1. No.9 Postwar Recovery, 1945-49 Economic Development of Japan

2. Postwar Recovery 1945-49 The Japanese economy collapsed due to input shortage. Inflation surged. Living standards plummeted. Food was severely lacking. The US occupied Japan from 1945 to 1952 and forced democratization and demilitarization (but later partly reversed). Subsidies and US aid supported the war-torn economy. The priority production system, using planning method, contributed to output recovery (1947-48). Inflation was ended by Dodge Line stabilization (1949). Army General Douglas MacArthur, head of GHQ GHQ building in Hibiya, around 1950 American soldiers in occupied Japan

3. Price Gap Subsidies Fukkin Loan Balance, Mar. 1949 US Aid and Korean War Boom Two Artificial Supports 竹馬経済 (Subsidies & US Aid)

4. Basic Problems of Japan’s Economic Reconstruction (1946) Saburo Okita, Yonosuke Goto, eds Long-term goals must be set for Japan’s recovery and global industrial positioning. Concrete real-sector strategies to attain these goals, sector by sector. PP.148-50 This report is a good example of Japan’s economic thinking, also reflected in its current development and ODA strategies. --Kyrgyzstan Report (Prof. Tatsuo Kaneda, 1992) --JICA Vietnam Report (Prof. Shigeru Ishikawa, 1995) --A new proposal for Africa (JICA-JBIC, May 2008) It is very different from the “general framework” approach of Western donors (governance, poverty reduction, health and education, debt reduction, matching funds, etc).

5. JICA-JBIC ： Report of the Stocktaking Work on the Economic Development in Africa and the Asian Growth Experience (May 2008), pp.14-15 1.Identify desired vision, economic structure, and positioning in global value chain. 2.Through public-private dialogue, discover growth-leading industries for future. 3.Identify their constraints (infra, HRD, etc). 4.Devise measures to remove constraints and promote targeted industries. Establish “ Industrialization Strategy ” as a process, not just a document. Measures must be consistent with the country ’ s institutional capability and executed under discipline and competition.

6. WAR Alternative Ways to Stop Inflation Shock approach (austerity) Gradualism (use of subsidies & US aid) Conditional shock approach (PPS & Dodge Line) Prof. Arisawa and the Ministry of Commerce and Industry PP.150-54 100 150 30 60 1934-361946 PPS Shock approach Industrial output Steel Coal Heavy oil (imported) Other industries (1) (2) (3) Priority Production System 30 mil tons Hiromi Arisawa

7. Priority Production System 傾斜生産方式 HOWEVER--Yoichi Okita & Elvira Kurmanalieva “Was PPS a Success?” GRIPS Research Report, Nov. 2006 Virtuous circle between coal & steel production did not happen (VAR analysis); imported heavy oil and materials were true causes of recovery. PPS was successful only as a diplomatic tool to persuade US to permit these imports. Source: Historical Statistics of Japan, vol.2, 1988. Industrial Production Index PPS Dodge Line Korean War

8. Dodge Line Stabilization (1949) Washington sends Joseph Dodge, a US banker with strong belief in free market and sound budget, to end inflation (after stopping inflation in Germany). Super-balanced (surplus) budget—cut spending, end subsidies, raise utility prices. Fiscal balance (bil. yen): -92.3 (1946), -103.9 (1947), -141.9 (1948), +156.9 (1949) Credit restraint—end fukkin loans. Unify and fix exchange rate at $1=360 yen. Prof. Carl Shoup’s tax reform—direct tax-based (income tax, corporate taxes), strengthen local tax base, rationalize tax collection. Mr. Dodge Prof. Shoup

9. Democratization Demilitarization New Constitution based on human rights and pacifism (1947) Tokyo Military Tribunal (1946-48)—execution and imprisonment of war criminals Breaking up of zaibatsu (1946); later remerged as keiretsu (with no holding company) New labor laws to protect workers’ rights (1945-47) Land reform (1946-) Women’s suffrage (1945) PP.154-56

10. Economic Reforms in Postwar Japan Edited by Yutaka Kosai & Juro Teranishi, 1993 Radical reforms were possible because of - US occupation - Wartime control that reduced the power & incentives of zaibatsu and landlords - General distrust in the market mechanism - Foreign aid and Korean War boom (macro supports) Labor, land and zaibatsu reforms for changing power relations, distribution, equity (not for efficiency). Three-step deregulation—(i) reforms under planning & US occupation, 1945-50; (ii) global re-integration, 1950s-mid 70s; (iii) financial deregulation & SOE privatization, 1980s.  Markets need time to grow? Or strong political resistance to slow down reforms?

