Japans Economic Miracle

Reasons for Economic Success Foreign Influences

Era of unprecedented high speed growth when Japans economy expanded at an average rate of 10% annually between 1950 to 1973. Japan continued to have a healthy economy well into the 1980s.

USAs direct financial aid to Japan

USA provided more than US$1 million a day to Japan between 1946-1948 as part of the Government and Relief in Occupied Areas program. Kicked started Japans economic recovery through the injection of much needed liquidity. The aid was extremely crucial in helping Japan get back on its feet since it alleviated starvation, thereby preventing social unrest that could potentially hinder economic growth. More importantly, it equipped Japan with an able bodied work force to power Japans industries. This aid also trickled down to help Japan repair its damaged infrastructure which helped revive Japans prostrate post war economy. First vital step towards national reconstruction. Set the foundation of the Japanese economic miracle from which other factors and policies built upon. Reflected USAs willingness to act as the engine for world growth and recovery.

USAs favourable macro-economic policies towards Japan

USA retreated on its decision to break up the Zaibatsus which formed the bedrock of Japans industries in the late 1940s. They were now reintegrated as Keiretsus. The former Zaibatsus were the fulcrum of Japans prewar economy and hence were instrumental in ensuring it health.

Keiretsus could lend the much needed expertise, technology and infrastructure to Japans post war economy, therefore accelerating its recovery. Japans prostrate economy did not have to start from scratch which enabled it to get back on its feet quickly. This reflected USAs willingness to turn a blind eye to the Zaibatsus war crimes as they felt economic recovery took precedence in light of the Cold War. Japan also benefitted from the opening up of the American economy following GAT talks which cut 73% of non agricultural tariffs by the 1960s, most of which belonged to the USA.

Facilitated an increase in trade volume by enabling Japanese goods to enter the US market easily. Significant since Japan could tap into the worlds largest consumer market for growth through increases in export revenue. This also illustrates USA tolerance of its allies preferential systems. Allowed Japan to keep its protectionist measures on steel(1950s) and automobiles(1960s). Enabled Japanese infant industries to develop from a secured market position by preventing the crowding in and flooding in effect to become dominant global market players which acted as engines for Japans economic growth. Reflected USAs willingness to act as the engine for world growth and recovery.

Demilitarisation and US-Japan military alignment

As part of the 1951 San Francisco Treaty, Japan had to demilitarize. US provided protection by stationing air and naval bases in islands such as Okinawa.
Enabled US to project is military might into SEA, thereby

helping to contain the threat of communism. Allowed Japan to channel 99% of its GDP into the civilian economy. Privileged economic development over the military as illustrated by the Yoshida Doctrine. Government had a larger fiscal budget, thus able to effectively create a capitalist developmental state which required constant and costly intervention. The security arrangement also ensured that the communist threat never reached Japans shores, therefore creating a stable political sphere. Moreover, manpower could be concentrated into the various pinpointed industrial sectors, thereby creating a large efficient workforce to power Japans economic growth.

Reasons for success Domestic influences

Capitalist developmental state
The Ministry of International Trade and Industry(MITI) pinpointed and subsidized favoured industries such as steel in the 1950s and automobiles in the 1960s. Funding was crucial in nurturing infant industries and accelerated its growth, enabling them to become key global market players by giving them an artificial competitive advantage. Due to their dominance, export led growth became the backbone of Japans economic success.

The government also artificially suppressed the Yen by pegging 360 Yen to 1 USD.

This made Japans exports more cost competitive, therefore fuelling overseas demand for Japanese made products. At the same time an undervalued exchange rate protects the domestic market since foreign imports are priced less competitively as compared to local ones and hence have a lower demand. Artificially kept the level of competition low. This created a huge imbalance of trade which allowed Japan to run a chronic trade surplus. The success experienced in the export industry powered Japans economic growth. Japans competitive currency devaluation hinged on USAs willingness to accept asymmetrical benefits as it adopted the locomotive theory.

Stable government
The ruling Liberal Democratic Party stayed in power from 1955 to 1993. The stable political sphere ensured continuity of Japans economic policies, many of which the benefits could be reaped only in the long run. In addition, due to their entrenchment, there was little partisan politics that could potentially hinder Japans long term economic growth. The consistent economic centralization and planning hence ensured a viable and successful capitalist developmental state. Stable government also hinged on US financial aid and favourable macro economic policies which the LDP capitalized on to further economic recovery which enabled them to gain legitimacy.

Workforce and culture in Japan

The Japanese worked on average 2097 hours annually in 1986 as compared to 1828 hours that the Americans clocked in. Each Japanese firm had its own total quality management unit.

