Prof. Y. SanoSchool of Economics

Introduction to Japanese BusinessHistory of Japanese Economic Development

December 12th / 19th 2013

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Scene of Echigoya in Edo, 18th Century

Main Business Area “Nihonbashi, Edo” in 18th century

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KushanEmpire

UighurG ö k t ü r k s

Rice

“Trade” in 6th Century (flow of culture and civilization)

Two Most Important Cultural Flows – Buddhism and Rice

Theravāda Buddhism

Mahāyāna Buddhism

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KushanEmpire

UighurG ö k t ü r k s

Rice

“Trade” in 6th Century (flow of culture and civilization)

Two Most Important Cultural Flows – Buddhism and Rice

Theravāda Buddhism

Mahāyāna Buddhism

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Historic Topics

7th c. Buddhism, other Asian civilization emigrated through China / Korea

630 Prince Shotoku established Emperor’s ruling system

1192 First samurai government

2800 BC Rice cultivation

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Historic Topics

1274 1281 Defeat of Mongolian invasion (Kamikaze)

1543 Portuguese introduced firearm “matchlock” (Tanegashima)

1549 Francisco de Xavier of Jesuits brought Christianity to Japan

circa 1550 Oda Nobunaga and other local feudal lords initiated 　　　　　　　　　 deregulated “free market” (Rakuichi, Rakuza 楽市、楽座）

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Historic Topics

1600 　　 Battle of Sekigahara

1575 Battle of Nagashino Gun-armed Oda-Tokugawa allies defeated Takeda

cavalry. 　

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Western Eastern

Eastern (Tokugawa) Allies won and opened Tokugawa Shogun Government. Pre-modern Edo Era enjoyed 260 year isolation.

Battle of Sekigahara in 1600 (Tokugawa’s pre-modern Edo Era)

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1603 Tokugawa Shogun Government Basis for robust feudal government system

Historic Topics

17th ～ 19th c Edo Era “260 years of self-imposed isolation” (pre-modern Japan) Period of unique Japanese culture development

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Edo(Tokyo)

Osaka

Edo – Osaka 550 km (344 miles)

Hikyaku “Flying Legs” takes 7 days

It may take longer, and dangerous

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New type of business – Bill of Exchange

Edo(Tokyo)

Exchange HouseOsaka

Suppose Buyer in Edo pay to Seller in Osaka

Buyer in Edo asks Exchange House toIssue Bill of Exchange

Buyer send B/E to Seller in Osaka which orders Customer to pay to Seller

Customer

Customer counterbalances its account with Exchange House

No need to send money for a long distance reducing risk of loss. Functions of B/E has been established in 18th c.

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New type of business

1693 　　 Dōjima Rice Exchange

New type of business – Forward Rice Exchange

• Center of Japan‘s system of ice brokers (fudasashi 札差）• Forerunners to banking system. Established in 1697• Rice brokers and moneychangers (ryōgaeshō 両替商 ) 　　 gathered their shops and warehouses in the Dōjima. • Samurais including daimyo (feudal lords) paid in rice• Rice brokers, moneychangers played crucial profitable role • Economy shifted from rice to coin, paper money by Dōjima merchants• Osaka merchants developed monopoly on rice trade Osaka, and Kinai. • Samurai panicked over the exchange rate into coin, speculators and

conspiracies kept stores of rice in warehouses• 1733 starvation widespread. Riots uchikowashi ( 打壊し ) happened• 1735 Shogunate set price floor in Edo and Osaka• Tokugawa Yoshimune (8th Shogun) made attempts at reforms, known as Kome

Shōgun (the Rice Shogun). Solved rice economy• 1773 the Shogunate re-established the Rice Exchange• Large proportion of the nation's monetary transactions handled through

Dōjima managing deposits, withdrawals, loans, and tax payments.

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Social stability promoted rice production growth.

1600 – 1700 <Phase-1>• Farmland → 150% • Population 12 mil → 31 mil

1700 – 1850 <Phase-2>• Farmland expansion ended.• Population stayed at 30 mil. • Rice production kept rising by technical development (fertilizers, equipment etc.)

