Economic history of Japan

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History of Japan
Paleolithic 35000–14000 BC Jōmon period 14000–400 BC Yayoi period 400 BC – AD 250 Kofun period 250–538 Asuka period 538–710 Nara period 710–794 Heian period 794–1185 Kamakura period 1185–1333 Kemmu restoration 1333–1336 Muromachi period 1336–1573 Nanboku-chō period 1336–1392 Sengoku period Azuchi-Momoyama period 1568–1603 Nanban trade Edo period 1603–1868 Bakumatsu Meiji period 1868–1912 Meiji Restoration Taishō period 1912–1926 Japan in WWI Shōwa period 1926–1989 Japanese militarism Occupation of Japan Post-Occupation Japan Heisei period 1989–present
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The economic history of Japan is one of the most studied for its spectacular growth after the Meiji Revolution to be the first non European Power and after the Second World War when the island nation rose to become the world's second largest economy.

1 First contacts with Europe (16th century)
- 1.1 Trade with Europe
2 Edo period
3 From the Meiji Restoration to World War II
4 Militarism
5 Postwar period
- 5.1 Occupation
- 5.2 Rebuilding
6 Oil crisis
7 Factors of growth
8 1980s
9 The Evolving Occupational Structure
10 Timeline
11 See also
12 References

[edit] First contacts with Europe (16th century)

Main article: Nanban trade period

Renaissance Europeans were quite admiring of Japan when they reached the country in the 16th century. Japan was considered as a country immensely rich in precious metals, mainly owing to Marco Polo's accounts of gilded temples and palaces, but also due to the relative abundance of surface ores characteristic of a volcanic country, before large-scale deep-mining became possible in Industrial times. Japan was to become a major exporter of copper and silver during the period.

The Samurai Hasekura Tsunenaga in Rome in 1615, Coll. Borghese, Rome.

Japan was also perceived as a sophisticated feudal society with a high culture and a strong pre-industrial technology. It was densely populated and urbanized. It had Buddhist “universities” larger than any learning institution in the West, such as Salamanca or Coimbra.^{[citation needed]} Prominent European observers of the time seemed to agree that the Japanese "excel not only all the other Oriental peoples, they surpass the Europeans as well" (Alessandro Valignano, 1584, "Historia del Principo y Progresso de la Compania de Jesus en las Indias Orientales).

Early European visitors were amazed by the quality of Japanese craftsmanship and metalsmithing. This stems from the fact that Japan itself is rather poor in natural resources found commonly in Europe, especially iron. Thus, the Japanese were famously frugal with their consumable resources; what little they had they used with expert skill. Her copper and steel were the best in the world, her weapons the sharpest, her paper industries were unequaled.

[edit] Trade with Europe

The cargo of the first Portuguese ships (usually about 4 smaller-sized ships every year) arriving in Japan almost entirely consisted of Chinese goods (silk, porcelain). The Japanese were very much looking forward to acquiring such goods, but had been prohibited from any contacts with the Emperor of China, as a punishment for Wakō pirate raids. The Portuguese (who were called Nanban, lit. Southern Barbarians) therefore found the opportunity to act as intermediaries in Asian trade.

A Portuguese carrack in Nagasaki, 17th century.

From the time of the acquisition of Macau in 1557, and their formal recognition as trade partners by the Chinese, the Portuguese Crown started to regulate trade to Japan, by selling to the highest bidder the annual "Capitaincy" to Japan, in effect conferring exclusive trading rights for a single carrack bound for Japan every year. The carracks were very large ships, usually between 1000 and 1500 tons, about double or triple the size of a large galleon or junk.

That trade continued with few interruptions until 1638, when it was prohibited on the ground that the ships were smuggling priests into Japan.

Portuguese trade was progressively more and more challenged by Chinese smugglers on junks, Japanese Red Seal Ships from around 1592 (about ten ships every year), Spanish ships from Manila from around 1600 (about one ship a year), the Dutch from 1609, the English from 1613 (about one ship per year).

