Postwar Recovery, 1945-49

Tokyo destroyed by American bombing, near Shimbashi Station, after the war in 1945.

The crowd at a black market, near Osaka Station? in 1946.

Chapter 10

1. Physical war damage
After the war defeat, Japan was occupied by the allied forces. In fact,
the US was the only country that ruled Japan. The occupying force was called
the Supreme Commander of the Allied Powers (SCAP) or, alternatively, theGeneral Headquarters (GHQ—this term was more popular among Japanese).
The GHQ was headed by US Army General Douglas MacArthur. In contrast toGermany, the occupation of Japan was indirect, in the sense that the Japanese
government continued to exist and function and sometimes even resisted USorders. Another feature unique to Japan was that it was occupied by one country, unlike Germany which was occupied by the US, the UK, France and the
USSR. This meant that Japan could avoid the risk of being divided when theCold War began.
The US conducted a survey on the effectiveness of military attacks
against Japan during the war. There were two factors that contributed to Japan’s
defeat.
Sea lane blockade—virtually all Japanese military and commercial ships
were sunk, and the country lost the means to transport energy and materials
between the mainland and the colonies or occupied areas. Without inputs,

Figure 10-1 Industrial Production Index(1935 = 100)

400
Machinery

300
Steel

Total

200
100
Food
Textiles

1951

1950

1949

1948

1947

1946

1945

1944

1943

1942

1941

1940

1939

1938

1937

1936

1935

0

Source: Management and Coordination Agency, Historical Statistics of Japan, Vol. 2, 1988.

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Postwar Recovery, 1945-49

Table 10-1 The Loss of National Wealth Due to the Pacific War(In millions of yen at end-of-war prices)Type of Physical Asset
Total assets
Ships
Industrial machinery
Structures
Industrial materials
Household assets
Communications and water supply
Electricity and gas
Railroad and road vehicles

Before War

After War

Ratio ofDestruction

253,130
9,125
23,34690,43532,953
46,427
4,156
14,933
15,415

188,852
1,796
15,352
68,21525,08936,8693,497
13,313
13,892

25.4%
80.3%
34.2%
24.6%
23.9%
20.6%
15.9%
10.8%
9.9%

Source: Economic Stabilization Board, A Comprehensive Report on the War
Damage of Japan Caused by the Pacific War, 1949.
Note: War damage includes direct damage by bombing and shelling as well as
indirect damage due to scrapping, removal and the lack of maintenance.

production came to a halt. This was the primary reason for the collapse ofJapan’s war economy.
Strategic bombing (mostly in 1945)—virtually all Japanese major cities
were subject to US aerial bombing. The largest air raid was conducted in theeastern sections of Tokyo on March 10, 1945, when about 100,000 people
were trapped in fire and killed within a few hours. Atomic bombs were
dropped on Hiroshima (90-120,000 immediately killed) and Nagasaki (6070,000 immediately killed). However, bombing did not reduce Japan’s production capacity as much as expected, although it had a strong psychological impact.
The US report concluded that the sea lane blockade was more effective than the strategic bombing. It also argued that US bombing should have targeted railroads rather than housing.
The Japanese government also produced a report on war damage.
Table 10-1 shows the proportions of physical assets lost during the war. Most of
the losses were incurred toward the end of the war.
The two-thirds of machinery stock survived despite heavy air raids.
The surviving factories and railroads were inoperative, however, due to the lackof energy and inputs. Immediately after the war, in 1945 and 1946, output collapsed to only 20 percent of the wartime peak, or 30 percent of the prewar peak

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which was recorded between 1934 and 1936. The lack of inputs was the reason,
not the lack of capacity.

2. Shortages and inflation
Economic planning was continued even after the war and until 1949.
In a crisis situation, economic control must replace paralyzed private sector
activity. As during the war, necessities continued to be rationed and the government directed production and input procurement. Prices were controlled, subsidies were provided and the economy was still tightly regulated. However, compared with wartime, controls became less effective because of the emergence ofa large number of black markets.
Shortages were most severe and living standards were lowest in 1946,a year after the end of the war. As food became extremely scarce, it was fearedthat many people would starve to death. As soldiers and civilians returned homefrom war fronts and former colonies, unemployment became a serious problem.
Joblessness was expected to reach 10 million. However, neither mass starvation
nor massive unemployment materialized, because idle population was absorbed
largely in the informal and agricultural sectors. Many urban people worked in
the informal sector to survive1. These sectors provided temporary jobs and afood sharing mechanism.
Urban residents had to travel to rural villages in extremely crowded
trains to exchange their remaining property, such as kimono and cloth, for food.
Rationed food was too small in quantity. Everyone had to violate the law and
go to the black market to survive. It is reported that Judge Yoshitada Yamaguchi of Tokyo District Court was so honest that he did not want to break the
Food Control Law. He ate only rationed food and refused to take advantage of

1

The informal sector refers to the collection of jobs that are not officially registered or permitted,
such as street peddlers, personal service providers and household works in contrast to legally
sanctioned enterprises and cooperatives. Since it operates in a grey zone between legal and illegal, its status remains uncertain, being subject to official round-ups and confiscation and without protection of workers’ rights or contract enforcement. For the same reason, there is little
incentive for physical asset formation. The informal sector tends to emerge in a country in crisis
or whose market economy is underdeveloped or temporarily paralyzed.

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The people’s economic life was hardest from late 1945 to 1946. Many urban people lost their houses and properties,
even if they survived the US bombing. From upper left to lower right, (1) life in a makeshift hut; (2) eating simple food at a
black market; (3) a train packed with city dwellers traveling to country side to barter clothing for food. But if they werecaught by police, purchased items would be confiscated. (4) A seller opens a straw mat to show fish in a black market.

illegal food. In October 1947, he died of starvation.
To cope with output collapse and unemployment, the Japanese government printed money to finance subsidies while imposing price controls.
Clearly, this strategy could not be sustained for long. Monetization of fiscal
deficits created triple-digit inflation from 1946 to 1949. Black market inflation
was even higher, especially in the early period. This was the highest inflationthat Japan ever experienced, before or since.
Foreign trade was strictly controlled and any transaction had to beapproved by the SCAP. Private foreign trade was prohibited. For each commodity, the SCAP decided the dollar price and the yen price separately, so an
implicit exchange rate existed for each item. In effect, Japan between 1945 and1949 had a multiple exchange rate system. Exchange rates for exports (150-600
yen per dollar) were generally more depreciated than exchange rates for imports(125-250 yen per dollar).
The volume of international trade was also very limited. Apart fromcontrolled trade, the US provided large amounts of humanitarian and economic

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aid to Japan, amounting to a cumulative $1.95 billion during 1946-50, which
helped to ameliorate the shortages of food and consumer goods. It was said that
the Japanese economy was barely surviving with two artificial supports, namely
subsidies and US aid. These supports had to be removed as quickly as possible.

3. The Basic Problems of 1946
Immediately after the war defeat, two young officials organized astudy group to discuss ways to rebuild the Japanese economy following the war
damage. Their names were Saburo Okita and Yonosuke Goto. Actually, preparation for this had been going on toward the end of the war. Okita and Goto
were electrical engineers stationed in Beijing, but they knew Japan would soon
lose the war. They returned to Tokyo to organize a study group.
The first meeting of the study group was held on August 16, 1945,
one day after Japan’s defeat. The topic was the foreseeable impact of the Bretton Woods Agreement concluded a year earlier and the creation of the IMF and
the World Bank. After that, study meetings on various topics were hosted every
week with the attendance of prominent officials and academics. Okita and Goto
provided a secretarial service, summarizing the key points of each discussion
and drafting a report. The study was begun as a private endeavor but was later
officially recognized as the Special Survey Committee of the Ministry of Foreign Affairs. The interim report was issued in late 1945 and the final draft was
produced in March 1946. With minor revisions, the final report was publishedin September 1946.
This report, with the title “The Basic Problems of Japan’s Economic
Reconstruction,” was an excellent example of Japanese development thinking2.
It started with the analysis of external environment and internal situation. From
this, an ambitious yet realistic positioning strategy was derived. Then concretemeasures and action plans were contemplated. Many of the strategic orientations proposed in this report are common to Japan’s development policy advice
even today. For example, when Prof. Tatsuo Kaneda drafted a policy recom-2This report is now available in English translation—see Saburo Okita, ed, Postwar
Reconstruction of the Japanese Economy, University of Tokyo Press, 1992.

