Economic History, Part 3 Postwar Recovery (1945–1964)

Postwar Recovery (1945–1964)

• Economic Devastation and the "Japanese Miracle"
  • Japan's aggregate output experienced a drastic decline due to the Pacific War, hitting its lowest point in 1945.
  • The subsequent economic recovery was rapid and remarkable, often referred to as the "Japanese miracle".
  • Figure 4.1 illustrates the real gross national product of Japan from 1885-2000, showing the severe impact of the war and the following recovery.
  • Data Note:
    • Calendar year basis for 1885-1944.
    • Fiscal year basis for 1946-2000.
    • The Ohkawa-Shinohara GNP deflator (1941-54) differs from the Japanese government's figures.

American Occupation (1945–1952)

• Allied Occupation and Reforms

  • Following Japan's surrender in 1945, the country was occupied by Allied forces, primarily led by the USA.
  • Sovereignty was restored in 1952.
  • The American Occupation implemented several economic reforms:
    • Land reform.
    • Dissolution of the zaibatsu (large business conglomerates).
    • Labor legislation.
  • The US also provided direct economic assistance and procurement spending during the Korean War (1950-1952), further boosting Japan’s economy.

• Market Economy Resilience

  • Japan's rapid postwar growth was primarily due to the resilience of its market economy.
  • Saving and investment guided the economy towards a steady-state growth path, influenced by labor force expansion, technological advancement, and wealth accumulation.
  • The war destroyed physical capital but didn't fundamentally alter the parameters of Japan's steady-state path.
  • The centrally planned systems of the Soviet bloc were not imposed on Japan, allowing capitalism to flourish.

• American Occupation Era Policies

  • From August 15, 1945, Japan's government was subordinate to the USA until the restoration of sovereignty on April 28, 1952, via the San Francisco Treaty.
  • The Supreme Commander of Allied Powers (SCAP), initially General Douglas MacArthur, directed occupation policies.
  • The American government chose to utilize existing Japanese government structures to implement SCAP-dictated policies, rather than imposing martial law.
  • The initial three years focused on "democratization," strengthening representational government and promoting social equality through wealth redistribution and economic opportunities.

Democratization

• Political and Economic Democratization

  • Japan underwent complete disarmament, disbanding its armed forces and prosecuting war criminals.
  • A new constitution was drafted at General MacArthur's direction, in a remarkably short time (one week), and presented to Japanese officials on February 13, 1946.

• Key Features of the New Constitution

  • Enfranchisement: Women were granted the right to vote, and the voting age lowered from 25 to 20.
  • Bicameral Diet: Established a two-house parliament.
    • Lower House (House of Representatives, shūgi-in): members elected every four years, elects the prime minister, and can be dissolved for new elections.
    • Upper House (House of Councilors, sangi-in): members serve six-year terms, with half standing for re-election every three years; some members elected by prefectures, others by national vote.
  • Government Structure: The prime minister and majority of the Cabinet must be Diet members.
  • Constitutional Amendments: Require a two-thirds majority in both houses and ratification by a national referendum.
  • Judicial System: A Supreme Court appointed by the Cabinet serves as the final court of appeal.
  • Emperor's Role: Officially recognized as "the symbol of the state" without governmental powers.
  • Article 9: Renounces war as a sovereign right and prohibits the maintenance of land, sea, and air forces.
    • Despite Article 9, Japan maintains “self-defense forces” (jieitai) since 1954, leading to constitutional questions regarding participation in multinational military coalitions.
  • The new Constitution firmly established parliamentary democracy, aiming to prevent domination by military leaders.

• Economic Democracy

  • The Occupation authorities aimed to promote social equality through:
    • Redistributing land and shares of stock (Zaibatsu Dissolution).
    • Encouraging labor unions.

Land Reform

• First Land Reform Measure (December 28, 1945)

  • Sought to institutionalize changes in agricultural land rental caused by wartime controls, which favored tenant cultivators.
  • Land rentals and sales were under price controls since 1939.
  • Price ceilings on rice and other agricultural goods were implemented.
  • The government purchased staples from cultivators at inflated prices and distributed them to consumers at lower, controlled retail prices, under the 1942 Food Control Law.
  • Tenant cultivators paid land rentals in cash at controlled levels based on unchanging retail prices.
  • Example: In November 1945, the official retail price of rice was 55 yen per koku, while the producer price was 300 yen per koku. (1 koku = 5.1 bushels or 331.5 lbs).
    • Tenant cultivators were only paying a small fraction of the producer price value.
  • The law limited land ownership to 5 chō (12.25 acres), but few landowners exceeded this limit.

