World War I and Economic Turmoil

This section covers the period from World War I to the 1980s, when the Japanese economy enjoyed a prolonged period of relatively high growth by global standards. Ten case studies are presented, examining fourteen innovative entrepreneurs who made primarily incremental innovations as well as actual breakthroughs.

Japan’s industrial revolution reached completion just after the Russo-Japanese War (1904–1905), with the prolonged postwar depression beginning in 1907 (Meiji 40). Despite the “intermediate economic boom” around 1910, spurred by hydroelectric expansion in the electric power sector, the broader Japanese economy turned sluggish. As the balance-of-payments crisis worsened, Japan’s economy came to a standstill.

World War I, from 1914 to 1918 (Taisho 3–7), changed all this. Although Japan joined the Allied powers (the U.K., France, and Russia), because of geographical distance from the war zone, the Japanese referred to World War I as the “Great War in Europe.” Exports grew rapidly. Japan supplied munitions and foodstuffs to the Allied countries in Europe, increased exports to Asian countries with emerging business opportunities left by the withdrawal of European powers, and exported raw silk to the U.S., which was experiencing an economic boom. Japan was able to improve its balance of payments after achieving mild success in domestic production of heavy and chemical industrial products previously supplied by Europe.

When reconstruction demand arose during and immediately after World War I, in 1919, Japan’s economic growth rate surged to an unprecedented level, leading to the “World War I boom” and “postwar boom.” Of note, the gold standard ceased to function globally due to World War I; Japan also prohibited gold exports in 1917 and left the gold standard.

These booms did not last long, however, as they were a result of temporary increase in demand spurred by wartime and postwar reconstruction. The situation turned darker in the wake of the 1920 recession, with the Japanese economy entering a period dubbed “chronic recession”—experiencing not only recession, but also a series of further setbacks: the Great Kanto Earthquake of 1923, the financial crisis of 1927 (Showa 2), and the Showa Depression of 1929–1931.

As Japan’s balance of payments worsened once again, only in January 1930 did it finally return to the gold standard with Finance Minister Junnosuke Inoue’s decisive lifting of the gold export ban and implementation of austerity measures (the so-called “gold release”) during the Showa Depression.

The Showa Depression, connected to the Great Depression that began in 1929 in the U.S., was the worst economic recession in Japan’s modern history, with the country’s nominal gross national product posting a substantial contraction in 1930–1931.

The Japanese Economy Gets on a Long-Term Growth Track

Nevertheless, from a global perspective, Japan’s economic growth during the “chronic recession” of the 1920s was comparatively not all that bad. Its average economic growth from the 1910s to the 1920s, both in gross and per capita value, was slightly higher than that of the U.S, which was then the leader of global economic development.Footnote 1 This relative strength in comparison to the global average, even as Japan was entering a recessionary phase, can be attributed to expansion of the domestic market, brought about by increasing urbanization and electrification during this period.

In the evaluation of historian Ryoichi Miwa, “the scale of the Japanese economy moved to a higher level after World War I.” He adds, “In the 1920s, Japan began its shift toward a mass consumer society while changing its consumption habits toward those of Europe.Footnote 2” This trend beginning in the 1920s—with Japan’s economic growth rate exceeding those of the U.S., U.K., and Germany—continued for a long period, with a brief interruption around World War II. The trend continued until reaching a halt in the 1990s.Footnote 3

The Years Leading to World War II

Pre-World War II Japan emerged from the Great Depression (Showa Depression) ahead of other developed Western countries. Its economic recovery was spurred by the reimposition of a ban on gold exports in December 1931 by Prime Minister Tsuyoshi Inukai’s administration, a move that pulled Japan away from the gold standard and toward a managed currency system.

Under the managed currency system, Finance Minister Korekiyo Takahashi’s economic policies focused on creation of effective demand, successfully stimulating economic recovery. (These policies highlighting demand were later recognized as predecessors of John M. Keynes theory.) In addition, the depreciation of the yen that resulted from reimposition of the gold export ban, combined with the tariff revision of 1932, boosted exports and blocked imports. By the mid-1930s, Japan’s heavy industry had achieved an “internal cyclical expansion of production,Footnote 4” driven by lessened import pressure.

The Second World War (1939–1945) cast a heavy shadow over the Japanese economy. During the war, Japan’s economy was subjected to state control, with freedom of business activity severely curtailed. Economic controls began with the enactment of the 1938 National Mobilization Law and continued even after the war until about 1952, the end of Occupation.