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Postwar Recovery, 1945-49

mendation for Kyrgyzstan (Kaneda, 1992), or when Prof. Shigeru Ishikawa
wrote a JICA report on Vietnam (JICA, 1995), their logical sequence was very
similar to that of the Basic Problems report. The author’s current research on
Vietnam’s industrialization in the age of globalization also follows the same
sequence (Ohno and Thuong, 2005). While the targeted industries may differ
from one country to another, the procedure to identify and study them remains
common.
The report has 193 pages in two parts. The first part analyzes the new
global situation and the historical and geographical position of the defeatedJapan. War damage is carefully examined and some positive aspects are also
noted. The second part contains proposals for promoting industries and targeting exports, sector by sector, with the necessary concrete policy actions. Realsector issues dominate, while monetary and fiscal problems are discussed only
lightly. The key ideas in the report can be summarized as follows3:
・ Japan’s economic vision should be based on a deep analysis of shifting
global trends.
・ A comprehensive and concrete recovery strategy must be designed andimplemented. It must be based on industrialization, technology improvement and a dynamic transformation of trade structure.
・ Each important industry must be analyzed carefully, and realistic and concrete promotion programs must be proposed. Comparative advantages intextiles and agriculture were now lost because of the expected emergenceof the rest of Asia. Japan must aim at skilled labor-intensive industries.
Many people were inspired by this report, but its recommendations
were not formally adopted by the government. Indirectly, however, the idea that“limited resources must be selectively used for restarting an expansionary
reproduction cycle” was put into practice via the priority production system

3

Today’s readers may feel uncomfortable when they read the strong assertion in this report thatthe free economy was hardly recommendable as the world economy was decisively shifting
toward planning. But we must recall that this was the dominant thinking dating back to the prewar period, and planning was even inevitable in the situation of severe economic crisis. Anotherargument, that Japan’s future depended on industrialization rather than on agriculture, trade orservices, may sound obvious. But this should be construed as an opposition to the American
policy at that time to completely de-industrialize Japan (see below).

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Table 10-2 Some Excerpts from the Basic Problems Report (1946)(Two numbers refer to the page numbers in the Japanese original and the English translation respectively)
・The major causes for such reproduction on a regressed scale are found in the sluggish domestic production of coal and in the shortages of raw material imports. (p.63/66)
・In capitalistic free competition many Japanese industries will be overwhelmed by gigantic
modern foreign industries, and Japan’s industrial structure will thus be deformed. This will
make it necessary to adopt State policies that will keep at least basic industries intact.
(p.81/85)
・A national posture will have to be assumed in which all the people do not seek an affluent consumer life but are content with minimum standards of living, consume conservatively, andincrease savings—thereby contriving to recover economic power and not seeking financial
assistance from the outside world for consumption purposes. (p.85/88)
・A comprehensive and specific year-to-year reconstruction program will have to be formulated
in order to revive the Japanese economy from the extreme destitution in which it finds itself
now. The waste of economic power that would result from allowing laissez-faire play to market forces will not be permitted in order that all the meager economic power remaining may
be concentrated in a direction toward reproduction on an enlarged scale and that the processof reconstruction may be expedited. (p.92/94)
・The principal role in Japan’s economic reconstruction will have to be played by manufacturing… Therefore when the Japanese political and economic systems have been democratizedand their aggressive character wiped out, the nation’s heavy industries should be allowed to
grow to a considerable extent… As Japanese heavy industries are certain to be subjected tointernational competition in the future on the one hand, and because the benefit of adequate
governmental protection as experienced in the past will become difficult to obtain on theother hand, they will have to cultivate—through the rationalization of management and theelevation of technological levels—the ability to withstand the competition from foreign
goods in terms of production costs as well. (pp.111-112/114)

directed by Prof. Hiromi Arisawa, one of the members of the study group (seebelow).

4. How to stop inflation
After inflation peaked in 1946, it persisted at triple digit level until
1949. Its cause was clear: monetization of the fiscal deficit. The fiscal deficit inturn was generated by the following two policies.

・Subsidies—subsidies were mainly directed at intermediate inputs, such ascoal, steel, copper, and fertilizer, but some were targeted at consumer
goods, especially food. More precisely, price controls were imposed, and150

Postwar Recovery, 1945-49

Figure 10-2 Retail Price Inflation in Tokyo(Official prices, change over 12 months)

(%)
800
700
600
500
400

Dodge Line
Stabilization

300

War ends

200
100
0

Jan-51

Jul-50Jan-50Jul-49Jan-49Jul-48Jan-48

Jul-47Jan-47

Jul-46

Jan-46

Jul-45Jan-45

Jul-44Jan-44-100

Source: Management and Coordination Agency, Historical Statistics of Japan, Vol. 4, 1988.

the government provided production subsidies (literally called “compensation for price gaps”) in order to cover the losses incurred by private
producers.

・Recovery Financial Fund (fukkin) loans—the targets of these loans were
designated priority industries, in particular the coal industry. Policy loans
were provided by the Ministry of Finance to these industries. Government bonds (fukkin bonds) were issued to finance these loans. Most ofthese bonds were directly purchased by the Bank of Japan, which
increased the money supply.
Economists still debate the merits and demerits of these policies.
From the viewpoint of stopping inflation, they were clearly undesirable and had
to be terminated as soon as possible. But from the viewpoint of real sector
recovery, a delicate balance had to be struck between fighting inflation and sustaining output. Cutting these subsidies and loans immediately might have killed
all remaining industrial activities.
The first attempt to stop the inflation was the deposit blockade of1946. The government suddenly announced that (i) everyone now had an upper
limit of 500 yen per month for the withdrawal of bank deposits; and (ii) existing151

Chapter 10

paper notes would be annulled unless they were deposited at the bank. Thus,
people were forced to keep their money at the bank while inflation continued.
This reduced the money supply to one-third and slowed inflation temporarily.
But people naturally felt deceived by the government and the credibility of its
monetary policy was lost. Soon, inflation accelerated again.
After the failure of the deposit blockade, different approaches to disinflation were proposed and hotly debated. Contested ideas were as follows:(1) Accepting inflation: in July 1946, Finance Minister Tanzan Ishibashi
stated that a budget deficit and high inflation were acceptable as longas they prevented further output collapse and unemployment. He said
that the present inflation in Japan was caused by supply shortages andnot by excess demand. Thus, price stability called for supporting producers and workers. A sound budget in such a situation meant accepting a fiscal deficit.
(2) Shock approach: in January 1948, Kihachiro Kimura, a socialist Member of Parliament, argued the opposite. He said that price stability was
the precondition for output recovery. As long as inflation continued,
people would hoard goods in anticipation of higher prices. This would
reduce supply and raise prices even more. A bold anti-inflation policy
was necessary to stop this vicious circle. The US government in Washington also shared this view.
(3) Gradualism: the Economic Stabilization Board, as well as General
MacArthur of the SCAP, feared that big-bang stabilization would devastate Japanese industries and lead to social crisis. They hoped to lower
inflation step by step using subsidies, fukkin loans and US aid, while
reducing these support measures over time.
(4) Conditional shock approach: Prof. Hiromi Arisawa of Tokyo University recognized that an anti-inflation policy would reduce output temporarily. But he also knew that inflation had to be eliminated to end
speculation and hoarding. He argued that output must be raised by theplanning method to 60 percent of the prewar level, then a strong antiinflation package should be adopted. Output would probably fall backto about 30 percent of the prewar level following this shock, but people
could somehow endure this level, which actually prevailed in 1946. If

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the anti-inflation policy was implemented too soon, without such initial
output recovery, the shock would be too severe.
The policy which was actually adopted turned out to be close to what
Prof. Arisawa proposed.

