From the post World War II reconstruction period to the 1960’s, the Japanese economy achieved an average annual growth rate of over 10 percent, a rate that was high not only in comparison to other countries, but historically high for Japan as well. (Kumon and Rosovsky 68) It was during this period that the foundation was set for this country to become an economic giant. Some of the most characteristic economic mechanisms of the Japanese system trace their roots to that period; an understanding of that period is indispensable when trying to understand the current Japanese economy.
The time called postwar reconstruction started for Japan with the end of World War II in 1945. The economic toll on the country was enormous. Fully, one forth of all Japanese assets in terms of fixed capital and facilities had disappeared, and 80% of the ships had been lost. To add to the burden, expanded military expenditures during the final periods of the war had caused rampant inflation, and the lack of foreign currency coming in severely limited trade, which in turn resulted in the extreme shortages of materials. The desperate state of Japan can clearly be seen with the naked eye. (Reid 47)
The apparent malformity led to many reforms that brought an end to sharecropping and boosted agricultural income. Farmers were given reasons to have greater desire to raise crops and increase productivity. The industry was decentralized, with spin off and newly created corporations bringing about stiffer competition. The heads of zabatzu affiliated companies were replaced, and the foundation was laid for more democratic management styles. Opening shares up for public trading helped democratize ownership and created the base for today’s financial markets.
This time also saw a policy in graded production. (Treager 6) This policy was enacted to deal with the shortage of funds and raw materials that had been caused by severely limited trading. The resources were allocated to the industries deemed most “important” from a national standpoint. This, in practice, meant that bank loans were concentrated in steel, electric power, chemicals, and other industries that formed the basis for industrial development. These sectors were also given favored tax treatment and enjoyed other policies designed to foster their growth. Graded production was only used for a very brief period fallowing the end of the war but the philosophy behind it has made it self felt in later industrial policy.
The postwar policies for the revitalization of industry made enormous contributions to real economic activation, but they also caused runaway inflation. Excessive government intervention into the private sector caused corporate management to become lax. This, in turn, prompted a clamp down on finances in 1949, when the government unveiled a variety of policies that were designed to rationalize industrial activity. These policies became known as the “Dodge Line” after the name of an American minister invited to Japan in the capacity of advisor. (Ito 59) Their goals were to one, control fiscal expenditures in order to achieve a “small government”, and two, to review subsides to corporations, placing more emphasis on market mechanisms, encourage household savings, draw a clear line between government and private activities, and three, to do away with price controls and double standard foreign exchange, producing a free and competitive domestic market that made it possible for the Japanese economy to revive.
The Dodge Line forced private corporations to take responsibility for themselves in what became a free and competitive environment. They were given the incentive to rationalize themselves, which became one of the deciding factors in the high-growth period that began in the 1960’s. There was another factor that supported the postwar economic boom, The factor was none other than the Korean war. (Ito 60) The dodge line was an effective policy for holding down inflation and allowing market mechanisms to recover, but it also brought about fears of deflationary pressures due to tightly controlled fiscal policies. With the outbreak of the Korean War the United States started buying a variety of goods and services from Japan, most notably military-related goods. The “special demand” that was created removed any deflationary effects that the dodge line would have had and helped get the Japanese economic stride get into stride smoothly. By 1951, mining and industrial production had recovered to prewar levels, and 1952 saw consumption rise to a level as high as it had ever been previously.
Until Japan recorded its first large surplus in 1968, trade fallowed a clear pattern of having deficits during growth periods and surpluses during slumps. (Nester 131) This meant that, when trying to expand the economy by using a policy of fiscal and monetary expansion, the limits of what could be accomplished in terms of international trade balance soon became apparent, and aggregate demand once again had to be suppressed. This so-called stop-and-go policy is characteristic of fiscal and monetary policies of the time but it also indicates some of the structural problems in the Japanese economy, namely, that it had poor foreign currency reserves and was under a certain amount of constraint in terms of international trade balance.
The period is also characterized by vast differences in the productivity and wages paid by large corporations and their smaller counterparts, which caused a kind of double structure to appear. (Ito 398) In the 1960’s small corporations between one and forty-nine employees accounted for 49% of all employment. In contrast the figure was 17% for the United States and 11% for Great Britain. One of the factors was that while large corporations were able to use their credit to obtain bank loans easily, the overall lack of funds made it difficult for smaller businesses to obtain financing. This, in turn, led to differences in the capital-labor ratio. Large corporations with high capital-labor ratios enjoyed the merits of their “scales, and were able to boost their productivity by introducing the latest technological advances. But even under the double structure, small businesses could accumulate capital because of the high economic growth (Kumon an Rosovsky 98).
