The postwar Japanese economic development is characterized by different phases of development based on the rate of growth. The phase of the high growth occurred in the 1950s and the 1960s, and it followed the reconstruction period starting from 1945. From the 1970s, the economy started experiencing a declining but stable rate of growth that lasted through to the 1990s. From the late 1990s, the Japanese government started implementing new market policies to accommodate international standards and remain competitive in international markets. The last phase (current) phase of economic development is characterized by unstable growth but a strong economy (Okazaki, 2015). The phases of the postwar Japanese economic development and the transition from a closed industrial economy to a market economy are based on government attempts to revitalize the local industries and support local companies in foreign trade. The role of government in the postwar high growth period was to support a transition from industrial to market-based economy and the industrial policy was characterized by structural readjustment to attain sustainability.
Following the end of the WII, Japan focused on reconstructing the local economy. The government targeted various industries and sectors of the economy as the basis for the reconstruction. The main aim was to implement priority production, which is a system that allocates resources to the most productive industries or sectors of the economy (Okazaki, 2015). The initial targets were the coal and steel industries. This plan required extensive government control of the production and supply systems in the market. It addressed this requirement through the creation of the Ministry of International Trade and Industry (MITI). The MITI created the framework for the priority production by coordinating the operations of public and private entities.
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"Japanese Industrialization – The role of the Government and the Industrial Policy in Postwar High Growth, 1950s-60s".
MITI played the role of coordinating the parties in industrial development and market for imports and exports to ensure that various interests were considered and balanced to achieve the desired growth. For example, MITI coordinated the relationship between local manufacturers and importers to control market competition. The importers were required to make applications from agencies under the MITI. This was done through a monetary policy on the foreign exchange. The government had the direct control of foreign currency. As such, importers had to get the necessary resources from the government before dealing with foreign merchandise. As such, the government was able to regulate foreign trade in favor of Japanese industries by restricting imports.
The creation of MITI was in line with the history of Japanese government control over trade and investments. As such, the implementation of the economic reconstruction measures involved restrictive measures on production, investments and trade. For instance, the government would ration the distribution and allocation of key resources for industrial production. The outcome was an effective system for boosting industrial production volume. The aim of the industrial policy was to revitalize the declining industries and promote effective use of resources for production. These goals required government interventions for smooth operation and coordination. The first phase of the implementation of the industrial adjustment policy targeted the industries that dominated the supply and demand structures at production and investment levels. Overall, there was increased efficiency in the key industrial sectors. However, the efficiency in industrial production came at a price on the economy because of low productivity, unemployment, high inflation and other issues. Government restrictions in the economy harmed private investments and created barriers to a thriving local economy. The most urgent economic issues for the government were the hyperinflation and the high cost of doing business. It responded by adopting measures to allow a gradual transition from an industrial to a market economy.
The transition to a market economy started with the implementation of the Dodge Line policy. The policy was developed by Joseph Dodge and recommended measures for promoting a thriving market economy in Japan. A market-driven economy would provide Japan with economic independence by providing a strong consumer base in the local market. The Dodge policy recommended: Using the principle of a balanced budget, expanding the tax net, stopping uneconomic government loans, minimal government intervention in trade and using a fixed exchange rate between the Japanese yen and the US dollar (Okazaki, 2015). Each of these measures would contribute to the transition to a market economy in various ways.
The Dodge policy created economic reforms that were characterized by the elimination of monopolies, disbandment of big business and opportunities for private investment. These reforms created the foundation of the high growth period and can be identified in various sectors of the economy. For instance, agricultural land reforms provided the basis for more investments in farming and increased productivity among farmers. The agricultural outputs soured during the high growth period (Sadahiro, 1991). The disbandment of big business and the introduction of the anti-monopolistic rules created opportunities for private investment. These changes popularized the stock market and allowed the creation of competitive business units and associations (Richardson, 1993). The policy was successful in stabilizing the rate of high inflation caused by the industrial policy.
The most critical change instituted by the government from the 1950s was the transition from the direct control of markets to a new regulatory framework based on market dynamics (Richardson, 1993). The economic policy instruments were changed to allow for this transition, which sought to give incentives to the private sector and institutionalize a collaborative consensus between the government, private institutions and trade unions. To this end, the Temporary Law for Adjustment of Demand and Supply of the Basic Commodities was discarded in 1952 (Sadahiro, 1991). This law had been used by the government as the basis for rationing the distribution of resources to allow for controlled industrial production. The abolishment of the law created a competitive environment for the supply of raw materials for production. In the same year, the Agency for Economic Survey was created to replace the Headquarter of the Economic Stabilization (Sadahiro, 1991). The latter was mainly used as a tool for market regulation and direct intervention by the government. The Agency for Economic Survey created an institution for collaboration between the government, market actors and other interests in the development of economic policy. This change was critical for the formulation of effective economic measures to guide economic growth.
