Economic history of Japan

The economic history of Japan is most studied for the spectacular social and economic growth in the 1800s after the Meiji Restoration. It became the first non-Western great power, and expanded after the Second World War. When Japan recovered from devastation to become the world's second largest economy behind the United States, and from 2010 behind China as well. Scholars have evaluated the nation's unique economic position during the Cold War, with exports going to both U.S.- and Soviet-aligned powers, and have taken keen interest in the situation of the post-Cold War period of the Japanese "lost decades".

Prehistoric and ancient Japan

Yayoi period

Bronze mirror from Yayoi period excavated in Tsubai-otsukayama kofun, Yamashiro, Kyoto

The Yayoi period is generally accepted to date from 300 BCE to 300 CE.[1] However, radio-carbon evidence suggests a date up to 500 years earlier, between 1,000 and 800 BCE.[2][3][4][5] During this period Japan transitioned to a settled agricultural society.[6][7] As the Yayoi population increased, the society became more stratified and complex. They wove textiles, lived in permanent farming villages, and constructed buildings with wood and stone. They also accumulated wealth through land ownership and the storage of grain. Such factors promoted the development of distinct social classes.[8] Yayoi chiefs, in some parts of Kyūshū, appear to have sponsored, and politically manipulated, trade in bronze and other prestige objects.[9] That was made possible by the introduction of an irrigated, wet-rice agriculture from the Yangtze estuary in southern China via the Ryukyu Islands or Korean Peninsula.[1][10]

Kofun period (c. 250–538)

Reconstructed Kofun-era warehouse

The Kofun period recorded Japan's earliest political centralization, when the Yamato clan rose to power in southwestern Japan, established the Imperial House, and helped control trade routes across the region.[11] Much of the material culture of the Kofun period demonstrates that Japan was in close political and economic contact with continental Asia (especially with the southern dynasties of China) via the Korean Peninsula; bronze mirrors cast from the same mould have been found on both sides of the Tsushima Strait. Irrigation, sericulture, and weaving were brought to Japan by Chinese immigrants, who are mentioned in ancient Japanese histories; the Chinese Hata clan (秦, read "Qín" in Chinese) introduced sericulture and certain types of weaving.[12]

Classical Japan

Asuka period (538–710)

Copper wadōkaichin (和同開珎) coinage from the 7th century, Asuka period

The Yamato polity evolved greatly during the Asuka period, which was concentrated in the Asuka region and exercised power over clans in Kyūshū and Honshū, bestowing titles, some hereditary, on clan chieftains. The Yamato name became synonymous with all of Japan as the Yamato rulers suppressed other clans and acquired agricultural lands. Based on Chinese models (including the adoption of the Chinese written language), they developed a system of trade roads and a central administration. By the mid-seventh century, the agricultural lands had grown to a substantial public domain, subject to central policy. The basic administrative unit of the Gokishichidō (五畿七道, "five cities, seven roads") system was the county, and society was organized into occupation groups. Most people were farmers; others were fishers, weavers, potters, artisans, armorers, and ritual specialists.[13]

In 645, the Soga clan were overthrown in a coup launched by Prince Naka no Ōe and Fujiwara no Kamatari, the founder of the Fujiwara clan.[14] Their government devised and implemented the far-reaching Taika Reforms. The Reform began with land reform, based on Confucian ideas and philosophies from China. It nationalized all land in Japan, to be distributed equally among cultivators, and ordered the compilation of a household registry as the basis for a new system of taxation.[15] What were once called "private lands and private people" (私地私民, shichi shimin) became "public lands and public people" (公地公民, kōchi kōmin), as the court now sought to assert its control over all of Japan and to make the people direct subjects of the throne. Land was no longer hereditary but reverted to the state at the death of the owner. Taxes were levied on harvests and on silk, cotton, cloth, thread, and other products. A corvée (labor) tax was established for military conscription and building public works.[13]

Wadōkaichin (和同開珎) is the oldest official Japanese coinage, having been minted starting on 29 August 708[16] on order of Empress Genmei.[17][18][19] Inspired by the Chinese Tang dynasty coinage Kaiyuan Tongbao, the Wadōkaichin began being produced following the discovery of large copper deposits in Japan during the early 8th century.[20][21]

Nara period (710–794)

Heian period (794–1185)

While on one hand, the Heian period was an unusually long period of peace, it can also be argued that the period weakened Japan economically and led to poverty for all but a tiny few of its inhabitants. The control of rice fields provided a key source of income for families such as the Fujiwara and was a fundamental base for their power.[22] The aristocratic beneficiaries of Heian culture, the Ryōmin (良民 "Good People") numbered about five thousand in a land of perhaps five million. One reason the samurai were able to take power was that the ruling nobility proved incompetent at managing Japan and its provinces. By the year 1000, the government no longer knew how to issue currency and money was gradually disappearing. Instead of a fully realized system of money circulation, rice was the primary unit of exchange.[22]

