II

Japan’s Amazing Recovery

NANA-KOROBI YA-OKISeven times down, eight times up

SHORN of its pre-World War II possessions, Japan is now a small country. The 142,644 square miles of the four main islands and the small ones nearby give Japan a land area about the size of the state of California, and yet of this area only 15 percent is arable.¹ Into this relatively tiny fringe of land off the Asian mainland are crowded 90 million hard-working, energetic, and industrious people gravely handicapped in their struggle for subsistence by a frightening poverty of natural resources.

Indeed, Japan is an economic paradox. Once again the world’s leading textile exporter, the country must import all of its raw cotton. Although the leading steel producer in Asia, Japan lacks coking coal and has little iron ore. Its large aluminum industry is wholly dependent upon imported bauxite. Japan’s fertilizer industry is based largely upon imports of phosphate rock and potassic salt. Of the 33 metallic minerals used in industry, Japan has only 6. All the rest must be imported, as must about 95 percent of Japan’s petroleum, 78 percent of the salt, and 20 percent of the food it consumes.

As Mr. Joseph M. Dodge, former financial adviser to General MacArthur and foreign economic policy adviser to President Eisenhower, put it succinctly: “The fundamental problem of the Japanese nation can be expressed in the simple terms of too many people, too little land and too few natural resources. These combine to press heavily on every circumstance of national life.”²

Compare Japan and Canada. Japan’s 90 million people are packed into 142,644 square miles; Canada’s 16 million people occupy 3.6 million square miles. Japan produced 11 million tons of ingot steel in 1956 (perhaps 13 million in 1957). Canada produced 4.8 million tons. But Canada’s iron ore output was 11 million tons last year and is still growing. Japan, with ore sufficient to produce only one million tons a year, had to import nearly eight million. Despite a bumper harvest, Japan had to spend $533 million for foodstuffs. Canada, on the other hand, sold $974 million worth of agricultural products abroad.³

TABLE II-1. JAPANESE NATIONAL INCOME, POPULATION, AND PRICES, 1930-1956

F: Japanese fiscal year.C: Calendar year.

Source: Kokumin Shotoku [National Income] 1956 F. Y., Economic Planning Agency, Tokyo

By aggression, Japan’s militarists had hoped to secure permanent economic well-being through the creation of a “Greater East Asia Co-Prosperity Sphere” which would ensure markets for manufactures, an endless supply of essential and cheap raw materials, colonial posts for ambitious and hotheaded young men who might otherwise cause trouble at home, and space for migration to relieve the pressure of population. Ending as it did in disaster, Japan’s bid for hegemony in eastern Asia not only failed to alleviate such problems, but in fact added to their intensity.

Japan, in losing its empire, lost 52 percent of its area, and with it the dream of integrated economic development. Its access to food and industrial raw materials—to oil and salt and iron ore and rice—became more, rather than less, restricted. Its administrators, colonists, soldiers, and adventurers came pouring back into the four home islands—over five million were repatriated in two years—and the Japanese population, 72 million at the time of surrender, has now grown to 90 million.

Japan’s capacity to balance its payments by maximizing its exports of goods and services was shattered by the wartime destruction of its industry and shipping. Approximately 40 percent of the built-up area of the 66 cities attacked by air was destroyed, as was 30 percent of Japan’s industrial capacity, 80 percent of its shipping, and 30 percent of its thermal power. Two-thirds of the prewar cotton industry, which had a capacity of 12 million spindles, was scrapped by the Japanese war administrators, and then bombing caused a further loss of some 20 percent in spinning capacity and 14 percent in weaving.

From the depths of defeat, destruction, and despair, Japan has, in one short decade, staged an amazing recovery. With one exception, all major economic indexes had by 1956 exceeded prewar peaks. The exception was trade, especially exports. Manufacturing and mining output, which fell to 30 percent of the prewar level in 1946, had by 1951 exceeded it and by 1956 was twice as high. The increase in electric power generation was even greater. Even in the fields of agriculture, forestry, and fishery, where the growth of output is usually slow, all branches except sericulture surpassed the prewar level in 1950 and by 1956 were 30 percent above prewar levels. Real national income, which was reduced to less than 60 percent of the prewar figure in 1946, roughly recovered the prewar level by 1950 and by 1956 had surpassed it by 50 percent.⁴ Real income per capita rose 46 percent between 1950 and 1956, and by the end of 1956 was 16 percent above prewar (1934-36) levels (see Table II-1).

