ASIAS FIRST GIANT: A BRIEF LOOK AT JAPANS DEVELOPMENT

Asias First Giant: A Brief Look at Japans Development

Abstract
If Amsden (1992) says that South Korea is Asias next giant then Japan is the first. Japans
economic development was unprecedented in history and set an example to other countries in the
Asia by showing that late development and catching up were more than theoretical concepts.
Japans explosive economic growth and its swift catch up with developed countries, along with
its overall improvements in efficiency (Krugman, 1994) raised much attention.
Much has been said about the Japanese way of economic development in the last several
decades, and one thing is clear that Japan charted its very own and unique route to development.
This paper outlines the main tenets of Japans development, and tries to answer, how Japan
became a developed economy in less than half a decade.
Section one makes a brief historical introduction, followed by a discussion about the initial
conditions, effects of institutional developments in Japan after the World War II, and the impact
of colonization. Section two outlines the effects of traditions in Japans economic development,
enters the discussion of establishment of the dual economy, and the role of government. Section
three is about the impact of trade on Japans development and how Japan achieved development
using its own resources. Section four summarizes the previous three sections and concludes the
paper.
Introduction
Historical aspect of development should always be an important part of the analysis, as it implies
path dependencies. Therefore this section starts with a short history of Japan, and later discusses
the initial conditions and institutional developments in post-war Japan.
Japan has ancient historical roots, however due to space limitations; we start from the Edo
Period. According to Hanley and Yamamura (1977) before Edo Period, Japan consisted of feudal
lords fighting over the control of the land, until Tokugawa Ieyasu became the dominant power,
and formed the Togkugawa Shogunate. Edo Period, lasted for more than two hundred and fifty
years, and Japan became a prosperous country.
Sakoku, the Period of Isolation, started in early 17 th century, to protect the Shoguns authority
over his domain, as the rapid spread of Christianity raised concerns about peoples loyalty to
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ASIAS FIRST GIANT: A BRIEF LOOK AT JAPANS DEVELOPMENT

Shogun (Hanley & Yamamura, 1977). During Sakoku, Japan was completely secluded from the
rest of the world, except for some low volumes of trade. Arrival of Commodore Matthew Perry
with his ships in late 19th century marks the end of Sakoku, and Japans opening up to the world.
Following the abolishment of Sakoku, Japan underwent political, economic, and cultural
transformations, and emerged as the Empire of Japan, after a process called Meiji Restoration.
Japans industrial revolution began during Meiji, and Japan grew as a country that is capable of
waging wars against world powers, such as China and Russia, after only couple of decades of
industrialization effort. Japan also colonized Manchuria, Korea, and Taiwan during this Period.
Meiji Period brought both safety and perils to Japan. Industrialization along with colonization of
Manchuria, Korea, and Taiwan ensured a steady flow of economic surplus to Japan, when
combined with its earned mandate over Pacific Islands North of Equator meant prosperity never
seen before.
However Meiji also brought fascism and statism to Japan. Especially after 1920s militaristic
tendencies of Japan heightened under military rule. Military with a large base of industrial
production under its control diverted almost all of the manufacturing effort to the massively
production of arms. Military government ensured a steady flow of arms by establishing close
relations with the industrialists of the era, Zaibatsu. Military rule lasted until the A-bomb
incidents in Hiroshima and Nagazaki, followed by the immediate surrender of Emperor of Japan
to Allied Powers.
Initial Conditions and Institutional Development
Initial conditions were far from being unfavorable for development in post-war Japan. Japan had
a sound industrial base, a battered yet qualified human capital, along with well-established
traditions and institutions. The industrialization effort starting in late 19 th century and into the
first three decades of the 20th century effectively gave Japan a good head-start in economic
development in Asia.
Japan became a world power quickly following its industrialization. A simple rice growing
economy grew out to be an industrial giant, which is able to produce one of the largest
battleships in early 20th century, Yamato. Japan did have a sound industrial base even after the
WWII; however the factories and equipment were stripped to be fitted for the arms production.
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ASIAS FIRST GIANT: A BRIEF LOOK AT JAPANS DEVELOPMENT