Throughout the Heian period, the power of the imperial court declined. The court became so self-absorbed with power struggles, and with the artistic pursuits of court nobles, that it neglected the administration of government outside the capital.[23] The nationalization of land undertaken as part of the ritsuryō state decayed as various noble families and religious orders succeeded in securing tax-exempt status for their private shōen manors[24] By the eleventh century, more land in Japan was controlled by shōen owners than by the central government. The imperial court was thus deprived of the tax revenue to pay for its national army. In response, the owners of the shōen set up their own armies of samurai warriors.[25] Two powerful noble families that had descended from branches of the imperial family,[26] the Taira and Minamoto clans, acquired large armies and many shōen outside the capital. The central government began to use these two warrior clans to suppress rebellions and piracy.[27] Japan's population stabilized during the late-Heian period after hundreds of years of decline.[28]

Feudal Japan

Kamakura period (1185–1333)

The samurai armies of the whole nation were mobilized in 1274 and 1281 to confront two full-scale invasions launched by Kublai Khan of the Mongol Empire.[29] Though outnumbered by an enemy equipped with superior weaponry, the Japanese fought the Mongols to a standstill in Kyushu on both occasions until the Mongol fleet was destroyed by typhoons called kamikaze, meaning "divine wind". In spite of the Kamakura shogunate's victory, the defense so depleted its finances that it was unable to provide compensation to its vassals for their role in the victory. This had permanent negative consequences for the shogunate's relations with the samurai class.[30] Japan nevertheless entered a period of prosperity and population growth starting around 1250.[31] In rural areas, the greater use of iron tools and fertilizer, improved irrigation techniques, and double-cropping increased productivity and rural villages grew.[32] Fewer famines and epidemics allowed cities to grow and commerce to boom.[31]

Muromachi period (1333–1568)

A ship of the Muromachi period (1538)

In spite of the war, Japan's relative economic prosperity, which had begun in the Kamakura period, continued well into the Muromachi period. By 1450 Japan's population stood at ten million, compared to six million at the end of the thirteenth century.[31] Commerce flourished, including considerable trade with China and Korea.[33] Because the daimyōs and other groups within Japan were minting their own coins, Japan began to transition from a barter-based to a currency-based economy.[34] During the period, some of Japan's most representative art forms developed, including ink wash painting, ikebana flower arrangement, the tea ceremony, Japanese gardening, bonsai, and Noh theater.[35] Though the eighth Ashikaga shogun, Yoshimasa, was an ineffectual political and military leader, he played a critical role in promoting these cultural developments.[36]

The Japanese contact with the Ming dynasty (1368–1644) began when China was renewed during the Muromachi period after the Chinese sought support in suppressing Japanese pirates in coastal areas of China. Japanese pirates of this era and region were referred to as wokou by the Chinese (Japanese wakō). Wanting to improve relations with China and to rid Japan of the wokou threat, Ashikaga Yoshimitsu accepted a relationship with the Chinese that was to last for half a century. In 1401 he restarted the tribute system, describing himself in a letter to the Chinese Emperor as "Your subject, the King of Japan". Japanese wood, sulfur, copper ore, swords, and folding fans were traded for Chinese silk, porcelain, books, and coins, in what the Chinese considered tribute but the Japanese saw as profitable trade.[37]

First contacts with Europe (16th century)

Renaissance Europeans were quite admiring of Japan when they reached the country in the 16th century. Japan was considered a country immensely rich in precious metals, a view that owed its conception mainly to Marco Polo's accounts of gilded temples and palaces,[38] but also due to the relative abundance of surface ores characteristic of a volcanic country, before large-scale deep-mining became possible in Industrial times. Japan was to become a major exporter of copper and silver during the period.

The Samurai Hasekura Tsunenaga in Rome in 1615, Coll. Borghese, Rome

Japan was also perceived as a sophisticated feudal society with a high culture and advanced pre-industrial technology. It was densely populated and urbanized. Prominent European observers of the time seemed to agree that the Japanese "excel not only all the other Oriental peoples, they surpass the Europeans as well" (Alessandro Valignano, 1584, "Historia del Principo y Progresso de la Compania de Jesus en las Indias Orientales).

Early European visitors were amazed by the quality of Japanese craftsmanship and metalsmithing. This stems from the fact that Japan itself is rather poor in natural resources found commonly in Europe, especially iron. Thus, the Japanese were famously frugal with their consumable resources; what little they had they used with expert skill.

Trade with Europe

The cargo of the first Portuguese ships (usually about four small ships every year) that arrived in Japan consisted almost entirely of Chinese goods (silk, porcelain). The Japanese were very much looking forward to acquiring such goods, but had been prohibited from any contacts with the Emperor of China, as a punishment for Wakō pirate raids. The Portuguese (who were called Nanban, lit. Southern Barbarians) therefore found the opportunity to act as intermediaries in Asian trade.

A Portuguese carrack in Nagasaki, 17th century

From the time of the acquisition of Macau in 1557, and their formal recognition as trade partners by the Chinese, the Portuguese started to regulate trade to Japan, by selling to the highest bidder the annual "Captaincy" to Japan, in effect conferring exclusive trading rights for a single carrack bound for Japan every year. The carracks were very large ships, usually between 1000 and 1500 tons, about double or triple the size of a large galleon or junk.

That trade continued with few interruptions until 1638, when it was prohibited on the ground that the ships were smuggling priests into Japan.

Portuguese trade was progressively more and more challenged by Chinese smugglers on junks, Japanese Red Seal Ships from around 1592[39] (about ten ships per year), Spanish ships from Manila from around 1600 (about one ship per year), the Dutch from 1609, and the English from 1613 (about one ship per year).