• Development of cash crops (cotton, tea, rapeseed, silk)

Phase-1 Phase-2

Rise of proto-industries

million

Rice and Population in Edo Era

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US 4 Black Steamships Opens the door of Japan (1853)

1858 Treaty of Amity and Commerce • Opened door for to foreign trade• Unequal treaty > No jurisdiction over foreigners > No right on duty control (fixed to 5%) > No government control over trade > No control over money exchange rate (caused big outflow of Japanese gold)

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• Silk : top export item (60-85%) • Cotton : top import item (35-50%)

• Machine spinning cotton thread overwhelmed Japanese hand spinning thread

One sided export / import might have caused Japanese mono-culture economy

→potential economical colonization

• Tokugawa government relied on foreign finance.

• Trade imbalance caused heavy inflation.

→Cause of final collapse of Tokugawa government

Influence of International Trade at the end of Tokugawa Government

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1853

1868 – 69

1867

From landlord’s economy (by rice) to capitalism economy (by money)

Meiji Restoration in 1868

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1868 Meiji restoration1876 Mitsui & Co. Ltd. Established1877 Seinan War1880 Industrialization began1894-95 Sino-Japanese war1904-05 Russo-Japanese war1923 Great Kanto (Tokyo) Earthquake1927-32 Showa depression1941-45 WW2 (Pacific War)

Topics in History Meiji Restoration to the 2nd World War

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Old Edo

New Tokyo

Edo renamed to Tokyo (Eastern Kyoto). 京都→東京High street changed from wooden to stony.

Meiji Restoration 1868 　 Change of City

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Edo girl

Meiji LadiesNow

Ladies have always been forerunners for change

Ladies keep changing dynamically though

Meiji Restoration 1868 　　　 Change of Ladies

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Old Edo

New Tokyo

1602 Mitsui Takatoshi （三井高俊） started Liquor Shop “Echigo-ya” ( 越後殿の酒屋＝越後屋）

Start of Mitsui

1673 Mitsui Takatoshi （三井高利） started Cloth Shop “Echigo-ya” which later became Mitsukoshi （三越）

18th c “Echigo-ya” expanded its business to Exchange House which later became Mitsui Bank （三井銀行）

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Old Edo

New Tokyo

1870 Iwasaki Yataro （岩崎弥太郎） took over “Tsukumo Shookai” ( 九十九商会 ) 　 then changed to “Mitsubishi Shookai” ( 三菱商会 )

Start of Mitsubishi

1877 Made big fortune on Seinan War （西南戦争）

1885 Iwasaki Yanosuke （岩崎弥之助） took over20th c Expanded business to shipbuilding, banking,

coal mining, real estate, brewing, electric etc

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HJMS Mikasa by Vickers

Platt Brothers’ spinning machine

a) Military enhancement- Renewal of war equipment- Massive mobilization of soldiers

b) Industrial modernization - National factories (Light industries) - Railway construction

- Communication system- Banking systems- Coal mine development- Agricultural development

→ 　 Huge money and resources needed

Meiji Government’s Priority Development Policy

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• Foreign traders dominated trade functions - export / import - shipping - trade financing - marine insurance• Japanese trading knowledge were lacking. - foreign market information - materials / technology sourcing - financing knowledge - international product knowledge - capital strength to run various business at once

Urgency of enhancing Japanese trading initiative

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Mitsui’s first HO

1876 Mitsui & Co., Ltd. founded as the first Sogoshosha (General Trading House)

President : Takashi MasudaEmployees : 16 (now 39,864 consolidated)Mitsui family : No equity

Credit support only Business style : Commission agency Export : raw silk, coal, rice, cotton fabric

Import : raw cotton, spinning machines, railway machines and rails.

Domestic : tax rice

Birth of Trading Company (Sogoshosha)

Rebels GovernmentLost Won

70,00030,000

Seinan War (Last Samurai’s War)

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• Meiji government took over Tokugawa liabilities including the salaries to samurais without jobs.

