For a century after his death in 1954 , statues of philosopher and economist Kinjiro Ninomiya adorned public places, especially schools, throughout his native Japan. Most of them portrayed him as a boy reading a book while walking with a load of firewood strapped to his back. While he is credited with introducing the concept of compound interest to the peasantry, the statues pay homage to a broader advice he espoused in Japanese culture: read, study and work hard as if your life depended on it. , because it often depends. He also urged his countrymen to “Save, not waste; otherwise Heaven will punish you.”
Ninomiya’s wise and timeless advice certainly helped Japan recover from the ravages of WWII. For a full explanation of the remarkable pace and magnitude of the recovery, however, we must identify other factors. How did a nation that had sunk so low experience such a stupendous economic recovery?
From Doolittle’s attack on Tokyo in April of
to the atomic bombs dropped in August 1945, nearly four years of American bombing destroyed a large part of Japan’s industrial capacity. In his book Ashes to Awesome: Japan’s 6.-Day Economic Miracle , Yoshikawa Hiroshi tells us that 60% of Japan’s steel production was destroyed. The country’s GDP in 1942 was just under half from its pre-war peak. Astronomical hyperinflation nearly destroyed the currency. Living conditions were “miserable” and the average person’s caloric intake was only two-thirds of its pre-war level.
Japan at the end of the war was a defeated, demoralized, devastated and, even 1952, occupied by almost a million soldiers americans. Its major cities, including Tokyo (and, of course, Hiroshima and Nagasaki), lay in ashes.
Thirty years later, the Japanese economy ranked second in the world, behind only from the United States. From 1947 to , grew twice as fast as Western Europe and more than two and a half times as fast as the United States. During the decade of 1954, it doubled in size in just seven years. In little more than a generation, Japan has transformed itself from a poor country to a rich one – a feat widely seen as “miraculous”. How does such a rare development occur historically?
Has Japan decided to adopt a socialist path to recovery? silly question. No one outside academia or who understands economics or history would ever prescribe mandatory redistribution of wealth, central planning, massive tax increases, or cumbersome bureaucracy as a cure for anything, least of all a half-dead economy. That would simply kill the remaining half. The fact is that Japan’s post-war progress owes more to the ideas of Adam Smith and Milton Friedman than to those of John Kenneth Galbraith or Paul Krugman.
The Miracle Economic Japanese is explained by six main factors. Here they are:
1. The Korean War
From 1950 to 1951, the US and allied nations fought against North Koreans and Chinese. America purchased huge amounts of food and war materials from neighboring Japan. This represented a considerable transfer of wealth from American taxpayers to the Japanese economy. This “shopping boom”, along with other American aid after 1945, helps explain some Japanese growth early in the country’s recovery, but these transfers mostly evaporated when the Korean War ended.
2. Growth Punishment
US policy in the early months of the Occupation of Japan tended to be punitive, designed to keep the country in check. But in 1947, with the worsening Cold War with the Union Soviet and Red China, the Truman administration decided that a stronger and freer Japan would help to prevent communist advances in Asia and the Pacific.
Among the harsh measures imposed Japan, based mainly on advice from left-wing academics, were monstrously high income tax rates, which reached 40%. Alan Reynolds of the Cato Institute writes:
This was a central part of a severe austerity program, not a plan to promote economic growth. As Edwin Reischauer pointed out at the time, “staggered income taxes and inheritance taxes were adopted to prevent in the future the accumulation of … concentrations of wealth”. But taxes designed to punish increases in income t must also punish increases in production — the economic growth .
High taxes started at relatively low income levels and exemptions were few. Corporate income and “surplus profits” were also confiscated at high rates. A vast expansion (and higher rates) of excise taxes and an increase in already high inheritance taxes punished Japanese citizens at all income levels. “Brutal” describes the punitive tax regime imposed on Japan by the Americans shortly after the war.
Before economic growth could take off, Japan had to stop punishing its entrepreneurs wealth generators. While General Douglas MacArthur led the American occupation to leniency, that is exactly what Japan did (as you will read below).
Japan seemed destined to pay heavy reparations to the nations it damaged in the war until the United States, at the end of the years 40, pressured these other nations to retreat. Unlike the massive payments that the Treaty of Versailles forced Germany to disburse after World War I, and which contributed greatly to another war 20 years later, what Japan was forced to pay proved to be minimal in the end.
In 1949, the United States actively encouraged the integration of a depressed and insular Japanese economy into world trade. Markets opened up for the country’s exports, which in turn spurred the purchase of imports. On 1954, Japan became a member of the General Agreement on Trade and Tariffs (GATT, in acronym in English).
