ECONOMIC

DEVELOPMENT OF
JAPAN
 AGENDA
TOKUGAWA PERIOD (1603 -1868)

MEIJI PERIOD (1868 -1912)

THE TWENTIETH CENTURY (1912 -1939)

THE POST-WAR PERIOD (1955 -1975)

CURRENT PERIOD
Tokugawa Period
1603 – 1868
 Tokugawa or Edo Period
Before this period, Internal Wars and Power Shifts were frequent especially during late 15 th to the end of 16th Century - Sengoku (Warring) period

Leyasu Tokugawa unified the country after a series of wars and established the town of Edo as the Capital city.

The baku han system is equivalent to the landlord system in the western countries in the middle age period. The daimyo acted as the land lord who could
absolutely control over his domain or han. The most powerful daimyo is the daimyo of Edo or shogun, which was the country headquarter.

The preconditions for modernization and industrialisation were set in this period and are
listed as follows

(1) Political unity and stability

Shogun
(2) Agricultural development in terms of both area and productivity
Daimyo
(3) The development of transportation and the emergence of nationally unified markets
The Caste System
(4) The rise of commerce, finance and the wealthy merchant class Shi = Samurai
Samurai Nou = Farmer
(5) The rise of pre-modern manufacturing (food processing, handicraft, etc.) 7% Kou = Artisans
Shou = Traders
(6) Industrial promotion by local governments
Farmer 80%
(7) High level of education

Artisans &
Traders 13%
 Tokugawa or Edo Period Infrastructure
Roads and Coastal
waterways
development throughout country

Alternate
Attendance

Edo = Major
Extensive Consumption Center
Local
Commercial
Activities Osaka = Great
Enter Port

Rise in Rise Production and Population

The rapidly rising in population from 20 million in 1600 to

High -Income Area ( Fertile
30 million in 1700. Agricultural Lands with High
Output)
Population Growth -------- Labor ↑

Villages were well organized and permitted autonomy as

long as they paid rice taxes as stipulated by the central or
local government. The rice tax was levied on villages, not
on individual farmers.
MEIJI PERIOD
1868 - 1912
 MEIJI PERIOD
The bakufu monopolized foreign trade ,Korea and Ryukyu (Okinawa) had diplomatic relations with Japan while Chinese and Dutch merchants were allowed to
trade with Japan. All other transactions were strictly prohibited. No Japanese were allowed to go abroad or come home from abroad.

Four American military ships (Black Ships) led by Commodore Matthew C. Perry entered Edo Bay in 1853. Perry demanded a friendship treaty which allowed
American ships to use Japanese ports. The Bakufu agreed to sign the treaty owing to the military strength of the Americans.

The commercial treaties which the bakufu signed with the West were unequal treaties in the sense that (i) Japan had no right to decide tariffs; and (ii) the Japanese
court could not judge foreign criminals in Japan. Inability to indict foreign criminals was considered to be great national humiliation.

The opposition blamed the bakufu for signing defective treaties. They also criticized the bakufu for economic turmoil, including inflation, and yielding to foreign
pressure without national consensus or imperial permission.

The political fight finally centered on who would remove the bakufu and establish a new government. In a series of relatively minor battles ,the bakufu forces were
defeated and the new Meiji government was established in 1868.

The national slogan was fukoku kyohei which means “rich country,strong army.”

In order to modernize Japan, the Meiji government had three goals:

1. Industrialization (economic modernization)

2. Introducing a national constitution and parliament (political modernization)
3. External expansion (military modernization)
 MEIJI PERIOD
Local autonomy under the han system was replaced by a centralized government and prefectures whose governors
were appointed by Tokyo.

A new land tax at the initial rate of 3 percent of the land value replaced the old rice tax which was levied on annual yield.

