Economic Development of Japan
Review
Topics for Review
• Umesao Theory (evolutionary history)
• Edo—preparation for modernization
• Meiji—private sector dynamism
• Free market vs. industrial policy
• Coping with post-bubble recession
• Politics
Discussion and Q&A
Dr. Tadao Umesao’s View of the World
Western Europe
(UK)
Japan
Dry Area
Russia
China
India
The Meditt erra-nean a
nd Islamic States
Eurasian Continent
Evolution of Peripheral Society
Interaction between Internal and External Forces
External stimuli Base society
Foreign systems
Period of adjustment
& rapid change
Period of internalization
& stability
Failed adjustment:
social instability, economic crisis, foreign dominance, etc.
Failed adjustment
xxxx xxxx xxx
I. Emperor’s Rule II. Samurai’s Rule
X
III. Modern -ization
WAR
IV. Postwar
Clan fights
× 645
NARA
Centraliz ation
HEIAN
Nobles, Decentra
lization
Internal wars, dynamic
& fluid society
Peace, isolation, conserva tive class
society
EDO
Tokugawa Shogunate
KAMAKURA MUROMACHI
SENGOKU
1867
MEIJI
Westerniz ation, industriali
zation, militariliza
tion
Rapid recovery
and growth
Hunting &
gathering Taika Reform
Rice Chinese culture &
political system Buddhism
WEST: guns &
Christianity WEST!!! US occupation 1945-52
1603
PP.16-17
× 671 Jinshin War
Edo: Pre-conditions for Industrial Take-off
• Political unity and stability
• Agricultural development and commercialization
• Development of transportation and nationally unified markets
• Rise of commerce, finance and wealthy merchant class
• Rise of pre-modern manufacturing
• Industrial promotion by local governments (policy capability)
• High level of education (HRD)
P.23
Cumulative history, Edo achievements, national unity and nationalism
Private-sector dynamism and entrepreneurship
(primary force)
Policy support (supplementary)
Japan’s economic growth was driven mainly by private dynamism while policy was also helpful
Policy was generally
successful despite criticisms:
--Power monopoly by former Satsuma & Choshu politicians --Privatization scandal, 1881 --Excessively pro-West
--Unfair by today’s standard
Rapid
industrialization esp. Meiji and post WW2 period
P.56
Rise and Fall of Merchants and Enterprises
0 50 100 150 200 250
1849 1864 1875 1888 1902
Persons
Millionaires of Edo period
New millionaires of Late Edo
New millionaires in early Meiji
New millionaires in company boom period
Source: Computed from Miyamoto (1999）, p.53. Each line shows how many of the new millionaires emerging each period survived in later periods.
Q: Who were the main drivers of Meiji industrialization?
A: All types of entrepreneurs including Edo gosho, Yokohama mer chants, Meiji zaibatsu, and company boom millionaires.
► Survival game was severe: many entries, many exits
► Japan’s industrial
revolution: from 1880s to 1900s
► Japan-China War,
Japan-Russia War also accelerated industrialization
P.47
Dynamic Business Leaders and Managers
Yataro Iwasaki 1835-1885
Tosa samurai; founder of Mitsubishi Zaibatsu
Eiichi Shibusawa 1840-1931
Super business coordinator who created 500 companies
Tomoatsu Godai 1836-1885
Satsuma samurai; super bus iness coordinator for Kansa i Area
Rizaemon Minomura 1821-1877
Super manager and reforme r of Mitsui Zaibatsu
Saihei Hirose 1828-1914
Super manager of Sumitom o Zaibatsu and Besshi Cop per Mine
Takeo Yamanobe 1851-1920
Super factory manager and f ounder of Osaka Spinning C ompany
Monozukuri (Manufacturing)
Spirit
• Mono means “thing” and zukuri (tsukuri) means “making” in indigenous Japanese language.• It describes sincere attitude toward production with pride, ski ll and dedication. It is a way of pursuing innovation and perfe ction, often disregarding profit or balance sheet.
