After the war, Japan's government entered into a partnership with private enterprise. But its private insurance industry was devastated. Private insurance companies had failed as Japan had passed through the earthquake of 1923, the Great Depression and then the destruction from bombing raids during the war. Japan's government became the nation's insurance agency: against sickness, injury, unemployment and just about everything else that insurers cover, including social security for the elderly. Japan's government turned the nation into a welfare state comparable to what was developing in Scandinavia. Japan's government, still under occupation, was replacing, it was said, a feudal economy with a welfare economy. Its welfare policy was to benefit from Japan's culture of social responsibility and conformity. Japan was to cling to its universal welfare, and rather than inhibiting Japan's economic growth it was to develop into one of the fastest growing economies in the world.
The outbreak of the Korean War boosted Japan's economy as Japan became the supplier of goods needed for war. Payments from the US government bolstered the Japanese economy, amounting to 27 percent of Japan’s total export trade. But a more permanent boost to Japan’s postwar industrialization was a government ministry: the Ministry of International Trade and Industry (MITI). In 1951, MITI established the Japan Development Bank, which supplied private industry with low-cost capital for long-term growth. MITI stimulated cooperation between government and private industry. Here was government involvement in the economy that US conservatives had no taste for. MITI coordinated various industries to national production goals, and MITI had the power to promote industries it believed promising. A writer contributing to Wikipedia commented that, “The low cost of imported technology allowed for rapid industrial growth. Productivity was greatly improved through new equipment, management, and standardization.”
By the mid-1950s, Japan's economy reached prewar levels. In 1951, Japan's Gross National Product was half that of West Germany's, one-third of Britain's, and 4.2 percent that of the US GDP. In the late 1950s, Japan's rice crop set new records, a result of advances in fertilizers, insecticides and seed strains. Japan expanded its fruit growing, vegetable, meat and dairy industries, and with the Japanese consuming more bread and meat, the nation became self-sufficient in rice. The greater productivity in agriculture made more people available for the workforce needed in Japan's industrial sector. Production in textiles, small electronic appliances, photographic equipment and automobiles increased with a competitive advantage over the methods and practices employed by US industrial leaders.
In 1960 Japan had 16.5 percent of the per capita GDP of the United States. The US was burdened by its Cold War commitments, including its efforts in Vietnam from 1965 into the early 1970s. By 1988, near the end of the Cold War, Japan had passed ahead of the US in per capita GDP and had moved further ahead of South Korea. And Japan had gained also on Switzerland, the world leader in per capita GDP in 1988. In 1960 Japan had 27.2 percent of Switzerland's per capital GDP. In 1988 that figure had risen to 82 percent.
In 1962, Japan's agricultural work force was 29 percent of the overall work force, down from 41 percent in 1955. Its Gross National Product in 1962 was $44.8 billion measured in 1951 dollars, up from $15.1 billion, and in 1963 its Gross National Product increased 13 percent. Japan had been saving a good percentage of its earnings and a higher percentage of the nation's wealth went into investment rather than into the consumerism pursued in the United States. With economic recovery, Japan's government was able to increase its investment in research and development, which, in turn, helped Japan's economic development.
By 1970, Japan had overtaken all European economies. It had become the second largest economy in the world and it was a world leader in education. In 1975, Japan's GNP was double Britain's and 40 percent of that of the United States – all this despite its welfare. The country's continuing birth to death welfare was benefitting from the country's economic success. According to Niall Ferguson (The Ascent of Money, p. 209), "In 1975 just 9 percent of national income went on social security, compared with 31 per cent for Sweden."
Japan's industrial work force was benefiting from the economic growth. The work force was paid relatively well – nothing like the subsistence wages in the Soviet Union during the economic growth years of Stalin's five-year plans. And the Japanese continued to save at a higher rate than people in the United States.
