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Prof. Y. Sano School of Economics

Introduction to Japanese Business History of Japanese Economic Development. December 12 th / 19 th 2013. Prof. Y. Sano School of Economics. Main Business Area “Nihonbashi, Edo” in 18 th century. Scene of Echigoya in Edo, 18 th Century.

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Prof. Y. Sano School of Economics

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  1. Introduction to JapaneseBusiness HistoryofJapaneseEconomicDevelopment December12th / 19th 2013 Prof. Y. Sano School of Economics

  2. Main Business Area “Nihonbashi, Edo” in 18th century Scene of Echigoya in Edo, 18th Century

  3. “Trade” in 6th Century (flow of culture and civilization) Mahāyāna Buddhism G ö k t ü r k s Uighur Kushan Empire Rice Theravāda Buddhism Two Most Important Cultural Flows – Buddhism and Rice

  4. “Trade” in 6th Century (flow of culture and civilization) Mahāyāna Buddhism G ö k t ü r k s Uighur Kushan Empire Rice Theravāda Buddhism Two Most Important Cultural Flows – Buddhism and Rice

  5. Historic Topics 2800 BC Rice cultivation 7th c. Buddhism, other Asian civilization emigrated through China / Korea 630 Prince Shotoku established Emperor’s ruling system 1192 First samurai government

  6. Historic Topics 1274 1281Defeat of Mongolian invasion (Kamikaze) • 1543 Portuguese introduced firearm “matchlock” (Tanegashima) Francisco de Xavier of Jesuits brought Christianity to Japan circa 1550 Oda Nobunaga and other local feudal lords initiated deregulated “free market” (Rakuichi,Rakuza 楽市、楽座）

  7. Historic Topics 1575 Battle of Nagashino Gun-armed Oda-TokugawaalliesdefeatedTakeda cavalry. 1600 Battle of Sekigahara

  8. Battle of Sekigahara in 1600 (Tokugawa’s pre-modern Edo Era) Western Eastern Eastern (Tokugawa) Allies won and opened Tokugawa Shogun Government. Pre-modern Edo Era enjoyed 260 year isolation.

  9. Historic Topics • Tokugawa Shogun Government • Basis for robust feudal government system 17th～19th c Edo Era “260 years of self-imposed isolation” (pre-modern Japan) Period of unique Japanese culture development

  10. New type of business – Bill of Exchange Edo – Osaka 550 km (344 miles) Hikyaku “Flying Legs” takes 7 days It may take longer, and dangerous Edo (Tokyo) Osaka

  11. New type of business Suppose BuyerinEdo pay to Seller in Osaka Buyer in Edo asks ExchangeHouse to Issue Bill of Exchange Buyer send B/E to Seller in Osaka which orders Customer to pay to Seller Customer counterbalances its account with Exchange House Customer Edo (Tokyo) Exchange House Osaka No need to send money for a long distance reducing risk of loss. Functions of B/E has been established in 18th c.

  12. New type of business – Forward Rice Exchange 1693 Dōjima RiceExchange • Center of Japan‘s system of ice brokers (fudasashi札差） • Forerunners to banking system. Established in 1697 • Rice brokers and moneychangers (ryōgaeshō 両替商) • gathered their shops and warehouses in the Dōjima. • Samurais including daimyo (feudal lords) paid in rice • Rice brokers, moneychangers played crucial profitable role • Economy shifted from rice to coin, paper money by Dōjima merchants • Osaka merchants developed monopoly on rice trade Osaka, and Kinai. • Samurai panicked over the exchange rate into coin, speculators and conspiracies kept stores of rice in warehouses • 1733 starvation widespread. Riots uchikowashi (打壊し) happened • 1735 Shogunate set price floor in Edo and Osaka • Tokugawa Yoshimune (8th Shogun) made attempts at reforms, known as Kome Shōgun(the Rice Shogun). Solved rice economy • 1773 the Shogunate re-established the Rice Exchange • Large proportion of the nation's monetary transactions handled through Dōjima managing deposits, withdrawals, loans, and tax payments.