The Dutch, who, rather than "Nanban" were called "Kōmō" (Jp:紅毛, lit. "Red Hair") by the Japanese, first arrived in Japan in 1600, on board the Liefde.[40] Their pilot was William Adams, the first Englishman to reach Japan. In 1605, two of the Liefde's crew were sent to Pattani by Tokugawa Ieyasu, to invite Dutch trade to Japan. The head of the Pattani Dutch trading post, Victor Sprinckel, refused on the ground that he was too busy dealing with Portuguese opposition in Southeast Asia. In 1609 however, the Dutch Jacques Specx arrived with two ships in Hirado, and through Adams obtained trading privileges from Ieyasu.

The Dutch also engaged in piracy and naval combat to weaken Portuguese and Spanish shipping in the Pacific, and ultimately became the only westerners to be allowed access to Japan from the small enclave of Dejima after 1638 and for the next two centuries.

Edo period

Japanese-made clockwatch of the 18th century, or Wadokei. Then time changed in the season because from sunrise to sunset made 12 hours and from sunset to sunrise made 12 hours.

Economic development during the Edo period included urbanization, increased shipping of commodities, a significant expansion of domestic and, initially, foreign commerce, and a diffusion of trade and handicraft industries. The construction trades flourished, along with banking facilities and merchant associations. Increasingly, han authorities oversaw the rising agricultural production and the spread of rural handicrafts. By the mid-18th century, Edo had a population of more than 1 million and Osaka and Kyoto each had more than 400,000 inhabitants. Many other castle towns grew as well. Osaka and Kyoto became busy trading and handicraft production centers, while Edo was the center for the supply of food and essential urban consumer goods. Rice was the base of the economy, as the daimyō collected the taxes from the peasants in the form of rice. Taxes were high, about 40% of the harvest. The rice was sold at the fudasashi market in Edo. To raise money, the daimyō used forward contracts to sell rice that was not yet harvested. These contracts were similar to modern futures trading.[41]

The beginning of the Edo period coincides with the last decades of the Nanban trade period, during which intense interaction with European powers, on the economic and religious plane, took place. At the beginning of the Edo period, Japan built her first ocean-going Western-style warships, such as the San Juan Bautista, a 500-ton galleon-type ship that transported a Japanese embassy headed by Hasekura Tsunenaga to the Americas, and then continued to Europe. Also during that period, the bakufu commissioned around 350 Red Seal Ships, three-masted and armed trade ships, for intra-Asian commerce. Japanese adventurers, such as Yamada Nagamasa, were active throughout Asia.

In order to eradicate the influence of Christianization, Japan entered in a period of isolation called sakoku, during which its economy enjoyed stability and mild progress. But not long after, in the 1650s, the production of Japanese export porcelain increased greatly when civil war put the main Chinese center of porcelain production, in Jingdezhen, out of action for several decades. For the rest of the 17th century most Japanese porcelain production was in Kyushu for export through the Chinese and Dutch. The trade dwindled under renewed Chinese competition by the 1740s, before resuming after the opening of Japan in the mid-19th century.[42]

During the period, Japan progressively studied Western sciences and techniques (called rangaku, literally "Dutch studies") through the information and books received through the Dutch traders in Dejima. The main areas that were studied included geography, medicine, natural sciences, astronomy, art, languages, physical sciences such as the study of electrical phenomena, and mechanical sciences as exemplified by the development of Japanese clockwatches, or wadokei, inspired from Western techniques.

Meiji period

After 1854, when the Tokugawa shogunate first opened the country to Western commerce and influence (Bakumatsu), Japan went through two periods of economic development. When the Tokugawa shogunate was overthrown and the Meiji government was founded, Japanese Westernization began completely. The first term is during Pre-war Japan, the second term is Post-war Japan.[43]

In the first half of the Meiji period, most labour disputes occurred in the mining and textile industries and took the form of small-scale strikes and spontaneous riots. The second half of the period witnessed rapid industrialization, the development of a capitalist economy, and the transformation of many feudal workers to wage labour. The use of strike action increased, and 1897, with the establishment of a union for metalworkers, saw the beginnings of the modern Japanese trade-union movement.[44]

The industrial revolution first appeared in textiles, including cotton and especially silk, which was based in home workshops in rural areas. By the 1890s, Japanese textiles dominated the home markets and competed successfully with British products in China and India, as well. Japanese shippers were competing with European traders to carry these goods across Asia and even to Europe. As in the West, the textile mills employed mainly women, half of them under age twenty. They were sent there by their fathers, and they turned over their wages to their fathers.[45] Japan largely skipped water power and moved straight to steam powered mills, which were more productive, and which created a demand for coal.

1907 saw the greatest number of disputes in a decade, with large-scale riots at Japan's two leading copper mines, Ashio and Besshi, which were only suppressed by the use of troops. None of these early unions were large (the metalworkers union had 3,000 members, only 5% of workers employed in the industry), or lasted longer than three or four years, largely due to strong opposition from employers and the government's anti-union policies, notably the Public Order and Police Provisions Law (1900).[46]

One of the biggest impacts on the economy that the Meiji period brought was the end of the feudal system. With a relatively loose social structure, the Japanese people were able to advance through the ranks of society more easily than before. They were able to do this by inventing and selling their own wares. More important was the fact that the Japanese people now had the ability to become more educated. With a more educated population, Japan's industrial sector grew significantly. Implementing the Western ideal of capitalism into the development of technology and applying it to their military helped make Japan into both a militaristic and economic powerhouse by the beginning of the 20th century.[47]

In the Meiji period, leaders inaugurated a new Western-based education system for all young people, sent thousands of students to the United States and Europe, and hired more than 3,000 Westerners to teach modern science, mathematics, technology, and foreign languages in Japan (O-yatoi gaikokujin). The government also built railroads, improved roads, and inaugurated a land reform program to prepare the country for further development.