In 1983, in non-military research and development Japan pulled ahead: 2.7 percent of GDP against 2.0 percent for the United States and 1.0 for the Soviet Union. note54
Economically, Japan still had major concerns. It was dependent on various imports – feed for its livestock, wheat and other cereals and iron ore for its steel and iron industries. It had to import all of the oil that it consumed. Japan imported more fish than it exported. Its farms were small and inefficient compared to those in the United States, and Japan needed to protect its farmers from competition with farmers in the United States in order to maintain a healthy independence in food production – something not always appreciated by policy analysts in the United States. Japan was always on the edge of belt tightening, to hold back from an unfavorable balance of trade. But Japan was also investing heavily abroad, creating and diversifying wealth and tying itself more closely with the rest of the world – the opposite of what had been doing in the 1930s.
Throughout the 1970s, Japan's economy in size was second only to the United States. After a mild slump in the mid-1980s the economy boomed again, and in 1990 it ranked first among the major industrial powers in per capita GDP. Credit was easily available and interest rates low.
Something unsound began taking place in the latter half of the 1980s. It has been described as "over-investment." It could be called, "irrational exuberance," in other words, too much enthusiasm and optimism in the pursuit of money. A "bubble" was being created while credit was easily available, interest rates were low and borrowing massive. Speculation created real estate prices that were extremely over-valued. Japan's stock market index, the Nikkei, reached a dizzying height of 37,189 in January, 1990, up from 10,000 in 1984.
From its height in January 1990 the Nikkei that month plunged, signaling that some were aware of the over investment. By July 1992 the Nikkei was down around 16,000 – a 57 percent fall. It was to be a tough decade financially and a decade of economic decline for the Japanese. During the period of over-investment, bankers, as human and as dumb as others, had overestimated growth. Seeking bigger monetary gains, they had made bad and increasingly risky loans. The result was a banking crisis in the 1990s.
The 1990s became know as Japan's "Lost Decade." Investments were increasingly directed out of the country, and the slowing investments in technology at home cut into Japan's manufacturing and competitive edge.
There was a lot of government investment in infrastructure, bridges, airports and roads. The 1995 Kobe earthquake, which killed thousands, stimulated more spending. But unemployment continued to hover around 5 percent officially – unofficially maybe around 10 percent.
Consumers remained little interested in spending other than for their essentials. They preferred to save, and with the public creating little demand, prices fell – a deflationary spiral downward. Japan's Central Bank set interest rates at approximately zero. But public interest in spending remained low.
The banking crisis festered, and in late 1997 came numerous bank failures that produced a crisis in lending. Companies had massive debts and an inability to obtain loans for capital investment. The government injected 1.8 trillion yen into Japan’s main banks to keep banking going. But the injections failed to stem the growing crisis. Banks were hiding the extent of their real losses and "bad assets." A government bail-out took hold in 1999. Many banks were unsustainable, and a wave of bank consolidations took place – to produce what would eventually be only four national banks in Japan.
The economy moved along, averaging 1.7 percent growth in the 1990s. Japan's economy as measured by per capita GDP had been greater than that of the United States in 1989 by 108 percent; in 2003 Japan's per capita GDP was only 88 percent as large as that of the United States. The value of stocks represented on the Nikkei exchange stayed down and hit bottom in April 2003 at 7,831, a drop of almost 80 percent in value from its January 1990 high. Government debt as a percentage of GDP had a steady increase from around 70 percent at the beginning of the 1990s to around 170 percent by 2003.
A business writer for the New York Times, Hiroko Tabuchi, has written:
Only in 2003 did the [Japanese] government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail. (NYT Feb 12, 2009)
Also from 2003, Japan was benefiting from more sales to the United States and China. Japan's currency had weakened relative to other currencies which helped revive its sales abroad, helping to create what would be called a recovery. Then came the international financial crisis in late 2007. Japan in 2008 returned to recession. Government debt reached 192 percent in 2009. Japan's per capita GDP for that year was down to just a little over 70 percent that of the United States. And going into 2010 the Nikkei stock average was hovering down around the 10,000 level, a little more than one-forth what it had been in January 1990.
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