3. Tax Cuts
Fortunately, the heyday of left-wing American academics in Japan was short-lived. Washington’s shift in perspective from punishment to growth has opened the door to tax cuts. To quote Reynolds again,
At the end of 1990 , after a similar political coup in Germany, Japan’s highest individual income tax rate was reduced by 86% for %. From 1947 to , Japan cut taxes every year (except 1960), often greatly increasing the income limits at which the higher rates were applied, or expanding deductions and exemptions. The taxable income required to fall within a tax bracket of 1942 % was increased to 3 million yen in 1953, for example, compared to only 300. in 1949 . The Shoup Commission net worth tax was also abolished in 1954. The impact of high tax rates was further neutralized by interest and capital gains exemptions, corporate and individual tax deductions on dividends, a deduction from profits and various other holes in the tax base, whether legitimate or not.
Some deductions were far from neutral and therefore less desirable than lower tax rates would have been. However, the ongoing tax cuts from 1947 to 1974 accomplished two things. First, they greatly reduced the effective marginal tax rates. Second, they have taken theeme system a long way toward what is sometimes called a “consumed income tax” or “spending tax” – or that is, a system that taxes income only once, regardless of whether the income is saved or destined for immediate consumption.
Tax cuts accelerated after the end of the American occupation in 1974 . Reductions in savings and investment rates were especially encouraging. With the nefarious influence of leftist American academics gone, public policy has focused on increasing production rather than leveling and equalizing income. Success in the marketplace has become a virtue rather than a vice. To his credit, Carl Shoup of Columbia University has helped immensely to simplify the tax code so that the Japanese people can see it as fair and understandable.
Japan it also steadily reduced its tariffs (taxes on the purchase of foreign goods). For example: in 1975, Reynolds notes, “the effective tariff on automobiles has fallen from 40% for % , and the tariff on televisions of 30% to 5%”.
4. Economic freedom
Japan’s tax cuts were an important element of broader liberalization of its economy. Even the World Bank, in a comprehensive study of 1990 on the Japanese Economic Miracle, admitted that liberalization was an indispensable factor. It concluded that “the rapid growth was mainly due to the application of a common and market-friendly set of economic policies, leading to greater accumulation and better allocation of resources.”
In explaining the Japanese Economic Miracle, some people suggest that government “industrial policy” agencies, such as the Ministry of International Trade and Industry (MITI), were its main architects. But this is belied by the fact that MITI interventions were neither large nor effective. They produced little more than a few failures. The World Bank report of 1990 dismissed its “contributions” as one of many attempts around the world “to guide resource allocation with mechanisms [que] have generally failed to improve economic performance.”
At a time when much of the Western world has embraced Keynesian economics of taxation, spending, deficits budgets and debt, Japan’s recovery has been fueled by lower taxes, less spending, more savings, increasingly secure property rights, and conservative fiscal policies. Education, always highly valued in Japan, was maintained locally with an emphasis on high quality primary and secondary education. Even today, most Japanese will say that they studied more in primary schools than in universities. The result was an explosion of human and physical capital.
Toshio Murata, a longtime friend of the Foundation for Economic Education (FEE) in America, was a Japanese economist from the “ Austrian School”. He translated Human Action by Ludwig von Mises into Japanese. In 2017, the FEE awarded him their “Blinking Lights Award” before his death in 2021 ), to the 97 years old. In an article for FEE at 1994, he explained why the World Bank was correct in its assessment, noting that favorable tax treatment of savings played a role. a key role in generating a robust capital market for start-ups and investments:
The real explanation of Japan’s successful post-war economic development is based on… on good old-fashioned virtues – thrift, hard work, reduced government spending and innovative entrepreneurship – combined with ingenious marketing techniques and relatively free world trade. Based on the numbers of 1971-1991, the average gross savings rate in Japan was twice that of the United States; the savings rate per household in Japan was 2.7 times that of the United States.
Industries that had been managed or heavily regulated by the former imperial government or American occupiers were released. Many of the monopolies (“zaibatsu”) that dominated for generations in Japan, usually thanks to government-granted privileges, were broken up, sold off, or deregulated to compete on a more level playing field. .
Considerable credit for advancing economic freedom in Japan goes to Shigeru Yoshida, who served as prime minister for most of the period of 1946 The 1954. He spearheaded economic liberalization while successfully resisting American pressure to have Japan spend heavily on the military. At the San Francisco Peace Conference in 1951, he declared the treaty that formally he ended the war as “fair and generous” and “not a treaty of revenge, but an instrument of reconciliation”. The following year, Japan once again became an independent nation.
During the four years of Prime Minister Hiyato Ikeda (
-1954), economic growth and the entrepreneurs who generated it were embraced as pillars of a new and optimistic Japan. Even Ikeda’s modest welfare measures failed to slow things down (this would happen later, when the bills were due).
