Japan’s Economic Growth and Engagement in Asia

Abstract

The San Francisco Peace Treaty was a milestone for Japan as it ended the occupation in April 1952. Challenges were formidable for Japan, however. Although the United States considered Japan a strategically important country during the Cold War, Japan, an aggressor in the Second World War, had to make special efforts to regain trust as a member of the international community.

The San Francisco Peace Treaty was a milestone for Japan as it ended the occupation in April 1952. Challenges were formidable for Japan, however. Although the United States considered Japan a strategically important country during the Cold War, Japan, an aggressor in the Second World War, had to make special efforts to regain trust as a member of the international community. A series of democratic reforms were launched during the occupation, but the political system was yet to be stabilized; political parties were making and breaking alignments in a fluid manner. Under strong pressures from the United States to increase its defense capability during the Cold War, Japan had to adjust its interpretations of the Constitution that appeared to have prohibited Japan from having even defensive forces. Political adjustments were inevitable. Furthermore, Japan’s economy was still extremely tenuous. Very few observers expected that Japan would experience miraculous economic growth in subsequent years.

1 Normalization Diplomacy

While the San Francisco Peace Treaty normalized Japan’s relations with the major countries, such as the United States and the United Kingdom, it failed to address Japan’s relations with many other important countries. Neither the People’s Republic of China nor the Republic of China was invited to San Francisco because the United States and the United Kingdom had different attitudes toward China; the US continued to recognize the Republic of China while the United Kingdom recognized the People’s Republic of China. Neither the Republic of Korea nor the Democratic People’s Republic of Korea were invited to San Francisco as they were not considered parties to the war with Japan. Although the Soviet Union participated in the San Francisco conference, it did not sign the treaty. India, considering the draft treaty prepared by the US and the UK too harsh on Japan, did not participate in the conference. While many signatories of the treaty waived war reparations, several countries maintained that they normalize relations with Japan pending agreed upon reparations.¹

Normalization of relations with India went smoothly. India was ready to accept Japan with more lenient terms than the San Francisco Treaty. India notified Japan on September 8 that it intended to establish diplomatic relations in timing the San Francisco Treaty. The two countries established diplomatic relations on April 28, 1952 and signed a peace treaty in June that went into effect in late August. India waived war reparations.

When Prime Minister Yoshida signed the San Francisco Treaty, which stipulated that “Japan renounces all right, title and claim to Formosa and the Pescadores,”² he was not interested in choosing either Beijing or Taipei; he wanted to wait and see which China would be accepted by the international community. The United States, however, intended to settle Japan–China relations outside of the San Francisco Treaty framework; John Foster Dulles, special envoy to the peace treaty negotiations with Japan, urged Yoshida to start negotiations with Taipei. According to Dulles, the ratification of the San Francisco Treaty could have become difficult if Japan did not select Taiwan since there were many supporters of Taiwan in the Senate. Yoshida gave in, and Tokyo and Taipei started peace treaty negotiations. The Taipei negotiators demanded war reparations, to which Tokyo negotiators responded in the negative by claiming that the damages caused by Japan were limited to mainland China, which Taipei’s government did not control. The San Francisco Treaty was ratified on March 20, lifting the pressures on Japan. Determined to establish diplomatic relations with Japan as early as possible, Taiwan decided to waive reparations from Japan, as was the case with the United States and many other US allies. The Peace Treaty between Japan and the Republic of China was signed on April 28, 1952, exactly when the San Francisco Treaty went into effect.

Another important country Japan needed to normalize relations with was the Soviet Union. As long as the Soviet Union was antagonistic to Japan, there was no hope of Japan becoming a member of the United Nations since Moscow had a veto in the Security Council. The biggest difficulty was the issue of the Northern Territories,³ which the Soviet Union occupied in the weeks after Japan’s acceptance of the Potsdam Declaration on August 14. In the San Francisco Treaty, “Japan renounces all right, title and claim to the Kurile Islands.”⁴ Japan claimed that the “Kuril Islands” mentioned in the treaty did not include the “Northern Territories.” Prime Minister Hatoyama Ichiro, who succeeded Yoshida in late 1954, agreed to start negotiations with the Soviet Union in June 1955 but was not able to achieve immediate progress.

