No.9 Postwar Recovery, 1945-49

Economic Development of Japan

Postwar Recovery 1945-49

• The Japanese economy collapsed due to

input shortage. Inflation surged. Living

standards plummeted.

• The US occupied Japan and forced

democratization and demilitarization

(but later partly reversed).

• Subsidies and US aid supported the war-torn economy.

• The priority production system, based on economic

planning, contributed to output recovery (1947-48).

• Inflation was ended by Dodge Line stabilization (1949).

Army General

Douglas MacArthur,

head of GHQ

Coal

PowerShipping

Fertilizer

TextileSteel

Other

132 bil yen(3.9% ofGDP)

Mil yen % of GDP

1946 9,011 1.9%

1947 22,511 1.7%

1948 62,499 2.3%

1949 170,213 5.0%

1950 60,161 1.5%

1951 30,261 0.6%

1952 27,000 0.4%

0

500

1000

1500

2000

2500

3000

1946

1947

1948

1949

1950

1951

1952

1953

1954

1955

Mi l l i on USD

Imports

Exports

US aid

Korean Wardemand

Price Gap Subsidies

Fukkin Loan Balance, Mar. 1949

US Aid and Korean War Boom

Two Artificial

Supports 竹馬経済(Subsidies & US Aid)

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, etc).

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.

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 30

60

1934-36 1946

PPS

Shock approach

Industrial output

Steel Coal

Heavy oil (imported)

Other industries

(1)

(2)

(3) (3)

Priority Production System

30 mil tons

Hiromi Arisawa

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.

0

20

40

60

80

100

120

140

16019

36

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

1951

1952

Steel

Coal

All industry

(1936 = 100)

Source: Historical Statistics

of Japan, vol.2, 1988.

Industrial

Production

IndexPPS

Dodge Line

Korean War

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.

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

Economic Reforms in Postwar JapanEdited 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 relation, distribution, equity (not for efficiency)

• Three-step deregulation—(i) reforms under control, 1945-50; (ii) integration, 1950s-mid 70s; (iii) financial deregulation & SOE privatization, 1980s

Markets need time to grow, or political resistance?

New Constitution 1947GHQ draft as the base; initial Japanese drafts, maintaining emperor’s sovereignty, were rejected.

• 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

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

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

Alternative interpretations of Art.9--All war and military forces are prohibited, including for self-defense.--All war and military forces are prohibited, but Japan has self-defense rights.--War and military forces are permitted for the purpose of self-defense.

PM Abe (2014)

--The right of collective self-defense (SDF assisting US military under enemy attack) should be permitted (do so by cabinet decision, not by constitutional amendment)

Land Reform, 1946-50

1945 plan was rejected by GHQ (5ha max; only 11%

of land redistributed; “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

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 (before WW2)

--Availability of large number of educated staff (unemployment

pressure)

Problem—economic inefficiency

--Average farm remained small: 1.09ha (1941)0.99ha (1955)

--More incentive to produce? Estimated productivity did not rise.

--Study shows no difference in rice farmers’ land productivity or

labor productivity (1939-41 data) :

Owned land (3,780kg/ha, 20kg/laborday)

Tenanted land (3,687kg/ha, 19.6kg/laborday)

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.