Japanese Economy

-2Kozo UEDA

Topic
Post-war Economic Growth
How and why did the Japanese economy grow?

Contents
Facts about Japans growth
Reasons for growth
Slowdown
Solows growth model

Review GDP change

About 500 trillion yen (~ 5 trillion US$) now

Review GDP change

Positive growth, but its pace is declining.

GDP per capita in a long time frame

Take-off in Meiji Restoration and pick-up after war
(GK $)
35,000

Japan

USA

30,000

India

China

25,000

England/GB/UK

20,000
15,000
10,000
5,000

1
1400
1700
1803
1810
1817
1824
1831
1838
1845
1852
1859
1866
1873
1880
1887
1894
1901
1908
1915
1922
1929
1936
1943
1950
1957
1964
1971
1978
1985
1992
1999
2006

Source: Maddison Project Database

International comparison
Relatively high growth from the mid 1880s
Start

Duration

Growth rate Growth rate

Growth rate of
of income
of population per-capita income

Britain

1765-85

180.5

2.2

1.0

1.2

France

1831-40

128.5

2.0

0.3

1.7

US

1834-43

125.5

3.6

2.0

1.6

Germany

1850-59

110.5

2.7

1.0

1.7

Netherlands 1860-70

100.5

2.5

1.3

1.2

Australia

1861-69

100.5

3.2

2.2

1.0

Japan
(Kuznets)

1874-79

88.5

4.0

1.1

2.9

Japan
(Ohkawa)

1885-89

78

3.6

1.1

2.5

Italy

1895-99

68

2.8

0.7

2.1

Note: Growth up to 1963-67.

Source: Table 2.1 in Ito (1992)

Reasons for economic growth

Why did Japan achieve high economic growth?
After Meiji Restoration
After WWII

Reasons for economic growth 1

From 1880s (Meiji era)
Meiji Restoration in 1868

Reasons for growth borrowed from Ito (1992)

1. Heritages from the Tokugawa era
High education level
Capital accumulation
High technological level of agriculture
Infrastructure
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Reasons for economic growth 2

2. Policies of the Meiji government
Strong central government
Mobility of labor
Education
Fiscal reform
Infrastructure
Introduction and diffusion of foreign technology
Industrial policy
Establishing a central bank and curbing inflation
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Reasons for post-war

economic growth 1
Numerous reasons are pointed out.
Economic reforms after the WWII brought by GHQ
(Allied occupation force)
Anti-trust: zaibatsu dissolution
Land reform: land redistribution from absentee landlords
to tenant farmers
Labor reform: workers granted rights to organize a labor
union

Educational reform: 6-3-3-4 years

Boom created by the Korean War (June 1950)
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Reasons for post-war

economic growth 2
High saving rate and investment-led growth
Export-led growth
Exchange rate was 360 yen/dollar
Low prices of imported material

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 Investment pushed up GDP.

Contribution of net export was not big, but export had
large spillover.

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Reasons for post-war

economic growth 3
Sound fiscal and monetary policy
Balanced budgets
Targeted industrial policy
Rationing of limited foreign reserves

Hard-working
High educational level and low gap
Innovation
Low military expenditure
High demand for durable goods
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Economic slowdown
Two trigger events
Note: This does not mean that they are the
fundamental reasons.

Two oil shocks: 1973- and 1979 Yens appreciation: Collapse of the Bretton
Woods regime
The exchange rate of 360 yen/dollar was revised to
308 in 1971, and then moved to the floating
exchange rate system.
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Exchange rate
Yen appreciation

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Solows growth model 1

As we saw, too many reasons exist.
Lets clarify them based on an economic model.
See, for example, the textbook by Romer
Advanced Macroeconomics.

Growth accounting

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Solows growth model 2

Growth accounting
Economic growth can be decomposed into three
factors: technology (A), labor (L) and capital (K).
Production function
Y(t) = F(K(t), A(t)L(t))
Suppose, more specifically, a Cobb-Douglas type:
Y(t) = (K(t))(A(t)L(t))1
Then we have
dY(t)/Ydt = dK(t)/Kdt + (1-)dA(t)/Adt + (1-)dL(t)/Ldt

growth

capital

technology

labor
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Growth accounting 1
Growth accounting
dY(t)/Ydt = dK(t)/Kdt + (1-)dA(t)/Adt + (1-)dL(t)/Ldt

growth

capital

technology

labor

We can obtain data for Y, K, L, but not for A.

That is often called TFP, total factor productivity.
For example, RIETI JIP database is useful.
(http://www.rieti.go.jp/jp/database/JIP2012/index.ht
ml)

From the above equation, we can deduce

dA/dt.
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Growth accounting 2
Japan exhibited higher growth than US.
Capital was more important than labor in Japan,
in contrast to US.
Technology contributed by more than a half.
Japan
1953-71
Average growth 8.81%
rate
Absolute

Relative to
8.81%

Absolute

Relative to
4.00%

Labor

1.85

(21.0)

1.30

(32.5)

Capital

2.10

(23.8)

0.79

(19.8)

Technology

4.86

(55.2)

1.91

(47.8)

Source: Table 3.2 in Ito (1992)

US
1948-69
4.00%

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Growth accounting 3
According to RIETI JIP database, labor, in
particular, drives slowdown from 1990.
Technology also declines.
Macro economy (excluding housing and activities not elsewhere classified)
Real GDP Growth
Contribution of Labor Input Growth
Contribution of Man-hours Growth
Contribution of Labor Quality Growth
Contribution of Capital Input Growth
Contribution of Capital Quantity Growth
Contribution of Capital Quality Growth
TFP Growth

Source: RIETI JIP database

1970-80
4.65%
1.27%
0.35%
0.92%
1.29%
1.63%
-0.34%
2.10%

1980-90
1990 2000
4.43%
0.93%
1.05%
-0.10%
0.43%
-0.60%
0.62%
0.50%
1.87%
1.03%
1.49%
0.96%
0.38%
0.06%
1.52%
0.00%

2000-2008
1.40%
0.12%
-0.42%
0.54%
0.35%
0.18%
0.17%
0.94%

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Growth accounting 4
According to Hayashi and Prescott (2002),
declined technology explains the slowdown.
Labor continues to lower growth.

Source: Table 1 in Hayashi and Prescott (2002)

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International comparison
Average annual growth in 1985-2010
Labour input

ICT capital

Non-ICT capital

Multi-factor productivity

7
6
5
4
3
2
1
0
-1

Source: OECD Factbook 2013: Economic, Environmental and Social Statistics

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Is growth accounting perfect?

Does TFP accurately reflect technology?
Why not?
Suppose

A depression hits the economy.

A factory stops production.
Y decreases.
Which one decreases, A, K, or L?

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References

Chen, Kaiji, Ayse Imrohoroglu, Selahattin Imrohoroglu, The Japanese

Saving Rate between 1960 and 2000: Productivity, Policy Changes, and
Demographics, Economic Theory, 32, pp.87-104, 2007.
Hara et al. The New Estimates of Output Gap and Potential Growth Rate,
Bank of Japan, 2006.
Hayashi, Fumio and Edward C. Prescott, The 1990s in Japan: A Lost
Decade, Review of Economic Dynamics, 5, pp.206-235, 2002.
Ito, Takatoshi, The Japanese Economy, MIT Press, Cambridge:
Massachusetts, 1992.
Romer, David, Advanced Macroeconomics, 4th eds., McGraw Hill.
Solow, Robert M., A Contribution to the Theory of Economic Growth,
Quarterly Journal of Economics, 70, pp.65-94, 1956.

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