At one point, the Soviet Union suggested to cede Habomai and Shikotan if Japan agreed to Soviet sovereignty over Kunashiri and Etorofu. The United States noted to Japan that recognizing Soviet sovereignty over these islands, which Japan “renounces all rights, title, and claim,” would represent giving “greater advantages”⁵ to the Soviet Union than to the signatories of the San Francisco Treaty and could lead the United States to demand the same “advantages.” This meant that the United States might claim complete sovereignty over Okinawa, which remained under US occupation by stipulation of the San Francisco Treaty. Prime Minister Hatoyama, who visited the Soviet Union in October, gave up on concluding with a peace treaty that would satisfy Japan’s demands and agreed to establish diplomatic relationship by a joint declaration. In the Joint Declaration, two countries simply agreed to “continue … negotiations for the peace treaty” and the Soviet Union “agrees to transfer to Japan the Habomai Islands and the island of Shikotan, the actual transfer of these islands to Japan to take place after the conclusion of a Peace Treaty …”⁶ The establishment of diplomatic relations with the Soviet Union, though unsatisfactory to many Japanese with respect to the lost territories, paved the way for Japan’s membership to the United Nations in December 1956. In the subsequent years, the Soviet Union denied the existence of any territorial issues with Japan. After the disbandment of the Soviet Union, the Russian Federation recognized the existence of territorial issues. However, subsequent negotiations for a peace treaty have never resulted in a mutually agreeable compromise.

Six countries demanded Japan pay reparations: Burma, Cambodia, Indonesia, Laos, the Philippines, and Vietnam. Negotiations with these countries became complex and time consuming, largely because the San Francisco treaty left the settlement of reparations to bilateral negotiations. As each country made its own demands without coordinating with others, the total sum of their initial demands were beyond anything Japan could possibly pay. Japan had to weigh how much it should be obliged to pay to whom within these multiple bilateral negotiations.⁷

The negotiations on war reparations between Burma and Japan proceeded first; they concluded the agreement in October 1954, and Japan agreed to pay $200 million in reparations to Burma in the following 10 year period. Japan and the Philippines reached their agreement in May 1956; Japan agreed to provide $25 million each year for the first 10 years and $30 million for the second 10 years (totaling $550 million). In addition, Japan agreed to provide $250 million in loans. Japan and Indonesia reached an agreement in September 1957, when Prime Minister Kishi Nobusuke visited Indonesia for the first time as Japanese prime minister; Japan agreed to pay $223 million as reparations and cancel $177 million in debts that Indonesia owed in trade payments. Japan also agreed to provide $400 million in loans.

Japan and Vietnam concluded a reparations agreement in May 1958; Japan agreed to provide $39 million over five years. In addition, Japan agreed to provide loans up to $7.5 million. In observation of Japan’s reparations agreements with the Philippines and Indonesia, both of which were supposed to receive $800 million including reparations, cancelation of debts and loans, Burma demanded Japan to increase reparations; Burma insisted that the damage it suffered was equivalent to these two countries. Japan insisted that their original agreement with Burma was fair, but after several years of negotiations, in 1963 Tokyo agreed to extend grant aids totaling $140 million and loans of $30 million. In November 1954, Cambodia notified Japan that it would waive reparations. Laos also waived reparations in 1956. In appreciation of these decisions, Japan concluded economic and technical cooperation agreements with both countries in 1959, in which Japan offered $4.19 million grants to Cambodia and $2.78 million to Laos. Grants given to Cambodia and Laos were referred to as “sub-reparations.”

Although the San Francisco Treaty stipulated that Japan’s reparations should be made by “the services of the Japanese people in production, salvaging and other work,”⁸ it turned out that “services” alone would not add up to the required amount of reparations and would not meet specific demands of the recipient countries. As a result, reparations were provided in the form of capital goods procured in Japan and paid in yen. In other words, reparations were often implemented as “projects” of importance to the recipient countries. In Burma, the Balu Chaung Hydro Power Plant was constructed as reparations; when it was completed in 1960, it provided 60% of electricity in Burma (Fujikura and Nakayama 2016, p. 43–44). In Indonesia, early projects to develop the Brantas River Basin were implemented through Japanese reparations, such as the Nejama Diversion Tunnel and the Karangkates Dam (JICA 1998, pp. 44–49).

