The Japanese economic miracle is known as Japan's record period of economic growth between the post-World War II era to the end of the Cold War. During the economic boom, Japan rapidly became the world's second largest economy (after the United States). By the 1990s, Japan's demographics began stagnating and the workforce was no longer expanding as it did in the previous decades, despite per-worker productivity remaining high.
This economic miracle was the result of post-World War II Japan and West Germany benefiting from the Cold War. It occurred chiefly due to the economic interventionism of the Japanese government and partly due to the aid and assistance of the U.S. Marshall Plan. After World War II, the U.S. established a significant presence in Japan to slow the expansion of Soviet influence in the Pacific. The U.S. was also concerned with the growth of the economy of Japan because there was a risk after World War II that an unhappy and poor Japanese population would turn to communism and by doing so, ensure Soviet control over the Pacific.
The distinguishing characteristics of the Japanese economy during the "economic miracle" years included: the cooperation of manufacturers, suppliers, distributors, and banks in closely knit groups called keiretsu; the powerful enterprise unions and shuntō; good relations with government bureaucrats, and the guarantee of lifetime employment (shūshin koyō) in big corporations and highly unionized blue-collar factories.
The Japanese financial recovery continued even after SCAP departed and the economic boom propelled by the Korean War abated. The Japanese economy survived from the deep recession caused by a loss of the U.S. payments for military procurement and continued to make gains. By the late 1960s, Japan had risen from the ashes of World War II to achieve an astoundingly rapid and complete economic recovery. According to Knox College Professor Mikiso Hane, the period leading up to the late 1960s saw "the greatest years of prosperity Japan had seen since the Sun Goddess shut herself up behind a stone door to protest her brother Susano-o's misbehavior." The Japanese government contributed to the post-war Japanese economic miracle by stimulating private sector growth, first by instituting regulations and protectionism that effectively managed economic crises and later by concentrating on trade expansion.
Japanese economic miracle refers to the significant increase in the Japanese economy during the time between the end of World War II and the end of the Cold War (1945–1991). The economical miracle can be divided into four stages: the recovery (1946–1954), the high increase (1955–1972), the steady increase (1972–1992), and the low increase (1992–2017).
Although heavily destroyed by the nuclear bombardment in Hiroshima and Nagasaki, and other Allied air raids on Japan, Japan was able to recover from the trauma of WWII, and managed to become the second largest economic entity of the world (after the United States) by the 1960s (Soviet Union excluded). However, after three decades, Japan had experienced the so-called "recession in growth", as the United States had been imposing economic protection policy in oppressing Japanese production and forcing the appreciation of the Japanese yen. In preventing further oppression, Japan greatly improved its technological advances and raised the value of the yen, since to devalue, the yen would have brought further risk and a possible depressing effect on trade. The appreciation of the yen led to significant economic recession in the 1980s. To alleviate the influence of recession, Japan imposed a series of economical and financial policy to stimulate the domestic demand. Nevertheless, the bubble economy that took place in the late 1980s and early 1990s and the subsequent deflationary policy destroyed the Japanese economy. After the deflationary policy, the Japanese economy has been through a time of low increase period which has lasted until today. For more detailed information regarding this period, see Economic history of Japan and Lost Decade (Japan).
Japan was seriously harmed in WWII. For instance, during wartime, "the Japanese cotton industry was brought to its knees by the end of the Second World War. Two-thirds of its prewar cotton spindles were scrapped by wartime administrators, and bombing and destruction of urban areas had caused a further loss of 20 percent of spinning and 14 percent of weaving capacity". Nonetheless, the ability of recovery astonished the world, earning the title of "Japanese Economic Miracle". By and large, every country has experienced some degree of industrial growth in the post-war period, those countries that achieved a heavy drop in industrial output due to war damage such as Japan, West Germany and Italy, have achieved a most rapid recovery. In the case of Japan, industrial production decreased in 1946 to 27.6% of the pre-war level, but recovered in 1951 and reached 350% in 1960.