• Second Land Reform Law (March 1946)

  • Disallowed absentee landlordism.
  • Permitted resident landlords to retain at most 1 chō (4 in Hokkaido).
  • Disallowed owner cultivation of more than 3 chō (12 in Hokkaido).
  • The government purchased land for resale to tenants at controlled prices from 1939, unadjusted for massive inflation.
    • By the end of 1949, retail prices were 150 times greater than in 1939, essentially confiscating land.
  • Local land commissions managed the process.

• Outcomes of Land Reform

  • Share tenancy was drastically reduced between 1947 and 1950.
  • In 1946, nearly half the agricultural land was cultivated by tenants; by 1955, only about one-tenth.
  • Land reform did not significantly increase agricultural productivity.
    • Productivity differences between share tenancy and owner cultivation were minimal.
    • Productivity increases stemmed from labor intensity, chemical fertilizers, and hybrid seeds.
  • The Second Land Reform primarily transferred wealth without stimulating production or eliminating inefficiencies.
    • Agricultural land productivity increased by 56%, due to labor, fertilizers and seed selection.

• 1952 Agricultural Land Law

  • Codified restrictions on land ownership and use.
  • Agricultural land could only be sold to those cultivating at least 0.3 chō.
  • Individual land ownership could not exceed Second Land Reform limits.
  • Land lease terms were strictly controlled, and kept at low levels.
  • Land use controls continue to distort land allocation, e.g. rice fields in urban areas.
  • Owners face penalties for diverting land to other uses or selling to non-cultivators.
  • Political support for these controls comes from nonagricultural landowners.

Dissolution of the Zaibatsu

• American Antagonism

  • The American Occupation held zaibatsu owners and managers responsible for Japan's military aggression.
  • This was directed at both original and "new zaibatsu" that invested in Japanese occupied territories.
  • The sentiment arose from wartime passions rather than objective facts.

• Historical Context

  • Major zaibatsu like Mitsui and Mitsubishi had ties to political parties in the 1920s.
  • The "new zaibatsu" had associations with Japan's armed forces and initially benefited from these ties.

• Measures Against Zaibatsu

  • Expropriation of securities holdings of designated individuals and companies.
  • Dissolution of main holding companies.
  • Resale of shares to individuals outside zaibatsu families or management.
  • Purge of management personnel.
  • Forced liquidation of tangible assets.

• Holding Company Liquidation Commission

  • Formed to oversee expropriation and redistribution of corporate equities.
  • Expropriated securities from 56 zaibatsu family members and 83 designated companies, including those of the big four (Mitsui, Mitsubishi, Sumitomo, Yasuda) and the new zaibatsu (Nissan, Nakajima).
  • Dissolved main holding companies.
  • Sold expropriated shares to the public between May 1948 and December 1950.
  • Forced 1120 companies to divest stockholdings in other companies.

• Political and Economic Purges

  • Barred selected political, military, and bureaucratic officials from posts (over 200,000 people).
  • In January 1947, 1535 officers of economic organs, industry control associations, and private companies were barred from holding vacated positions for ten years.
  • In January 1948, purge extended to zaibatsu founding families and 2798 additional persons.
  • The ten-year limit was shortened; restrictions were removed on nearly all economic purgees, including zaibatsu family members, by mid-1951.
  • Economic purges elevated younger executives to top-level positions.
    • This led to relatively low mandatory retirement ages (55 years) in companies.

• Attempted Reorganization of Large Firms

  • In July 1947, SCAP forced the liquidation of Mitsui and Mitsubishi Trading Companies.
  • The Holding Company Liquidation Commission (HCLC) was empowered to order divestiture of tangible assets from firms with “excessive concentration of economic power”.
  • In February 1948, the Commission identified 325 companies for reorganization.
    • Unlike zaibatsu dissolution, the aim was wealth redistribution, not wealth redistribution.
  • Due to Newsweek editorials and Senator William Knowland's criticism, the deconcentration policy became controversial.
  • In May–June 1949, the HCLC reorganized 11 companies into 26 smaller ones and ordered other companies to divest factories or securities.
  • In 1954, Mitsui and Mitsubishi Trading Companies were re-amalgamated and regained their dominance.