Japan’s colonization of Korea cast a long and extremely complicated shadow. It took more than a decade for Japan and South Korea to establish a diplomatic relationship in 1965. No diplomatic relationships have been established between Japan and North Korea even to this day. Difficult issues included legal and moral assessment of Japan’s colonization, the status of the two Koreas, geopolitical reality involving the United States and Soviet Union, and specific bilateral issues, such as fishery in the case of 1950s South Korea and abduction issues in the case of North Korea since the 1980s.

Despite South Korea’s insistence that it was entitled to participate in the San Francisco conference as a member of the allied forces, it was not invited to the peace conference as this was not recognized by the United States and United Kingdom. As a result, all concrete issues between South Korea and Japan had to be worked out between the two countries. The negotiations, started in 1951, bogged down almost immediately; South Korea insisted that Japan’s colonization had been illegal since annexation in 1910 while Japan insisted that the annexation was made in accordance with the international law then applicable. Japan protested against South Korea’s occupation of Takeshima, a small island in the Sea of Japan that both Japan and South Korea claimed sovereignty. Japan also protested South Korea’s capture of Japanese fishing boats in the area within the “Syngman Rhee Line,” the line beyond the then internationally accepted territorial waters. Negotiations terminated for some time due to what South Koreans called “Kubota’s absurd statements.” In response to South Korea’s claims of huge losses suffered from Japan’s colonization, Kubota Kan’ichiro, Japan’s chief negotiator, was said to have argued that Japan contributed to the development of Korea by making investments in railways, ports, and agriculture.

Negotiations resumed in 1957 when Prime Minister Kishi Nobusuke retracted Kubota’s statements, but they stalled again almost immediately as South Korea opposed the Japanese government’s decision to return residents in Japan of North Korean origins back to North Korea. 1960 was a year of political turmoil in both Japan and South Korea. Prime Minister Kishi, considering the Japan-US Security Treaty of 1951 inadequate, engaged in negotiations with the Eisenhower administration to revise it. The revision was mostly clarification of purposes and obligations of the two countries but triggered a massive anti-government movement after the two countries signed the revised treaty in 1960; the protesters believed that the Kishi cabinet was about to introduce more repressive rule in Japan. The demonstrators surrounded the Diet Building and a female student was killed in the chaos. A planned visit by President Eisenhower was cancelled. The revised treaty was ratified by the Diet on June 19, and the Kishi cabinet resigned in July. As the new government under Ikeda Hayato displayed a “low-profile” posture with the promise of “income-doubling,” the political tension subsided significantly in Japan.

In Korea, the government of Rhee Singman was toppled by the student-led April Revolution. The government led by Prime Minister Chang Myon, established by the new Constitution, was not able to bring stability. The military led by Park Chung Hee staged a coup in May 1961; Park organized a military government and, in 1963, drew up a new constitution to establish the third republic in which he became the elected president. It was after the May military coup that progress was made in Japan-South Korea negotiations. Under the encouragement of the Kennedy administration in the United States, Ikeda and Park agreed to work out the details of normalization. Park, determined to achieve improved economic prosperity, was eager to settle a deal to obtain necessary funds for development. Realizing the futility of adding up objective evidence to justify claims incurred by colonial rule, the two countries made a deal in which Japan agreed to extend $300 million in grants and $200 million in low interest loans to South Korea, and both sides agreed not to make any more claims. As there was still opposition to normalization in both countries, it was not until 1965 that both countries finally signed the treaty and other related agreements to establish diplomatic relations.

