Postwar Japanese economy and growth

Post-World War II Japan: A Nation in Transition

Devastated by the Allies in World War II, Japan has emerged as one of the world's most economically and technologically advanced societies today. Some observers have suggested that the "Japanese miracle" was the result of a collusion between the government and industry to prosecute economic growth through a series of subsidies and favorable business climates, while others maintain this explosive growth was due to the industrious and business-savvy Japanese people themselves. In order to determine which is correct, this paper will provide a review of Japan from the time of the signing of the peace treaty bringing an end to World War II and the years that followed. A review of the peace treaty and what was demanded of Japan to bring an end to the war after the bombing of Nagasaki will be followed by an examination of the role of the U.S. In ruling post-war Japan. An assessment of how Japan aggressively pursued its post-war reconstruction, including what industries were pursued and why, will be discussed by an analysis of those factors which made it possible for Japan to recover in such a short time following the devastating war and become a major global industrial power. A summary of the research will be provided in the conclusion.

Review and Analysis

Background and Overview. Following the surrender of Japan in World War IIJapan was under Allied military occupation during the period from 1945 to 1952. The occupation was headed by the Supreme Commander for Allied Powers (SCAP), a position filled by U.S. General Douglas MacArthur until 1951. While nominally overseen by a multinational Far Eastern Commission in Washington, D.C., and an Allied Council in Tokyo (which included the United States, the Soviet Union, China, and the Commonwealth countries), the occupation was virtually an all-American operation. Although MacArthur established a large General Headquarters in Tokyo to conduct occupation policy with support by local "military government" teams; however, Japan, unlike Germany, was not governed directly by foreign troops. Rather, SCAP depended on the Japanese government and its agencies, especially the efficient bureaucracy, to carry out its directives. General principles for the proposed governance of Japan had been spelled out in the Potsdam Declaration and spelled out in U.S. government policy statements drafted and forwarded to MacArthur in August 1945 (Watanabe 2003).

The key points of these policies were simple and straightforward, and included the demilitarization of Japan (so that it would not again become a danger to peace); democratization, meaning that, while no particular form of government would be forced upon the Japanese, efforts would be made to develop a political system under which individual rights would be guaranteed and protected; and the establishment of an economy that could adequately support a peaceful and democratic Japan. Further, MacArthur shared the vision of a demilitarized and democratic Japan and he was well suited to the challenge. MacArthur was an outstanding administrator and possessed the leadership and charisma that appealed to the defeated Japanese. MacArthur did not tolerate any domestic nor foreign interference, and aggressively went about creating a new Japan. To this end, he encouraged an environment in which new forces could and did rise, and, where his reforms corresponded to trends that had already established in Japanese society, they served to play a critical part in Japan's recovery as a free and independent country (Winchester 1989).

In his recollection of the negotiations surrounding the Japanese surrender, Shigemitsu (1958) reported that the Instrument of Surrender was delivered on the evening of September 2, 1945, which was quickly followed by a copy of an order, issued by MacArthur's headquarters, to the Foreign Ministry's Yokohama Agent, Minister Suzuki. The order stated that the whole of Japan was to be placed under military government. "The report shocked the Japanese Government and the people. It seemed that Japan and the Allied Powers interpreted Japan's acceptance of the Potsdam Declaration in a radically different manner" (Shigemitsu 1958:375). The source of this dismay was based on the assertion that the Allied Powers' interpretation was that Japan's unconditional surrender signified that, just as in the case of Germany, the country would on occupation be governed by the Army of Occupation. However, Japan's interpretation was that its surrender was dramatically different from that of Germany, which had in effect disintegrated. By sharp contrast, Japan was surrendering under the terms of the Potsdam Declaration. According to that declaration, the Japanese forces were required to surrender unconditionally; however, the existence of the Japanese Government was recognized and the reciprocal nature of the functions of the Army of Occupation and the Government were clearly recorded (Shigemitsu 1958). In spite of the initial shocked reaction from the Japanese populace, the occupation represented a period of rapid social and institutional change that was based on applying foreign models with a Japanese style.