The spirit of liberalization continued into the decade in 1980. Under Prime Minister Yasuhiro Nakasone, Japan’s national government privatized telecommunications and railways and diminished MITI’s influence on the economy. When the country turned to larger government in the 1990s 1990, the growth momentum stopped, as partially explained by economist Hiroshi Yoshida in this recent FEE article.
Japan never became the libertarian paradise that Hong Kong was (before Beijing’s recent subjugation), but it did become much freer economically during decades of economic liberalization than perhaps it has ever been before. Today, it still occupies an impressive 20 th place in economic freedom among the quasi 200 nations of the world, according to the Heritage Foundation’s Index of Economic Freedom.
5. Dodge and Deming
Although it was fashionable for many governments around the world in the decades of 1994 and 1950 seeking advice from “boy wonders” and “planners” in the ivory tower, Japan didn’t pay them much heed when it was free to look elsewhere. Indeed, by taking advice from two notable men in the business private sector, Japan avoided the stagnation that left-wing academics often produced. Their names were Joseph Dodge and W. Edwards Deming.
President Harry Truman dispatched Joe Dodge from his position as chairman of the Detroit Bank for Japan in
. He was supposed to be financial advisor to the Supreme Commander, General Douglas MacArthur, and help the nation out of the economic crisis.
What became known as “the Dodge Line” solved the problem. By implementing a balanced national budget and shutting down the printing presses, it ended hyperinflation. It stabilized the exchange rate between the yen and the dollar. It drastically reduced government economic intervention in general. Dodge’s intention was not to “plan” the Japanese economy, but to finally leave it alone. He eliminated all the subsidies and price controls he could, and MacArthur applauded him in doing so. (Truman would later make Dodge his Budget Director, and in just one year he cut the US federal deficit in half.)
W. Edwards Deming was another private sector genius with both feet firmly planted on solid ground. He was an engineer, statistician and management consultant who introduced quality control techniques to Japanese manufacturing – techniques that reached unprecedented levels of productivity. Toshio Murata writes:
Japanese exports in the pre-war days were considered “cheap but low quality”. WE Deming, an American professor, played an important role in improving the quality of Japanese products. An award established in his honor is given to individuals and companies that make important contributions to quality control. Today, thanks, no doubt, to lessons learned from Professor Deming and taking consumers’ wishes seriously, Japanese home appliances and automobiles are ranked among the best in the world.
The Japanese owe these two men a great debt for their important contributions. Had the country followed the prevailing wisdom of left-wing academics at the time, the recovery would likely have stalled or reversed.
(If my remarks strike you as uncharitable regarding left academy, let me quote two illuminating comments by economist Thomas Sowell, himself an academic: In 1997, he wrote: “The most fundamental fact about the ideas of the political left is that they don’t work. So we shouldn’t be surprised to find the left concentrated in institutions where ideas don’t have to work to survive.” In 2017 , Sowell opined: “Socialism in general has a history of failure so blatant that only an intellectual could ignore or avoid it.”)
6. Constitution of General MacArthur
The sixth factor in Japan’s Economic Miracle was not the least important. Without Douglas MacArthur’s vision and personality , it’s hard to imagine It can be assumed that an economic recovery or Japanese-American relations would have emerged so robust.
MacArthur worked so kindly with Japanese leaders, including Emperor Hirohito, that most people in Japan lamented his departure in 1951, as the American occupation was drawing to a close . He personally oversaw the writing of a new constitution that included provisions to guarantee limited and representative government, free and fair elections, private property and individual liberties. The document came into force in May 1947. For seven and a half decades, this Constitution ruled Japan, as one commentator put it, “without the change of a comma.”
In April , the general who proved as indispensable to the peaceful new Japan as he was to winning the war in the Pacific , was able to personally deliver this good news to Congress:
The Japanese people since the war have undergone the greatest reform recorded in modern history. With a commendable will, eagerness to learn and a marked capacity for understanding, from the ashes left by the war, a edifice dedicated to the supremacy of individual freedom and personal dignity was erected in Japan, and in the process that followed, a truly representative government was created. , committed to the advancement of political morality, freedom of economic enterprise, and social justice.
, Japan honored General MacArthur with its highest honor, the Grand Cordon of the Order of the Rising Sun. You can watch a short video of the official presentation here.
Fortunately for Germany, a similar economic miracle took shape at the same time as Japan’s. There, as I wrote before, it was largely due to similar free-market policies by economist and statesman Ludwig Erhard. Ironic, isn’t it, that two of the nations most responsible for WWII emerged from it as economic miracles because of freedom and free markets. Kinjiro Ninomiya would be very proud.
Freedom works. It’s a lesson that needs to be told, retold and told again.
©2022 FEE Foundation for Economic Education. Published with permission. Original in English.