Japan's postwar economic miracle

The first postwar years were marked by hunger, black markets and inflation. The occupation's reforms – land reform, the dissolution of the zaibatsu holding companies, the legalisation of unions – reshaped the economy. In 1949 the American banker Joseph Dodge imposed a strict stabilisation programme, the Dodge Line, which balanced the budget, ended inflation and fixed the yen at a single exchange rate against the dollar. The Korean War of 1950–1953 then brought a flood of American procurement orders for vehicles, textiles and equipment that revived industry. By the mid-1950s output had surpassed prewar levels, and the government's Economic White Paper of 1956 declared that 'the postwar period is over'.

From 1955 Japan entered a period of growth without precedent. Successive booms, named after mythical emperors and deities – the Jinmu, Iwato and Izanagi booms – signalled that each was greater than anything before. Heavy and chemical industries expanded along the Pacific coast from Tokyo to northern Kyushu, where new coastal industrial complexes combined steelworks, refineries and petrochemical plants. Prime Minister Ikeda Hayato's Income Doubling Plan of 1960 promised to double national income within ten years, a goal achieved in about seven.

The 1964 Tokyo Olympics, together with the opening of the Tōkaidō Shinkansen and urban expressways, showcased the new Japan. In 1968 Japan's gross national product overtook that of West Germany, making it the second-largest economy in the non-communist world. Consumers moved from the 'three sacred treasures' of the 1950s – black-and-white television, washing machine and refrigerator – to the 'three Cs' of the late 1960s: car, colour television and air conditioner ('cooler').

Economists point to several factors. Households saved a high share of their incomes, and banks channelled these savings into industrial investment. Firms imported technology through licences and improved it, while a well-educated workforce moved from agriculture into manufacturing. A stable exchange rate and open American markets favoured exports, and Japan spent little on defence.

The role of government is debated. The Ministry of International Trade and Industry (MITI) and the Ministry of Finance guided investment, allocated foreign exchange and technology licences and promoted strategic industries – an approach the political scientist Chalmers Johnson called the 'developmental state'. Other scholars stress market competition and private enterprise, noting that some of the most successful firms, such as Honda and Sony, grew with little state support.

The large company of the high-growth era was built on what observers called the three pillars of Japanese employment: lifetime employment for core male employees, seniority-based wages and enterprise unions organised by company rather than by trade. Annual spring wage negotiations (shuntō), begun in 1955, spread the gains of growth. Companies were linked in keiretsu groups through cross-shareholdings, main banks and long-term supplier relations; the successors of the zaibatsu – Mitsubishi, Mitsui, Sumitomo – re-formed as bank-centred groups.

Manufacturers developed methods of quality control and production that later influenced industry worldwide, above all the Toyota Production System with its just-in-time delivery and continuous improvement (kaizen).

Growth transformed daily life. Millions of young people left farming villages for factories and offices, often travelling on special trains for graduates of middle school. Farming declined from employing around two fifths of the workforce in the early 1950s to a small minority by the 1970s. Large public housing estates (danchi) rose in the suburbs, the nuclear family with a salaried husband and a full-time housewife became the social model, and university enrolment rose rapidly. By the 1970s most Japanese considered themselves middle class.

Rapid industrialisation caused severe environmental damage. The four great pollution diseases became national scandals: Minamata disease, caused by mercury discharged by a chemical company into Minamata Bay in Kumamoto Prefecture and officially recognised in 1956; a second outbreak of Minamata disease in Niigata; itai-itai disease from cadmium in Toyama; and Yokkaichi asthma from petrochemical emissions in Mie. Victims' lawsuits and citizens' movements forced change: the 'Pollution Diet' of 1970 passed fourteen environmental laws, and the Environment Agency was created in 1971.

The end of the fixed exchange rate in 1971 and the first oil shock of 1973 ended high-speed growth; in 1974 the economy shrank for the first time since the war. Japan adjusted quickly, saving energy and shifting towards cars, electronics and machinery, and grew at a steadier four to five per cent a year until the late 1980s. Exports led to trade friction with the United States and Europe over textiles, steel, televisions, cars and semiconductors, and the American sociologist Ezra Vogel's book Japan as Number One (1979) captured Western fascination with Japan's success.

After the Plaza Accord of 1985 the yen rose sharply. Low interest rates fed a speculative bubble in shares and land that peaked at the end of 1989. Its collapse in the early 1990s ended the postwar growth story and opened the long stagnation of the Heisei era.

The postwar miracle made Japan one of the richest societies in the world and a model for the later development of South Korea, Taiwan and China. Many of its institutions – lifetime employment, keiretsu, main banks – were weakened after 1990 but still shape Japanese business. It is often compared with West Germany's Wirtschaftswunder: both countries rose from defeat through industrial exports, high investment and cooperative labour relations, and both became leading manufacturing nations with close ties to the United States.