→ over 30% of the government expenditure

Cause of Seinan War

→ 　 Samurai angry!! 　　→　　Rebellions

• Meiji government reformed tax from rice to money. → detached samurai from feudalistic land ownership

• Meiji government abolished the social classes and removed samurai’s privileged social status, which caused them financial difficulties and future instability.

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• Why did samurai lose the war against conscripts from non samurai classes?- Modern equipment- Fire power superiority- Advanced communication system (including literacy)→War was no longer the art of personal skill of Swards.

Lessons from Seinan War

• The lessons from the war - Meiji government believed in the Western civilization. → needs of industrial modernization - Government noticed the value of communication skill. → needs of educational system modernization

Key words : Military, Industrialization, Education

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Consequence of Seinan War

First railway

Miike mine

Tomioka silk mill

• Huge war expenditure- War expenditure ate almost total tax revenue.- Disorganized money supply caused terrible inflation.

→　 Government could not proceed industrial modernization.

・　 Government went for privatization of government assets - Railways (Nippon, Sanyo, Kyushu, Kansai, Hokutan etc.) - Government factories (silk mill, spinning firm, shipyard, beer etc.) - Government mines (Miike, Takashima, Sado, Ikuno etc.) - Banking sector (Daiichi etc.) - Real estate (Hokkaido development bureau etc.)

• Tax increase and extreme deflation policy- Tax reformed : from rice (Edo Era) to money (Meiji Era)- Peasant exhausted. → 　

mass of flow to cities caused cheap labors.=> Massive industrialization by private sectors.

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Growth of light industry (cotton: top priority for money save)

Russo-Japanese

warSino-Japanese

war

In 1883, Osaka Spinning Co was equipped with 15000 spindles and run by steam engine in the city. With low labor costs, Japanese cotton thread became competitive for export by 1895. Osaka Spinning Co

Early local spinning mills were too small with only 2000 spindles and run by water wheel.

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• New Ring spinning machines employed at early stage. (The machine for young girls to work with.)

• Young girl labors were massively supplied from agricultural sector at cheap costs. (Girl labors lived in a dormitory for 2 shift work.)

• Used various imported cotton for best mix (mainly Indian and American).

• Rise of Japanese merchant fleet.

• Government support on financing and tax.

Growth of light industry (cotton: top priority for money save)

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Growth of light industry (raw silk : top earning item)

Raw silk was top earning item (particularly from US) until WW2

YearProduction Export

Share in US marketProduction by machine Export To US

　 tons % tons % %

1878 1,360 0.0 871 17.4 0.0

1890 3,255 42.5 1,266 66.0 52.0

1895 6,012 56.4 3,486 57.6 49.4

1890 6,584 56.4 2,779 57.1 51.0

1895 6,897 65.6 4,345 74.6 51.3

1910 11,230 74.7 8,802 70.2 62.0

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Growth of heavy industry (Coal, the blood of industry)

• Japanese major coal mines were located in Kyushu island.

• Mass development was made by Zaibatsu. (Mitsui, Mitsubishi, Sumitomo, Furukawa etc.) • Coal was the blood of Japan’s industrial development.

Year Production Export　 (1,000 t/y) (1,000t/y)

1875 567 51 1880 882 132

1990 6,489 2,438

1910 15,681 2,816 Statue of miner

Growth of heavy industry (rise of Japanese technology)

Yahata steel mill (1901)

HJMS Yamato(1940)

Zero fighter plane (1939)

Japanese heavy industry relied heavily on military demand. This encouraged development of own unique technologies. 33

WW1, Earthquake, Financial Crisis then War Tone Economy

• WW1, 1914-1918WW1 lead Japan to booming but bubble economy collapsed after the war

WW1 de-stabilized gold standard and exchange rate volatility widened

WW1 turned Japan from debtor country to creditor country• Kanto earthquake in 1923

Earthquake devastated Tokyo, Yokohama with more than 140 k death tollDamage was over 3 times of Japan’s budget. Bank system got impact

