Japan’s Encounter with Global Capitalism

In the second half of Part I, we will focus on four cases, featuring six innovative entrepreneurs active during the final days of the Edo period through the post Russo-Japanese War period. Assessed individually, their innovations were “incremental” in essence. However, the unique system resulting from the combination of their innovations allowed Japan to industrialize in the wake of Europe and the United States, becoming the first to accomplish this among late developer nations. Thus the entrepreneurs to be discussed in the second half of Part I could also be viewed collectively as breakthrough innovators of global historical significance.

Here we first turn back the clock to the time of the port opening at the end of the Edo period, which took place about 15 years before the Meiji Restoration. From there, we will reexamine the modernization and industrialization process in Japan.

Industrialization in a broad sense can begin through handicrafts that precede mechanization, and the Edo period in Japan was no exception. In the mid-nineteenth century, small-scale handicraft operations by individuals partnering with merchants were fairly common, especially in the textile industry. In addition, some factory-style handicraft operations appeared. Such operations, however, essentially represented proto-industrialization, a concept proposed by Franklin Mendels and Pierre Deyon based on their study of eighteenth century Flanders. This style of handicraft operation can be labeled “pre-industrial industrialization”; or “Genki teki Kogyo ka” in Japanese.Footnote 1 In Japan, the start of full-scale industrialization came after the country’s encounter with global capitalism through the port opening at the end of the Edo period.

Following a series of events—the arrival of U.S. Commodore Matthew C. Perry in 1853 (Kaei 6), the signing in 1854 (Ansei 1) of the Treaty of Amity and Friendship between Japan and the U.S., and the 1858 Treaty of Amity and Commerce between Japan and the U.S.—the Tokugawa Shogunate was forced to abandon its isolationist policy and open Japan’s ports. This direct encounter with the world’s capitalist powers, including the U.K., which was already establishing itself as the “manufacturing house of the world,” overwhelmed Japan with the obvious disparity in economic and military power between herself and them. Such a disparity was evident in Japan’s being forced to accept the infringement of its judicial sovereignty (i.e., acceptance of unilateral consular jurisdiction) and losing autonomy over tariffs (i.e., acceptance of a consensus-based tariff system) in the treaties of amity and commerce that Japan signed with others. Of these, the treaties of commerce “pegged Japan to the world’s few countries that were practicing free trade at the time and deprived Japan of the freedom to adopt protective tariffs as an instrument of its industrial policy.”Footnote 2 It was not until the signing in 1911 (Meiji 44) of the new Japan-U.S. Commerce and Navigation Treaty did Japan regained most of its autonomy over tariffs.

The greatest political impact of the port openings at the end of the Edo period was as a catalyst for the movement to promote the Emperor as leader of the nation and repel foreign powers (Sonno-joi movement). This uprising ultimately led to the end of the Tokugawa shogunate and the demise of feudal Japan. There are two opposing theories on the Meiji Restoration of 1868. One claims that the Restoration was comparable to the civil revolution in Europe that gave birth to the modern nation state; the other maintains that it was only a form of an absolutist revolution leading to the creation of a semi-feudal imperial system. I take the former view, that the Meiji Restoration guaranteed various reforms indispensable for economic activity—freedom of contract, business, relocation, and occupation. It also brought about the land tax reform of 1873 and the subsequent abolition of stipend payments for aristocrats (Chichiroku Shobun) which helped establish modern land ownership.

Accumulation of Capital and Labor

The port openings at the end of the Edo period had a profound economic impact on Japan, accelerating what the economists call primitive accumulation, the build-up of two essential components of capitalism: capitals and wage labor. After the Meiji Restoration, this primitive accumulation continued despite turmoil triggered by inflation and deflation under Shigenobu Okuma and Masayoshi Matsukata, successive secretaries of finance. Accumulation reached its final phase when the worsening of economic disparity among farmers led to the dissolution of the peasantry. Okuma and Matsukata were appointed to the post of Finance Minister in 1873 and 1881, respectively. Inflation became a problem under Okuma, while deflation characterized Matsukata’s term. The 1882 establishment of the Bank of Japan was a symbolized the completion of primitive capital accumulation.

