Japan - Postwar Economy
Japan’s postwar economy developed from the remnants of an industrial infrastructure that suffered widespread destruction during World War II. After the end of World War II, Japan's economy was in a shambles, and its international economic relations were almost completely disrupted. Initially, imports were limited to essential food and raw materials, mostly financed by economic assistance from the United States. Because of extreme domestic shortages, exports did not begin to recover until the Korean War (1950-53), when special procurement by United States armed forces created boom conditions in indigenous industries. In 1952, at the close of the Allied Occupation, Japan was a “less-developed country,” with per capita consumption roughly one fifth that of the United States. Over the following two decades, Japan averaged an annual growth rate of 8%, enabling it to become the first country to move from “less developed” to “developed” status in the postwar era. The reasons for this include high rates of both personal savings and privatesector facilities investment, a labor force with a strong work ethic, an ample supply of cheap oil, innovative technology, and effective government intervention in private-sector industries.
By 1954 economic recovery and rehabilitation were essentially complete. For much of the 1950s, however, Japan had difficulty exporting as much as it imported, leading to chronic trade and current account deficits. Keeping these deficits under control, so that Japan would not be forced to devalue its currency under the Bretton Woods System (see Glossary) of fixed exchange rates that prevailed at the time, was a primary concern of government officials. Stiff quotas and tariffs on imports were part of the policy response. By 1960 Japan accounted for 3.6 percent of all exports of noncommunist countries.
Japan was a major beneficiary of the swift growth attained by the postwar world economy under the principles of free trade advanced by the International Monetary Fund and the General Agreement on Tariffs and Trade, and in 1968 its economy became the world’s second largest, following that of the United States.
During the 1960s, the dollar value of exports grew at an average annual rate of 16.9 percent, more than 75 percent faster than the average rate of all noncommunist countries. By 1970 exports had risen to nearly 6.9 percent of all noncommunist-world exports. The rapid productivity growth in manufacturing industries made Japanese products more competitive in world markets at the fixed exchange rate for the yen (for value of the yen--see Glossary) during the decade, and the chronic deficits that the nation faced in the 1950s had disappeared by the middle of the 1970s. International pressure to dismantle quota and tariff barriers mounted, and Japan began moving in this direction.
Between 1950 and 1970, the percentage of Japanese living in cities rose from 38% to 72%, swelling the industrial work force. The competitive strength of Japanese industry increased steadily, with exports growing, on average, 18.4% per year during the 1960s. After the mid-1960s, a current account balance surplus was achieved every year except for a couple years following the oil crisis of 1973. The economic growth in this era, supported by strong private-sector facilities investment based on a high personal savings ratio, was accompanied by significant changes in Japan’s industrial structure.
Whereas formerly the mainstays of the economy were agriculture and light manufacturing, the focus shifted to heavy industry. Iron and steel, shipbuilding, machine tools, motor vehicles, and electronic devices came to dominate the industrial sector. In December 1960, Prime Minister Ikeda Hayato announced an income-doubling plan which set a goal of 7.8% annual growth during the decade of 1961–1970. Government economic planning aimed at expansion of the industrial base proved exceedingly successful, and by 1968 national income had doubled, achieving an average annual growth rate of 10%.
The 1970s brought major, wrenching changes for Japan's external relations. The decade began with the end of the fixed exchange rate for the yen (a change brought about mainly by rapidly rising Japanese trade and current account surpluses) and with a strong rise in the value of the yen under the new system of floating rates. Japan also faced sharply higher bills for imports of energy and other raw materials. The new exchange rates and the rise in raw material prices meant that the surpluses of the decade's beginning were lost, and large trade deficits followed in the wake of the oil price shocks of 1973 and 1979. Expanding the country's exports remained a priority in the face of these raw material supply shocks, and during the decade exports continued to expand at a high annual average rate of 21 percent.
As the international competitiveness of Japanese industry strengthened, exports increased and the trade surplus grew while at the same time the United State's trade deficit increased, so in response, in August 1971 the United States ceased the conversion of dollars to gold and established import surcharges. This was called the "Nixon Shock," and this was used as an opportunity to switch the major world currencies from a fixed exchange rate system to a variable exchange rate system.
