The Japanese Economy and the Effect of the Second World War

Updated on May 10, 2018

Since an economy is naturally a complicated and diverse subject, to make a broad claim concerning Japan having been economically revolutionized or marked by the Second World War (which will be viewed here as 1937-1945 in the case of Japan, starting with the beginning of the Second Sino-Japanese War) runs into the natural problem in that some sectors were clearly elements of continuity with pre-war developments, and other ones were dramatically altered. Even those which were impacted hugely by the war bear their similarities to pre-war discourse and debate, and thus to write them as disjunctures in the history of Japan can be deceptive. Thus, an analysis of the impact of the Second World War upon Japan only can be really undertaken upon individual sectors. Nevertheless, as a general estimate it can said that the Japanese economy’s changes during the post war era find their principal source in the pre-war era, the changes being at most amplified by the Second World War.

War is the health of the state, for the two feed each other. For Japan during the Second World War, or the Greater East Asian War as they might term it, the state grew dramatically in response to the challenges brought about by the war, in terms of the services it provided and the reach it had in the economy. Welfare and social services had existed before the war to some extent. During the 1920s urban small-leaders began to be mobilized for “district councilors” to provide modest welfare services. A social affairs bureau was created under the Hara Cabinet in 1920, producing health insurance unions for employees in large businesses or a government administered insurance plan for workers, as well as death, injury, and sick pay benefits. The beginnings of the Japanese welfare and social state, which would expand post war, were laid here, part of a world-wide change in the relationship between the state and its citizens and as a rationalizing method to provide for the challenges of an industrial economy.

The New York Stock Market Crash was a global event, and although the depression's effects were not as bad in Japan, it was the principal driver behind the construction of the modern Japanese economy.
The New York Stock Market Crash was a global event, and although the depression's effects were not as bad in Japan, it was the principal driver behind the construction of the modern Japanese economy.

The Great Depression helped to transform the Japanese economy dramatically in many ways. Some were less intrusive in the economy, such as dropping the gold standard (which actually came during the Great Depression crisis), or intense government deficit spending which helped stimulate the economy (in heavy industry and chemicals particularly) while others were part of a vision held by bureaucrats of a state directed and rationalized economic system. There had been thoughts by bureaucrats in such regards as early as the 1920s, and the government under the shadow of the Great Depression established the Industrial Rationalization Bureau, to promote trusts and cartels. This initially mostly helped the big zaibatsu, but the government by 1936 would move as far as nationalizing the electric power industry, despite business and political party opposition.

During the war the extent of state control was magnified, such as with the passage of the National General Mobilization Law in 1938, which allowed the bureaucracy greater control over resource management, providing the state with vast new powers. New super cartels were formed in 1941 by the Control Associations. Small manufacturers were forcibly rationalized in 1943 to put them to work for the war effort. Industrial production rose greatly, 15% between 1937 and 1941, as a war economy began to take root. Much of this economic prosperity was destroyed by the war of course. Post-war, the government would not be a near-command economy like it had been in the war, Instead, it would rely upon a system of “administrative guidance” to aim to direct the economy towards desirable sectors, which was much more similar to pre-war practices than those pioneered during the fire of war.

The Mitsubishi headquarters, one of the big zaibatsu.
The Mitsubishi headquarters, one of the big zaibatsu.

The institution of the zaibatsu however, is proof of the way in which certain structures in Japan resisted modification from both Japanese and American efforts. Zaibatsu were Japanese conglomerates, extremely powerful and linking together a wide diversity of different companies, both horizontally and vertically. Although they did make loans outside the combine and recruit graduates from prestigious universities like the University of Tokyo (which shows that the post-war rise in university education had clear precedents before the war, although it should be emphasized that the post-war university boom was on an entirely different scale), they were largely self-contained in their practices. They were well connected to bureaucrats, military men, and political party leaders, with outsized influence. During Japanese colonial expansion, they were much involved in economic exploitation in new Japanese regions, such as Korea or Manchuria. Despite this, they were not popular with the Japanese far right, who disliked their lack of morals and greed, and for some for the way in which they entrenched social inequality. Allied occupation authorities simultaneously associated them with Japanese militarism, and oversaw an effort to attempt to disestablish them. Although this did succeed in putting an end to the formal structures of the zaibatsu, they were quite quickly regrouped by the beginning of the 1950s, this time around banks rather than holding companies. Their case is one which demonstrates that the power and influence of the Americans in Japan was not absolute: when they dealt with affairs on which the Japanese were opposed, it could be terribly difficult for the Americans to have their way in practice.

