The Japanese Economy

The Japanese Economy (ISBN: 9780262534147) was written by Takatoshi Ito, published by The MIT Press in 1992. A second edition was published in 1996.

The Tokugawa Economy was characterized by...

• sakoku

• shinoo-kooshoo (lit.) (caste system)

  • peasants produce rice; 37% of harvest paid as taxes

    • 10%-30% of land is cultivated by tenants; tenants pay 20%-28% of harvest to daimyoo (lit.)

  • rice market emerged with 3/4 provided by daimyoo (lit.)

    • rice futures market in Osaka by 1730

• sankin-kootai (lit.) (court attendance)

• gold, silver, and copper coins with daily exchange rates
  • paper bills in use by private merchants were set to silver standard
• port of Dejima opened to Dutch and Chinese after currency began flowing out of country (to correct balance of payments)

Opening the country led to rapid economic changes.

• gold, silver coins were exchanged 1:1 by weight
  • domestic exchange rate for gold and silver was 1:5, while international rate was 1:15; government forced to adjust domestic rate after 7 years
• 500% inflation from 1859 to 1868

Meiji era characterized by...

• industrialization and military seizure
  • government seized foreign industry in reaction to tariffs, sanctions (esp. U.S.)
  • government built infrastructure and used industry subsidization policies
• exported silk, tea; gradually moved to manufacturing economy
• banking was centralized into a national bank
• shifted between gold and silver standards for expansive monetary policy
  • silver standard preferred by Pacific trade (esp. Mexico and Argentina)
  • gold standard preferred by European industrial powers
  • Finance Minister Korekiyo Takahashi left gold standard for expansive monetary policy in reaction to Great Depression
• Great Depression largely did not affect the economy (see above)
• Indonesian oil was a major goal for involvement in World War 2

Post-war Japan saw rapid economic growth. Some factors for this:

• ratio of exports to GNP remained constant
• fixed exchange rate (as mandated by Dodge Line) halted inflation and kept Japanese exports cheap
• Economic Planning Agency (EPA, organized under MITI) published 5-year plans that thoroughly communicated targets and changes to monetary/fiscal policy
• EPA monitored recession with diffusion indices rather than aggregated economic data, enabling them to more quickly react
  • typical Keynesian business cycle management theory
  • raise interest rates to cool down the economy until balance of payments was corrected (i.e. imports fell back to the target proportion)
• MITI boosted industrial economy (esp. coal, steel, shipbuilding)
  • plenty of examples exist for industries that defied MITI yet prospered (esp. automobiles)
• culture of lower salary with the expectation of a high bonus means that firms can react to a slowing business cycle by reducing the bonus

In the 1970s, the economic state worsened. Some factors for this:

• oil shocks hit aggregate supply and...
  • caused uncontrollable inflation, leading to the abandonment of the fixed exchange rate (and thereby also of Keynesian policy)
  • diminished returns on capital investment, slowing private investment
• government debt accumulated, crowding out private investment
• monetary market was liberalized, allowing private investment out of Japan
• firms attracted investment through keiretsu
  • publicly traded corporations with supermajority held by a parent holding company, effectively keeping full control
  • also keeps most shares off-market, stabilizing stock price
• MITI's full employment schemes led to many distribution systems featuring redundant middlemen

Viewing this era through a supply-side production function:

• rapid growth in all input factors but the economy as a whole saw most return from capital
  • in other words, Japan's economic growth was susceptible to capital shocks...
• "more than half of Japan's growth is attributed to 'technological progress and residuals'"

Viewing this era through a demand-side production function:

• real investment grew consistently
• the balanced budget (as mandated by the Dodge Line) protected private investment
• Korean War drove aggregate demand

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