Discussion Point 3: How Did Japan’s Economy Continuously Grow Over a Long Period? Catch-Up and Domestic Demand

Abstract

This section disagrees somewhat with traditional, export-driven “Catch-Up Industrialization Theory” to explain the long, almost uninterrupted growth of Japan’s economy until the 1980s. Increasing domestic demand consumption—as a result of ongoing incremental innovation, increased organizational capacity, and private-sector capital investment—is argued to be the main driving force.

Examining Akira Suehiro’s “Catch-Up Industrialization Theory”

The long period of the Japanese economy’s relatively high growth from World War I to the 1980s can be seen as the result of catch-up industrialization aimed at drawing level with, and then surpassing, Western countries. In Japan’s case, the road was long and arduous because of the defeat in World War II.

Akira Suehiro’s “Catch-up Style Industrialization Theory” (Nagoya University Press, 2000) systemically analyzes catch-up industrialization. Although the book does not directly focus on Japan, by applying his arguments it is possible to understand the characteristics of Japan’s economic growth.

Suehiro characterizes “catch-up industrialization” as “export-driven industrialization.¹” Although there are different types of “catch-up industrialization,” such as NICs (Newly Industrializing Countries) and NAICs (Newly Agro-Industrializing Countries), they all have one thing in common: export-driven industrialization.² When Suehiro discussed the production, export, and overseas production of televisions in Asia, the sales channels envisioned there were not intended to satisfy domestic demand in the respective countries of origin (including Japan), but were geared toward the overseas market, especially the United States.³

The problem here is that Suehiro “stands on the understanding that Japan was the most typical example of ‘catch-up industrialization’.⁴” However, as Suehiro himself admits to some extent,⁵ Japan’s economic growth after World War II was driven by domestic demand, not by exports. It is somewhat unreasonable to suggest that postwar Japan achieved domestic demand-driven economic growth while also claiming that Japan was the most typical country of export-driven “catch-up industrialization”. However, it is well known that the national consensus to “catch up and overtake” the Western countries was an important driving force in Japan’s postwar economic growth. Thus the “catch-up industrialization theory” cannot simply be dismissed as an argument irrelevant to postwar Japan.

There are two ways to resolve this dilemma. One is to take the position that Japan was the most typical country of export-driven “catch-up industrialization” in the prewar period but not in the postwar period. The other is to modify the characterization of “catch-up industrialization” to incorporate the role of domestic demand in the industrialization process.

The former is not an altogether appropriate position. While true that Japan’s economy was generally more dependent on exports in the prewar period than in the postwar period, there remains undeniable inaccuracy in the view that Japan’s economic development was export-driven in the prewar period when exports and income from abroad as a percentage of nominal gross domestic expenditure accounted for 5% (1885), 6% (1890), 10% (1895), 11% (1900), 13% (1905), 15% (1910), 20% (1915), 19% (1920), 20% (1925), 17% (1930), 23% (1935), and 20% (1940).⁶ In other words, the view that Japan was the most typical example of the export-driven “catch-up industrialization” in the prewar period is not fully credible; the latter approach, taking into account the role of domestic demand as well as exports, is more credible.

In fact, Suehiro’s “Catch-Up Industrialization” in several places also mentions the role of domestic demand in the economic development of Asian countries. For example, Suehiro introduces without any critical commentary Hitoshi Hirakawa’s theory that “Asian NIEs” (Newly Industrializing Economies) are a developmental stage of NICs that “achieved growth not only through exports but also by incorporating domestic demand.⁷” Based on Thailand’s experience, Suehiro states that “the expansion of newly emerging agricultural products and the growth of agro-industry, through higher incomes for rural and regional merchants and upper class farmers, provided an expanding domestic market for import-substituting industries.⁸” In his final chapter, Suehiro predicts that “catch-up industrialization” in Asian countries will continue, citing the persistence of the “growth ideology” as one argument: “People’s inclination toward ‘affluence’ will only increase, never decrease.⁹” Suehiro’s standpoint is that Asian countries that followed the path of “catch-up industrialization” already established a certain degree of orientation toward “affluence.” Thus, Suehiro’s “catch-up industrialization theory” seems to leave plenty of room for the role of domestic demand.

Examining the World Bank’s “East Asian Miracle”

The World Bank’s “The East Asian Miracle¹⁰” published in 1993 discusses eight High-Performing Asian Economies (HPAEs)—Japan, Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, and Indonesia—discussing the relationship between high economic growth and public policies in these countries.¹¹ The paper also argues that each of these countries’ governments introduced “export standards,” encouraging competition among private-sector companies to meet such standards, an argument similar to Akira Suehiro’s “Catch-up Industrialization theory.”