The statement made by Japanese Foreign Minister Shiina Etsusaburo during his visit to Seoul in February 1965 was positive in easing tensions between the two countries. He immediately said after landing in Seoul, “It is regrettable that there was an unhappy period in the long history of our two nations. We deeply regret this” (Yoshizawa 2005, p. 219; Fukushima 2021, p. 294). The “Agreement on the Settlement of Problems Concerning Property and Claims and on Economic Co-operation between Japan and the Republic of Korea,” stipulates that the “problem concerning property, rights and interests of the two Contracting Parties and their nationals (including juridical persons) …is settled completely and finally.”⁹ The basic treaty that establishes diplomatic relations has a clause that each party interprets in its own way: “all treaties or agreements concluded between the Empire of Japan and the Empire of Korea on or before August 22, 1910 are already null and void.”¹⁰

2 From the Ashes to High Growth

The period in which Japan engaged in normalization diplomacy was also a period of Japan’s economic recovery and the beginning of high growth. Japan had to start as a completely devastated country in the immediate aftermath of the war. The gross national product (GNP) of Japan in 1946 was one half the GNP of 1938, the highest in the prewar period. Steel production became 7% of the prewar level (Yoshikawa 1997, p. 14). While production was severely constrained, inflation became rampant: 364.5% in 1946, 195.9% in 1947, and 165.6% in 1948 (Ito and Hoshi 2020, p. 54). By applying the methods of command economy used during war time, the government gave priority to the production of coal and steel by giving substantial subsidies to these sectors and tried to stabilize prices by introducing “official” prices. Although the production of coal and steel increased, three-digit inflation continued. The United States, in control of the occupation forces, introduced drastic fiscal discipline and forced the Japanese government to abolish many subsidies.

As a result, the Japanese economy overcame inflation but ended up with serious deflation. The initiatives known as the Dodge Plan, named after the US banker Joseph Dodge who was sent to take charge of fiscal discipline, stagnated the economy, but it revived “free competition” by transforming many industries virtually nationalized during the war and propped up by postwar subsidies into real private industries.

The Korean War broke out in 1950. Although it destabilized international security, the war provided an opportunity to the stagnant Japanese economy. The United States procured many products in Japan needed for the war effort. Japan’s exports in 1950 were about $800 million, and the US “special procurement” poured $600 million into Japan over the two years from 1950 to 1951 (Nakamura 1998, p. 439). The bottleneck of the Japanese economy was the shortage of “hard currencies” to purchase raw materials and intermediate goods necessary to produce manufactured goods for export. The “special procurement” gave Japan necessary dollars to restart manufacturing production.

The Japanese economy recovered from the devastation of war, but difficulties continued in terms of the balance of payments. Japan suffered from trade deficits from 1951 to 1957. In 1953, trade deficits constituted -4.5 percent of GNP (Ito and Hoshi 2020, p. 54). In 1955, Japan’s foreign currency reserves were $770 million, less than 30% of its total imports (Fukao 2020: 196). By the middle of the 1950s, however, Japan’s per capita GDP reached the highest level achieved in the prewar period. The official white paper for the economy, published in 1956, pronounced, “it is no longer the postwar period.”¹¹ The Japanese economy restored a semblance of normalcy even though there were many pessimistic economists.

By the middle of the 1950s, Japanese politics reached a state of equilibrium of a sort. During the occupation period, many political parties emerged along the political spectrum from the rightist conservatism to communism. The Yoshida cabinet that presided over the end of the occupation was a coalition of various anti-communist conservative forces. The end of the occupation revealed submerged differences among conservatives as many politicians purged by General Headquarters came back to the political arena. One important issue was the revision of the Constitution; Yoshida did not support revision, while many other conservatives argued for revisions so that Japan would be able to rearm.

However, the political parties in support of Constitutional revisions did not gain the two-thirds majority necessary to propose constitutional revisions in the two general elections held in 1952 and 1953, although conservatives as a whole, including those in opposition of Constitutional revisions, kept the majority in the Diet, thus allowing Yoshida to be in power until late 1954. Now that constitutional revisions became politically impossible, the conservatives reached a consensus to establish Self-Defense Forces partly in response to US pressure for rearmament. Prime Minister Hatoyama Ichiro, who succeeded Yoshida in 1954 and had insisted on constitutional revisions, now argued that the Japanese constitution did not prohibit Japan from exercising its right to self-defense as a sovereign country. In response to the conservatives, the leftist parties decided to establish the Socialist Party of Japan in October 1955. So then, the conservatives decided to form a unified party named the Liberal Democratic Party (LDP) in November 1955. The establishment of two political forces ushered in a new structure to Japanese politics, which many political scientists call the 1955 System. In the 1955 System, the two forces were not equal in power; the LDP continued to keep the majority in the Diet until 1993.