One reason for Japan's quick recovery from war trauma was the successful economic reform by the government. The government body principally concerned with industrial policy in Japan was the Ministry of International Trade and Industry. One of the major economic reforms was to adopt the "Inclined Production Mode" (傾斜生産方式 keisha seisan hoshiki). The "Inclined Production Mode" refers to the inclined production that primarily focus on the production of raw material including steel, coal and cotton. Textile production occupied more than 23.9% of the total industrial production. Moreover, to stimulate the production, Japanese government supported the new recruitment of labour, especially female labour. By enhancing the recruitment of female labour, Japan managed to recover from the destruction. The legislation on recruitment contains three components: the restriction placed on regional recruitment and relocation of workers, the banning of the direct recruitment of new school leavers, and the direct recruitment of non-school leavers under explicitly detailed regulations issued by the Ministry of Labor.
The second reason that accounts for Japan's rapid recovery from WWII was the outbreak of the Korean War. The Korean War was fought in territory that had been, until 1945, Chōsen (朝鮮) that Empire of Japan had colonised. As the United States was participating in the conflict on the Korean Peninsula, it turned to the Japanese economy for procurement of equipment and supplies because the logistics of shipping from the States soon became a significant problem for the military. Japan's industry was soon providing the required munitions and logistics to the American forces fighting in Korea. The demand stimulated the Japanese economy enabling it to recover quickly from the destruction of the Pacific War and provide the basis for the rapid expansion that was to follow. However, Japan's economic recovery and coming growth was at the expense of enabling the destruction of Korea and its people, its former colony.
After gaining support from the United States and achieving domestic economic reform, Japan was able to soar from the 1950s to the 1970s. Furthermore, Japan also completed its process toward industrialization, and became one of the first developed countries in East Asia. The Japanese Economic Yearbooks from 1967 to 1971 witnessed the significant increase. In 1967, the year book said: the Japanese economy in 1966 thus made an advance more rapidly than previously expected. In 1968, the year book said that the Japanese economy continued to make a sound growth after it had a bottom in the autumn of 1965. The words "increase", "growth" and "upswing" filled with summaries of the year books from 1967 to 1971. The reasons for Japan to complete industrialization are also complicated, and the major characteristic of this time is the influence of governmental policies of the Hayato Ikeda administration, vast consumption, and vast export.
In 1954, the economic system MITI had cultivated from 1949 to 1953 came into full effect. Prime Minister Hayato Ikeda, who Johnson calls "the single most important individual architect of the Japanese economic miracle," pursued a policy of heavy industrialization. This policy led to the emergence of 'over-loaning' (a practice that continues today) in which the Bank of Japan issues loans to city banks who in turn issue loans to industrial conglomerates. Since there was a shortage of capital in Japan at the time, industrial conglomerates borrowed beyond their capacity to repay, often beyond their net worth, causing city banks in turn to over-borrow from the Bank of Japan. This gave the national Bank of Japan complete control over dependent local banks.
The system of over-loaning, combined with the government's relaxation of anti-monopoly laws (a remnant of SCAP control) also led to the re-emergence of conglomerate groups called keiretsu that mirrored the wartime conglomerates, or zaibatsu. Led by the economic improvements of Sony businessmen Masaru Ibuka and Akio Morita, the keiretsu efficiently allocated resources and became competitive internationally.
At the heart of the keiretsu conglomerates' success lay city banks, which lent generously, formalizing cross-share holdings in diverse industries. The keiretsu spurred both horizontal and vertical integration, locking out foreign companies from Japanese industries. Keiretsu had close relations with MITI and each other through the cross-placement of shares, providing protection from foreign take-overs. For example, 83% of Japan's Development Bank's finances went toward strategic industries: shipbuilding, electric power, coal and steel production. Keiretsu proved crucial to protectionist measures that shielded Japan's sapling economy.
