History and Perspective of Japanese Economy (1854-2000)

CONTENTS

l. Introduction

2. History of the Japanese Economy
2.l. The Tokugawa Period (1603-1868)
2.2. The Meiji Era (1868-1912)
2.3. The Japanese Development up to the End of World War II (1912-1945)
2.4. The American Occupation (1945-1952)
2.5. Period of Rapid Growth (1950-1973) ll
2.6. The Effects of the Two Oil Crises (1973-1983)
2.7. Japan´s Bubble Economy of the 1980s
2.8. The Lost Decade (1990-2000)

3. Perspective of the Japanese Economy
3.l. Necessary Reforms for the Future
3.2. Japan´s New International Role

4. Conclusion

Bibliography

Figures

l Industrial Structure and National Income Ratio

2 Industrial Structure and Employment Ratio

3 Export Structure 1890-1965

4 Import Structure 1890-1965

5 Japan´s Exports and Imports of Cotton Clothes

6 Real Military Spending

7 Annual GDP Growth of Japan (1956-2000)

8 Japan´s GNP (1893-1989)

9 Financial and Macroeconomic Conditions in the 1990s

10 Unemployment Ratio in Japan 199l-2002

Tables

l Average Annual Growth Rates in Real GNP and Population 1885-1995 in percent

1. Introduction

Japan with its 126.8 million inhabitants is the unique example of a “Non- Western” economy achieving an equal standard of living with other Western countries. On top of that, the Japanese economy is the second largest in the world. The Gross Domestic Product (GDP) Japans has been $ 4.7 trillions in the year 2000. This makes Japans economy about 2.5 times larger than the German one – measured in Dollars.^l In the light of Japans extraordinary role in world economics, it would be very interesting to look at the background of Japans historical development of economics. Unfortunately there is non or little knowledge in Germany about this. The picture, we have here, is often influenced by clichés such as the Japanese imperialism, the pervasive government bureaucracy and the impressing Japanese economic growth. However, the economy in Japan is no longer growing. There are structural problems. We have to ask the question how the ´Japanese Model´ can go on. I will therefore give an overview about the Japanese economy and its possibilities in the future.

The start of modern economic growth in the 1870s is closely connected with the opening Japans to the rest of the world. To understand this development, we have to take a closer look at the economic history before 1854. Thus, my starting point of the historic development is the so-called Tokugawa period. After that, I will talk about the different phases of the Japanese economic history up to this date. Out of the sheer volume of the single phases, we can only consider the most important events, and determining factors of any one development. After we have viewed the historical phases, we will introduce the perspectives of the Japanese economy. We will on one hand look at the future development within Japan and on the other hand at the economic possibilities internationally.

2. History of the Japanese Economy

2.1. The Tokugawa Period (1603-1868)

After many civil wars toward the end of the sixteenth century, Ieyasu Tokugawa (later called Shōgun) emerged in 1603 as the national leader. For more than 250 years, the Tokugawa dynasty reigned Japan from Edo (which in 1868 became Tokyo). This political system had to thank Ieyasu Tokugawa and his dynastic heirs for its stability, who established the Baku-han system. This system was similar to the feudal system of Continental Europe. It included the Shinō-Kōshō (a kind of caste system), the Sankin-Kōtai (the alternating attendance of local lords in Edo) and the Sakoku (seclusion policy). These

structures had far reaching influences on the economic development Japans, even into the Meiji Era.^[2]

The caste system (Shinō-Kōshō) distinguished between four social classes: samurai (warriors with civil bureaucracy tasks), farmers (70-80 percent of the population), artisans and merchants. These social classes were differentiated between privilege, status and occupation. To which class one belonged was determined at birth and lasted a lifetime. With this, the system was blocking

the exploitation of comparative advantages in choices of occupation.^[3]