As the 1960 Japan-US security treaty revision indicated, LDP rule was not without political crises. But LDP predominance provided political stability, in which Japan enjoyed an unprecedented period of “high growth.” The average annual economic growth from 1955 to 1970 was 9.7%.¹² Prime Minister Ikeda Hayato set the goal of doubling income in 10 years; the gross national product actually doubled within 7 years. Japan surpassed West Germany in terms of gross national product in 1968, becoming the second largest economy in the capitalist camp of the Cold War.

The high growth was realized by active introduction of advanced technology, investment in the private sector, expanding domestic demands and the favorable international environment. The 1950s was a period of technological innovation for many products: Japanese companies actively engaged licensing contracts with technologically advanced Western companies and invested heavily in the production of key products such as steel, chemicals, and consumer products such as radios, television, and automobiles. Large scale steelworks were built at Kashima, Kimitsu, Mizushima, and other places on the seacoast. Petrochemical refineries were also built on the seacoast. TOYOTA built its first factory specialized in producing passenger cars in 1958.¹³ Japan’s share of the world’s steel production grew from 6.4% in 1960 to 15.7% in 1970; synthetic fibers, from 16.9% to 21%; shipbuilding, from 20.7% to 48.3%; passenger cars, from 1.3% to 14.2% (Nakamura 1998, p. 550). Full scale infrastructure developments were launched in the 1950s, often with the financial assistance of the World Bank. Major projects included the expressway from Nagoya to Kobe and high speed rail, the Shinkansen, from Tokyo to Osaka. The Tokyo Olympics scheduled in 1964 were a major impetus to accelerate further infrastructure developments such as the metropolitan expressways and subways. As the economy grew, so did wages. The average Japanese household began to be equipped with the “Three Sacred Treasures”: television sets, washing machines, and refrigerators. Many Japanese began to identify as middle class; while about 70% felt they belonged to the middle class in the late 1950s, 89% did so in 1969 (Nakamura 1998, p. 521).

The international environment was favorable to Japan. In 1955, Japan acceded to the General Agreement on Tariffs and Trade (GATT) and regained access to global markets, although several countries were reluctant to give full access to Japanese products because of their memories of pre-war competition with “cheap” Japanese goods. Trade was important because Japan needed hard currencies to purchase necessary raw materials. But trade was not the single most important engine of growth in the 1950s and 1960s. The ratio of private fixed investment to GNP increased rapidly from 10% to more than 20% by 1970. The ratio of exports to GNP also increased in the same period but lower than 10% (Ito and Hoshi 2020, p. 58–59). This does not mean that trade was not important. Japan’ exports to the whole world grew dramatically and surpassed France and the United Kingdom by the early 1970s (Fig. 1). The average annual growth rate from 1960 to 1970 was 17%, and Japan’s exports constituted 6.8% of total exports in the world.¹⁴ The largest market for Japan’s exports was the United States, comprising nearly 32% in 1970. The second most important was Southeast Asia; the five Southeast Asian countries of Indonesia, Malaysia, the Philippines, Singapore, and Thailand accounted for 9.5% of Japan’s exports in 1970.

Fig. 1

Exports of Major Economies: 1960–1972

Dramatic changes in the economy, while improving people’s living standards, also created serious problems domestically and unexpected challenges internationally. Domestically, the most serious problem was pollution. Pollution related to petro-chemical industries included Minamata disease, Itai-itai (“it hurts, it hurts”) disease, and Yokkaichi Asthma. Minamata disease is mercury poisoning caused by wastewater containing methylmercury released from a chemical factory in Minamata, Kyushu. The number of officially recognized deaths was 1,963, but those who died before the disease was discovered in 1956 are not accounted for. The same disease was found in Niigata prefecture in the 1960s. Itai-itai disease was caused by contamination of cadmium released from mines in Toyama prefecture. Yokkaichi Asthma was caused by air pollution from an industrial complex in the Yokkaichi region. Smog became prevalent in most metropolitan areas, and sludge filled many rivers and coastal seas in the 1960s. The government response to pollution was slow; the Pollution Control Basic Law was not enacted until 1967, and the Environment Protection Agency was established in July 1971. It was during the 1970s that regulations became more and more strict.

