Economic Development of Japan

Review

Topics for Review• Umesao Theory (evolutionary history)• Edo—preparation for modernization• Meiji—private sector dynamism• Free market vs. industrial policy • Coping with post-bubble recession• Politics

Discussion and Q&A

Dr. Tadao Umesao’s View of the World

WesternEurope (UK)

JapanDry Area

Russia

China

India

The Meditterra-nean and Islamic　 States

Eurasian Continent

Evolution of Peripheral Society Interaction between Internal and External Forces

External stimuli

Base society

Foreignsystems

Period of adjustment & rapid change

Period of internalization & stability

Failed adjustment:social instability, economic

crisis, foreign dominance, etc.

Failed adjustment

xxxx xxxx xxx

I. Emperor’s RuleII. Samurai’s Rule

X

III. Modern-ization

WAR

IV. Postwar

Clan fights

× 645

NARA

Centralization

HEIAN

Nobles,Decentralization

Internal wars,

dynamic & fluid society

Peace, isolation, conservative class society

EDO

Tokugawa Shogunate

KAMAKURAMUROMACHI

SENGOKU

1867

MEIJI

Westernization,

industrialization,

militarilization

Rapid recovery

and growth

Hunting & gathering

Taika Reform

Rice Chinese culture &political systemBuddhism

WEST: guns &Christianity

WEST!!! US occupation1945-52

1603

PP.16-17

× 671Jinshin War

Edo: Pre-conditions for Industrial Take-off• Political unity and stability• Agricultural development and commercialization• Development of transportation and nationally unified markets• Rise of commerce, finance and wealthy merchant class• Rise of pre-modern manufacturing• Industrial promotion by local governments (policy capability)• High level of education (HRD)

P.23

Cum

ulat

ive

hist

ory,

Edo

ach

ieve

men

ts,

nati

onal

uni

ty a

nd n

atio

nali

sm

Private-sector dynamism and entrepreneurship

(primary force)

Policy support(supplementary)

Japan’s economic growth was driven mainly by private dynamism while policy was also helpful

Policy was generally successful despite criticisms:--Power monopoly by former Satsuma & Choshu politicians--Privatization scandal, 1881--Excessively pro-West--Unfair by today’s standard

Rapid industrialization esp. Meiji and post WW2 period

P.56

Rise and Fall of Merchants and Enterprises

0

50

100

150

200

250

1849 1864 1875 1888 1902

Persons

Millionaires of Edo period

New millionaires of Late Edo

New millionairesin early Meiji

New millionaires in company boom period

Source: Computed from Miyamoto (1999）, p.53. Each line shows how many ofthe new millionaires emerging each period survived in later periods.

Q: Who were the main drivers of Meiji industrialization?

A: All types of entrepreneurs including Edo gosho, Yokohama merchants, Meiji zaibatsu, and company boom millionaires.

► Survival game was severe: many entries, many exits

► Japan’s industrial revolution: from 1880s to 1900s

► Japan-China War,Japan-Russia War also accelerated industrialization

P.47

Dynamic Business Leaders and Managers

Yataro Iwasaki1835-1885

Tosa samurai; founder of Mitsubishi Zaibatsu

Eiichi Shibusawa1840-1931

Super business coordinator who created 500 companies

Tomoatsu Godai1836-1885

Satsuma samurai; super business coordinator for Kansai Area

Rizaemon Minomura1821-1877

Super manager and reformer of Mitsui Zaibatsu

Saihei Hirose1828-1914

Super manager of Sumitomo Zaibatsu and Besshi Copper Mine

Takeo Yamanobe1851-1920

Super factory manager and founder of Osaka Spinning Company

Monozukuri (Manufacturing)

Spirit• Mono means “thing” and zukuri (tsukuri) means “making” in

indigenous Japanese language.

• It describes sincere attitude toward production with pride, skill and dedication. It is a way of pursuing innovation and perfection, often disregarding profit or balance sheet.

• Many of Japan’s excellent manufacturing firms were founded by engineers full of monozukuri spirit.

PP.65, 179-181

Sakichi Toyota1867-1930

Konosuke Matsushita1894-1989

Soichiro Honda1906-1991

Akio Morita (Sony’s co-founder)1921-1999

“J-Model” vs. “Global Standard”

Industrial View Free Market View

Motivation Long-term firm growth (industrial engineers)

Quick result orientation (financial investors)

Skill and technology

Internal accumulation by permanent staff

Task-based contract or outsourcing

Concept of “firm”

Long-lasting community for achieving excellence

Restructure, buy or sell for best performance

Role of Government

Assist industries with technology, management, finance, etc.

Set laws and rules only; let private sector operate freely without meddling

Competition & integration

Raise competitiveness before integration; temporary official help

Open up and compete from the beginning; level playing fields

Origin of the Post-WW2 Japan System• Featuring long-term commitments and official intervention

Government-led industrial drive, administrative guidance, subcontracting, lifetime employment, keiretsu, mainbanks, friendly trade unions, BOJ window guidance, etc.

• Negative view—this system was installed artificially after 1937 to execute war. It continued to work reasonably well in the 1950s-60s, but it is now obsolete.

• Positive view—advanced industrialization requires such features. Free markets do not generate high-tech or heavy industries. Japan needed such a system to develop.

This means laissez-faire policy supports light industries and simple processing only; to go further, developing countries need above features even today.

PP.140-41

Average Tariff RateCalculated as (tariff revenue)/(import value)

0

5

10

15

20

25

1870

1880

1890

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

All commodities Average of non-zero tariff commodities

1899 Restoration oftariff rights

%

Industrial Policies in Postwar Japan(From Prof. Akira Suehiro’s 2006 Slides)

• The fiscal investment and loan program (FILP, p.165fn) promoted trade and industry until early 1960s

• Loans by Japan Development Bank and Exim Bank was relatively small, but had two important effects--Catalyst for larger commercial bank loans

--Information sharing between business and government

• Cooperative policy formulation and implementation• The “return match game” and learning effect—firms co

uld apply many times for JDB and SME loans

Japan’s IP contributed to development of the market mechanism rather than distorting the market.