Industry in Japan only required a transformation effort to suit its factories towards the needs of
the public (Takafusa, 1981).
Even in the Edo Period, literacy and education in general was considered to be very important.
And not only in schools the education went on, but also the mother was responsible for the
proper education of her children. Education was also utmost importance in the Meiji Period and
resulted in a qualified human capital for Japan even after the devastation that WWII brought to
the country. Especially the management of large conglomerates, Zaibatsu, was responsible for
the early establishment of many Japanese firms that are well known today.
Developments that were undertaken during the fascist era, as an all-around militarization effort
required the full mobilization of resources and a capital friendly environment, established an
institutional base for the post-war development in Japan.
The institutional developments came with the full mobilization of resources for a militarization
effort were; stable industrial relations, close government-business relations, government
intervention and provision of a friendly environment for capital accumulation.
Stable industrial relations of labor and capital are considered to be one of the backbones of the
Japanese economic model for development. The foundations of the industrial relations in Japan
were seeded mostly in the late Meiji Period.
Full mobilization of resources resulted in the centralization of the economic processes. For this
to work military rule in Japan had to have a balanced and sustainable setting of industrial
relations. A full utilization of labor required the effective suppression of labor, starting with the
elimination of the Marxist leaders in labor unions. Industry-wide labor unions were dissolved
and replaced by the enterprise-wide unions, effectively reducing the concentration of labor
unions and focusing their effort. Suppression of the real wages was also necessary to keep the
inflation low during a full mobilization of resources. On the other hand, the government also
ensured that the income gap did not widen between the managers and the workers. Government
simply ordered the managers to cut down their own wages, contributing towards to the wage
suppression and therefore control of inflation. Finally, a life-time employment system was
introduced.

ASIAS FIRST GIANT: A BRIEF LOOK AT JAPANS DEVELOPMENT

Military government furthermore coordinated the entrepreneurial efforts of the Zaibatsu through
close relations, and by force if necessary, ensuring the full mobilization of resources towards
militarization of Japan. Military government also established industrialization, as a national goal.
Industrial Patriotic Association and others like it promoted industrialization all around Japan.
These developments contributed to the formation of a friendly environment for capital
accumulation in Japan.
Following the post-war occupation and eventual parliamentary democracy Japan inherited almost
all of the above institutions as they are, or in a different form, which contributed greatly to its
economic model of development. Life-time employment and enterprise-wide unions are also
adopted in post-war Japan, which formed the stable industrial relations during Japans catch up,
and also in considered to be contributors of Japanese firms development of competitive
advantages over American or European counterparts, especially after 1970s.
Close government-business relations were also carried over to the post-war Japan, as Zaibatsu
were simply replaced with Keiretsu. Zaibatsu were industrialist families in pre-war Japan, who
controlled the large conglomerates, which were operating almost in all important sectors.
Zaibatsu, due to their close relations with the military rule until 1945 were all trialed, and were
dissolved during the democratization of Japan by the Allied Powers. However, following the
departure of American military forces following the end of the Korean War, Japan started to
utilize the human capital of Zaibatsu in forming the new Keiretsu. These were a group of
holding companies, operating in several different industries, organized around a Main Bank.
Governments interventionist attitude towards the economy was also present in the post-war
Japan. Supported with the Keynesian economic policies of the era; Japanese government
effectively intervened in the general economy, and provided administrative guidance to Japanese
firms. In other words, Japanese government intervention went beyond the Western interpretation
of Keynes, as in big government and lender of last resort central bank, and actually oriented the
industrial effort of the whole economy through a coordinated group of policies.
It is important to notice in understanding the initial conditions, that Japan had the institutions in
place before it began its second journey of development. However, these institutions were not
inherited in post-war Japan without any change. Therefore some of the important institutional
changes should be mentioned.
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ASIAS FIRST GIANT: A BRIEF LOOK AT JAPANS DEVELOPMENT