Notwithstanding the maintenance of previous Japanese governmental organs to help operate the nation, SCAP acted quickly to remove the principal supports of the militarist state during the early months of the occupation. For instance, the Japanese armed forces were demobilized and millions of troops and civilians from overseas were repatriated. In essence, the Japanese empire was dissolved, the Japanese State Shinto was disestablished, and nationalist organizations were abolished and their members removed from important posts. Further, Japan's military industries were dismantled. The Home Ministry with its prewar powers over the police and local government was abolished; the police force was decentralized and its extensive power was removed. Similarly, the Education Ministry's broad powers over education were restricted, and obligatory courses on ethics (shushin) were abolished. Finally, all prominent individual in the Japanese wartime organizations and politics, including commissioned officers of the armed services and all high executives of the principal industrial firms, were removed from their positions. An international tribunal was established to conduct war crimes trials, and seven men, including the wartime prime minister Tojo, were convicted and hanged; another 16 were sentenced to life imprisonment (Winchester 1989).

The most important reform carried out by the occupation was the establishment of a new constitution. In 1945, SCAP had made it clear to Japanese government leaders that revision of the Meiji constitution should be their highest priority. When MacArthur was Supreme Commander of Allied Powers in Japan, he attempted to fulfill his father's mission. He remembered the general's lectures on the value of using conciliation rather than punishment when dealing with a defeated enemy, his hatred of racial bigotry, and, particularly, his strong belief in republicanism.:In Tokyo, Douglas treated the Emperor Hirohito much as his father had treated President Aguinaldo. For example, Douglas refused to give an order against fraternization with Japanese civilians. According to Winchester (1989), "In contrast to the rules established for Allied solders occupying Germany, GIs in Japan were allowed to mingle with the local civilians. General Arthur felt that orders against fraternizing were unenforceable: "Soldiers will be soldiers," he said. MacArthur's father had told him he should "never give an order unless I was certain it would be carried out. I wouldn't issue a no fraternization order for all the tea in China." (Young 1994:325). Winchester reports that the Japanese response to the occupying troops was respectful and courteous.

It was in this benign atmosphere in the post-war years that MacArthur pursued his primary goal to stimulate the development of democratic principles and to guarantee to the Japanese people the personal liberties outlined in the U.S. Constitution (Young 1994). When the Japanese efforts to create a new document failed, MacArthur's government section prepared its own draft and presented it to the Japanese government as a basis for further deliberations. Endorsed by the emperor, this document was placed before the first postwar Diet in April 1946. It was formally promulgated on November 3 and went into effect on May 3, 1947.

The emphasis in the new constitution was clearly on the people rather than on the imperial. After the war, the Japanese people's sovereignty was guaranteed by a 31-article bill of rights, with Article 9 renouncing forever "war as a sovereign right of the nation" and pledging that "land, sea and air forces" would "never be maintained." The emperor was declared to be no longer "sacred" or "inviolable," and was described as the "symbol of the state and of the unity of the people." The constitution also established a bicameral Diet, with the most power concentrated in the House of Representatives; the members of this body would now be elected by both men and women. Further, the old peerage was abolished and the House of Peers was replaced by a House of Councillors. The Privy Council was dissolved and the prime minister was to be chosen by the Diet from its members; an independent judiciary was also established with the right of judicial review (Watanabe 2003).

In spite of its rapid creation and foreign-based inspiration, the new Japanese constitution received wide public support. While the ruling conservatives desired to revise it following Japan's regaining its sovereignty in 1952, and an official commission preferred changes in the constitution in 1964, no political group in postwar Japan has been able to secure the two-thirds majority required to make the revisions. Although parts of the structure established by the document have been modified through administrative actions (including a reversal of the principle of decentralization in areas such as the police, the school system, and some spheres of local administration), and while Article 9 has been compromised by the decision to form a National Police Reserve that in 1954 became the Self-Defense Forces, the basic principles of the constitution have enjoyed support among all factions in Japanese politics. Executive leadership proved to be the chief asset of the new institutions, and, with the abolition of the competing forces that had hampered the premiers of the 1930s, Japan's postwar prime ministers have found themselves firmly in charge of the administration and (with limited rearmament) the armed forces as well. As a result, responsible Japanese leadership eventually replaced the more nebulous claims of imperial authority of the past.

