How the US Occupation of Japan Worked in Favor of Its Economy


By Mark J. RavinaUniversity of Texas at Austin

Let’s begin by talking about the economy. We find three key factors in Japan’s postwar economic miracle: US occupation policy, Japanese policy, and dumb luck, or more eloquently, ‘good fortune’. For now, let’s focus on how the US occupation of Japan set up the country for success both by design and by accident.

Image of Japanese and American flags waving in the air
Initially, the US policy was shaped by the idea that Japan needed to pay some price for WWII. (Image: Savvapanf Photo/Shutterstock)

The US Occupation Policy 

Initially, the US occupation policy was shaped by the idea that Japan needed to pay some price for WWII. For example, the Potsdam Declaration by the US, the UK, and the USSR in July 1945—outlining the terms for Japan’s surrender—mentioned ‘the exaction of just reparations in kind’. 

The arrival of the troops as part of the allied forces of occupation in Japan in 1946
The US occupation is one of the key factors of Japan’s economic prosperity. (Image: No 9 Army Film & Photographic Unit/Public domain)

But, the Potsdam Declaration also mentioned ‘Japanese participation in world trade relations’. Those two goals don’t quite jibe—punish Japan or make it a world trading partner. And after Japan’s surrender, the US policy shifted steadily from the first goal to the second.

Early occupation plans also called for Japan to pay punitive reparations to China and the rest of East Asia. Edwin Pauley, a US oilman, and confidant of President Harry Truman, developed that policy. Pauley argued that Japanese heavy industry was inseparable from militarism. He wrote that Japan suffered from a ‘top-heavy industrial structure which was incapable of functioning efficiently except when geared either to making war or preparing for war.’

Edwin Pauley’s View about Japan’s Heavy Industry

In Pauley’s view, much of Japan’s heavy industry was sustainable only because labor was kept cheap through authoritarian measures. Eliminating much of the country’s heavy industry would, therefore, be a boon to the Japanese people. 

Further, Pauley argued that dismantling industrial plants and relocating them to China and the Philippines—in the form of reparations—would allow those countries “to resist Japanese economic control, and to forestall any attempt at renewed Japanese military aggression…they will then be like sentinels, watching Japan from nearby”.

This article comes directly from content in the video series The Rise of Modern JapanWatch it now, on Wondrium.

Free-trade: A Solution to Japan’s Trade Problems

Pauley insisted that because Japan was dependent on imported raw materials, it had to invade neighboring countries to get those raw materials. He also argued that Japan had invaded China to get a market for its exports. Pauley’s solution was to eliminate Japan’s export-oriented industries.

Free-trade advocates had a different solution to the same problem: free trade. Let Japan buy raw materials, like oil, and export steel and aluminum on the international free market. That was a throwback to the 1920s, when the United States and Japan had agreed on an ‘open door’ in China for each other’s goods. 

The postwar version was the November 1947 General Agreement on Tariffs and Trade (GATT), dedicated to raising living standards by expanding world trade; that 1947 agreement was the father of today’s World Trade Organization.

China was a founding member of GATT. So, for free-trade advocates, GATT solved the problem of Japanese militarism. Instead of relying on the Japanese military to get access to the China market, Japanese companies could rely on GATT and the United States’ broader commitment to a global free market. GATT didn’t bode well for the Pauley plan. And things got worse for Pauley. 

The End of Pauley’s Plan

One strange irony of the Pauley plan is that even though Pauley himself was a US oilman, a Truman supporter, and later a Reagan Democrat, some of the most dogged defenders of the Pauley plan for reparations were supporters of the Chinese communist leader Mao Zedong. And it was the Chinese civil war that finished off the Pauley plan. 

As early as 1946, Pauley himself had to admit that China might not be politically stable enough to receive hundreds of millions of dollars of dismantled Japanese industrial plants. And in December 1949—when Mao and the Communist Party routed the Nationalists, ending a decades-long civil war—what was left of the Pauley plan was dead. Only months later, China and the US were on opposite sides in the Korean War.

The Success of US Occupation of Japan 

 A 10000 Yen banknote from 1958
US occupation had many successful results for Japan’s economy. (Image: Bank of Japan/Public domain)

A vibrant capitalist Japanese economy became a primary goal of the US occupation. Still, that goal was achieved only partly by plan, and partly by accident. One huge success of the US-led occupation was the Japanese land reform. At the war’s end, almost half of the land in Japan was cultivated by tenant farmers, and about half of that was owned by just 3% of the landlords. 

The challenge for any non-Marxist land-reform program is how to redistribute the land without violating property rights. The occupation authority didn’t want to just seize and redistribute tenanted land. Instead, it simply required the sale of tenanted landholdings above one hectare (about 2.5 acres). And when the landlord was forced to sell, the tenant had the first option to buy.

Under normal circumstances, Japanese tenants would have a hard time raising enough money to follow through. Tenant farming is not lucrative. But the occupation authority fixed prices at 1945 market values. At the same time, inflation was rampant, and the occupation didn’t index land prices. 

So, the land was severely undervalued. The result was that millions of tenant farmers became landowners and doubled their incomes. The new property owners became the core of a rural middle class: largely conservative and deeply committed to capitalism because land ownership was now working for them rather than against them.

Common Questions about How the US Occupation of Japan Worked in Favor of Its Economy

Q: What were the key factors in Japan’s postwar economic miracle?

Three factors played a major role in the postwar Japanese economic miracle: the US occupation policy of Japan, Japanese politics and good fortunes. 

Q: What were Edwin Pauley’s plans toward postwar Japan?

Under Edwin Pauley‘s plans for the US occupation of Japan, America would ask Japan to pay punitive reparations to China and the rest of East Asia. Also, according to Pauley, most of Japan’s heavy industry was sustainable only because labor was kept cheap through authoritarian measures. Therefore, the elimination of these industries would be a blessing for the Japanese people.

Q: What was the primary goal of the US occupation?

One of the main goals of the US occupation of Japan was a vibrant capitalist economy for the country. One great success of the US-led occupation was Japan’s land reform. Through this reform, agricultural land became so cheap that all tenant farmers who worked on rent were able to buy their own lands and become landlords.

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