The development of capitalism in Japan

Andrew Flood 1993

This is the text and notes I used for the Japan talk given to a branch meeting. Its a bit difficult to follow as its mostly in note form.

The Tokugawa era followed from a 16C civil war in Japan. The ruler was the Shogun who owned about 25% of the land the rest being held by various Daimyo who owed allegiance to the Shogun. The Emperor at the time was no more than a figurehead. A large class of Samurai had come into being, some 2 million people or 7% of the population. Most were not rich but did no work and were parasitic on the economy. Some had large allowances and carried out the administrative functions. They lived in Joka-machi (castle towns). This period however was a time of internal and external peace.

The peasants made up the bulk of the population about 75%. The main source of revenue for the Shogun etc. was the land tax which usually amounted to between 40 and 50% of the paddy field yield. Other payments and services were also exacted. As in Europe peasants were tied to the land. Tax was paid collectively by the village.

In this period new techniques started to be used and the traditional structure of society changed. In the towns craft workers were controlled by guilds which only played a role in regulating trade, i.e. they had no defence role. A few small factories of up to a hundred people existed in the textile, wax and sake sectors but they were not significant. Mining had more significance and capitalistic methods started to intrude here.

A merchant class existed which handled the movement of rice tribute etc. around Japan. By the early 18C retail shops had become numerous, one employing over 1000 at a number of outlets in Toyoko. The Shogun's forbade the building of large ships however as part of a policy to isolate Japan from the outside world. Trade was restricted to the Chinese at Nagasaki and the Dutch at Deshima.

This policy was eroded by the southern daimyo but only collapsed when the US sent a fleet to japan in 1854 which refused to leave without an agreement. In 1858 the government was forced to open 5 ports and grant rights to foreigners. The west bombarded two cities in 1863 and 1864 demonstrating to the most hostile clans that they could not hold out. In the 18C an intellectual renaissance started which include studying western sciences along with a revival of Shintoism which upheld the divine right of the Emperor against the Shogun.

As this period developed the Shogun's found themselves short of money. The only significant income was the tax on land and a lot of this was swallowed by corruption. The ban on foreign trade meant the taxes which European rulers gained from such trade was not available. The currency was repeatedly debased which caused discontent from the merchants. Once Japan was forced to open up expenditure on defence was forced to rise rapidly making the situation worse.

The Dyamio were increasingly forced to rely on loans from the merchants and slashed the Samurai allowances. The merchants gained considerable power but they never tried for political power. The samurai became impoverished, dismissed their heredity servants and turned to a wide range of scams to make money. In the last couple of decades the Tokugawa social structure started to collapse so that even the power of the merchants guilds was lost as a class of shokunin arose outside the guilds. Cheap western imports started to flood in, prices rose and the basis for the economy changed. The Shogun started building docks and western style factories. the Chonin found there interests lay with the Dyanio so in 1868 it was the Samurai of the lowest rank who moved against the Shogun in the name of the Emperor. The Shogun collapsed and the Emperor was restored to a constitutional position not occupied for 800 years.

The restoration government despite being hostile to the west rapidly pushed the adoption of western methods. The opium wars in China of 1839-42 had showed how vulnerable Japan could be. Revolts still occurred of clans who favoured the old system up to 1877 but it was the restoration of the Emperor which seemingly contradictorly brought the end to the feudal economic system in Japan.

Meiji era (to 1912)

In 1869 feudalism was abolished and the clans surrendered their fiefs to the government. All classes were declared equal before the law and barriers on local movement and internal trade removed. Individuals were allowed acquire land and all the professions and trades were thrown open. Foreigners were brought n as advisors and technicians and Japanese encouraged to go abroad. The state established schools, colleges and experimental agricultural stations. In 1877 the government organised an industrial exhibition in Tokyo.

The government sought to maintain the balance of trade by purchasing rice and silk to export on one hand and by establishing factories on the other. Railways, steamships and post and telegraphs were also introduced in this decade. It has been said that "there was scarcely any important Japanese industry of the Western type .... which did not owe its establishment to state initiative" at the end of the 19th Century.

The state intervention also provided a role for the Samurai which would otherwise have remained a dangerous class for the government. In this time also the infrastructure was massively built up, a limited railway line was important but more important was the construction of dirt roads and the introduction of carts and rickshaws on a large scale. Many small scale plants also arose in this period which although still traditional were to become important later.. Between 1868 and 1873 foreign trade doubled but imports far exceeded exports. Half of the imports came from Britain and consisted of manufactured goods and capital goods.

