High-speed growth and its discontents

import substitution

The process whereby a state attempts to achieve economic growth by raising protective tariffs to keep out imports and replacing them with indigenously produced goods.

see Table 14.1

Ikeda’s decision to concentrate on economic growth had a solid foundation, for the Japanese economy had begun to expand markedly from the mid-1950s onwards. In particular, this period had witnessed an increase in the productivity of heavy industry with a substantial rise in steel production and Japan becoming the world’s largest shipbuilder. In addition, under the protection of tariffs on foreign goods, Japan was able to make progress in import substitution by, for example, building up its automobile and electronic industries. Ikeda worked to stimulate growth by further stressing the importance of exports, thus leading to a huge increase in Japan’s trade with both the developed and the developing nations. As a result, his ambitions for Japan were met beyond anyone’s wildest expectations, for in the 1960s the economy grew at an average rate of 10.4 per cent per annum, overtaking those of France, Britain and West Germany.

Ministry of International Trade and Industry (MITI) The Japanese government ministry most closely associated with directing Japan’s economic growth.

Japan was able to achieve such rapid growth for a number of reasons. One of the most important was the way in which the government acted to create an economic environment that stimulated growth. A vital element in this strategy was the Ministry of International Trade and Industry (MITI), which utilized methods that had previously been adopted during wartime to direct national resources to stimulate growth in certain sectors of the economy, such as steel production and shipbuilding. For example, MITI used its control over the distribution of imported raw materials and foreign currency earnings to favour those sectors of industry that were seen as vital to future economic growth, and used tariffs and other mechanisms to protect Japanese companies.

Table 14.1 Japanese economic growth, 1955-65

Source: Johnson (1982, p. 237)

to ensure that public and private capital was made widely available to the key industrial sectors.

In retrospect, the political scientist Chalmers Johnson has characterized Japan as constituting a ‘developmental state’. What he means by this is that, in contrast to the American model of capitalism, where the government acts largely to ensure fair competition, and to the communist model, in which the state both plans and controls industrial growth, in Japan the state played a direct role in planning the development of a capitalist economy. As Johnson argues, perhaps the best way to conceptualize this is to say that Japan maintained the tools of a wartime economy during a period of peace.

However, as well as these domestic factors, Japan was assisted by the fact that the international environment favoured growth.

Another vital factor in Japan’s rapid growth was that, primarily for Cold War reasons, the United States was prepared to go to great lengths to nurture and sponsor its development within the Bretton Woods system. During the 1950s Washington continued to adhere to the view that Japanese economic growth was the one sure way to undermine the appeal of the Left within Japanese politics. Added to the belief that a strong Japanese economy would have a beneficial effect on Asia, this meant that it was very much in American interests to ensure that the Japanese economy remained healthy. In order to assist Japan economically the United States provided help in a number of areas. For example, it maintained its procurements for the American military throughout the decade, and eased Japan’s path into the world economy by sponsoring its entry into the General Agreement on Tariffs and Trade (GATT) organization in 1955. Moreover, Washington tolerated Japan’s use of protectionist restrictions, such as high tariff barriers and limits on foreign direct investment, to defend its growing heavy industry sector.

developmental state

A term coined by the political scientist Chalmers Johnson to refer to a state which plays a direct strategic role in planning the development of a capitalist economy. First used in relation to Japan, but subsequently utilized more broadly to refer to South Korea, Taiwan and the developing countries in South­East Asia.

Bretton Woods

The site of an inter-Allied conference held in 1944 to discuss the post-war international economic order. The conference led to the establishment of the IMF and the World Bank. In the post­war era the links between these two institutions, the establishment of GATT and the convertibility of the dollar into gold were known as the Bretton Woods system. After the dollar’s devaluation in 1971 the world moved to a system of floating exchange rates.

General Agreement on Tariffs and Trade (GATT) An international agreement arising out of the Bretton Woods conference covering tariff levels and codes of conduct for international trade. The progressive lowering of tariffs took place in a succession of negotiating rounds. In 1995 it passed its work on to the World Trade Organization.

Debating Japan's 'economic miracle'

The most volatile debate in regard to modern Japanese history has been that over the methods Japan used to achieve its remarkable economic growth after 1945. In the 1950s and early 1960s American political scientists and historians, such as Edwin Reischauer,suggested that the Japanese recovery was a testament to the enlightened guidance provided by the United States. Japan was accordingly presented as an example of how the modernization theories of economists such as W.

The nature of the analysis changed dramatically in 1982 with the appearance of Chalmers Johnson's highly influential book, MITI and the Japanese Miracle (Stanford, CA, 1982) in which he argued that the Japanese state, in the form of MITI, had been the key element in guiding the economy towards rapid growth. Japan, he argued, was a 'developmental state' that operated in a fundamentally different way to the American capitalist system. This thesis not only sparked off a new historical discourse, but also substantially influenced the contemporary debate in the United States about how it should deal with Japan and its ever-increasing trade surplus, and inspired a number of commentators to engage in 'Japan-bashing' books and articles. Gradually, a number of Johnson's contentions have been challenged. Writers such as Daniel Okimoto (1989) have demonstrated that MITI's record of 'admin­istrative guidance'was far from flawless, while others, such as Kent Calder (1993) and Mark Mason (1992), have put more emphasis on the role of the large industrial companies. Furthermore, as the economic history of the Cold War becomes subject to greater scrutiny, the manner in which the United States encouraged Japanese growth is once again being studied, most notably in Aaron's Forsberg's book America and the Japanese Miracle (Chapel Hill, NC, 2000). The idea that there is a monocausal explanation for Japan's success is thus not sustainable.