Around 1880, as primitive accumulation was entering its final phase, a series of major corporations were established in the form of joint-stock companies. Tokio Marine Insurance was established in 1879, Nippon Railway in 1881, and Osaka Cotton Spinning in 1882. As the success of these pioneering corporations boosted confidence in the joint-stock company system, Japan saw an entrepreneurial boom during a 4-year period (1886–1889), with newly emerging companies dealing in insurance, railroad, textile spinning, and others areas, all riding the wave. Although this boom was halted by the Depression of 1890, there is no doubt that industrialization had clearly begun to take off in Japan.

Industrial Revolution in Japan

The Depression of 1890 that followed the entrepreneurial boom meant that capitalist production had begun in earnest in Japan. If an industrial revolution is synonymous with the establishment of capitalism in a given nation, then Japan’s own industrial revolution started in the 1880s, just over a century after Britain.

When a late developer like Japan experiences its own industrial revolution, it can access state-of-the-art technologies already developed in industrialized nations, but it must also fight pressure from earlier developers to import their products while its own industrialization is still underway. Although the cheap labor costs of a late developer mean that labor-intensive, light industries can remain relatively resistant to import pressures, that’s not the case for capital-intensive heavy industries face substantial pressure. Therefore, to complete an industrial revolution to be completed in a late developer, must establish machine-based production in light industries, such as the textile industry. In addition, it should either: transform light industry into an export industry to guarantee stable imports of heavy machinery: or develop its own domestic production of heavy industry.

In terms of machine-based light industry, Osaka Cotton Spinning’s opening of a large factory equipped with 10,500 spindles in 1883 was a milestone for Japan. In resisting import pressure, it was important that cotton yarn exports surpassed imports in 1897, and that raw silk exports surged during 1900–1905. And as for development of heavy industry, the blast furnaces at the government-run Yawata Iron & Steel Co., Ltd. became fully operational in 1904, and by the end of that decade, Japan became self-sufficient in the production of ships and weapons.

Thus, Japan’s industrial revolution was completed by the mid-to-late-1900s. In the process, Japan experienced two wars: the Sino-Japanese War of 1894–1895 and the Russo-Japanese War of 1904–1905. Following these wars, the scale of Japan’s finances grew drastically, with funds distributed to many sectors: (1) As part of the “Post-Russo-Japanese War Management,” laws were enacted for arms expansion, including the Navigation Encouragement Law and the Shipbuilding Encouragement Law (both in 1896); (2) Establishment of a state-run ironworks (promulgation of the Ironworks Governmental Regulations in 1896, with Yawata chosen as its location in 1897); (3) Establishment of special banks (1897 for Nippon Kangyo Bank, 1898–1900 for Prefectural Agricultural and Industrial Bank, 1900 for Hokkaido Takushoku Bank, and 1902 for the Industrial Bank of Japan); (4) Implementation of policies regarding the expansion of telegraph and telephone operations; (5) Also as part of the “Post-Russo-Japanese War Management,” expansion of armaments, nationalization of railroads, and establishment of the South Manchurian Railway (all in 1906), were carried out; (6) Measures to expand state-owned steel mills and telegraph and telephone operations were introduced. During this period, the gold standard was established in 1897, backed by the large reparations obtained from the Qing Dynasty. In addition, overseas colony operations grew, through the occupation of Taiwan in 1895 and of South Sakhalin in 1905, and through the annexation of Korea in 1910.

Three Types of Businessmen

The many businessmen were active during Japan’s industrialization process can be divided into three main types:

  1. 1.

    Salaried managers, such as Hikojiro Nakamigawa.

  2. 2.

    Owner-managers, represented by Yataro Iwasaki, Yanosuke Iwasaki, Zenjiro Yasuda and Soichiro Asano.

  3. 3.

    Investor-managers, such as Eiichi Shibusawa.

In the second half of Part I, we examine the activities of these businessmen individually and evaluate their performance from the standpoint of innovation.