Economic Growth after WWII

35.2.2: Economic Growth after WWII

Japan’s impressive economic growth after World War II depended on a number of factors, including the nation’s prewar experience, the advantageous conditions of the post-war occupation by the Allied forces, the high level and quality of investment that persisted through the 1980s, a well-educated and disciplined labor force, economies of scale, and global politics.

Learning Objective

Recognize the ways in which Japan encouraged economic growth after the war

Key Points

  • Japan experienced dramatic political and social transformation under the Allied occupation in 1945–1952. The occupation sought to decentralize power in Japan by breaking up the zaibatsu, transferring ownership of agricultural land from landlords to tenant farmers, and promoting labor unionism. Other major goals were demilitarization and democratization of Japan’s government and society. The cabinet became responsible not to the Emperor but to the elected National Diet. Japan’s new constitution came into effect in 1947 and guaranteed civil liberties, labor rights, and women’s suffrage.
  • In the aftermath of the war, about 40% of the nation’s industrial plants and infrastructure were destroyed, and production reverted to levels of about 15years earlier. U.S. assistance totaled about $1.9 billion during the occupation. About 59% of this aid was in the form of food, 15% in industrial materials, and 12% in transportation equipment. A variety of U.S.-sponsored measures during the occupation contributed to the economy’s later performance by increasing competition.
  • The early post-war years were devoted to rebuilding the lost industrial capacity with major investments in electric power, coal, steel, and chemicals. By the mid-1950s, production matched prewar levels. Released from the demands of military-dominated government, the economy not only recovered its lost momentum but also surpassed the growth rates of earlier periods. In 1965 industrial sectors employed more than 41% of the labor force, while only 26% remained in agriculture.
  • Japan’s highly acclaimed post-war education system contributed strongly to the modernizing process. The world’s highest literacy rate and high education standards were major reasons for Japan’s success in achieving a technologically advanced economy.
  • The mid-1960s ushered in a new type of industrial development as the economy opened itself to international competition in some industries and developed heavy and chemical manufacturers. Whereas textiles and light manufacturing maintained their profitability internationally, products such as automobiles, electronics, ships, and machine tools, assumed new importance.
  • The 1973 oil crisis shocked economies that had become dependent on imported petroleum. Japan experienced its first post-war decline in industrial production, but the following recovery only strengthened Japan’s economy. The factors that contributed to the post-WWI growth included the nation’s prewar experience, which provided several important legacies; the high level and quality of investment that persisted through the 1980s; well-educated and disciplined labor force; economies of scale; and global politics, including international military conflicts, which often benefited Japan’s economy.

Key Terms

zaibatsu
A Japanese term for industrial and financial business conglomerates whose influence and size allowed control over significant parts of the Japanese economy from the Meiji period until the end of World War II.
keiretsu
A set of companies with interlocking business relationships and shareholdings. This type of informal business group maintained dominance over the Japanese economy for the second half of the 20th century.

 

Background: Post-World War II Occupation of Japan

Japan experienced dramatic political and social transformation under the Allied occupation in 1945–1952. US General Douglas MacArthur, the Supreme Commander of Allied Powers, served as Japan’s de facto leader and played a central role in implementing reforms, many inspired by the New Deal of the 1930s. The occupation sought to decentralize power in Japan by breaking up the zaibatsu (industrial and financial business conglomerates in the Empire, whose influence and size allowed control over significant parts of the Japanese economy), transferring ownership of agricultural land from landlords to tenant farmers, and promoting labor unionism. Other major goals were demilitarization and democratization of Japan’s government and society. The cabinet became responsible not to the Emperor but to the elected National Diet. The Emperor was permitted to remain on the throne but ordered to renounce his claims to divinity. Japan’s new constitution came into effect in 1947 and guaranteed civil liberties, labor rights, and women’s suffrage.

The San Francisco Peace Treaty of 1951 officially normalized relations between Japan and the United States. The occupation ended in 1952, although the U.S. continued to administer a number of the Ryukyu Islands, with Okinawa the last to be returned in 1972.

Seizure of the zaibatsu families assets, 1946, source: Showa History, Vol.13: Ruins and Lack published by Mainichi Newspapers Company.

 Seizure of the zaibatsu families assets, 1946, source: Showa History, Vol.13: Ruins and Lack published by Mainichi Newspapers Company.The zaibatsu were the heart of economic and industrial activity within the Empire of Japan, and held great influence over Japanese national and foreign policies. Under the Allied occupation after the surrender of Japan, a partially successful attempt was made to dissolve the zaibatsu. Many of the economic advisors accompanying the SCAP administration had experience with the New Deal program and were highly suspicious of monopolies and restrictive business practices, which they felt to be both inefficient and a form of corporatocracy and thus inherently anti-democratic.

