The Japanese Economic Miracle

The Japanese Economic Miracle

Key terms

keiretsu (vs. zaibatsu)

Growth rates:

Between 1955 and 1975 the Japan economy (GNP) grew 4,900%

this was not without precedent -- between 1931 and 1934 Japanese industrial output grew by over 80%

But postwar growth is remarkably steady:
- 1946-54 -- 10.8%
- 1955-60 -- 9.1%
- 1960-65 -- 9.8%
- 1965-70 -- 12.1%
Total size of Japanese economy
- 1955 to 1995 increased 10 times

What are the two inflections points of the postwar economy?

Non-policy factors

Technological innovation
- massive imports of new technology -- between 1950 and 1962 nearly 2,000 contracts for technical cooperation were signed (roughly 2/3 with American companies)
- Rapid technological catch up in steel, petrochemicals, electronics, and motor manufacturing
High rate of investment
- Japan had a remarkably high savings rate postwar -- as much as 18% of disposable income (US in same period is 7 or 8%)
- This is due in part to negative factors such as inadequate retirement programs and underdeveloped consumer financing
- But also to bonus payment system
Highly motivated labor force
- well-educated and growing
- postwar baby boom means demand does not outstrip supply of labor
Loans rather than equity
- In 1935 68% of industrial funds were raised from stock sales
- By 1960 this had fallen to 10%
- WHY? Korean War boom in demand comes during a capital shortage
  - distinctive feature of Japanese industry
  - dependent on loans rather than stock for capital
- Consequences of dependence on loans
  - Bank of Japan and other government agencies are lenders of last resort
  - Independence from shareholders
    - companies do not have to show immediate short term profits
    - they do not have to pay dividends
  - Accelerates the formations of keiretsu
    - when the conglomerates reform after the end of the occupation they are based around banks
    - six-top keiretsu:
    - Because companies are heavily leveraged -- they are very vulnerable to foreign takeovers -- which makes the gov. extremely protective
    - Because companies are heavily leveraged -- it is difficult to know what they are worth
Growth in world trade
- Japan has been getting a larger share of the world trade pie, but the pie has been growing rapidly
- Japanese economy more than doubles between 1960 and 1970, but US and Europe each grow by ~50%

Policy factors -- MITI

Key MITI targets

synthetic textiles (1953)
plastics (1955)
petrochemicals (1955)
automobiles (1956)

MITI strategies

foreign currency and Development Bank loans were authorized by MITI
- according to 1949 law -- any foreign currency earned by a Japanese company through trade must be turned over to gov account
accelerated depreciation allowances were granted
it was provided with land for plant a low cost
special tax breaks -- exemption of custom duties on imported materials
pushes QC, promotes work W. Edwards Deming (1900-93) and other quality control proponents

Japan is early adopter of Deming-style TQM
"Cease dependence on inspection to achieve quality. Eliminate the need for massive inspection by building quality into the product in the first place."
"Remove barriers that rob people in management and in engineering of their right to pride of workmanship"
"Put everybody in the company to work to accomplish the transformation. The transformation is everybody's job"
"Eliminate slogans, exhortations, and targets for the work force asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships, as the bulk of the causes of low quality and low productivity belong to the system and thus lie beyond the power of the work force."

Case study: Steel

Production target: in 1952 MITI calculated how much steel they thought Japanese industry would need
Capital costs: MITI estimates ¥42 billion
- private sector banking could provide about ¥31 billion
- so the Japan Development Bank planned to cover the remaining ¥11 billion
- once the government made it clear that it was backing steel, private banks became eager to lend, so the net government investment was much smaller
Technology: basic oxygen converter
- vastly reduced the time and labor requirements
- first deployed commercially in Austria in 1952
- MITI encouraged Japanese companies to license the technology
- Approved loans for the construction of massive new steel plants
Results:

Output of 7.5M metric tons in 1953
68M metric tons in 1968
Because of higher capital investment, Japanese labor productivity is double US

Case study: Autos

CHEAP AND TINY: Honda was primarily a motorcycle manufacturer, but beginning in 1962 it rushed to enter the car business in order to meet a MITI specified minimum threshold as a car maker. With little experience as a car maker, Honda produced tiny, motorcycle-like cars.

The first Honda sold in the US, was the N600 was produced in March 1967. It was a front-wheel drive two-door sedan with a 78.7-inch wheelbase and approximately 122 inches long. It was technologically advanced for its time. It had a mere height of 52.2 inches and a curb weight of 1213 lbs powered by a type S2, SOHC, 599 cc (36.553 cu in) air cooled 2 cylinder engine able to reach a top speed of 81 mph.

BREAKTHROUGH: Desperate to find a niche in a crowded market, Honda moved aggressively to development a low-pollution engine, the CVCC. Although conceived for the Japanese market, the environmental crisis in the US led federal fuel efficiency standards. In this new climate, the Honda CVCC engine won plaudits as the first engine to pass 1975 emission standards in the US. Because Honda meet environment standards by increasing fuel efficiency, its cars were also ideal for the post OPEC Oil Embargo market. This established a pattern still common in the industry: while US automakers complained that they could not meet pollution and fuel efficiency standards, Honda representatives bragged that they already had.

AFFORDABLE LUXURY: In the 1980s, Japanese car makers began to produce more luxurious cars, anticipating competition from Korea and China. Basic models became bigger and plushed sophisticated: the 2009 Civic was more than twice as heavy (2600 lbs) and the engine is nearly three times as large (1799 cc) as the N600.

Many Japanese car makers began luxury lines: Acura (Honda, launched 1984), Lexus (Toyota, launched 1989), and Infiniti (Nissan, launched 1989).

The Rupture of the 1970s

Arab Oil Embargo (energy prices soar)
End of Bretton Woods (Japanese labor is no longer cheap)
- 1970 $1 US = ¥360
- 1975 $1 US = ¥297
- 1980 $1 US = ¥227
- 1985 $1 US = ¥238
- 1990 $1 US = ¥149
- 1995 $1 US = ¥94
- 2000 $1 US = ¥108
US recognizes PRC instead of Taiwan

US does NOT give Japan advance warning
Does the US have a new capitalist ally in East Asia?

Trade friction

Japan's economy is too big for US to absorb exports
US begins demanding "voluntary" limits on exports

How does the Japanese economy survive?

Old industries adapt
- Japanese car makers move "upscale" with higher profit margins
- e.g. Honda develops Acura, Toyota develops Lexus
New industries and products

"Walkman" personal stereo
VCR players
Game consoles

The Ruptures of the 1990s

Economic collapse
- Plaza Accords (1985) -- intervention to depreciate US$ to relieve trade deficit
- 1987 -- Black Monday in NYSE
- 1989 -- Japanese real estate bubble bursts -- prices had increased over 40% in 1985 to US$25,000/sq.m --
- Banking system lend based on real estate values
- Liquidity trap and "zombie banks"
Death of Shōwa emperor
Tiananmen
Seoul 1988 Olympics -- emblematic of rise of Korean competition