Japanese Economy A 2012 Fall Seinan Gakuin University

Japanese Economy A2012 FallSeinanGakuinUniversity Noriaki EZOE Professor Ph.D. Economics Department Seinan Gakuin UniversityJapan Mail address: ezoe@seinan-gu.ac.jp Homepage address: https://w3.seinan-gu.ac.jp/~ezoe/

Part ⅠChapter 4 Japanese Economic History, Postwar Development (1945 – 1970s) What you will learn in this chapter 1Reform and Postwar Recovery :1945--1949 2 Analyzing Economic Growth 3 Postwar high growth : 1950s—1970s Japanese Economy

1 Japanese history: 1945—1970ｓ Postwar Recovery and growth Showa 1945 : Surrendered, Allied military occupation began 1947 : Japan adopted a new constitution 1952 : The Treaty of San Francisco ：The Allied occupation ended 1956 : Japan was granted membership in the United Nations . 1964 : Tokyo Olympic ： Japan achieved rapid growth to become the second- largest economy in the world. 1973 : The high growth ended in the mid-1970s ( Nixon Shock,oil crisis ) 1978 : Second oil crisis Japanese Economy

1.1 Postwar Recovery: 1945-1949 Douglas MacArthur, (1880 - 1964) head of GHQ 1945 Tokyo The Japanese economy collapsed due to input shortage. Inflation surged. Living standards plummeted. The US occupied Japan and forced democratization and demilitarization (but later partly reversed). 1 Demilitarization : establishment of a new constitution.(1947) 2 Economic democratization: three reforms (next) 3 Various forms of democracy: enlarged voting rights , new education system, and political system were introduced. These reforms transformed Japan to a democratic society. Japanese Economy

PP.155-56 Topic : 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

Article 9 Controversy Article 9 describes ``Pacifism’’. • Renunciation of war • No possession of military forces • Denial of the state’s right of belligerency Self-Defense Forces Established in 1954 : Is SDF unconstitutional or not ? 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. Japanese Economy

Three Economic ReformsPostwar occupation: economic and institutional restructuring 1 Anti-Trust Measures the Zaibatsu (Mitsui, Mitsubishi, Sumitomo, Yasuda) were dissolved (1946-1951) which had controlled the prewar Japanese economy. At the end of the war, major Zaibatsu groups held about 40 percent of equity (paid-in capital). The occupation force required the auctioning off of the shares owned by their holding companies, and thus the Zaibatsu groups were technically dissolved in 1946 and 1947. (they were revamped as keiretsu corporate groups mainly tied together through cross-shareholding of stock in the aftermath of the Occupation) The Anti-Monopoly Law (1947) was introduced to maintain competition. - --- The aim was the creation of a more competitive economy. These policies made many markets more competitive, prompted vigorous investment demand, and enhanced consumer welfare. Japanese Economy

2 Land reform (1946 - 50): Prior to reform, land ownership was highly concentrated. --All land above 1ha (4ha: Hokkaido) must be sold at the very low price. 6 million families get the land.Land reform decentralized ownership in the interest of equalizing income and wealth. --- The reform establish an owner-farmer system. This contributed to income equality and political stability . 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) --- On the other hand, the small lot size has prevented farmers from taking advantage of scale economies. Agriculture has gradually become heavily subsidized and has been placid under numerous government controls. Japanese Economy

3 Labor reform (1946) three labor laws were enacted: the labor union law, the labor working conditions law, and the business and labor relations. Workers were granted the rights to organize in unions and to engage in collective bargaining. As a result of these changes, labor unions spread. The percentage of unionized workers jumped from 3.2 percent in 1945 to 41.5 percent in 1946, and then to 53.0 percent in 1948. --- The intent and effect labor reform was to give the working class a louder voice in corporate management. Japanese Economy

Table : recovery period Japanese Economy

1.2 Recovery process High inflation after the war The supply side: devastation of plant, and infrastructure. (Damage 25.4% of Japan's national wealth) ---accelerate the recovery of productive capacities The demand side: the returning soldiers and civilians. ------consumer demand increased Table 1 shows : The severe shortage of production combined with a swelling of demand resulted in rampant inflation. To tame the inflation, the government took drastic action : froze prices, and rationed necessities. But, the government could not combat inflation. Japanese Economy

Various Economic Policies (1946) stimulate the supply side The Priority Production System: To accelerate the recovery of productive capacity in major industries, the government directly planned the growth of coal and steel industries in 1947,which had spillover benefits for the overall economy. PPS Industrial Production Index Dodge Line Korean War Source: Historical Statistics of Japan, vol.2, 1988. Japanese Economy