TABLE II-2. INDEXES OF JAPANESE INDUSTRIAL ACTIVITY, 1934-1956

Source: Economic Statistics of Japan, 1956, Bank of Japan, Tokyo, p. 203.

The average annual rate of growth for mining and manufacturing production during the ten postwar years has been 22 percent, as against about 9 percent in prewar days (see Table II-2). The rate of economic growth in terms of real national income has averaged more than 11 percent a year as compared with 3 to 5 percent prewar. From the outbreak of the Korean War to 1957, real national income rose 58 percent, industrial activity 158 percent, and employment 22 percent.⁵

The boom accelerated during fiscal 1956-57. Industrial production rose 23 percent during the year. If 1953 can be called a year of expanding domestic consumption and 1955 a year of expanding exports, then 1956 was a year of boom in domestic investment. Consumption rose by 4.7 percent, exports by 20 percent, while imports increased 40 percent. Private investment grew by 60 percent and private equipment investment by 80 percent. The government’s estimate at the beginning of the fiscal year put the national income at 4.3 percent and industrial production at 7.2 percent above the previous year. Actually, however, the former increased by 13.9 percent and the latter by 23.4 percent. National income grew at a rate more than twice as great as that envisaged in the five-year plan, industrial production and exports three times as fast, imports more than five times as fast, and investment more than eight times as fast.⁶

Since 1950 Japan has had a more rapid industrial expansion than any other major manufacturing country, even greater than the remarkable recovery in West Germany’s industrial output. This may be seen in Table II-3. Less of the expanded Japanese output was funneled into exports, however, than in the case of West Germany. Over the seven-year period Japanese manufacturing output rose 186 percent, compared with a 97 percent increase in West Germany. The latter, however, was able to expand its volume of exports by 200 percent as against Japanese expansion of 166 percent. In value terms, total world exports rose 65 percent between 1950 and 1957. Exports of the United Kingdom rose 45 percent, of the United States 86 percent, of Japan 200 percent, and of West Germany 272 percent.

The failure of Japanese exports to expand as rapidly as West Germany’s may be attributed primarily to three factors, although there were a number of minor ones: (a) the vast inflation which gripped Japan during most of the postwar decade, (b) the consequent fact that it was more profitable most of the time to sell at home than abroad, and (c) production costs in Japan in many lines, particularly heavy goods and chemicals, were higher than those of competitors abroad, owing in part to obsolete techniques and equipment. All of these factors tended to overprice Japanese exports in world markets from time to time. Exports were the one major economic series which failed to recover prewar levels by the end of 1956, when they stood at 85 percent of the 1937 figure.⁷

TABLE II-3. JAPAN AND WEST GERMANY, COMPARATIVE RECOVERY, 1950 TO 1956

Sources: International Financial Statistics, International Monetary Fund, June 1957, and Monthly Bulletin of Statistics, United Nations, September 1957.

Naturally several intriguing questions suggest themselves. How did this rapid recovery come about? Since no single simple answer is likely, what were the principal factors responsible for what Thomas E. Dewey⁸ described as “one of the economic miracles in the history of the world”? Whether miraculous or man-made, why was the recovery more effective in Japan’s domestic than in its foreign commerce? Why, that is, did exports lag behind and fail to regain prewar levels? Is the recovery firm and lasting? Has normalcy been regained or is Japan in fact, in the midst of a “fragile boom”? Are the difficulties that have been overcome major or minor, compared with those yet to be faced? Is the subtle aura of admiration for mutual accomplishment, emanating from both Tokyo and Washington, premature or justified?

It is possible to isolate certain factors and claim, with some degree of logic, that these things were especially helpful in promoting Japanese recovery.

First, the six billion dollars of U.S. funds poured into Japan during the postwar decade. Since the Japanese national budget provided for annual expenditures ranging from $1.8 billion in 1950 to $2.8 billion in 1956, this was pump-priming on a major scale. During the first half of the decade it took the form of $2 billion of direct aid.⁹ Over the last half of the decade—the period following the outbreak of the Korean War in mid-1950—it consisted of expenditures of $4 billion for “special procurement,” i.e. the purchase of supplies, equipment, services, and amusements for U.S. and U.N. troops in Korea, Japan, and the Ryukyus. This injection of dollar plasma helped to rehabilitate industry, balance Japan’s payments for the decade, create purchasing power, and build a foreign exchange reserve. It also raised prices, a process in which the Japanese really needed little assistance.