5. Priority production system, 1947-48
The priority production system (PPS) refers to a policy of concentrating scarce resources in a few strategically important industries to jump-start a
recovery (though it is called a “system,” it is actually a policy). It is a type of
economic planning. Recovery of a few key industries is expected to have positive spillover effects on the entire economy.
Prof. Arisawa was a member of the personal advisory group of Prime
Minister Shigeru Yoshida. In July 1946, General MacArthur told Yoshida that
he would allow Japan to import a small number of goods4. Yoshida orderedbureaucrats to prepare a wish list for imports, but the list they produced was toolong. Yoshida asked his advisors to shorten the list. The following five items
finally remained: steel, coal (anthracite), heavy oil, rubber, and buses.
MacArthur did not want to let Japan import heavy oil since it was inshort supply globally. But Prof. Arisawa urged Prime Minister Yoshida to renegotiate with the Americans, saying that if Japan was permitted to import heavy
oil, the Japanese government would promise to produce 30 million tons of coal.
Heavy oil was an input to steel production, and steel was needed to rehabilitate
coal mines. For Japan, coal was the only energy source which was domesticallyavailable. If enough coal was produced, the surplus could be distributed as anenergy input to other industries.
MacArthur agreed to let Japan import heavy oil under this promise.
Prof. Arisawa, who proposed the idea, became the chairman of the subcommit-

4

During the war, the Japanese government guaranteed compensation for any losses incurred byindividuals or firms engaged in military production. In July 1946, the GHQ ordered to cancel
this guarantee which drove a large number of firms into bankruptcy and default. Prime Minister
Yoshida appealed to General MacArthur on the difficulties caused by this decision, to which
MacArthur responded by allowing Japan to import certain products to ameliorate the situation.

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tee responsible for producing 30 million tons of coal. In parallel, the Ministry ofCommerce and Industry was also contemplating a similar plan. Prof. Arisawa’s
method was meticulous. He summoned the general directors and chief engineers of all coal mines in Japan to gather information. Based on actual coaldeposits, veins, extraction speed, working hours and so on, he calculated the
supply capacity. On the demand side, he estimated the possible coal use by the
SCAP, power companies, railroads, and industries.
“Dig 30 million tons of coal” became a sort of national campaign.
The Minister of Commerce and Industry visited the Joban Mine to cheer workers. In the streets of large cities, the daily output of coal was posted. The
evening radio program sent words of thanks to hard-working coal miners allover Japan. The government secured inputs for coal mines using subsidies andfukkin loans, and provided special housing for coal miners. Although the actual
delivery of imported heavy oil was delayed, the production goal was more orless realized. Domestic coal production in 1947 was 29.32 million tons. The
output of key industries other than coal fell slightly short of targets in 1947. But
the priority production system was continued in 1948 and most targets wereachieved in that year. The economy began to rebound in 1947. But inflation
was still high.

6. US policy in occupied Japan
Japan was under US occupation from 1945 to 1951. During this period, US policy on occupied Japan shifted significantly.
At first, the objective of occupation was the demilitalization of Japan.
The US wanted to cripple the Japanese economy so that it would never be able
to produce military goods again. No heavy industry was to be allowed. Remaining machines were to be stripped and shipped to the rest of Asia as reparations
in kind. However, these policies were not actually implemented. The SCAP
also introduced democracy, since the lack of democracy, such as businessmonopolies, lack of workers’ rights and exploited peasants, was considered tobe behind Japan’s military expansion. The following three democratic reforms
were executed by the order of the SCAP:

・Zaibatsu breakup—big businesses were accused of helping militarism

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Postwar Recovery, 1945-49

during the war. Group companies were broken up into separate entities.
But this policy was later reversed and a new type of industrial group,
called keiretsu, emerged5.

・New labor laws—the new laws guaranteed workers’ rights on organizing
labor unions, collective bargaining and basic working conditions.

・Land reform—all farmland of absentee landlords and holdings above certain limits were confiscated and sold to actual tillers. The sales price was
low and high inflation quickly depreciated its real value. This increased
the land ownership of farmers significantly, which was good from theviewpoint of equity and political feasibility, but land was now divided
into too many small plots to conduct efficient farming, which was undesirable from the viewpoint of improving productivity. Family farming ona small scale has become the dominant trait of Japanese agriculture eversince.
In addition, a new constitution was drafted and implemented underpressure from the SCAP on May 3, 1947. The Japanese government now celebrates this day as a national holiday. Compared with the Meiji Constitution of
1889, the following features are noteworthy:･ Sovereignty rests with people.
･ The emperor is a symbol of Japan with no political functions.
･ Renunciation of war and non-possession of military forces (Article 9).
･ Guarantee of basic human rights.
･ Separation of power among legislative, administrative and judicial branches.
Article 9 is unique to Japan and has caused many heated arguments
ever since. The full text of Article 9 runs as follows:
Aspiring sincerely to an international peace based on justice and order, theJapanese people forever renounce war as a sovereign right of the nation and5

Zaibatsu is a group of large companies operating in many sectors that are owned by one holding
company dominated by an influential family. Keiretsu is a looser collection of companies without a holding company at the top, whose member companies are related to each other throughcooperation in finance and technology, mutual share holding, personnel rotation and the like. A
pyramidal subcontracting structure in the automobile and motorcycle industries is also called asystem of keiretsu companies.

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the threat or use of force as means of settling international disputes.
In order to accomplish the aim of the preceding paragraph, land, sea, and airforces, as well as other war potential, will never be maintained. The right ofbelligerency of the state will not be recognized.

Although the possession of armed forces is explicitly prohibited by
the constitution, Japan now actually has the Self-Defense Force. Hardliners
want to revise Article 9 so that Japan can own a full military force without anacrobatic interpretation of the Constitution. Others want to keep Article 9 andabolish the Self-Defense Force.
But around 1947, US occupation policy shifted dramatically becauseof the start of the Cold War. Now the US wanted to strengthen Japan as a capitalist ally and an anti-communist base. Besides that, economic aid to Japan was
becoming too burdensome for US taxpayers. Remilitarization and the economic
recovery of Japan, including the rebuilding of heavy industries, were promoted.
Socialist and labor movements were discouraged.
In addition, a policy gap existed within the US government. Washington demanded free markets and big-bang macroeconomic stabilization as soon
as possible, but General MacArthur and his SCAP staff in Tokyo, who werecalled “New Dealers”—a group of people who supported official intervention at
the time of the Great Depression in the 1930s—preferred gradualism withappropriate state roles.

7. Dodge Line stabilization of 1949
But this debate within the US government was ended when Washington sent Joseph Dodge to Tokyo in early 1949. Dodge was the president of
Detroit Bank and a strong believer in the free economy. He ordered the following austerity measures to terminate inflation. His policy package was called the“Dodge Line.”･ Stop fukkin loans.
･ Abolish all subsidies and raise utility charges.
･ Strengthen taxation and cut expenditure.
･ Have a “super-balanced budget”—the primary balance should be zero,
which means the entire budget should be in surplus.

