I’ve been pleasantly surprised that some of my most popular posts are excerpts from the only history book I ever wrote, Panic, Prosperity, and Progress. Over this holiday weekend, I’ll be sharing, over the course of four days, the chapter dedicated to the inflation and bursting of the Japanese bubble of the 1980s. I think you’ll find some interesting parallels with China.
As the summer came to a close in 1945, Japan lay in ruins. It had spent the past five years at war, and the nation had been assaulted by an unrelenting fire-bombing campaign, climaxed, of course, by the only two nuclear weapons ever dropped on humans in world history. Japan, once with dreams of Pacific-wide domination, was now one of the poorest and most-devastated nations on Earth.
The United States, Japan’s fiercest opponent during the war, now turned its attention to rebuilding a country in which 25% of housing had been laid waste and whose power grid and industrial infrastructure were effectively non-existent. What would happen over the next half-century would become one of the most astonishing economic miracles – – as well as one of history’s greatest collapses – – ever recorded.
The Early Economic Structure
As an island-nation, Japan for centuries had been isolated from the rest of the world, at first by the surrounding sea, and later by deliberate cultural choice. Japan was a nation that, as far as possible, practiced self-reliance. In the late 19th century, there existed a world of difference between highly-developed industrialized nations such as the U.S. and Britain when compared to Japan.
As a largely agricultural society, Japan focused its modernization efforts on improving mechanization and modernization of farming. From the 1880s to the beginning of the 20th century, Japan made great improvements in its ability to produce large amounts of foodstuffs, which expanded its ability to trade with other nations for the natural resources and other goods it lacked.
During this time, several important characteristics developed in the Japanese mindset with respect to business. First, as an island that needed goods from other nations to feed and provide for its own population, Japan became an adept and active trader with other nations overseas; second, as a country that benefited from the inventiveness of those same nations, it became quite proficient at adopting and improving technologies and techniques from its trading partners; and third, as a culture, Japan was clearly divided between landowners (a tiny percentage of the population) and those who actually worked the land.
In a way, Japan was, even during the early 20th century, operating within the same agricultural feudalism that Europe had during the middle ages, hundreds of years before. The majority of the population was working in agricultural, and almost all of them toiled on the land with little in the way of rights or profits.
The Aftershocks of War
World War II took most able-bodied men off the farms and put them into battle. At the war’s conclusion, the reversal of this flow of bodies meant that nearly 8 million people left the military and were expected to return to civilian life.
This was coupled with the fact that all those formerly employed creating the weapons, transportation, and other necessary product for wartime were no longer needed, thus over a million and a half Japanese citizens returned from overseas to their native land. In all, over 13 million people who wanted to work were needing work after the war ended.
Japan’s need for food was greater than ever, so the vast agricultural industry still awaited all those workers. Farming provided work for 18 million citizens, but, as before, the work did not pay well, and even those employed found themselves underemployed. The country was reduced to subsistence living, as millions toiled in the fields just to have something to eat each night.
There was another big problem for Japan, and that was a lack of energy. Even though Japan had abundant coal resources, the people that had been forcibly made to extract those resources – Korean and Chinese prisoners of war – had returned to their own countries, and there was a lack of skilled workers and necessary equipment to extract the necessary coal for the nation’s energy requirements.
In short, Japan had millions of people without enough work, enough food, or enough energy, and it was widely feared that the winter of 1945-1946 would usher in widespread starvation throughout a country that had already lived through years of horror. It was during this era that another deep-set cultural principal was embraced: small families. In a country with too many mouths to feed, it was decided the only reasonable long-term solution was a reduce the birthrate.
The U.S. Rebuilds
The United States understood that a healthy, prosperous ally in the Asia region would be far more valuable than a ruined nation, and it sought to rebuild and feed Japan to help the country get back on its feet. To this end, it put into motion three policy reforms that would rework the cultural and economic fabric of the nation for decades to come.