Land Tax Reform ↑ Productivity

“Increase
Production,Encourage
Industry”
How Japan achieved industrialization: Iwakuru
Mission
(Shokusan Kogyo)
• The opening of Japan to knowledge of
foreign technology ↑Technology
• Hired foreign advisors Transfer Dual engine of growth
development driven by strong
• Agriculture experiment stations ↑ Total Factor private dynamism, and
Productivity supported by (mostly)
• Telegraph and rail network, postal system, appropriate policies.
↑ Social
police forces, power plant Infrastructure
• Schools and universities ↑ Human capital
 MEIJI PERIOD
The Emergence of
Administration of
Commercial banks,
I. Cotton Spinning and Silk Reeling Finance Ministry
• National banks,
Comparative Advantage of producing cotton yarn and raw silk under Matsukata
• Accounted for 1/3 of net products in Japan factories And Central bank
• Created 15% of the value added in manufacturing and 3% of GDP
• Still relatively labor intensive
The improvement of
II. Establishment of national enterprises in various fields National Security Shipbuilding and
• 3 shipyards Coastal navigation
• 5 munitions works
• 10 mines
• 52 factories
Trend Growth of GNP and Investment
III. Steel manufacturing, Shipbuilding and Coastal Navigation industry
• Government policies to promote this industry 12

– 75% of all Japanese government subsidies 10

– Increase in tariff rate from 5% to 15%
8

Percentage
IV. Banking Industry
GNP
• Large joint – stock enterprises 4
Investment
• The Emergence of Public Financial Intermediaries 2
– The Hypotech Bank
0
– The Hokkaido Bank

88

92

06

10
90

94

96

98

00

02

04

08

12
– The Industrial Bank of Japan -2
18

18

18

19

19

19

19
18

18

18

19

19

19
-4
Year
Twentieth Century
1912 – 1939
The Twentieth Century(1912-1939)
1914-1918
01 World War I. The Japanese entered
the WWI to seize the opportunity of
Germany’s distraction in Europe and
1917 expand influence in China & Pacific.
Rapid industrialization led to a boom
in the economy. Japan used the
02
absence of war torn European
competitors to advance its economy. 1923
Higher inflation though caused Yen to Tokyo was hit by a severe earthquake
depreceate. 03 of magnitude of 7.9 in the Kanto
region. Estimated casualties totalled
1927 142800 including 40000 who went
The Showa financial crisis. Post the missing. This along with a fire
earthquake in 1923, government
04 tornado made matters worse.
allowed banks to start provide loans.
A moratorium was imposed to allow 1937
postponement of due payments. On Outbreak War with China. The Marco
the final due day, there was a 05 Polo bridge incident is considered as
meltdown. the start of the war in which an
1939 escalation between the troops
Beginning of World War II. Some escalated into a full scale invasion.
consider Sino-Chinese war as the
06
beginning of WW2 in Asia. China
with aid received from US started a
counter-offensive attack which led
Japan to declare war on US on 1941.
 Japanese Economy & World War I

Japanese
Net Real
High Global goods
International depreciation
Interest Rate became
Lender of Yen
cheaper

• Japan had always been a borrowing country before World War I. Japan had already
borrowed around 1 Billion yen in British & American currency.
• Many lenders were wary of such hunger for borrowing. Thus prices of the goods Japan
was importing rose sharply.
• But the tides changed during the WW1 when the European countries were more severely
impacted.
• Japan saw this as an opportunity of economic advancement. Imports Exports
• Many Japanese conglomerates like Yokohama rubber company, Nikon, Mitsubishi Motor
company, etc were formed in 1917
• Between 1914 and 1918, domestic manufacturing increased by 54 percent in inflation
adjusted terms & exports increased by three times in money terms and by 47 percent in
value
• Japan was building up a very large gold reserve, in the form of foreign-held currencies. GDP
Through the smooth operations of its state-sponsored exchange bank, the Yokohama
Specie Bank (YSB), ¥94.4 million in gold poured into the country in 1916; in 1917, the
number rose to ¥247.2 million.
Kanto Earthquake and the following Showa
Crisis
Kanto Earthquake Showa Crisis New Banking Act
The new Banking Act was effective
An earthquake of 7.9 hit the kanto The moratorium was lifted in 1923 but
from Jan 1,1928. The Act stipulated
region. It hit during lunchtime, due to large portions of the ECBs were due to
minimum capital requirements for banks
which many were near gas stoves be paid for which date was set at sep
and prohibited banks and banking
leading to fire out breaks. A typhoon 30,1927. The govt started issuing bonds
managers from conducting most of the
at the same time helped spread the exchangeable with ECBs. Under
non-banking businesses. Under this Act,
fire. Moreover, the Koreans were pressure, the then FM falsely declared
the authorities reinforced the bank
massacred after the earthquake (8000- that the Wantanabe
examination and encouraged
12000) Bank had defaulted
amalgamation of banks to stabilize the
financial
system as a whole.
The Aftermath The Financial Panic
The earthquake damaged financial assets A further panic was sparked when
of many banks. The govt passed an Debates revealed financial difficulties
emergency ordinance to impose a between BOT & Suzuki & Co. The govt.
moratorium that allowed for again had to pass an ordinance authorizing
postponement of payments due from that BOJ to send relief to BOT. The Privy
month onward in the districts affected. Council which was investigating these
BOJ made special arrangements for steps, rejected the ordinance. This led to a
special loans. The govt. passed another huge financial panic which finally led to a
ordinance to indemnify BOJ for any crisis.
losses incurred in rediscounting of bills.
 1920s was a crisis for Japan