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Postwar Recovery, 1945-49･ Unify multiple exchange rates at 360 yen to the dollar.
In addition, Prof. C.S. Shoup, an American fiscal expert, was also
sent to Japan to introduce a new tax system. His advice was adopted in 1950
and became the basis of Japanese taxation in the postwar period. It was a system with a heavy reliance on direct taxes, especially income and corporate
taxes, which became a key feature of the Japanese tax system for a long time tofollow. Japan had no broad-based indirect tax, such as VAT or general consumption tax, until 1989.
The Dodge Line stabilization was very successful in stopping inflation. But as feared, the shock on economic activity was severe and people
expected a serious recession. Indeed, output soon began to decline. The Bank ofJapan tried to supply liquidity against the order of Dodge. Prof. Arisawa feltthat stabilization measures were adopted too soon; he thought that Dodge
should have waited another year.
We do not know how serious this recession would have been, because
another big event intervened. As the Japanese economy started to shrink, theKorean War (1950-53) broke out. Whatever the political implications of thiswar might have been, its impact on the Japanese economy was positive. The US
forces used Japan as a supply base and procured great amounts of military andcivilian goods. For Japanese industries, this was tantamount to a sharp increasein external demand, as in the export boom experienced during WW1. The recession ended quickly and the Japanese economy began to grow. Minor inflation
also returned, but price stability was restored when the Korean War ended.
The Dodge Line stabilization also had important systemic implications. The Japanese economy had been a planned one since 1937 and economic
control continued during the postwar recovery period. The achievement of pricestability and the abolition of price controls and subsidies finally allowed Japanto return to a freer economy. Now the national economy could be deregulated
and the role of government could be reduced. However, this did not mean acompletely free economy; many elements of official intervention remained evenafter the end of planning.
Joseph Dodge is sometimes appreciated for ending inflation andrestoring economic freedom, and sometimes criticized for implementing a

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shock therapy (although its undesirable effect was cancelled by the Korean
War). It is likely that most Japanese thank him rather than blame him.

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Postwar Recovery, 1945-49

Hiromi Arisawa and Saburo Okita discuss postwar recovery
Below is the excerpt from a dialogue which took place between these two gentlemen in 1986 (quoted from Arisawa, 1989, pp.33-34). Both of them were deeply
involved in the postwar recovery policies.

Hiromi Arisawa (1896-1988)

Saburo Okita (1914-1993)

OKITA: What was your opinion on the nationalization of the coal industry [proposed around 1946-47]?
ARISAWA: As for me, I never thought of nationalizing it.
OKITA: Wasn’t it at the time of Minister of Commerce and Industry Chosaburo
Mizutani? A law on the nationalization of coal mines was proposed.
ARISAWA: I never thought of nationalization. As a matter of fact, Japanese coalmines were already operating under government’s directives. In other words, coalmines were virtually under state control. Germany nationalized coal production, and I
discussed the matter extensively in many articles. But I had no intention of nationalizing our coal mines. Of course, if some unexpected situation arose, nationalization
would have been an option. But what was the point in nationalizing only coal?
OKITA: Around that time, there was a debate over the so-called Chukan Antei
Ron [intermediate stabilization, which means gradual disinflation] between you and
Mr. Kimura, the socialist Member of Parliament. Your idea was to stop inflation after
the government permitted the output to recover to a certain level relative to the prewar
size. But Mr. Kimura regarded disinflation as the prerequisite for output recovery.
That was the key point in the debate. You wrote in an article that the two views differed in the prioritization of policies. It certainly was a big difference, from the viewpoint of your “economics of transition.”

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ARISAWA: Regarding the disinflation policy, my view at that time was to adopt
the priority production system first to let the production recover to 60 percent of the
prewar level, then stop the inflation by bold measures. If the big-bang disinflation
were introduced before output recovery, it would have plunged the Japanese economy
into a tremendous confusion, so it should not have been done. In either case, inflation
stabilization would cause the output to decline. The crucial point was how deep thisdecline would be. Bold stabilization measures were unavoidable, but the timing must
be chosen wisely, at a time when the priority production system proceeded further andthe output reached 60 percent of the prewar level.
My view was that bold stabilization would surely cause the output to decline.
Under the worst scenario, the output might even decline to a half. I insisted on therecovery to 60 percent of the prewar level, because if you had that level, the subsequent output decline would take it to the 30 percent of the prewar level. Since output
actually fell to that level immediately after the war and people could somehow survive, to me that was the minimum acceptable level.
Before Mr. Dodge arrived in Japan, I went to see Mr. Fein, financial advisor of
the GHQ’s Economic and Science Bureau. His position was that Japan needed a bigbang anti-inflation program. I told him that it was too early to implement it. He tried
to persuade me into early stabilization, but I never relented. The logic I have justexplained was behind my insistence.

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The High Growth Era

The special train carrying new high school graduates to big cities in 1964 – These youths were called “golden eggs.”

Chapter 11

After the recovery period of 1945-49 and the Korean War from 1950
to 1953, the Japanese economy entered into a period of high growth. From themid-1950s to the early 1970s, average real growth was approximately 10 percent. This very high and sustained growth transformed the Japanese economy
and society significantly. By around 1970, Japan overtook West Germany andbecame the second largest economy in the capitalist world, as measured by
GNP, after the US. Japan’s catching-up process with the West was finally over.
There are many issues to be discussed for this very interesting period. This
chapter will discuss the following five topics: “rationalization” drive, macroeconomic management, industrial policy, global re-integration, and socialchange.

1. Rationalization
During the preceding period of 1945-49, when economic planningwas still in place and Japan was virtually a closed economy, the principal policy
objective was a quantitative recovery. The recovery policy was pursued at any
cost, ignoring efficiency. Subsidies, fukkin loans and US aid were provided.
But in the early 1950s, after the Dodge Line stabilization, the Japan-

Figure 11-1 Real GNP Growth since the High Growth Era
(%)
14
12
10
8
6
4
2
0
-2
2001

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

1968

1965

1962

1959

1956

1953

-4

Source: Cabinet office, Annual Report on National Accounts, various issues.

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The High Growth Era

ese economy entered another phase. The new situation can be described as follows.
・ Controls and subsidies were abolished and the market mechanism waslargely restored.
・ Private international trade began. However, this was not yet free trade; pastlegacies such as exchange control, import protection, foreign currency surrender requirement and administrative guidance were still in place.
・ There was global inflation associated with the Korean War. But Japanese
inflation was higher than the world average: between 1949 and 1951,
Japanese wholesale prices rose 64 percent and consumer prices rose 8.5
percent. During the same period, wholesale price inflation in the US andthe UK was 16.1 percent and 11.1 percent, respectively.
・ A new fixed exchange rate of 360 yen to the dollar was established in1949. This level was considered appropriate initially, but due to the Korean War inflation, the yen became overvalued.
・ Japan regained political independence with the signing of the San Francisco Peace Treaty in 1951, and US economic assistance ended. At the sametime, the Japan-US Security Treaty was concluded in 1951 (renewed in1960), and Japan became a US ally in the Cold War.
・ Japan had only small international reserves amounting to $567 million at
the end of 1950.
Under these new circumstances, Japanese industries had to strive for
efficiency and competitiveness. The days of economic planning and physicalexpansion were over, and the challenge for cost reduction and higher quality
began.
Before the outbreak of the Korean War in June 1950, Japanese industrial costs were roughly in line with those in the US. But by 1953, most ofJapanese industrial inputs had become more expensive than those in the US. In
particular, coal and steel were among the most expensive. These were precisely
the two products targeted by the Priority Production System in 1947-48! The
so-called “problem of high prices of coal and steel” reduced the competitiveness of all other industries that used them as inputs.
To cope with overvaluation and the loss of competitiveness, three163