Japanese textile workers
Japanese textile workers

Labor and labor relations is another element which was dramatically altered by the war. Here, it might be best to divide it into two sections: urban workers and rural labor. Both were greatly affected by the war and both in many similar ways, but their circumstances require a different perspective. To start with, some note should be made of the fashion of employment. Japanese women were heavily overrepresented in industrial workers before the war, as noted. Many workers were still independent artisans, working in small scale or independent businesses, which even if they had new technologies, were still organized in a fashion which had varied little for centuries. Small shopkeepers joined them. Much of this was organized along family-based labor structures. Post-war, the number of family workers dropped constantly, from some 2/3rds of the labor force in the late 1950s to under ½ by the 1970s. The number of women who were employed outside the home rose from 42 to 53%, although many continued to work in essentially the same way as before, just in the electronics instead of the textiles industry (the number of women employed in textiles dropping markedly). Society became much more egalitarian, more urban, although small businesses continued to proliferate thanks to LDP (Liberal Democratic Party, the largest Japanese political party) support.


Japanese urban male workers before the Great War were individualistic, and highly mobile, although it was also a world in flux. They switched jobs with ease, paid little attention to the recriminations from above, demanded their rights, and developed unions despite these being banned, reaching 8% of the working population in 1931. Companies responded with increased training for workers with non-binding promises of greater job-security, health and savings plans, and additional wages for reliable workers. In effect, by the end of the 1920s, the ideal of a stable and reasonably well remunerated proletariat existence had been developed, which by the 1960s would give workers an array of benefits from housing, to medicine, to entertainment, to transport, to social engagement. Although the Great Depression naturally threw the pre-war labor system into chaos, the beginnings of the post-war government-backed labor system were demonstrated even before the beginning of the war: “discussion councils” were formed in workplaces as early as 1937, and in barely the first year of the war, in 1938, Patriotic Industrial Service Federation was created to promote these councils and to establish a single national union. In practice, its actual effect was small, but some post-war labor relations can be drawn from the idea of universal inclusion of workers in organization and valuing them to at least some extent. Similarly, mandatory pay scales were implemented, which would live on postwar - especially when Americans initially supported massive drives for unionization, something which they would later regret after Japanese unionization rate shad reached more than 50% of the workforce. These mass unionization drives were also a success before of pre-war Japanese union members who were experienced enough to lead the development of their post-war counterparts : although the Japanese labor relation became much more conciliatory after the war, they might have been familiar with harsh disputes like those of Miike mine as well, where government police were sent in to contain strikers, just like during the 1920s and 1930s. And despite the “permanent employment” which was developed, many workers still quite their jobs near the beginning in search of mobility. Clear parallels exist between the pre and post-war era, much more than with the War itself.



Although Japan did not mobilize women to the extent of other nations during the Second World War, there were still many that were put to work.
Although Japan did not mobilize women to the extent of other nations during the Second World War, there were still many that were put to work.

Of course, for women, there was little of the same and despite forming more than a majority of the Japanese industrial labor force of this period, they were poorly paid and were excluded from such hopes for advancement. So too were Koreans, burakumin (social outcasts who were “unclean”), and other minorities. During the war, women were not mobilized as much as they could have been (although as noted pre-war they composed a high percentage of the labor-force already), but the number of employed women did rise dramatically in absolute terms. Koreans meanwhile were taken in in huge numbers to work with Japanese fighting on the front, up to 2 million of them.

Japanese farmers at work.
Japanese farmers at work.

In the countryside, the 1930s started as an era of great desperation and hardship for the countryside. Life had not been easy during the 1920s, when the long secular upwards development of Meiji agriculture had reached its limitations and agricultural growth had stagnated, but in the 1930s the international market crashed and agricultural commodity prices. Farmer debt had risen to crippling levels. The government responded with what would become a crucial post-war policy of intervention in the rural regions, promoting huge outlays for rural development and debt relief - and in a way which had started to help lower farmers as well, breaking the long monopoly of large farmers and landlords as the principal beneficiaries of government programs. Government programs supported more rational and scientific farm management, cooperatives, crop diversification, accounting, and long-term planning on the behalf of communities.

Farming still remained materially much the same until decades after the Second World War, as shown by this picture from the 1950s, but the structure in which it was placed had dramatically changed.
Farming still remained materially much the same until decades after the Second World War, as shown by this picture from the 1950s, but the structure in which it was placed had dramatically changed.

The war had perhaps an even greater impact on the countryside’s organization than the cities, as the State put into place rice controls, took control of the distribution and retail of rice, and favored small growers at the expense of landlords. Post-war, the Americans would undertake a major process of land reform in the Japanese countryside. This should not be ignored, but the real dramatic changes of Japanese agriculture, the ones which remain intact until today - the government-managed rice system, which is now used to subsidize and keep the agricultural system afloat - date from the Japanese wartime experience. The American land-reform was a modification, albeit an important one, to a Japanese model, and one which has been less important in the sweep of history afterwards. It was also one which succeeded because there had been a willing train of thought about the importance of the subject within the Japanese bureaucracy, before the war. And while the war had resulted in a dramatic change for the organization of agriculture in the countryside, for many life and livelihood in the countryside remained much as it had before the war.