Trend Growth of GNP and Investment

20

15

10
GNP
ercentage

5 Investment
P

-5
Year
 Rise of Militancy & World War II
1 2 3 4 5
RISE IN RIGHT WING CAPTURE OF MANCHURIA PM ASSASSINATION SINO JAPANESE WAR WORLD WAR II

In the early 1930s, the Ministry A faction of radical army officers Internally popular nationalism Japan’s expansionist vision grew GDP was growing at more than
of Home Affairs began arresting bombed a tiny part of the South was booming because local increasingly bold. Japan’s 5% before WWII and mining
left-wing political dissidents, Manchuria Railroad &, falsely leaders such as Shinto priests political elite aspired to have contributed more than 30% to the
generally to exact a confession attributing the attack to the were recruited by the various Japan acquire new territory for GDP, more than double of what
and to renounce anti-state Chinese, invaded Manchuria. The movements to indoctrinate the resource extraction and settling agriculture was contributing. In
leanings. Over 30,000 such Kwantung Army conquered populace with ultra-nationalist surplus population. These order to acquire further resources,
arrests were made between 1930 Manchuria and set up the puppet ideals. In March 1932 the ambitions led to the outbreak of Japan had always had huge
and 1933. Thus, radical right- government of Manchukuo there “League of Blood” assassination the 2nd Sino-Japanese War in expansionist views. The US
wing groups, inspired by fascism without permission from the plot & the chaos surrounding the 1937. After their victory in the started cutting on its aids to Japan
and Japanese nationalism, rapidly Japanese government. trial of its conspirators further Chinese capital, the Japanese after China war. Soon after
grew in popularity. International criticism of Japan eroded the rule of democratic law military committed the infamous Netherlands & UK followed as
following the invasion led to in Japan. In May, a group of Nanking Massacre. Japanese well. This led to Japan forging
Japan withdrawing from the right-wing Army& Navy officers military failed to defeat the alliances with Germany & Italy
League of Nations assassinated the PM Inukai Chinese govt and the war during the WWII
Tsuyoshi. This ended the rule by descended into a bloody
political parties in Japan. stalemate that lasted until 1945.
 Post War Period
1945 and beyond...
Adopted Economic Plans:
Growth Target/Actual
Name Plan Period Major Purposes
Growth
Economic Self Reliance Economic self-reliance Full
1956 ~1960 4.9% - 8.8%
Plan employment
Doubling National Income High growth Higher living
1961 ~1970 7.8% - 10.0%
Plan standard
Economic and Social Balanced and fulfilled
1967 ~1971 8.2% - 9.8%
Development Plan economy/society
Economic and Social Basic People’s welfare
1973 ~1977 9.4% - 3.5%
Plan International relations
Economic Plan for 2nd Half Stable development
1976 ~1980 6%+ - 4.5%
of the 1970s Fulfilled people’s living

There have been 14 officially adopted economic plans. Although their planning periods were five to ten years, all of
them were replaced by revised plans before the end of the original plan period.
The ‘Doubling National Income Plan, aimed at doubling national income in real terms in ten years was executed
successfully by building confidence within Japanese business and household sectors, thereby attaining such rapid
economic growth.
The Development of Japan Post War Era
Phase I (1945-1960) Catching Up Process