Post-war Japan went through the so called democratization of Japan, by the Allied Powers.
Among many reforms, three of them are considered to be relevant for post-war economic
development of Japan: dissolution of Zaibatsu, land reform, and labor reform.
Especially during the military rule in Japan, Zaibatsu had grown the strongest. Close
coordination of Zaibatsu with the military rule is one of the main pillars under Japans military
ambition towards World War II. Dissolution of Zaibatsu was considered to be the last nail in the
coffin for Japans military ambitions after the destruction by the A-bomb.
Dissolution of Zaibatsu also meant that the almost feudal labor relations established between the
Zaibatsu and the labor were no longer current. It also meant the destruction of monopolies and
oligopolies in many sectors, and contributed to the competitive market forces in early years of
modern Japan.
Land reform helped farmers to acquire their own land from the landlords, and therefore resulted
in the decentralization of the agricultural sector. Rice production expanded, which also was
supported by land improvements and introduction of agricultural technology, created surplus in
the economy. Farmer income increased, which in turn created domestic demand for goods and
services.
Unionization skyrocketed in post-war Japan following the labor reform. Greater unionization
against smaller firms due the dissolution of Zaibatsu, increased the bargaining power of the
workers, and resulted in higher real wages, which also contributed to domestic demand.
These changes in institutions came as a result of US democratization of Japan, to eliminate
further militaristic ambitions, and to form a fortress of democracy in Asia, where a growing
threat of communism from Soviets were present. Institutional changes, in contributing to the
domestic demand in the short run, and in establishing a somewhat democratic system in the long
run, can be considered as crucial developments in post-war Japan.
Democratization of Japan, did effect the institutions in Japan, however compared to colonization,
institutions and traditions can be considered as unchanged. Japan was never colonized, and
therefore was able to go through the social transformations brought by the changing nature of
social relations gradually and willingly. As a result Japan did inherit most of its traditions and
institutions it had, and got rid of the ones that it think it did not needed, and incorporated the
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ASIAS FIRST GIANT: A BRIEF LOOK AT JAPANS DEVELOPMENT

ones that it kept to its development model. This is one of the reasons why Japanese model
economic development is unique.
Traditions, Dual Economy, and Role of Government
Traditions play a great role in Japans ability to conceive a unique model of economic
development. Japanese traditions are one of the main reasons, the way in which the economic
organization reestablished and evolved as the Japanese economy exploded in the cold war era.
Similar in the pre-war society, Japanese collectivism and paternalism is the main pillar, which
carries the complex institutional framework in post-war Japan. A good example is the family
system, representing the nucleus of the society, is led by the father.
Sarariman, the name of a typical working class father, clearly shows the role that the Japanese
society imbued the leader of the family. This does not necessarily mean that mother is not
important in the family; on the contrary, the mother has her own job to raise and educate the
children. Therefore a paternalistic society with established family system ensures a steady supply
of qualified human capital.
What is more important here is the fact that the importance of paternalism in understanding the
role of government in intervening the economy. One might argue that the government
interventions are less likely to be perceived as hostile in an economy where the society is
considered as collectivistic and paternalistic, due to the simple role the government imbued with,
the role of the father.
Paternalism as the limitation of ones own autonomy for the benefit of that same person has
influenced the context of the political economy of post-war Japan by simply through the respect
to the state and the elite.
Paternalism enabled the government intervention in the economy so seamless and effective,
because Japanese society had faith in the ruling class to steer the economy. Japanese society, due
to paternalism, accepted the rise of Keiretsu as long as the greater society has also benefited from
the economic growth and development, and indeed that was the case.

