Japanese Real GDP Growth, 1925–2001

The data on real GDP in Japan in the post-WWII era is very interesting.

I provide this data below (though it begins in 1925 so we can see the Great Depression era data too):

Year | Real GDP* | Growth Rate
* in millions of international Geary-Khamis dollars

1925 | 112 209 |
1926 | 113 212 | 0.89%
1927 | 114 860 | 1.45%
1928 | 124 246 | 8.17%
1929 | 128 116 | 3.11%
1930 | 118 801 | -7.27%
1931 | 119 804 | 0.84%
1932 | 129 835 | 8.37%
1933 | 142 589 | 9.82%
1934 | 142 876 | 0.20%
1935 | 146 817 | 2.76%
1936 | 157 493 | 7.27%
1937 | 165 017 | 4.77%
1938 | 176 051 | 6.68%
1939 | 203 781 | 15.75%
1940 | 209 728 | 2.91%
1941 | 212 594 | 1.36%
1942 | 211 448 | -0.53%
1943 | 214 457 | 1.42%
1944 | 205 214 | -4.30%
1945 | 102 607 | -50%
1946 | 111 492 | 8.65%
1947 | 120 377 | 7.96%
1948 | 138 290 | 14.88%
1949 | 147 534 | 6.68%
1950 | 160 966 | 9.10%
1951 | 181 025 | 12.46%
1952 | 202 005 | 11.58%
1953 | 216 889 | 7.36%
1954 | 229 151 | 5.65%
1955 | 248 855 | 8.59%
1956 | 267 567 | 7.51%
1957 | 287 130 | 7.31%
1958 | 303 857 | 5.82%
1959 | 331 570 | 9.12%
1960 | 375 090 | 13.12%
1961 | 420 246 | 12.03%
1962 | 457 742 | 8.92%
1963 | 496 514 | 8.47%
1964 | 554 449 | 11.66%
1965 | 586 744 | 5.82%
1966 | 649 189 | 10.64%
1967 | 721 132 | 11.08%
1968 | 813 984 | 12.87%
1969 | 915 556 | 12.47%
1970 | 1 013 602 | 10.70%
1971 | 1 061 230 | 4.69%
1972 | 1 150 516 | 8.41%
1973 | 1 242 932 | 8.03%
1974 | 1 227 706 | -1.22%
1975 | 1 265 661 | 3.09%
1976 | 1 315 966 | 3.97%
1977 | 1 373 741 | 4.39%
1978 | 1 446 165 | 5.27%
1979 | 1 525 477 | 5.48%
1980 | 1 568 457 | 2.81%
1981 | 1 618 185 | 3.17%
1982 | 1 667 653 | 3.05%
1983 | 1 706 380 | 2.32%
1984 | 1 773 223 | 3.91%
1985 | 1 851 315 | 4.40%
1986 | 1 904 918 | 2.89%
1987 | 1 984 142 | 4.15%
1988 | 2 107 060 | 6.19%
1989 | 2 208 858 | 4.83%
1990 | 2 321 153 | 5.08%
1991 | 2 393 300 | 3.10%
1992 | 2 415 691 | 0.93%
1993 | 2 425 642 | 0.41%
1994 | 2 450 521 | 1.02%
1995 | 2 487 838 | 1.52%
1996 | 2 574 912 | 3.49%
1997 | 2 619 694 | 1.73%
1998 | 2 592 327 | -1.04%
1999 | 2 609 742 | 0.67%
2000 | 2 669 450 | 2.28%
2001 | 2 624 523 | -1.68%
(Maddison 2003: 172 and 174).

Some points of interest follow:

(1) Japan’s real GDP fell by 50% in 1945, one of the most disastrous falls ever seen in any nation.

(2) From 1946 to 1973, Japan’s annual real GDP figures show no decline: it did not see any fall in annual figures in this period (Sorkin 1997: 569). Instead of a business cycle, there was what can be called a growth cycle (phases of slower or faster growth) (Sorkin 1997: 569). This in my view has much to do with Japan’s highly successful industrial policy, conducted in these years by the government department called the “Ministry of International Trade and Industry” (MITI; or, in Japanese, 通商産業省 [Tsūshō-sangyō-shō]), although both the Japanese Ministry of Finance and the Economic Planning Agency were also involved.

For a seminal account of MITI, see Johnson (1982).

Critics of the notion that the success of Japanese industrial development was due to MITI occasionally point to some mistakes the organisation made, as if this refutes the overall success of the policies it implemented.

But the Japanese government had already adopted a vigorous industrial policy from Meiji era onwards that launched Japan on its road to economic greatness. I have dealt with that in this post.

To a great extent, the role of MITI after 1945 was merely a continuation of the government intervention in the economy that had always characterised Japan.

The extent of the economic industrial planning in Japan has always puzzled Western observers – especially economists – and a well known joke arise reflecting this: Japan was supposedly “the only Communist country that works” (a remark apparently made by an Italian journalist in Japan in 1989: House 1989). (On this issue, it is striking that Marxism had a not inconsiderable influence on academic economics in Japan in the post-1945 era: as late as the 1960s, the economics department at Tokyo University, the most respected in Japan, was heavily Marxist [Hadley 1989: 292].)

(3) Keynesian ideas were adopted early in Japan, even before Keynes’s General Theory. I have already summarised the story of how Takahashi Korekiyo (Japan’s Finance Minister) rescued Japan from the Great Depression in a highly successful use of fiscal stimulus in a post here. But Keynesian theory also permeated the Economic Planning Agency (another government organisation), and Keynesian policy was used mostly notably from 1965 (Hadley 1989: 292).

