Abstract
The Japanese prewar intellectual and policy environment was dominated by officials with law degrees and increasingly by the military. There were important schools of economics, both Marxist, and neoclassical, but their influence was mainly confined to academia. During wartime they suffered severe intellectual repression. The wartime economy relied on an allocation policy led by technocratic planners working under the “reform bureaucrats.” Immediately postwar there was a revival: economists were able to display moral leadership and play a leading role in adapting the MacArthur reforms and devising the formula for modern Japanese growth.
Early Twentieth-Century Economic Setting
The 1867 Meiji Restoration marked the early industrialization of the Japanese economy, as well as considerable political and social change.1 Victories over China in the 1894–95 war and Russia in the 1904–5 conflict reinforced Japan's sense of regional superiority, with increasing economic control over neighboring regions—Korea, Formosa (Taiwan), Manchuria, and some other Chinese provinces, viewed as the “Inner Empire.” This reinforced a rising sense of pan-Asianism offering the Western-colonized peoples of East and South Asia a sympathetic prospect of self-determination. Internally, Japanese self-regard was underpinned by the concept of kokutai, incorporating ideas of Japanese insularity and uniqueness.
Politics and economic drivers were tightly integrated: the Japanese inner empire offered access to key resources that were scarce in the home economy but were fundamental to its industrialization: coal, iron ore, other minerals, oil, and some food commodities. Japanese neutrality during the devastation of World War I allowed it to take advantage of high export prices. Regional trade grew, assisted by custom treaties, special access rights, other import protection, and control over mineral resources, using Japanese technology and capital to exploit them. Japanese exports grew very strongly in the first two decades of the twentieth century, and the economy expanded accordingly.
By the 1920s, a series of adverse events challenged this economic progress, altering Japanese perceptions of a benign regional environment into something more challenging and even threatening. By 1920 prices were approximately double prewar levels, exacerbated by significant infrastructure spending and an ill-conceived military intervention into Siberia. That year an asset bubble broke, and commodity prices fell. Key export industries such as silk and cotton suffered badly, triggering bank runs, corporate failures, declining competitiveness, and a growth slowdown (Patrick 1971).
In 1923 the Great Kanto Earthquake struck Tokyo, killing 140,000 and destroying thousands of businesses. The government indemnified losses and issued Kanto Earthquake Bills to finance reconstruction. However, by 1927 this led to a major debt buildup, and fears of default sparked a bigger problem: the Showa Financial Crisis. Many small banks failed, with consequent unemployment and political unrest. That year the Japanese government dispatched troops to China, in the First Shandong Expedition. This was the first of several military interventions in Nanking, Hankou, and Jinan, and ultimately the 1931 Manchurian Incident sparking major conflict.
Schools of Economic Thought in Japan
The post-Meiji environment valued higher learning, a blend of traditional and newer approaches. Economic knowledge was transmitted through translations of Western writings, visits of Western economists, and study abroad by Japanese. In contrast to some Western views, Japanese economists in the early twentieth century were internationally connected and interested in European economic ideas. The Tokyo Imperial University was established in 1877, the first of a network of imperial universities, and it has maintained its preeminence until today. Its Law Faculty produced the vast majority of key officials in the first half of the twentieth century. The Meiji-era hierarchical examination system regulated entry to universities and to the civil service (though Tokyo University law graduates were exempted from such requirements). In addition, the university was also the leading institution for economic thinking, with its first classes in economics in 1880 (initially taught through the Faculty of Law) and its flagship publication Journal for State Science established in 1887.
The Kyoto Imperial University was established in 1897 as the next tier institution. Economics was taught by professors in the School of Law there (themselves mostly Tokyo Imperial University graduates), until a separate department devoted to economics was created in 1919, with the establishment of the Kyoto University Economic Review in English in 1926.2 Over the next half century, the government established seven such imperial universities in mainland Japan and one each in Formosa and Korea.
Schools of economic thought were sometimes colored by a legacy of traditional “Confucianist” views of the economy (Honjo [1943] 1965). Confucian thinking could be interpreted in various ways, but it implied an obligation on the part of policymakers to administer the nation to advance the interests of its people, broadening conventional Western economic thinking to incorporate views of humanity and morality. Sometimes the term “oriental economics” was used, particularly in contrast to Western colonialism in East Asia.
The post–Meiji Revolution era was particularly interested in the nation-centered developmentalism of the German historical school, its evolutionary approach helping explain Japan's late economic development. This proposed activist industry policy, industrial protectionism, and centralized economic direction on the Prussian model. Nishizawa and Ikeo (2018) note that many young Japanese scholars studied in Germany and their influence would continue through World War II. In 1890 the Japanese National Economics Association was established, to promote national independence and protect vulnerable industries. Around this time, some key texts such as those by Friedrich List and Gustav von Schmoller were being accessed in Japan.
Separate from the Imperial University system, a number of private universities and higher commercial schools were established with private funding in the early twentieth century. These schools were more interested in Anglo liberal classical economics (J. S. Mill and Alfred Marshall being frequently studied). They taught business studies, market mechanisms, and financial and monetary studies. In 1906 the Kobe Higher Commercial School established the Journal of Political Economy and Commercial Science, which was more sympathetic to reform liberalism. After World War I, the strong development of the corporate economy led to interest in business economics at higher commercial schools like Hitotsubashi, Waseda, and Osaka. In 1926 the Japanese Society of Business Administration was founded. Some private university students studied in the United Kingdom and increasingly in the United States.
Japanese academics had followed the writings of Marx and Engels, European social democracy, and watched the Bolshevik uprising in Russia, which sparked enduring interest in Marxist economics, which also seemed relevant to 1920s Japan with its social unrest, rice riots, and totalitarian pressures. The Tokyo Imperial University's economics faculty became a particular hotbed of young Japanese Marxist economists, some of whom had studied in the radical post–World War I milieu of Germany.