This caused the yen to strengthen, so the Japanese government, with was worried about a strong yen recession, implement aggressive fiscal support, easier financing, and a low-interest-rate policy. This resulted in pouring too much money into market, which in turn caused prices to rise. In addition, poor weather overseas caused grain prices to rise, and then in October 1973 the 4th Middle East War broke out, causing the price of crude oil from Persian Gulf oil-producing countries to rise greatly. These factors caused the February 1974 wholesale price index in Japan to rise 37% over the same month the previous year to create a state of runaway inflation. At this time the mass media blamed trading company activities for the price increases saying the trading companies were probably cornering the market or hording.
Until that time the general trading companies had been well thought of as Japan's economic pioneers for developing overseas markets, investing in new businesses, and other activities, but as sales grew to several trillion yen, the sheer size of the trading companies was criticized. In addition, as the Japanese economy became massive, the accustomed double-digit growth changed to single-digit growth and industry changed from heavy industries, such as steel and heavy equipment, to light industries, such as electronics.
Prime Minister Tanaka Kakuei’s Basic Economic and Social Plan (February 1973) forecast continued high growth rates for the period 1973–1977. However, by 1973 domestic macroeconomic policy had resulted in a rapid increase in the money supply, which led to extensive speculation in the real estate and domestic commodity markets.
Japan was already suffering from double-digit inflation when, in October 1973, the outbreak of war in the Middle East led to an oil crisis. Energy costs rose steeply and the yen’s exchange rate, which had not reflected its true strength, was shifted to a floating rate. The consequent recession lowered expectations of future growth, resulting in reduced private investment. Economic growth slowed from the 10% level to an average of 3.6% during the period 1974–1979, and 4.4% during the decade of the 1980s.
The Iranian Revolution that occurred in 1979 caused a temporary stoppage in crude oil production, sending up the price of crude oil again, moving it from $10 a barrel to $30 a barrel in 1980. This second oil crisis in 1979 contributed to a fundamental shift in Japan’s industrial structure from emphasis on heavy industry to development of new fields, such as the VLSI semiconductor industry. By the late 1970s, the computer, semiconductor, and other technology and information-intensive industries had entered a period of rapid growth. As in the high-growth era, exports continued to play an important role in Japan’s economic growth in the 1970s and 1980s. However, the trade friction that accompanied Japan’s growing balance of payments surplus brought increasingly strident calls for Japan to further open domestic markets and to focus more on domestic demand as an engine of economic growth.
Most of the concerns of the 1970s diminished in the 1980s. Oil and other raw material prices fell dramatically, and Japan's trade deficits turned quickly to enormous trade surpluses by the middle of the decade. In response to these surpluses, the value of the yen rose against that of other currencies in the last half of the decade, but the surpluses proved surprisingly resilient to this change. The large surpluses, combined with foreign perceptions that Japan's import markets were still relatively closed, exacerbated tension between Japan and a number of its principal trading partners, especially the United States. A rapid increase in imports of manufactured goods after 1987 eased some of these tensions, but as the decade ended, friction still continued.
Through most of the postwar period, foreign investment was not a significant part of Japan's external economic relations. Both domestic and foreign investments were carefully controlled by government regulations, which kept the investment flows small. These controls applied to direct investment in the creation of subsidiaries under the control of a parent company, portfolio investment, and lending. Controls were motivated by the desire to prevent foreigners (mainly Americans) from gaining ownership of the economy when Japan was in a weak position after World War II, and by concerns over the balance of payments deficits. Beginning in the late 1960s, these controls were gradually loosened, and the process of deregulation accelerated and continued throughout the 1980s. The result was a dramatic increase in capital movements, with the biggest change occurring in outflows--investments by Japanese in other countries. By the end of the 1980s, Japan had become a major international investor. Because the country was a newcomer to the world of overseas investment, this development led to new forms of tension with other countries, including criticism of highly visible Japanese acquisitions in the United States and elsewhere.
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