Industrialization in Post-War Japan. In his book, The Postwar Japanese Economy (1995), Nakamura Takafusa locates the "roots" of both industrial policy and administrative guidance in the controlled Japanese economy of the 1930's and he calls the Ministry of International Trade and Industry (MITI) the "reincarnation" of similar Japanese wartime agencies. By common agreement among the Japanese, the economic "miracle" first appeared to them during the early 1960s. In its September 1 and 8, 1962 issues, the Economist of London published a long two-part essay entitled "Consider Japan." These essays were quickly translated and published in Tokyo as Odorokubeki Nihon ("Amazing Japan"). Up to this point in time, Johnson reports that the majority of Japanese simply did not believe the rate of economic growth they were achieving (a rate unprecedented in Japanese history), and their pundits and economists were writing cautionary articles about how the boom would fail, about the crises to come, and about the irrationality of government policy. "Yet where the Japanese had been seeing irresponsible budgets, 'overloans,' and tremendous domestic needs, the Economist saw expansion of demand, high productivity, comparatively serene labor relations, and a very high rate of savings" (Johnson 1982:97). As a result, there has been an enormous amount of attention, both domestic and foreign, of the postwar Japanese economy and the search for the source of the "miracle." (Johnson 1982).

Proponents of the "no-miracle-occurred" school of analysis do not literally assert that nothing happened to Japan's economy; however, they maintain that what happened was not miraculous but rather a normal outgrowth of market forces. Patrick argues, "I am of the school which interprets Japanese economic performance as due primarily to the actions and efforts of private individuals and enterprises responding to the opportunities provided in quite free markets for commodities and labor. While the government has been supportive and indeed has done much to create the environment for growth, its role has often been exaggerated" (Patrick 1977:239). However, there is a problem, Patrick concedes: "It is disturbing that the macro explanations of Japanese postwar economic performance -- in terms of increases in aggregate labor and capital inputs and in their more productive allocation -- leave 40% plus of output growth and half of labor productivity growth unexplained" (Patrick 1977:225). If it could be shown that the government's industrial policy made the difference in the rate of investment in certain economically strategic industries (for instance, in developing the production and successful marketing of petrochemicals or automobiles), then perhaps it could be said that its role has not been exaggerated (Johnson, 1982). Tabb argues that "the Japanese system replaces Taylorism and Fordism with flexible production" (p. 37); however, Moore (1997) believes this assessment falls short of the mark by viewing these approaches as primarily being production techniques without taking into consideration the fundamental differences in cultures that contributed to the process.

According to Odagiri (1992), the rapidity with which post-war Japan caught up with EuroAmerican economic standards and even surpassed them in several sectors, has naturally created considerable interest, as well as suspicion, among Westerners concerning Japan's economy and management. This interest has been further reinforced by the fact that the Japanese do not share the Protestant ethic that has been believed to be imperative to Western capitalist development (Odagiri 1992). The result has been a denial of a claim that Japan followed the same ground rules of capitalist development as the West.

From this perspective, it is little wonder that the popular explanations have stressed either cultural differences or a deliberate conspiracy undertaken by the government and industries (Odagiri 1992).

According to the culture theory, Japanese culture differs from Western culture in ways that were naturally favorable for economic development. The most frequently cited of these types of differences are the emphasis placed on harmony rather than rivalry in interpersonal relationships (frequently quoted in this connection is the first Japanese constitution established by Prince Shotoku in the year 604, which stated in its first article that harmony, "wa," should be most highly respected), and the loyalty and paternalism which operate in essentially vertical social relations (Nakane 1970). These, it has been argued, have led the Japanese to create efficient teamwork, a commitment to company or social goals, and a close collaboration between labor, business, and government (Odagiri 1992).