Keiretsu also fostered an attitude shift among Japanese managers that tolerated low profits in the short-run because keiretsu were less concerned with increasing stock dividends and profits and more concerned about interest payments. Approximately only two-thirds of the shares of a given company were traded, cushioning keiretsu against market fluctuations and allowing keiretsu managers to plan for the long-term and maximize market shares instead of focusing on short-term profits.
The Ikeda administration also instituted the Foreign Exchange Allocation Policy, a system of import controls designed to prevent the flooding of Japan's markets by foreign goods. MITI used the foreign exchange allocation to stimulate the economy by promoting exports, managing investment and monitoring production capacity. In 1953, MITIs revised the Foreign Exchange Allocation Policy to promote domestic industries and increase the incentive for exports by revising the export-link system. A later revision based production capacity on foreign exchange allocation to prevent foreign dumping.
During the time of reconstruction and before the 1973 oil crisis, Japan managed to complete its industrialization process, gaining significant improvement in living standards and witnessing a significant increase in consumption. The average monthly consumption of urban family households doubled from 1955 to 1970. Moreover, the proportions of consumption in Japan was also changing. The consumption in daily necessities, such as food and clothing and footwear, was decreasing. Contrastingly, the consumption in recreational, entertainment activities and goods increased, including furniture, transportation, communications, and reading. The great increase in consumption stimulated the growth in GDP as it incentivized production.
The period of rapid economic growth between 1955 and 1961 paved the way for the Golden Sixties, the second decade that is generally associated with the Japanese economic miracle. In 1965, Japan's nominal GDP was estimated at just over $91 billion. Fifteen years later, in 1980, the nominal GDP had soared to a record $1.065 trillion.
Under the leadership of Prime Minister Ikeda, former minister of MITI, the Japanese government undertook an ambitious "income-doubling plan" (所得倍増). Ikeda lowered interest rates and taxes to private players to motivate spending. In addition, due to the financial flexibility afforded by the FILP, Ikeda's government rapidly expanded government investment in Japan's infrastructure: building highways, high-speed railways, subways, airports, port facilities, and dams. Ikeda's government also expanded government investment in the previously neglected communications sector of the Japanese economy. Each of these acts continued the Japanese trend towards a managed economy that epitomized the mixed economic model.
Besides Ikeda's adherence to government intervention and regulation of the economy, his government pushed trade liberalization. By April 1960, trade imports had been 41 percent liberalized (compared to 22 percent in 1956). Ikeda planned to liberalize trade to 80 percent within three years. His plans however met severe opposition from both industries who had thrived on over-loaning and the nationalist public who feared foreign enterprise takeovers. The Japanese press likened liberalization to "the second coming of the black ships," "the defenselessness of the Japanese islands in the face of attack from huge foreign capitalist powers," and "the readying of the Japanese economy for a bloodstained battle between national capital and foreign capital." Ikeda's income-doubling plan was largely a response to this growing opposition and widespread panic over liberalization, adopted to quell public protests. Ikeda's motivations were purely pragmatic and foreign policy based, however. He moved toward liberalization of trade only after securing a protected market through internal regulations that favored Japanese products and firms.
Ikeda also set up numerous allied foreign aid distribution agencies to demonstrate Japan's willingness to participate in the international order and to promote exports. The creation of these agencies not only acted as a small concession to international organizations, but also dissipated some public fears about liberalization of trade. Ikeda furthered Japan's global economic integration by joining the GATT in 1955, the IMF, and the OECD in 1964. By the time Ikeda left office, the GNP was growing at a phenomenal rate of 13.9 percent.
In 1962, Kaname Akamatsu published his famous article introducing the Flying Geese Paradigm. It postulated that Asian nations will catch up with the West as a part of a regional hierarchy where the production of commodity goods would continuously move from the more advanced countries to the less advanced ones. The paradigm was named this way due to Akamatsu's envisioning this pattern as geese flying in unison with Japan being an obvious leader.