The Japanese Communist Party with its anarcho-syndicalist roots was founded in 1922, then outlawed three years later, although it continued underground. Most Japanese Marxist economists did not view themselves as activist Communist Party members. Japanese interpretation of Marxism tended toward viewing a welfare conflict, rather than a European-style class struggle. They saw the role of economics as providing a better basis for human welfare, building on European social welfare ideas, stimulated by the readings of J. A. Hobson, Lujo Brentano, and the Webbs (see Miwa 2015; Yagi 2022).3
In 1926 the full Das Kapital volumes were translated into Japanese. There were different interpretations and sharp disagreements in academia about ideas such as the labor theory of value. An ongoing argument among Marxists was how to interpret Marx's more European-centric teachings and, in particular, how to categorize the Meiji Restoration. The Koza school (or the “lectures faction”) took the Comintern line—Japanese agricultural organization remained largely feudal, so a bourgeois revolution would still be necessary to precede a proletarian revolution. By contrast, the Rono school (or the “labour and farmer faction,” sometimes labeled Trotskyist) argued that Japanese agricultural development was well underway and that the country was now ripe for proletarian revolution.4
Japanese Marxists understood general equilibrium economics and its connections with socialist systems of allocation. This built on teachings of Walras and Cassel, employing mathematical techniques to determine general or partial equilibrium stability conditions. This work was mainly theoretical, and there seemed limited interest in the major European debates sparked by Oskar Lange and others in the 1930s about central planning versus market mechanisms. Japanese planning would always be based on a mixed public/private system.5
Ever since Japanese sympathy for Keynes's Versailles Treaty views in The Economic Consequences of the Peace, there had been interest in his subsequent economic writings. By the 1930s, Japanese economists were alert to current Western ideas. Keynes's Treatise on Money was translated in 1932, and the General Theory was translated in 1936, soon after its publication. That same year a Japanese study group was formed on Keynesian economics (Morris-Suzuki 1989). Subsequently, a group of younger economists, particularly at Hitotsubashi University, took Keynes's macroeconomic ideas forward (Hamada 1986; Ikeo 1997).
Key politicians like long-term finance minister Takahashi Korekiyo, though he had no formal economic training, had been aware of Keynes for some time. In 1929 he wrote an article explaining his misgivings about Japan's return to the gold standard, which contained a (partially incomplete) explanation of the yet to be formalized Kahn/Keynes multiplier effect, together with a warning about the risks of falling into a liquidity trap. He elaborated on the multiplier in a series of Diet speeches. But using government spending to stimulate demand was as much derived from the writings of early Japanese economists such as Maeda Masana, as it was purely Keynesian.6
The period also saw the emergence of informal schools of economics, based around universities, and the establishment of more formal research institutes, often privately funded. For example, the Ohara Institute for Social Research funded by a cotton consortium in 1918 became an important center for Marxist studies. Sugihara (1997) records that the Research Department of the South Manchurian Railway Company included many Marxists.
Think tanks or discussion groups became favored ways of reaching Japanese consensus on difficult subjects. The most famous was the Showa Kenkyukai, an eclectic study group of professionals who in the late 1930s acted as a sounding board for Prime Minister Konoe. It included academic economists and economic commentators, along with an interdisciplinary mix of journalists, advisers, and bureaucrats (Okita 1983). Members spent most time discussing the future of Japan and resolution of the “China question.” The group was disbanded in haste after links were revealed with the Russian spy Richard Sorge (who was later hanged).
The Depression and Reform
There were also growing anti-Marxist schools of economists. Morris-Suzuki notes the most influential Western influence came from Carl Menger and the Austrian school, led in Japan by Koizumi Shinzo.7 Joseph Schumpeter had Japanese students and visitors at the University of Bonn, and later was well known in Japan, visiting in 1931 and speaking on the Great Depression (Kubo and Hagemann 2022).
Inoue Junnosuke, the governor of the Bank of Japan in the early 1920s, admired German austerity policies that were being used to dampen hyperinflation, and several young economists from the Bank of Japan spent time at the German Reichsbank where they were influenced by the views of President Hjalmar Schacht. Ignoring the advice of Keynes and others, the governor decided to rejoin the gold standard at a high exchange rate, expecting this would reduce poorly performing companies and give Japan world power status. However, this implied a revaluation of over 10 percent in the currency. International financial institutions sold Japanese yen to buy US dollars, and the Japanese government could not stem the resulting outflow of gold. This had a harsh effect on the economy—interest rates rose, trade and prices fell, companies laid off workers, wages fell, and household budgets were hit, with even famine reported.
At the same time, the international environment was worsening: Japanese export production had been dominated by silk and other textiles for American markets, but the US stock market crash and the growth of synthetic rayon products halved the price of raw silk and textile exports. This was worsened by the American Hawley-Smoot tariff legislation in 1930 and by Britain's reinstatement of the Imperial Preference System; other nations began to retaliate with industrial import protection and international trade declined significantly.
The Japanese finance minister, Takahashi, responded forcefully: first, the yen was devalued by cutting the link with the gold standard and was allowed to depreciate considerably, then refixed against sterling with some capital controls in place. This made Japanese exports more competitive, and they soon responded with a positive trade balance. The second tool was monetary policy—increasing money supply to provide liquidity and stimulate domestic demand, by increasing the Bank of Japan's limits on the unbacked commercial paper. The base interest rate fell, allowing cheaper finance and encouraging businesses to borrow and expand.
The third pillar was fiscal policy: a program of Y600 million over three years matched by an equivalent amount from local government, funded by selling Treasury bonds to the public, and boosted by the Ministry of Finance selling bonds to the Bank of Japan. These moves were linked to more active industry policy, with cheaper funding and a program of public works financed by debt to be paid for by a tax increase after recovery. This resulted in a big increase in government spending, successfully financed by bonds eventually sold to the private sector.
The economy responded strongly, but the debt had to be financed. The 1935–36 budget was a turning point: as Takahashi tried to balance the budget, he forcefully overruled the demands of the army and navy ministers in the cabinet. But Japan had entered an era of right-wing instability: in February 1936, a contingent of young officers assassinated Takahashi and several other ministers. The attempted coup was eventually suppressed, but by now military members of the cabinet could veto national budgets, and this marked the end of civilian budgetary control.8
Intellectual Repression and Wartime Writings
The Japanese government had monitored the Russian Revolution closely, concerned about revolutionary risks and territorial tensions with the Soviet Union. Some members of the outlawed Communist Party were imprisoned. Although not all active Communists, pressure was applied to Marxist school economists: five Marxist economic professors were forced to resign from imperial universities in 1928, and one of them, Kawakami Hajime, was later imprisoned.