International trade in Japan is one area which would be easy to assign as a disjuncture, as with many other previous systems. Before the war, during the Great Depression, Japan had poured effort into the construction of the Yen Bloc, in an attempt to provide for a closed economy of imports and exports to sustain the Japanese trading system during a time of great stress and internal misery. In this zeitgeist, and following the teachings of people such as general Ugaki Kazushige, Japan had conquered Manchuria (with valuable farmland and strategic resources) and embarked upon a campaign of conquest into China (for its iron and coal), and when the resources for this became inaccessible upon the international market, war had been the chosen path to take needed oil, rice, rubber, and other valuable resources from the European colonies of South-East Asia. Post-war, Japan was reduced to only its own territory, and by necessity it was henceforth obligated to rely upon the international market. Thus, seemingly a clear case of change brought about by the war.

The principal territories of the Japanese empire. In 1931 it added Manchuria, and a frenzy of expansion occurred during the Second World War.
The principal territories of the Japanese empire. In 1931 it added Manchuria, and a frenzy of expansion occurred during the Second World War.

The situation is of course, not so simple. Japan was neither purely ideologically committed to a closed economy before the war, nor was unity total concerning a laissez-faire intercourse with the world afterwards. During the 1930s, despite the closed market and trading bloc position taken by Japanese bureaucrats, Japanese exports had mimicked their post-war developments, with a branching out from simple textiles to bicycles, to toys, to simple machinery, to tires. This was not dissimilar to the post-war Japanese economy which enjoyed such success in these sectors. In the 1920s, Japanese businessmen had supported liberal leaders in the interests of pursuing a conciliatory policy towards China and one of general peace internationally, which would enable free trade and the export of their products - such a policy being actually carried out by Japanese foreign minister Kijuro Shidehara. As noted by Ishibashi Tanzan, a liberal business journalist: “To sum it up, as I see it, Greater Japanism fails to advance our economic interests, and in addition we have no hope [of sustaining] this policy in the future. To persist in this policy and thereby throw away the profits and preeminent position that can be obtained from the very nature of things and, for its sake, to make even greater sacrifices; that is decidedly not a step our people should take.”

Furthermore, after the war, the Japanese economy maintained certain illiberal elements, just as before the war it had not been entirely liberal nor illiberal. The government had important controls over currency exchange and technology licenses, and it layered tariffs to help certain sectors develop at home. Arisawa Hiromi and Tsuru Shigeto, prominent economists, had recommended that Japan develop its internal resources and minimize imports and exports, something which economically was counterproductive but seemed logical in the case of another war.

Before the war, Japan’s principal trading partner was America. It relied upon extensive raw material imports from South-East Asia, at that time colonies of the European colonial powers. After the war, Japan’s principal trading partner was America. It relied upon extensive raw material imports from South-East Asia, by then independent countries which traded freely with Japan. Japan’s trade patterns were impacted by the war, but much of the basic structure remained the same. The true change for Japanese economic patterns would come latter, with the rise of China.

Instead of seeing the Second World War as a tremendous divide within the lines of Japanese trade and engagement with the world, it is more profitable to see it in terms of a modulation, which provided alternate scenarios and realities to which people attempted to adapt and change. As with many of the stories which can be told of the sad period between when the guns fell silent on the eleventh hour of the eleventh day of the eleventh month and the conflagration which gripped the world once more two decades later, the tragedy wasn’t hopelessness and the impossibility of the fragile construction of peace, but rather that fortune conspired against this unhappy era.

The Japanese post-war economic boom owes more to the Great Depression than to the Second World War.
The Japanese post-war economic boom owes more to the Great Depression than to the Second World War.

This same philosophy as a whole can be applied to Japan. The war did not change everything, and much of what it did change had its roots in pre-war Japanese thinking and social trends. Even if its influence was dramatic in accelerating pre-war Japanese developments, the war laid itself into ideological thoughts and ideas present in Japan. To divide Japanese economic history into a pre, and post-war economic history, would miss the important overlaps and ties between them. For these reasons, Japan’s economic history can be summed up as one of continuity, where the difference between the two was not so much one of fundamental difference in manners, but difference in scale: the post-war society was simply the edges of the pre-war society developed as a mass society rather than remaining on the leading edges of development. If Japan developed in a particular fashion after the Second World War, it was becomes the seeds for it had been laid before the sound of guns, and the war itself, rather than being part of a decisive change in the Japanese experience, had been a detour away from the otherwise steady march of Japanese history.


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    © 2018 Ryan Thomas

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