Exports were mainly raw materials and Japan was greatly assisted by the outbreak of silkworm disease in Europe. The only manufactured goods to be exported consisted of traditional Japanese arts. In 68-69 Expenditure totalled 45 million yen but income was only 14 million. The defect was made up by borrowing off government supporters and printing money. The situation improved after 1969 due to a number of factors including the crushing of internal rebellion and the stabilisation of the currency.

in 1875 the whole tax system was overhauled and the number of different taxes reduced from 1600 to 74, the land tax (3-2.5%) was still the major source of revenue for many years however. In 1872 a national banking system was established. This was of limited success until in 1877 when the samurai pensions were commuted for public bonds. The Samurai used these bonds to found banks but the fast rising government debt lead to violent inflation. The price of rice doubled in the 3 years following 1877. Farmers and landlords did well out of this as both groups had incomes in rice but paid tax in currency. The situation stabilised again in 1881.

1880 - 1900

1881 Central banks established rather than national banks

Taxes increased and state assets sold off.

1886 practise of annual budgets introduced

1894-5 Sino Japanese war cost 200 million yen paid without raising taxes or adding significantly to national debt



National debt Million yen

December 1894 207

December 1903 435

December 1907 2244 (War with Russia 1,500 million yen)


Russian war Japan gained Korea, Kwantung peninsula and South Manchuria.

After 1907 no increase in national debt although expenditure did increase

period up to W.W.I characterised by 1) increase in annual expenditure

2) growth of national debt

3) large import of foreign capital

1882 - 1904 Central bank replaces national bank, currency returns to par with silver. Agricultural prices fall so many farmers sell resulting in bigger farms. Gold instead of silver adopted as standard in 1897.

1896 first bank lending to business in exchange for securities set up by state.

War with China lead to Japanese colonial expansion.

Deposits bureau of 1887 was PO savings scheme which served to direct the savings of the poor into capitals for large scale enterprise and overseas expansion.

There were also a large number of very small private banks with an average of only 1.5 branches.

There was no real division of the banks into commercial banks, merchant banks etc.

Japanese economic development has two sectors

1) Foundations on peasant agriculture and small scale manufacturing.

2) Large scale commonly state created enterprises.

It was not until 1900 -> that urban growth outgrew rural growth.

After 1878 agricultural production grew considerably due to new techniques and the farming of new areas.

Silk production and export grew very rapidly but remained a small scale peasant based industry, from 1900 however egg production was concentrated in fewer hands. Between 1883 and 1913 both production and export increased by a factor of 8. Spinning the silk did become large scale so that by 1913 only 22% was done at home. The capital for the silk industry was however provided by either the new banks or foreign loans. Its growth depended on co-operation between the state and the old and modern sectors of the economy. Weaving remained a small home based industry.

Cotton spinning grew eight fold up to 1913, new methods and markets along with the end of protectionism and the import of cheap Indian cotton were important. The availability of cheap female spinners probably played the key role.

There was no real use of wool before 1900 but this grew rapidly so that by 1913 an export trade in Muslin was growing. Hemp and flax production was also re-organised during this period.

By 1913 textiles was by far the most important sector of manufacturing . 60% of those working in factories were working in textile factories and these Accounted for 45% of factory output. Conditions for workers were poor, the heads of peasant families sold girls to agents to work in the factories. They then lived in dormitories at the factories. This system was rooted in tradition.

Metal industry saw only government lead growth due to high capital costs, economies of scale and the difficulty of using traditional skills in modern manufacturing methods. By 1913 these industries were still not profit making and accounted for only 40% of consumption.

Mining grew primarily in the private sector, coal output although low in productivity grew by a factor of 30 from 1877 to 1913.

Copper mining grew so by 1914 Japan was the second largest copper exporter. Both mining and refining was in the hands of a few families who also owned factories which consumed a lot of the copper. These included Mitsubishi.

The oil industry grew rapidly up to 1903 and slowly thereafter as new fields became limited.

Shipbuilding grew five fold, most of this development happening after 1900. Although the first steel ship was only launched in the 1890's by 1913 the Japanese yards were building warships. Output was still unimpressive by western standards.

Engineering as a whole was small employing some 60 000 in 1913 but already contained some significant names..

Other manufacturing industries included those for beer, sugar, cement and glass. There were also a host of enterprises which have no western equivalent producing only for the home market.

1888 -> 1910 railway freight grew by a factor of 50.

1873 -> 1913 shipping tonnage grew by a factor of 100. The need to buy transport for the states imperial adventures was very important in this.

1881 -> 1913 foreign trade grew tenfold. At the state imports were manufactured goods and export were raw materials. By the end the situation was much more balanced.