• Financial crisis in 1927Unsettled earthquake bills caused banking crisisOver 2000 banks in 1919 fell into 625 banks in 1932 but BOJ did not help

• Great depression, 1930-1932Wall Street crash in 1929 devastated Japanese economySocial instability rose Fascism and aggression for new market

• Marching to War Economy, 1937-1945

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Post War Economic Recovery

Tokyo 1945

Tokyo 1990

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Historical Topics after WW2

1949 China (PRC) Cold war1950 Korean war

1956 2nd Middle East war (Suez War)1960’s Vietnam war1967 3rd Middle East War

1973 4th Middle East War1979 Iranian revolution1981 Iran Iraqi War1985 (Plaza accord)1991 Gulf war2003 Iraqi war

1947 Dissolution of Zaibatsu by GHQ order1950 Korean war booming1952 Release from Allied rule 1955-73 Post-war booming1964 Tokyo Olympic1970 Osaka Expo

1973 1st Oil shock Post war boom ended

1985-91 Bubble economy1991-2001 Lost 10 years2011 Tohoku Great Earthquake

Japan Asia

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WW2 damage on industry

Korean War

WW2

War to China

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GHQ Orders

“Entire demilitarization of Japan” MacArthur• Indirect ruling through new Japanese government• New constitution => democratization• Purging pre-war leaders (political, economical)• Strict anti monopoly law• Dissolution of Zaibatsu• Farmland reform(70%:from big landlords to peasants)• Trade union authorized• New educational system launched• War compensation to Asian countries

Pre-war economic order was destroyed.

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Desperate Post War Economy

• War time stocks quickly exhausted• Coal production down seriously (from 50 mil t/y down to 10 mil t/y)• Extremely unbalanced goods and money (over money supply generated huge demand.)

Another inflation

Hyper inflation

Immediate Production Needed

Priority production system

“Reconstruction Fund”

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Priority production system

Steel mills

Coal mines

OIL GHQ

Steel Production30 mil t/y

Other industries Special rations

Steel productspriority share

Coals

Priority goal

J. Gvt MITI

OK

Request

Special supply

Steel productssmaller share

priority share

Reconstructionfund

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1948 “Dodge Line” deflation policy• Yen/US$ rate fixed at Yen 360/$ (till 1971)

1949 Depression by deflation. Japanese starving

Korean War

1950 Sudden war demand by US Dollar• No direct involvement in the war

1954 Industry caught up pre-war level

Hard Deflation Policy and Korean War

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Demilitarization destroyed war industry> Japan freed from military expenditure (security on small cost of US-Japan Security Treaty)> War industries reformed to heavy chemical industries (Asian textile industries replaces Japanese superiority)> War engineers moved to electronics, motor car industry. +MITI’s leadership to industrial innovation> Projected ship demand to survive shipbuilding yards> Government’s financial institutions to grow industrial competitiveness> Protection of industries against foreign intrusion> Privatization of power utilities (9 regional companies)> Massive and continuous infrastructure construction

Fruit of demilitarization policy and MITI’s initiatives

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Large private investment > Heavy war damage -> Chance of facility renewal> War based demand -> Consumers demand

Massive consumers demand> Higher income distribution to labors and farmers.> High saving trend.

Energy change from Coal to Oil> Cheap energy source for easier handling

Bank’s Keiretsu formation> Major bank as leading equity / investment supporter

Innovation trilogy> Renewal of heavy industries (improvement)> Motor car and electric home appliances (catching up US)> Petrochemical and electronics (brand new industries)

Elements of post-war economic drive

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Pre-WW2 entrepreneurs (typical) Post-WW2 entrepreneurs (typical)

Toyota (motor car) Panasonic (electronics)

Bridgestone tire (tyre) Mazda (motor car)

Kuraray (textile) Honda (motor car)

Ajinomoto (food) Sony (electronics)

Nakano vinegar (food) Yammar Diesel (machinery)

Kikkoman soy source (food) Idemitsu (oil)

Shinetsu chemical (chemical) Kajima (construction)