Does the World Bank’s view in “The East Asian Miracle,” that export standards have been adopted in HPAEs, including Japan, hold true? As far as Japan is concerned, the answer to this question must be probably not.¹²

Table 1 shows the trend of export dependence in the six East Asian countries for every five-year period starting in 1975. This table shows that Japan’s dependence on exports was considerably lower than that of Singapore, Malaysia, Thailand, Korea, and Indonesia.

Table 1 “Changes in Export Dependence of Six East Asian Countries” (1975–1990) (Unit: %)

Japan’s dependence on exports stayed below 10% during its period of high economic growth. Specifically, the figures were 9.6% in 1960, 9.6% in 1965, and 9.8% in 1970.¹³ Domestic demand, such as personal consumption and private-sector capital investment, drove Japan’s rapid growth, not exports.

In the 1980s, Japan’s trade surplus grew substantially. This was not the result of industrial policies aimed at promoting exports as the World Bank’s “The East Asian Miracle” suggests. Rather, it was the result of the growing organizational capacity of Japanese firms, forged by stiff competition in the domestic market.

Long-Term Growth as a Result of Incremental Innovations

The second of the three questions presented in this book’s Introduction concerning Japanese business is: “How was it possible for the Japanese economy, once on a growth path, to achieve high growth over a long period of time, a feat rarely seen in world history?” In closing Part II, which focuses on the period from the end of the Meiji era to the 1980s, I would like to answer this question from the perspective of innovation. That is: “Incremental innovation resulted in a prolonged period of relatively high growth driven by domestic demand.”

A necessary condition that enabled the long period of the Japanese economy’s relatively high growth was the continuous expansion of Japan’s domestic market. The transition to a mass consumer society began with World War I and temporarily stalled during World War II, but progressed more rapidly after the war. The shift to a mass consumer society also proceeded in Europe and the United States, but in Japan, the consumer revolution progressed to a greater and deeper extent not only because the disposable income of the Japanese people increased but also because their lifestyles became Westernized at the same time. In addition, active capital investment in the private sector accelerated the expansion of domestic demand in the 1930s as well as during the period of rapid postwar growth. This increase in private-sector capital investment was arguably the most important factor in Japan’s higher economic growth, surpassing that of Western industrialized nations. Thus, from the 1910s through the 1980s, the Japanese economy enjoyed relatively high growth driven by domestic demand, unlike other East Asian countries and regions whose growth was dependent on exports.

If the necessary condition for Japan’s relatively high growth was the expansion of domestic demand, the sufficient condition was the “increased organizational capability of Japanese companies” led by innovative entrepreneurial activities. To link the expansion of domestic demand to economic growth, it was necessary to comprehensively enhance fundamental corporate activities, to “create, manufacture, and sell.” To do so, the development, manufacturing, and sales divisions of a company needed to share information and work closely with each other in implementing a series of “kaizen” (improvements). Incremental innovation, symbolized by the word “kaizen,” was a sufficient condition for the Japanese economy to achieve relatively high growth over a long period of time.

Of course, the period from the 1910s to the 1980s also saw breakthrough innovations such as the invention of Ajinomoto by Kikunae Ikeda and the automatic loom by Sakichi and Kiichiro Toyoda. However, Ajinomoto Co.’s development thereafter as a comprehensive food manufacturer, led by Saburosuke Suzuki II who succeeded in commercializing the unique breakthrough innovation, can be attributed to a series of incremental innovations. Additionally, what decisively increased the international competitiveness of Toyota Motor Corporation, effectively founded by Kiichiro Toyoda, was the establishment and evolution of the “Toyota Production System.” Toyota System became a symbol of incremental innovation, closely aligned with the word “kaizen” (improvement). In general, during this period, breakthrough innovation was a partial phenomenon, and incremental innovation was dominant.

Many cases of incremental innovation start with a proactive response to customer needs. This focus on customers was common to all entrepreneurs discussed in Part II, from Ichizo Kobayashi and Yasuzaemon Matsunaga, who pioneered urbanization and electrification, to Konosuke Matsushita, who initiated the “consumer revolution.” This focus on customers helped cultivate deeper domestic demand.

At the same time, the entrepreneurs discussed in Part II also actively and boldly invested in new businesses whenever they saw opportunities. This stance was evident in the case of Shitagau Noguchi, Yoshisuke Aikawa, and Sazo Idemitsu, who, despite the enormous risks involved, forged into the continent before World War II. Yataro Nishiyama was another driving force behind the rapid economic growth of the postwar period, pioneering large-scale capital investment.

However, the series of active and bold investments by innovative entrepreneurs that led to the long-term growth of the Japanese economy eventually began to wane. The sense of crisis harbored by Toshio Doko in the late 1980s would turn into a reality during the period covered in Part III.