Theme II 2a Transformation of East Asian Economies (Japan)

Theme II 2a: Transformation of East Asian Economies (Japan) “The best way to grow rapidly is to have the country bombarded” -Milton Friedman

A. Japan’s Economic Recovery Ai, Government Intervention 1. To rebuild Japan’s essential industries, the government created strategies and supportive mechanisms that emphasised on industries. By receiving preferential treatment from the government, these industries development were boosted, enabling Japan’s industrial basis to grow a. Reconversion Finance Bank (RFB) set up to selectively loan to firms essential to recovering production. The RFB was essential due to a scarcity in capital from the war, hence RFB provided capital that enabled steel and coal entrepreneurs to reinvest and increase production capability and capacity. Steel production grew from 40% to 70% pre-war level in a year b. Economic Rehabilitation Plan emphasised government control of the economy to promote activities of key industries (coal and steel). With government focus and resources, their development was accelerated. Instrumental for Japan’s industrial production, their growth enabled Japan’s industrial production to recover to 80% prewar levels in 1949 Aii. International Developments 1. Deemed as a strategic location due to its proximity to both US’s pacific interests and vulnerability to communist threat, Japan and US entered a cooperative relationship in which America leverages on Japan’s strategic geographical location in exchange from economic benefits from American activity. a. After UN entered the Korean War in 1950, Japan became the supply depot for Un forces. US placed orders of 7000 trucks worth 13 million with Japanese firms, reviving Japanese automobile industry. Japan’s support against containment and rollback stimulated its economy with war-related goods and services. b. Japan’s proximity to China and USSR+ North Korea’s aggression made America fearful of communist attacks against Japan, thus establishing Anpo, giving legal basis to the hosting of military bases and US troops for maintaining peace and stability. free ride’ (Japan was able to consistently keep its military spending under 1% of GNP and concentrate on generating economic growth under an American security umbrella) B. Japan’s Economic Miracle and Growth Criteria for Singnificance 1. Rapid Industrialisation- Change to its industrial exports 2. Economic Growth (Characterised by high growth rates and other economic indicators Rapid Industrialisation - Japan’s industrial productivity increased at the fastest rate in the world Economic Growth - 1970-1980s Annual GNP growth rates ranged from 4%-5% - Inflation was modest and unemployment remained below 2 - Represented 10% of the world’s GNP and later increased to 15% - Provided for 30% of world’s FDI flow and it was the world’s largest single foreign investor

Bi. International Development 1. Growth of global economy gave Japan’s economy multiple chances to leverage in industrial opportunities because of outbound American MNCs and cheap oil prices. These help to fuel and grow Japan’s developing industrial scene who industrialise more quickly and explore advance industries, modernising Japan. a. Relatively cheap oil prices ($2.50-$3.00), Japan was well placed to take advantage of the shift to oil as a new energy source to fuel industrial expansion as much of its industrial plants were new, making it much easier to use oil to form the start instead of having to adapt in older plants. Japan’s use of oil increased 6- fold from 1950s-960s b. 1960s outbound American MNCs seemed business opportunities in developing countries like Fairchild Semiconductor. It signed an agreement a with Nippon Electric Company for the former’s planer tech to be used. This allowed NECs and eventually a string of Japanese companies like sharp to produce integrated circuits faster than self research. Enabled Japan’s electronics industry to develop into a pillar of Japan’s economy 2. America viewed Japan as an important Cold War ally due to the latter serving as an American foothold in the pacific, America treated Japan preferentially in the form of economic benefits and acting as Japan’s protection. This allowed Japan to divert military spending to expand its economy. a. Eisenhower Administration approved a reduction in Japanese defence spending, specifically Japan’s financial support of US forces. Allowing Japan’s defence as a share of GDP to decline by 20%. Japan was able to divert defence spending that should have increased due to proximity to communist strongholds, to develop its private sector. Contributed to 80%-90% of Japan’s 10.4% growth. b. Japan struggled to find markets to tap into due to the infancy of SEA ones and discriminatory policies by GATT countries against Japan. America allowed Japan access to US markets by granting Japan MFN status. US promoted Japanese exports as Japan could tap into American markets, expand its consumer base and business opportunities allowing 300 million in trade surplus. 3. Dependence on exports limited its growth during the crisis decades when its trading partners became weary of Japanese products due to its quality and price. They thus sought to protect their economies from the effects of financial crisis by implementing protectionist measures to limit Japanese exports. a. 1977 Trigger Price Mechanism imposes tariffs on Japanese steel should they be sold at prices lower than a trigger price to protect the inefficient US steel industry that has been burdened by increased factors of production (oil) due to the 1973 oil Crisis. b. Due to the oil shortages caused by the 1970 Oil Crisis, both the EC and US imposed a Voluntary Export Restriction (VER) on Japanese cars to protect the competitiveness of locally produced cars as Japanese cars were more fuel- efficient. Car exports dropped by around 30% and a decrease in sales produced less export revenues

4. As US hegemonic support for the global economy becomes unsustainable due to depleting gold reserves and massive trade deficits, it made unilateral decisions for its own economic interests that posed repercussions for Japan by removing asymmetrical benefits, limiting Japan’s trade exports a. US gold reserves depleted by 5 billion from 1948-1959, Nixon was forced to devaluate the USD and impose 10% surcharge on all imports. Japan had to appreciate the yen. Japanese exports faced a considerable rise in their prices, reducing their competitiveness and appeal compared to local products. b. US trade deficit with Japan rose to 40 billion. Reagan used Section 301 of the Omnibus Trade and Competitiveness Act, enabling him to adopt punitive sanctions against unfair trading partners. This was used as leverage to renegotiate trade agreements, forcing Japan to rebalance its trade and decreasing Japan’s trade surpluses. US exports to Japan increased by 9% Bii. Government Intervention 1. The government devised a strategic direction centred around an EOI through preferential policies towards the private sector and plans for trade liberalisation. Enterprises and trade developed as they benefited from the government’s policies and in turn, increase Japanese exports. a. 1955 5 Year Plan for Economic Self Support and 1958 New Long Range Economic Plan placed greater emphasis on the private sector. With government emphasis, the private sector received more resources and were able to expand while nascent industries developed. b. 1960 General Plan for Trade and Foreign Exchange Liberalisation (GPTFEL) devised roadmaps for the liberalisation of individual commodities and products, targeting a liberalisation rate of 80% gradually in 3 years. Ease of regulations made Japan able to export easier while the gradualism employed protected infant industries from foreign competitors. 2. Government implemented plans ensured that the industry was well poised to benefit