The first reform was to break up what were known as the zaibatsu, which were the business conglomerates that were given favorable treatment by the government and enjoyed great advantage over any competition. These conglomerates were granted lower taxes, large government loans and subsidies, and favored selection during government contract provision. A cozy and corrupt relationship existed between the government and these firms, and it would be impossible for the healing force of capitalism to exist side-by-side with this feudalistic artifact.
The dismantling of zaibatsu power took several forms, many of which had the goal of establishing a more equal relationship between the public and the management of an organization. The companies would be required to sell their stock to the public and, where necessary, break up into smaller, independent units as opposed to operate as a huge monopoly. The groundwork was put in place for real competition, and the Anti-Monopoly Law would ensure that no large firm was permitted to achieve a stranglehold on the recovery.
The second, which was especially important for an agrarian culture like Japan’s, was land reform. Here too, the general goal was to democratize the business entity, ending the landlord/serf relationship. The government bought the large land holdings of the farmers and divided into much smaller lots, putting it into the hands of those working the soil. A farmer working his own land not only is going to be much more proficient at the task than a distant and detached owner, but will also maximize the use of the land since, at last, he has the opportunity for personal profit.
The land reform that was put into place swiftly transformed the agribusiness of the nation, as the percentage of farmers who owned the land on which they worked went from only about 50% up to 90% just a few years later. This reinvigorated farming in the country and eliminated the terror of potential starvation that the country faced at war’s end.
Finally, the nature of what it meant to be an employee in Japan was changed with a series of laws that led to substantial growth of labor unions. Unions had been virtually non-existent in Japan until the end of World War II, and workers had no meaningful rights. Once workers were giving the opportunity to organize, bargain, and strike, unions became prominent with amazing swiftness: membership in labor unions grew from essentially 0% in 1945 to 60% in 1949.
Now workers had a voice they never had before: they could organize themselves, collectively bargain, or protest any management practices viewed as dangerous or unfair. Beyond this, Japanese business took on the rather unusual pledge of lifetime employment. As long as an employee was willing to work hard for a company, he in turn was told he could expect gainful employment until retirement. Thus, workers in Japan went from having almost no rights at all to enjoying some of the most generous rights of any employees in the world.
Besides all of these important reforms, there is one other critical aspect to remember about the new Japan: they were forbidden from having a military. Although this may have seemed like a devastating concession at the time, extracted from a humiliated and defeated nation, it turned out to be a tremendous economic blessing. A country that is forbidden from having its own military is also relieved the huge and non-productive expense. The United States was going to provide whatever military protection the Japanese might have otherwise enjoyed, all without having to fund it.
From Dodge to Independence
In the late 1940s, it was quite clear to the United States that they had a new war on their hands – a Cold War – and that a strong ally in Asia was more important than ever. Although Japan was recovering, the United States wanted to accelerate the recovery and sought the help of Detroit banker Joseph Dodge to focus on the currency and economy of the nascent land.
Inflation was starting to get out of control in Japan, so the Dodge plan (known as the “Dodge Line”) set out three laws to address the problem: (1) require a balanced government budget; (2) cease the loans from the Reconstruction Finance Bank, since the flood of cash had already set the nation’s recovery in motion and was actually starting to cause economic harm; (3) eliminate subsidies being handed out by the government, since they were interfering with natural business growth.
Dodge’s guidance helped stabilize the Japanese economy and its currency, and his economic leadership was, in the years to come, recognized as invaluable. Empower Hirohito himself would, in 1962, award Dodge a medal in reorganization of his work during this period of economic recovery.
A greater blessing came to Japan from the most ironic of sources: another war. In 1950, when the Korean War began, Japan found itself with two great economic advantages: first, it had rebuilt itself to the point that it was a proficient and capable industrial resource, and second, it was geographically situated at a strategically important place relative to the Korean peninsula.
Just as the United States economy was saved from another depression when World War II began, the Japanese economy was saved by the Korean War. Japan was so firmly on its feet by 1952 that the United States ended its occupation of the country and left the Japanese to their own independence once more. In just a few years, Japan was changed from the most ferocious enemy of the U.S. to a reliable base for its ships and planes. Nothing would be the same for either nation from that point forward.