Phase II (1970-80) Failure to Reform and Bubble Economy

-Post war Democratization
-Savings Shortage Phase III (1990 - ) Long Stagnation and
-Japanese Style Market System - Front Runner necessity for competitive Beyond
market
-Employment Practices
-Failure to transform the system -Excess Capacity
-Main Bank System
-Expansion behaviour -Financial Crisis
-Corporate Governance
-Policy to cope up with Yen’s -Deflation
-Government Intervention and Public
appreciation
policies -Zero Interest
-’Bubble’
-Structural Reform
-Ageing Japan
 • Zaibatsu dissolution (1945): Zaibatsu were big
conglomerates of major companies and banks, often
controlled by a share-holding company. To eliminate
concentration of economic power, zaibatsu were
dissolved and share holding companies were prohibited.
• Fair market rules (1947): American-style market rules
were imported. The most important laws were the Anti-
trust Law and the Securities Exchange Law, enacted in
order to secure market competition and transparency.
• Agricultural reform (1945): The government purchased
land from absentee landlords and all the tenant land in
excess of one hectare and sold them to tenant farmers at
nominal prices. The percentage of tenant land dropped
from 46% to10%.
• Labor market reform (1945): The organization of labor
unions was promoted, and their labor movements were
legalized.
• Education reform (1947): The compulsory education
General Douglas MacArthur- The Supreme Commander was extended from 6 to 9 years.
of the Allied Forces (SCAP) was the in charge of Japan
from 1945-1952. SCAP was responsible for all the reforms
till they remained in power. They even dictated a new
constitution to Japan’s leaders which included downgrading
the Emperor’s status to that of a figurehead without any
political control.
Economic Reconstruction and Re-industrialization

Priority Production Strategy: Change in US Strategy: International Conditions:

Steel, coal mining, electricity, • Allow Japan to re-industrialize. Cold war and Korean war
shipbuilding, marine and railway • Unification of Yen exchange rate triggered development of Japanese
transportation, and chemical to 360 JPY/ 1 USD economy.
fertilizer.

By 1952, Japan restored the real GDP level to a level comparable with that of 1935.

Coping up with Saving Shortages

FILP Loan Program: Window Guidance: Financial Institutions:

Channel Public Funds to key Bank of Japan (BOJ) provided loans and Three big long-term credit banks were
industries through Japan guidance to private financial institutions established (along with large
Development Bank. which gave it to business sectors commercial banks) in order to provide
resulting in low capital ratios. long-term credit to these key
industrial sectors.
Rapid Growth 1950s to 1960s – Real GDP grew by 9.3% YoY (After 1955)
Economic Growth: Virtuous Cycle: National Consensus:
Demand expansion, Production Benefited big businesses in heavy This scheme was often criticized
expansion, Increases in income, industries. as having overly-favored key
Consumption expansion, Increases Businesses and consumer-goods and industries and big businesses.
in savings, Investment growth and services sectors suffered from People viewed it as trickle down
an Expansion of production shortages of investment funds. strategy.
capacity
Demand:
Dual structure: Shortage of production capacity – investment demand
Lower productivity and poorer New consumer durables – consumer demand
working conditions in small Increased Quality and undervalued exchange rate – export expansion
businesses, consumption-goods
Supply:
and service sectors
Innovation seeds from overseas
Market Opening: Growth of working-age population and its migration
In 1960 the government Increase in household savings
liberalized foreign trade that Rise in education attainment to enhance human capacity
changed a ground rule from
‘restriction as a rule, openness as Yen regained convertibility in 1960. By 1970, majority foreign ownership was
an exception’ to the contrary. allowed in 80% of Japanese industries.
Main Bank System : Labour Market:
• Largest share in total bank • Long-term or ‘life-time’ employment
loans. • Wage increases and promotions based on
• Other banks used it as their seniority
guarantee to provide loans Rationality of longterm employment:
Downside: • Accumulation of company-specific skills
Weakened competition among and technology
financial institutions for borrowers. • Smooth transfer of skills from one
employee to another
• Saving of workers’ transition costs of
changing jobs

The post war period is considered as Japanese Economic Miracle period. It translates to the time frame of 1945 to 1991.
The previously discussed reforms and systems became the pillars of development of Japan/s Economy which made it the
2nd largest economy of the world from 1968 to 2010.
But the period of 1991 – 2010 is often described as a period of Lost Score as Japan’s economy grew by very low rates
(~2%). The reason for this is rooted in the history of Japan with the name of Asset Price Bubble
 Asset Price Bubble