  13. Rice and Population in Edo Era • Social stability promoted rice production growth. • 1600 – 1700 <Phase-1> • Farmland → 150% • Population 12 mil → 31 mil • 1700 – 1850 <Phase-2> • Farmland expansion ended. • Population stayed at 30 mil. • Rice production kept rising by technical development (fertilizers, equipment etc.) • Development of cash crops • (cotton, tea, rapeseed, silk) million Phase-1 Phase-2 Rise of proto-industries

  14. US 4 Black Steamships Opens the door of Japan (1853) • 1858 Treaty of Amity and Commerce • Opened door for to foreign trade • Unequal treaty • > No jurisdiction over foreigners • > No right on duty control (fixed to 5%) • > No government control over trade • > No control over money exchange rate • (caused big outflow of Japanese gold)

  15. InfluenceofInternationalTradeat the end of Tokugawa Government • Silk : top export item (60-85%) • Cotton : top import item (35-50%) • Machine spinning cotton thread overwhelmed Japanese hand spinning thread • One sided export / import might have caused Japanese mono- culture economy • →potential economical colonization • Tokugawa government relied on foreign finance. • Trade imbalance caused heavy inflation. • →Cause of final collapse of Tokugawa government

  16. Meiji Restoration in 1868 1853 1867 1868 – 69 From landlord’s economy (by rice) to capitalism economy (by money)

  17. Topics in History Meiji Restoration to the 2nd World War Meiji restoration Mitsui & Co. Ltd. Established Seinan War 1880 Industrialization began 1894-95 Sino-Japanese war 1904-05 Russo-Japanese war 1923 Great Kanto (Tokyo) Earthquake 1927-32 Showa depression 1941-45 WW2 (Pacific War)

  18. Meiji Restoration 1868ChangeofCity Edo renamed to Tokyo (Eastern Kyoto). 京都→東京 High street changed from wooden to stony. New Tokyo Old Edo

  19. Meiji Restoration 1868ChangeofLadies Edo girl Ladies keep changing dynamically though Ladies have always been forerunners for change Now Meiji Ladies

  20. Start of Mitsui 1602 Mitsui Takatoshi （三井高俊）started Liquor Shop “Echigo-ya” (越後殿の酒屋＝越後屋） 1673 Mitsui Takatoshi （三井高利）started Cloth Shop “Echigo-ya” which later became Mitsukoshi （三越） 18th c “Echigo-ya” expanded its business to Exchange House which later became Mitsui Bank （三井銀行） New Tokyo Old Edo

  21. Start of Mitsubishi 1870 Iwasaki Yataro （岩崎弥太郎）took over “Tsukumo Shookai” (九十九商会)then changed to “Mitsubishi Shookai” (三菱商会) 1877 Made big fortune on Seinan War （西南戦争） 1885 Iwasaki Yanosuke （岩崎弥之助） took over 20th c Expanded business to shipbuilding, banking, coal mining, real estate, brewing, electric etc New Tokyo Old Edo

  22. Meiji Government’s Priority Development Policy a) Military enhancement - Renewal of war equipment - Massive mobilization of soldiers b) Industrial modernization - National factories (Light industries) - Railway construction - Communication system - Banking systems - Coal mine development - Agricultural development →Huge money and resources needed HJMS Mikasa by Vickers Platt Brothers’ spinning machine

  23. Urgency of enhancing Japanese trading initiative • Foreign traders dominated trade functions • - export / import • - shipping • - trade financing • - marine insurance • Japanese trading knowledge were lacking. • - foreign market information • - materials / technology sourcing • - financing knowledge • - international product knowledge • - capital strength to run various business at once

  24. Birth of Trading Company (Sogoshosha) 1876 Mitsui & Co., Ltd.founded as the first Sogoshosha (General Trading House) President : Takashi Masuda Employees : 16 (now 39,864 consolidated) Mitsui family : No equity Credit support only Business style : Commission agency Export : raw silk, coal, rice, cotton fabric Import : raw cotton, spinning machines, railway machines and rails. Domestic : tax rice Mitsui’s first HO