(1949) restricting thedemand The Dodge plan (1949)(Economic Stabilization Programs ) The government implemented a balanced budget, suspension of new loans from the Reconstruction Bank, and the reduction and abolition of subsidies. The exchange rate was set at $1=360 yen Washington sendsJoseph Dodge(right) ,1948. a US banker with strong belief in free market and sound budget (1949) The Shoup tax system : government revenues were derived mostly from income tax. (Prof.Carl Sharp was sent by US president) As a result, the inflation stopped, but the economy went into a deflation. Japanese Economy

Cold War broke out (1950) The Early Days of the Cold War 1947: the Cominform was organized by the Soviet Union. 1948:the blockade of Berlin by the Soviet Union. Communist power gained in China. The occupation policy changed. ---The most notable change was the creation of the "Self-Defense Forces." In addition, the policy of breaking up large companies was not fully carried through. The priority shifted to strengthen the Japanese productive capacity. 1950: The Korean War broke out. • Japan received large procurement orders from the U.S. Army . • The special export demand( although short-term ; until 1952 ) helped the full recovery of Japan's economy. Japanese Economy

2 Analyzing Economic Growth2.1 Long run economic growth the history of economic growth in Japan Steady growth from the Meiji period to World War II. Figure 1 illustrates. Three observations (Ito Ch.3). 1. the rapid economic expansion in Japan was not unique to the postwar era. 2. Japan's growth accelerated between the end of the war and the oil-price crisis of 1973-74. 3. Japan's economic growth has consistently outpaced that of the US. Japanese Economy

Figure : Japan's GNP 13 12 11 10 9 8 1825 1893 1901 1909 1917 1925 1933 1941 1949 1957 1965 1973 1981 1989 .-------log of GNP (billion yen, 1980 prices); ---- trend of prewar GNP extrapolated to postwar years; --- peak level of prewar GNP. Japanese Economy

Figure : Growth rates of Japan (solid line) and U.S. (broken line). 16 12 8 4 0 -4 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 Japanese Economy

Table : Real GNP growth rates of postwar Japan.1 Japan’s growth was phenomenal.2 After the oil crisis, it showed the high performances.3 The trend line of prewar was surpassed by the postwar line. We attempts to explain the reasons behind Japan's rapid economic growth from the end of World War II to 1973, and the reasons for the slowdown after the first oil crisis. Japanese Economy

2.2Analyzing sources of economic growthWhy Could Japan Accomplish High Economic Growth? Economic growth can be viewed from either the demand side or the supply side. ( Balanced growth can be achieved when both demand and supply grow without disruptions ) Aggregate demand can be understood as the definition of GNP: • Yd = C + I + G + (EX — IM) (1) where aggregate demand (Yd) is the sum of consumption (C), investment (I), government expenditures (G), and net exports (EM — IM) Japanese Economy

2.2Analyzing sources of economic growthWhy Could Japan Accomplish High Economic Growth?--Review of Text: Growth Economics-- Economic growth can be viewed from either the demand side or the supply side. ( Balanced growth can be achieved when both demand and supply grow without disruptions ) Aggregate demand can be understood as the definition of GNP: • Yd= C + I + G + (EX — IM) (1) where aggregate demand (Yd) is the sum of consumption (C), investment (I), government expenditures (G), and net exports (EM — IM) Japanese Economy

Review of Text: Growth Economics • Supply side: • Growth is measured as changes in real GDP per capita • The aggregate production functionshows how productivity (real GDP per worker) depends on the quantities of physical capital per worker (K/L) human capital per worker (H/L) and the technology (T) Japanese Economy AChapter 4

The source approach Output Growth (GDP) can be analyzed by supply side: decompose growth of output into growth of the factors of production.( See Tables) The source approach demonstrates how the growth rate can be divided into contributions from various factors of production. : this approach answers the question of why Japan grew so fast. Japanese Economy

Table :Source: Denison and Chung 1976a, pp. 98-99. Japanese Economy

Table :Source: Shinohara 1986, p. 17. Japanese Economy

Observations These tables suggest 1 The high growth rate of Japan depends on all three of the major factors. 2 Capital accumulation was more important than labor in Japan, in contrast to the US experience. 3 More than half of Japan's growth is attributed to "technological progress and residuals. Japanese Economy