Taisho era (1912 - 1926)

W.W.I gave Japan new markets, contracts for munitions and a strong demand for it's shipping bringing in an industrial boom till 1920. The number of factory workers doubled to 1.6 million.

1915-18 export surplus averaged 352 million yen. 1918 exports were *3 the value of those of 1913, in volume 47% greater.. Shipping tonnage doubled and income in freights increased by a factor of ten. From 1914 to 1919 Japans net international credits netted 3000 million yen.. Gold reserves increased by a factor of 7.

There was also 300% inflation which lead to rice riots in 1919 which reflected a loss in the standard of living for workers.

The boom collapsed in March of 1920 and depression lasted until 1922.. There was an 820 million import excess in this period. Deflation was not however carried as far as other countries as this would have sent a lot of industry and some banks to the wall. The large families which owned the industry (but also the banks) would not allow this. Until the earthquake of 1923 this meant the Yen was overvalued.

From 1923 to 1924 easy credit to facilitate rebuilding after the quake lead to a period of inflation. In 1925 rumours that shipments of gold from Japan would again be permitted and the subsequent rise in the Yen led to a fall in exports and prices. In 1927 a financial crisis hit as a result of this and 35 banks closed their doors until the government advanced 700 million yen. This crisis resulted in the readjustment of the economy to peace time conditions.

In 1930 the gold embargo was lifted but the depression in the states lead to a collapse in prices and over 1/4 of the gold reserves leaving the country. In 1930 silk prices declined by 50% and the export trade in general fell by 26%. Peasant farmers were ruined and the government was forced to spend on relief work. It still persisted in carrying through deflation and in December of 1931 the government was overthrown by the militarists was base was in the peasantry and small manufacturers.

This period however did result in important modifications in the banking sector including the reduction in the number of banks from 2285 in 1918 to 913 in 1930.

The central bank remained weak however as the great banks of the zaibatsu became more powerful.

Between 1913 and 1929 foreign trade increased by a factor of 3. Colonial trade consisted of 1/5 of the total by 1929. The percentage of finished goods increase from 29% of exports to 44%.

Between 1914 and 1930

Population grew 25% to 64 million

National income grew 200% in real terms., workers wages grew 50-60%, peasants income grew but less than this.

Volume of manufacturing production trebled. Cotton and silk were greatly enlarged. Wool, worsted, steel, chemicals, engineering and iron grew considerably but their relative importance remained small.

There was little change in the peasantry in terms of numbers and manufacturing only accounted for 20% of employment.

Textile industries became dominated by large scale production and employed 50% of the factory workforce.

Steel output rose to cover 70% of needs but pig iron imports still accounted for 40% despite quadrupling production. About 90% of the ore required was imported. In both coal and copper japan became an importer rather than an exporter.

Shipbuilding rose to 650,000 tons in 1919 only to fall to 165,000 by 1929 due to a combination of high costs and the Washington treaty which restricted the size of the Japanese navy.

Other engineering sections however continued to grow after the war, employment in manufacturing rose to 5.9 million in 1930 from 4.7 million in 1914.

Trade unions were formed after the war but conditions were not favourable. A lot of workers were still short time peasants girls, there was a large pool of surplus labour and industry was paternalistic. Only among seamen and transport workers were effective unions formed.

In 1923 there were 100000 trade unionists, in 1931 there were 370000.

After 1880 the state sold its holding but it still held the railways, undertakings key to national security, those unprofitable in Japanese conditions (iron and steel) and valuable fiscal companies (salt and tobacco). In addition there were a number of industries on the Asian continent where the state supplied part of the capital.

Government subsidies went to shipping, shipbuilding, private railways, some chemical production, petroleum extraction in Karafuto, iron, steel and the largest, agriculture. In 1931 this amounted to a total of 61 million yen or 3% of general budget expenditure. 2/3 of this went to agriculture. Tariffs were also used to protect key industries rather than as a way of raising income as otherwise tariffs were low.

The government also set up associations of producers and trade associations to have a self-policing quality control system. In 1925 manufacturers in certain export markers were authorised to form guilds and the minister could compile non-members to abide by guild regulations.

Zaibatusu (trans. money-cliques)

Mitsui, Mitsubishi, Sumitomo and Yasuda were four of the families which had bankrolled the restoration and the early years of Meijj. They were descended from some of the large merchant families at the time of the daimyo and after recruiting notable samurai they became agents for the execution of government policy.

In return for financial assistance to the government they received low price State properties and valuable contracts. They owned large sections of the economy, banks, manufacturing, transport and mines. By the late 20's they could impose there wishes on the government. Their ownership also penetrated into the mass of small scale enterprises.