The Dutch, who, rather than "Nanban" were called "Kōmō" (Jp:紅毛, lit. "Red Hair") by the Japanese, first arrived in Japan in 1600, onbard the Liefde. Their pilot was William Adams , the first Englishman to reach Japan. In 1605, two of the Liefde's crew were sent to Pattani by Tokugawa Ieyasu, to invite Dutch trade to Japan. The head of the Pattani Dutch trading post, Victor Sprinckel, refused on the ground that he was too busy dealing with Portuguese opposition in Southeast Asia. In 1609 however, the Dutch Jacques Specx arrived with two ships in Hirado, and through Adams obtained trading privileges from Ieyasu.

The Dutch also engaged in piracy and naval combat to weaken Portuguese and Spanish shipping in the Pacific, and ultimately became the only westerners to be allowed access to Japan from the small enclave of Dejima after 1638 and for the next two centuries.

[edit] Edo period

A Japanese-made clockwatch of the 18th century, or Wadokei.Then time changed in the season because from sunrise to sunset made 12 hours and from sunset to sunrise made 12 hours

The beginning of the Edo period coincides with the last decades of the Nanban trade period, during which intense interaction with European powers, on the economic and religious plane, took place. It is at the beginning of the Edo period that Japan built her first ocean-going Western-style warships, such as the San Juan Bautista, a 500-ton galleon-type ship that transported a Japanese embassy headed by Hasekura Tsunenaga to the Americas, which then continued to Europe. Also during that period, the bakufu commissioned around 350 Red Seal Ships, three-masted and armed trade ships, for intra-Asian commerce. Japanese adventurers, such as Yamada Nagamasa, were active throughout Asia.

In order to eradicate the influence of Christianization, Japan entered in a period of isolation called sakoku, during which its economy enjoyed stability and mild progress.

Economic development during the Edo period included urbanization, increased shipping of commodities, a significant expansion of domestic and, initially, foreign commerce, and a diffusion of trade and handicraft industries. The construction trades flourished, along with banking facilities and merchant associations. Increasingly, han authorities oversaw the rising agricultural production and the spread of rural handicrafts.

By the mid-eighteenth century, Edo had a population of more than 1 million and Osaka and Kyoto each had more than 400,000 inhabitants. Many other castle towns grew as well. Osaka and Kyoto became busy trading and handicraft production centers, while Edo was the center for the supply of food and essential urban consumer goods.

Rice was the base of the economy, as the daimyo collected the taxes from the peasants in the form of rice. Taxes were high, about 40% of the harvest. The rice was sold at the fudasashi market in Edo. To raise money, the daimyo used forward contracts to sell rice that was not even harvested yet. These contracts were similar to modern futures trading.

During the period, Japan progressively studied Western sciences and techniques (called rangaku, literally "Dutch studies") through the information and books received through the Dutch traders in Dejima. The main areas that were studied included geography, medicine, natural sciences, astronomy, art, languages, physical sciences such as the study of electrical phenomena, and mechanical sciences as exemplified by the development of Japanese clockwatches, or wadokei, inspired from Western techniques.

[edit] From the Meiji Restoration to World War II

Since the mid-nineteenth century, when the Tokugawa government first opened the country to Western commerce and influence, Japan has gone through two periods of economic development. The first began in earnest in 1868 and extended through World War II; the second began in 1945 and continued into mid-1980s.

In the Meiji period (1868-1912), leaders inaugurated a new Western-based education system for all young people, sent thousands of students to the United States and Europe, and hired more than 3,000 Westerners to teach modern science, mathematics, technology, and foreign languages in Japan (O-yatoi gaikokujin). The government also built railroads, improved roads, and inaugurated a land reform program to prepare the country for further development.