Chapter 11

Figure 11-2 Japanese Industrial Prices Relative to US Prices(US price level = 100)300
June 1950

250

June 1952

200
150
100
50

Pulp

Raw rubber

Coal

AmmoniumsulfateAluminium

Long steel

Flat steel

Pig iron

Silk yarn

Rayon

Cotton yarn

Sugar

Wheat

0

Source: Kosai, 1995, p.56.

policy options were theoretically possible: (i) yen devaluation; (ii) deflation
through macroeconomic austerity; and (iii) productivity improvement. Japan
chose the third option. The option (ii) was also partly adopted through a relatively tight macroeconomic policy stance, but option (i) was not even considered. Japan had just overcome the postwar crisis, unified exchange rates in
1949, and regained political independence in 1951. Under the Bretton Woods
fixed exchange rate system, Japan felt that it was unacceptable, politically anddiplomatically, to revise the newly installed exchange parity so soon.
Gorika, or rationalization, means improving productivity throughinvestment in new technology and machinery and reorganizing production andmanagement. This became a national economic goal in the early 1950s. During
the Korean War, many companies enjoyed the US military procurement boom
and accumulated profits. These profits were the main financial source for introducing new technology and machinery. However, labor unions often opposed
rationalization because they thought this slogan was used as an excuse for laying off workers and imposing hard working conditions.
Some industries succeeded in rationalization but others failed anddeclined. Between coal and steel, the former industry was a loser and the latter
was a winner. Both contributed to a rise in overall productivity—the coal indus-

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The High Growth Era

try by disappearing and the steel industry by becoming more competitive. The
coal industry was especially hard hit because the world energy source shifted
dramatically from coal to oil, which was cheaper. Unlike coal, Japan had toimport 90 percent of its oil because the domestic supply was severely limited(Japan’s dependency on imported oil rose subsequently to as high as 99.7 percent).
The policy stance of the government was also crucial in industrial
rationalization. In 1953-54, as imports surged and Korean War military procurement ended, Japan faced a balance-of-payments crisis. The Bank of Japanraised interest rates and the budget and the fiscal investment and loan program(FILP)1 were tightened. The intention of the policy makers was to lower inflation to near zero (finally!) and encourage industries to reduce costs further. This
policy was quite different from the one adopted after the WW1 boom in the
1920s. At that time, the main objective was to rescue weak companies andbanks. By contrast, in the 1950s, they were asked to become more efficient orexit. It may be argued that, when an artificial boom ends and the business condition worsens, austerity measures are needed to prepare for the next period ofsustained high growth.
Another important fact is that new instruments of industrial policy
were created during the early 1950s. To replace the price controls, subsidies andfukkin loans of the early recovery period, the following new policy tools wereintroduced:
・ Foreign exchange budget
・ Capital control, including control of technology imports
・ Preferential tax treatment for specific industries
・ Creation of the Japan Development Bank and other policy banks
・ A number of laws for promoting enterprise rationalization
Equipped with these policy tools, the Japanese government was now

1

The fiscal investment and loan program (FILP) was a system in which funds from postal savingsand pension contributions were mobilized to conduct investment and loans having public nature
through state institutions and credit mechanism. It was a system unique to Japan and featured
the size as large as about the half of the general budget and close coordination with the generalbudget in planning procedure and complementarity.

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Chapter 11

The two major events in 1960

The Miike miners, their families, and sympathizers fought hard against “capitalists”
but they lost.

Protestation against the government over the renewal of the Japan-US
Security Treaty.

ready to assist industries.
The year 1960 was a dividing year in postwar Japan. In that year, thelabor dispute at Miike Coal Mine, located in Kyushu and operated by the MitsuiGroup, came to a climax. The management of the mine announced a selective
laying-off of workers, especially labor union leaders, to carry out rationalization. Coal miners protested and occupied the company’s hopper facilities. Thiswas considered an ultimate fight between all capitalists and all workers inJapan, but eventually the miners lost. Another big event in 1960 was a renewalof the Japan-US Security Treaty. The Kishi Cabinet of Jiminto, or the Liberal

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The High Growth Era

Democratic Party (LDP), tried to force it through the parliament despite nationwide protests. A huge demonstration was staged which surrounded the parliament building and one female student was killed. But the treaty was renewed
and the government subsequently resigned for causing the mess. With these two
events, the days of direct confrontation in ideology and politics were over. The
new LDP government, led by Prime Minister Hayato Ikeda, refocused national
attention from politics to economics by proposing the “Income Doubling Plan.”
He proposed to double Japan’s GNP in ten years, which required an average
growth of 7.2 percent annually. Japan actually grew faster than this and Ikeda’s
goal was achieved within six to seven years, much sooner than expected. Political radicalism was gradually replaced by a more cooperative management-labor
relationship. There were some remnants of student and left-wing groups callingfor violent revolution into the early 1970s, but they lost the support of the general public.

2. Macroeconomic management
During the 1950s and 60s, macroeconomic management had the following features.
The budget was generally sound and in surplus. In addition, the sizeof government relative to GNP gradually declined, especially during the 1950s.
Monetization of fiscal deficits was prohibited. In fact, no government bonds
were issued in postwar Japan until 1965. For this reason, there exists no statistics on government bonds or their interest rates prior to that time.
On the monetary side, the fixed exchange rate of 360 yen to the dollar
was maintained from 1949 to 1971. The Bretton Woods system permitted occasional realignments of the exchange parity when “fundamental disequilibria”
emerged, but Japan never considered changing its parity. Some people argue
that the yen became gradually undervalued in real terms, because Japanese productivity growth was higher—and thus its costs became lower—compared withthe rest of the industrial world. But this conclusion is debatable (McKinnon andOhno, 1997). Japanese wages and prices were rising at speeds consistent withJapanese productivity increases, and there is no decisive evidence of a tendency
for the yen’s undervaluation. This is quite in line with what we expect in a167

Chapter 11

Figure 11-3 Central Government Budget and Expenditure(% of GNP)
40

30
Revenue
20
Expenditure
10

1973

1971

1969

1967

1965

1963

1961

1959

1957

1955

1953

1951

0

Source: Management and Coordination Agency, Historical Statistics of Japan, Vol. 3, 1988.

world of fixed exchange rates. A young country with unstoppable dynamism inindustrialization naturally expands its global market share. Exchange rateadjustments can hardly reverse this power shift since it comes from a structuralchange in the real economy. The governments of more mature economies thatdemand the currency revaluation of such a country may only be fooling themselves and evading the true question. This can be said about postwar Japan aswell as today’s China.
A fixed exchange rate constrains the monetary policy. In other words,
when the exchange rate is fixed, the monetary policy is no longer an independent variable that can be determined by the monetary authorities, since the central bank is required to use the monetary policy to maintain the exchange rate at
the committed level. This is called the “endogeneity” of the monetary policy
under a fixed exchange rate. Once the yen/dollar exchange rate was fixed, theBank of Japan had to continuously adjust its monetary policy to keep it fixed. In
Japan, this policy constraint was imposed specifically as follows.
Since there was no free capital movement at that time, a balance-ofpayments deficit basically meant a trade deficit. When the domestic economy
overheated and imports surged, the Bank of Japan tightened money by raisingshort-term interest rates and through “window guidance” (telling commercial

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The High Growth Era

Figure 11-4 International Reserves

1975

1973

1971

1969

1967

1965

1963

1961

1959

1957

1955

1953

1951

1949

(In USD billion, excluding gold)
20
18
16
14
12
10
8
6
4
2
0

Source: International Monetary Fund, International Financial Statistics, various issues.

