Japanese Economy A 2012 Fall Seinan Gakuin University Noriaki EZOE Professor Ph.D. Economics Department Seinan Gakuin University Japan Mail address: Homepage address: 1

Chapter 3 Economic History, Part2: From Meiji to War Period What you will learn in this Chapter 1 Meiji Industrial development. 2 WW1 and 1920s 3 World Deflation and War economy 2

Japanese history: 1912—1945 Key Historical Events Meiji( 明治 ) Meiji restoration First railway line between Tokyo and Yokohama The Meiji Constitution is promulgated Sino-Japanese War Russo-Japanese War Annexation of Korea Death of emperor Meiji. Taisho( 大正 ) Japan joins allied forces in WW The Great Kanto Earthquake devastates Tokyo and Yokohama. Showa( 昭和 ) Manchurian Incident Second Sino-Japanese War starts Pacific War starts Japan surrenders after two atomic bombs are dropped over Hiroshima and Nagasaki. 3

1 Meiji Industrial development the Meiji Restoration: The resignation of the shogun led to the Boshin War and the establishment of a centralized state nominally unified under the Emperor. Adopting Western political, judicial and military institutions, the Cabinet organized the Privy Council, introduced the Meiji Constitution, and assembled the Imperial Diet. - The Meiji Restoration transformed the Empire of Japan into an industrialized world power that pursued military conflict to expand its sphere of influence. - After victories in the First Sino-Japanese War (1894–1895) and the Russo-Japanese War (1904–1905), Japan gained control of Taiwan, Korea, and the southern half of Sakhalin. - Japan's population grew from 35 million in 1873 to 70 million in

Table1 Conditions at the start of economic growth (Flath 2005 P.39) 5

Macroeconomy of Late Meiji (1890s-1900s) Ohno Trade, Budget & Finance, Saving Mobilization Aggressive public spending continued for militarization and industrialization, causing budget deficit and gold reserve loss. Cotton industry succeeded in import substitution. Trade exhibited dual structure—exporting light industry goods to Asia and importing machinery from the West. Yen initially floated down, but was fixed at $1=2 yen after joining the gold standard in Banks and stock exchanges were set up, but main source of saving remained self-finance and joint stock companies within the private business sector. Japan relied relatively little on FDI. But foreign bonds were issued to execute the Japan-Russia War, local public investments and budget financing. 6

Cumulative history, Edo achievements, national unity and nationalism Private-sector dynamism and entrepreneurship (primary force) Policy support (supplementary) Japan’s economic growth was driven mainly by private dynamism while policy was also helpful Policy was generally successful despite criticisms: --Power monopoly by former Satsuma & Choshu politicians --Privatization scandal, Excessively pro-West --Unfair by today’s standard Rapid industrialization esp. Meiji and post WW2 period Ohno P.56 7

Rise and Fall of Merchants and Enterprises Q: Who were the main drivers of Meiji industrialization? A: All types of entrepreneurs including Edo gosho, Yokohama merchants, Meiji zaibatsu, and company boom millionaires. ► Survival game was severe: many entries, many exits ► Japan’s industrial revolution: from 1880s to 1900s ► Japan-China War, Japan-Russia War also accelerated industrialization Ohno P.47 8

The hallmark of economic growth is the expansion of industry. Manufacturing Manufacturing output was growing at a faster rate than agriculture. (Flath P.35) 9 Many of Japan’s excellent manufacturing firms were founded by engineers. Sakichi Toyota Konosuke Matsushita Soichiro Honda Akio Morita (Sony’s co-founder)

Parallel development or “hybrid technology” Ohno PP

Source: Ryoshin Minami, The Economic Development of Japan, Meiji Ohno PP Shifts in Trade Structure 11

Government was relatively small Ohno P.47 Meiji Source: Ryoshin Minami, The Economic Development of Japan,

Source: Management and Coordination Agency, Historical Statistics of Japan, vol.3, Japan Statistical Association, 1988, pp Tax Revenue Structure Meiji 13

Japanese Economy and Foreign Capital, Simon Bytheway, 2005 (in Japanese, PhD dissertation at Tohoku Gakuin Univ.) After 1858, foreign trading firms came, but their activities were confined to foreign settlement areas. Japan prohibited FDI until 1899 (revision of commercial law). Even after that, policy and popular opinion remained hostile to FDI. During Meiji period, foreign debt issue was much larger than FDI Share in foreign saving mobilization--gov’t bonds 82.5%, municipal bonds 7.8%, corporate bonds 9.0%, FDI 0.7% However, FDI played important roles in some industries (see below), esp. technology transfer through patents. Ex. light bulbs: bamboo filament  tungsten filament 14