• Many of Japan’s excellent manufacturing firms were founded by engineers full of monozukuri spirit.
PP.65, 179-181
Sakichi Toyota 1867-1930
Konosuke Matsushita 1894-1989
Soichiro Honda 1906-1991
Akio Morita (Sony’s co-founder)
1921-1999
“J-Model” vs. “Global Standard”
Industrial View Free Market View
Motivation Long-term firm growth (industrial engineers)
Quick result orientation (financial investors)
Skill and technology
Internal accumulation by permanent staff
Task-based contract or outsourcing
Concept of
“firm”
Long-lasting community for achieving excellence
Restructure, buy or sell for best performance Role of
Government
Assist industries with
technology, management, finance, etc.
Set laws and rules only;
let private sector operate freely without meddling Competition
& integration
Raise competitiveness before integration;
temporary official help
Open up and compete from the beginning;
level playing fields
Origin of the Post-WW2 Japan System
• Featuring long-term commitments and official intervention
Government-led industrial drive, administrative guidance, s ubcontracting, lifetime employment, keiretsu, mainbanks, fr iendly trade unions, BOJ window guidance, etc.
• Negative view—this system was installed artificially after 193 7 to execute war. It continued to work reasonably well in the 1 950s-60s, but it is now obsolete.
• Positive view—advanced industrialization requires such featur es. Free markets do not generate high-tech or heavy industries.
Japan needed such a system to develop.
This means laissez-faire policy supports light industries and si mple processing only; to go further, developing countries need above features even today.
PP.140-41
Average Tariff Rate
Calculated as (tariff revenue)/(import value)
0 5 10 15 20 25
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990
All commodities Average of non- zero tariff commodities
1899 Restoration of tariff rights
%
Industrial Policies in Postwar Japan
(From Prof. Akira Suehiro’s 2006 Slides)
• The fiscal investment and loan program (FILP, p.165fn) promoted trade and industry until early 1960s
• Loans by Japan Development Bank and Exim Bank was relatively small, but had two important effects
--Catalyst for larger commercial bank loans
--Information sharing between business and government
• Cooperative policy formulation and implementation
• The “return match game” and learning effect—firms co uld apply many times for JDB and SME loans
Japan’s IP contributed to development of the market m
echanism rather than distorting the market.
Figure 4 Mechanism of FLI and the Role of MITI and JDB
Policy Making Policy
Implementation
Fiscal Finance
technology advice managerial advice
Source: Drafted by Akira Suehiro Individual Firms
applied to fiscal finance
Industrial Council on Specific Industry or Target
Government Officers, Academicians,
Specialists Business Associations
for each industry
J apan Development Department of Heavy Bank
Industry
Ministry of International Trade and Industry
(MITI)
Ministry of Finance (MOF)
Fiscal Fund Bureau
Late 1950s - 1960s
How to Cope with Post-Bubble Recession?
Inefficient firms & banks
Bad debt restructuring
Macro policy stance
Real sector policy After WW1
Bubble (1920s)
Rescue with BOJ credit
Hide problem until 1927 crisis
Neutral? Heavy
industry drive
After Korean War Bubble (1950s)
No rescue Not necessary Moderately tight
Rationalizatio n (investment, technology) After Heisei
Bubble (1990s)
Rescue Jusen (real estate non banks)
Restructure after 1997-98 banking crisis
Fiscal activism
& zero-interest rate policy
Not much
US-led global financial crisis (2008-09)
Rescue big US banks, auto makers, etc.
Effort begun in US
Global effort to ease macro policies
New energy policy?
Causes of the Banking Crisis, 1927
Kamekichi Takahashi & Sunao Morigaki, History of Showa Financial Crisis, 1968.
Fundamental causes (more important)
• Internal problems in the banking system (kikan ginko)
• Rescuing weak businesses generously without serious restructuring after the bubble burst.
