Japan was also perceived as a sophisticated feudal society with a high culture and a strong pre-industrial technology. It was densely populated and urbanized. It had Buddhist “universities” larger than any learning institution in the West, such as Salamanca or Coimbra. Prominent European observers of the time seemed to agree that the Japanese "excel not only all the other Oriental peoples, they surpass the Europeans as well" (Alessandro Valignano, 1584, "Historia del Principo y Progresso de la Compania de Jesus en las Indias Orientales).
Early European visitors were amazed by the quality of Japanese craftsmanship and metalsmithing. This stems from the fact that Japan itself is rather poor in natural resources found commonly in Europe, especially iron. Thus, the Japanese were famously frugal with their consumable resources; what little they had they used with expert skill. Her copper and steel were the best in the world, her weapons the sharpest, her paper industries were unequaled.
From the time of the acquisition of Macau in 1557, and their formal recognition as trade partners by the Chinese, the Portuguese Crown started to regulate trade to Japan, by selling to the highest bidder the annual "Capitaincy" to Japan, in effect conferring exclusive trading rights for a single carrack bound for Japan every year. The carracks were very large ships, usually between 1000 and 1500 tons, about double or triple the size of a large galleon or junk.
That trade continued with few interruptions until 1638, when it was prohibited on the ground that the ships were smuggling priests into Japan.
Portuguese trade was progressively more and more challenged by Chinese smugglers on junks, Japanese Red Seal Ships from around 1592 (about ten ships every year), Spanish ships from Manila from around 1600 (about one ship a year), the Dutch from 1609, the English from 1613 (about one ship per year).
The Dutch, who, rather than "Nanban" were called "Kōmō" (Jp:紅毛, lit. "Red Hair") by the Japanese, first arrived in Japan in 1600, onbard the Liefde. Their pilot was William Adams , the first Englishman to reach Japan. In 1605, two of the Liefde's crew were sent to Pattani by Tokugawa Ieyasu, to invite Dutch trade to Japan. The head of the Pattani Dutch trading post, Victor Sprinckel, refused on the ground that he was too busy dealing with Portuguese opposition in Southeast Asia. In 1609 however, the Dutch Jacques Specx arrived with two ships in Hirado, and through Adams obtained trading privileges from Ieyasu.
The Dutch also engaged in piracy and naval combat to weaken Portuguese and Spanish shipping in the Pacific, and ultimately became the only westerners to be allowed access to Japan from the small enclave of Dejima after 1638 and for the next two centuries.
The beginning of the Edo period coincides with the last decades of the Nanban trade period, during which intense interaction with European powers, on the economic and religious plane, took place. It is at the beginning of the Edo period that Japan built her first ocean-going Western-style warships, such as the San Juan Bautista, a 500-ton galleon-type ship that transported a Japanese embassy headed by Hasekura Tsunenaga to the Americas, which then continued to Europe. Also during that period, the bakufu commissioned around 350 Red Seal Ships, three-masted and armed trade ships, for intra-Asian commerce. Japanese adventurers, such as Yamada Nagamasa, were active throughout Asia.
In order to eradicate the influence of Christianization, Japan entered in a period of isolation called sakoku, during which its economy enjoyed stability and mild progress.
Economic development during the Edo period included urbanization, increased shipping of commodities, a significant expansion of domestic and, initially, foreign commerce, and a diffusion of trade and handicraft industries. The construction trades flourished, along with banking facilities and merchant associations. Increasingly, han authorities oversaw the rising agricultural production and the spread of rural handicrafts.
By the mid-eighteenth century, Edo had a population of more than 1 million and Osaka and Kyoto each had more than 400,000 inhabitants. Many other castle towns grew as well. Osaka and Kyoto became busy trading and handicraft production centers, while Edo was the center for the supply of food and essential urban consumer goods.
Rice was the base of the economy, as the daimyo collected the taxes from the peasants in the form of rice. Taxes were high, about 40% of the harvest. The rice was sold at the fudasashi market in Edo. To raise money, the daimyo used forward contracts to sell rice that was not even harvested yet. These contracts were similar to modern futures trading.
During the period, Japan progressively studied Western sciences and techniques (called rangaku, literally "Dutch studies") through the information and books received through the Dutch traders in Dejima. The main areas that were studied included geography, medicine, natural sciences, astronomy, art, languages, physical sciences such as the study of electrical phenomena, and mechanical sciences as exemplified by the development of Japanese clockwatches, or wadokei, inspired from Western techniques.
