rate of 360 yen per US dollar. With this set ofthree policies, Dodge intended to stop high inflation and stabilize themacroeconomy. Meanwhile, with respect to microeconomic policy,
he instructed the government to abolish controls on prices anddistribution. Backed by the powers of the occupation authorities,
these policies were implemented swiftly, making the Japanese
economy successfully transit to a market economy.
Abolition of government controls and the fixed exchange rate
58 Japan SPOTLIGHT • March / April 2017

implied that Japanese industries and firms had to compete with eachother and with foreign industries and firms. The government
considered that it was necessary to promote new industries becausesome of the existing industries would lose competitivenesscompared with the industries in developing countries, which would
endeavor to promote industries based on low wages. However, directcontrols, which had been employed for industrial policy, were
outdated. In this circumstance, the government devised a set of new
tools for industrial policy.
First, two new public financial institutions, the Export Bank ofJapan (EBJ) and the Japan Development Bank (JDB), were
established in 1950 and 1951, respectively. The EBJ was renamed
the Export–Import Bank of Japan (EIBJ) in 1952. The funds for thesefinancial institutions were mainly from the Fiscal Investment and
Loan Program (FILIP), which started in 1948. FILIP is a program thatinvests and loans government funds to the private sector. The largest
portion of its funds came from postal savings. The EIBJ and JDP
were two of the major channels through which FILIP funds wereloaned to the private sector, with low-interest rates.
Second, a program of special administrative tax relief wasintroduced by the Enterprise Rationalization Promotion Law in 1952.
The government reduced corporate tax in cases where a firm
installed certain sorts of equipment that were effective in promoting
rationalization, according to the law, and thereby promoted
investment in new equipment. Third, the Enterprise Rationalization
Promotion Law also prescribed subsidies for R&D. Policy-based
finance, tax relief and subsidies for R&D have been employed as the
major industrial policy tools up to the present.
Besides these tools, there was another powerful policy tool utilized
in the 1950s, the foreign exchange allocation system. In the 1950s,
all foreign exchange was concentrated with the government, whichthen allocated foreign exchange based on the “foreign exchange
budget”. The part of the budget for commodity imports was drawn
up by MITI. The foreign exchange budget was classified into two
categories, the budget for foreign exchange allocation goods (FAgoods) and that for automatic approval goods (AA goods). As shownin Chart 3, the FA budget accounted for 70–80% of the total foreignexchange budget.
The distinction between the FA and AA budgets was essential
because, with respect to the FA goods, the budget was allocated toindividual commodities. This implied that MITI could impose de facto
import quotas on FA commodities, using the foreign exchange
allocation budget, given their prices. MITI used this system toprotect domestic industries. Meanwhile, in relation to industries thatheavily depended upon imported raw materials, by controlling
foreign exchange allocations to the raw materials, MITI could
indirectly control production in those industries. Furthermore, it isnotable that MITI allocated the foreign exchange budget for each FA
good to individual firms. This implies that MITI allocated rent to
individual firms because the import of FA goods was more or lessrestricted. Thus, MITI promoted exports and investment of individual
firms by linking the foreign exchange allocation to exports andCHART 3

Composition of foreign exchange budget
million dollars
3,500
3,000

FA budget
AA budget
FA budget/Total

2,500

%
90.0
80.0
70.0
60.0

2,000

50.0

1,500

40.0
30.0

1,000

20.0

500
0

10.0
1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963

0.0

Source: T. Okazaki and T. Korenaga, “The Foreign Exchange Allocation Policy in Postwar
Japan: Its Institutional Framework and Function” in T. Ito and A. Kreuger eds.,
Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice andPolicy Issues, University of Chicago Press, 1999