Internationally, Japanese were perplexed by the criticism targeted at its increasing exports. The first instance was textile exports to the United States. Although complaints about Japan’s textile exports started in the 1950s and an agreement on “voluntary export restraints” of cotton textiles was made, it was not until the late 1960s when the issue became highly politicized. President Richard Nixon, in his presidential campaign of 1968, promised stricter regulations on textile imports from Japan and demanded that Prime Minister Sato Eisaku bring Japan’s exports of textiles under control. At that time, the major issue facing Sato was to persuade the Americans to return Okinawa to Japan. In 1965, Sato told Okinawans that unless Okinawa was returned to Japan, the postwar era would not end. Although the United States recognized the strategic importance of maintaining military bases in Okinawa, it decided that it would be better to return Okinawa to Japan in order to solidify relations. However, this was only allowed as long as Japan gave the US free use and control of the military bases. In order to realize the return of Okinawa, Sato strategically made the decision to cooperate with the United States, and in 1969, the US agreed to return Okinawa in 1972. However, as the Japanese textile industry did not agree to a voluntary restraint of exports, Sato did not make further efforts to resolve this issue. President Nixon was extremely unhappy and pressured Japan to make progress on this trade issue, too. Until the early 1960s, the United States had a bilateral trade surplus with Japan. The trend reversed in the middle of the 1960s. By 1970, the US bilateral trade deficit with Japan increased to become second only to that with Canada (Fig. 2). Under these economic circumstances, Sato’s reluctance to solve the textile problem became particularly frustrating to Nixon.

More broadly, the United States began to question the basic international framework established in the postwar period. First, President Nixon decided to change the strategic environment so that the United States could achieve an “honorable withdrawal” from Vietnam. By secret negotiations, he struck a deal with Mao Zedong, who also wanted to make a strategic shift under increasingly tense Sino-Soviet relations. In July 1971, Nixon announced that he would visit China in the following spring. Sato was notified about this only a few minutes before the announcement, the Japanese media called it the “Nixon shock.” Since 1952, when Japan was pressured by John Foster Dulles to make peace with Chiang Kai-shek, Japan had consistently followed the US anti-Beijing position. Now, Japan had to cope with the prospect of a US-China reproachment.

Fig. 2

U.S. Trade Deficits: 1970

Exactly one month later, President Nixon brought another “shock” to Japan. On August 15, 1971, President Nixon announced a “new economic policy,” which included the imposition of a 10% import surcharge on all imported products and suspension of the convertibility of the dollar to gold. He stated: “now that other nations are economically strong, the time has come for them to bear their fair share of the burden of defending freedom around the world. The time has come for exchange rates to be set straight and for the major nations to compete as equals. There is no longer any need for the United States to compete with one hand tied behind her back.”¹⁵ In Nixon’s view, the fixed exchange system gave unfair privileges to countries like Japan. The textile problem was finally resolved in the autumn of 1971 when Japan mostly conceded to US demands. This was not the end of trade frictions with the United States. In subsequent years, trade issues continued on items such as electronic equipment, automobiles, and semi-conductors, while criticism increased regarding Japan “free riding” on security affairs.