To promote industrialization, the government decided that, while it should help private business to allocate resources and to plan, the private sector was best equipped to stimulate economic growth. The greatest role of government was to help provide the economic conditions in which business could flourish. In short, government was to be the guide, and business the producer. In the early Meiji period, the government built factories and shipyards that were sold to entrepreneurs at a fraction of their value. Many of these businesses grew rapidly into the larger conglomerates. Government emerged as chief promoter of private enterprise, enacting a series of pro-business policies.

The development of banking and reliance on bank funding have been at the centre of Japanese economic development at least since the Meiji era.[48]

Early 20th century

From 1918 to 1921, a wave of major industrial disputes marked the peak of organized labour power. A prolonged economic slump that followed brought cutbacks in employment in heavy industry.[49] By 1928, the GNP of Japan at current prices peaked at ¥16,506 million. In the mid-1930s, the Japanese nominal wage rates were a tenth of those in the United States (based on mid-1930s exchange rates), while the price level is estimated to have been about 44% that of the US.[50]

Comparison of GDP per capita (US Dollars) between East-Asian Nations and the US in 1935:

Country	GDP/capita, in 1935 dollars (Liu-Ta-Chung[51])	GDP-PPP/capita, in 1990 dollars (Fukao[50])	GDP-PPP/capita, in 1990 dollars (Maddison[52])
U.S.	540	5,590	5,590
Japan (excl. Taiwan and Korea)	64	1,745	2,154
Taiwan	42	1,266	1,212
Korea	24	662	1,225
China	18	543	562

Militarism

Before World War II, Japan built an extensive empire that included Taiwan, Korea, Manchuria, and parts of northern China. The Japanese regarded this sphere of influence as a political and economic necessity, preventing foreign states from strangling Japan by blocking its access to raw materials and crucial sea-lanes, as Japan possessed very few natural and mining resources of its own, although it imported large amounts of coal from Korea, Manchukuo, and some regions of occupied China. Japan's large military force was regarded as essential to the empire's defense.

Rapid growth and structural change characterized Japan's two periods of economic development since 1868. In the first period, the economy grew only moderately at first and relied heavily on traditional agriculture to finance modern industrial infrastructure. When the Russo-Japanese War began in 1904, 65% of employment and 38% of the gross domestic product (GDP) was still based on agriculture but the modern industry had begun to expand substantially. During World War I, Japan used the absence of the war-torn European competitors on the world market to advance its economy, generating a trade surplus for the first time since the isolation in the Edo period. By the late 1920s, manufacturing and mining contributed 23% of GDP, compared with 21% for all of agriculture. Transportation and communications had developed to sustain heavy industrial development.

In the 1930s, the Japanese economy suffered less from the Great Depression than most industrialized nations, its GDP expanding at a rapid rate of 5% per year. Manufacturing and mining came to account for more than 30% of GDP, more than twice the value for the agricultural sector. Most industrial growth, however, was geared toward expanding the nation's military power.

Beginning in 1937 with significant land seizures in China, and to a greater extent after 1941, when annexations and invasions across Southeast Asia and the Pacific created the Greater East Asia Co-Prosperity Sphere, the Japanese government sought to acquire and develop critical natural resources in order to secure economic independence. Among the natural resources that Japan seized and developed were: coal in China, sugarcane in the Philippines, petroleum from the Dutch East Indies and Burma, and tin and bauxite from the Dutch East Indies and Malaya. Japan also purchased the rice production of Thailand, Burma, and Cochinchina.

During the early stages of Japan's expansion, the Japanese economy expanded considerably. Steel production rose from 6,442,000 tons to 8,838,000 tons over the same time period. In 1941 Japanese aircraft industries had the capacity to manufacture 10,000 aircraft per year. Much of this economic expansion benefited the "zaibatsu", large industrial conglomerates.

Over the course of the Pacific War, the economies of Japan and its occupied territories all suffered severely. Inflation was rampant; the Japanese heavy industry, forced to devote nearly all its production to meet military needs, was unable to meet the commercial requirements of Japan (which had previously relied on trade with Western countries for their manufactured goods). Local industries were unable to produce at high enough levels to avoid severe shortfalls. Furthermore, maritime trade, upon which the Empire depended greatly, was sharply curtailed by damage to the Japanese merchant fleet over the course of the war.

By the end of the war, what remained of the Japanese Empire was wracked by shortages, inflation, and currency devaluation. Transport was nearly impossible, and industrial production in Japan's shattered cities ground to a halt. The destruction wrought by the war eventually brought the Japanese economy to a virtual standstill.

