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Historical Development, The Era of High Growth

cheap blouses, modern industries, export boom, broken toys, Japanese exports

Japan’s GDP grew an average of 9 percent annually from the end of postwar reconstruction in 1955 until the oil crisis of 1973 (called the oil shock in Japan), when international oil prices rose dramatically. While countries often grow quite rapidly during their industrial takeoff, Japan’s takeoff was unparalleled. In its years of highest growth, from 1965 to 1970, Japan’s GDP grew an average of 12 percent a year.

By 1973 Japan’s economy, five times as large as in 1955, was the third largest in the world. People began speaking of the “Japanese economic miracle” Instead of exporting easily broken toys and cheap blouses, Japan was now renowned for its high quality steel, ships, cars, and televisions.

The fruits of growth were widely spread among the Japanese people. During this period, real (inflation-adjusted) wages per person increased between 7 and 8 percent per year. By 1970 living standards had tripled. Whereas in the 1950s few households enjoyed piped-in water, a refrigerator, a car, a washing machine, or a color television, virtually every household does today. Throughout the era of high growth—and into the 1990s—Japan maintained one of the world’s most equal distributions of income as well as consistently low unemployment and no permanent underclass.

Economists attribute Japan’s growth during this period to a number of factors. One important element was high rates of saving and investment. Traditionally, Japan’s household saving rates, about 7 to 9 percent of income, were not high by international standards. However, huge tax incentives, increasing prosperity, and other factors gradually raised saving rates to 20 percent of income by 1973. As a share of GDP, business savings from growing corporate profits were even more important. Household and business savings provided capital for high levels of investment in things such as new factories and machinery that fed economic growth.

New technology and education also stimulated growth. Japan invested heavily in technology imports in the 1950s, and in several industries Japanese firms were among the first to adapt or commercialize technology invented elsewhere. Acting before their U.S. counterparts, Japanese steel makers built new plants with electric arc furnaces that helped them to produce quality alloy steels more efficiently, and Japanese television makers adopted solid-state technology that allowed them to produce televisions that were more compact, powerful, and reliable.

The process of industrialization itself accelerated growth, as many workers moved from low-productivity farming and textile production into modern industries enjoying higher efficiency and economies of scale (factors decreasing costs of production while increasing output). In 1950 farmers outnumbered factory workers; by 1970 farmers and fishers accounted for only 17 percent of all workers while the manufacturing workforce had risen to 40 percent. Equally important, production of higher-demand, higher-value goods, such as machinery, gradually replaced lower-demand items, such as textiles. By 1970 much of Japan’s industrial output consisted of products that had not even existed in the Japanese market 20 years earlier, such as color televisions, petrochemicals, and air conditioners.

An export boom was also a critical factor. From 1955 to 1971 Japanese exports increased 15 percent per year. Without exports, Japan could not have paid for all the imports of raw material and food it needed. Until the mid-1960s, Japan imported more goods than it exported (a trade deficit) nearly every year. However, as a result of the industrial shift to higher-demand goods, the country began to export more than it imported (a trade surplus). The increase in exports accelerated industrialization. Although industries such as steel, cars, and television got their start serving the domestic market, all soon began relying on the export market for growth.

Economists disagree about how important government economic policy was in fostering Japan’s growth, but much of the evidence indicates that it played a crucial role. Governmental measures helped accelerate savings and investment, the absorption of new technologies, and the shift to modern industries and high-value exports. Virtually every key export industry enjoyed protection and promotion during their early stages. For example, in 1953 Japan’s young automobile industry was almost wiped out by cheap European car imports. In response, the government allowed only negligible imports of foreign cars until 1965, when Japan’s auto industry was able to compete on its own. In addition to protecting emerging industries, the government provided special tax credits to favored industries and directed banks to provide low-interest loans to targeted sectors. While some industries that received aid were notable failures, such as petroleum refining and aviation, the overall success rate was high. Without government industrial policy Japan would still have industrialized, but perhaps not at “miracle” rates.

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