Secondly, it was a decade of expanding world recovery and prosperity characterized by a high and rapidly growing level of world trade. What trade expansion Japan enjoyed did not have to come at anyone else’s expense. As the pie grew steadily larger, each could have a bigger piece. Between 1938 and 1948 the volume of world exports rose only 1.4 percent. Between 1948 and 1957 world trade increased 77 percent in volume. Between 1937 and 1947 the volume of world industrial production rose 21 percent; from 1948 to 1957 it increased 58 percent. That Japan should share in, and benefit from, a decade of marked economic expansion was not surprising.

United States sponsorship constitutes the third factor in Japan’s recovery. While in the early days of the Occupation, U.S. policy held that it was up to the Japanese themselves to repair the economic damage they had suffered as a result of the war they had started,¹⁰ this was soon perceived to involve unrealistic assumptions. There followed a gradual reversal of the Occupation’s role in Japanese economic affairs—at one point carried to the extreme of using Allied troops to enforce collection of both Japanese rice and taxes—and a wide turnabout in the U.S. view of the way Japan was to be treated. The immediate post-surrender attitude, that the magnitude of the crime at Pearl Harbor was so great that severe penalties should be imposed, gave way to the theory that Japan, defeated and weak, had to be restored to economic health so that it might cease to be a drain on the resources of the American taxpayer.

A very large number of economic measures were undertaken by the Occupation, ranging from direct aid to currency reform, tax revision, and establishment of a counterpart fund, the proceeds of which were to be used for rehabilitation of Japanese industry.¹¹ After the signing of the peace treaty in 1952, the United States government sponsored Japan’s re-entry into world trade relationships, concluding reciprocal trade agreements with Japan, securing Japan’s admission to the General Agreement on Tariffs and Trade, and using its own tariff concessions to other nations to secure favorable treatment for Japan. United States firms concluded a large number of technical assistance contracts with Japanese companies which enabled them to obtain the latest knowhow, patents, copyrights, and machinery and equipment, as well as training for their technicians. The U.S. International Cooperation Administration established a Productivity Center in Japan to help Japanese industries to become more efficient and competitive. The U.S. Export-Import Bank granted a long series of revolving credits to Japan to enable it to buy American raw cotton on favorable terms. Under surplus commodity disposal agreements American wheat, barley, cotton, etc. were sold to Japan for yen, rather than dollars, and part of the yen were then loaned to the Japanese for economic development. The World Bank granted Japan a series of loans to rehabilitate, modernize, and expand its electric power and steel-producing facilities.

To what extent these and a host of related measures, too numerous to detail, aided Japanese recovery will be long debated both in the United States and in Japan, but it seems reasonably clear that the United States’ positive and helpful attitude, in contrast, for example, to the negative, truculent, and restrictive activities of the Soviet Union, eased Japan’s way over the difficult postwar decade.

The postwar world trend toward liberalization of trade policies, slow and limited though it may have been, was a fourth factor which was of some benefit to Japan. In 1938 Japan was responsible for 5.37 percent of total world exports. Its attempt to build back to this figure over the last decade—an effort which was only half successful, since Japan’s exports in 1956 were but 2.74 percent of the world total—was eased to some extent by the activities of the International Monetary Fund, the General Agreement on Tariffs and Trade, and the International Bank for Reconstruction and Development, but handicapped by the painfully slow pace in the return to currency convertibility. While some nations continued to discriminate against Japanese products, the general international atmosphere of disapproval and discouragement of such restrictions undoubtedly lessened the discrimination which, in the absence of this international attitude, might have been much more severe.

The industrial boom, stimulated by the outbreak of the Korean War, was a fifth factor aiding Japanese recovery. By increasing Japanese industrial output to much higher levels than had been realized in the previous postwar years, it netted substantial profits for industry, which when plowed back raised the rate of capital formation in Japan to a new postwar high and permitted widespread replacement of obsolete and inefficient equipment. By raising employment and wage income to new high levels it led to a domestic consumption boom, which brought Japanese output to new peaks. Capital formation in Japan from 1950 on was substantially higher than in prewar years.¹²

Paradoxically, it seems likely that the alternation of several periods of inflationary expansion followed by periods of monetary restraint helped to achieve higher levels of output and employment for Japan. The inflationary excesses of the period from September 1945 to March 1949, while they perhaps created more problems than they solved, did help to lubricate the Japanese economic machine and start it functioning again. It also seems likely that the “austerity” program pursued by Mr. Dodge in 1949 and 1950 (until the outbreak of the Korean War) came just in time to prevent inflationary excesses from dissipating any gains which the monetary and fiscal acceleration had stimulated. The Dodge policy, therefore, consolidated Japan’s economic position and provided a more solid and sound base from which to move forward again.

