By Mark J. Ravina, University of Texas
However we measure Japan’s economic boom, the Japanese economy did grow very fast for a very long time. Any serious explanation as to why, has to include multiple factors, the first of which relates to what can be called, ‘the boring basics’. Read on to know more.
Japanese Industrial Production
Between 1950 and 1960, Japanese industrial production increased more than four-fold, and then more than tripled between 1960 and 1970. Thus, over those 20 years, industrial production grew by an average of more than 13% per year.
By comparison, the US industrial production increased about 75% between 1950 and 1960, and then another 50% from 1960 to 1970. Thus, it would be more like 5% per year.
The 1973 Oil Embargo
For Japan, this exponential economic growth wasn’t a smooth sail. There were some bumps in the road owing to Japan’s dependence on imported energy. The 1973 oil embargo, as a result, caused a short, but severe, recession. It resulted afterwards, in a slower growth through the 1970s and 1980s than that in the previous decades.
The spurt that the Japanese economy witnessed was caused by many factors. However, they all rested upon, what one can call, ‘the boring basics’.
The term boring basics refer to a domestic environment in which capitalists and entrepreneurs could thrive—basically a stable currency, stable interest rates, and stable financial institutions.
The ideal environment would also include a solid material infrastructure and social infrastructure. Material infrastructure would include things such as highways, railroads, seaports, and airports—also a reliable electrical grid and clean water. Social infrastructure, on the other hand, would refer to functioning schools, police, and courts. None of those need to be best in the world. They just needed to be good enough.
Levels of Corruption
In addition, the boring basics of the economy, which lend stability, also include, a government without punishing levels of corruption.
It isn’t a utopian expectation of a world of complete government transparency or absolute fairness. Maybe getting that government contract will require a bit of wining and dining. That’s fine. One just doesn’t want to find jobs for some corrupt general’s entire extended family.
This article comes directly from content in the video series The Rise of Modern Japan. Watch it now, on Wondrium.
Establishing the Boring Basics
As simple and easy it might seem, establishing the boring basics is difficult. Think of all the places that lacked those basics during the postwar period. One might have visited countries where businessmen worry about coups; or that the government will change the currency.
How about places where criticizing the president means our business might be seized and given to the president’s son-in-law? Or places where the most-talented engineering and medical students study in the United States and Europe, and then, settle abroad permanently?
That’s still most of the world. And that’s not a great environment for economic growth.
By contrast, postwar Japan nailed the boring basics. It supported the same government year after year; the same currency; the same adequate, if unexceptional, school system, which produced enough engineers and accountants to keep everything running smoothly.
And the Japanese economy grew in a favorable global environment.
Japanese Economy’s Peak Years
The 1950s to 1970s was a great time for world capitalism. According to World Bank data, nominal gross national income (GNI) in the United States—that is, the value of all finished goods and services—almost doubled between 1960 and 1970.
Western Europe’s gross national income more than doubled. One probably doesn’t think of France as a postwar economic model, but its nominal GNI doubled. By that same measure, Japan’s GNI increased four-fold—double the rate of the rest of the industrialized world. Thus, the Japanese economy’s peak years coincided with a booming world economy.
The Exchange Rates and Partnership with Big Businesses
Another macro-economic factor that might explain the Japanese economic miracle were the exchange rates. From 1949 to 1971, the yen was fixed at 360 yen to the dollar. The yen was set intentionally low as part of a US policy to boost Japanese exports and help rebuild the Japanese economy.
Interestingly, since the Japanese currency, the yen, was cheap, Japanese labor was also cheap. It was also capable and disciplined. To be blunt, it was first-world quality at third-world prices.
This meant that Japanese workers could be employed in state-of-the-art production facilities.
Japanese companies also became world leaders in key industries like automobiles and consumer electronics. This was helped by the partnership between the Japanese government and big business. Japan wasn’t a command economy, where the state ran key businesses. Rather, the state pushed businesses to grow in ways that advanced key government objectives.
Solution for a Capital- and Resource-poor Japan
The guiding idea was that Japan is capital poor and resource poor. So, it can’t quite trust market forces. In normal industrial competition, manufacturers might build too many plants and overproduce. It would leave the factories idle which would be expensive, especially when capital was scarce.
Clearly, in order for Japan to be competitive internationally, it couldn’t be fully competitive domestically.
This also meant that the government needed to limit competition at home. However, it didn’t want Japanese companies to get fat and lazy but, instead, use that protection to compete internationally.
The Japanese government saw the solution in encouraging cartels, but strictly only the ones with an explicit international goal. Thus, it was a strange hybrid vision—limiting competition with the end goal of making domestic companies more competitive.
It is in this context that the Japanese economic planning has been described as ‘market conforming state interventions’; and also, more humorously, as ‘socialism, except that it works’.
Common Questions about the Japanese Economic Boom
Japanese industrial production increased more than four-fold between 1950 and 1960, and then more than tripled between 1960 and 1970.
The term boring basics refer to a domestic environment in which capitalists and entrepreneurs could thrive—basically a stable currency, stable interest rates, and stable financial institutions.
Since the Japanese currency, the yen, was cheap, Japanese labor was also cheap. It was also capable and disciplined. To be blunt, it was first-world quality at third-world prices.
