Economics: Case Study: Post-WWII Japan

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The big economic success story of the 20^th Century is Japan. At the end of World War II, Japan lay decimated, its capital stock partly destroyed by the war, much of it devoted to wartime production and the people of Japan were poor. Yet between 1951 and 1973, the Japanese economy grew at an annual rate of about 10% during a period time when the growth rate of the United States economy was only about 3%. What was going on? What made the Japanese gross domestic product increase 7 -fold during this period of time? What accounts for the Japanese economic miracle?
Well, Japan started from a much smaller base than the United States, so growth was going to be a higher percent anyway. But there were five factors at work in the story of Japan that made it especially well suited for an industrial revolution.
The first was a high savings rate. The people of Japan save a lot more of their income than their counterparts in the United States and Europe, therefore there's a large pool of funds available for businesses to borrow to invest in plant and equipment. During the period I discussed, the 50's, 60's and 70's, the capital stock of Japan was increasing at an annual rate of about 9%, a 9% growth rate of the total stock of machines and factories and tools available for producing output. At some points, gross domestic product was made up of almost 40% of it being tools; that is, the capital stock accounting for 40% of what was produced in the economy going right back into factories to produce more. The Japanese people save a lot and an economy with a lot of savings can grow rapidly as new machines are deployed.
A second factor is the imitation of technology from abroad. The Japanese didn't have to invent their own technology; they could look at the factories of Europe and the United States, which had already learned by trial and error about best practices. So the ability of the Japanese to imitate and adapt allowed them to import technology and put it to work on the factory floor. And that allowed them to do that with much savings of time and effort.
A third consideration that's related is the skill of the Japanese workforce. Japanese school children are well trained in science and math and their school curriculum is disciplined. When they graduate, they're ready to go to work in industry and they're ready to be good adapters and imitators of technology and creators of new ways of doing things. A high skilled workforce lets you quickly create an industrial revolution.
A fourth consideration is the relationship between labor and management in Japan. Lifetime employment has been the norm in Japan since World War II; that is, you go to work in a factory and you could expect to stay there for the rest of your life if you wanted to, and many Japanese workers do. Because the company knows that you're going to be with them all your life, they have an incentive to invest in your productivity, give you good on the job training and invest in your human capital. And there's a rule against other Japanese companies coming in and hiring away your company's labor, so you're not going to be poached away by a competitor. Your company knows that the investments they make in you are going to go right to their bottom line. Because of this cozy relationship between labor and management, there are fewer strikes in Japan, and managers and workers socialize more with one another on the factory floor. They eat in the cafeteria together, they wear the same uniforms and the gap in pay between managers and workers is much narrower than it is in the United States or in Europe. The good labor relations and the productive environment that is enhanced by lifetime employment were keys to Japan's success over this period.
Finally, there is the relationship between the government and business in Japan. Japan has a very intentional industrial policy, overseen by the Ministry of Trade and Industry. The Ministry of Trade and Industry, sometimes known as MTI, in many cases, actually undertook to allocate capital and allocate resources in the economy to encourage some industries to grow and others to shrink. MTI probably oversaw the success of the computer industry in Japan by actually allowing certain firms to get certain kinds of patents or directing capital to particular efforts, or cooperation between the government and industry in the development of new chips and new technologies. Plus MTI put in place tariffs and quotas that protected these Japanese industries from foreign competition during their infancy, allowing them to grow rapidly without fear of being undercut by imports from abroad.
Another issue is the issue of antitrust. In the United States and Europe, there is a lot of concern that if firms become too big, they'll begin to gouge customers by raising prices due to their monopoly power. In Japan, on the other hand, that's never been especially a concern, rather the concern has been allowing firms to cooperate in the ways that allow them to grow and get their costs down low and become internationally competitive. Because of this, the Japanese firms are some of the largest in the world, because their own government has allowed them to get big. There's also a pretty cozy relationship between Japanese businesses and the banks that finance them, the banks also being among the largest in the world. The tight web of connections between banks, firms and the government in Japan is something that distinguishes it from the U.S. and from most European countries. The Kuretsu arrangement in Japan is a connection among firms that work together to create opportunities for themselves and to exploit them. This tight relationship between firms, their suppliers and their banks is something that is distinctively Japanese.
So the Japanese economic miracle can be accounted for by these five factors: highly trained workforce, lots of savings, good skills at imitation and adaptation and the Ministry of Trade and Industry and its involvement in the government, as well as this special relationship between labor and the management of the companies.
Now, one more thing to keep in mind, and that is that the things that made Japan successful between the 50's and the 70's began to contribute to Japan's troubles in the 70's, 80's, and particularly the 90's. Take a country that's saving a lot of its income and put it in a situation in which there are no longer a lot of easily identified opportunities for investment. What's going to happen? Once Japan's economy is fully stocked with good capital with the Japanese people still saving a lot of their income, there's an opportunity then for trouble, and that is that whenever the economy slips into recession, as it did in the early 1990's, the fact that the Japanese are saving a lot and not spending much prolongs the recession. This is the Keynesian idea that sometimes savings is bad, because they're not spending, factories don't have places to sell their output, then they're inclined to layoff workers, which they can't, because the workers have to be paid anywhere because of lifetime employment. You've got an economy that just shrinks, and shrinks and shrinks into a deeper recession. Because the return on capital is so low, the typical Japanese household investing in Japanese businesses has to save a lot of money for retirement, because they're not going to get a very big return on their investments.
So Japan's high savings rate, which, at one time, was a big part of its engine of success, may nowadays be working against it. But the interesting thing to look at is how Japan grew so rapidly, how it so quickly became the second-largest economy in the world and a major, major industrial power. And the answer has a lot to do with savings and trained labor, but it also has to do with an alternative form of economic organization, one in which the government is much more involved, and in which banks and businesses work together much more closely, and in which management and labor have a unique relationship.
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Case Study: Post WWII Japan Page [2 of 2]