3 Re-engagement in Asia

Normalizing diplomatic relations is one thing. Constructing positive relations is quite another. Japan normalized diplomatic relations with most Asian countries by the middle of the 1960s. As trade with mainland China was limited because of Japan’s decision to normalize relations with Taiwan,¹⁶ Southeast Asia became a very important market next to the United States. As described above, Japan’s exports to Southeast Asia expanded rapidly. But other than the projects implemented by reparations, Japan’s engagement in Southeast Asia was limited. Japan explored various concepts of regional development but none of them took off (Hoshiro 2008). The only significant development was the establishment of the Asian Development Bank in 1966. Its concept was originally nurtured by a private study group in Japan and the discussion in the Economic Commission for Asia and the Far East (ECAFE). The Japanese government and the US government agreed to become the largest contributors in the spring of 1965, and the final agreement of establishing the bank was signed in December 1965. Japan proposed to host the headquarters in Tokyo, but final voting favored Manila. Prime Minister Sato wrote in his diary: “Asian people haven’t yet approved Japan’s power. Unpleasant” (Sato 1998, p. 342). However, all presidents of the Asian Development Bank have been Japanese (Takahashi 2004; Cho 2009).

A major adjustment to Japan’s engagement in Asia was normalization of relations with the People’s Republic of China. Arguments for the establishment of diplomatic relations with Beijing had existed in Japan all along. But as long as Washington continued to have antagonistic relations with Beijing, shifting Japan’s diplomatic relationship from Taipei to Beijing was out of the question. However, the Nixon shock and subsequent Sino-American reproachment changed all this. Zhou Enlai sent a secret message to Prime Minister Tanaka Kakuei, successor to Sato, that China would not make demands that Japan could not accept. In September 1972, Tanaka decided to visit Beijing to normalize relations with the People’s Republic of China. In the joint communiqué to normalize relations, China “declares that in the interest of the friendship between the Chinese and the Japanese peoples, it renounces its demand for war reparation from Japan” while Japan “is keenly conscious of the responsibility for the serious damage that Japan caused in the past to the Chinese people through war, and deeply reproaches itself.”¹⁷ However, relations with China remained limited in the 1970s. China was still an economically isolated country. Relations with South Korea were expanding, but political relations with Seoul were always tenuous. The most promising relations in Asia appeared to be those with Southeast Asia.

However, in 1974, shocking events happened in Southeast Asia. When Prime Minister Tanaka landed at the Bangkok airport, he found thousands of student protestors on the street denouncing “economic aggression” (Asahi, January 10, 1974). Tanaka then moved to Indonesia and found even more fierce anti-Japanese protests. More than 10,000 protestors took to the streets. Japanese automobiles were burned, Japanese companies were set on fire and the Japanese flag in the embassy was taken down (Asahi, January 16, 1994). The riots in Bangkok and Jakarta reflected people’s frustration against the authoritarian governments in their respective countries and Japan, which appeared to be in support of such governments. The Japanese appeared engaged in aggression, this time in economic rather than military terms. Japan became the largest source of imports to Indonesia, Thailand, and Burma by 1960. It became the largest exporter to these three countries and Malaysia, the Philippines, and Singapore by 1970. In 1973, exports from Japan to Thailand were $732 million and 2.7 times as much as imports from the United States, the second largest origin of imports to Thailand.¹⁸

4 Expansion of Official Development Assistance

In other words, in the 1970s, Japan faced criticism from what it considered its most important partners: the United States and Southeast Asia. Japan was criticized by the United States for not fulfilling responsibilities commensurate with its economic power. Japan was criticized in Southeast Asia for engaging in economic aggression instead of military force. Increasing defense capability could be an answer to the problem with the United States. But it was counter-productive to the problem in Southeast Asia, where war-time memories were still vivid and did not appeal to many Japanese who believed that militarism had brought Japan to catastrophe. One policy measure many Japanese thought suited this context was Official Development Assistance (ODA).

Japan’s development assistance began in the 1950s as part of its efforts to re-join the international community as well as to support Japan’s economic recovery (Kato et al. 2016; Shimomura 2021). By joining the Colombo Plan, a regional organization established in 1950 for the development of human resources in Asia, in 1954, Japan intended to show its willingness to engage in international cooperation despite its still poverty-stricken economic conditions. Under the Colombo plan scheme, Japan initiated small-scale technical cooperation programs. To promote such technical cooperation, the Organization of Technical Cooperation Agency was established in 1962. In 1958, Japan extended a concessional loan to India. By establishing the Overseas Economic Cooperation Fund (OECF) in 1961, Japan began to extend a series of concessional loans (yen loans) to Southeast Asia, often complimenting on-going reparations projects. The OECF took charge of concessional loans programs established in conjunction with the reparation and sub-reparation agreements. As these loans limited procurement to Japanese companies, their projects were opportunities for Japanese exports. This was positive for Japan’s economy but became a source of friction, especially with the United States and other donor countries. By the end of the 1960s, when Japan became the second largest economy in the capitalist camp, the “tied” nature of Japan’s yen loans began to attract international criticism for it was regarded as more an export promotion than international aid. The United States, in addition, was eager to demand that Japan expand the ODA in Asia, where it wanted to prevent an expansion of communism.