Central Government Bonds Outstanding Source: Management and Coordination Agency, Historical Statistics of Japan, vol.3, Japan Statistical Association, 1988, pp

2 WW1 and 1920s WW1 brought a huge export-led boom to Japan. This solved fiscal and BOP problems (for the moment). The bubble burst in 1920 and a recession period began. FDI and import substitution in heavy industries proceeded, and new zaibatsu emerged. Taisho Democracy and the rise of social movements (labor, farmers, women, “outcasts,” socialism) Shidehara Diplomacy—use non-military means (diplomacy) to secure trade benefits, Japan-US friendship and Chinese interests. 16

1920s WW1 Bubble burst and recessionary period begins Machinery, chemical, heavy industries expands Electrification (hydraulic power generation) rises WW1 2.1 Economy : Real GNE Growth (5-year moving average ) Estimate by Ohkawa, Takamatsu, Yamamoto 17

World War I and Export-led Boom Export-led demand pushed up prices, profits and production—artificial acceleration of import substitution, esp. in machinery and chemicals. BoP crisis (gold reserve loss) was solved. Narikin emerged (Suzuki, Ship Narikins). They spent money on big villas, parties, women. Production Trade (bil yen) Ship Narikin Industrial production Domestic Supply Ratio Ohno PP

New Zaibatsu (Konzern) Heavy & chemical industries (not banks, textiles, trade) Backed by political connection and support Active investment in Korea and Manchuria (NE China) Ohno PP NameFeaturesCurrent firms Nissan 日産 （ Japan Industry ） Cars, chemicals, machinery, fishery, mining; Raising fund in stock market; Invest in Manchuria Hitachi, Nissui, Nissan Motors, Sompo Japan, Japan Energy Riken 理研 Chemical, medical research Riken （ Res. Inst.) Nicchitsu 日窒 Fertilizer, medicine, metalsChisso Nisso 日曹 Sodium hydroxide (NaOH)Nihon Soda Mori 森 Aluminum, ammonia, iodineShowa Denko 19

2.2 Taisho Democracy The Taisho period ( ) is considered the time of the liberal movement known as the "Taisho democracy" -- It is usually distinguished from the preceding chaotic Meiji Era and the following militarism-driven Showa Era. Background: Social: Emergence of new middle mass (professionals, salaried workers) -Labor movement and May Day (1920) Politically: the movement of parliamentary democracy spread throughout Japan. -In 1925, all males of twenty-five and older were given the right to vote. Protests were legal and there were many of them. -Landless farmers’ riots and formation of farmers’ union (1922) -Women’s movement (1920) -Rise of socialism and Marxism Culture: The influence of western culture in the Meiji era continued. -Writers : many wrote the famous works of modern Japanese literature. -Media : Radio broadcasts started in 1925, magazines and publications were started. -Art : paintings, music,dancing and sports were prospered. Universal suffrage movement 20 Voters/Population

2.3 Shidehara Diplomacy His policy was more moderate than before or after him Maintain good relations with US and UK Respect Washington Naval Disarmament Treaty ( ) Hamaguchi Cabinet signs London Naval Disarmament Treaty despite objection from military (1930) No military intervention in China; secure Japan’s economic interest through diplomacy and negotiation When China protests and resists, his diplomacy breaks down Domestically, criticized as Coward Diplomacy Failed to stop Manchurian Incident (1931) started by Kantogun (Japanese Army stationed in China) Ohno P Kijuro Shidehara, Foreign Minister, , Prime Minister

Japan-US Relationship Largest trading partner: US share in Japan’s trade— export 44%, import 26% (in 1925) In China--Japan asserts its “special interests” in China, US wants open door policy (esp. for bank loans) Immigration Problem 1890s Japanese economic immigrants to US West Coast; Anti-Japanese movement begins 1907 Gentlemen’s Agreement to curb Japanese immigration 1913 Anti-Japanese legislations in California 1924 Ban on Japanese immigration 1942 Japanese Americans are sent to concentration camps Manzanar Camp, California 22

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3 World Deflation and War economy 3.1 Showa Financial Crisis WW1 Bubble and Burst WW1 boom greatly increased fund demand --Some large banks tried to modernize management --Many kikan ginko lent to narikin for speculation --Total number of banks remained about the same Speculation fever continued in — stock market fell, prices plummeted, credit crunch began. Bankruptcies—Mar (7) Apr (45) May (106), Jun (127) Bank runs—169 (21 closed), Apr-Jul

s and global depression Showa Economic Crisis Causes GNP(bil yen ) (1) Impact of global depression 1929 : the Wall Street Crash. (2) Austerity policy initiated and continued by FM Inoue Consequences (1) Severe price deflation (2) Rural impoverishment, coupled with famine (3) Cartelization and rationalization (“free market doesn’t work”) (4) Rise of fascism (army, navy, right-wing groups) --Rejection of party politics --“Reform” movement 1/ Military readiness for total war 2/ Totalitarian state for the benefit of farmers and workers 25