With the growth of militarist “patriotism,” intellectual repression was becoming widespread and policed by the Special Higher Police (Tokko). By the 1930s, any economic work containing antiwar sentiments was banned. This included most Marxist writings but could even include some classical economic research on capitalism (Dimand and Wakatabe 2011). The year 1933 saw stronger repression of “dangerous thought” with more academic dismissals; and in 1936–37, there were mass arrests of Marxist and socialist professors. The Marxist economists were driven underground.9
The wartime years in the economics faculty of the prestigious Tokyo Imperial University were chaotic due to a mix of professorial factionalism and government suppression (Karashima 2016). According to Hein (2004), half a dozen left-wing Tokyo Imperial University economists were imprisoned for what was viewed as subversive writings in the 1930s. Economics faculties outside the imperial university system were less ideological and more stable. However, no one was completely safe from the Thought Police. During the war, they arrested and tortured Kawada Hisachi, a Keio University graduate with Communist Party links, working in the Institute of World Economy in Tokyo during the war, (falsely) accusing him and his wife of espionage (Tsurumi 1986).
Some brave economists continued their independent research throughout World War II. Certain publications in the 1930s and 1940s were highly mathematical, and theoretical economic research was safer than practical policy work (e.g., Aoyama 1943). But as shown below, these academically active economists had limited influence on the Japanese wartime administration, in contrast to a separate group of “reform bureaucrats.”
Nationalist Economists
The Japanese Imperial Army had been modernized in the early twentieth century under German military influence. They readopted the Meiji slogan Fukuoku Kyohei, translated as “Enrich the Country, Strengthen the Army.” Economic strength and security seemed indelibly intertwined. In the lead-up to the war, some nationalist intellectuals drew from Tokugawa-era thinking on Japanese ethnic and moral superiority and from German historical school economists like Friedrich List, Gustav von Schmoller, and Werner Sombart. This also sparked interest in ideas of Western Fascism, seeing its German historical school's evolutionary approach as helping explain Japan's late economic development. Nationalists were more attracted by ideas of state supremacy over Western arguments of individual and market rationality. The practical Japanese planning tradition that developed through the 1930s and allowed military expansionism was based as much on German traditions of state direction as on Soviet-style planning (Kerde 1999).
The Tokyo University economist Okochi Kazuo and others formed the influential “production theory” in the 1930s, advocating the reconstruction of social structure with the purpose of best serving national production, in contrast to the prevailing Marxist ideas (Tsurumi 1986). He became influential in the Imperial Rule Assistance Organization, promoting the invasion of China, and serving as a technocrat during the war arguing for efficiency reforms. In this context he was allowed a limited degree of independent criticism. But when his Tokyo professor and colleague Kawai Eijiro was forced out of his position for his liberal views, Kazuo failed to support him.
By the mid-1930s, a particularly anti-Marxist academic orthodoxy had emerged with the Japan Economic Association (1934) and the Japan Economic Policy Association (1940). Some of their work was funded by state research organizations, and money also flowed from the large budgets of the army and the navy into research, new chairs, and new institutes, with some attempts to establish a “Japanese economics” as an alternative to Western liberalism.
What later became the important Institute for Economic Research was founded at Hitotsubashi University. Several Hitotsubashi economics professors worked for army research projects during World War II and became advisers to ministries after the war. Osaka Imperial University hosted the well-funded Institute for East Asian Economy established in 1940 to promote the “common prosperity” ideas of militarists.
Some of these efforts were curtailed by wartime, as teachers and students were assigned to part-time munitions work, and some campuses were taken over by the military. With the full-scale invasion of the Chinese mainland in 1937, the Japanese economy moved to a total war footing. The Kyoto University Economic Review reflected this with articles focused on anti-Western colonialism, Japanese exceptionalism, wartime economics (especially the economics of shipping), and the economic potential of a Japanese regional empire. Increasingly, these papers had a patriotic nationalist flavor rather than being academically analytical.
Many of the articles were critical of Western trade with East Asia and called for emancipating the region from the yoke of Western capitalism. Articles on the “China question” made (unconvincing) claims that Japan was respecting Chinese political independence, arguing it showed equality and respect, and that any imperialistic exploitation was actually the outcome of Western capitalism. Articles on the “wider territory economy” and “the greater East Asian war” in 1941–42 viewed conflict as an inevitable outcome of the need to supply resources that had been unfairly blocked by Western powers. It proposed trade agreements to provide contractual frameworks for “inferior” populations to supply “superior” ones (see Tsurumi 1986; Miwa 2015; Yagi 2022).
Reform Bureaucrats and Technocrats
In the later 1920s, a group of younger bureaucrats from technical ministries and cabinet planning agencies had advanced ideas about changing a passive supervisory state into a more activist management approach. A year after the 1931 invasion of Manchuria, the puppet state of Manchukuo was established, and its administration was handed from the military over to bureaucrats, who brought their technical skills to finance, industry, infrastructure, agriculture, and legal frameworks. Far from viewing it as an imperialist invasion, these “reform bureaucrats” wanted to showcase Manchukuo development to the West and also to provide a pilot for new planning techniques on the Japanese mainland.
The senior members of this reform bureaucracy were mainly law graduates from Tokyo Imperial University. These legally trained officials either had specialized in statist views of German law (Friedrich List was particularly influential) or held progressive Marxist views, as reflected in their interest in state planning. But reform bureaucrats also adopted National Socialist concepts of “living space” and “national land planning,” with objectives of regional self-sufficiency. The laissez-faire state was to be replaced by the planned state, based on concepts of Japanese ethnic superiority, with wide appeal to both rightist and leftist politicians, promoting efficiency, co-prosperity, and pan-Asian hegemony, with technocratic management focused on total war thinking (Sakuda 1938; Kerde 1999).