  25. Seinan War (Last Samurai’s War) Rebels Government Won Lost 30,000 70,000

  26. Cause of Seinan War • Meiji government took over Tokugawa liabilities including the salaries to samurais without jobs. → over 30% of the government expenditure • Meiji government reformed tax from rice to money. • → detached samurai from feudalistic land ownership • Meiji government abolished the social classes and removed samurai’s privileged social status, which caused them financial difficulties and future instability. →Samurai angry!!　　→　　Rebellions

  27. Lessons from Seinan War • Why did samurai lose the war against conscripts from non samurai classes? - Modern equipment - Fire power superiority - Advanced communication system (including literacy) →War was no longer the art of personal skill of Swards. • The lessons from the war • - Meiji government believed in the Western civilization. • → needs of industrial modernization • - Government noticed the value of communicationskill. • → needs of educational system modernization Key words : Military, Industrialization, Education

  28. Tomioka silk mill Consequence of Seinan War • Huge war expenditure - War expenditure ate almost total tax revenue. - Disorganized money supply caused terrible inflation. →Government could not proceed industrial modernization. • Tax increase and extreme deflation policy • - Tax reformed : from rice (Edo Era) to money (Meiji Era) • - Peasant exhausted. → • mass of flow to cities caused cheap labors. • => Massive industrialization by private sectors. Miike mine First railway ・　Government went for privatization of government assets - Railways (Nippon, Sanyo, Kyushu, Kansai, Hokutan etc.) - Government factories (silk mill, spinning firm, shipyard, beer etc.) - Government mines (Miike, Takashima, Sado, Ikuno etc.) - Banking sector (Daiichi etc.) - Real estate (Hokkaido development bureau etc.)

  29. Growth of light industry(cotton: top priority for money save) In 1883, Osaka Spinning Co was equipped with 15000 spindles and run by steam engine in the city. With low labor costs, Japanese cotton thread became competitive for export by 1895. Osaka Spinning Co Early local spinning mills were too small with only 2000 spindles and run by water wheel. Russo-Japanese war Sino-Japanese war

  30. Growth of light industry(cotton: top priority for money save) • New Ring spinning machines employed at early stage. (The machine for young girls to work with.) • Young girl labors were massively supplied from agricultural sector at cheap costs. (Girl labors lived in a dormitory for 2 shift work.) • Used various imported cotton for best mix (mainly Indian and American). • Rise of Japanese merchant fleet. • Government support on financing and tax.

  31. Growth of light industry (raw silk : top earning item) Raw silk was top earning item (particularly from US) until WW2

  32. Growth of heavy industry (Coal, the blood of industry) • Japanese major coal mines were located in Kyushu island. • Mass development was made by Zaibatsu. • (Mitsui, Mitsubishi, Sumitomo, Furukawa etc.) • Coal was the blood of Japan’s industrial development. Statue of miner

  33. Growth of heavy industry (rise of Japanese technology) HJMS Yamato (1940) Yahata steel mill (1901) Japanese heavy industry relied heavily on military demand. This encouraged development of own unique technologies. Zero fighter plane (1939)

  34. WW1, Earthquake, Financial Crisisthen War Tone Economy • WW1, 1914-1918 WW1 lead Japan to booming but bubble economy collapsed after the war WW1 de-stabilized gold standard and exchange rate volatility widened WW1 turned Japan from debtor country to creditor country • Kanto earthquake in 1923 Earthquake devastated Tokyo, Yokohama with more than 140 k death toll Damage was over 3 times of Japan’s budget. Bank system got impact • Financial crisis in 1927 Unsettled earthquake bills caused banking crisis Over 2000 banks in 1919 fell into 625 banks in 1932 but BOJ did not help • Great depression, 1930-1932 Wall Street crash in 1929 devastated Japanese economy Social instability rose Fascism and aggression for new market • Marching to War Economy, 1937-1945

  35. Post War Economic Recovery Tokyo 1945 Tokyo 1990

  36. 1949 China (PRC) Cold war 1950 Korean war 1956 2nd Middle East war (Suez War) 1960’s Vietnam war 1967 3rd Middle East War 1973 4th Middle East War 1979 Iranian revolution 1981 Iran Iraqi War 1985 (Plaza accord) 1991 Gulf war 2003 Iraqi war 1947 Dissolution of Zaibatsu by GHQ order 1950 Korean war booming 1952 Release from Allied rule 1955-73 Post-war booming 1964 Tokyo Olympic 1970 Osaka Expo 1973 1st Oil shock Post war boom ended 1985-91 Bubble economy 1991-2001 Lost 10 years 2011 Tohoku Great Earthquake Historical Topics after WW2 Japan Asia