According to a 2020 study, Japan used its imperial power to boost its industrialization.[53]

Post-World War II

The war wiped out many of the gains which Japan had made since 1868. About 40% of the nation's industrial plants and infrastructure were destroyed, and production reverted to levels of about fifteen years earlier. The people were shocked by the devastation and swung into action. New factories were equipped with the best modern machines, giving Japan an initial competitive advantage over the victor states, who now had older factories. As Japan's second period of economic development began, millions of former soldiers joined a well-disciplined and highly educated work force to rebuild Japan. Japan's colonies were lost as a result of World War II, but since then the Japanese had extended their economic influence throughout Asia and beyond.

Occupation

After the Japanese surrender on 15 August 1945, allied forces, mostly American, rapidly began arriving in Japan. Almost immediately, the occupiers began an intensive program of legal changes designed to democratize Japan. One action was to ensure the creation of a Trade Union law to allow for the first time workers to organize, strike, and bargain collectively, which was passed by the Diet of Japan on 22 December 1945.[54] While the law was created while Japan was under occupation, the law itself was largely a Japanese work. It was put together by a large legal advisory commission headed by the legal scholar Suehiro Izutaro. The commission was quite large, consisting of "three Welfare ministry bureaucrats and two scholars, a steering committee of 30 members (including the communist firebrand Kyuichi Tokuda), and an overall membership of more than 130 members representing universities, corporations, political parties, the bureaucracy, social workers, and labor."[55] US assistance totaled about US$1.9 billion during the occupation, or about 15% of the nation's imports and 4% of GNP in that period. About 59% of this aid was in the form of food, 15% in industrial materials, and 12% in transportation equipment. US grant assistance, however, tapered off quickly in the mid-1950s. US military procurement from Japan peaked at a level equivalent to 7% of Japan's GNP in 1953 and fell below 1% after 1960. A variety of United States-sponsored measures during the occupation, such as land reform, contributed to the economy's later performance by increasing competition. In particular, the post-war purge of industrial leaders allowed new talent to rise in the management of the nation's rebuilt industries. Finally, the economy benefited from foreign trade because it was able to expand exports rapidly enough to pay for imports of equipment and technology without falling into debt, as had a number of developing nations in the 1980s.[56]

A 2018 study, using the synthetic control method whereby Japan is compared to "synthetic Japan" (a combination of which are similar to Japan but without the US alliance), found that the US alliance allowed Japan's GDP to "grow much faster" from 1958-68.[57]

"Gifts From Heaven"

In the wake of WWII, the Japanese citizenry was suffering from widespread exhaustion and despair from the war, known as "kyodatsu," causing large-scale dejection and despondency.[58] The term "gifts from Heaven" was coined by cartoonist Kato Etsuro in his first illustrations under US military occupation. These gifts referred to the bloodless democratic revolution from above ushered in by US forces that put an end to a socially debilitating war.[59] Of the many aspects of the revolution from above, the reforms extending the right to vote to women, strengthening labor unionization, and liberalizing the economy were some of the most enduring changes that stand to this day.[60]

Following the 1947 elections, in which the Japan Socialist Party came in first, Prime Minister Tetsu Katayama formed a coalition government with the Democratic Party and the National Cooperative Party.[61] One of the first and most significant economic reforms was the division and distribution of rural land to Japanese tenant farmers. Previously, property belonged to landlords and farmers worked on it in a feudal type system. Modern capitalist theory held that this feudal practice did not incentivize growth and the rural landlord class was dissolved.[62] In addition to the dissolution of the landlord class, the massive business conglomerates known as "Zaibatsu" that had effectively controlled the Japanese economy for almost 100 years were also broken up and faced market competition.[63] The Law for the Elimination of Excessive Economic Concentration (passed in December 1947) provided for the dissolution of any company considered to be monopolistic,[64] while the "law on the expulsion of Zaibatsu-affiliated controls" of January 1948 enforced the resignation of Zaibatsu board members who were related closely to Zaibatsu families, while a measure was taken to ban on holding the concurrent board posts of their affiliated companies. In addition, a government employees law was enacted, the first group of Japanese Supreme Court justices was appointed, local government and the police were reorganised, the Ministries of Home Affairs, Navy, and War were abolished,[65] extensive revisions were made to criminal law, and progress was made on land reform.[66] Finally, the unionization of Japanese workers was encouraged by US occupying forces that forced companies to compete on technology and innovation.[67]

Rebuilding

The early post-war years were devoted to rebuilding lost industrial capacity: major investments were made in electric power, coal, steel, and chemicals. By the mid-1950s, production matched prewar levels. Released from the demands of military-dominated government, the economy not only recovered its lost momentum but also surpassed the growth rates of earlier periods. Between 1953 and 1965, GDP expanded by more than 9% per year, manufacturing and mining by 13%, construction by 11%, and infrastructure by 12%. In 1965 these sectors employed more than 41% of the labor force, whereas only 26% remained in agriculture.

Japan's highly acclaimed post-war education system contributed strongly to the modernizing process. The world's highest literacy rate and high education standards were major reasons for Japan's success in achieving a technologically advanced economy. Japanese schools also encouraged discipline, another benefit in forming an effective work force.

The mid-1960s ushered in a new type of industrial development as the economy opened itself to international competition in some industries and developed heavy and chemical manufactures. Whereas textiles and light manufactures maintained their profitability internationally, other products, such as automobiles, electronics, ships, and machine tools assumed new importance. The value added to manufacturing and mining grew at the rate of 17% per year between 1965 and 1970. Growth rates moderated to about 8% and evened out between the industrial and service sectors between 1970 and 1973, as retail trade, finance, real estate, information technology, and other service industries streamlined their operations.

