The Arc of Japan’s Economic Development Interest in Japan has shifted over the years, from a focus on the miracle economic growth of the post-war period through the 1970s, to a fascination with the appar- ent export powerhouse and then to a morbid curiosity into how and why Japan has slowed down. This core textbook provides an overview of the Japanese economy from the period before the Meiji Restoration, and its astonishing growth through- out the twentieth century, before conducting a thorough analysis of the contempo- rary scene and the implications of the recent financial crisis. The book begins by exploring Japan’s economic development from the 1600s to the end of the American Occupation, focusing on the circumstances behind the government’s preferences for intervention and guidance in economic affairs to achieve its objectives. It then traces the survival of this approach under the Ameri- cans. Separate chapters incorporate original research that illustrates the effects and gradual fading of that policy approach in the post-war era. Alexander reviews the foundations of modern Japan’s economic development and shows how the state’s central objective in the 1870s – to develop industrial capabilities to supply a modern military that could protect the country – led to government officials’ distrust of capitalism and a desire to guide economic affairs themselves, especially during war and post-war chaos. The author goes on to highlight how returns on capital declined for 100 years until 2000, how indus- try growth shifted to a new trajectory in the 1990s and how Japan’s economic characteristics grew to look more like those of the US. The final chapter projects the Japanese economy into the future, emphasizing the rise of diversity across regions, industries, companies and individuals. The research on industrial structure, capital returns and Japan’s similarities and differences from other countries breaks new ground. This book is particularly relevant to all those studying the contemporary economy of Japan, historical and economic development and economic structural change, among others, and will also benefit financial analysts. Arthur Alexander is a Visiting Professor of Economics at Georgetown Univer- sity and Johns Hopkins School of Advanced International Studies. The Arc of Japan’s Economic Development Arthur Alexander First published 2008 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 This edition published in the Taylor & Francis e-Library, 2007. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Routledge is an imprint of the Taylor & Francis Group, an Informa business © 2008 Arthur Alexander Printed and bound in Great Britain by TJ International Ltd, Padstow, Cornwall All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Alexander, Arthur J. The arc of Japan’s economic development/Arthur Alexander. p. cm. ISBN 978-0–415-70023-8 (hardcover) – ISBN 978-0-415-70024-5 (softcover) 1. Japan–Economic policy. 2. Japan–Economic conditions. I. Title. HC462.A4597 2007 338.952–dc22 2007015690 ISBN 0-203-79986-0 Master e-book ISBN ISBN10: 0-415-70023-X (hbk) ISBN10: 0-415-70024-8 (pbk) ISBN10: 0-203-79986-0 (ebk) ISBN13: 978-0-415-70023-8 (hbk) ISBN13: 978-0-415-70024-5 (pbk) ISBN13: 978-0-203-79986-4 (ebk) This book, as with everything else that I have written for more than 40 years, is dedicated to my wife, Elaine, the motivating spirit behind it all Contents List of figures viii List of tables xi 1 Japan’s place in the contemporary economic world 1 2 The nineteenth-century transformation of the Japanese economy 15 3 From Meiji to the Second World War: political and international developments 40 4 Economic developments in the first half of the twentieth century 48 5 Planning supplies for war 58 6 The American Occupation and the post-war economy 68 7 Bank-centred finance and corporate governance 92 8 Capital investment and rates of return 105 9 Structural change in the Japanese economy 122 10 The privatization of Japan’s public corporations 137 11 Is Japan different? Implications for economic growth 172 12 Economic prospects for Japan: moving to a new trajectory 188 Appendix 207 Notes 211 Bibliography 212 Index 221 Figures 1.1 Japan’s global ranking by GDP per person, 1950–2000 5 1.2 GDP in Japan and the United States, 1886–2005 6 1.3 GDP per capita, Japan and the United States, 1886–2005 8 1.4 Average annual growth rate of real GDP per capita over the preceding 10 years and GDP per capita, 1975–2005 10 1.5 Average annual 10-year growth rate (%) of real GDP per capita for Japan, the United States and Switzerland, 1960–2005 12 1.6 Gap between US year and Japanese year in which Japan first attained US level of GDP per capita 13 2.1 Elementary school enrolment rates, number of teachers in kindergarten through high school and number of college and university students, 1873–1920 29 2.2 Manufacturing and agricultural shares of net national product, 1885–1940 (%) 34 4.1 Business failures (suspension of business transactions with banks) and inflation rate (% change of GDP deflator, two-year average at annual rate), 1895–1940 50 4.2 Machinery production (000 1934–36 ¥ and number of employees, 1880–1940) 55 4.3 Military spending to GDP and military personnel to total population, 1876–1944 (%) 56 5.1 Ratio of dividends to current profits, 1923–44 (%) 64 6.1 Coal production, 1945–50, million tons, annual rate 79 6.2 Inflation rate, wholesale price index, six-month change at annual rate, 1945–51 (%) 85 7.1 Sources of corporate external funds, 1935–80 (%) 93 7.2 Number of banks, 1920–56 95 7.3 Shares owned by type of shareholder, Tokyo Stock Exchange, 1949–2005 (%) 97 7.4 Share of total assets accounted for by bank loans, paid-in capital and bonds (large manufacturing firms), 1960–2005 (%) 102 Figures ix 7.5 Mergers and acquisition in Japan, 1986–2005 (number of transactions) 104 8.1 Real GDP per capita and real capital per worker, Japan, 1965–92, and 59 other countries in 1990 106 8.2 Ratio of private sector capital stock to private sector GDP (1955–2005, 1990 prices) 107 8.3 Real returns on total aggregate non-residential capital (Japan: 1910–2004; US: 1914–2005) 108 8.4 Real returns on private sector non-residential capital (Japan: 1955–2004; US: 1930–2005) 109 8.5 Ratio of operating profit plus interest to total assets, large corporations, 1960–2006 111 8.6 Returns on Japan’s direct investment assets abroad and foreign assets in Japan, 1980–2005 112 8.7 Returns earned on Japan’s direct investment assets abroad and by large, domestic manufacturing companies, 1993–2005 113 8.8 Returns on US FDI in Japan, all American FDI and Japan’s FDI abroad, 1980–2005 114 8.9 Ratio of capital payments to private non-residential investment, Japan and US, 1932–2005 115 8.10 Capital share of national income (Japan, US; 1950–2005, %) 119 8.11 Returns on Japan’s non-residential capital stock with alternative depreciation and elasticity assumptions, 1910–2004 120 9.1 Cumulative industry percentage of GDP growth versus cumulative industry percentage of GDP (1970–2005, 42 industries) 123 9.2 Modified Gini coefficients of industry growth contributions over preceding 10-year period, 1980–2005 127 9.3 Cumulative industry GDP growth (annual rate) as percentage of base-year GDP versus cumulative industry share of GDP (1970–2005, 42 industries) 129 9.4 Cumulative industry percentage of total growth versus cumulative industry percentage of output, 1980–90 130 9.5 Size distribution of 42 actual and simulated industries (2005, billion 1995 ¥, log scale) 131 9.6 Modified Gini coefficients of industry growth distribution over preceding 10-year period, actual and simulated, 1980–2005 131 9.7 Standard deviation of 10-year change of detrended industry GDP (trillion ¥, 1980–2005) 132 9.8 Cumulative real cost reduction as percentage of base-year GDP versus cumulative industry GDP (1970–98, 82 industries, %) 133 9.9 Cumulative industry percentage of GDP growth versus cumulative industry percentage of GDP (Japan: 1988–98, 42 industries; US: 1985–95, 66 industries) 135