Many of the mid-level reform bureaucrats had engineering or technology backgrounds, and they drew selectively on writings from the United States (Thorstein Veblen, Fred Taylor), the Italian Fascist experience, Soviet planning, and German Planwirtschaft (as implemented by Walther Rathenau, e.g., Felix 1971). Technocracy was seen to avoid the inefficiencies of laissez-faire capitalism. Engineers in government and the zaibatsu organized powerful institutions to promote “scientific industry.” These ideas attracted a new style of younger zaibatsu managers and a new generation of army technocrats (known as the “control faction”), some of whom had studied economics in addition to their military training (Mimura 2011).
As the Manchukuo experiment matured, similar approaches were applied in Korea, Formosa, and “leased” territories in China, as a basis for urban planning, infrastructure development, and government administration there. As Tokyo moved to a wartime footing in the later 1930s, techno-Fascism spread into the homeland too. Prime Minister Konoe Funimaro provided sympathetic leadership and encouragement to this technocratic approach.
In startling contrast to the stated idealism of pan-Asian modernism, the exceptionalist views of the senior Japanese bureaucrats and military players demonstrated extreme racism. The key leaders of the Manchukuo administration, Kishi Nobusuke from the Ministry of Commerce and Industry and Hoshino Naoki from the Ministry of Finance (both of them law graduates from Tokyo Imperial University), treated Chinese as subhuman and presided over an empire fueled by slave labor. Kishi designed the first five-year plan for Manchukuo, which promoted heavy industry (coal, steel, electricity, and weapons development). From 1937, he was administrator of the Manchuria Industrial Development Company, which involved the largest capital projects in the Japanese Empire. During the war years, one million Chinese were forced into slave labor there each year, where they had a tragically short life expectancy.10
Institutions and Planning
Japanese planning drew inspiration from early German statist planning and also from the 1920s Soviet Gosplan approach (Mimura 2011). It established production targets, then allocated the resources and infrastructure necessary to achieve these. In contrast to Stalinist central planning, it allowed for some pricing mechanisms, private production, peasant agriculture, and private property rights. Planning techniques were not particularly sophisticated—military demand drove targets that were disaggregated through a loose input-output framework (but without Leontief-style optimization procedures). Bureaucrats were confident in their ability to direct economic activity, and they used terms like “new economic morality” to denote a uniquely Japanese public-private-community cooperation (Kerde 1999; Miwa 2015). Based partly on their experience in Manchuria, the reform bureaucrats encouraged the establishment of big “national policy” firms focused on the war effort.
In 1937 Prime Minister Konoe, with a cabinet that was increasingly military-dominated, amalgamated several agencies to form the Cabinet Planning Board, which became an important vehicle for bureaucrats to design and manage the new corporatist economy.11 The board drafted a Materials Mobilization Plan (to allocate resources to the military, government bodies, and the private sector) and enacted the National Total War Mobilization Law with new controls on foreign exchange, import availability, industrial mobilization, and labor force mobilization. Werner (2002) portrayed the Cabinet Planning Board as the “economic general staff” of the military economy. The 1940 Konoe cabinet established the “New Economic Order” with tighter controls.12
The 1940 Imperial Rule Assistance Association merged many Japanese nationalist movements and political parties into a loose umbrella organization reducing political divergences. While there were elements of totalitarianism, in contrast to the mass movements and charismatic leaders of Italy, Germany, and the Soviet Union, Japanese political parties were less important and the leaders were lower profile military generals and Tokyo University bureaucrats. Particularly influential were a dozen prominent bureaucrats from various ministries and army circles who formed the “Monday Club” from 1939 (Kerde 1999).
These institutions initially showed promise in identifying and harnessing key resources. In the immediate prewar years, there was huge anticipatory production of war materiel and large stockpiling of reserves like oil. However, as World War II ground on and Japan's shipping fleet was decimated, the original plans had to be retrenched. Miwa (2015) argues that contrary to common perceptions, Japanese wartime planning was not particularly competent. Targets were argued among army, navy, bureaucrat, and zaibatsu interests, frequently being set at unrealistic levels without necessary resources, resulting in missed deadlines, poor quality, and black markets. Original targets were rarely realized and were constantly revised.
Under the 1938 National Mobilization Law, bureaucrats severely restricted production of consumer goods—for example, there was virtually no textile production for household use after the Pearl Harbor attacks. Widespread rationing was in place and in the later war years even rationed goods were unavailable, and it became a constant struggle to find basic foods. The administration used traditional neighborhood associations to direct local rationing, to promote savings and volunteer labor, and apply compulsory drafting (Pauer 1999). Women and older men were mobilized into the workforce, and even children did some work within the schooling system. About a million of the rural population migrated to urban factory jobs resulting in a farm labor shortfall and agricultural production quotas.
By late 1943, responsibility for military supplies was taken over by the Munitions Ministry and the administrative functions by the Cabinet Council Office. A year later, with the war proceeding badly, general planning was transferred directly under the control of the prime minister. The institutional separations were becoming less distinct—General Tojo, already minister of the army, had succeeded Konoe as prime minister, and in 1944 he also became chief of general staff, centralizing control of economic powers.
Economics and Finance in Wartime
While important in universities, economists were not a core part of the Japanese wartime planning process. A postwar investigation by the US Bombing Survey team in 1946 listed the senior members of the wartime planning agencies and related bodies (US Government 1946). Half had been trained at military academies (particularly the National Army College). Almost all the remainder were law graduates from Tokyo Imperial University (which also included some economics policy in its law degrees). Only one member (in the Ministry of Commerce) could claim to be an economics graduate.13
Bureaucrats may have been relatively powerful in planning, but they did not have things entirely their own way. By 1940, there was pushback to their planning techniques from politicians in the Diet and from some of the powerful zaibatsu concerned about their own commercial interests. In addition, the armed forces maintained some independence from the cabinet, claiming a direct line of responsibility to the emperor under the Meiji Constitution, and with their right to nominate the army minister, who in turn could veto any budget with insufficient military appropriations.
In the early 1930s, Finance Minister Takahashi Korekiyo had issued bonds underwritten by the Bank of Japan, explicitly as a temporary funding solution for the budget. After his assassination, finance ministers were under huge pressure from military cabinet ministers to use off-balance sheet accounts, unconditionally backed by the Bank of Japan, to raise funds. These were ultimately funded by domestic savings (heavily promoted by the ministry) and by exploitation of resources from colonized countries. Production in the occupied territories was financed by printing unbacked notes, with the compulsory revaluation of the yen against local currencies.