 Work ethic of high efficiency and productivity. They defined the frontier of productivity, enabling quality products to be manufactured quickly and cheaper. As such, Japanese goods were competitive in both cost and differentiation. Enabled Japanese goods to flood into international markets and crowd out local producers. This translates to large export revenue which powered Japans economic growth. The efficient workforce further enhanced the success of the capitalist developmental state by injecting more dynamism into the pinpointed industrial sectors. Japan also boasts of high savings rates of up to 20% in 1973.

Thrift was embedded into Japanese culture. This gave state aligned banks such as the Bank of Japan extra funds to invest into economic development, thereby contributing to the Japanese economic miracle. Enabled the government to maintain a capitalist developmental state since it had ample funds for costly intervention.

Causes led to Consequences

Japans depression refers to the more than 10 years of stagnation and lackluster growth of an average 0.37% in the 1990s, with 4 periods of recession.

Policies in production

MITI targeted favoured industries and transformed them into world leaders in exports.

Analyse how this was successful initially

However, the government failed to give attention to industries such as software and aerospace that would be the boom sector of the 1990s. This illustrates the detrimental effects of an overreliance on government economic directions as the government is also susceptible to oversight. It was a myopic approach to just concentrate economic resources on a few industries and not diversify. Moreover, the comparative advantage of these industries was long eroded, thereby contributing to a lack of dynamism and stagnation in the Japanese economy.

Policies in finance
The Bank of Japan constantly intervened in the financial sector by extending loans to companies. This is seen from the BOJs $2.8 billion dollar loan to Sony to fund its takeover of Columbia Pictures. This is significant as BOJs loans injected much needed capital into Japans infant industries. Created a favourable business environment which fuelled the entrepreneurial spirit. This capital was than well invested into expansion of operations, thereby fuelled the development of companies(Sony, Toyota) which became dominant international firms. Due to their dominance, export led growth became the backbone of Japans economic success.

However, from the 90s, the BOJ continued extending loans to bankrupt companies due to political business nexus. The amount of nonperforming loans to the private sector is estimated at $1.77 trillion.

As such, capital was displaced from healthy business to zombie corporations that would otherwise expire in the free market. The loans artificially kept these non performing companies afloat. Hence, these bad loans meant that there was a lack of funds to finance new loans to profitable industries which could become the engines for Japans growth and economic recovery. Failure to resolve bad debt has weakened the overall health of the financial system and stymied economic recovery.

Policies in trade and investment

The Japanese government followed anti competitive trade practices. This can be seen from their artificial suppression of Yens value(360 Yen to 1USD).

Analyse how this was successful initially

The Japanese government continued these practices well into the 1990s by erecting protectionist measures to protect its domestic economy and uncompetitive industries. This is extremely detrimental to the Japanese economy as it gave industries little impetus to innovate and increase their efficiency since they enjoyed a sheltered market position. In the long run, this means that large portions of the Japanese economy not only failed to measure up to the standards of the best worldwide competitors but fall far behind them. Protectionist business relics lingered on past the point where they continued to be essential. Need to embrace free market competition which would inject dynamism into the Japanese economy.

Interventionist habits

The Japanese government introduced Keynesian style stimulus packages which pumped funds into developing Japans infrastructure and the overall macro economy. These funds were effective as they repaired Japans damaged infrastructure and further developed it which helped Japans economic recovery take off. World class infrastructure created the foundation from which industries could thrive since they enjoyed external economies of scale. Hence, this facilitated the development of the export industry which became the backbone of Japans phenomenal economic growth.

However, the Japanese government continued to introduce Keynesian style stimulus packages to prime the pump for economic recovery but it resulted in a public debt of nearly 140% of Japans GDP by 2002.

This reveals that the Japanese governments spending was poorly invested. The economy needed a complete restructuring and not stimulus packages. Japanese economic model was too entrenched, making it extremely difficult to reform. The governments extensive intervention was ultimately detrimental and ineffective as it exacerbates Japans current economic problems. Failed to adequately address the economic depression.

Really an economic miracle?

Capitalist illusion: Faade of great economic prosperity that appears to be driven by free market forces but is actually artificially propped up by interventionist influences. It would also be one that is unsustainable in the long run. Economic miracle: Organic and sustainable economic growth that is brought about by natural free market forces.

Structure
Japanese economic miracle was artificially engineered by the US and Japanese government. *Two para each(use the macro themes of the causes) Economic depression revealed that the Japanese economic model was ultimately unsustainable as it lacked the dynamism of free market forces.