History of the Japanese Economy

An overview of Japanese economic, monetary, and fiscal policies over time.

Edo Era

During the Edo Era (江戸時代), social classes existed roughly as:

1. Lords
2. Farmers
3. Craftsmen
4. Merchants

Mercantilism was seen as an unproductive activity.

Isolationism

Sakoku (鎖国) was the preeminent economic policy of the Tokugawa shogunate. From 1639 to 1868 (Commodore Perry and the Black Ships), trade was restricted tightly. Immigration was also entirely forbidden, with the primary intention therein being the expulsion and execution of foreign missionaries.

Some sources use kaikoku (海禁) (lit. "maritime restrictions") to clarify that there were exceptions.

Meiji Restoration and Imperial Japan

The Meiji Restoration (明治維新) saw the economy reorganized for military power. This militarism remained and accelerated until the end of Imperial Japan.

War

Japan claimed territory through the Sino-Japanese War (1894-1895), the Russo-Japanese War (1904-1905), and World War I (1914-1918). Exploitative state-run companies were established in colonies to further feed the war economy.

World War II brought a forceful end to this era and this policy more generally.

Postwar Period

Japanese policy was dictated by the occupying force, GHQ (General Headquarters), until self-rule was re-established in 1952. See here for more context on this period.

Corporations

The zaibatsu (財閥) were dissolved and eventually supplanted by the keiretsu (系列).

Monetary Policy

Postwar Japan saw hyperinflation and a breakdown of currency-based trade. Multiple currencies were issued for disparate use; A円 for U.S. military trade, B円 for civilian trade. Per-island exchange rates were set.

The U.S. military phased out use of A円, establishing B円 as the sole Japanese currency. In 1949 GHQ set a fixed exchange rate of $1=360円. This monetary policy persisted until 1971 (President Nixon drops gold standard).

War

The Korean War (1950-1953) saw increased investment into Japan by the U.S. military, as well as increased commercial activity by U.S. military personnel. Military bases became economics centers.

High Growth Rate Era

Until 1973, Japan benefited from rapid technological advancement and growth in commercial and manufacturing sectors.

Manufacturing

Factories and foundries quickly pivoted from war economy into consumer goods. The so-called 3 sacred items (refrigerators, washing machines, and televisions) were seen as key export products.

Japanese manufacturing continued to develop technologically, and by the 1960s the new 3 sacred items were cars, color televisions, and coolers (A/C).

Labor

The labor market of this period has been described as sanchan agriculture (三ちゃん農業) (sanchan referring to じいちゃ, ばあちゃ, and かあちゃん). Men worked for companies, while women and the elderly farmed.

Government Intervention

The Japanese ministries, especially those of Finance (MOF) and International Trade and Industry (MITI) were extremely active in the Japanese economy. With the primary goal being full employment, rather than efficient labor, the ministries organized supply chains to have the maximum number of small-to-medium businesses as middlemen.

There was general unavailability of credit; the ministries were often the only way to get capital invested into a startup.

The bureaucratic and regulatory processes were dominated by an iron triangle between the LDP, the MOF, and keiretsu (系列).

Causes of Stagflation

The end of the fixed exchange rate in 1971 led to a more competitive U.S. dollar.

The oil shocks, and more generally the unrest in the Middle East, led to disruptions of international supply chains.

Large Japanese businesses, such as car manufacturers, reincorporated as MNCs. They moved their headquarters to countries with more favorable tax rates, and moved production to countries with more reliable supply chains or cheaper labor forces.

Modern Japan

Stagflation

The government pursued expansionist monetary policy continuously, leading to a zero interest rate. In 2019, PM Abe experimented with a negative interest rate.

The collapse of a real estate and stock bubble led to widespread insolvency of major banks. Rather than letting them fail, the government propped them up as zombie banks.

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