Economic Growth

In the aftermath of the war, about 40% of the nation’s industrial plants and infrastructure were destroyed and production reverted to levels of about 15 years earlier. U.S. assistance totaled about $1.9 billion during the occupation, or about 15% of the nation’s imports and 4% of gross national product (GNP) in that period. About 59% of this aid was in the form of food, 15% in industrial materials, and 12% in transportation equipment. A variety of U.S.-sponsored measures during the occupation, such as land reform, contributed to the economy’s later performance by increasing competition. Finally, the economy benefited from foreign trade because it was able to expand exports rapidly enough to pay for imports of equipment and technology without falling into debt. New factories were equipped with the best modern machines, giving Japan an initial competitive advantage over the victor states, who now had older factories.

The early post-war years were devoted to rebuilding the lost industrial capacity, with major investments made in electric power, coal, steel, and chemicals. By the mid-1950s, production matched prewar levels. Released from the demands of military-dominated government, the economy not only recovered its lost momentum but also surpassed the growth rates of earlier periods. Between 1953 and 1965, GDP expanded by more than 9% per year, manufacturing and mining by 13%, construction by 11%, and infrastructure by 12%. In 1965 these sectors employed more than 41% of the labor force, whereas only 26% remained in agriculture. Millions of former soldiers joined a well-disciplined and highly educated work force to rebuild Japan.

Japan’s highly acclaimed post-war education system contributed strongly to the modernizing process. The world’s highest literacy rate and high education standards were major reasons for Japan’s success in achieving a technologically advanced economy.

The mid-1960s ushered in a new type of industrial development as the economy opened itself to international competition in some industries and developed heavy and chemical manufacturers. Whereas textiles and light manufacturing maintained their profitability internationally, products such as automobiles, electronics, ships, and machine tools assumed new importance. The value added to manufacturing and mining grew at the rate of 17% per year between 1965 and 1970. Growth rates moderated to about 8% and evened out between the industrial and service sectors between 1970 and 1973 as retail trade, finance, real estate, information technology, and other service industries streamlined their operations.

Oil Crisis

Japan faced a severe economic challenge in the mid-1970s. The 1973 oil crisis shocked economies that had become dependent on imported petroleum. Japan experienced its first post-war decline in industrial production, along with severe price inflation. The recovery that followed the first oil crisis revived the optimism of most business leaders, but the maintenance of industrial growth in the face of high energy costs required shifts in the industrial structure.

Changing price conditions favored conservation and alternative sources of industrial energy. Although the investment costs were high, many energy-intensive industries successfully reduced their dependence on oil during the late 1970s and 1980s and enhanced their productivity. Advances in microcircuitry and semiconductors in the late 1970s and 1980s led to new growth industries in consumer electronics and computers and to higher productivity in established industries. These adjustments increased the energy efficiency of manufacturing and expanded knowledge-intensive industries. The service industries expanded in an increasingly postindustrial economy.

Factors of Growth

Complex economic and institutional factors affected Japan’s post-war growth. First, the nation’s prewar experience provided several important legacies. The Tokugawa period (1600–1867) bequeathed a vital commercial sector in burgeoning urban centers, a relatively well-educated elite, a sophisticated government bureaucracy, productive agriculture, highly developed financial and marketing systems, and a national infrastructure of roads. The buildup of industry during the Meiji period to the point where Japan could vie for world power was an important prelude to post-war growth from 1955 to 1973 and provided a pool of experienced labor.

More important were the level and quality of investment that persisted through the 1980s. Investment in capital equipment, which averaged more than 11% of GNP during the prewar period, rose to about 20% of GNP during the 1950s and to more than 30% in the late 1960s and 1970s. During the economic boom of the late 1980s, the rate still hovered around 20%. Japanese businesses imported the latest technologies to develop the industrial base. As a latecomer to modernization, Japan was able to avoid some of the trial and error needed by other nations to develop industrial processes. In the 1970s and 1980s, Japan improved its industrial base through licensing from the US, patent purchases, and imitation and improvement of foreign inventions. In the 1980s, industry stepped up its research and development, and many firms became famous for their innovations and creativity.

Japan’s labor force contributed significantly to economic growth. Before and immediately after World War II, the transfer of numerous agricultural workers to modern industry resulted in rising productivity and only moderate wage increases. As population growth slowed and the nation became increasingly industrialized in the mid-1960s, wages rose significantly although labor union cooperation generally kept salary increases within the range of gains in productivity.

The nation also benefited from economies of scale. Although medium-sized and small enterprises generated much of the nation’s employment, large facilities were the most productive. Many industrial enterprises consolidated to form larger, more efficient units. While the zaibatsu were dissolved after the war, keiretsu—large, modern industrial enterprise groupings—emerged. The coordination of activities within these groupings and the integration of smaller subcontractors into the groups enhanced industrial efficiency.

Finally, circumstances beyond Japan’s direct control contributed to its success. International conflicts tended to stimulate the Japanese economy until the devastation at the end of World War II. The Russo-Japanese War (1904–5), World War I (1914–18), the Korean War (1950–53), and the Second Indochina War (1954–75) brought economic booms to Japan.

Attributions