equipment, respectively. The foreign exchange allocation system
continued until the early 1960s, when Japan implemented the “tradeliberalization” recommended by the IMF, GATT, and the US
government.
In the high growth period, combining those tools, the government
implemented various industrial policies. They included the policy for
updating the equipment of basic industries (power generation, ironand steel, etc.), and promotion of new industries (synthetic fibers,
automobile, petrochemical, computers, etc.). They were typical“targeting” policies, which aimed at promoting the industries thatwere regarded as strategic by the government.
The “industrial rationalization” policy in the 1950s was a case of atargeting policy. When the Japanese economy transited to a market
economy in 1949, the iron and steel industry had a problem in thatits production equipment was out of date. Chart 4 indicates the
distribution of the vintage of rolling mills in Japan. More than half ofthe rolling mills in terms of capacity were installed before the Sino–
Japanese War. In particular, concerning the mills for sheet steel, theJapanese iron and steel industry was far behind in introducing strip
mills. Hence, MITI supported iron and steel firms to invest in strip
mills through loans from the JDB and the allocation of foreignexchange to import strip mills. An increase in investment in newrolling mills is reflected in the shift of the vintage distribution from1949 to 1955 and 1960. In the 1950s, iron and steel equipment inJapan grew younger, which in turn contributed to the international
competitiveness of the Japanese iron and steel industry. Indeed,steel became one of the major export commodities from Japan,
which caused trade frictions with the US in the 1960s.
Meanwhile, in the high growth period, some industries, such as
the coal and natural fiber industries, lost a comparative advantage.
For these declining industries, the government implemented theindustrial adjustment policy to facilitate capacity reduction. The

adjustment policy for the coal industry started in 1955 when the Coal
Industry Rationalization Law was legislated. Under this law, the Coal
Industry Improvement Public Corporation was established to buy
inefficient mines from private mining firms to scrap.

Shift of Growth Path & Industrial Adjustment
The First Oil Crisis in 1973 was not only a turning point in thegrowth of the macroeconomy, but it also had impacts on individual
industries. In particular, the sharp rise in the oil price damaged thebasic material industries, which were energy intensive, and many ofthem subsequently faced a structural depression. Chart 5 shows thereturn on assets (ROA) and the operation of equipment of the
manufacturing industries. The ROA substantially declined after the oilcrisis, and it is clearly correlated with the decline in the operation
rate of equipment. As suggested in this chart, manufacturingindustries, particularly the basic material industries, faced a problem
of excess capacity. In these circumstances, MITI extensively
implemented the industrial adjustment policy from the late 1970s to
the 1980s. The legal framework was provided by the Law on
Temporary Measures for Stabilization of Specified Depressed
Industries (1978) and the Designated Industries Structural Revision
Extraordinary Measures Law (1983).
Under these laws, MITI designated depressed industries facing
structural problems. Each designated industry drew up a plan forequipment disposal to be approved by MITI, which supported theimplementation of the plan with policy-based finance, tax relief andexemptions from the Antitrust Law. Fourteen and 26 industries were
designated by the Law on Temporary Measures for Stabilization ofSpecified Depressed Industries and the Designated Industries
Structural Revision Extraordinary Measures Law, respectively.
CHART 4

Capacity of rolling mills in Japanby period of installation
％
60.0
1949

50.0

1955
1960

40.0
30.0
20.0
10.0
0.0

-1936

1937-1940

1941-1945

1946-1950

1951-1955

1956-1960

Source: T. Okazaki and T. Korenaga, “1950 nendai no Nihon niokeru setsubi kindaika toseisansei: Tekkogyo niokeru ‘Sangyo Gorika’” (Update of industrial equipment andits productivity implication in 1950s Japan: “Industrial Rationalization” in the ironand steel industry), RIETI Discussion Paper Series 15-J-064, 2015

Japan SPOTLIGHT • March / April 201759

ECONOMIC HISTORYCHART 5Return on assets & equipment operation
rate of manufacturing industries
%
4.50

%
140
Return on assets (left scale)

4.00

Operation ratio of equipment(right scale)

3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00

19601962196419661968197019721974197619781980198219841986198819901992199419961998

130

Effects of Designated Industries Structural
Revision Extraordinary Measures Law
Law
1980

120

1981

110

1982

100

1983

90

1984

80

Source: T. Okazaki ed., Tsuho Sangyo Seisakushi, 1980-2000 (History of Trade and Industrial
Policy, 1980-2000), vol. 3 , Research Institute of Economy, Trade and Industry,
2012