To promote industrialization, the government decided that, while it should help private business to allocate resources and to plan, the private sector was best equipped to stimulate economic growth. The greatest role of government was to help provide the economic conditions in which business could flourish. In short, government was to be the guide and business the producer. In the early Meiji period, the government built factories and shipyards that were sold to entrepreneurs at a fraction of their value. Many of these businesses grew rapidly into the larger conglomerates. Government emerged as chief promoter of private enterprise, enacting a series of probusiness policies.

In the mid 1930s, the Japanese nominal wage rates were 10 times less than the one of the U.S (based on mid-1930s exchange rates), while the price level is estimated to have been about 44% the one of the U.S.^[1]

Comparison of GDP per capita between East-Asian Nations and the U.S. in 1935:

Country	GDP/capita, 1935$ (Liu-Ta-Chung ^[2])	GDP-PPP/capita, 1990$ (Fukao ^[3])	GDP-PPP/capita, 1990$ (Maddison ^[4])
U.S.	540	5,590	5,590
Japan (excl. Taiwan and Korea)	64	1,745	2,154
Taiwan	42	1,266	1,212
Korea	24	662	1,224
China	18	543	562

[edit] Militarism

Before World War II, Japan built an extensive empire that included Taiwan, Korea, Manchuria, and parts of northern China. The Japanese regarded this sphere of influence as a political and economic necessity, preventing foreign states from strangling Japan by blocking its access to raw materials and crucial sea-lanes, as Japan possessed very few natural and mining resources of it own, although it imported large amounts of coal from Chosen, Manchukuo, and some regions of occupied China. Japan's large military force was regarded as essential to the empire's defense.

Rapid growth and structural change characterized Japan's two periods of economic development since 1868. In the first period, the economy grew only moderately at first and relied heavily on traditional agriculture to finance modern industrial infrastructure. By the time the Russo-Japanese War began in 1904, 65% of employment and 38% of the gross domestic product (GDP) was still based on agriculture, but modern industry had begun to expand substantially. By the late 1920s, manufacturing and mining contributed 23% of GDP, compared with 21% for all of agriculture. Transportation and communications had developed to sustain heavy industrial development.

During World War I, Japan used the absence of the war-torn European competitors on the world market to advance its economy, generating a trade surplus for the first time since the isolation in the Edo period.

In the 1930s, the Japanese economy suffered less from the Great Depression than most industrialized nations, expanding at the rapid rate of 5% of GDP per year. Manufacturing and mining came to account for more than 30% of GDP, more than twice the value for the agricultural sector. Most industrial growth, however, was geared toward expanding the nation's military power.

Beginning in 1937 with significant land seizures in China, and to a much greater extent after 1941, when annexations and invasions across Southeast Asia and the Pacific created the Greater East Asia Co-Prosperity Sphere, the Japanese government sought to acquire and develop critical natural resources in order to secure economic independence. Among the natural resources Japan seized and developed were coal in China (where production rose substantially under Japanese control, from 15 million metric tonnes in 1936 to 58 million metric tonnes in 1942)^{[citation needed]}, sugarcane in the Philippines, petroleum from the Dutch East Indies and Burma, and tin and bauxite from the Dutch East Indies and Malaya. Japan also purchased the rice production of Siam, Burma, and Cochinchina.

During the early stages of Japan's expansion, the Japanese economy expanded considerably. Japanese iron production rose from 3,355,000 tonnes in 1937 to 6,148,000 tonnes in 1943.^{[citation needed]} Steel production rose from 6,442,000 tonnes to 8,838,000 tonnes over the same time period. In 1941 Japanese aircraft industries had capacity to manufacture 10,000 aircraft per year. From 1941 to September 1944 defence production (including airplanes and vessels) rose by 94%.^{[citation needed]} Much of this economic expansion benefitted the "zaibatsu", large industrial conglomerates.