• In 1985, US realised that their currency is too high and people are
preferring Japanese goods over theirs.
• Plazo Accord was signed which depreciated Japanese Yen with
respect to USD.
• Net exports fell which forced Bank of Japan to use low interest rate
policy and monetary easing. Wards of Tokyo became 4 times more
• Banks wanted to make more money and started giving loans without valuable than the entire United States
taking risk into account.
• People invested the money in lands and stocks which skyrocketed
the price of both.
• After 4 years, government asked BOJ to tighten monetary policy
which increased lending cost.
• This burst the Asset Price Bubble and the stock market and asset
price rallied downwards.
Rapid Growth period from 1950s to 1970s:
Positives:
 Average Life Span of males and females increased from 60 and
63 to 71 and 77 respectively.
 Higher education became accessible. Education on all aspects
including nutrition, vaccination and medical care improved.
 Japan focussed on development of manufacturing sector and
traded goods. But the wages of workers in non-manufacturing
non-traded goods also increased, narrowing the wage gap.
 Majority of population was considered ‘middle class’ with a wide
range of consumer durables: Consumption Revolution.

Negatives:
 Labour surplus to labour shortage. Increase in wages with labour
productivity gaps. Productivity-growth differential.
 Under development of living-related infrastructure
 Urban overpopulation and rural depopulations: traffic jams, poor
housing conditions and shortage of urban infrastructure in urban
sector. More reliance on food imports, increased risk to natural
disasters and budget dependance on government.
 Environmental degradation: Basic Law for Anti-pollution Measures
in 1967, Establishment of the Environmental Agency in 1971
 Under-development of non-trading industry.
Efforts to tackle the Lost Decade:
 Decreasing fiscal balances: the outstanding government debt
reached 160% of GDP in 2000.
 Early 1980: High interest rates to reduce real estate inflation. GDP
went downwards.
 1991: As equity and RE values reduced, BOJ cut interest rates but
there was liquidity trap. (0.5 % discount rates)
 Inefficient allocation of money through expansionary fiscal policy
 2001: BOJ targeted money supply instead of interest rates. But
this increased money supply led to credit crunches at banks.

Changes in Japan:
 Structural Reforms: Corp. management by managers promoted from employees, long term
employment structures, long standing relationships with suppliers and clients, govt.s and businesses
 Weakening of Main-Bank functions: Financial liberalisation and decentralisation of banking industry
 Declined Cross-Share holdings: Weak capital market governance due to cross-share holdings was
avoided. Capital structures and shareholdings changed.
 Weakened Japanese employment practices: External labour market came into play, competition
and development of part-time services, globalisation and IT development.
 Regulatory reforms: Excessive government regulation reduced the risk sensibility of businesses,
which was later reformed. In 1990, 42% of Japan’s production was under some kind of regulation.
 Government incentivised consumption through various policies, to revive the economy.
 The wage-rate structures were re-defined as the increasing age of workers came with large wages
PM Junichiro Koizumi and Shinzo Abe (2001-2006):
 Reformed of the policy formation process itself: Decision making earlier relied heavily on Liberal Democratic
Party factions and had no leadership.
 Cleaning up the aftermath of the ‘bubble economy: Disposal of NPLs, halving of primary deficit of the
government.
 Privatization of some govt. services and initiatives for moving from public to private sector.
 Trinity reform: Shifting functions/authorities to the local government, Shifting the tax base from the central to local
governments and reducing transfer taxes and categorical grants to local governments
 From Interventionalist govt. to coordinator govt.:

Self-Reliance of
Expansion of Corporate Compact and Efficient
individuals and
Activity and Investments Government
households
• Corporate Governance • Labour Market Liberalisation • Budget consolidation
• Corporate restructuring • Human Capital Management • Administrative reform
• FDI into Japan • Job choice society and social • FILP reform
• Corporate taxation and security • Local govt’s autonomy
regulatory changes • Educational reform • Electronic government
• Financial system reform • Corporate pension and • Entrepreneurial promotion
• SME policy personal income taxation • Regulatory reforms
Thank
You