The Economic Miracle
How Japan Won the War by Losing the War

Rebuilding the Economy
Rebuilding the Nation
With Japan’s defeat in WWII, the nationalistic sentiment that had been so carefully constructed since the beginning of the Meiji Restoration, was seriously undermined; indeed, Emperor Hirohito’s formal announcement that Japan had conceded defeat (August 15, 1945) marked not only the end of the war, but the end of the emperor’s role as the “divine” center of the nation. How then was Japan able to recover from an economy that had been literally decimated by the war in such a short span of time?

From Zaibatsu... Keiretsu
[By the 1970s, the Japanese economy was dominated by well-established companies such as Mitsubishi and Mitsui—the worlds oldest major company.] The names were old, but they now designated a new kind of enterprise grouping consisting of affiliated companies (keiretsu) rather than the family-centered zaibatsu of the prewar period. Each group included a bank, likely an insurance company, a real estate firm, and a cluster of companies engaged in every conceivable line of business, where its main competitor was most frequently a member of a rival group. The activities of the various member firms of each group were coordinated in periodic meetings of their presidents in presidents’ clubs. Interlocking directorships, mutual stock holdings, and internal financing further held the organizations together, although more loosely than in the old zaibatsu....
...The keiretsu grew in size and strength until in the mid-1970s a study by Japans Fair Trade Commission found that the six major groupings, composed of 175 core companies, held 21.9 percent of all the capital in Japan and had a controlling interest in another 3095 corporations that held 26.1 percent of the nations capital. In addition, there were their substantial investments in other companies that they influenced without controlling. [BHJC, 269]
  • What are the advantages of the keiretsu system—both for the keiretsu themselves and for the Japanese economy in general?
  • What are the disadvantages?
Japan Incorporated
The Employer/Employee Relationship
In the very largest firms, employees fell into three categories. At the top was management, largely recruited from university graduates. A man...would enter the company with others of his age, expecting to be promoted along with them in accordance with seniority, providing he was suitably conscientious and his health did not break down. The least able would gradually be hived off into less prestigious appointments. The most able could hope eventually to reach the very peak, since family ownership was rare. The price to be paid was hard work, measured by hours spent in the office, and unremitting loyalty, in return for which the ‘salaryman’ received what was by Western standards a small monthly wage but a fairly generous expense account.
       In the next lowest category were the company’s regular ‘permanent’ workers, rather less well educated, but not marked off by any obvious status symbols. Pay was good, as was in-job training. There was a high degree of security of employment, made financially possible by a flexible bonus system, plus a willingness on the part of both employer and employee to resort to job changes and re-training, rather than dismissals, when times were hard. Not infrequently there were company housing, company health and pension schemes, and company holidays. Not many of these benefits extended to the lowest cohort, the temporary workers, who were also the people most likely to lose their jobs in a recession.... [RMJ, 256]

An employee’s point of entry into the system, as into the government bureaucracy, was determined by education, which gave the majority of Japanese an interest in ensuring that their children went as far as possible up the educational ladder and attended the best possible schools. This was particularly so, because educational attainment was measured by the reputation of the school or university, rather than by the individual’s prowess in it....It is not surprising, therefore, that there was fierce competition to get into those of the highest reputation; and since this entailed passing entrance examinations, the result was an annual ‘examination hell’. What is more, the best schools afforded the best preparation for entry to the best universities, so the struggle extended downwards through the system. A survey published in 1988 showed that of a sample of Tokyo children in their last year of elementary school, three-quarters attended cramming schools (juku) during the summer vacation. One in four of these did so every day.  [RMJ, 257-8]

Japanese companies provided varied services and facilities for their employees, including company dormitories for the unmarried. There were company athletic teams and a host of recreational activities, such as organized outings to mountain retreats. These were intended not only to foster the health and well-being of the employees but also to strengthen feelings of group solidarity and identification with the sponsoring firm, which used them to convey an image of paternalistic solicitude. At Toyota, Japan’s leading automobile manufacturer, white-collar men received an entire year of training, including a month in a company camp. Recruitment patterns that centered on certain universities, encouraging ties among men entering a company in the same year; an emphasis on longevity in promotions; the practice of extensive consultation; and a strong preference for decision by consensus all helped foster management solidarity.