In 1973, the first oil-price shock struck Japan (1973 oil crisis). The price of oil increased from 3 dollars per barrel to over 13 dollars per barrel. During this time, Japan's industrial production decreased by 20%, as the supply capacity could not respond effectively to the rapid expansion of demand, and increased investments in equipment often invited unwanted results—tighter supply and higher prices of commodities. Moreover, the Second Oil Shock in 1978 and 1979 exacerbated the situation as the oil price again increased from 13 dollars per barrel to 39.5 dollars per barrel. Despite being seriously impacted by the two oil crises, Japan was able to withstand the impact and managed to transfer from a product-concentrating to a technology-concentrating production form.
The transformation was, in fact, a product of the oil crises and United States intervention. Since the oil price rose tenfold, the cost of production also soared. After the oil crises, to save costs, Japan had to produce products in a more environmentally-friendly manner, and with less oil consumption. The biggest factor that invited industrial changes after the oil crises was the increase in energy prices including crude oil. As a result, Japan converted to a technology-concentrating program, ensuring the steady increase of its economy, and standing out beyond other capitalist countries that had been significantly wounded during the oil crises. Another factor was the friction between the United States and Japan, as Japan's rapid economic growth could potentially harm the economic interests of the United States. In 1985, the United States signed the "Plaza Accord" with Japan, West Germany, France and Britain. The "Plaza Accord" was an attempt to devalue the US dollar, yet harmed Japan the most. Japan attempted to expand international markets through the appreciation of the Japanese yen, yet they over-appreciated, creating a bubble economy. The Plaza Accord was successful in reducing the U.S. trade deficit with Western European nations but largely failed to fulfill its primary objective of alleviating the trade deficit with Japan.
The Ministry of International Trade and Industry (MITI) was instrumental in Japan's post-war economic recovery. According to some scholars, no other governmental regulation or organization had more economic impact than MITI. "The particular speed, form, and consequences of Japanese economic growth," Chalmers Johnson writes, "are not intelligible without reference to the contributions of MITI" (Johnson, vii). Established in 1949, MITI's role began with the "Policy Concerning Industrial Rationalization" (1950) that coordinated efforts by industries to counteract the effects of SCAP's deflationary regulations. In this way, MITI formalized cooperation between the Japanese government and private industry. The extent of the policy was such that if MITI wished to "double steel production, the neo-zaibatsu already has the capital, the construction assets, the makers of production machinery, and most of the other necessary factors already available in-house". The Ministry coordinated various industries, including the emerging keiretsu, toward a specific end, usually toward the intersection of national production goals and private economic interests.
MITI also boosted the industrial security by untying the imports of technology from the imports of other goods. MITI's Foreign Capital Law granted the ministry power to negotiate the price and conditions of technology imports. This element of technological control allowed it to promote industries it deemed promising. The low cost of imported technology allowed for rapid industrial growth. Productivity was greatly improved through new equipment, management, and standardization.
MITI gained the ability to regulate all imports with the abolition of the Economic Stabilization Board and the Foreign Exchange Control Board in August 1952. Although the Economic Stabilization Board was already dominated by MITI, the Yoshida Governments transformed it into the Economic Deliberation Agency, a mere "think tank," in effect giving MITI full control over all Japanese imports. Power over the foreign exchange budget was also given directly to MITI.
MITI's establishment of the Japan Development Bank also provided the private sector with low-cost capital for long-term growth. The Japan Development Bank introduced access to the Fiscal Investment and Loan Plan, a massive pooling of individual and national savings. At the time FILP controlled four times the savings of the world's largest commercial bank. With this financial power, FILP was able to maintain an abnormally high number of Japanese construction firms (more than twice the number of construction firms of any other nation with a similar GDP).
Coincidentally, the conclusion of the economic miracle coincided with the conclusion of the Cold War. While the Japanese stock market hit its all-time peak at the end of 1989, making a recovery later in 1990, it dropped precipitously in 1991. The year of the conclusion of the Japanese asset price bubble coincided with the Gulf War and the dissolution of the Soviet Union.