banks to reduce new loans). Since Japanese firms depended heavily on bankloans, this had an immediate effect of curtailing investment. As the economy
cooled down, the balance-of-payments pressure eased. Every time the economy
grew too strongly, the Bank of Japan had to adopt this policy. This was called
the “the ceiling of the balance of payments” or “stop-go policy.” This was practiced until the mid-1960s.
To cope with the balance-of-payments pressure under a fixedexchange rate system, West Germany frequently intervened in the foreignexchange market and also adjusted the Deutsche Mark occasionally. Since there
was always an upward pressure on the DM, adjustments were always in the
upward direction. In contrast, Japan chose macroeconomic austerity (tightmoney) as a tool for balance-of-payments adjustment. Thus West Germany
accumulated international reserves while Japanese reserves remained small andstable until the mid-1960s (since then, however, the Bank of Japan has intervened aggressively and rapidly accumulated dollar assets).
Under this monetary regime, Japanese wholesale prices were virtuallyconstant. From 1951 to 1971, the wholesale price index rose at an annual rate of
0.7 percent. This remarkable price stability was also experienced in the US andWest Germany. Indeed, the early postwar period of the 1950s and 60s was aperiod of historically unprecedented global price stability. Japan “imported”

169Chapter 11

this global price stability in tradable goods by maintaining a fixed exchange
rate. The consumer price index rose slightly faster, at an annual 4.4 percent. In
those days, this phenomenon, called “creeping inflation,” was considered amacroeconomic problem2. During the same period, nominal wages rose 10.2
percent, nominal GDP rose 14.5 percent, and M1 rose 15.9 percent (all in annual average increases). Meanwhile, real GDP rose by an average of 9.4 percent
per year during 1951-71.
Japan joined the World Bank in 1952 and began to borrow from it in
the following year. It soon became the World Bank’s second largest borrower
after India. Japan continued to borrow from the World Bank until 1969. All
World Bank loans to Japan were used for building industrial infrastructure suchas power plants, highways and the Shinkansen (bullet trains). Unlike today’s
ODA trends, no part of them was directed toward education, healthcare, ruraldevelopment or other social-sector programs. World Bank loans were madethrough the Japan Development Bank, which were then on-lent to the proposedindustrial projects. This procedure was called the “two-step loans.” It is noteworthy that World Bank loans financed less than 1 percent of total domestic
investment. Japan financed its vigorous investment in this period almost entirely through domestic savings. There was virtually no receipt of FDI, let alone
portfolio investment, from abroad. But Japanese firms were extremely active inimporting technology, and the government strongly supported it.

3. MITI and industrial policy
The Ministry of International Trade and Industry (MITI) was createdin 1949 by merging the Ministry of Trade and Industry, the Coal Agency, andthe International Trade Agency. Later, in 2001, MITI was renamed to the Min-2

It should be noted, however, that differential inflation across different goods and services does
not necessarily imply economic disequilibrium. If wage rates and other factor prices are
assumed to be equalized across all industries, industries with higher productivity growth canachieve faster price reduction relative to industries with low productivity growth. The fact thatJapanese consumer prices rose faster than its wholesale prices reflects higher productivity
growth in the industries heavily represented in the former (machinery, automobile, electronics,etc) than the industries included in the latter (food, housing, services, etc). This argument is formally presented in the Balassa-Samuelson Theorem in international economics.

170

The High Growth Era

istry of Economy, Trade, and Industry (METI).
During the mid 1950s to the early 1970s, MITI played a role in Japanese industrialization, but economists still debate its importance. Was highgrowth achieved because of MITI or despite it? Some affirm that MITI’s policies were crucial, while others argue that they were a negative factor overpowered by private dynamism. Still others say that MITI’s role was insignificant or
neutral. Some industries succeeded without official promotion (consumer electronics, cameras, motorbikes, pianos, watches, calculators, etc). Other industries
failed even with official support (coal, aluminum refining, nuclear fusion, mainframe computers, etc). As for the automobile industry, there were both rejection
and acceptance of official intervention. MITI tried to merge automobile companies prior to trade liberalization because 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 didvery well subsequently (see the box on Honda at the end of this chapter). However, it should also be recalled that the automobile industry was protected withhigh tariffs in its early stage of development.
There are also econometric studies on the effectiveness of MITI policies, but the results remain inconclusive and depend on the data and theresearcher. Some studies examined whether targeted industries on averageachieved higher growth than those without support. But partly because someindustries received support for downsizing, and partly because underlying
growth rates differed across industries, such a test is not a fair evaluation. Using
econometrics to evaluate industrial policy is extremely difficult due to theimpossibility of constructing a convincing “counter-factual” (how Japaneseindustries would have developed had MITI not intervened). The contention ofthis book is that private dynamism was primary but policy also played a usefulrole in Japan. This conclusion also applies to earlier industrialization in the
Meiji period.
Unlike Japan’s unvarying vision on the importance of industrialization and the role of government, the development policy of the World Bank has
oscillated greatly. In the early postwar period, World Bank loans were provided
primarily for industrial development. In the 1970s, social sector programs wereintroduced to gradually replace industrial projects. Throughout the 1980s, the171Chapter 11

World Bank consistently denied the effectiveness of selective industrial policy,
in which the government targeted and supported certain industries. This freemarket ideology was strongly influenced by the so-called neoclassical development economics. However, World Bank programs began to regain balance inthe 1990s. Its East Asian Miracle report (1993) admitted that selective industrial policy sometimes worked in the past, though only for Japan, Taiwan and
Korea. The 1997 World Development Report further recognized the possibilityof selective industrial policy for countries with strong institutions (meanwhile,countries with weak institutions were advised to strengthen them first). In thefollowing several years, the concern of the World Bank shifted significantly
from economic development to poverty reduction. But since around 2002, it has
begun to refocus on industrial promotion and infrastructure development as asource of growth.
Industrial promotion measures adopted by the Japanese government
were no different from those widely practiced elsewhere in the world: preferential taxes, subsidies, low-interest policy loans, R&D assistance, SME promotion, entry restriction, coordination of output, investment and exports, building
infrastructure, and the like. While the list of measures was similar, it can be said
that MITI implemented them far more effectively than other countries. In addition, MITI had a set of softer instruments for sharing information and organizing actions among various stakeholders including: (i) creation of visions andtargets, (ii) shingikai (deliberation councils), (iii) close links with business associations, (iv) administrative guidance, and (v) human networks through personnel rotation and amakudari (assumption of high posts in private firms under
MITI’s influence after early retirement)3.
It is often said that MITI chose target industries by the income elasticity criterion and the productivity criterion. In other words, industries whose
global demand was expected to grow strongly and whose productivity was
expected to rise quickly were selected for promotion. But this explanation is a
bit too simple and obvious. Certainly, most countries would like to do this if it
3

For more on these policy measures, see Johnson (1982), Itoh et al (1988), Okimoto (1991), andKomiya et al (1988). As for regulation on FDI firms such as local contents requirement, technical transfer and export-import balance requirement, Japan did not have to consider them since
its growth was not dependent on the attraction of FDI.