That the industrial expansion engendered by the Korean War, leading into the domestic consumption boom of 1953, carried output and employment to new high levels was as clear as the inflationary excesses it created. Consequently the classic sound money policy instituted in the fall of 1953 by the Yoshida Government and continued into 1955 was a much needed corrective, which by greatly improving Japan’s monetary, fiscal, and price structure enabled the country to strengthen its international economic position and press on to new gains in this area.¹³ It seems likely that the monetary and fiscal restraints imposed in 1957, brought on by the fact that Japan’s domestic expansion in 1956 had run beyond its balance of payments capacity, would in turn provide necessary correctives, consolidate the economic base, and thus permit subsequent new advances. The policy of monetary and fiscal restraint of 1949-50, 1954-55, and 1957 may thus be regarded as a sixth factor contributing to Japan’s economic recovery.

A seventh factor was the changed nature of the Japanese domestic market. Japan’s prewar economy featured a limited domestic market, the result, in part, of low wages and limited farm income. This tended to focus attention of Japanese producers on foreign markets. The limited ability to sell at home, because of the low consuming power of the domestic market, forced them to look abroad. Low production costs, resulting in part from low wages, enabled them to surmount tariff barriers and penetrate foreign markets, especially in consumer goods.

Great changes have occurred in the Japanese domestic market over the past dozen years. The share of rent and interest in the national income has fallen sharply, while that of compensation of employees and farm income have risen significantly. Rent and interest declined from 18 percent of national income before the war to 4 percent in recent years. The wage-earners’ share of distributed national income rose from a prewar average of 38 percent to 48 percent in recent years, while that of farmers increased to a smaller extent.¹⁴ Thus a redistribution of national product, adverse to the high-income, low-consumption, monied groups, and favorable to the low-income, high-consumption, wage-earning and farm groups, with their heightened propensity to spend on consumer goods, has enormously increased the absorptive capacity of the domestic market in Japan.

The high rate of capital investment is the ninth factor responsible for Japan’s amazing postwar recovery. At first glance, this may appear to be a contradiction of the previous factor. If you have a redistribution of national income in favor of groups with a high propensity to consume, how do you at the same time attain a higher rate of capital formation? Part of the answer is that there is really no contradiction. A larger volume of sales in a market of greater absorptive capacity enhances aggregate profit and permits the plowing back into business investment of more substantial sums than when the total market was much smaller and restriction of output widely practiced. But there were also a number of special factors in postwar Japan which led to a higher rate of capital formation than before the war. Postwar Japan required a tremendous amount of investment, first to replace the facilities destroyed or damaged during the war, and then to keep abreast of technological advances and developments.

To finance this capital investment, which contributed so substantially to the growth of the Japanese economy in the postwar period, Japan had one negative and two positive advantages. Over the last decade Japan has been largely freed from the enormous nonproductive spending on armaments which, before the war, amounted to more than one-half of the annual national budget. As a result the government has been able in the postwar period to increase its investment activities in key industries—iron and steel, coal, electric power, and transportation. Furthermore, the inflationary expansion of credit which the government sponsored from time to time over the past decade, through the Reconstruction Finance Corporation, the Bank of Japan, the Japan Development Bank, etc., was used in good part to finance capital expansion. Add to this the increased plowing back of a steadily rising aggregate volume of business profits, and the basis for Japanese postwar capital investment expansion would seem to be clear.¹⁵

Finally, perhaps the most basic factor in Japan’s recovery was the attitude and knowhow of the Japanese people. Hard-working, industrious, firm in their determination to overcome poverty and devastation, they were familiar with industrial processes and with the techniques of foreign trade. Japan is not an underdeveloped country. The Japanese people know well how to produce goods and penetrate foreign markets. They did not need to learn these basic concepts from the ground up, as was true in much of the rest of Asia in the postwar decade. All they needed was a chance to apply their ingenuity and resourcefulness, and when this came to them at the end of the Occupation, along with fortuitous developments such as the Korean War boom and a favorable international atmosphere of expanding trade and declining restrictions, they simply put their knowledge to work. The encouraging economic results attest to the view held by careful observers of the Japanese scene, that in the context of a peaceful world, with expanding trade and rising standards of living, the Japanese will make their way.