The local lords were required to alternate their residence yearly between their home domain and Edo (Sankin-Kōtai). The families stayed the whole time in Edo to be used by the Shōgun as dead-pledge for the case of a rebellion by the lords. To guarantee the alternation, they had to develop a system of roads and coastal waterways. Apart from that, there was a strong migration of people to Edo, as there lived Japans most wealthy families. Edo had become the city of the samurai and a major consumption center. The families financed their daily necessities with the land taxes paid in rice and these taxes were collected in the various domains of Japan. This rice was stored and sold in Osaka. There was even a rice future market in Osaka. Through this, Osaka became the city of merchants. As an effect, merchants were often wealthier than the members of the samurai class. They were able to accumulate capital over the Tokugawa

years and used their capital to educate their children or to industrialize later in the Meiji era.^[4]

The isolation from foreign countries (Sakoku) was introduced to avoid the intrusion of destabilising and subversive ideas from abroad. This policy caused unfortunately a technological lag behind the Western nations. When the United States forced Japan in 1853 to open a port for free trading, its isolation came to an end. Following this, between 1854 and 1858 the Shōgun entered into several agreements with foreign countries. In 1859, Japan had three open ports. Japan used gold and silver coins during the Tokugawa regency. The agreed exchange rates for these coins did not reflect the relative world market prices. On the world market, Japanese gold coins had a higher value relative to foreign silver coins, than the Japanese exchange rates reflected. The gold coins flowed out of Japan, following a profitable arbitrage. In order to lower the relative price, the Japanese government minted many new inferior gold coins. This finished the profitable arbitrage, but brought a huge inflation during the 1860s. Prices

increased up to 500 percent.^[5]

There was strong criticism within Japan concerning this new policy. Moreover there were terrorist activities directed against foreign residents. Thus, in 1865 an allied flotilla entered Kobe. The Japanese government was forced to put down tariff rates from twenty percent to an average of five percent at the highest. This undignified treatment of Japan contributed to the fall of Tokugawa. The armies of several domains ended the regency of Tokugawa in 1868. Officially the only sixteen years old Emperor Meiji was appointed. In reality, the government was an oligarchy, mainly of two local domains.^[6]

The Tokugawa Period laid the foundation for the later industrialisation of the Meiji era, even though they had the seclusion policy: The infrastructure was well developed through a network of major roads. The education level was relatively high. This was due to the system of temple schooling. There was a considerable capital accumulation amongst the merchants, which was useful for the later following economic investments of the Meiji era.^[7] In the South Western regions existed an accomplished agricultural technology including an advanced irrigation system.^[8]

The population increased from about 20 million in 1600 to about 30 million at the end of Tokugawa regency, but since the beginning of the eighteenth century there was hardly any increase in the population. The reason being, that the Japanese voluntarily limited their family size to obtain a higher per capita wealth.^[9]

2.2. The Meiji Era (1868-1912)

The new proclaimed ruling council of government put immediately many reforms in place to pave the way for the industrialisation. They established a strong central authority, which had seventy-five subordinated prefectures. These prefectures removed the old sovereign domains of the feudal Tokugawa system. The budget was now centrally managed in Tokyo the former Edo. In 1869, the caste system was abolished. During the years of 1873 till 1876, the samurai class was dispossessed and only insufficient compensated. Until 1877, there were rebellions and riots amongst all the people who lost out during the reformist changes. These rebellions and riots had to be suppressed. To finance the military expenditures, in 1878, the government fell back to the concept of war-tax-inflation. The reformed land tax (now 3 percent of the lands assessed value paid in currency) as major tax revenue was not enough to finance this.^[10] In 187l, Japan established a new currency, the Yen. The government copied in 1872 the National Banking Law of the United States. This liberal law allowed private national banks to issue paper money backed by reserves of gold and since 1878, silver. 153 new national banks were founded between the years of 1876 and 1879. The dispossessed samurai played an important role in this as they offered their compensations as paid-in-capital.^ll The strong inflation of the late 1870s convinced the government to monopolise the issuance of money. Therefore, the central Bank of Japan was established in 1882. Through this, the government was guaranteed the sole seigniorage. Apart from that many new

private commercial banks were established. In the mid-1880s, Japan had a well-established banking system, which was needed for the coming industrialisation. The banks were all limited liability companies. Their model of finance became the predominant form of organisation for other manufacturing firms.^[12]