• Impact of Zaibatsu Dissolution

  • Zaibatsu dissolution disrupted corporate governance mechanisms based on concentrated ownership.
  • Yishay Yafeh found a negative correlation between the percentage of shares expropriated and firm performance during 1951–1953.
  • Firms re-established shareholding interlocks after the Occupation ended, forming financial keiretsu.
  • Large commercial banks became major stockholders, replacing the zaibatsu families’ role in corporate governance.
  • Holding companies remained prohibited under the Anti-monopoly Law.
    • Holding companies were permitted again in 1997.

Labor Legislation

• SCAP Encouragement of Labor Unions

  • Aimed to provide an outlet for free political expression.
  • Japan’s military government banned labor unions in 1940.
    • The ban remained effective until the war’s end.

• Economic Purpose of Unions

  • To extract higher wages for members by:
    • Creating labor scarcities.
    • Providing services such as contract negotiation and worker identification.
  • The right to strike is essential for union success.
  • Japanese labor unions organized selected industries despite legal restrictions.

• Early Labor Laws and Restrictions

  • Article 17 of the Police Regulations (1900) outlawed coercive acts during strikes, effectively prohibiting strikes.
  • Despite Article 17, unions organized in industries like merchant marine, railroad operation, printing, and coal mining.
  • In July 1926, the Diet repealed Article 17 and provided for police conciliation of labor disputes.
    • This interfered little with union-busting dismissals by employers.
  • Union membership peaked at 8% in 1931.

• Konoe Administration

  • Abolished independent labor unions in November 1940.
  • Organized workers into company-by-company political cells called sangyō hōkokukai (sanpō).
    • Modeled on the German Nazi government’s National Labor Front.

• Post-War Labor Laws

  • Under SCAP guidance, Japan’s Diet enacted three labor laws.
    • The Labour Union Law (December 1945)
      • Recognized labour unions with elected leaders.
      • Recognized the right to strike.
      • Disallowed employers from collecting indemnities for strike-related losses.
      • Prohibited discrimination against union members.
      • Extended union agreements to other employees if 75% of employees were union members.
      • Provided for national and prefectural labor relations commissions.
    • Labour Relations Adjustment Law (September 1946)
      • Detailed procedures for labour relations commissions.
      • Defined conciliation, mediation, and arbitration.
      • Prohibited strikes by policemen, firemen, and government bureaucrats.
      • Later broadened to prohibit strikes by all public employees (Ordinance 201, July 1948), made permanent by amendments in 1950 and 1952.
    • Labour Standards Law (April 1947)
      • Stipulated employment terms, including 25%$ added wages for overtime.
      • Established minimum wage mechanisms.
      • Prohibited child labor.
      • Required 30-day notice of dismissal.
      • Provided employer compensation for on-the-job accidents.
      • Mandated workplace safety and sanitation standards.
  • The new Constitution (November 1946) included Article 28, guaranteeing workers’ rights to organize and bargain collectively.
    • However, prohibitions against strikes by government employees have been upheld.

• Unionisation Trends

  • Unionization increased rapidly after December 1945.
  • By year’s end 1949, 55.8%$ of the nation’s non-farm labor force belonged to unions.
  • By 1955, the unionized fraction declined to about one-third and has since steadily decreased.
  • Most unions formed were enterprise unions, not industrial or craft unions.
  • In the early postwar years, two national confederations competed for prominence.
    • Sanbetsu: Allied with the Communist Party.
    • Sōdōmei: Allied with the Democratic Socialist Party.
      • The high-water mark came in 1947 when a general strike was called by Sanbetsu which was then prohibited by MacArthur.