ASIAS FIRST GIANT: A BRIEF LOOK AT JAPANS DEVELOPMENT

Dedication to tradition also shaped the business organization, and government business
relations in post-war Japan. As mentioned in the previous section, Keiretsu have become the
main pillar of the economic development, similar to Zaibatsu, who were the building blocks of
the pre-war Japanese industrialization.
Keiretsu were a number of firms gathered around a Main Bank, through which the activities of
the firms were financed. Main Bank held the shares of the firms, and therefore had interest in the
success of these firms, and also firms held shares of other firms in the same Keiretsu, which in
turn created mutual benefits for every member of the Keiretsu to survive and thrive.
Business environment and the nature of government business relations, are all shaped by the
collectivist nature of the Japanese society, which had institutional consequences. This is most
apparent in the business environment where, Keiretsu were collaborating rather competing with
each other. More interestingly government approved Keiretsu cartels were formed all over the
country. A cooperative rather than a competitive business environment, contributed to the
accumulation of capital and the growth of Japanese economy.
There is more to the business environment in post-war Japan, as Keiretsu only represents one
side of the medallion. On the other side exists a traditional sector, where competitive pressures
are intense, and mostly consisting of small firms in large numbers who deals with labor intensive
work. If Keiretsu were the modern sector, Japanese dualistic economy is complete with the
existence of this traditional sector.
Traditional sector acted as the labor supplier the modern sector, as theorized by Lewis (1954), by
being the sub-contractors of the large firms. Competitive pressures were very high compared to
the modern sector, and this is considered to be the reason lying behind the fact that a greater
portion of inventions came from this sector. Traditional sector also provided the necessary supply
of intermediate goods to the larger firms, which is most apparent in the case of Japanese
automobile producers. As an example Toyota outsourced the production of certain parts to
smaller firms, as well as formed closer relationship with them, which even includes sending
engineers and investing in the operations or enlargement of these firms. In that sense, modern
sector and traditional sector both benefited from a mutual dependency.

ASIAS FIRST GIANT: A BRIEF LOOK AT JAPANS DEVELOPMENT

Government business relations also showed the features of a collectivist society, where
coordination of industries through state apparatus and the formation of councils, which brought
together different actors in the economy, ensured the open sharing of information and collective
decision making. Business secrets were not apparent, and even the attempt of hiding any sort of
relevant information were severely punished. This in turn, amplified the ability of the
government to effectively guide, and manage the economy.
Governments role in forming economic policy did have a contribution to the economic success
of Japan. Post-war Japan had the interventionist government as well, but this time the
government provided administrative guidance. In fact, Japanese government still guided the
firms about what to produce and how, including when to invest and divest, which had also
directed the firms towards activities with greater productivity, thereby guiding the structural
change of the Japanese economy.
Government intervention guided with economic policy in Japan were structured before the rapid
growth phases of the economy, and were secularly maintained in the face of radical changes
(Takafusa, 1981). This is apparent in the rapid and timely transformation of Japanese industries
from high energy consuming industries to ones with low energy consumption during the oil
shock of the 1970s.
Japanese government also formed economic programs, with alternating sets of either aggressive
or conservative goals, along with the suppression of military spending and obsessive
concentration of the national effort towards reconstruction of the economy being one of the
striking features of post-war Japanese development (Takafusa, 1981).
Developing on Its Own Resources and the Impact of Trade on Development
A striking feature about Japans economic development is the fact that Japan developed on its
own resources. And indeed Japan did not receive any foreign aid beyond the one it received from
USA right after the war, which was not even comparable to Koreas aid from US that was fifteen
percent of Koreas GDP, or any foreign direct investment, except in late 20 th century, long-after it
was industrialized (Akkemik, 2009). In a brief look, what Japan has accomplished is outstanding.