In the Meiji period (1868-1912), leaders inaugurated a new Western-based education system for all young people, sent thousands of students to the United States and Europe, and hired more than 3,000 Westerners to teach modern science, mathematics, technology, and foreign languages in Japan (O-yatoi gaikokujin). The government also built railroads, improved roads, and inaugurated a land reform program to prepare the country for further development.
To promote industrialization, the government decided that, while it should help private business to allocate resources and to plan, the private sector was best equipped to stimulate economic growth. The greatest role of government was to help provide the economic conditions in which business could flourish. In short, government was to be the guide and business the producer. In the early Meiji period, the government built factories and shipyards that were sold to entrepreneurs at a fraction of their value. Many of these businesses grew rapidly into the larger conglomerates. Government emerged as chief promoter of private enterprise, enacting a series of probusiness policies.
In the mid 1930s, the Japanese nominal wage rates were 10 times less than the one of the U.S (based on mid-1930s exchange rates), while the price level is estimated to have been about 44% the one of the U.S.
Comparison of GDP per capita between East-Asian Nations and the U.S. in 1935:
|Country||GDP/capita, 1935$ (Liu-Ta-Chung )||GDP-PPP/capita, 1990$ (Fukao )||GDP-PPP/capita, 1990$ (Maddison )|
|Japan (excl. Taiwan and Korea)||64||1,745||2,154|
Rapid growth and structural change characterized Japan's two periods of economic development since 1868. In the first period, the economy grew only moderately at first and relied heavily on traditional agriculture to finance modern industrial infrastructure. By the time the Russo-Japanese War began in 1904, 65% of employment and 38% of the gross domestic product (GDP) was still based on agriculture, but modern industry had begun to expand substantially. By the late 1920s, manufacturing and mining contributed 23% of GDP, compared with 21% for all of agriculture. Transportation and communications had developed to sustain heavy industrial development.
During World War I, Japan used the absence of the war-torn European competitors on the world market to advance its economy, generating a trade surplus for the first time since the isolation in the Edo period.
In the 1930s, the Japanese economy suffered less from the Great Depression than most industrialized nations, expanding at the rapid rate of 5% of GDP per year. Manufacturing and mining came to account for more than 30% of GDP, more than twice the value for the agricultural sector. Most industrial growth, however, was geared toward expanding the nation's military power.
Beginning in 1937 with significant land seizures in China, and to a much greater extent after 1941, when annexations and invasions across Southeast Asia and the Pacific created the Greater East Asia Co-Prosperity Sphere, the Japanese government sought to acquire and develop critical natural resources in order to secure economic independence. Among the natural resources Japan seized and developed were coal in China (where production rose substantially under Japanese control, from 15 million metric tonnes in 1936 to 58 million metric tonnes in 1942), sugarcane in the Philippines, petroleum from the Dutch East Indies and Burma, and tin and bauxite from the Dutch East Indies and Malaya. Japan also purchased the rice production of Siam, Burma, and Cochinchina.
During the early stages of Japan's expansion, the Japanese economy expanded considerably. Japanese iron production rose from 3,355,000 tonnes in 1937 to 6,148,000 tonnes in 1943. Steel production rose from 6,442,000 tonnes to 8,838,000 tonnes over the same time period. In 1941 Japanese aircraft industries had capacity to manufacture 10,000 aircraft per year. From 1941 to September 1944 defence production (including airplanes and vessels) rose by 94%. Much of this economic expansion benefitted the "zaibatsu", large industrial conglomerates.
Over the course of the Pacific War, the economies of Japan and its occupied territories all suffered severely. Inflation was rampant; prices in Japan in 1944 were 3.25 times higher than in 1936. Japanese heavy industry, forced to devote nearly all its production to meeting military needs, was unable to meet the commercial requirements of Japan (which had previously relied on trade with Western countries for their manufactured goods). Local industries were unable to produce at high enough levels to avoid severe shortfalls. Furthermore, maritime trade, upon which the Empire depended greatly, was sharply curtailed by damage to the Japanese merchant fleet over the course of the war. From a fleet of 6,000,000 tonnes of shipping in 1941, Japan was reduced to one of 2,000,000 tonnes by 1944.
By the end of the war, what remained of the Japanese Empire was wracked by shortages, inflation, and currency devaluation. Transport was nearly impossible, and industrial production in Japan's shattered cities ground to a halt. The destruction wrought by the war eventually brought the Japanese economy to a virtual standstill.
See also Japanese post-war economic miracle.