Japan, like Germany, had a curious post-WWII boom, not only from reconstruction of the devastated economy, but also through strong industrial development. By 1965, the post-WWII recovery and boom had run its course, and Japan required more fiscal stimulus and greater social spending. That was provided by the government in a program of deficit-financed stimulus that actually continued for many years, and – apart from the oil shock years – did not result in serious inflation (Hadley 1989: 306–307). Real GDP growth – as can be seen from the figures above was – was also impressive.

In 1979, the deficit reached 6.1% of GDP and stimulus averted an actual recession in Japan in these years when other nations were plunged into the global recession that radiated out from the US in the wake of the Volcker shock.

(4) In the 1980s, Japan engaged in ill-conceived financial deregulation (Fukao 2003: 134–135), which was one major cause of the asset bubble in these years (although poorly designed tax policies and monetary policy were clearly involved too). The collapse of the asset bubble and the balance sheet recession (a form of debt deflationary crisis) caused the “lost decade.”

From the data above, we can see that the “lost decade” was really an era of low growth, not continuous negative growth. Japan was not in recession from 1993–1997, but had serious deleveraging problems, a banking crisis, and debt deflation.

Many myths have arisen about the lost decade, and one of them is that Keynesianism somehow “failed” to work in this era. That is nonsense. If anything, Keynesianism saved Japan from a terrible depression. In fact, when fiscal stimulus was abandoned for austerity in 1997, the economy plunged into a recession in 1998.

Japan had mild to moderate Keynesian stimulus packages from about 1993 to 1997 (although the actual fiscal impact of some of the early ones is grossly exaggerated [Posen 1998: 41]), but the result was mild to moderate growth from 1993–1995. In 1996, expansionary policy produced an impressive 3.49% growth rate – much higher than anyone predicted (Posen 1998: 41). (As an aside, I highly recommend Adam S. Posen’s Restoring Japan’s Economic Growth [Washington, D.C. 1998], p. 41f. for analysis of the extent of fiscal stimulus in the 1990s.)

But then from 1997 Prime Minister Ryutaro Hashimoto imposed sharp fiscal contraction and a recession resulted.

A major consequence of the recession induced by fiscal contraction was that the Japanese budget deficit soared by 68% as tax revenue collapsed. This must be counted as one fundamental reason why Japanese public debt soared so badly. When fiscal expansion was applied again on a large enough scale in 1998 the recession ended and growth resumed.

All this is well known in the Japanese press:

“Japan’s first experiment in austerity policies began under Prime Minister Ryutaro Hashimoto (1996–98). Severe spending cuts were seen as needed to rein in budget deficits caused by previous efforts to recover from the 1991 Bubble collapse. Recession followed quickly. Tax revenues collapsed. The national debt increased.

Under Prime Ministers Keizo Obuchi (1998–2000) and then Yoshiro Mori (2000–2001), Japan returned to fiscal expansion policies and the economy recovered rapidly, with the Nikkei Dow share index reaching almost 20,000. But with tax revenues still only in the recovery stage the deficit hawks were able to swoop in once again under Prime Minister Junichiro Koizumi (2001-2006). Austerity in the name of ‘structural reform’ became the order of the day. The Nikkei Dow promptly collapsed to the 7,000 level, tax revenues fell again and the national debt increased by ¥200 trillion in just five years despite the boost to the economy from expanded exports to China and the United States.”

Gregory Clark, “Economics of Austerity Don’t Add up,” The Japan Times Online, August 15, 2012.

Japan in the 1990s was somewhat like America in the 1930s: although Japan differed from the US in that averted an actual depression, its fiscal policy was not applied properly and was then reversed in 1997 a disastrous error. In the US, Roosevelt reversed his moderate fiscal expansion in 1937, and the US relapsed into depression in 1938. Both 1938 (in the US) and 1998 (in Japan) serve as warnings of the dangers of austerity in a weak economy.

It is a pity that the lesson of the Japanese lost decade is forgotten, completely misunderstood or utterly misrepresented by certain neoclassicals, Austrians and other advocates of austerity.

BIBLIOGRAPHY

Clark, Gregory, 2012. “Economics of Austerity Don’t Add up,” The Japan Times Online, August 15.

Fukao, M. 2003. “Japanese Financial Deregulation and Market Discipline,” in Edgardo Demaestri, Pietro Masci (eds.), Financial Crises in Japan and Latin America. Inter-American Development Bank, Washington, D.C. 129–162.

Hadley, E. M. 1989. “The Diffusion of Keynesian Ideas in Japan,” in Peter Hall (ed.), The Political Power of Economic Ideas: Keynesianism Across Nations. Princeton University Press, Princeton. 291–309.

House, Karen Elliott. 1989. “The Second Century – World Leadership – The ’90s and Beyond: Though Rich, Japan is Poor in Many Elements Of Global Leadership – In Politics, Arms and Ideology, It Wields Little Influence, While Alienating Many – Myth of an Asian Trading Bloc,” Wall Street Journal, 30 January: 1.

Johnson, Chalmers. 1982. MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975. Stanford University Press, Stanford, Calif.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.

Posen, Adam S. 1998. Restoring Japan’s Economic Growth. Institute for International Economics, Washington, D.C.

Sorkin, A. L. 1997. “Recessions after World War II,” in D. Glasner and T. F. Cooley (eds.), Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York. 566–569.