ASIAS FIRST GIANT: A BRIEF LOOK AT JAPANS DEVELOPMENT

However, this might not be the real nature of the Japanese development. In fact, I argue that
Japan did not go through a problem of finding financing for its development effort, due to the
fact that Japan did industrialized once, and had formed an industrial base prior to the WWII.
In fact, it can be argued that Japan did not industrialize on its own resources, in his first
industrialization attempt, and on the contrary has extensively utilized the savings of its colonies.
Manchuria, Korea, and Taiwan were colonies of Japan in Meiji Period, and especially Korea and
Taiwan only used for rice cultivation, effectively creating an external dual economy. Therefore
Japan was able to divert its economic effort from agriculture to industrialization investing the
savings from its colonies, which can be considered as an adequate explanation to the rapid
industrialization of Japan in the late 19th century. In a sense Japans first industrialization is very
similar to that of Britains in the 18th and 19th centuries.
Prior to the World War II, Japan was considering itself as a super power, and its economic power
was a proof to this claim. Therefore, considering the preservation of most of Japans industrial
base along with an educated population and established traditions and institutions, Japan only
had to revive its own potential, and continue its interrupted journey towards development
following the war.
However, one might undermine the Japanese unless the effect of institutional changes on savings
in Japan and Japanese governments efforts to coordinate these savings towards new investment
were also mentioned. As mentioned above, the land reform and labor reform resulted in the
increase in both farmer and worker incomes, which also increased domestic demand for goods
and services. Growing incomes also meant higher savings in the economy. Government also used
its power to direct these savings towards productive investments, through especially the use of
Japan Post Bank and Bank of Japan.
Finally, the effect of Korean War must be mentioned. As argued by Takafusa (1981) one of the
most important contribution to the Japanese economy, right after the WWII, came due to the US
requirements for Korean War. Japan was the main base for US, and also Japanese supplied the
US war effort, therefore acquiring large amounts of foreign exchange. Korean War resulted in a
greater utilization of Japans industrial base, and exposed the Japanese industrialist to
international competition, which in turn drove the new investment aiming to import technology
from abroad (Takafusa, 1981).
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ASIAS FIRST GIANT: A BRIEF LOOK AT JAPANS DEVELOPMENT

The meaning of trade for Japanese development is mainly based on its relation to technological
progress, corporate restructuring, and earning foreign exchange. Japan, after reconstruction of its
industries started to focus on exports to earn foreign exchange with the aim of upgrading its
production technology, even in the early phases of its second industrialization. Realization of the
international competition is one of the key factors which form the outward interest in Japan.
Corporate restructuring, that is the adoption of newer and better organizational and management
practices is also another motive for Japans outward orientation. As corporate restructuring
disrupts current practices and transforms the old organizations, productivity gains are achieved,
which translate into the overall higher productivity of the economy.
A combination of the pursuit of technological progress and corporate restructuring translates into
a conscious attempt for structural change of the economy by the Japanese. This is clearly pointed
out by the flying geese hypothesis by Kaname Akamatsu. Akamatsu (1962) clearly shows the
entrance, dominance, and departure of Japanese firms into product markets, as they gradually
make their way towards more complex products in time. This is a clear indication of the
structural change of the economy.
Conclusion
Japan is a great example of late development and catching up. Japans developmental model
inspired many Asian countries, some of which became the East Asian Tigers. In looking at
Japans developmental effort in the second half of the 20 th century, we have investigated the
history of japan as it has indications about some of the most important factors in affecting
Japans second industrialization; initial conditions, traditions, and institutions.
Building on tradition and its institutions, Japan directed its effort of industrialization with an
effective coordination of a highly competitive and innovative traditional sector with a adaptive
and effective modern sector, revolving around a stable industrial relations environment, under a
close examination and orientation by the government.
Japan, seem to have developed its own resources in its second industrialization effort, even
though there might be other arguments concerning Japans first industrialization, and its
colonization of neighboring countries. Regardless of other arguments, there are contributions of
international trade to Japans second industrialization, both in obtaining foreign exchange, and in
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ASIAS FIRST GIANT: A BRIEF LOOK AT JAPANS DEVELOPMENT

forcing structural change on the economy by the adoptions of new technologies and
organizational methods.

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ASIAS FIRST GIANT: A BRIEF LOOK AT JAPANS DEVELOPMENT

REFERENCES
Akamatsu, K. (1962). A historical pattern of economic growth in developing countries. The
Developing Economies, 1, 3-25.
Akkemik, K. A. (2009). Industrial development in East Asia : a comparative look at Japan,
Korea, Taiwan, and Singapore. Singapore ; Hackensack, NJ: World Scientific.
Amsden, A. H. (1992). Asia's next giant: South Korea and late industrialization: Oxford
University Press, USA.
Hanley, S. B., & Yamamura, K. (1977). Economic and demographic change in preindustrial
Japan, 1600-1868: Princeton University Press Princeton, NJ.
Krugman, P. (1994). The myth of Asia's miracle. Foreign affairs, 62-78.
Lewis, W. A. (1954). Economic development with unlimited supplies of labour. The manchester
school, 22(2), 139-191.
Takafusa, N. (1981). The Postwar Japanese Economy: Its Development and Structure:
University of Tokyo Press.

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