Review of Text: the savings–investment spending identity • savings and investment spending are always equal for the economy as a whole. • In a open economy : Y = C + I + G + X - IM, C = Y – T - S, With these two equations, we can write saving as S = Y – C – T, = I + G + X – IM – T. Hence, S – I = (G - T) + (X - IM) (**) In words, accounting identity reduces to Saving – Investment = Gov’t deficit + Trade Surplus (or deficit) Japanese Economy

Implications: saving and growth From (**), S – I = (G - T) + (X - IM). The equation dose not imply any causal relationships. But, it gives us a macroeconomic implication. This can be interpreted ; (other things being equal), 1.A high saving likely reduces the capital cost of investment, which sustain a high level of investment. The high level of Investment makes it possible to adopt the advanced technology, which results in faster economic growth. 2. A high saving rate will finance government deficits without causing a high real interest rate or borrowing from abroad. 3. A high rate of saving will produce foreign lending (capital outflow). This will, in the long run, establish the country as a world lender. . Japanese Economy

Some implications for the Japanese economy Historical facts : In Japan the saving rate has been consistently high. - During the 1950s and the 1960s, the first implication, higher investment, was realized. - After the oil crisis of 1973-74, investment plummeted and government deficits grew. Government deficits has been financed without a borrowing from outsides. - In the 1980s, with government deficits reduced and investment still low, capital outflow soared. Japan has become a world largest lender. Japanese Economy

Table : Net national saving rates of Japan and selected other nations, 1960-2000 (Flath; Table 5.1 p. 99) Recent trend : Japanese saving rates has fallen rapidly.-- . Ageing Population Japanese Economy

The Savings–Investment Spending Identity Investment spending (I) = National savings (NS)+ Capital inflow(KI) in an open economy I = SPrivate + SGovernment + (IM − X) = NS + KI Next figures Japanese Economy

Capital inflows Private savings Private savings Budget deficit Budget deficit Capital outflows Figure :The Savings–Investment Spending Identity (b) Japan (a) United States Japanese investment spending in 2007 was higher as a percentage of GDP (23.8%). It was financed by a higher level of private savings as a percentage of GDP (32.1%), which was offset by both a capital outflow (−4.9% of GDP) and a relatively high budget deficit (−3.4% of GDP). Share of GDP Share of GDP 25% 20 15 10 5 0 –5 –10 –15 25% 20 15 10 5 0 –5 –10 –15 Investment spending Investment spending Savings Savings • U.S. investment spending in 2007 (equal to 18.8% of GDP) was financed by a combination of private savings (15.7% of GDP) and capital inflows (5.2% of GDP), which were partially offset by a budget deficit (−1.6% of GDP). Japanese Economy

The international Background: 1950s – 1970s • The international economic order contributed to the Japanese economic recovery and growth. Cold War The instability of the 1920s and 1930s was replaced with a bipolar world in which the United States and the Soviet Union opposed each other in both geopolitical and ideological arenas. International Trade system The United States designed to encourage trade through its sponsorship of the United Nations, the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade . Technology Transfer American companies were encouraged to license technology to Japanese companies in the new international environment. Japan redirected its trade towards the huge and expanding American market. Japanese Economy AChapter 4

3 High Economic Growth Mid 1950s to early 1970s Overview Rationalization (1950s)—new technology and investment for productivity & cost reduction Quality and productivity movement (private sector-led) From political conflicts to economic growth (1960)—“Income Doubling Plan” Re-integration into the world economy Rising living standards Negative aspects—pollution, traffic congestion… Japanese Economy

Post WW2 Real Growth Yen floats Shift from political to economic agenda 2nd Oil Shock 1st Oil Shock Bubble collapses

Ohno PP.162-65 Rationalization (1950s) • Korean War inflation reduced Japan’s cost competitiveness, especially coal & steel. • Competitiveness was regained by investingin mass production and new technology.Industry must exit if uncompetitive (coal). • Funds: private company profits from theKorean War boom. • Tight macroeconomic policy under a fixedexchange 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. Anti-rationalization negotiation, 1955 Anti-rationalization rally, 1961

Quality and Productivity (Kaizen) Movement were Private-sector Driven Private sector, not government, led quality and productivity improvement; private absorptive capacity was very strong. NPOs were created by the initiative of top executives of private firms with nationwide networks for dissemination Cooperation between managers & workers within factories Collaboration among government-industry-academia • Productivity techniques imported from the US (mostly top-down, statistical) were revised to fit Japanese production environment (bottom-up, mindset change, continuous effort by teamwork)