Over the course of the Pacific War, the economies of Japan and its occupied territories all suffered severely. Inflation was rampant; prices in Japan in 1944 were 3.25 times higher than in 1936.^{[citation needed]} Japanese heavy industry, forced to devote nearly all its production to meeting military needs, was unable to meet the commercial requirements of Japan (which had previously relied on trade with Western countries for their manufactured goods). Local industries were unable to produce at high enough levels to avoid severe shortfalls. Furthermore, maritime trade, upon which the Empire depended greatly, was sharply curtailed by damage to the Japanese merchant fleet over the course of the war. From a fleet of 6,000,000 tonnes of shipping in 1941, Japan was reduced to one of 2,000,000 tonnes by 1944.^{[citation needed]}

By the end of the war, what remained of the Japanese Empire was wracked by shortages, inflation, and currency devaluation. Transport was nearly impossible, and industrial production in Japan's shattered cities ground to a halt. The destruction wrought by the war eventually brought the Japanese economy to a virtual standstill.

[edit] Postwar period

World War II wiped out many of the gains Japan had made since 1868. About 40% of the nation's industrial plants and infrastructure were destroyed, and production reverted to levels of about fifteen years earlier. The people were shocked by the devastation and swung into action. New factories were equipped with the best modern machines, giving Japan an initial competitive advantage over the victor states, who now had older factories. As Japan's second period of economic development began, millions of former soldiers joined a well-disciplined and highly educated work force to rebuild Japan. Japan's colonies were lost as a result of World War II, but since then the Japanese have extended their economic influence throughout Asia and beyond.

[edit] Occupation

The United States occupation of Japan (1945-52) resulted in the rebuilding of the nation and the creation of a democratic state. United States assistance totaled about US$1.9 billion during the occupation, or about 15% of the nation's imports and 4% of GNP in that period. About 59% of this aid was in the form of food, 15% in industrial materials, and 12% in transportation equipment. United States grant assistance, however, tapered off quickly in the mid-1950s. United States military procurement from Japan peaked at a level equivalent to 7% of Japan's GNP in 1953 and fell below 1% after 1960. A variety of United States-sponsored measures during the occupation, such as land reform, contributed to the economy's later performance by increasing competition. In particular, the postwar purge of industrial leaders allowed new talent to rise in the management of the nation's rebuilt industries. Finally, the economy benefited from foreign trade because it was able to expand exports rapidly enough to pay for imports of equipment and technology without falling into debt, as had a number of developing nations in the 1980s. After many years of hard work Japan has become one of the richest country in the world.

[edit] Rebuilding

The early postwar years were devoted to rebuilding lost industrial capacity: major investments were made in electric power, coal, iron, steel, and chemical fertilizers. By the mid-1950s, production matched prewar levels. Released from the demands of military-dominated government, the economy not only recovered its lost momentum but also surpassed the growth rates of earlier periods. Between 1953 and 1965, GDP expanded by more than 9% per year, manufacturing and mining by 13%, construction by 11%, and infrastructure by 12%. In 1965 these sectors employed more than 41% of the labor force, whereas only 26% remained in agriculture.

Japan's highly acclaimed postwar education system contributed strongly to the modernizing process. The world's highest literacy rate and high education standards were major reasons for Japan's success in achieving a technologically advanced economy. Japanese schools also encouraged discipline, another benefit in forming an effective work force.

The mid-1960s ushered in a new type of industrial development as the economy opened itself to international competition in some industries and developed heavy and chemical manufactures. Whereas textiles and light manufactures maintained their profitability internationally, other products, such as automobiles, ships, and machine tools assumed new importance. The value added to manufacturing and mining grew at the rate of 17% per year between 1965 and 1970. Growth rates moderated to about 8% and evened out between the industrial and service sectors between 1970 and 1973, as retail trade, finance, real estate, information, and other service industries streamlined their operations.

[edit] Oil crisis

Japan faced a severe economic challenge in the mid-1970s. The world oil crisis in 1973 shocked an economy that had become virtually dependent on foreign petroleum. Japan experienced its first postwar decline in industrial production, together with severe price inflation. The recovery that followed the first oil crisis revived the optimism of most business leaders, but the maintenance of industrial growth in the face of high energy costs required shifts in the industrial structure.