• National Confederations of Labour unions

  • After the prohibition, Sanbetsu shrank to insignificance.
  • Sōdōmei merged to form Dōmei (merged again in 1987 to form Rengo).
  • Largest was Sōhyō, formed in 1950 (swelled with numbers after “red purge”).
  • Since 1987 Rengō have been the main supporters of the Japan Socialist Party.
    • The real political battles have occurred within in the Liberal Democratic Party (LDP).
  • LDP prevailed in the General Elections from its formation (1955) until 1993

• Effectiveness of Unions

  • Individual labor unions (enterprise model) are the most effective bargaining units in wage negotiations.
  • Craft Unions are more effective than enterprise at monopolising the supply of labour, but enterprise unions economize on costs of negotiating and enforcing labour contracts.
  • Legitimized unions as bargaining units and political organizations but did not lead to the establishment of effective labor monopolies.

Rise and Fall of Government Controls

• Post-War Financial Obligations

  • The Japanese government issued new currency to meet its obligations, causing price inflation.
    • In the two weeks between capitulation and formal surrender, wholesale prices doubled.
    • By the end of the Occupation (1952), prices had increased a hundredfold from the August 15, 1945 level.
  • The Americans implemented SCAP and directed the price controls.
    • Black market prices exceeded official prices by a factor of 30.

• Attempts to control Inflation.

  • The Japanese Government mandated that all private money holdings, other than currency of the smallest denominations, be deposited in commercial banks on February 16, 1946.
  • Government price controls were strengthened.
    • Price Control Ordinance of March 1946.
  • The Economic Stabilization Board was set up in August 1946 in order to abolish the consortia of leading producers know as Control Associations.
    • The former system used rationing carried out by the control associations.
    • Fifteen new public corporations (kōdan’s) were set up in order to carry out the rationing of major commodities.
      • The kōdan’s would purchase the commodities from producers at controlled prices, and resell in rationed amounts to demanders at lower prices (operating at a loss, and adding further to government spending).

• Price Control Limitations

  • Despite the kōdan’s, the inflation continued
    • Black markets flourished.
    • Official price indices were based on black market prices.
  • The prices for goods were adjusted a couple of times (March 1946 base year level average increased x8 and in July 1947 increased x65 and in June 1948 increased x110).
    • Government wages then only increased x28 and x57 respectively.
  • To halt the inflation Government expenditures would need to be curbed and new sources of Government revenue found.

• SCAP Intervention on Financial Measures

  • The Americans took a rather dim view of the Japanese government’s continuing payment of war debts, quite apart from the inflationary consequences, and in October 1946 had the Diet enact a special measure that effectively dissolved all private claims against the Japanese government arising from wartime procurement, war indemnities, and so on.
  • Because of these concerns, two laws were enacted in October 1946 to enable businesses and financial institutions to restructure: The Business Reconstruction and Adjustment Law, and The Financial Institutions Reconstruction and Adjustment Law.

• Additional Steps to Increase Revenue

  • Capital Levy: SCAP had the Diet exact (November 1946), a graduated tax on personal assets exceeding ¥100,000 (approximately equal to ¥1.5 million in 1995 prices), including financial assets such as bank balances and securities, as well as real assets such as houses and other property.
    • The tax rate ranged from 10%$ on the first ¥10,000 of taxable assets up to 90%$ on taxable assets in excess of ¥15 million, and raised approximately ¥43.5 billion in revenue.
    • The capital levy did little to close the massive fiscal deficits.

• Reconstruction Finance Bank: RFB

  • New government financial institution authorized by the Diet in October 1946.
    • Provided subsidized loans to private companies. (financed by the bank of Japan).
    • Interest rates were far below the rate of inflation.
  • The bulk of the RFB loans went to the coal mining, electric power, steel and chemical fertilizer industries.
    • This was labelled the priority production scheme (keisha seisan hōshiki).
  • Under the Emergency Financial Measures Ordinance (February 1946), private commercial banks were directed by government edict to allocate 50%$ of their loans to the same priority industries favoured by the RFB.
  • In October 1948, after the Ashida Hitoshi administration fell, Yoshida Shigeru returned as prime minister.
  • Price controls, subsidies, and government regulation actually compounded the adverse effects of inflation.
    * Policies were creating hurdles for the economic recovery.