From December 1931 the militarists were in power. The new finance minister Takahashi instituted what was a Keynesion "Full employment" policy in 1931 some four years before Keynes wrote his "General theory". He increased government expenditure through borrowing and easy credit and funnelled these funds into the military and into Manchuria. he refused to increase subsidies or taxation and argued that the increase in expenditure would help the economy alone.

The economy recovered but whether it would have done so without the cost reductions of the previous period is another question. What's more earnings which had fell sharply in the period of the depression (1929 - 31) rose only slightly and in real terms continued to fall. Japanese workers had paid for the recession but did not gain from the boom which followed it except in terms of employment. A lot of the boom went into munitions and Manchuria.

The high profits made in these years enabled manufacturers to extend their business and pay off their loans. In 1935 Takahashi had decided recovery had been completed and attempted to end the process of reflation. The army however was unwilling to except an end to its loans and had him murdered. In 1937 the Japanese economy having met its limits was forced increasingly to become a war economy.

In textiles in this period employment fell from 55.3% in 1929 to 36.8% in 1937 although there was no fall in the number employed.. Metals, Chemicals and machinery rose from 23% to 43% in the same period. Factory employment rose from 1,800,000 to 2,900,00 or by over 50%.

Ship production soared so that by 1937 the Japanese had the third largest merchant fleet in the world.

Textiles in fact grew massively in all but silk but the depression in the Silk industry offset this growth. Small firms tended to disappear and large ones became the rule. productivity underwent a massive boost so that despite the fact that output rose the number of operatives fell. In wool for instance productivity trebled.

In manufacturing the increase in productivity was also massive, in metals output per man hour rose 25%.

In Engineering Japan increasing became self-sufficient even in complicated equipment. Overstaffing had been eliminated at the end of the 20's. Output even rose in mining.

In this period the government had become more involved in regulation including the setting up of cartels to control prices etc. part of the reasonfor this was that political power had shifted to the military and away from the Zabutsio. Up till 1937 however the Zabutso still managed to defeat the nationalisation of electricity. For the most part however the Zabutso retreated in front of the combined assaults of the military, the peasants and the small producers.

The war economy also brought advantages to the Zabutso however as it stimulated the development of heavy industry but the military directed as much of this into non-zabuto groups leading to new groups including Nissan. This period also saw exports becoming more diverse as machinery and finished goods being exported to the colonies replaced silk exports to America. the colonies accounted for about 25% of exports and imports.

However Japans exports only accounted for 3.65% of world exports in 1935.

This was sufficient to produce an outcry in the West as for the first time Japanese exports became competitive.

Wage plasticity was one of the key factors behind the growth of the Japanese economy, there was a lot of competition for jobs so that real wage cuts could be rapidly implemented whenever there was a crisis. The war economy of the 30's also meant the depression far earlier than in most countries but at the cost of allowing the military to achieve power. There is a clear reflection of this in the fascist countries of this period and perhaps a warning to the US.

The defeat of Japan in W.W.II meant she lost all her colonies, the markets and the production facilities there. Over a quarter of the city area was ruined, the physical distruction being equivalent to twice the national income of 48-49. Capital equipment in many plants had been run down and many more plants had equipment that was useless for peacetime.

Within 25 years Japan was the worlds 3rd strongest economy. Industrial production was ten times the level of 1936, by 1970 the standard of living was approaching that of western Europe.


Economic confusion, government lavished out funds causing inflation, recovery was modest and due to US aid. The Zaibatsu were dissolved, and many of the economic, political and military leaders were purged. Land reform was introduced giving the peasants the land and labour laws creating better conditions for the workers were passed. All this was at the instruction of the occupation authorities. With the start of the cold war US policy changed to stabilising Japan. In 1948 Industrial production was only 40% of pre war volume.


The Korean war of June 1950 saw Japan receiving huge orders from the UN forces so by 1951 industrial production exceeded the pre-war volume giving a favourable balance of payments. The treaty of 1952 gave Japan sovereignty as an allies against the USSR with US bases in the country. This gave a source of income after the Korean war. Between 1952 and 1956 this was over 3000 million dollars or 25% of the value of commodity imports. Up to 1959 it was still worth 14% of imports.

By 1953 output was 50% greater than in the 30's but wages had only recovered to the levels of the 30's. By 1957 economic recovery had been completed so even the export trade was at 90% of the pre war level, GNP was 150% of the 30's, production was 250% but national income per head was only 10%. In these years profits obviously went very much towards reinvestment the workers got few real benefits from recovery. Real GNP grew at 7% a year, outstripped only by West Germany and about 30% of GNP was reinvested.