According to the conspiracy theory, the Japanese have united to achieve a shared national goal of economic growth. The government, it has been suggested, specifically designated which industries should be promoted, and guided the target industries in this direction through a system of subsidies, unfair trade practices, or persuasion. The businesses followed this guidance and, in return, the government was responsive to their views and coordinated them to avoid damaging competition. In sum, the whole economy has behaved like a single entity, a "Japan Inc." that pursued the mutual goals of attaining economic growth and succeeding in international markets, with the government acting as the supreme decision-maker (Odagiri 1992). Johnson (1982) agrees in part with the latter, and notes that the factors that contributed to Japans high-speed post-war growth included, on the protective side: discriminatory tariffs, preferential commodity taxes on national products, import restrictions based on foreign currency allocations, and foreign currency controls. Furthermore, on the developmental (or what the Japanese call the "nurturing") side, these initiatives also included the supply of low-interest funds to targeted industries through governmental financial organs, subsidies, special amortization benefits, exclusion from import duties of designated critical equipment, licensing of imported foreign technology, providing industrial parks and transportation facilities for private businesses through public investments, and "administrative guidance" by MITI transportation facilities for private businesses through public investments, and "administrative guidance" by MITI (Johnson 1982:29).

At any rate, heavy regulation and controls in the financial sector were instituted during the war and immediate post-war years that were carefully designed to promote economic development (Carlile & Tilton 1998). According to Black's Law Dictionary (1990), a conspiracy is "a combination or confederacy between two or more persons formed for the purpose of committing, by their joint efforts, some unlawful or criminal act, or some act which is lawful in itself, but becomes unlawful when done by the concerted actions of the conspirators" (309). It would seem that the Japanese government and big business were, in fact, closely aligned in what they wanted and how they were going to achieve it in the post-war years, but whether this collusion can be categorized as being "criminal" is questionable. For instance, Carlile and Tilton (1998) note a turning point came with the implementation of capital liberalization in the mid-1960s. "The Japanese government (that is, the Ministry of Finance [MOF] and the Ministry of International Trade and Industry [MITI]) and business leaders were determined to protect Japanese companies from the takeover bids of foreign companies that were expected once capital liberalization occurred" (39). Given Japan's diffuse ownership structure, government officials and top managements of large firms were concerned that foreign firms would quickly take control of Japan's leading companies. Fears of this type were only exacerbated after 1962 in response to a prolonged bear market. Then, the average listed share price in the first section of the Tokyo Stock Exchange (TSE) fell by almost 50% between its October 1961 peak and April 1965 trough. As a result, the Japanese government made to decision to support stock prices in response and used these operations to facilitate the establishment of a retinue of stable shareholders in Japan's leading firms. By so doing, the Japanese state's previously neutral stance toward the structure of corporate ownership shifted to a decidedly activist one (Carlile & Tilton 1998). This decision would have a profound effect on the automobile industry in particular. Initially, the big business community strongly favored the abolition of ban on holding companies found in Article 9 of the Antimonopoly Law as a way to counteract the threat of foreign takeovers of Japanese firms.

Other measures that were proposed to oppose such takeovers included raising the 10% ceiling on shareholding by financial institutions and placing provisions in a company's articles of incorporation (teikan) that would prevent foreign investors from owning shares and attaining board member status in a company. In 1967, a committee of Japanese businesspersons maintained that the introduction of holding companies would facilitate negotiations in situations in which mergers would be difficult or impossible to realize for the companies involved to achieve economies of scale through holding-company organized cooperative efforts (Carlile & Tilton 1998). In addition, MITI drafted a variety of plans that incorporated these ideas, and the Council on Foreign Capital subsequently initiated discussions about the authorization of holding companies for the purpose of establishing stable shareholders and encouraging mergers and acquisitions (Carlile & Tilton 1998).

While the proposed abolition of Article 9 never came to fruition, this failure was not just a result of Fair Trade Commission opposition; it was also due to the fact that in the interim significant progress had been made in establishing stable shareholders. According to Carlile and Tilton, a Deliberation Council for Coordinating Capital Increases (ZA-shi ChA-sei Kondankai) was created in 1961 and aggressively sought to suppress increases in corporate capital during the mid-1960s. This effort was quickly followed by the creation of new joint public-private institutions, known as the Japan Joint Securities Corporation (Nihon KyA-dA? ShA-ken Kabushiki Kaisha) and the Japan Securities Holding Association (Nihon ShA-ken Hoyu Kumiai). These two quasi-governmental organizations were nominally tasked with maintaining stock prices; the agencies used special loans provided by the Bank of Japan and ultimately purchased approximately 6% of all shares listed in the first section of the TSE from the stock market itself, from investment trusts (mutual funds), and from securities companies (Carlile & Tilton 1998). This volume of purchases was adequate to achieve the desired effect on stock prices.