News ID: 190186
Published: 0333 GMT April 03, 2017
Japan, from the ashes of Hiroshima to world’s third largest economy

Postwar economic reconstruction

Postwar economic reconstruction

By Sadrodin Moosavi

Section 1

World War II cost Japan 2,120,000 military lives and 480,000 civilians, totaling between 2,600,000 and 3,100,000 lives (nationalww2museum.org). According to some estimates, it also cost Japan $56 billion in 1945 dollars, which is equal to $588,269,950,118.33 in 2005 (caseagainstbush.blogspot.com). The damage to ports, residential areas, industries, agriculture and the infrastructure was huge. The Japanese government took several measures to reconstruct the war damages and improve its economy. The measures included reforms in many areas, which paved the way not only for the reconstruction of war damages, but also for Japan to emerge as a giant economy.

I visited Kyoto University in November and met Professor Junko Watanabe (PhD in Economics, teaching at the Graduate School of Economics and Faculty of Economics) to discuss the process of reconstruction and reforms in the postwar period. Professor Watanabe was kind enough to allot several hours to discuss the details of economic reforms. What follows is based on my interview with her.

 

Postwar economic recovery (1945-54)

 

It took Japan only a few years to stand on its feet again after reeling from the damages of World War II. For instance, Professor Watanabe stated, “Japan’s economy recovered rapidly after the devastation of World War II. For example, the growth rate from 1953 to 55 was seven percent.”

Economic development and growth in the postwar period was so amazing that in a period of about three decades, Japan was ahead of many great economic powers in its economic growth rate (Table 1). This great accomplishment was achieved due to several policies and reforms as well as the discipline, values and culture specific to the Japanese people.

The rising numbers show that the so-called “rapid growth period”

occurred largely between the mid 1950’s until the early 1970’s.

Removal of obstacles to production

As the economy picked up, the government realized that there was a gap between supply and demand, which also caused inflation. Usually, when the economy grows, and consumption, investment and exports rise, the supply side of the economy responds by increasing output.  However, in the short term, it is common for demand to outstrip supply. We call this situation ‘excess demand’. Hence, the government had to remove obstacles in the way of production to meet the demand, Professor Watanabe said.

Side by side, some measures were taken to control inflation, she said, hence, in the first place, it was decided to reduce the monetary base by reducing the amount of currency in circulation (liquidity), and also by placing restrictions on the amount of money that could be withdrawn from bank accounts.

However, such measures could not succeed without raising the productivity capacity and increasing the number of available goods in the market, she said.  Hence, the government introduced a priority-production system, in which financial and material resources were directed towards basic industries such as coal and steel that formed the industrial base. By increasing the output of coal and steel, it was thought that these resources would then be poured into other industries, stimulating the economy as a whole.

 “While this policy largely succeeded,” Watanabe added, “it didn’t help the problem of inflation, since it involved increasing finance to industry.”

The next policy measure was the so-called ‘Dodge Line’.  It is named after Joseph Dodge, the senior

economic adviser at General Headquarters, the Supreme Commander of the Allied Powers’ (GHA/SCAP), also known as ‘General Headquarters of the Allied Powers’ (GHQ) at the time. This policy fixed the exchange rate to the dollar at 360 yen.

 “While this policy is said to have brought Japan into the international trading system,” she said, “in order for it to work, Japan needed to keep a lid on inflation. To do so, Dodge restricted government expenditure by policies of restricting demand and introducing deflationary measures.”

In this way the Japanese economy reintegrated into the world economy. However, as it was a drastic policy, in the short term, the economy fell into depression, with many firms laying off workers. At this time, the government became more unstable, and the situation in general was turbulent, said the professor.

As if providence did not want Japan to face another hardship, international developments came to her rescue at that crucial juncture.

Professor Watanabe said that the boom in demand brought about by the Korean War rescued the Japanese economy.

 “In 1950, the Korean War broke out, and as Japan was geographically close to the war zone, orders for various types of military equipment and other goods for the American military came in very fast. Also, as a side-effect of the war, the world economy became a sellers’ market, and the Japanese economy moved back into positive growth. Japanese cotton-manufactured goods in particular expanded significantly. In this way, Japan escaped the severity of Dodge Line recession.”

Other measures were required to turn Japan’s economy into a world class one after the heavy devastations caused by the war. Serious reforms were required in the fields of capital and labor to complete other reforms.

 

Capital / Labor Input

 

Naturally, when the economy picked up in the postwar period, the demand for capital increased. Therefore, both the government and the private sector encouraged capital formation, she said.

The productive capacity of the steel industry had fallen to 53 percent of its level in 1938, and that of agriculture had fallen to 60%. All areas of the economy had been affected by American bombing, while many residential areas and other buildings were destroyed. So there was huge demand for new capital stock for reconstruction of houses, buildings, as well as capital goods.

“As the recovery got underway, the individual consumption level increased. In other words, there was a pressing need for more capital, which is an essential component of

economic growth,” the professor said. “Japan would slowly fulfill these needs over the coming years and the result was a sharp rise in the growth rate and economic boom”.

When the economy was on a recovery track, about seven million people returned to Japan from China, Korea and Taiwan: they included the newly-demobilized ex-soldiers and civilian repatriates.

Getting work and food in those days was extremely difficult; postwar Japan initially faced famine due to a severe food shortage. However, Japan seemed to be lucky, for as the economy was recovering, these ex-soldiers and civilian repatriates became an important labor force to contribute to the postwar recovery, the professor emphasized.

 

Iran Daily is grateful to Kyodo News for supplying the photographs for this series.

 

 (To be continued)

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