However, the existence of a double structure in the Japanese economy was later to have a great influence in the country’s labor markets. Generally, large corporations had access to modern technology introduced from overseas, but, in order to use it to produce goods, they had to assure themselves a skilled labor force. Smaller corporations, in contrast, tended to be tied to older, more traditional technology, and could therefore function with unskilled labor. Shortages in skilled labor caused a polarization to occur, in which wages rose at plants where skills were in demand and held steady or fell at plants where they were not. When this happened, one of the ways large corporations fought back was to put in effect a lifetime employment system. The technological level of smaller corporations eventually rose, and it is possible that this was the reason why the lifetime employment system subsequently gained such popularity.(Ito 210)
Another aspect that should be considered is the unique ties that developed between government and industry during the high-growth period. Japanese government/industry relations can generally be thought of in terms of industrial policy. Economists debate just what exactly industrial policy is and whether or not it is very effective. (Nester 146) Suffice it is to say that several important policy mechanisms were put into effect in the 1950’s and 1960’s. One of these was the Industrial Structure Council that the Ministry of International Trade and Industry (MITI) established in the early 1960’s (Ito 196) The council is made up of leading academic and business figures, who exchange opinions on what direction Japanese industry should take in the future and produce a vision on how the industrial structure should be developed. In fact, however, it serves as a forum where representatives of industry and government can adjust their opinions and develop a social consensus on the direction in which the country is going to head. From to time of its inception to the present day, the council has formed the backbone of MITI’s administrative efforts. The vision it produces is, to corporations, a guideline with a consensus behind it, and it reduces the uncertainty and risk involved in individual managerial decisions.
In 1953, the Fiscal Investment and Loan Program was introduced and administered nationally by the Ministry of Posts and Telecommunications quickly became a unique system of Japanese public finance. This system, in a nutshell, diverts funds from the postal and savings program then the money is used to make loans and investments, and augmenting the general budget, which is based only on government tax income. (Kumon and Rosovsky 65) There Tended to be a lack of funds in the reconstruction and high growth periods, so the system allowed the government to adjust the distribution of available funds, thereby giving it control over the distribution of the resources necessary for production.
Finally, some mention should be made of the trends seen in the industries representative of the postwar reconstruction and high growth periods. First on the list is steel, which forms the basis for other industries by 1953; the industry had recovered from its devastation during World War II, topping 1943’s wartime record for crude steel production. At the time Japan was producing 80,000 tons of crude steel a year, while the United States production stood at 100 million tons. Japan accounted for only about 3.3 percent of world steel production then, though 20 years after the war it had grown to fifteen or sixteen times that. Steel production overtook that of Great Britain in 1961 and of West Germany in 1964, placing Japan as the number two steel producer in the world, ranked in the same league as the United States and the Soviet Union. (Nester 206)
The home electrical appliance is a typical example of high growth in the consumer goods area. Japanese families experienced the first “home appliances boom” in the latter half of the 1950s. Black and white televisions, washing machines, and electric refrigerators sold like hotcakes as the country tried to catch up to the standard of living enjoyed in Europe and the United States, and the industry saw yearly growth rates of 48 percent. The three products were known at the time as the “three essential status symbols” in a phrase that a play on words about the three divine (Shinto) symbols of the Japanese throne. Televisions had appeared in 37 percent of all households by 1960, just seven years after broadcasts had begun. Later in the 1960s a new impetus emerged: color televisions, coolers also known as air conditioners, and cars became known as the “Three C’s” and led the age. (Ito 373)
At the end of the war there were only 110,000 cars in Japan. By 1960, the number had grown to 2.2 million, and in 1970 it had burgeoned to 17.8 million. It should be kept in mind, however, that the production of passenger cars which are the mainstay of today’s automobile industry, did not overtake that of trucks until the mid 1960s.(Kumon and Rosovsky 162) High growth had brought about an increase in personal income, which in turn made it possible for the market for durable goods to expand. The existence of these “trigger industries” made high macroeconomic growth possible.