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Japan's Economic Miracle, How to rise from the collapse

Japan economic miracle
The defeat of the Japanese Empire in the second world war made the country's economic situation a mess. The destruction of valuable national assets due to the war and the high unemployment rate was one of the causes of the collapse of the Japanese economy. The abolition of the Japanese imperial army and all occupations related to the military left more than 13 million people unemployed at that time. Losses due to bombardment carried out by the Allies during the war and the destruction of two important Japanese cities by atomic bombs also made them worse off.

Not only that, the inflation that occurs is no less troublesome. This is because there are still costs incurred to meet military needs, including allowances for disabled soldiers, compensation for war victims, payments for ready-made military goods and much more.

These two problems certainly made Japan helpless at that time, the Japanese economy could be said to have been on the verge of collapse.

Then, how can Japan rise up and become an Asian economic giant? Let's discuss them one by one.


The first step taken by America when occupying Japan was demilitarization—all Japanese military power was disabled and could only depend on America. This is one of the factors that revived the Japanese economy, with the reduced military budget, the Japanese government can focus on other fields.

After that, America through SCAP (Supreme Commander for the Allied Powers) formed at least three reforms for Japan, namely the abolition of the zaibatsu (conglomerate groups), land reform, and democratization of workers.

We can start from the disappearance of the zaibatsu, before 1945 the presence of the zaibatsu was one of the reasons for Japan's economic progress, even in the second world war one of the zaibatsu giants, namely Mitsubishi, played an important role in supplying war equipment. However, America felt this zaibatsu was too monopolizing the market. America decided to abolish this zaibatsu and open up as much of the market as possible to the public, so that small businesses could compete.

Next is land reform. Before 1945, about 2/3 of agricultural land in Japan was owned by landlords and farmers only rented the land for cultivation. This feudalistic system was eliminated by distributing the lands directly to the peasants. With this land reform, it is hoped that farmers can plant without having to think about rent and the social system that places landlords as an upper class can also be lost.

The last reform that America carried out in the context of democratizing Japan was to give workers the right to associate. Around 1948-1949 the proportion of workers affiliated with unions reached 60%. With the existence of a union, the problem of low wages and a bad working environment can be reduced. Higher salaries also affect the level of public consumption which is increasing.

Dodge Plan 1948

Joseph Dodge a president of the Detroit Bank was sent by Washington to restore the Japanese economy. The policy package that Dodge offers includes more or less five things:
  • Stop borrowing
  • Eliminate all subsidies and increase utility costs
  • Improved tax effectiveness and cut spending
  • Reduce government intervention
  • Sets the exchange rate to 360 yen per 1 US dollar.
All of Dodge's policy packages are very effective in stopping inflation. However, this drastic change caused a shock to the Japanese economy. Economic activity declined and Japan was almost stuck on the brink of recession. This Dodge Plan succeeded in making Japan one step ahead towards a freer economy, although there was still little intervention from the government.

Korean War

As explained above, the first time the Dodge Plan was implemented, the Japanese economy almost went into a serious recession due to drastic policy changes. The recession that occurred due to the Dodge Plan could be handled when the Korean War broke out. You could say the Korean War brought its own "Blessing" for Japan.

The Korean War, which split Korea into two, was arguably the turning point for Japan's economic recovery. American troops on the Korean peninsula relied on supplies from Japan at that time. This has an impact on increasing the production of export goods which also boosts the Japanese economy. The relatively fixed exchange rate because the Dodge Plan also helped pump up the Japanese economy. Total Japanese income from American troops in Korea was about $590 million in 1951 and $800 million in 1952 and 1953, respectively.

Politics and Human Resources

Not only that, Japan's success is also influenced by the unique characteristics of the Japanese. This uniqueness is one of the factors of their success in generating their economy, they can improve the skills they learn from Western countries and implement them in their own system. One example is that they can create a “Low-cost mass production system” technology which they produce from a combination of imported technology with local needs.

In addition, the political policy of Prime Minister Hayato Ikeda which launched the "Double Income Plan" which increases the income of workers and improves their quality of life. The plan that was previously targeted in ten years can be achieved within seven to eight years. Since 1966-1970 Japan's economic growth has always been more than 10%. Until its peak in 1968, Japan became the world's economic giant under the United States.