Oil crisis

Japan faced a severe economic challenge in the mid-1970s. The 1973 oil crisis shocked an economy that had become dependent on imported petroleum. Japan experienced its first post-war decline in industrial production, together with severe price inflation. The recovery that followed the first oil crisis revived the optimism of most business leaders, but the maintenance of industrial growth in the face of high energy costs required shifts in the industrial structure.

Changing price conditions favored conservation and alternative sources of industrial energy. Although the investment costs were high, many energy-intensive industries successfully reduced their dependence on oil during the late 1970s and 1980s and enhanced their productivity. Advances in microcircuitry and semiconductors in the late 1970s and 1980s led to new growth industries in consumer electronics and computers, and to higher productivity in pre-established industries. The net result of these adjustments was to increase the energy efficiency of manufacturing and to expand knowledge-intensive industries. The service industries expanded in an increasingly postindustrial economy.

Structural economic changes, however, were unable to check the slowing of economic growth as the economy matured in the late 1970s and 1980s, attaining annual growth rates at only 4–6%. But these rates were remarkable in a world of expensive petroleum and in a nation of few natural resources. Japan's average growth rate of 5% in the late 1980s, for example, was far higher than the 3.8% growth rate of the United States. Despite more petroleum price increases in 1979, the strength of the Japanese economy was apparent. It expanded without the double-digit inflation that afflicted other industrial nations (and that had bothered Japan itself after the first oil crisis in 1973). Japan experienced slower growth in the mid-1980s, but its demand-sustained economic boom of the late 1980s revived many troubled industries.

Factors of growth

Complex economic and institutional factors affected Japan's post-war growth. First, the nation's prewar experience provided several important legacies. The Tokugawa period (1600–1867) bequeathed a vital commercial sector in burgeoning urban centers, a relatively well-educated elite (although one with limited knowledge of European science), a sophisticated government bureaucracy, productive agriculture, a closely unified nation with highly developed financial and marketing systems, and a national infrastructure of roads. The buildup of industry during the Meiji period to the point where Japan could vie for world power was an important prelude to post-war growth from 1955 to 1973, and provided a pool of experienced labor.[68]

Second, and more important, was the level and quality of investment that persisted through the 1980s. Investment in capital equipment, which averaged more than 11% of GNP during the prewar period, rose to about 20% of GNP during the 1950s and to more than 30% in the late 1960s and 1970s. During the economic boom of the late 1980s, the rate still hovered around 20%. Japanese businesses imported the latest technologies to develop the industrial base. As a latecomer to modernization, Japan was able to avoid some of the trial and error earlier needed by other nations to develop industrial processes. In the 1970s and 1980s, Japan improved its industrial base through licensing from the US, patent purchases, and imitation and improvement of foreign inventions. In the 1980s, industry stepped up its research and development, and many firms became famous for their innovations and creativity.[69]

Japan's labor force contributed significantly to economic growth, because of its availability and literacy, and also because of its reasonable wage demands. Before and immediately after World War II, the transfer of numerous agricultural workers to modern industry resulted in rising productivity and only moderate wage increases. As population growth slowed and the nation became increasingly industrialized in the mid-1960s, wages rose significantly. However, labor union cooperation generally kept salary increases within the range of gains in productivity.

High productivity growth played a key role in post-war economic growth. The highly skilled and educated labor force, extraordinary savings rates and accompanying levels of investment, and the low growth of Japan's labor force were major factors in the high rate of productivity growth.

The nation also benefited from economies of scale. Although medium-sized and small enterprises generated much of the nation's employment, large facilities were the most productive. Many industrial enterprises consolidated to form larger, more efficient units. Before World War II, large holding companies formed wealth groups, or zaibatsu, which dominated most industry. The zaibatsu were dissolved after the war, but keiretsu—large, modern industrial enterprise groupings—emerged. The coordination of activities within these groupings and the integration of smaller subcontractors into the groups enhanced industrial efficiency.[70]

Japanese corporations developed strategies that contributed to their immense growth. Growth-oriented corporations that took chances competed successfully. Product diversification became an essential ingredient of the growth patterns of many keiretsu. Japanese companies added plant and human capacity ahead of demand. Seeking market share rather than quick profit was another powerful strategy.

Finally, circumstances beyond Japan's direct control contributed to its success. International conflicts tended to stimulate the Japanese economy until the devastation at the end of World War II. The Russo-Japanese War (1904–05), World War I (1914–18), the Korean War (1950–53), and the Second Indochina War (1954–75) brought economic booms to Japan. In addition, benign treatment from the United States after World War II facilitated the nation's reconstruction and growth.

The changing occupational structure

As late as 1955, some 40% of the labor force still worked in agriculture, but this figure had declined to 17% by 1970 and to 7.2% by 1990 and under 5% in the 21st century as Japan imported more and more of its food and small family farms disappeared.[71]

Japan's economic growth in the 1960s and 1970s was based on the rapid expansion of heavy manufacturing in such areas as automobiles, steel, shipbuilding, chemicals, and electronics. The secondary sector (manufacturing, construction, and mining) expanded to 35.6% of the work force by 1970. By the late 1970s, however, the Japanese economy began to move away from heavy manufacturing toward a more service-oriented (tertiary sector) base. During the 1980s, jobs in wholesaling, retailing, finance, insurance, real estate, transportation, communications, and government grew rapidly, while secondary-sector employment remained stable. The tertiary sector grew from 47% of the work force in 1970 to 59.2% in 1990.