During the 1937–45 wartime era, there were ten ministers of finance and two Bank of Japan governors, almost all of them graduates in law from Tokyo Imperial University. These officeholders were not necessarily all powerful. Cohen (1946) describes the prime minister as having limited cabinet power, more like a board chair. Certain ministries acted relatively independently. Ultimately, the Japanese war effort was controlled by what the US Bombing Survey described as a consensus of the “oligarchy of ruling factions,” in particular the group around the emperor led by the keeper of the privy seal, the Jushin group of senior statesmen, and the cabinet—particularly the army and navy ministers, themselves strongly influenced by hardline junior officers.14
Trade Tensions
The Japanese had long harbored resentment from the post–World War I Versailles negotiations rebuffing their proposed racial equality clause and rejecting all their territorial claims. The country subsequently joined the League of Nations, but the Manchuria invasion was heavily criticized, and in 1933 Japan withdrew from the league in protest.
After successfully exiting the gold standard in 1931, a determined export drive into depression-afflicted world markets antagonized Western trading interests, even though most Japanese exports did not compete directly with the big powers (one major exception being textiles). By 1930 a new regional economy was emerging in East Asia, initially led by cotton and silk textile integration. But Chinese textile mills (sometimes assisted by Japanese investment and technology) began outcompeting more expensive Japanese production, pushing the latter toward Indian and Southeast Asia cotton markets and to American silk markets (which remained open as there was no US silk production to protect).15
British trade policy was also hurting Japanese trading interests. In 1930 the United Kingdom imposed import duties, and the Ottawa Imperial Economic Conference meant that Japanese exports to India and other British colonies faced increasing barriers. British approval of Chinese currency reform in 1935 and support for Chinese nationalism left Japanese in fear that an economic bloc was being erected against their interests. The Dutch also attempted to limit Japanese imports, but most trade into the British Straits Settlements and the Dutch East Indies used migrant Chinese as middlemen and continued to grow (until this group organized anti-Japanese boycotts after the 1937 invasions of mainland China).
For its part, the United States had imposed anti-Japanese immigration controls and the 1922 Washington Naval Treaty restrictions, and refused to recognize the Manchukuo puppet state. The Hawley-Smoot import tariffs in 1930 included some measures specifically aimed at Japanese imports. The Japanese navy saw Japan's “Southward Advance” policy as requiring naval domination of the South China Sea to protect distant sources of raw material and anticipating eventual US naval confrontation. After Japan's 1940 advance into French Indochina, the United States further imposed a strict embargo on exports of steel and oil to Japan, and this was viewed by the military government as a direct attack on the country's essential interests.
East Asian Economic Integration
Since the late nineteenth century, Japan had viewed itself as the center of a pan-Asian movement that could replace Western imperialism in the Asia region with an idealized form of Japanese regional leadership. Japanese nationalists saw this as a way to control the resources that would be necessary for Japan to become a leading world power. Idealists among them also saw such an arrangement as benefiting occupied territories, a belief that persisted throughout the decade of war, in apparent dissonance with the cruel reality of Japanese occupation.
The military felt the obvious way to ensure this was by invasion and coercion. In contrast, some economists argued for a regional trade-investment approach. One of the most liberal (and pragmatic) ministers, Takahashi Korekiyo, argued that resources could best be assured through cooperative relationships. In 1921 he sent the prime minister a memorandum titled “An Opinion Concerning the Establishment of East Asian Economic Power.” In it he argued Japan should withdraw troops and military installations in China, stop loans to gain rail and mining concessions there, terminate demands on taxes as security for the loans, and cut support for exploitative Japanese interests on the mainland. He felt Japan would benefit more from a strong industrializing China, and these two Asian powers together could create a competitive economic bloc equivalent to the Anglo-American alliance, open to foreign capital and regional trade. However, his prime minister dismissed this as “a schoolboy theory that must be suppressed” (quoted in Smethurst 2007: 222).
Many intellectuals around the Konoe administration continued to be interested in the idea of an East Asian bloc, variously described as a league or a community. Keio University professor Kada Tetsuji, while disclaiming European-style imperialism, suggested an “economic cooperative union” focused on a triangle of Japan, China, and Manchukuo, but with the future possibilities of southern expansion (Karashima 2016). Akamatsu Kaname, a Tokyo University economist, had brought back from Germany ideas by Nicolai Kondratieff on catch-up long cycles, which was later translated into a regional model of dynamic competitiveness (eventually known as the “Flying Geese model”). Such a concept was first formalized in a speech by Prime Minister Konoe announcing the “new order in East Asia.”16
To circumvent the growing protectionism of the sterling/dollar zones, economic planners also called for a yen bloc, which involved currency reform in the inner empire. In 1938 Japan established the Asian Development Board (Koain) with branches in China, to promote industrial development, economic controls, financial policy, currency, laws, transport, and communication networks there. By 1940 there was a more defined concept that would offer coprosperity and peace for its members in Southeast and South Asia, the Greater East Asia Co-Prosperity Sphere. This was seen as the Japanese equivalent of the US Monroe Doctrine, protecting essential interests but also liberating colonized populations in the British Straits Settlements, French Indo-China, and the Dutch East Indies.
By early 1942, the Japanese military had occupied all six main countries of Southeast Asia, with a total population of 140 million (twice that of Japan itself). The Japanese finance minister instructed the occupiers to “adopt a policy of self-sufficiency in the South, keep the shipment of materials from Japan to that area to the minimum necessary to maintain order and to utilise labour forces there, ignore for the time being the decline in the value of currency and the economic dislocations that will ensue from this, and in this way push forward” (quoted in Huff and Majima 2013: 937–38).
In 1942 the Ministry of Greater East Asia was established to absorb previous agencies. Initially, there was some support from within occupied territories. In 1943 the Greater East Asian Conference took place in Tokyo, hosting representatives of nationalist forces through the region including from India, Burma, China, Philippines, and Thailand, encouraging them to join the Axis war effort.