Domestic politics in Japan became turbulent from 1974 to 1976.¹⁹ The establishment of the cabinet of Prime Minister Fukuda Takeo resulted in Japan’s international position becoming more clear. Fukuda, in his meeting with President Jimmy Carter in March 1977, “expressed his intention that Japan would further contribute to the stability and development of that [Asian-Pacific] region in various fields, including economic development.”²⁰ Fukuda directed an increase to the ODA budget for FY 1977, and in May, Japan announced its intention to double its ODA budget in the coming five years. In January 1978, Japan announced that all of its yen loans would be “untied,” and in July, it made its “first medium-term target for the ODA,” which shortened the period of doubling its budget from five years to three years. In subsequent years, Japan set several such targets and the amount of ODA increased substantially. In 1989, Japan became the top ODA funds provider in the world.

Along with the decision to expand ODA budgets, in August 1977, Prime Minister Fukuda elaborated his policy toward Southeast Asia in a speech given in Manila. He declared:

First, Japan, a nation committed to peace, rejects the role of a military power, and on that basis is resolved to contribute to the peace and prosperity of Southeast Asia, and of the world community.

Second, Japan, as a true friend of the countries of Southeast Asia, will do its best for consolidating the relationship of mutual confidence and trust based on “heart-to-heart” understanding with these countries, in wide-ranging fields covering not only political and economic areas but also social and cultural areas.

Third, Japan will be an equal partner of ASEAN and its member countries and cooperate positively with them in their own efforts to strengthen their solidarity and resilience, together with other nations of the like mind outside the region, while aiming at fostering a relationship based on mutual understanding with the nations of Indochina and will thus contribute to the building of peace and prosperity throughout Southeast Asia.²¹

This declaration was later to be called the “Fukuda Doctrine,” ideas repeatedly referred to by subsequent Japanese leaders.

An important development in Japan’s Asia policy was its decision to extend the ODA to China. As discussed above, China waived “reparations” from Japan when the two countries normalized their relations in 1972. China had maintained its position not to accept foreign aid until Deng Xiaoping came to power. When he visited China as Japan’s prime minister for the first time since normalization of relations in 1972, Prime Minister Ohira Masayoshi, announced that Japan would extend large scale yen loans for infrastructure development. ODA support was not considered delayed reparations; Japan found that it was in its strategic best interest to support Deng Xiaoping’s modernization efforts under the Cold War. However, Ohira was deeply indebted to the “Chinese people’s great magnanimity,” and in his mind, ODA support needed to be more than a strategic calculation.

Fig. 3

Net ODA to Asia–Pacific

Japan, to accommodate US strategic interests, extended ODA to such countries as Pakistan and Turkey, but the major portion of Japan’s ODA went to the Asia–Pacific region, including China. As Fig. 3 indicates, Japan was the dominant donor to the Asia–Pacific in the 1980s to 1990s. Projects started as reparations, such as the Brantas River Basin Development in Indonesia, continued with the massive financial and technical support of Japan’s ODA, resulting in increased electricity production with huge irrigated areas suffering from fewer floods. Japan’s ODA was the major source of funds and technical cooperation for the Development of the Eastern Seaboard, a major industrial complex that transformed Thailand into an industrial hub in Southeast Asia. Japanese ODA to China financed major infrastructure developments in the 1980s and 1990s. Though obviously not the only source of economic development in the Asia–Pacific, the Japanese ODA was at least one of the important factors that contributed to the economic miracle of the region (Tanaka 2017).