World War II wiped out many of the gains Japan had made since 1868. About 40% of the nation's industrial plants and infrastructure were destroyed, and production reverted to levels of about fifteen years earlier. The people were shocked by the devastation and swung into action. New factories were equipped with the best modern machines, giving Japan an initial competitive advantage over the victor states, who now had older factories. As Japan's second period of economic development began, millions of former soldiers joined a well-disciplined and highly educated work force to rebuild Japan. Japan's colonies were lost as a result of World War II, but since then the Japanese have extended their economic influence throughout Asia and beyond.
Japan's highly acclaimed postwar education system contributed strongly to the modernizing process. The world's highest literacy rate and high education standards were major reasons for Japan's success in achieving a technologically advanced economy. Japanese schools also encouraged discipline, another benefit in forming an effective work force.
The mid-1960s ushered in a new type of industrial development as the economy opened itself to international competition in some industries and developed heavy and chemical manufactures. Whereas textiles and light manufactures maintained their profitability internationally, other products, such as automobiles, ships, and machine tools assumed new importance. The value added to manufacturing and mining grew at the rate of 17% per year between 1965 and 1970. Growth rates moderated to about 8% and evened out between the industrial and service sectors between 1970 and 1973, as retail trade, finance, real estate, information, and other service industries streamlined their operations.
Changing price conditions favored conservation and alternative sources of industrial energy. Although the investment costs were high, many energy-intensive industries successfully reduced their dependence on oil during the late 1970s and 1980s and enhanced their productivity. Advances in microcircuitry and semiconductors in the late 1970s and 1980s led to new growth industries in consumer electronics and computers, and to higher productivity in pre-established industries. The net result of these adjustments was to increase the energy efficiency of manufacturing and to expand so-called knowledge-intensive industries. The service industries expanded in an increasingly postindustrial economy.
Structural economic changes, however, were unable to check the slowing of economic growth as the economy matured in the late 1970s and 1980s, attaining annual growth rates no better than 4 to 6%. But these rates were remarkable in a world of expensive petroleum and in a nation of few domestic resources. Japan's average growth rate of 5% in the late 1980s, for example, was far higher than the 3.8% growth rate of the United States. Despite more petroleum price increases in 1979, the strength of the Japanese economy was apparent. It expanded without the double-digit inflation that afflicted other industrial nations (and that had bothered Japan itself after the first oil crisis in 1973). Japan experienced slower growth in the mid-1980s, but its demand-sustained economic boom of the late 1980s revived many troubled industries.
Second, and more important, was the level and quality of investment that persisted through the 1980s. Investment in capital equipment, which averaged more than 11% of GNP during the prewar period, rose to about 20% of GNP during the 1950s and to more than 30% in the late 1960s and 1970s. During the economic boom of the late 1980s, the rate still hovered around 20%. Japanese businesses imported the latest technologies to develop the industrial base. As a latecomer to modernization, Japan was able to avoid some of the trial and error earlier needed by other nations to develop industrial processes. In the 1970s and 1980s, Japan improved its industrial base through technology licensing, patent purchases, and imitation and improvement of foreign inventions. In the 1980s, industry stepped up its research and development, and many firms became famous for their innovations and creativity.
Japan's labor force contributed significantly to economic growth, not only because of its availability and literacy but also because of its reasonable wage demands. Before and immediately after World War II, the transfer of numerous agricultural workers to modern industry resulted in rising productivity and only moderate wage increases. As population growth slowed and the nation became increasingly industrialized in the mid-1960s, wages rose significantly. However, labor union cooperation generally kept salary increases within the range of gains in productivity.
High productivity growth played a key role in postwar economic growth. The highly skilled and educated labor force, extraordinary savings rates and accompanying levels of investment, and the low growth of Japan's labor force were major factors in the high rate of productivity growth.
The nation has also benefited from economies of scale. Although medium-sized and small enterprises generated much of the nation's employment, large facilities were the most productive. Many industrial enterprises consolidated to form larger, more efficient units. Before World War II, large holding companies formed wealth groups, or zaibatsu, which dominated most industry. The zaibatsu were dissolved after the war, but keiretsu—large, modern industrial enterprise groupings—emerged. The coordination of activities within these groupings and the integration of smaller subcontractors into the groups enhanced industrial efficiency.
Japanese corporations developed strategies that contributed to their immense growth. Growth-oriented corporations that took chances competed successfully. Product diversification became an essential ingredient of the growth patterns of many keiretsu. Japanese companies added plant and human capacity ahead of demand. Seeking market share rather than quick profit was another powerful strategy.