Role of Private Sector Organizations in Introduction, Development and Diffusion of Foreign Technologies Private Sector Organizations (JPC, JUSE, JMA, etc.) US & European Countries Private Companies (Technology Transfer) (Technology Transfer) • Dispatch of study missions to US & Europe • Invitation of foreign advisors • Translation of foreign literature into Japanese • <To Learn> • Study on adaptability of new technology (by committees and working groups: industry-govt.- academia joint research) • Trial application and modification of technology (pilot projects) • <To Test & Modify> • Guidance and advices • Education and training • Qualification and certification system • Award system • Enlightenment and movement • <To Diffuse> Source: Adapted from Tsuyoshi Kikuchi “The Roles of Private Organizations in the Introduction, Developmentand Diffusion of Production Management Technology in Japan” (original paper published in the Bulletin of the Graduate School of International Cooperation Studies No. 4, 2011, Takushoku University).

Ohno PP.177-78 Labor Surplus Ends around 1960 Job offer/job seeker ratio(Public job matching service) Wage Gap by Employment Size(Large firms’ wage=100) Unemployment Ratio Golden Eggs—some left,others stayed

Internal Labor Migration ModelLewis, Fei-Ranis, Harris-Todaro Modern Sector Traditional Sector • Formal jobs • Informal jobs • Unemployment Poverty Surplus laborMutual help for survival Labormigration Pool of Underclass Rural Villages Urban Centers Not all migrants can find jobs. Most of them go to the unstable informal sector or join the pool of the unemployed.

Japanese SMEs and “Dual Structure” High & stable salaryLife-time employment Large firms • SMEs’ problems—low productivity, low wage, job instability  SME Policy for protecting weak SMEs • As the labor market tightened around 1960, the wage gap began to narrow. Government also subsidized farmers. • Today, high-tech SMEs are considered as the source of Japanese competitiveness (but not all of them). Parent-subsidiary relation SMEs Migration Low wageJob insecurityExploited by large firms Agriculture

Ohno P.185 Consumption Boom—Cause or Effect? Three C’s(1960s) Three Divine Devices (late 1950s) Household Ownership Ratios of Consumer Durables

3.3 Economic Results • Results : Rising living standards, consumption boom and new life style. -- great increases of GDP, per capita income, and real wages (low unemployment rate) Japan as a Developed Country (see Table 3 ) • Negative Side Effects • Poor Infrastructures--- traffic congestion- • unequal development among geographic regions and among economic sectors • Environmental pollution(Minamata Disease and Itai-Itai Disease in the late 1960s) • the high rate of inflation Japanese Economy AChapter 4

3.4 The end of rapid growth Nixon Shock(1971) : U.S. stopped the convertibility of the dollar into gold. The yen exchange rate up. Oil crisis (1973,1978) War in the Middle East caused the price of oil to rise. These external shocks brought Japan's rapid growth to an end. The economy grew at slower and steadier rates. Japanese Economy

Real GDP Growth(Fiscal Year – April to March) Average 1956-73 9.1% Average 1974-90 4.2% Average 1991-2010 0.9% Japanese Economy Source: The System of National Accounts site, Cabinet Office.

The three major factors in the end of the postwar Japanese miracle -The oil crises, -The decrease in investment, -and The slowdown in technological progress They werenot independent of one another. The real reason of Japan's growth rate fall ? Japan finally caught up with the United States and the Western European countries technologically at some point in the mid 1970s. Since it is harder to develop a country's own new technology than to merely obtain licenses, then growth rate fall. Japanese Economy

TableJapan during oil crises. Japanese Economy

Ohno P.187 Monetary Growth and Inflation (12-month change) Bubble 1st oil shock 2nd oil shock Bubble collapses Bretton Woods fixed dollar system ends General float begins Plaza Agreement Japanese Economy

Growth Slowdown in the 1970s-80s • Japan’s economic maturity—income reached the world’s highest level • Oil shock and global stagflation • General floating of major currencies US W.Ger. France Japan UK Italy Japanese Economy

Productivity Slowdown (estimated by labor-material Cobb-Douglas prod. func.) Japanese Economy

Conclusion Factors of growth (1) The imported foreign technology (2) The high saving rate (3) large supply of high-quality labor (4) The sound monetary and fiscal policy: The reasons of the high growth: - a sustained period during , the prices of the raw materials and agricultural commodities which Japan had to import were relatively low. -sound policy decisions by Japan's monetary and fiscal authorities through the 1950s and the 1960s, -and a high saving rate, which provided sufficient funds to support a high investment rate. Slow down: economic maturity—Japan caught up with the developed countries technologically. Japanese Economy

Japanese Economy A 2012 Fall Seinan Gakuin University