Takahashi Budget and Recovery Korekiyo Takahashi, Finantial Minister in the cabinets ( ) Japanese Keynesian. He directed the first Keynesian policy. Expanded government expenditures But, he never managed to constrain the Japanese military forces. 26 Takahashi was assassinated by rebellion army in 1936

3.3 War Economy Increasing expansionism and militarization. From July 1937 Japan was at war with all of China, and after December 1941 was at war with the United States, Britain, and their allies The end of democracy During the 1920s, Japan changed its direction toward a democratic system of government. However, parliamentary government was not rooted deeply enough to withstand the economic and political pressures of the 1930s, during which military leaders became increasingly influential. 1925: when communism and socialism were banned, some of the protests became illegal. Political debate and democracy completely suppressed. Ohno P

Manchurian Incident (1931) (Sep. 18 Incident) Kantogun ( 関東軍 Japanese army stationed in China) initiates well-planned invasion of Manchuria without informing Tokyo Tokyo Government and Army HQ try to stop it but fails  Kantogun is now uncontrollable  Violating “open door, equal opportunity” principle US Secretary of State Stimson’s press statement undermines FM Shidehara (regarding Jinzhou bombing) Seiyukai (Inukai) Government declares the “independence” of Manchuria (1932). The League of Nations determines that Manchuria is not an independent state and Japan’s action is not self-defense  Japan withdraws from the League of Nations (1933) Ohno PP

Northeastern China today

Military Government Beginning in 1937, government appropriations for arms purchases had increased dramatically, and comprehensive economic controls over foreign exchange, bank loans, and production and pricing in selected industries were all coordinated so as to divert resources away from civilian goods and toward weapons. Economic planning to mobilize people and resources under private ownership (no nationalization) Planning Board, National Mobilization Law; State Power Management Law Control over civil life becomes pervasive Total war with US--Ministry of Military Demand; Military Needs Company Act Economic collapse due to lack of inputs War with China prolongs  Resource shortage within Yen Bloc  Invade SEA for more resources  Total war with US and rest of the world 30

Military ProductionConsumer Product Supply Maritime Transport during Pacific War

World War Ⅱ 1940 : Japan occupied French Indochina (Vietnam). These actions intensified Japan's conflict with the United States and Great Britain. The United States placed an oil embargo on Japan. This was expected a resulting oil shortage. Japan decide to capture the oil rich Indonesia and to start a war with the US and Great Britain : On December 7, 1941, Japan attacked the Pearl Harbor. Japan was able to expand her control over a large territory that expanded to the border of India in the West and New Guinea in the South within the following six months : The Japanese had conquered Burma, Siam, the Indonesia, and the Philippines. The turning point was the Battle of Midway in June : Intensive air raids started over Japan. 1945: In spring, US forces invaded Okinawa. On July 27, the Allied powers requested Japan in the Potsdam Declaration to surrender unconditionally. US forces dropped two atomic bombs on Hiroshima and Nagasaki on August 6 and 9. On August 8, the Soviet invasion of Manchuria. the atomic bombings of Hiroshima and Nagasaki in on August 15, Japan agreed to an unconditional surrender. 32

Pacific war ; Map of Japanese Empire

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War time economy Flath(2005)conclusion : Japan’s war leaders had miscalculation badly, sacrificing much of the nation's material wealth on a losing bid for foreign conquest.(P.66) Flath(2005): Figure 3.5 (P.64) Wartime Production Possibility Curb shows the trade off between weapons and civilian goods. Producing more military goods diverted resources away from the production of civilian goods. 35

The war cost The war cost Japan and the rest of the Greater East Asia Co-Prosperity Sphere millions of lives and left much of the nation's industry and infrastructure destroyed. The Allies (led by the US) repatriated millions of ethnic Japanese from colonies and military camps throughout Asia, largely eliminating the Japanese empire and restoring the independence of its conquered territories. The Allies also convened the International Military Tribunal for the Far East on May 3, 1946 to prosecute some Japanese leaders for war crimes. 36

References Dadid Flath [2005],The Japanese Economy, Oxford University Press. Takatoshi Ito[1992], The Japanese Economy, MIT Press. Morishima, M [1982], Why Has Japan Succeeded? Cambridge University Press. Kenichi Ohno[2006], The Economic Development of Japan, GRIPS Development Forum. Reischauer, E.[1988], The Japanese today, Harverd University Press. 37