Towards the end of 57 difficulties started with the balance of payments, government corrective measures halted production and prices fell. By the end of 1958 recovery had begun. In 1960 production was twice the 1955 level. Real incomes at last started to rise and a high level of savings helped investment. The rise in productivity however continued to keep ahead of wage increases.


In 1960 the Government published an income doubling plan for 1961-1971. This encouraged heavy investment in new equipment and a rise in demand for services and consumer items. 1961 had 15% real growth, this dropped to 7% in 1962 due to another balance of payments crisis and deflationary polices in response. Growth was much faster than predicted despite short recessions in 1964-65 and from 1967-71 growth averaged 12%. Labour shortages lead to a rise in wages but this was offset by rises in productivity. In this decade consumer prices rose faster than whole sale prices, another method by which the workers were paying for the economic development.

The textile industry had been devastated by the war with machinery being melted to provide metals for the war industry. Cotton and wool recovered slowly but a huge boom occurred in man made textiles. This was part of a changeover form labour intensive industry to capital intensive industry.

The motor, shipbuilding, steel and electronics industries all had massive growth. To compare 1930 with the end of the 60's textiles had dropped from 37 of production to 7%, metal, chemical and engineering had risen from 36% to 67%.

Foreign trade was slow to recover due to the loss of the colonies up to the 60's. In the 70's it grew at double the world rate so that by 1970 it was treble the 1930's level. The economy however remained less dependant on foreign trade. Exports had switched from low tech. textiles to high tech gods, presumably again reflecting a change from labour to capital intensive industry. Imports and exports were to the developed world rather than the under developed one. The Vietnam war was one exception to this.

After the war the occupying forces broke up the zaibatsu and their subsidiaries. The national Iron and steel companies were also privatised. By the late 50's however the three major zaibstu again occupied a position of power. Many more companies had arisen with familiar names like Honda and Hitachi so their control was not as absolute as before the war. However the bulk of the large scale economy was again controlled by a very few firms.

Aside in the 60's enterprises employing less than 9 paid only 44% of the wages that enterprises employing more than this paid.

The banking system was dismantled by the allies but resumed its old shape by the end of the 50's. Money was put into savings rather than securities freeing up large amounts of capital for capital investment. This has changed in the last few years. Some 80% of capital investment came from such sources.

Labour organisation

The pre-war unions were weak and in July of 1940 the government dissolved all labour organisations. The occupation gave the workers the right to organise and strike while employers were penalised for not recognising unions. This was in the pre-cold war period. By 1948 there were 6,750,000 members of the unions. these unions were militant but with the cold war in 1949 (high of 55%) the legal conditions were modified making conditions tougher, membership declined. By 1970 it had recovered to the point where 12 million were unionised or 33% of the non agricultural workforce, 25% of these were women.

Unions are organised on an enterprise rather than an occupation level and bargaining was carried out locally. The national body played a political rather than a negotiating role. Public enterprise unions like the railways are an exception to this and they often played the key role in the spring offensive in the 70's (Annual wage claims).

Most industries still had no rate for the job as there are many add ons to the basic wage. Profit related bonus were common which were often equivalent to several months wages. Temporary workers which are a major section of the workforce receive none of these benefits however. By the 70's wages were 250% pre war levels but productivity was greater again.

Post war land reform.

Allies saw fascist movement in 30's having support of over rented peasants so decided to destroy the landlord class. By 1949 tenanted land had dropped from 48% to 9% of cultivated land. Inflation meant in effect the landlords were expropriated.

Great improvements were made in productivity and in the 50's peasants started leaving the land. In 1955 39% of the pop were engaged in forestry or agriculture. By 1969 this had dropped to 18% and many of these were part time farmers with jobs in industry. Agriculture was strongly protected by subsidies and tariffs. Small scale farming was still the rule in the 70's however.

At the end of the war the allies privatised a lot of government holdings and dismantled the public sector. This sector remained small so by the mid 60's only 8% of employment (as against 22% in the UK) was in this sector. In 1967 government expenditure was only 21% of GNP compared to a European average of 40%.

Government influence over the economy has however been decisive, in the 60's it was responsible for 30% of capital formation. A generous load and tax break system for private enterprise also helped. Tight control of exports and imports was also retained.

Recover due to

American contribution aid and procurement

Korean war

Vietnam war

increase in efficiency as compared to other nations.

Large increase in labour supply, with large reserves of under employed workers.

High capital stock due to high savings

High rate of investment in new machinery

Government investment towards growth not welfare state or armaments

rapid response to deflationary measures particularly ease of cutting wages due to their high linkage to profit