Japan Postwar Economic Miracle

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         Japanese economy was devastated following the defeat of the country in World War II. Human casualties, high unemployment rate, demolished industrial complexes, payment and compensation for war damage were the face of Japan’s economy during that period. The allied forces led by the United States’ general Douglas MacArthur occupied Japan and reform the country’s military, political, economic and social circumstances (United States Office of The Historian, 2017). The U.S feared the rise of Communism and the onset of Cold war would led Japan to establish economic ties with communist countries in seeking to re-establish its own economy (Leitner, 1999). The occupation led Japan to hand over the right to use any military forces and relied on the United States for protection. This policy enabled Japan to decrease its spending on military and defense forces, which contribute to the country’s economic reform (Takada, 1999). Japan emerged as major economy and showed a tremendous growth throughout the decades known as ‘Japanese economic miracle’.

The United States is credited as the main contributor towards Japan’s economic miracle. However, there are arguments that support the ‘other factors’ in contributing to the recovery of the Japanese economy. The purpose of this essay is to argue whether the united states deserve more credits in its role in shaping Japanese economy or there are other factors that contribute in stimulating the economic growth.

The Role of the United States

            The United States occupied Japan for seven years immediately after World War II and General Douglas MacArthur reformed Japan’s economic structure to be self-sufficient (Endo, 2006). Establishing democracy and pluralism was the main purpose of the occupation, however, in later years the U.S began to change tack and stressed the need for economic recovery due to the fact economic dislocation would encourage the growth of communism (Best et al., 2008). During this period, the U.S had suspended and prohibited military production, eliminated the concentration in production and property rights, and resumption of peaceful economic activity (Neeson, 2008). This policy liberated the Japanese economy and propelled the economic reconstruction.

Japan enjoyed protection after signed the security treaty in 1960 which commit the U.S. to help to defend the country if Japan came under attack, in return the country need to provide bases and ports for U.S. armed forces (Packard, 2010). Plus, the article 9 under the new Japanese constitution installed by MacArthur forbids Japan to maintain armed forces (Sakurada, 1998). This treaty and new constitution lifted Japan from military spending and enable the monetary resources to be channeled towards growing the country’s economy.

Economic assistance to Japan also came in the form of $2 billion in direct economic aid with the span of five years (McWilliams & Piotrowski, 1997). Japan enjoyed free ride on defense due to protection by the U.S. and economic aid. However, McWilliams and Piotrowski (1997) also mentioned that other internal factors within Japan itself were more important in explaining Japan’s postwar economic miracle.


Internal factors within Japan

            Best et al., (2008) mentioned that one of the most important factor of Japan achieving such rapid economic growth was the government action to create an economic environment that stimulated the growth. The role of government in rebuilding the Japan was crucial, as noted by Pempel and Muramatsu (1995, as cited in Siddiqui, 2009) “Economic development has been persistently pursued as a national goal by Japan’s business and political leaders since Meiji Restoration in 1668 and with renewed enthusiasm after the 2nd World War.”  Soon after the War, elected Prime Minister Shigeru Yohisda emphasized on economic development through trade-offs between the use of Japanese soil for U.S. military and Japanese defense to the U.S, thus allowed Japan to cut costs on defense, and get the access to American market and new technology (Harrison, 2008). After Yoshida, PM Hayato Ikeda also concentrated his policy to economy and pledged to maintain the economic growth (Watanabe, 2016). Best et al., agreed that this policy laid a solid foundation for the Japanese economic expansion from the mid-1950s.

When the Japanese economy began to show rapid economic growth, the Bank of Japan (BOJ) introduced the ‘window guidance’ policy (Fukumoto et al., 2010). According to Werner (2015), this core economic policy behind Japan post-war economic success consist of direct credit allocation quotas strictly enforced by central banks. The BOJ provides guidance to financial institutions (other commercial banks) regarding their lending position. The regulations took the in the form of increase in loan or limitation of overall lending position (Hoshi, Scharfstein, & Singleton, 1993). The window guidance required commercial banks to direct their loans to firms operated in strategic industry targeted by the government for economic development and reduce loan to non-strategic industry (Nester, 1993). A documentary film by NHK (2015) showed the Japanese banks had focused their loans on firms operated in industries that support the shift of the country’s economy from weapon based industry to consumer good industry. This policy helped the emergence of firms such as; Hitachi, Toyota, Sony, Mitsubishi, Toshiba and others, which drive the export industry of Japan and contribute to the economic growth of the country (Miyazaki, 1967). These manufacturers’ cumulative increase in output and productivity played an important role in the growth of Japanese economy (Siddiqui, 2009).

Beside window guidance by Bank of Japan, the government also contributing the growth of the economy speared by Ministry of International Trade and Industry (MITI). MITI steered the course of the nation economy and coordinated its industrial growth. MITI hoped to shape and direct Japanese production by administrative regulations (Murata, 1994). It targeted specific industries for growth and establish relationship with foreign market on which Japanese firms would concentrate their market expansion (McWilliams & Piotrowski, 1997). The minister focused on giving out financial aid in the industries of steel, shipbuilding, chemicals, and machinery which were forecasted of having large and rapidly growing international market and helped Japanese economy to grow quicker (Takada, 1999). The minister also protected all the modern industry of Japan until the targeted industries gained enough power to compete in the world market (Matsumoto, 1992). MITI’s strong linkage with private sector created a collaboration between the state and big businesses. These characteristics had defined the role of MITI in driving growth for the economy of Japan (Johnson, 1982).

The support from government and private sector had accounted the formation of business group called keiretsu. The group link industrialists, banks and trading through ownership of stock and long exclusive relationship, where individual companies gained financial strength and connections that allows them to cut foreign rivals and gain market share in high-growth industry with long-term potential (Crawford, 1998). The combination of keiretsu and the main bank system reduced financial risks faced by individual companies and enable Japan to complete its industrialization successfully (Ozkan, 2011). The organization of businesses in keiretsu is one of the factor that drives the growth of post-war Japanese economy by establishing inter-financing between keiretsu members (Miyazaki, 1967). This inter-financing was essential in post-war Japanese market, considering the absence of venture capital in the market (Lincoln, 2001; as cited in Lincoln and Shimotani, 2010). By filling the gap in Japan’s maturing economy, monitoring and sharing risk between members, the keiretsu collaboratively develop high-growth economic era of Japan (Lincoln & Shimotani, 2010)

In conclusion

In explaining Japan post-war economic miracle, there is no single factor that embrace all the necessary elements in driving the economic growth. There were external factors in the form of military protection and financial aid, thus enable the country to recover rapidly. Besides that, the internal factors triggered by government incentives and contribution by private sectors had driven Japan’s economic growth. The quest of economic recovery initiated by early Japan’s post-war Prime Minister had united Japan in achieving mutual objective. The politicians took early initiative in visioning the recovery of the economy. Doctrine and policy made by the government served the purpose of economic recovery. The quest then continued to the banks and individual businesses itself. The central Bank guided the commercial banks on channeling their loans to strategic industrial sector to help the economic growth. The Ministry of International Trade and Industry protect the industry and directed the growing sector by linking the government and individuals company, and helped businesses in international market expansion. The organization of businesses in the form of keiretsu helped individual companies in gaining financial support and business connections in order to compete against foreign rivals. Private businesses supported by government initiative, helped Japan to recover its economy after being devastated in World War II. Hence, the United States played a role and credited for its contribution for Japan’s post war economic boom, but as being discussed above, the U.S. did not deserve much more credit for Japan’s economic miracle.



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