The Wartime Economy
As became increasingly clear, Japanese management of occupied territories had one main aim—the extraction of key raw materials for the home country war effort, using compulsion, confiscation, and slave laborers and prisoners of war without constraint. Oil from the Dutch East Indies, agricultural production from the Philippines, and rubber and tin from Indochina and the Straits Settlements were shipped. However, despite the military control over extraction, the Japanese navy could never completely control its sea routes and ultimately lost most of its shipping capacity to superior US firepower.
Japanese wartime economists focused on industry-specific resource availability and supply chains, shipping, inventories, and inputs. However, there was little evidence of the advanced operations research and other optimization techniques that were being developed by mathematicians and economists at the time in the United Kingdom, United States, and USSR. The work of analysts was complicated by poor data, misleading propaganda, and official repression. As the war ground on, material shortages, supply chain fragility, and aerial bombing meant that the country was fast exhausting its access to mineral deposits, its energy supplies, and the industrial output needed for the war machine. Coking coal from Northern China, iron ore from Manchuria and Korea, and bauxite from Southeast Asia were most at risk for armaments. There was a desperate search for other substitutes such as alum shale in China, pig iron from Manchuria, and synthetic oil from Southeast Asia. The economic outlook was increasingly pessimistic, and analysts had to hide “unpatriotic” reports from seizure by the Thought Police. It was difficult for economists to understand and analyze the true economy under such conditions.
Ultimately, with Japanese shipping decimated and all the mainland ports bombed, a group of advisers bypassed military control and instead prioritized shipments of foodstuffs for the civilian population; the anticipated hostile enemy occupation was expected to threaten widespread starvation for the Japanese population, already receiving insufficient daily calories. This meant emergency shipments of salt and soybeans were transported in the few surviving landing craft straight on to Japan's beaches.
Immediate Postwar Economic Rethinking
By the end of the war, a number of economists emerged as intellectual leaders, arguing that peace was a public good that needed to be nurtured through economic stability. Among them were Marxists and liberal economists who had survived the war. They could claim some moral leadership, quite apart from their economic ideas.
In a remarkable example of Japanese intellectual resilience, only the day after the war ended, the Harvard-trained economist Tsuru Shigeto and the Tokyo Imperial University–trained technocrat Okita Saburo, two of the key wartime bureaucrats, pulled together an informal group of about thirty economists, bureaucrats, and engineers, including the cream of the prewar technocrats, calling themselves the Committee for Research into Post-War Problems. They met in Tokyo in the half-destroyed building of the South Manchuria Railway Company. These (all) men shared the belief that Japan's leaders had made terrible mistakes, and some of them had been personally involved in this. The group comprised a mix of technocrats, Marxists, and others. They agreed that the postwar economy must be demilitarized, more egalitarian, democratic, and able to participate in the international economy.
The economic problems to be confronted included widespread malnutrition and even famine, threatened reparations, massive wartime destruction, loss of almost all industrial capacity, widespread poverty, displaced populations, and fear of what the Allied occupation would bring. Initially, they were no more than a private study group, but later were recognized as the “Special Survey Committee” of the Ministry of Foreign Affairs. They systematically searched for undestroyed documents and data, creating their own statistical sources, using abacuses, cranking the handles on primitive calculating machines, searching for paper and other supplies on the black market, and working by the light of candles.17
By the end of the year, the group had completed “Guidelines for the Reconstruction of the Japanese Economy,” and in a few more months a follow-up: “The Basic Problems of the Reconstruction of the Japanese Economy.” Despite the problems of paper supplies, ten thousand copies were eventually printed and widely distributed, becoming a forerunner of Japanese official white papers. The Americans were producing their own reports on Japan, but this was Japan's first response to the problems that lay ahead. Its mixed planning approach was familiar, but its democratic ideals implied a huge shift from prewar thinking.
The MacArthur Occupation
After the armistice, there were initial proposals to divide Japan into separate US, Soviet, Chinese, and British administrative zones. But with the USSR occupying northern offshore islands and the Chinese borders, Cold War tensions were rising and the United States exerted its dominance. General Douglas MacArthur was appointed as supreme commander for the Allied powers in Japan. In principle, law and order remained under Japanese control, and the Allied occupation powers (effectively the US military government) worked through Japanese government officials where possible.
The year 1946 was marked by extreme food scarcity, inadequate rations, black markets in the cities, severe housing shortages, returning soldiers without jobs or money, no imported supplies except for US humanitarian aid, and a postwar boom of malnourished babies. For several years, Japanese inflation raged out of control at several hundred percent per year. Families sold kimono, furniture, and jewels, anything valuable, to buy basics like rice, sugar, and soap. Black market prices skyrocketed, estimated to reach thirty times official prices.
As in Germany, a US survey mission initially argued that Japanese reparations should involve dismantling one thousand factories, reducing Japan to a subsistence agrarian country. Japanese economists refuted this, pointing instead to a Brookings Institution report recommending a standard of living targeted at 1930 levels, before Japan's military adventures. Given the wartime losses and the postwar population increase, Okita and colleagues calculated this implied Japanese plant capacity would actually need to increase rather than reduce. This became “A Study of Japan's Reparations Capacity,” which was submitted to the US mission in 1946, where it gradually gained their support.
Although famously egocentric, MacArthur admitted he was no economist, and he brought in a series of US experts to design reforms. Under MacArthur's supervision (and with the insightful advice of North American academics like Cambridge and Harvard–trained socialist E. H. Norman), Japan's government system underwent enormous change. A new written constitution was adopted, reducing the emperor to the status of a constitutional monarch and renouncing war and barring Japan from maintaining armed forces. Having learned a lesson from the prewar military pressures to fund Japanese expansionism, the new constitution entrenched a constitutional budgetary process to be controlled by a civilian cabinet and Diet.
There was a further push toward Western democratization along the lines of the US New Deal, with a reformed education system extending compulsory schooling based on the German experience and the enfranchisement of women. Major land reform policy was guided by a series of articles by Japanese agricultural economists that had been published prewar in the Kyoto University Economic Review. Farms were purchased from absentee landlords and resold cheaply to tenant farmers who worked the land. This radical reform was somewhat surprising, coming from the capitalist United States with its concern for private property rights and its criticism of Communist land nationalization. Initially, the policies encouraged a strong family farming tradition and led to a remarkable increase in agricultural productivity, though ultimately many plots proved small and inefficient, engendering agricultural protectionism.