  37. WW2 damage on industry War to China WW2 Korean War

  38. GHQ Orders • “Entire demilitarization of Japan” MacArthur • Indirect ruling through new Japanese government • New constitution => democratization • Purging pre-war leaders (political, economical) • Strict anti monopoly law • Dissolution of Zaibatsu • Farmlandreform(70%:from big landlords to peasants) • Trade union authorized • New educational system launched • War compensation to Asian countries • Pre-war economic order was destroyed.

  39. Desperate Post War Economy • War time stocks quickly exhausted • Coal production down seriously • (from 50 mil t/y down to 10 mil t/y) • Extremely unbalanced goods and money • (over money supply generated huge demand.) Hyper inflation Immediate Production Needed Priority production system Another inflation “Reconstruction Fund”

  40. Priority production system Special supply OIL OK GHQ Request Priority goal Steel products priority share Steel Production 30 mil t/y Steel mills J. Gvt MITI priority share Coal mines Steel products smaller share Coals Reconstruction fund Other industries Special rations

  41. Hard Deflation Policy and Korean War • 1948 “Dodge Line” deflation policy • Yen/US$ rate fixed at Yen 360/$ (till 1971) • 1949 Depression by deflation. Japanese starving • Korean War • 1950 Sudden war demand by US Dollar • No direct involvement in the war • 1954 Industry caught up pre-war level

  42. Fruit of demilitarization policy and MITI’s initiatives Demilitarization destroyed war industry > Japan freed from military expenditure (security on small cost of US-Japan Security Treaty) > War industries reformed to heavy chemical industries (Asian textile industries replaces Japanese superiority) > War engineers moved to electronics, motor car industry. + MITI’s leadership to industrial innovation > Projected ship demand to survive shipbuilding yards > Government’s financial institutions to grow industrial competitiveness > Protection of industries against foreign intrusion > Privatization of power utilities (9 regional companies) > Massive and continuous infrastructure construction

  43. Elements of post-war economic drive Large private investment > Heavy war damage -> Chance of facility renewal > War based demand -> Consumers demand Massive consumers demand > Higher income distribution to labors and farmers. > High saving trend. Energy change from Coal to Oil > Cheap energy source for easier handling Bank’s Keiretsu formation > Major bank as leading equity / investment supporter Innovation trilogy > Renewal of heavy industries (improvement) > Motor car and electric home appliances (catching up US) > Petrochemical and electronics (brand new industries)

  44. Leading entrepreneurs

  45. Million Yen, at 1990 value 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Post War Recovery (Growth of mean personal income) WW2 • Mean personal income = Nominal personal income / GNP deflator • Price is re-evaluated on the level of 1990 • Until WW2, mean personal income was along with CPI. After WW2, increase of mean personal income was far more than CPI

  46. Three sacred imperial treasures (symbol of consumers’ dream) Original (in 7C) (The symbols of imperial legitimacy) New (in 20C) (The symbols of modern life) Wisdom Anyway rich Benevolence Valour

  47. Spread of electric home appliances (spread of happiness?) Ratio of household spread of electric appliances Refrigerator Color TV Washing M/C Mobilephone Vacuum cleaner Car PC Digi Cam AC Elect oven DVD player recorder Post war booming

  48. Japan GDP per capita (US$) Ratio Ratio Japan vs. World World Angus Madison HP (http://www.ggdc.net/maddison/) GDP per capita Japan vs. World • Japan’s GDP per capita has been on world average until WW1 time. • Rapid growth after WW1 was heavily hit in WW2 but then sharply developed its productivity to 1990. • What was the incentive behind? Per capita GDP (US&)

  49. Global market shares of typical countries USA Japan UK China

  50. Symbol of success (Tokyo Olympic, Osaka EXPO) 1964 1970

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