• Reconstruction Finance Bank: RFB

  • Government regulation and control was never stronger than in during the early years of the American Occupation.
    • Misguided policies delayed economic recovery.
  • State control of Japan’s foreign trade
    • Virtually all of Japan’s foreign trade was on a government-to-government basis during the first two years of the occupation.
      • SCAP did authorize some private imports in July 1947.
    • Board of Trade: international trade was channeled through an agency of the Japanese government.

• Trade regulations during the Occupation Years

  • The Board of Trade purchased domestic goods for export, as authorized by SCAP, and sold imported foreign goods, both at controlled prices, debiting and crediting a yen-denominated revolving fund.
  • In aggregate: Imports into Japan exceeded exports
    • This trade deficit was financed by US aid.
      • Imported food, petroleum, fertilizer, and medicine proffered to the Board of Trade for sale in Japan was a gift to the government of Japan from that of the USA.
        • Aid programs labeled GARIOA (government and relief in occupied areas) and EROA (economic rehabilitation of occupied areas).
        • This policy virtually assured failure to exploit comparative advantage.

The Dodge Line

• “Reverse Course” in American Policy

  • Relaxation of government controls over Japan’s economy forms the major part of a “reverse course”.

• Shift in US perspective

  • Japan could be a US ally in Asia because US relations with the Soviet Union had deteriorated, and the Communist revolution had succeeded in mainland China.

• Joseph M. Dodge arrives

  • President Truman dispatched Joseph M. Dodge to Tokyo, to review economic policies and carry out necessary changes as Washington politics dictated that SCAP should no longer regard Japan’s economic recovery with indifference but should actively promote it.

• Impact of the “Dodge line”

  • The Dodge line included an end to inflation-financed subsidies, restoration of private foreign trade at a single exchange rate, and eventual elimination of US aid.
    • The Reconstruction Finance Bank was shut down.
    • The kōdan, the public corporations charged with administering price controls, were shut down.
    • The number of items subject to price controls were greatly reduced.
    • All government enterprises and agencies had to be consolidated into the general account of the Japanese government.
  • To attain fiscal balance, the ruling Liberal Party had to forgo its campaign promise to reduce the statutory tax rates.
  • Many government employees were laid off, including 100,000 railway workers and 20,000 telephone workers.
  • US Trade subsidies were terminated.

• The 1949 Reconfiguration

  • From April 25, 1949, the terms of all transactions between SCAP and Japan’s Board of Trade were determined by applying the same exchange rate to the original purchase price of every item, ¥360 = $1.
  • In May 1949 the Board of Trade was reconfigured as a bureau within the Ministry of Commerce and Industry, now renamed the Ministry of International Trade and Industry (MITI).
    • Foreign trade rationing became a component of Japanese industrial policy.
  • Foreign exchange remained artificially scarce in Japan until the 1960s.

• Dodge line and economic impact

  • The rapid inflation at last ground to a halt, the growth in Japan’s money supply was checked and demand for money increased:
    • Expanded supply of goods.
  • The Korean War boom ensued before the full effects of the Dodge line could be observed.
    • The Korean war began on June 25, 1950, with a surprise attack on South Korea by North Korea.
  • During the first two years of the Korean War, Japan became a major staging area for US troops and a major supplier of military goods.

The Solow Growth Model

• The Central Problem

  • Economic growth represents the core problem in macroeconomics.
  • There exists a body of thought on economic growth referred to as the neoclassical growth model, or the Solow growth model.

• Basic Premises of the Model

  • As shown by the economist and Nobel laureate Robert Solow, three facts, approximately true of many actual economies, together imply that an economy’s real Gross National Product (GNP) and capital stock will follow specific, easily characterized, paths.

• Three Facts:

  • Constant returns to scale
  • Constant saving rate
  • Constant rate of growth of labor

• Constant Returns to Scale

  • By “constant returns to scale” is meant that proportional increases in capital and labor enable equiproportional change. The appropriate definition of output is real gross national product (GNP): the aggregate of goods and services produced in the economy in a year, valued at constant prices.
  • Under constant returns to scale, GNP depends upon employment of capital and labour according to an aggregate production function, F, such that Y = F(L, K) or, for \lambda > 0, F(\lambda L, \lambda K) = \lambda F(L, K).
  • That is, if the aggregate production function exhibits constant returns to scale, then GNP-per-unit-of-labor depends only upon the capital-to-labor ratio and not upon the absolute amounts of labor or capital employed. Y/L = F(1, K/L)
  • Production functions, including aggregate production functions, conform to the law of diminishing marginal returns. That is, the successive additions to output arising from expanded employment are progressively smaller.