Finally, circumstances beyond Japan's direct control contributed to its success. International conflicts tended to stimulate the Japanese economy until the devastation at the end of World War II. The Russo-Japanese War (1904-5), World War I (1914- 18), the Korean War (1950-53), and the Second Indochina War (1954-75) brought economic booms to Japan. In addition, benign treatment from the United States after World War II facilitated the nation's reconstruction and growth.
Japan's economic growth in the 1960s and 1970s was based on the rapid expansion of heavy manufacturing in such areas as automobiles, steel, shipbuilding, chemicals, and electronics. The secondary sector (manufacturing, construction, and mining) expanded to 35.6% of the work force by 1970. By the late 1970s, however, the Japanese economy began to move away from heavy manufacturing toward a more service-oriented (tertiary sector) base. During the 1980s, jobs in wholesaling, retailing, finance, insurance, real estate, transportation, communications, and government grew rapidly, while secondary-sector employment remained stable. The tertiary sector grew from 47% of the work force in 1970 to 59.2% in 1990.
Unlike the economic booms of the 1960s and 1970s, when increasing exports played the key role in economic expansion, domestic demand propelled the Japanese economy in the late 1980s. This development involved fundamental economic restructuring, moving from dependence on exports to reliance on domestic demand. The boom that started in 1986 was generated by the decisions of companies to increase private plant and equipment spending and of consumers to go on a buying spree. Japan's imports grew at a faster rate than exports. Japanese postwar technological research was carried out for the sake of economic growth rather than military development. The growth in high-technology industries in the 1980s resulted from heightened domestic demand for high-technology products and for higher living, housing, and environmental standards; better health, medical, and welfare opportunities; better leisure-time facilities; and improved ways to accommodate a rapidly aging society. This reliance on domestic consumption also became a handicap as consumption grew by only 2.2% in 1991 and at the same rate again in 1992.
During the 1980s, the Japanese economy shifted its emphasis away from primary and secondary activities (notably agriculture, manufacturing, and mining) to processing, with telecommunications and computers becoming increasingly vital. Information became an important resource and product, central to wealth and power. The rise of an information-based economy was led by major research in highly sophisticated technology, such as advanced computers. The selling and use of information became very beneficial to the economy. Tokyo became a major financial center, home of some of the world's major banks, financial firms, insurance companies, and the world's largest stock exchange, the Tokyo Securities and Stock Exchange. Even here, however, the recession took its toll. In 1992, the Nikkei 225 stock average began the year at 23,000 points, but fell to 14,000 points in mid-August before leveling off at 17,000 by the end of the year.
With so much money readily available for investment, speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market. The Nikkei stock index hit its all-time high on December 29, 1989 when it reached an intra-day high of 38,957.44 before closing at 38,915.87. The rates for housing, stocks, and bonds rose so much that at one point the government issued 100-year bonds. Additionally, banks granted increasingly risky loans.
At the height of the bubble, real estate values were extremely over-valued. Prices were highest in Tokyo's Ginza district in 1989, with choice properties fetching over US$1.5 million per square meter ($139,000 per square foot). Prices were only slightly less in other areas of Tokyo. By 2004, prime "A" property in Tokyo's financial districts had slumped and Tokyo's residential homes were a fraction of their peak, but still managed to be listed as the most expensive real estate in the world. Trillions were wiped out with the combined collapse of the Tokyo stock and real estate markets.
With Japan's economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were increasingly directed out of the country, and Japanese manufacturing firms lost some degree of their technological edge. As Japanese products became less competitive overseas, the low consumption rate began to bear on the economy, causing a deflationary spiral.
The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low guarantee of being repaid. Loan Officers and Investment staff had a hard time finding anything to invest in that would return a profit. Meanwhile, the extremely low interest rate offered for deposits, such as 0.1%, meant that ordinary Japanese savers were just as inclined to put their money under their beds as they were to put it in savings accounts. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called "zombie businesses". Eventually a carry trade developed in which money was borrowed from Japan, invested for returns elsewhere and then the Japanese were paid back, with a nice profit for the trader.
The time after the , which occurred gradually rather than catastrophically, is known as the in Japan. The Nikkei 225 stock index eventually bottomed out at 7603.76 in April 2003 before resuming an upward climb.
Systemic reasons for deflation in Japan can be said to include:
The Economist has suggested that improvements to bankruptcy law, land transfer law, and tax laws will aid Japan's economy.
The Mises Institute recommends that government regulators allow natural market forces to correct for the monetary expansion of the 1980s. Ultimately, a return to an asset- or commodity-backed currency (such as the Gold Standard) is necessary.