Why Japan’s economy grew so fast after World War II

From the Doolittle Raid on Tokyo in April 1942 through to the atomic bombings of Hiroshima and Nagasaki in August 1945, nearly four years of continuous aerial bombardment had destroyed much of Japan’s infrastructure and industrial capacity.

Tokyo and Osaka, as well as Nagoya, suffered especially severe damage, and the March 1945 firebombing of Tokyo alone had left large districts of the capital in ashes.

According to historian Yoshikawa Hiroshi, approximately 93 per cent of the country’s steel production was destroyed by the end of the war.

Japan’s gross national product in 1946 had fallen to just under half of its wartime peak, and hyperinflation was quickly weakening the value of the yen.

An average of 13.1 million people were unemployed, and the caloric intake for ordinary citizens had dropped to roughly two-thirds of pre-war levels.

In addition to the physical devastation, Japan had lost all of its colonial possessions in Korea and Manchuria, as well as Southeast Asia, which were territories that had previously supplied raw materials and export markets for Japanese industry.

More than six million Japanese nationals were repatriated from former colonies and battlefields, as well as prison camps, after 1945, and millions of demobilised soldiers and civilians flooded back to the home islands.

As such, pressure on the already strained food supply became critical. American shipments of food were likely the primary reason a nationwide famine was averted during the winter of 1945–1946.

After Japan’s formal surrender on 2 September 1945, the United States began a military occupation under General Douglas MacArthur and the Supreme Commander for the Allied Powers (SCAP) that lasted until 1952.

Initially, American policy was punishment-focused, and it focused on dismantling the country’s military-industrial capacity to prevent future aggression.

By 1947, as Cold War tensions with the Soviet Union deepened, Washington adopted what later became known as the reverse course.

American planners shifted from punishment and demilitarisation towards economic recovery and political stability, as well as anti-communist containment, since they now viewed a wealthy Japan as a strategic barrier against communist expansion in East Asia.

Several critical reforms during the occupation created the conditions for later economic growth.

SCAP oversaw land reform that redistributed agricultural holdings from large landlords to tenant farmers, which raised rural productivity and consumer purchasing power.

By 1950, tenant farmers, who included part-tenants, had fallen from 43.5 per cent of all farmers in 1947 to 11.8 per cent.

The Trade Union Law of 1945 granted workers the right to organise and bargain collectively, as well as strike, which led to significant improvements in wages and working conditions.

Education reform also strengthened recovery, especially as the post-war school system extended compulsory education to nine years, and lower secondary school enrolment had reached 99.2 per cent by 1950, which helped supply industry with literate and trainable workers.

Also, Japan’s new constitution came into force on 3 May 1947. Article 9 renounced war and declared that land and sea forces, as well as air forces, would not be maintained.

That clause kept military spending low in the early post-war years and left more public resources available for economic recovery.

In 1949, the American banker Joseph Dodge implemented the “Dodge Plan,” which imposed a balanced national budget and halted excessive government lending, as well as fixing the exchange rate at 360 yen to the US dollar.

By stabilising prices and creating a predictable business environment, the Dodge Plan brought Japan’s damaging inflation under control.

The San Francisco Peace Treaty was signed in September 1951 and formally ended the state of war and restored Japanese sovereignty.

Under an accompanying security agreement, American forces continued to provide Japan’s external defence, which meant the government could direct a minimal share of its budget towards military spending.

As a direct result, resources that would otherwise have been consumed by defence were channelled into industrial investment and infrastructure.

When war erupted on the Korean Peninsula in June 1950, Japan’s geographic proximity to the conflict made it an essential supply base for American and United Nations forces.

The United States placed enormous procurement orders with Japanese manufacturers for military vehicles and repaired aircraft, as well as other essential supplies.

Companies such as Toyota received substantial contracts for trucks, and Japan’s heavy industries, many of which had been on the verge of collapse, were revitalised almost overnight by this sudden wave of demand.

The economic effect of these procurement orders was dramatic, since industrial production accelerated rapidly as factories operated at full capacity.

The influx of US dollars provided the foreign exchange that Japan desperately needed to import raw materials and new technology.