Changing price conditions favored conservation and alternative sources of industrial energy. Although the investment costs were high, many energy-intensive industries successfully reduced their dependence on oil during the late 1970s and 1980s and enhanced their productivity. Advances in microcircuitry and semiconductors in the late 1970s and 1980s led to new growth industries in consumer electronics and computers, and to higher productivity in pre-established industries. The net result of these adjustments was to increase the energy efficiency of manufacturing and to expand so-called knowledge-intensive industries. The service industries expanded in an increasingly postindustrial economy.

Structural economic changes, however, were unable to check the slowing of economic growth as the economy matured in the late 1970s and 1980s, attaining annual growth rates no better than 4 to 6%. But these rates were remarkable in a world of expensive petroleum and in a nation of few domestic resources. Japan's average growth rate of 5% in the late 1980s, for example, was far higher than the 3.8% growth rate of the United States. Despite more petroleum price increases in 1979, the strength of the Japanese economy was apparent. It expanded without the double-digit inflation that afflicted other industrial nations (and that had bothered Japan itself after the first oil crisis in 1973). Japan experienced slower growth in the mid-1980s, but its demand-sustained economic boom of the late 1980s revived many troubled industries.

[edit] Factors of growth

Complex economic and institutional factors affected Japan's postwar growth. First, the nation's prewar experience provided several important legacies. The Tokugawa period (1600-1867) bequeathed a vital commercial sector in burgeoning urban centers, a relatively well-educated elite (although one with limited knowledge of European science), a sophisticated government bureaucracy, productive agriculture, a closely unified nation with highly developed financial and marketing systems, and a national infrastructure of roads. The buildup of industry during the Meiji period to the point where Japan could vie for world power was an important prelude to postwar growth and provided a pool of experienced labor following World War II.

Second, and more important, was the level and quality of investment that persisted through the 1980s. Investment in capital equipment, which averaged more than 11% of GNP during the prewar period, rose to about 20% of GNP during the 1950s and to more than 30% in the late 1960s and 1970s. During the economic boom of the late 1980s, the rate still hovered around 20%. Japanese businesses imported the latest technologies to develop the industrial base. As a latecomer to modernization, Japan was able to avoid some of the trial and error earlier needed by other nations to develop industrial processes. In the 1970s and 1980s, Japan improved its industrial base through technology licensing, patent purchases, and imitation and improvement of foreign inventions. In the 1980s, industry stepped up its research and development, and many firms became famous for their innovations and creativity.

Japan's labor force contributed significantly to economic growth, not only because of its availability and literacy but also because of its reasonable wage demands. Before and immediately after World War II, the transfer of numerous agricultural workers to modern industry resulted in rising productivity and only moderate wage increases. As population growth slowed and the nation became increasingly industrialized in the mid-1960s, wages rose significantly. However, labor union cooperation generally kept salary increases within the range of gains in productivity.

High productivity growth played a key role in postwar economic growth. The highly skilled and educated labor force, extraordinary savings rates and accompanying levels of investment, and the low growth of Japan's labor force were major factors in the high rate of productivity growth.

The nation has also benefited from economies of scale. Although medium-sized and small enterprises generated much of the nation's employment, large facilities were the most productive. Many industrial enterprises consolidated to form larger, more efficient units. Before World War II, large holding companies formed wealth groups, or zaibatsu, which dominated most industry. The zaibatsu were dissolved after the war, but keiretsu—large, modern industrial enterprise groupings—emerged. The coordination of activities within these groupings and the integration of smaller subcontractors into the groups enhanced industrial efficiency.

Japanese corporations developed strategies that contributed to their immense growth. Growth-oriented corporations that took chances competed successfully. Product diversification became an essential ingredient of the growth patterns of many keiretsu. Japanese companies added plant and human capacity ahead of demand. Seeking market share rather than quick profit was another powerful strategy.