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The High Growth Era

were possible. The real question was how MITI did this successfully—howindustrial selection was made and how wrong decisions were avoided in practice. We must ask concretely how needed information was collected, howdemand, productivity and the state of competition were forecasted, and how thepotential of each company and industry was evaluated. In choosing industries,
MITI did not rely on existing formulas or econometric models as the main
source of information. What is perhaps most amazing is the fact that crucial
information and correct intuition naturally emerged in MITI’s daily contacts
with the private sector.
There are other theoretically interesting issues concerning the industrialization in the 1950s and 60s. Let us discuss two of them.
Excess competition—one of the most important reasons for official intervention throughout the prewar and postwar period was excess competition.
At the time of economic recession, the Japanese government frequently
required industries to agree on output cartels, scrap and consolidate excess
capacity, and accept corporate mergers. In addition, it often resorted toexport quota allocation to forestall the accusation of “torrential exports” by
its trading partners. Liberal economists contend that excess competition is aterm in contradiction, and its validity highly doubtful (Komiya et al, 1988,
pp.10-11). But other economists accept the possibility of excess competition
to the serious damage of national welfare if certain conditions are present,such as shortages of information, violation of intellectual property rights,
increasing returns to scale (the so-called scale merit), and the fallacy ofcomposition in sales promotion (Murakami, 1984). For example, prewar
recessions were often aggravated by the collective behavior of producers
which expanded sales to compensate for reduced prices, which further
accelerated price declines. In industries which can achieve cost reduction in
proportion to the size of capital equipment, overcapacity becomes the norm
as every producer rushes to invest. In developing countries where copied
products circulate freely, producers with high technology and strict observance of laws are the first to be eliminated, a situation which can hardly becalled desirable from the viewpoint of sound industrial development.
Infant industry promotion—this is a classical theory of industrialization first173

Chapter 11

proposed in the 19th century. In a nutshell, it says that burgeoning industries
with initial high cost should be temporarily protected by tariffs if they can
reduce cost as time passes and experience is accumulated. There are also
well-known caveats for this argument, such as the condition that later profits, properly discounted, should exceed initial protection cost. Again, theexistence of increasing returns or the so-called learning effect is the key
determinant of the validity of infant industry promotion. Neoclassical economists contend that, while this theory is beautiful on paper, actual governments seriously lack the ability to choose the right industries or resist political pressure. If implemented, this policy will only lead to the permanent
protection of hopeless industries at a huge cost to the national economy.
This type of counter-argument is called the political economy of protection.
But can we assume that all governments are stupid and incapable? In East
Asia where industrialization is proceeding in certain recognizable order andpattern, is it really true that latecomers like Vietnam and Myanmar havenothing to learn from the experiences of Thailand and Malaysia in choosing
industries and formulating policies? 4
Quite a few Western economists believe that these ideas are alreadydiscredited and outdated in the age of global mega competition and free capital
mobility. They flatly reject their value as policy advice to the developing world.
However, most Japanese development economists do not agree with this view.
According to them, these old arguments contain an element of truth and can beresurrected and applied even today provided that proper modifications are madeto reflect the current situation.

4. Reintegration into the global economy
Table 11-1 illustrates the main steps which Japan took to re-integrate

4

It should be noted, however, that developing countries today are required to be integrated into
the global free trade system in their early stages of development through WTO and FTAs. Thissituation of lost tariff rights is similar to what Japan had to cope with during the Meiji period.
We must fully recognize the fact that latecomer countries today have little freedom in tariff policy necessary for the execution of infant industry promotion.

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The High Growth Era

Table 11-1 The Road to Global Economic Re-integration
1951
1952
1955
1956
1964
Late 1960s

US occupation ends; political independence restored
Japan becomes a member of the IMF and the World BankJapan joins GATT; however, many countries refused to grant full trade
rights to Japan and trade discrimination against Japan continued
Japan joins the United Nations
Japan joins the OECD; IMF Article 8 status attained (no exchange restriction
on current-account transactions); the Tokyo Olympics held (hosting the
Olympic games often accelerates growth and boosts national pride)
Tariff reductions implemented

itself into the global economy.
The market mechanism was restored by the Dodge Line stabilizationin 1949, but this did not mean a completely free economy. On the contrary,
many policy measures continued to regulate the markets. One of them wasimport protection. Japan’s trade barriers had been high during the 1920s and
30s, and with the intervening period of trade interruption during the war and US
occupation, tariff protection continued into the 1950s and 60s. However, theJapanese government was determined to lower tariffs in an effort to rejoin theworld economy and implement the GATT Kennedy Round which requiredcomprehensive tariff reduction by all member countries. Transition to a more
liberal trade system was also necessitated for political and diplomatic reasons.
Japan’s trade liberalization in the 1960s had the following salient features: (i) it was executed gradually and in a well-planned manner; (ii) tariff
reduction was closely linked with industrial promotion measures to strengthen
competitiveness; and (iii) the government used international commitments toavoid domestic political capture. Removal of import barriers was carried out
under the very strong “ownership” (policy autonomy) of the Japanese government in close consultation with the business community. Since trade liberalization schedules were pre-committed and considered non-negotiable, producers
concentrated their efforts on improving efficiency rather than lobbying for theextension of protection. Official support was provided according to actual performance, such as export volume, rather than political connection. Domestic
firms competed fiercely with each other, but the competition was coordinatedby the government so as to prevent the dropping-out or bankruptcy of any firm.

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Chapter 11

Thus, competition and cooperation coexisted in a situation described as “compartmentalized competition” by Yasusuke Murakami (1984).
The process of trade liberalization in postwar Japan was ideal in thesense that it was wisely used for obliging domestic industries to become morecompetitive. But its successful execution required a very high institutional
capacity. For most developing countries, this is not an easy task.
While trade barriers were gradually reduced, capital control was notabolished during the high growth period. It was removed step by step from the1970s onwards. The most important step in liberalizing capital transactions was
the Foreign Exchange Law of 1980, which belongs to a much later period thanthe one we are discussing.

5. Social transformation
Economists still argue about the true cause of high growth in the
1950s and the 60s. Some say that vigorous investment was the key. Others
assert that it was export-driven. Some Keynesian economists, like Hiroshi
Yoshikawa (1997), believe that the most important force was robust consumption. However, it is very difficult to single out one factor as the only cause,since all variables were interrelated.
At any rate, the consumption boom was certainly a very prominent
feature of the high growth era, whether it was the cause or the effect. In the late
1950s, all consumers wanted to purchase washing machines, refrigerators, andblack-and-white TVs—these were called “three divine devices.” In the 1960s,
color TVs, cars, and “coolers” (air conditioners) attracted everyone’s attention—they were called “three C’s.” As markets and production scale expanded,
costs and prices declined, which in turn further stimulated demand. The mass
production system also generated a white-collar middle-class who purchased
these goods. This virtuous circle continued until the early 1970s.
Before the high growth era, the basic lifestyle of the Japanese people
in terms of food, clothing, and housing changed very slowly. Before WW2,
most people generally ate Japanese food such as rice, miso soup, pickled vegetables, fish, natto beans, and sake, and wore Japanese kimono, geta (wooden
sandals) and zori (a kind of sandals), and lived in wooden houses divided by

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The High Growth Era

Table 11-2 Four Major Pollution Lawsuits of Postwar Japan
Cause and Symptoms

AccusedEnterprise(s)Final RulingFirst reported in 1956. Water
contaminated by organic mercury caused
Minamata Disease
numbness, speech disturbances,(Minamata City,
narrowing of field of vision, mental
Kumamoto Prefecture) disorders, loss of muscle coordinationand other neurological disturbances.

ChissoCorporation

Itai-itai Disease(Jintsu River, Toyama
Prefecture)

First reported in 1955. Water pollution bycadmium caused severe pain. “Itai-itai”
means “it hurts, it hurts.”

Mitsui Kinzoku(Mitsui Mining
and Smelting
Company)

The plaintiff
won in August
1972

Niigata Minamata
Disease(Agano River, Niigata
Prefecture)

First reported in 1965. Water pollution byorganic mercury; same disturbances as
Minamata Disease.