New labor laws established the rights of workers to organize trade unions, stipulated minimum working conditions, and regulated labor disputes. The Americans had in mind the development of US-style craft-based unions, but the reforms brought growth in Japanese company-based unions. They proved very militant, and many strikes took place, culminating in a planned general strike in early 1947. This worried the American administration, as they feared the spread of Communist union leaders, and they clamped down on the industrial disruptions.
The 1946 International Military Tribunal for the Far East targeted key military and civilian leaders. Former prime minister Konoe decided his only honorable action was to commit suicide. The postwar Edict 109 purged over twenty thousand Japanese from the armed forces, wartime politicians, Fascist sympathizers, and some government officials. Left-wingers were not immune in the mounting Cold War tensions: the Communist Party and the Japanese Socialist Party were also effectively frozen out of government positions. The universities were banned from using the title “Imperial.” Half a dozen Kyoto University economics professors were expelled from their posts, and in 1946 junior faculty members at Kyoto protested the wartime conduct of senior colleagues, especially through the Institute for East Asian Economy, forcing the resignations of all the faculty's economics professors (Dimand and Wakatabe 2011). The purges did not just affect right-wingers: some eminent Marxist professors like Kei Shibata were forced to resign due to their involvement in the New Order Movement.18
Early Economic Recovery and the Economic Stabilization Board
Hein (2004) argues that postwar economic policy aimed to achieve growth, not purely for its own sake, but because this was seen as the way to ensure peace and security. Having felt misled by the Fascist morality in the past, many Japanese now had more faith in the technical arguments of academic economists. This meant a focus on rapid growth, with consumption and savings sacrificed to heavy industrial rebuild and open trade with American markets.
There was a revival in Marxist economics after the war, attracting some international interest through works such as Marxist Economics by the eminent economist Michio Morishima and also driven by modernist socialist interpretations by Westerners such as Oskar Lange and Joan Robinson. This school looked to reinterpret Marx in the context of modern Japanese capitalism, encouraged by the later 1947–48 socialist government. However, following the ascendancy of the Chinese Communist Party in 1949, there was less tolerance for these ideas and more interest in a middle way. Marxists worked with non-Marxists on reparations and reconstruction.19
The purge of business leaders who had cooperated with the Japanese wartime government had the effect of bringing in a new generation of younger Japanese management espousing American ideas of business administration. There was renewed interest in Keynesian economics among academics, especially in its American interpretation through the writings of American academic economists, particularly Paul Samuelson (translated into Japanese in 1953). But to the irritation of the Americans, Marxist economics continued strong in many universities, and there were ongoing debates about the viability of capitalism versus socialism. Socialist economists wanted policies that delivered not just capital productivity but also labor productivity to drive a higher wage economy.
“The Basic Problems of Japan's Economic Reconstruction” contained some key innovative ideas: that Japan's future should be built on industrialization, new technology, and trade, taking account of likely big changes in global competitiveness. These could be expected to erode Japanese comparative advantage in sectors like textiles and agriculture compared to the rest of Asia, and therefore it was argued Japan must focus on skill-intensive industry. The report identified priority sectors for access to materials and funding. In particular, coal was crucial for the steel industry. “Dig 30 million tons of coal” became a national campaign, with subsidies and loans for mining. MacArthur agreed that the US aid program should include imports of oil for steelmaking.
In 1947 the Reconstruction Finance Bank was established to fund a wider range of priority industries: coal, fertilizer, electric power, iron and steel, and machinery. There was still rampant hyperinflation with prices surging. This was caused by strong demand for goods in an economy with bombed-out factories and no access to imported materials, worsened by the government issuing reconstruction bonds, which the Bank of Japan turned into printed money. There was a pervasive black market and ad hoc price controls.
That year Japanese domestic politics changed with the first Socialist Party leader, Tetsu Katayama, elected prime minister. He was more interventionist by nature, and there was some concern among the (still occupying) Americans as to the policies a socialist might support. However, like his predecessors, he held office for only about a year, an enduring Japanese pattern that left longer-term Japanese bureaucrats wielding much power. Katayama established the Economic Stabilization Board, which proved resilient and important.
The Economic Stabilization Board continued to construct long-term economic plans, put together national income statistics, and issued the first economic white paper report on “the state of the economy” (very loosely based on the first British postwar white paper). The report was published in Japanese and English and was hugely influential among Japanese officials and the Allied occupation administration. It proposed the priority focus on scarce capital, rebuilding of heavy industry for civilian uses, transition to an export economy, with an overall focus on fast growth, assisted by receptive US markets, the US defense umbrella, and an evolving Japanese consensus on the appropriate recovery path. Early advice was around supply-side efficiency, rather than demand management. The government would plan and direct but should be “market-friendly.” Sympathetic US colleagues put key Japanese planners in touch with New Dealers from the Tennessee Valley Authority and the US National Resources Planning Board.
Not all of the board's work was approved by the US administration. An early investigation, “Report on National Wealth Damaged by the Pacific War,” included estimates of the atomic bombing impact, which were highly controversial and initially withheld from the public.
American Economic Expertise
As the postwar economic challenges became evident, the US administration looked to a number of visiting economic experts. Their ideas were very important, but so too was the influence of Japanese economists in the administration who subtly adapted many of the reforms. Government-business relationships were close but took on a uniquely Japanese character, as also did business-trade union relationships.
Concentrated economic power through key companies, banks, and landlords (the zaibatsu) had allowed militarism to flourish prewar and helped fund the war effort. The American economist Eleanor Hadley designed so-called economic democratization reforms invoking the dissolution of the zaibatsu in 1945 and the Fair-Trade Law and the Economic Power Excessive Concentration Elimination Law in 1947. However, growing concern about Soviet expansion in the East and the Korean War soon led the US administration to rethink, looking to reequip Japan as an anti-Communist capitalist economy, allowing the formation of keiretsu, looser industrial groupings linked through ongoing relationships or shareholdings.
