Busting Myths: The Economic Miracle of the Land of the Rising Sun

Japan is famous for its rapid financial development after WWII. At present, the economy of Japan is the third-biggest in the world in terms of nominal GDP. Despite Japan’s deficiency in natural resources, it still manages to export technologically advanced goods and services. Significant contributions have been made in the science and innovation sector making it a worldwide innovator in the car and electronic ventures. The Japanese economy astonished many after it saw a GDP growth of 10% in the ensuing time frame after the war. Let us dive further into the historical backdrop of Japan's economy to take a look at the variables which prompted such a supernatural development.


After World War II, most of the businesses in Japan suffered enormously. However timely intervention and a huge monetary development brought upon rapid changes. The industrial growth went up from 27.6% in 1946 to 350 % in 1960, with 1951 being the point that started this significant recuperation. The war had completely ruined the economy of Japan, killed millions of people and destroyed much of the capital stock of the country. This caused the rate of return on capital to be very high since most of its former capital was destroyed. This change in the investment scenario allowed capital investment to become lucrative to investors and allowed them to accumulate more capital.


The Korean War was fought in 1950 and with it, there was an enormous increase in demand for Japanese military gear because of the strategic issues looked at by the Korean military in getting supplies from the US. This spike in demand helped provide Japan with an initial footing, however, Japan’s economic miracle cannot be pinpointed to any one key factor but rather a wide array of trade and tax policies amongst other reasons that led to its growth.


In 1945, Japan surrendered to the US & its allies with its economy being revamped under the Supreme Commander of the Allied Powers. These new reforms transformed the institutional environment in Japan. Under the occupation, a large number of Japanese conglomerates called zaibatsu were liquidated and were revamped as keiretsu which are often credited with the success of the Japanese economy. Keiretsu were great business groups that linked industrialists, banks, and trading firms via shared stock ownership and long-standing exclusive relationships. Through the keiretsu, individual firms acquired financial strength and contacts that enabled them to overtake foreign and domestic rivals. Acquiring market share was prioritized over short term profits and they went on to join long-term potential high-growth markets. These groups were stable in themselves but created an environment of extreme competition especially in the international markets. This led to new advancements coming up rapidly, leading to the growth of innovation in terms of ideas, efficiencies, techniques, machinery, and even workforce.


The education scenario was also fast developing. Middle schooling was made compulsory With the keiretsu model blooming, increased demand for skilled labour led to special care being given. Employees were hired directly from the prestigious universities of the country and underwent rigorous training. Introduction of land reforms in Japan removed the existing landlordism and gave a strong push for agricultural productivity along with mechanization of rice cultivation. Lack of land fertility meant that these reforms helped farmers and boosted the economy. Moreover, collective borrowing which was earlier considered illegal was authorized by constitutional legalities.


Internalization of the labour laws also played an important role in developing the Japanese economy. Premium wages and long term employment guarantees along with the legalization of collective borrowing and formation of unions that were previously extended exclusively to white-collar employees were now extended to blue-collar employees which eventually included a major portion of the workforce. Post-1950, Japan internalized labour which produced a highly flexible labour market. As a result, Japanese workers adopted many of the core concepts of just-in-time production management and quality assurance circles in assembly industries. They also learnt how to create an efficient system set-ups as part of an attempt to manufacture "just-in-time" and defect-free parts. The idea to revolutionize assembly line manufacturing was followed aggressively by Japan during the 1950s and 1960s. The United States, through its funding of the United Nations, the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade, was an architect of multilateral institutions intended to promote trade. With the aim of building military alliances to contain Eurasian Communism, the US brought Japan to a bilateral security treaty under its "nuclear umbrella." American companies were encouraged to license new international technology to Japanese companies in the new international environment.


Businesses were supported by the rationalization of production by the Japanese government. New industries like the automobile, synthetic fibre, and consumer electric machinery also started to bring in new technology which led to autonomous growth. With increasing, wages and price increases in capital and technology-intensive products, textile and other sectors lost their lure which eventually led to a decline in prices for these technology-intensive products in comparison to their foreign competitors. Hence the scenario of comparative advantage shifted. All these industries made positive adjustments in their products and policies which enabled them to compete in foreign markets and boosted the economic activity of the nation. In addition to the economic boost, a long-term credit bank system was introduced in order to provide public funds and long-term loans to the business sector. The Japanese government encouraged savings by not imposing income taxes on a portion of savings and the first 13,000 dollars in the bank account were tax-free. Universally, low tax rates and economic freedom prevailing in the country along with these reforms fueled up the savings and investment as citizens had more money to invest.


Coming back to the Ministry of Trade and Industry, it instituted policies that benefited selective industries that were attributed to Japan's success as an economic giant. It worked to drive down the cost of securing foreign technology along with reducing the royalties that Japanese firms had to pay on technology licenses. Industrial policy, however, posed the same question of information as socialist planning: Until the economy creates it, neither national policymakers nor anybody else can determine the ideal manufacturing framework. Through encouraging the wrong sectors, efforts at industrial planning are likely to impede growth. MITI has been no different. Private firms did have a major impact on industrialization in Japan and can be accredited with the successful industrialization that took place in the country but what MITI succeeded in doing was the creation of superior infrastructure and a positive economic environment by setting in place effective policies for private sector growth. Given the intervention of MITI, Japan's institutional climate of fairly low intrusion from the government and strong economic independence has helped the country to expand steadily for a number of years.


In conclusion, all these factors other than the one's which are popularly mentioned have nearly an equal share in Japan's miracle success. There have been nations like Italy which, initially, like Japan faced similar economic destruction and grew rapidly but were not able to achieve what Japan did. Both the private sector and public sector firms, government’s policies of tax, inflation, regulation, labour laws, and introduction of various reforms along with the support from the US have their own individual role in contributing towards the Japanese Economic Miracle.


Authored by Bhanu Jain, St. Stephen's College


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