Showa Denko

The plaintiff
won inSeptember 1971

Yokkaichi Asthma(Yokkaichi City, Mie
Prefecture)

Petrochemical complexes which started
operations in the late 1950s caused air
pollution by SOx and other substances.
Major symptoms included sore throats,coughing, respiratory organ troubles,
vertigo, nervous diseases, and eye
irritation.

Mitsubishi
Petrochemicals,
The plaintiff
Showa
won in August
Yokkaichi
1972
Sekiyu, andfour othercompanies

The plaintiff
won in March1973

paper sliding doors. People slept on tatami mats with futon. But all this changed
dramatically during the 1960s. Bread, coffee and western food became common. Very few people now wear kimono today except on New Year Holiday
and other special occasions. Concrete and steel-built apartments with blinds andcurtains became popular. Urbanization progressed. Big families were replacedby nuclear families. Individualism began to replace group orientation. Among
all periods in Japanese history, perhaps the high growth era brought the greatest
changes in lifestyle.
For a long time, the labor surplus persisted and wages remained
depressed in the Japanese economy. But high growth brought a critical change.
Around 1960, the labor surplus turned into a labor shortage. The so-called“turning point” was finally reached as in the Arthur Lewis model5. Special
5

The Lewis model divides the economy into the traditional sector (engaged in agriculture) and themodern sector (engaged in urban industries). It is a development model that postulates labor
migration from rural areas to cities as the modern sector expands and absorbs more labor. When
this process progresses sufficiently, a new phase, called the turning point, is reached in whichrural surplus labor disappears and wage increase is required in order to employ more workers.

177Chapter 11

trains were prepared to transport fresh graduates from middle and high schools
in rural areas to big cities as new workers. As the labor market tightened, theseyoung workers were highly demanded by industries as “golden eggs.”
During the high growth period, environmental destruction caused by
rapid industrialization became intolerable. Water and air quality deteriorated. A
people’s grass-roots movement rose against commercial irresponsibility andofficial negligence, culminating in four principal lawsuits against public hazards as shown in Table 11-2. All of these lawsuits ended with the victory of theplaintiff consisting of affected residents.
In the political sphere, two conservative parties merged to become the
Liberal Democratic Party (LDP) in 1955, which has dominated Japanese politics ever since. The LDP lost the prime minister’s seat from 1993 to 1996, but
subsequently regained it. This political situation, with the powerful and conservative LDP and weak opposition parties, has been called the “1955 Regime.” Inmany senses, the LDP is much like the Seiyukai Party in the prewar period. Its
support base is rural. The LDP distributes public money for rural investment
and farm subsidies. With the coming of Prime Minister Kakuei Tanaka (inoffice during 1972-74), the LDP’s ruling style characterized by rural money
politics for winning votes became firmly established, and it still continues
today. Many LDP politicians want to continue building Shinkansen (bullet
trains) routes and highways despite the severe budget crisis.
In comparison with prewar politics punctuated by dramatic power
shifts and frequent crises, the postwar political structure in general and the 1955
Regime in particular have been highly static (Banno, 2004). The absence of an
opposition party with sufficient capability to run a government, such as the
Minsei Party in the prewar period, partly explains this. In a situation where noserious political competition existed, the LDP delegated national security issues
to the maintenance of good relationship with the United States and the assurance of the US military umbrella, and confined domestic political agenda tosuch socio-economic issues as growth, trade negotiations, environmental protection and social security. This led to the political regime in which serious
debates and power shifts rarely occurred. Recent political events suggest that
21st century Japan may move gradually toward the two-party system, but its
realization is far from certain.

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The High Growth Era

Soichiro Honda: A Postwar Business Hero
Postwar Japan produced many business heroes. Among them, Soichiro Honda(founder of Honda Motor Company), Konosuke Matsushita (founder of Matsushita
Electric Industrial Company, with brand names National and Panasonic) and Masaru
Ibuka and Akio Morita (founders of Sony) are particularly famous. They were all
engineer-type inventors, who began in a tiny factory with a great vision and desire to
produce new and better products to conquer the Japanese—and world—market. They
encountered a number of failures and hardships but persevered until great success wasreached. They were driven by the unquenchable monozukuri (making things) spirit,
not by high salaries, quarterly profits or balance sheets. After building a business
empire, each of them became interested in the non-business world, including education, culture, the environment and economic diplomacy.
Soichiro Honda was a son of a blacksmith in Shizuoka. When he was a boy, helearned the techniques of bellowing, using furnaces, andcasting from his father. From early on, he was crazy aboutmechanics. When his father opened a bicycle shop, Soichiro
helped him as a repairman.
After finishing secondary school, Soichiro worked foran automobile repair company. After six years, he was promoted to head the company’s Hamamatsu branch when he
was twenty-one. He was not satisfied with just repairing
automobiles, so he started to experiment to create new parts.

Soichiro Honda (1906-1991)

In those days, virtually all cars were imported, and domestic production of parts wasan important goal for the industry. Soichiro tried to produce piston rings, a crucial
engine part, by himself but it was not easy. After realizing that experience must be
supplemented by theory, he studied metallurgical and mechanical engineering at
Hamamatsu Technical School.
After the war defeat, Soichiro established a new company to produce motorbikes
which later became Honda Giken Kogyo (Honda Motor Company). Honda’s firstmotorbikes, the Dream (146cc) and the Cub (50cc), were big hits. Around 1954,
Honda faced a crisis due to fierce competition and technical problems with its products, but the crisis was overcome by the efforts of Takeo Fujisawa, the competent179

Chapter 11

marketing manager.
Soichiro wanted to enter—and win—the Tourist Trophy (TT), an international
motorbike race in Britain. He created a special team to manufacture a powerful
motorbike for this race. In 1959, Honda first participated in the TT; and in 1961,
Honda achieved complete victory by winning 1st to 5th prizes in both 125cc and250cc classes. At the same time, Honda introduced the Super Cub, a popular 50cc
motorbike with an efficient engine. It became an even bigger hit with consumers.
In the 1960s, Honda began to produce automobiles. This move was accelerated
by the MITI’s plan to consolidate Japanese auto makers to compete with America. If
this policy was implemented, newcomers like Honda would be excluded, so Honda
rushed to enter this market. The first popular small car, the N360, sold well but waslater criticized as defective.
In 1970, a tough environmental law was enacted in the United States requiring
automobiles to drastically reduce emissions. Honda became the first auto maker in theworld to clear this standard in 1972 with its newly invented CVCC engine. This
proved that Honda had the highest technology in automobiles as well as in motorbikes. It also stimulated the other Japanese auto manufacturers to produce fuel-efficient, low-emission cars.
Let us quote some words of Soichiro Honda.
“The presidents of this company have all been unruly and unpredictable, including
myself.” “So all of you must work very hard to support the company.” (addressing to thecompany staff at Honda’s 35th Anniversary, 1983)“All presidents raised issues with me. A president who doesn’t do that is useless.” (recalling the time when Presidents Kume and Kawamoto both advocated a water-cooled system
when Soichiro insisted on an air-cooled system, in developing the CVCC engine)“Don’t be a victim of the company. You must work in order to enjoy your own life.” (tonew recruits)“Everyone dreams and hopes for a success. I believe a success comes only 1 percent of
the time, supported by the 99 percent of failures. The final success is attained by challenging the new world with a pioneer spirit and after the repeated use of failures, reflection
and courage.” (at the time of receiving an Honorary Doctor’s Degree from the Michigan
Institute of Technology, 1974)“It’s OK. Your greasy hand is good. I very much like the smell of grease.” (when a worker tried to shake hands with Soichiro and, realizing his greasy hand, quickly withdrew it)

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The High Growth Era

Sources: Miyamoto, 1999; Honda Soichiro Study Group, eds, The Anaclets of
Honda Soichiro, Shogakukan, 1998.

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