Worried by the destabilizing effects of hyperinflation on the currency and on social stability, Washington dispatched the former Detroit banker Joseph Dodge to Tokyo in early 1949. His key advisers were two German-American economists who had worked previously on stabilizing German and Austrian currencies: the New Dealer economist Raymond Goldsmith and Gerhard Colm from the US Council of Economic Advisers. The Dodge Plan aimed to reduce demand by cutting public deficits through the “Nine Point Economic Stabilization Program.” It ordered rapid austerity measures, including ending fukkin loans, terminating government subsidies, increasing utility charges, removing price controls, terminating inflationary bonds, dissolving the Reconstruction Finance Bank, strengthening taxation collection, cutting government expenditure, and fixing the exchange rate to the US dollar.
This package was followed by the Columbia fiscal expert Professor C. S. Shoup leading a team of seven US economists in reorganizing the Japanese tax system, working on national accounting statistics, and putting in place a heavy reliance on income and corporate tax. There was encouragement for household saving, which subsequently showed a significant upsurge.
These austerity measures were successful at stabilizing inflation, but at the cost of severe cuts to output. This would have depressed the Japanese economy and caused further political problems, except that there was an unexpected and hugely stimulatory event ahead: the Korean War of 1950.
Conclusion
Japan's prewar intellectual environment was vibrant, with academic economists developing views ranging from Marxism to neoclassical economics. However, in government, economic policy was dominated by officials with law degrees, overwhelmingly from Tokyo Imperial University. Nationalism, economic colonialism, and military domination in the 1930s marked the preeminence of “reform bureaucrats,” technical planners with legal and military backgrounds. Their economic plans were designed to deliver confiscated resources to the militarized Japanese economy but were unsophisticated in method. In method, academic economists fought and lost arguments about social objectives and open trading relationships and were not particularly influential in Japanese wartime economic policymaking, some of them evicted or even imprisoned by military repression.
There was a power vacuum in postwar administration, and now Japanese economists were able to display moral and policy leadership. They showed vision, helped absorb and adapt the MacArthur reforms, staffed the new Japanese planning agencies, and set the foundation for modern Japanese growth.
The author thanks Professor Peter Drysdale, Dr. Andrew Levidis, and participants at a workshop on economists in World War II for their comments, with additional guidance from Professors Ariane Dupont-Kieffer and Harald Hagemann and particularly detailed comments and guidance from Robert Dimand.
Notes
This article is almost entirely about male economists—formally trained female economists were very rare in Japan’s wartime environment and were even absent from many support roles. The insightful stories of a few Japanese women working on some economic matters are told in Madden and Dimand 2018. Several note the “liberating” effect of wartime factory employment for women previously confined to the home.
The articles in the Review, as documented in Dimand and Wakatabe 2011, provide a rich picture of evolving Japanese economic views.
Morris-Suzuki (1989) notes that for many Japanese economists, Marxist economic thinking was an intellectual idea not a political movement. She cites Hajime Kawakami at Tokyo Imperial University who translated Das Kapital, as a particularly influential pioneer, stimulated by his visit to the slums of London. The impact of the Russian Revolution on Japanese Communism is discussed in detail in Linkhoeva 2020. See Hoston 1986.
The “lectures faction” was so-named for a collection of contributors to a seven-volume publication published in 1932 (Ando 1998).
These developments are summarized in Nishizawa and Ikeo 2018. They also show how general equilibrium developments from Europe reached Japan earlier than the English-speaking world.
The remarkable career of Takashi Korekiyo from indentured laborer to seven-time finance minister is recounted in Smethurst 2007. He had a long-standing acquaintance with Cambridge economics, and he appears to have read The Economic Consequences of the Peace and some journalistic material in Essays in Persuasion. Takahashi was also influenced by translations of Keynes’s views on UK gold standard restoration and had been interested in A Tract on Monetary Reform. The “multiplier” reference is elaborated in Smethurst (244).
Koizumi Shinzo studied Western classical economics (his doctorate was on David Ricardo) and also Austrian economics, channeling Bohm-Bawerk’s Austrian attack on Marxist economics.
For context and detail, see Bollard 2020.
Yagi (2000) names forty prominent economists who were expelled from universities during this period. Increasingly some liberal non-Marxists were also targeted.
Kishi Nobusuke had topped his law class at Tokyo University, rose rapidly through the Commerce Ministry, and studied industry policy in the United States, Germany, and the Soviet Union; he was impressed by Russian industry plans, American Taylorist labor management techniques, and German cartels and engineering. Despite having been directly responsible for millions of Chinese deaths and labeled as a Class A war criminal, he was never punished, and a decade later astonishingly became prime minister. His son later became foreign minister, and his grandson Shinzo Abe also became prime minister.
Konoe graduated with a law degree from Kyoto Imperial University but had also studied Western philosophy and socialism.
Werner (2002) argues that the New Economic Order transformed the Japanese corporate structure from its 1920s laissez-faire format to what would become the postwar Japan-style corporate capitalism, with large firms, low labor mobility, and a focus on growth not shareholder returns under administrative “guidance.”
The Faculty of Law and Politics have taught law within a broad policy framework including some economics.
As early as February 1944, the Naval General Staff had concluded Japan could not win the war, but such was the complex nature of Japanese decision-making that it took a further eighteen months to reach sufficient consensus to advise the emperor.
More commercial detail is given in Sugihara 1997.
Akamatsu himself was placed under military command in 1943 and sent to Singapore to direct research in the regional economy (Korhonen 1994).
A gripping account of the challenges is given in Okita 1983.
Kei Shibata’s articles in the Kyoto University Economic Review and elsewhere illustrate how economists had to adjust their views to fit the regime’s prevailing approach through wartime. Intense intellectual and emotional disruption confronted these economists over the period.
Hein profiles three eminent academics (Arisawa Hiromi, Nakayama Ichiro, Tsuru Shigeto) who epitomized this path: sophisticated theorists but committed to producing practical policy advice based on factual data. All were well-grounded in Marxist as well as neoclassical economics, with theoretical influence from the German social policy school, but policy inspiration from wider sources, including the US New Deal, the British Labour Party, the German ordoliberals, and later Nehru and the Non-Aligned Movement. (Tsuru had the unhappy distinction of having been interned in both Japan and the United States.)