Moreover, the nature and intensity of the debate have changed over time. In the 1980s the Japanese model appeared as a threat to the United States and as a possible panacea to the development conundrum, and therefore became one of the central research areas in the field of political economy.

assist in the stabilization ofJapanese politics. As a result, Japanese automobiles and motorcycles began to enter the American market for the first time and in 1965 the United States suffered its first trade deficit with Japan.

In addition, Japan continued to benefit commercially from the Cold War tensions in the region. As Sino-American tensions escalated in the mid-1960s and the situation in South Vietnam began to worsen, the United States was keen to use Japan’s growing economic power to stabilize the region. In 1965 the United States brokered the opening of diplomatic relations between Japan and South Korea which previously had proved impossible owing to the lingering animosity between the two countries. This move, which in part was designed by Washington as a means of strengthening the Korean economy and reducing its reliance on the United States, opened a major new market for Japanese goods and investment. In addition, as the Vietnam War reached its peak, Washington encouraged Japan to expand its trade links with South-East Asia. Accordingly, in 1966 Japan extended credits to Thailand and Malaysia, helped with the restructuring of Indonesia’s debt burden and became one of the largest contributors to the newly established Asian Development Bank. These economic measures helped to stimulate the regional economy, thus benefiting Japanese exports. Japan also gained directly from the Vietnam War, for the fact that the United States was engaged in a major war in East Asia meant that once again the procurement tap flowed freely, with hundreds of millions of dollars being earned every year.

see Chapter 12

Japan’s economic success was thus achieved through the happy combination of a variety of domestic and international factors. However, such marked progress brought with it its own problems, particularly when it appeared to Washington that Japan was profiting from the Cold War but doing very little to contribute to the struggle against communism. This problem first arose during the Vietnam War. The Japanese government of Eisaku Sato, who replaced Ikeda in 1965, took an ambivalent attitude towards the war. On the one hand, Sato recognized that participation in the war would reopen the wounds that had appeared during the 1960 Security Treaty crisis, and that a low-key approach was therefore preferable. On the other, he acknowledged that the United States was, after all, the guarantor of Japanese security, and that he had therefore to prove Japan’s loyalty to its ally. Moreover, by the mid-1960s a new issue had arisen that required Japan to woo the United States — its desire to see the rapid retrocession of Okinawa. Sato therefore followed a cautious line in which he expressed his public support for the American cause in Vietnam while at the same time not committing Japan in any substantial way to assist the war effort.

This policy succeeded in keeping the peace within Japan, but it did not impress Washington and helped to create a backlash that was to have pro­found consequences. The difficulties began for Sato with the appearance in Washington in January 1969 of the new Republican administration of Richard Nixon. Almost from the outset Nixon created problems for Japan by redefining American policy towards East Asia. His aim, as set out in the Nixon Doctrine of July 1969, was to reduce American commitments to the region by forcing allies such as Japan to take greater responsibility for their own defence. At first this new initiative seemed to have its desired effect. In November 1969 Sato held a summit conference with Nixon in Washington in which the former declared that Japan saw the security of South Korea and Taiwan as essential to its own. In return Nixon agreed that Okinawa would return to Japanese sovereignty in 1972, but that the United States would retain its military bases.

This promising start was, however, derailed by another issue — trade. At the summit Sato committed Japan to introduce new voluntary limits on its textile exports to the American market, but on his return to Tokyo he quickly reneged on his promise. Feeling betrayed, President Nixon decided to engage in a demonstration of power in the two ‘Nixon shocks’ of1971. The first ‘shock’ came in July when he announced his intention to visit the PRC in the following year. In a calculated insult, Sato was only given one hour’s notice of this major reorientation of American foreign policy. This shift in American thinking towards China suited Japan’s purposes, for it brought the prospect of its finally being able to open trade links with the PRC, but the manner in which the announcement was made was disquieting. The following month saw a further surprise when, on 15 August, the anniversary of Japan’s surrender, Nixon declared that the dollar would devalue and that a 10 per cent surcharge would be placed on imports entering the United States. In one fell swoop this action brought down the Bretton Woods order that had helped to nurture Japan’s rise to prosperity and returned the international economy to a period of instability.

These two shocks made it clear that the United States was no longer prepared to ease Japan’s path, and that the latter could not expect prosperity without responsibility. The era in which Japan, as a result of its vital position in the Cold War, could afford to ‘hide under America’s skirt’ was thus drawing to an end. While the strategic alliance with the United States was not under threat, it was clear that Japan could and should do more to contribute to the stability of the international order by using its now enviable economic power.