With defeat in August 1945, Japan lost its overseas colonies of Korea, Taiwan, and South Sakhalin. In addition, major Japanese cities had been reduced to rubble by U.S. air raids. For some time after the war’s end, life in Japan was precarious, evidenced by severe food shortages. During this period Japan was under occupation of the Allied Powers, led by the United States. The economic reforms implemented under the Allied occupation, such as dismantling of zaibatsu, prohibition of monopolies, labor reform (establishment of labor rights), and farmland reform, had a major impact on Japan’s economy and on Japanese companies.

The reforms, however, turned out to be important prerequisites for the growth of Japan’s postwar companies. Occupation era reforms led to the advancement of salaried managers and the rejuvenation of management in general with labor unions securing a solid legal basis, and discrimination based on status between office and factory workers banned. The reforms also marked the beginning of fierce competition among oligopolies in major industries and expansion of the domestic market through growth of personal consumption.

The Allied Occupation of Japan ended in 1952. Japan’s industrial production, real gross national product (GNP), and real personal consumption had already surpassed their prewar highs in 1951, while real per capita GNP and real per capita personal consumption bettered their prewar highs in 1953.

From High Growth to Stable Growth

As just noted, the Japanese economy returned to pre-World War II levels in both production and consumption between 1951 and 1953. Henceforth, from the mid-1950s to the early 1970s it enjoyed a period of rapid growth unprecedented in world history. The average annual nominal economic growth rate for the 15-year period (1956–1970) was 6.2% in the U.S. and 10.3% in West Germany; and between 1956 and 1969 it was 7.2% in France, 8.1% in the U.K., 9.4% in Italy—but in Japan it reached 15.1%! In terms of real GNP, the Japanese economy grew at an annual rate of 10.4% over those 15 years, with the economy expanding 440%.Footnote 5

Japan’s major industries strengthened their global competitive edge in the mid-1960s at the height of the country’s rapid economic growth. This growing strength resulted from the transition to an open economy through trade and capital liberalization. Movement to an open economy was also accompanied by growing Japanese concerns over the threat posed by foreign goods and capital, and sometimes termed “the second arrival of the Black Ship [Commodore Matthew C. Perry].” Despite such concerns, however, through large-scale investments and concerted labor-management efforts united by a sense of crisis, Japanese labor productivity rose at a rate surpassing that of advanced Western countries, strengthening Japanese corporate competitiveness. As a result, Japan’s balance of trade, in deficit for almost the entire postwar period, turned to surplus in 1964.

Japan’s high growth rate came to an end during the first oil crisis of 1973–1974. However, even after the crisis, Japan’s economic growth, although slower than in earlier periods, remained higher through the 1980s than that of advanced Western countries. Footnote 6 Thus, Japan’s economic growth from the mid-1970s to the end of the 1980s is better seen as “stable” rather than “slow.”

The economy achieved stable growth even after the first oil crisis because Japanese companies, supported by good labor-management relations and amicable inter-company relations, effectively: (1) developed management strategies based on a long-term perspective; (2) developed products that met market needs such as energy conservation; and (3) thoroughly streamlined and upgraded production processes. As a result, when the pace of economic growth declined internationally in the post-oil crisis period, global attention to Japanese companies increased rapidly. The phrase “Japan as number one” began to gain currencyFootnote 7 in the context of Japanese companies successfully overcoming the oil crisis.

Incremental Technological Innovation and “Japanese Style Management”

As the era of rapid economic growth ended, the idea that corporations belonged to their employees was taking hold in major Japanese companies. Employee power was implemented through a mechanism to achieve incremental (cumulative and continuous) technological innovation from the production floor, supported by cooperative labor-management relations. This system was the fruit of so-called Japanese-style management that “aims to maximize employee profits based on cooperative labor-management relations.”

From the mid-1950s through the 1980s Japanese managers implementing Japanese-style management repeatedly made growth-oriented decisions, helping the economy achieve relatively high growth compared to other economies. Companies achieved long-term growth, leading to a continuous rise in stock prices and improved working conditions, thereby successfully aligning shareholder and employee interests.

Part II covers a lengthy period. The innovative entrepreneurs presented include diverse leaders in urbanization and electrification (Ichizo Kobayashi and Yasuzaemon Matsunaga), exceptional breakthrough innovators (Saburosuke Suzuki II and Kiichiro Toyoda), those who attempted overseas expansion before World War II (Shitagau Noguchi, Yoshisuke Aikawa, and Sazo Idemitsu), others who led the rapid economic growth (Yataro Nishiyama and Konosuke Matsushita), challengers to the global market in the postwar period (Masaru Ibuka, Akio Morita, Soichiro Honda, and Takeo Fujisawa), and one who warned of an upcoming dark era (Toshio Doko).