Economic Development of Japan

1. Economic Development of Japan No.9 Postwar Recovery, 1945-49

2. Postwar Recovery 1945-49 • The Japanese economy collapsed due toinput shortage. Inflation surged. Livingstandards plummeted. • The US occupied Japan and forceddemocratization and demilitarization(but later partly reversed). • Subsidies and US aid supported the war-torn economy. • The priority production system, based on economic planning, contributed to output recovery (1947-48). • Inflation was ended by Dodge Line stabilization (1949). Army GeneralDouglas MacArthur, head of GHQ

3. Two ArtificialSupports 竹馬経済(Subsidies & US Aid) Price Gap Subsidies US Aid and Korean War Boom Fukkin Loan Balance, Mar. 1949

4. PP.148-50 Basic Problems of Japan’s Economic Reconstruction (1946) Saburo Okita, Yonosuke Goto, eds • Long-term goals must be set for Japan’s recovery and global industrial positioning. • Concrete real-sector strategies to attain these goals, sector by sector. This report is a good example of Japan’s economic thinking, also reflected in its current development and ODA strategies. --Kyrgyzstan Report (Prof. Tatsuo Kaneda, 1992) --JICA Vietnam Report (Prof. Shigeru Ishikawa, 1995) --A new proposal for Africa (JICA-JBIC, May 2008) It is very different from the “general framework” approach of Western donors (governance, poverty reduction, health and education, debt reduction, etc).

5. JICA-JBIC：Report of the Stocktaking Work on the Economic Development in Africa and the Asian Growth Experience (May 2008), pp.14-15 Establish “Industrialization Strategy” as a process, not just a document. • Identify desired vision, economic structure, and positioning in global value chain. • Through public-private dialogue, discover growth-leading industries for future. • Identify their constraints (infra, HRD, etc). • Devise measures to remove constraints and promote targeted industries. Measures must be consistent with the country’s institutional capability and executed under discipline and competition.

6. PP.150-54 Alternative Ways to Stop Inflation Hiromi Arisawa • Shock approach (austerity) • Gradualism (use of subsidies & US aid) • Conditional shock approach (PPS & Dodge Line)Prof. Arisawa and the Ministry of Commerce and Industry 150 Priority Production System Industrial output WAR Heavy oil (imported) (1) 30 mil tons Shock approach 100 Coal Steel 60 (2) PPS (3) (3) 30 30 Other industries 1934-36 1946

7. Priority Production System傾斜生産方式 Dodge Line Industrial Production Index PPS HOWEVER--Yoichi Okita & Elvira Kurmanalieva “Was PPS a Success?” GRIPS Research Report, Nov. 2006 • Virtuous circle between coal & steel production did not happen (VAR analysis); imported heavy oil and materials were true causes of recovery. • PPS was successful only as a diplomatic tool to persuade US to permit these imports. Korean War Source: Historical Statistics of Japan, vol.2, 1988.

8. Dodge Line Stabilization (1949) • Washington sends Joseph Dodge, a US banker with strong belief in free market and sound budget, to end inflation (after stopping inflation in Germany). • Super-balanced (surplus) budget—cut spending, end subsidies, raise utility prices Fiscal balance (bil. yen): -92.3 (1946), -103.9 (1947), -141.9 (1948), +156.9 (1949) • Credit restraint—end fukkin loans • Unify and fix exchange rate at $1=360 yen. • Prof. Carl Shoup’s tax reform—direct tax based (income tax, corporate taxes), strengthen local tax base, rationalize tax collection.

9. PP.154-56 Democratization • Demilitarization • New Constitution based on human rights and pacifism (1947) • Tokyo Military Tribunal (1946-48)—execution and imprisonment of war criminals • Breaking up of zaibatsu (1946); later remerged as keiretsu (with no holding company) • New labor laws to protect workers’ rights (1945-47) • Land reform (1946-) • Women’s suffrage (1945)

10. Economic Reforms in Postwar JapanEdited by Yutaka Kosai & Juro Teranishi, 1993 • Radical reforms were possible because of--US occupation--Wartime control that reduced the power & incentives of zaibatsu and landlords--General distrust in the market mechanism--Foreign aid and Korean War boom (macro supports) • Labor, land and zaibatsu reforms for changing power relation, distribution, equity (not for efficiency) • Three-step deregulation—(i) reforms under control, 1945-50; (ii) integration, 1950s-mid 70s; (iii) financial deregulation & SOE privatization, 1980s Markets need time to grow, or political resistance?