Japanese companies, especially the large modern concerns, mostly retained the loyalty of their employees, who were made to feel that what was best for the company was also best for Japan. This business ideology gained credence from management’s practice of plowing earnings back into the firm so that it could continue to grow and hopefully surpass its rivals....[M]anagement was able to get workers to agree to moderate wage increases and fringe benefits. The threat of foreign competition was also used effectively, and for years Japanese companies enjoyed a lower labor bill and more labor peace than many of their competitors in Europe and America. The quest for economic growth gave Japan a sense of national purpose even as it promised an improved standard of living for the people. [BHJC, 269-70]

The government fostered growth by establishing a political climate favorable to economic expansion, by investing in infrastructure, by adopting appropriate fiscal and monetary policies, and by setting production targets, assigning priorities, and generally orchestrating the economy....Although the Construction Ministry controlled the bulk of infrastructure spending, the Finance Ministry and the Ministry of International Trade and Industry (MITI) coordinated economic growth. The importance of MITI [reorganized as METI in 2001] reflected the crucial role of foreign trade in Japan’s economy and the determination of the government to oversee the country’s economic and political relations with other countries. By deploying foreign exchange allocations, manipulating quotas, and establishing barriers protecting native capital from foreign competition, the government channeled the flow of investment funds. It could also extend or deny tax privileges. It thus had at its disposal a variety of weapons to bring recalcitrant firms into line if persuasion, pressures, or both failed. Generally, it preferred to rely on discussion and to act as much as possible on the basis of a shared government-business consensus....Consensus was possible not only because of the shared aims and interest of government and business but also because of ties between the government and the business community. Often these ties were personal, because the men at the top in the private sector and those heading the influential and prestigious government ministries tended to share similar backgrounds (both included a high proportion of Tokyo University graduates).... [BHJC, 270-1]
Export Success!!!
Japanese growth [in the boom years 1960 to 1970] was export-oriented in ways that had not been envisaged under the defense agreements with the United States. In particular, export success no longer depended on industries having lower wage rates than their competitors, which would have implied making low-priced goods for underdeveloped areas, but on those whose efficiency was great, honed by competition in the market at home.... [The Rise of Modern Japan, 248]
In the later 1970s and 1980s, Japan’s emphasis on high technology led to a decrease in dependence on imported raw materials. By 1984, Japan had reduced its use of imported raw material per unit of manufacture to 60 percent less than it had been twenty years earlier. This change also positioned Japan to compete with the emerging economies of such neighbors as Korea and Taiwan. Encouragement was given [to] electronics, telecommunications, biochemicals, and machine tools.... [BHJC, 274]

Growth of GNP declined to the level of other fully developed countries, but Japan’s trade imbalance, especially with the United States, posed a continuing problem. Expectations to the contrary, it was not solved by the rising value of the yen, which did, however, facilitate Japanese investment in the United States.
One business response to new conditions was the transformation of Japanese companies into multinationals. Increasingly, Japanese concerns, in addition to trading in world markets, became involved in manufacturing overseas. These operations were generally successful on the factory floor, but it proved more difficult to internationalize management or “localize” the “transplants.” In many cases, Japanese companies were resented for reserving the best jobs for those at home, for building factories far from the troubled, job-hungry cities, for favoring their keiretsu partners, and for generally taking advantage of opportunities abroad denied to foreign companies at home....
[Prime Minister] Nakasone cooperated with the United States to reduce the trade surplus by emphasizing domestic spending, cooperating on monetary policy, and trying to open Japanese markets to more imported goods....The yen remained strong, propelled by a hot economy that sent the stock market soaring and raised land prices to astronomical levels. Japan became a major exporter of capital—building factories and buying foreign debt, prestigious hotels, and trophy real estate such as new York’s Rockefeller Center, acquired by a Mitsui affiliate in 1989. Nevertheless, the balance of payments remained in Japan’s favor. [BHJC, 274-5]

Other Factors
The question of how Japan managed to recover from its complete economic collapse at the end of WWII to become one of the most important economies in the world has been studied in great detail by many authors. In his book on Japan’s influential role in the Industrialization of East Asian, Ezra F. Vogel provides a significantly different set of factors that contributed to Japan’s success, which may be summarized as follows:

(i) U.S. Aid: Due in large part to concern about the spread of communism in Russia, China, North Korea and Vietnam, America (and to some extent other members of the Allied Forces) provided technological and economic experts to train their Japanese counterparts.

(ii) Destruction of the Old Order: With the pre-War military and political factions thoroughly discredited, the new political leaders could make policy decisions without considering the interests of the pre-War elites.

(iii) Urgency of the Political and Economic Crisis: As with the beginning of the Meiji period, the sense of urgency associated with rebuilding the economy in order to preserve the national interest helped to galvanize support at all levels of society for the self-sacrifices that were necessary to restore and indeed surpass the level of development that had been attained up to WWII.

(iv) Eager and Plentiful Labor Force: After the war, 6 million soldiers and civilians returned from Japan’s overseas colonies and “spheres of interest”; with such a large workforce in need of employment, the cost of production was very low, allowing Japan to produce goods which could effectively compete on the international market.

(v) Confucian Ethic: A final factor was the cultural force of Confucian ethics, which supported the principle of sacrificing the needs of the individual for the greater needs of the collective.

[cf. Ezra F. Vogel, The Four Little Dragons: The Spread of Industrialization in East Asia (Cambridge, MA: Harvard University Press, 1991), 83-112]

In the end, none of these factors can explain Japan’s economic miracle on its own; together, however, they gave Japan (and indeed to the other Asian countries that would follow its model: Taiwan, South Korea, Hong Kong and Singapore) an advantage in economic development that was absent from other developing nations around the world.