1980s

Throughout the 1970s, Japan had the world's third largest gross national product (GNP)—just behind the United States and Soviet Union—and ranked first among major industrial nations in 1990 in per capita GNP at US$23,801, up sharply from US$9,068 in 1980. After a mild economic slump in the mid-1980s, Japan's economy began a period of expansion in 1986 that continued until it again entered a recessionary period in 1992. Economic growth averaging 5% between 1987 and 1989 revived industries, such as steel and construction, which had been relatively dormant in the mid-1980s, and brought record salaries and employment. In 1992, however, Japan's real GNP growth slowed to 1.7%. Even industries such as automobiles and electronics that had experienced phenomenal growth in the 1980s entered a recessionary period in 1992. The domestic market for Japanese automobiles shrank at the same time that Japan's share of the United States' market declined. Foreign and domestic demand for Japanese electronics also declined, and Japan seemed on the way to losing its leadership in the world semiconductor market to the United States, Korea and Taiwan.

Unlike the economic booms of the 1960s and 1970s, when increasing exports played the key role in economic expansion, domestic demand propelled the Japanese economy in the late 1980s. This development involved fundamental economic restructuring, moving from dependence on exports to reliance on domestic demand. The boom that started in 1986 was generated by the decisions of companies to increase private plant and equipment spending and of consumers to go on a buying spree. Japan's imports grew at a faster rate than exports. Japanese post-war technological research was carried out for the sake of economic growth rather than military development. The growth in high-technology industries in the 1980s resulted from heightened domestic demand for high-technology products such as electronics, and for higher living, housing, and environmental standards; better medical care and more welfare; expanded leisure-time facilities; and improved ways to accommodate a rapidly aging society.[72]

During the 1980s, the Japanese economy shifted its emphasis from primary and secondary activities (notably agriculture, manufacturing, and mining) to processing, with telecommunications and computers becoming increasingly vital. Information became an important resource and product, central to wealth and power. The rise of an information-based economy was led by major research in highly sophisticated technology, such as advanced computers. The selling and use of information became very beneficial to the economy. Tokyo became a major financial center, home to some of the world's major banks, financial firms, insurance companies, and the world's largest stock exchange, the Tokyo Securities and Stock Exchange. Even here, however, the recession took its toll. In 1992, the Nikkei 225 stock average began the year at 23,000 points, but fell to 14,000 points in mid-August before leveling off at 17,000 by the end of the year.

Since the end of the Cold War

1989 Economic Bubble

In the decades following World War II, Japan implemented stringent tariffs and policies to encourage the people to save their income. With more money in banks, loans and credit became easier to obtain, and with Japan running large trade surpluses, the yen appreciated against foreign currencies. This allowed local companies to invest in capital resources more easily than their overseas competitors, which reduced the price of Japanese-made goods and widened the trade surplus further. And, with the yen appreciating, financial assets became lucrative.

With so much money readily available for investment, speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market. The Nikkei stock index hit its all-time high on 29 December 1989 when it reached an intra-day high of 38,957.44 before closing at 38,915.87. The rates for housing, stocks, and bonds rose so much that at one point the government issued 100-year bonds. Additionally, banks granted increasingly risky loans.

At the height of the bubble, real estate was extremely over-valued. Prices were highest in Tokyo's Ginza district in 1989, with choice properties fetching over US$1.5 million per square meter ($139,000 per square foot). Prices were only slightly less in other areas of Tokyo. By 2004, prime "A" property in Tokyo's financial districts had slumped and Tokyo's residential homes were a fraction of their peak, but still managed to be listed as the most expensive real estate in the world. Trillions were wiped out with the combined collapse of the Tokyo stock and real estate markets.

With Japan's economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were increasingly directed out of the country, and Japanese manufacturing firms lost some degree of their technological edge. As Japanese products became less competitive overseas, some people argue that the low consumption rate began to bear on the economy, causing a deflationary spiral.

The easily obtainable credit that had helped create and engorge the real-estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low guarantee of being repaid. Loan Officers and Investment staff had a hard time finding anything to invest in that would return a profit. Meanwhile, the extremely low interest rate offered for deposits, such as 0.1%, meant that ordinary Japanese savers were just as inclined to put their money under their beds as they were to put it in savings accounts. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called "zombie businesses". Eventually a carry trade developed in which money was borrowed from Japan, invested for returns elsewhere and then the Japanese were paid back, with a nice profit for the trader.

The time after the bubble's collapse (崩壊, hōkai), which occurred gradually rather than catastrophically, is known as the "lost decade or end of the 20th century" (失われた10年, ushinawareta jūnen) in Japan. The Nikkei 225 stock index eventually bottomed out at 7603.76 in April 2003, moved upward to a new peak of 18,138 in June 2007, before resuming a downward trend. The downward movement in the Nikkei is likely due to global as well as national economic problems.