11. PP.155-56 New Constitution 1947 GHQ draft as the base; initial Japanese drafts, maintaining emperor’s sovereignty, were rejected. • Natural law--social contract among people (preface) • Sovereignty resides with the people • Emperor is the symbol of the state and people’s unity (without political power). • Basic human rights--not just freedom, but also guarantee of minimum living standards • Pacifism (Article 9) • Balance of power among legislature, executive and judiciary

12. PP.155-56 Article 9 Controversy • Aspiring sincerely to an international peace based on justice and order, the Japanese people forever renounce war as a sovereign right of the nation and the threat or use of force as means of settling international disputes. • In order to accomplish the aim of the preceding paragraph, land, sea, and air forces, as well as other war potential, will never be maintained. The right of belligerency of the state will not be recognized. • Renunciation of war • No possession of military forces • Denial of the state’s right of belligerency

13. Self-Defense Forces Established in 1954 Interpretation of LDP Government (until 2009)--Invasion is prohibited but self-defense is permitted.--SDF is a minimal power and not military forces Alternative interpretations of Art.9--All war and military forces are prohibited, including for self-defense.--All war and military forces are prohibited, but Japan has self-defense rights.--War and military forces are permitted for the purpose of self-defense. PMAbe(2014) --The right of collective self-defense (SDF assisting US military under enemy attack) should be permitted (do so by cabinet decision, not by constitutional amendment)

14. Land Reform, 1946-50 Redistribution of land ownership to actual cultivators 1945 plan was rejected by GHQ (5ha max; only 11%of land redistributed; “absentee landlord” definition ambiguous) 1946 plan adopted and accepted by GHQ--All land above 1ha (4ha: Hokkaido) must be sold--Land price is nominally fixed under high inflation--Land buyers can pay in 30-year installments--For remaining tenants, rents are frozen and monitored Implementation (mainly 1947-48) --Involving 6 million families (2 million were losers)--Owned land increased from 54% (1941) to 91% (1955)--Labor-intensive: 415,000 officials and volunteers mobilized--Absentee landlord holdings: 80-90% transferred--Other landlord holdings: 70-80% transferred MacArthur: “most successful reform” politically and for equity.

15. Reasons for “success”--Forced reform under US occupation (“landlords are evil”)--Accurate data and village network for easy identification of ownership and cultivators--Preparation by reform-minded officials (before WW2)--Availability of large number of educated staff (unemployment pressure) Problem—economic inefficiency --Average farm remained small: 1.09ha (1941)0.99ha (1955)--More incentive to produce? Estimated productivity did not rise.--Study shows no difference in rice farmers’ land productivity or labor productivity (1939-41 data) : Owned land (3,780kg/ha, 20kg/laborday) Tenanted land (3,687kg/ha, 19.6kg/laborday)

16. Rural Life Quality Improvement Movement M. Mizuno and H. Sato, eds, Development in Rural Society: Rethinking Rural Development, IDE-JETRO, 2008, in Japanese. • In 1948, GHQ ordered the Ministry of Agriculture to initiate nationwide “Life Improvement & Dissemination Movement.” • Many local governments (Yamaguchi, Kagoshima, etc) also launched similar programs with enthusiasm. • Official directives + grass-root village activities organized by life improvement dissemination staff (=village housewives). • Daily life improvement: cooking, nutrition, meals, clothing, bedding, cleaning, washing, child raising, public morals, weddings/funerals, superstition, feudal habits, etc. • Staff training in Tokyo and major cities; universities and research institutions providing information and techniques. • Similarly, “New Life Improvement”, “Life without Mosquitoes and Flies Movement,” etc. up to the 1950s and 1960s.