Economists have estimated that procurement spending during the Korean War injected approximately $3.5 billion into the Japanese economy between 1950 and 1955, which provided a stimulus that pushed the country past its pre-war standard of living and into its period of sustained high growth.

One of the defining features of Japan’s post-war growth was the active involvement of government agencies in directing industrial policy.

The Ministry of International Trade and Industry (MITI) was established in 1949 and became the main driver of Japan’s industrial strategy by identifying sectors with the greatest potential for long-term growth.

MITI targeted steel and shipbuilding, as well as motor vehicles and electronics, and it provided these industries with favourable access to capital and imported technology, as well as protection from foreign competition.

Japanese firms also imported foreign patents and technical knowledge under official supervision.

Sony’s decision in the early 1950s to license transistor technology from Western Electric became one famous example of this approach, and Japanese companies then refined imported ideas into cheaper and more reliable consumer goods.

During the 1950s and 1960s, Japanese businesses developed a distinctive corporate structure known as the keiretsu, in which manufacturers, suppliers, distributors, and banks formed tightly integrated networks.

Groups that centred on names such as Mitsubishi and Mitsui, as well as Sumitomo, could access reliable financing from affiliated banks and coordinate production in ways that reduced costs and increased efficiency.

In many large firms, core male employees also expected lifetime employment and seniority-based wages, which encouraged loyalty and long-term training.

However, these arrangements did not cover everyone. Women workers, employees in small firms, and many workers outside the major corporate groups faced lower pay and less security.

The high rate of personal savings among Japanese households provided the capital that banks lent to these industrial groups, as the savings-to-disposable-income ratio in Japan averaged 18.3 per cent between 1959 and 1970, compared to just 7 per cent in the United States.

In December 1960, Prime Minister Hayato Ikeda announced his Income Doubling Plan, which set a target of 7.8 per cent annual economic growth over the following decade.

The plan was conceived by the economist Osamu Shimomura and aimed to double national income by 1970 through a programme of tax reductions and increased public investment, as well as expanded welfare spending.

Remarkably, the economy surpassed Ikeda’s expectations, and it achieved an average annual growth rate of 10 per cent throughout the 1960s.

Growth also rested on an export surge in ships, steel, cameras, transistor radios, televisions, and later motor vehicles.

Japan’s shipbuilding volume rose from 2.65 million tons in 1955 to 7.97 million tons in 1965, which made the country the leading shipbuilder in the world.

Major infrastructure projects reinforced this recovery. The Tōkaidō Shinkansen opened on 1 October 1964, just days before the Tokyo Olympic Games, and the Games presented Japan to the world as modern, orderly, and technologically confident.

By 1968, Japan had overtaken West Germany to become the world’s second-largest economy after the United States, and the sustained growth period between November 1965 and July 1970 became known as the “Izanagi boom,” which was named after a creation deity in Japanese mythology.

Rapid industrial growth also imposed serious costs. Industrial pollution produced public health disasters such as Minamata disease and Yokkaichi asthma, which exposed the human price of unchecked factory expansion.

By the early 1970s, several factors began to weaken Japan’s extraordinary rate of expansion.

The 1973 oil crisis, which was triggered by the Organisation of Arab Petroleum Exporting Countries’ embargo on nations that supported Israel, caused global oil prices to triple.

Since Japan imported virtually all of its petroleum, inflation surged, industrial costs climbed sharply, and the annual growth rate dropped from roughly 10 per cent to around 4.6 per cent for the rest of the decade.

Also, the collapse of the Bretton Woods system in 1971 also affected Japan’s competitive position in international trade.

For over two decades, the yen had been fixed at 360 to the US dollar, which was a rate that kept Japanese exports artificially cheap on world markets.

Once the yen was allowed to float freely, it appreciated in value, which made Japanese goods more expensive for foreign buyers.

The end of miracle-level growth did not bring immediate economic collapse, but it began a period of steadier expansion that was typical of a mature industrial economy.

At the same time, Japan’s trade surplus and export strength caused increasing friction with the United States in the late 1970s and 1980s, especially in steel and cars, as well as consumer electronics.

The foundations that had been built during the miracle years continued to support steady growth through the 1980s, and by 1991 Japan’s per capita GDP had reached 85 per cent of the American level, which effectively completed the process of catching up with the Western industrialised world.