Deflation from the 1990s to present

Deflation in Japan started in the early 1990s. On 19 March 2001, the Bank of Japan and the Japanese government tried to eliminate deflation in the economy by reducing interest rates (part of their 'quantitative easing' policy). Despite having interest rates near zero for a long period, this strategy did not succeed.[73] Once the near-zero interest rates failed to stop deflation, some economists, such as Paul Krugman, and some Japanese politicians spoke of deliberately causing (or at least creating the fear of) inflation.[74] In July 2006, the zero-rate policy was ended. In 2008, the Japanese Central Bank still had the lowest interest rates in the developed world and deflation continued.[75]

Systemic reasons for deflation in Japan can be said to include:

Fallen asset prices. There was a large price bubble in both equities and real estate in Japan in the 1980s (peaking in late 1989).
Insolvent companies: Banks lent to companies and individuals that invested in real estate. When real estate values dropped, many loans went unpaid. The banks could try to collect on the collateral (land), but due to reduced real estate values, this would not pay off the loan. Banks have delayed the decision to collect on the collateral, hoping asset prices would improve. These delays were allowed by national banking regulators. Some banks make even more loans to these companies that are used to service the debt they already have. This continuing process is known as maintaining an "unrealized loss", and until the assets are completely revalued and/or sold off (and the loss realized), it will continue to be a deflationary force in the economy.
Insolvent banks: Banks with a large percentage of their loans which are "non-performing" (loans for which payments are not being made), but have not yet written them off. These banks cannot lend more money until they increase their cash reserves to cover the bad loans. Thus the number of loans is reduced sooner and less funds are available for economic growth.
Fear of insolvent banks: Japanese people are afraid that banks will collapse so they prefer to buy gold or (United States or Japanese) Treasury bonds instead of saving their money in a bank account. People also save by investing in real estate.

The Economist has suggested that improvements to bankruptcy law, land transfer law, and tax law will aid Japan's economy. In October 2009 the Japanese government announced plans to increase tobacco and green taxes while reducing rates for small and medium-sized companies, according to NHK.

In 2011 Japan under Yoshihiko Noda decided to consider joining the Trans-Pacific Strategic Economic Partnership.

The global economic recession of the late 2000s significantly harmed the economy of Japan. The nation suffered a 0.7% loss in real GDP in 2008 followed by a severe 5.2% loss in 2009. In contrast, the data for world real GDP growth was a 3.1% hike in 2008 followed by a 0.7% loss in 2009.[76]

Economic policy over the past several quarters in Japan has been influenced by the 'Abenomics' debate, with the government pursuing aggressive government infrastructure spending hikes and significant yen devaluations.

Prior to the global Coronavirus recession, the 2019 4th quarter GDP shrank an annualized 7.1% from the previous quarter[77] due to two main factors.[78] One is the government's raise in consumption tax from 8% to 10%.[79] The other is the devastating effects of Typhoon Hagibis, also known as the Reiwa 1 East Japan Typhoon (令和元年東日本台風, Reiwa Gannen Higashi-Nihon Taifū), or Typhoon Number 19 (台風19). The 38th depression, 9th typhoon and 3rd super typhoon of the 2019 Pacific typhoon season, it was the strongest typhoon in decades to strike mainland Japan, and one of the largest typhoons ever recorded at a peak diameter of 825 nautical miles (950 mi; 1529 km). It was also the costliest Pacific typhoon on record, surpassing Typhoon Mireille's record by more than US$5 billion (when not adjusted for inflation).[80] In the resort town of Hokone, record rainfall of almost a meter (942.3 mm, 37.1 inches) fell in only 24 hours.[81] This adds to the effect of the Coronavirus on people's lives and the economy, the prime minister unveiling a 'massive" stimulus amounting to 20% of GDP.[82] In April 2020, Prime Minister Shinzo Abe announced that COVID-19 pandemic in Japan, which also forced a national state of emergency,[83] gave the nation its worst economic crisis since the end of World War II.[84] Jun Saito of the Japan Center for Economic Research stated that the pandemic delivered the "final blow" to Japan's long fledging economy, which also resumed slow growth in 2018.[85] Two stimulus packages, in April and May 2020, injected 234 trillion yen (USD$2.2 trillion), or almost 40% of Japan's GDP.[78]

Timeline

Foundation of Tokugawa shogunate, beginning of early modern industrialization
Meiji Restoration, beginning of industrialization
The World War II, controlled economy during the war
End of the World War II, beginning of the way to an economic power state
25 April 1971, End of the gold standard
22 September 1985, Plaza Accord
29 December 1989, Nikkei 225 average peaks at 38,915
1990s, "the Lost Decade", as it is known in Japan, is the time after Japan's economic bubble collapsed. The Nikkei 225 stock index bottomed out at 7603.76 in April 2003, moved upward to a new peak of 18,138 in June 2007, before resuming a downward trend.
July 1997, start of the Asian financial crisis which caused several companies including Nissan Mutual Life Insurance and Yaohan to go bankrupt
Post 2000, Bank of Japan begins quantitative easing strategy
2011, the Aftermath of the 2011 Tōhoku earthquake and tsunami had far-reaching economic consequences
Abenomics, Japan's Prime Minister Shinzō Abe's programme to help the country's economic recovery: the economics side is one part of a more general programme, which was commented by Joseph Stiglitz.[86]
2020, Japan's economy suffered due to the COVID-19 pandemic, with Abe announcing that Japan had encountered its worst economic crisis since the end of World War II.[84]

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