The initial steps taken include the establishment of government financial institutions, mainly the Japan Export-Import Band and the Japan Development Bank, as tools for fiscal regulation. The government then passed the Enterprise Rationalization Promotion Act in 1952 (Okazaki, 2015). The act was used as to encourage private capital investments by introducing tax incentives. Additionally, the act provided for state-private partnership in research and development. The partnership involved government financing of research activities undertaken by private entities.
In line with the market transformation agenda, the government took further steps to adjust the industrial economic structure. In 1955, it announced the Initiative on National Passenger Car and the first national economic plan (Sadahiro, 1991). The plans declared their targets in promoting the local market and creating opportunities for employment. The major benefits of economic reforms started being realized in 1955 with the stabilization of the domestic prices and a balanced internal external account of trade. In 1960, the government announced the Doubling National Income Plan, which created a comprehensive guideline of national goals (Sadahiro, 1991). The plan focused on the macroeconomic factors of social capital and social services such as social security and literacy levels. The plan sought to create a strategic balance of demand and supply in the market economy. For instance, the investment in education would supply the labor market with a workforce with the required skills. To this end, Japan adopted measures on import liberalization (Richardson, 1993). The move created a competitive local economy where local manufacturers competed with foreign products in the market. The rate of import liberalization increased sharply afterwards as the government responded to foreign pressure to open the local market to foreign firms.
The industrial policy in this period was characterized by structural adjustments in Japanese industries to achieve high levels of sustainability. The aim of the adjustment was to eliminate surplus resources and facilitate business reforms characterized by new business units, integrations and alliances (75th OECD Steel Committee Meeting, 2013). Structural adjustments in Japanese industries were accompanied by increasing investments in R&D, energy efficiency, employee welfare and environmental conservation (75th OECD Steel Committee Meeting, 2013). The aim of these investments was to create a responsive and sustainable economic structure. For instance, the investment in R&D ensured that the Japanese Steel industry remained competitive after the Korean War-related Special procurement. The Korean War had provided a high and steady demand for steel from Japan, and the war demand had been critical in preventing an economic recession in Japan (Sadahiro, 1991). The end of the war meant that cutting production volume by a large margin because of low demand.
As industries reduced their output capacity to focus on productivity, measures were being taken to reduce the risk of high unemployment. Employees were continually being reassigned to new business units based on R&D. The production was now in new business fields such as manufacturing of high-end electronic devices. Also, there were changes in the human resource management to promote the necessary values for a market-driven production. The structural adjustments were critical in helping Japan to maintain a strong economy against the declining industrial output. The country was able to respond to declining demand for steel and iron by shifting to production of high-quality steel related products.
The impacts of the government reforms and industrial policy continued to influence the economy in the subsequent phases of development. For instance, steel production in Japan peaked in the 1970s but from then the volume has been declining. The number of steel production sites reduced from 72 in 1976 to 28 in 2012 (75th OECD Steel Committee Meeting, 2013). Overall, the number of steel-related plants, sites and employees has been declining in Japan. However, the industry remains competitive because of production of high-quality steel products. The investments in the Japanese steel industry are now directed towards R&D activities for improving efficiency and increasing productivity.
The postwar high growth period was the result of government economic reforms that started immediately after the war. The government started with the creation of MITI to promote the growth of key sectors of economic, particularly coal and steel industries. MITI created an industrial economy that focused on efficiency and high production volume. However, this system created economic challenges including hyperinflation. In response, the government started implementing reforms to transition to a market-based economy with the adoption of the Dodge policy. The government interventions attracted private investments and provided opportunities for the development of social capital and social services. The industrial policy in the market economy focused on restructuring to allow for more innovation and sustainable operations. The measures included creating incentives for R&D and creating a dynamic and responsive labor market. The government looked forward at minimizing the impact of unemployment and social problems on industrial development and market dynamics. Market reforms created social dynamics that are dictated by market competition. These include the development of the middle class of consumers. Thus, the economic reforms created a flexible and dynamic society. The social transformations were necessary for the development of a competitive domestic industrial workforce and market. Also, labor reforms contributed to social transformations in Japan. The labor reforms recognized the role of labor unions and set the basis for favorable working conditions. As such, Japanese workers enjoyed various workplace incentives that played a role in creating social stability.
- 75th OECD Steel Committee Meeting.(2013). Japanese steel industry structural adjustment process and status. Retrieved from https://www.oecd.org
- Okazaki, T. (2015).Japan’s industrial policy: Objective evaluation and feedback are crucial. Research Institute of Economy, Trade and Industry. Retrieved from https://www.rieti.go.jp/en/papers/contribution/okazaki/05.html
- Richardson, B. (1993). The political economy of Japan.ICPS.
- Sadahiro, A. (1991). The Japanese economy during the era of high economic growth retrospect and evaluation. Department of Research Cooperation Economic Research Institute Economic Planning Agency Tokyo, Japan. Working Paper, 4.