• Constant National Saving Rate

  • National saving is a constant fraction of national income. Saving means wealth accumulation. Wealth is the present value of assets, and income is the amount of wealth that, if consumed in a year, would leave wealth unchanged National Saving Rate = Constant

• National Income.

  • The net national product (NNP), the gross output of the economy minus depreciation. (Depreciation is the physical wearing out of capital.)
  • NNP = GNP - \delta K
    • \delta is the depreciation rate, 0 < \delta < 1.
  • The assumption that national saving is a constant fraction of national income means that

• Net Investment.

  • If the economy maintains balanced trade, the annual net additions to the nation’s stock of capital i.e. net investment, must exactly equal saving.

• Constant Growth Rate of Labor

  • If, in addition to constant returns to scale and constant saving rate, the labor supply is growing at some constant given rate, then the economy will have an equilibrium path along which capital and real gross national product grow at the same exogenous rate as labor.

• Technological Change

  • Labor might be measured in “efficiency units,” so that a twentieth-century workman equipped with modern tools and the knowledge of their use is in some sense the equivalent of a multiple of his nineteenth-century counterparts.
    • n = n' + \alpha.
      • n = growth rate of labor
      • n' = constant growth rate of population
      • \alpha = rate of technological progress.

The Solow Growth Model and Japan

• The Japanese Production Function: The long-term trend rates of growth can be taken to indicate the steady-state growth rate.

• Data Statistics:

  • 1885-1935: The steady-state growth rate was around 3%$ per year, of which 1%$ was population growth and 2%$ was persistent technological advance.
  • Since 1935, the pace of technical advance seems to have risen from 2%$ per year up to around 3%$ per year. Population growth continues at about 1%$ per year.

• Profit-Maximising Firms

  • Firms employ workers to the extent that their incremental contribution to the firms’ output, \partial Y / \partial L, referred to as the marginal product of labour, just equals the real wage rate (w/P), the money wage rate divided by the price level.
  • Analagously, the equilibrium real rental price of capital (r/P) equals the marginal product of capital, \partial Y / \partial K.

• Output Analysis: If the aggregate production function exhibits the characteristic of constant returns to scale:

  • \frac{∂F}{∂L} L + \frac{∂F}{∂K} K = Y

• The Cobb-Douglas Production Function

  • Y = AL^{θ} K^{1−θ}
  • θ is the elasticity of output with respect to labor.
    • labors share in Japan in recent decades has been around 3/4
  • Presuming that the labor’s share in Japan of recent decades averages 3/4, we infer that a Cobb–Douglas production function with parameter θ = 3/4 accurately represents Japan’s aggregate output.

• Return to Steady Sate

  • A large component of Japan’s rapid growth in real GNP during the postwar years should be considered a return to such a steady-state path.

• Capital Stock Devastation

  • It is estimated that the real output of Japan’s economy in 1946 stood at a mere 50%$ of its 1939 level.
  • A Cobb–Douglas production function with parameters that are consistent with Japan’s national income statistics (labor’s share ≈ 3/4) is reduced by half only if the stock of capital is reduced by 94%.

• Post War Damage Assessments

  • Destruction of one-fourth of the physical capital would have reduced output by only 7%, again assuming labor’s share = 3/4.

• Savings Rate.

  • Japan’s real GNP grew beyond its old steady-state path, and since about 1974 seems to have followed a new path, about 1.4 times higher than the old one.
    • Japan’s net national saving rate from 1885 to 1945 averaged between 5%$ and 10%.
    • In the four decades following 1945 it generally averaged between 20%$ and 30%.

• The Net national Saving Rate

  • .In other words, the net national saving rate would have had to have quadrupled, which it approximately did do, moving from 6%$ before the war to 24%$ afterwards, say.

• Conclusion

  • The Japanese miracle began the day in February 1949 that Joseph Dodge went to work dismantling government control of the Japanese economy.
  • Nevertheless, the capital stock and aggregate output of Japan reached their postwar steady-state paths only in the mid-1970s.