Reviewing their accomplishments at the end of a difficult decade, a note of caution ran through many of the Japanese analyses. While the feeling was widespread that recovery from the immediate postwar chaos and confusion had been achieved and that Japan had successfully overcome its short-term temporary problems, it was also felt that the country would now need to face its longer-run, far more deep-seated and basic dilemmas, before indulging in unrestrained rejoicing.

In this vein the Japanese Economic Planning Agency^* declared:

The speed of Japan’s postwar recovery has surprised all. It was fostered by the plodding industry of the Japanese and quickened by a favorable turn in the world situation. But sight should not be lost of the fact that the very speed and depth of a defeat-induced downfall helped to quicken the speed of an uphill climb. And we were never lacking in the energy for the uphill climb. . . .

No longer are we in the “postwar” age, because our growth through postwar reconstruction is over. We are face to face with a new era. Our future growth will be sustained by transformation. Transformation, in turn, will be made possible only by a speedy yet stable economic expansion. . . .

We must begin now to adapt ourselves to the constant technological progress of the world and the transformation which that progress brings. Each day that we put off that effort will put us further behind the advanced nations in qualitative level—and bring those underdeveloped nations who are busy with industrialization efforts close to us in quantity level. . . .

Instead of celebrating our luck-borne quantity boom with song and dance, we must ride the international tide of transformation here and now for the future well-being of our country.¹⁶

The Japanese Ministry of Finance put it more tersely:

In ten years after the war the Japanese economy may be said to have at last got out of the period of disorder to be launched on the course of normal growth. The fact is, however, that normalization has just got underway, and there remain, it is needless to say, many problems still to be solved. The solution of long-term structural difficulties underlying the Japanese economy particularly depends upon steady efforts in the future. The most fundamental of problems is the increasing pressure of population and the difficulties from the problem of unemployment resulting therefrom.¹⁷

In a speech late in 1956 Mr. Ichimada, then Finance Minister, stressed two other factors of long-term concern:

With the encouragement and stimulus America gave us, we have made great efforts and progress toward recovery. Last year [1955] we were able to balance our international payments more or less even excluding the special dollar receipts resulting from American military spending in Japan. Compared with prewar times, our mining and industrial production has increased by two times and our national income by 50 percent. The standard of living has surpassed the prewar standard and we have come to a point in our recovery where it seems to appear that we have attained a self-supporting economy. However, Japan has to meet various foreign obligations arising from the war, such as reparations payments. . . . The payment of such external obligations is, as you will recognize, a heavy burden on our national economy—a burden we must carry for quite a number of years. . . . Speaking briefly of my own country, I should say that the future of our national economy is not an easy one. For while the degree of our dependence on foreign trade is very great, the world trend today is toward greater economic competition.¹⁸

The London Economist noted:

Outwardly, Japan looks prosperous. Scarcely a village street lacks its radio and camera shops, and there is a fast growing nucleus of 350,000 television-viewing families. The Japanese spend £350 million on pachinko—a gambling game which is one of the national passions; 115 million gallons of beer flow down Japanese gullets annually; cinemas are going up at a rate of two a day to entertain one billion customers a year. Yet there is no inflation, for wages are rising more slowly than national product. This has been achieved by a prodigious effort; industrial production increased sharply last year and Japan is selling abroad seven times more ships and four times more textiles than in 1952. But the population is also increasing at a rate of well over a million a year, and if national product is to continue to keep pace with it, Japanese business men must concentrate increasingly on the manufacture of heavy industrial goods, and find markets to sell them in. At the moment, too much of Japan’s trade is dependent on the export of consumer goods of the kind whose sale would be disproportionately hard hit by any world recession.¹⁹

The Oriental Economist remarked:

The growth in Japan’s national income in 1956 was certainly remarkable. But it must not be forgotten that despite this phenomenal increase the per capita income level still remains one-ninth that of the United States and far below that of countries such as Britain, France and West Germany. Moreover, the rate of growth had an unfavorable effect on the balance of trade, which in turn has resulted in a series of measures to restrict credit.²⁰

In a brief nutshell, the Economic Planning Agency summed up: “The 1956 Japanese economy started off with an unprecedented boom and ended with a foreign exchange crisis.”²¹