News ID: 190316
Published: 0535 GMT April 05, 2017
Japan, from the ashes of Hiroshima to world’s third largest economy

Postwar economic reconstruction

Postwar economic reconstruction

Section 3

By Sadrodin Moosavi

The low-growth/maturity phase: 1973-85


The first oil shock: 1973-74


In November 1973, during the Middle East War (Arab-Israeli War), OPEC (Organization of the Petroleum Exporting Countries) members took the drastic decision to raise oil prices by 400 percent, and also to sharply reduce oil supplies.

It was a political decision to use oil as a diplomatic weapon, but its effects of the oil shock on the world economy were to cause ‘stagflation’ in many countries.

Even in Japan, the impact of the oil shock brought an end to the era of rapid economic growth.

In 1973, many industries relied on oil as a basic raw material (in particular, Japan had a high reliance on Middle Eastern oil at that time), the increase in the price of oil raised the prices of many other goods. 

In 1974, a ‘crazy’ inflation spiral had developed, and people rushed to stock up on basic necessities in advance. This type of ‘herd mentality’ led to a famous incident where a rumor that toilet paper was in short supply led housewives to rush to the supermarkets. This mass purchasing actually caused toilet paper to run out temporarily.

Usually, when there is a recession, prices of goods fall, and deflation sets in, while in an economic boom prices rise, and inflation occurs. For this reason, generally in a recession a government would use Keynesian-style economic measures to increase demand in the economy, without worrying about inflation.  

“However, the combination of stagnation and inflation together meant that conventional economic policies could not be used. Therefore, in the 1970’s, Japan along with other developed countries tried to beat recession by looking at the structural problems in the economy.”

In 1974, the Japanese economic growth rate turned negative for the first time in the postwar years.  Even so, from the latter half of the 1970’s, compared to the advanced industrialized countries, Japan would go on to show both high productivity, and a high growth rate. The Japanese economy showed great resilience and flexibility in response to the oil shocks.  


The rate of Japan’s economic growth

Adapting to the oil shock (Cost reduction through ‘Corporate effort’ etc.)

The oil shock had its impact on many developed and developing economies. Without any doubt it had its impact on Japan’s as well. How was Japan able to adapt to the oil shocks? Professor Watanabe mentioned the following measures that were adopted by the Japanese government to cope with the 1973 oil shock.

  1. Change in industrial structure

  Japan used the oil shock of the 1970s as an opportunity to shift from industries that consume vast quantities of oil, such as the chemicals industries, to those such as automobile manufacturing that are based around assembly manufacturing.

  1. The development of energy-saving technology resulting in a fall in dependence on oil

Each major industry adopted an ‘energy-saving’ policy to try to develop technology and techniques that conserve as much as possible on raw materials such as oil.

It was also a response to the pollution problems that high usage of oil and other raw materials had caused in the rapid growth period of the 1960’s. Japan’s energy-saving technology at this time was the most advanced in the world. To date, as part of the efforts to stop environmental degradation, these technologies are being exported abroad to countries such as China.