11. New Constitution Promulgated Nov. 3, 1946; Enforced May 3, 1947 Initial Japanese drafts, maintaining emperor’s sovereignty, were rejected by GHQ. Instead, the American draft served as the base. Natural law--social contract among people (preface). Sovereignty resides with the people. Emperor is the symbol of the state and people’s unity (without political power). Basic human rights--not just freedom, but also guarantee of minimum living standards. Pacifism (Article 9). Balance of power among legislature, executive and judiciary. PP.155-56

12. Article 9 Controversy Renunciation of war No possession of military forces Denial of the state’s right of belligerency 1)Aspiring sincerely to an international peace based on justice and order, the Japanese people forever renounce war as a sovereign right of the nation and the threat or use of force as means of settling international disputes. 2)In order to accomplish the aim of the preceding paragraph, land, sea, and air forces, as well as other war potential, will never be maintained. The right of belligerency of the state will not be recognized. PP.155-56

13. Self-Defense Forces Established in 1954 Interpretation of LDP Government (until 2009) --Invasion is prohibited but self-defense is permitted. --SDF is a minimal power and not military forces About PM Abe (2014-2016) --“Recently, security situations surrounding Japan have changed significantly for worse.” --The Right of Collective Self-defense should be permitted (SDF to assist US forces under enemy attack), in addition to self-defense. --This policy was introduced by a cabinet decision (July 2014), not by a constitutional amendment. --In July 2015, parliament passed a bundle of laws to allow SDF to go abroad (up to now, ad hoc laws were created for individual operations in Iraq, S. Sudan, etc.) --If PM Abe wins Upper House election (July 2016) and secure 2/3 of total seats, he can even amend the Constitution.

14. Land Reform, 1946-50 1945 plan was rejected by GHQ (5ha max covering only 11% of land; “absentee landlord” definition ambiguous) 1946 plan adopted and accepted by GHQ --All land above 1ha (4ha: Hokkaido) must be sold --Land price is nominally fixed under high inflation --Land buyers can pay in 30-year installments --For remaining tenants, rents are frozen and monitored Implementation (mainly 1947-48) --Involving 6 million families (2 million were losers) --Owned land increased from 54% (1941) to 91% (1955) --Labor-intensive: 415,000 officials and volunteers mobilized --Absentee landlord holdings: 80-90% transferred --Other landlord holdings: 70-80% transferred MacArthur: “most successful reform” politically and for equity. Redistribution of land ownership to actual cultivators

15. Reasons for “success” --Forced reform under US occupation (“landlords are evil”). --Accurate data and village network for easy identification of ownership and cultivators. --Preparation by reform-minded officials (even before WW2). --Availability of large number of unemployed but educated staff. Problem—economic inefficiency --Average farm remained small: 1.09ha (1941)  0.99ha (1955). --Incentive to produce? Estimated productivity did not rise. --Study shows no difference in rice farmers’ land productivity or labor productivity (1939-41 prewar data) : Owned land (3,780kg/ha, 20kg/laborday) Tenanted land (3,687kg/ha, 19.6kg/laborday)

16. Rural Life Quality Improvement Movement In 1948, GHQ ordered the Ministry of Agriculture to initiate nationwide “Life Improvement & Dissemination Movement.” Many local governments (Yamaguchi, Kagoshima, etc) also launched similar programs with enthusiasm. Official directives + grass-root village activities organized by life improvement dissemination staff (=village housewives). Daily life improvement: cooking, nutrition, meals, clothing, bedding, cleaning, washing, child raising, public morals, weddings/funerals, superstition, feudal habits, etc. Staff training in Tokyo and major cities; universities and research institutions providing information and techniques. Similarly, “New Life Improvement”, “Life without Mosquitoes and Flies Movement,” etc. up to the 1950s and 1960s. M. Mizuno and H. Sato, eds, Development in Rural Society: Rethinking Rural Development, IDE-JETRO, 2008, in Japanese.