Finally, circumstances beyond Japan's direct control contributed to its success. International conflicts tended to stimulate the Japanese economy until the devastation at the end of World War II. The Russo-Japanese War (1904-5), World War I (1914- 18), the Korean War (1950-53), and the Second Indochina War (1954-75) brought economic booms to Japan. In addition, benign treatment from the United States after World War II facilitated the nation's reconstruction and growth.

[edit] 1980s

Throughout the 1970s, Japan had the world's second largest gross national product (GNP)—just behind the United States— and ranked first among major industrial nations in 1990 in per capita GNP at US$23,801, up sharply from US$9,068 in 1980. After a mild economic slump in the mid-1980s, Japan's economy began a period of expansion in 1986 that continued until it again entered a recessionary period in 1992. Economic growth averaging 5% between 1987 and 1989 revived industries, such as steel and construction, which had been relatively dormant in the mid-1980s, and brought record salaries and employment. In 1992, however, Japan's real GNP growth slowed to 1.7%. Even industries such as automobiles and electronics that had experienced phenomenal growth in the 1980s entered a recessionary period in 1992. The domestic market for Japanese automobiles shrank at the same time that Japan's share of the United States' market declined. Foreign and domestic demand for Japanese electronics also declined, and Japan seemed on the way to losing its leadership in the world semiconductor market to the United States, Korea and Taiwan.

Unlike the economic booms of the 1960s and 1970s, when increasing exports played the key role in economic expansion, domestic demand propelled the Japanese economy in the late 1980s. This development involved fundamental economic restructuring, moving from dependence on exports to reliance on domestic demand. The boom that started in 1986 was generated by the decisions of companies to increase private plant and equipment spending and of consumers to go on a buying spree. Japan's imports grew at a faster rate than exports. Japanese postwar technological research was carried out for the sake of economic growth rather than military development. The growth in high-technology industries in the 1980s resulted from heightened domestic demand for high-technology products and for higher living, housing, and environmental standards; better health, medical, and welfare opportunities; better leisure-time facilities; and improved ways to accommodate a rapidly aging society. This reliance on domestic consumption also became a handicap as consumption grew by only 2.2% in 1991 and at the same rate again in 1992.

During the 1980s, the Japanese economy shifted its emphasis away from primary and secondary activities (notably agriculture, manufacturing, and mining) to processing, with telecommunications and computers becoming increasingly vital. Information became an important resource and product, central to wealth and power. The rise of an information-based economy was led by major research in highly sophisticated technology, such as advanced computers. The selling and use of information became very beneficial to the economy. Tokyo became a major financial center, home of some of the world's major banks, financial firms, insurance companies, and the world's largest stock exchange, the Tokyo Securities and Stock Exchange. Even here, however, the recession took its toll. In 1992, the Nikkei 225 stock average began the year at 23,000 points, but fell to 14,000 points in mid-August before leveling off at 17,000 by the end of the year.

[edit] The Evolving Occupational Structure

As late as 1955, some 40% of the labor force still worked in agriculture, but this figure had declined to 17% by 1970 and to 7.2% by 1990. The government estimated in the late 1980s that this figure would decline to 4.9% by 2000, as Japan imported more and more of its food and small family farms disappeared.

Japan's economic growth in the 1960s and 1970s was based on the rapid expansion of heavy manufacturing in such areas as automobiles, steel, shipbuilding, chemicals, and electronics. The secondary sector (manufacturing, construction, and mining) expanded to 35.6% of the work force by 1970. By the late 1970s, however, the Japanese economy began to move away from heavy manufacturing toward a more service-oriented (tertiary sector) base. During the 1980s, jobs in wholesaling, retailing, finance, insurance, real estate, transportation, communications, and government grew rapidly, while secondary-sector employment remained stable. The tertiary sector grew from 47% of the work force in 1970 to 59.2% in 1990.