• The 1923 earthquake and exchange rate instability furt her weakened Japanese economy.
Immediate causes
• Political fights over the unsettled earthquake bills.
• Minor misstatement by Finance Minister Kataoka.
Rationalization 合理化 (1950s)
• Korean War inflation reduced Japan’s cost competitiveness, especially coal & steel.
• Competitiveness was regained by investing in mass production and new technology.
Industry must exit if uncompetitive (coal).
• Funds: profits from the Korean War boom.
• Tight macroeconomic policy under a fixed exchange rate to force rationalization.
• 1956 Economic White Paper: “We are no longer in the postwar period”—the recovery phase is over, new
sources of growth must be found.
PP.162-65
Anti-rationalization negotiation, 1955
Anti-rationalization rally, 1961
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
168%
Debate on Fiscal Stimuli, 1990s-Now
• During the 1990s, large fiscal spending was used to stimulate the economy. But there was no strong recovery, while the
government debt skyrocketed.
• Some argued for even bigger stimuli; others said that would only worsen the situation.
PP.211-212
Government debt in % of GDP
Bubble burst
• PM Koizumi (2001-06) s et limits on spending (inf rastructure, welfare).
• PM Aso (2008-) returned to big fiscal spending to c ombat recession.
Koizumi Abe Fukuda Aso
Pure dictatorship
Full democracy Democratic
institution (Form)
Political competition
Constitution Laws
Parliament Election Court
Reform vs conservatism, big vs small g overnment, other policy debates
Edo Meiji
Taisho
Fascism
Constitution Parliament
Democracy movement, Party cabinet Democratization
New constitution
Showa2
War 1937
1945-51 LDP dominance Lack of policy debate
Male suffrage
Now 1960 US rule
Defeat
Showa1
1889 1925
Military rises1931
1937-45
(Content)
Political fights
Flexibility in Coalition Building, 1858-1881
Industrialization
Constitution
Parliament
Foreign expedition
Okubo (Satsuma) 1830-1878
Kido (Choshu) 1833-1877
Saigo (Satsuma) 1827-1877
Itagaki (Tosa) 1837-1919
Fukoku Kyohei
(rich country, strong military)
Kogi Yoron(democratiz ation)
Source: Banno (2007), edited by presente r.
Naichi Yusen (internal reforms first)
Seikanron
(Korean expedition plan)
Two-party Politics 1924-1932
PP.130-32Minsei Party
民政 党 (Kenseikai until 1927)Seiyukai
政友会(Estab. in 1900 by Hirobumi Ito)
Economy Small government, free market, fiscal austerity & industrial rest ructuring for return to gold
Big government, fiscal activism, local public works for securing v otes
Foreign p olicy
Oppose militarism, protect Japa n’s interest by diplomacy, prom ote disarmament
To attack Minsei Party, support military and fascism if necessary, even deny democracy
Remark Peace orientation is laudable, bu t stubborn deflation policy caus ed fascism to gain force
Economic recovery policy was w elcomed, but its opportunism sev erely undermined democracy
Seiyukai statements:
“Prof. Minobe’s theory denies the supreme dignity of Emperor. Just banning his b ooks is not enough.”
“Go, go, Japan, the leader of Asia, the vast land of Manchuria and Mongolia is wai ting for you!!!” (election campaign song)”
The 1955 Regime (LDP dominance)
• The Liberal Democratic Party (LDP) formed in 1955, held power until now (except 1993-96).
• Securing rural votes by subsidizing agriculture and bu ilding rural infrastructure (firmly established by PM K akuei Tanaka 1972-74)
• LDP has many factions and zoku-giin groups (politici ans promoting subsidies in particular fields)
• Opposition parties are too weak to challenge LDP’s rule.
• Reform movement inside LDP
Koizumi reform—how successful?
Abe, Fukuda, Aso too weak
P.178
LDP
Factions & zoku-giin Other parties