Table 1 reports the results of regression analyses on the effects of
the Designated Industries Structural Revision Extraordinary
Measures Law. The observations are for 120 manufacturingindustries, of which 26 were designated by the law, and they coverseven years (1980–1986), which include the period before and after
the enactment of the law. The variable “Law” is a dummy variable,
which equals one if an industry was designated by the law in a year.
Hence, the coefficient of “Law” captures the impact of the law in thesense of difference in differences. The coefficients of “Law” arepositive and statistically significant in all cases where we use ROA,TFP growth and labor productivity growth as the dependent
variables. It is suggested that the Designated Industries Structural
Revision Extraordinary Measures Law was effective in improving
profitability and productivity of the designated industries.
On the other hand, the industrial adjustment policy by MITI wascriticized by the US in the context of bilateral economic friction in the
1980s. From 1983 to 1984, the Industrial Policy Dialogue was held
between Japan and the US, during which the US argued that thecompetitiveness of Japanese firms was nurtured by promotional
policies targeting strategic industries and, hence, that it was unfair.
In addition, the US criticized the Designated Industries Structural
Revision Extraordinary Measures Law, arguing that it aimed atpreserving declining industries and was a barrier to imports. Facingthese criticisms, along with the criticism of an expanding surplus on
the current account balance, the Japanese government made efforts
to compromise with the US government, which was reflected in the
Maekawa Report in 1986.
This circumstance brought about a substantial change in industrial
policy, especially the industrial adjustment policy. Because of the
sharp appreciation of the yen after the Plaza Agreement in 1985,
industrial adjustment was still an important issue for industrial policyin the late 1980s. However, the approach and tools for industrial
60 Japan SPOTLIGHT • March / April 2017

TABLE 11985
const.
obs.
Number of industries
R2 withinbetweenoverall
Industry FE

ROA

TFP growth0.0339 ***(3.02)
0.0328 ***(6.30)
0.0262 ***(5.24)
0.0199 ***(4.24)
0.0117 ***(2.36)
0.0158 ***(3.18)
0.0175 ***(3.78)
0.0452 ***(10.24)
840
120
0.113
0.015
0.019
Yes

0.104 ***
(3.36)
0.0639 ***(2.92)
0.0571 ***(3.65)
0.047 ***
(2.60)
0.0304 *(1.76)
0.00792(0.32)
0.0274 *(1.70)-0.0271 **(-2.06)
840
120
0.025
0.003
0.001
Yes

Labor productivity
growth
0.114 ***
(3.01)
0.025(1.04)
0.024(1.54)
0.022(1.29)-0.001(-0.05)0.004(0.24)
0.030 *
(1.92)
0.042 ***
(3.17)
840
120
0.014
0.001
0.002
Yes

Note: *** statistically significant at 1% level.
* statistically significant at 10% level.
Heteroscedasticity robust t values are in parentheses.

Source: T. Okazaki ed., Tsuho Sangyo Seisakushi, 1980-2000 (History of Trade and Industrial
Policy, 1980-2000), vol. 3, Research Institute of Economy, Trade and Industry, 2012adjustment became substantially different from those utilized in theearly 1980s. In 1987, the Law for Facilitating Transformation ofIndustrial Structure was legislated, succeeding the DesignatedIndustries Structural Revision Extraordinary Measures Law. This law
differed from the 1983 law in that its objects were individual firms
and areas, not industries, and that it did not include exemptions fromthe Antitrust Law. These characteristics distinguish the policies after
the late 1980s from the traditional industrial policies prior to thattime. Shinji Fukukawa, who was administrative vice-minister of
MITI from 1986 to 1988, states that, in retrospect, “We decided not
to renew the Designated Industries Structural Revision Extraordinary
Measures Law, and to take a measure to depressed areas” and “theDesignated Industries Structural Revision Extraordinary Measures
Law was the last policy targeting individual industries.” He evaluatedthis change as indicating the transition of industrial policy from anindustry-oriented policy to a market-oriented one.

Structural Reforms for Activating Innovation
after Long Stagnation
In 1991, the asset bubble collapsed and the Japanese economy
transited to the third phase, i.e. the phase of long stagnation. In thisperiod, the main issue of industrial policy shifted from industrial
adjustment to structural reform of the economy. At first, structuralreform had an aspect of international harmonization of economic