Figure 4 Mechanism of FLI and the Role of MITI and JDB

Policy Making

Policy Implementation

Fiscal Finance

technology advice managerial advice

Source: Drafted by Akira Suehiro

Individual Firmsapplied to fiscal finance

Industrial Council on SpecificIndustry or Target

Government Officers,Academicians,

Specialists

Business Associationsfor each industry

J apan DevelopmentBank

Department of HeavyIndustry

Ministry of InternationalTrade and Industry

(MITI)

Ministry of Finance(MOF)

Fiscal Fund Bureau

Late 1950s - 1960s

How to Cope with Post-Bubble Recession?

Inefficient firms & banks

Bad debt restructuring

Macro policy stance

Real sector policy

After WW1 Bubble (1920s)

Rescue with BOJ credit

Hide problem until 1927 crisis

Neutral? Heavy industry drive

After Korean War Bubble (1950s)

No rescue Not necessary Moderately tight

Rationalization (investment, technology)

After Heisei Bubble (1990s)

Rescue Jusen (real estate nonbanks)

Restructure after 1997-98 banking crisis

Fiscal activism & zero-interest rate policy

Not much

US-led global financial crisis (2008-09)

Rescue big US banks, auto makers, etc.

Effort begun in US

Global effort to ease macro policies

New energy policy?

Causes of the Banking Crisis, 1927Kamekichi Takahashi & Sunao Morigaki, History of Showa Financial Crisis, 1968.

Fundamental causes (more important)• Internal problems in the banking system

(kikan ginko)• Rescuing weak businesses generously without

serious restructuring after the bubble burst. • The 1923 earthquake and exchange rate instability furt

her weakened Japanese economy.

Immediate causes• Political fights over the unsettled earthquake bills.• Minor misstatement by Finance Minister Kataoka.

Rationalization 合理化 (1950s)

• Korean War inflation reduced Japan’s cost competitiveness, especially coal & steel.

• Competitiveness was regained by investingin mass production and new technology.Industry must exit if uncompetitive (coal).

• Funds: profits from the Korean War boom.• Tight macroeconomic policy under a fixed

exchange rate to force rationalization.• 1956 Economic White Paper: “We are no longer in the

postwar period”—the recovery phase is over, new sources of growth must be found.

PP.162-65

Anti-rationalization negotiation, 1955

Anti-rationalization rally, 1961

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

168%

Debate on Fiscal Stimuli, 1990s-Now• During the 1990s, large fiscal spending was used to stimulate

the economy. But there was no strong recovery, while the government debt skyrocketed.

• Some argued for even bigger stimuli; others said that would only worsen the situation.

PP.211-212

Government debt in % of GDP

Bubble burst

• PM Koizumi (2001-06) set limits on spending (infrastructure, welfare).

• PM Aso (2008-) returned to big fiscal spending to combat recession.

Koizumi Abe Fukuda Aso

Pure dictatorship

Full democracy

Democratic institution

(Form)

Political competition

ConstitutionLawsParliamentElectionCourt

Reform vs conservatism, big vs small government, other policy debates

EdoMeiji

Taisho

Fascism

ConstitutionParliament

Democracy movement,

Party cabinet

DemocratizationNew constitution

Showa2

War1937

1945-51 LDP dominanceLack of policy debate

Male suffrage

1960Now

US rule

Defeat

Showa1

1889

1925

1931Military rises

1937-45

(Content)Political fights

Flexibility in Coalition Building, 1858-1881Industrialization

Constitution

Parliament

ForeignexpeditionOkubo (Satsuma)

1830-1878

Kido (Choshu)1833-1877

Saigo (Satsuma)1827-1877

Itagaki (Tosa)1837-1919

Fukoku Kyohei (rich country, strong military)

Kogi Yoron (democratization)

Source: Banno (2007), edited by presenter.

Naichi Yusen(internal reforms first)

Seikanron (Korean expedition plan)

Two-party Politics 1924-1932 PP.130-32

Minsei Party 民政党 (Kenseikai until 1927)

Seiyukai 政友会(Estab. in 1900 by Hirobumi Ito)

Economy Small government, free market, fiscal austerity & industrial restructuring for return to gold

Big government, fiscal activism, local public works for securing votes

Foreign policy

Oppose militarism, protect Japan’s interest by diplomacy, promote disarmament

To attack Minsei Party, support military and fascism if necessary, even deny democracy

Remark Peace orientation is laudable, but stubborn deflation policy caused fascism to gain force

Economic recovery policy was welcomed, but its opportunism severely undermined democracy

Seiyukai statements:“Prof. Minobe’s theory denies the supreme dignity of Emperor. Just banning his books is not enough.”“Go, go, Japan, the leader of Asia, the vast land of Manchuria and Mongolia is waiting for you!!!” (election campaign song)”

The 1955 Regime (LDP dominance)• The Liberal Democratic Party (LDP) formed in 1955,

held power until now (except 1993-96).• Securing rural votes by subsidizing agriculture and bu

ilding rural infrastructure (firmly established by PM Kakuei Tanaka 1972-74)

• LDP has many factions and zoku-giin groups (politicians promoting subsidies in particular fields)

• Opposition parties are too weak to challenge LDP’s rule.

• Reform movement inside LDP Koizumi reform—how successful? Abe, Fukuda, Aso too weak

P.178

LDP

Factions & zoku-giin

Other parties