Matsuzakaya department (retail) Obayashi (construction)

　 Santory (food)

　 Takeda pharmaceutical

　 Maruha fishery (food)

　 Kagome ketchup (food)

　 Lion soap (sanitary)

Leading entrepreneurs

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Million Yen, at 1990 value 3.5

3.0

2.5

2.0

1.5

1.0

0.5

• Mean personal income = Nominal personal income / GNP deflator• Price is re-evaluated on the level of 1990• Until WW2, mean personal income was along with CPI. After WW2, increase of mean personal income was far more than CPI

WW2

Post War Recovery (Growth of mean personal income)

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Original (in 7C)(The symbols of imperial legitimacy)

New (in 20C)(The symbols ofmodern life)

Valour

Wisdom

Benevolence Anyway rich

Three sacred imperial treasures (symbol of consumers’ dream)

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Refrigerator

Washing M/C

Vacuum cleaner

Color TV

Car

AC

Elect oven

PC

Mobilephone

Digi C

am

DVD playerrecorder

Post war booming

Spread of electric home appliances (spread of happiness?)

Ratio of household spread of electric appliances

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Ratio Japan vs. World

Japan

World

Rat

io

Angus Madison HP (http://www.ggdc.net/maddison/)

GDP per capita Japan vs. World

•Japan’s GDP per capita has been on world average until WW1 time.•Rapid growth after WW1 was heavily hit in WW2 but then sharply developed its productivity to 1990.•What was the incentive behind?

Per capita GDP (US&

)

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USA Japan UK China

Global market shares of typical countries

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1964

1970

Symbol of success (Tokyo Olympic, Osaka EXPO)

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• 4th Middle East War caused OAPEC’s new oil strategy• High energy price pushed up costs of production and services => High rate of economic booming ended

Japan’s quick earlier recovery by export> High performance and reliable products> Strong marketing (product variety, after sales services)> Low profit margin, low wages> Relatively cheap Yen rate> “Our company” culture (Life time employment, in-house

social security, in-house promotion till CEO)> Japanese QC/OJT theory : Kanban system etc.

Oil Shock 1973 and Recovery of Japan

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Economic development rate

1974

1985

1991

Oil Shock 1973 and stable development

Source: Prime Minister Office: Yearly GDP Growth

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Major city land price index and Nikkei stock index

Major city land price index

Nikkei index

Plaza accord

BubbleCollapsed

Bubble Economy in late 1980’s

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Rapid industrial development caused environmental pollution. It caused heavy damage on living environment and big social conflicts.

> Air pollution (Yokkaichi asthma) > Water pollution (Minamata diseases) > Soil pollution (Itai-itai diseases) > Noise > Vibration

Bitter pay for development

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1967 Pollution prevention law1970 Intensive debate in the parliament1993 Environment protection law

> After number of casualties and damages left behind tragedies, strict control was imposed and environmental protection technologies were developed.

⇒Now Japan has most advanced technologies.

Ashio copper mine

Bitter pay for development (Environmental Pullution)

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(k)1400

1200

1000

800

600

400

200

(m)140

120

100

80

60

40

20

1000 years BC

2006 peak

Kam

akura Gvt

Imperial rule

Tokugawa Shogun G

vt

Meiji rest.

WW

2

AD

AD

Over 65 year oldage rate

Pre history era

0.6 4.5 5.5 6.4 6.812.3

31.3

33.3

56.0

83.9

111.9

126.9115.2

95.2

68.2

47.7

20110

260

16080

590

Reference : Up to Meiji Restoration : from “Japanese History from population” Hiroshi Kito (2000)

Population in 1920, 1950, 1975,2000 : from Census results

2030,2050,2075,2100 : estimates by National Laboratory of Social Security and Demographic Issues

Temperature down by 2℃

Battle of Sekigahara

Demographic challenge

Long term demographic change

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Great Tohoku Earthquake

What will be Japan’s future?

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Thank you for your attention

For further contact:sanoyoshio@soec.nagoya-u.ac.jp

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