institutions, in response to criticism from the US. However, as
economic stagnation continued, structural reform was given a new
mission, namely reform for constructing a new institutional basis for
economic growth.
There is another reason behind this need for a new institutional
basis of economic growth, apart from long stagnation. In the 1980s,
the Japanese economy almost matched the US economy, not only interms of per capita GDP but also in terms of total factor productivity(TFP). In other words, the Japanese economy became one of thefrontrunners in the world, which implies that it faced a newchallenge. From the Meiji Era, the Japanese economy had continued
to grow by adopting and improving technologies from advanced
countries but when the catch-up had been achieved, Japan needed tocreate original innovations to continue its growth.
The need for original innovations was recognized by MITI in thelate 1970s. In 1979, MITI proposed the concept of Japan as a“technology-intensive nation” as a part of its “Vision for Industrial
Policy in the 1980s”. The vision claimed that “a turning point iscoming, a move away from an industrial pattern of “reaping”
technologies developed in the seedbeds of the West, to a pattern of“sowing and cultivating” that displays greater creativity. With thecentury of catch-up modernization at an end, from the 1980s
onwards we will enter a new and unexplored phase.”
One approach that MITI took to achieve economic growth basedon innovation was structural reform of the economy. In 1993, theSubcommittee on Fundamental Issues of the Industrial Structure
Council, under MITI, publicized the “Interim Proposal” whichstressed the need for wide-ranging institutional reforms. Morespecifically, this proposal stressed the reform of regulations. It wasstated that not only government regulations but also various private
practices restricted access to the Japanese market and theemergence of new businesses. In addition to regulatory reform, it
TABLE 2

Effects of industrial cluster policy
Network growth

Sales growth

Cluster

0.079 (0.0266) ***0.0684 (0.0150) ***Network-0.365 (-0.0002) ***0.0286 (0.0001) ***Emp

0.021 (0.0001) ***0.1410 (0.0004) ***Sales

0.075 (0.0002) ***-0.0968 (0.0004) ***Age-0.002 (0.0002) ***-0.1604 (0.0002) ***Yes
Yes
312,8401418.480.2262

Yes
Yes
313,1901024.220.0559Prefecture FE
Industry FE
obs.
F
R2

Note: Robust standard errors are in parentheses.
*** statistically significant at 1% level.

Source: T.Okubo, T.Okazaki, and E.Tomiura, “Industrial cluster policy and transaction networks:
Evidence from firm-level data in Japan, RIETI Discussion Paper Series, 16-E-071, 2016

proposed a broader reform of institutions, including the corporate
system, the employment system and the financial system. The idea
is that, whereas these institutions worked as the foundation of the
postwar growth of the Japanese economy, they were not appropriate
to a new pattern of economic growth based on original innovations.
Indeed, structural reform of the economy has been one of the
major policy issues of successive cabinets from the late 1990s until
the present. The first cabinet that stressed it as an issue was theHashimoto Cabinet (1996–1998), which gave top priority to “Six
Reforms” – reforms of administration, economic structure, financial
system, social security system, fiscal structure and education. These
broad reforms were far beyond the jurisdiction of MITI and METI, butthey played a leading role in drawing up reform plans in the cabinet,
which resulted in a series of regulatory reforms, the “Japan Big
Bang” of the financial system, the reform of FILIP, and the revision of
the corporate law, among other reforms.
Another more specific approach to activating innovations was theindustrial cluster policy that METI launched in 2001. It was a type ofregional economic policy, but the aim and the contents were
substantially different from the traditional regional economic policy,
which intended to achieve “balanced development of regions”. The
industrial cluster policy was motivated by the innovation-based
growth of Silicon Valley, and it aimed to promote industrial clusters
incubating innovations. For this purpose, METI designated 20
industrial clusters around Japan. Many firms and universities
participated in these clusters. METI supported those firms anduniversities to form networks with each other, and it also mediatedbetween the firms and regional banks. Table 2 shows the results ofregression analyses comparing the growth of transaction networks
and sales between the firms that participated in the cluster policy
program and the other firms. As shown, the firms participating in the
program tended to expand their transaction networks and sales
faster.

Conclusion
As stated above, the aims and tools of industrial policy in postwar
Japan have changed substantially over time. It should be stressedthat Japanese industrial policy is not a static set of policies but rather
is characterized by flexibility. In the changing economic environment,
industrial policy has been evolving to address the issues that theJapanese economy faces, devising tools under the constraints
operating in each period.

Tetsuji Okazaki is a professor of economics at the University of Tokyo. He has
been the president of the International Economic History Association (IEHA)
since 2015. His articles have appeared in major journals on economic history
and economics, including American Economic Review, Journal of Economic
History, Economic History Review and Explorations in Economic History.

Japan SPOTLIGHT • March / April 201761