After the inflation, during the 1880s, it was the goal of the government and Minister of Finance Matsukata, to re-establish the silver-convertibility, valid since 1878. Matsukata chose the deflation instead of a new silver-parity to restore fiscal and monetary balance. The Matsukata Deflation of the 1880s induced a business recession in Japan.^[13] In summary, one could say that Japans monetary regime from 1878 till 1897 was based on two principles: The Yen was tied to the value of silver and the exchange rate floated against the British sterling, tied to the value of gold.^[14]

In 1879 the compulsory education was introduced. This was an essential factor for economic growth. In addition, the government initiated at the early 1870s a series of infrastructural measures: The first railroad connection was opened, the postal system was initiated, and the first telegraph service was established between Tokyo and Yokohama.^[15] The government furthered the introduction and diffusion of modern foreign technologies by training technicians abroad. They founded - from 1878 to 1886 - modern state-run silk factories and

spinning mills. The first truly successful spinning mill in Japan 1883 - the Osaka Boseki Company - was however the result of private enterprise. The company worked closely with the banks and - in anticipation to its western pendants – allowed night shifts.^[16]

The use of new technologies from abroad and the growing trade characterises the start of modern economic growth in the 1870s. During the following decades the Japanese industrial structure was to see great changes.

Figure l and Figure 2 give an overview over this change. Labour force was increasingly taken out of the agriculture-sector and used for the other two sectors. This was possible, because of the increased productivity of land and

labour, resulting in a higher agricultural production per capita. The increased productivity was caused by more capital and technological advancement. Therefore, it was possible to reduce the import of agricultural goods (Figure 4). In sum, in the nineteenth century there was an import substitution from food to raw materials (especially raw cotton) and an export substitution from agricultural to textiles (Figure 3 and Figure 4). In 1893 there were already forty

cotton spinning factories in Japan. Figure 5 shows the rise of the textile industry as one of the most important export factors.^[17]

A contributing factor to Japans fast industrial development was also the construction of powerful military forces. The government supported the domestic shipbuilding industry and created a demand for large quantities of weapons and ammunition. This demand promoted industrial structures.^[18] As soon as the military forces were strong enough, the Meiji oligarchy started to pursue foreign expansion. This corresponded with the principles of their politics: "rich country, strong army“. Japan tested his powerful forces

successfully in the Sino-Japanese War 1894-1895. China capitulated quickly and had to acknowledge Korea's independence and ceded Taiwan and the Pescadores to Japan. Additionally, China had to pay ¥ 362 million indemnity (equivalent to 225 million 1895 dollars). This indemnity and the windfall of a worldwide appreciation of silver provided the needed reserves to adopt the gold standard in 1897. As Japan conceived a threat to his design on Korea through Russia at the beginning of the twentieth century, the effect was in 1904-1905 the Russo-Japanese War. This war gave Japan as a result complete control over Korea and the Manchurian railway. In 1910, Japan annexed

Korea. Following this huge gain of power, in 19ll Japan reached with several commercial treaties with other countries control of its own tariffs.^[19]

In sum, despite of the governmental industry policy the spirit of the Meiji was one of laissez- faire, not governmental control. The modern enterprises were run mainly as joint-stock-companies with the equity participation of hundreds of investors. Next to these, large conglomerates, the Japanese Zaibatsu, were formed. The distinguishing features of the Zaibatsu were their diversification among several industry sectors and their close control by the founding families.

[...]

^[1] Wor1d Bank (2001)

^[2] Ito (1997, p.8)

^[3] F1ath (2000, p.23)

^[4] F1ath (2000, pp.24-25)

^[5] Ito (1997, pp.10-11)

^[6] F1ath (2000, p.29)

^[7] Ito (1997, p.18)

^[8] Yamamura (1973)

^[9] F1ath (2000, p.27)

^[10] F1ath (2000, pp.29-32)

^[11] Yamamura (1967)

^[12] F1ath (2000, p.34)

^[13] F1ath (2000, pp.33-34)

^[14] Ito (1997, p.21)

^[15] Ito (1997, p.20)

^[16] Ito (1997, pp.32-33)

^[17] Ito (1997, pp.22-27)

^[18] Yamamura (1977)

^[19] F1ath (2000, pp.36-37)